978-0078023866 Chapter 6 Lecture Note Part 2

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Public Policy

The courts may decline to enforce certain otherwise binding contracts because to do so would

not be in the best interest of the public. Noncompete clauses are common and may be fully

lawful depending largely on whether the time and geographic restrictions imposed are

reasonable. If unreasonable, the courts will either not enforce the clause or will alter it to

achieve a fair result.

Another commonplace public policy concern is the exculpatory clauses limited liability clause, or

release. One might require to agree to release others of any liability for harm that might befall

him/her when participating in any potentially hazardous activity. Often, such agreements are

enforceable in the manner of any other contractual provision, but sometimes they are not.

Legal Briefcase: Hanson v. America West Airlines, 544 F. Supp. 2d 1038 (U.S. Dist. Ct.

Central Dist. Cal. 2008)

Practicing Ethics: 2010 Gulf Oil Disaster: BP Contracts Unfair/Unconscionable?

In May 2010, British Petroleum (BP) oil company was in the midst of frantic efforts to stop the oil

flowing into the Gulf of Mexico from its doomed Macondo 252 well while also trying to clean up

the immense quantity that escaped after the explosion of the Deepwater Horizon drilling vessel.

“Several hundred” shrimpers, oyster harvesters, and others making their living from the Gulf

signed contracts with BP to work as paid volunteers in the cleanup process. Among the

provisions in those contracts were promises by the volunteers not to file legal claims against the

oil company should they sustain damages of any kind in the cleanup process. Those provisions,

which many of those signing may not have fully understood, included promises not to sue in

case of accident or injury and not to talk to anyone about the disaster or cleanup without BP

approval. Those provisions also required a 30-day notice before pursuing legal claims against

BP, even in the event of an emergency. Reportedly, BP also expected workers to add the oil

giant to their personal insurance policies so that worker injuries or damages would fall to each

worker’s insurance rather than to BP. Commercial fisherman and United Commercial

Fisherman’s Association president, George Barisich, filed suit to block enforcement of the

restrictive promises and U.S. District Judge Helen Berrigan ruled the offending provisions were

overbroad and “unconscionable” and declared them null and void. BP and the Fisherman’s

Association soon reached an agreement removing the waiver language and agreeing not to

enforce those provisions in contracts already signed.

Sources: Sabrina Canfield, “Judge Enjoins BP’s Unconscionable Contract with

Fishermen-Volunteers,” Courthouse News Service, May 4, 2010,

http://www.courthousenews.com; Brendan Kirby, “Full Report: BP Backs Away from

Controversial Oil Spill Settlement Language,” May 5, 2010, http://blog.al.com

Part Two—Interpreting and Enforcing Contracts

The five ingredients in a binding contract are: agreement, consideration, capacity, genuineness of assent,

and legality of purpose. A contract may be created by establishing these conditions. Contracts sometimes

must fulfil writing formalities to be enforceable. Third parties may have claims against some contracts.

A. In Writing?

Certainly a common belief is that agreements must be in writing to be enforceable; but in most cases,

oral contracts are fully enforceable. Oral contracts are subject to misunderstanding or to being

forgotten, and fraudulent claims can readily arise from oral understandings. Consequently, states have

drawn on the English Statute of Frauds in specifying that the following kinds of contracts, in most

cases, must be in writing to be enforceable:

Collateral contract

The sale of land

Promises that cannot be performed within one year

Contracts for the sale of goods at a price of $500 or more

Contracts in consideration of marriage

Executor/administrator’s promise

E-mail Exchanges and Statute of Frauds

Under Tennessee’s adoption of the Uniform Electronic Transactions Act, attorneys’ exchange of

e-mails setting forth proposed settlement terms to resolve a family dispute over the ownership of a

parcel of land was determined to create a signed, binding agreement, satisfying the state’s Statute of

Frauds.

Failure to Comply

A fully performed oral contract, even though not in compliance with the Statute of Frauds, will not

be rescinded by the courts. However, incomplete oral contracts that fail to comply with statute are

unenforceable. If a party to an unenforceable oral contract has provided partial performance in

reliance on the contract, the courts will ordinarily provide compensation under quasi-contract

principles for the reasonable value of that performance. [For more on the Statute of Frauds, see

www.expertlaw.com/library/ business/statute_of_frauds.html]

The Parol Evidence Rule

In general, whenever a contract has been reduced to writing with the intent that the writing

represents a complete and final integration of the parties intentions, none of the parties can

introduce parol evidence (oral or written words outside the “four corners” of the agreement) to add

to, change, or contradict that contract when that evidence was expressed/created at the time of or

prior to the writing. The written agreement is presumed to be the best evidence of the parties’

intentions at the time they entered the contract.

