Contracts and Sales (Defenses to Formation) Flashcards
(175 cards)
1
Q
Defenses to Formation
A
A person can defend a breach of contract action by showing that there was no meeting of the minds because of any of the following: mistake; misunderstanding; misrepresentation, nondisclosure, or fraud; undue influence, duress, or lack of capacity to contract.
2
Q
Mistake
A
A mistake is a belief that is not in accord with the facts as to a basic assumption on which the contract was made that materially affects performance. Note that the mistake must be regarding a belief about an existing fact and not regarding a future event.
3
Q
Mutual mistake
A
Mutual mistake occurs when both parties are mistaken as to an essential element of the contract. In this situation, the contract may be voidable by the adversely affected party upon proof of the follow: (1) a mistake of fact existed when the contract was formed (2) the mistake relates to a basic assumption of the contact (3) The mistake has a material impact on the transaction and (4) the adversely affected party did not assume the risk of the mistake. When reformation of the contract is available to cure a mistake, neither party can avoid the contract.
4
Q
Conscious ignorance
A
A party may bear the risk of a mistake when: (1) the party is aware at the time of the contract of having only limited knowledge of the facts to which the mistake relates; and (2) the party accepts such limited knowledge as sufficient
4
Q
Mistaken party’s negligence
A
When the mistake is attributable to a party’s failure to know or discover facts before entering into the contract, the party may nonetheless assert the defense of mistake unless the party failed to act in good faith and in accordance with the reasonable standards of fair dealing. The mistaken party’s negligence regarding the mistake is not sufficient to prevent the mistaken party from avoiding the contract.
5
Q
Unilateral mistake
A
When only one of the parties was mistaken as to an essential element of the contract when the contract was formed, either party can generally enforce the contract on it terms.However, the mistaken party can void the contract if the elements for a mutual mistake exist and either: (1) The mistake would make enforcement of the contract unconscionable; or
(2) The non-mistaken party caused the mistake, had a duty to disclose or failed to disclose the mistake, or knew or should have known that the other party was mistaken. For a unilateral mistake to form the basis for rescission, there must be an absence of serious prejudice to the other party.
6
Q
Reformation for mistake
A
When a writing fails to express the agreement because of a mistake of both parties, the court may, at a party’s request, reform the writing to express the agreement, except to the extent that rights of third parties who have relied on the document, such as good-faith purchasers for value, will be unfairly affected.
Reformation of a writing for mistake is available if: (1) There was a prior agreement (either oral or written) between the parties; (2) The parties agreed to put that prior agreement into writing; and (3) As a result of a mistake, the prior agreement and the writing differ. A party’s negligence in failing to read the writing does not preclude reformation if the writing does not correctly express the prior agreement and the party acted in good faith and in accordance with reasonable standards of fair dealing. Note that if one party, without the other party’s consent, intentionally omits a term from the writing that had been agreed upon by the parties, reformation would be available on the grounds of misrepresentation.
7
Q
Misunderstanding
A
A misunderstanding occurs when both parties believe that they are agreeing to the same material terms but they in fact agree to different terms.
8
Q
Neither party knows or should know of the misunderstanding
A
If the misunderstanding involves a material term and neither party knows or has reason to know of the misunderstanding, then there is no contract.
9
Q
One party knows or should know of the misunderstanding
A
If a material term in the offer and acceptance is ambiguous and only one party knows or has reason to know that the other party has a different understanding of the meaning of the ambiguous term, then there will be a contract formed based on the meaning of the term as understood by the unknowing party. While a contract exists, the contract may be voidable on grounds of mistake or misrepresentation due to the conduct of the party with the superior knowledge.
10
Q
Both parties know of the misunderstanding
A
There is no contract if both parties at the time of contracting knew or had reason to know that a material term was ambiguous, unless both parties intended the same meaning.
11
Q
Waiver of the misunderstanding
A
Even if there is a misunderstanding, one party may waive the misunderstanding and enforce the contract according to the other party’s understanding.
12
Q
Subjective determination of misunderstanding
A
In determining the existence of a misunderstanding, it is each party’s knowledge or reason to know of the misunderstanding that governs, not what a reasonable person would know. In this regard, the objective theory of contracts does not apply. In addition, in determining what a party knows or has reason to know, the principles regarding conscious ignorance and negligence apply.
13
Q
Misrepresentation
A
A misrepresentation is an untrue assertion of fact. To constitute a fact, the assertion must be about a present event or past circumstance. An assertion of an opinion, such as a belief or judgment as to the quality, value, or authenticity of an item or the occurrence of a future event, is generally not an assertion of a fact. However, a party may interpret an assertion of an opinion, if reasonable, as an assertion that the person knows facts that are consistent with the opinion or that the person knows facts sufficient to justify the formation of the opinion. Misrepresentation can be innocent, negligent, or fraudulent.
14
Q
Fraudulent misrepresentation
A
Fraudulent misrepresentation requires proof of the following: (1) The misrepresentation is fraudulent; a) A false assertion of fact made knowingly or recklessly without knowledge of its truth; and b) With intent to mislead the other party; (2) The misrepresentation induced assent to the contract; and (3) The adversely affected party justifiably relied on the misrepresentation.
15
Q
Nondisclosure
A
Affirmative conduct to conceal a fact is equivalent to an assertion that the fact does not exist. In addition, mere nondisclosure of a known fact is tantamount to an assertion that the fact does not exist, if the party not disclosing the fact knows that: (1) Disclosure is necessary to prevent a previous assertion from being a misrepresentation, fraudulent, or material;
(2) Disclosure would correct a mistake of the other party as to a basic assumption and the failure to disclose would constitute lack of good faith and fair dealing;
(3) Disclosure would correct a mistake of the other party as to the contents or effect of a writing evidencing their agreement; or (4) The other party is entitled to know the fact because of a confidential or fiduciary relationship.
16
Q
Fraud in the factum
A
Fraud in the factum (or fraud in the execution) occurs when the fraudulent misrepresentation prevents a party from knowing the character or essential terms of the transaction.In such a case, no contract is formed, and the apparent contract is void (i.e., not enforceable against either party) unless reasonable diligence would have revealed the true terms of the contract.
17
Q
Fraud in the inducement
A
Fraud in the inducement occurs when a fraudulent misrepresentation is used to induce another to enter into a contract. Such a contract is voidable by the adversely affected party if she justifiably relied on the misrepresentation in entering into the agreement.
18
Q
Nonfraudulent misrepresentation
A
Even if nonfraudulent, a misrepresentation (innocent or negligent) can still render a contract voidable by the adversely affected party if: (1) The misrepresentation is material (i.e., information that would cause a reasonable person to agree or that the person making the misrepresentation knows would cause the adversely affected party to agree); (2) The misrepresentation induced assent to the contract; and (3) The adversely affected party justifiably relied on the misrepresentation.
19
Q
Effect of party’s fault in not knowing or discovering facts
A
A party’s fault in not knowing or discovering facts before entering into the contract does not prevent the party’s reliance on the misrepresentation from being justified unless it constitutes a failure to act in good faith and in accordance with the reasonable standards of fair dealing. The party’s negligence regarding learning about the falsity of the misrepresentation is not sufficient to prevent the party from avoiding the contract.
20
Q
Cure of a misrepresentation
A
If, following a misrepresentation but before the deceived party avoids the contract, the facts are cured so as to accord with the previously misrepresented facts, then the contract will no longer be voidable by the deceived party.
