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Contracts-Flow Chart
Law of Contract
Osmania University
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CONTRACT
A contract is a legally enforceable agreement. Promise + Consideration = K Promise + Detrimental Reliance = K
CONSIDERATION
To constitute consideration, a performance or promise must be bargained for, i. sought in exchange for another performance or a return promise
Each party has the duty to bargain in good faith
DETRIMENTAL RELIANCE
In some instances, detrimental reliance acts in place of consideration.
PROMISE
A promise is the manifestation of intent to act or refrain from acting in a specified way
A promise or performance must offer some legal detriment, i. something of value or some form of freedom
Conditional & Illusory Promises An agreement that depends on the wish, will, or pleasure of one of the parties will not be enforced.
ENFORCEABLE
UNENFORCEABLE
No Commitment One party cannot convert what both parties knew to be a joke into a serious transaction simply by claiming it to be so.
There must be a meeting of the minds.
Satisfaction Clauses Two Categories: (1) Objective test: Reasonable person standard, where “satisfaction” can be asserted to something measurable (2) Subjective test: Good faith standard, where “satisfaction” is determined by the fancy, taste, or judgment of the parties
Exclusivity: Good Faith & Reasonable Efforts Implied Promises = A promise may be lacking, and yet the whole K may be “instinct with an obligation, imperfectly expressed.” In these situations the court reads in the promise through good faith and reasonable efforts by both parties.
DISCRETIONARY
Vague & Indefinite Terms
Six Ways of Interpreting a Term:
The Courts use these to determine INTENT (1) Language of the K (2) Dictionary (3) Prior Negotiations Between the Parties (4) Trade Usage (5) Standards Incorporated by Reference (6) The Conduct of the Parties
Other relevant factors: Evidence; Subject Matter
(I). Lack of Capacity
(1) Illiteracy without guidance (2) Mentally Ill (3) Infant (Minor)
K is voidable if:
- Party is unable to understand in a reasonable manner
- Party is unable to act in a reasonable manner
(II). Duress
(1) Mere Stress of $ Situation = No Void of K (Bad public policy) (2) Assent Induced by Improper Threat = Voidable K (3) Business Compulsion creates no other speedy remedy = Voidable K. i. did the person do what they otherwise would not have done?
Defenses to K
Formation
An unjustified failure to perform an absolute duty
(III). Unconscionable & Unjust
K’s of Gross Inequality are not sustained
Adhesion & Unjust Terms: K’s offered by the party with more power to the party with weaker power on a take-it-or-leave-it basis.
Rule: Enforceability depends upon the (1) degree of inequality and the (2) social necessity of the contract.
Unconscionability: Occurs where there is an absence of meaningful choice on one party, together with contract terms unreasonably favorable to another party. Must be a necessary act of life, not a luxury or hobby.
Rule: Where the element of unconscionability is present at the time a K is formed, the K is unenforceable. K must be with the reasonable expectations of the weaker party [substantive] to be enforceable. Conduct is also considered [procedural].
NOTE: Both substantive and procedural unconscionability must be shown for a K to be unenforceable.
Compensatory Damages
When a person makes a promise, the promisor undertakes the promised performance or a sum or money that will place the promisee in the same position as they would have been had the promise been performed.
Expectation Positive: What the injured party would have made in profit had the K been performed.
Rule: The law is meant to place compensate the injured party for the benefits he would have gained in the contract, not to place the injured party in a better position than they would have been in had they performed the K.
KP – Cost of Goods Sold = Damages
Reliance Negative: Returns the injured party to before the K was made.
Rule: Wasted expenditure can be recovered when it is wasted by reason of the defendant’s breach of K. If one party knows expenses exist as a result of their agreement to K, but breaches anyway, that party is liable for the expenses of the injured party.
Restitution Negative: Getting back the benefits conferred. “Disgorging” the benefits conferred.
A court may award damages in an attempt to return to the injured party any value that it may have conferred on the breaching party. This interest is distinguished from quantum meruit because restitution can only be given for breach of K.
Fair Market Value of benefit conferred is returned.
General v. Consequential Damages
General Damages: Incidental damages resulting from the seller’s breach including those commercially reasonable. Consequential Damages: (1) In a sellers breach: Any loss resulting from general or particular requirements and needs that the seller had reason to know at the time of K and could not have reasonably prevented; (2) Injury to person or property directly resulting from a breach of K.
To recover consequential damages: (1) The damages must flow naturally from the breach (2) Both parties must be aware of the damages and assume the risk of those damages at the time of K
Basic Remedies
Remedies: How the Law Enforces Promises
INJUNCTION SPECIFIC
PERFORMANCE
Granted IF: There is a breach Remedy at law is inadequate (UCC) Performance is practical Courts can supervise Special Circumstances Contract is clear and valid Uniqueness makes it impossible to assess damages Not Granted IF: Inconvenient and Expensive Impractical Contract too vague Project too complex No Special Circumstances
Granted IF: Special circumstances to prevent unfair competition (anti-competition clauses Unfair trading of secrets Unique goods and services Limited to Employment Contracts Public interest is at harm Irreparable harm where monetary damages is not enough If costs of remedy damages exceed cost of injunction (Walgreens) Temporary/Permanent?
Easier to get for Sale of Goods Contract
SPECIFIC RELIEF: Granted when legal remedy is inadequate.
