Posts categorized as "Contract Law"

New Contract Law Video on Condition Subsequent

I have a new video up on the condition subsequent in contract law.  I'll have some more posts soon but am tied down for a bit with other projects.  Feel free to get in touch though!

 

New Contract Law Video on Condition Precedent

I uploaded a video Contracts: What is a condition precedent?  I will follow up on this with some more on conditions and remedies under contract law.

 

What are innominate terms in a contract?

Eeek!  This is an English legal term so forgive me for trying to answer this question anyway.  Also, please forgive the length of this post. Exploring this answer might be helpful to understanding some aspects of contract law for students of US law, too.

Let's look at US contract law first:

Terms of a contract are divided into two categories:

1. Conditions

2. Promises (sometimes called warranties).  Sometimes a promise is also a condition.

Our general rules are:

If party A fails to comply with a  condition of the contract, or a condition otherwise does not occur, party B can repudiate the whole contract.

If party A fails to comply with a promise, party B can usually just sue for damages.

What is a condition?

A condition is something that must occur before a party is obligated to do something.  Insurance contracts are a good source if you want to find conditions.  Let's say Beta Insurance Company insures Alan's house against damages from falling objects.  His insurance contract will probably include terms similar to the following:

Beta will insure Alan against damages resulting from falling objects if, and only if:

  1. Alan pays a $1 premium on the first day of every month.
  2. The falling object must first penetrate the outside of Alan's house.  By way of example, Alan is insured against a meteor falling through his roof, not a plate falling from his shelf.
  3. Alan alerts Beta as to the damage within 48 hours.

Let's say a meteor crashes through Alan's roof and Alan waits 72 hours to report the damage.  At that point the damage to the house is $100,000.  In many jurisdictions the insurance company will probably succeed in arguing that Alan gets nothing.  Beta's duty to pay was a condition of Alan reporting the accident in a timely manner.  The insurance company is not going to pay $100,000 and not even $75,000 - - the insurance company in many jurisdictions is not going to pay at all.  See our general rule above: if a condition fails to occur or A fails to comply with a condition, B has no obligations.

What is a promise?

A promise is something that a party is obligated to perform.  As we see above, sometimes  a party does not have to keep its promise unless a condition occurs.  

Let's say Grandma Betty hires Alan Construction company to build her a house.  She agrees to pay $1,000,000.  Betty has trouble walking so the house must not have stairs. In addition, Alan promises to make every room in the house wired for the internet.  Alan finishes the house but one of the bathrooms does not have internet access.  The house is otherwise just what Betty needs.  Can Betty refuse to pay?  No.  But she might be able to sue for damages because Alan broke his promise to make every room in the house equipped for internet access.  Maybe the cost of the house will be reduced by a few thousand dollars.

Let's turn to English Law for a moment:

Innominate Terms

As I understand it, English law adds a third type of classification - - innominate terms that cannot be classified as conditions or warranties/promises.  As I understand it, we do not know whether a party can repudiate the contract or not until a court decides how serious was the term's breach.    Depending on the seriousness of the breach, an English court will allow a party to repudiate or just sue for damages.

For example, let's say Alan Computers hires Beta Cleaners to clean up its offices.  The contract provides that "Beta must not disclose secret information belonging to Alan."  One of Beta's cleaners comes across a memorandum and tells his wife that Alan Computers is scheduled to have a wine and cheese party on Friday at 4:15.  This information was not public.  Not much harm is done.  But let's say one of Beta's cleaners leaks information to the public that Alan Computers is running behind schedule on its new computer model.  This disclosure destroys Alan Computers.  Well, in both cases the same provision of the contract was breached. My understanding is that "Beta must not disclose secret information" would be viewed as an innominate term.  In the first case, Alan could try to sue for damages, but in the second case, Alan could probably also repudiate the contract.

Back to US Law:

Look back at our story of Grandma Betty.  Let's say the construction company built this poor woman's house with endless stairways similar to an Escher drawing.  This was a material breach.  Betty can probably repudiate because the construction company's breach defeated the entire purpose of the contract to build a house suitable for an elderly person who had trouble walking.  

I'll try to get a video on my YouTube page soon regarding contracts and remedies.

What is an intended third-party beneficiary?

