Read attached 2 chapters (chapter 9 and 10) and submit a news article/ journal that related to the chapters read. 

Must be current news and fortune 500 companies. 

2 pages per chapter!! 

This is due Wednesday at 9AM EST!!!! 

Chapter Nine The Law of Contracts and Sales—I

It is a fundamental requirement of a free-enterprise economy that entities in the private sector and at all levels of government be able to enter into agreements that are enforceable by courts of law. Without the assurance that business agreements are legally enforceable, everyday commercial dealings would be difficult to carry out. Contract law has evolved to provide enterprises with the predictability and security they need to flourish and to produce quality products.

Contract law affects several other areas of law discussed in this book. When we take up the law of torts and product liability (

Chapters 11

 and 

12

), for instance, much of our discussion will concern breaches of the warranties of merchantability, fitness, or usefulness. In our review of the law of business associations (

Chapters 16

 and 

17

), we will examine contracts between principal and agents, employer and employees, and partners in partnership agreements. You will see when we analyze antitrust law (

Chapter 24

) that contracts that unreasonably restrain trade are prohibited. The basis for our discussion of labor law (

Chapter 20

) is collective bargaining agreements and what practices government regulation will tolerate being incorporated into those agreements. Finally, when we discuss the relationship between management and consumers (

Chapter 25

), the law of contracts will be our starting point. Contract law is thus immensely significant in the legal environment of business.

This chapter begins with a definition and classification of contract law. It analyzes the six elements of a contract and then explains which contracts must be in writing in order to be enforceable. The parol evidence rule, the nature of third-party beneficiary contracts, and the assignment of rights completes 

Chapter 9

.

Critical Thinking About The Law

Contract law promotes predictability in exchange. In other words, as a future business manager, you might enter into a contractual agreement in which you agree to pay a certain amount of money in exchange for another business’s goods or services. Because contracts are legally enforceable, you are much more likely to receive these goods at the price on which you both agreed when there is an existing contract. Hence, there is greater predictability, and less risk, when a contract exists, because the possibility of a lawsuit deters businesses from deviating from the terms of a contract. Therefore, contracts keep businesses and individuals accountable to the agreements they make.

Predictability and accountability are only two reasons why contract law is so important, but certain primary ethical norms underlying these reasons have greater priority and influence than others. As you consider the benefits of contract law, this critical thinking exercise will urge you to think about the primary ethical norms that influence the law of contracts (see 

Chapter 1

).

1. Which primary ethical norm would be most important to someone who viewed contract law as a crucial method of promoting predictability in exchange?

Clue: This person might want to ensure that his business runs smoothly, even though some of his operations depend on another business or individual honoring the terms of the contract.

2. If someone were mostly concerned with contract law’s function of keeping businesses and individuals accountable to their agreements, which primary ethical norm would this person value the most?

Clue: This person might be fearful that other businesses or individuals might not perform as they agreed, thereby harming those who depend on their performance.

Definition

, Sources, and Classifications of Contract Law

Definition

A 

contract

 is generally defined as a legally enforceable exchange of promises or an exchange of a promise for an act that assures the parties to the agreement that their promises will be enforceable. Contract law brings predictability to the exchange. For example, if a corporation manufacturing video recorders enters into an agreement with a retailer to provide a fixed number of video recorders each month, the retailer knows that it can rely on the corporation’s promise and advertise the availability of those video recorders to its customers, because if the manufacturer tries to renege on the agreement, its performance is enforceable in a court of law. Contracts are essential to the workings of a private-enterprise economy. They assist parties in the buying and selling of goods, and they make it possible to shift risks to parties more willing to bear them.

contract

A legally enforceable exchange of promises or an exchange of a promise for an act.

Sources of Contract Law

Contract law is grounded in the case law of the state and federal courts, as well as state and federal statutory law. Case law—or what is often known as the common law because it originated with the law of English courts—governs contracts dealing with real property, personal property, services, and employment contracts. Statutory law, particularly the Uniform Commercial Code (UCC), generally governs contracts for the sale of goods. The UCC has been adopted in whole or in part by all 50 states and the District of Columbia. This chapter integrates case law with the UCC.

Case Law

 The law of contracts originated in judicial decisions in England and the United States. Later, states and the federal courts modified their case law through the use of statutory law. Nonetheless, the formation of contract law and its understanding are based on fundamental principles set out by the courts and, more recently, in the Restatement of the Law of Contracts. The Restatement summarizes contract principles as set out by legal scholars. Case law (or common law) applies to contracts that cover real property (land and anything attached permanently therein or thereto), personal property, services, and employment contracts.

Uniform Commercial Code

 To obtain uniformity among state laws, particularly law as applicable to sales contracts, the National Conference of Commissioners on Uniform State Laws and the American Law Institute drafted a set of commercial laws applicable to all states. This effort was called the Uniform Commercial Code. Gradually, the states adopted the document in whole or in part. Thereafter, businesses had uniform requirements to expedite interstate contracts for the sale of goods.

In general, the requirements of Article 2 of the UCC regarding formation and performance of contracts are more liberal than those applied to contracts based on common-law principles. Particular differences are noted in sections of this chapter and 

Chapter 11

. Article 2 seeks to govern the sale of goods in all states except Louisiana. A sale consists of the passing of title to goods from buyer to seller for a price. A contract for the sale of goods includes those for present and future sales. The code defines goods as tangible personal property. Personal property includes property other than real property (land and that attached thereto). When the UCC has not specifically modified the common law of contracts, common law applies.

Please note: Article 2 is continually being revised to provide coverage of contracts dealing with electronic data processing, licenses, and leases. Article 2A prescribes a set of uniform rules for the creation and enforcement of contracts for the sale of leases of goods (e.g., lease contracts for the sale of an automobile). In this case, a question of whether the case law or the UCC (Article 2) should govern.

 Case 9-1 Paramount Contracting Co. v. DPS Industries, Inc.

709 S.E.2d 288 (Ga. App. 2011)

Paramount, a civil engineering firm and general contractor, submitted a bid to perform the construction of runway improvements at the Atlanta Hartsfield-Jackson International Airport. Paramount included DPS’s quote for supplying the fill dirt for the project in its bid. DPS’s written quote described its work as “furnish[ing] and haul[ing]/deliver[ing] borrow dirt from DPS’s location to the job site,” and specifically excluded the provision of “traffic control, dust control, security and escort services” from the scope of work. The quote provides that the dirt would be delivered for a price of “$140/Truck Load.”

After Paramount was awarded the airport project, it contacted DPS about the amount of dirt and number of trucks it would need for the airport project. DPS believed that the parties had a contract, and it sent a letter to Paramount confirming that it was “holding approximately 45,000 [cubic yards] of borrow dirt ready to be hauled in to your project once we receive [the] 10-day notice from you.” Paramount did not respond.

Over the next two months, DPS sent other letters to Paramount about their agreement, but Paramount did not respond. After a meeting of executives from the two companies, Paramount sent the following:

[Y]ou insisted that we give commitment to you for buying the dirt before you will give us price [for other work]. This really was a surprise to us . . . Also please note that we have never committed to buy all the fill materials from you. In the last meeting you were informed that we intend to purchase some materials from you and it may be through other subcontractors. Our decisions will be conveyed to you as soon as possible.

Ultimately, Paramount bought the dirt it needed from another vendor. DPS sued Paramount for breach of contract. The jury found for DPS. Paramount appealed.

Judge Blackwell

The question of formation depends on [whether the contract is] governed by Article 2 of the Commercial Code or the common law. It is easier, generally speaking, to form a binding contract under Article 2 than under the common law. Article 2 applies only to contracts for the sale of goods, and it does not apply to contracts for the mere provision of services or labor. When a transaction involves both the sale of a good and the provision of services or labor, whether the transaction is governed by Article 2 depends upon the “predominant purpose” of the transaction. When the predominant element of a contract is the sale of goods, the contract is viewed as a sales contract and [Article 2] applies, even though a substantial amount of service is to be rendered in installing the goods.

DPS said that the parties contemplated only that DPS would sell and deliver dirt, and DPS urged that Article 2 applies because the sale of goods—the dirt that DPS offered to furnish Paramount—was the predominant purpose of the contemplated transaction. Paramount, on the other hand, said that the parties also contemplated that DPS would perform other tasks, such as placing and compacting dirt at the construction site.

It was for the jury to weigh the conflicting evidence, resolve this disputed issue of fact, and determine exactly what the contemplated transaction involved. So long as the evidence would permit a rational jury to resolve this issue in a way that would lead to a conclusion that the sale of goods was the predominant purpose of the contemplated transaction.

The evidence is consistent with the finding that the sale of dirt was the predominant purpose of the contemplated transaction. The DPS quote contains representations and warranties about the quality of the dirt. The pricing was based on the quantity of dirt furnished, not the miles driven or time spent to deliver the dirt. DPS did not provide a separate pricing for the sale of the dirt and its delivery. Paramount itself characterized the transaction repeatedly as one for the sale and furnishing of dirt, not the hauling of dirt.

Paramount relies on testimony that the costs of furnishing and hauling dirt would amount to approximately $70 or $80 per load, and that these costs would include both the expenses of operating a backhoe to load trucks and the expenses of operating the trucks. Paramount says that these cost factors all relate to hauling dirt and establish, therefore, that most of the transaction costs were related to hauling, not furnishing, the dirt.

Under Article 2, dirt is a “good” only if it is severed from the land by the seller, so the separation of dirt from the land is a necessary component of the sale of dirt, not its transportation after sale.

Finally, Paramount asks us to attribute the majority of the costs to hauling on the basis of the conventional wisdom that “dirt is cheap.” We decline this invitation. Dirt might well be cheap, but we have no reason to believe that it is free and no basis for knowing just how cheap it is. We are not prepared to speculate that the commercial value of such dirt is negligible, much less to reverse a judgment entered on a jury verdict based on such speculation.

*

* 

Paramount Contracting Co. v. DPS Industries, Inc. 709 S.E.2d 288 (Ga. App. 2011).

Judgment affirmed.

Classifications of Contracts

A contract is generally referred to as a binding set of promises (agreement) that courts will enforce. Terms that refer to types of contracts are sprinkled throughout this text. So that you will clearly understand what we are talking about, we define several classifications of contracts in this section.

Express and Implied Contracts

 An 

express contract

 is an exchange of oral or written promises between parties, which are in fact enforceable in a court of law. Note that oral and written promises are equally enforceable. An 

implied (implied-in-fact) contract

 is established by the conduct of a party rather than by the party’s written or spoken words. For example, if you go to the dentist in an emergency and have a tooth extracted, you and the dentist have an implied agreement or contract: She will extract your throbbing tooth in a professional manner and you will pay her for her service. The existence and content of an implied-in-fact contract are determined by the reasonable-person test: Would a reasonable person expect the conduct of these parties to constitute an enforceable contract? Additionally, see the following case for an examination of various types of contracts.

express contract

An exchange of oral or written promises between parties, which are enforceable in a court of law.

implied (implied-in-fact) contract

A contract that is established by the conduct of a party rather than by the party’s written or spoken words.

 Case 9-2 Pan Handle Realty, LLC v. Olins

Appellate Court of Connecticut 140 Conn. App. 556, 59A.3d 842 (2013)

The plaintiff is a Connecticut limited liability company (a form of business organization—see 

Chapter 17

), which constructed a luxury home at 4 Pan Handle Lane in Westport [Connecticut] (the property). The defendant [Robert Olins] expressed an interest in leasing the property from the plaintiff for a period of one year. In pursuit of that interest, he submitted an application proposing to rent the property from the plaintiff at the rate of $12,000 per month, together with an accompanying financial statement. The plaintiff responded to the defendant’s proposal by preparing a draft lease for his review, which the defendant promptly forwarded to his attorney.

On January 17, 2009, the defendant and his real estate agent, Laura Sydney, met with Irwin Stillman, then acting as the plaintiff’s representative, to discuss the draft lease (January 17 meeting). At that meeting, the defendant and Irwin Stillman agreed to several revisions to the draft lease that had been proposed by the defendant’s attorney, then incorporated the revisions into the lease and signed it. The resulting lease, which was dated January 19, 2009, specified a lump sum annual rent of $138,000. At the time of the signing, the defendant gave the plaintiff a postdated check for $138,000. The lease agreement required the plaintiff to make certain modifications to the property prior to the occupancy date, including the removal of all of the furnishings from the leased premises.

On January 21, 2009, the plaintiff’s real estate broker informed it that, according to Sydney, the defendant planned to move into the property on January 28, 2009. The next day, the defendant requested information from the plaintiff for his renter’s insurance policy, which the plaintiff duly provided. By that time, the plaintiff had also completed the modifications requested by the defendant at the January 17 meeting and agreed to in the lease agreement, including the removal of the furniture. The defendant’s check, which was postdated January 26, 2009, was deposited by the plaintiff on that date.

The following day, however, Citibank advised the plaintiff that the defendant had issued a stop payment order on his postdated rental check and explained that the check would not be honored. The plaintiff subsequently received a letter from the defendant’s attorney stating that “[the defendant] is unable to pursue any further interest in the property.” Thereafter, the plaintiff made substantial efforts to secure a new tenant for the property, listing the property with a real estate broker, advertising its availability and expending $80,000 to restage it. Although, by these efforts, the plaintiff generated several offers to lease the property, was never able to find a qualified tenant, or, for that reason, to enter into an acceptable lease agreement with anyone for all or any part of the one year period of the defendant’s January 19, 2009 lease.

Thereafter, on March 6, 2009, the plaintiff filed this action [in a Connecticut state court], alleging that the defendant had breached an enforceable lease agreement. The plaintiff further alleged that, despite its efforts to mitigate [lessen] its damages, it had sustained damages as a result of the defendant’s breach, including unpaid rental payments it was to have received under the lease, brokerage commissions it incurred to rent the property again, and the cost of modifications to the property that were completed at the defendant’s request.

The court issued a memorandum of decision resolving the merits of the case in favor of the plaintiff (May 11 decision). In that decision, the court found, more particularly, that the plaintiff had met its burden of proving that the parties had entered into an enforceable lease agreement, that the defendant had breached that agreement, and that the breach had caused the plaintiff damages in lost rent and utility bills incurred during the lease period. On the basis of these findings, the court awarded the plaintiff compensatory damages in the amount of $146,000—$138,000 in unpaid rent for the term of the lease and $8,000 in utility fees incurred by the plaintiff during the lease period, plus interest and attorney’s fee.

Judge Sheldon

The defendant’s claim on appeal is that the court improperly determined that the parties entered into a valid lease agreement. The defendant contends that because “material terms were still being negotiated and various issues were unresolved,” there was no meeting of the minds, which is required to form a contract.

In order for an enforceable contract to exist, the court must find that the parties’ minds had truly met. . . . If there has been a misunderstanding between the parties, or a misapprehension by one or both so that their minds have never met, no contract has been entered into by them and the court will not make for them a contract which they themselves did not make.

There was evidence in the record to support the court’s finding that the parties entered into a valid lease agreement because there was a true meeting of the parties’ minds as to the essential terms of the agreement. Prior to the January 17 meeting, the plaintiff had provided the defendant with a draft lease agreement, which the defendant had forwarded to his attorney for review. The defendant testified that at the January 17 meeting, he and the plaintiff’s representative discussed the revisions proposed by the defendant’s attorney, made the revisions and signed the lease.
*

* 
Pan Handle Realty, LLC v. Olins Appellate Court of Connecticut 140 Conn. App. 556, 59A.3d 842 (2013).

Types of Contracts

Express

An exchange between parties of oral or written promises that are enforceable

Implied

A contract established by the conduct of the parties

Unilateral

An exchange of a promise for an act

Bilateral

An exchange of one promise for another promise

Void

A contract that at its formation has an illegal object or serious defects

Voidable

A contract that gives one of the parties the option of withdrawing from the agreement

Valid

A contract that meets all the legal requirements for a fully enforceable contract

Executed

A contract the terms of which have been performed

Unenforceable

A contract that exists but cannot be enforced because of a valid defense

Quasi-contract

A court-imposed agreement to prevent the unjust enrichment of one party when the parties have not previously agreed to an enforceable contract

Unilateral and Bilateral Contracts

 A 

unilateral contract

 is defined as an exchange of a promise for an act. For example, if City A promises to pay a reward of $5,000 to anyone who provides information leading to the arrest and conviction of the individual who robbed a local bank, the promise is accepted by the act of the person who provides the information. A 

bilateral contract

 involves the exchange of one promise for another promise. For example, Jones promises to pay Smith $5,000 for a piece of land in exchange for Smith’s promise to deliver clear title and a deed at a later date. In the case below we see the importance of whether a unilateral contract exists.

unilateral contract

An exchange of a promise for an act.

bilateral contract 

The exchange of one promise for another promise.

 Case 9-3 Audito v. City of Providence

United States District Court, District of Rhode Island 263 F. Supp. 2d 2358 (2003)

The city of Providence, Rhode Island, decided to hire a class of police officers in 2001. All had to graduate from the Providence Police Academy to be eligible. Two sessions were held. To be qualified, the applicants to the academy had to pass a series of tests and be deemed qualified after an interview. Those judged most qualified were sent a letter informing them that they had been selected to attend the academy if they completed a medical checkup and a psychological exam. The letter for the applicants to the 61st Academy, dated October 15, stated that it was a “conditional offer of employment.”

Meanwhile, a new chief of police was appointed in Providence. He changed the selection process, which caused some who had received the letter to be rejected. Audito and 13 newly rejected applicants (who had completed the examination) sued the City of Providence in federal district court, seeking a halt to the 61st Academy unless they attended. The plaintiffs alleged in part that the city was in breach of its contract.

Justice Torres

[T]he October 15 letter is a classic example of an offer to enter into a unilateral contract. The October 15 letter expressly stated that it was a “conditional offer of employment” and the message that it conveyed was that the recipient would be admitted into the 61st Academy if he or she successfully completed the medical and psychological examinations, requirements that the city could not lawfully impose unless it was making a conditional offer of employment.

Moreover, the terms of that offer were perfectly consistent with what applicants had been told when they appeared [for their interviews]. At that time, [Police Major Dennis] Simoneau informed them that, if they “passed” the [interviews], they would be offered a place in the academy if they also passed the medical and psychological examinations.

The October 15 letter also was in marked contrast to notices sent to applicants by the city at earlier stages of the selection process. Those notices merely informed applicants that they had completed a step in the process and remained eligible to be considered for admission into the academy. Unlike the October 15 letter, the prior notices did not purport to extend a “conditional offer” of admission.

The plaintiffs accepted the city’s offer of admission into the academy by satisfying the specified conditions. Each of the plaintiffs submitted to and passed lengthy and intrusive medical and psychological examinations. In addition, many of the plaintiffs, in reliance on the City’s offer, jeopardized their standing with their existing employers by notifying the employers of their anticipated departure, and some plaintiffs passed up opportunities for other employment.

