Contracts II – Flashcards

A minor's contract is voidable, but not automatically void, at the election of the minor. There are exceptions to the rule, including those contracts for the necessities of life such as food, shelter, and medical care. Upon reaching the age of majority, a minor may choose to affirm the contract. If the minor does not actively disaffirm the contract within a reasonable time of reaching the age of majority, then he has affirmed the contract through conduct.

If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, then the contract is voidable by the victim.

Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. If a party's manifestation of assent is induced by undue influence of the other party, the contract is voidable by the victim.

If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest her assent and the maker: (a) knows or believes that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion.

A misrepresentation is material if it would be likely to induce a reasonable person to manifest her assent, or if the maker knows that it would be likely to induce the recipient to do so.

The modern view is that a vendor has an affirmative duty to disclose material facts where: (a) necessary to prevent a previous assertion from being a misrepresentation, fraudulent or material; (b) disclosure corrects a mistake as to a basic assumption of the contract and if nondisclosure is akin to a failure to act in good faith and fair dealing; (c) disclosure corrects a mistake as to the contents or effect of a writing, evidencing the agreement; (d) the other person is entitled to know because of a relationship of trust and confidence between them.

The unconscionability doctrine has two parts that must both be met: procedural and substantive. Procedural unconscionability refers to surprise or oppression due to unequal bargaining power and lack of meaningful choice, considering all the circumstances surrounding the transaction including the manner in which the contract was entered, whether each party had a reasonable opportunity to understand the terms of the contract, and whether the important terms were hidden in a maze of fine print. Substantive unconscionability refers to a contractual provision that is overly harsh or that produces one-sided results.

Agreements that restrain competition such as non-compete covenants are generally unenforceable, unless they satisfy certain requirements. First, the covenant must be ancillary to a valid transaction or relationship. The purpose of the ancillary requirement is to make sure the covenant serves a bona fide purpose other than simply acting as a restraint on competition. One type of ancillary relationship is a covenant by an employee not to compete with her former employer. Even if such promise is ancillary to an otherwise valid transaction, the promise may be an unreasonable restraint of trade and thus violate public policy if: (a) the restraint is greater than needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public. To determine reasonableness, we examine the restrictive covenant itself for such factors as time duration, geographic scope, and scope of activity, as well as the legitimate interest of the promisee, hardship to the promisor, and likely injury to the public.

Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable unless he bears the risk of the mistake under Section 154.

A party bears the risk of a mistake when: (a) the risk is allocated by agreement, or (b) he is aware, at the time the contract is made, that he had only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performance that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in Section 154, and: (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake.

Under the common law doctrine, a party's contractual duties will be discharged if it becomes literally impossible to perform them after the contract has been formed.

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Further, a mere change in the degree of difficulty of performance, unless well beyond the normal range, does not amount to impracticability.

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Under the pre-existing duty rule, a party's merely promising to perform an existing obligation will not serve as valid consideration for additional return compensation from the other party.

The Uniform Commercial Code (UCC) governs all contracts for the sale of goods, where a good is a moveable object.

The common law governs all contracts for services and anything other than the sale of a good.

Delay in delivery or non-delivery in whole or in part by a seller is not a breach of his duty under a contract for sale 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.

If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.

Undue influence involves persuasion which tends to be coercive in nature. It requires both excessive pressure by the dominating party and undue susceptibility in the servient party. The existence of a confidential or trusting relationship between the parties, although not required, would support a showing of coercive persuasion. The following additional factors would further help show whether overpersuasion was used: i) time; ii) place; iii) urgency of business to be completed; iv) extreme emphasis on the negative consequences of delay; v) use of multiple dominant persuaders; vi) no third party advisors; and vii) no time to get financial or legal advice.

An assignment is an act or manifestation by the owner of a right (the assignor) indicating his intent to transfer that right to another person (the assignee). For an assignment to be valid and enforceable against the obligor, the assignor must make clear his intent to relinquish the right to the assignee. The assignment takes effect through the actions of the assignor and the assignee, and the obligor need not accept the assignment to render it valid.

Contractual rights are generally assignable, unless: (a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on the obligor, or materially impair the obligor's chance of obtaining return performance, or materially reduce its value to him; or (b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or (c) assignment is validly precluded by contract. A clause prohibiting the assignment of contractual rights generally does not bar assignment, but merely gives the obligor the right to sue for breach if an assignment is made.

In general, all contractual duties may be delegated to a third party. A party (the obligor) who is subject to a duty of performance under a contract may properly delegate that duty by employing someone else (the delegate) to perform the duty. There are some exceptions to this general rule, which include the following: where the contract is for personal services, where there is a special relationship of trust between the obligor and the obligee, where there is a material change in performance or expectancy of performance, and where there is a contractual restriction on delegation of duties. The party who is originally bound to perform will remain subject to that duty until performance is actually rendered, unless his duty is released by the obligee.

The obligee generally has rights against both the original obligor as well as the delegate, who promises to assume the original obligor's duty.

An assignment supported by consideration is irrevocable. Consideration consists of two elements: (a) a bargained-for exchange, and (b) that which is exchanged must be of legal value. In a bargained-for exchange, the promise induces the detriment and the detriment induces the promise.

An assignee may directly enforce her rights against the obligor.

