Contracts Flow Charts

Mutual Assent

Offer

Acceptance

Rule for most cases

Special offer rules

How to accept (requirements)

Communication of Present Commitment

Termination of power to accept (see other chart)

Manifestation of Present Commitment

By the offeree to the offeror

To the terms

Proper Manner

Unilateral

Bilateral

Silence as acceptance

Rules to determine manner

Performance to Accept

Promise to Accept

Reasonable person test, looking at:

Language Used

Context in which language used

&

Advertisements, Circulars, etc.

GR: Not offers except with specific offeree or a limited qty

Requests for Bids

GR: Not offers and considered invitations to offers

Letters of Intent

GR: Not offer unless party makes it clear they are to be bound

Offeree takes benefit

Certainty of Terms Required

Parties

Subject Matter

Rule if doubtful whether unilateral or bilateral?

Bilateral

Reason to believe silence is accepted

Previous dealings have allowed silence

Acts inconsistent w/ offerror's ownership

If Offer is prescribes manner

If Offer suggests manner

If Offer is silent re manner

Must comply

Any reasonable manner

Any reasonable manner

Price Quantity

(Common Law)

Not Required (Use as Evidence of Contract)

Time

ONLY in the following situations

Place

Interpret language to determine which

Last Updated: 10 December 2008

Termination of the Power to Accept

Revocation

Rejection

Death or Incapacity

Manifestation not to Accept

Effect: Terminates power to accept

Lapse

CounterOffer

GR: Time stated in offer or reasonable time

Rule for face-toface GR: offer lapses at the end of the conversation

Direct Revocation

Indirect Revocation

Elements

Irrevocable Offers

UNLESS

Defined: Offeror takes definite actions inconsistent with an intention to enter into the contract

Contrary intention is expressed by either party

Offeree manifests intent to take it under further OR advisement

Elements

Inconsistent Act

&

Reliable Information

Offer

Bilateral

Unilateral

Option Contract (Trade $ for time)

Offeree starts performance (Creates an option contract)

From the offeree to the offeror

Relating to the same subject

Proposing Different Bargain

Firm Offers (U.C.C.) Offers between merchants to buy or sell goods in a signed writing which gives assurance that it will be held open is not revocable for lack of consideration during time stated or reasonable time (not to exceed 3 months). Last Updated: 11 December 2008

Consideration

GR: Bargained-for exchange

Recurring Problems

Forbearance (Withhold some legal action)

Invalid claims are good consideration, if:

GR: Forbearance is good consideration

Plaintiff asserts claim in good Faith

&

Pre-Existing Duty Rule

Adequacy

GR: Courts will not usually inquire into the adequacy of consideration, except:

Claim has a reasonable Basis

Like-Kind Exchange

GR: A party who agrees to do what he has already legally obligated himself to do has given no consideration

Illusory Problems

GR: Agreeing to do what one has already done in the past is not good consideration

GR: Promises cloaked in consideration and are actually one-sided is not good consideration

Elements

UNLESS

Addition of Genuine New Duties

Nominal

Moral & Past Considerations

Insufficiency (items not capable of being owned)

Settlement of a Genuine Dispute

Minority Rule: Unforeseen change in circumstances and the extra compensation must be fair

Promise

Free to perform at promisor's own discretion

Promise cannot restrict promisor's discretion by either:

Good Faith Rip & Tear Contracts

U.C.C.: No Pre-Existing Duty Rule (see U.C.C. § 1-103 Duress)

OR Reasonable Efforts

OR Reasonableness Last Updated: 03 December 2008

Promissory Estoppel

Elements See Restatements (Second) Contracts § 90

Uses

#1 As a substitute for consideration Promise

&

Promisor should reasonably expect to induce action or forbearance

&

Promise does induce such action or forbearance

&

Injustice can only be avoided by enforcing the promise

EXCEPTION A charitable subscription and marriage settlement is binding without proof that the promise induced action or forbearance

#2 As a substitute for a writing required by a statute of frauds

#3 As a way of making bids (offers) irrevocable

#4 As a way of policing unfair negotiation behavior

Measure of Damage The court has the discretion to granting partial or full enforcement. The remedy granted for breach may be limited as justice requires. In other words, sometimes a party may be limited only to reliance damages.

