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Contract Law Ch-1: Offer and Acceptance
Topic
Page
1. The Offer 32. Offer, Acceptance and Contract 33. Offers by Merchants and the Uniform Commercial Code (UCC) 4
4.1. Offers and Counter Offers Between Merchants 44.2. Memorializing Oral Contracts 5
5. Demonstrating Acceptance of an Offer 56. Silence and Acceptance 57. Methods of Communication, Offers and Responses 68. Advertisements vs. Unilateral Contracts 69. Revocation of Offers Reviewed: -
9.1. Revocation – Common Law 9.2. Revocation – Estopped by Option 9.3. Revocation – Merchants 9.4. Revocation - by Mail 9.5. Revocation - by Hearsay 9.6. Revocation - Unilateral Contracts
8
910. Advertisement Offers and Special Offers 1011. Illusory Contracts 1012. The Mailbox Rule – Offer and Rejection 1113. Offers and Quotes 1114. Offers and Expressions of Further Enquiry 1215. Acceptance of Offers and New Negotiations 1216. Gifts: Offer and Acceptance 1217. Offers and Multiple Acceptances 1318. Termination of the Offer by Counter Offer 13 19. Contracts With Price Term Left Open 1320.1 Offers Calling for the Shipment of Goods 1420.2 21.
Subsequent Cancellation of the Order Offers made with C.I.F. (Cost + Insurance & Freight)
14
22.1. Requirement Contracts 1522.2. Requirement Contracts: Fluctuating Market Conditions 1522.3. Requirement Contracts: When Price Left Open 1522.4. Requirement Contracts: When Things Go Wrong 16
23. Term: ‘Within One Month’ 1624. Offer: Rewards (Review) 1725. Sales Commission Contracts 18
Contract Law Ch-2: Consideration, Assignment, Delegation and
Third Party Beneficiaries
Topic: Consideration Page1. Consideration Introduction 3
2.1 Consideration and Contract Modification 32.2. Good Faith Modification vs. Consideration 3
3. Consideration and Contract Modification Between Merchants 44. The Doctrine of Promissory Estoppel 45. Implied-In-Fact Contracts,
Unjust Enrichment and Quasi Contracts
4
6. Consideration and Pre-Existing Duties 57. Service Contract Modifications vs. Merchant UCC Contract
Modifications 6
8. Consideration and Gifts: Promissory Estoppel and Detrimental Reliance
6
9. Consideration and Forbearance 710. Consideration Before the Promise is Made. (Lost, Found and
Reward) 7
11. Excusing New Consideration for an Existing Moral Obligation 8
Topic: Assignment and Delegation Page1. Assignments Introduction 92. Assignments (Novation) vs. Delegations 103. Delegation 114. Delegation and Consent Requirements 115. Delegation of Performance or Delegation Performance and
Assumption of Duty 11
6. Multiple Assignments 127. Assignments and Changing the Obligor’s Obligation 138. Assignments: Intentions to Assign vs. Present Assignments 139. Assignments and Garnishments 14
10. Assignments and Leases: Liability of Assignor and Assignee 1411. Assignments and Liabilities of Landlord 15
Topic: Third Party Beneficiaries (3PBs) Page1. 3PB: Introduction 162. 3PB: Intended vs. Identical 163. Identifying an Intended 3PB 174. The Rights of an Intended 3PB
4.1. Donee 3PB 4.2. Creditor 3PB
171718
5. Creditor Intended 3PB vs. Donee 3PB 186. Creditor Suing Promisee or Promissor: Vesting Rights 197. Intended 3PB Rights and Obligations 198. Defending a Claim Against a Vested 3PB 209. 3PB and Insurance Policies (Review)
The Insurance Policy The Effect of the Insurer Re-insuring a Policy
202021
Contract Law Ch-3: Statute of Frauds and Parol Evidence Rule
Topic: Statute of Frauds
Page
1. Statute of Frauds: Introduction 22. Modifying Contracts 33. Statute of Frauds: Sale of Land and the Essential Terms That Must
be Included in the Writing. 3
4. Sale of Land and Description Requirements 35. Sale of Land and Parties Signing the Contract 46. Sale of Land and the Doctrine of Equal Dignities 47. Sale of Land and Specific Performance 48. Statute of Frauds & UCC: Sales of Goods 49. Statute of Frauds: Full Performance
(& Exceptions) 5
10. Privity of Statute of Frauds Contracts 511. Errors and Omissions in the Contract 6
Topic: Parol Evidence
Page
1. Parol Evidence Introductions 72. Oral Evidence to Explain- Not to Contradict Written Contract 73. Contemporaneous Oral or Prior Agreements 74. Parol Evidence and Latent Ambiguity 85. Parol Evidence: Complete and Partial Integration 96. Parol Evidence: Hindsight 97. Parol Evidence: Consideration 98. Parol Evidence: Plain Meaning Rule 10
Contract Law Ch-4: Condition & Discharge
Topic: Condition
Page
1. Conditions Introduction 22. Conditions Precedent 23. Condition Precedent (Review) 34. Condition Precedent vs. Condition Subsequent 35. Constructive Condition Precedent 46. Condition Concurrent 47. Implied Conditions 48. Warranty: Satisfaction Guaranteed 49. Warranties: ‘Warranty of Truthfulness’ 4
10. Insurance Clauses: Time of Payout Stipulated 511. Misrepresentation 512. Time of the Essence 5
Topic: Discharge
1. Unilateral Mistake 72. Mutual Mistake 73. Mutual Mistake and Assumption of Risk 74. Mistake by an Intermediary (Mistake in the Transmission) 75. Mistake: Correcting Acknowledged Errors 86. Doctrine of Mistake Reviewed 87. An Accord 88. Satisfaction of the Accord 99. Accord and Satisfaction: Checks 9
10. Discharge for Material Breach 911. Destruction of Subject Matter 1012. No Discharge Due to Appreciation of Risks 1113. Discharge: Frustration of Purpose 1114. Discharge: Impossibility & Impracticability 1115. Discharge: Failure of Star Performer 1216. Impossible Deadline and Schedules 1217. Contracts With an Illegal Purpose 1218. Contracts Involving Minors 1319. Automobile Accidents and Offers to Pay Medical Expenses 14
Contract Law Ch-5: Remedies
Topic:
Page
1. Anticipatory Repudiation (AR) 32. AR and Prospective Inability to Perform 3
3.1. AR and Equivocal Repudiation 43.2. Selling to Buyers Who May be Insolvent 4
4. Specific Performance and Personal Services 55. Liquidated Damages 66. Waiving Rights Under a Contract 67. Entire Contracts 68. Divisible Contracts 7
9.1. Option Contracts 89.2. Options: Buyer Changes His Mind and Advises Seller 89.3. Expired Options 99.4. Options and Bids (Tenders) 99.5. Options and Specific Performance 109.5. Options and Consideration 109.7. Options and Revocation 1010. Doctrine of Release 1111. Time of the Essence: Late Performance Under a Contract 1112. Calculating Damages for Cancelled Orders or Rejecting Non-
Conforming Goods 11
13. Non-Conforming Goods and Damages 1214. Revocation of Acceptance: Rejecting Goods After Acceptances 1315. How Does the Seller Know Whether the Goods Have Been
Accepted? 13
16. Goods Stolen or Damaged in Transit 1317. Breach of Building Contracts 1418. Rejecting Non-Confirming Goods 1419. Seller Refuses to Accept Rejected Goods and Will Not Refund
Monies 15
20. Right of Inspection of Shipped Goods 15
1
Contract Law Ch-1: Offer and Acceptance
Topic
Page
1. The Offer 32.1. Accepting the Offer 32.2. Crossing Offers and Acceptance 3
3. Offers by Merchants and the Uniform Commercial Code (UCC) 44.1. Offers and Counter Offers Between Merchants 44.2. Memorializing Oral Contracts 5
5. Demonstrating Acceptance of an Offer 56. Silence and Acceptance 67. Methods of Communication, Offers and Responses 68. Advertisements vs. Unilateral Contracts 69. Revocation of Offers Reviewed: -
9.1. Revocation – common law 9.2. Revocation – Estopped by Option 9.3. Revocation – Merchants 9.4. Revocation - by Mail 9.5. Revocation - by Hearsay 9.6. Revocation - Unilateral Contracts
8
910. Advertisement Offers and Special Offers 1011. Illusory Contracts 1012. The Mailbox Rule - Offer and Rejection 1113. Offers and Quotes 1114. Offers and Expressions of Further Enquiry 1215. Acceptance of Offers and New Negotiations 1216. Gifts: Offer and Acceptance 1217. Offers and Multiple Acceptances 1318. Termination of the Offer by Counter Offer 13 19. Contracts with Price Term Left Open 13
20.1. Offers Calling for the Shipment of Goods 1420.2. Subsequent Cancellation of the Order 14
21. Offers Made With C.I.F. (Cost + Insurance & Freight) 1422.1. Requirement Contracts 1522.2. Requirement Contracts: Fluctuating Market Conditions 1522.3. Requirement Contracts: When the Price Left Open 1522.4. Requirement Contracts: When Things Go Wrong 16
2
23. Term: ‘Within One Month’ 1624. Offer: Rewards (Review) 1728. Sales Commission Contracts 18
3
1. The Offer
Rule: For a communication to be considered an offer, it must be made in the form of a clear expression of a promise, an undertaking, or commitment. When taken as a whole the offer creates an obligation on the offeror to perform something. The offer must be communicated to the offeree.
2.1.
2.2.
Accepting the Offer Rule: Although it may sound elementary, an offer must be accepted to complete the formation of a contract. We also need to look at how the offer should be accepted: -
1. Does the seller require prompt acceptance? 2. Does the seller require acceptance only by performance? 3. Does the seller require telephone or written confirmation of
acceptance followed by performance, or 4. Does the seller require telephone and written confirmation followed
by performance? 5. Is the offer time limited? These are called implied or express terms of acceptance.
Therefore, when an offer is made, check if the offer was accepted in the manner specified by the seller, (if at all). We need to check that if there was a specified manner was it complied with? These issues will help determine the precise moment the contract was formed.
Crossing Offers and Acceptance Rule: Sometimes, the seller will make an offer in the mail. The buyer, unaware of the seller’s offer, may simultaneously mail an offer to the seller. Here, even if the offers are for the same amount, no contract will be created until either party acknowledges and accepts the offer received. Thus, there must be a genuine acceptance of an offer.
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Example: Sid and Bill talk about the possibility of Sid selling his automobile to Bill for $5,000.00. Both guys said they’d think about it. A few days later Sid decides to send Bill a note saying ‘I really need the money so I want to offer you my auto for $4,500.’ Sid mails this letter in the morning. Bill on that same day wonders if Sid would accept $4,500 for the auto since that’s all Bill could afford. Bill mails his offer to Sid on the same day. The question becomes, has a contract been formed between them? The answer is ‘no’ because neither side has yet accepted each other’s offer.
3. Offers by Merchants and the Uniform Commercial Code (UCC) Rule: At common law, unless consideration is paid to the seller to keep the offer open, the offer will be revocable at will, even if the seller has promised to keep the offer open unless consideration was paid to keep that offer open. Under the UCC, a signed written offer by a merchant will be irrevocable. If no period as to how long the offer is to remain open is stated, the offer will be deemed open for 90 days.
4.1. Offers and Counter Offers Between Merchants Rule: At common law, a variation in the terms of the offer by the buyer will be deemed a counter offer. However, under the UCC, a slight variation in the terms of the contract by the buyer will not be deemed a counter offer. Instead it will be treated as a modification of the original offer. In the alternative, the modification will be treated as being ‘collateral’ to the original offer that becomes part of the overall deal. Modifications to a contract will not be effective where: -
1. The counter offer substantially and materially alters the nature of the offer.*
2. The original offer forbids any alterations.
3. The modification is rejected within a reasonable time (10 days).
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*Commentary: Remember, when a merchant makes a counter offer it will not, as in common law, be deemed a rejection of the original contract. Instead, the modification will simply not be incorporated if it substantially or materially alters the nature of the contract. Thus, the parties (merchant to merchant) will still be bound by the terms of the original terms of the contract.
4.2. Memorializing Oral Contracts Rule: Here, A’ and B’ orally make an agreement after negotiation of all the salient terms & conditions. Thus, A’ and B’ have an oral agreement. Providing there are no Statute of Fraud issues A’ & B’ may or may not reduce their agreement to a writing.
Therefore, having reached an agreement A’ and B’ could further agree to memorialize the agreement. This simply means to put the agreement in writing as a record. If for some reason the agreement is never memorialized and signed by both or either party this will not affect the oral contract made in any way. In fact, if there was an agreement to memorialize the oral agreement and this does not take place, this will merely be a breach of the oral agreement to memorialize and will not be a breach of the substantive contract.
5. Demonstrating Acceptance of an Offer
Rule: An offer can be accepted by performance or a promise to do the act bargained for. Thus, if A’ offers B’ $1000 to paint his house, B’ can actually paint the house, thus demonstrating his acceptance; or B’ can communicate acceptance by promising to paint the house at an agreed time.
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6. Silence and Acceptance Rule: Generally, silence cannot be interpreted as an acceptance to an offer. However, there has been some prior course of dealings where silence was the agreed method of acceptance, silence could be interpreted as a form of acceptance. So if A’ makes an offer to B’ saying, “If I don’t hear from you by Friday, I’ll take it as an OK to start work the following Monday”. If B’ does not reply to A’s offer no contract would have been formed. This is because there has been no acceptance. Therefore, even if A’ starts the work no contract has been formed, B’ would have needed to have communicated acceptance verbally or in writing.