The city argues that there is no contract between the parties because the plaintiffs have no legally enforceable right to employment. The city correctly points out that, even if the plaintiffs graduate from the Academy and there are existing vacancies in the department, they would be required to serve a one-year probationary period during which they could be terminated without cause. That argument misses the point. The contract that the plaintiffs seek to enforce is not a contract that they will be appointed as permanent Providence police officers; rather, it is a contract that they would be admitted to the Academy if they passed the medical and psychological examinations.
*

* 
Audito v. City of Providence United States District Court, District of Rhode Island, 263 F.Supp.2d 2358 (2003).

The federal district court ruled in favor of Audito et al.

Critical Thinking About The Law

The offer of admission to the Police Academy under certain conditions does not provide a guarantee of an employment contract. It does, however, provide the opportunities promised if the applicants fulfill certain conditions.

1. When the new police chief changed the rules for employment, why was he not permitted to do so legally?

Clue: The reasoning here is similar to the reasoning whenever one party to an agreement decides it does not like the contract it previously formed.

2. What is the relevant rule of law in this case?

Clue: What requirements are imposed once one makes an offer to enter into a unilateral contract?

Void, Voidable, and Valid Contracts

 A contract is 

void

 if at its formation its object is illegal or it has serious defects in its formation (e.g., fraud). If Jones promises to pay Smith $5,000 to kill Clark, the contract is void at its formation because killing another person without court sanction is illegal. A contract is 

voidable

 if one of the parties has the option of either withdrawing from the contract or enforcing it. If Jones, a 17-year-old in a state where the legal age for entering an enforceable contract is 18, executes an agreement with Smith, an adult, to buy a car, Jones can rescind (cancel) the contract before he is 18 or shortly thereafter. A 

valid contract

 is one that is not void, is enforceable, and meets the six requirements discussed later in this chapter.

void contract

A contract that at its formation has an illegal object or serious defects

.

voidable contract

A contract that gives one of the parties the option of withdrawing.

valid contract

A contract that meets all the legal requirements for a fully enforceable contract.

Executed and Executory Contracts

 An 

executed contract

 is one of which all the terms have been performed. In our earlier example, if Jones agrees to buy Smith’s land for $5,000, and Smith delivers clear title and a deed and Jones gives Smith $5,000, the necessary terms (assuming no fraud) have been carried out or performed. In contrast, an executory contract is one of which all the terms have not been completed or performed. If Jones agrees to paint Smith’s house for $2,500 and Smith promises to pay the $2,500 upon completion of the paint job, the contract remains executory until the house is completely painted. The importance of complete performance will be shown in 
Chapter 11
’s discussion of discharge and remedies for a breach of contract.

executed contract

A contract of which all the terms have been performed.

Quasi-Contract

 A 

quasi-contract

 is a court-imposed agreement to prevent unjust enrichment of one party when the parties had not really agreed to an enforceable contract. For example, while visiting his neighbor, Johnson, Jones sees a truck pull up at his own residence. Two people emerge and begin cutting his lawn and doing other landscaping work. Jones knows that neither he nor his wife contracted to have this work performed; nevertheless, he likes the job that the workers are doing, so he says nothing. When the landscapers finish, they put a bill in Jones’s mailbox and drive off. It turns out that the landscapers made an honest mistake: They landscaped Jones’s property when they were supposed to landscape Smith’s. Jones refuses to pay the bill, arguing that he did not contract for this work. He even calls the landscapers unflattering names. The court orders Jones to pay, finding that he was unjustly enriched. (Jones would not have had to pay if he had not been in a position to correct the mistake before it took place. That is, Jones would not have had to pay had this mistaken landscaping occurred while he and his wife were vacationing in Paris.)

quasi-contract

A court-imposed agreement to prevent the unjust enrichment of one party when the parties had not really agreed to an enforceable contract.

It should be noted that the receiver of the service must pay for the value of the service, not necessarily the contract price, only if he were in a position to stop the erroneous service.

Elements of a Legal Contract

A valid contract has six elements: (1) legal offer, (2) legal acceptance, (3) consideration, (4) genuine assent, (5) competent parties, and (6) a legal object. When these six elements are present, a legally enforceable contract usually exists.

Legal Offer

The contractual process begins with a 

legal offer

. “I will pay you $2,000 for your 1978 Cutlass,” Smith says to Jones. Smith has initiated a possible contract and is known as the offeror. Jones is the offeree. For Smith’s offer to be valid, by common-law principles, it must meet three requirements:

legal offer

An offer that shows objective intent to enter into the contract, is definite, and is communicated to the offeree.

1. The offer must show objective intent to enter into the contract. The court will look at the words, conduct, writing, and, in some cases, deliberate omissions of the offer. The court will not concern itself with subjective measurements, such as what was in the person’s mind at the time of entering into the contract. It simply asks whether a reasonable person who listened to Smith’s statements would conclude that there was a serious intent to make an offer.

2. The offer must be definite; that is, there must be some reference to subject matter, quantity of items being offered, and price of the items. In Smith’s offer, all three references are present. Article 2 of the UCC, because it is intended to govern daily transactions in goods, is less stringent. It allows the price and other terms—but not subject matter or quantity—to remain open or to be based on an industry standard of “reasonableness.” Suppose, for example, that X offers to sell “20 widgets that are needed” to Y at a “reasonable price with specific terms to be negotiated.” This is an example of the more open-ended approach to legal offers taken by UCC Section 2-204. The courts also weigh industry custom and prior dealings to determine whether the terms are definite.

3. The offer must be communicated to the party (offeree) intended by the offeror. Smith’s offer was communicated directly to Jones, but what of an offer by Bank X to pay for information leading to the arrest and conviction of Y, a robber? Z does not know of the reward, but several days after it is offered, she sees Y running out of a store with something in his hand. Z apprehends Y. Should she get the reward from Bank X? The bank’s offer of a reward was not communicated to her, so the technical requirements of contract law have not been met. Most state courts, however, and many state statutes, would allow Z to collect, for it is public policy to encourage citizens to assist in apprehending criminals.

The case below indicates that there is a lack of definiteness.

 Case 9-4 Baer v. Chase

United States Court of Appeals, Third Circuit 392 F.3d 809 (2004)

Greenberg, Judge.

Chase, who originally was from New Jersey, but relocated to Los Angeles in 1971, is the creator, producer, writer and director of The Sopranos. Chase has numerous credits for other television productions as well. Chase had worked on a number of projects involving organized crime activities based in New Jersey, including a script for “a mob boss in therapy,” a concept that, in part, would become the basis for The Sopranos.

In 1995, Chase was producing and directing a Rockford Files “movie-of-the-week” when he met Joseph Urbancyk who was working on the set as a camera operator and temporary director of photography.

Chase, Urbancyk, and Baer met for lunch on June 20, 1995, with Baer describing his experience as a prosecutor. Baer also pitched the idea to shoot “a film or television shows about the New Jersey Mafia.” At that time Baer was unaware of Chase’s previous work involving mob activity premised in New Jersey. At the lunch there was no reference to any payment that Chase might make to Baer for the latter’s services.

In October 1995, Chase visited New Jersey for three days. During this “research visit” Baer arranged meetings for Chase with Detective Thomas Koczur, Detective Robert A. Jones, and Tony Spirito who provided Chase with information, material, and personal stories about their organized crime. Baer does not dispute that virtually all of the ideas and locations that he “contributed” to Chase existed in the public record.

After returning to Los Angeles, Chase sent Baer a copy of a draft of a Sopranos screenplay that he had written, which was dated December 20, 1995. Baer asserts that after he read it he called Chase and made various comments with regard to it. Baer claims that the two spoke at least four times during the following year and that he sent a letter to Chase dated February 10, 1997, discussing The Sopranos script.

Baer asserts that he and Chase orally agreed on three separate occasions that if the show became a success, Chase would “take care of” Baer, and “remunerate Baer in a manner commensurate to the true value of his services.”

Baer claims that on each of these occasions the parties had the same conversation in which Chase offered to pay Baer, stating “you help me; I pay you.” Baer always rejected Chase’s offer, reasoning that Chase would be unable to pay him “for the true value of services Baer was rendering.” Each time Baer rejected Chase’s offer he did so with a counteroffer, “that I would perform the services while assuming the risk that if the show failed Chase would owe me nothing. If, however, the show succeeded he would remunerate me in a manner commensurate to the true value of my services.” Baer acknowledges the counteroffer always was oral and did not include any fixed term of duration or price. In fact, Chase has not paid Baer for his services.

On or about May 15, 2002, Baer filed a complaint against Chase in [a federal] district court [claiming among other things] breach of implied contract. Eventually Chase brought a motion for summary judgment. Chase claimed that the alleged contract [was] too vague, ambiguous and lacking in essential terms to be enforced.

The district court granted Chase’s motion.

Baer predicates [bases] his contract claim on this appeal on an implied-in-fact contract. The issue with respect to the implied-in-fact contract claim concerns whether Chase and Baer entered into an enforceable contract for services Baer rendered that aided in the creation and production of The Sopranos.

[A] contract arises from offer and acceptance, and must be sufficiently definite so that the performance to be rendered by each party can be ascertained with reasonable certainty. Therefore parties create an enforceable contract when they agree on its essential terms and manifest an intent that the terms bind them. If parties to an agreement do not agree on one or more essential terms of the purported agreement, courts generally hold it to be unenforceable.

[The] law deems the price term, i.e., the amount of compensation, an essential term of any contract. An agreement lacking definiteness of price, however, is not unenforceable if the parties specify a practicable method by which they can determine the amount. However, in the absence of an agreement as to the manner or method of determining compensation the purported agreement is invalid. Additionally, the duration of the contract is deemed an essential term and therefore any agreement must be sufficiently definitive to allow a court to determine the agreed upon length of the contractual relationship.

The question with respect to Baer’s contract claim, therefore, is whether his contract is enforceable in light of the traditional requirement of definitiveness. A contract may be expressed in writing, or orally, or in acts, or partly in one of these ways and partly in others. There is a point, however, at which interpretation becomes alteration. In this case, even when all of the parties’ verbal and non-verbal actions are aggregated and viewed most favorably to Baer, we cannot find a contract that is distinct and definite enough to be enforceable.

Nothing in the record indicates that the parties agreed on how, how much, where, or for what period Chase would compensate Baer. The parties did not discuss who would determine the “true value” of Baer’s services, when the “true value” would be calculated, or what variables would go into such a calculation. There was no discussion or agreement as to the meaning of “success” of The Sopranos. There was no discussion how “profits” were to be defined. There was no contemplation of dates of commencement or termination of the contract. And again, nothing in Baer’s or Chase’s conduct, or the surrounding circumstances of the relationship, shed light on, or answers, any of these questions. The district court was correct in its description of the contract between the parties: “The contract as articulated by the Plaintiff lacks essential terms, and is vague, indefinite and uncertain; no version of the alleged agreement contains sufficiently precise terms to constitute an enforceable contract.” We therefore will affirm the district court’s rejection of Baer’s claim to recover under a theory of implied-in-fact contract.
*

* 
Baer v. Chase, United States Court of Appeals, Third Circuit 392 F.3d 809 (2004).

Affirmed for the Plaintiff.

Methods of Termination of an Offer

 Generally, the common law provides five methods of terminating an offer.

1. Lapse of time. The failure of the offeree to respond within a reasonable time (e.g., 30 days) will cause an offer to lapse.

2. Death of either party. The death of the agent of a corporation, however, will not terminate the contract, because in most cases the company will continue.

3. Destruction of the subject matter. If the item contracted for cannot be replaced because of an accident or occurrence that is not the fault of the offeror, the offer may be terminated.

4. Rejection by the offeree. If the offeree does not accept the offer, it is terminated.

5. Revocation by the offeror. If the offeror withdraws the offer before the offeree accepts it, the offer is terminated.

The UCC differs somewhat from the common law in methods of termination of an offer. Here are some examples.

Rejection by the Offeree

 At common law, a counteroffer by the offeree constitutes rejection (method 4 in the preceding list) and brings about a termination of the offer. For example, suppose Jones offers to sell his house for $200,000 and no more or less. If Smith offers Jones $185,000, Smith has terminated the original offer and now has set forth a counteroffer ($185,000), which Jones can either accept or reject.

UCC Section 2-207 allows for modification by offerees when dealing with the sale of goods. For example, in the case of nonmerchants, such as Smith and Jones, a counteroffer by the offeree (Smith) does not constitute a rejection, because there is still a clear intent to contract, but the additional term added by the offeree will not become part of the contract. For example, suppose Smith offers to sell his bicycle to Jones for $300. If Jones tells Smith that he will buy his bicycle for the amount of $300 if Smith paints it black, a contract exists even though the painting of the bicycle was not part of the original offer by Smith.

If both parties to a contract for goods are merchants, under Section 2-207, terms added to a contract by an offeree will become additional terms and part of an enforceable contract unless one of the following conditions exists: (1) the added terms are material to the contract; or (2) the offeror limited the term of the original offer to the offeree by placing it in writing; or (3) one of the parties objects to any added term within a reasonable period of time.

Revocation by the Offeror

 At common law, the offer is terminated if the offeror notifies the offeree that the offer is no longer good before the offeree accepts it (revocation; method 5 in the preceding list). An offeree can forestall that type of termination by paying an offeror an amount of money to keep the offer open for a time. This tactic is called an option, and usually it will exist for 30 days. During this time, the offeror can neither sell the property to another nor revoke the offer. Under UCC Section 2-205, a firm offer made by a merchant in writing, and signed by the merchant with another, must be held open for a definite period (three months). The firm offer cannot be revoked, and no consideration is required (the offeree need not buy an option).

Applying the law to the facts . .

Linda offers Stacey a deal to purchase Linda’s car for a great price. Stacey agrees, and puts down 5 percent of the price of the car, and says she will pay the rest in a month. Before the month is over, Linda changes her mind and tells Stacey that due to unforeseen circumstances, she cannot sell the car anymore. Stacey tells Linda she cannot change her mind like that. Is Stacey correct? Why or why not?

Legal Acceptance

Legal acceptance

 involves three requirements that must be met. For an acceptance to be valid,

legal acceptance

An acceptance that shows objective intent to enter into the contract, that is communicated by proper means to the offeror, and that mirrors the terms of the offer.

1. an intent to accept must be shown by the offeree;

2. the intent must be communicated by proper means; and

3. the intent must satisfy, or “mirror,” the terms of the offer.

Intent to Accept

 There must be objective intent (words, conduct, or writing) similar to that required of a legal offer. If Jones offers to sell Smith his 1978 Cutlass for $2,000 and Smith responds by stating, “I’ll think it over,” there is no objective intent to accept because there exists no present commitment on the part of Smith. In general, silence does not constitute acceptance unless prior conduct of the parties indicates that they assume it does.

Communication of Acceptance

 In general, any “reasonable means of communication” may be used in accepting an offer, and acceptances are generally binding upon the offeror when dispatched. Both industry custom and the subject matter will determine “reasonableness” in the eyes of a court. If, however, the offeror requires that acceptance be communicated only in a certain form (e.g., letter), any other form that is used by the offeree (e.g., telegram) will delay the effectiveness of the acceptance until it reaches the offeror. If the offer states that “acceptance must be by mail” and the mails are used, the acceptance is effective upon deposit at the post office. If a telegram is used instead of mail, the acceptance will not be effective until it reaches the offeror. The strictest interpretation of this rule (known as the “mailbox rule”) states that any acceptance at variance with the terms of the offer cannot form a contract even when actually received by the offeror.

Determining whether there has been a valid acceptance is not always easy, as shown by the following classic case involving Pamela Lee Anderson, of Baywatch and (more recently) Dancing with the Stars, fame.

 Case 9-5 The Private Movie Company, Inc. v. Pamela Lee Anderson et al.

Superior Court of California, County of Los Angeles (1997)

The plaintiff, Private Movie Company (Efraim), sued the defendant, Pamela Lee Anderson (Lee), for $4.6 million, alleging that she breached both an oral and a written contract so that she could work on a different project. The plaintiff claimed that an oral contract existed on November 18, 1994, when the parties agreed on all of the principal terms of a “deal,” at the conclusion of a “business meeting” at the offices of defendant’s personal manager. The plaintiff claimed that a written contract was entered into on December 21, 1994, when the plaintiff’s lawyer sent the defendant copies of a “long-form” contract. The plaintiff claimed that this contract was a written embodiment of the oral agreement reached on November 18, 1994.

The somewhat confusing facts that were testified to, and disputed, at trial made it difficult for the judge to determine whether a contract existed. The events began in October 1994, when plaintiff’s attorney, Blaha, sent the plaintiff’s script to the defendant’s agent. After several conversations, an offer was also sent to her agent. At trial, Efraim testified that Lee had said she loved the script and the character, but she was concerned about the nudity and sexual content of the script. Efraim said that he told Lee that the script would be rewritten and he would do whatever she wished regarding the nudity.

On November 18, a business meeting was held by Efraim, his attorney, the defendant’s agents (Joel and Stevens) and manager (Brody), and the director, to negotiate a contract. Those present at the meeting testified that agreement was reached on a specific makeup person, security, trailer to be provided for Lee, start date, expenses, and per diem. The issue of limiting the amount of nudity used in the theatrical trailer or any of the advertising material was raised, and apparently was resolved by an understanding that Brody (defendant’s manager) would provide a list of dos and don’ts and that Private Movie would abide by them. The structure of the agreement was also discussed, with an understanding that there would be two contracts—an acting contract and a consulting contract—thereby allowing Private Movie to save money relating to payment of benefits. The issue of the sexual content or simulated sex in the movie script was not raised at the meeting, nor was the issue of any script rewrites brought up. At the end of the meeting, Efraim asked the defendant’s agent whether the deal was closed if Lee’s compensation was increased to $200,000. The agent said yes.

A few days later, Efraim had his attorney draft the agreement with the increased compensation. Several drafts were exchanged between the attorney and the defendant’s agent, all containing the following nudity clause:

Nudity. The parties hereto acknowledge that the Picture will include “nude and/or simulated sex scenes.” Player has read the screenplay of the Picture prior to receipt of the Agreement and hereby consents to being photographed in such scenes, provided that such “nude and simulated sex scenes” will not be [handled] nor photographed in a manner different from what has been agreed to unless mutually approved by Artist and producer.

The rewritten script was sent to the defendant on December 27, 1994. The plaintiff’s attorney testified that he called the defendant on December 29, 1994, and she said the script was great, but she wanted a different makeup artist and would split the difference in cost. The defendant testified that she recalled no such phone call. She said that she reviewed the script on January 1, 1995, saw that the simulated sex scenes remained, and called her manager to tell him she would not do the film.

The plaintiff found a less well-known actress to make the film and brought his action against the defendant.

Justice Horowitz

When the parties orally or in writing agree that the terms of a proposed contract are to be reduced to writing and signed by them before it is to be effective, there is no binding agreement until a written contract is signed. If the parties have orally agreed on the terms and conditions of a contract with the mutual intention that it shall thereupon become binding, but also agree that a formal written agreement to the same effect shall be prepared and signed, the oral agreement is binding regardless of whether it is subsequently reduced to writing.

