Playlist: 39 Videos: 115 Minutes
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Introduction to Contract Law
Contract law concerns the legal principles governing the exchange of goods or services between individuals or businesses. This chapter will explore the sources of contract law applicable to the sale or exchange of goods or services. It will lay out the elements necessary to form a contract and each party’s duty of performance under the contract. It will examine key contract principles, such as performance, breach, enforceability, voidability, etc. It will lay out the generally applicable rules that courts employ when interpreting contracts. This includes rules about what terms or communications are considered to be part of the contract. Lastly, it explores the remedies available to parties who suffer harm as a result of another party’s breach. For further written and video explanation, discussion and practice questions, see Contract Law (Intro)
What is a “Contract”?
A contract is a legally enforceable promise or an exchange of promises. To be enforceable, the contract must meet certain elements. There must be an offer, acceptance of that offer, and then an intended exchange of value between the parties. These elements demonstrate a “meeting of the minds” between the parties. That is, the parties have a common understanding of the material terms of the agreement. A contract does not have to be a formal, written document. It can be a verbal agreement or it can arise through the conduct of the parties. Those who make a contract do not have to use the word contract or even recognize that they have made a legally enforceable promise. Each state develops its own contract law. Contract law provides confidence and promotes productivity by making private agreements between individuals legally enforceable. Plainly stated, it helps make buyer and seller willing to do business together. For further written and video explanation, discussion and practice questions, see What is a "Contract"?
Restatement of Contracts and Uniform Commercial Code
States create their own contract law. They pass statutes and allow courts to develop common law. In doing so, state legislators and judges rely upon model laws in developing the statutory and common law. These model laws are known as the Restatement of Contracts and the Uniform Commercial Code. These model laws influence judges who interpret contract law and legislators who draft statutes that resemble (or copy exactly) these model laws. As such, you can study model laws to acquire a broad understanding of how contract law works. You can then look to the specific laws of your state to determine the exact law that applies to a given situation. Restatement of Contract - The Restatement of Contracts (Restatement) is a model law that deals primarily with contracts that do not involve the sale of goods or when goods are not the primary subject of the contract. Most state common law generally tracks closely the provisions of the Restatement. Article 2 of the Uniform Commercial Code - Article 2 of the Uniform Commercial Code (UCC) governs contracts for the sale of goods. It has been uniformly accepted by nearly every state in the United States. A sale of goods includes any manufactured product, crops, timber, livestock, attachments to land, exchanged currencies, mined minerals, etc. It does not include intellectual property, securities, non-commodity currencies, and un-mined minerals.To be subject to the provision of the UCC, goods must be the primary purpose of the contract. If services are the primary purpose of the agreement, the incidental inclusion of goods is not covered by the UCC or corresponding state statutes. For further written and video explanation, discussion and practice questions, see What are the sources of contract law?
Unilateral Contract vs Bilateral Contract
Contracts are divided into unilateral and bilateral agreements based upon the duty of performance and how an offer to contract is accepted. Bilateral Contract - A bilateral contract consists of two promises between individuals that form a contract. Specifically, one party makes a promise to another party that she will do something (or forgo doing something) in exchange for the other party’s promise to do something (or promise to forgo doing something). Unilateral Contract - A Unilateral contract is an agreement with only one promise. That is, one party promises a future action if the other party performs whatever is requested of her. The promising party does not want a return promise. As such, a contract is formed or comes into exists once the other party begins to perform the requested services. For further written and video explanation, discussion and practice questions, see What is a "unilateral contract" vs. a "bilateral contract"?
Express Contract vs Implied Contract
Express Contract - An express contract arises from interactions in which parties actually discuss the agreement and the promised terms. The contract does not have to be formal or in writing, but it requires that the parties express their intentions in an agreement. Implied-in-Fact Contract - An implied-in-fact contract arises from the conduct of the parties, rather than from words. That is, the parties interact in a manner that constitutes a legally enforceable contract. This means that all of the elements of an enforceable contract can be inferred from the actions of the parties. Implied-in-Law or Quasi-Contracts - An implied-in-law contract is a contractual relationship ordered by the court. It lacks the mutual asset element of a contract, but the court deems the interactions between parties to be a contract under the law. This court action is generally taken to avoid an unjust result, such as when one party is unjustly enriched at the expense of another. The court will hold that the law implies a duty on the first party to pay the second, even though the elements to find a legally enforceable contract between the two parties are absent. For further written and video explanation, discussion and practice questions, see What is an "express contract" vs. an "implied contract"?