As mentioned earlier, if A’ and B’ had developed a long history of doing business this way then B’s silence may be deemed as an acceptance. In this case if B’ wanted to prevent a contract from being created he would need to let A’ know within a reasonable time that on this occasion any silence should not be interpreted as an acceptance.
7. Methods of Communicating Offers and Responses Rule: Any reasonable method of communicating offers and responses are acceptable.
8. Advertisements vs. Unilateral Contracts Rule: Advertisements are generally regarded as mere invitations to treat. This means that responses to adverts are inquiries and it is then up to the seller to make the offer prompted by the buyer’s inquiry. EG: Seller receives an order for 50 widgets, but only ships 10. This is in effect a counter offer. If the buyer accepts the 10 widgets (by treating them as his own property), even if the buyer has an expectation of receiving the remaining 40 widgets the seller will not be liable to the buyer for any more. This is because the buyer’s order of 50 widgets will be regarded as an offer. This offer was rejected with a counter offer of 10 widgets. The buyer accepted the counter offer by treating the goods as his own. Therefore a contract was formed and executed.
7
The buyer, upon receiving only 10 widgets, could have rejected them and demanded the full order, or advise the seller that this counter offer was not accepted. The buyer and seller could then enter into further negotiations.
Contrasting Advertisements With Unilateral Contracts. In contrast, a unilateral contract is quite different. With unilateral contracts there are no negotiations, no deals, no invitations to treat. Instead the offeror’s terms and conditions are final and are open to acceptance only. Unilateral contracts generally appear where the offeror clearly and unambiguously indicates that performance is the only method of acceptance. EG1: A beauty pageant seeks entrees, and the terms, conditions and prizes are stated on the entry form. Clearly, in this situation any contestant would not be able to enter into negotiations regarding any of the entry terms. This is the principle of a unilateral contract. EG2: Also, if A’ says to B’ “if you can come up with $X by Friday you can buy my sailboat”. This would also be a unilateral contract since the only way B’ can accept A’s offer is to come up with $X by Friday. Another type of unilateral contract would be an offer to the public at large, such as a reward. The offeror clearly wants to pay only if the terms of the reward are satisfied. EG3: Information leading to the arrest of X’ would also be a unilateral contract in the form of a reward. Alternatively, the reward could be for a lost pet. Telling the offeror that they are actively trying to satisfy the conditions of the reward will not change the fact that acceptance of the offer can only be demonstrated by actual satisfaction of the reward conditions.
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9.
9.1.
9.2.
9.3.
Revocation of Offer Review Revocation –common law Rule: At common law when an offer is made, it may be revoked at anytime up until the offer has been accepted. Thus, the key here is to make sure that the offer is withdrawn before it is accepted. Revocation - Estopped by Option Rule: Also, the buyer may pay for the offer to be kept open. This is called buying an option. The option is itself a collateral contract and must be paid for with additional consideration. Thus, any promise by seller to keep an offer open that is not supported with additional consideration will be unenforceable. Revocation - Merchants Rule: Under the UCC a signed written offer by a merchant will be irrevocable. If no period as to how long the offer is to remain open is stated, the offer will be deemed open for 90 days.
9.4. Revocation by Mail Rule: Remember, in order for an acceptance of an offer to be effective it must be accepted before it is withdrawn or revoked by the offeror.
If an offer is accepted by mail, it is effective upon its dispatch. If the offer is to be withdrawn by mail, the offeree must receive the revocation before the offeree mails his acceptance.
9.5. Revocation by Hearsay
Rule: An offer is effectively revoked when the offeree acquires knowledge of the offer’s revocation. This information can be acquired from a third party or where the offeree finds out that the offeror has already disposed of the item on offer. At this point the offeree has lost his power of acceptance.
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9.6. Revocation – Unilateral Contracts Rule: We know that a unilateral contract is an offer that can only be accepted when the offeree completes performance. In most cases, merely looking for the lost pet or keeping a look out for a missing person, will not constitute an acceptance of a unilateral contract. However, some unilateral contracts will be deemed accepted if the condition is a process rather than a single act, eg, a writing competition, an endurance sport or a race. In these types of events there should be a closing date that would allow a reasonable time for completion.
Once a unilateral contract has been accepted by performance of the process the offer becomes irrevocable to all those who have begun or completed the process, i.e., started the race, begun writing a story etc.
Therefore, even if an offeree, (subsequent to commencing performance), becomes aware of the offer being withdrawn, it will be ineffective as to that offeree. The withdrawal will however be effective against anyone who had not commenced performance of the offer. If a unilateral contract is revoked, anyone who has already commenced performance of the contract can quit and sue for damages or complete the condition and sue for the prize money. Even if the offeree dies having performed the unilateral contract the estate of the deceased may still claim on the decedent’s behalf.
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10. Advertisement Offers and Special Offers
Rule: As discussed earlier, advertisements are generally regarded as mere invitations to treat. This means that responses to adverts are generally regarded as inquiries and it is then up to the seller to make the offer prompted by the buyer’s inquiry.
If the advertisement is in the form of a ‘special offer’ this is treated as an offer open to all those who become aware of the special offer. In other words, if a buyer makes a deal with the seller and the buyer was unaware of the special offer, the contract formed will be binding as negotiated. Therefore, even if the buyer subsequently became aware of the special offer, the buyer may not go back to demand a rebate, refund or take advantage of the benefit of the special offer.
11. Illusory Contracts
Rule: We know that to create a valid contract, each promise must be supported by consideration. Where only one party appears to be under a clear obligation to the other party, the contract will be deemed illusory. This is because both parties must be under some mutual obligation in order to form the contract. However, once the offeree makes a good faith payment based on the terms of the offer made, this will create a binding contract from that point.
In contrast, a merchant’s signed written offer to another party (although not creating a contract in and of itself) will be irrevocable by that merchant at least for a reasonable period of time. The recipient can then take advantage of the offer by accepting it. At that point a contract will come into existence.
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12. The Mailbox Rule - Offer and Rejection.
Rule: Under the Mailbox Rule, acceptance of an offer by mail creates a contract the moment the acceptance is mailed. The letter must be properly addressed and stamped.
EG: A’ accepts an offer by mailing acceptance to B’. If A’ later that same day changes his mind and telephones B’, even if B’ agrees to it because he is unaware of the earlier mailed acceptance, A’s revocation will be ineffective. A’ will be bound. Any attempt by A’ to not honor the agreement will place him in breach of contract.
In contrast, with a rejection of an offer, the rejection is effective only when the other party receives it. For revocation to be effective, it must be received before the offeree communicates acceptance. Note: If the period for acceptance is stated in the offer the offeree must accept the offer within that period to create a contract. The Mailbox Rule does not apply where the offer states that acceptance will not be effective until received.
13. Offers and Quotes
Rule: A request for a quote is not an offer, but merely an inquiry to receive offers for consideration or perusal. This is also true when a seller sends generalized estimates in the neighborhood consisting of flyers, and mail outs. These are regarded as invitations to treat. Sending a quote is not an offer unless it creates a reasonable expectation in the mind of the offeree that the offeror is willing to enter in a contract on the basis of the offered quote.
EG: If A’ asks B’ to quote for a specific project, this is more likely to be interpreted as an offer. If A’ asks B’ for his catalog wherein a certain product and price is published, the sending of the catalog will not be deemed an offer. However, if A’ asked B’ about a particular product and B’ sends his catalog containing that product with the price, this would be deemed an offer and the contract would be formed upon B’ placing an offer based on the price quoted in the catalog. Therefore, the courts will always consider the circumstances surrounding the way the quote or offer was made.
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14. Offers and Expressions of Further Enquiry Rule: Once an offer has been made the offeree may respond, not with a counter offer, but with an expression of further enquiry. This is different from a counter offer as it is merely an enquiry from the offeree for more information about the offer on the table, ‘Does the sale price include X’ or ‘Is the seller flexible on price or delivery dates’. In other words, the buyer’s response does not amount to a rejection of the offer, but merely a request for further details about the offer.
The test is- would a reasonable person believe that their offer was being rejected or merely explored?
15. Acceptance of Offers and New Negotiations Rule: Sometimes a buyer can accept the seller’s offer without question. The buyer can then make a further offer to the seller as to potential repeat sales. If the seller rejects the repeat sale offer, it will not invalidate the buyer’s acceptance of the seller’s offer and acceptance of the original deal. This is because the original order stands as an independent contract from the repeat sales offer that can be rejected independently.
EG: A’ offers B’ ten boxes of chocolates at $100 per crate. B’ accepts A’s offer and sends the $100 with a note. The note reads, “I’d like to order another ten boxes but could you do it for $90.00 per crate?” If A’ rejects this offer, then the original deal for the ten boxes that has already been accepted at $100. If A’ rejects the offer and decides not to send any chocolates at all, A’ will be in breach of the original deal for ten boxes at $100 per crate, but not the repeat sales offer, because it was not accepted.
16. Gifts: Offer and Acceptance
Rule: A gift is not complete until the donee becomes aware of it. Thus, until the donee becomes aware of it from the donor directly, the donor may revoke the gift at any time. This is because the donee’s rights have not vested. The donee’s right will vest if the donee becomes aware of the gift from the donor and detrimentally relies on it before the donor withdraws the gift.
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If the donor actually places the gift in the hand of the donee and makes a clear and unambiguous declaration of a present intention to transfer title to the donee, especially if witnessed, then the transfer will be deemed complete there and then. In these circumstances it is no longer possible for the donor to subsequently change his mind and revoke the gift. It’s simply too late.
17. Offers and Multiple Acceptances Rule: Sellers may accept more than one offer for a product on sale and the seller will be generally bound to honor all the offers accepted, even if the seller has to buy in more products to cope with demand. Only if the seller is unable to honor any accepted offer will the seller be in breach of his contractual obligations.
18. Termination of the Offer by Counter Offer Rule: We know that generally speaking an offer will be terminated by an express rejection by the offeree. Also offers can lapse if the offer is time limited. Once an offer has been terminated it cannot be resurrected. The offer is dead. Instead a new offer would need to be made.
An offer can be terminated by way of a counter offer. Under common law if the offeree makes a counter offer the original offer is terminated and the counter offer becomes the new offer on the table.
19.
Contracts with Price Term Left Open Rule: As long as the parties intended to be bound by their agreement the parties may leave the price term out of the contract. However, there must be a clear method of determining the final price including a quantity term.
At the time the price is to be fixed it is possible for the buyer and seller not to agree on the price. In such cases the court will determine a reasonable price. The buyer will be able to buy the item at that price.
Alternatively, if the seller fails to set a good faith price as promised, the buyer may cancel the contract or fix a reasonable price and purchase it at that price and tender payment in good faith.
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20.1.
20.2.
Offers Calling for the Shipment of Goods Rule: Remember, an offer can be accepted by performance or a promise of performance. Therefore, an offer calling for the prompt shipment of goods can be accepted by simply shipping the goods, or by promising to ship the goods according to the order. Subsequent Cancellation of the Order Rule: Sometimes the buyer may subsequently cancel the order having entered into a contract for prompt shipment. Even if the goods have not yet been shipped, any cancellation (repudiation) by the buyer would be a breach of contract for which the seller could seek damages.
21. Offers Made With C.I.F. (Cost + Insurance & Freight)
Rule: In sale of goods contract it is common for sellers to use the phrase C.I.F. as a part of their offer or published pricing catalogs. C.I.F. means that the published price is subject to the additional charges of insurance and freight. In other words Cost + Insurance and Freight.
Whenever a seller receives an order, the order is treated as an invitation to treat. In other words, the seller will need to make an offer to the buyer that the price will be subject to C.I.F. At this point there is no contract until the buyer agrees to the C.I.F. clause. If the buyer does not agree with the C.I.F clause no contract is formed and no party has any claim against the other.
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22.1. Requirements Contracts
Rule: A requirements contract arises where retailer A’ agrees to have supplier B’ satisfy all A’s requirements for a certain product at a set price. Typically, these contracts will be exclusive and for a set duration. In practice, the agreement need not have all these elements in place. However, there must be a clear obligation of mutual commitment between the parties. These contracts are based on the principle of good faith.
22.2. Requirement Contracts: Fluctuating Market Conditions Rule: When parties sign up to a requirements contract both sides are deemed to assume the risk of fluctuating market conditions. The price of the product could go up for the supplier. In such an instance, that increase in price could not be passed on to the retailer, unless the contract allowed. Similarly, if the demand for the retailer’s business declined due to market conditions, the retailer could not simply cancel the agreement.
22.3. Requirement Contracts: When Price Left Open Rule: Leaving the price term open will not destroy the contract. Under U.C.C. rules, where the price term has been left open the price can be set at the prevailing market price at the time the product is due for delivery. Remember, where the parties are unable to agree the price at that time the court can decide a fair price. Also the buyer may tender a good faith price and retain the goods, if already received.
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22.4. Requirements Contracts: When Things Go Wrong Rule: When a requirements contract goes sour for either the supplier or the retailer, a common claim by the losing party is that their continued performance under the contract would result in losses and thus performance would be impracticable.