Whether it is the intention of the parties that the agreement should be binding at once, or when later reduced to writing, or to a more formal writing, is an issue to be determined by reference to the words the parties used, as well as all of the surrounding facts and circumstances.

One of the essential elements to the existence of a contract is the consent of the parties. This consent must be freely given, mutual, and communicated by each party to the other.

Consent is not mutual unless the parties all agree upon the same thing in the same sense. Ordinarily, it is the outward expression of consent that is controlling. Mutual consent arises out of the reasonable meaning of the words and acts of the parties, and not from any secret or unexpressed intention or understanding. In determining if there was mutual consent, the Court considers not only the words and conduct of the parties, but also the circumstances under which the words are used and the conduct occurs.

Parties may engage in preliminary negotiations, oral or written, before reaching an agreement. These negotiations only result in a binding contract when all of the essential terms are definitely understood and agreed upon even though the parties intend that formal writing including all of these terms shall be signed later.

An acceptance of an offer must be absolute and unconditional. All of the terms of the offer must be accepted without change or condition. A change in the terms set forth in the offer, or a conditional acceptance, is a rejection of the offer.

Plaintiff has presented no testimony that Lee, on 11/18/94, the date [on] which Plaintiff alleged that an oral contract was created, personally agreed to perform in the movie Hello, She Lied; Plaintiff, therefore, has the burden of proving that Joel and/or Stevens, her “agent” and “manager,” had the authority to bind her to an oral written contract.

The parties do not and did not agree on the definition of “simulated sex.” Clearly the performance of simulated sexual scenes in the film was important and material to both Lee and Efraim. Efraim stated that he would abide by whatever Lee wanted in this regard.

Nudity and sexual content are material deal points that must be resolved before there can be a binding contract. An agreement concerning sexual content or simulated sex was not reached in this instance. Lee did not agree to the terms relating to simulated sex or to the script offered by the Plaintiff.

Plaintiff’s letter of 1/13/95 to Lee claims she “agreed to perform simulated sex scenes, and the exact type of nudity had been agreed upon in detail.” Efraim claimed in deposition that Lee agreed to perform simulated sex scenes and agreed to the draft contract to confirm that fact. Blaha testified that Paragraph 9 was a correct statement of the agreement. In deposition he stated it was a mistake. The rewritten script has three or four scenes that depict simulated sex. It is obvious that the “offer” made by Plaintiff concerning this issue was not complete and unqualified, nor was there any acceptance of this issue that was complete and unqualified.

Brody and Joel testified to their opinion that they thought they had “closed the deal” on 11/18/94 or shortly thereafter. Such perceptions have very little legal relevance. Brody testified that he had authority to negotiate this contract. Joel never spoke with Lee concerning the transaction and did not negotiate points such as script rewrite or sexual content.

Plaintiff has failed to prove by a preponderance of the evidence that Lee entered into an oral or written contract to perform in the movie Hello, She Lied.

*

* 
The Private Movie Company, Inc. v. Pamela Lee Anderson et al. Superior Court of California, County of Los Angeles (1997).

Judgment in favor of Defendant, Lee.

Critical Thinking About The Law

We know that language is not usually clear. Words convey information but not always the information that the speaker or writer intends. Ambiguity characterizes those words and phrases that do not have a clear meaning. These ambiguous terms might result in another person’s misinterpreting what the writer or speaker actually meant. In contract law, ambiguity could create problems between an offeror and offeree, as the two parties might not be in agreement on the same terms of the contract if the contract contains ambiguous language. In Case 9-5, the parties thought they understood each other. Key ambiguous phrases, however, created confusion in the contract negotiations and, consequently, raised concerns about whether there was actual consent by both parties.

As business managers, it is imperative that you demand clear definitions in the contracts that you offer and accept. The following questions pertaining to Case 9-5 prompt you to consider the importance of ambiguity in contract law.

1. What key ambiguous phrases did the court discuss?

Clue: Find the legal term in dispute that the judge defined. Also, look for ambiguity in the specific elements of the contractual negotiations between the plaintiff and the defendant.

2. How did the ambiguity in the alleged contract affect the court’s reasoning?

Clue: Do you think the court would have ruled differently in Case 9-5 had the ambiguity not existed?

Satisfying, or “Mirroring,” the Terms of the Offer

 Under the common law, to be valid, the acceptance must satisfy, or “mirror,” the terms of the offer. For example, if Jones offers to sell Smith his Cutlass for $2,000 and Smith responds by saying, “I’ll give you $1,800,” this is not a legal acceptance but a counteroffer by Smith, which then must be accepted by Jones in order for the terms of the counteroffer to be satisfied and a contract to arise. Under UCC Section 2-207, acceptance does not have to be a mirror image of the offer. Terms can be added to the contract without constituting a counteroffer if they meet one of the three conditions listed in the section on methods of termination of an offer.

Internet and E-Contracts: Acceptance Online

 Parties now enter into many agreements online. Section 2-213 of the UCC deals with electronic communication of an acceptance by an offeree. This UCC section provides that “receipt of an electronic communication has a legal effect; it has that effect even though no individual is aware of its receipt,” but “in itself does not establish that the content sent corresponds to the content received.” Thus, receipt is required for acceptance by electronic communication, and receipt occurs when the email or other message arrives, even if the receiver does not know it has arrived. Also, the parties are left to use other means of proof to establish that all of the email or messages made it from one party to another. The company or offeror must list all the terms of the offer that the offeree is about to enter into. The offeree (buyer) must click on “I agree” or “I agree to the terms.” Usually, terms set out by the offeror (seller) include cost, payment, warranties, arbitration provisions, and other substantive terms. As “click-on,” “click-through,” or “click-wrap” agreements have become customary in many industries, there is little dispute between parties as to the formation of a contract thereby.

Consideration

Consideration

 is defined as a bargained-for exchange of promises in which a legal detriment is suffered by the promisee. For example, Smith promises Jones that if she gives up her job with Stone Corporation, he will employ her at Brick Corporation. The two requirements of consideration are met: (1) Smith (promisor) has bargained for a return promise from Jones (promisee) that she will give up her job; (2) when Jones gives up her job, she has lost a legal right, the contractual right to her present job with Stone Corporation. The reader should note that legal detriment (giving up a legal right or refraining from exercising a legal right) must take place. Economic detriment is not necessary. For example, a student agrees not to go to any bars during fall semester in exchange for his mother’s promise to give him $500. The student’s giving up his right to go to bars is a legal detriment because he now cannot do something he previously could legally do.

consideration

A bargained-for exchange of promises in which a legal detriment is suffered by the promisee.

Adequacy of Consideration

 In general, the courts have not been concerned with the amount of consideration involved in a contract, especially in a business context. Even if one party makes a bad deal with another party—that is, if the consideration is inadequate—the courts will usually refuse to interfere. Unless a party can show fraud, duress, undue influence, or mistake, the court will not intervene on behalf of a plaintiff. However, sufficiency of consideration, as opposed to adequacy, will be examined by the court. Sufficiency of consideration requires both a bargained-for exchange of promises and legal detriment to the promisee.

Preexisting Duty Rule

 In defining consideration, we said that a legal detriment to a promisee requires the giving up of a legal right or the refraining from exercising a right. Logically, the courts have then declared that if a party merely agrees to do what he or she is required to do, there exists no detriment to the promisee. For example, Smith contracted with Jones for Jones to build him a house by April 1, 1988, for $150,000. On February 1, 1988, Jones came to Smith and said that, because of the number of jobs he had, he would not be able to finish by April unless Smith agreed to a bonus of $10,000. Smith agreed to the bonus, and the house was completed by April 1. Smith then refused to pay the bonus, claiming that there was a preexisting duty on the part of Jones because he had a contractual duty to finish by April 1. Jones took him to court, but lost the suit because no consideration existed for the bonus agreement. There is an important exception to the preexisting duty rule: The UCC, which applies to the sale of goods, states that an agreement modifying the original contract needs no consideration to be binding.

Promises Enforceable without Consideration

 The courts have enforced certain contracts when the requirements of consideration were not met, using the doctrine of promissory estoppel to do so. This doctrine requires (1) a promise justifiably relied on by the promisee, (2) substantial economic detriment to the promisee, and (3) an injustice that cannot be avoided except by enforcing the contract.

Consider this hypothetical example. An elderly couple pledged in writing to leave $1 million to their family church for a building fund if the church raised another $1 million. The church accepted the offer, raised the matching funds, and contracted with an architect and builder. The couple died and, in their will, left the money to another church. When the family church sued the deceased’s estate on the basis of the promissory estoppel doctrine, the court awarded it the full amount pledged, even though a bargained-for exchange of promises did not exist. The family church justifiably relied upon the couple’s promise, causing substantial economic injury to the church, and injustice could not be avoided in any other way.

Liquidated and Unliquidated Debts

 A liquidated debt exists when there is no dispute about the amount or other terms of the debt. If A owes B and C $500,000, and B and C agree to accept $100,000 as settlement for the debt, they are not precluded from suing A later on for the balance. The courts reason that the first agreement by A to pay a particular amount ($500,000) to B and C was supported by consideration. The second agreement to pay $100,000 was not because A had a preexisting duty to pay $500,000, and there was, therefore, no legal detriment on A’s part to support B and C’s agreement to accept the lesser amount.

An unliquidated debt exists when there is a dispute between the parties as to the amount owed by the debtor. If there is an agreement similar to the preceding one, except that the amount A originally owed B and C is in dispute, the general rule is that consideration exists for the second agreement, and the creditors cannot come back and sue for the balance of what they thought they were owed. B and C would have no claim for the full $500,000, but would be limited to $100,000. The rationale is that new consideration was given for the second agreement. There exists a legal detriment because B and C are giving up a legal right to sue for an unspecified debt. The debtor is also giving up a legal right because there is uncertainty as to what he or she owes in an unliquidated debt situation.

Type of Consideration	Description
Illusory promises	A contract providing that only one of the parties need perform, only if he or she chooses to do so; the contract is not supported by consideration.
Moral obligation	Contracts based on love or affection lack consideration. A majority of the states hold that deathbed promises may constitute moral obligation but lack legal binding consideration.
Preexisting duty	A promise lacks consideration if a person promises to perform an act or do something she already has an obligation to do. For example, many states have statutes that prevent law enforcement officers from collecting rewards when apprehending a criminal who has a reward on his or her head. Also, as noted earlier, the original terms of a contract cannot be changed or modified unless unforeseen difficulties exist. Also, some exceptions are granted by the UCC.
Illegal consideration	A contract is not supported by consideration if the promise is supported by an illegal act. “I agree to pay you $10,000 if you burn my house down.” Arson is unlawful and a promise to do such an act is unsupported by legal consideration.
Promises That Lack Consideration

Genuine Assent

When two parties enter into a legally enforceable contract, it is presumed that they have entered of their own free will and that the two parties understand the content of the contract in the same way. If fraud, duress, undue influence, or mutual mistake exists, 

genuine assent

, or a “meeting of the minds,” has not taken place, and grounds for rescission (cancellation) of the contract exist. 

Table 9-1

 lists the factors that prevent genuine assent.

genuine assent

Assent to a contract that is free of fraud, duress, undue influence, and mutual mistake.

Table 9-1  Factors Preventing Genuine Assent

· Fraud

· Duress

· Undue influence

· Bilateral mistake

· Unilateral mistake

Fraud

Fraud
 consists of (1) a misrepresentation of a material (significant) fact, (2) made with intent to deceive the other party, (3) who reasonably relies upon the misrepresentation, (4) and as a result is injured. For example, Smith enters into a contract to sell a house to Jones. The house is 12 years old, and Smith knows that the basement is sinking. She fails to tell Jones. After Jones moves in, she finds that the house is sinking about two feet a year. In this case, there was a misrepresentation of a material fact, because Smith had a duty to disclose the fact that the house was sinking, but did not do so. Furthermore, there existed knowledge of the fact with intent to deceive. The law does not require that an evil motive exist, but only that the selling party (Smith) knew and recklessly disregarded the fact that the house was sinking. Reliance existed on the part of Jones, who thought the house was habitable, and of course injury to Jones took place because the house was not worth what she paid for it. The cost of preventing further sinking of the house would be part of the damages involved. Note that this example illustrates fraud based on a unique set of facts.

fraud

Misrepresentation of a material fact made with intent to deceive the other party to a contract, who reasonably relied on the misrepresentation and was injured as a result. See also criminal fraud.

Duress

 Another factor that prevents genuine assent of the parties is 

duress

, defined as any wrongful act or threat that prevents a party from exercising free will when executing a contract. The state of mind of the party at the time of entering into the contract is important. If Smith, when executing a contract with Jones to sell a house, holds a gun on Jones and threatens to shoot Jones if he refuses to sign the contract, grounds exist for rescission of the contract. Duress is not limited to physical threats, however. Threats of economic ruin or public embarrassment also constitute duress. An illustration of duress is set forth in the case below.

duress

Any wrongful act or threat that prevents a party from exercising free will when executing a contract.

 Case 9-6 Stambovsky v. Ackley and Ellis Realty

Supreme Court, Appellate Division, State of New York 169 A.D.2d 254 (1991)

Plaintiff Stambovsky purchased a home from Ackley, who was represented by Ellis Realty. After entering the contract but before closing, Stambovsky learned that the house was said to be possessed by poltergeists, reportedly seen by Ackley and her family on numerous occasions over the previous nine years. As a resident of New York City, Stambovsky was unaware that apparitions seen by the Ackleys were reported in the Reader’s Digest and the local press of Nyack, New York. In 1989, the house was also included on a five-home walking tour, in which the house was described as “a riverfront Victorian (with ghost).” Stambovsky brought an action for rescission of the contract, arguing that the reputation of the house impaired the present value of the property and its resale value. He argued that the failure of the Ackleys and Ellis Realty Company to disclose the nature of the house as haunted was fraudulent in nature. The defendants argued that the principle of caveat emptor (buyer beware) applied in the state of New York and they had no affirmative duty to disclose nonmaterial matters. They moved for dismissal. The lower court granted the dismissal. The plaintiff appealed.

Judge Rubin

While I agree with [the] Supreme Court [New York’s trial court] that the real estate broker, as agent for the seller, is under no duty to disclose to a potential buyer the phantasmal reputation of the premises and that, in his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn’t a ghost of a chance, I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his down payment. New York law fails to recognize any remedy for damages incurred as a result of the seller’s mere silence, applying instead the strict rule of caveat emptor. Therefore, the theoretical basis for granting relief, even under the extraordinary facts of this case, is elusive if not ephemeral.

“Pity me not, but lend thy serious hearing to what I shall unfold.” (William Shakespeare, Hamlet, Act I, Scene V [Ghost].)

From the perspective of a person in the position of plaintiff herein, a very practical problem arises with respect to the discovery of a paranormal phenomenon: “Who you gonna call?” as the title song to the movie Ghostbusters asks. Applying the strict rule of caveat emptor to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client—or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin that should be exorcised from the body of legal precedent and laid quietly to rest.

The doctrine of caveat emptor requires that a buyer act prudently to assess the fitness and value of his purchase and operates to bar the purchaser who fails to exercise due care from seeking the equitable remedy of rescission. For the purposes of the instant motion to dismiss the action, the plaintiff is entitled to every favorable inference that may reasonably be drawn from the pleadings; specifically, in this instance, that he met his obligation to conduct an inspection of the premises and a search of available public records with most meticulous inspection and the search would not reveal the presence of poltergeists at the premises or unearth the property’s ghoulish reputation in the community. Therefore, there is no sound policy reason to deny plaintiff relief for failing to discover a state of affairs that the most prudent purchaser would not be expected to even contemplate.

The case law in this jurisdiction dealing with the duty of a vendor of real property to disclose information to the buyer is distinguishable from the matter under review. The most salient distinction is that existing cases invariably deal with the physical condition of the premises and other factors affecting its operation. No case has been brought to this court’s attention in which the property value was impaired as the result of the reputation created by information disseminated to the public by the seller (or, for that matter, as a result of possession by poltergeists). Where a condition that has been created by the seller materially impairs the value of the contract and is peculiarly within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care with respect to the subject transaction, nondisclosure constitutes a basis for rescission as a matter of equity. Any other outcome places upon the buyer not merely the obligation to exercise care in his purchase but rather to be omniscient with respect to any fact that may affect the bargain. No practical purpose is served by imposing such a burden upon a purchaser. To the contrary, it encourages predatory business practice and offends the principle that equity will suffer no wrong to be without a remedy.

In the case at bar, defendant seller deliberately fostered the public belief that her home was possessed. Having undertaken to inform the public at large, to whom she has no legal relationship, about the supernatural occurrences on her property, she may be said to owe no less a duty to her contract vendee. It has been remarked that the occasional modern cases that permit a seller to take unfair advantage of a buyer’s ignorance but has created and perpetuated a condition about which he is unlikely to even inquire, enforcement of the contract (in whole or in part) is offensive to the court’s sense of equity. Application of the remedy of rescission, within the bounds of the narrow exception to the doctrine of caveat emptor set forth herein, is entirely appropriate to relieve the unwitting purchaser from the consequences of a most unnatural bargain.

Reversed in favor of Plaintiff, Stambovsky.

Dissenting Opinion

The parties herein were represented by counsel and dealt at arm’s length. This is evidenced by the contract of sale, which contained various riders and a specific provision that all prior understandings and agreements between the parties were merged into the contract, that the contract completely expressed their full agreement and that neither had relied upon any statement by anyone else not set forth in the contract. There is no allegation that defendants, by some specific act, other than the failure to speak, deceived the plaintiff. Nevertheless, a cause of action may be sufficiently stated where there is a confidential or fiduciary relationship creating a duty to disclose, and there was a failure to disclose a material fact, calculated to induce a false belief. Plaintiff herein, however, has not alleged and there is no basis for concluding that a confidential or fiduciary relationship existed between these parties to an arm’s length transaction such as to give rise to a duty to disclose. In addition, there is no allegation that defendants thwarted plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.
*

* 
Stambovsky v. Ackley and Ellis Realty, Supreme Court, Appellate Division, State of New York 169 A.D.2d 254 (1991).

Critical Thinking About The Law

Although judges frequently rely on legal precedent, there is no fixed standard by which judges must give a certain weight to precedent. In other words, judges differ in the degree to which they show deference to legal precedent and legislative acts. Consequently, several judges viewing the same case and same set of facts could reach conflicting decisions. As you learned in 

Chapter 3

 about the American legal system, judges work on the basis of different philosophies: some believe in judicial restraint and others believe in judicial activism. These underlying philosophies are in part responsible for the varying degrees of importance that judges give to the four primary ethical norms (see 
Chapter 1
). In turn, the degree of importance that a judge attaches to each of these ethical norms plays a significant role in the shaping of a judge’s reasoning and the court’s conclusion. The following questions pertaining to Case 9-6 encourage you to consider the importance of primary ethical norms in a judge’s reasoning.