To understand this question, imagine that Perry & Debby sign a contract.  Debby promises to paint Perry's fence. Debby breaches the contract by failing to paint the fence.  We know that Perry can sue Debby.  But what about Tina, Perry's neighbor, who was not a party to the contract?   Obviously the answer is probably "No."  We would call Tina a "third-party" because she was not one of the parties to the contract.  Generally speaking, third-parties, or non-parties to a contract, cannot sue.  That makes sense.   Perry was injured, not Tina, so why should Tina ever be allowed to sue Debby?

One circumstance where Tina could sue Debby is if she were an "intended third-party beneficiary"  of the contract.  For example, let's say Perry owes Tina money.  He's short on cash but is able to make a deal with Debby that Debby will paint Tina's fence. Tina likes this idea and will forgive the debt.  Here, Debby's performance is intended to benefit Tina -- she's painting Tina's fence.  If Debby doesn't paint Tina's fence, Tina will probably be allowed to sue Debby for breaching the contract, even though Tina was not a party to the contract.

You will want to look at the Restatement (Second) of Contracts and to read cases of course, but usually on a law school examination where there is an intended beneficiary one party owes money to the third-party or the party has a reason to want to donate the benefit of the performance to the third-party.  For example, when a husband names his wife as the beneficiary of a life insurance policy, the wife is the intended third-party beneficiary of the contract between the husband and the insurance company.

On a law school examination you should also be prepared to distinguish incidental beneficiaries of a contract from intended beneficiaries.  Sometimes a third-party will benefit from parties performing according to a contract but that benefit is merely incidental - - it is not the intention of the contracting parties.  For example, let's say Tina hires Perry to fix her car.  She needs a new brake.  Debby, an auto-parts supplier, is late delivering her weekly shipment of parts to Perry and this slows down the repair job.    Under these circumstances, sure, Tina would like Debby to deliver parts on time, but Tina is probably just an incidental beneficiary of the agreement between Perry and Debby.  

Below is a short video discussing intended third-party beneficiaries.

Do you have any suggestions for answering contract law questions on a bar or law school exam?

Yes.  I'm actually planning to put together some material just on answering bar exam questions and law school test questions but here is a quick tip that should earn you some points and help you answer any contract law question.  

When you see a contract law question typically you want to think about the following two issues first: Does the Uniform Commercial Code apply?  Does the Statute of Frauds apply?  For example, if there is a contract for the sale of goods priced at more than $5000, then the UCC applies.  If a contract can't be completed in less than one year, an agreement in consideration for marriage (marry me and I'll buy you a car - - does anyone do this????), an agreement to buy or sell real estate etc., then the Statute of Frauds applies and the contract should be in writing.

Don't forget to answer both these questions first.  If it is an essay question make sure you write down your analysis with respect to the UCC and the Statute of Frauds even if you think the answer is obvious. 

Below is a link to a short video on the Statute of Frauds and you'll find in the video a link to more vids on contract law.

 

What is a unilateral contract?

I have a short video up discussing unilateral contracts.  Getting over jet lag here in the US but welcome any questions.

 

When is duress a defense in a contract case?

Very rarely!

A party can argue that he does not have to perform a contract if he was forced to sign the contract.  A simple example would be if a salesperson pointed a gun at a customer and said, "Sign the contract or I'll shoot you."  Obviously that should not be a contract. The customer did not have a meaningful choice to sign the contract or not so he is not legally bound by his promise.

If one party makes an improper threat, and the other party does not have a choice, we say there was duress.  Sometimes an economic threat is less obvious than pointing a gun but can still be improper.  For example, let's say Mr. B is in a bad financial position and desperately needs his job to support his family.  Let's say Mr. A can cause Mr. B to lose his job.  Now Mr. A threatens Mr. B that if he does sign a contract t he'll cause Mr. B to lose his job.  This sounds like duress because Mr. B did not have a meaningful choice but to sign the contract and Mr. A improperly threatened to cause Mr. B to lose his job.

Don't confuse economic duress with someone trying to get the possible deal for himself.  If I own a classic car and I know you really want to buy the car I can demand that you pay as much as possible.  Yes, it might make you upset to pay so much money but you have a choice.  I'm not threatening you.  If you don't want to buy my classic car, buy a different one.

How does the UCC change the mirror image rule?

