Appendix D | Contracts Problems

Problem Set 1

  1. Fran agreed to purchase certain items on credit from the XYZ Corporation. The agreement called for the payment of substantial late fees and other charges and also called for a repossession of all items purchased if any individual payments were missed. Fran is a recent immigrant from Haiti who has great difficulty reading and writing English. In fact, Fran signed the contract using only a simple “X.” When the XYZ Corporation sought to enforce the contract after Fran defaulted, what defense might be available to Fran? Discuss.
  2. X and Y entered into an express oral contract for the purchase of a certain amount of wood saws. X delivered the saws to Y and Y refuses to pay for them, stating that there was no specific agreement as to price. Is there an obligation to pay? Why? What price?
  3. Carol read an ad in the local newspaper offering a baby grand piano for sale for $350.00. Carol visited the home of the offeror and gave the seller a check for $350.00, promising to return in the afternoon to pick up the piano. The seller then went off to church and after Mass, she stopped off at her good friend’s home where the general opinion of several of her friends was that the piano was worth much more than $350.00. The seller then had the piano appraised and found that it was indeed worth around $2,000.00. The seller then called Carol and said that “I’ve changed my mind and I’m not going to sell.” The seller mails the check back to Carol. Is there a contract? Can Carol get the piano? Why? Might the seller claim unconscionability?
  4. Tom is a local franchisee of the Popeye’s Chicken Corp. A provision in the franchise agreement calls for the payment of $2,000 if the franchisee “fails to perform any of the terms or conditions of the contract.” Tom runs into some economic difficulties and misses a one month payment of the franchise fee and the franchiser now seeks to enforce the $2,000 clause. Is such a clause enforceable? What standard?
  5. X and Y were involved in an automobile accident on South Orange Avenue, right near Center Street. Y claimed that X was responsible for the accident and X agreed to pay all of Y’s expenses and doctor bills rather than risk a potential lawsuit where X might lose his license. About a month later, X receives a letter from a Mr. Simeri (who lives on the intersection) in which Mr. Simeri says that he saw the entire accident clearly and Y definitely went through the red traffic light. X now refuses to honor his promise and Y sues for breach of contract. Who will win? Why? What test will the court apply?
  6. Rick Veldman, age 17, signs up for Karate lessons and agrees to a 36 lesson package at $50.00 each. After taking the lessons, Rick attempts to get his money back, claiming that he was a minor when the contract was entered into. Does Rick have a legitimate legal argument? Suppose that Rick had waited until 8 months after reaching his age of majority to try to get his money back ? What rule do courts apply today to service contracts?
  7. X, a 17 year old boy, agrees to pay back $1,000 to a local bank, in return for a loan to help pay a SAT tutoring course. Later, X receives a gift from his grandfather and attempts to cancel his contract with the bank. X not only wants to return the $1,000, but also wants to avoid paying the reasonable interest charges, claiming that he was a minor when he entered into the contract. Is X correct? What rule?
  8. X, an infant, signed an agreement with a baby-sitting contracting firm, whereby X would receive 8 jobs per month in return for paying 15% back to the babysitting company. After X worked for the company for 3 months, she received a bill for $37.50, the share she had promised to pay. X now refuses to pay the bill claiming that she is a minor. Is she correct? What rule should the court apply?
  9. X, a salesman for a natural gas company, falsely assured Y, a buyer of residential natural gas for home building purposes, that a certain minimum pressure would be all that would be needed to insure adequate home heating pressure. X knew that the specifications he had given out were false. However, Y was very knowledgeable in the area of natural gas and knew that X’s assurances were “probably unrealistic or false,” but Y went through with the deal because the “price was right.” Later, when the gas was shown to have improper pressure, Y sues X for fraud. What result? Reasons?
  10. Fred, a minor, bought an I-Pod from Best Buy at a cost of $150.00, financing the purchase over an 18-month period. Fred reached his 18th birthday (the age of majority) and made a payment on account. Then Fred tried to rescind the contract using age as a defense. Can he now do so?
  11. X and Y were both minors and entered into a contract for the purchase and sale of a motor bike. X later tries to rescind the sale. Is a minor’s contract with another minor voidable by whom?
  12. John owed $25,000 to his neighbor Jim at 4% interest. When Jim requested payment, John admitted that he was unable to do so. Jim then told John that if he did not make
    an immediate payment, he would be forced to sue John and possibly put a lien on John’s house. John thereupon agreed to re-finance the amount of the loan at a higher interest rate. Later, when Jim tried to enforce the new agreement, John defended on grounds that he entered into this agreement under “duress.” Who is right? Why?
  13. X went to work as president of a hat factory. X learned that the factory was having some difficulty in making its payroll, so X orally assured the workers that if the factory was unable to meet the monthly payments to its workers, X would do so personally. Later, X had a disagreement with his Board of Directors and quit his job. When the factory was unable to meet its payroll, the workers contacted X, reminding him of his earlier promise. Can X be compelled to honor his promise? What defense might be available? Would any exception to the general rule apply? Suppose that X were a partner in the hat factory. Might that change the result?
  14. X orally sold a piece of real estate to Y. Y moved on to the premises, put in an “in- ground” swimming pool, and made other improvements to the property. Later X tried to deny that a contract for sale had been entered into and claimed the Statute of Frauds as an absolute defense. Who is right? Why?
  15. Elvis Presley agreed orally to hire a booking agent to represent him for a three-year period or “until such time as you secure for me 12 major contract bookings.” Later, Elvis fires the agent and the agent sues for breach of contract. Elvis’ lawyer asserts the Statute of Frauds as a defense. Who is right? Discuss. Suppose the contract was for an 18-month period and contained no specific task assignment?
  16. Andrew entered into an oral contract for the purchase of $5,750 worth of sporting goods and other athletic supplies. Later, Andrew refused to accept the goods and was sued for breach of contract. What defense might be available to Andrew? Suppose the goods had been specially manufactured for use by Andrew. Might that change the result? What is a specially manufactured good?
  17. X sold Y a TV repair business. The contract contained a clause which prohibited X from opening up a similar business in a 10 mile radius for a period of 5 years. Is such a clause enforceable? Why or why not? What rule?
  18. X set his son up in a printing business. When his son began to experience some financial setbacks, X called various suppliers and orally promised:
    1. I’ll stand behind any losses my son incurs; or
    2. If my son can’t pay, just send me the bills and I’ll make good on them. Later, the business experiences real difficulty and various creditors contact X and seek payment.
    3. What defense might be available to X? How would you counter this argument? Discuss.
  19. Peter Grace promises the Trustees of the local University that he will be giving the University a $7 million dollar gift for the construction of a modern residence dormitory. Invited to the campus, Mr. Grace comes under attack by various student radicals for alleged involvement in covert CIA activities. Incensed, Grace cancels his pledge to the University. However, in the meantime, the University had expended considerable sums to hire an architect, draw up plans and break ground for the new structure, all costing around $2 million dollars. Is Mr. Grace’s promise to the University enforceable? On what showing? To what extent? Discuss.
  20. X contracted to purchase 100,000 bushels of apples from a certain fruit farmer in Spokane, Washington. Just prior to the delivery date, a major volcano erupts and the entire crop is destroyed. Might the farmer be compelled to honor his contract? Explain. What defense might be available?