1. Which primary ethical norm was guiding the judge’s reasoning in the majority opinion?

Clue: Consider the factors the judge discussed in favoring the plaintiff’s interests over the defendant’s interests.

2. To further illustrate the significance of ethical norms, to which ethical norm did the dissenting judge give highest priority?

Clue: Similar to the first question, why do you think the judge elevated the defendant’s interests over the plaintiff’s interests?

3. What missing information would help you better evaluate the court’s reasoning?

Clue: Find the reasons the plaintiff provides for rescission of the contract. What omitted evidence could have made the plaintiff’s case more convincing?

Undue Influence

 If one party exerts mental coercion over the other party, there is 

undue influence

 and, therefore, no genuine assent. There are two court- established requirements for undue influence: (1) There must be a dominant–subservient relationship between the contrasting parties (e.g., a doctor and patient, lawyer and client, or any trusting relationship). (2) This dominant–subservient relationship must allow one party to influence the other in a mentally coercive way. An example of coercion that meets these requirements is a dying patient’s contracting with a family doctor to sell his family land at an unreasonably low price in order to pay the doctor bills.

undue influence

Mental coercion exerted by one party over the other party to the contract.

Mistake

 A 

mistake

 also prevents a meeting of the minds, or genuine assent. If both parties made an error as to a material fact, a mutual, or bilateral, mistake has occurred, and as a general rule the courts will rescind such contracts. If, however, an error is made by only one party to the contract, a unilateral mistake has occurred, and the courts generally will not grant the mistaken party a rescission of the contract. An exception to this rule is made if the nonmistaken party knew or should have known of the mistake. For example, if five contractors bid on a $10 million hospital project and Smith’s bid is $2 million below all other bids because of an accountant’s error, the hospital should realize the error before accepting the bid, especially if Smith immediately notifies the hospital of the mathematical error and the contract is executory in nature. A mistake of future value or quality of an object is enforceable by either party; each party has assumed that there may be a change in value.

mistake

Error as to material fact. A bilateral mistake is one made by both parties; a unilateral mistake is one made by only one party to the contract.

Competent Parties

The fifth essential element of a legally enforceable contract is 

competency

 of the parties. A person is presumed to be competent at the time of entering into a contract, so most people who raise the defense of a lack of capacity must prove that, at the time the contract was entered into, the individual did not have the ability to understand the nature of the transaction and the consequences of entering into it. This defense often arises when contracts involve minors or insane or intoxicated persons.

competency

A person’s ability to understand the nature of the transaction and the consequences of entering into it at the time the contract was entered into.

Minors

 A minor is a person under the legal age of majority. The states differ as to age of majority for entering into enforceable contracts. The age of majority for contractual capacity should not be confused with the age at which one can drink or can vote in state and federal elections. Contracts made by minors are voidable and can be disaffirmed by the minor at any time before the minor becomes of a majority age or shortly thereafter. If the minor fails to disaffirm a contract, he or she will be considered to have ratified (approved) it and is, thus, legally bound. For example, Smith, at age 17 years, 3 months, entered into a contract with Jones to buy the latter’s automobile for $2,000. In the state in which the contract was executed, the majority age was 18. After using the automobile for 2 years and 1 month, Smith returned the auto and asked for his $2,000 back, minus depreciation on the car, because he was only 17 when he entered the contract and he claimed that, therefore, the contract was voidable. Smith was not allowed to disaffirm his contract because he had ratified the agreement by failing to disaffirm it before he turned age 18 or shortly thereafter.

A minor is generally liable for the reasonable value (not the contract or the market value) of necessaries (food, clothing, shelter), which enable the minor to live in a manner to which he or she is accustomed. To avoid the issues of what constitutes a necessary, prudent businesspeople check purchasers’ ages very carefully and require a parent or guardian to cosign a loan when the borrower is a minor. For example, a student who is a minor for contractual purposes is not able to obtain a loan at a bank without a parent’s signature, and merchants generally check to see if a charge card in the possession of a minor is issued in a parent’s name.

Applying the law to the facts . .

Let’s say that an 11-year-old signed her name to an online contract for a magazine subscription that would bill the address of the recipient at the time of shipment. Nowhere on the contract was the purchaser required to state his or her age. When the child receives the bill and the parents refuse to pay it for her, does the magazine company have any recourse against anyone? What if the online form said that the offer was limited to residents of the United States aged 18 or older?

Statutes That Make Minors Liable for Some Contracts

At common law, state statutes and some case law make minors liable for certain contracts. They cannot assent to the common-law doctrine of disaffirmance with regard to the following:

· Contracts to support children, especially when a minor is emancipated

· Contracts to enlist in the armed forces

· Contracts for life insurance

· Contracts for medical, surgical, and pregnancy care

· Contracts for health insurance

· Contracts for sports and entertainment when a court has approved the contracts

Insanity

 If a person is adjudicated by a court of law to be insane, or is de facto (in fact) insane at the time of entering into a contract, the individual will be allowed to disaffirm a contract. Court-appointed guardians may also disaffirm such agreements.

Intoxication

 A person who is intoxicated to the degree that understanding the nature of the contract and its consequences is impossible will be able to disaffirm a contract in all cases but those involving necessaries. Courts will look closely at the degree of intoxication. To disaffirm, the intoxicated individual must return the item bought. In the case of necessaries, the intoxicated individual is not allowed to disaffirm, but is held liable for the reasonable value of such items.

Legal Object

The sixth necessary element of a contract is a 

legal object

. This means that the subject matter of the agreement must be lawful. If it is not, the contract is void at its inception. Contracts that are in violation of state or federal statutes, as well as those in violation of case law, are void as a matter of public policy.

legal object

Contract subject matter that is lawful under statutory and case law.

Statutory Law

 State statutes that forbid wagering agreements (betting) and usurious (defined as exorbitant) finance charges or interest rates on loans, as well as those aimed at licensing and regulation, have been the subject of much adjudication. For example, if Smith practices law in a state without being admitted to practice before its highest state court, the courts will generally not enforce any contracts Smith made with clients for services rendered. Smith may also be subject to criminal charges. State statutes require licensing of nurses, doctors, accountants, real estate agents, electricians, and many other groups (the list varies from state to state), so as to protect the public from incompetents. Some opponents of these statutes argue that they were enacted at the behest of interest groups to decrease the supply of individuals in a particular profession or trade and, hence, prevent competition. Whatever their origin, however, courts will not enforce contracts made by unlicensed providers of services for which licensure is required.

Case Law

 Often, when there is a question as to whether a contract has a lawful object, statutory law does not clearly indicate whether the contract is void or unenforceable. For example, agreements not to compete are found to be contrary to the public policy of fostering competition, and there are federal and state antitrust laws (statutes) making price-fixing between competitors illegal and void. However, when an otherwise lawful contract of employment contains a no-competition clause, pursuant to which an employee agrees not to become employed by a competitor of his or her employer, the courts will look at whether the restriction on the employee is for a reasonable time and area. In addition, it will look at the relative bargaining power of the employer and employee and the hardship on the employee who is contractually forbidden to

Online Fantasy Sports: Luck or Skill?

Online fantasy sports leagues are called “gambling,” and millions play (estimates vary from 20 million to 40 million). Participants (owners) build teams based on real-life players (usually football). At the end of a week, performances of real-life players are translated into points and the points of all the players on a team are totaled at the end of a season. The winner may win money and prizes. Participants pay a fee to play and use the site facilities.

In some instances, money is paid into a “pot,” and at the end of the (football) year, each owner of a fantasy team with the most points wins the “pot.”

Are these games ones of chance (luck), or of skill? It could be argued that fantasy games are games of chance because events beyond the participants’ control (e.g., injury to a key player such as a quarterback) could determine the outcome for a participant’s team.

If you are a day trader in securities, you are betting on stocks that you buy in a one-day period. When you buy and sell such securities (stocks, bonds, commodities), are you gambling? You are in fact “betting” that the value of the securities will go up. Is this a game of chance, or of skill? How are these “games” different? What are the policy implications for our society, based on your answer? For example, is there an enforceable contract between fantasy-league participants? What if online “gambling” is declared illegal by Congress? See Humphry v. Viacom, 2001 WL 1797648 (D.N.J. 2007), which does not answer this question but raises some more questions with regard to fantasy games.

work for another employer in the same industry. As the following case shows, each factual situation is carefully examined, and the standard of reasonableness is used to determine whether the contract is enforceable.

 Case 9-7 Brown & Brown, Inc. v. Johnson

New York Supreme Court, Appellate Division, Fourth Department 115 A.D.3d 162, 980 N.Y.S.2d 631(2014)

Brown & Brown, Inc., is a firm of insurance intermediaries—insurance agents, brokers, and consultants—in New York City. Brown hired Theresa Johnson to provide actuarial analysis. On Johnson’s first day of work, she was asked to sign a nonsolicitaion covenant, which prohibited her from soliciting or servicing any of Brown’s clients for two years after the termination of her employment. The covenant specified that if any of its provisions were declared unenforceable, they should be modified and then enforced “to the maximum extent possible.” Less than five years later, Johnson’s employment with Brown was terminated, and she went to work for Lawley Benefits Group, LLC. Brown filed a suit in a New York state court against Johnson, seeking to enforce the nonsolicitation covenant Johnson filed a motion to dismiss Brown’s complaint. The court ruled in Brown’s favor, and Johnson appealed.

Judge Whalen

A nonsolicitation covenant is overbroad and therefore unenforceable if it seeks to bar the employee from soliciting or providing services to clients with whom the employee never acquired a relationship through his or her employment. Here, the non-solicitation covenant purported to restrict Johnson from, inter alia [among other things], soliciting, diverting, servicing, or accepting, either directly or indirectly, “any insurance or bond business of any kind or character from any person, firm, corporation, or other entity that is a customer or account of the New York offices of the Company during the term of the Agreement” for two years following the termination of Johnson’s employment, without regard to whether Johnson acquired a relationship with those clients. We conclude that the language of the non-solicitation covenant render it overbroad and unenforceable.

Plaintiffs contend that we nevertheless should partially enforce the covenant, in as much as plaintiffs seek to prevent Johnson from soliciting and servicing only those clients with whom Johnson actually developed a relationship during her employment with plaintiffs. We reject that contention. . . . Partial enforcement may be justified if the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, but has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing. Factors weighing against partial enforcement are the imposition of the covenant in connection with hiring or continued employment[,] . . . the existence of coercion or a general plan of the employer to forestall competition, and the employer’s knowledge that the covenant was overly broad. Here, it is undisputed that Johnson was not presented with the Agreement until her first day of work with plaintiffs, after Johnson already had left her previous employer. Plaintiffs have made no showing that, in exchange for signing the Agreement, Johnson received any benefit from plaintiffs beyond her continued employment.

. . . The fact that the Agreement contemplated partial enforcement does not require partial enforcement. . . . Allowing a former employer the benefit of partial enforcement of overly broad restrictive covenants simply because the applicable agreement contemplated partial enforcement would . . . enhance the risk that employers will use their superior bargaining position to impose unreasonable anti-competitive restrictions, uninhibited by the risk that a court will void the entire agreement, leaving the employee free of any restraint. In our view, the fact that the Agreement here contemplated partial enforcement does not demonstrate the absence of overreaching on plaintiffs’ part, but, rather, demonstrates that plaintiffs imposed the covenant in bad faith, knowing full well that it was overbroad. We therefore conclude that the non- solicitation covenant should not be partially enforced.
*

* 
Brown & Brown, Inc. v. JohnsonMoore v. Midwest Distribution, Inc. New York Supreme Court, Appellate Division, Fourth Department 115 A.D.3d 162, 980 N.Y.S.2d 631(2014).

Affirmed for Defendant Johnson.

A state intermediate appellate court reversed the lower court’s ruling and granted Johnson’s motion to dismiss Brown’s action with respect to the nonsolicitation covenant. The covenant was overbroad. Furthermore, it was not presented to Johnson until her first day of work, and she received no benefit for signing it beyond her continued employment.

Contracts That Must Be in Writing

Most contracts need not be in writing. They are enforceable as long as the six elements of a contract exist. The statute of frauds, which originated in England in 1677, however, requires certain business contracts to be in writing. Originally, those contracts listed in this section, and some other nonbusiness contracts, were required to be in writing because they were thought to be the most likely situations in which perjury would occur. Today, each state requires by statute that various contracts be written in order to be enforceable.

In most states, the requirements for a written contract include some evidence of writing and the signature of the party being sued. The writing should reasonably outline the terms and state who are the parties to the agreement. Contracts governed by UCC Section 2-201 are not subject to these requirements. The party suing may have the only evidence of writing with his or her signature on it. Often, between merchants, confirmation memoranda summarize oral agreements and are satisfied by only one party. The nonsigning party must simply review the memorandum. The statute of frauds is satisfied if the nonsigning party agrees to its content.

The business-related contracts discussed in this section are those that most frequently fall within the statute of frauds. They therefore must be in writing to be enforceable.

Contracts for the Sale of an Interest in Land

An “interest in land” includes mortgages, easements (an easement is a contract that allows a party to cross your land, for example, with electrical wires), and, of course, the land itself and the buildings on it. Leases for longer than one year usually have to be in writing.

A notable exception to the requirement that contracts for sale of an interest in land must be written is partial performance. For example, if substantial improvements have been made on a piece of property by a lessee in reliance on an oral commitment by the lessor to sell, the oral contract will be enforced. Case 9-8 illustrates the importance of contracts performable within one year, and the concept of reasonableness.

Contracts to Pay the Debts of Another

If Smith promises to pay Jones’s debt to the bank should Jones be unable to pay it, this contract must be in writing, under the statute of frauds. In this situation, Smith has secondary liability to the bank. If, however, Smith tells the bank that she will act as a surety for Jones’s debt, Smith has a primary liability to the bank. This agreement is not within the statute of frauds and, therefore, may be enforced even if it is only oral.

In the first situation, Smith’s promise was conditional in nature. That is, on condition that Jones does not pay, the bank may look to Smith, but first it must look to Jones. In the second situation, the bank may first look to Smith. It does not have to go to Jones at all because it has a guarantor or surety agreement with Smith.

Contracts Not Performable in One Year

A contract must be in writing if it specifies that it will last longer than one year (years run generally from the formation of the contract rather than the beginning of performance). For example, in most states, a baseball player who agrees to play for a team for three years at $2 million a year must sign a written contract in order for the agreement to be enforceable. If, however, no date is set in the contract for the completion of performance, the contract need not be in writing. For example, an agreement to provide help for a person until that person dies does not fall within the statute of frauds, and thus does not have to be in writing to be enforceable.

Sale of Goods of $500 or More

Under UCC Section 2-201, contracts for the sale of goods of $500 or more (generally the price of the goods is the determinant, not the value) fall within the statute of frauds and must be in writing to be enforceable. There are three exceptions to this rule: (1) one of the parties to a suit admits in writing or in court to the existence of an oral contract; (2) a buyer accepts and uses the goods; (3) the contract is between merchants, and the merchant who is sued received a written confirmation of the oral agreement and did not object within 10 days. In all of these instances, the oral contract will be enforced even if it is for goods worth $500 or more. An example below of the importance of the sale of goods ($500) rule is shown with the Iacono case.

 Case 9-8 Iacono v. Lyons

Court of Appeals of Texas 16 S.W.3d 82 (2000)

The plaintiff, Mary Iacono, and the defendant, Carolyn Lyons, had been friends for almost 35 years. In late 1996, the defendant invited the plaintiff to join her on a trip to Las Vegas, Nevada, for which the defendant paid. The plaintiff contended that she was invited to Las Vegas by the defendant because the defendant thought the plaintiff was lucky. Sometime before the trip, the plaintiff had a dream about winning on a Las Vegas slot machine. The plaintiff’s dream convinced her to go to Las Vegas, and she accepted the defendant’s offer to split “50-50” any gambling winnings. The defendant provided the plaintiff with money for the gambling.

The plaintiff and defendant started to gamble, but after losing $47, the defendant wanted to leave to see a show. The plaintiff begged the defendant to stay, and the defendant agreed on the condition that the defendant put the coins into the machines because doing so took the plaintiff, who suffers from advanced rheumatoid arthritis and was in a wheelchair, too long. The plaintiff agreed and took the defendant to a dollar slot machine that looked like the machine in her dream. The machine did not pay on the first try. The plaintiff then said, “Just one more time,” and the defendant looked at the plaintiff and said, “This one’s for you, Puddin.” They hit the jackpot, and the slot machine paid $1,908,064. The defendant refused to share the winnings with the plaintiff and denied that they had an agreement to split any winnings. The defendant told Caesar’s Palace that she was the sole winner and to pay her all the winnings.

The plaintiff sued the defendant for breach of contract. The defendant moved for summary judgment on the ground that any oral agreement was unenforceable under the statute of frauds. The trial court entered summary judgment in favor of the defendant. The plaintiff appealed.

Justice O’Connor

The defendant asserted the agreement . . . was unenforceable under the statute of frauds because it could not be performed within one year. There is no dispute that the winnings were to be paid over a period of 20 years.

The one year provision of the statute of frauds does not apply if the contract, from its terms, could possibly be performed within a year—however improbable performance within one year may be.

To determine the applicability of the statute of frauds with indefinite contracts, this Court may use any reasonably clear method of ascertaining the intended length of performance. The method is used to determine the parties’ intentions at the time of contracting. The fact that the entire performance within one year is not required, or expected, will not bring an agreement within the statute.

Assuming without deciding that the parties agreed to share their gambling winnings, such an agreement possibly could have been performed within one year. For example, if the plaintiff and defendant had won $200, they probably would have received all the money in one pay-out and could have split the winnings immediately.

Therefore, the defendant was not entitled to summary judgment based on her affirmative defense of the statute of frauds.
*

* 
Iacono v. Lyons, Court of Appeals of Texas 16 S.W.3d 82 (2000).

The Court of Appeals of Texas reversed and ruled in favor of the Defendant.

Nonbusiness Contracts

Nonbusiness-related contracts that must be in writing to be enforceable are (1) contracts in consideration of marriage and (2) contracts of an executor or administrator to answer for the debts of a deceased person.

Parol Evidence Rule

The 

parol (oral) evidence rule

 states that when parties have executed a written agreement, which is complete on its face, oral agreements made before or at the same time as the written agreement that vary, alter, or contradict the written agreement are invalid. Most state courts do not even allow such oral agreements to be introduced in evidence. For example, suppose that Smith enters into a written contract with Jones to sell him a two-year-old Chevy Citation for $5,000 and the contract terms state that “all warranties are excluded.” At the time of signing, Smith orally tells Jones, “Don’t worry, we’ll warranty all parts and labor.” This oral agreement made at the time of execution will not be allowed into evidence because it varies from the written agreement. Exceptions to the parol evidence rule are set out in 

Table 9-2

.

parol (oral) evidence rule

When parties have executed a written agreement which is complete on its face, oral agreements made before or at the same time as the written agreement that vary, alter, or contradict the written agreement are invalid.