I received a few questions about counter-offers and the UCC.  Let's go slowly, this post will be a little longer than most:

MIRROR IMAGE RULE

The traditional, common-law contract rule is that to form a contract the terms of the acceptance must be the same as the offer.  This is known as the "mirror image" rule.  If Alan offers to sell Barry a car for $5,000, payment by Tuesday, Barry would only be able to accept the contract on those precise terms.  If Barry says he "accepts" the offer but payment by Wednesday, our traditional rule is that there is no contract.  Why?  Because the acceptance and the offer are not the same  - - the payment date is different.

Traditional contract rule says that Barry actually rejected Alan's offer (even though he thinks he might have accepted it) and made a counter-offer to Alan.  The counter-offer is to buy the car for $5,000 payment by Wednesday.  Now Alan has a choice.  Alan can accept the offer or reject it.

This can create a problem.  Barry might think he can buy the car on Wednesday but Alan, under our traditional rules, could refuse to sell the car.  Alan could correctly say there was never a contract because Barry's acceptance did not mirror the terms of Alan's offer.

Mirror image rule video

 

 

THE UCC REJECTS THE MIRROR IMAGE RULE

The Uniform Commercial Code replaces the mirror image rule in contracts for the sale of goods.  In practice, the UCC usually becomes a factor where parties are not orally negotiating but sending written forms back and forth.  It might help to imagine Alan and Barry sending written purchase and sale forms back and forth in which Barry's terms in his purchase order are different from Alan's terms.

 Pursuant to the UCC, if Barry writes that he accepts Alan's offer but with payment on Wednesday,  this is not always a rejection.

The rule under the UCC depends on a few factors.  

First, did Barry tell Alan that there would be no contract unless Alan accepts payment on Wednesday?  

Second, are Alan and Barry "merchants"?  Merchants means they professionally deal with the goods in question - - in this case, cars.

 Third, do Barry's terms "materially" change the contract?  Material here means significantly.

ADDITIONAL TERMS ARE PROPOSALS

The UCC tells us that if one party adds additional terms to an offer, this not a rejection unless the party insists that a contract will depend on acceptance of these additional terms.   If Barry says he accepts Alan's offer and we don't think he is really insisting on payment by Wednesday, we have a contract.  Barry's terms are considered additional proposals to the contract.  That is, Barry is making a proposal for a different payment date.  

THE PROPOSALS CAN BECOME PART OF THE CONTRACT

The UCC provides that the additional terms can become part of the contract if the parties are merchants.  That is, Barry's proposal for payment by Wedensday can automatically become part of the contract if both he and Alan professionally deal in cars, unless an exception applies. 

WHEN DO PROPOSALS NOT BECOME PART OF THE CONTRACT?

Proposals do not become part of the contract if the parties are not merchants, if the additional terms materially change the contract, or the other party rejects the proposed terms.

Let's assume that Alan and Barry are merchants. Barry's terms would not become part of the contract if payment by Wednesday would be considered a material change to the contract.  Furthermore, if Alan tells Barry in a reasonable amount of time that he rejects Barry's proposal to pay by Wednesday, the proposed terms would not become part of the contract.

What if a minor misrepresents his age when he enters into a contract?

Generally speaking in the United States minors are allowed to disaffirm contracts (there are some exceptions).  

But what if the minor tricks the other party by misrepresenting himself to be an adult?  Is it fair to allow the minor to walk away from the contract?  

Different states take different approaches. Some states provide that a minor who deceives the other party is obligated under the contract.  However, some of these states require that the other party reasonably believed that the minor was an adult at the time.   In those states if the other party knows or should know that the minor is trying to trick him, then the minor will be allowed to disaffirm the contract. 

Can a contract case ever go to federal court?

Someone asked:

"is it possible that contract law is in the decision of judge in Federal? Is there any case in Federal court?"

 

The person asking the question is correctly noting that contract cases in the United States are almost always decided under state law (there are some exceptions).  If that's true, can a contract case ever go to federal court?

Of course!  Remember, a state law claim can go to federal court if we have diversity subject matter jurisdiction.  If the parties are citizens of different states and the amount in controversy is greater than $75,000, then a state law contract claim, state law tort claim, etc. can go before a federal court.  The federal court applies state law to the case, although the parties are in federal court.  There are other possibilities where a state law claim can be decided in federal court but diversity jurisdiction is, I think, the most likely scenario.  

Below is a short video on diversity subject matter jurisdiction: