Chapter Nine | Genuineness Of Assent

In this chapter, we shall consider four areas of contract law that deal with evaluating the nature of assent given by a party to a contract. Questions relating to the genuineness of assent are usually raised after a contract has been entered into, either as a defense to a breach of contract or in an attempt by a party to rescind a contract, asserting that some problem existed at the beginning of a contract that may have precluded genuine assent. The four areas we shall consider are: 1) unilateral and bilateral mistake; 2) duress; 3) undue influence; and 2) misrepresentation and fraud.

Mistake

There may be a case where one or both of the parties to a contract claim that a mistake has been made in the formation of an agreement which would preclude the existence of a true “meeting of the minds” between the parties. It may also be alleged that the words of a contract do not convey the real intent of the parties.

There are two types of mistake. A unilateral mistake is a mistake made by one party in a contract; a bilateral or mutual mistake is made by both parties in the contract. A mistake may be made as to facts or may be made as to the identity of the subject matter of the contract, a matter of judgment as to the value of an item, or the quality of an item. Generally speaking, only a mistake as to a matter of fact, and not a mistake in judgment—sometimes called “buyers’ or sellers’ remorse”—will permit a party to rescind a contract on the ground of a mistake.

A frequently cited example of a unilateral mistake involves an error in a bid made by a construction contractor, perhaps caused by a computational or mathematical error or a misunderstanding of the terms of the invitation to bid. In general, a unilateral mistake does not afford a party any right to rescind the contract unless the other party knows or has reason to know that a mistake has been made; unless enforcement of the contract against a party would be oppressive or might result in an unconscionable result; and where rescission of the contract would impose no substantial hardship on the innocent party.

A classic case from 1898 exemplifies the harsh rule found in the common law. Odell Construction Co. made a bid to install plumbing in an apartment building. When the president of the company, Herbert Odell, added up the costs on the job, he and his secretary apparently forgot to include figures for the pipe fittings. Because of this omission, Odell’s bid was $6,500 below those of the other bidders and, of course, it was accepted by the prime contractor, Sunspan, Inc. Since Odell had made a unilateral mistake, the court would not afford a remedy to Odell under these circumstances.

Under a more modern view, however, exceptions to the general rule have been recognized. Reflecting our earlier discussion, many courts will not apply the unilateral mistake rule when the other party to the contract knows or should have known that a mistake was made, or where the mistake was the result of an inadvertent computational or mathematical error, and not as a result of gross negligence. Thus, the “blundering party” will be permitted to seek to reform or rewrite the contract, seek its rescission, or might be able to assert a defense against enforcement of the contract. Remember, however, that the mistake must be palpable; that is, the mistake must be known or obvious to the party receiving the bid.

Example

A construction company bids on a golf course addition. In marking up its bid, the president fails to take into account a major component. The bid submitted was fully 20% below what it should have been. In such a case, a court might conclude that since the bid received was “far below” that which was expected, the receiving party should have known that a mistake had been made. In these circumstances, it is incumbent on the receiving party to check to see if the bid was correct. (Sant­ucci v. City of Chicago). Contrast this decision to Odell.

Where both parties to a contract share a common assumption about an important fact upon which they have based their bargain and that assumption turns out to be false, the bargain may be avoided on the basis of a mutual mistake. The classic case of a mutual mistake of fact involved a ship named “Peerless” that was scheduled to leave Bombay with a shipment of Surat cotton goods. The case of Raffles­ v. Wichelhaus discusses the question of a mutual mistake of fact. Notice also the unusual form of the case, stated under English common law.

 

Case Summary

Raffles v. Wichelhaus And Another

906, 159 Eng. Rep. 375 (1864) Court of Exchequer (Per Curiam)

BACKGROUND AND FACTS

The defendant purchased a shipment of Surat cotton from the plaintiff “to arrive ex Peerless’ from Bombay.” The defendant expected the goods to be shipped on the Peerless sailing from Bombay in October. The plaintiff expected to ship the goods on another Peerless, which sailed from Bombay in December. By the time the goods arrived and the plaintiff tried to deliver them, the defendant was no longer willing to accept them.

Declaration.

For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, that the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit. 125 bales of Surat cotton, guaranteed middling fair merchant’s Dhollorah, to arrive ex “Peerless” from Bombay; and that the cotton should be taken from the quay, and that the defendants would pay the plaintiff for the same at a certain rate, to wit, at the rate of 17d. per pound, within a certain time then agreed upon after the arrival of the said goods in England. Averments: that the said goods did arrive by the said ship from Bombay in England, to wit, at Liverpool, and the plain­tiff was then and there ready, and willing and offered to deliver the said goods to the defendants. Breach: that the defendants refused to accept the said goods or pay the plaintiff for them.

Plea.

That the said ship mentioned in the said agreement was meant and intended by the defendants to be the ship called the “Peerless,” which sailed from Bombay, to wit, in October; and that the plaintiff was not ready and willing and did not offer to deliver to the defen­dants any bales of cotton which arrived by the last mentioned ship, but instead thereof was only ready and willing and offered to deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship, which was also called the “Peerless,” and which sailed from Bombay, to wit, in December.

There is nothing on the face of the contract to show that any particular ship called the “Peerless” was meant; but the moment it appears that two ships called the “Peerless” were about to sail from Bombay there is a latent ambiguity, and parol evidence may be given for the purpose of showing that the defendant meant one “Peer­less,”­ and the plaintiff another. That being so, there was no consensus ad idem, and therefore no binding contract.

The judgment was for the defendants.

Duress

Duress involves a claim of the use of coercive force or a threat of force against a party to a contract. Duress may be used either as a defense to an action for breach of con­tract or as grounds for rescission of a contract. In determining whether duress exists, a court will evaluate the nature of the threat against a party to a contract. Two types of duress were recognized under common law: simple duress (also called economic duress or “duress of goods”); and actionable duress, which is sometimes known as “legal duress” to distinguish it from simple duress.

Example

Crotty and Schneeman are involved in an automobile accident on South Orange Avenue. Crotty agrees to settle the case for $5,000, but Schneeman balks. Crotty’s attorney sends Schneeman a letter demanding the payment of $5,000 or he will immediately file a negligence suit and seek damages in the amount of $100,000. Schneeman agrees but later backs out of the deal, claiming that he entered the contract under duress. Is he correct? Suppose that Crotty had threatened Schneeman with a criminal prosecution for driving without insurance? Would that change the result?

Generally, a threat to file a civil suit where there are “good grounds” for the suit (e.g., where a breach has actually occurred or where a required or timely payment has not been made), would not constitute actionable duress and would be classified as simple or economic duress.

Actionable duress, on the other hand, includes a threat of physical violence or force (“I’m going to make you an offer you can’t refuse”); a threat to initiate a criminal prosecution; a threat to wrongful seize or withhold property; or threats of “other wrongful acts” that are in some way improper, illegal, immoral, or unconscionable.

Example

The “Flamingo Kid” notices Bert cheating in a game of gin rummy. He approaches Bert and says that unless Bert agrees to hire him as a salesperson in his car dealership, he will expose his cheating to the Club Board of Directors. In fear of imminent exposure, Bert signs the employment contract. Can Bert claim duress and void the contract of employment?

Economic duress will not generally be found where one of the parties is in desperate need of the subject matter of the contract or is being economically pressured into “making a deal,” and the other party takes advantage of that need or desire in order to drive a very hard, even one-sided bargain.

However, the abusive or oppressive threat to deploy pressure has been recognized by some courts as constituting economic duress, if the parties were truly “mismatched” and the victim’s will has been “overmatched.” Does this sound like an application of the rule of unconscionability?

Example

Sabitus falls six months behind on his home mortgage note. The bank contacts him and states that unless he agrees to refinance the mortgage at a higher rate (14% as opposed to 6%); they will “pull the mortgage” and will foreclose on it. Sabitus agrees to refinance, but later seeks to avoid the refinanced mortgage on the ground that he entered the agreement under duress. Is Sabitus correct?

Finding “economic distress” will generally not afford a party a remedy where “actionable distress” will provide such a remedy.

Undue Influence

Closely related to the concept of duress is that of undue influence. The defense of undue influence originated in a court of equity as a ground for setting aside a transaction that was imposed by a dominant party over a subservient party. Undue influence involves the deployment of over-persuasive bargaining tactics designed to overcome the will of a party. There are two broad classes of undue influence. In the first instance, Restatement Section 497 notes that one party uses a dominant psychological position in an unfair manner to induce the subservient party to consent to an agreement to which he or she would not otherwise have consented. In the second instance, a party uses a position of trust and confidence to unfairly persuade the other party to enter into a transaction. The party being taken advantage of does not, in reality, exercise free will in entering into a contract. Many allegations of undue influence arise after the death of the person alleged to have been unduly influenced. In this scenario, relatives of the deceased will typically seek to set aside a will or an inter vivos (living) transfer or gift of property in what is termed a “wills contest.”

Generally speaking, two conditions must be present in order to prove undue influence:

  1. Susceptibility, that is, the person allegedly being influenced must be open to the influence caused by conditions such as old age, infirmity, mental or physically weakness, handicap, psychological dependency, etc.; and
  2. Opportunity, that is, a special relationship of trust and confidence exists between the parties. This relationship may encompass traditional fiduciary or confidential relationships such as: attorney-client, trustee-beneficiary, guardian-ward, administrator-legatee; or non-traditional relationships such as: husband-wife, parent-child, physician-patient, nurse-patient, pastor-parishioner, funeral director-putative customer, or even a good friend-aged or confused individu­al.

The following elements, found in Odorizzi v. Bloomfield School District, 246 Cal. App. 2d 123 (1966), are common circumstances leading to a finding of undue influence:

  • Discussing the bargain at an unusual or inappropriate time;
  • Consummation of the transaction at an unusual place;
  • Insistence that the transaction be concluded at once, with extreme emphasis on the risks or disadvantages of delay;
  • The use of multiple persuaders;
  • The absence of any independent third party advice;
  • Statements discouraging a weaker party to consult an independent advisor.

According to a rule enunciated in the seminal case of Wenger v. Rosinsky, 192 A.2d 82 (1963), once the prima facie elements of susceptibility and opportunity are shown, the burden of proof is shifted to the dominant party to prove, by clear and convincing proof, that:

  • There was no abuse of confidence;
  • The transaction was done in “good faith”;
  • The transaction (perhaps a gift or a provision of a will) was made in a manner that was free, independent, and voluntary.

Undue influence may also be raised as a defense to enforcement of a contract if the transaction sought to be enforced was the product of unfair persuasion. In equity, the usual remedy once undue influence had been proven was cancellation of any instrument procured by undue influence, avoidance of the transaction, and what a court of equity would term “restoration of the status quo ante.”

Misrepresentation and Fraud

It may be said that fraud and misrepresentation represent a “curious mixture” of contract and tort law. Under the common law, an action for fraud was technically an action in tort (deceit) and not in contract. However, as fraud may affect the genu­ineness of a party’s ability to assent to a contract, fraud is an important contract consideration. Cases involving fraud can normally be divided into two main categories: (1) the defrauded party obtains what he bargained for, but because of a misrepresentation, the item is worth less than he had reason to expect; (2) the defrauded party obtains something substantially different from what he was led to expect. In these cases, the defrauded party has been deprived of the “benefit of his or her bargain” and thus will ordinarily be sufficient to permit a disaffirmance of the contract.

There are three types of fraud under the common law. Fraud in the execution is a real or universal defense rendering a contract void. It consists of a deception that has the consequence of preventing a party from realizing that a contract has been created. A second type of fraud may occur when an oral contract or understanding has been reduced to a writing. Here, the victim of fraud trusts that their counterpart will reduce the oral agreement to a written expression. Acting on the assurance that this has been done faithfully, the victim signs the writing without reading it. Depending on the jurisdiction, the innocent party may be permitted to assert the personal defense of fraud, ignoring the fact that the fraud could have been uncovered had the victim taken the step to read the document before signing it. (However, it should be recognized that the failure to read a document may not be raised as a defense to breach in most jurisdictions and thus is clearly a minority view.)

The third type of fraud, fraud in the inducement, occurs where consent to a bargain is induced by lies, misstatements, or half-truths. Fraud in the inducement is a personal defense, which renders the contract voidable at the option of the innocent victim.

The basic distinction between fraud and misrepresentation lies in the presence or absence of scienter, which is defined as the intent to deceive. Scienter arises either from the knowl­edge of falsity or the reckless disregard of the truth of a statement. We may see the term “innocent misrepresenta­tion” used to describe the situation where a party has made a misrepresentation but has not done so with “scienter” or intent. The misrepresentation is termed as “innocent” only in the sense that it was not done with scienter or intent. It is still actionable.

Issues Of Damages

Depending on the jurisdiction, if an innocent misrepresenta­tion has occurred, the innocent party may rescind the contract but may not be able to seek damages for the innocent misrepre­sentation. In other jurisdictions, if a court finds that either fraud or misrepresentation was committed, the innocent party may be permitted to rescind the contract and will be restored to the original, pre-contract condition, but will also be permitted to sue for compensatory damages. The compensatory damages will be computed on the basis of the difference between the value of the item as represented or promised in the contract and the value of the item received by the innocent party. Additionally, in some circum­stances, an innocent party may seek punitive damages to punish the party who committed fraud (but not misrepresentation) for their bad behavior. In many cases, the actual damages will be trebled to effect this prospective.

Elements Of Proof

Four elements are necessary to prove contract fraud: 1) a false representation of a material fact; 2) scienter (referring to intent); 3) justifiable reliance; and 4) proof of damages.
A material fact is defined as any fact that is important in inducing a party to enter into a contract. According to the Restatement, § 470(2), materiality exists whenever “the misrepresentation would be likely to affect the conduct of a reasonable man.” There are several special aspects or rules concerning this first element of proving fraud relating to the issue of a material fact.

Example

Margot takes her watch to a jeweler for an appraisal. The jeweler tells Margot that the watch is “not a very good” one and that “in my opinion, it is worth about $75.” Based upon this opinion, Margot sells the watch to Babcock. It is an interesting question whether Margot might be able to rescind her contract with Babcock on a theory of bilateral or mutual mistake; however, if such an action were not possible, Margot might sue the jeweler for fraud. Even though the jeweler has stated an opinion, that opinion would be action­able because the jeweler is an expert and clearly Margot has relied on the jeweler’s advice when selling the watch to Babcock. 

Misrepresentation of Fact

Relief may be granted for a misrepresentation of fact, and not for a statement of opinion. However, the distinction between “fact and opinion” is sometimes rather difficult to maintain. A statement or a representation or prediction of a future fact, or a statement of an opinion is gener­ally not actionable as fraud. As a practical matter, a seller may be expected to employ a certain amount of “puffing” or “trade talk” without incurring liability for fraud. However, a statement of opinion given by an expert (a disinterested professional) to an unsophisticated purchaser may give rise to a cause of action for fraud. This opinion may become one of fact, depending on the circumstances of the case.

The case of Vokes v. Arthur Murray illustrates how dance instructors, who made various statements concerning Vokes’ dance potential, committed fraud. It will be one of the most memorable and interesting cases from your study of contract law. Note especially the use of the English language by the judge. Before you read Vokes, it might be a good idea to have a thesaurus close by! Do you believe that the statements were mere opinions? Why should J.P. Davenport and Arthur Murray be held liable for the statements of one of its instructors? Do you think that Mrs. Vokes bears any personal responsibility here?

 

Case Summary

Vokes v. Arthur Murray, Inc.

District Court of Appeal of Florida, 2d District, 212 So. 2d 906 (1968)

BACKGROUND AND FACTS

The defendant, Arthur Murray, Inc., operated dancing schools throughout the nation through local franchised operators, one of whom was the defendant. The plaintiff, Audrey E. Vokes, a widow without family, wished to become “an accom­plished dancer” to find “a new interest in life.” In 1961 she was invited to attend a “dance party” at J. P. Davenport’s “School of Dancing.” Vokes went to the school and received elaborate praise from her instructor for her grace, poise, and potential as “an excellent dancer.” The instructor sold her eight half hour dance lessons for $14.50 each, to be utilized within one calendar month.

Subsequently, over a period of less than sixteen months, Vokes bought a total of fourteen dance courses, which amounted to 2,302 hours of dancing lessons for a total cash outlay of $31,090.45, all at Davenport’s school.

PIERCE, Judge

These dance lesson contracts and the monetary consideration therefore of over $31,000 were procured from her by means and methods of Davenport and his associates which went beyond the unsavory, yet legally permissible, parameter of “sales puffing” and intruded well into the forbidden area of undue influence, the suggestion of falsehood, the suppression of truth, and the free exercise of rational judgment, if what plaintiff alleged in her complaint was true. From the time of her first contact with the dancing school in February, 1961, she was influenced unwittingly by a constant and continuous barrage of flattery, false praise, excessive compliments, and panegyric encomiums, to such extent that it would be not only inequitable, but unconscionable, for a Court exercising inherent chancery power to allow such con­tracts to stand.

She was incessantly subjected to overreaching blandishment and cajolery. She was assured she had “grace and poise”; that she was “rapidly improving and develop­ing in her dancing skill”; that the additional lessons would “make her a beautiful dancer, capable of dancing with the most accomplished dancers”; that she was “rapidly progressing in the development of her dancing skill and gracefulness”, etc., etc. She was given “dance aptitude tests” for the ostensible purpose of “determining” the number of remaining hours of instructions would be needed by her from time to time.

At one point she was sold 545 additional hours of dancing lessons to be entitled to award of the “Bronze Medal” signifying that she had reached “the Bronze Standard,” a supposed designation of dance achievement by students of Arthur Murray, Inc.

Later she was sold an additional 926 hours in order to gain the “Silver Medal,” indicating she had reached “the Silver Standard,” at a cost of $12,501.35.

At one point, while she still had to her credit about 900 unused hours of instructions, she was induced to purchase an additional 24 hours of lessons to partici­pate­ in a trip to Miami at her own expense, where she would be “given the opportunity to dance with members of the Miami Studio.

She was induced at another point to purchase an additional 126 hours of lessons in order to be not only eligible for the Miami trip but also to become “a life member of the Arthur Murray Studio,” carrying with it certain dubious emoluments, at a further cost of $1,752.­30.

At another point, while she still had over 1,000 unused hours of instruction she was induced to buy 151 additional hours at a cost of $2,049.00 to be eligible for a “Student Trip to Trinidad,” at her own expense as she later learned.

Also, when she still had 1100 unused hours to her credit, she was prevailed upon to purchase an additional 347 hours at a cost of $4,235.74, to qualify her to receive a “Gold Medal” for achievement, indicating she had advanced to “the Gold Standard.”

On another occasion, while she still had over 1200 unused hours, she was induced to buy an additional 175 hours of instruction at a cost of $2,472.75 to be eligible “to take a trip to Mexico.”

Finally, sandwiched in between other lesser sales promotions, she was influenced to buy an additional 481 hours of instruction at a cost of $6,523.81 in order to “be classified as a Gold Bar Member, the ultimate achievement of the dancing studio.”

All the foregoing sales promotions, illustrative of the entire fourteen separate contracts, were procured by defendant Davenport and Arthur Murray, Inc., by false representations to her that she was improving in her dancing ability, that she had excellent potential, that she was responding to instructions in dancing grace, and that they were developing her into a beautiful dancer, whereas in truth and in fact she did not develop in her dancing ability, she had no “dance aptitude,” and in fact had difficulty in “hearing the musical beat.” The complaint alleged that such representa­tions to her “were in fact false and known by the defendant to be false and contrary to the plaintiff’s true ability, the truth of plaintiff’s ability being fully known to the defendants, but withheld from the plaintiff for the sole and specific intent to deceive and defraud the plaintiff and to induce her in the purchasing of additional hours of dance lessons.” It was averred that the lessons were sold to her “in total disregard to the true physical, rhythm, and mental ability of the plaintiff”. In other words, while she first exulted that she was entering the “spring of her life”, she finally was awakened to the fact there was “spring” neither in her life nor in her feet.

It is true that “generally a misrepresentation, to be actionable, must be one of fact rather than of opinion”. But this rule has significant qualifications, applicable here. It does not apply where there is a fiduciary relationship between the parties, or where there has been some artifice or trick employed by the representor, or where the parties do not in general deal at “arm’s length” as we understand the phrase, or where the representee does not have equal opportunity to become apprised of the truth or falsity of the fact represented.

” * * * A statement of a party having * * * superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.”

It could be reasonably supposed here that defendants had “superior knowledge” as to whether plaintiff had “dance potential” and as to whether she was noticeably improving in the art of terpsichore. It would be a reasonable inference from the untended averments of the complaint that the flowery eulogists heaped upon her by defendants as a prelude to her contracting for 1944 additional hours of instruction in order to attain the rank of the Bronze Standard, thence to the bracket of the Silver Standard, thence to the class of the Gold Bar Standard, and finally to the crowning plateau of a Life Member of the Studio, proceeded as much or more from the urge to “ring the cash register” as from any honest or realistic appraisal of her dancing prowess or a factual representation of her progress.

” * * * (W)hat is plainly injurious to good faith ought to be considered as a fraud sufficient to impeach a contract,” and that an improvident agreement may be avoided” * * * because of surprise, or mistake, want of freedom, undue influence, the suggestion of falsehood, or the suppression of truth.” (Emphasis supplied.)

Judgment and Remedy.

The court reversed the trial court’s dismissal of appellant dance student’s fourth amended complaint because it held that the complaint set forth a cause of action for undue influence and misrepresentation as grounds for avoiding the contracts and that appellant was entitled to her day in court.

Why should J.P. Davenport and Arthur Murray be held liable for the statements of one of its instructors? Do you think that Mrs. Vokes bears any personal responsibility here?

Mrs. Vokes’ complaint, which had originally been dis­missed at the trial court, was reinstated, and the case was returned to the trial court to allow Vokes to prove her case.

Statements of Quality

Statements of quality or value or commendations, using such adjectival phrases as “good,” “adequate,” “great,” “successful,” “the best,” “the finest quality,” etc., are generally not action­able. However, there may be circumstances where such state­ments may be actionable, as where the parties are not acting “on equal footing” or where one party has superior knowledge about the true facts of a situation. In such a case, a court may find that the “opinion line has crossed into the law of fact.” (Wat Henry Pontiac v. Bradley, 202 Okl. 82 (1949)).
The case of Sellers v. Looper concerns the phrase “a good well.” Note the use of the JNOV after the jury had returned its verdict. What is a JNOV? How and why is it used? Refresh your memory of the steps in a civil law suit.

 

Case Summary

Sellers v. Looper

Supreme Court Of Oregon, 264 Ore. 13; 503 P.2d 692 (1972)

BACKGROUND AND FACTS

This is an action for damages based upon fraudulent misrepresentation pertaining to a well on property the plaintiffs purchased from defendants. The trial court found for plaintiffs. On motion, the trial court found JNOV and plaintiffs appealed.

Defendants argue here that the plaintiff had not submitted evidence sufficient to establish fraudulent representations to induce plaintiffs to enter into the contract to purchase the property.

The plaintiffs contend: Statements regarding quality, value or the like may be considered misrepresen­tations of fact where the parties are not on equal footing and do not have equal knowledge or means of knowledge “and the decision of whether a representation is of fact or of opinion is always left to the jury” and therefore the order setting aside the jury’s verdict should not have been entered.

* * * Defendant’s argue that the representation of a “good well” was a mere inclusion of adjectival words of commendation or opinion and therefore, not actionable.

In Holland v. Lentz, we held:

* * * It is recognized that statements of opinion regarding quality, value or the like, may be considered as misrepresentations of fact, that is, of the speaker’s state of mind, if a fiduciary relationship exists between the parties, as for example, representations of value of a real estate broker to his princi­pal; or where the parties are not on equal footing and do not have equal knowledge or means of knowledge.

Prosser stated: * * * misrepresentation will not lie for misstate­ments of opinion as distinguished from those of fact * * *
The evidence discloses that defendants owned a house and acreage located in Illinois Valley near the city of Cave Junction, Oregon. In May of 1969, defendants executed a listing agreement to sell the property with Mrs. McLean, a real estate broker. This agreement included information given by the defendants to Mrs. McLean. Mrs. McLean testified:

I asked the Loopers: Do you have a good well * * * and the comment came back, “Yes, we have a good well

* * *.”

On May 28, 1969, plaintiffs contacted Mrs. McLean.

Q: At the time you told them that there was a good well on the property, did you tell them that for the purpose of inducing them to buy the Looper’s property?

A: A good well on any property is a tremendous inducement. If you have a good well, that’s a selling point…

Q: At the time you told them that there was quote, a good well on the property, what did you mean to convey by that, what meaning did you mean to get across to the prospective buyers?

A:* * * that it was an adequate well, there was plenty of water * * *

Q: Plenty of water for what?

A: Adequate for household, and usually that includes a modest garden.
In the early evening of July 28, 1969, the parties met and inspected the house and “looked at the well and pump house.” No specifications as to the depth of the well or how many gallons it would pump per hour were given the plaintiffs and the realtor did not have this information. The sale was later consummated.

On August 15, 1969, plaintiffs moved onto the property and on August 22, 1969, the well went dry. Plaintiffs drilled two additional wells but found no water.
We conclude that there was sufficient evidence to submit the case to the jury. A reasonable person could believe that a “good well” meant a well with adequate water for family household use and the plaintiffs relied on this representation.

The evidence shows that defendants knew the water in the well got low in the Fall of the year and they had to be careful in flushing the indoor toilet or the well would probably go dry. The plaintiffs were not on equal footing with the defendants and did not have equal knowledge of the adequacy or lack of adequacy of the water in the well. The jury returned a verdict for the plaintiffs and “These matters are ordinarily for the determination of the jury.”

* * *”

Reversed With Instructions to Reinstate the Jury’s Verdict.

Active Concealment

Active concealment occurs where a party, through its conduct, conceals the true nature of a situation. Ac­tions such as turning back the odometer of a car, adding oil to the crankcase of a car where the oil would have otherwise run out, causing the engine to seize, painting over a crack in the ceiling or wall, and gluing together pieces of a set of china, are examples of active concealment. This is often termed the “half truths” rule since a party to a contract will often disguise the true nature of a transaction. Consider these two examples.

Example

Capone agrees to purchase a collie puppy from Spindell. The puppy is blind in one eye but when Spindell shows the puppy to Capone, he skillfully keeps the puppy’s head turned so that Capone does not notice the defect. Has Spindell committed fraud through concealing the true nature of the puppy’s eye condition?

Example

Paul Hemmeter purchased a home in South Bend, Indiana. When Paul notices that water is pooling in his basement, he calls his neighbor to help in the bailing out operation. His neighbor tells Paul: “Gee, that’s funny. There used to be a big crack in the basement floor. Mrs. Lovejoy (the former owner) must have painted over it.” Has Mrs. Lovejoy commit­ted fraud? What theory? Evaluate.

Misrepresentation of Law

Under the common law, in the absence of a fiduciary relationship, a statement made by a person con­cerning a matter of law was not actionable as fraud even if untrue because of a curious rule that “everyone was presumed to know the law.” The rule established was that a statement of the law governing a given set of facts is merely the expression of opinion by the speaker absent a fiduciary relationship. No person ought to rely on such opinion without further research.

The case of Puckett Paving v. Carrier Leasing exemplifies the common law rule concerning statements as to a matter of law. Note that in this case, the court stated that a different result might have been obtained had there been a fiduciary relation­ship (a special relationship of trust and confidence) between the parties.

 

Case Summary

Puckett Paving v. Carrier Leasing Corp.

Supreme Court of Georgia, 236 Ga. 891; 225 S.E.2d 910 (1976)

BACKGROUND AND FACTS

Carrier brought an action to recover four heavy-duty trucks from Puckett. The pleadings and the evidence show that Puckett was in possession of the vehicles under the terms of two certain leases providing for monthly payments in stated sums for 44 months.

Puckett had an option to purchase same for a stated price after all monthly payments had been made; that Puckett had made all monthly payments but refused to purchase the vehicles or to return them. Carrier elected to recover the vehicles rather than damages.

Puckett filed an answer and cross claim alleging that the contracts were induced by fraud in that an agent of Carrier “assured defendant that the lease agreements entered into would be considered a lease by the IRS” but that the IRS considered the same to be a sale and not a lease, resulting in damage to Puckett. The trial Court ordered Puckett to return the vehicles.

We affirm. Assuming such statements were made by an agent of Carrier to Puckett, they could only have been expressions of an opinion as to how the IRS had treated such agreements or would treat them in the future.

“Where no fiduciary relationship exists, misrepre­sentations as to a question of law will not constitute remedial fraud, since everyone is presumed to know the law and therefore cannot in legal contemplation be deceived by erroneous statements of law, and such representations are ordinarily regarded as mere expres­sions of opinion.”

Affirmed.

Note that in this case, the court stated that a different result might have been obtained had there been a fiduciary relationship (a special relationship of trust and confidence) between the parties.

As times changed, a new rule has developed. Today, most courts would hold that a profession­al who gives an opinion as to a matter of law in a profes­sional setting, would be responsible for the truth of the statement made. Professionals such as commercial lessors, architects, financial planners, real estate brokers, tax professionals – those professions which require a greater or more substantial knowledge of the law than possessed by a layperson – would fall within the rule of law found in the case of Yorke v. Taylor, 356 Mass. 42 (1969). Would the application of the rule in Yorke v. Taylor have changed the result in Puckett Paving?

Scienter

The second element of a cause of action for fraud is that of scienter—either knowledge of falsity or reckless disre­gard of the truth. Scienter implies an intent to deceive, or a “guilty mind,” and is required to prove fraud. Without proof of scienter, a plaintiff will only be able to prove misrepresentation and will certainly not be eligible to receive punitive damages.

In most cases, scienter will be found in the words or actions of a party. An important question arises: When might silence constitute a basis of an action for fraud?

Under the common law, in a typical “arms length” contract negotiation or business transaction, neither party had the positive duty to come forward with facts and disclose them to the opposite party. Because the par­ties were operating “at arms length,” no “duty to speak” existed. Parties were expected to take steps to protect their own interests.

Example

Fidelis Brokerage House contacts its clients using a phone bank or “boiler room” operation. To its potential customers in New Jersey, it has recommended the purchase of shares in the Fibex Corporation. To potential clients in California who already own Fibex stock, it has recommended that they sell their shares. Is there a duty of full disclosure? Has Fidelis committed fraud? What basis?

This common law rule has been supplanted in many cases by decisions that have established a “duty to speak.” Some of the circumstances establishing a “duty to speak” include:

  • In the sale of a home or other real property, the seller must disclose material “latent defects,” that is, any defect that would not be readily discovered upon an inspection and which is known by the seller. The application of this rule depends on state law.
  • If a serious defect or serious potential problem is known to the seller (i.e., a crack in the engine block that might cause a serious steering problem), but could not reason­ably be discovered by the buyer, some courts may impose a “duty to speak.”
  • Where a fiduciary relationship exists. A fiduciary relationship is a special relationship of “trust and confidence” between parties. Examples of a fiduciary relationship include lawyers and their clients, partners in a partnership, a broker and a client, direc­tors of a corporation and their sharehold­ers, and a guardian and his or her ward.
  • To correct a prior statement which, although true when made, has now become false or untrue due to a change in facts or circumstances.

Read Bergeron v. Dupont.

 

Case Summary

Bergeron v. Dupont

359 A.2d 627 (1976)

BACKGROUND AND FACTS

The plaintiff purchased a mobile home park from the defendant. Subsequent to the transfer of title, plain­tiff brought this action to recover damages allegedly sustained as a result of fraudulent misrepresentations by the defendant, Lawrence Dupont, Jr., through his agent.

On January 25, 1973, the plaintiff and defendant executed a purchase and sale agreement which specified a sale price of $89,999. In the course of negotiations, the agent represented that the septic system in the park was satisfactory, requiring only an occasional pumping out for proper functioning.

Subsequent to the signing of the agreement but prior to the closing, complaints were lodged by park residents in February, 1973, with the water supply and pollution control commission to the effect that effluent from some of the systems was emerging above ground. Tests by the State in February were inconclusive because of weather conditions, but on March 13 and 14, tests disclosed that three of the systems had failed. The Defendant was informed by a sanitary engineer from Concord sometime during this period that they were testing the system because of the emergence of the effluent.

The title was transferred on March 14, 1973, and shortly thereafter the plaintiffs were informed that three of the septic systems had failed. The plaintiff replaced them and the cost of replacement was the basis for the verdict.

The master found on the issue of defendant’s fraud as follows: At no time did the defendant reveal to the plaintiff that the state was investigating a complaint from tenants. The defendant’s representations to the plaintiff regarding the conditions of the septic tank and systems were a material factor in persuading the plain­tiff to buy the mobile home park. When the defendant acquired new knowledge regarding the conditions of the septic systems, he came under the duty to disclose this additional information to the plaintiff since it was at variance with the representations previously made.

The Master correctly ruled that a representation which was true when made could be fraudulent if the maker failed to disclose subsequent information which made the original representation false. While it is true that one who makes a representation believing it to be true and does not disclose its falsity until after the transaction has been consummated has committed no fraud, both parties herein treat March 14, the date of the closing, as the time at which the rights of the parties became fixed.

AFFIRMED.

Justifiable Reliance

The third element of proving fraud is that of “justifiable reliance”; that is, the party claiming that he or she has been defrauded must prove reasonable or justifiable reliance upon the misrepresentation in entering into the contract. This is very similar to a finding of causation in the area of tort law. The question of reliance is preeminently a question of fact. The plaintiff need not prove that the false statement was the sole factor in entering into the contract; rather, that it was an important element in inducing him or her to enter into a contract.

As we have noted, a certain amount of “puffing” or “trade talk” may be expected in a sales contract. Two views of reliance developed. Under one view of the common law, it was the duty of every person “to take notice of obvious facts and to investigate the truth of representations.” Under this view, if a statement was obviously or patently false, a plaintiff could not say that he justifiably relied upon it. For example, while a statement by a car salesman that a car might get “45 miles to a gallon of gas” when in reality, it will get only 30 miles to a gallon, might form the basis for a cause of action for fraud, a statement that the car might get “400 miles to a gallon” probably would not. As result, sometimes the more outrageous a statement, the less likely that an action for fraud could be maintained. At the same time, a second view, more favorable to plaintiffs, developed that “the law will afford relief even to the simple and credulous who have been duped by art and falsehood.” (Kendall v. Wilson, 41 Vt. 567 (1869). The issue of reliance is ordinarily an issue for the jury to decide as a question of fact.

Similarly, if a party knows actually knows that a statement is untrue, he or she may not later claim justifiable reliance. For example, if a salesperson were to falsely assure an office manager that a copy machine will produce 75 full copies per minute, and the office manager knows that the machine will in fact only produce 35, there can be no action for fraud since no justifiable reliance can be shown on the part of the office manager.

Is there a requirement of investigation or of inspection of goods or property by a purchaser? Generally, yes, especially if an inspection or investigation would not require the services of an expert, the expenditure of considerable time or money, or any special training or expertise. However, if a defect in property is latent (not readily seen) or hidden, the buyer would be justified in relying on statements or representations of the seller, and no inspection would be required.

Damages

Finally, the innocent party must suffer some pecuniary or monetary injury or damage as a result of fraud or misrepresentation. If the plaintiff is only attempting to rescind or cancel the contract, the court will not require other proof of monetary damages. However, if the plaintiff is seeking damages in the form of money, proof of an injury is required.

As a final look at the area of fraud, we will read the case of Miller v. Plains Insurance Co.

 

Case Summary

Miller v. Plains Insurance Co.

Springfield Court of Appeals (Missouri), 409 S.W. 2d 770 (1966)

BACKGROUND AND FACTS

The plaintiff in this action, D. C. Miller, is suing the insurance company of the owner and driver of the automobile in which his wife was killed. The owner and operator of the automobile, Hazel Gales, also perished in the crash. She was insured by Plains Insurance Company, the defendant. The policy provided, among other things, $500 medical expense coverage and up to $10,000 uninsured motorists coverage. This coverage provides for payment to the insured in case the insured is involved in an accident where someone else is at fault and does not have any insurance.

At the trial, Miller was awarded both $500 in medical expenses and $10,000 under the uninsured motor­ists provision. On appeal, the defendant argued that had it known certain representations were untrue, it would not have undertaken the risk in insuring Gales, who had a record for moving traffic violations and, in particu­lar, for hazardous driving and did not disclose it when applying for the policy.

TITUS, Judge

What is a material misrepresentation? A misrepre­sentation that would likely affect the conduct of a reasonable man in respect to his transaction with another is material. (Emphasis added.) Materiality, however, is not determined by the actual influence the representation exerts, but rather by the possibility of its so doing. A representation made to an insurer that is material to its determination as to what premium to fix or to whether it will accept the risk, relates to a fact actually material to the risk which the insurer is asked to assume. The word “risk” does not relate to an actual increase in danger but to a danger determined by the insurer’s classification of the various circumstances affecting rates and insurability. That the fact misrep­resented has no actual subsequent relation to the manner in which the event insured against occurred, does not make it any the less material to the risk. Thus, whether a misrepresentation is material in an application for an automobile insurance policy, is determined by whether the fact, if stated truthfully, might reasonably have influenced the insurance company to accept or reject the risk or to have charged a different premium, and not whether the insurer was actually influenced.

It is a well known fact insurance companies rely on expense, loss, and other statistical data to measure differences among risks and thus ascertain rates to be charged for individual risks in accordance with standards for measuring variations in hazards. This is recognized and, to some extent, controlled by our statutes. Ques­tions as to traffic violations of prospective insured and as to previous accidents in which they have been involved are legitimate fields of research for insurance companies, for these are not only rate determining facts but may also determine if the risk will even be insured. In consideration of the authorities previously cited, * * * we are of the opinion the misrepresentations involved in this case might reasonably be expected to have influenced the insurance company to have accepted or rejected Mrs. Gales as an insured or to have charged her a different premium for issuing her a policy. As the only evidence in this case is that if defendant had known the truth it would have declined the risk, we are drawn to the conclusion the misrepresentations were material and should permit defendant to avoid its liability under the policy.

Judgment and Remedy

The decision of the trial court was reversed. The defendant, Plains Life Insurance Company, did not have to pay the $10,000 uninsured motorists claim or the $500 medical expense coverage because of the material misrepresentation of fact made by Hazel Gales when she filled out the applica­tion on the basis of which her insurance policy was issued. The court decided there was no true assent by the insurance company to insure Gales under these circumstances. No insurance contract ever came into existence.

The court in Miller permitted an insurance company to deny coverage because of a material misstatement of fact made by a party in filing an application for insurance. It ruled that no contract had come into existence because of the fraud committed by Mrs. Gales.

Do you believe that a fair result was reached in this case? How did Miller participate in the fraud committed? Do you agree with the definition of materiality found here?

 

Ethical Considerations

Baseball Cards

An employee of Grillo Sports Cards inadvertently places an authentic Honus Wagner player card with a lot of cards selling for $1.00 a piece. The Wagner card is worth $25,000. Should Grillo be able to get back their card from its purchaser, nine year old Bobby Parker, on grounds that their employee had made a terrible mistake”? Suppose Bobby actually knew of their mistake? Would or should that change your decision?

 

Questions

Raffles v. Wichelhaus

  1. Why did the dispute arise?
  2. What was the nature of the “mutual mistake” made by the parties?
  3. What is a latent ambiguity?
  4. What do the words “consensus ad idem” mean?

Vokes v. Arthur Murray, Inc.

  1. What is “sales puffing”?
  2. When will an opinion be actionable as fraud?
  3. What does it mean to deal “at arm’s length”?
  4. Does Mrs. Vokes bear any responsibility for her loss?

Sellers v. Looper

  1. What is a JNOV? How and when is it used?
  2. What were the parties’ opposing views on the question of a commendation?
  3. What were the precise words used by Mrs. McLean regarding the condition of the well? What do they signify to you? What did they mean to the court?
  4. Who decides the issue of whether a statement is one of fact or opinion?
  5. Whose testimony was most important in this case? Why?
  6. What is a fiduciary relationship?
  7. When will parties to a contract not be acting on “equal footing”?

Puckett Paving v. Carrier Leasing Corporation

  1. Why did Puckett Paving sue Carrier?
  2. Why did opinions as to a matter of law generally not constitute remedial fraud under the common law?
  3. Are there any exceptions?
  4. Is the rule enunciated in this case currently in use? What is the modern view?

Bergeron v. Dupont

  1. Who is a “Master”? Under what circumstances will a court use a Master to decide a case?
  2. When did the defendant learn about the deteriorating condition in the septic tank? Why was that critical?
  3. What was the measure of plaintiff’s damages?
  4. When did the rights of the parties become fixed?
  5. How did the master rule in the case?
  6. What is a “closing”? What events take place at a closing?

Miller v. Plains Insurance Co.

  1. What is “uninsured motorist” coverage?
  2. When would a representation found in an insurance application be considered material?
  3. What was the effect of the court finding that a misrepresentation had taken place?
  4. Was the result in this case a fair one?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Eleven | Legality

Generally speaking, a contract which involves a viola­tion of a statute or an administrative regulation, or which violates public policy is not enforceable by a court of law. Such a contract is void or is a nullity. Likewise, should the subject matter of a contract involve some form of criminal activity or the commission of a tort (a civil wrong), the contract is also void and unenforceable.

When only a part of a contract is illegal, and the illegal provision or portion does not involve serious moral turpitude, the illegal portion of the agreement may be disregarded and the legal part of the contract may be enforced. The contract is said to be divisible or severable. However, if the entire contract is so completely integrated that the parts cannot be separated, the entire agreement will be void and unenforceable.

An Agreement Contrary To Public Policy

Public policy is an important rationale used for striking down or refusing to enforce a contract or a clause of a contract on grounds of immorality, unconscionability, economic policy, unprofessional conduct, and other criteria. At the outset, it must be recognized that “public policy” is a somewhat vague area of the law. Even though a con­tract or an agreement may not violate some formal statute or regulation, a contract may still be unenforceable if it violates public policy. Public policy is determined by assessing a wide variety of stat­utes, court and administrative decisions, and public attitudes and perceptions about the nature of law and society. It is essentially a “legal value judgment” concerning the nature and type of contractual relationships a society will recognize and enforce.

 

Case Summary

Laos v. Soble

503 P.2d 978 (Ariz. 1972)

HOWARD, J.

This is an appeal from a judgment in favor of defendants in a lawsuit to recover from them a fee purportedly due and owing to the plaintiff.

The plaintiff’s claim was predicated upon the following document, written in longhand and signed by attorney Soble:

”The case was tried to the court, both Laos and Soble testifying as to the circumstances which gave rise to this writing. The trial court, in ruling in defendants’ favor, apparently believed Soble’s version, i.e., that the agreed upon compensation was for Laos’ services as an appraisal witness in an impending condemnation trial. Since, according to him, he did not avail himself of such services, the obligation to pay Laos did not arise.

On appeal, Laos contends that the document upon which he relied reflects that he was entitled to judgment as a matter of law. We believe that the document reflects the contrary  that, as a matter of public policy, the contract is illegal and therefore void. Although illegality was neither asserted in the trial court nor on appeal, we have a duty to raise such questions sua sponte when the face of the record reflects illegality.

An agreement to pay a witness a fee contingent on the success of the litigation is against public policy and void.

Professor Corbin points out that the use of “expert” testimony has been subject to grave abuses and that bargains for obtaining same should be under close supervision by the court. A similar concern was ex­pressed in Belfonte v. Miller:

*  *  *  The difficulties and dangers which surround so called expert testimony are well understood by the profession and it is the manifest duty of our courts to carefully scan all special compensation in addition to the witness fees allowed by the law *  *  * The rule applied to such contracts is not to be affected by proof that the behavior of the parties was in fact exemplary, for it is the tendency of such contracts which serves to generate their undesirability. Improper conduct or bias can be predicted easily when the compensation of the witness is directly related to the absolute amount of an award which may in turn be dependent to a great degree on the testimony of that same witness. *  *  *

We are of the opinion, and so hold, that a contract providing for compensation of a witness contingent on the success of the litigation is subversive of public justice for the reason that his evidence may be improperly influenced. Public policy considerations brand such contract illegal.

Although the trial court’s denial of plaintiff’s claim was correct, but for a different reason, we affirm.

Licensing Statutes

Every state has adopted a variety of vocational and professional licensing statutes that regulate the profession­al and business conduct of certain groups or professions in soci­ety.

Types of Licenses

A regulatory license regulates the standards of conduct of certain professionals. In order to procure a regulatory-type license, certain baseline qualifications must be met. Qualifications may include possessing special skill, special knowledge, special training, or meeting a minimum educational level. In addition, the party seeking a regulatory license may be required to demonstrate that he or she has passed a professional certification or licensure examination.

A revenue license is often no more than an occupational tax. The purpose of revenue license is merely to raise revenue necessary to monitor the underlying activity. Any applicant will be granted the license upon the payment of the proper fee. A revenue license is also called a ministerial license. In deciding whether a particular license is regulatory or revenue in nature, it is important to assess the legislative intent and legislative history of the underlying statute mandating registration or licensure. 

If a court concludes that a regulatory license is required, a party seeking enforcement of any underlying contract must prove that the proper license was in force at the time the contract came into existence. Failure to possess a regulatory license at the time any consideration is furnished prevents a court from enforcing an agreement concerning that professional activity or conduct. Where the purpose of the licensing statute is merely to raise revenue, an underly­ing contract may still be enforced, even though the required license had not been obtained. The individual, however, may be required to procure the proper license before any judgment is entered by the court.

 

Case Summary

Markus & Nocka v. Julian Goodrich Architects, Inc.

230 A.2d 739 (Vt. 1969)

BARNABY, J.

The defendant was the principal architect on a project involving an addition to the DeGoesbriand Hospital in Burlington, Vermont. The hospital directed the defendant to engage the services of the plaintiff firm as consulting architects. The plaintiff is a Massachusetts architectural firm specializing in hospital design. The arrangement was accomplished and evidenced in an exchange of letters between the parties. The project with which the plaintiff was connected involved the development of an outpatient department, emergency department, laboratory and xray departments. The duties of the plaintiff included a study of the medical needs to be incorporated into the addition, inspection of the premises, consultation with hospital staff, preparation of construction and equipment estimates, detail drawings of specialized rooms, participation in revision of preliminary sketches, and provision of specifications for cost and bid purposes. The plaintiff’s staff made numerous trips to Burlington, consulting with hospital personnel and medical staff, and prepared plans and detailed drawings. As the matter finally wound up, the design recommendations of the plaintiff were not accepted by the hospital staff, and the new expansion was finally put out to bid and constructed on the basis of plans and working drawings of the defendant. The compensation of the plaintiff was to be 1 percent of construction cost plus travel expenses, and this 1 percent figure was the basis of the judgment in favor of the plaintiff awarded below.

It is unquestioned that these activities were carried on in connection with construction to be under­taken within Vermont. The facts show that the plans and sketches were developed based on information obtained from visits to the Vermont site and consultation with the Vermont hospital personnel. Indeed, the acts evidencing performance under the contract, sufficient at law or not, have no other relevance than to this Vermont project on its Vermont site. Thus they are within the ambit of the Vermont architectural registration statute. *  *  *

Architectural contracts entered into in violation of such registration statutes are held to be illegal, and the provisions for payment of commissions under them are unenforceable. The underlying policy is one of protect­ing the citizens of the state from untrained, unquali­fied, and unauthorized practitioners. It has been applied to many professions and special occupations for similar protective purposes. *  *  *

26 V.S.A. 121 specifically mentions consultation as one of the activities prescribed for one not registered. This is not to say that any kind of consultation between architects of different states can be contractually valid only with registration. It does mean that when the nonresident architect presumes to consult, advise, and service, in some direct measure, a Vermont client relative to Vermont construction he is putting himself within the scope of the Vermont architectural registration law. Nothing in that law suggests that the services must be somehow repetitive to be prohibited. No basis for excusing this plaintiff from its express provisions appears here. *  *  *

Judgment reversed and judgment for the defendants to recover their costs.

Covenants (Promises) Not to Compete

A covenant not to compete may be found in two general types of busi­ness contracts:

  1. A promise made by the seller of a business or of an enterprise to a buyer wherein the seller agrees not to open or be involved in a similar business in a specified geographic area for a specified period of time; or
  2. A clause which is part of an employment contract which restricts an employee from discussing or divulging so called “trade secrets” (special or limited insider infor­mation) or which restricts or completely forbids the employee from engaging in competition or going to work with a competi­tor when an employment contract is terminated.

A promise made by the seller of a business will be en­forced if it is reasonable in terms of time, area, and scope. When the area is too broad or extensive or the time is too long for the reasonable protection for the buyer, a covenant not to compete will generally not be enforced.

Under a strict common law interpretation, if such a covenant “failed” in any respect (i.e., the court concluded that a covenant was unreasonable as to either time or area), the court could not enforce any part of the covenant. Nor would a court rewrite (reform) any of the provisions of a contract in order to make a provi­sion reasonable. Why?  First, courts do not really like such covenants and consider them to be in “restraint of trade.”  Second, to rewrite a covenant to make it reasonable (i.e., twenty-five miles is unreasonable for a restaurant—ten miles is reasonable; 5 years is unreasonable for a barber—6 months is reasonable) would put the court in a position of actually writing the contract for the parties, subjecting the parties to an agreement they had not actually made.

An agreement by a person to refrain from exercising his or her trade or profession is generally viewed unfavorably by courts because it is “inimical to the interests of society in a free and competitive market and to the interests of the person restrained in earning a livelihood.”  (See United States v. Addyston Pipe & Steel Co., 85 F. 271 (1898)). However, the covenant is enforceable if it is reasonable. In all cases, the covenant must be a part of a larger contract of employment, supported by consideration, or it may be termed as a “naked covenant” and denied enforcement by a court.

A covenant not to compete in a contract of employment is closely scruti­nized by courts and will be strictly construed when enforcement is sought. The burden of proof is placed on the party seeking to enforce the covenant. Courts may ask the following questions when determining whether such a clause in a contract of employ­ment will be enforceable:

  1. Is the restraint reasonable in the sense that it is no greater than necessary to protect the legitimate business interests of the employer in such areas as protection of trade secrets or other confidential information?
  2. Is the restraint unreasonable and unduly harsh on the employee in terms of time or area (especially extending into an area or territory in which the employee did not work)?
  3. Would the employee’s work for a competitor irrepa­rably injure or harm the employer’s business or threaten such irreparable injury (especially with regard to an intangible such as “good will”)?
  4. Is the employment of a unique, extraordinary, or unusual type?

Courts are sometimes reluctant to enforce a covenant where the public will be denied a necessary or essential service. In this case, the court might in fact prefer to award monetary damages for the breach of the cove­nant instead of issuing an injunction or a restraining order. An example might be where a veterinarian agrees not to compete against his former associates for a period of three years. In the small farming community where the vet lives, there are no other vets. In these cir­cumstances, a court might be reluctant to enforce the covenant because the public might be denied an important service. The court might instead award money damages against the vet for breach of the covenant, the amount to be determined as a matter of proof during a trial. 

In recent years, some courts have in fact become more proactive concerning restrictive covenants. Several courts now follow the “blue pencil” rule, which permits the court to “strike out” any unreason­able provisions from an agreement and to modify the time or area to provide reasonable protection to the parties. The “blue pencil” rule has its origins in the doctrine of severability as applied to illegal contracts. 

It should be noted that in a few states (most notably, California), an employer cannot restrict a regular employee, not in possession of any specialized information or “trade secrets,” from engaging in employment when the term of a contract ends, holding that such restrictions are void and a violation of public policy as a matter of law. In general, however, properly drawn covenants are enforce­able and provide important protections in business relationships. One other exception occurs in the case of a covenant not to compete applicable to an attorney. Depending on the jurisdiction, such covenants may be judged as per se illegal on public policy grounds. 

Read Frederick v. P.B.M. and consider the application of the rules discussed to the facts of the case. Did it surprise you that the lower court granted the injunction?

 

Case Summary

Frederick v. Professional Bldg. Main. Indus. Inc.

Court of Appeals of Indiana , 168 Ind. App. 647; 344 N.E.2d 299 (1976)

Garrard, J.

In 1967, appellee (PBM) employed Frederick as a management trainee in PBM’s contract cleaning and maintenance business. In 1972, Frederick resigned. When he then sought to engage in the contract maintenance business on a part time basis, PBM brought this action to enforce a covenant against competition. The trial court enjoined Frederick and he appeals. The issue is whether the covenant given by Frederick is enforceable.

It reads as follows:

James Frederick hereby covenants that he will not engage in contract maintenance business, including, but not limited to, janitorial services, window cleaning, floor cleaning, commercial or residential cleaning, either as a sole proprietor, partner, or agent or em­ployee of a corpo­ra­tion­ or other business organization in the following localities:

The counties of Lake, Porter, La Porte and St. Joseph in Indiana; of Will and Cook, in Illinois, except Chicago; and the counties of Berrien and Van Buren in Michigan.

This covenant shall extend for a period of ten years from the date of termination of this contract.

Such covenants are in restraint of trade and are not favored by the law. However, they will be enforced if they are reasonable. *  *  *  This determination must be made upon the basis of the facts and circumstances surrounding each case. It depends upon a consideration of the legitimate interests of the covenantee which might be protected, and the protection granted by the covenant in terms of time, space and the type of conduct or activity protected.

While the burden of proving the facts and circum­stances rests with the party seeking to enforce the covenant, the ultimate determination of whether the covenant is reasonable is a question of law for the courts.

In addition, if the covenant as written is not reasonable, the Courts may not enforce a reasonable restriction under the guise of interpretation, since this would amount to the court subjecting the parties to an agreement they had not made.

In the case before us, the evidence discloses that Frederick was employed by PBM at a management level. Through his employment, Frederick acquired skills related to the performance of janitorial services provided by PBM and to the technique of surveying a proposed job and computing a competitive and profitable bid. However, the potential use by a former employee of merely skill and ability he has acquired will not justify a restraint.

Frederick was also privy to bidding and cost analysis which PBM considered confidential. While there was no evidence that this information was novel or unique, so as to construe it as a trade secret, it is apparent that it might be used in an effort to undercut PBM’s bids. *  *  *

The evidence disclosed that PBM conducted its operations in the eight counties enumerated in the covenant. However, it was not established that Frederick worked in all eight counties. *  *  * The covenant restraining him from engaging in the contract maintenance business was unreasonable in prohibiting activity in counties where he had not worked. *  *  *

No evidence was introduced bearing directly on the reasonableness of the covenant’s ten year term. *  *  *

Bringing these factors together, it appears that Frederick was to be restrained from acting not only as a proprietor but also as an employee in furnishing janito­rial services by contract. The geographic area of the restriction was more broad than the area in which he worked. He was not in possession of any trade secrets, but did have pricing information which in the immediate short term, might enable him to undercut PBM. On this basis, he was to be restrained for ten years. Such a restraint is unreasonable, and the covenant is therefore void.

REVERSED.

Usury

Usury involves a contract that car­ries an excessive and illegal rate of interest. Most states regulate the rate of interest by a specific statute. Such statutes typi­cally provide for a “legal rate” where no rate has been stated in a contract, and a maximum rate that is the most that can be legally charged under all circumstances.

If a court determines that an agreement is usurious, a number of remedies are available. The majority of states today will deny recovery of any and all interest on usurious loans. Some states require the forfeiture of both principal and interest; other states permit the borrower to recover double or triple the interest previously paid. Still other states may permit the charging of a “legal rate” where the interest rate charged “inadvertently” surpassed the legal rate.

Exculpatory Clauses

An exculpatory clause is a provision of a contract that relieves a party of liability for its own ordinary negligence. Exculpatory clauses are not favored by the courts and will be strictly construed against the party writing them.

At common law, courts would enforce exculpatory claus­es on the ground of “freedom of contract,” especially where a contract was entered into by two private parties, and no gross negligence, fraud, willful injury, or violation of a law was involved. Later, courts modified their views and began to refuse to enforce an exculpatory clause in an employment relation­ship, so that an employer would be liable to employees for any negligence, despite the existence of an exculpatory clause.

However, where there is a public interest involved, an exculpatory clause will generally be held to be void and against public policy. A public interest is established where one of the parties is a public institution—one owned or operated by the government or some subsidiary or branch of the government, i.e., a public hospital, a public school, or a municipally owned parking facility. In recent years, some courts have sig­nificant­ly narrowed the number of parties who may exculpate themselves from liability and have created a new category, termed a “quasi-public” institution, which can not exculpate itself from liability based on its own negligence. A quasi-public institution may be defined as a private party or business entity that:

  1. Deals with a large number of people;
  2. Solicits the public business;
  3. Deals in a necessary and/or vital service (i.e., transportation, education, banking, etc.).

Read the case of HyGrade Oil v. New Jersey Bank. How did the court reach its conclusion that HyGrade Oil could not absolve itself from liability based on its own negligence?  Do agree you with this view or do you subscribe to the notion of absolute “freedom of contract”?  What was the decision of the court?  What did Hy-Grade Oil actually win?

 

Case Summary

Hygrade Oil Co. v. New Jersey Bank

350 A.2d 279 (Super. Ct. N.J. 1975)

HyGrade Oil Company (plaintiff) brought this action against New Jersey Bank (defendant), which refused to credit HyGrade’s account with an amount assertedly deposited by HyGrade in the bank’s night depository box.

BISCHOFF, Judge. The resolution of this appeal requires us to determine whether a clause in a “night depository agreement” between a bank and a customer, providing that “the use of the night depository facilities shall be at the sole risk of the customer,” is valid and enforceable.

In February, 1974, in order to protect the increas­ing cash supply generated by operations of its fuel business, plaintiff’s manager, Flaster, signed a night depository agreement with defendant bank. This agreement (in printed form and apparently used by other banks in the area) contained the following provision:

*  *  *  it is hereby expressly understood and agreed that the use of the night depository facilities is a gratuitous privilege extended by the bank to the undersigned for the conve­nience of the undersigned, and the use of the night depository facilities shall be at the sole risk of the under­signed.

It is clear that where a party to the agreement is under a public duty entailing the exercise of care he may not relieve himself of liability for negligence, and unequal bargaining power or the existence of a public interest may call for the rejection of such clauses.

The Uniform Commercial Code contains many provisions protecting banks in their daily operations. We find it significant that the Legislature provided in the same statute, that a bank may not, by agreement, disclaim responsibility for “its own lack of good faith or failure to exercise ordinary care” in the discharge of the duty imposed upon it by that statute.

A review of the cases in other states considering the validity of similar exculpatory clauses in night depository contracts indicates that the majority rule is to give full force and effect to the clauses.

The basic theory underlying these and other similar cases is that the absence of an agent of the bank when the night depository facilities are used creates the possibility of dishonest claims being presented by customers. In New Jersey we have rejected such a thesis in other situations and have held that the possibility of fraudulent or collusive litigation does not justify immunity from liability for negligence.

Other courts have refused to recognize the validity of such clauses. In holding such a clause inimical to the public interest, the court in Phillips Home Furnish­ings, Inc. v. Continental Bank (1974) said:

We find the public need for professional and competent banking services too great and the legitimate and justifiable reliance upon the integrity and safety of financial institutions too strong to permit a bank to contract away its liability for its failure to provide the service and protections its customers justifi­ably expect, that is, for its failure to exercise due care and good faith. *  *  *

We therefore hold that a bank cannot, by contract, exculpate itself from liability or responsibility for negligence in the performance of its functions as they concern the night depository service.

Judgment for New Jersey Bank reversed.

How did the court reach its conclusion that HyGrade Oil could not absolve itself from liability based on its own negligence? Do agree you with this view or do you subscribe to the notion of absolute “freedom of contract?” What was the decision of the court? What did Hy-Grade Oil actually win?

 

Ethical Considerations

Restrictive Covenants

Under what circumstances should a court involve itself in re-writing a covenant not to compete when the court determines the time period of the restraint is unreasonable?

At what point should a court permit a party to rescind a bid when it has made a clerical error in putting forth its bid? What about the case where there has been a major increase in the price of an underlying component in a contract which has skyrocketed in price because of something over which a party had no control? If the court permits a rescission of a contract, what does this say about the “sanctity of contracts?” And, what about the rights of the other party to the contract?

 

Questions

Laos v. Soble

  1. What defense did Soble raise at the trial?
  2. What standard did the court apply on appeal?  How was this issue raised?
  3. What was Professor Corbin’s view of such circumstances?
  4. Why did the court affirm the lower court’s decision?
  5. What is “public policy”?
  6. What is “expert testimony”?  What type of testimony can expert witnesses offer that other witnesses cannot offer?  Do some research about the Daubert Rule.

Marcus & Nocka v. Julian Goodrich Architects

  1. What service was the plaintiff to perform?
  2. Why was that fact critical?
  3. What was the basis of the judgment of the lower court?
  4. What is the policy behind a registration statute?
  5. The defendants were able to recover their costs. What are such “costs”?

Frederick v. Professional Building Maintenance Industries, Inc.

  1. What was the time period and area provided in the covenant?
  2. What is such a covenant called?
  3. What view does the court take of such covenants?  Why?
  4. When might such a covenant be enforced by a court?
  5. Where will we usually find such covenants?
  6. What is the usual remedy sought in such cases?
  7. Why doesn’t the court simply rewrite a covenant to make it reasonable?
  8. What is the “blue pencil” rule?
  9. Who bears the burden of proof concerning such covenants?
  10. What are “trade secrets”?  What is “good will”?

Hy-Grade Oil v. New Jersey Bank

  1. What Why did Hy-Grade Oil sue its bank?
  2. How did the bank defend?  What was the basis of its defense?
  3. How did the court arrive at its decision?
  4. What was the decision?  Did that mean that Hy-Grade Oil will have its account properly credited?
  5. What is a public institution?
  6. What is a quasi-public institution?
  7. What is an exculpatory clause?
  8. How can a party legally limit its liability for its own negligence?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Twelve | Performance And Discharge

Most contractual relations will be terminated or ended according to the provisions or terms of the agreement, i.e., by performance of the parties. However, some contracts will be terminated or ended by certain acts of the parties, by operation of law, by impossibility of performance (an issue discussed previously in the chapter on consideration), mutual rescission or agreement of the parties, or through some legally recognized excuse.

When payment of money is called for in a contract, the contract will be completed by the payment of money. If a check is tendered by a debtor or by a purchaser, the payment by the check is a conditional payment and the underlying obligation is not discharged until the check is actually “paid” or honored by the bank. Unless the agreement stipulates otherwise, a creditor can refuse to accept a check because technically a check is not legal tender. Rather, a check is a substitute for money. [See UCC §2 511.]  If payment is only to be accepted in cash or in some other form (for example, a barter transaction), this should be clearly stated in the contract.

A tender is defined as an “unconditional offer of a debtor to pay to the creditor the exact amount due on the date due.”

If a creditor refuses to accept a tender by the debtor, the debt is not discharged, but the refusal to accept the tender stops the running of any interest charges, may lift any liens filed against property held by the debtor, and may also prevent charging court costs and attorney’s fees to the debtor in the event a suit is filed.

Time For Performance

Where a time of performance is stated in the contract and the time is clear and unambiguous, performance must be made on or before that date.

When no time is specified in the contract, a party has a reasonable time to perform. Where the nature of the contract is such that time is not an important factor, reasonable delay may be permitted by a court.

Where a clause in a contract expressly states “time is of the essence” or the nature of the contract itself is such that time is obviously an important factor (construction contracts or contracts for purchase or sale of perishable goods), the failure to perform on time may be actionable as a breach and may under certain circumstances permit a party to rescind a contract, cancel a contract, seek a substitute performance, seek the remedy of cover or resale, or seek monetary damages.

The Doctrines Of Material Breach And Substantial Performance

When a party fails to perform a promise according to its terms, it is important to determine if the breach is material. If the breach is material, the aggrieved party may sue for “total breach” and the aggrieved party may have the power to cancel the contract. If the breach is not material, the aggrieved party may sue for “partial breach,” but may not cancel the contract. While the rules may seem clear, there is no simple test to determine whether the breach is material. Materiality is ordinarily a question of fact for a jury. Among the factors to be considered are:

  1. To what extent, if any, the contract has been performed at the time of the breach. “A breach which occurs at the very beginning [of a contract] is more likely to be deemed material even if it is relatively small.” (Note, 21 Colum. L. Rev. 358 (1921)).
  2. A willful breach is more likely to be considered as material than a breach caused by negligence or other circumstances.
  3. A quantitatively serious breach is more likely to be considered material.

It is recognized that full performance is required in most cases to discharge a contractual obligation. It is also recognized that some agreements (for example, certain construction contracts) are quite complex. In such cases, a court may apply the doctrine of substantial performance to determine if a breach has occurred. This doctrine permits recovery where there has been substantial performance, subject to an offset (deduction) for a nominal, trifling, or technical breach, or a departure from the strict letter of the contract. In order to apply the substantial performance doctrine, the part of the contract that is unperformed must not destroy the value or the purpose of the contract and the doctrine does not apply where the breach is willful or intentional. 

Performance Subject To The Standard Of Satisfaction

When one party to an agreement contracts to “personally satisfy” the promisee, courts will apply one of two tests, depending on the nature of the contract:

When a contract involves personal taste, skill or fancy, the promisee has, in effect, the final word and may reject a performance, even if it is alleged that such a rejection is subjectively arbitrary or capricious. However, most courts will require at least a “good faith” standard in the rejection; that is, a court will require an “honest or good faith reason” for the rejection. The interesting case of former Secretary of State Henry Kissinger and his rejection of an official portrait on ground that he “just didn’t like it” provides an application of this rule. 

Where the subject matter of the contract concerns matters that are not purely personal in nature, the courts will apply an objective standard; that is, if a reasonable person would be satisfied with the performance, the promisor may be permitted to recover under the terms of the contract. This issue would be one for a jury to determine.

Example

A manufacturer of pre-fabricated housing offers the following statement:  “All windows, doors, and other parts of the home all made to your satisfaction.”

In this case, most courts would apply the objective or reasonable person standard to judge a rejection of the items described in the contract.Contracts may also contain a provision that completion of the contract “depends upon the satisfaction of a third party” (an architect, a building inspector, an appraiser, etc.). In such a case, the court would apply an objective test and might permit recovery of amounts due under the contract if the court determines that the certificate of approval is unnecessary, or was withheld due to “bad faith,” fraud, mistake, or gross error on the part of the third party.

Read the Plante case. What standard did the court apply?  Note especially the measure of damages.

 

Case Study

Plante v. Jacobs

Supreme Court Of Wisconsin, 10 WIS. 2D 567, 103 N.W. 2D 296 (1960)

Overview

The Jacobs’ entered into a written contract with the plaintiff, Plante, to furnish the materials and to construct a house on their lot, in accordance with plans and specifications, for a sum of $26,756. During the course of construction, the plaintiff was paid $20,000. Disputes arose between the parties concerning the work being done. The Jacobs refused to continue paying. The plaintiff did not complete the house. The trial court found that the contract was substantially performed. The Jacobs were told to pay $4,152.90 plus interest and court costs.

Outcome

The appellate court upheld the trial court’s judgment. Although there were some twenty items of incomplete or faulty performance by the builder, none of these was made the essence of the contract. Therefore the court held that substantial performance was evident. The court held, however, that the correct rule for determining damages due to faulty construction amounting to incomplete performance “is the difference between the value of the house as it stands with faulty and incomplete construction, and the value of the house if it had been constructed in strict accordance with the plans and specifications. This is the diminished value rule.”

What standard did the court apply in the Plante case? Note especially the measure of damages.

Discharge By Acts Of The Parties (Conditions)

The legal distinction between a covenant and a condition is very important. A covenant is a promise and determines what must be performed in order to discharge a contractual duty. Conditions determine when and if a duty must be performed at peril of breach of contract. The failure of a promisor to perform a covenant may be a breach of contract. If circumstances arise which leave a condition unsatisfied, the legal consequence is that the dependent promise does not become a matter of any contractual duty. Failure to satisfy a condition, on the other hand, is never a breach of contract. 

Many contracts contain conditions, either express or implied, that control performance. A condition is traditionally defined as an act or an event, other than a lapse of time, which affects a duty to render a promised performance. These conditions are termed concurrent, precedent, or subsequent.

Concurrent conditions are those conditions that require that the performance of both parties take place at the same time. Thus, neither party can demand that the other party perform first. Most bilateral contracts contain concurrent conditions (i.e., the sale of goods, which requires both payment and delivery to occur simultaneously; or a real estate transaction where the buyer tenders the money and the seller tenders the deed).

A condition precedent is an act, an event, circumstance, or contingency that must occur according to the express or implied terms of the agreement or be satisfied or excused before a duty of performance is required under a contract. A non-technical formulation of a condition precedent might be: “I am not liable to perform this promise unless _______________.”  In the case of a unilateral contract, Smith’s performance is a condition precedent to Jones’ duty of payment. As an example, an insurance policy may require that an insured driver must give notice of a loss within a certain specified period after the occurrence of the loss. Failure to provide the insurance carrier with the required notice may permit the insurer to deny liability or coverage. A second example occurs in many real estate contracts: “This contract is contingent upon the buyer securing a suitable mortgage….”

A condition subsequent is any fact, the existence or occurrence of which by agreement of the parties, operates to discharge or terminate an existing duty of performance. For example, a contract may provide that a party will be released from “any and all obligations” upon the happening of a certain event  (for example, “if interest rates rise to 10% or more by June 1, 2012, the borrower may withdraw from this transaction”). A simple example can be found in the following: “I am liable to perform this promise until or unless __________ [a factual circumstance will be inserted].”

Parties to a contract may mutually agree to terminate or rescind an agreement and place each other in their original positions. The surrender of rights under the original agreement by each party is the consideration for the mutual agreement of rescission. It should be noted that the mutual rescission of a contract to sell or buy land would be required to be in writing under the Statute of Frauds.

Other Acts Of Termination

Novation

The abandoning of a prior contract and substituting a new contract in its place is termed a novation. A novation is accomplished by an agreement to discharge a previous contractual duty or to release the party who was originally bound to a contract and substitute a new party who agrees to undertake performance and to be bound by the contract. A novation may never be presumed (even from the passage of a significant amount of time) and must always be affirmatively proven by the party who is claiming a release from a prior contract. If the original contract was required to be in writing under the Statute of Frauds, so too must the novation be in writing. This is sometimes called the “equal dignity” doctrine. 

Accord And Satisfaction

An accord is an agreement to substitute performance in satisfaction of an original debt or obligation. When the agreement is executed and satisfaction has been made, it is called an accord and satisfaction (discussed earlier in the case of A. G. King Tree Surgeons v. Deeb).

Anticipatory Breach

At common law, a breach of contract could not occur until the time for performance had arrived. However, since the English case of Hochester v. DeLaTour (1853), courts have recognized that a total breach of a contract may occur if a party unequivocally repudiates the contract—even prior to the date stipulated in the contract. A repudiation is a “positive statement to the promisee or other person having a right under the contract, indicating that the promisor will not or cannot substantially perform his contractual duties.”  (Martin v. Kavanewsky, 157 Conn. 514 (1969)).

The facts of Hochester v. DeLaTour (118 Eng. Rep. 922 (1853)) are illuminating. In April of 1852, the plaintiff and defendant entered into a contract under which the plaintiff was to work for a fixed period of time commencing on June 1, 1852. On May 11, 1852, the defendant stated he would not perform. The plaintiff filed suit for breach of contract. The defendant contended that no breach could occur until the time for performance (June 1, 1852) had arrived. The court disagreed and in so doing created the doctrine of anticipatory breach.

Under the common law, when an anticipatory breach occurs, the aggrieved party has the right to elect between two remedies. An aggrieved party may:

  • Wait until the time for performance and sue for the actual breach; or 
  • Treat the repudiation as an anticipatory breach and sue immediately.

The UCC incorporated the common law rule concerning anticipatory repudiation in UCC §2-610. The UCC notes that the aggrieved party may “for a commercially reasonable time await performance by the repudiating party” or “may immediately resort to any remedy for breach.”  As we will see in the discussion on sales, the Code also provides that when reasonable grounds for insecurity arise, a party may demand “adequate assurances of performance,” and in the interim, may suspend his performance until he receives such assurances. (UCC §2-609). The Code further provides that 

“After receipt of a justified demand, failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.”  Grounds for insecurity will be judged according to “reasonable commercial standards” of “good faith” and “honesty in fact.”

Operation Of Law

A contract may be discharged by operation of law when a statute has made the subject matter of the agreement unlawful, where the contract is judged to be in a violation of public policy, or where a statute may excuse performance. Chapter 12 discusses the area of the legality of the subject matter of a contract.

For example, a discharge in bankruptcy is the result of a proceeding in which the debtor is released from an obligation to pay a debt. By law, the discharge, properly granted, terminates the obligation to pay the debt.

Impossibility

Review the materials presented earlier on the termination of offers relating to objective and subjective impossibility. Here is another “dance lesson” case. It is far less dramatic than the Vokes case! 

 

Case Summary

Parker v. Arthur Murray, Inc.

Appellate Court Of Illinois, 2D Div., 1St Dis.

10 Ill. App. 3D 1000, 295 N.E. 2D  487 (1973)

BACKGROUND AND FACTS

Plaintiff Parker, a thirty seven year old college educated bachelor who lived alone, contracted over two years for a total of 2,734 hours of dance lessons for which he had paid $24,812.80. Each contract, and each extension, contained the same boldface words, “NON CANCELABLE CONTRACT,” and some included a statement that no refunds would be made. Parker was seriously injured in an automobile accident and rendered incapable of continuing his dance lessons. Parker sued Arthur Murray to recover money paid for unused lessons.

DECISION AND RATIONALE

The trial court’s ruling that impossibility of performance was grounds for rescission was upheld, and despite the contract provisions Parker was allowed to recover the prepaid sums of money for unused lessons. The appellate court held that the plaintiff never contemplated waiving the right to invoke the doctrine of impossibility of performance. “Although neither party to a contract should be relieved from performance on the ground that good business judgment was lacking, a court will not place upon language a ridiculous construction. We conclude that plaintiff did not waive his right to assert the doctrine of impossibility.”

The modern doctrine of impossibility can be traced to the 1863 case of Taylor v. Caldwell (122 Eng. Rep. 309 (K.B. 1863). In this case, the defendant had promised to allow the plaintiff to use his music hall for giving concerts. Prior to the time of performance, a fire destroyed the music hall. The English court held that the defendant was excused from performance and that his failure to perform did not constitute a breach of contract. Since this case, American courts have held that objective impossibility is an excuse for non-performance of a contract where there has been a destruction, material deterioration, or unavailability of the subject matter or means of performance of the contract through no fault of a party seeking the excuse. In some cases, a court will require the parties to have contemplated a particular source of supply or the condition when the parties entered into an agreement.

It is interesting to note that the principle of impossibility is well illustrated by a number of cases involving the closing of the Suez Canal in 1956 and in 1967. (See 23 Rutgers L. Rev. 41 (1969). Because a substitute route around Africa was available, the court held that canal closings neither excused performance nor were grounds for the recovery of additional compensation under the theory of unforeseen difficulties. 

Finally, the Restatement, Section 281, basically mirrors Section 2-615 of the Uniform Commercial Code and has introduced the concept of “commercial impracticability” into the discussion. It suggests that increases in costs “well beyond the normal range” that create “extreme and unreasonable difficulty” or “expense” could trigger the application of the doctrine of commercial impracticability, thus excusing performance or permitting a party to seek additional consideration.

Ethical Considerations

Time Is Of The Essence

Contracts frequently contain a “time is of the essence” clause. Are there any circumstances where a court should ignore such a clause and refuse to enforce it?

Debt Discharge

Sonny owes his Dad $10,000. One night, Sonny offers his Dad $5,000 to completely settle the debt and Dad accepts this offer. Later, Dad brings suit against Sonny for the remaining $5,000. Should Dad’s acceptance of the $5,000 discharge Sonny’s debt?

 

Questions

  1. Explain the doctrine of substantial performance.
  2. How do courts address performance subject to the satisfaction of one of the parties?
  3. Many contracts contain conditions. Explain conditions concurrent, precedent, or subsequent.
  4. What are the requirements for the creation of a novation?
  5. What is required to create an accord and satisfaction (refer to A.G. King Tree Surgeons v. Deeb)?
  6. In the case of anticipatory breach of contract, an aggrieved party may select from which two options?
  7. Explain how the doctrine of impossibility was applied in Parker v. Arthur Murray, Inc.

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Thirteen | Remedies for Breach of Contract

A breach of contract occurs when a promisor fails, with­out any legal excuse or cause, to perform any of the obligations, undertakings, or promises stipulated in the contract. In such a case, the non-breaching party, also called the aggrieved party, is entitled to seek to a remedy against the breaching party. In most cases, this involves a suit for money damages. In some cases, a party may seek an injunction or a writ of specific performance in a court of equity in conjunction with a contract action. An injunction compels a party to do or refrain from specific acts. 

Damages

Compensatory Damages

Damages that are awarded to compensate the non-breaching party for the loss of the bargain are called compensatory damages. Compensatory damages may also be known as “general damages” or “benefit of the bargain” damages. For a breach of contract, “the law of damages seeks to place the aggrieved party in the same economic position he would have had if the contract had been [fully] performed.”  In a contract for the sale of goods, at least two possibilities exist. If the seller commits a breach and fails to deliver the goods called for in the contract, one possible measure of damages is the difference be­tween the contract price and the market price of the goods at the time of the breach.

Example

Suppose that Seton Hall University contracts to buy 10 Notebook Computers from Computers R-Us at $4,000 each. If Computers R-Us fails to deliver the Notebooks as called for in the contract, and the current price of the computers is $4,500, Seton Hall’s measure of damages in this case is $5,000 (ten times $500—the difference in the current price and contract price).

In other cases, the buyer may avail himself of the remedy of “cover”; that is, the buyer may go into the marketplace and make “in good faith and without any unreasonable delay any reasonable purchase or a contract to purchase goods in substitution” for those due from the seller. The buyer may then recover from the seller the dif­ference between the cost of cover and the contract price, plus any incidental or consequential damages, less any expenses saved. The remedy of cover is found in UCC §2712, and is the preferred action for an aggrieved buyer under the Uniform Commercial Code.

Incidental damages [UCC §2715] are any reasonable expenses incurred in effecting cover (i.e., transportation charges, freight charges, phone calls, etc.) or in the resale of the goods [UCC §2-710].

Example

In our PC example, if Seton Hall absolutely needed the Notebooks for an important conference, they might go to a local computer dealer and effect cover. Suppose the cover price was $4,650. Under the UCC, Seton Hall would be entitled to recover the difference between the cover price ($4,650) and the contract price ($4,000­), equaling $650 per unit, plus any incidental damages, minus any expenses saved, provided, of course, that this purchase had been made in “good faith.”

On the other side of the equation, under UCC §2706, a seller may elect to resell the goods which a buyer has wrong­fully rejected or when the buyer has refused to take delivery. Here, the seller may recover the difference between the resale price and the contract price (together with any incidental damages under UCC §2710, but less any expenses saved). All of the elements of the resale must be reasonable, and in some cases, notice of the resale must be given to the breaching party.

Consequential Damages

Interestingly, prior to 1854, there were almost no rules relating to contract damages. Assessment of damages was generally left to the discretion of the jury. In 1854, the important case of Hadley v. Baxendale was decided. The court laid down two important rules, applicable generally to the area of contract damages. First, the aggrieved party may recover those damages “as may fairly and reasonably be considered… arising naturally, i.e., according to the usual course of things, from such breach of contract itself.”  Second, the aggrieved party may recover damages “such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”    Under the first rule, for example, cover or resale damages under UCC §2-712 or UCC §2-706 will naturally and obviously flow from the breach so everyone will be deemed to contemplate them. Under the second rule, “special” or “consequential” damages may be deemed to be within the contemplation of the parties, but only under well-defined “special circumstances.”

Consequential damages are those caused by special circumstances occurring beyond the contract itself.  Such damage, loss, or injury does not flow directly and immediately from the act of the breaching party, but from some of the consequences or results of such an act.  In order for a court to award consequential damages (often in the form of lost profits), the breaching party must know that “special circumstances” will cause the non-breaching party to suffer an additional loss. In prac­tical terms, the non-breaching party may have to give the breaching party “notice” of the special circumstances.

Example

The ice shipment for the Fubarski Meat Market is not delivered as required by contract. Consequently, Fubarski’s entire freezer of fresh kielbasa is ruined. Fubarski goes to the local 7-Eleven and purchases ice, at an additional cost of $100 over and above the contract price. The ice company would be liable for the additional $100 as “cover” damages. In addition, the ice company might also be held liable for the meat spoilage as consequential damages arising from the consequences of the failure to deliver the ice.A second type of spe­cial or consequential damages occurs in cases where a defective product causes personal injury. Compensation for personal injury would be an example of consequential damages that might arise in a breach of warranty action. 

Let’s look at the classic common law case of Hadley v. Baxendale.

 

Case Summary

Hadley v. Baxendale

156 Eng. Rep. 145 (1845)

BACKGROUND AND FACTS

The plaintiffs ran a flour and gristmill in Gloucester, England. The crankshaft attached to the steam engine broke, causing the mill to shut down. The shaft had to be sent to a foundry located in Greenwich so that the new shaft could be made to fit the other parts of the engine. The defendants were common carriers, who transported the shaft from Gloucester to Greenwich. The plaintiffs claimed that they had informed the defendants that the mill was stopped and that the shaft must be sent immedi­ately. The freight charges were collected in advance, and the defendants promised to deliver the shaft the following day. They did not do so, however. Consequently, the mill was closed for several days. The plaintiffs sued to recover their lost profits during that time. The defendants contended that the loss of profits was “too remote.”   The court held for the plaintiffs, and the jury was allowed to take into consideration the lost profits. The high court reversed.

OPINION

We think that there ought to be a new trial in this case; but, in so doing, we deem it to be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our opinion, to direct the jury to be governed by when they estimate the damages.

* * *  Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communi­cated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contem­plation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstanc­es been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.

* * * Now, in the present case, if we are to apply the principles above laid down, we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person?  Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. On the other hand, again, suppose that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow. Here it is true that the shaft was actually sent back to serve as a model for a new one, and that the want of a new one was the only cause of the stoppage of the mill, and that the loss of profits really arose from not sending down the new shaft in proper time, and that this arose from the delay in delivering the broken one to serve as a model. But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstanc­es, such consequences would not, in all probability, have occurred; and these special circum­stances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a conse­quence of the breach of contract as could have been fairly and reason­ably contemplated by both the parties when they made this contract. ∗∗∗∗∗∗∗∗∗∗

The English court ordered a new trial, holding that the “special circumstanc­es” that caused the loss of profits had not been sufficiently communicated by the plaintiffs to the defendants. The plaintiff would be required to give “express notice” of these circumstances in order to collect special damages.

Punitive Damages

Punitive damages are also called exemplary damages. Punitive damages are designed to punish a “guilty” party for intentional, malicious, willful, or wanton conduct in order to make an example of the breaching party. The purpose of awarding punitive damages is to deter the wrongdoer from similar conduct in the future, as well as to deter others from engaging in similar conduct.  Gener­ally, punitive damages will not be awarded in cases of simple breach of contract, except for a category of cases involving contract fraud, due to the presence of “scienter,” or the intent to deceive. The court may add an additional amount (in some cases, three times the actual damages, called treble damages) in order to punish the breaching party for this wrong­ful conduct.

The United States Supreme Court entered the debate concerning punitive damages in 1996 and held in BMW of North America, Inc. v. Gore (517 U.S. 559) that under the Due Process Clause of the Fourteenth Amendment the amount of punitive damages awarded by a jury cannot be “grossly excessive” and must bear some reasonable relationship to the actual damages sustained. There have also been attempts by several state legislatures to limit or even abolish punitive damages in a wide variety of tort cases. The issue of excessive damage awards is often addressed by the request of a party for a remittitur of the damages awarded.

Nominal Damages

Where a party has suffered no true or provable damage, a court may choose to award only nominal damages which recognize the existence of a breach. In our Notebook computer case, if the cost of the Notebooks had declined, and Seton Hall could not demonstrate any incidental damages, Seton Hall might only be entitled to the award of nominal damages for this “technical breach,” because no actual monetary loss had been sustained. In such a case, a prudent plaintiff might think twice and decide not to file a lawsuit in the first place.

Liquidated Damages

A contract may specify an exact dollar amount that is to be paid in the case of a default or a breach. Such a clause is called a liquidated damage clause. Under the common law, a court would enforce a liquidated damage clause if: 

  • The amount set as liquidated damages is a reasonable estimate of the probable loss; and 
  • The parties must intend to provide for damages rather than a penalty. 

Suppose that a student had attempted to rent an apartment in South Orange and had submitted a standard rental application. As part of the application process, the student had to put down one month’s rent (approximately $800). The contract stated that the student would forfeit the deposit if she failed to rent the apart­ment. When the student changes her mind, she is informed that her deposit will be retained as liquidated damages. Can the landlord keep the deposit?  What standards should the court apply?  Evaluate.

Attorneys’ Fees

In the United States (as opposed to Great Britain, which has adopted a modified “loser pays” view), an award of damages will not ordinarily include reimbursement of the successful party’s attorney’s fees. Attorney’s fees should be viewed in light of the prior discussion of consequential damages. However, it has become common practice for commercial and residential leases, commercial paper, and contracts for sale of real estate to contain a clause providing for the collection of “reasonable attorney’s fees” in a case of non-payment  A majority of courts uphold such agreements, permitting recovery of a stipulated amount in excess of the damages that would accrue, provided that the amount demanded is reasonable. What do you think of the “Loser Pays” rule found in Great Britain?      

The Remedy of Specific Performance

The remedy of specific performance is an extraordinary remedy developed in a court of equity, also called a Chancery Court, to provide relief when the legal remedy of damages was inadequate. The remedy of specific performance is most appropriate when the non-breaching party is not seeking monetary damages; rather, the non-breaching party asks a court to issue a decree ordering a party affirmatively to carry out contractual duties (called a mandamus action), or desires performance of the promises in the contract.

Generally, courts will award specific perfor­mance if monetary damages are inadequate to put the non-breach­ing party in as good a position had the contract had been fully performed. In most cases of contracts for the sale of goods, monetary damages will be deemed adequate, since substitute goods may be readily available in the marketplace through the remedy of cover, or the goods can be sold in the marketplace through the remedy of resale. However, under the common law, if the goods were considered unique, a court of equity may issue a decree of specific performance. Under the common law, such “unique” items included antiques, objects of art, racehorses, stock in a closely held corporation, and all land. Recall the remedy W.O. Lucy was seeking in Lucy v. Zehmer.

Courts are very reluctant to grant specific performance in personal service contracts because public policy consider­ations discourage what would amount to involuntary servitude. In addition, courts do not generally desire to monitor a continuing personal service contract to assure that it is carried out. Specific performance is rarely available in an action in a small claims court.

Read Tower City Grain v. Richman for a discussion of specific performance under the UCC. Although the UCC attempted to liberalize the availability of the remedy of specific performance in §2-716, such relief may remain the extraordinary rather than the ordinary remedy because courts generally prefer aggrieved parties to avail themselves of the remedies of cover and resale in cases of a breach of contract involving the sale of goods.

 

Case Summary

Tower City Grain Co. v. Richman

232 N.W.2d, 61 N.D. (1975)

Plaintiff sued the defendant for specific perfor­mance of an oral contract for the sale of wheat. The lower court ordered specific performance and the defen­dant appealed. The defendant contended that specific performance was not a proper remedy in this case.

PEDERSON, J.