Exceptions

Parol evidence may be admissible under the following exceptional circumstances:

To add missing terms to an incomplete written contract.

To explain ambiguities in a written contract.

To prove circumstances that would invalidate a written contract; that is, to establish one of

the grounds of mistake, fraud, or illegality.

Contract’s Terms: Paper versus Website?

Fadal Machining Centers, a machine and machine parts manufacturer, sued Compumachine, one

of its distributors, for breach of contract. Under the distributorship agreement any legal action

arising out of the contract would be heard in a California federal district court. The agreement also

stated that Fadal could establish the terms of sale on occasion. Each of the fifteen allegedly unpaid

invoices referred to Fadal’s website for the terms and conditions of sale. The terms found on the

website included an arbitration clause and a statement that they would prevail over any other

agreement.

I. Third Parties

Assignment of Rights

Ordinarily, a party to a contract is free to transfer her or his rights under the contract to a third party.

That transfer of rights is labeled an assignment (see Figure 6.3). The party making the transfer is

the assignor; the one receiving the right is the assignee; the party who must perform, is the obligor.

Some contracts are not assignable without the consent of the obligor. That would be the case

where the obligor’s duties are materially altered by the assignment.

Delegation of Duties

The parties to a contract may also delegate their duties under the contract to one or more third

parties. A delegation of duty leaves the delegatee (the one to whom the duty is delegated),

primarily responsible for performance; but, the obligor/delegator (the one who made the

delegation), remains secondarily liable in case, the delegatee, fails to fulfill the duty to, the obligee

(the one to whom the duty is owed under both the original contract and the delegation). As with the

assignment of rights, some contractual duties, particularly those of a personal service nature,

cannot be delegated without consent.

Third-Party Beneficiary Contracts

Normally, those not a party to contract have no rights under that contract. However, third parties

may be assigned rights or delegated duties under a contract. A third party may enforce a contract

where that contract was expressly intended to benefit the third party. Third-party beneficiaries are of

three kinds: creditor, donee, and incidental.

Creditor Beneficiary

Where the contract requires one party to pay an outside third party on the other party’s behalf.

Donee Beneficiary

When the promisee’s primary purpose in entering a contract is to make a gift to another, that third

party is a donee beneficiary of the contract. The most common of these situations involves an

ordinary life insurance policy for which the owner (the promisee) pays premiums to the life

insurance company (the promisor), which is obliged to pay benefits to the third party upon the

death of the promisee/ policy owner..

Incidental Beneficiary

Often a third party receives benefit from a contract although conferring that benefit was not the

contracting parties’ primary purpose or intent.

Legal Briefcase: Jimenez v. Gilbane Building Company, et al. 693 S.E.2d 126 (Ga. Ct. App.

2010)

II. Discharge

Discharge can occur in many ways, but the most important of these are (1) conditions, (2) performance or

breach, (3) lawful excuses, (4) agreement, and (5) by operation of law.

Discharge by Conditions

Sometimes a contract is useful to one or more of the contracting parties only if some future event

occurs or fails to occur. Under those circumstances, the parties may write into the contract a clause

providing that performance is required only if the specified condition occurs or fails to occur. Those

conditions take three forms: conditions precedent, conditions subsequent, and conditions

concurrent.

Conditions Precedent

A conditions precedent clause specifies that an event must occur before the contract parties to the

contract are obliged to perform.

Conditions Subsequent

A conditions subsequent clause excuses performance if a future transpires.

Conditions Concurrent

Here the contract simply specifies that the parties are to perform their duties at the same time.

Each performance is dependent on the other.

Express or Implied Conditions

Express conditions are those explicitly agreed to by the parties. Express conditions are often

prefaced by words such as when, if, provided, and so forth. Implied-in-fact conditions are not

explicitly stated in the contract but are derived by the court from the conduct of the parties and the

circumstances surrounding the bargain. Implied-in-law conditions (also called constructive

conditions) are those that, although not expressly provided for in the contract or not able to be

reasonably inferred from the facts, the court imposes on the contract to avoid unfairness.

Whose Ring?

Barry Meyer and Robyn Mitnick became engaged August 9, 1996, at which time Barry gave Robyn

a custom-designed, $19,500 engagement ring. On November 8, 1996, Barry asked Robyn to sign a

prenuptial agreement, but Robyn refused. The parties agree the engagement ended at that point,

but they each blame the other for the breakup. Robyn did not return the ring, and Barry sued for its

return.

Source: Meyer v. Mitnick, 625 N.W.2d 136 (Ct. App. Mich. 2001).

Discharge by Performance or by Breach of Contract

Complete performance is, of course, the normal way of discharging a contract. Failure to fully

perform without a lawful excuse for that failure results in a breach of contract. The consequences of

both full performance and breach of contract can be described in four parts:

Complete Performance—No Breach of Contract

This type of contract is the most common method of discharge—the situation in which the parties

simply do precisely what the contract calls for.When fully performed, a contract has been executed.