21
Q
Avoidance or reformation for misrepresentation
A
When one party misrepresents the content or legal effect of a writing to another party, the other party may elect to avoid the contract or to reform it to express what had been represented.
22
Q
Undue Influence
A
Undue influence is the unfair persuasion of a party to assent to a contract. Undue influence can occur in a relationship between a dominant party and a dependent party because the dependent party lacks expertise or experience or has diminished mental capacity. Such relationships include trustee-beneficiary, lawyer-client, doctor-patient, financial adviser–client, and, in some cases, parent-child. A party to a contract who is a victim of undue influence can void the contract.
23
Q
Confidential relationship—fairness and disclosure
A
When a confidential relationship between contracting parties is established, the burden of proving that the contract is fair may be placed on the dominant party. The dominant party to the contract may also be held to a higher standard of disclosure than she would in a contract between arms-length parties.
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Third-party undue influence
When a person who is not a party to the contract causes the undue influence, the victim may void the contract unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence.
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Damages
Restitution damages may be available to the party induced to enter into a contract because of undue influence.
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Duress
Duress is an improper threat that deprives a party of meaningful choice.
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Improper threat
Examples of improper threats include threats of a crime, a tort, or criminal prosecution or the threat of pursuing a civil action (when made in bad faith). In addition, threatening to breach a contract is improper if doing so would violate the duty of good faith and fair dealing.
28
Threat of criminal prosecution
The threat of criminal prosecution is an improper means of inducing a person to enter into a contract. It does not matter whether the person making the threat honestly believes that the person who would be subject to criminal prosecution is guilty. Nor does it matter whether the person threatened with prosecution is in fact guilty of the crime.
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Threat of civil action
Unlike the threat of criminal prosecution, the threat of a civil action is generally not improper. The lack of success in pursuing a civil action does not make the threat improper unless the civil action is pursued in bad faith.
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Deprivation of meaningful choice
A person is deprived of meaningful choice only when the person does not have a reasonable alternative to succumbing to the threat. Thus, regarding the threat of a civil action, a person generally has the reasonable alternative of defending against the action. However, if the threat also involves the seizure of property in conjunction with the civil action or if it prevents the person from fulfilling other contractual obligations, then the person may be deprived of a meaningful choice.
31
Effect on the contract
When a party’s agreement to enter into a contract is physically compelled by duress, such as the threat to inflict physical harm, the contract is void. In other instances when a party is induced to enter into a contract by duress, such as when the threat is a breach of the duty of good faith and fair dealing, the contract is voidable.
When a person who is not a party to the contract causes the duress, the victim may void the contract unless the nonvictim party to the contract gave value or materially relied on the contract while acting in good faith and without reason to know of the undue influence. Generally, restitution damages are available to the party induced to enter into a contract under duress.
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Competence
In contracts law, competence refers to a party’s legal capacity to be held to contractual duties. Parties to a contract must be competent. Incompetency arises because of infancy, mental illness or defect, guardianship, intoxication, and corporate incapacity.
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Infancy
Infants (in most states, individuals under the age of 18) do not have the capacity to contract. A contract between an infant and a competent party is voidable by the infant but not by the competent party. This means that the infant may either disaffirm (void) the contract and avoid any liability under it or hold the other party to the contract. If the infant disaffirms, it must be done either before the individual reaches the age of majority or within a reasonable time thereafter, or else the contract is deemed ratified. If the contract is disaffirmed, the individual must restore any benefits received under the contract, if possible.
34
Liability for necessities
An exception to the infancy rule exists when the contract is based on necessities. When necessities are furnished to the infant, the infant must pay for them, but the recovery by the person furnishing the necessities is limited to the reasonable value of the services or goods (not the agreed-upon price). Recovery is under a theory of quasi-contract.
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Statutory exceptions
By statute, an education loan made to a minor student may not be voidable by the student but instead may be fully enforceable by the lender. Similar treatment may also be accorded an insurance contract entered into by a minor.
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Mental Illness
If an individual is adjudicated mentally incompetent, a purported contract made by the individual is void. However, if there has been no adjudication, a contract is voidable and may be disaffirmed if the individual is unable to: (1) Understand the nature and consequences of the transaction; or (2) Act in a reasonable manner regarding the transaction and the other party has reason to know of this fact. If a contract is made during a lucid period, the contract is fully enforceable unless the person has been adjudicated incompetent. A mentally incompetent person may be liable for the reasonable value of necessities furnished by another party.
37
Guardianship
If an individual’s property is under guardianship because of an adjudication (such as for mental illness or defect, habitual intoxication, narcotics addiction), that individual has no capacity to contract, and a purported contract made by the individual is void. A person under guardianship may be liable for the reasonable value of necessities furnished by another party.
38
Intoxication
A contract entered into during alcohol or drug intoxication is voidable by the intoxicated party if he was unable to understand the nature and consequences of the transaction and the other party had reason to know of the intoxication. The intoxicated party must act promptly to disaffirm the contract and is required to return any value received, if possible. Generally, the intoxicated party may be liable in quasi-contract for the fair value of the goods or services furnished.
39
Defenses to Enforcement
A party to a contract can assert that the nature of the agreement or the manner of its formation should prevent its enforcement. Defenses to enforcement include: illegality, unconscionability, and public policy.
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Illegality
If the consideration or performance due under a contract is illegal, then the contract is illegal and unenforceable. If a contract contemplates illegal conduct, it is void. If a contract becomes illegal after it is formed, the duty to perform under the contract is discharged. Note that a contract is illegal for contract purposes when it contravenes a statute or a rule of common law; it need not involve activity that results in criminal penalties. Examples of illegal contracts include contracts that are usurious and contracts for the commission of crime.
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Effect of illegality
Illegal transactions are not recognized or enforceable, restitution is not awarded for consideration, and no remedy is available for partial performance.
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Exceptions - Effect of illegality
When the promisee is justifiably ignorant of the facts that make the contract illegal, the promisee is permitted to bring a claim for damages against the breaching promisor if the promisor acted with knowledge of the illegality. Even if both the promisor and the promisee are excusably ignorant, the promisee may have a claim in restitution.
43
Exceptions - Lack of illegal purpose
If a contract does not involve illegal consideration or the performance of an illegal act and a party has substantially performed, then that party may recover if she is unaware of the illegal purpose that the other party intends to make of that performance.In addition, the party who has substantially performed can recover even if she knows of the illegal use that the other party intends to make of the performance. However, the performing party cannot recover if she acted to further the illegal use of the performance or the use involves grave social harm. A party’s purpose of furthering illegal use may be evidenced by additional acts that facilitate that illegal use or by a course of dealing with persons engaged in the illegal conduct.
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Divisible contracts
If a contract can be easily separated into legal and illegal parts, then recovery may be available on the legal part(s).
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Licensing violation
The enforceability of a contract for an act regulated by a license or similar requirement depends on whether the requirement has a regulatory or revenue-raising purpose. If the licensing requirement has a regulatory purpose and the public policy for the requirement clearly outweighs the interest in enforcing the promise, then the party may not enforce the contract. In weighing the policy for the requirement against the interest in enforcing the promise, the nature of the interest protected (e.g., health and safety versus economic) and the magnitude of the penalty should be considered, as should whether the violation was intentional or inadvertent.
46
Availability of restitution
When the parties are not equally at fault (not in pari delicto), the less guilty party may be able to recover restitutionary damages.
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Withdrawal
A party to an illegal contract who withdraws from the transaction before the improper purpose has been achieved may be entitled to restitution for a performance that the party has rendered when the party has not engaged in serious misconduct.
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Unconscionability
A contract (or part of a contract) is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would have agreed to it. A court may modify or refuse to enforce a contract or part of a contract on the grounds that it is unconscionable. Whether a contract is unconscionable is a question of law for the court to decide; the issue does not go to the jury.The contract or part of the contract at issue must have been offensive when it was made. Unconscionability may also be applied to prevent unfair surprise.Factors rendering a contract unconscionable are often categorized as either procedurally unconscionable or substantively unconscionable.
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Procedural unconscionability
Procedural unconscionability occurs when a party is induced to enter into the contract without a meaningful choice because of deception, compulsion, or significantly unequal bargaining positions.
Examples of procedural unconscionability may include boilerplate contract provisions that are inconspicuous, hidden, or difficult for a party to understand or contracts of adhesion (a take-it-or-leave-it contract) when the parties’ bargaining power is greatly unequal.
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Substantive unconscionability
Substantive unconscionability occurs when the substance of the contract itself is unduly unfair.
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Public policy
Even if a contract is neither illegal nor unconscionable, it may be unenforceable if it violates a significant public policy. Examples include a contract in restraint of marriage, a contract for the commission of a tort, or a contract that unreasonably restrains trade. To determine whether enforcement is appropriate, the interest in enforcing the contract is weighed against the interest in disfavoring enforcement. If the contract restrains trade (e.g., a covenant not to compete), a court will consider factors such as the geographic scope and duration of the restraint to determine whether the contract is reasonable.When a contract violates a policy that was intended to benefit the contracting party seeking relief, the contract may still be enforced to avoid frustrating the purpose of the policy.
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Implied-in-Fact Contracts
When a person’s assent to an offer is inferred solely from his conduct, the resulting agreement is typically labeled an implied-in-fact contract. To be contractually bound, a person must not only intend the conduct but also know or have reason to know that his conduct may cause the offeror to understand that conduct as assent to the offer.
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Implied-in-Law Contracts (Quasi-Contracts)
When a plaintiff confers a benefit on a defendant and the plaintiff has a reasonable expectation of compensation, allowing the defendant to retain the benefit without compensating the plaintiff would be unjust. In this case, the court can permit the plaintiff to recover the value of the benefit to prevent the unjust enrichment. Although this type of action is often based on an implied-in-law contract or a quasi-contract, quantum meruit recovery does not depend on the existence of a contract.A court may allow restitutionary recovery if: (1) The plaintiff has conferred a measurable benefit on the defendant; (2) The plaintiff acted without gratuitous intent; and
(3) It would be unfair to let the defendant retain the benefit because either: (a) The defendant had an opportunity to decline the benefit but knowingly accepted it; or (b) The plaintiff had a reasonable excuse for not giving the defendant such opportunity (e.g., because of an emergency).
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Contrast an express contract with implied-in-fact and implied-in-law contracts:
Express contract: Party verbally expresses assent to an offer.
Implied-in-fact contract: Party’s assent is inferred from conduct.
Implied-in-law contract: Party confers a benefit on the other party with a reasonable expectation of compensation.
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Warranties in Sale-of-Goods Contracts
UCC Article 2 allows for not only express warranties but also the implied warranties of merchantability and fitness for a particular purpose. An express warranty is a warranty created by the seller’s overt actions or words. The implied warranties of merchantability and fitness are warranties that are implied by law.
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Express warranty
Any promise, affirmation, description, or sample that is part of the basis of the bargain is an express warranty unless it is merely the seller’s opinion or commendation of the value of the goods. The use of a sample or model will create a warranty that the goods the buyer is to receive will be like the proffered sample or model. Under Article 2, words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty are construed as consistent with each other, but negation or limitation is inoperative to the extent that such construction is unreasonable. Thus, disclaimer clauses that grossly conflict with the express warranties, such as “All warranties, express or implied, are disclaimed,” are ignored. Note, however, that the parol evidence rule may bar evidence of oral express warranties or disclaimers of such warranties.
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Implied Warranty of Merchantability
A warranty of merchantability is implied whenever the seller is a merchant. For this purpose, to be a merchant, the seller must deal in goods of the kind sold. To be merchantable, goods must be fit for their ordinary purpose and pass without objection in the trade under the contract description. A breach of this warranty must have been present at the time of the sale.
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Implied Warranty of Fitness for a Particular Purpose
A warranty that the goods are fit for a particular purpose is implied whenever the seller has reason to know (from any source, not just from the buyer) that: (1) The buyer has a particular use for the goods and (2) The buyer is relying on the seller’s skill to select the goods.
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Implied warranty of merchantability
One way for the seller to disclaim the implied warranty of merchantability is to use the term “merchantability.” This may be done orally. If it is in writing, the disclaimer language must be conspicuous
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Implied warranty of fitness for a particular purpose
One way for the seller to disclaim the implied warranty of fitness for a particular purpose is to make the disclaimer in writing and conspicuous. A writing is conspicuous if it is presented in a way that a reasonable person would have received notice of it. Unlike the implied warranty of merchantability, implied warranties of fitness for a particular purpose may be excluded by general language but only if it is in writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, “There are no warranties that extend beyond the description on the face hereof.”
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Both implied warranties - "as is" language
Unless the circumstances indicate otherwise, an implied warranty can also be disclaimed by stating that the goods are sold “as is” or “with all faults” or if similar language is used that makes plain that there is no implied warranty.
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Both implied warranties - Buyer’s inspection of the goods
If the buyer, before entering into the contract, examined the goods or a sample or model as fully as he desires or refused a demand by the seller to fully examine the goods, then there is no implied warranty concerning defects that an examination ought to have revealed to the buyer.
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Both implied warranties - course of dealing or performance or trade usage
An implied warranty can also be excluded or modified by course of dealing, course of performance, or trade usage.
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Discharge
If conditions are excused or satisfied, the parties have an absolute duty to perform unless that duty is discharged (i.e., extinguished). If some supervening event or change in circumstances arises after a contract is formed, the duty to perform might be discharged. Depending on the context, discharge may occur for any of the following reasons: Impracticability, Frustration of purpose, Rescission by mutual agreement, Release,
Destruction of or injury to identified goods
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Impracticability
A party’s duty to perform can be dismissed by impracticability. The defense of impracticability is available if: (1) Performance becomes illegal after the contract is made, (2) The specific subject matter of the contract (e.g., the goods) is destroyed, (3) In a personal services contract, the performing party to the contract dies or becomes incapacitated; or (4) Performance becomes impracticable.
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Assumption of Risk
If a party assumes the risk of an event that makes performance impracticable, then the defense of impracticability will not apply. Note that impracticability is not available merely when a party has made a bad deal and will have to pay more, even a lot more, than originally contemplated. It requires some totally unexpected occurrence that completely upsets the parties’ expectations. Generally, the cost increase must be extreme.