Under UCC Section 2-202, written memoranda that are intended to be a final expression of the parties’ agreement cannot be contradicted by prior or contemporaneous oral agreement, but may be explained or supplemented orally by course of dealing or usage of trade, by course of performance, or by evidence of consistent additional terms. This UCC rule allows the courts to admit into evidence oral testimony with regard to written agreements that would ordinarily be inadmissible under case law.

Table 9-2 Exceptions to the Parol Evidence Rule

1. Oral agreements used to prove a subsequent modification of a written agreement are admissible. 2. Oral agreements to clear up ambiguity in the written agreement are admissible. 3. Oral agreements to prove fraud, mistake, illegality, duress, undue influence, or lack of capacity are admissible. 4. Oral agreements concerning collateral matters not germane to the written agreement are admissible.

Linking Law and Business Accounting

Land is treated specially, not just in the law but in other disciplines as well. As you may recall from your accounting class, land is classified as a long-term operational asset. One distinguishing characteristic of land is that it is not subject to depreciation or depletion. In other words, land is considered to have an infinite life because it is not destroyed by use. If an organization makes a basket purchase, or acquires several assets in a single transaction, the amount paid should be carefully divided between the land and the other assets on the organizational financial statements. Therefore, the balance sheet will reflect the nondepreciable nature of the land, while allowing noticeable depreciation or depletion of the other assets purchased.

Source: T. Edmonds, F. McNair, E. Milam, and P. Olds, Fundamental Financial Accounting Concepts (New York: McGraw-Hill, 2000), pp. 408–10.

Third-Party Beneficiary Contracts and 

Assignment of Rights

Types of Third-Party Beneficiary Contracts

So far, our discussion has focused on contracts between two parties (usually Smith and Jones). Two parties, however, may enter into a contract with the clear intent to benefit a third party; in these cases, there is a third-party beneficiary contract. The third party is not a party to the contract but merely a beneficiary of it. These contracts are divided into:

1. Intended beneficiary contracts. Two parties to a contract (promisor and promisee), either by words, writing, or actions, intend to bring benefits to a third party by virtue of an enforceable contract.

2. Incidental beneficiary contracts. There is no intent to bring benefits to the third party. The benefit is unintentional and the incidental beneficiary cannot sue to enforce such a contract.

A 

donee–beneficiary contract

 exists when the purpose of the promisee in obtaining a promise from the promisor is to make a gift to a third person. For example, Liberty Insurance Company (promisor) promises to pay Smith (third party) a sum of $100,000 upon the death of Jones (promisee) in exchange for Jones’s payment of a yearly premium. Under this third-party donee–beneficiary contract, Smith may sue Liberty Insurance Company if it fails to pay the $100,000 upon the death of Jones.

donee–beneficiary contract

A contract in which the promisee obtains a promise from the promisor to make a gift to a third party.

A third-party 

creditor–beneficiary contract

 exists when the purpose of the promisee in requiring a promisor’s performance to be made to a third person is to fulfill a legal obligation of the promisee to the third person. For example, Smith (promisee) works for Jones (promisor) in exchange for Jones’s promise to pay Taylor $6,000 that Smith owes to Taylor. Under this third-party creditor–beneficiary contract, if Smith does the work and Jones refuses to pay, Taylor may sue both Jones and Smith.

creditor–beneficiary contract

A contract in which the promisee obtains a promise from the promisor to fulfill a legal obligation of the promisee to a third party.

Note that insurance contracts and all forms of creditor collection agreements are third-party beneficiary contracts. These types of agreements are obviously very important in our economy.

Assignment of Rights

An 

assignment

 is the present transfer of an existing right. Contracts between two parties may be assigned to a third party under certain conditions. Suppose that B, a manufacturing company, sells A, a retail company, 600 bicycles at $100 apiece on credit. A, known as the obligor-promisor, agrees to pay B, the obligee-promisee-assignor, $60,000. A does not pay, and therefore B has the right to sue A; but B has another choice: to assign this right to C, a collection agency, and receive immediate cash from C. In effect, B is assigning to C, known as the assignee, A’s promise to pay in the future in exchange for receiving cash from C now (see 

Exhibit 9-1

). C has the right to sue both A and B. That is, if the collection agency is unable to collect the money from the retailer A, it may sue not only retailer A but also the manufacturer, B, to recover the cash it advanced in anticipation of collecting the debt.

assignment

The present transfer of an existing right.

The conditions attached to most assignments are that unless the obligor (A) receives notice of assignment by the obligee-assignor (B), the obligor has no duty to the assignee (C). Once that notice is received, however, the assignee “stands in the shoes” of the obligee.

Exhibit 9-1 Assignment of Contract Rights

Certain classes of assignments are not recognized by law:

1. Assignments that materially change the duty of the obligor

2. Assignments forbidden by state statute

3. Any assignment forbidden by the original contract between the obligor- promisor and the obligee-promisee

4. Contracts for personal services (e.g., an artist’s contract to paint an individual’s portrait)

Summary

A contract is defined as a legally enforceable exchange of promises. The sources of contract law are case law from state and federal courts and statutory law from the federal and state legislatures, particularly from the UCC. Contracts may be classified as express or implied; unilateral or bilateral; void, voidable, or valid; executed or executory; and quasi.

The six necessary elements of a legal contract are (1) a legal offer, (2) a legal acceptance, (3) a consideration, (4) genuine assent, (5) competent parties, and (6) a legal object. The UCC differs somewhat from the common law in its requirements for contracts. 

Table 9-3

 outlines some of the differences.

Table 9-3 Comparison Between Common Law and the UCC

Area of Comparison	Common Law	UCC
Contract application	Real property, services, and employment contracts	Contracts for the sale of goods
Requirements for offer	Includes subject matter, price, and quantity	Includes subject matter and quantity; may leave price and other terms open
Option agreements	Requires consideration for all option agreements	No consideration needed
Requirements for acceptance	Terms of acceptance are mirror image of offer	Mirror image not necessary; additional terms allowed if one of three requirements is met
Requirements for consideration	Consideration required for contract to be enforceable except under doctrine of promissory estoppel	Consideration not needed for modifications
Statute of frauds (contracts that must be in writing)	Real estate contracts, contracts not performable within one year	Sale of goods of $500 or more, with three exceptions

Some types of contracts fall within the statute of frauds and, therefore, must be in writing to be enforceable. The parol evidence rule invalidates most oral agreements made before or at the same time as a written contract if the oral agreements alter or contradict the terms of the written contract.

Third-party beneficiary contracts may be of either the donor–beneficiary or the creditor–beneficiary type. A contract made between two parties may be assigned to a third party under certain conditions.

Review Questions

1. 9-1 How does a contract based on common law differ from one based on the Uniform Commercial Code?

2. 9-2 Explain the distinction between a void and a voidable contract; between an executed and an executory contract; between a unilateral and a bilateral contract.

3. 9-3 Describe the three requirements for a valid acceptance.

4. 9-4 Describe the three requirements for a valid offer.

5. 9-5 Explain how an acceptance can be terminated.

6. 9-6 Explain the difference between liquidated and unliquidated debts.

Review Problems

1. 9-7 Fisher, an employment agency, sued Catani, a minor, for breach of contract for the balance due the agency of $101.25 as a commission for finding Catani employment. The defendant disaffirmed his contract with the agency, while still a minor, two months after obtaining the job and one month after he quit. Can he disaffirm? Explain.

2. 9-8 Robinson was employed as an assistant manager in Gallagher Drug Company Store. He was accused of theft and embezzlement, which he admitted to, and was fired. The following day, at company headquarters, he signed a contract promising to repay the company $2,000. Robinson made payments totaling $741, and then stopped. Gallagher sued for the balance. Robinson’s defense was that he had signed the agreement under duress. What logical problem arises in Robinson’s arguing that he became aware of the duress after he attended a support group for unemployed managers?

3. 9-9 Osborne, a former chairman of the board of Locke Steel Company, entered into an agreement with Locke that, on retirement, he would hold himself available for consultation and would not work for any direct or indirect competitors of the company. In exchange for these promises, the company agreed to pay Osborne $15,000 a year for the rest of his life. After paying for two years, the company stopped payments when Osborne refused to consent to a modification of the agreement. Osborne sued. The defendant, Locke, argued that there was no consideration because the contract was based on past services, and thus there was no detriment to the promisee (Osborne). Who won? Explain.

4. 9-10 Fisher, an inexperienced businessman, bought equipment and chinchillas from Division West Chinchilla in order to start a chinchilla ranch. Fisher got into the business because Division West had told him that chinchilla ranching was an “easy undertaking . . . and no special skills were required.” Fisher lost money operating the ranch. He sued, claiming that he had relied on Division West’s fraudulent representations. Who won? Explain.

5. 9-11 William Story promised his nephew that he would pay the nephew $5,000 if he gave up “using tobacco, swearing, and playing cards and billiards until he was 21.” The nephew did so and asked his uncle for the money. His uncle agreed to pay but died before he did so. The uncle’s estate refused to pay, arguing that there was no consideration for the uncle’s promise. Should the court uphold the agreement in this case? Why or why not?

Case Problems

1. 9-12  Wilcox hired Esprit Log and Timber Frame Homes to build a log house, which the Wilcoxes intended to sell. They paid Esprit $125,260 for materials and services. They eventually sold the home for $1,620,000 but sued Esprit due to construction delays. The logs were supposed to arrive at the construction site precut and predrilled, but that did not happen. So it took five extra months to build the house while the logs were cut and drilled one by one. The Wilcoxes claimed that the interest they paid on a loan for the extra construction time cost them about $200,000. The jury agreed and awarded them that much in damages, plus $250,000 in punitive damages and $20,000 in attorneys’ fees. Esprit appealed, claiming that the evidence did not support the verdict because the Wilcoxes had sold the house for a good price. Is Esprit’s argument credible? Why or why not? How should the court rule? Esprit Log and Timber Frame Homes, Inc. v. Wilcox, 302 Ga. App. 550, 691 S.E.2d 344 (2010).

2. 9-13  Amber gave her boyfriend, Frederick, title to her house by quitclaim deed after he paid off her mortgage balance. The couple then separated, and Amber moved out. Two months later, they reconciled, but Amber refused to move back into the house with Frederick unless he granted her an undivided one-half interest in the house. The couple then signed a document making them “equal partners” in the house and providing for the disposition of the property in the event of a break-up. Is resuming a romantic relationship by moving back in with the other person adequate consideration to form a contract? Willis v. Ormsby, 966 N.E.2d 255 (Ohio 2012).

3. 9-14  D.V.G. (a minor) was injured in a one-car auto accident in Hoover, Alabama. The vehicle was covered by an insurance policy issued by Nationwide Mutual Insurance Co. Stan Brobston, D.V.G.’s attorney, accepted that the settlement could be submitted to an Alabama state court for approval. D.V.G. died from injuries received in a second, unrelated auto accident. Nationwide argued that it was not bound to the settlement because a minor lacks the capacity to contract and so cannot enter into a binding settlement without court approval. Should Nationwide be bound to settlement? Why or why not? Nationwide Mutual Insurance Co. v. Wood, 402 So.3d 580 (Ala. 2013).

4. 9-15  Brendan Coleman created and marketed Clinex, a software billing program. Later, Retina Consultants, P.C., a medical practice, hired Coleman as a software engineer. Together, they modified the Clinex program to create Clinex-RE. Coleman signed an agreement to the effect that he owned Clinex, Retina owned Clinex-RE, and he would not market Clinex in competition with Clinex-RE. After Coleman quit Retina, he withdrew funds from a Retina bank account and marketed both forms of the software to other medical practices. At trial, the court entered a judgment enjoining (preventing) Coleman from marketing the software that was in competition with the software he had developed for Retina Consultants. The court also obligated Coleman to return the funds taken from the company’s bank account. Coleman appealed. Coleman v. Retina Consultants, P.C., 286 Ga. 317, 687 S.E.2d 457 (2009).

5. 9-16  The National Collegiate Athletic Association (NCAA) regulates intercollegiate amateur athletics among the more than 1,200 colleges and universities with which it contracts. Among other things, the NCAA maintains rules of eligibility for student participation in intercollegiate athletic events. Jeremy Bloom, a high-school football and track star, was recruited to play football at the University of Colorado (CU). Before enrolling, he competed in Olympic and professional World Cup skiing events, becoming the World Cup champion in freestyle moguls. During the Olympics, Bloom appeared on MTV and was offered other paid entertainment opportunities, including a chance to host a show on Nickelodeon. Bloom was also paid to endorse certain ski equipment and contracted to model clothing for Tommy Hilfiger. On Bloom’s behalf, CU asked the NCAA to waive its rules restricting student-athlete endorsement and media activities. The NCAA refused, and Bloom quit the activities to play football for CU. He filed a suit in a Colorado state court against the NCAA, however, asserting breach of contract on the ground that NCAA rules permitted these activities if they were needed to support a professional athletic career. The NCAA responded that Bloom did not have standing to pursue this claim. What contract was allegedly breached in this case? Is Bloom a party to this contract? If not, is he a third-party beneficiary of it? Explain. Bloom v. National Collegiate Athletic Association, 93 P.3d 621 (Colo. Ct. App. 2004).

Thinking Critically about Relevant Legal Issues

Megawidget Corporation wants to buy 1,000 widget parts from Douglas Dealer. Megawidget’s president, Mega Buyer, sends an email message to Douglas placing an order for the 1,000 widget parts at $10,000. Douglas emails back and clicks on a button on his computer screen, which is an icon of a little hand shaking. Mega receives the email and also clicks on the handshake icon on his computer. A week later, Mega finds out that he can buy the widget parts cheaper from Dealing Dan. Mega wants to rescind his contract with Douglas, and so claims that, under Article 2 of the UCC, his contract with Douglas had to be in writing to be valid; that is, the email was not a written contract and the “handshake” via icon was meaningless. Discuss the outcome of this contract dispute using a critical thinking approach.

1. What is the legal issue in this case? Explain.

2. What language in what section of Article 2 of the UCC is relevant in deciding this case? Is the language ambiguous? Explain.

3. What information seems to be missing from this case exposition? Explain.

4. What argument would Douglas use in upholding his position? Explain.

On The Internet

· www.loc.gov From this site you can find links to a wealth of information about contracts.

· www.lectlaw.com A site that provides multiple contract examples and forms. Under the heading “Some Main Rooms,” click on “Free Legal Forms.”

· www.legaldocs.com This site provides information about how to prepare contracts and contains legal forms to use as templates for your own contracts.

· lp.findlaw.com This site contains links to government agencies that regulate contracts. Click on “Corporate Counsel,” then “Business Operations.” Under the heading “Business Operations, click on “Commercial Contracts.”

For Future Reading

· Duxbury, Robert. Contract Law (Nutshells). Sweet & Maxwell, 2006.

· Friedman, Stephen E. “Improving the Rolling Contract.” American University Law Review 56 (2006): 1.

· Robertson, Andrew. “The Limits of Voluntariness in Contracts.” Melbourne University Law Review 29 (2005): 179.

· Wendt, John T., and Michael J. Garrison. “The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach.” American Business Law Journal 45 (2008): 107.

Chapter Ten The Law of Contracts and Sales—II

In our discussion of the law of contracts in 

Chapter 9

, we were concerned that agreements be enforceable. We noted that without enforceability of contract law by a court, there would be no predictability for enterprises that produce and sell goods. Without this there would be no security and financial stability for a firm. We would see the risk of loss increase and entrepreneurship decline if contracts were not enforceable at all levels of the manufacturing, marketing, and distribution of services and goods.

In this chapter we carefully examine the methods by which a contract can be discharged (particularly through performance), as well as the remedies that are possible for firms and individuals who are injured by a breach of contract for the sale of goods (Articles 2 and 2A of the Uniform Commercial Code [

UCC

]). E-contracts are highlighted and the concepts underlying them are distinguished from traditional contract principles. This chapter also addresses the international dimensions of contracts and sales agreements.

Critical Thinking About The Law

In 
Chapter 9
, we emphasized the importance of predictability and stability for those who enter into contracts. Nevertheless, we do not want parties to jump immediately to the conclusion that they have a contract every time they talk about an exchange. Instead, we want to make it possible for people to talk about an exchange without having actually made a commitment to the exchange. Why?

To aid your critical thinking about issues surrounding contract formation and performance, let’s look at a fact pattern involving concert tickets.

Jennifer and Juan were recently involved in a breach-of-contract case. Juan had two extra tickets to a Garth Brooks concert, and he agreed to sell these tickets to Jennifer. After they had agreed on the price, Juan promised to give the tickets to Jennifer the next day. The next day, however, Jennifer did not want the tickets. Jennifer had discovered that it was an outdoor afternoon concert. Jennifer argued that she should not have to buy the tickets because she is allergic to sunlight and unable to spend any extended period of time outside. The judge ruled in favor of Jennifer.

1. What ethical norms seem to dominate the judge’s thinking (see 

Chapter 1

)?

Clue: We have said that security is one reason for enforcing contracts. Review your list of ethical norms. Which norms seem to conflict with security in this case?

2. What missing information might be helpful in this case?

Clue: To help you think about missing information, ask yourself the following question: Would the fact that Juan knew that Jennifer was allergic to sunlight affect your thinking about this case?

3. What ambiguous words might be troublesome in this case?

Clue: Examine the reasoning that Jennifer uses to argue that she should be released from the contract.

Methods of Discharging a Contract

When a contract is terminated, it is said to be discharged. A contract may be discharged by performance (complete or substantial), mutual agreement, conditions precedent and subsequent, impossibility of performance, or commercial impracticability.

Discharge By Performance

In most cases, parties to an agreement discharge their contractual obligation by doing what was required by the terms of the agreement. Many times, however, performance is substantial rather than complete. Traditional common law allowed suits for breach of contract if there was not 

complete performance

 of every detail of the contract. Today, however, the standard is 

substantial performance

. This standard requires (1) completion of nearly all the terms of the agreement, (2) an honest effort to complete all the terms, and (3) no willful departure from the terms of the agreement.

complete performance

Completion of all the terms of the contract.

substantial performance

Completion of nearly all the terms of the contract plus an honest effort to complete the rest of the terms, coupled with no willful departure from any of the terms.

Courts usually find substantial performance when there is only a minor breach of contract. For example, A, a contractor, agreed to build a house with five bedrooms for B. By the terms of the agreement, each of the rooms was to be painted blue. By mistake, one was painted pink, and B refused to pay A the $10,000 balance due on the house. The court awarded A $10,000 minus the cost of painting the wrongly painted room, finding that the departure from the contract terms was slight and unintentional and, therefore, insufficient for B to refuse to perform (pay) as agreed to in the contract.

If the breach is material, the injured party may terminate the contract and sue to recover damages. A material breach is substantial and, usually, intentional. Today, courts allow a party to “cure” a material breach if the time period within which a contract is supposed to be performed has not lapsed. In the following case both parties might be in breach of contract. For which party may the breach be material?

 Case 10-1 Kohel v. Bergen Auto Enterprises, L.L.C.