Discharge from a contract on the grounds of impracticable performance is available but the standard is very difficult to meet. To satisfy this claim the claiming party would need to demonstrate that they would suffer extreme hardship due to events totally unforeseeable by both parties. These difficulties would need to be more than could reasonably be assumed from the risk of fluctuating market conditions.
Alternatively, the buyer could claim that the market had completely dried up. The retailer could no longer sell any of the products even with substantial price discounting or aggressive marketing. In this case both sides could be relieved of their obligations providing the above claim was made in good faith and not because the retailer simply wanted to change suppliers.
23. Term: ‘Within One Month’ Rule: Where the phrase ‘within one month’ is used in a contract it is generally taken to mean that payment will fall due 30 days after completion, and not before.
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24. Offers: Rewards (Review)
Rule: Rewards are also unilateral contracts. These are offers to the public at large. Rewards are contractual offers creating a power of acceptance by performance only, not by a promise to perform. Information Leading to the Arrest and Conviction of Felon: Where the purpose of the reward is to apprehend a felon, this is taken to mean that the offeror will be satisfied with the supply of information that leads to the arrest and conviction of the felon. The offeree is not personally required to apprehend the felon himself. Rewards are Irrevocable Offers: Generally speaking once the offer of a reward has been made it is irrevocable against anyone who has seen the offer and who has commenced a search for that person or object. The reward can only be revoked against anyone who has not commenced his or her search. In addition, the revocation must be made with the comparable amount of publicity as the original reward offer. Revocation of Reward by Lapse of Time: Rewards can be deemed revoked by lapse of time. If no time limit has been stated on the reward then the offer will lapse after a reasonable amount of time. What is a reasonable amount of time would become a matter of fact for the court to determine. Rewards and Bounty Hunters: Bounty hunters typically work under a paid contract by a private company to find someone. Can the bounty hunter also claim any public reward? If the bounty hunter finds out about the reward after he tracks down the wanted person he may still be able to claim the public reward as a bounty hunter. The bounty hunter could argue that the nature of the offer was that of a bounty and therefore the traditional elements of contract theory are not applicable. This could be argued where the offeror was a government agency. Rewards and Hiring a Private Investigator: Firstly, let us remind ourselves that a reward is a unilateral contract that is accepted by performance only, i.e., actually looking for the person/object according to the reward. If the investigator is hired on a daily basis, bearing in mind the fugitive could be found at any time, they are, in effect, entering into a series of daily unilateral contracts. Accordingly, a daily contract can be terminated at the end of any given day.
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25. Sales Commission Contracts Rule: The best approach to these types of contracts is to read the terms of the contract under which the employment was entered. Tip: If the terms are clear and it is an integrated contract then these terms must be applied rigorously even if they appear harsh or biased in some way.
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Contract Law Ch-2: Consideration, Assignment, Delegation and
Third Party Beneficiaries
Topic: Consideration Page1. Consideration: Introduction 3
2.1 Consideration and Contract Modification 32.2. Consideration vs. Good Faith Modification 4
3. Consideration and Contract Modification Between Merchants 44. The Doctrine of Promissory Estoppel 55. Implied-In-Fact Contracts,
Unjust Enrichment and Quasi Contracts
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6. Consideration and Pre-Existing Duties 77. Service Contract Modifications vs. Merchant UCC Contract
Modifications 8
8. Consideration and Gifts: Promissory Estoppel and Detrimental Reliance
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9. Consideration and Forbearance 910. Consideration Before the Promise is Made. (Lost, Found and
Reward) 10.1 Refraining to File Suit May Equal Consideration P.10
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11. Excusing New Consideration for an Existing Moral Obligation 10
Topic: Assignment and Delegation Page1. Assignments Introduction 112. Assignments (Novation) vs. Delegations 123. Delegation 134. Delegation and Consent Requirements 135. Delegation of Performance or Delegation Performance and
Assumption of Duty 13
6. Multiple Assignments 147. Assignments and Changing the Obligor’s Obligation 158. Assignments: Intentions to Assign vs. Present Assignments 159. Assignments and Garnishments 16
10. Assignments and Leases: Liability of Assignor and Assignee 1611. Assignments and Liabilities of Landlord 17
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Topic: Third Party Beneficiaries (3PBs) Page1. 3PB: Introduction 182. 3PB: Intended vs. Identical 183. Identifying An Intended 3PB 194. The Rights of an Intended 3PB
4.1. Donee 3PB 4.2. Creditor 3PB
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5. Creditor Intended 3PB vs. donee 3PB 206. Creditor Suing Promisee or Promissor: Vesting Rights 217. Intended 3PB Rights and Obligations 218. Defending a Claim Against a Vested 3PB 229. 3PB and Insurance Policies (Review)
The Insurance Policy The Effect of the Insurer Re-insuring a Policy
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Topic: Consideration
1. Consideration Introduction
Rule: In order for a contract to be valid the parties need to exchange something of legal value. This is called consideration. The offeror must communicate an offer, which is a clear expression of a promise, an undertaking, or commitment which when taken as a whole creates an obligation. Likewise the offeree must make a reciprocal commitment. Thus, the exchange of these obligations between the parties can be regarded as consideration as the obligations exchanged have legal value: -
1. Money 2. Labor, (including promotion & distribution) 3. Services 4. Forbearance 5. Promises, undertakings and obligations.
2.1. Consideration and Contract Modification Rule: If a contract is modified there needs to be reciprocal modifications to the obligations (mutual consideration) of both parties for the modification to be enforceable.
EG: If A’ contracts for B’ to build A’s house for $100,000 any subsequent modifications must result in a benefit to both parties, i.e., less work, less payment, more work, more payment. Not less work, same payment. Even if A’ agreed that B’ could do less work for the same contract payment, B’ would not be able to enforce that modification. This is because any modifications must be reciprocated on both sides.
Note: Even if the reciprocated modification is not of equal value this will be ok as long as there is a measure of reciprocation, i.e., consideration.
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2.2. Consideration vs. Good Faith Modification
Rule: Where the seller forgets to include a certain term or item in the sale contract and this omission was made in good faith, providing the buyer agrees to a subsequent modification this will be acceptable where: -
1. The modification will need to be in writing if the sale price is over $500.
2. The modification will need to be in writing if the modification
would take the sale price over $500. 3. If the contract is under $500 then the oral agreement on the
modification will be enforceable. Commentary: Contrast With the Pre-existing Duty Doctrine In the pre-existing duty doctrine parties have agreed under contract to perform some mutual obligations. Here, one party wishes to change their obligation under the contract in some way, without reciprocating value. Essentially it boils down to less work for the same money. Although this type of arrangement is acceptable and valid under the minority court view, the majority court view holds that mutual consideration in contract modification is required. Thus, even if the innocent party agrees to the modification for no benefit this agreement will be unenforceable.
3. Consideration and Contract Modification Between Merchants Rule: Under the UCC contract modifications between merchants do not require consideration to be enforceable. As long as the modification is proposed in good faith then once agreed the modification will be binding upon both parties.
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4. The Doctrine of Promissory Estoppel
Rule: When an offeror/offeree makes a promise to do something as part of a contractual obligation then it is reasonably foreseeable and expected that the person receiving the promise will rely on it to his or her own detriment. Where it can be shown that the promise did in fact induce the other party into a contract, this contract will be deemed enforceable if the only way to avoid injustice to the other party would be to enforce the contract.
However, where the promise was made for a specific purpose i.e., wedding expenses and it was discovered by the promisor before payment was made that the promisee really wanted to use the money for some other purpose, then the promisor would not be estopped from refusing to make the payment. Note, even if the promisee had already detrimentally relied on the promise of funds for that secondary purpose, the promisor could still legally refuse to make the payment.
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5. Implied-in-Fact Contracts, Unjust Enrichment and Quasi-Contracts
Rule: These are all forms of contract that can arise without the typical formalities of offer and acceptance or consideration requirements. The remedies here are all based on equitable doctrines. Implied-in-Fact Contract: This form of contract will arise where acceptance of the offer is demonstrated by conduct. EG: For example, a customer enters a barbershop and takes a seat in the barber’s chair. When a customer does this and receives a haircut, an implied contract is formed based on the customer’s conduct. Thus, the customer accepted the barber’s offer to cut his hair by simply sitting in the barber’s chair. The customer must therefore pay for his hair cut. Other common examples include scenarios where a delivery truck driver or contractor conveys some benefit to the wrong neighbor. The neighbor sees the error, but remains silent and allows the work to continue. By not objecting to the contractor conveying a benefit the recipient is deemed to agree to enter into an implied-in-fact contract. Thus, the recipient must pay for the work when it is completed, even though no oral or written bargain was negotiated. If the buyer tenders payment in full when the offer is made this will create an implied-in-fact contract. The buyer’s full performance will also satisfy the Statute of Frauds requirement for the agreement to have been reduced to a writing.
Unjust Enrichment: This arises where there is no enforceable contract at all, yet one person has for some reason conferred a benefit on another person with the reasonable expectation of being paid. If the other party were to retain the benefit without paying for it he would be unjustly enriched. The court will therefore, when appropriate, create what is called a ‘quasi contract’ and enforce it to avoid unjust enrichment to one party. Quasi Contract: A quasi contract as outlined above is a legal fiction used to remedy situations of potential unjust enrichment.
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6. Third Party Consideration vs. Pre-Existing Duties Pre-Existing Duties Rule: This is really a development on the doctrine of consideration and contract modification. We know that the pre-existing duty doctrine requires parties to have agreed by way of contract to perform some mutual obligations. Where one party subsequently wishes to change their obligation under the contract, (essentially, less work for the same money), the majority court view holds that mutual consideration in contract modification is required. Therefore, even if the innocent party agrees to the modification for no reciprocal benefit this agreement will be unenforceable. Third Party Consideration However, there’s an important distinction here. A’ and B’ are in contract, where B’ is contracted to build A’s house for $200,000 by April 1st. If C’ promises to pay B’ a further $50,000 if B’ completes the house for A’ by April 1st, C’ will be bound to that promise because this second agreement is in privity between C’ and B’ and is regarded as an independent contract.
There is no pre-existing duty between C’ and B’. Therefore, no additional consideration is required. It does not matter that A’ and B’ are in contract for B’ to do the same thing. The two relationships are independent. If A’ had promised to pay B’ the extra $50,000 to ensure that B’ completed the house by April 1st, then this would be unenforceable under the pre-existing duty rule.
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7. Service Contract Modifications vs. Merchant UCC Contract
Modifications Service Contract Modifications: These are contracts not involving the sale of goods. These contracts always follow the traditional common law rules requiring that any contract modification will require reciprocal (but not necessarily equal in value) consideration. Merchant UCC Contract Modifications: These are contracts between merchants. In this case contract modifications do not require additional consideration providing:
1. The modification does not materially alter the contract. 2. The original contract does not forbid modification. 3. The promisee does not object to the modification within a
reasonable time (up to10 days)
8. Consideration and Gifts: Promissory Estoppel and Detrimental Reliance. Rule: Where a donor wishes to bestow a gift to another, no consideration is required from the donee. The donee is merely receiving a gift. Thus, it is generally not possible for the donee to enter into a contractual arrangement since an essential element of contract formation is an exchange of consideration. So, if the donor decided to change his mind he would be free to do so.
However, the equitable doctrines of ‘promissory estoppel’ and detrimental reliance would be available to any donee that could argue they had been told about the gift, specifically by the donor, (notification by a third party will not count), and had detrimentally relied on the gift. Secondly, this detrimental reliance was foreseeable. In this case the promise would be enforceable to prevent injustice.
In deciding these claims the courts would also take into account all the surrounding factors including out of pocket expenses incurred by the donee.
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9. Consideration and Forbearance Rule: Forbearance is a well-established form of consideration. Forbearance is the giving up of a right to do something one is legally entitled to do. EG1: A’ contracts with B’ that A’ will not mow his own lawn on Sunday mornings before noon. By negotiating this contract this will give B’ the opportunity to sleep peacefully since B’ works nights. B’ pays A $500 per month under this agreement.
Here, A’ has provided consideration to the contract simply by giving up his right to mow his lawn at the agreed time. Even if A had no intention of mowing his lawn at that time B’ would still be obliged to pay A’ under the contract.
EG2: If A’ has good faith grounds to sue B’ over a dispute, B’ can offer money to A’ not to file suit. If B’ subsequently discovers that A’ would have probably lost anyway, B’ will still be required to pay A’ the money promised for not filing suit. The consideration on A’s part was the giving up of his right not to sue. As long as A’ had a good faith basis for bringing suit, B’ is liable to pay A’ under the agreement made. (See also point 10.1).
10.
Consideration Before the Promise is Made. (Lost, Found and Reward) Rule: This can be best described as the ‘lost, found and reward doctrine’. Meaning, if A’ loses something, e.g., a dog, B’ finds the dog and returns it to A’, if A’ then subsequently promises B’ a reward for finding the dog, this promise is wholly unenforceable. This is because the promise came after the volunteered act and thus no consideration was given to enforce the contract. In other words, it should have been ‘lost, reward and found meaning, A’ loses dog; A’ posts a reward, which is the promise of payment, and therefore an obligation. B’ upon seeing the offer of a reward searches for and finds the dog. This amounts to an acceptance. Finding the dog is also full performance of the contract on B’s part therefore B’ can enforce the contract. The offer was made; the offer was accepted and performed; now A’ must pay to complete his obligation.
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10.2 Refraining To File Suit May Equal Consideration New circumstances can arise that create new consideration and obligations that can be enforceable.
EG: B’ finds A’s dog without knowledge of an offer. A’ promises a reward but changes his mind. B’ threatens to sue believing in good faith that he has a case. To prevent the suit A’ then offers B’ $200 not to file. If B’ accepts A’s offer and does not file and A’ once again, changes his mind B’ can sue for the $200. This is because both sides exchanged that will be deemed adequate consideration.
11. Excusing New Consideration for an Existing Moral Obligation Rule: Here, two parties A’ and B’ enter into an agreement. A’ breaches his obligations under the contract. B’ will have a certain amount of time under the Statute of Limitations or the Statute of Latches to file suit for A’s breach. However, if the time period has lapsed for B’ to take legal action, A’ and B’ may enter into a new agreement based on A’s pre-existing duty to perform the task as previously bargained. No new or additional consideration will be required. Thus, if A’ once again breaches the agreement, lack of new consideration will not bar recovery by B’. The court will find that A’ was already under a pre-existing moral obligation to perform.
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Assignments and Delegations
An obligor is the person who owes a duty of performance. The obligee is recipient of the obligor’s performance.
1.
Assignments: Introduction Rule: Generally, all contractual rights may be assigned. In fact, even where the contract specifically forbids assignment, this restriction is regarded as meaning, ‘no assignment as to who will do the work’. In other words either side may assign the benefit under the contract to a third party.
EG: A’ contracts with B’ for B’ to build a house for A.’ The contract contains the ‘no assignment’ clause. In this case B’ must build the house. B’ cannot assign the building of the house to his friend C’. However, B’ can assign his interest in the payment of the house to D’. As long as B’ notifies A’ of the assignment A’ must pay D’. D’ upon receiving notice of this arrangement becomes an ‘intended third party beneficiary’ (3PB).
If A’ ignores this assignment having received notification of it and pays B’ anyway, A’ will still be liable to D’, upon D’s demand. Where there is no restriction assigning a contract, once the assignment has been made the assignor is no longer in privity with the obligee (the other party to the original contract). Thus, the assignor generally has no lingering interest in the contract. Instead the new assignee and the obligor become contractually bound to each other. The assignee inherits the same rights and obligations as the original assignor. Thus the assignee can enforce the contract.
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2. Assignments: Novation vs. Delegations
Rule: With an assignment of both the benefit and the obligation under the contract, the assignor with the consent of the obligee is seeking to step out of all obligations and benefits in the contract. This type of assignment is intended to create a completely new relationship or privity of contract between the obligee and the new assignee. Where all parties consent to such an assignment we have what is called a Novation. In other words, where the obligee agrees to the assignment of the contract he is agreeing to discharge the assignor of all his duties under that contract. Thus, the obligor not only takes on the assignor’s duties, but also assumes all the assignor’s liabilities under the contract. In so doing, the assignor is completely released and the assignee / obligor enter into complete privity with the obligee. When an assignor assigns his obligations under the contract, he also promises the assignee that he is not aware of any reason why the obligee (the person with whom the assignor has been in contract with) may be excused performance under the contract. Note here that the assignor is now going as far as to guarantee that the obligee will in fact perform. Thus, if after the assignment the obligee does in fact fail to perform, the assignee may not seek recovery from the assignor. The assignor is no longer in privity of contract with the assignee or the obligee. If the obligee does not consent to the assignment, the assignor may still assign the contract but this will be deemed a delegation and the assignor (now delegator) will contractually remain in privity with the obligee and the assignee. Thus, if the assignee (now delegatee) fails to perform, the obligee can bring an action against the delegator and possibly the delegatee (see below).
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3. Delegation
Rule: Generally, all contractual duties may be delegated to a delegatee and the consent of the obligee is not required. However, there are several contracts that cannot be delegated or assigned: -
1. Personal Management: Duties involving key personal judgment or skill.
2. Client-Attorney: Duties involving special trust. 3. Expectancy: If the delegation would materially change the obligee’s
expectancy, i.e., a substantial deterioration in anticipated profits, performance, results or quality.
4. Contract expressly forbids delegation.
4. Delegation and Consent Requirements Rule: We know that consent is not required when a delegator wishes to delegate the performance of the work to a delegatee (except for the aforementioned exemption). In addition to consent not being required, the obligee cannot refuse to allow the delegatee to do the work without finding himself in breach of contract.
5. Delegation of Performance and Assumption of Duty Rule: Here we are concerned with whom the obligee may sue in the event of poor performance of the contract. In other words, if the delegatee performs badly, can the obligee sue the delegator and the delegatee? In this situation the delegatee is the principal in that the delegatee must be the first person the obligee claims against. However, if this initial claim fails then since a delegator remains in privity of contract the delegator is said to stand as surety if the delegatee fails to perform his obligations, he may be sued next by the principal /obligee.
Before the principal / obligee can commence his claim against the delegatee we need to look at the nature of the delegation. We need to examine whether the delegatee agreed to assume all liabilities under the contract or merely agreed to carry out the work on behalf of the delegator.
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The delegatee’s liability will turn on whether he was merely undertaking the work on behalf of the delegator or whether he also took on the assumption of duty in the contract. An indication of the latter would arise where the arrangements concluded, according to the agreement, with the obligee making payment directly to the delegatee. Where it is not clear as to whether the delegatee assumed the duty in the contract the majority courts would hold that unless a contrary intention is made clear, the words ‘assigning the contract’ or ‘all of my rights under the contract’ will be construed that the delegatee assumes only the duty of performance. In other words, merely undertaking to do the work for the delegator will not mean that the delegatee agreed to assume all liabilities under the contract. An additional element of assumption on behalf of the delegatee is required.
6. Multiple Assignments Rule: If an assignor fraudulently assigns the same contract a second time, this second assignment will be unenforceable against the obligee. Instead the 1st and 2nd assignees will have to determine which assignment will prevail. The majority view is very similar to the common law approach. If an assignment has been given for consideration it is deemed irrevocable. In other words, it cannot legally be re-assigned to someone else. Therefore, in multiple assignments preference will be given to the assignment where consideration was given for the assignment.
Further Note: No notice is required to be given to the obligor to perfect an assignment of the benefit. The only purpose for notification of the assignment to the obligor is to direct the obligor’s payment, not to perfect the assignment. Thus, the assignment is deemed perfected upon due execution of an assignment deed.
If the obligor is notified of the assignment but still pays the assignor, then the assignee may still demand full payment from the obligor. However, if the obligor is not notified of the assignment and pays the assignor, then the obligor does not have to pay again to the assignee.
[Remember: - The obligor is the person who owes a duty of performance. The obligee is the recipient of the obligor’s performance].
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7. Assignments and Changing the Obligor’s Obligation.
Rule: At common law, assignments cannot be made where the assignment could change the nature of the obligation between the parties. Requirements Contracts: Under the Unified Commercial Code (UCC) an assignment of a requirements contract is allowable. However, to be enforceable the assignment must not result in an unreasonable or substantial change in the obligations between the new parties than was anticipated by the original parties to the contract. Exoneration Contracts: An exoneration clause insures a named person as to their liabilities and performance under the contract. If the contract were to be assigned, the insurer’s risk would substantially change from that originally foreseen by the parties. Thus, an exoneration clause would prevent such a contract from being assignable. It would make no difference if the named assignee were as equally qualified as the name insured under the contract as the risk would be deemed substantially changed. Prohibited Assignments: Any future rights to a contract not yet drafted cannot be assigned. Also, any attempt to assign future wages (e.g. to avoid spousal payments) that have been garnished will be prohibited.
8. Assignments: Intentions to Assign vs. Present Assignments Rule: As we have already covered, for the most part all contractual rights may be assigned. In fact, even where the contract specifically forbids assignments, assignment as to benefit under the contract is still assignable. Now we have to look at the language of the assignor.
The absolute key here is to look for words that would indicate the assignor’s ‘present or immediate assignment’ as opposed to a ‘mere intention to assign’. This distinction although subtle is crucial to the outcome. For an assignment to be effective the assignor must actually assign the contract immediately to the assignee. If the assignor merely says that he will assign the contract, but does not actually execute that intention then there is no assignment.
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9. Assignments and Garnishments
Rule: A garnishment is a court order that enables a creditor to recover monies owed by attaching or laying claim to a particular source of income currently being paid to the debtor. For example, garnishing the debtor’s wages, salary or royalties.
However, if the debtor has already irrevocably assigned his right to that income to another for consideration, (as opposed to just giving the rights away), then any attempt to garnish it would fail.
10. Assignments and Leases: Liability of Assignor and Assignee Rule: When an assignor assigns a lease he remains liable for the covenants under the lease that run with the land for the duration of the lease. For example, the covenant to pay rent, maintenance dues, etc.
Note: Even though the assignor has assigned the lease, he is still deemed to be in privity with the landlord. Thus, if the assignee, having taken over the lease, defaults on the covenants the landlord may recover losses from the original assignor. The assignee is also liable. Therefore, the assignor and assignee are jointly and severally liable on all covenants running with the land for the remaining term of the lease.
The assignor is said to be liable in Privity of Contract.
The assignee is said to be liable under Privity of Estate.
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11. Assignments and Liabilities of Landlord
Rule: The landlord is liable for all his obligations (covenants running with the land) for the duration of the lease he signs with his tenants. If the landlord sells the tenanted property to a new landlord he remains liable for all the leases he signed with the then tenants. For example, general repairs etc.
The landlord is liable for the leases he signed under Privity of Contract. If the new landlord breaches any of the covenants that were assigned to him by the old landlord, both the old and the new landlord are said to be jointly and severally liable on these leases.
With regards to the new tenants signed on directly with the new landlord, these new tenants would only have recourse against the new landlord as there is both privity of estate and privity of contract between the two parties.
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Third Party Beneficiaries (3PBs)
[The promissor (obligor) is the person who owes a duty of performance to the Promisee. The promisee is the person who provides consideration to the Promissor in return for the promise. The beneficiary/donee (obligee) is the person who receives the benefit of the Promissor’s performance.]
1. 3PB Introduction Rule: A 3PB arises where the promisee contracts with a promissor that the promissor will be required to fulfill his obligation to a third party instead of the promisee.
EG: A contracts with B’ for B’ to paint A’s house for $1,000. As part of the agreement, B’ requests that instead of A’ paying B’, B’ wants A’ to pay C’, B’s daughter.
This is the typical 3PB scenario. We then need to explore the rights and obligations of each party concerned.
2. Intended 3PB vs. Incidental 3PB Rule: There is an important distinction here. Only an intended 3PB may enforce the contract between the promisee and the promissor. An intended 3PB is the person whom both parties had intended to specifically benefit under the contract. Thus, if the intended 3PB does not get what was promised under the contract an intended 3PB will have standing to enforce the contract.
Incidental 3PBs have no right to enforce a contract. The best way to determine whether a person is an intended 3PB is to ask: -
1. Is the 3PB to receive performance directly from the promissor? If
not they are more likely to be an incidental 3PB. 2. Is the 3PB named or ascertainable as a beneficiary from the
agreement? If yes, then more likely to be an intended 3PB.
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3. Identifying an Intended 3PB Rule: There are three key ways to determine whether the 3PB is an intended 3PB: -
1. Is the 3PB actually mentioned or identified in the contract?
2. Does the promissor have to render performance directly to the 3PB?
Because the promisor has been paid to do so.
3. Does the promisee and the 3PB have any kind of family or business relationship that would indicate that the promisee intended to benefit them?
Commentary: It is not necessary to know the exact identity of the 3PB at the time the contract is made, only that the 3PB will be identifiable at the time the performance by the promissor is due. Note also, that the promisor must not be acting gratuitously for the promisee. There must be some contractual relationship between the promisor and the promisee.
EG: ‘Pay to my children as are alive at the time of my death’. Note here, the promissor’s obligation does not commence until the promisee’s death.
4.
4.1.
The Rights of an Intended 3PB Rule: An intended 3PB has contractual rights that they can enforce. Donee 3PB: A donee 3PB may sue the promissor for non-performance, but may not sue the promisee whose act is gratuitous. The donor, not the promissor, must tell the donee 3PB directly of the gift and the donor should have foreseen that the donee would and in fact did detrimentally rely on the promise of the gift.
The donor may revoke the gift even if the donee had been told of the gift provided the promissor had not already performed the contract or if the donee had not detrimentally relied on the gift yet.
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4.2. Creditor 3PB A creditor 3PB may sue the promissor and or the promisee for non-performance. The equitable remedy of specific performance is also available too. Where the promisee enters into a contract with the promisor to do business, the promisee can stipulate that part of the consideration be paid (or rendered) to 3PB, e.g., the promisor must pay 10% of the amount due to the intended 3PB. Alternatively, the promisor may be required to perform some service to the 3PB. Where this is found to be the case, the 3PB may sue the promisor if he fails to perform the contract as agreed with the promisee. It is also true that if the promisee breaches his obligations under the contract, this will relieve the promissor’s obligation to perform that part of the contract that conferred benefit to the 3PB. Put another way, if the 3PB’s rights had vested, then he could sue the promisor.
5. Creditor Intended 3PB vs. Donee 3PB Rule: A significant distinction between a creditor intended 3PB and a donee intended 3PB is the fact that the intended 3PBs options for enforcement depend on his classification here.
1. If the 3PB is a creditor, then the creditor may sue the promisee or the promissor to enforce the promise.
2. If the 3PB is a donee, then the donee may only sue the promisee and
then only if the donee learned of the gift directly from the promisee and detrimentally relied on the promise.
3. If the 3PB is a potential contractor for a promisee and promissor
(P&P), in that the 3PB has been named in the contract under negotiations by the P&P that has yet to be finalized. In this scenario, neither P&P has directly informed the 3PB of their considerations. Nevertheless the 3PB finds out and detrimentally relies on the wording in the contract. The 3PB also incurs significant expenses too. Ultimately, the P&P decide not to go ahead with the initial 3PB mentioned in the draft contract. If that 3PB brings suit against P&P, he will fail, because P&P did not directly communicate any commitment to the 3PB.
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6. Creditor Suing Promisee or Promissor: Vesting Rights Rule: We now know that only a creditor 3PB has the dual option to sue the promisee or promissor for enforcement of a contract. However, before the creditor may commence his action we need to make sure that his rights have vested. There are several ways a creditor 3PB could establish that his rights have vested.
1. Where the creditor 3PB agrees to the three-way arrangement. Note: - even if the creditor were not initially aware of the agreement, his rights would vest as soon as he became aware.
2. Where the creditor commences his action. This could start with a
simple invoice or letter to the P&P claiming the benefit under the contract.
3. However, if the P&P agreed to change the 3PB in the contract
before the original 3PB became aware of it, then that original 3PB’s rights would not have vested.
4. If the 3PB rights have vested, then any subsequent change to the
contract as to a replacement 3PB would be void. The original 3PB would prevail in any legal challenge.
5. Where the creditor detrimentally changed his position in reliance of
the contract as a result of learning of the contract from the promisee himself.
7. Intended 3PB Rights and Obligations Rule: We know that an intended 3PB has contractual rights in the contract that they can enforce. However, the 3PB is limited up to those rights the promisee would have. Thus, if the promisee only substantially performed his part of the contract, the 3PB could only enforce up to the value of that substantial performance, not the full concentrate value. Note: In many scenarios the promisee is often referred to as an assignor since he may have assigned the benefit he had in a contract, such as royalties, to a creditor intended 3PB.
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8. Defending a Claim Against a Vested 3PB. Rule: Remember, once a 3PB's rights have vested, the original contracting party may not modify the contract without the assent of the 3PB. However, if the modification were due to a requirement of law or if the promissor had a defense against the promisee as to non-performance, then the 3PB would be equally subject to that legal defense. In other words, if the promissor were claiming that the reason that he has not performed his obligation was due to a breach by the promisee in the contract, then the 3PBs claim would be subject to the promissor’s defense. Another defense would be for the promissor to claim that the 3PB was not a bona fide 3PB. This would have to be established by the promissor.
9. 3PB and Insurance Policies (Review) Rule: Although we have looked at the working of 3PBs, when these rules are applied to insurance policies we need to be as clear as possible as to how the relationships between the insured, the insurer and the ultimate 3PB relate to each other. The Insurance Policy: Firstly we need to look at the policy itself. Here we are looking for the following elements: -
1. The named 3PB 2. The power to change the 3PB stated in the policy 3. The power to assign the policy/ to use the policy as security Where there is a power to change the 3PB reserved in the policy, the insured can change the intended 3PB at will. This is providing the 3PB (who is a donee 3PB) is unaware of the provision and has not already detrimentally altered their position in reliance of the arrangement. Where there is power to assign the policy (to use the policy as security for a loan), in the event of the death of the insured and the loan not being repaid, the policy proceeds will be used to clear the outstanding loan first. This will be in preference to any other claim.
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The Effect of the Insurer Re-insuring a Policy: Insurers will often limit their exposure to risk by asking another insurer to share the risk with them for a fee. This is known as re-insurance. This creates a secondary 3PB relationship.
Here the original insurer becomes a promisee to the re-insurer, because the re-insurer is now promising to pay out on behalf of the insurer to the 3PB; the original insured. The insured is now a creditor 3PB as to the insurer.
The insured is also in relationship with the insurer as promisee – promissor with a donee 3PB.
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Contract Law Ch-3: Statute of Frauds and Parol Evidence Rule
Topic: Statute of Frauds (S/F)
Page
1.1. Statute of Frauds: Introduction 21.2. Answering for the Debt of Another 2
2. Modifying Contracts 33. Statute of Frauds: Sale of Land and the Essential Terms That Must
be Included in the Writing. 3
4. Sale of Land and Description Requirements 35. Sale of Land and Parties Signing the Contract 46. Sale of Land and the Doctrine of Equal Dignities 47. Sale of Land and Specific Performance 48. Statute of Frauds & UCC: Sales of Goods 49. Statute of Frauds: Full Performance
(& Exceptions) 5
10. Privity of Statute of Frauds Contracts 611. Errors and Omissions in the Contract 6
Topic: Parol Evidence
Page
1. Parol Evidence Introductions 72. Oral Evidence to Explain- Not to Contradict Written Contract 73. Contemporaneous Oral or Prior Agreements 74. Parol Evidence and Latent Ambiguity 85. Parol Evidence: Complete and Partial Integration 96. Parol Evidence: Hindsight 97. Parol Evidence: Consideration 98. Parol Evidence: Plain Meaning Rule 10
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1.1. Statute of Frauds: Introduction
Rule: Under the Statute of Frauds (S/F) certain contracts are deemed so important in nature that unless the agreement has been reduced to a writing /written form, the contract will be unenforceable. Types of agreements that have to be in writing: -
1. A promise by the executors or administrators of an estate to cover the estate debts out of their own pocket.
2. A promise to answer for the debts of another.
3. Promises made in consideration marriage.
4. Any agreement creating an interest in land. Creation of an interest
lasting more than one year i.e., an easement, or 2-year lease. Employment contracts or any other contract that cannot by its terms be completed in one year.
5. Any contract that cannot be completed in less than a year.
6. Under UCC, sale of goods of $500 or more.
Note: Contracts relating to the performance of services, i.e., electrical, painting, building and entertaining are not subject to S/F rules.
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1.2. Answering for the Debt of Another
Rule: We know that where the promise is to answer for the debt of another this agreement must be in writing to satisfy the S/F. However, if the beneficiary of the promise is the promisor then this will not need to be in writing. EG: A’ is an elderly man and needs B’ to take care of him by driving A’ from place to place. B’ does not have a car so A’ stands as surety/ guarantor for B’ so that B’ can get the loan. A’ does not sign papers confirming that he will stand as guarantor but nevertheless gives an oral undertaking to the lender. If B’ defaults on the loan, A’ will not be able defend the claim under the S/F since A’ was the principal beneficiary of the promise. In other words, the beneficiary of the promise, A’, was also the promisor to the bank (promisee).
2. Statute of Frauds and Modifying Contracts Rule: If a contract is within the S/F and has been reduced to a writing there can be no effective modification of the contract, unless those modifications were also reduced to a writing and signed by the party to be bound. Note, that if the contract is not initially within the S/F, but is subsequently modified, and the modification would bring the contract within the S/F, then the modification would need to be in writing also. The distinction here is, a contract can be valid because it meets the offer, acceptance and consideration requirements, nevertheless the contract will be unenforceable if the S/F requirements are not satisfied. The S/F rules also apply to Merchant UCC Contracts. Therefore, although merchant contracts do not require additional consideration where minor modifications are concerned, if the contract touches on S/F issues the contract and any subsequent modifications must be in writing to be enforceable.
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3. Statute of Frauds: Sale of Land and the Essential Terms That Must be
Included in the Writing. Rule: Under the S/F, contracts for the sale of land must be in writing. For other products the price may be left out provided there is a clear mechanism for determining the price, (see below). However, the price of the land cannot be left out of the writing to be decided later.
4. Sale of Land and Description Requirements Rule: Under the S/F, the description of the land can be very simple, such as the name of the property or a general description as to what and where the land is located. In contrast, in the actual land sale document the description must be very precise so as to avoid any ambiguity whatsoever. This is a much higher standard.
5. Sale of Land and Parties Signing the Contract Rule: If only the seller has signed the contract, only the seller will be bound under the contract and vice versa. Therefore, only the parties who sign the contract can be bound by it.
6. Sale of Land and Doctrine of Equal Dignities Rule: Under the Doctrine of Equal Dignities any agent instructed to enter into a sale of land contract must himself be appointed in writing to satisfy the S/F. Failure to comply with this requirement will render the contract unenforceable as against the party that has breached this rule.
7. Sale of Land and Specific Performance Rule: Under the Doctrine of Specific Performance this equitable remedy is available if the seller refuses to sell the property to a willing, able and ready buyer under contract. However, if the buyer pulls out, the seller cannot claim specific performance since damages are able to compensate the seller for his loss of sale.
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8. Statute of Frauds & UCC: Sales of Goods Rule: Remember that under the S/F both parties need to sign any contractual agreement to bind each of them. If only one party signs, then under the S/F only the party that signed the agreement will be bound by its terms.
In contrast, under UCC rules, a merchant party engaged in an agreement for sale of goods for $500+ may negotiate a modification to the agreement that is only signed by the modifying party. Although signed by only one of the parties the modification will bind both parties as long as: -
1. The modification does not materially alter the contract. 2. The contract does not forbid alterations. 3. Any proposed modifications are not objected to within a
reasonable time (10 days).
Where the modification pertains to a quantity issue the modified quantity must be stated in the contract.
9. Statute of Frauds & Full Performance (& Exceptions) Rule: We know that where a contract is required to be in writing failure to do so will render the contract unenforceable. Shipped, Received and Accepted: However, under an exception to the S/F doctrine, if goods are shipped at the request of the buyer and are received and accepted by the buyer that contract is enforceable. Otherwise the buyer could argue S/F and not pay. Special Order Goods: Specially manufactured goods ordered by the buyer are not subject to S/F. Thus, if the buyer cancels the specially ordered goods, he will be in breach of contract even if the contract was oral. Provided the manufacturer had begun substantial manufacture of the special order goods he could enforce the contract. In either scenario whether the value of the goods exceeded $500 is not relevant since S/F is waived.
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10. Privity of S/F Contracts Rule: The S/F as a defense or argument is only available to either of the parties.
EG: A’ and B’ contract for B’ to build a driveway. Building of the driveway came about as a result of an oral agreement creating an easement between the land of A’ and C’.
Subsequent to the agreement between A’ and B’, A pays a deposit to B’ in good faith. B’ now refuses to carry out the work arguing a violation of the S/F between A’ and C’. B’ claims that the agreement violates the S/F as it creates an interest in land, which must be evidenced in writing.
In this situation, B’ cannot argue as to the contractual relationship between A’ and C’ as he is not in privity with them. Therefore, even if the argument is true, it cannot amount to a defense for any breach of contract B’ may commit.
11. Statute of Frauds: Errors and Omissions in the Contract Rule: These issues are often linked to a larger scenario covering other related issues. Example: An oral promise to pay Third Party Beneficiary (3PB) as part of a land sale deal. In this scenario A’ agrees to sell land to B’. As part of the deal, A’ asks B’ to make the payment to C’. The agreement is reduced to writing as required by the S/F. However, the agreement for B’ to make the payment to C’ instead of A’ is omitted in error from the contract. Where do the parties stand?
1. Firstly, we know that any agreement creating an interest in land must be evidenced in writing to be enforceable to satisfy the S/F. Because C’s interest is in the payment of money as opposed to obtaining an interest in land, his rights as to enforcement is not, prima facie, affected.
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2. The oral promise to pay C’ should be regarded as a collateral
intended 3PB contract, since it falls outside S/F requirements. Parol Evidence
1. Parol Evidence Introduction
Rule: Parol Evidence (PE) is the doctrine that seeks to allow into evidence oral statements to an agreement that were not included in the written contract. This situation will often arise where there is a dispute between the parties as to what the complete terms of the agreement consisted of. However, under PE, as to what information will be admissible is limited.
2. Oral Evidence to Explain Not to Contradict Written Contract Rule: The whole purpose of PE is to admit evidence that could provide an explanation as to the meaning of a written term within the contract.
This goes to the heart of the matter. For example, A’ and B’ enter into a contractual agreement and omit to include a particular term or clause into the contract. Unless the omitted clause would assist in explaining the meaning of clauses in the contract then any oral statements omitted are not admissible.
3. Contemporaneous Oral or Prior Agreements Rule: Under PE, prior writings or contemporaneous oral statements, agreements or contemporaneously made oral agreements may be admitted for the sole purpose of explaining, (not contradicting), a term or clause in a contract.
As to the meaning of contemporaneous oral statements, this would include only oral statements’ execution of the contract. Once the written contract was executed it became the sole controlling document for court review. Remember, previously written agreements may be admissible for the purpose of explaining ambiguous terms, but not to contradict a term whose meaning is clear.
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4. Parol Evidence and Latent Ambiguity Rule: Ambiguity alone is not sufficient to trigger the admission of PE. In fact, the awareness of the parties and their understanding as to the meaning of the clause in question will determine whether or not a contract had been formed at all. Thus: -
1. If neither party were aware of the ambiguity at the time the contract was entered into then there would be no contract formation. However if both parties understood the ambiguous clause in exactly the same way there would be contract formation.
2. If both parties were aware of the ambiguity then once again,
providing both parties understood the ambiguity the same way and thus had a meeting of minds, there is a contract.