(UCC 2-719)
Punitive Damages Almost never recoverable for breach of contract. Only if compensatory damages are inadequate. Exist to punish/deter the wrongdoer, considered inappropriate for contract cases.
Construction K Mitigation Once contract has been breached non- breacher should not be allowed to pile up damages. Stop building when they tell you to stop. Remedy is to treat contract as broken when receives notice and sue for the recovery of such damages as he may have sustained from breach. Ex. Luten Bridge
Construction: KP - Cost of Completion (expectation) Or KRate for completed part + Lost Profit (reliance)
Employment K Mitigation Employee has to show that he was actively looking for another job after employment contract was breached. Must prove there was no other comparable employment. o The employee’s rejection of or failure to seek other available employment of a different or inferior kind may NOT be resorted to in order to mitigate damages. (Shirley McLain) Can collect excess damages with the difference between salaries for both jobs. (Employee) Money needs to comparable, type of work, seniority (how much input you’ll have), reputation, location and skill set.
Employement: Employer: Replacement K – Breached K Employee: KPrice – 2nd Job Earnings (Mitigation)
Sale of Goods Mitigation If lost volume seller: UCC 2-708: If the measure of damages proved (KPrice
- Market Price) is inadequate to put seller in as good a position as performance would have done, seller’s lost profit on the sale is an appropriate measure. o Expectation Interest Protected
Sale of Goods: Seller: K Price – Market Price Buyer: Cover Price – Kprice
AVOIDABLE CONSEQUENCES : DUTY TO MITIGATE DAMAGES
Injured party should do whatever it reasonably can to improve all reasonable and proper opportunities to lessen injury. Non-breaching party cannot recover for damages it could have reasonable avoided following notice that the other party is repudiating the contract. Restatements 350.
Limits on
Promise
For a K to be enforceable: No violation of public policy No criminal activity
Relationships
Secret Service
K is not enforceable if: Litigation discloses confidential matters Litigation might have even a slight chance of impairing or undermining covert operations
Legal Limits
If a contract is immoral, unfair, or illegal, then it is unenforceable and against public policy: Illegal on face Illegal in performance Illegal in procurement The illegality must be of a substantial degree to prove no K.
Positive Law = Public Policy Limits on Contract Restatement § 178 (1) A promise is unenforceable if legislation makes it so, or if its enforcement is clearly outweighed in the circumstances because of public policy. (2) In weighing enforcement courts examine: (i) The parties justified expectations (ii) Any forfeiture that would result if enforcement were denied (iii) Special public interest in enforcement of a term. (3) In weighing public policy: (i) The strength of the relevant policy (ii) The likelihood that refusal to enforce will further that policy (iii) The seriousness of misconduct (iv) The connection between the misconduct and the promise
Parent-to-Child
(1) Extrinsic evidence of a binding agreement must be shown (2) Evidence must be express: clear and convincing to prove K (3) Circumstances are considered
Spousal (Some states have a palimony rule) Property rights established in a pre-nuptial agreement are enforceable
Spousal support waivers and pre-nuptial agreements are not in violation of public policy and are not per se unenforceable. Judicial discretion is applied to determine enforceability of K
Unmarried cohabitants can sue only under Quantum Meruit because no marriage K exists. Occurs if one party retains an unreasonable amount of property that was gained by the efforts of both parties.
Attorney – Client
Limited to Quantum Meruit for the value of services performed by attorney when client discharges attorney
(V). Pre-Existing Duty
A promise to do something one is already obligated to do, or forbearing to do what they are not legally entitled to do. There is no contract in cases of pre-existing duty because there is no bargained for exchange of consideration. One party must already do something.
Contract Modification: (1) New Consideration. Any change in an existing K must have new consideration to support it. In such a case, the K is continued, not ended. (= more compensation for more hours worked) (2) Mythical Intermediate K. Employment K’s. (a) Old K (b) is terminated by consent of both parties (c) and a new K is executed in its place. The mutual promise to terminate is consideration (Intermediate K), and to re-contract is again consideration. Usually occurs in one moment. (= pay raise for same work hours).
Actions Speak Louder Than Words (N.O. K’s): (i) The pattern of conduct between two parties may can amount to the oral modification of a K. (ii) Conduct as oral modification may amount to a waiver of some right by a party
Settlements of Debt & Compromise: The difference between the two depends upon the intent of the parties. (A) Accord & Satisfaction = A compromise providing for the future acceptance of a stated performance in satisfaction of the existing claim. (B) Substituted Contract = A compromise agreement itself that is accepted as a substitution and extinguishment of the existing claim.
An Accord is more likely if: (1) The original duty was one to pay money; (2) if the issue is undisputed; (3) if it was liquidated; (4) if it was matured
(IV). Action or Forbearance from Reliance § 74 Restatement Forbearance to assert a claim that proves to be invalid is not consideration unless: (a) the claim is doubtful because of uncertainty as to the law (b) the forbearing party believes that the claim may be fairly determined to be valid
If the plaintiff believes in good faith that they could have brought a claim but did not file suit in exchange for something else, that good faith agreement will be enforced.
DETRIMENTAL RELIANCE:
In some instances, if one party relied on the promise of another party and thus did or did not do something because of that promise, the promise is enforceable even though it did not have bargained for consideration
Unbargained-For Reliance: (1) Must be reasonable (2) Must be foreseeable
(VI). Form & Enforceability
Consideration
(Continued)
Contracts-Flow Chart
Course: Law of Contract
University: Osmania University
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