Substantial Performance—Nonmaterial Breach of Contract

In some cases complete performance is not achieved because of minor deviations from the

agreed-on performance. Most notably in construction contracts and in many personal or

professional service contracts, the courts have recognized the doctrine of substantial performance.

Assuming that the variation was not the result of bad faith, the court will enforce the contract as

written, but require a deduction for any damages sustained as a consequence of the imperfect

performance.

Unacceptable Performance—Material Breach of Contract

When a party falls beneath substantial performance and does not have a lawful excuse for that

failure, a material breach of contract has occurred. A material breach discharges the nonbreaching

party’s duties and permits that party to sue for damages or rescind the contract and seek

restitution.

Duke University Breached Its Contract with a Student?

Andrew Giuliani was recruited by Coach Rod Myers to play golf at Duke University. Coach Myers

allegedly said that Giuliani would be given “life-time access” to Duke’s “state-of-the-art” training

facilities when he became a Duke alum, and that he would be able to compete for the opportunity

to play against the best golfers in the NCAA. Giuliani alleged that Duke “promised to provide [Mr.

Giuliani] with various educational services, lodging, and a right of access to the Athletic

Department’s Varsity program and facilities.” Coach Myers unexpectedly passed away in the spring

of 2007 and Coach O.D. Vincent took over. Vincent decided to cut the squad in half and announced

that he was canceling Giuliani’s golf eligibility. Vincent pointed to several incidents of alleged bad

behavior by Giuliani. Vincent then presented Giuliani with a written agreement setting out the steps

that would have allowed Giuliani to rejoin the team. Giuliani refused to sign the agreement. Giuliani

then filed a breach of contract suit against Duke University and Vincent.

Source: Giuliani v. Duke University, 2010 U.S. Dist. LEXIS 32691 (M.D.N.C.).

Advance Refusal to Perform—Anticipatory Breach of Contract

Sometimes one of the parties, before performance is due, indicates by word or deed that she or he

will not perform. Normally an anticipatory breach (also called anticipatory repudiation) is the

equivalent of a material breach, discharging the nonbreaching party from any further obligations

and allowing the nonbreaching party to sue for damages, if any.

A. When Has a Breach of Contract Occurred? When Should the Law Intervene in a Contract?

Legal Briefcase: Castillo v. Tyson 701 N.Y.S. 2D 423 (N.Y.S. Ct. App. Div. 2000)

Discharge by Lawful Excuses (for Nonperformance)

Sometimes contracts are discharged lawfully even in the event of nonperformance. This can occur

when performance is either impossible or impractical.

Impossibility

After agreement is reached but performance is not yet due, circumstances may be so altered that

performance is a legal impossibility. In such situations nonperformance is excused. Impossibility

here refers not simply to extreme difficulty but to objective impossibility; that is, the contracted-for

performance cannot be accomplished by anyone. [For more on impossibility of performance, see

[http://www.west.net/~smith/imposbl.htm]

Commercial Impracticability

The UCC’s commercial impracticability standard is more easily established than the impossibility

doctrine of the common law, but note that only exceptional and unforeseeable events fall within the

impracticability excuse for nonperformance. Mere changes in market conditions do not give rise to

commercial impracticability.

Discharge by Agreement

Contractual discharge is sometimes achieved by a new agreement arrived at after entering the

original contract. These agreements take a variety of forms, one among them being—accord and

satisfaction. Parties reach an accord when they agree to a performance different from the one

provided for in their contract. Performance of the accord is called satisfaction, at which point the

original contract is discharged. A binding accord and satisfaction must spring from a genuine

dispute between the parties, and it must include consideration as well as all of the other ingredients

in a binding contract..

Discharge by Operation of Law

Under some circumstances, contractual duties are discharged by the legal system itself. Among

those possibilities: (1) The contractual responsibilities of a debtor may be discharged by a

bankruptcy decree (2) Each state has a statute of limitations that specifies the time within which a

performing party can initiate a lawsuit against a nonperforming party.

III. Remedies

A. Remedies in Law

The general goal of remedies law is to put the parties in the position they would have occupied had the

contract been fulfilled. Normally the best available substitute for actual performance is monetary

damages.

Compensatory Damages

In brief, the plaintiff in a breach of contract action is entitled to recover a sum equal to the actual

damage suffered. The plaintiff is compensated for her losses by receiving a sum designed to “make

her whole,” to put her where she would have been had the contract not been breached.

Sale of Goods—a breach involving a sale of goods is governed by the UCC. Typically the measure of

compensatory damages would be the difference between the contract price and the market price of the goods

at the time and place the goods were to be delivered (see UCC 2-708 and 2-713).

Consequential Damages

The victim of a breach may be able to recover not just the direct losses from the breach but also

any indirect losses that were incurred as a consequence of that breach. Such consequential

damages are recoverable only if they were foreseen or were reasonably foreseeable by the

breaching party.

Not a Fan?

Construction worker Brent Loveland showed up at the home of Oklahoma State University football coach

wearing a University of Oklahoma Sooners baseball T-shirt. He was fired from the job that day. Loveland sued

Gundy and his wife, Kristen, alleging, among other things, breach of contract. Loveland’s lawsuit sought the

$80,600 that he was allegedly to be paid for the 13-week job, and the potential income of over $30,000 he lost

because he turned down other jobs owing to his commitment to work on the Gundy home.

Incidental Damages

The costs incurred by the nonbreaching party in arranging a substitute performance or otherwise

reducing the damages sustained because of the breach are recoverable as incidental damages.

Nominal Damages

In some cases of breach, the court will award only an insignificant sum because the nonbreaching

party has suffered no actual damages. The point of nominal damages is to illustrate the

wrongfulness of the breach.

Punitive Damages

Sometimes when the breaching party’s conduct is particularly reprehensible, the court will penalize

that wrongful behavior by awarding of punitive damages to the injured party. Normally punitive

damages cannot be awarded in breach of contract cases except when provided for by statute or

when the breach is accompanied by a tort such as fraud.

Rescission and Restitution

In some instances including a material breach, mistake, fraud, undue influence, and duress, the

wronged party may rescind (undo) the contract. The effect of a contract rescission is to return the

parties to the positions they occupied before they entered the agreement. Generally, both parties

must then make restitution to each other by returning whatever goods, property, and so forth were

transferred under the contract or an equivalent amount of money.

Mitigation

The law imposes expectations on the victim (the non breaching party). Specifically, the

nonbreaching party is required to take reasonable steps toward mitigation—that is, to minimize her

or his damages.

Liquidated Damages

The law also offers the opportunity to provide some control over the penalty for breach by including

in the contract a liquidated damages clause. Here the individual and the other party to the contract

agree in advance about the measure of damages should one default on his or her duties. That

clause is fully enforceable so long as it is not designed to be a penalty but rather a good faith effort

to assess in advance an accurate measure of damages.

B. Remedies in Equity

Where justice cannot be achieved via money damages alone, the courts will sometimes impose

equitable remedies. The chief forms of equitable remedy in contract cases are specific performance,

injunction, reformation, and quasi-contract.

Specific Performance

In unusual circumstances the court may order the breaching party to remedy its wrong by

performing its obligations precisely as provided for in the contract. Normally that specific

performance is required only where the subject matter of the contract is unique and thus cannot be

adequately compensated with money. Examples of such subject matter might include a piece of

land, an art work, or a family heirloom. Normally the courts will not grant a specific performance

remedy in personal service contracts (such as an agreement by a cosmetic surgeon to perform a

face-lift).

Injunction

An injunction is a court order that may either requires or forbid a party to perform a specified act.

Injunctions are granted only under exceptional circumstances. Perhaps the most common of those

are the noncompetition agreements.

Reformation

Reformation is an equitable remedy that permits the court to rewrite the contract where it

imperfectly expressed the parties’ true intentions. Typically such situations involve a mutual mistake

or fraud.

Quasi-Contract

What happens if one party has conferred a benefit on another, but a contract has not been created

because of a failure of consideration, the application of the Statute of Frauds or something of the

sort? To prevent unjust enrichment, the court might then imply a contract as a matter of law.

Practicing Ethics: Bloggers Work for Free?

Liberal journalism blog aggregator and opinion site The Huffington Post was sued in a class action

in 2011 on the grounds that the blog had failed to pay the more than 9,000 bloggers who had

provided content for the blog over a period of years. AOL purchased The Huffington Post earlier in

2011 for $315 million; the bloggers sought approximately a third of the purchase price, asserting

their contributions had made The Huffington Post that valuable an acquisition. In 2012, a federal

judge dismissed the lawsuit, concluding that the bloggers had not expected money in return for

their contributions to The Huffington Post.

Source: Chad Bray, “Huffington Post Wins Dispute with Unpaid Bloggers,” Wall Street Journal Law

Blog, March 30, 2012 [http://

blogs.wsj.com/law/2012/03/30/huffington-post-wins-disputewith-unpaid-bloggers/]; and Stephanie

Francis Ward, “Huffington Post Bloggers Sue, Seeking Payment for Writing,” ABA Journal, April 12,

2011

[http://www.abajournal.com/news/article/huffpo_bloggers_sue_seeking_payment_for_writing/].