Enforceable Contract vs Valid Contract
There are several common characteristics of contracts that dictate whether a contract actually exists and whether it is enforceable in a court of law. The following vocabulary is important for characterizing these aspects of a contract. Valid and Invalid - A contract is valid when all of the elements essential to forming a legal contract are present. Conversely, a contract is invalid (or rather, there is no contract) if any of the essential elements of a contract are missing. The elements to forming a valid contract (offer, acceptance, consideration, and a meeting of the minds) are discussed further below. Enforceable and Unenforceable Contract - An enforceable contract is one that can be enforced in court of law. That is, the law allows for enforcement of the contract. An enforceable contract must always be valid. A valid contract may, however, be unenforceable. That is, even though all of the essential elements of a contract are present, a court will not enforce the contract. For further written and video explanation, discussion and practice questions, see What is an "enforceable contract" vs. a "valid contract"?
Void Contract vs Voidable Contract
Void and Voidable Contracts - An otherwise valid contract may be void pursuant to the law. That is, state law identifies certain types of contracts that are deemed void from the outset. These include contracts that violate public policy or have an illegal purpose. A voidable contract is an agreement where either one or both parties has the right to make the contract void. That is, the contract is valid and enforceable until one party elects to void it. For further written and video explanation, discussion and practice questions, see What is a "void contract" vs. a "voidable contract"?
Contract Elements – Offer, Acceptance, Consideration
As previously discussed, a contract is a specific promise to another and also a specific demand of that person. The demand could be a promise of future action (bilateral contract) or immediate performance of an act (unilateral contract). The promise and demand is an “offer”. Meeting with the offeror’s demand is known as “acceptance”. Both parties must give or exchange something of value with the other. The thing of value is known as “consideration”. Consideration is the promise to give, or actual giving, of a requested benefit or the incurring of a legal detriment (i.e., doing something one does not have to do.). Both parties must be of a legal age and sound mind, and the purpose of the agreement cannot be illegal or against public policy. For further written and video explanation, discussion and practice questions, see What are the requirements to form a Contract (Offer, Acceptance, Consideration)?
What is a “Offer” to Contract?
The following elements must be present to establish a valid offer to contract. Offeror and Offeree - An offer to contract must contains a specific promise from the the person making the promise (offeror) and a specific demand of the individual receiving the offer (offeree). Intent to Make an Offer - The offeror must intend to make the offer. Whether there is intent to make an offer is judged from the position of the offeree. If a reasonable person in the position of the offeree would believe the offeror’s words or actions constitute an offer, it is an offer. This is an objective, rather than subjective, standard for determining whether the intent to make an offer exists. Definite Terms - An offer to contract must be sufficiently definite. That is, the terms of the offer must be sufficiently specific to allow the offeree to understand and accept the offer. The offeree must understand that she is the intended recipient of the offer and may accept it. Also, the terms of consideration must be stated. Remember, the above elements do not have to be in writing or formal. Further, the parties do not have to realize that their words or actions constitute a valid contract; rather, each element is judged by an objective standard. That is, how would a reasonable person perceive the actions potentially constituting an offer? For further written and video explanation, discussion and practice questions, see What is an "Offer"?
When does an Offer terminate?
An offer to contract terminates at the following times or under the following conditions: Specific Provision in the Contract; Lapse of Time; Offeree’s Rejection; Counter Offer; Revocation by Offeror; Destroy Subject Matter of Contract; Death or Mental Incapacity; Illegality. Some of the methods of contract termination are voluntary, while others others are a result of circumstances beyond the control of the parties. To learn more about these conditions and for further written and video explanation, discussion and practice questions, see When does an offer to contact terminate?
What is the Mirror Image Rule”?
Acceptance of a contract is the assent of the offeree to the demands contained in the offeror’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offeror. An offeree accepts a unilateral contact by undertaking the performance demanded by the offeror. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are as follows: Mirror-Image Rule (Restatement) - Contracts that are not primarily for the sale of goods may be governed by rules derived from the Restatement of Contracts. The Restatement proposes the “mirror-image rule” for acceptance of an offer. This rule states that the acceptance of an offer must be exactly as demanded by the offeror. That is, the acceptance must “mirror” the offer. If the offeree adds new terms to the acceptance, it is not really an acceptance. Acceptance with different or additional terms constitutes a counteroffer. For further written and video explanation, discussion and practice questions, see Mirror Image Rule?
What is the “Battle of the Forms?”
Rule for Sale of Goods (UCC) - The mirror-image rule does not apply to sales of goods under the UCC. The UCC recognizes that a contract is formed if the acceptance of the offer is unequivocal. That is, if it is obvious the parties agree on the primary or material terms of the agreement, an acceptance that changes or adds additional terms is a valid acceptance. The effect of different or additional terms depends on whether the parties are merchants. If either party is not a merchant, any additional or different terms are deemed suggestions for addition and do not become part of the contract. If both parties are merchants, the additional terms become a part of the contract, unless: they materially alter the contract; acceptance is conditioned on the specific terms of the offer; or the offeror specifically rejects the additional or different terms. For further written and video explanation, discussion and practice questions, see Rule for Sale of Goods
Silence is not acceptance of an Offer
Silence with Regard to Offer - Failing to reply to an offer is not acceptance in most cases. This is true even if the offer says silence will be considered acceptance. There are, however, exceptions to this rule. If the relationship between the parties is such that it is not expected that the offeree reply, silence by the offeree may constitute acceptance. Another exception would be where the offeree readily understands that silence or a failure to respond means acceptance of the offer. This generally only arises in situations where the offeror and offeree have a history of prior dealings. Lastly, in the case of contracts between merchants under the UCC, silence may constitute acceptance of an offer. In some instances, a merchant is required to expressly reject goods that are delivered; otherwise, her silence constitutes acceptance of the contract. For further written and video explanation, discussion and practice questions, see Silence is Not Acceptance?
What is the “Mailbox Rule”?
Mailbox Rule - The mailbox rule is a default rule that applies when the offeror does not place specific requirements on the manner of acceptance. Under this rule, the offeree accepts the offer when it is sent to the offeror. This could include dropping it in the mail or sending it with a courier. This may also include providing notice of acceptance via email or other electronic communication (regardless of whether the offeror actually checks or reads the email). As such, if an offer is made to multiple offerees, the first offeree to accept in any manner (including by dropping the acceptance in the mail) has a binding contract. For further written and video explanation, discussion and practice questions, see Mailbox Rule
What is Contract “Consideration”?
Consideration is anything of value. Recall that a valid contract must include an exchange of value between the offeror and offeree. The value should be the inducement or incentive for the other party entering into the agreement. That is, it must be the subject of the bargain between the parties. A promise to make a gift is not binding because the party receiving the gift gives no value in return for the promise. When the existence of consideration is not clear, the court will examine the transaction as a whole to determine if consideration exits and the contract is enforceable. Types of Consideration - The amount or value of the consideration present does not matter. It need not be money or goods. Acceptable types of consideration include: Agreement to Refrain: An agreement to refrain from doing something that you have the right and ability to do may constitute consideration. Agreement not to Sue: An agreement not to sue the other party may be sufficient consideration when reasonable grounds exist to make a lawsuit possible. Prior Consideration - Generally, consideration in a prior agreement is not valid consideration in a new agreement, except in very limited circumstances. The reason is because the individual is already obligated under the old agreement. Trying to promise to do the same thing does not provide a new form of value. Under the UCC, however, a preexisting obligation can constitute valid consideration if the offeror is a purchaser of $500 or more in goods, and she offers to pay more than an additional $500 for the same goods. This exception exists to protect certain business arrangement from failing. For further written and video explanation, discussion and practice questions, see What is Consideration?
What is “Promissory Estoppel?”
Promissory Estoppel Exception to Consideration Requirement - A doctrine known as “promissory estoppel” may serve as a substitute for consideration to make an agreement into a valid contract. Promissory estoppel is an equitable doctrine. If the offeree reasonably relies on the offeror’s promise to her detriment, the doctrine of promissory estoppel may make the contract valid despite the absence of consideration. The three key elements are: that the offeree rely upon the promise or assurances of the offeror in accepting the offer; that the reliance must be reasonable in light of the situation; and the relying party must suffer a tangible detriment. For further written and video explanation, discussion and practice questions, see What is promissory Estoppel?
What is a “Other Exceptions to Consideration Requirement” for a Contract?
Other Exceptions to Consideration Requirement - There are two very broad, common exceptions to the requirement that a contract be supported by consideration. Option Contracts - An option contract is an agreement between parties that allows one party a specific period of time to purchase a particular asset at a given price. Firm Offers - The UCC recognizes the enforceability of a promise to keep open (not retract or cancel) the offer to purchase or sell a good for a specific period of time. For further written and video explanation, discussion and practice questions, see What is the requirement of a "lawful purpose"?
What is Mental Capacity to Contract?
To enter into a contract, a person must have mental capacity sufficient to understand the nature and consequences of her actions. If mental capacity is absent, the contract is voidable by the person lacking capacity. There are three classes of persons commonly understood to lack capacity to be bound by contractual promises: Minors - A minor is someone below the statutory age of mental capacity within a jurisdiction. Generally, a person must be 18 years old or older to have the requisite mental capacity to contract. As such, a minor who enters into a contract can void the contract at any time prior to reaching the age of majority. The exception to this rule is when the contract involves goods or services necessary for the child’s survival. This could include food, water, shelter, etc. In the case of necessities, the child will be obligated to pay the reasonable value of the goods or services received. If the child fails to disaffirm the contract by this time, she thereby ratifies the contract and is bound going forward. Intoxicated Person - An intoxicated person may lack the mental capacity necessary to contract. Generally, this will require extreme intoxication. If the intoxicated person enters into a contract, she must disaffirm the contract within a reasonable time of regaining capacity and learning of the contract. If she fails to do so within a reasonable time, she has ratified the contract and will be bound. Mentally Incompetent Person - A mentally incompetent person generally lacks the ability to enter into a contract. If the mental incompetency is temporary, the individual must disaffirm any contract entered into during incapacity within a reasonable time of regaining capacity. If the person is permanently incapacitated, the contract is either void or voidable at the insistence of a legally appointed guardian. Each state may pass additional situations in which it deems an individual mentally incompetent to enter into contractual relations. For further written and video explanation, discussion and practice questions, see What is "mental capacity" to contract?
What is a “Lawful Purpose” for a Contract?
A contract must have a lawful purpose to be enforceable. That is, the contract cannot violate or cause others to violate the law or public policy. Crimes and Torts - Contracts that require commission of a crime or tort or violate accepted standards are void. If a contract has both legal and illegal provisions, a court will often enforce the legal provisions and refuse to enforce the illegal ones. Unconscionable Contracts - An unconscionable contract is one that is so unfair that it is said to “shock the conscience”. Unconscionability is broken down into “substantive unconscionability” and “procedural unconscionability”. Substantive Unconscionability - This means that the terms of the agreement are so extremely unfair or one-sided in favor of a party that it is unlikely that the other party to the agreement understood its terms. Procedural Unconscionability - This refers to the conditions under which the contract was formed. The terms of the contract may indicate that one party was taken advantage of by another party with greater bargaining power. Such a contract may be void as against public policy if the circumstances indicate that a reasonable person would not have entered into the agreement without the existence of an undue hardship. In some situations, the undue hardship must have been brought on by the party unduly benefited by the contract. Contracts that Restrain Trade - Contracts that restrain trade may be illegal and thus void. This is true for contracts that create a monopoly, fix prices, and divide up markets. This is generally the area of antitrust law. A court may also find a contract void if it serves to frustrate economic activity in a manner not covered by antitrust law or it intentionally interferes with contractual relations or unfairly competes. States are free to pass statutes or develop common law that protects the public interest. A contract that runs afoul of what is deemed necessary for the public good may also be void. For further written and video explanation, discussion and practice questions, see What is the requirement of a "lawful purpose"?
Types of “Voidable Contract”
There are several scenarios that make a contract voidable by one or both parties. These include: Fraud, Misrepresentation, Duress, Undue Influence, Mutual Mistake, and Unilateral Mistake. To learn about the scenarios and for further written and video explanation, discussion and practice questions, see What are common types of "voidable contract"?
Contracts in Writing – Statute of Frauds
Some valid contracts are required to be in writing to be enforceable by a court of law. The requirement that a contract be in writing is generally dependent upon the subject matter of the agreement. A statute requiring that a contract be in writing is known as a “statute of frauds”. These statutes are designed to prevent fraud in the formation of contracts. Most statutes do not require that the entire contract be in a formal writing; rather, there must be sufficient writing (in any form) to demonstrate the core aspects of the agreement.The following types of contract are generally required to be in writing in all jurisdictions: Sale of an Interest in Land; Collateral Promise to Pay Another’s Debt; Contract Cannot Be Performed within One Year; and Sale of Goods of $500 or More. States may establish other contracts that are required to be in writing to be enforced in that jurisdiction. For example, most states require insurance policies to be written. For further written and video explanation, discussion and practice questions, see When is a contract required to be in writing - Statute of Frauds?
What type of writing is required?
To meet the requirements of the statute of frauds, there must be a sufficient writing to demonstrate that a contract exists. The writing can be typed, handwritten, or electronic. The agreement must generally be signed by the party against whom it is being enforced. A signature may be a mark, seal, stamp, electronic signature, or a handwritten agreement. Between merchants, a confirmation regarding the contract by one merchant that is not objected to by the other merchant will be sufficient, even though it is not signed by the other merchant. For further written and video explanation, discussion and practice questions, see What type of writing satisfies the statute of frauds?
Exceptions to the Statute of Frauds requirement
Jurisdictions recognize a number of exceptions to the requirement that certain contracts be in writing to be enforceable. Common exceptions to the writing requirement are as follows: Admission Under Oath, Part Performance, Promissory Estoppel, Rules Involving Goods, Specialty Goods, Partial or Complete Performance, and Contract Between Merchants. The justification for the above exceptions to the statute of frauds is that each situation provides an additional level of proof regarding the existence of a contract. It reduces the need for a writing to prove that the contract exists and its terms. To learn more about these exceptions and for further written and video explanation, discussion and practice questions, see Exceptions to the Statute of Fraud
Who are 3rd-party beneficiaries to a contract?
The parties to the contract are the primary beneficiaries. In general, individuals who are not parties to a contract have no rights to sue to enforce the contract or to get damages for a breach of contract. There are, however, exceptions to this rule. It is possible for third parties to have rights in a contract. A third-party beneficiary may have rights under a contract if the original parties to the contract intend for the agreement to benefit the third party and that intent is demonstrated in the agreement. This may happen at the time of the contract, or a third party may also acquire rights in an already executed contract if one party to the contract validly transfers those rights to the third party. The extent of the third party’s rights is determined by her status as either a donee beneficiary or creditor beneficiary. Donee Beneficiary - A donee beneficiary is a third party who receives contractual rights as a gift from the promisee. If a promisee makes a contract with a promisor for the benefit of a third-party, donee beneficiary and the promisor fails to perform, the donee beneficiary may not bring an action against the promisee (individual transferring the contract), but may bring an action against the promisor (individual obligated under the contract). Since the transfer to the donee beneficiary is a gift, there are no grounds for recourse against the promisee. Creditor Beneficiary - A creditor beneficiary is a third party who receives contractual rights from the promisee as satisfaction of a debt. When a promisor fails to perform under the subject contract, the creditor beneficiary can bring an action against the promisee, as the value of the consideration transferred is gone. The promisee may also bring an action against the promisor, as her rights have been harmed by the promisor’s failure to perform. For further written and video explanation, discussion and practice questions, see Who are third-party beneficiaries to a contract?
What are “Assignment” and “Delegation” of a contract?
Assignment is the transfer by one party of her right to receive performance from the other party to the contract. Delegation is the transfer by one party of her duties to perform under a contract. There are many concepts relevant to assignment and delegation of a contract, including: What are the Methods of Assignment or Delegation?; Is there a Writing Requirement? What are Non-Assignable/Delegable Contracts?; When is there a Material Changes of Responsibility? What is an Increase in Burden or Risk?; When is a contract based upon Special Skills? What happens when there are Multiple Assignments? Who is a Purchaser in Good Faith for Value? What happens if the assignment is subject to Court Action? What are Novations?What is the effect of Written Assignment? What is the effect of Revocation of an Assignment? What happens when there is a Modification after Assignment?; What are the Continued Delegator Responsibilities? Most of these rules regarding assignment and delegation are capable of modification in a contract between the parties. To learn more about these rules and for further written and video explanation, discussion and practice questions, see What is "assignment" and "delegation" of a contract?
What is a party’s Duty of Performance?
Parties to a contract have duties or obligations thereunder. There are generally three options to relieve these obligations: Perform - An individual is relieved from her duties under a contract once she has fully or substantially performed those duties. The individual is “discharged” from the contract. Release from Contract - Either party may be released from a contract by the other party. Alternatively, the person may be released if the contract becomes void. Breach - Once a party to a contract breaches that contract, she and the other party no longer have duties to perform. If the contract is enforceable, the other party then has the ability to enforce the contract against the other party by seeking damages. Performance of the contract and release eliminate a person’s liability under the contract. Breach exposes the breaching party to damages or losses suffered for the breach. None of these options relieve a party form tort liability if her actions with regard to the contract constitute a tort. For further written and video explanation, discussion and practice questions, see When is a partys "duty of performance"?
“Executed Contract” vs “Executory Contract”
An executed contract is one in which the parties have performed their duties under the contract. An executory contract is one in which the parties have not yet performed their obligations under the agreement. For further written and video explanation, discussion and practice questions, see What is an "executed contract" vs an "executory contract"?
Performance, Substantial Performance, and Breach of Contract
Performance of a contract relieves a person from further duties under the contract. There are three levels of performance: Complete Performance - Complete performance by a party means that the performinging party has fulfilled every duty required by the contract. A completely performing party is entitled to a complete performance by the other party. Substantial Performance - Substantial performance of a contract means less than complete performance; but, the level of performance is sufficient to avoid a claim of breach of contract. More specifically, it means that a party has performed all material elements of the contract, but there are non-material aspects left uncompleted. Breach of Contract - Any performance that is not complete or substantial performance is a material breach. This entails performance at a level below what is reasonably acceptable. The materially breaching party cannot sue the other party for performance and is liable for damages to the other party for the breach. For further written and video explanation, discussion and practice questions, see What is "Performance", "Substantial Performance", and "Breach" of a contract?