3. If only one party was aware of the ambiguity then the contract will
be binding to the extent that the ignorant party reasonably understood the ambiguous term.
Commentary: To recap where a merchant makes an offer as to the sale of certain goods and there is an ambiguous term. If both sides argue its interpretation in opposing ways the courts will find that there has been no meeting of minds and therefore no contract formed. Remember, the courts will not depart from giving a contract its literal interpretation unless there are substantial grounds for showing that an alternate interpretation should be given.
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5. Parol Evidence and Complete and Partial Integration Rule: We know that previously written agreements or contemporaneous oral statements may be admissible to explain, not contradict, the terms of the contract. PE can only be admitted on this basis. Complete Integration: Where a contract is deemed to be the final draft it is termed a complete integration of the negotiations. Once the agreement is executed no PE may be admitted to vary the terms of the executed contract. Partial Integration: It may be argued that the contract in dispute was not the final draft of the contract. The argument here is that the contract is a partial integration and thus contract negotiations were still on going.
Therefore, if one party can successfully argue that the agreement is not a complete integration (final draft) then that party may avoid liability under the contract. However, if both sides have signed the agreement there will be a very strong presumption that the agreement was understood by both parties to be the final agreement.
Scrivener Error: Where both sides fail to notice an error in the contract by way of a mutual mistake in the integration the courts may grant relief to amend the drafting error.
6. Parol Evidence and Hindsight Rule: Any arrangements subsequent to the contract will not be admissible under PE rules. The courts do not want to know what was in the minds of either party with the benefit of hindsight. The courts only wants to know what the parties agreed to and intended at the time the agreement was executed.
7. Parol Evidence and Consideration Rule: If there is an argument as to whether consideration was exchanged by either party, evidence as to this issue can be admitted. This is because consideration evidence will not vary the terms of the contract. Consideration relates to the collateral issue as to whether a legal agreement was formed.
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8. Parol Evidence and Plain Meaning Rule
Rule: When reading the contract under dispute the court will give the contract its plain literal meaning. There are occasions however, where phrases are used that are unique to a particular trade or established over a history of prior dealings between the parties. Where either party claims this, the judge may depart from the plain meaning rule upon submission of PE supporting this argument.
EG: Both A’ and B’ had always used the term ‘10’ to mean ‘10 dozen’ in their contracts. The literal meaning interpretation is 10. In the trade or custom, 10 means 10 dozen. If either party can demonstrate that this had been the case on prior dealings this evidence will be admitted. Note that admission of this evidence will not vary the terms of the contract only explain the meaning.
The court will need strong supporting evidence to depart from giving the contract its plain literal interpretation. In other words, if the contract is given its literal meaning this would create an overwhelming anomaly. EG: If the contract given its literal meaning a buyer would end up paying 10 times the normal price of the product, i.e., if 10 were not given its trade meaning as meaning 10 dozen.
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Contract Law Ch-4: Condition & Discharge
Topic: Conditions to Contracts
Page
1. Conditions Introduction 22. Conditions Precedent 23. Condition Precedent (Expanded) 34. Condition Precedent vs. Condition Subsequent 35. Constructive Condition Precedent 46. Condition Concurrent 47. Implied Conditions 48. Warranty: Satisfaction Guaranteed 49. Warranties: ‘Warranty of Truthfulness’ 4
10. Insurance Clauses: Time of Payout Stipulated 511. Actionable Misrepresentation 512. Time of the Essence 6
Topic: Discharge From Contractual Obligations
1. Unilateral Mistake 72. Mutual Mistake 73. Mutual Mistake and Assumption of Risk 74. Mistake by an Intermediary (Mistake in the Transmission) 75. Mistake: Correcting Acknowledged Errors 86. Doctrine of Mistake Reviewed 87. An Accord 88. Satisfaction of the Accord 99. Accord and Satisfaction: Checks 9
10. Discharge for Material Breach 1011. Destruction of Subject Matter 1012. No Discharge Due to Appreciation of Risks 1113. Discharge: Frustration of Purpose 1114. Discharge: Impossibility & Impracticability 1115. Discharge: Failure of Star Performer 1216. Impossible Deadline and Schedules 1217. Contracts With an Illegal Purpose 13
17.1. Contracts Made Illegal by Operation of Law 1318. Contracts Involving Minors 1419. Automobile Accidents and Offers to Pay Medical Expenses 15
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Conditions To Contracts
1. Conditions Introduction Rule: Conditions are the substantive or material elements of a contract. In fact breach of a condition can result in the innocent party being discharged from the contract altogether. In other words, a breach of a condition is more than a slight under-performance of the contract. Conditions can arise before the substantive contract becomes effective, during the contract (concurrent), and after the contract (subsequent) has been performed. Conditions can even be implied.
2. Condition Precedent Rule: A condition precedent is a condition that must occur before the substantive contract becomes effective, or an event that must occur before an obligation to perform attaches.
EG1: A’ must complete all preliminary estimates in construction before a set date, then the terms set out in the main construction contract between A’ and B’ will become effective upon satisfactory estimates. EG2: A’ must deliver a product by a set date, then B’ will accept goods and pay. If delivery is not made by that date, then B’ will be under no duty to accept goods. EG3: A’ and B’ agree that if the Patriarchs win the Super Bowl, A’ and B’ will go into business together.
Where there is a condition precedent clearly established this must be satisfied in full before any obligation to perform the substantive contract attaches.
If the condition is not met then any renegotiation will constitute a new contract. The terms of the new contract will then be the only basis of the relationship. In other words the new contract will be the controlling document.
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3. Condition Precedent (Expanded) Rule: A condition precedent is a condition that must be satisfied before the obligations within the main contract become binding.
1. If the condition is not met or is impossible to meet despite due diligence on the obligated party then both parties will be discharged from the contract.
2. If the condition is reasonable, but still is not met by the obligated
party because of a lack of due diligence then the guilty party will be in breach of contract for failure to fulfill the condition.
3. If the condition is for the benefit of the obligated party then that
party may choose to waive the condition and still hold the non-obligated party to perform the substantive contract.
EG: A’ agrees under contract to buy B’s home. This agreement to buy is conditioned upon A’ being able to obtain a mortgage of 8% or less. If A’ is unable to obtain a mortgage at that rate, since the benefit is for A’ he can still proceed to buy the property. The condition is deemed waived. B’ cannot withdraw from the sale on the grounds that A’ could not obtain the mortgage at the agreed rate. The condition was only intended to benefit A’, therefore, A’ has the option to waive it. If A’ could not obtain a suitable mortgage then A’ could decide that the condition be discharged from the contract without being in breach.
4. Condition Precedent vs. Condition Subsequent Rule: We know that a condition precedent is a duty that must occur first, before any obligation on the other party arises. Until the condition precedent is met, the other party is under no obligation or duty whatsoever.
In contrast, a condition subsequent acts to cut off an already existing duty. For example, A’ contracts to buy widgets from B’. The contract is executed with the condition that, if A’ is not completely satisfied within 30 days A’ can return the widgets and receive a full refund. Here, the condition is subsequently applied after the purchase. If the condition is activated, it will cut off A’s duty of performance which is to pay for the widgets.
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5. Constructive Condition Precedent
Rule: In addition to any express conditions in the contract the court may also ‘construct’ conditions into the contract so as to ensure both parties receive the performance for which they had bargained.
6. Condition Concurrent Rule: As the name suggests these are conditions that are capable of occurring together and the parties are required to perform them at the same time, concurrently, e.g. cash on delivery.
7. Implied Conditions Rule: Implied conditions are conditions that could reasonably be implied from the evidence of the intentions of both parties, in the absence of an express condition written into the contract. For example, painter to buy paint for the project and homeowner to pay for the paint.
8. Warranty: Satisfaction Guaranteed Rule: When a contract guarantees personal satisfaction this will be deemed to mean the personal satisfaction of the buyer. This is a subjective test. Thus, as long as the buyer is not satisfied for any reason he may reject the goods and return them without penalty, even if the buyer’s reason for a rejection is irrational.
9. Warranties: ‘Warranty of Truthfulness’ Rule: Where an undertaking is given as to the truthfulness of a statement, e.g., ‘to the best of my knowledge or belief’, the promissor is not ultimately responsible. Thus, if the promissor is subsequently proved to be mistaken this will not invalidate the contract or provide a cause of action against him. The form of words ‘ to the best of my knowledge’ may not be construed as a warranty or guarantee as to the accuracy of the statement. It is merely an honest assertion.
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10. Insurance Clauses: Time of Payout Stipulated
Rule: Insurance contracts have many types of clauses as to the timing of payments. Where there is a clause as to the timing of a payout to a minor, the court will interpret the meaning of the clause so as to avoid forfeiture if the child does not reach the triggering age. Thus, if the child dies or is in need prior to the scheduled triggering date the court will seek to benefit the child.
Therefore, look at the motivation behind the clause. For example, where a child is scheduled to receive a payout at 21, the motivation would be to avoid the child receiving the money at too young an age. However, if the child was in great need or died, the court could relax the condition so as to benefit the child or child’s next of kin to meet associated expenses.
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Actionable Misrepresentation Rule: In order to ground the tort of misrepresentation we need to ensure that each element of the tort has been satisfied: -
1. An actual misrepresentation by D’ to P’. 2. D’ to have made the statement with scienter (knowingly or with
reckless disregard as to the truth or falsity for the truth). 3. D’ made the statement with the intention to induce P’ to rely on D’s
statement. Note: Typically, D’ will be a sales type of person with some financial interest in the outcome. However, even a disinterested (no financial interest) D’ may be liable.
4. D’s misrepresentation caused / induced P’s to act accordingly. 5. It was reasonable for P’ to rely on the statement. 6. P’ suffered damages as a result.
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1.2. Time of the Essence
Rule: The phrase ‘time is of the essence’ means any delay beyond the agreed delivery date will be deemed a material breach of contract and will discharge the innocent party from further performance. However, ‘time is of the essence’ clauses should be clearly marked on the contract unless it is patently clear that any delay beyond the agreed delivery date would be a major material of contract, e.g., delivery of the wedding dress the day after the wedding.
Where delivery is not a ‘time is of the essence’ issue then a small delay past the due date for delivery will be regarded as a minor breach of the contract. Here, the innocent party will be able to deduct a small amount if any harm or damage is suffered as a result of the delay.
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Topic: Discharge from Contractual Obligations
1. Unilateral Mistake Rule: Where only one party entering the contract is mistaken about a term of the agreement, this unilateral mistake will not prevent the formation of a binding contract. However, rescission is still available if the rescinding party can establish legal grounds. For example that both parties were mistaken as to a material term in the contract.
2. Mutual Mistake Rule: Where both parties entering the contract are mistaken as to a material term in the contract this will prevent the formation of a contract altogether, since there was no meeting of minds.
3. Mutual Mistake and Assumption of Risk Rule: When both parties entering into a contract are mistaken about facts relating to the agreement, the contract may be voidable by the adversely affected party if: -
1. The mistake related to a basic assumption on which the contract was made.
2. The mistake has a material effect on the agreed-upon exchange. 3. The party seeking avoidance did not assume the risk of the mistake.
Commentary: Assuming the risk: If the party seeking to void the contract was primarily responsible for the mistake, then the guilty party will most likely not be granted relief.
4. Mistake by an Intermediary (Mistake in the Transmission) Rule: Where there is a mistake by an intermediary in the transmission, by way of fax or letter etc, the communication will be binding unless the other party should have known that the communication as received was an error. In other words, that the error was patent.
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5. Mistake: Correcting Acknowledged Errors Rule: Where both parties become aware of an error in the contract they can agree to correct the error in the agreement orally or in writing. How the error is corrected will depend on Statute of Frauds requirements. Should there be a subsequent dispute over the original contract, evidence of the subsequent agreement will be admissible. This does not violate the Parol Evidence rule. Remember, under Parol Evidence, subsequent arrangements or understandings cannot be used to explain ambiguous terms of the original contract. However, in this case the evidence is would be used to demonstrate the existence of a subsequent contract altogether.
6. Doctrine of Mistake Reviewed Rule: Where only one party entering the contract is mistaken about a term, this is unilateral mistake. As outlined above, a unilateral mistake will not prevent formation of the contract.
If the non-mistaken party knows or had reason to know of the mistake made, he is not permitted to take advantage of the error in the offer. In other words, if the error is such that the offeree should have known and relies on the defective offer anyway, (in order to take advantage of the mistake), then the guilty party may be discharged from the contract. In this situation the guilty party is said to have been put on notice of the mistake and cannot take advantage of a patent error.
Discharge by Way of an Accord and Satisfaction
7. An Accord Rule: Where there are two parties in genuine disagreement as to whether complete performance has been made, both sides may enter into a compromise agreement to resolve the matter. This new agreement is called an accord. The accord must be supported by consideration on both sides. For example, one party might forbear something whilst the other side accepts less money as a compromise.
If either party breaches the accord by not performing their part of the new bargain, the innocent party may sue under the original contract or under the accord.
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A creditor may attempt to breach an accord by refusing payment under the accord and demand the original amount owed. Here, the debtor can demand specific performance, in that the creditor accepts the payment under the accord. Alternatively, the debtor could wait until the creditor files suit then he could raise the existence of the accord as a defense.