Superior Court of New Jersey, Appellate Division 2013 WL 439970 (2013)

Per Curiam

On May 24, 2010, plaintiffs Marc and Bree Kohel entered into a sales contract with defendant Bergen Auto Enterprises, L.L.C. d/b/a Wayne Mazda Inc. (Wayne Mazda), for the purchase of a used 2009 Mazda. Plaintiffs agreed to pay $26,430.22 for the Mazda and were credited $7,000 as a trade-in for their 2005 Nissan Altima. As plaintiffs still owed $8,118.28 on their Nissan, Wayne Mazda assessed plaintiffs a net payoff of this amount and agreed to remit the balance due to satisfy the outstanding lien.

Plaintiffs took possession of the Mazda with temporary plates and left the Nissan with defendant. A few days later, a representative of defendant advised plaintiffs that the Nissan’s vehicle identification (VIN) tag was missing. The representative claimed it was unable to sell the car and offered to rescind the transaction. Plaintiffs refused.

When the temporary plates on the Mazda expired on June 24, 2010, defendant refused to provide plaintiffs with the permanent plates they had paid for. In addition, defendant refused to pay off plaintiffs’ outstanding loan on the Nissan as they had agreed. As a result, plaintiffs were required to make monthly payments on both the Nissan and the Mazda.

On July 28, 2010, plaintiffs filed a complaint in [a New Jersey state court] against Wayne Mazda.

On February 2, 2012, the court rendered an oral decision finding that there was a breach of contract by Wayne Mazda. On February 17, 2012, the court entered judgment in the amount of $5,405.17 in favor of the plaintiffs against Wayne Mazda. (The defendant appealed to a state intermediate appellate court.)

Defendant argued that plaintiffs’ delivery of the Nissan without a VIN tag was itself a breach of the contract of sale and precludes a finding that defendant breached the contract. However, the trial court found that plaintiffs were not aware that the Nissan lacked a VIN tag when they offered it in trade. Moreover, defendant’s representatives examined the car twice before accepting it in trade and did not notice the missing VIN until they took the car to an auction where they tried to sell it. There is a material distinction in the plaintiffs’ conduct, which the court found unintentional, and defendant’s refusal to release the permanent plate for which the plaintiffs had paid, an action the court concluded was done to maintain “leverage.”

The evidence indicated that the problem with the missing VIN tag could be rectified. Marc Kohel applied and paid for a replacement VIN tag at Meadowlands [Nissan] for $35.31. While he initially made some calls to Meadowlands, he did not follow up in obtaining the VIN tag after the personnel at Wayne Mazda began refusing to take his calls.

The court concluded that “Wayne Mazda didn’t handle this as adroitly (skillfully) as they could. . . .” Kevin DiPiano, identified in the complaint as the owner and/or CEO of Wayne Mazda, would not even take [the plaintiffs’] calls to discuss this matter. The court found:

Mr. DiPiano could have been better businessman, could have been a little bit more compassionate or at least responsive, you know? He was not. He acted like he didn’t care. That obviously went a long way to infuriate the plaintiffs. I don’t blame them for being infuriated.

Here, plaintiffs attempted to remedy the VIN tag issue but this resolution was frustrated by defendant’s unreasonable conduct. We thus reject defendant’s argument that plaintiffs’ failure to obtain the replacement VIN tag amounted to a repudiation of the contract.

*

* 

 Kohel v. Bergen Auto Enterprises, L.L.C. Superior Court of New Jersey, Appellate Division 2013 WL 439970 (2013).

Affirmed, for the Plaintiffs Marc and Bree Kohel.

Performance to Satisfaction of Another

Contracts often state the completed work must personally satisfy one of the parties or a third person. When the subject matter of the contract is personal, the obligation is conditional, and performance must actually satisfy the party specified in the contract. For instance, contracts for portraits, works of art, and tailoring are considered personal because they involve matters of personal taste. Therefore, only personal satisfaction of the party fulfills the condition unless a court finds that the party is expressing dissatisfaction simply to avoid payment or otherwise is not acting in good faith.

Most other contracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise. When the subject matter of the contract is mechanical, courts are more likely to find the performing party has performed satisfactorily if a reasonable person would be satisfied with what was done. For example, Mason signs a contract with Jen to mount a new heat lamp pump on a concrete platform to her satisfaction. Such a contract normally need only be performed to the satisfaction of a reasonable person.

Material Breach of Contract

A 

breach of contract

 is the nonperformance of a contractual duty. The breach is material when it is intentional and usually substantial.

Uniform Commercial Code and Performance and Convention on International Sale of Goods

 

The substantial performance doctrine does not apply to the sale of goods. The performance of a sale or lease contract under UCC Section 2-301 requires the seller or lessor to transfer and deliver what is known as conforming goods (perfect tender rule). The buyer or lessee must accept and pay for the conforming goods. The UCC states an exception to the perfect tender rule. If the goods or tender of delivery fail to conform to the contract in any respect, the buyer has the following options: (1) reject all the goods, (2) accept all that are tendered, or (3) accept any number of units the buyer chooses to and reject the rest. The buyer must generally give notice to the seller of any defect in the goods or tender of delivery and then allow the seller a reasonable time to cure the defect.

Seventy nations are signatories to the United Nations Convention on the International Sale of Goods (

CISG

), and goods are sold worldwide under the authority of the CISG. Under that convention, all four of the following conditions must be met to show an exception to the perfect tender rule: (1) the buyer has resorted to another remedy, such as avoidance or price reduction; (2) the seller failed to deliver or, in the case of nonconforming goods, the nonconformity was so serious that it constituted a fundamental breach; (3) the buyer gave timely notice to the seller that the goods were nonconforming; and (4) the buyer made a timely request that the seller provide substitute goods. As in the civil-law nations, the court may grant specific performance without regard to whether money damages are inadequate.

Discharge By Mutual Agreement

After a contract is formed, the parties may agree that they should rescind (cancel) the contract because some unforeseen event took place that makes its fulfillment financially impracticable. For example, if A agrees to build B a house for $150,000, and then, while building the basement, runs into an unforeseen and uncorrectable erosion factor, both parties may want to cancel the agreement, with restitution to A for expenditures on the basement construction. The contract is then said to be discharged by mutual agreement.

Sometimes the parties wish to rescind an original agreement and substitute a new one for it. This type of discharge by mutual agreement is called accord and satisfaction. If the parties wish to substitute new parties for the original parties to the agreement, this is called novation. Note that novation does not change the contractual duties; it merely changes the parties that will perform those duties. Suppose a rock star (original party) is unable to perform at a concert because of illness, and a star of the same stature (substitute party) agrees to appear instead. If all parties, including the concert impresario, agree to the substitution, there is discharge by mutual agreement.

Applying the law to the facts . .

Bixley and Joe enter into an agreement whereby Joe agrees to buy Bixley’s Cigar Shop. Bixley is planning to retire. As the date for the transfer draws closer, Bixley starts thinking that he really doesn’t want to retire, so he calls Joe and asks whether Joe would be willing to reconsider the deal. Joe was actually starting to worry about whether he could run the operation, so he gladly agreed to just forget the deal. How has the contract been discharged? What if it were only Joe who got cold feet, and he found someone who was happy to buy the business according to the terms of the original sales contract? If Bixley agrees that Carley will replace Joe, then how would we describe the discharge of this contract?

Discharge by Conditions Precedent and Subsequent

Condition Precedent

 A 

condition precedent

 is a particular event that must take place in order to give rise to a duty of performance. If the event does not take place, the contract may be discharged. For example, when Smith enters into a contract with Jones to sell a piece of real estate, a clause in the agreement requires that title must be approved by Jones’s attorney before closing and execution of the contract for sale. If Jones’s attorney does not give this approval before the closing, then Jones is discharged from the contract. The following case illustrates discharge of a contract by a condition precedent.

condition precedent

A particular event that must take place to give rise to a duty of performance of a contract.

 Case 10-2 Architectural Systems, Inc. v. Gilbane Building Co.

U.S. District Court, Maryland 760 F. Supp. 79 (1991)

Carley Capital Group (Carley) was the owner of a project in the city of Baltimore known as “Henderson’s Wharf.” The project was designed to convert warehouses into residential condominiums. On September 4, 1987, Carley hired Gilbane Building Company (Gilbane) to be the general contractor and construction manager for the project. Gilbane hired Architectural Systems, Inc. (ASI), as the subcontractor to perform drywall and acoustical tile work on the project. The subcontract included the following clause: “It is specifically understood and agreed that the payment to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving contract payments from the owner.”

Gilbane received periodic payments from Carley and paid ASI as work progressed. By late 1988, ASI had satisfactorily performed all of its obligations under the subcontract and submitted a final bill of $348,155 to Gilbane. Gilbane did not pay this bill because it had not received payment from Carley. On March 10, 1989, Carley filed for bankruptcy. ASI sued Gilbane, seeking payment.

Justice Young

ASI argues that it did not assume the credit risk simply by the inclusion of the statement “as a condition precedent” in the subcontract. It may not be sound business practice to accept such a business proposal but that is what occurred. The provision unambiguously declares that Gilbane is not obligated to pay ASI until it first received payment by the owner. The cause for the owner’s nonpayment is not specifically addressed and could be due to a number of causes, including insolvency.

A provision that makes a receipt of payment by the general contractor a condition precedent to its obligation to pay the subcontractor transfers from the general contractor to the subcontractor the credit risk of non-payment by the owner for any reason (at least for any reason other than the general owner’s own fault), including insolvency of the owner.
*

* 
Architectural Systems, Inc. v. Gilbane Building Co., U.S. District Court, Maryland 760 F. Supp. 79 (1991).

Decision in favor of Gilbane.

Condition Subsequent

 A 

condition subsequent

 is a particular future event that, when it follows the execution of a contract, terminates the contract. For example, a homeowner’s insurance contract may discharge the insurer from responsibility for coverage in the event of an “act of war” (condition subsequent).

condition subsequent

A particular event that, when it follows the execution of a contract, terminates the contract.

Discharge By Impossibility of Performance

In early common law, when disruptive unanticipated events (e.g., war) occurred after the parties entered into a contract, the contract was considered enforceable anyway. Thus, if a shipping line could not transport goods it had agreed to transport because of a wartime blockade, or if it could transport the goods but had to take a more expensive route to do so, it (or its insurance carrier) was required to pay damages or absorb the costs of the longer route. Courts today take the view that if an unforeseeable event makes a promisor’s performance objectively impossible, the contract is discharged by 

impossibility of performance

. Objectively impossible is defined as meaning that no person or company could legally or physically perform the contract.

impossibility of performance

Situation in which the party cannot legally or physically perform the contract.

This defense to nonperformance is used most frequently in three circumstances. First is the death or illness of a promisor whose personal performance is required to fulfill the contract when no substitute is possible. For example, suppose that a world-renowned artist is commissioned to paint an individual’s portrait. If the artist dies, the contract is discharged because there is no substitute for the artist. Second is a change of law making the promised performance illegal. For example, if A enters into a contract with B to sell B her home to be used for residential purposes, and subsequent to their agreement the property is zoned commercial, the contract will be discharged. The final circumstance is the destruction of the subject matter. If A enters into a contract with B to buy all the hay in B’s barn and the barn burns down with the hay in it before shipment takes place, the contract is discharged because performance is impossible.

Discharge By Commercial Impracticability

The courts have sought to enlarge the grounds for discharge of a contract by adding the concept of 

commercial impracticability

, defined as a situation in which performance is impracticable because of unreasonable expense, injury, or loss to one party. In effect, a situation that was not foreseeable, or the nonoccurrence of which was assumed at the time the contract was executed, in fact occurs, making performance of the contract unreasonably expensive or injurious to a party. For example, a plastics manufacturer becomes extremely short of raw materials because of a war and an embargo on oil coming from the Middle East. The manufacturer’s contracts with retailers for plastic goods will be discharged in most cases if the court finds that the manufacturer could not have anticipated the war and had no alternative source of materials costing about the same price.

commercial impracticability

Situation that makes performance of a contract unreasonably expensive, injurious, or costly to a party.

Contracts with the Government and the Sovereign Acts Doctrine

When a party’s performance is made illegal or impossible because of a new law, a performance contract is usually discharged, and damages are not awarded. But what happens when a party contracts with the government, and the government then promulgates a new law that makes its own performance impossible? If it no longer wishes to be bound by a contract, can the government discharge its obligations by changing the law to make performance illegal?

According to the sovereign acts doctrine, the government generally cannot be held liable for breach of contract due to legislative or executive acts. Because one Congress cannot bind a later Congress, the general rule is that subsequent acts of the government can discharge the government’s preexisting contractual obligations.

This doctrine has limits, however. If Congress passes legislation deliberately targeting its existing contractual obligation, the defense otherwise provided by

Linking Law and Business Management and Production

Quality is defined as the extent to which a product functions as intended. The measure of excellence for a product is ranked primarily by the purchaser on the basis of certain characteristics and features, but the managers must oversee production processes to ensure that quality standards are being met. Managers are continuing to realize that an improvement in the quality of products leads to greater productivity for the organization. By emphasizing greater quality, a firm will probably spend less time and money on repairing defective products. Also, manufacturing quality products reduces the chance of production mistakes and inefficient use of materials.

One method of providing greater assurance that an organization is producing quality products is with statistical quality control. This is a process by which a certain percentage of products for inspection is determined to ensure that organizational standards for quality are met. Organizations that place a strong emphasis on quality, possibly by implementing an effective statistical quality control strategy, are less likely to be faced with having their goods rejected under the perfect tender rule or facing litigation for a breach of contract over defective products. Thus, a serious and consistent emphasis on quality reaps many benefits for an organization.

Source: Adapted from S. Certo, Modern Management (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 445, 447. Reproduced by permission.

the sovereign acts doctrine is unavailable. The government it not prevented from changing the law, but it must pay damages for its legislatively chosen branch. On the other hand, if a new law of general application indirectly affects a government contract, making the government’s performance impossible, the sovereign acts doctrine will protect the government in a subsequent suit for breach of contract.

The contract dispute in the following case arose out of the cancellation of a wedding reception due to a power failure. Is a power failure sufficient to invoke the doctrine of commercial impracticability?

 Case 10-3 Facto v. Pantagis

Superior Court of New Jersey, Appellate Division 915 A.2d 59 (2007)

Leo and Elizabeth Facto contracted with Snuffy Pantagis Enterprises, Inc., for the use of Pantagis Renaissance, a banquet hall in Scotch Plains, New Jersey, for a wedding reception in August 2002. The Factos paid the $10,578 price in advance. The contract excused Pantagis from performance “if it is prevented from doing so by an act of God (e.g., flood, power failure, etc.) or other unforeseen events or circumstances.” Soon after the reception began, there was a power failure. The lights and the air-conditioning shut off. The band hired for the reception refused to play without electricity to power their instruments, and the lack of lighting prevented the photographer and videographer from taking pictures. The temperature was in the 90s, the humidity was high, and the guests quickly became uncomfortable. Three hours later, after a fight between a guest and a Pantagis employee, the emergency lights began to fade, and the police evacuated the hall. The Factos filed a suit in a New Jersey state court against Pantagis, alleging breach of contract, among other things. The Factos sought to recover their prepayment, plus amounts paid to the band, the photographer, and the videographer. The court concluded that Pantagis did not breach the contract and dismissed the complaint. The Factos appealed to a state intermediate appellate court.

Justice Skillman

Even if a contract does not expressly provide that a party will be relieved of the duty to perform if an unforeseen condition arises that makes performance impracticable, a court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event. In deciding whether a party should be relieved of the duty to perform a contract, a court must determine whether the existence of a specific thing is necessary for the performance of a duty and its destruction or deterioration makes performance impractical. A power failure is the kind of unexpected occurrence that may relieve a party of the duty to perform if the availability of electricity is essential for satisfactory performance.

The Pantagis Renaissance contract provided: “Snuffy’s will be excused from performance under this contract if it is prevented from doing so by an act of God (e.g., flood, power failure, etc.), or other unforeseen events or circumstances.” Thus, the contract specifically identified a “power failure” as one of the circumstances that would excuse the Pantagis Renaissance’s performance. We do not attribute any significance to the fact the clause refers to a power failure as an example of an “act of God.” This term has been construed to refer not just to natural events such as storms but to comprehend all misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or present. Furthermore, the clause in the Pantagis Renaissance contract excuses performance not only for “acts of God” but also “other unforeseen events or circumstances.” Consequently, even if a power failure caused by circumstances other than a natural event were not considered to be an “act of God,” it still would constitute an unforeseen event or circumstance that would excuse performance.

The fact that a power failure is not absolutely unforeseeable during the hot summer months does not preclude relief from the obligation to perform. Absolute unforeseeability of a condition is not a prerequisite to the defense of impracticability. The party seeking to be relieved of the duty to perform only needs to show that the destruction, or deterioration of a specific thing necessary for the performance of the contract makes performance impracticable. In this case, the Pantagis Renaissance sought to eliminate any possible doubt that the availability of electricity was a specific thing necessary for the wedding reception by specifically referring to a “power failure” as an example of an “act of God” that would excuse performance.

It is also clear that the Pantagis Renaissance was “prevented from” substantial performance of the contract. The power failure began less than forty five minutes after the start of the reception and continued until after it was scheduled to end. The lack of electricity prevented the band from playing, impeded the taking of pictures by the photographer and videographer and made it difficult for guests to see inside the banquet hall. Most significantly, the shutdown of the air-conditioning system made it unbearably hot shortly after the power failure began. It is also undisputed that the power failure was an area-wide event that was beyond the Pantagis Renaissance’s control. These are precisely the kind of circumstances under which the parties agreed [in their contract] that the Pantagis Renaissance would be excused from performance.

Where one party to a contract is excused from performance as a result of an unforeseen event that makes performance impracticable, the other party is also generally excused from performance.

Therefore, the power failure that relieved the Pantagis Renaissance of the obligation to furnish plaintiffs with a wedding reception also relieved plaintiffs of the obligation to pay the contract price for the reception.

Nevertheless, since the Pantagis Renaissance partially performed the contract by starting the reception before the power failure, it is entitled to recover the value of the services it provided to plaintiffs.
*

* 

Facto v. Pantagis, Superior Court of New Jersey, Appellate Division 915 A.2d 59 (2007).

Reversed for Facto.

Remedies for a Breach of Contract

The fact that a court will enforce a contract does not mean that one party will automatically sue if the other breaches. Businesspeople need to consider several factors before they rush to file a lawsuit: (1) the likelihood of the suit’s succeeding; (2) whether they wish to maintain a business relationship with the breaching party; (3) the possibility of arbitrating the dispute through a third party, thus avoiding litigation; and (4) the cost of arbitration or litigation as opposed to the revenues to be gained from enforcing the contract.

Remedies for a breach of contract are generally classified according to whether the plaintiff requests monetary damages (“legal” remedies) or nonmonetary damages (equitable remedies). Remedies for breach set out by the CISG include: (1) avoidance or cancellation of contract, (2) right to remedy or cure, (3) setting of additional time or extension, (4) price/reductions, (5) money damages, and (6) specific performance.