A divisible contract is one that has multiple parts or is divided up into segments. Each segment exists and can be completed independently. That is, each segment has duties that require completion. An installment contract is an example of a divisible contract. Each installment has duties or obligations that must be completed. Performance of one segment does not relieve a party from the obligation to perform the other segments. Further, breach of one segment does not excuse performance of the other segments by the parties. For further written and video explanation, discussion and practice questions, see What is performance of a "Divisible Contract"?
Whan a Party is Discharged from the Contract
An individual is relieved from her duty to perform a contract in the following scenarios: Void Contract - If a contract becomes void, both parties are relieved from their duty of performance. Breach by Other Party - If the other party materially breaches the contract, the non-breaching party is relieved from the obligation to further perform the agreement. Failure of a Condition - A contract may contain any number of conditions that may materialize (or fail to materialize), which relieve the parties’ obligation to perform under the contract. Impossibility, Impracticability, of Frustration of Purpose - Parties to a contract may be relieved from their obligation to perform if performance becomes impossible, commercially impracticable, or the underlying purpose of the contract is frustrated. Waiver or Release - A party may, per her own volition, sign a waiver or release relieving the other party’s obligation to perform. Any of the above situations may release one or both parties from their duties of performance. For further written and video explanation, discussion and practice questions, see When is a partys duty of performance discharged?
Conditions Precedent and Subsequent
Conditions are facts or situations that must materialize (or fail to materialize) for either or both parties to have the duty to perform a contract. Conditions are generally divided as follows: Condition Precedent - A condition precedent is where something must take place or a situation must arise prior to or before a party has a duty to perform. Condition Subsequent - A condition subsequent excuses contractual performance if some future event takes place or situation arises. A condition may be expressed between the parties or implied from the nature of the agreement. That is, the parties affirmatively discuss or include the conditions in the agreement or the language or nature of the contract may imply certain conditions on performance. The contract may also contain conditions that must take place concurrently before either party has a duty to perform. This is often the case when the contract requires simultaneous performance. Most point-of-sale purchases involve an implied concurrent condition of performance. For further written and video explanation, discussion and practice questions, see What are conditions to Contract (Precedent & Subsequent)?
Tendering performance means to offer or attempt to perform the agreement. Often a party’s offer or attempt to perform is sufficient to satisfy the condition of performance and obligate the other party’s performance. That is, a party cannot avoid her obligation under the contract by failing to accept the other party’s tender of performance. One party offering or attempting to perform is a condition to the other party’s obligation to perform. Unless a contract states otherwise, the default rules under the UCC and Restatement place conditions on the delivery of services and the delivery of a product by a party to a contract. UCC Condition of Performance - The UCC states the buyer tendering payment to the seller of a good is a condition that must be satisfied before the seller has the duty to deliver the good. Restatement Condition of Performance - The Restatement, in contrast to the UCC, requires that a service provider must tender performance before the other party has a duty to pay for those services. In either case, rejecting a party’s tender of performance can constitute a breach of contract if the tender of performance conforms to the requirements of the contract. For further written and video explanation, discussion and practice questions, see What is "tendering performance" of a contract?
Impossibility vs Impracticability
Impossibility of performance, commercial impracticability, and a supervening frustration may excuse a party’s duty to perform a contract. Further, it will relieve the party from liability for the non-performance. Impossibility of Performance - A party may be excused from her duty to perform under a contract if performance becomes impossible. Events that make a contract impossible include: Illegality of the subject matter; The subject of the contract (property) is destroyed; One of the parties to the contract dies or becomes physically or mentally disabled; Natural forces interrupt the contract; Performance would cause substantial risk of physical harm to one party. Impossibility of performance will only excuse a party’s performance if the impossibility is not the fault of the non-performing party. Further, impossibility will not excuse liability for non-performance if the contract expressly contemplated the risk of conditions making performance impossible and specifically placed those risks upon the non-performing party. Commercial Impracticability - Commercial impracticability arises when performance of a contract by a party has become unfeasibly difficult or costly to perform. The difference between impracticability and impossibility is that impracticability is still physically possible; however, performance will result in a substantial hardship to the performing party. Impracticability will excuse performance where the excused party did not have control over (or was not at fault for) the condition that made performance impracticable. Further, the excused party must not have expressly or impliedly assumed the risk of the duties becoming impracticable. Generally, impracticability is only found in extreme circumstances. For further written and video explanation, discussion and practice questions, see What are "Impossibility" and "Impracticability"
Frustration of Purpose
Supervening Frustration of Purpose - This is when circumstances arise that fundamentally frustrate a party’s reason or purpose for entering a contract. The doctrine is similar to impracticability, but it does not relate to a party’s hardship; rather it focuses on her expectation and purpose in entering the agreement. For a frustrating circumstance to relieve or excuse an obligation under a contract, the party cannot have assumed the risk of the circumstance (in the contract) or be at fault for the occurrence or the non-occurrence of the event or circumstance. Further, the occurrence or non-occurrence must have been a basic assumption on which the contract was made. For further written and video explanation, discussion and practice questions, see What is "Frustration of Purpose"?