8. Satisfaction of the Accord Rule: Where the accord has been fully performed by both parties, this will completely discharge the parties from the original contractual obligations. Thus, if the accord was a compromise as to the amount owed, once the compromised amount has been paid, the creditor may not pursue the debtor for any amount. The original amount is deemed cleared under the discharge of the accord agreement.
9. Accord and Satisfaction: Checks A common example of an accord and satisfaction arises where A’ and B’ have a genuine dispute as to the amount owed. A’ drafts a check for a lesser amount as a proposal for settlement and presents it to B’. Written on the check are the words “payment in full’. There may also be a reference on the check to some oral or written agreement detailing the accord. If B’ cashes the check this will be deemed an acceptance of the accord. The actual cashing of the check will discharge or satisfy the accord. From that point B’ will not be able to pursue A’ under the original agreement prior to the accord.
If the check marked ‘payment in full’ also refers to a letter with conditions, then cashing the check will imply these written conditions have also been accepted.
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10. Discharge for Material Breach Rule: Where there is a material breach of contract the injured party will be able to discharge themselves from further obligations under the contract and bring an action for breach of contract.
11. Destruction of Subject Matter Rule: Generally, where the contract is between non-merchants and the subject matter is destroyed through no fault of either party both sides will be discharged of their obligations under the contract. Note, the contract itself is not terminated by operation of law; merely the obligation to perform under the contract is discharged. Remember, when dealing with the issue of discharge we’re not saying that the contract formed was not valid, only that the obligation to perform under the contract has been discharged.
Builders Exception: A builder contracted to construct a building for his client is not discharged from that duty if the building is destroyed prior to delivery. The builder must rebuild or refund client’s money. In fact unless builder rebuilds the property at his own expense the builder will be deemed in breach of contract and may be sued accordingly. The only defense for the builder would be to argue that the buyer had expressly assumed the risk.
Commentary as to Risk of Loss
1. For sale of goods by a non-merchant, risk of loss does not pass to buyer until the goods are actually received.
2. For sale of goods by a merchant this will follow U.C.C. Here, the
risk of loss passes when the contract is made. Sometimes the seller will state F.O.B. terms.
Thus, if a merchant selects out goods specifically for a buyer but before goods are shipped or collected they are destroyed through no fault of the either party then both parties are discharged. The U.C.C. does not follow the Doctrine of Equitable Conversion. If this were the case then the buyer would be liable to pay the merchant for the destroyed goods.
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12. No Discharge Due to Appreciation of Risks Rule: Where both parties enter into a contract aware that the risks involved under the contract could result in either side losing or gaining substantially, the court will not interfere. Thus, neither party will be able to seek contractual discharge unless enforcement of the contract would result in substantial loss.
13. Discharge: Frustration of Purpose Rule: If the purpose of the contract has been frustrated, most courts will discharge the contractual duties to perform, even though performance was possible.
Frustration arises where both parties appreciate the purpose of the contract at the time the contract was made, but subsequently that purpose was destroyed by an unforeseeable supervening act or event. For example, an open-air concert planned in January for August is frustrated due to a freak snowstorm in August. The concert facility is destroyed.
14. Discharge: Impossibility & Impracticability Rule: A contractual duty to perform may be discharged by what is called ‘objective impossibility’. This means that no one under any circumstances could have performed that contractual obligation. Where objective impossibility is demonstrated the party unable to perform may be discharged. In contrast, there is subjective impossibility. This means that the party was unable to perform due to difficulties experienced by them alone. In other words another person / company could have performed the contract. Example: A’ contracts to take B’ to the airport. The day before the trip A’s car is stolen. This is not objective impossibility. This is because A’s ability to fulfill his obligation was not impossible, as another carrier could make the same trip. However, if A’s duty was to take B’ to the airport and there was a severe blizzard blocking all routes to the airport, then this would amount to objective impossibility since no other carrier could make the same trip at that time either. In this latter case, A’ would be discharged without penalty from his obligation to perform the contract.
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Discharge: Impracticability: A party may claim discharge on grounds of impracticability where the party has encountered extreme and unforeseeable difficulties. These difficulties would need to be at the point where it would be unreasonable to hold this party to their performance of the contract.
15. Discharge: Failure of Star Performer Rule: If the contract is one for the personal services of a star performer and the performer is injured or is too ill to perform, then both parties will be discharged.
16. Impossible Deadlines and Schedules Rule: An unavoidable delay will not be actionable where a supervening event outside of the control of both parties occurs. So much so that the delay of the work makes it impossible for timely completion stipulated in the contract.
If the work had not yet started and there was a supervening event that delayed the commencement of the work to the point where it would be impossible to meet the deadline, the obligated party would also be discharged from the contract without penalty.
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17.1. Contracts with an Illegal Purpose
Rule: If either the consideration or the subject matter of a contract is illegal the contract will be unenforceable. However, if the contract was formed for an illegal purpose, but neither the consideration nor subject matter is illegal then the contract may be enforceable. The contract would be enforceable at the option of the party not directly involved in the illegality. EG: Landlord rents an apartment, but the tenant wishes to use the apartment for an illegal purpose. Here, the letting of the apartment is not illegal only the use of the apartment for unlawful activity is.
17.2. Contracts Made Illegal by Operation of Law Rule: Sometimes during the contract formation process laws may change that could render an otherwise legal contract illegal by operation of law.
1. Before offer made: If new law came into force before an offer was made then any offer made was not being considered valid in the first place.
2. After offer made: If the new law came into force after the offer was
made then it would have the effect of revoking the offer made. 3. After contract formed: If the new law came into force after the
contract was formed (offer and acceptance) then it would have the effect of discharging the parties on the grounds of impossibility.
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18. Contracts Involving Minors
Rule: Minors generally lack the capacity to enter into and be bound by a contract. Any contract entered into as a minor is voidable. This means that the minor, in order to avoid liability under the contract, must disaffirm his obligations under the contract. The minor must communicate his intention to hold himself discharged from the contract. Silence is insufficient. At all times the contract will be binding upon the adult party to the contract.
Where the contract involves necessities such as medical treatment, shelter, foods and furniture, the minor may not disaffirm their obligation under the contract. The contract is binding.
Once a minor becomes an adult he may still disaffirm the contract entered into as a minor. If he renegotiates the contract as an adult it becomes binding.
A minor can enter into an insurance policy agreement. Once entered into, the policy cannot subsequently be voidable by the infant and both parties are thereby bound by its terms.
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19. Automobile Accidents and Offers to Pay Medical Expenses
Rule: Where there has been an offer to pay the medical expenses of an injured party we need to look to see if the offer was made conditionally, i.e., in exchange for not filing charges. Where this type of conditional offer is made this would be deemed ‘bargained for exchange’ and as such would be enforceable.
Where the offer is made with no conditions or obligations attached this is said to be a gratuitous offer and as such is revocable at any time. Unless, since the offer was made, the injured party had detrimentally relied on the promise by incurring medical expenses.
Where the promise of paying the medical fees is made directly to the treating physician, the paying person will be the promisee, the doctor will be the promissor and the patient will be the intended 3PB. In this relationship the 3PB does not have to satisfy any consideration requirements.
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Contract Law Ch-5: Remedies
Topic:
Page
1. Anticipatory Repudiation (AR) 32. AR and Prospective Inability to Perform 4
3.1. AR and Equivocal Repudiation 43.2. Selling to Buyers Who May be Insolvent 44.1. Specific Performance 54.2. Specific Performance and Personal Services 5
5. Liquidated Damages 66. Waiving Rights Under a Contract 67. Entire Contracts 68. Divisible Contracts 7
9.1. Option Contracts 89.2. Options: Buyers Changes His Mind and Advises Seller 89.3. Expired Options 99.4. Options and Bids (Tenders) 99.5. Options and Specific Performance 109.5. Options and Consideration 109.7. Options and Revocation 1010. Doctrine of Release 1111. Time of the Essence: Late Performance Under a Contract 1112. Calculating Damages for Cancelled Orders or Rejecting Non-
Conforming Goods 11
13. Non-Conforming Goods and Damages 1214. Revocation of Acceptance: Rejecting Goods After Acceptances 1315. How Does the Seller Know Whether the Goods Have Been
Accepted? 13
16. Goods Stolen or Damaged in Transit 1317. Breach of Building Contracts 1418. Rejecting Non-Confirming Goods 1419. Seller Refuses to Accept Rejected Goods and Will Not Refund
Monies 15
20. Right of Inspection of Shipped Goods 15
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21. Shipping Non-Conforming Goods With Advance Notice to the Buyer
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22. Late Delivery of Goods 1623. Risk of Loss: Free On Board: FOB [Location] 1624. Risk of Loss and Shipping Defective or Non-Conforming Goods 1625. Punitive Damages 17
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1. Anticipatory Repudiation (AR)
Rule: AR occurs where one party (the repudiator), prior to the time set for performance of his promise, indicates unequivocally that he will absolutely not be able to perform the contract. In contrast, if one party said that they would be starting the contract but that there would be a delay, then this is clearly not a repudiation of the contract. Where there is a repudiation the remedy for breach of contract will depend on the following circumstances: -
1. If the innocent party has done their part under the contract and the guilty party has now refused to do their part, the innocent party will have to wait until the deadline for performance has past. This is to give the guilty party the opportunity to change their mind within the deadline agreed.
2. If neither party has completed their performance (i.e., executory)
then: -
i. The non-repudiator can take immediate action as to the breach. The non-repudiator is not required to wait until the deadline set for performance. The non-repudiator can also suspend his performance under the contract.
ii. The non-repudiator has the option to wait until the
deadline.
iii. The non-repudiator can urge performance of the contract, while at the same time seek other offers in order to mitigate losses. This is because there is no guarantee that the non-repudiator will be successful in persuading the repudiator to resume performance.
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2. AR and Prospective Inability to Perform Rule: Here, we are dealing with the situation where there has been no outright repudiation, but one party is nevertheless concerned that the other party will not perform their part of the contract. In this case, the concerned party may demand assurances of performance. If the potentially guilty party does not address these concerns, the innocent party may treat the contract as being repudiated and cease further performance.
3.1. AR and Equivocal Repudiation Rule: Repudiation must be completely unequivocal. Therefore, any attempt to re-negotiate a contract for more money should not be regarded as a repudiation of the contract. If the contract is treated as repudiated due to a request to re-negotiate, the re-negotiating party can sue for breach of contract if the re-negotiator did not unequivocally walk off the job or expressly refuse further performance.
3.2. Selling to Buyers Who May be Insolvent Rule: Where a seller subsequently discovers that his buyer may be insolvent his options and obligations are as follows: -
1. U.C.C. provides that the seller may demand that the buyer pay cash immediately even if the payment date is not yet due.
2. U.C.C. provides that the seller may demand full payment of any
outstanding previous orders under the same contract. For example, a recurring order contract. Payment can be demanded in cash before the seller will be obliged to ship any further orders.
3. U.C.C. provides that the seller may demand the return of any goods
shipped up to 10 days after the buyer has received them if the goods were sold on credit.
4. U.C.C. provides that where the seller is able to recover goods
previously shipped on credit this will release the buyer from any further obligations.
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4.1 Specific Performance Rule: Specific performance is granted where: -
1. There is a valid contract in place. 2. Legal remedy (money damages) is inadequate. 3. Enforcement is still feasible. If the item under contention has been
sold in error or in good faith, enforcement under specific performance is no longer feasible.
4. Mutuality is still present.
In essence, the courts are reluctant to award the equitable remedy of specific performance where money damages will suffice. However there are circumstances where money damages will not be deemed sufficient as a remedy: -
1. Sale of land. Land is considered unique. 2. Goods that are considered rare, unique, works of art, pedigree or
specially bred animals.
4.2. Specific Performance and Personal Services Rule: With regards to personal service contracts, the court will not order specific performance. However, where such a contract is broken money damages will be awarded and, if appropriate, the breaching party can be prohibited for working for a rival company or in the same field.
Sports Player and Sport Club Artist and Record Company Actor and Film Studio Designer and Architects etc.
In each case, while the company cannot force the artist to perform, they can obtain an injunction preventing the artist from working for another label. Thus, the company can obtain money damages and an injunction if appropriate. However, where failure to perform is due to ill-health damages will not be available. This is because the performer will be able to raise the defense of impossibility. This defense will only be available as long as the illness persists.
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5. Liquidated Damages
Rule: Liquidated damage clauses are enforceable only if the damages were difficult to estimate at the time the contract was formed. The amount agreed upon must be reasonable and must be based as closely as possible on the potential losses the innocent party could suffer in the event of a delay. Thus, the damages must not be punitive.
If the liquidated damages clause is struck down, the innocent party may still seek to recover any actual losses suffered as a result of the breach.
6. Waiving Rights Under a Contract Rule: Rights under a contract must be waived knowingly. In other words they cannot be waived in ignorance. Unless the party concerned has expressly waived a right under the contract, the right will be preserved.
7. Entire Contracts Rule: Many contracts can be described as either ‘entire contracts’ or ‘divisible contracts’. A divisible contract is one that can be split into equal units. (See point 8 below). Entire contracts cannot be divided and can only be treated as a whole. With entire contracts any substantial breach would be treated as a breach of the whole contract.
EG1: A’ contracts with B’ to buy an automobile with delivery by May 1st. This would be regarded as an entire contract. There is no way to divide performance of the contract. Thus, failure to deliver the automobile would a complete breach of contract. EG2: A’ contracts with B’ to buy 1000 boxes of widgets with by delivery by May 1st. This too is an entire contract. Here, although the widgets could be divided into individual units, there is no indication that there was any agreement by the parties that delivery would be acceptable in a phased or staged way.