Monetary Damages (“Legal” Remedies)

Monetary damages

 (often referred to as exemplary damages) include compensatory, punitive, nominal, and liquidated damages.

monetary damages

Dollar sums awarded for a breach of contract; “legal” remedies.

Compensatory Damages

 The purpose of 

compensatory damages

 is to place the injured (nonbreaching) party to a contract in the position in which that party would have been in had the terms of the contract been performed. For example, if a firm contracted to buy 8,000 widgets at $10 apiece to be delivered by August 15, the buyer has a right to go out and buy the widgets from another source if they are not delivered by the contract date. Suppose the widgets bought from the other source cost $10.50 apiece. In that case, the buyer can sue for the 50-cent difference in price per unit plus court costs. If the buyer cannot obtain widgets anywhere else, it can sue for lost profits.

compensatory damages

Monetary damages awarded for a breach of contract that results in higher costs or lost profits for the injured party.

The courts have set out three standards that the plaintiff-buyer must meet in order to recoup lost profits:

1. The plaintiff-buyer must show that it was reasonably foreseen by the defendant-seller that if it did not deliver the promised goods, the buyer would have no alternative source and, thus, would lose profits.

2. The plaintiff-buyer must show the amount of the damages with reasonable certainty; the buyer cannot just speculate about what this amount is.

3. The plaintiff-buyer must show that it did everything possible to mitigate the damage—that is, it looked for other possible sources of the goods.

In the case below the court is careful to award damages “naturally and proximately caused by the breach.”

 Case 10-4 Hallmark Cards, Inc. v. Murley

United States Court of Appeals, Eighth Circuit 703 F.3d 456 (2013)

Janet Murley served as Hallmark Cards, Inc.’s, vice president of marketing. In 2002, Hallmark eliminated her position as part of a corporate restructuring. Murley and Hallmark entered into a separation agreement under which she agreed not to work in the greeting card industry for eighteen months, disclose or use any confidential information, or retain any business records relating to Hallmark. In exchange, Hallmark offered Murley a $735,000 severance payment. After the non-compete agreement (see 
Chapter 9
) expired, Murley accepted a consulting assignment with Recycled Paper Greetings (RPG) for $125,000. Murley disclosed confidential Hallmark information to RPG. On learning of the disclosure, Hallmark filed a suit in a federal district court against Murley, alleging breach of contract. A jury returned a verdict in Hallmark’s favor and awarded $860,000 in damages, consisting of the $735,000 severance payment and the $125,000 Murley received from RPG. Murley appealed.

With respect to $735,000, Murley contends Hallmark was not entitled to a return of its full payment under the parties’ separation agreement because Murley fulfilled several material terms of that agreement (e.g., the noncompete provision). Under the circumstances, we cannot characterize the jury’s reimbursement of Hallmark’s original payment under the separation agreement as grossly excessive or glaringly unwarranted by the evidence. Hallmark’s terms under the separation agreement clearly indicated its priority in preserving confidentiality. At trial, Hallmark presented ample evidence that Murley not only retained but disclosed Hallmark’s confidential materials to a competitor in violation of terms, and primary refund of its $735,000 is not against the weight of the evidence.

With respect to the remaining $125,000 of the jury award, Murley argues Hallmark can claim no entitlement to her compensation by RPG for consulting services unrelated to Hallmark. We agree. In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain as well as damages naturally and proximately caused by the defendant at the time of the agreement. Moreover, the law cannot elevate the non-breaching party to a better position than she would have enjoyed had the contract been completed on both sides. By awarding Hallmark more than its $750,000 severance payment, the jury award placed Hallmark in a better position than it would find itself had Murley not breached the agreement. The jury’s award of the $125,000 payment by RPG was, therefore, improper.

The U.S. Court of Appeals for the Eighth Circuit vacated the award of damages but otherwise affirmed the judgement in Hallmark’s favor. The appellate court remanded the case to the lower court to reduce the award of damages to include only the amount of Hallmark’s severance payment.

Punitive Damages

 Damages in excess of compensatory damages that the court awards for the sole purpose of deterring the defendant and others from doing the same act again are known as 

punitive damages

. They are infrequently awarded in contract cases.

punitive damages

Monetary damages awarded in excess of compensatory damages for the sole purpose of deferring similar conduct in the future.

Nominal Damages

 Sometimes the court awards a very small sum (usually $1) in 

nominal damages

 to a party that is injured by a breach of contract but cannot show real damages. In these cases, the court generally enables the injured party to recover court costs, though not attorney’s fees.

nominal damages

Monetary damages of a very small amount (e.g., $1) awarded to a party that is injured by a breach of contract but cannot show real damages.

Liquidated Damages

 Liquidated damages

 are usually set in a separate clause in the contract. The clause generally stipulates that the parties agree to pay so much a day for every day beyond a certain date that the contract is not completely performed. Liquidated damages clauses are frequently found in general contractors’ agreements with individuals, corporations, and state or local agencies in situations in which it is essential that a building project be completed on time. Such clauses help the contracting parties avoid going to court and seeking a judicial determination of damages—with all the attendant delays and expenses.

liquidated damages

Monetary damages for nonperformance that are stipulated in a clause in the contract.

The UCC (Sections 2-715[1] and 2A-504) permits parties to a sale or lease contract to establish in advance damages that will be paid upon a breach of contract. These liquidated damages will substitute for actual damages. The concept of liquidated damages is illustrated in Case 10-5.

 Case 10-5 Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr.

Supreme Court of Montana 79 P.3d 250 (2003)

Arrowhead School District No. 75 is located in Park County, south of Livingston, Montana, and consists of one school, Arrowhead School for the 1997–98 school year, the School employed about 11 full-time teachers and several part-time teachers. During that school year, the School employed Klyap as a new teacher instructing mathematics, language arts, and physical education for the sixth, seventh, and eighth grades. In addition, Klyap, through his own initiative, helped start a sports program and coached flag football, basketball, and volleyball.

The School offered Klyap a contract for the 1998–99 school year in June 1998, which he accepted. This contract provided for a $20,500 salary and included a liquidated damages clause. The clause calculated liquidated damages as a percentage of annual salary determined by the date of breach; a breach of contract after July 20, 1998, required payment of 20 percent of salary as damages. Klyap also signed a notice indicating that he accepted responsibility for familiarizing himself with the information in the teacher’s handbook that also included the liquidated damages clause.

On August 12, Klyap informed the School that he would not be returning for the 1998–99 school year even though classes were scheduled to start on August 26. The School then sought to enforce the liquidated damages clause in Klyap’s teaching contract for the stipulated amount of $4,100.

After Klyap resigned, the School attempted to find another teacher to take Klyap’s place. Although at the time Klyap was offered his contract the School had 80 potential applicants, only two viable applicants remained available. Right before classes started, the School was able to hire one of those applicants, a less experienced teacher, at a salary of $19,500.

The District Court determined that the clause was enforceable because the damages suffered by the School were impractical and extremely difficult to fix. Specifically, the court found that the School suffered damages because it had to spend additional time setting up an interview committee, conducting interviews, training the new, less experienced teacher, and reorganizing the sports program. The district court also found that such clauses are commonly used in Montana and that the School had routinely and equitably enforced the clause against other teachers. After concluding that the School took appropriate steps to mitigate its damages, the court awarded judgment in favor of the School in the amount of $4,100. Klyap appealed.

Justice Nelson

The fundamental tenet of modern contract law is freedom of contract; parties are free to agree mutually to terms governing their private conduct as long as those terms do not conflict with public laws. This tenet presumes that parties are in the best position to make decisions in their own interest. Normally, in the course of contract interpretation by a court, the court simply gives effect to the agreement between the parties in order to enforce the private law of the contract. When one party breaches the contract, judicial enforcement of the contract ensures [that] the nonbreaching party receives expectancy damages, compensation equal to what that party would receive if the contract were performed. By only awarding expectancy damages rather than additional damages intended to punish the breaching party for failure to perform the contract, court enforcement of private contracts supports the theory of efficient breach. In other words, if it is more efficient for a party to breach a contract and pay expectancy damages in order to enter a superior contract, courts will not interfere by requiring the breaching party to pay more than was due under their contract.

Liquidated damages are, in theory, an extension of these principles. Rather than wait until the occurrence of breach, the parties to a contract are free to agree in advance on a specific damage amount to be paid upon breach. This amount is intended to predetermine expectancy damages. Ideally, this predetermination is intended to make the agreement between the parties more efficient. Rather than requiring a post-breach inquiry into damages between the parties, the breaching party simply pays the nonbreaching party the stipulated amount. Further, in this way, liquidated damages clauses allow parties to estimate damages that are impractical or difficult to prove, as courts cannot enforce expectancy damages without sufficient proof.

After reviewing the facts of this case, we hold that while the 20% liquidated damages clause is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly oppressive. First, as the School pointed out during testimony, at such a small school teachers are chosen in part depending on how their skills complement those of the other teachers. Therefore, finding someone who would provide services equivalent to Klyap at such a late date would be virtually impossible. [The anticipation of this] difficulty was borne out when only two applicants remained available and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one with experience teaching at that very School, Klyap would have to be aware of the problem finding equivalent services would pose.

Second, besides the loss of equivalent services, the School lost time for preparation for other activities in order to attempt to find equivalent services. As the District Court noted, the School had to spend additional time setting up an interview committee and conducting interviews. Further, the new teacher missed all the staff development training earlier that year so individual training was required. And finally, because Klyap was essential to the sports program, the School had to spend additional time reorganizing the sports program as one sport had to be eliminated with Klyap’s loss. These activities all took away from the other school and administrative duties that had been scheduled for that time.

Finally, although the School testified it had an intent to secure performance and avoid the above damages by reason of the clause, such an intent does not turn a liquidated damages clause into a penalty unless the amount is unreasonably large and therefore not within reasonable expectations.

Therefore, because as a teacher Klyap would know teachers are typically employed for an entire school year and would know how difficult it is to replace equivalent services at such a small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a 20% of salary liquidated damages provision for a departure so close to the start of the school year.

Accordingly, we hold the District Court correctly determined that the liquidated damages provision was enforceable.
*

* 
Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr., Supreme Court of Montana 79 P.3d 250 (2003).

Affirmed for the School.

Critical Thinking About The Law

This case highlights the court’s flexibility. Ordinarily, when a person signs a contract with someone else, the courts will hold the parties to the terms of the agreement. In this case, there was no dispute, for instance, about the fact that a 20-percent-of-salary liquidated damages provision was in the contract between the plaintiff and the school district. Yet, as the reasoning in the case made clear, there are certain ground rules that must be satisfied before the court enforces the provisions of a contract.

1. What evidence would Klyap have had to possess for him to have prevailed in this case?

Clue: Follow the court’s reasoning step by step to see what the judge checked before agreeing to enforce the contract.

2. Why might the court have not enforced the contract provision in question had the liquidated damages provision been 40 percent, rather than 20 percent?

Clue: Is it likely that Klyap would have agreed freely to such a provision?

Equitable Remedies

When dollar damages are inadequate or impracticable as a remedy, the injured party may turn to nondollar or 

equitable remedies

. Equitable remedies include rescission, reformation, specific performance, and injunction.

equitable remedies

Nonmonetary damages awarded for breach of contract when monetary damages would be inadequate or impracticable.

Rescission

 

Rescission
 is defined as the canceling of a contract. Plaintiffs who wish to be put back in the position they were in before entering into the contract often seek rescission. In cases of fraud, duress, mistake, or undue influence (discussed in 
Chapter 9
), the courts will generally award rescission.

rescission

Cancellation of a contract.

Reformation

 The correction of terms in an agreement so that they reflect the true understanding of the parties is known as 

reformation

. For example, if A enters into an agreement to sell B 10,000 widgets at $.50 per unit when the figure should have been $5.50 per unit, A may petition the court for reformation of the contract.

reformation

Correction of terms in an agreement so that they reflect the true understanding of the parties.

Specific Performance

 A court order compelling a party to perform in such a way as to meet the terms of the contract calls for 

specific performance

. Courts are reluctant to order specific performance unless (1) a unique object is the subject matter of the contract (e.g., an antique or artwork) or (2) real estate is involved. To obtain a specific performance order, the plaintiff must generally show that dollar damages (damages “at law”) are inadequate to compensate for the defendant’s breach of contract. Even then, a court will often refuse to grant the order if it is incapable of supervising performance or is unwilling to do so. For these reasons, specific performance in contract cases is infrequently granted.

specific performance

A court order compelling a party to perform in such a way as to meet the terms of the contract.

Injunctions

 Injunctions

 are temporary (e.g., 30 days) or permanent orders of the court preventing a party to a contract from doing something. The plaintiff must show the court that dollar damages are inadequate and that irreparable harm will be done if the injunction is not granted. For instance, if an opera singer contracts with an opera company to sing exclusively for the company and then later decides to sing for other opera companies, the court may grant an injunction to prevent her from singing for the other companies. Injunctions, like specific performance, are seldom granted in contract law cases.

injunction

Temporary or permanent court order preventing a party to a contract from doing something.

Remedies for Breach of a Sales Contract (Goods)

Remedies for the Seller

 Under the UCC, remedies for the seller resulting from the buyer’s breach include the following:

· The right to recover the purchase price if the seller is unable to sell or dispose of goods (Section 2-709[1])

· The right to recover damages if the buyer repudiates a contract or refuses to accept the goods (Section 2-708[1])

Remedies for the Buyer

 If a seller breaches a sales contract by failing to deliver conforming goods or repudiating the contract prior to delivery, the buyer has a choice of remedies under the UCC:

· The right to obtain specific performance when the goods are unique or remedy at law is inadequate (Section 2-716[1])

· The right to recover damages after cancellation of the contract

· The right to reject the goods if the goods or tender fail to conform to the contract, or the right to keep some goods and reject the others

· The right to recover damages for accepted goods if the seller is notified of the breach within a reasonable time (Section 2-714[11])

· The right to revoke an acceptance of goods under certain circumstance (Section 2-608[1], [2])

In the case that follows, the issue is whether two years after the sale of goods is a reasonable period of time in which a buyer may discover a defect in goods and notify the seller.

 Case 10-6 Fitl v. Strek

Supreme Court of Nebraska 690 N.W.2d 625 (2005)

In September 1995, James Fitl attended a sports-card show in San Francisco, California, where he met Mark Strek, an exhibitor at the show, who was doing business as Star Cards of San Francisco. Later, on Strek’s representation that a certain 1952 Mickey Mantle Topps baseball card was in near-mint condition, Fitl bought the card from Strek for $17,750. Strek delivered it to Fitl in Omaha, Nebraska, where Fitl placed it in a safe-deposit box. In May 1997, Fitl sent the card to Professional Sports Authenticators (PSA), a sports-card grading service. PSA told Fitl that the card was ungradable because it had been discolored and doctored. Fitl complained to Strek, who replied that Fitl should have initiated a return of the card within “a typical grade period for the unconditional return of a card . . . 7 days to 1 month” of its receipt. In August, Fitl sent the card to ASA Accugrade, Inc. (SAS), another grading service, for a second opinion on its value. ASA also concluded that the card had been refinished and trimmed. Fitl filed a suit in a Nebraska state court against Strek, seeking damages. The court awarded Fitl $17,750, plus his court costs. Strek appealed to the Nebraska Supreme Court.

Justice Wright

Strek claims that the lower court erred in determining that notification of the defective condition of the baseball card 2 years after the date of purchase was timely pursuant to [UCC] 2-607(3)(a).

The [trial] court found that Fitl had notified Strek within a reasonable time after discovery of the breach. Therefore, our review is whether the [trial] court’s finding as to the reasonableness of the notice was clearly erroneous.

Section 2-607(3)(a) states, “Where a tender has been accepted the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.” [Under UCC1-204(2)] “[w]hat is a reasonable time for taking any action depends on the nature, purpose, and circumstances of such action.”

The notice requirement set forth in Section 2-607(3)(a) serves three purposes. The most important one is to enable the seller to make efforts to cure the breach by making adjustments or replacements in order to minimize the buyer’s damages and the seller’s liability. A second policy is to provide the seller a reasonable opportunity to learn the facts so that he may adequately prepare for negotiation and defend himself in a suit. A third policy is the same as the policy behind statutes of limitation: to provide a seller with a terminal point in time for liability.

[A] party is justified in relying upon a representation made to the party as a positive statement of fact when an investigation would be required to ascertain its falsity. In order for Fitl to have determined that the baseball card had been altered, he would have been required to conduct an investigation. We find that he was not required to do so. Once Fitl learned that the baseball card had been altered, he gave notice to Strek.

One of the most important policies behind the notice requirement is to allow the seller to cure the breach by making adjustments or replacements to minimize the buyer’s damages and the seller’s liability. However, even if Fitl had learned immediately upon taking possession of the baseball card that it was not authentic and had notified Strek at that time, there is no evidence that Strek could have made any adjustment or taken any action that would have minimized his liability. In its altered condition, the baseball card was worthless.

Earlier notification would not have helped Strek prepare for negotiation or defend himself in a suit because the damage to Fitl could not be repaired. Thus, the policies behind the notice requirement, to allow the seller to correct a defect, to prepare for negotiation and litigation, and to protect against stale claims at a time beyond which an investigation can be completed, were not unfairly prejudiced by the lack of an earlier notice to Strek. Any problem Strek may have had with the party from whom he obtained the baseball card was a separate matter from his transaction with Fitl, and an investigation into the source of the altered card would not have minimized Fitl’s damages.
*

* 
Fitl v. Strek, Supreme Court of Nebraska 690 N.W.2d 625 (2005).

Affirmed in favor of Fitl.

Applying the law to the facts . .

Kallie operates a boutique and enters into a contract with JJ Scarves for the purchase of 25 print scarves that she plans to sell at her boutique. If the company fails to deliver the scarves at the agreed-upon date, and two weeks later sends her a letter saying they are sorry but they cannot fulfill the terms of the contract, what would her damages be? What if the opposite situation occurred and Kallie refused delivery of the scarves without even looking at them, saying that she was sorry, but her customers just didn’t seem to purchase scarves, so she just couldn’t accept the order? What would the company’s damages be? In each situation, what would the nonbreaching party have to do to ensure they would be able to recover damages?

E-Contracts

In 
Chapter 9
, and in this chapter, we have examined the traditional principles governing contracts for the sale of real and personal property, as well as the sale and lease of goods as defined by the UCC. E-contracts are now an everyday part of a cyberspace era. Although many of the traditional contract principles apply to contracts entered into online, they should include these minimum provisions:

· Remedies that are available to the buyer if any of the goods contracted for are defective.

· A statement of the seller’s referral policy.

· A statement of how the goods are to be paid for.

· A forum selection clause, which indicates the location and/or forum where a dispute will be settled should one arise.

· A disclaimer-of-liability provision by the seller for certain uses of a good sold.