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Elements of impracticability
For the defense of impracticability to be available, the following conditions must also be met: (1) An unforeseeable event has occurred, (2) Non-occurrence of the event was a basic assumption on which the contract was made and (3) The party seeking discharge is not at fault. When performance becomes impracticable for a seller of goods, the seller must notify the buyer. Impracticability usually arises after a contract is made. However, a fact that makes a party’s performance impractical can exist when a contract is made. This is so if the party has no reason to know the fact and if the nonexistence of the fact is a basic assumption on which the contract is made.
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Partial Impracticability
When the performance of an obligation is only temporarily impracticable, the obligor’s duty is suspended during the impracticability. The obligation is not discharged unless the performance is materially more burdensome after the impracticability than had the impracticability not occurred. When impracticability does not prevent a seller from delivering some of the goods, the goods actually produced must be apportioned among all buyers with whom the seller has contracted. The buyer, however, may refuse to accept and may cancel the contract.
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Failure of a Particular Source of Supply
If the contract provides that a specific source of supply be used and that source of supply fails, performance is discharged. This is so even when other sources are readily available. Courts will excuse performance when the parties have specifically identified the source in the contract.
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Failure of Agreed-Upon Method of Transportation
If, by no fault of either party, the agreed-upon delivery facility or method of transportation or payment becomes unavailable or commercially impracticable, delivery or payment by any commercially reasonable method may be tendered and must be accepted.
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Frustration of Purpose
The doctrine of frustration of purpose applies when an unexpected event arises that destroys one party’s purpose in entering into the contract, even if performance of the contract is not rendered impossible. The frustrated party is entitled to rescind the contract without paying damages. The event that arises (1) must not be the fault of the frustrated party, and (2) its non-occurrence must have been a basic assumption of the contract. If this is the case, the party’s duty to render performance is discharged unless the language of the agreement or the circumstances otherwise indicate. The occurrence need not be completely unforeseeable to the parties. It must, however, be unexpected and not a realistic prospect. For the doctrine of frustration of purpose to be applicable, the frustration must be so severe that it is not within the assumed risks inherent under the contract. As with the defense of impracticability, the defense of frustration of purpose can arise when a fact that substantially frustrates a party’s principal purpose exists when a contract is made. This is so if the party has no reason to know the fact and if the nonexistence of the fact is a basic assumption on which the contract is made.
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Rescission
Rescission is the act of cancelling a contract and placing the parties as close as possible to their original positions before the contract was formed. Rescission (i.e., cancellation, revocation, repeal) of a contract can occur by the mutual agreement of the parties. The surrender of rights under the original contract by each party is consideration for the rescission by mutual agreement. In cases of third-party beneficiaries, a contract cannot be rescinded by mutual agreement if the rights of the third-party beneficiary have already vested.
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Release
A release is a writing that manifests intent to discharge another party from an existing duty.
For common-law contracts, the release must generally be supported by consideration to discharge the duty.
Under the UCC, however, a claim or right can be discharged in whole or in part without consideration by a written waiver or renunciation signed and delivered by the aggrieved party. No consideration is needed to support the release.
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Destruction or Injury to Identified Goods
If a contract calls for the delivery of goods identified when the contract is made and the goods are destroyed by no fault of either party before the risk of loss passes to the buyer, then the contract is avoided. Both parties are discharged; neither party must perform, and neither party has breached. If the goods are damaged but not destroyed, then the contract is avoided unless the buyer accepts the goods at a reduced price without any other claim against the seller.
Note: If the risk of loss has passed to the buyer, then the contract is not avoided, and the seller may demand performance by the buyer.
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Third-party Beneficiary Contracts
A third-party beneficiary contract results when the parties to a contract intend that performance by one of the parties will benefit a third person who is not a party to the contract.
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Creditor and Donee Beneficiaries
The First Restatement classifies third-party beneficiaries as: (1) Creditor, (2) Donee or
(3) Incidental beneficiaries.
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Creditor Beneficiaries
If performance of a promise would satisfy an actual, supposed, or asserted duty of the promisee to a third party and the promisee did not intend to make a gift to the third party, then the third party is called a creditor beneficiary. A creditor beneficiary has the right to sue either the promisor or promisee to enforce the contract.
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Donee beneficiary
If the promisee entered into the contract to confer a gift on a third party, then the third-party donee beneficiary is given the right to sue the promisor.
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Incidental beneficiary
A third party can enforce the contract if the third party is an intended beneficiary. Otherwise, the third party is an incidental beneficiary who cannot enforce the contract.
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Intended and Incidental Beneficiaries (Exam Note)
On the exam, if the promise indicates that the promisor will pay the third party directly to relieve the promisee from a debt, then the third party is likely an intended beneficiary. In contrast, if the promisor is to pay the promisee so that she may pay the third party, then the third party is most likely an incidental beneficiary.
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Intended Beneficiary
An intended beneficiary is one to whom the promise of the performance will satisfy the obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. In addition, recognition of the right to performance in the beneficiary must effectuate the intent of the parties to the contract.
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Incidental Beneficiary
An incidental beneficiary is one who benefits from a contract even though there is no contractual intent to benefit that person. An incidental beneficiary has no rights to enforce the contract.
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Beneficiary's Right to Recover from Promisee
An intended beneficiary of a gift promise (i.e., a donee beneficiary) may sue only the promisor because the promisee is not under an obligation to the intended beneficiary. However, if it is foreseeable that the intended beneficiary of the gift would reasonably rely on the promise and the beneficiary does justifiably rely on it to his detriment, then the intended beneficiary may also sue the promisee to recover reliance damages. An intended beneficiary to whom the promisee owed money (i.e., a creditor beneficiary) or an intended beneficiary to whom the promisee is under a legal obligation may sue either the promisor to enforce his contractual promise or the promisee on the underlying obligation, but only one recovery is allowed.
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Vesting of Beneficiary's Rights
The rights of an intended beneficiary vest when the beneficiary: (1) Materially changes position in justifiable reliance on the rights created, (2) Manifests assent to the contract at one party’s request, or
(3) Files a lawsuit to enforce the contract.
Once the beneficiary’s rights have vested, both original parties to the contract are bound to perform the contract. Any efforts by the promisor or the promisee to rescind or modify the contract after vesting are void unless the third party agrees to the rescission or modification.
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Promisor's Defenses
The promisor can raise any defense against the third-party beneficiary that the promisor had against the original promisee.The beneficiary is liable for counterclaims arising from the contract that the promisor can establish against the promisee, but the beneficiary’s liability cannot exceed the amount that the promisor owes under the contract.The promisor generally may not assert any defenses that the promisee has against the intended beneficiary.However, if the promisor’s promise is to assume the promisee’s obligation, then the promisor can raise the promisee’s defense.
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Promisee's Rights
When the promisor fails to pay the third-party beneficiary, the promisee, on behalf of the third-party beneficiary, can sue the promisor for specific performance of the promise. In addition, when the promisee has paid a creditor beneficiary pursuant to their agreement, the promisee can directly sue the promisor for reimbursement to the extent of the promise and, if the creditor beneficiary’s claim is fully satisfied, by subrogation to the beneficiary’s claim against the promisor.
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Assignment of Rights and Delegation of Duties
Assignment is the transfer of rights under a contract. Almost all contract rights can be assigned. Partial assignments are permissible, as is the assignment of future or unearned rights. Delegation is the transfer of duties and obligations under a contract. As a general rule, most obligations under a contract can be delegated.
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Limitations on Assignment
Generally, almost all contract rights can be assigned. However, an assignment is not allowed if the assignment: (1) Materially increases the duty or risk of the obligor or (2)Materially reduces the obligor’s chance of obtaining performance. In addition to the above limitation, contract provisions may limit or prohibit a party’s right to assign the contract. For example, a contract provision, such as contractual language stating, “Any assignment of rights under this contract is void,” can render an otherwise allowable assignment void and unenforceable by the assignee against the obligor. By contrast, a contract provision that merely prohibits an assignment (e.g., “An assignment of rights under this contract is prohibited”) will have a different effect. While giving rise to an action for breach against the assignor, such a provision prevents neither the assignor from assigning those rights nor the assignee from suing the obligor. In other words, the assignor retains the power to make an assignment. Unless circumstances indicate the contrary, a prohibition on the assignment of a contract (e.g., “This contract may not be assigned”) does not affect the assignment of contract rights but only bars the delegation of duties.
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Requirements
No formalities are needed for an assignment, but there must be a present intent to transfer the right immediately. No consideration is needed, but the lack of consideration would affect revocability of the assignment.
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Distinguish promise of a future payment
A promise by a contracting party to pay moneys received under the contract to a third party is not an assignment of the party’s contractual rights but a promise of a future payment. Consequently, the third party is not an assignee of the contract.
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Revocability - assignment for consideration
If an assignment is for consideration, it is irrevocable.
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Revocability - Gratuitous assignment
A gratuitous assignment is an assignment that is not supported by consideration.A gratuitous assignment is generally revocable unless: (1) The obligor has already performed; or (2) Promissory estoppel applies. A gratuitous assignment that is revocable will be automatically revoked upon the assignor’s death, incapacity, or bankruptcy. In certain instances, a gratuitous assignment is irrevocable. For example, if the contract right that is being assigned is evidenced by a document that symbolizes the right (e.g., a bankbook, an insurance policy, or a stock certificate), then delivery of the document makes the assignment irrevocable. Also, the delivery of a written assignment signed by the assignor to the assignee makes the assignment irrevocable.
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Rights of the Assignee
Under an assignment, the assignee generally:
(1) Takes all of the rights of the assignor as the contract stands at the time of the assignment; but (2)Takes subject to any defenses that could be raised against the assignor. The rights of the assignee are subject to setoff if the transaction giving rise to the setoff occurred before the obligor was given notice of the assignment. In addition, the rights of the assignee are subject to a setoff that arises out of the same transaction. The assignee is also subject to any modification of the contract made before the obligor obtained notice of the assignment. Thus, the obligor’s payment to the assignor can be raised as a defense provided the payment was made before the obligor had notice of the assignment.
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Subsequent Assignment
A subsequent assignment of the same right revokes any prior revocable assignment. If the first assignment was an irrevocable assignment, then the first assignee will have priority over the second assignee unless the second assignee is a bona fide purchaser for value without notice of the first assignment. In this case, the assignee who obtains payment from the obligor or judgment first will have priority. If the second assignee knows about a prior assignment, then the second assignee is estopped from asserting a claim over the first assignee, even if the second assignee would have otherwise prevailed.
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Rights of the Assignor
When there is assignment of a party’s rights under a contract and the assignment is not revoked, the assignor cannot enforce the contract.
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Delegation of Duties - When Disallowed
Delegation is not permitted when a party to the contract has a substantial interest in having the delegating party perform or the delegation is prohibited by the contract. Unless circumstances indicate otherwise, the prohibition on the assignment of a contract (e.g., “This contract may not be assigned”) bars the delegation of duties even though it does not affect the assignment of rights. An example of when a party has a substantial interest in having the delegating party perform is with a personal services contract involving taste or a special skill.
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Delegation of Duties - Effect on Delegator
When obligations are delegated, the delegator is not released from liability. Recovery can be had against the delegator if the delegatee does not perform, unless the other party to the contract (the obligee) agrees to release that party and substitute a new one (a novation). Merely consenting to a delegation does not create a novation; a novation generally requires that all involved parties mutually intend to substitute in the new party.
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Novation
A novation is the substitution of a new contract for an old one when the original obligor is released from his promises under the original agreement.A novation may be express or implied after delegation if: (1) The original obligor repudiates liability to the original promisee; and (2) The obligee subsequently accepts performance of the original agreement from the delegatee without reserving rights against the obligor.
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Effect on Delegatee
The delegatee’s acceptance of a delegation of contract duties constitutes a promise to perform those duties. That promise is enforceable against the delegatee if the delegatee has received consideration or there is a consideration substitute that makes the promise enforceable.
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Effect on Other Party to the Contract
Any delegation of performance under a contract for the sale of goods may be treated by the other party as creating reasonable grounds for insecurity. The other party may, without prejudice to the party’s rights against the delegator, demand assurances from the delegatee. However, as long as the delegation was permitted, the other party must accept the conforming performance of a delegatee or be in breach of the contract. If the promise is enforceable by the delegator, such as when the promise is supported by consideration, the other party to the contract is treated as a third-party beneficiary of the delegation and may be able to enforce the delegatee’s promise.
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Effect of Assignment of Contract
An assignment of a contract that is not limited to contractual rights (e.g., “This contract is assigned to…”) is typically treated as both an assignment of rights and a delegation of duties.
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Statute of Frauds
Contracts that fall within the Statute of Frauds are unenforceable unless evidenced by a writing. The writing must: (1) Be signed by the party against whom enforcement is sought; and (2) Contain the essential elements of the deal.
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Writing Required
The writing need not be formal (i.e., receipts or correspondence can serve as memoranda). The essential elements may be in more than one writing if one of the writings references the other(s). The writing need not be delivered to the party trying to enforce the contract. Even if it is lost or destroyed, it still operates to satisfy the Statute of Frauds, and its prior existence can be proved by oral evidence. A memorandum sufficient to satisfy the Statute of Frauds need not be written when a promise is made. The memorandum also need not be addressed to the promisee to be enforceable by the promisee.
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Types of Contracts Within the Statute of Frauds
Most states require that the following five categories of contracts be evidenced by a writing: Marriage – a contract made upon consideration of marriage;
Suretyship – a contract to answer for the debt or duty of another;
One year – a contract that cannot be performed within one year of its making;
UCC – under the UCC, a contract for the sale of goods for a price of $500 or more; and
Real property contract – a contract for the sale of an interest in real property.Statute of Frauds issues are often tested. You can remember which types of contracts are governed by the statute by using the mnemonic Mr. SOUR (Marriage, Suretyship, One year, UCC, Real property).
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Marriage Provision
Any agreement in consideration of marriage is within the Statute of Frauds, except the promises by each to marry the other (i.e., the marriage contract itself). A prenuptial agreement is the paradigm of an agreement made in consideration of marriage that is subject to the Statute of Frauds. A promise made in consideration of marriage does not become enforceable merely because the marriage has occurred in reliance on it. However, additional part performance or action in reliance may make such a promise enforceable.
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Surety Provision
Suretyship is a three-party contract in which one party (the surety) promises a second party (the obligee) that the surety will be responsible for any debt or other obligation of a third party (the principal) resulting from the principal’s failure to pay or perform as agreed.A suretyship induces the second party to extend credit or otherwise perform an obligation to the third party. A promise to answer for another’s debt or other obligation must generally be in writing to be enforceable.