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Where there is no agreed plan by the parties to receive delivery of performance in a staged way the contract will be deemed an ‘entire contract’. In the event of a subsequent partial delivery, the partial-performing party will be deemed in breach. The issue will then be about whether the breach was a material breach or a minor breach.
8. Divisible Contracts Rule: A divisible contract arises where it is agreed from the inception of the contract that performance is to be completed in phases. In fact, even if it was not intended by both parties that the contract was to be treated as a divisible contract it may still be construed as such where each of the phases of performance are identical in performance. Where the contract phases of performance are not identical the contract may not be deemed or construed as a divisible contract. EG 1: A’ contracts with B’ for B’ to paint 20 identical apartments for $20,000 in total. If B’ painted 15 apartments and quits, B’ would be entitled to $15,000 if a divisible contract were found. EG 2: If A’ agrees to pay B’, for B’ to build A’s house and further agrees that payment is to phased as follows: - Foundation 30,000 Walls and Roof 30,000 All Interior Trim 30,000 If B’ quits after the foundation, walls and roof, this would not be regarded as a divisible contract that would allow B’ to claim $60,000 representing completion of 1st two phases. This is because each phase is not identical in performance. Instead, A’ could sue B’ for the costs of completing the building. B’ would be entitled to the actual value of the work done, less damages claimed by A’.
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9.1. Option Contracts
Rule: Option contracts arise when a buyer wishes to have the seller keep an offer open exclusively for the benefit of the buyer. During the option period the buyer can take his time to decide whether or not to take advantage of the offer. In order to secure an enforceable option the buyer must pay some consideration to the seller for the option. Without this consideration the offer becomes unenforceable and the seller may change his mind and sell to another even if a promise had been given to the original buyer to keep the offer open.
9.2. Options: Buyer Changes His Mind and Advises Seller Rule: Here, the buyer has paid for an offer to remain open for a set period of time. If the buyer tells the seller within the option period that he no longer wishes to purchase the item the option must still remain open. This is because the buyer could change his mind and he has paid for this right within the time period of the option. Even if the buyer makes a counter offer which is rejected, this will not affect the option contract. Again, the offer must remain open for the duration of the option period. When the buyer chooses to exercise his option within the option period the substantive contract for the underlying offer is formed.
However, if the buyer communicates that he no longer wishes to exercise his option and the seller detrimentally relies on that instruction and sells the product, then the buyer’s power to exercise the option would be lost and the seller would not be in breach of contract. Therefore, providing the product had not yet been sold then the buyer could still exercise his option. Any refusal by the seller to complete the transaction would be deemed a breach of contract.
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9.3. Options: Expired
Rule: If during the currency of the option the option is not exercised the option will lapse. The option contract would have been fully performed. Even though the promisee may not have taken up the option, the benefit to the promisee was to at least have the choice. If the promissor sells or disposes of the goods or services prior to the expiry of the option, the promissor will be in breach of contract. Some options have an ‘up to X days period’. This means that the option can be held open from one day up to the X number of the days specified. The ‘up to’ period is taken to mean that the offeror can perform the task under the option within the maximum number of days. For example, a landlord might require a maximum of 15 days to check an applicant’s credit and references. This task could be done in day 1, even though there may be a 15-day option.
9.4. Options and Bids (Tenders) Rule: Where offers are made as bids (tenders), they become binding on the promissor (offeror). This is because the offeror is deemed to know that by submitting the tender the recipient (offeree) is likely to detrimentally rely on the bid. The offeree, having made his decision to accept the tender, must have the confidence that the bid will be honored.
In other words, the offeree has an options contract. The offeree, upon acceptance of the bid, picks up the option.
Once the bid is submitted by the offeror it is irrevocable and is binding upon receipt by the offeree. The only way out is for the offeree to waive the tender voluntarily. This is not a release, but what is called ‘making a gift of the offer back to the offeror’. Otherwise the offeror will have to wait to see if his option is picked up or not.
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9.5 Options and Specific Performance Rule: Where the option relates to land, providing the option agreement has been drafted in writing and consideration paid, a breach by either party will enable the innocent party to claim specific performance, even if money damages would suffice.
9.6. Options and Consideration Rule: All option contracts must be supported by consideration in order to be enforceable. The consideration agreed need not be recited in the option agreement. The Parol Evidence rule will allow the evidence of consideration since any discussion as to the issue of consideration will not contradict or modify the terms of the contract.
9.7. Options and Revocation Rule: Once an option contract has been entered into with due consideration it becomes irrevocable for the duration of the option. However, the parties may agree to include in the agreement that the person granting the option may revoke the option at any time.
This appears to be a contradiction in the whole purpose of the option, nevertheless the parties are free to so agree. However such an agreement will be subject to collateral attack on the grounds that a power to allow revocation at any time renders the contract illusory, as one party is under no obligation to perform. All enforceable contracts must place both parties under some mutual obligation of performance.
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10. Doctrine of Release
Rule: A party may be deemed released from his obligations under the contract: -
1. Where there has been a signed writing releasing the obligor the party whose obligation has attached requires a release. Thus, in a unilateral contract only the offeror would require a release.
2. An offeree having accepted an offer would need a release from the
offeror. If the offeree subsequently changed his mind about wanting to perform his obligations under the contract. This would be required where the offeror had detrimentally relied on the acceptance of the offer.
11. Time of the Essence: Late Performance Under a Contract Rule: Unless the nature of the contract is such as to make performance on the exact day agreed upon vitally important or the contract stipulates that ‘time is of the essence’, late performance will not, de facto, be regarded as a material breach of contract.
Remember, where there is a material breach the innocent party can be discharged from their obligation under the contract. Where there has been a minor breach the innocent party may not be discharged from their obligations under the contract but will be able to claim damages sufficient to be compensated for the delayed performance.
12. Calculating Damages For Cancelled Orders or Rejecting Non-Conforming Goods Rule: When calculating the damages a seller or buyer may claim under various formulae that can be used to calculate the loss. If the buyer has been let down by the seller, the buyer will be looking to recover the additional costs incurred, if any, from buying the goods elsewhere. Often, in seeking to find an alternative supplier the goods are invariably more expensive. The buyer will also be able to recover any monies paid, deposit or full refund if no goods have been received.
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If the seller has been let down by the buyer, the seller will be looking to recover his loss of profit from that sale. This is recoverable even if the seller quickly finds a new buyer. Since that seller would have found that buyer anyway and thus would have made two sales instead of one. Therefore, the seller may still recover his loss of profit. Contract Price - Less - Market Price Market price being determined as to what the goods could have been sold for at the time the contract was made. Contract Price - Less - Resale Price Resale price being determined as to what the goods were actually sold for. Contract Price - Less - Wholesale Price This equals a seller’s loss of profit if buyer cancels out on the contract. Plus: Any other closely related and foreseeable costs incidental to the sale foreseeable by the buyer, e.g., shipping and handling.
Plus: Any monies paid, deposit or full payment.
13. Non-Conforming Goods and Damages Rule: When a buyer rightfully rejects non-confirming goods, he has several options: -
1. A refund of any monies paid. 2. The cost, in damages, of buying replacements if more expensive else
where. (The contract price less the market price). 3. Reject the goods, cancel the contract and sue for damages.
4. Accept any conforming goods, reject the non-conforming goods and
sue for damages.
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14. Revocation of Acceptance; Rejecting Goods After Acceptance Rule: A buyer may accept goods believing them to be satisfactory upon a cursory inspection. However he may subsequently discover that the product under performs or has some latent defect that was not discoverable at the time. In this case the buyer may revoke his initial acceptance. He can then notify the seller and obtain a replacement and any damages incidental to the breach of contract. If the seller refuses then the buyer has the usual remedies as follows: -
1. A refund of any monies paid. 2. The cost, in damages, of buying replacements if more expensive else
where. (The contract price less the market price). 3. Reject the goods, cancel the contract and sue for damages.
4. Accept any conforming goods, reject the non-conforming goods and
sue for damages. If the goods accepted are of lesser value, then the buyer may sue for the difference.
15. How Does the Seller Know Whether the Goods Have Been Accepted?
Rule: Acceptance occurs when the buyer: -
1. Indicates that the goods are acceptable after allowing for a reasonable period for inspection.
2. Fails to reject the goods within a proper time 3. Does any act that is inconsistent with the seller’s ownership.
16. Goods Stolen or Damaged in Transit
Rule: Under the UCC, when the contract is silent as to when the risk of loss passes from seller to buyer, the risk of loss is deemed to have transferred from seller to buyer when seller has placed the goods with a common carrier. Thus, any loss or damage after that point will rest with buyer.
However, if the goods shipped are non-conforming or are so defective that the buyer would have been unlikely to accept them anyway, then the risk of loss will stay with the seller until the buyer accepts or rejects the shipment.
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17. Breach of Building Contracts Rule: A’ (owner) and B’ (builder) enter into a contract for B’ to build or remodel A’s property. A’ breaches the contract by refusing further performance (non-payment). If B’ had started but not completed the construction, B’ would be entitled to recover any profit as damages that he would have made from the contract if he had been able to complete it plus all of his costs.
EG: Builder contracts to build house for $100,000. Builder estimates his profit as being $10,000. Costs are estimated at $90,000. Having spent $50,000 in costs, Owner repudiates contract. Here Builder would be able to recover $50,000 in costs plus $10,000, loss of estimated profit.
18. Rejecting Non-Confirming Goods Rule: Non-conforming goods are goods that are shipped to a buyer and the goods shipped are not exactly what the buyer ordered. A buyer who received such goods generally has the right to: -
1. Accept all 2. Reject all and cancel the contract 3. Accept any commercial units that are conforming and reject the rest
To properly reject non-conforming goods the buyer must do so within a reasonable time after delivery. The buyer has a duty to notify the seller promptly that the goods have been rejected. This is because if the goods were shipped according to a deadline, the seller, upon prompt notification, could cure the defect by immediately shipping conforming goods.
Also, if the buyer intends to keep the non-conforming goods, but pay a discounted price, the buyer must notify the seller of this intention. Merely sending a discounted payment will not suffice since the seller would rightly expect the balance to be paid in due course.
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19. Seller Refuses to Accept Rejected Goods and Will Not Refund Monies Rule: Where the buyer has paid for goods which turn out to be non-confirming and the seller refuses to accept the return of goods and refuses to refund monies paid: -
1. The buyer may sell the goods and credit the proceeds to the amount owed by the seller.
2. The buyer may sell the goods at a public sale without reference to seller.
3. The buyer may sell the goods at a private sale, however the seller must be notified.
20. Right of Inspection of Shipped Goods Rule: Under UCC rules the buyer is allowed a reasonable time to inspect the goods received before deciding whether to accept or reject them.
If the goods appear to be non-conforming, the buyer may take a reasonable time (days) to inspect and test to see if the non-conforming goods perform in a satisfactory manner. If these goods, during the inspection and testing, fail to satisfy the buyer’s requirements then the buyer may reject the goods and bring suit against the seller for breach of contract.
However, if the buyer retains the goods longer than is reasonably necessary the buyer is deemed to have accepted the goods and loses his right of rejection.
Furthermore, if the buyer, seeing that the non-confirming goods are not satisfactory, goes on to carry out further tests on a sample of the products, any expense incurred will not be recoverable in any breach action. Indeed the buyer would have been deemed to have accepted any non-confirming goods unduly tested.
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21. Shipping Non-Conforming Goods With Advance Notice to the Buyer Rule: If the seller receives an order for a specific product, but only has a similar product available, he may ship the non-conforming product to the buyer without being in breach of contract providing the seller first notifies the buyer of this intention. This is called ‘an accommodation’. If the seller fails to do this and sends non-conforming goods anyway, a valid contract would have been created, but the seller would be considered in breach of his contract obligations for sending non-conforming products.
22. Late Delivery of Goods Rule: As with non-conforming goods, if goods were to be delivered according to an agreed deadline, the buyer has the same options as if the goods were non-conforming. However, once the goods have been received and are accepted then the buyer is bound on the contract according to the terms therein. The buyer is deemed to have waived the late delivery.
23. Risk of Loss: Free On Board: FOB [Location] Rule: The FOB is a shipping term that the seller declares in his sale and shipping documentation. The FOB is typically followed with the seller or buyer’s address. For example, FOB [Boston] being the buyer’s address. Meaning that the seller remains liable for any damage that may occur to the shipment until the buyer takes delivery of it. If the shipment is FOB [California], the sellers’ address, then the sellers’ liability ends as soon as the goods are transferred to the common carrier.
24. Risk of Loss and Shipping Defective or Non-Conforming Goods Rule: If goods are shipped that are so defective that the buyer would have every right to reject them, the risk of loss will not pass when the goods are dispatched to common carrier. Instead, the risk of loss would stay with the seller until the buyer receives the conforming goods. Thus if they were stolen or damaged further in transit then the buyer would bear no risk at all.
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25.
Punitive Damages Rule: Punitive damages are available but only if the court determines that D’s conduct was fraudulent or based on an intentional breach of a fiduciary duty. In the law of Torts, to ground punitive damages the P’ is required to show that D’s conduct was reckless, malicious, willful or wanton. Therefore it is very important to apply the right common law standard to the question being tested.
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