“Waiver” and “Release” from a Contract”
A waiver and a release serve to excuse one or both parties’ duty of performance. Waiver - When a party intentionally relinquishes a right to enforce the contract. A waiver is generally employed after a party fails to perform. Release - When one party is relieved from her promise of performance. A release generally occurs before a contracting party has to perform. Waiver and release are often used synonymously to refer to a single document that simultaneously relieves a party from her duty to perform and excuses a non-performance or breach. For further written and video explanation, discussion and practice questions, see Waiver or Release from Contract
What is “Breach of Contract”?
A party who is not relieved from her duty of performance and fails to perform her obligations under a contract is said to breach the contract. Breach entails a failure to perform material duties in accordance with the agreement. This can include a complete lack of performance, partial performance of the material duties, or performance that fails to meet the demanded standard. A breach by one party relieves the other party’s duty of performance. For further written and video explanation, discussion and practice questions, see What is a Breach of Contract?
Resolving a Breach of Contract
There are several remedies or solutions available for a breach of contract: Negotiated Settlement - The parties may work out a satisfactory solution to most breaches of contract is resolved by the parties themselves through voluntary negotiated settlements. Arbitration - The parties may agree to submit their dispute to a neutral third party or parties to resolve the dispute. Litigation - The parties seek to enforce their contract rights in a court of law. All of these methods are discussed in greater detail in other chapters of this text.For further written and video explanation, discussion and practice questions, see What methods exist for resolving a breach?
Remedies for Breach of Contract
A breach of contract action may result in any number of damages: Compensatory Damages, Consequential Damages, Liquidated Damages, Nominal Damages, Specific Performance, Rescission. For more information on these remedies, and for further written and video explanation, discussion and practice questions, see What remedies exist for a breach of contract?
What is Efficient Breach?
Efficient breach occurs when a party makes a conscious decision to breach a contract after balancing the costs of complying against fulfilling the contractual obligation. This normally arises in situations where a party will incur fewer losses or make more money by breaching the contract than the party would suffer in compensatory or consequential damages if sued. For further written and video explanation, discussion and practice questions, see What is "efficient breach"?
Rules for Interpreting a Contract
Courts in different jurisdictions may employ unique standards when interpreting the meaning of contract terms. Common approaches include: Plain Meaning - The majority of jurisdictions interpret contract provisions based upon their “plain meaning.” That is, if a contract term is unambiguous, the court will apply the meaning commonly applied to the term or provision. Reasonable Person - Other jurisdictions interpret contract provisions based upon how a “reasonable person” in the applicable circumstances would interpret the contract. This is known as the “objective standard.” Subjective Intent - Some jurisdictions will look to any outside evidence to determine the subjective intent of the parties. Some other common approaches to interpreting contract provisions are as follows: Express Terms - Afford the greatest weight to the contract’s express terms. Implied Terms - Look to implied terms originating from the course of dealing, course of performance, or trade usage. Specific Terms - Give greater weight to specific terms than general terms. Actively Negotiated Terms - Terms that are actually negotiated between the parties are given greater weight than standard terms or boilerplate. Totality of Circumstances - The court will take into consideration the overall circumstances of the agreement. Contract Purpose - The purpose of the contract, if ascertainable, should be considered in interpreting the intentions of the parties. All Writings - Interpret all parts of the contract as a whole (including when the contract consists of multiple writings). Context - Words are given their prevailing meaning in the context of the contract. Trade Terms & Course of Dealing - Specific trade terms are to be interpreted in accordance with their meaning in the trade. The parties’ intentions are interpreted consistently and in accordance with course of performance, dealing, and trade usage. Interpret Against Drafter - Ambiguous terms may be interpreted against the drafter. Jurisdictions may employ any combination of these approaches when interpreting provisions or giving weight to conflicting terms. For further written and video explanation, discussion and practice questions, see What rules does a court follow in interpreting a contract?
What is the “Parol Evidence Rule”?