*  *  *  The Uniform Commercial Code is controlling in the instant case and states in part:

1. Specific performance may be decreed where the goods are unique or in other proper circumstances.

2. The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (Emphasis added.)

While the Richmans’ contention that fungible goods were not a proper subject for the remedy of specific relief under prior law is correct, the adoption of the Uniform Commercial Code in 1966 liberalized the discre­tion of the trial court to grant specific performance in a greater number of situations. The Official Comment to §2-716, UCC, provides in pertinent part:

1. The present section continues in general prior policy as to specific perfor­mance and injunction against breach. However, without intending to impair in any way the exercise of the court’s sound discretion in the matter, this Article seeks to further a more liberal attitude than some courts have shown in connection with the specific perfor­mance of contracts of sale.

2. In view of this Article’s emphasis on the commercial feasibility of replacement, a new concept of what are “unique” goods is introduced under this section. Specific performance is no longer limited to goods which are already specific or ascer­tained at the time of contracting. The test of unique­ness under this section must be made in terms of the total situation which characteriz­es the contract.

In addition, (the Code) states that “the remedies provided by this title shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully per­formed.”  We cannot presume that an award of damages fails to put an aggrieved party in as good a position as if the other party had fully performed. There was no finding or conclusion to that effect by the trial court in this case.

A complaint which prays for the equitable remedy of specific performance must clearly show that the legal remedy of damages is inadequate. A defendant should not be deprived of a jury trial, to which he would be entitled in an action at law, unless the plaintiff is clearly entitled to the equitable remedy he seeks.

Historically, specific performance, which is an equitable remedy, was applied primarily to contracts relating to goods which were “unique.”  All real estate was deemed to be unique, and so were goods which had sentimental as distinguished from market value. Another basis for invoking specific performance was the inadequa­cy of the remedy at law.

A factual basis for a conclusion that the remedy of specific performance is available should be found by the trier of facts in order, that this court, on appeal may know the basis upon which it arrived at such a conclu­sion.

There is no finding by the trial court in this case that indicates what it believes to be the proper circum­stances. Our examination of the record indicates no evidence upon which such finding could be based. The fact that the complaint prayed for specific performance and that the Richmans have in their possession the type and quantity of wheat called for in the contract are not adequate to support such a finding.

The buyer may obtain specific performance of the contract for the sale when the goods are unique or other proper circumstances are shown. Because the purpose of this section is to liberalize the right to specific performance, it would appear that it is not to be of great significance whether a given circumstance is regarded as involving “unique goods” or “proper circum­stances”; ordinarily, circumstances which are proper will impart uniqueness to the goods. “Uniqueness in a reasonable commercial setting is the significant point.”

Without holding that specific performance can never be invoked to enforce a contract for grain or other fungible goods, we conclude that it was a manifest abuse of discretion and an error as a matter of law for the trial court to grant such a remedy under the circumstanc­es of this case.

Judgment reversed and remanded with leave to amend.

As can be seen, the writers of the UCC attempted to broaden the scope of specific performance by adding a section [§2716 (1)] which states that specific perfor­mance may be decreed where the goods are “unique” or “in other proper circumstances.” Yet, many courts are reluctant to go beyond the conventional categories of unique goods found in the common law. Under the code, what is the precondition to filing a suit for specific performance?  What are “proper circumstances”?  Why are some courts so reluctant to go beyond the common law?

The court found that specif­ic performance would be an appropriate remedy in Campbell Soup Co. v. Wentz. However, the court ultimately refused to issue the decree for specific performance because it ruled that the underlying contract was unconscionable. What did the court find unconscionable about the contract between the parties?

 

Case Summary

Campbell Soup Co. v. Wentz

172 F.2d 80 (3d Cir. 1948)

BACKGROUND AND FACTS

Campbell Soup Company, the plaintiff, entered into a contract for the sale of carrots with farmers who grew and produced the particular variety of carrots used in the company’s canned goods. Under the terms of the contract, a farmer was required to cut, clean, and bag the produce. When the carrots were delivered, the company determined if they conformed to company specifi­ca­tions. Another provision in the contract excused the company from accepting carrots under certain circumstanc­es but retained the right to prohibit the sale of those carrots elsewhere unless the company agreed. The carrots involved in this case were Chantenay red carrots.

Campbell Soup made a written contract with the defendant, Wentz, a Pennsylva­nia farmer. Wentz was to deliver all the Chantenay red carrots he grew on his fifteenacre farm that year for $30 per ton. During the year, the market price of the carrots rose sharply to about $90 per ton, and Chantenay red carrots became virtually unobtainable. The defendant told a Campbell representative that he would not deliver his carrots at the contract price. Then, he sold the rest of his carrots to a neighboring farmer. Campbell bought about half the shipment from the neighboring farmer and then realized that it was purchasing its own “contract carrots.”  Campbell refused to purchase any more and sought an injunction against both the defendant and the neighboring farmer to prohibit them from selling any more of the contract carrots to others. In addition, Campbell sought to compel specific performance of the contract against Wentz. The trial court denied the equitable relief requested by Campbell.

GOODRICH, Circuit Judge

*  *  *

The trial court denied equitable relief. We agree with the result reached, but on a different ground from that relied upon by the District Court.

*  *  *

We think that on the question of adequacy of the legal remedy the case is one appropriate for specific performance. It was expressly found that at the time of the trial it was “virtually impossible to obtain Chantenay carrots in the open market.”  This Chantenay carrot is one which the plaintiff uses in large quantities, furnishing the seed to the growers with whom it makes contracts. It was not claimed that in nutritive value it is any better than other types of carrots. Its blunt shape makes it easier to handle in processing. And its color and texture differ from other varieties. The color is brighter than other carrots. The trial court found that the plaintiff failed to establish what proportion of its carrots is used for the production of soup stock and what proportion is used as identifiable physical ingredi­ents in its soups. We do not think lack of proof on that point is material. It did appear that the plaintiff uses carrots in fifteen of its twenty one soups. It also appeared that it uses Chantenay carrots diced in some of them and that the appearance is uniform. The preserva­tion of uniformity in appearance in a food article marketed throughout the country and sold under the manufacturer’s name is a matter of considerable commer­cial significance and one which is properly considered in determining whether a substitute ingredient is just as good as the original. 

*  *  *

Judged by the general standards applicable to determining the adequacy of the legal remedy we think that on this point the case is a proper one for equitable relief. There is considerable authority, old and new, showing liberality in the granting of an equitable remedy. We see no reason why a court should be reluctant to grant specific relief when it can be given without supervision of the court or other time consuming process­es against one who has deliberately broken his agreement. Here the goods of the special type contracted for were unavailable on the open market, the plaintiff had contracted for them long ahead in anticipation of its needs, and had built up a general reputation for its products as part of which reputation uniform appearance was important. We think if this were all that was involved in the case specific performance should have been granted.

We are not suggesting that the contract is illegal. Nor are we suggesting any excuse for the grower in this case who has deliberately broken an agreement entered into with Campbell. We do think, however, that a party who has offered and succeeded in getting an agreement as tough as this one is, should not come to a chancellor and ask court help in the enforcement of its terms. That equity does not enforce unconscionable bargains is too well established to require elaborate citation.

This case provides an interesting glimpse into the relationship between the equitable remedy of specific performance and the doctrine of unconscionability. Since specific performance is an equitable remedy, the petitioner must come to court “with clean hands,” reflecting the following legal maxim: “He who seeks equity must do equity.”  What do you think this phrase means? 

The Requirement of Mitigation

In a situation where a breach of contract has oc­curred, the non-breaching party may be required to lessen or miti­gate damages. A party who has suffered a wrong by a breach may not unreasonably sit by and allow damages to accumulate or worsen. The law will not permit the aggrieved party to recover from the breaching party those damages that he “should have foreseen and could have avoided by reasonable effort without undue risk, expense, or humiliation.” [Restatement, Contracts §336(1)].

The doctrine requires reasonable efforts by the non-breaching party to mitigate or lessen damages. However, the wronged party is not required to mitigate if the cost of mitigation would involve unreasonable expense or if the effort itself would be unreasonable. The case of Parker v. Twentieth Century Fox demonstrates the operation of the mitigation principle in a case of a breach of an employ­ment contract.

 

Case Study

Parker v. Twentieth Century Fox Film Corp.

474 P.2d 689 (1970)

Procedural Posture

Shirley McLain Parker signed a contract to play the female lead in Twentieth Century Fox’s projected motion picture Bloomer Girl. Before production began, the corporation decided not to produce the picture and notified the actress of its decision. With the professed purpose of avoiding damage to the actress, the corpora­tion offered her the leading role in another film entitled Big Country, Big Man. She rejected the alter­nate role and sued for damages. The corporation claimed the actress had unreasonably refused to mitigate harm to her career by refusing to accept the substitute role. Parker won the case.

Outcome

The trial court pointed out that although the contract for the substituted role offered identical compensation and terms as the prior contract, Bloomer Girl was to have been a musical, and Big Country was to be a dramatic western movie. Furthermore, the musical was to be filmed in California, the western in Australia. The original contract also specified that the actress could approve the director for the musical, and if that person failed to direct the picture, she was to have the right to approve any substitute director. The actress also had the right to approve of the musical’s dance director and the screenplay. The western offer eliminat­ed or impaired each of those rights. Twentieth Century Fox’s sole defense is that the actress unreasonably refused to mitigate damages by rejecting the substitute offer of employment.

Outcome

In this case, the offer to star in the western was for employment both different from and inferior to that of making the musical, and no factual dispute exists on that issue. The female lead as a dramatic actress in a western style motion picture can by no stretch of the imagination be the equivalent of or substantially similar to the lead in a song-and-dance production. In addition, the western offer proposed to eliminate or impair the approvals the actress had under the original musical contract, and thereby constituted an offer of inferior employment.

There is a split of authority in real estate leasing cases, although the majority view would indicate that the lessor must at least attempt to mitigate damages in case of a breach by a lessee by at least attempting to re-rent the property. Any reasonable expenses incurred in these efforts would be recoverable as “incidental expenses.”

Example

Two Seton Hall University students are renting an apartment in South Orange. For no good reason, the students decide to move out, causing a breach of the lease agreement. Under these circumstances, most states would require that the landlord use reasonable means to secure a new tenant. If such a tenant becomes available, the landlord will be required to mitigate the damages that are recoverable from the former tenant. Of course, the breaching party is liable for the difference between the amount of the original rent and the rent received from the new tenant. The landlord would also be entitled to recover any costs reasonably incurred in the mitigation effort. Now suppose the landlord did absolutely nothing and refused to take steps to re-rent the apartment.  The court might reduce the amount of damages awarded by the amount the landlord could have received had reasonable steps in mitigation been taken.

In a case where an employee has been terminated for no just cause, but where the employer alleges that the employee had failed to mitigate their damages by refusing to accept alternate employment, the burden of proof is on the employer to prove the existence of an alternate job and to prove that the employee could have been hired—that is, that the employee had failed to mitigate his or her damages by refusing to accept suitable alternate employment.

 

Ethical Considerations

Punitive Damages

Should a state legislature place an arbitrary limit on the award of punitive damages or should this issue be strictly reserved for a jury, subject always to a motion for a remittitur to a judge?

Specific Performance

Generally, a court of law or an arbiter cannot order specific performance of a contract. Do you agree or disagree with this prohibition? If specific performance were an option to a judge or arbiter, would that fundamentally change the role of the court or of an arbiter?

 

Questions

Hadley v. Baxendale

  1. What remedy was the plaintiff seeking?
  2. What is a “common carrier”?
  3. How did the court formulate the rule established in this case for awarding damages?
  4. Where would you expect to find an agreement to provide for consequential damages?

Tower City Grain v. Richman

  1. What remedy was the plaintiff seeking?  Why?
  2. What is the definition of “uniqueness” under common law?  Under the Code?
  3. What finding must be made before a court can award specific performance?
  4. Who decides whether the remedy of specific performance would be an appropriate one?
  5. What items fall within the definition of uniqueness under the common law?

Campbell Soup v. Wentz

  1. Was the remedy of specific performance appropriate in this case?  Why or why not?
  2. Who is a “chancellor”?  What is equity?
  3. What was unconscionable about the contract entered into between the parties?
  4. Explain the “clean hands” doctrine.

Parker v. Twentieth Century Fox

  1. What is mitigation?
  2. What would be the measure of Parker’s damages?
  3. Who has the burden of proof concerning mitigation?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Seven | Consideration

Consideration may be defined as “something bargained for in return for a promise.” Some promises have little or no legal significance because the element of bargain is missing. For example, if a person promises to give a gift to another person, a court would not generally impose an obligation to complete the gift because the bargain element is missing. Gifts are legally classified as donative transactions and are not enforceable as contractual promises — they are considered as gratuitous and not supported by consideration.

Consideration may consist of the following:

  • In a bilateral contract, the consideration for the promisor’s promise is a promise made by the promisee.
  • In a unilateral contract, the consideration for the promisor’s promise is the act of the promisee.
  • In a forbearance on the part of the promisee, which is defined as the giving up of a valid legal right. For example, “I will give up my right to sue you for defamation if you agree to retract your comments.”
  • In the creation, modification, or destruction of a legal relationship. (Example: I promise to pay you $500 if you will agree to let me out of my apartment lease/revise my employment contract.)

The common law placed great emphasis on the concepts of “benefit” and “detriment” in deciding if a promise would be enforced. Under a modern view, courts look instead to the existence of the bargain to determine if a promise will be enforced.

Moral Obligations And Past Consideration
­

A promise based on past consideration (an act that occurred in the past), or upon a moral obli­ga­tion, a moral duty, a sense of honor, or love or affection is generally not enforceable­. For example, “in consideration of the fact that you named your first son Stanislaus in my honor, I promise to pay you $10,000.” This promise is generally not enforceable because the act had occurred in the past. How does this differ from the following promise; “If you agree to name your first son Stanislaus in my honor, I promise to pay you $10,000”?

The Rules of Consideration

There are two general rules that supply the basis for an understanding of consider­ation.

First, a court will not usually question the adequacy of consideration. That is, simply stated, courts are not generally concerned if the transaction was a good bargain or a bad bargain in an economic sense, only that there in fact was a bargain! This rule has one major exception: where a bargain is made between parties within a fiduciary or confidential relationship, a court of equity may be concerned with the adequacy of the bargain and will carefully scrutinize such a bargain in order to assure that any consideration was adequate.

The second general rule may be stated as follows: Once parties enter into an agreement, they are bound by the terms agreed upon. Any attempt to change the terms of the agreed-upon bargain (especially the compensation term), “hold out” or renegotiate a “better deal,” will be met with a “consideration problem” found in the application of what is known as the pre-existing duty rule.

Pre-Existing Duty Rule

The pre-existing duty rule states: “Where a party does or promises to do what he is already legally bound to do or promises to refrain from doing or refrains from doing what he is not legally permitted to do, he has not incurred legally sufficient detriment.” Under these circumstances, there is no consideration for the underlying promise. The pre-existing duty may arise in the context of a prior contract or may be imposed by a statute or law. Let’s look at three examples of the application of the pre-existing duty rule.

Example

Frederick agrees to hire Williams for a two-year period at $500 per week. After a six-month period, Frederick orally promises to increase Williams’ wages to $600 per week. Later, when Wil­liams notices that his pay has remained at $500, he contacts Frederick and Frederick refuses to increase the pay. Frederick’s promise to pay the additional $100 is unenforceable because it is essentially gratuitous and is not supported by consideration. Williams was already under a preexisting duty (a contract) to work for a two-year period for $500 per week.

Example

Ray Ryker is a Sheriff in Bergen County. When a drunk driver kills Mrs. Gyros’ husband, she posts a $5,000 reward for the capture of the driver. Later, when Ryker appre­hends the driver in a drunk-driving stop, he seeks the reward. Since Ryker was already under a preexisting duty to perform the act in question by virtue of his job as an under-sheriff, he is not entitled to the reward because he has suffered no legal detriment. Ryker has furnished no new or additional consider­ation to Mrs. Gyros for her promise.

The pre-existing duty rule has been seen as overly harsh and rigid in some circumstances where conditions change and where there may be legitimate reasons to seek a revision in contract terms. As a result, several exceptions to the pre-existing duty rule developed.

Example

Jacobs, a contractor, agrees to build a home for the Martins. After completing about half of the job, Jacobs demands an additional $10,000 or he will “walk out on the job.” Even if the Martins agree to the payment of the additional $10,000, their promise would not generally be enforceable because Jacobs was already under a preexisting duty to construct the home at the original contract price. Their promise to pay the additional amount of $10,000 is not supported by consideration and would be barred by the pre-existing duty rule. 

Rescission

It is entirely possible that two parties can mutually agree to terminate an existing agreement if the agreement is executory and has not yet been performed. The surrender of rights under the agreement by each party is the consideration for the mutual agreement of rescission. For example, Carr and Hanner enter into a con­tract whereby Carr will purchase Hanner’s Honda. Carr later calls Hanner and informs him that he is no longer interested and “could he just back out.” Hanner agrees. This results in a rescission of the original contract and a termination of the obligations of both parties.

Unforeseen Difficulties

During the performance of a contract, a party might encounter unforeseen and substantial problems that could not have been anticipated at the time the contract was entered into. These problems must be of the type and character that are “entirely beyond the contem­plation of the parties.” One such problem is seen in the concept of force majeure. Unforeseen difficulties would ordinarily not include occurrences such as strikes, labor shortages, inclement weather, or an increase in the price of components or goods. These types of “difficulties” indeed should have been foreseen and provided for in a contract, as risks which might be ordinarily or normally encountered in an “arms length” business relation­ship.

Secondly, if the “unforeseen difficulty” involves a severe and unexpected increase in price, as in Westinghouse Corporation Uranium Contract Litigation (405 F. Supp. 316 (1975), some courts will hold that the contract has been “frustrated” and will permit an increase in the price or will permit a party to remove him or herself from a contract. However, the increase in price or circumstances must be unusual, extreme, or severe.

Unforeseen difficulties may be analogized to the doctrine of “commercial impracticability” found in UCC Section 2-715 which provides a valid excuse for breach of contract “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

It should be noted that while a plea to a court on grounds of “unforeseen difficulties” or “commercial impracticability” might be successful on the first occasion where a severe price increase occurs, most analysts agree that such a plea might not be appropriate or successful on a subsequent occasion.

Special Aspects of Consideration

Accord and Satisfaction

An issue may arise where a debtor realizes that he or she is in a relative position of strength with respect to the desire of a creditor to secure some amount of repayment on a debt. In such a case, the debtor may attempt to hold the payment hostage to a demand that the creditor will accept less than a contract requires. In contrast, there may be a case where the debtor has a genuine dispute with a creditor as to any amount owed that the debtor wishes to resolve the dispute by making a final payment. In this case, a debtor may attempt to discharge a disputed amount through an accord and satisfaction.

An accord and satis­faction is an attempt by a debtor to legally extinguish a debt by paying or tendering a lesser amount than that stipulated in the contract or that is demanded by a creditor. The accord is defined as the agreement whereby one of the parties undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than that which was originally promised or agreed upon. Satisfaction takes place when the accord is executed (when a party agrees to accept the lesser amount in satisfaction of the debt).

Read the following case carefully.

 

Case Summary

A. G. King Tree Surgeons v. Deeb

356 A.2d 87 (NJ 1976)

DALTON, J.

This is a contract action brought by A. G. King Tree Surgeons for the contract price of $480, plus tax and interest, for tree pruning work performed at the home of defendant George Deeb on or about May 30, 1975.

Plaintiff alleges the work was performed pursuant to an oral contract made by telephone, after an estimate of $480 had been transmitted orally, also by phone, to defendant. The work agreed on and actually performed was, according to plaintiff, the pruning of 15 trees on defendant’s property.

Defendant states by way of affirmative defense that * * * an accord and satisfaction was reached before the filing of this lawsuit. * * *

First, it is undisputed that defendant, upon receipt of the invoice for $504 (representing the $480 contract price plus $24 tax), protested to plaintiff by telephone that he had never entered into a contract for this amount and had only authorized an estimate from plaintiff, nor did he ever sign a contract or an acknowledgment of work performed. This is not, therefore, a case of a liquidat­ed sum which is due and owing but rather a genuine dispute between the parties as to what liability, if any, defendant owes to plaintiff for the work performed.

Second, it is undisputed that shortly after this controversy arose defendant’s attorney forwarded to plaintiff defendant’s check in the amount of $100 with a notation typed on the reverse side (above the space for the endorser’s signature) to the effect that this $100 was in full and final settlement of all claims of A. G. King against defendant for work performed in May 1975. Along with the check defendant’s attorney sent a letter of transmittal which stated in no uncertain terms that although defendant denied that authorization was ever given to plaintiff to perform work for defendant, nevertheless the $100 check was submitted in good faith in an attempt to amicably settle the claim, and that if plaintiff wished to settle for this amount, he should deposit the check. Plaintiff corporation, through its president A. G. King, did deposit the check but only after he obliterated the notation placed on it by the drawer and substituted in its place a notation that the check was only in partial payment of the amount due. Based on this set of facts defendant argues that an accord and satisfaction was reached between the parties at the time the check was deposited, notwithstanding the fact that the president of plaintiff corporation altered the notation on the reverse side of the check. This court agrees.

The traditional elements of an accord and satisfac­tion are the following: (1) a dispute as to the amount of money owed; (2) a clear manifestation of intent to settle the dispute; (3) accep­tance of satisfaction by the creditor.

The president of plaintiff corporation alleges, of course, that there could be no acceptance of any offer of settlement since he deliberately altered the check before depositing it, making it clear that he considered the $100 only a partial payment and not a full settlement of the matter. However, it is clear that plaintiff had no right to alter the check. If the check was unacceptable as a final settlement, plaintiff’s remedy was to return the check to defendant and sue for the full amount claimed due. Plaintiff chose rather to alter the check, accept the $100 “in partial payment” and sue for the difference.

In this case, however, the check did not stand alone; it was accompanied by a letter from defendant’s attorney which made it clear that (1) there was a genuine dispute between the parties as to what amount of money, if any, was due plaintiff; (2) defendant intended that the $100 check was to be in full satisfaction of the dispute between the parties; and (3) if, and only if, plaintiff agreed to settle the dispute for this amount, the check was to be deposited.