Problem Set 2

  1. XYZ Corporation sent a letter to Harry Hotdog, in which it offered Harry employment as a managerial trainee at an annual salary of $35,000. Harry wrote back, stating: “I will accept, but would you consider raising the salary to $36,000? I don’t feel that I can work for any less than $36,000 per year.” Can XYZ Corporation now offer the job to someone else?
  2. Fly-By-Night Construction Company agreed to construct a one car garage for Innocent, who agreed to pay $7,500. Before the garage was built, Innocent promised to pay Fly-By- Night an additional $3,700 if it would build a two car garage instead of a one car garage. After Fly-By-Night had completed the two car garage, Innocent paid $7,500, but refused to pay any more. Fly-By-Night sues Innocent for the additional $3,700. Can Fly-By-Night collect? Is there a “consideration problem” here?
  3. For fifteen years, Jim has mowed John’s lawn on Friday afternoons during the months of April through October, and John has paid Jim ten dollars for each mowing. One Friday, Jim brings his mower to John’s house, says hello to John, and mows John’s lawn. During this time, John watches Jim but says nothing. Later, John refuses to pay, alleging that
    he and Jim had not entered into an express agreement for mowing the lawn. Can Jim collect? Upon what theory?
  4. Sonny borrowed $3,000 at no interest from his father. The loan was to be repaid January 1, 2017. On that date, Sonny called his father and said that he only had $2,000. He asked if his father would accept the $2,000 as full satisfaction of the debt. The father agreed. After having received the $2,000, the father asked for an additional $1,000. Sonny refused to pay it, and the father sued. Who will win, and why?
  5. Uncle promised 16-year old Nephew a gold watch if Nephew would refrain from smoking until his 21st birthday. Nephew did refrain from smoking until age 21, but when he tried to collect the watch, Uncle refused. Can the Uncle be compelled to pay?
  6. Craig wanted to stage a production of the well-known play, “Kick Your Dog Down a Dusty Road.” He wrote Natalie, a famous actress, offering her the lead in the play at $10,000 per week for six weeks. His letter also stated “Offer ends in one week.” Natalie received the letter the next day and immediately mailed an acceptance. Natalie’s letter was temporarily lost in the mail and did not arrive until five days after she had dispatched it. Craig, not hearing from Natalie, decided to abandon the project. If Natalie sues Craig, what will be the result?
  7. Jack offered to sell a prime piece of real estate to I.O.U., a private university. I.O.U. paid Jack $500 to keep his offer open for 6 months, from September I to March 1. In October, Jack wants to sell the property to a third party, Industrialist, for a higher price. May Jack do so?
  8. In January, Two & Two (an accounting firm of national reputation based in New York) procured lists of all senior accounting students in the nation who ranked in the top 10 percent of their graduating classes. Two & Two sent out form letters on firm stationary which congratulated each recipient on his or her fine academic record. The letter also stated, in pertinent part:

    Should this letter be characterized as an offer? Why or why not?
  9. Thrifty promised to donate $500 to his favorite charity, the Irwin Home for Impoverished Lawyers. In reliance on Thrifty’s pledge, the Home immediately ordered some badly needed three-piece suits for some of its inmates. Thrifty later changed his mind and refused to make the donation. Can Thrifty be compelled
    to make the donation? What showing?
  10. On June 1, 2016 the Management Group, Inc. offered Hillary a position as house counsel, to begin September 1, 2016. Hillary did not communicate with the Management Group until October 1, 2016, when she showed up at its offices and announced that she wanted the job. The Management Group had already hired someone else. Is Hillary entitled to the job.
  11. While Hank Homeowner is away on vacation, workmen from the Cosmo Construction Company erroneously re-surface Hank’s dilapidated driveway, mistaking Hank’s house for the house on which they were supposed to be working. Cosmo later bills Hank, and Hank refuses to pay. Cosmo then sues Hank, arguing that Hank received a benefit, and thus should be required to pay. Discuss Cosmo’s chances of success under both contractual and quasi-contractual theories.
  12. Farthing published an advertisement in the newspaper offering a reward of $500 for the return of her cat. After several weeks, she changed her mind, and posted several signs around town that stated that her offer was withdrawn. Goodguy saw the newspaper ad but did not see the signs. He returned the cat and claimed the reward. Must Farthing pay him?
  13. Black wrote to Berlin: “I have decided to sell my farm, Blackacre. I would want around $65,000 for it. Let’s have lunch next week and discuss it.” Has Black made an offer? Why or why not?
  14. Widow offered a reward of $50,000 for the apprehension of the person who had killed her husband. Sheriff Goodguy saw the reward offer. In the course of his duties, he apprehended the killer. Several days later, he claimed the reward, but the widow refused to pay. Should the Sheriff collect?
  15. The Klott’s signed an agreement to purchase a house owned by the Stewart’s. The day after the Klott’s moved into the house they became aware of malfunctioning water well in need of major repairs. During the negotiations for the sale of the house, no mention was ever made about the water supply. The Klott’s did not ask for any information; they had assumed the water came from the city well. Nor did the Stewart’s volunteer any information. The Klott’s sue the Stewart’s for damages, claiming that there was a fraudulent nondisclosure and concealment of the faulty well. Assuming the Stewart’s were aware of the faulty condition of the well at the time of the sale, are they liable for damages for not disclosing this information?
  16. Wilson had been working for the telephone company when Hayes and the Winslow Construction Co. promised her a job as a flag girl on a construction job. Wilson was told to quit her present job, which she did. Hayes and the Winslow Construction Co. did not fulfill their promise to employ Wilson, and she sues to recover lost wages during her period of unemployment. Are Hayes and Winslow Construction Co. liable on their promise? What theory?
  17. Rose, a minor under the age of 18, purchased an automobile from a Ford Motors dealer. Seven months later, Rose declared the contract invalid since, as a minor, she wasn’t permitted by law to make a contract for the purchase of an automobile. Rose demanded: (1) that the contract be declared invalid and (2) that the entire purchase price of the automobile be refunded to him. Will her demands be honored?
  18. Tovar, a Kansas physician, sought employment in an Illinois hospital as a resident physician. Terms of employment were agreed upon and Tovar signed a contract. After two weeks of employment with the Illinois hospital, Tovar was summarily dismissed on the grounds that he did not have a valid Illinois medical license. Tovar sues the hospital for wrongful termination of his employment contract, despite acknowledging that he did not have an Illinois license. Tovar claims that the license is not necessary to the fulfillment of the terms of the contract. Is the hospital liable on the contract?
  19. On October 20, 2016, Uscian and Blacconeri entered into a written contract for the sale of a certain parcel of land owned by Uscian. The contract was expressly contingent upon Uscian obtaining approval from the city to subdivide the property. Uscian’s application for subdivision was denied by the city. Thereafter, in December of 2016, the parties orally agreed to sell the property without first obtaining a subdivision. Later Uscian backed out of the deal. Blacconeri now sues for specific performance of the written contract. Uscian sets up the Statute of Frauds as his defense. Is this a valid defense? Explain.