Express conditions are those agreed to and imposed by the parties themselves, and usually are included in a written contract. Express conditions must be literally performed to give rise to the other party's duty of performance.

An excused condition means the obligor still has a duty to perform. Acceptable excuses include: (a) substantial performance; (b) waiver by words or conduct; (c) estoppel; and (d) wrongful hindrance by the party with the duty to perform to meet the condition.

If a party gives substantial performance under a contract, the other party cannot claim breach of contract. Substantial performance requires that there were only small deficiencies where precision was not critical. Compensation may be given for trivial defects.

Implied or constructive conditions are those imposed by the law to do justice. Constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient.

A buyer can breach a contract by repudiation or refusing to perform a contractual duty, or by wrongfully rejecting the goods.

A breach is the unexcused nonperformance of a contractual duty.

A partial breach is a minor nonperformance where the nonbreaching party received the substantial benefit of the bargain despite defective performance. If the breach is partial, the nonbreaching party still has a duty to perform but may seek damages for the minor nonperformance.

A material breach is a more serious breach which suspends the other party's duty to perform until the breach is cured. A breach may be material depending on the extent to which the following factors are met: (a) the extent to which the injured party is deprived of the benefit she reasonably expected; (b) the extent to which the injured party can be adequately compensated; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform will cure his failure; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

A material breach may ripen into a total breach, which discharges the non-breaching party's duty to perform under the contract. The non-breaching party can sue immediately for damages. A material breach becomes a total breach depending on the strength of the materiality factors above plus the following: (a) whether further delay appears likely to prevent or hinder the ability of the non-breaching party to make alternative arrangements, or (b) whether performance without delay is an important aspect to the contract. In other words, a total breach is a material breach that has not been cured after a reasonable period of time, and further delay will unduly prejudice the non-breaching party.

According to the perfect tender rule, the seller has to deliver goods that conform exactly to what was promised under the contract. If the goods or tender of delivery fail in any respect to conform to the contract, then this rule is violated and there is a seller's breach. The seller has the right to cure the nonconformity of good if the seller acted in good faith, seasonable notice is given to the buyer that the seller will cure, and the time for performance has not yet expired.

If a seller has breached, the buyer can reject all the goods, accept all the goods, or accept some and reject the rest. The buyer's right to reject the nonconforming goods is subject to the seller's right to cure an improper tender of goods. The rejection must be within reasonable time after delivery or tender, and the buyer must seasonably notify the seller. The seller has the right to cure the nonconformity of the goods if the seller acted in good faith in making the original tender and if the time of performance has not yet passed.

If the seller, however, delivers perfectly conforming goods in accordance with the contract, then the buyer cannot reject the goods. If the buyer rejects perfectly conforming goods, then this is a wrongful rejection by the buyer and the buyer has breached.

A buyer accepts goods when the buyer does any of the following: after a reasonable opportunity to inspect the goods the buyer signifies to the seller that the goods are conforming, or if the buyer fails to effectively reject the goods after having had reasonable opportunity to inspect them.

A buyer can revoke acceptance of goods if the nonconformity of the goods substantially impairs their value, and the buyer did not discover the nonconformity but acceptance was reasonably induced by the difficulty of discovery before acceptance or by the seller's assurances that the goods were conforming. The buyer must revoke before there is substantial change in the condition of the goods not caused by their own defects. The buyer also must revoke within a reasonable time after discovery of the nonconformity and give the seller notice.

When reasonable grounds for insecurity arise with respect to performance of either party, the other may in writing demand adequate assurance of due performance and, until he receives such assurance, may if commercially reasonable suspend any performance for which he has not already received the agreed return.

Between merchants the reasonableness for grounds of insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. 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 is a repudiation of the contract.

The doctrine of anticipatory repudiation requires a clear manifestation of an intent not to perform the contract on the date of performance. Doubtful or indefinite statements that performance may or may not take place are not enough to constitute anticipatory repudiation. Either words or conduct can amount to repudiation.

Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has, since the repudiation, cancelled the contract or materially changed her position or otherwise indicated that she considers the repudiation final.

Cover damages is the difference between the cover price (the price of commercially reasonable substitute goods) and the contract price.

Incidental damages are out-of-pocket expenses incurred by the buyer/seller to deal with the consequences of the seller's/buyer's breach.

Courts commonly award the expectation interest, which is the benefit of the bargain had the contract been fully performed. General damages are those that arise naturally from the breach as the parties reasonably contemplated at the time the contract was made. General damages take into account four principles: foreseeability, causation, certainty, and mitigation, and are calculated using the following formula: loss in value (what is unpaid under the contract) plus other losses (incidental and consequential losses) minus cost avoided (costs not incurred) minus loss avoided (mitigation savings).

Under the Hadley v. Baxendale rule, special damages are those damages that result from special circumstances communicated at the time the contract was formed, so that both parties were aware of these special circumstances and could have contemplated such damages at the time the contract was made.

Resale damages are calculated by taking the difference of the resale price and the contract price. To recover resale damages, the seller must identify the goods being resold as the same ones under the contract; the seller must give the buyer notice of resale; and the resale must be made in good faith and in a commercially reasonable manner.

Market damages are the difference between the market price when the buyer learned of the breach and the contract price.