This rule or doctrine concerns the evidence that parties may introduce to the court interpreting the disputed contract. Specifically, it addresses the introduction into court of any evidence of the parties’ agreement that arose prior to the execution of the final agreement and is not included within the written document. This rule either allows or disallows a party from introducing that evidence to the court to modify or add terms to a contract. The purpose of this rule is to prevent confusion in the interpretation of the contract and fraud by any party against another. Prior Communications - The parol evidence rule primarily serves to exclude any evidence of prior negotiations (either before or contemporaneous with the signing of the contract) that has the effect of altering the express terms of the agreement. Information or communications contemporaneous with execution of the contract may be admissible in interpreting the contract, but are not admissible if they expressly contradict unambiguous, contract terms. Final Agreement - For the parol evidence rule to apply, the contract must be the final agreement between the parties. This means the contract is an “integration”. If the party is determined to be a final expression of the parties’ agreement, the parol evidence rule is effective to limit what information outside of the writing the parties can introduce to the court in interpreting the agreement. Integration Clause - The best way to make certain that the contract is deemed a complete and final expression of the parties’ intent is to include an “integration clause.” An integration clause, also called a “merger clause,” is a provision in a contract that says that the contract is a complete and final understanding of all the terms of the agreement. In other words, these clauses state that the contract is intended to be a complete integration. Some merger clauses will specifically state that any outside information or communications contemporaneous with the execution of the contract or prior thereto should not be considered a part of the contract. Other, more specific clauses, will specifically reference outside information, documents, or communications and state whether the terms of those items are included in the final agreement. These clauses are usually conclusive unless a contract defense applies (such as fraud, duress, etc.). An agreement may appear on its face as simply a partial understanding of the agreement between the parties. In such as case, the contract is not an integration. For further written and video explanation, discussion and practice questions, see What is the "Parole Evidence Rule"?
“Complete Integration” vs “Partial Integration”
The term integration determines the extent to which all provisions of the contract are included in the written document. It can either be completely integrated or partially integrated. Complete Integration - A complete integration is when the contract contains all of the facts or information regarding the parties’ agreement. If the court determines that a contract is a complete integration, the parol evidence rule limits all prior or contemporaneous outside evidence that contradicts, modifies, or supplements the contract. A complete integration will generally contain a strong integration clause specifically excluding any outside information not specifically mentioned in the terms of the agreement. Partial Integration - The written document may contain only part of the information constituting the agreement between the parties. If a court determines that a contract is a partial integration, it will allow certain outside evidence that serves to supplement or explain provisions of the contract. Even with a partial integration, the parol evidence rule restricts outside evidence of prior or contemporaneous communications that specifically contradict the terms of the written contract. Partial integrations generally do not contain integration clauses. Often, the agreement itself will make reference to outside communications to clarify certain provisions of the agreement. For further written and video explanation, discussion and practice questions, see What is a "complete integration" vs a "partial integration"?
Exceptions to the Parol Evidence Rule
Extrinsic evidence or information prior to or contemporaneous with the formation of the contract cannot be introduced to contradict the contract. Nonetheless, it may be necessary to employ extrinsic evidence or information from outside of the contract for the following reasons: to aid in the interpretation of existing terms (for example, when an ambiguity exists); to show that a writing is or is not an integration; to establish that an integration is complete or partial; to establish subsequent agreements or modifications between the parties (i.e., those arising after the contract is completed); or to show that the terms of the contract were the product of illegality, fraud, duress, mistake, lack of consideration or other invalidating cause. These exceptions exist to reduce misunderstanding and fraud between the parties and to promote judicial efficiency in the interpretation of agreements. For further written and video explanation, discussion and practice questions, see Exceptions to the Parol Evidence Rule
Patent and Latent Ambiguities in a Contract
One important exception to the parol evidence rule is the use of extrinsic evidence to determine the meaning the parties attribute to certain terms or provisions. Generally, a court will give a term its common meaning or the meaning common in the context of the contract (such as a particular trade usage). Nonetheless, often a term or provision of the contract will be ambiguous. In such a case, ambiguities are broken into latent and patent ambiguities. Generally, outside evidence may be introduced to clear up an ambiguity that is obvious on the face of the document. This is known as a “patent” ambiguity. If a party claims that the contract contains an ambiguous term, but it is not obvious on the face of the contract, the party is claiming that a “latent” ambiguity exists. In such a case the party may be able to introduce outside evidence to show that an ambiguity exists. If the court determines that an ambiguity exists, it may consider extrinsic evidence to resolve the ambiguity. Many courts do not distinguish between patent and latent ambiguities. If an ambiguity exists, extrinsic evidence is allowed to the extent necessary to clear up the ambiguity. The parol evidence rule’s prohibition on the use of evidence to change or add to the contract remains intact. For further written and video explanation, discussion and practice questions, see Patent and Latent Ambiguity in a Contract
Flashcard: Study Practice
Flashcard- Study Practice