It is the opinion of this court that the check and letter can, and indeed must, be read together as consti­tuting an offer to settle this dispute for $100, and that the depositing of the check constituted the acceptance of this offer. Once the check was deposited by plaintiff, no matter what alterations the corporation’s president personally made on its reverse side, an accord and satisfaction was reached. * * *

The letter of transmittal * * * recites the basis of the genuine dispute between the parties and the intent of defendant to have the enclosed payment totally satisfy the dispute, and this satisfies the first two require­ments of an accord and satisfaction. The third require­ment of an accord and satisfaction is the acceptance of the offer and, in this case, the deposit of the check by plaintiff operated ipso facto as such an acceptance. * * *

Judgment for defendant.

Substitutes for Valuable Consideration

Some promis­es may be enforced without consider­ation, either on grounds of public policy or in the exercise of a court’s equitable jurisdiction. These include:
A composition of creditors’ agreement is an agree­ment between an insolvent debtor and his/her creditors under which the creditors will accept either a specified amount or a percent­age of the amount owed. Such an agreement is fully enforce­able without consideration. These agreements frequently are substitutes for a filing of a petition in bankruptcy and are favored by courts.

The doctrine of promissory estoppel: This equitable doctrine is usually applied where a promisor makes a gratuitous promise, often involving a promise to make a gift. The parties are not bargaining for anything in a true commercial sense. For example, Aunt Edna tells her godson, Richard: “I promise to pay you $500 per week so you won’t have to teach any longer.” Later, Richard quits his job, but Aunt Edna now refuses to pay. The doctrine of promissory estoppel may permit the court to enforce Aunt Edna’s promise under certain circumstances if Richard has relied on the promise and changed his position by resigning from his teaching job.

The doctrine of promissory estoppel is based on the re­quirement of reliance on the part of the promisee. It is found in Section 90 of the Restatement of the Law of Contracts:
“A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”

One final point. In enforcing a promise based on promissory estoppel, a court may only enforce the promise to the extent of the reasonable reliance damages of the promise — not necessarily the full amount of the contract.

For example, suppose Jerry Lynch promises to donate $500,000 to St. Rose Church for the Athletic Fund and its drive to build an athletics complex. Based on Lynch’s pledge, St. Rose hires an engineer and clears two fields of underbrush. Later, Lynch backs out of his promise. If Lynch were sued on his promise under a contract theory, a court would probably dismiss the suit because, as we know, a promise to make a gift is generally not enforce­able because it is not supported by consideration. However, if a court were to apply the doctrine of promissory estoppel, St. Rose might be able to enforce the promise to the extent of its reasonable reliance damages—the monies actually expended by St. Rose in reliance on Lynch’s promise. Remember, promissory estoppel is not consideration; it is a substitute for consideration.

 

Ethical Considerations

Berry and Cleary

Berry Publishing is in a dispute with the Cleary Corporation, a book printing company located in South Bend, Indiana. Berry claims that Cleary has breached its contract with Berry by failing to deliver on its promise to produce sufficient copies of the “History of The Chicago Cubs” for distribution in several “Chicagoland” banks as a premium for opening up a new checking or savings account. After months of frustration and protracted negotations regarding acquiring a credit, Berry sends a check to Cleary, deducting $100,000, an amount it calculates represents its losses on the project. Cleary receives a letter explaining this deduction and a check reflecting the deduction. However, Cleary has crossed out the notation “Paid In Full” on the memo portion of the check and wrote “Partial Payment” instead.

Should a court enforce the alleged “accord and satisfaction” even though Cleary maintains that it was Berry who actually was responsible for the loss because they had delayed in providing the page proofs to Cleary? Shouldn’t this case proceed to a trial on the issues rather than on a “technical rule” like an “accord and satisfaction?”

 

Questions

  1. Find the unusual case of Fiege v. Boehm. Read it carefully. Do you agree with the court’s conclusion?

A. G. King Tree Surgeons v. Deeb

  1. What did King do when he received Deeb’s check?
  2. What are the elements of an “accord and satisfaction”? Were they present here?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

 

Chapter Five | Contracts Overview

Definition Of A Contract

A contract may best be defined as an enforceable promise. A contract may be oral or it may be in writing. Professor Williston, a remarkable teacher and legal scholar of contracts in the last century, noted: “A contract is a promise, or a set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” A promise is an undertaking that something either will or will not happen in the future. The term “contract” may also used by both laymen and lawyers to refer to a document in which the terms of a specific agreement are written.

Every contract involves at least two parties: the offeror (the party who makes an offer) and the offeree (the party to whom the offer is made). The offeror promises to do or to refrain from doing something.

Requirements of a Valid Contract

This discussion of contracts is not meant to be exhaustive. Rather, this text discusses contracts in the larger context of the legal, social, and regulatory environment of business from a managerial standpoint.

The following are the four basic elements of a valid contract:

  • An agreement, consisting of an offer and an accep­tance. Whether by words or actions, or a combination of both, the parties must form or come to an agreement. An essential prerequisite to the formation of a contract is the mutual manifestation of assent (agreement) to the same terms. This is sometimes called the “meeting of the minds” or “consensus ad idem” in Latin.
  • Consideration is defined as “something bar­gained for in return for a promise.” Today, courts focus especially on the concept of bargain in deciding if a particular promise should be enforced.
  • Legal capacity of the parties. Both the offeror and the offeree must have the contrac­tual capacity to enter into a contract. Contractual capacity may involve issues such as age (so called minors’ contracts) and mental state (e.g., persons suffering from senility or Alzheimer’s disease), and may involve issues such as fraud, undue influence, or duress.
  • Legal purpose. A contract cannot be formed for an illegal or immoral purpose, cannot violate a statute, or be in violation of “public policy.”

In addition, there are two “outside” factors that may make a contract unenforceable should one of the parties seek its enforcement in a court:

The Statute of Frauds requires that certain types of contracts must be in writing to be enforceable.

The Statute of Limitations prescribes the time period during which a party must sue for breach of contract or to enforce contractual rights.

Classifications of Contracts

Express Contract

An express contract is one in which all of the essential terms of the agreement are found in words, either orally or in writing. A brief word about oral contracts is appropriate. Strictly speaking, most contracts are not required to be in writing, unless the Statute of Frauds applies. However, attempting to enforce an oral contract may provide basic proof prob­lems for the litigants and for a court. Oral proof is valuable and probative, and in many cases, may be the only proof available. However, if parties’ oral testimony conflicts, in the absence of written proof, a court may be required to decide a dispute on the basis of credibility, or believability of witness­es. The words of humorist Will Rogers are quite appropriate: “An oral contract is not worth the paper it’s printed on!”

Implied Contract (Implied In Fact)

The following four steps generally establish an implied in fact contract:

  • Plaintiff furnished some service, goods, or property to the defendant;
  • Plaintiff expected to be paid for the service, goods, or property;
  • Defendant knew or should have known that payment was expected; and
  • Defendant had the opportunity to reject the service, property, or goods and did not do so.

Example
An implied in fact contract is created by conduct, rather than words. An implied in fact contract exists where facts and circumstances indicate that a contract or an agreement has been entered into. Every morning for a month, Freddy Glotz opens his front door and notices that the Ace Milk Company has delivered four bottles of milk. Freddy brings the full bottles into the kitchen, uses their contents, and leaves the empty bottles at the door. At the end of a one-month period, Freddy receives a bill for $120, representing $1 for each bottle of milk. Freddy refus­es to pay the bill stating that “no contract was entered into because I had never promised to pay for the milk.” Evaluate. Was there an express contract? Was there an implied contract? What could Glotz have done so that no implied contract would be found by a court?

The following case discusses the creation of an implied in fact contract and the obligation of the defendant, Caton, to pay for a service, despite the fact that he claimed he had no intention to do so. Pay close attention why the court inferred Caton’s promise to pay for the wall. This is also an important case relating to silence as the basis of creating an obligation in the area of contract law.

 

Case Summary

Day v. Caton

119 Mass. 513 (1876)

Background and Facts

Plaintiff Day owned a vacant lot that was next to defendant Caton’s vacant lot. Day decided to build a brick wall between the adjoining lots. The evidence indicated that Caton knew the wall was being built. Caton claimed that there was no express agreement between him and Day to pay for a portion of the wall, and that his silence and subsequent “use” of the wall did not raise an implied promise to pay anything for it. In the trial court, the jury found for the plaintiff, Day. Caton appealed the decision of the trial court to the Supreme Judicial Court of Massachusetts in order to have the judgment overruled.

DEVENS, Judge

The ruling that a promise to pay for the wall would not be implied from the fact that the plaintiff, with the defendant’s knowledge, built the wall, and that the defendant used it, was substantially in accordance with the request of the defendant, is conceded to have been correct.
The defendant, however, contends that the presiding judge incorrectly ruled that such promise might be inferred from the fact that the plaintiff undertook and completed the building of the wall with the expectation that the defendant would pay him for it, the defendant having reason to know that the plaintiff was acting with that expectation, and allowed him thus to act without objection.

The fact that the plaintiff expected to be paid for the work would certainly not be sufficient of itself to establish the existence of a contract, when the question between the parties was whether one was made. It must be shown that in some manner the party sought to be charged assented to it. If a party, however, voluntarily accepts and avails himself of valuable services rendered for his benefit, when he has the option whether to accept or reject them, even if there is no distinct proof that they were rendered by his authority or request, a promise to pay for them may be inferred. His knowledge that they were valuable, and his exercise of the option to avail himself of them, justify this inference. And when one stands by in silence, and sees valuable services rendered upon his real estate by the erection of a structure (of which he must necessarily avail himself afterwards in his proper use thereof), such silence, accom­pa­nied with the knowledge on his part that the party rendering services expects payment therefore, may fairly be treated as evidence of an acceptance of it, and as tending to show an agreement to pay for it.

* * * * *

If silence may be interpreted as assent where a proposition is made to one which he is bound to deny or admit, so also it may be if he is silent in the face of facts which fairly call upon him to speak.

If a person sees a laborer day-after-day at work in his field doing services, which must of necessity insure to his benefit, knowing that the laborer expected pay for his work when it was perfectly easy to notify him if his services were not wanted, even if a request were not expressly proved, such a request, either previous to or contemporane­ous with the performance of the services, might fairly be inferred. But if the fact was merely brought to his attention upon a single occasion and casually, if he had little opportunity to notify the other that he did not desire the work and should not pay for it, or could only do so at the expense of much time and trouble, the same inference might not be made. The circumstances of each case would necessarily determine whether silence with knowledge that another was doing valuable work for his benefit and with the expectation of payment indicated that consent which would give rise to the inference of a contract. The question would be one for the jury, and to them it was properly submitted in the case before us by the presiding judge.

Implied In Law (Also Called Quasi-Contract)

An implied in law contract is not a true contract created by the parties, but is an obligation imposed on the parties in equity in order to “do justice” and to avoid unjust enrichment. A quasi-contract may be created where one person confers a benefit on another who retains the benefit, and where it would be unjust not to require that person to pay at least something for the benefit. Recovery is generally based on the reasonable value of the services received by the defendant – in some cases, not including the profit of the person conferring the benefit. This remedy is termed quantum meruit.

Example

While Ma and Pa Ferg are on a week’s vacation in Hoboken, the EZ Roofing Company puts a new roof on the Ferg’s home. When the Ferg’s return home, they receive a bill for $2,500.0­0. When they refuse to pay the bill, the EZ Roofing Company brings suit against the Ferg’s based on a quasi-contract. Evaluate. Has there been unjust enrichment? What else would be required? 

Bilateral and Unilateral Contracts

A contract is unilateral if the offer can be accepted by the performance of an act. A contract is bilateral if both parties, the offeror and the offeree, have made mutual promises and are bound to fulfill obligations towards each other. For example, in a typical sales contract, the seller has promised to deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.

Example

Heller says to Teston, “If you cut my lawn next Wednes­day, I promise to pay you $10.” Heller has made a promise but has not asked Teston for a return promise. Heller has requested Teston to perform an act, not to make a promise or commitment to do so. Heller has thus made an offer for a unilateral contract that arises when and if Teston performs the act called for. However, if Teston fails to cut the lawn, he is not in breach of contract since he made no promise to do so.

Suppose Heller had said to Teston, “I promise to pay you $10 if you promise to cut my lawn each week this summer.” In this case, Heller’s offer requests Teston to make a commitment or promise to cut the lawn. A bilateral contract arises when the requisite return promise is made by Teston. deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.

Executory Contracts

A contract that has been fully performed by both the promisor and promisee is termed an executed contract. A contract that has not yet been full performed by either party is said to be executory. A contract that has been partially performed by one of the parties is called a partially executed contract.

Void and Voidable Contracts

A void contract is one that has no legal significance and results in no legal obligation upon the part of either a promisor or promisee. A void contract generally cannot be enforced by a court. A contract to commit a crime or a tort or a contract that violates “public policy” is an example of a void contract. A voidable contract is a contract in which at least one of the parties has the power to avoid his or her legal duty established in the contract by disaffirming the contract. In essence, one of the parties has the option or right to remove him or herself from the agreement with no negative legal consequences. If a party decides not to elect to remove him or herself from the contract, the contract will continue in full force.

Examples of voidable contracts may include agreements entered into by a minor, or a contract entered into as a result of fraud, mutual mistake, duress, or undue influence.

Unenforceable Contracts

An unenforceable contract arises when a court is legally constrained from enforcing a contract because of some extrin­sic factor not connected with the elements of a valid con­tract discussed above. For example, an otherwise valid contract may not be enforced by the courts because of the operation of the Statute of Frauds or the Statute of Limitations. Whether or not a contract is unenforceable is usually determined at a very early stage of a case, as a “threshold question,” through a motion for a summary judgment, or through a motion to dismiss a lawsuit filed by one of the parties.

Unconscionable Contracts

Under the early common law, courts would regularly enforce contracts entered into by parties under a principle known as freedom of contract—even contracts that appeared to be onesided, unfair, oppressive, burdensome, or unconscionable. This principle was embodied in the concept of “caveat emptor,” translated as “let the buyer beware.”

The modern basis for unconscionability appears in the Uniform Commercial Code, Section 2302, which attempted to change the essential relationship between the parties from “caveat emp­tor” to “caveat venditor,” or “let the seller beware!” The purpose of the doctrine of unconscionability is twofold: “prevention of oppression (sometimes called substantive unconscionability) and unfair surprise (procedural unconscionability).” It should be noted that in fashioning Section 2302, the writers of the Uniform Commercial Code intentionally failed to provide a precise definition of the term “unconscionable” in the belief that to do so might be to limit and defeat the purposes of the rule.

Williams v. Walker-Thomas is one of the seminal cases in the area of unconscionability. Judge Skelly Wright added much to the understand­ing and development of this difficult concept and to interpreting the reaches of Section 2-302.

Read Williams v. Walker-Thomas carefully.

 

Case Summary

Williams v. Walker – Thomas Furniture Store

198 A. 2d 914 (D.C. App. 1964)

J. Skelly Wright, Circuit Judge:

Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item. 
The contract further provided that “the amount of each periodical installment payment to be made by [purchaser] to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by [purchaser] under such prior leases, bills or accounts; and all payments now and hereafter made by [purchaser] shall be credited pro rata on all outstanding leases, bills and accounts due the Company by [purchaser] at the time each such payment is made.” (Emphasis added.) The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings. 
On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95. She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants’ motion for leave to appeal to this court.

Appellants’ principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

“Appellant’s second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant’s financial position. The reverse side of the stereo contract listed the name of appellant’s social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.”
    “We cannot condemn too strongly appellee’s conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable. While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. In Scott v. United States, 79 U.S. (12 Wall.) 443, 445, 20 L. Ed. 438 (1870), the Supreme Court stated:

“* * * If a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. * * *”

Since we have never adopted or rejected such a rule, the question here presented is actually one of first impression. 
Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. 28 D.C.CODE § 2-302 (Supp. IV 1965). The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived. Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced. 
Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.  Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration.

Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld. 
In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered “in the light of the general commercial background and the commercial needs of the particular trade or case.” Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” 1 CORBIN. We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract. 
Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.
 So ordered.

Generally, four major factors appear in the cases that have dealt with the question of unconscionability. These factors originated in Williams v. Walker-Thomas.

They include:

  • The absence of meaningful choice (that is, a condition that may be found in a tradi­tional “take it or leave it” or “boilerplate” contract);
  • Great inequality of bargaining power (where there is only one or a very few sellers available in the market­place);
  • The inclusion of terms that would cause unfair surprise, hardship, or oppression (e.g., penalty clauses, clauses which severely limit remedies, a “confession of judgment” claus­e); or
  • Circumstances where race, literacy, language, ethnicity, economic circumstances, or education are significant factors in determining the nature of the bargain, and the relationship between the parties.

In the case of Jones v. Star Credit (Supreme Court of NY, 1969), the court extended the concept of unconscionability to the price term of the contract. Jones v. Star Credit involved welfare recipients who purchased a freezer for $900 from “Your Shop at Home Service.” The contract was later assigned to the Star Credit Corporation, the defendant in this action.

According to Judge Wachler, the freezer had a maximum value of $300, but it ended up costing $1,234.80 after interest and other “add on” charges such as interest, credit life insurance, and credit property insurance were included in the contract. The court analyzed the contract under Section 2-302 of the Uniform Commercial Code and found it to be unconscionable as a matter of law.

Now, read Wille v. Southwestern Bell. Pay special attention to the expanded list of “unconscionable factors” noted by the court. Can you suggest any others for consideration? Do you agree with the inclusion of all of these factors? What is the most important factor? Consider this question: Why were Mrs. Williams and Mr. and Mrs. Jones successful in claiming unconscionability and Mr. Wille was not?

Case Summary

Wille v. Southwestern Bell Telephone Company

219 Kas. 755 (1976)

Background and Facts

The plaintiff, an operator of a heating and air conditioning business, sued the telephone company to recover damages caused by the omission of his ad from the yellow pages of the telephone directory. The contract for the ad contained a provision limiting the liability of the telephone company to the cost of the ad. The plaintiff contended that this provision was unconscionable. The lower court found for the defendant the plaintiff appealed.

HARMAN, J.

Appellant asserts unconscionability of contract in two respects: the party’s unequal bargaining power and the form of the contract and the circumstances of its execution.

American Courts have traditionally taken the view that competent adults may make contracts on their own terms, provided they are neither illegal nor contrary to public policy, and that in the absence of fraud, mistake, or duress, a party who has fairly and voluntarily entered into such a contract is bound thereby, notwithstanding it was unwise or disadvantageous to him. Gradually, however, this principle of “freedom of contract” has been qualified by the Courts as they were confronted by contracts so one-sided that no fair-minded person would view them as tolerable. An early definition of uncon­scionability was provided by Lord Chancellor Hardwicke, in the case of Chesterfield v. Jensen (1750).

* * * “A contract that such as no man in his senses and not under delusion would make on one hand, and as no honest and fair man would accept on the other; which are unequitable and unconscientious bargains; and of such even the Common Law has taken notice.”

* * * This doctrine received its greatest impetus when it was enacted as a part of the Uniform Commercial Code but the writers did not define the limits or parameters of the doctrine. Perhaps this was the real intent of the drafters of the code. To define is to limit its applica­tion and to limit its application is to defeat its purpose.

* * * The basic test is whether in the light of general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of the prevention of oppression and unfair surprise, and not of disturbance of allocation of risks because of superior bargaining power.

* * * One type of situation is that involving unfair surprise: where there has naturally actually been no assent to the terms of the contract. Contracts involving unfair surprise are similar to contracts of adhesion. Most often these contracts involve a party whose circumstances, perhaps his inexperience or igno­rance, when compared with the circumstances of the other party, make his knowing assent to the fine print terms fictional. Courts have often found an absence of a meaningful bargain. The other situation is that involv­ing oppression: where, although there has been actual assent, the agreement, surrounding facts, and the relative bargaining positions of the parties indicate the possibility of gross overreaching on the part of the person with the superior bargaining power. The economic position of the parties is such that one becomes vulnera­ble to a grossly unequal bargain.

* * * These factors include: 1) the use of printed form or boilerplate contracts drawn skillfully by the party in the strongest economic position, which establish industry-wide standards offered on a take-it-or-leave-it basis to the party in a weaker economic position, 2) a significant cost-price disparity or excessive price, 3) a denial of basic rights and remedies to a buyer of consumer goods, 4) the inclusion of penalty clauses, 5) the circumstances surrounding the execution of the contract, including its commercial setting, its purposes and actual effect, 6) the hiding of clauses which are disadvantageous to one party in a mass of fine print trivia or in places which are incon­spicuous to the party signing the contract, 7) phrasing clauses in language that is incomprehensible to a layman or that divert his attention from the problems raised by them or the rights given up through them, 8) an overall imbalance in the obligations and rights imposed by the bargain, 9) exploitation of the underprivi­leged, unsophisticated, uneducated and the illiterate, and 10) inequality of bargaining or economic power.

Important in this case is the concept of inequality of bargaining power. The UCC does not require that there be complete inequality of bargaining power or that the agreement be equally beneficial to both parties.

* * * At least some element of deception or substantive unfairness must presumably be shown.

The cases seem to support the view that there must be additional factors such as deceptive bargaining conduct as well as unequal bargaining power to render the contract unconscionable. In summary, the doctrine of unconscionability is used by the courts to police the excesses of certain parties who abuse their right to contract freely. It is directed against one-sided, oppressive and unfairly surprising contracts, and not against the consequences per se of uneven bargaining power or even a simple old-fashioned bad bargain.
Williston on Contracts states: “Parties should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side. It is only where it turns out that one side or the other is to be penalized by the enforce­ment of the contract so unconscionable that no decent, fair-minded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability.”

The inequality of bargaining power between the parties here is more apparent than real. There are many other modes of advertising to which the businessman may turn if the contract offered him by the telephone company is not attractive. We find in the record no basis for a conclusion that the application of the Limitation of Liability Clause could lead to a result so unreasonable as to shock the conscience. The language of the chal­lenged paragraph is not couched in confusing terms designed to capitalize on carelessness but is clear and concise. Appellant was an experienced businessman and for at least thirteen years had used the yellow pages. In his business, it is reasonable to assume he as a seller and serviceman had become familiar with printed form contracts that are frequently used in connection with the sale and servicing of heating and air condition­ing equipment and their attendant warranties and limita­tions of liability. Each case of this type must necessarily rest upon its own facts but after examining the terms of the contract, the manner of its execution and the knowledge and experience of the appellant, we think the contract was neither unconscionable or inequi­table so as to deny its enforcement.