Problem Set 3

  1. Torbert accepted Jordan’s proposal that they go to the Fall Cotillion together. In return for Jordan’s willingness to purchase tickets and pay all expenses, Torbert set aside the time and restricted herself from doing anything else on the evening of the dance. Jordan cancels the date at the last minute. Any possible basis of recovery? How much? (What is the measure of the damages?)
  2. Faulkner, seventeen years old, realized that his contracts were not enforceable because of his age. He bought an expensive television set, for which he agreed to pay $47.50 per month for twelve months. The seller did not know that Faulkner was a minor. After using the set for two months, Faulkner refused to make additional payments, returned the set, and demanded return of all monies paid. General Rule? Exceptions? State law exceptions?
  3. Reynolds, a minor, purchased a winter coat at a reasonable price. After wearing the coat for more than three months, she returned it to the store and demanded her money back. Will she recover? Why or why not?
  4. Colby was unconscious as a result of a hit-and-run accident. He was taken to the hospital, where he underwent emergency treatment and surgery. After regaining consciousness, Colby denied any responsibility for the hospital charges, stating that he had been incompetent to contract while in an unconscious state. Could Colby be compelled to pay?
  5. Engineering Research, Ltd., hired Jacobs to work on a research project that would require at least three years to complete. The offer of salary and employment were oral and Jacobs accepted it. Is the agreement enforceable?
  6. Zabinsky, an artist, was commissioned to do a portrait of Governor Simms. When he was called to Europe to do portraits of several members of a wealthy family, he assigned the duty to a famous artist who had taught him in graduate school. Is such an assignment possible? Why or why not? What showing?
  7. Wendel, an Olympic Skater, turned professional skater and signed an agreement with Ice Shows. After four weeks of practice, Wendel suffered a broken ankle. Any further obligations required of either party? Can Wendel be sues for breach?
  8. Stolts orally agreed to buy an 18th century chest from Empire Antiques for $4700. When Stolts went to pick up the chest, Empire refused delivery, stating that the chest was going to be given to a museum. Can Stolts get the chest?
  9. Goldstein found a watch with no identification so he could not locate the owner. An advertisement in the paper on Tuesday identified the watch and offered a $25 reward. Goldstein responded to the ad and returned the watch. The owner refused to pay the reward stating that the ad was “merely an invitation to trade” and not a firm offer. May Goldstein recover the $25 reward?
  10. While intoxicated, Russ bought a fur jacket from Sam paying her with a check for $1,300. Several hours later, remembering what he had done, he stopped payment on the check. Sam sued Russ for the $1,300 and refused to accept the return of the coat. Will the suit succeed? Why or why not?
  11. In a state where gambling is illegal, Hopkins agreed to act as a bookie. Hopkins’ boss refused to pay him for work done in the bookie establishment. Hopkins sues. Will he collect?
  12. Mrs. Williams purchases various items from a local retail store totaling almost $1,800. She signs a printed form which provided for installment payments and forfeiture of all items purchased if one of the installments was not paid on time. Mrs. Williams sues to set the contract aside. What basis? Discuss.
  13. Freddy sends Larry an offer to purchase gasoline. Larry receives the offer on August 12 and immediately wires Freddy that he is not interested in the deal. Prior to the receipt of this wire, Larry calls Freddy and says that he accepts. Is there a contract? Why?
  14. Under what circumstances might a newspaper ad or one found on the television be considered as an offer?
  15. Gerry bids on a construction job as a subcontractor. The contractor receives his bid but prior to the awarding of the contract, Gerry notices that he has made a clerical error and attempts to notify the contractor of this fact. Are there any circumstances where a revocation at this point might be possible?
  16. Freddy calls his friend Joe on the phone and states: “Remember those three pieces of land in Arkansas you were interested in buying? I’ll make them available to you for three weeks.” Three days later, however, Freddy sent Joe a letter and says: Lots sold. Sorry.” Joe contends that he had a firm option for three weeks. Is he correct?
  17. How does the U.C.C. define “goods”? “merchant”? “unconscionability”?
  18. Offer: Will sell between 6 and 7 thousand tons of potatoes: Acceptance: Will purchase 6,550 tons of potatoes. Is there a contract?

 

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?

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