· The manner in which an offer can be accepted (e.g., by “click on”). Similarly, an acceptance may be made under traditional principles or by the provisions of Article 2 of the UCC (previously discussed in 
Chapter 9
).

· Click-on terms that indicate agreement to the terms outlined in an offer.

· Browse-wrap terms that are enforceable (or binding) without the offeree’s active consent, as with click-on terms.

E-Signatures

In the year 2000, Congress enacted a law entitled the Electronic Signatures in Global and National Commerce Act (E-SIGN),

1

 allowing consumers and businesses to sign contracts online and making e-signatures just as binding as ones in ink. Such contracts as those for bank loans and brokerage accounts may be entered into over the Internet 24 hours a day. This prevents delays that arise from the need for paper contracts to be written, mailed, signed, and then returned. With e-signatures, the cost of drawing up paperwork, mailing it, and storing agreements is eliminated in favor of electronic retention.

1
 15 U.S.C. § 700 et seq.

The law went into effect on October 1, 2000, but questions were raised as to whether people would be able to forge electronic signatures on everything from online purchases to credit card applications. The law does not specify what constitutes a digital signature. Possible requirements include (1) a password that must be entered into a form on a Web page, with the website having to confirm that it belongs to a certain person; or (2) the use of hardware such as thumbprint scanning devices that plug into personal computers and transmit the thumbprint over the Internet to a business, which would keep it on file for authentication purposes.

Laws governing e-signatures differ from state to state. Some states, such as California, prohibit documents from being signed with e-signatures, whereas others do not. In 1999, the National Conference of Commissioners on Uniform State Law and the American Law Institute set out the Uniform Electronic Transcription Act (UETA),

2

 which sought to bring uniformity to this area of the law. The UETA, which has been adopted in whole or in part by more than 40 states, indicates that a signature may not be denied legal enforceability solely because of its electronic form.

2 

UETA §§ 102(8) AND (25).

The Uniform Computer Information Transaction Act

Prior to World War II, the common law of contracts was sufficient to handle most of the transactions in a mainly agricultural society. As the distribution and manufacturing of goods came to dominate commerce, the UCC was drafted by the National Conference of Commissioners on Uniform State Law, a consortium of lawyers, judges, businesspeople, and legal scholars. Individual states gradually adopted all or part of the UCC. For purposes of the law of contracts, Article 2 (Sales) and 2A (Leases) are highly significant, as shown in this and the preceding chapter.

As the world of computers and electronic commerce developed in the 1980s and 1990s, the common law of contracts and the UCC did not provide adequate guidelines, because the cyberspace economy is largely based on electronic contracts and the licensing of information. Questions developed as to how to enforce e-contracts, as well as what consumer protection should be provided. Therefore, in July 1999, the National Conference of Commissioners issued the Uniform Computer Information Transaction Act (

UCITA

).

Scope of the UCITA

 It should be emphasized that the UCITA deals only with information that is electronically disseminated.

3

 Under this act, a computer information transaction is an agreement to create, transfer, or license computer information. It does not cover licenses of information for traditional copyrighted materials such as books or magazines.

3 

UCITA § 102.

Many of the provisions of the UCITA are similar to Article 2 of the UCC. For example, a licensing agreement may be interpreted by the courts using the express terms of the agreement, as well as course of performance and usage. There are, however, several differences regarding licensing agreements under the UCITA:

· The party who sells the right to use a piece of software (licensor) can control the right of use by the buyer (licensee). In a mass market this is extremely important. An exclusive license means that for its duration, the licensor will not grant any other person rights to the same information. This is a matter of serious negotiation both nationally and internationally, with firms as well as with governments.

· If a contract requires a fee of more than $5,000, it is enforceable only if it is authenticated. To authenticate means to sign a contract or execute an electronic symbol, sound, or message attached to or linked with the record. Authentication may be attributed to a party’s agent. Authentication may be proven if a party uses information or if he or she engages in operations that authenticate the record.

The Business Community: Criticisms of the UCITA

 The UCITA would benefit software makers because it favors click-wrap agreements, and there would be uniformity to such agreements. This still leaves the question of enforcement of such agreements when they are between other business entities or governments.

Debate exists among those who want uniformity and critics who believe software makers would use uniformity to argue that they are not responsible for defect in the software they sell. For example, who would be held responsible for a software virus? Will consumers read the fine-print disclaimers? Some would argue that problems associated with e-contracts are similar to those encountered in dealing with contracts for real property, goods, and personal property.

Global Dimensions of Contract and Sales Law

As more nations in Europe, Latin America, and Asia have shifted toward market- oriented economies, international trade has increased, and, along with it, contracts implementing transactions between foreign entities (either governments or private companies) and U.S. companies have increased. International and regional treaties lowering or eliminating tariffs have hastened the trend to free trade. (See 

Chapter 8

 for a detailed description of recent trade pacts.)

Given this accelerating tendency toward free trade, the United Nations Commission on International Trade Law drafted the Convention on Contracts for the International Sale of Goods

4

 to provide uniformity in international transactions. The CISG covers all contracts for the sale of goods in countries that have ratified it. An estimated two-thirds of all international trade is conducted among

4 

15 U.S.C. App. (1997).

Scope	Battle of the Forms	Warranties	Statute of Fraud
Common Law	1. Provision of services 2. Contracts for sale of land or securities 3. Loan agreements	Mirror image rule	Any express warranties made	1. Transfer of real estate 2. Contract cannot be performed within one year 3. Prenuptial agreement 4. Agreement to pay debt of another
UCITA	Computer information (including software, computer games, and online access)	Contract even if acceptance materially alters the offer	1. Warranty of noninterference and noninfringement 2. Implied warranties of merchantability of computer program, informational content, fitness for licensee’s particular purpose and fitness for system integration	Contract for $5,000 or more
CISG	Sale of goods by merchants in merchants in different countries unless parties opt out	In practice, mirror image rule	1. Implied warranties of merchantability and fitness for a particular use 2. Any express warranties made	None
UCC	Sale of goods	If both are merchants additional terms are incorporated; if not, minor rules apply	Implies warranties for a particular purpose	Sale of 500 or more

the 70 nations that were signatories to the CISG as of April 2009.

5

 Parties to a contract can choose to adhere to all or part of the CISG, or they may select other laws to govern their transactions.

5 

See N. Karambelas, “Convention on International Sale of Goods: An International Law as Domestic Law,” Washington Lawyer, April 2009, p. 27; R. Schauffer et al., International Business Law (9th edition, 2015) pp 90–92.

On January 1, 1988, the CISG was approved as a treaty and incorporated into U.S. federal law. As a treaty, it overrides conflicting state laws dealing with contracts. Each of the 50 states is now examining conflicts between the Uniform Commercial Code (as adopted in the state) and the CISG, which supersedes it.

Some of the differences between the CISG and the UCC are highly significant. For example, under the CISG, a contract is formed when the seller (offeror) receives the acceptance from the offeree, whereas under the UCC, a contract is formed when the acceptance is mailed or otherwise transmitted. To take another example, under the CISG, a sales contract of any amount is enforceable if it is oral, whereas the UCC requires a written contract for a sale of goods of $500 or more.

Present and future business managers must become knowledgeable about these and other differences between the UCC and the CISG if they are to avoid costly and time-consuming litigation as international transactions in goods increase. You might want to review 
Chapter 8
 at this point to refresh your memory about the methods and details of international transactions.

Summary

Contracts are discharged by performance, mutual agreement, conditions precedent and subsequent, and sometimes through impossibility of performance. Remedies for breach of contract include dollar remedies such as lost profits, punitive, nominal, and liquidated damages. Often, when dollar damages are insufficient, the court will rely on equitable remedies (nondollar damages) such as rescission, restitution, specific performance, and reformation.

E-contracts require some minimum provisions that may differ slightly from common-law principles. With the help of statutory and case law, e-contracts are now becoming part of everyday business transactions. Contract laws became more uniform with the ratification by many nations of the Convention on Contracts for the International Sale of Goods. This has wide implications for the conduct of international transactions.

Review Questions

1. 10-1 List the criteria used by the courts in determining lost profits.

2. 10-2 Why do courts rely on equitable remedies? Explain.

3. 10-3 What is meant by “punitive damages?” Explain.

4. 10-4 Explain what is meant by the “reformation” of a contract.

5. 10-5 Why should a party who has not breached a contract be required to mitigate the damages of the breaching party?

6. 10-6 What are some provisions that should be included in e-contracts?

Review Problems

1. 10-7  In 2003, Karen Pearson and Steve and Tara Carlson agreed to buy a 2004 Dynasty recreation vehicle (RV) from DeMartini’s RV Sales in Grass Valley, California. On September 29, Pearson, the Carlsons, and DeMartini’s signed a contract providing that “seller agrees to deliver the vehicle to you on the date this contract is signed.” The buyers made a payment of $145,000 on the total price of $356,416 the next day, when they also signed a form acknowledging that the RV had been inspected and accepted. They agreed to return later to have the RV transported out of the state for delivery (to avoid paying state sales tax on the purchase). On October 7, Steve Carlson returned to DeMartini’s to ride with the seller’s driver to Nevada to consummate the out-of-state delivery. When the RV developed problems, Pearson and Carlson filed a suit in a federal district court against the RV’s manufacturer, Monaco Coach Corp., alleging, in part, breach of warranty under state law. The applicable statute is expressly limited to goods sold in Nevada. How does the Uniform Commercial Code (UCC) define a sale? What does the UCC provide with respect to the passage of title? How do these provisions apply here? Discuss.

2. 10-8  Internet Archive (IA) is devoted to preserving a record of resources on the Internet for future generations. IA uses the “Wayback Machine” to automatically browse websites and reproduce their contents in an archive. IA does not ask the owners’ permission before copying the material but will remove it on request. Suzanne Shell, a resident of Colorado, owns a website that is dedicated to providing information to individuals accused of child abuse or neglect. The site warns, “IF YOU COPY OR DISTRIBUTE ANYTHING ON THIS SITE YOU ARE ENTERING INTO A CONTRACT.” The terms, which can be accessed only by clicking on a link, include, among other charges, a fee of $5,000 for each page copied “in advance of printing.” Neither the warning nor the terms require a user to indicate assent. When Shell discovered that the Wayback Machine had copied the contents of her site—approximately eighty-seven times between May 1999 and October 2004—she asked IA to remove the copies from its archive and pay her $100,000. IA removed the copies and filed a suit in a federal district court against Shell, who responded, in part, with a counterclaim for breach of contract. IA filed a motion to dismiss this claim. Did IA contract with Shell? Explain. Internet Archive v. Shell, 505 F. Supp. 2d 755 (D. Colo. 2007).

3. 10-9  McDonald has contracted to purchase 500 pairs of shoes from Vetter. Vetter manufactures the shows and tenders delivery to McDonald. McDonald accepts the shipment. Later, on inspection, McDonald discovers that 10 pairs of shoes are poorly made and will have to be sold to customers as seconds. If McDonald decides to keep all 500 pairs of shoes, what remedies are available to her? Explain.

4. 10-10  Kirk has contracted to deliver to Doolittle 1,000 cases of Wonder brand beans on or before October 1. Doolittle is to specify means of transportation 20 days prior to the date of shipment. Payment for the beans is to be made by Doolittle on tender of delivery. On September 10, Kirk prepares the 1,000 cases for shipment. Kirk asks Doolittle how he would like the goods to be shipped, but Doolittle does not respond. On September 21, Kirk, in writing, demands assurance that Doolittle will be able to pay on tender of the beans, and Kirk asks that the money be placed in escrow prior to October 1 in a bank in Doolittle’s city named by Kirk. Doolittle does not respond to any of Kirk’s requests, but on October 5 he wants to file suit against Kirk for breach of contract for failure to deliver the beans as agreed. Explain Kirk’s liability for failure to tender delivery on October 1.

5. 10-11  Julius W. Erving (Dr. J) entered into a four-year contract to play exclusively for the Virginia Squires of the American Basketball Association. After one year, he left the Squires to play for the Atlanta Hawks of the National Basketball Association. The contract signed with the Squires provided that the team could have his contract set aside for fraud. The Squires counterclaimed and asked for arbitration. Who won? Explain.

6. 10-12  TWA had a sale/leaseback agreement with Connecticut National Bank. Because of the Gulf War, air travel was decreased and TWA was having trouble making its payments. Discuss the extent to which TWA could use commercial impracticability or impossibility as a defense for nonpayment.

Case Problems

1. 10-13  After submitting the high bid at a foreclosure sale, David Simard entered into a contract to purchase real property in Maryland for $192,000. Simard defaulted (failed to pay) on the contract. A state court ordered the property to be resold at Simard’s expense, as required by state law. The property was to be resold for $163,000, but the second purchaser also defaulted on his contract. The court then ordered a second resale, resulting in a final price of $130,000. Assuming that Simard is liable for consequential damages, what is the extent of the liability? Is he liable for losses and expenses related to the first resale? If so, is he also liable for losses and expenses related to the second resale? Why or why not? Burson v. Simard, 35 A.3d 1154 (Md. 2012).

2. 10-14  Cuesport Properties, LLC, sold a condominium in Anne Arundel County, Maryland, to Critical Developments, LLC. As a part of the sale, Cuesport agreed to build a wall between Critical Development’s unit and an adjacent unit within thirty days of closing. If Cuesport failed to do so, it was to pay $126 per day until completion. This was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. The wall was built on time, but without a county building code. Critical Developments did not modify the wall to comply with the code until 260 days after the date of the contract deadline for completion of the wall. Does Cuesport have to pay Critical Developments $126 for each of the 260 days? Explain. Cuesport Properties, LLC v. Critical Developments, LLC, 209 Md. App. 607, 61 A.3d 91 (2013).

3. 10-15  The Northeast Independent School District in Bexar County, Texas, hired STR Constructors, Ltd., to renovate a middle school. STR subcontracted the tile work in the school’s kitchen to Newman Tile, Inc. (NTI). The project had already fallen behind schedule. As a result, STR allowed other workers to walk over and damage the newly installed tile before it had cured, forcing NTI to constantly redo its work. Despite NTI’s requests for payment, STR remitted only half the amount due under their contract. When the school district refused to accept the kitchen, including the tile work, STR told NTI to quickly make the repairs. A week later, STR terminated their contract. Did STR breach the contract with NTI? Explain. STR Constructors, Ltd. v. Newman Tile, Inc., S.W.3d, 2013 WI, 632969 (Tex. App.–El Paso 2013).

4. 10-16  United Concrete purchased concrete from Red-D-Mix and later claimed that the concrete was defective because of issues with bleed water. Bleed water is excess water that seeps out of concrete after it has been poured; it rests on the surface and can weaken the concrete, leading to premature degeneration. United Concrete then sued Red-D-Mix for fraudulent representation under Wisconsin law. United Concrete claimed that a Red-D-Mix salesperson had assured United Concrete that the bleed water issue had been resolved. Red-D-Mix asserted in its defense that its salesperson’s statement was mere puffery and therefore not actionable.

Were the statements by the Red-D-Mix salesperson puffery? Why or why not? Does it matter whether the Red-D-Mix salesperson had any reasonable basis for making the statements? How could United Concrete have avoided this lawsuit? United Concrete & Construction, Inc. v. Red-D-Mix Concrete, 836 N.W.2d 807 (Wis. 2013).

5. 10-17  William West, an engineer, worked for Bechtel Corporation, an organization of about 160 engineering and construction companies, which is headquartered in San Francisco, California, and operates worldwide. Except for a two-month period in 1985, Bechtel employed West on long-term assignments or short-term projects for 30 years. In October 1997, West was offered a position on a project with Saudi Arabian Bechtel Co. (SABCO), which West understood would be for two years. In November, however, West was terminated for what he believed was his “age and lack of display of energy.” After his return to California, West received numerous offers from Bechtel for work that suited his abilities and met his salary expectations, but he did not accept any of them and did not look for other work. Three months later, he filed a suit in a California state court against Bechtel, alleging in part breach of contract and seeking the salary he would have earned during the two years with SABCO. Bechtel responded in part that, even if there had been a breach, West had failed to mitigate his damages. Is Bechtel correct? West v. Bechtel Corp., 117 Cal. Rptr. 2d 647 (2002).

Thinking Critically about Relevant Legal Issues

Judges should start offering punitive awards in breach-of-contract cases. Punitive damages are awarded for the sole purpose of deterring the defendant and others from doing the same act again. Our courtrooms are flooded with enough cases. Businesses know that they can get away with breaching their contracts. If we start imposing punitive damages, however, these businesses will alter their behavior.

This change would specifically affect those businesses that make it a practice to breach a contract whenever necessary. People are losing faith in the security of a contract. A survey of 100 first-year business students suggested that contracts are little respected and rarely followed in business.

1. What is the conclusion offered in this argument, and the reasons supporting the conclusion? Return to 
Chapter 1
 of this text.

2. The author cites a survey of 100 first-year business students who suggested that contracts are “little respected and rarely followed in business.” Do you see any problems with this evidence?

3. What additional information do you need to evaluate this argument?

4. What arguments could you make that are the opposite of those made by the author of this essay? Return to 
Chapter 1
.

Assignment

On The Internet

This chapter briefly introduces the UCITA as a means of regulating the increasing volume of e-commerce and electronic contracts. Not everyone, however, is in favor of the UCITA. Using the Internet, search for articles and opinions that present multiple perspectives about how the UCITA influences business operations.

You can begin by visiting the Americans for Fair Electronic Commerce Transactions (AFECT) site (www.ucita.com). What arguments does it present against UCITA? Then visit http://www.repository .law.indiana.edu/cgi/viewcontent.cgi?article =1251&context=fclj to read an article containing arguments in support of UCITA.

Now draft a brief response to what you have read. Would you support or oppose wider enactment of UCITA? Why? Would you recommend that any changes be made if your state was considering adopting parts of UCITA? What would those changes be?

On The Internet

1. www.law.cornell.edu/ucc/2/overview.html This site contains the part of the Uniform Commercial Code relevant to contracts and sales.

2. www.lectlaw.com/files/bul08.htm This site provides more information on nonperformance and breach of contract.

3. www.cisg.law.pace.edu/cisg/text/treaty.html Here you can find the United Nations Convention on Contracts for the International Sale of Goods.

4. http://www.uniformlaws.org/ Go to this site and do a search for Uniform Electronic Transactions Act to find out more about this uniform law.

For Future Reading

1. DiMatteo, Larry. “A Theory of Efficient Penalty: Eliminating the Law of Liquidated Damages,” American Business Law Journal 38 (2001): 633.

2. Eagan, William. “The Westinghouse Uranium Contracts.” American Business Law Journal 18 (1980): 281.

3. Karambelas, Nicholas. “United Nations Convention on International Sale of Goods.” Washington Lawyer (April 2009): 261–35.

4. Pryor, Jeremy. “Lost Profit or Lost Chance: Reconsidering the Measure of Recovery for Lost Profits in Breach of Contract Actions.” University Law Review 19 (2006–2007): 561–80.