AFFIRMED.

A final note on remedies for unconscionability. Should a court conclude that a contract is unconscionable (note that unconscionability is a matter of law to be decided by the judge), it may:

  • Refuse to enforce the contract;
  • Enforce the contract without the unconscionable clause; or
  • Limit the operation of the unconscionable clause.

 

Ethical Considerations

Private Contract Rights

Is it fair for the courts to interfere with the private contract rights of individuals?

 

Questions

  • What is the definition of a “merchant” under the Uniform Commercial Code?
  • What is the definition of “good faith” under the Uniform Commercial Code?
  • What is the definition of a “good” under the Uniform Commercial Code?

Day v. Caton

  • What does it mean to have a judgment overruled?
  • Why was the defendant’s silence construed as an agreement to pay?
  • Who normally decides questions of fact in contract cases? Who decides questions of law?

Williams v. Walker-Thomas

  • What is an installment note? A revolving charge? A pro rata payment?
  • What particular characteristics of Mrs. Williams were important to the court in determining if the contract was unconscionable?
  • What remedies are available to a court in a case where it finds a contract to have been unconscionable?

Wille v. Southwestern Bell

  • What early view of unconscionability was cited by Judge Harman?
  • What test did the court apply?
  • Of the circumstances cited in the case, which was most important to the court in arriving at its decision?
  • Why did Mr. Wille lose and Mrs. Williams and Mr. and Mrs. Jones win?
  • What is a “limitation of liability” clause?

    Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Eight | Contractual Capacity

Contractual capacity is the third element of a valid contract. A contract entered into by a party who lacks the requisite capacity may be either void or voidable. If one of the parties to a contract has been adjudged incompetent or insane by a court after a competency hearing, that contract will nor­mally be judged “void” by the court. In other cases, a party may allege and will have to prove that he or she lacked the ability to enter into a contract for one or more of the following reasons: the con­tract was entered into under the influence of drugs or alco­hol; mental incompetence (perhaps the onset of senility or Alzheim­er’s disease); mental retardation; intoxication; the side effects of medication; temporary delirium deriving from physical injuries sustained in an accident; extreme confusion; etc.
Generally, unless there has been an adjudication of incompetency, contractual capacity is a question of fact for a jury, rather than a question of law to be decided by a judge. In order to set aside a contract on grounds of lack of capacity, it is necessary to show that a party did not “understand the nature or consequences of the transaction” or that “by reason of mental illness or defect… [a party] is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition.”  Thus, upon such a showing, a party may exercise its option to disaffirm or remove him or herself from a contract. The contract is voidable.
One major topic of in the discussion of contractual capacity is a contract entered into by a party considered by the legal system to be a minor or an “infant.”

Minor’s Contracts

Some preliminary considerations are in order. A minor is any person who has not yet attained the required “age of majority” as determined by a given state. This age (usually 18, but in some states the age may still be 21) may or may not be the same age as is the age for voting, getting married, or purchasing or consuming alcoholic beverages. Each state by statute determines its own “age of majority” for entering into a contract.
The word “minor” may be synonymous legally with the word “in­fant.”  In some states, if a minor becomes emancipated (that is, the minor is considered to be “on his own”) that minor will be treated legally as an adult for the purposes of entering into a contract. Minors who might be considered emancipated are those who are married, who are serving in the armed forces, who make signifi­cant incomes (i.e., child stars, like Gary Coleman or Shirley Temple), or who live on their own. Unless adjudicated by a court, emancipation is likewise a question of fact for a jury.
An adult who enters into a contract with a minor has no right to terminate the contract. Only the minor enjoys the right to disaffirm the contract. If both parties to a contract are minors, then each of the minor parties will have the right to disaffirm the contract.
A contract entered into by a minor is thus an example of a voidable contract.

Three Rules of Minor’s Contracts

There are three rules that generally apply to minors’ contracts: the Majority Rule; the New York Rule; and the Third Rule.

Majority Rule

Under the majority rule, still applicable to more than two-thirds of the states, a minor may, at any time prior to reach­ing his/her age of majority, and for a reasonable time thereafter (usually no more than 30 days), disaffirm a contract, return the consideration in his/her possession or under his/her custody control at the time of disaffirmance in whatever form it is currently in, and receive back his/her full consideration. The majority rule provides maximum protection to a minor who has entered into a contract during the period of his or her minority.

New York Rule

Under the New York rule, a minor may disaffirm the contract, but is responsible in either quasi-contract or under a theory of restitution for the deprecia­tion, wear and tear, damage, fair use, or reasonable rental value of the items under his/her care, custody, or control pursuant to the contract. This approach seeks to balance the rights of both parties to the contract.

Third Rule

Under the “third rule,” a minor may only disaffirm a contract if he/she can return the consider­ation in its exact original form. The third rule will normally apply to so-called “lay away” contracts, where goods remain with the seller until they have been fully paid for.
In all cases, no particular form of language or conduct is required to effectuate a disaffirmance as long as the minor makes his or her intention clear.
Read the following case, Harvey v. Hadfield, carefully. Note especially the reasoning cited behind the minors’ contract rules discussed in this case. How do you know which rule a given state will apply to a contract entered into by a minor?
Case Summary

Harvey v. Hadfield

372 P.2d 985 (Utah, 1962)
Plaintiff, a minor, sues by his guardian ad litem to recover $1000 he had advanced under a proposed contract to buy a house trailer. He appeals from an adverse judgment.
Plaintiff, a student attending college turned 19 on October 13, 1959. A few days after his birthday, he quit school and got a job. In the latter part of October, he went to the defendant’s lot and selected a trailer he liked. He told the defendant of the above facts, of his plans to be married and of his desire to buy the trailer. The defendant advised him that he would have to get his father’s signature to get financing through the defen­dant.
Plaintiff responded that he thought he could arrange financing and that he could arrange to raise a thousand dollars as a down payment. He paid $500 on November 13 after having paid $500 on November 6, 1959 and applied to the bank for financing. The bank refused to accept his application for a loan because of his minority and because his father would not sign with him.
After the plaintiff’s plans failed to materialize, he asked the defendant to return his money. Defendant refused but finally did agree to a statement which the plaintiff typed up and which both signed. It released the trailer in question for sale and granted plaintiff $1000 (plus interest) credit on a trailer of his choice next Spring. About February 1, 1960, plaintiff’s attorney sent a letter to the defendant disaffirming the contract and demanding the return of his money. Upon refusal, this suit was com­menced.
Since time immemorial, Courts have quite generally recognized the justice and propriety of refusing to grant enforcement to contracts against minors except for necessities. It is fair to assume that because of their immaturity, they may lack the judgment, experience and will power which they should have to bind themselves to what may turn out to be burdensome and long lasting obligations. Consequently, courts are properly solici­tous of their rights and afford them protection from being taken advantage of by designing persons, and from their own imprudent acts, by allowing them to disaffirm contracts entered into during minority which upon more mature reflection, they conclude are undesirable. *  *  *
Accordingly, adults dealing with minors must be deemed to do so in an awareness of the privilege the law affords the minor of disaffirming his contracts. *  *  *
*  *  * A minor is bound not only for the reasonable value of necessaries but also for his contracts, unless he disaffirms them before or within a reasonable time after he attains his majority and restores to the other party all money or property received by him by virtue of said contracts and remaining in his control at any time after attaining majority.
Defendant advances the following proposition. *  *  * That even if the contract is disaffirmed, he is entitled to an offset of the actual damages he has sustained from the loss of sale of the trailer from the $1000.
Defendant urges that from the fact that plaintiff was “on his own,” working and contemplating marriage, he could reasonably regard him as “engaged in business as an adult” and that he was therefore capable of entering into a binding contract.
The defendant’s position is not sound. *  *  *
Our statute cannot be construed to support the defendant’s contention that the disaffirming party must compensate him for damages he may have incurred.
The code only requires that the minor restore “to the other party all money or property received by him by virtue of said contracts and remaining within his control at any time after attaining his majority.”  The trailer was left in the possession of the defendant. That fulfills the requirement of the statute.
The plaintiff minor having disaffirmed the contract is entitled to the return of his money.
REVERSED.

The Necessaries Doctrine

It is now well settled that a minor is liable for the reasonable value of necessaries furnished him or her under the theory of quasi-contract. While there is no one universally accepted definition, necessaries generally include those items furnished to a minor for his/her “life, health, or safety.”  A list of necessaries (often termed as “necessities” under the common law) might include such items as food, clothing, shelter, medical, and educational expenses.
Two special aspects of the necessaries doctrine must be considered. First, there has been a tendency by courts to expand the category of items that would be considered as necessaries (i.e., items such as life or health insurance, automobiles, sporting goods, audio equipment, a college loan; etc., may be considered as necessaries if these items are used in connection with one of the traditional categories). Second, a court will often look to the value or price of the item in question and the station or status in life of the minor to determine if a contract is for necessaries. Thus, a $25 cloth coat may be a necessary item for all minors; but a $5,000 mink jacket is only likely to be a necessity for someone of unusual means.
Finally, most courts will apply the New York rule to contracts where the minor has been furnished a personal service (i.e., dance or karate lessons; babysitting jobs; employment assistance), on the theory that the minor cannot return the service already rendered to him or her.

Ratification

Ratification is an act or an expression in words by which a minor, after having reached his or her age of majority, indicates an intention to be bound by the contract entered into during minority. An effective ratification cannot take place prior to the attainment of majority.
Ratification may be express, that is, a minor may give actual notice that he or she will be bound to the contract. The notice may come in the form of a letter, a telegram, or a phone call.
Ratification may also be implied from conduct, such as making a payment on account after reaching the age of majority, or retaining or continuing to use property after attaining majority.
Ratification might also result from a minor literally doing nothing after reaching his/her age of majority, although courts remain divided on the issue of silence and its effect on the issue of ratification.

A Minor’s Misrepresentation of Age

Suppose a minor is asked about his/her age. The minor lies (also known as making a misrepresentation) and states that he/she is over the age of majority and is no longer a minor.
According to the majority rule, a minor may still disaffirm the contract, even though he/she has misrepresented his/her age. There are several other rules or variations of the rule that individual jurisdictions may follow. These include:
If a minor misrepresents his or her age, he/she may not disaffirm. Period. This represents the extreme view on the matter and seeks to punish a minor for their misrepresentation.
If a minor misrepresents, he/she will be prohibited (estopped) from using minority as a defense. This view affords practically no protection at all to the minor who has misrepresented his or her age, unless he/she can return the con­sideration “as delivered,” in its exact original form.
Some courts will permit a minor who has misrepresented his/her age to disaffirm, but will then allow the minor to be sued in tort for fraud, resulting in an effective “set-off” of any amount of disaffirmance.
As was noted before, it is important to determine the views of an individual jurisdiction on these matters.

Ethical Considerations

Disaffirmance By A Minor

Larry Derry, who is 16, purchases a car from Cruiser Motors. Larry one night is invited to a party where is has a bit too much to drink. On the way home, he cracks up the car. It is now worthless. Larry now attempts to get his money back, claiming minority as a defense. Should courts continue to protect minors from the consequences of their conduct by relying on common law rules relating to disaffirmance of contracts?

Disaffirmance By Adults

Should the “other party” to a contract (not the minor) be afforded the same opportunity to disaffirm a contract as now possessed by the minor? Under what circumstances?

Entertainment And Sports

Do “minors” who work in show business or sports deserve more protection than others relating to contracts they might enter into?

 

Questions

  1. How can you determine an individual state’s view of necessaries and of the principle of ratification?
Harvey v. Hadfield
  1. What is a guardian ad litem?  When might one be used?
  2. Why do courts refuse to grant enforcement to minors’ contracts?
  3. What happens if an adult claims that he did not know a party was a minor?
  4. When and under what circumstances is a minor liable for a contract?
  5. What rule did the defendant propose?  Was it accepted by the courts?
  6. Why did the defendant urge that the court adopt the view that the plaintiff was “on his own?”
  7. What does it mean to be emancipated?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Ten | Writing And Form

The Statute of Frauds

The Statute of Frauds originated in the courts of England. The Statute of Frauds is entirely based on the subject matter of the contract. If the subject matter of the contract falls within one of the categories of the Statute, the ability to collect monetary damages, enforce the contract, or to seek specific performance is conditioned on proof that a contract exists in the form of a “signed writing,” signed by the party to be charged. In general, four types of business contracts “fall with­in” the Statute of Frauds, and are thus required to be in writing:

  1. Contracts involving the sale of land (the real estate), an interest in land (such as an easement, a mortgage, or a life estate), or a lease which extends for more than a certain period of time (usually one year, but two years in New Jersey); or
  2. Contracts that by their terms cannot be performed within one year of their formation; or
  3. The promise to answer for the debt, miscarriage, or default of another (so called secondary or collateral promis­es); or
  4. Under the Uniform Commercial Code, contracts for the sale of goods for the cumulative purchase price of $500.00 or more.

At its essence, the Statute of Frauds requires that a writing must evidence the agreement of the parties. Unless a specific format is required (e.g., a deed to land containing the “legal description” of the property), the writing may be in any form. The writing may be a memorandum, a receipt, telegram, letter, an exchange of correspondence, the records of a business, an acknowledgment, or even a letter that purports to repudiate a contract.

The Part Performance Exception

The part performance doctrine is a major exception to the application of the Statute of Frauds involving agreements relating to the sale of land. The part performance exception is applicable when an oral contract for the sale of land has been partially performed. If the court finds sufficient part performance, the oral contract will be enforced and the court may grant specific performance of the oral contract. Courts are especially prone to find part performance where the parties cannot be returned to the status quo because of the substantial actions undertaken by a party in reliance that a contract or agreement existed.

The case of Louron Industries v. Holman exemplifies the part performance doctrine. Be careful to note the nature of proof required. If proof by conduct or certain acts is introduced to prove the existence of an oral contract, such proof must point clearly and unmistakably to the existence of the oral contract. The three examples of proof under the part performance doctrine are: (1) Where the buyer pays a part of the purchase price and has taken actual and exclusive posses­sion of the property; (2) Where the buyer has made permanent, valuable, and substantial improvements to the property with the consent of the seller; and (3) Where the buyer has given consideration to the seller and the amount paid represents a greater amount than that usually paid by a lessee under the terms of a lease. Point number two is especially critical and will be found in most applications of the part performance doctrine.

 

Case Summary

Louron Industries, Inc. v. Holman

502 P.2d 1216 (Wash. App. 1972)

Plaintiffs sued defendants for specific performance of an oral contract to sell land. Plaintiffs had originally leased the land from defendants and had signed a written contract of purchase. Believing that defen­dants had also signed the agreement, plaintiffs made substantial improvements to the land beyond those permitted by the lease. Defendants asserted the statute of frauds as a defense, but the lower court found sufficient part performance and held for plaintiffs. Defendants appealed.

EDGERTON, J.

* * * Appellants * * * contend there was not a sufficient writing or part perfor­mance to take this case out of the statute of frauds * * * (W)e disagree.

In Miller v. McCamish, * * * the court stated:

(This Court has long held that an agreement to convey an estate in real property, though required … to be in writing with the formal requisites specified for a deed, may be proved without a writing, given sufficient part performance; and that specific performance will be granted where the acts allegedly constituting the part performance point unmis­takably and exclusively to the existence of the claimed agreement.)

And in Richardson v. Taylor Land & Livestock Co., * * * the Supreme Court pointed out what are evidences of part performance, saying:

The principal elements or circumstances in­volved in determining whether there has been sufficient part performance by a purchaser of real estate under an oral contract otherwise within the statute of frauds, are (1) deliv­ery and assumption of actual and exclusive possession of the land; (2) payment or tender of the consideration, whether in money, other property, or services; and (3) the making of permanent, substantial, and valuable improve­ments, referable to the contract.

In considering these factors of part performance in relation to the facts of this case, respondent’s posses­sion of the real property in and of itself would not be sufficient to take the case out of the statute of frauds because possession had been gained under the terms of the lease rather than by the contract to purchase. That possession alone would not point unequivocally to the existence of a seller-buyer relationship but would be equally consistent with the relationship of landlord and tenant. However, the payment of the $1,000 earnest money to appellants’ agent, when the terms of the lease called for $65 per month rental, was consistent with the sale and pointed toward a vendor-vendee relationship and was inconsistent with continuation of the lease. Moreover, the evidence shows that respondent made very substantial permanent improvements to the real property. These were in excess of those allowed by the terms of the lease and so they, too, were consistent with a sale rather than a lease. These factors bring the case within the rule announced above and constitute sufficient evidence of part performance to take the case out of the statute of frauds. * * *

Affirmed.

Performance Beyond One Year

The original Statute of Frauds enacted by the British Parliament in 1677 provided that a writing was required for “an agreement that is not to be performed within the space of one year from the making thereof.” This section is the least favored by courts, and has been subject to a variety of exceptions. In order for a particular contract to fall within the Statute of Frauds, the performance of the contract must be objectively impossible to perform within a year from the date of the formation of the contract. The issue is one of possi­bility, not probability, or even likelihood that the promise can be performed within a year.

A contract entered into for an indefinite period of time by definition, falls outside the Statute of Frauds. In the area of employment law, such a contractual relationship may be termed as one of “employment at will.

Promises To Answer For The Debt Of Another

A “promise to answer for the debt, miscarriage, or default of another,” termed a secondary or collateral promise, is required to be in writing under the Statute of Frauds. An example is promise of guaranty, also called suretyship. A secondary or collateral promise may also be called a “triggered promise,” since its performance only comes into existence or is “triggered” by the failure of the primary party to pay or perform. The Statute of Frauds generally applies to a secondary or collateral promise and not to a primary promise, unless the primary promise falls within another provision of the Statute of Frauds.

The main purpose doctrine exception applies to certain types of secondary or collateral promises. The main purpose doctrine exception provides that while the promise to answer for the debt of another generally must be in writing under the Statute of Frauds, where the secondary promisor has “some purpose of his own” (general­ly to secure some personal monetary or pecuniary gain or some personal benefit), the Statute of Frauds does not apply and no writing will be required. Oral proof may be introduced to prove the existence of the contract.

Contracts for the Sale of Goods U.C.C. §2201

The Statute of Frauds generally applies to a contract for the sale of goods for the price of $500.00 or more. This is a cumulat­ive re­quire­ment, that is, the “sale” is a total purchase concept. Even though no one item may meet the $500.00 requirement, if the total or cumulative purchase meets or exceeds $500.00, the entire transaction will fall within the Statute of Frauds and will be required to be in writing.

Having met these threshold requirements, UCC § 2-201 then requires:

  • Some writing sufficient to show an agreement (i.e., “that a contract for sale has been made between the parties”);
  • Signed by the party against whom enforcement is sought (“the party to be charged”) or by his authored agent or broker.

Under the UCC, a writing is not insufficient because it omits or incorrectly states a term agreed upon, but the contract is not enforceable beyond the quantity of goods shown in such writing. Thus, the UCC is much more lenient on the question of the sufficiency of the writing than was the common law, which required all of the “important terms” of a contract to be contained in the writing (i.e., price, quantity, parties, time for performance, etc.). Under the UCC, there are only three “definite and invariable” requirements as to the writing:

  • The writing must evidence an intention to enter into a contract;
  • The writing must be “signed,” which includes any authentication that identifies the party to be charged; and
  • The writing must specify a quantity.

The emphasis under the UCC is clearly on the existence of “some writing”—that is, a confirma­tion, sales slip, check, note, order slip, telegram, letter, etc. The signature is not required to be at the end of a document and can be placed anywhere on the writing so long as it can be authenticated. A signature can consist of a stamped name, a symbol, or a party’s initials, so long as it represents the intention of a party to acknowledge their assent.

The UCC requires that a quanti­ty be stated, and even the quantity need not be stated “accu­rately,” as long as the writing reflects the intention of the parties. However, the contract is not enforceable beyond the quantity stated in the contract.

Exceptions To The U.C.C.

There are three main exceptions to the UCC Statute of Frauds provision. An oral contract will be enforceable to the extent that a seller accepts payment or to the extent that a buyer accepts delivery of the goods contracted (“goods paid for/accepted”), also called the “partial performance” doctrine.
Where goods are to be specially manufactured or custom made for a buyer and are of the type not “ordinarily sold in the regular course of the seller’s business,” so long as the seller has either begun their manufacture or incurred obligations for their manufacture, no writing is required.
Finally, if there is no writing, but the defendant in his pleadings, testimony or otherwise has admitted that a contract for sale was made, the Statute of Frauds will not apply.

The Memorandum Substitute

The UCC also provides for an effective substitute for the writing requirements of the Statute of Frauds, which is referred to as the “confirmatory memorandum substitute.” When a merchant has concluded an oral contract with another merchant, it is common for one party to send to the other a letter of confirmation, a purchase order, or perhaps a printed form of the contract for their review and perhaps “counter-signature.”

Between merchants, however (that is, if both parties are mer­chants), an oral contract for the sale of goods is enforceable if one of the parties within a reasonable time of the making of the oral agreement sends a written confirmation containing the essential terms of an oral contract to the other party, and the party receiving the written confirmation has reason to know its contents and does not provide written notice of objection to the memorandum within 10 days.

Note that the memorandum substitute is the proper method to provide protection to a merchant whenever an oral contract or order is made for goods over $500.00. It would also be wise to send the memorandum by registered or certified mail in order to later prove that the other party “had reason to know its contents.” Why does the memorandum substitute require that both parties are merchants?

Interpretation of Contracts

Professor Thayer insightfully commented that there is no “Lawyer’s Paradise where all words have a fixed, precisely ascertained meaning.” (Thayer, A Preliminary Treatise on Evidence at Common Law 390 (1898)). Section 226 of the Restatement notes:

“Interpretations of words and of other manifestations of intention forming an agreement is the ascertainment of the meaning to be given to such words and manifestations.”

