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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/].