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Estate administrator as surety
A contract of an administrator (or executor) of a decedent’s estate may fall into this category when the administrator promises the creditor of the decedent’s estate that the administrator will assume personal liability for the debt if the estate does not have the funds to pay.
Regarding debts incurred by the decedent, the administrator is treated as a surety even though the administrator’s promise did not induce the creditor to extend credit to the decedent.
In jurisdictions that adhere to the common law, the administrator is personally liable for debts incurred by the decedent’s estate after the decedent’s death (e.g., funeral expenses). In addition, the creditor does not need the administrator’s promise to pursue collection of those debts from the administrator personally. In jurisdictions that have adopted the Uniform Probate Code (UPC), the administrator is not personally liable for the debts of decedent’s estate. A promise by the administrator to be personally liable for those debts would constitute a surety promise.
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Surety Provision Exceptions - Indemnity contracts
An indemnity contract (i.e., a promise to reimburse for monetary loss) does not fall within the Statute of Frauds as a suretyship provision.
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Surety Provision Exceptions - Main purpose exception
If the surety’s main purpose in agreeing to pay the principal’s debt is his own economic advantage, rather than the principal’s benefit, then the contract does not fall within the Statute of Frauds, and an oral promise by the surety is enforceable.
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Real Property Contracts
The Statute of Frauds applies to the following types of real property contracts: (1) A promise to create, transfer, or receive any interest in real property, (2) A contract providing for the subsequent conveyance of an interest in real property, (3) The assignment of a right to purchase real property, (4) An option contract for the sale of an interest in real property, (5) A promise to give a mortgage or other lien as security, (6) A real covenant, which creates a property interest and serves as a contract, and (7) A lease, which both creates a property interest and serves as a contract, unless the lease is for one year or less. A license is not subject to the Statute of Frauds. The statute does not apply to the conveyance of real property itself, which is governed by a separate statute (see Themis Real Property Outline for further discussion of the contents of a deed).
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Part performance
Even if an oral contract for the transfer of an interest in real property is not enforceable when it is made, subsequent acts by either party that show the existence of the contract may make it enforceable, even without a memorandum. Such acts include: (1) Payment of all or part of the purchase price, (2) Possession by the purchaser or (3) Substantial improvement of the property by the purchaser. Most jurisdictions require at least two of the above three acts to establish sufficient part performance.
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Full performance
When a party to an oral contract who has promised to convey real property performs, that party can enforce the other party’s oral promise unless the promise is itself the transfer of a real property interest.
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One-Year Provision
Contracts that cannot be performed within one year because of the constraints of the terms of the agreement must be in writing. The year starts the day after the contract is made. Thus, even a contract requiring services to be provided for a year or less may be subject to the Statute of Frauds if more than a year would pass between the contract being entered into and the services being fully rendered.
The fact that a contract is not completed within one year does not mean that it is voidable under the Statute of Frauds. For the Statute to apply, the actual terms of the contract must make it impossible for performance to be completed within one year. Full performance by either party to the contract will generally take the contract out of the Statute of Frauds. Although partial performance would not take the contract out of the Statute of Frauds, restitution would be available to the party who performed.
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Sale of Goods for $500 or More
The UCC Statute of Frauds requirements and exceptions for goods when the price is at least $500 are frequently tested. Some states have raised the threshold amount from $500 to $5,000. On the exam, assume that the amount is $500 unless stated otherwise.
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Type of writing required
To satisfy the Statute of Frauds, the above terms must be in writing, but that writing need not be an actual contract. It does not even need to be contained on one piece of paper—a series of correspondence between the parties may suffice.
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Sufficiency of the writing
When the price of goods is at least $500, the UCC requires a memorandum of the sale that must: (1) Indicate that a contract has been made, (2) Identify the parties, (3) Contain a quantity term; and (4) Be signed by the party to be charged. A signature includes any authentication that identifies the party to be charged, such as a letterhead on the memorandum.
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Mistake in writing
A mistake in the memorandum or the omission of other terms does not destroy the memorandum’s validity. An omitted term can be proved by parol evidence. However, enforcement is limited to the quantity term actually stated in the memorandum.
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Sale of Goods for $500 or More - Exceptions (writing not required)
No writing is required for specially manufactured goods if:
(1) The goods are to be specially manufactured for the buyer, (2) The goods are not suitable for sale to others in the seller’s ordinary course of business and (3) The seller has made “either a substantial beginning of their manufacture or commitments for their procurement.”
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Payment and acceptance by seller
A contract is outside the UCC Statute of Frauds to the extent that payment has been made and accepted. When a portion of the purchase price for a single item has been paid, most courts treat the contract as enforceable.
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Receipt and acceptance by buyer
A contract is outside the UCC Statute of Frauds to the extent that goods are received and accepted. Acceptance of a part of a commercial unit is acceptance of the entire unit.
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Failure to respond to a memorandum (when both parties are merchants)
If (1) both parties are merchants, (2) a memorandum sufficient against one party is sent to the other party, who has reason to know its contents, and (3) the receiving party does not object in writing within 10 days of receipt of the memorandum, then the contract is enforceable even though the receiving party has not signed it. As with the firm-offer rule, a merchant includes not only a person who regularly deals in the type of goods involved in the transaction but also any businessperson when the transaction is of a commercial nature.
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Modifications
Under the UCC, the requirements of the Statute of Frauds must be satisfied if the contract as modified is within its provisions. Any of the above exceptions would apply, though, to take a modification out of the Statute of Frauds.
A good-faith modification to a contract for the sale of goods that already falls within and satisfies this statute generally need not be in writing unless it affects either the subject matter of the contract or the quantity of goods to be sold. An attempted modification that violates the UCC Statute of Frauds operates as a waiver of the original term that cannot be retracted once a party has materially changed its position in reasonable reliance on the waiver.
The UCC would also enforce a provision in a contract for the sale of goods that required a modification to be in writing. Thus, even if the contract was for a sale of goods valued at less than $500 or involved one of the exceptions discussed above, if the contract specifically provided that any modification be in writing, then the UCC would enforce that requirement.Note that under a common-law contract, a provision requiring a modification to be in writing even though the modification would not otherwise fall within the Statute of Frauds would not be enforceable.
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General Exceptions - Promissory Estoppel
A promise that the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and that does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy may be limited as justice requires.
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Judicial Admission
A promise is enforceable against a party to the extent admitted by the party through discovery admissions or by testimony at trial.
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Parol Evidence Rule
The parol evidence rule generally prevents a party to a written contract from presenting extrinsic evidence of a prior or contemporaneous agreement that contradicts the terms of the contract as written. The rule is concerned with whether any of the earlier oral or written terms are part of the parties’ contract even though they are absent from the parties’ written agreement. Before signing a written agreement, parties typically negotiate their contract through a series of conversations, phone calls, letters, faxes, emails, etc. When the written contract is finally signed, it may include all of the terms of these negotiations or change the terms in some way. The oral and written statements from such a negotiation are extrinsic evidence. The ability of a contracting party to use extrinsic evidence to explain or supplement the written contract is subject to the parol evidence rule.
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Integration
An integration is a document that is the final expression of the parties’ agreement.
The first step is to determine whether the parties’ writing is integrated. The parol evidence rule applies only to a document that is an integration.
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Total Versus Partial Integration
If the writing is determined to be an integration, then the second step is to decide whether it completely expresses all of the terms of the parties’ agreement.
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Total integration
If the writing completely expresses all of the terms of the parties’ agreement, then it is a total integration, and the parties cannot introduce any extrinsic evidence (oral or written) of prior or contemporaneous understandings or negotiations.
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Partial integration
If the writing establishes the parties’ agreement about some but not all terms, then it is a partial integration. The parties are then permitted to introduce supplementary extrinsic evidence (oral or written) of other terms as long as the evidence is consistent with the writing but not if the evidence contradicts the terms of the writing.
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Intent of the Parties
The intent of the parties determines whether there is total, partial, or no integration.
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Common law—four-corners rule
Under the common law, a court is permitted to look only to the writing itself (within the four corners of the document) for evidence of intent. If the written contract appears to be detailed, then a court will likely conclude that it is totally integrated. A merger clause is evidence of complete integration, and it usually states, “This contract is the final and complete expression of the parties’ agreement and supersedes all prior contracts, agreements, understandings, negotiations, assurances, guarantees, or statements.”
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Second Restatement rule
The Second Restatement adopts a different approach to the parol evidence rule. If, under the circumstances, an extrinsic term of an agreement would naturally be omitted from a writing, then that term can be introduced so long as it does not contradict the writing.
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When the Parol Evidence Rule Is Inapplicable
The parol evidence rule does not apply to communications that occur after a written contract is executed; it applies only to agreements reached before or contemporaneously with the execution of the written contract.
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UCC rule
In contrast to the common-law and Second Restatement parol evidence rules, the UCC rule is much more lenient. The UCC essentially presumes that a written contract is only a partial integration and allows any additional consistent terms unless a court concludes that the parties certainly would have included the term in the written contract. Because that standard is difficult to establish, parties usually can bring in outside evidence.
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Raising a Defense to the Formation of a Contract
The parol evidence rule does not apply when a party raises a defense to the formation of a contract, such as mistake, misunderstanding, or misrepresentation. Parties may always introduce evidence that would show that no valid contract exists or that the contract is voidable.
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Establishing a Defense to the Enforcement of the Contract
Similarly, the parol evidence rule does not apply to evidence offered to establish a defense such as mistake, misrepresentation, incompetence, illegality, duress, or lack of consideration. If the evidence would make the contract void or voidable, then the parol evidence rule does not apply.
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Separate Deal
Even when there is full integration, evidence may be offered if it represents a distinct and separate contract.
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Condition Precedent
Parol evidence may also be admitted to prove a condition precedent to the existence of the contract.
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Ambiguity and Interpretation
Evidence may be admitted to interpret or clarify an ambiguity in the agreement. This can include evidence of trade usage or even local custom to show that a particular word or phrase had a particular meaning. If the ambiguity is obvious, the extrinsic evidence may be introduced. If the agreement is not ambiguous on its face, courts approach interpretation in two ways.
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Plain-meaning rule
This rule provides that the objective definitions of contract terms control the meaning of the contract, regardless of whether the meaning corresponds with the parties’ actual intent. Sometimes, courts will go outside the document to clarify the ordinary meaning of terms that are ambiguous or overly vague.
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Context rule
Some states permit courts to use a contextual approach to contract interpretation. Under the context rule, judges determine the contract’s meaning by considering all evidence of the facts and circumstances related to the transaction. The goal is to effectuate the parties’ actual contract objectives and purposes.
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Subsequent Agreements
The parol evidence rule does not apply to evidence of agreements between the parties after a writing is executed.
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Trade Usage and Course of Dealing or Performance
Even if the terms of a written contract for the sale of goods appear to be unambiguous, a party may explain or supplement the terms by evidence of trade usage or a course of dealing or performance.
If the express contract terms are inconsistent with the course of performance, course of dealing, or trade usage, priority is given as follows: (1) Express terms prevail over all others, (2) Course of performance prevails over course of dealing and trade usage; and
(3) Course of dealing prevails over trade usage.
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Course of performance
A course of performance is a sequence of conduct that is relevant to understanding an agreement between the parties if: (1) The agreement involves repeated occasions for performance by a party; and (2)The other party accepts performance without objection and with knowledge of the course of performance. A course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
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Course of dealing
A course of dealing is a sequence of conduct concerning previous transactions between the parties that can reasonably establish a common basis to interpret their conduct.
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Trade Usage
Trade usage is any practice or method of dealing in the particular business or industry that is used with such regularity as to justify an expectation that it will be used in the instant case.
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Conditions and Performance
The failure of a condition relieves a party of the obligation to perform. The failure of a party to perform a promise constitutes breach.A condition is a future event that must take place before a party’s contractual rights or obligations are created, destroyed, or enlarged. A promise constitutes a party’s obligation to act or refrain from acting. Ambiguity as to whether a statement creates a promise or a condition is usually resolved in favor of a promise over a condition.
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Types of Conditions
A condition may be express (clearly stated in the agreement) or implied (presumed based on the nature of a transaction).
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Express Conditions
Express conditions are established (expressed) in the contract. Words in the contract such as “on the condition that” or “provided that” are typical examples of express conditions. Express conditions must be complied with fully unless excused; substantial performance will not suffice. Arbitration clauses are enforceable, except when a consumer might be waiving an important substantive right. An express condition is enforceable even when the failure to meet the condition results in the denial of compensation.
For example, consider a buyer and seller who enter into a contract for the sale of a house if the buyer can obtain a loan. Under their contract, the seller promised to sell the house to the buyer, and the buyer correspondingly promised to buy the house. In this example, both promises are expressly conditioned on the buyer’s obtaining a loan.
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Implied Conditions
Implied conditions are conditions that are deemed to be part of the contract.
Implied-in-fact conditions are deemed conditions because the nature of the agreement suggests that the parties truly intended the conditions but failed to expressly include them.
Implied-in-law conditions are known as “constructive conditions.” Constructive conditions are supplied by a court if reasonable under the circumstances.[i]
The most common types of court-supplied implied conditions are called “constructive conditions of exchange” and arise most frequently in construction and employment contracts. A court will imply that the builder or employee must perform first (at least substantially) before the other side’s performance (the payment of money) becomes due. In addition to good faith, the UCC implies a duty of cooperation on the parties when one party’s performance depends on the cooperation of the other party. If a party fails to cooperate, the other party may suspend performance without being in breach.
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Timing of Conditions
Performance by one or both of the parties may be made expressly conditional in the contract, and the condition may precede the obligation to perform (condition precedent) or excuse the duty to perform after a particular event occurs (condition subsequent). A condition subsequent exists only for a duty that is absolute. (Note: Under the Restatement (Second) of Contracts, a condition subsequent is treated as a discharging event rather than as a condition.)A condition may also be a concurrent condition with another condition; each party’s duty to perform is conditioned on the other party’s duty to perform. Concurrent conditions effectively require each party to perform simultaneously.
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Burden of Proof
If a defendant’s duty is subject to a condition precedent, then the plaintiff has the burden of proving that the condition occurred. If the defendant’s duty is subject to a condition subsequent, then the defendant must prove the occurrence of the condition to avoid liability.
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Satisfaction of Conditions
The approach to determining whether a condition is satisfied is usually an objective standard based on whether a reasonable person would be satisfied. In most contracts, it is easy to conclude that all conditions have been satisfied. In contracts based on aesthetic taste, however, the satisfaction of the condition may be more difficult to determine.
When a party’s aesthetic taste determines whether the other party’s performance is satisfactory (e.g., painting a family portrait), satisfaction is determined using a subjective standard. Under this standard, if the party is honestly dissatisfied, even if the dissatisfaction is unreasonable, the condition has not been met. However, the party’s dissatisfaction must be in good faith, or a claim of dissatisfaction can be a breach, such as when a party is asserting dissatisfaction merely to avoid a contractual obligation. The objective standard is preferred when the matter subject to a party’s satisfaction involves the quality of nonunique goods or workmanship, rather than aesthetic taste.
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Order of Performance
When only one party’s performance of a contractual duty requires a time period, that party must complete performance before the other party is required to perform, unless the language or circumstances indicate otherwise. By contrast, when a party’s performance can be rendered at the same time as the other party’s performance, each party’s performance is conditioned on the other party’s performance (known as “the constructive condition of exchange”); consequently, both parties’ performances are due simultaneously, unless the language or circumstances indicate otherwise. In such a case, one party’s failure to perform excuses the other party’s performance.
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Substantial Performance
Substantial performance is the completion of all but the nonmaterial terms of a contract. A party who substantially performs in good faith can recover on the contract even though that party has not rendered full performance.
When parties expressly agree to a condition precedent (or a concurrent condition), they are generally held strictly to that condition; a party must fully comply with that condition before the other party’s performance is due. A party who substantially complies with such implied or constructive conditions can trigger the other party’s obligation to perform. This is known as the doctrine of substantial performance. The doctrine of substantial performance does not generally apply to a contract for the sale of goods.
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Effect on damages
In general, the party who substantially performed can recover the contract price minus any amount that it will cost the other party to obtain the promised full performance. Generally, a party who has not substantially performed cannot recover damages based on the contract, but the party may be able to recover through restitution.
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Willful breach
Substantial performance is less likely to be found when a party intentionally furnishes services that materially differ from what the party promised. Such a breach is more likely to be treated as a material breach.
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Material breach
The other side to substantial performance is material breach. A party who fails to substantially perform is in material breach. Many jurisdictions use the following five-pronged test to determine whether a breach is material: (1) The degree to which the breach deprives the other party of the benefit she reasonably expected, (2) The extent to which that party can be compensated for that deprivation, (3) The extent to which the breaching party will suffer forfeiture, (4) The likelihood that the breaching party will cure the breach, and (5) The extent to which the breaching party has acted in good faith.
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Time-is-of-the-essence clause
Although generally the doctrine of substantial performance does not apply when the parties have expressly provided for a specific condition, stock phrases that appear in many contracts do not automatically prevent the application of this doctrine. For example, even though a contract for the sale of land contains the phrase “time is of the essence,” a slight delay in performance typically does not give the other party the right to refuse to perform.
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Perfect Tender Under the UCC
Under the UCC, the basic obligations of a seller are to transfer ownership of the goods to the buyer and to tender goods conforming to the warranty obligations. The UCC requires perfect tender, and substantial performance will not suffice, except for installment contracts or when the parties agree that it applies. The buyer has a right to inspect the goods, and once the buyer accepts them, there is an obligation to pay. If a buyer rejects goods as nonconforming and time remains to perform under a contract, the seller has a right to cure and tender conforming goods.
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Transferring ownership
The UCC implies a warranty of title in all sales contracts, providing that the seller automatically warrants that: (1)The seller is conveying good title, (2) The transfer is rightful, and (3) The goods are delivered free from any security interest of which the buyer has no knowledge at the time of the contract. The buyer having actual knowledge of a security interest on the goods nullifies the warranty of title. The UCC permits disclaimer of the warranty of title, but such disclaimer must be by specific language or a circumstance that gives the buyer reason to know that the seller does not claim rightful title or that the seller is only purporting to sell such rights as the seller or a third person possesses.
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Seller’s obligation to tender goods
The seller must tender the goods in accordance with the contract provisions or in accordance with the UCC if the contract is silent on tender.
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Time of tender
In the absence of a specific contract provision, the goods must be tendered within a reasonable time after the contract is made.
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Manner of tender
The goods are to be delivered in one delivery unless otherwise provided in the contract or the circumstances give either party a right to make or demand delivery in lots (as when a party would clearly have no room to store the goods if they were delivered all at once).
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Place of tender
Unless otherwise agreed, the place of tender is the seller’s place of business (or residence, if the seller has no place of business), unless the goods are identified and the parties know that they are at some other location. In that case, the other location will be the place of tender.
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Method of tender
The four methods of tender are as follows: seller's place of business, shipment contract, destination contract, and goods in the hands of a bailee
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Seller's place of business
If the goods are tendered at the seller’s place of business, then the seller must place the goods at the disposition of the buyer and give the buyer notice, if notice is necessary to enable the buyer to take delivery.
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Shipment contract
If the contract does not specify a place of delivery, it is a shipment contract (often identified by the words “free on board [FOB] seller’s place of business”). For such contracts, the seller must deliver the goods to the carrier, make a proper contract for their shipment, obtain and deliver any document necessary for the buyer to obtain possession of the goods, and give the buyer notice that the goods have been shipped.
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Destination contract
If the contract is a destination contract (often identified by the words “FOB buyer’s place of business”), then the seller must deliver the goods to a particular place (specified in the contract) and tender them there by holding the goods at the buyer’s disposition and giving the buyer notice.
165
Goods in the hands of a bailee
When goods are in the hands of a bailee and are to be transferred without being moved, the seller must obtain a negotiable document of title or acknowledgment from the bailee of the buyer’s rights in the goods. However, unless the buyer seasonably objects, the seller can supply the buyer with a non-negotiable document of title or a written direction to the bailee to deliver the goods to the buyer. A contract that requires the seller to ship goods to the buyer by a third?party carrier is either a shipment contract or a destination contract. In the absence of a contract term or trade usage to the contrary, a shipment contract is presumed when the contract requires shipment by a third-party carrier. A sales contract is not a destination contract simply because the seller directs the carrier to ship to a particular destination; a “ship to” term has no significance in determining whether a contract is a shipment or destination contract for risk-of-loss purposes.
166
Contracts specifying cost, insurance, and freight
When a contract specifies cost, insurance, and freight (CIF), the price includes: (1) The cost of the goods, (2) The cost of transporting the goods, and (3) The cost of insuring the goods during shipment.
In a cost and freight (C&F) contract, the price includes: (1) The cost of the goods, and (2) The cost of shipment.
167
Contracts specifying free alongside ship
When a contract specifies free alongside ship, the seller is obligated to deliver the goods alongside a designated vessel in a manner that comports with the ordinary course of business of the port of delivery, or at a specified dock.
168
Buyer's obligations
When a conforming tender is made, the buyer is obligated to accept and, unless otherwise agreed, to pay for the goods. Rejection amounts to breach of contract.
169
Time and place of payment
Unless otherwise agreed, payment is generally due at the time and place at which the buyer is to receive the goods, even though the place of delivery is deemed to be the seller’s place of business under a shipment contract. The buyer may exercise his right of inspection before paying, even though the risk of loss has already been passed to the buyer. When goods are shipped on credit, the credit period begins to run from the time of shipment, but dating the invoice with an earlier time or a delay in sending the invoice will correspondingly delay the start of the credit period.