Whenever parties to a contract cannot agree on the terms of their contract and go to court to litigate the issue, the court will apply certain basic principles of construction and interpretation of the agreement.

The purpose of interpreting contracts is to deter­mine and then give the proper effect to the intention of the parties. Generally speaking, courts will give a reasonable meaning to the words used in a contract. In applying this principle, courts will utilize the “plain meaning rule”; that is, if a writing appears to be plain and unambiguous on its face, its meaning must be determined from the “four corners” of the instrument itself without resort to extrinsic evidence of any nature. In pursuit of “plain meeting,” courts will use an objective standard, the expressed intention of the parties, rather than any secret or hidden intention in interpreting a contract. In doing so, courts will read and interpret a contract in its entirety so as to give effect to all of its parts. This is yet another application of the objective test of Lucy v. Zehmer.

Certain problems may arise which may result in intervention and interpretation by the courts:

  • When a contract is partly written and partly printed, the written part will prevail if there should be a conflict. If an amount is expressed in conflicting words and figures, the words will prevail. Example: “three thousand dollars” written as $300 the correct sum will be three thousand dollars.
  • Usage of trade and customs of a community can be used to explain the meaning of unclear or ambiguous language found in a contract—this is especially true under the UCC.
  • Actions of parties occurring after executing a contract but prior to a controversy may be used by a court to demon­strate the real intention of the parties to an agreement.
  • Language in a contract that is either unclear or ambig­uous will be interpreted most strongly against the party who prepared the contract or the party who caused the confusion. An example exists in a provision of an insurance contract, which may be capable of more than one interpretation. Such a contract provision will be construed against the insurance company that, of course, prepared the contract­. For example, “exception clauses” are strictly construed in insurance contracts. If an insurance company wishes to exclude any coverage, the exclusion must be clearly and unambiguously stated. This rule also applies to so-called “boiler plate” contracts, often offered to the buyer on a “take it or leave it” basis.

The Parol (Oral) Evidence Rule

When a contract is reduced to a writing, it is logical to assume that the written contract contains all the terms agreed to by the parties. Professor Corbin states “When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence whether parol or otherwise, of antecedent [prior] understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing.” The parol evidence rule states that oral testimony is generally not admissible to vary the terms of a written contract when such oral testimony relates to statements made prior to the signing of the contract or to statements made at the same time [contemporaneous] the contract was made, if the parties intended as the final expression of their agreement.

Example

Fred signs a written contract in which he agrees to close on the purchase of a farm “on or about December 15, 2016.” However, it was clearly understood that Fred would only be required to complete the purchase if he could arrange a suitable mortgage. The ability to arrange for a mortgage is an example of a “condition precedent.” Oral or parol evidence would be per­mitted to prove the existence and failure of this condition. (A conditional clause, however, should be clearly stated in the contract.)

There are several important exceptions to the parol evidence rule:

  • Where the words used in a contract are ambiguous, that is, where words are capable of more than one meaning, oral or parol evidence may be offered to explain the ambiguity in the contract.
  • When a written contract is obviously incomplete (as where a detail is omitted or a blank is not filled in), oral or parol testimony is admissible to supply the missing term. Example: A promise (or covenant) not to compete contained a provision describing the area of non-competition as being “within a ten-mile radius of the city of _____________,” and the name of the city was not filled in. The court permitted oral testimony to fill in or supplement the missing name of the city.
  • The failure of a condition precedent. If parties to a written contract orally agree that a contract will not to be effective unless or until a certain event or condition takes place, the court will permit oral testimony to show that the condi­tion precedent was not fulfilled. In this case, the party offering the oral proof is not trying to vary the terms of the written agreement; rather, the introduction of the oral proof is essential to show that the agreement never came into existence.

Changes, modifications, or additions to a contract are not covered by the parol evidence rule, since the parol evidence rule only applies to oral proof of provisions made before or at the time of the signing of the written agreement. (Note, however, that other provisions, such as the Statute of Frauds or the rules concerning consideration might apply to keep oral proof from being introduced.)

It is also settled that the parol evidence rule does not prevent a party from using contemporaneous or prior negotiations or expressions to indicate that the writing was never intended to be a final expression of their agreement.

Ethical Considerations

The Kettles

Billy Kettle, the son of Ma and Pa Kettle, orally promises that his parents will be able to live on their property, a farm in Wall, New Jersey, “for their lifetimes.” In reliance on this promise, Ma and Pa execute a quit claim deed to their son but fail to include this provision. Later, Billy receives an offer to purchase the property by Hovdranian Builders but Ma and Pa decide they simply don’t want to move. When Billy moves to evict his parents, they attempt to introduce oral prof of Billy’s promise. Should the chancery court permit the introduction of this oral proof if it rises to the “clear and convincing” level? What if Billy admits in a sworn deposition that he had indeed made this promise to his parents? Should that change the result?

UCC And The Sales Of Goods

The Statute of Frauds under the UCC (2-201) deals with contracts for the sale of goods for the price of $500 or more. In light of more “modern times,” should this amount be raised? If so, to what amount?

Questions

Louron Industries v. Holman

  1. What was the basis for plaintiff’s suit? Why?
  2. Had the defendants signed the contract? Why did the plaintiff’s expect a court to enforce the contract even though there was no writing?
  3. What must proof point toward in cases of the application of the “part performance” doctrine
  4. What are the circumstances that will bring the case under the “part performance” doctrine?
  5. What particular facts here were most important for the plaintiff’s case?
  6. What is “earnest money”?

Access The Following Supplemental Cases From Lexis-Nexis

Hardin v. Brummett

  1. What is “earnest money”? What is an “employment at will” contract?
  2. What is an “indefinite period” contract?
  3. What is the rule employed in these types of contracts?

Howard, Weil, Labouisse v. Abercrombie

  1. Who was suing at the trial level? Why?
  2. Why had the broker charged Abercrombie’s account?
  3. What type of promise had Abercrombie made?
  4. Had the defendant wished to protect itself, and assure that Abercrombie’s promise would be enforced, what should it have done?
  5. What case was used as a precedent here?

Wilson Floors Co. v. Sciota Park, Ltd.

  1. What is the “main purpose” doctrine?
  2. Why did the bank make its promise to Wilson?
  3. What is the alternate name for this doctrine?

 

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Six | The Agreement

A contract is an agreement that consists of an offer and acceptance.

The Offer

An offer will be judged on the basis of three criteria:

  1. There must be serious intent on the part of the offeror to be bound by the terms of the offer;
  2. The terms of the offer must be definite or reasonably certain; and
  3. The offer must be communicated to the offeree.

Intention is measured by what is termed the “objective” or “reasonable man” test, which is exemplified in the classic English common law case, Carlill v. Carbolic Smoke Ball (holding that
an advertisement was considered as an offer for a unilateral contract that could be accepted by anyone who performed its terms). The objective test states that an offer will be judged by the objective or reasonable meaning of the words used—whether a “reasonable man would conclude that an offer had been made.” Under this criteria, the subjective intention of the parties is ordinarily irrelevant. However, an offer that is made in obvious anger, jest, or as the result of excitement will not generally meet the requirement of a serious offer. Likewise, an offer must be distinguished from mere statements of intention to be bound at a later date, preliminary negotiations or discussions, inquiries, or invitations (solicitations) to make an offer.
Let us consider a classic case that deals with the application of the “objective test.”

 

Case Summary

Lucy v. Zehmer

196 Va. 493 (1954)

BUCHANAN, Justice.

* * * The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

A. H. Zehmer admitted that * * * W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.
The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three beefers.

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.
The defendants insist that * * * the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

It is an unusual, if not bizarre, defense. * * *

In his testimony, Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. * * * The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. * * *

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’sobjectiontothefirstdraftbecauseit was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the complete- ness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and good faith sale and purchase of the farm.

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. (Emphasis added.) The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.

JUDGMENT AND REMEDY:

The Supreme Court of Virginia determined that the writing was an enforceable contract and reversed the decision of the lower court.

Mr. and Mrs. Zehmer were required by court order to carry through with the sale of the Ferguson Farm to W.O. Lucy. What remedy do you think would be appropriate in this case? Why?

Definiteness requires that the terms of an offer must be clear enough so that the offeree is able to make a decision whether to accept or reject the offer. In addition, if the terms of an agreement are indefinite, a court will not be able to enforce the contract or to determine what would be an appropriate remedy for its breach.

Generally, the common law required that an agreement should contain the following terms: (1) identification of the parties; (2) identification of the subject matter of the contract; (3) a quantity; (4) the consideration to be paid; and (5) the time for performance.

Media Offers And Advertisements

At common law, an advertisement, a circular or flier, or a radio or TV spot were not considered as offers; rather, these forms of communications were considered as statements of an intention to sell or a preliminary proposal inviting an offer to buy. Although most advertisements and the like were treated as invitations to negotiate and not offers, this does not mean that an advertisement could never be considered as an offer, binding a seller to a contract.

In the following case, the court had to decide whether a newspaper advertisement announcing a “special sale” in a department store should be construed as an offer, the acceptance of
which would complete a contract. Take special note of the test enunciated in Lefkowitz v. Great Minneapolis Surplus Store, Inc. It can be applied more broadly to decide if a party has truly made an offer to sell or buy. This test is also used to determine if a party has made an acceptance of an offer. It is an important formulation of the objective test.

 

Case Summary

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

251 Minn. 188, 86 N.W. 2d 689 (1957)

Background and Facts

Plaintiff Lefkowitz read a newspaper advertisement offering certain items of merchandise for sale on a first come first served basis. Plaintiff went to the store twice and was the first person to demand the merchandise and indicate a readiness to pay the sale price. On both occasions, the defendant department store refused to sell the merchandise to the plaintiff, saying that the offer was intended for women only, even though the advertisement was directed to the general public. The plaintiff sued the store for breach of contract, and the trial court awarded him damages.

MURPHY, Justice

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

On April 13, the defendant again published an advertisement in the same newspaper as follows:

The record supports the findings of the court that on each of the Saturdays following the publication of the above described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

* * * The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms.

*** [However] *** there are numerous authorities which hold that a particular advertisementinanewspaperorcircularletter relating to a sale of articles may be construed by the court as constituting an offer, accep- tance of which would complete a contract.

The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.”

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. * * *

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by thebadvertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.

JUDGMENT AND REMEDY

The Supreme Court affirmed the trial court’s judgment, awarding the plaintiff the sum of $138.50 ($139.50 for the Lapin stole less the $1 purchase price) in damages for breach of contract against the defendant department store.

Even under the common law, courts began to relax rigid standards relating to indefiniteness and would imply or insert reasonable terms in a contract wherever possible, especially where both parties had manifested a clear intention to enter into a contract.

Uniform Commercial Code

Under UCC §2-204, for example, a contract will not fail for indefiniteness if the parties clearly intend to enter into a contract and if a “reasonably certain basis” exists for granting an appropriate remedy by a court. What are some of the terms a court will imply in a contract?

Open price: If nothing is said as to price, or the price is left to be agreed by the parties and they fail to agree, or the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded, “the price is a reasonable price at the time for delivery” [§2-305].
If no place of delivery is specified, then delivery is to occur at the seller’s place of business [§2- 308(a)], thus obligating the buyer to pay for freight, insurance, and delivery charges.
If the time for shipment or delivery is not stated, then the time shall be a reasonable time after the contract is formed [§2-309].
If the time for payment is not specified, then payment is due at the time and place of delivery [§2-310 (a)] and no credit arrangements are implied. Payment of a reasonable charge for interest may be implied.

While these terms may be found in the UCC, and thus apply to contracts involving the sale of goods (“movable and tangible” items), their application is equally important in many other types of contracts.

In addition, terms that are omitted or unclear may be supplied by custom and usage of trade or by prior or contemporaneous dealings between the parties, subject to the parol evidence which will be discussed in the materials on the “writing and form” of contracts.

Under the third criteria, the offer must be communicated to the offeree so that the offeree knows of the terms of the offer. An offer cannot be accepted by an offeree who is unaware of the offer or who has not become apprised of it.

Termination Of An Offer

It should be recognized that an offer creates a power or right in the offeree to transform the offer into a binding contract through an acceptance. However, an offer will not remain in existence indefinitely. The offer can be terminated through the operation of law, actions of the parties, the occurrence of a stated condition, or by its own terms, normally through the lapse of a period of time stipulated in the contract.

Lapse Of Time

Where the time specified in the contract for an acceptance to be made has passed or an event or condition stipulated in the contract which would terminate an offer has occurred, the offer is terminated. For example, Freddy agrees to sell his stamp collection to Franky if Franky accepts by a certain date. Franky must accept this offer within the period stated. If he does not do so, the offer will have lapsed.

Should no time be specified in the offer itself, the offer will terminate at the end of a reasonable time, determined by such factors as the subject matter of the contract (an offer to buy or sell perishable goods would involve a relatively short period of time) and other relevant market and business conditions and circumstances.

Operation Of Law

An offer may also be terminated through operation of law. For example, the destruction of the subject matter of the contract through no fault of the party will terminate an offer.

The death or incompetency of the offeror or offeree in a personal service contract also terminates an offer. Since an offer is considered personal to both the offeror and the offeree, an offer will be automatically terminated if the offeror or offeree dies, becomes incapacitated, or is ruled incompetent by a court of law.

Where a statute or court decision makes an offer illegal, the offer will be terminated. These circumstances—destruction of the subject matter of the contract, death or incompetency of a contracting party, or the operation of a statute—are sometimes viewed under the doctrine of “objective impossibility” and may also be used as a defense to a claim of breach of contract or as an excuse for non-performance on the part of a party.

Action Of The Parties

An offer may also be terminated by actions of the parties.

Revocation of the offer by the offeror is a withdrawal of the offer by the offeror before the offeree accepts the offer. A revocation is not generally effective until it is actually received by the offeree or by the offeree’s agent. Generally speaking, an offer made to the general public or to a number of persons whose specific identity is unknown to the offeror (for example, an offer made in newspaper advertisement or in a TV or radio ad), may be revoked only by using the same medium or at least by using “the best means of notice reasonably available under the circumstances” that would give equal publicity to the communication of the revocation as the communication of the original offer. Certain types of offers, called “firm offers,” may not be revoked by the offeror under certain circumstances – one of these circumstances being where the offeree has paid consideration for an option or where the promise has been made in a “signed writing” under UCC §2-204 (the “Firm Offer Rule”).

An offer is terminated if the offeree rejects it or if the offeree makes a counter offer.

Example

Suppose that Berra offers to sell his new speedboat to Rizzuto for $10,000. Rizzuto responds, “$10,000 is too high; I’ll give you $8,500.” What is the legal effect of Rizzuto’s com- munication? First, it is clearly not an acceptance. Secondly, it is a rejec- tion of Berra’s offer to sell the boat for $10,000 and a counteroffer by Rizzu- to to buy the boat for $8,500. Now, if Berra agrees on $8,500, a contract will be formed based on this agreement. However, what happens if Berra re- jects the offer to purchase the boat at $8,500 and the price of such speed- boats skyrockets to $15,000? Can Rizzuto compel Berra to sell the boat to him at the original $10,000 price?

The answer is “no” because Rizzuto’s counteroffer legally termi- nated the original offer. Berra’s offer is no longer “on the table.”

Rejection by the offeree terminates an offer. There may be a very fine line between a rejection of an offer and an inquiry about trading on different terms than those contained in the original offer. Suppose that Freddy were to respond to a friend’s offer to buy his antique car: “That seems a bit low; I’ll just bet that you can do a lot better than that.” Is this communication a rejection of his friend’s offer or a mere inquiry which will not terminate (destroy) his friend’s offer?

A counteroffer by the offeree also terminates the original offer. Generally, a counteroffer is a rejection of the original offer and the making of a new offer by the offeree.

The Acceptance

An acceptance is an unconditional assent by either words or conduct by an offeree that manifests agreement to the terms of the offer. The acceptance is usually made in the manner requested in the offer where the offeror has stipulated an express, authorized means of acceptance. The acceptance must be unequivocal—that is, it may not impose or add new terms or conditions or tamper with the terms of the offer or (as we have seen) a court might conclude that a rejection and a counter offer has taken place. A unilateral contract can only be accepted by the offeree’s performance of the required act. A bilateral contract can be accepted by an offeree who promises to perform the act or the actual performance of the requested act.

Example

Igor Wells joins the “fruit of the month club.” Because he is on vacation during the month of May, Igor neglects to return the card for May’s fruit—the guava. Igor must now pay for the (spoiled) guava because his failure to return the card (silence) amounted to an acceptance of the offer to ship based on the express terms of the membership agreement.

A second circumstance where silence may amount to an acceptance occurs where prior dealings between the parties give the reasonable expectation of a reply.

Generally speaking, silence is not considered as acceptance of an offer even if the offeror has stated “your silence indicates your acceptance of this offer.” There are, however, circumstances where an offeree’s silence may constitute acceptance of an offer. Such situations arise where there is an affirmative “duty to speak” on the part of the offeree. A court might impose a duty to speak where a duty arises out of a contract itself (i.e., record or book club contracts frequently require that a member send back a card with a rejection of the month’s selection or the selection will be automatically shipped and an obligation to pay will arise).

Example

Berman, a retailer, has ordered snowshoes from Trotsky, the manufacturer, on numerous occasions and paid for them when they arrived. Out of convenience, Trotsky then began to ship snowshoes on a recurring basis, simply sending Berman a “confirmatory invoice,” noting that the snowshoes would be shipped on the eighth of each month. Whenever Berman received a shipment of the goods from Trotsky, he would simply sell them at retail and send a check to Trotsky for the amount due. Trotsky would only hear from Berman if Berman did not wish to place an order for that month. The last shipment of snowshoes (of course) is the subject of controversy as Berman now refuses to pay for them, claiming that his “silence” on the matter cannot create a contract. Because of the prior dealings between the parties, Berman’s silence (failure to notify Trotsky) will be construed as an acceptance of Trotsky’s offer to ship. Berman will be bound by contract and must pay for the last shipment of snowshoes.

Acceptance-Upon-Dispatch Rule

Read Morrison v. Thoelke and notice the application of the deposited acceptance or “mail box” rule which states that an acceptance is effective when it is dispatched (mailed) even if it is lost in transmission.

The problem of a “lost transmission” can be minimized by the parties by expressly altering the mailbox rule by stating that an acceptance is effective only upon actual receipt of the acceptance.

 

Case Summary

Morrison v. Thoelke

155 So. 2d 889 (Fla. 1963)

BACKGROUND AND FACTS

Defendants (Morrison) made an offer to buy real property owned by the plaintiffs, Thoelkes. They executed a contract for sale and purchase and mailed it to the plaintiffs for their acceptance and signature. The latter signed the contract and mailed it to the defendants. Before it was received by the defendants, the plaintiffs repudiated the contract by telephone. Nonetheless, when defendants received the contract they recorded it, thereby establishing their interest in the property as a matter of public record. Claiming that no contract existed, plaintiffs brought this suit to “quiet title” to the property – to remove the defendants’ claim of an interest in it from the record. Defendants counterclaimed, seeking specific performance of the contract. The lower court entered a summary decree for the plaintiffs and defendants appealed.

Allen, J.

* * * The question is whether the contract is complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror, or when the letter of acceptance is received, thus permitting repudiation prior to receipt. Appellants argue that posting the acceptance creates the contract; appellees contend that only receipt of the acceptance bars repudiation.

* * * In short, both advocates and critics muster persuasive arguments. As indicated, there must be a choice made (by the legal system) and such choice may, by the nature of things, seem unjust in some cases. Weighing arguments with reference not to specific cases but toward a rule of general application and recognizing the general and traditional acceptance of the rule as well as the modern changes in effective long- distance communication, it would seem that the balance tips towards accepting the notion that this case is controlled by the general rule that insofar as the mail is an acceptable medium of communication, a contract is complete and binding upon posting of the letter of acceptance.

The rule that a contract is complete upon mailing or the deposit of the acceptance in the mails, hereinbefore referred to as the “deposited acceptance rule.” * * * This rule, although not entirely compatible with ordered, consistent and sometime artificial principles of contract advanced by some theorists, is in our view, in accord with the practical considerations and essential concepts of contract law. Outmoded precedents may on occasion be discarded and the function of law should not be the perpetuation of error, but by the same token, traditional rules and concepts should not be abandoned save on compelling ground.

* * * We are constrained by factors hereinbefore discussed to hold that an acceptance is effective upon mailing and not upon receipt. Necessarily, this decision
is limited to circumstances involving the mails and does not purport to determine the rule possibly applicable to cases involving other modern means of communication.

* * * However, adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails, the repudiation was equally invalid…

Summary decree is reversed and the case remanded for further proceedings.

 

Ethical Considerations

Warren Boat Works v. Weaver

Fritz Weaver entered into a verbal contract with the Warren Boat Works whereby Fritz would assume the payments on a boat lease that had originally been entered into by Fritz’s neighbor, Jackson Limus with Warren. Unfortunately, the Boat Works burns down and Fritz’s boat is destroyed. To his surprise, Fritz is now being sued because he has now refused to continue to make the monthly payment on the boat which had been destroyed. Should Fritz be required to continue to make the payments under these circumstances?

 

Questions

Lucy v. Zehmer

  1. What remedy was Lucy seeking? Why?
  2. What was the defense raised by the defendants? Was it credible?
  3. When might the defense of intoxication be valid?
  4. What test did the court apply? Why couldn’t this court, or for that matter any court, apply the subjective test to contracts?
  5. Explain the objective test. Which test do you support? Why?

Lefkowitz v. Great Minneapolis Surplus Store

  1. What test did the court apply here to this “media offer?”
  2. How did the facts fit this test?
  3. What about the defendant’s “house rule?” What was the legal effect of the “house rule?”

Morrison v. Thoelke

  1. What is recording? What is the effect of recording?
  2. What is the purpose of a suit to “quiet title?”
  3. What remedy did the plaintiffs seek? Why?
  4. What rule did the court cite?
  5. According to the court, what is the role of precedents? When can or should a prece- dent be changed?
  6. What is a summary decree?
  7. What case did the court cite in support of its decision?
  8. What is the basis for holding that an acceptance is valid once it has been posted even if it has been lost in the mail?

 

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