Last Updated: 20 January 2009

Defenses

Undue Influence

Duress

Traditional Duress

Wrongful Act

Threat or use of violence, captivity, or other wrongful act or threat

Precludes Exercise of Free Will

Causation: The threat or use subjugated victim's will

Statutes of Fraud

Deception

Mistake of fact by both parties (substance, unconscious ignorance)

Economic Duress

Wrongful Act

Threat of breach in bad faith

Illegality

Mistake

Mistake has a material effect on K exchange

Mistake as to the basic assumption (quality, function, purpose)

Procedural (Process)

Absence of meaningful choice

&

Considerations: 1. Take-it-or-Leave it 2. Opportunity for legal advice 3. Legalese 4. Deceptive Sales

No feasible alternatives exist

Deception

Substantive (Terms)

OR

Precludes Exercise of Free Will

No practical legal remedy exists

Unconscionability

Gross inequality of bargaining power

"Shocks the conscience of the court" Extremely Unfair K Terms

Think Categorical: 1. Wealth 2. Education 3. Experience 4. Access to legal advice

Argument: π could have said "no"

Assumption of Risk Legitimate reasons to threaten breach

Contract allocates risk to a party

OR

Examples

Other party breached

Change in Circumstances

Considerations: 1. Marketplace 2. Parties Respective Risks 3. Competition

Party has a good contract defense

Party contracts knowing that she has limited knowledge of the facts (conscious ignorance)

OR Court allocates the risk to the party because it is just to do

Last Updated: 10 December 2008

Remedies

Damages

Coercive Equitable Remedies

Liquidation (Agreed) Damages

Restitution (see separate chart)

(Specific Performance)

(see separate chart)

Measure

(see separate chart)

Limitations

Rest (2d) § 347

Avoidability

Foreseeability

GR: Damages based on harms that a party could have evaded without reasonable burden, risk, or humiliation are not recoverable.

Arise in the ordinary course of events (naturally flow)

OR

Certainty

Special Circumstances

EXISTENCE

AMOUNT

∆ must have a reasonable reason to know

Prove damage actually occurred because of the breach

Prove the amount of damages by submitting enough evidence to allow a reasonable estimate

Additional Rules 1. Construction: After notification of a breach, the π must reasonably stop performance. See Luten Bridge. 2. Employee: Employee need not take an inferior job to address a wrongful termination. See Hussy and Parker.

General Damages (Benefit of the Bargain)

+

Special Damages

Reliance

Essential: Money spent preparing or performing a contract

OR

Situations where you can receive reliance only damages

-

Costs & Losses Avoided (Expenses Saved)

Consequential

Incidental: Money spent in anticipation of a contract and dealing with breach fall-out

&

New Business Rule: A new business can never claim lost profits damage due to a breach. (Only applies to some jurisdictions.) Argue what constitutes a new business.

Additional Rules 1. Emotional Distress: Only recoverable for breach when a high level of foreseeability is present. 2. Apply & Distinguish Cases - Ford (Tractor Light): Expect some damages, but actual damages are disproportionate to what was foreseeable. - Boiler: Only recover damages that are foreseeable. - Driveshaft: ∆ only responsible for damages knows or should have known.

1. Property damage 2. Personal injury 3. Lost resale profits 4. Lost use profits

1. Benefit of the bargain too uncertain. 2. Contract is a losing contract. 3. "Break-even" contract. 4. Public Policy. 5. Promissory Estoppel.

Last Updated: 10 May 2009

Three Steps in Damages Analysis - See Restatements (Second) § 347 Step 1: What kind of breach did the defendant commit? 1. Breach by Non-Performance? 2. Breach by Defective Performance (Partial Performance)? Step 2: What damages might the plaintiff be entitled? 4P's: Put the Plaintiff in the Performance Position 1. Benefit-of-Bargain Damages (General Damages) A. Breach by Non-Performance (General Damages = Get - Give) B. Breach by Defective Performance (General Damages = FMV Promised - FMV Received) 2. Plus (+) Essential and/or Incidental Reliance Damages a. Essential Reliance: Money spent preparing or performing a contract $ spent in performing or in preparing to perform b. Incidental Reliance: Money spent in anticipation of a contract and dealing with breach fall-out $ spent anticipating other party's performance $ spent dealing with breach fallout 3. Plus (+) Consequential Damages Property damage Personal injury Lost resale profits Lost use profits (It must be reasonable to the seller/buyer that the item will be resold) 4. Minus (-) Expenses Saved (Cost and Losses Avoided) Unauthorized damages: (1) punitive damages, (2) emotional distress, and (3) attorney fees (unless specified in contract). Step 3: Do any limitations justify reducing (-) P's damages recovery? Avoidability Foreseeability Certainty Last Updated: 10 May 2009

COMMON LAW General Damages for Commonly Made Contracts Type of Breach

Breaching Party

Non-Performance

Buyer

= K Price - FMV of Land

Non-Performance

Seller

= FMV of Land - K Price

Construction

Non-Performance

Owner

= K Price - contractor's cost of performing

Construction

Non-Performance

Contractor

= FMV of contractor's services - K Price

Construction

Defective Performance

Contractor

= COR1 (unless COR1 is grossly disproportionate to DIV2); OR = COR causes economic waste

Nature of Contract Land Purchase & Sale Land Purchase & Sale

Measure of Damages

Employment for Non-Performance Employer = K Price Specific Term Employment for Non-Performance Employee = FMV of employee's services - K Price Specific Term 1 Cost of Repairs (COR): captures what you lost; gets you where you were promised to be; more accurate, except in economic waster cases 2 Diminution of Value (DIV): determined by expert witnesses (not as accurate)

UNIFORM COMMERCIAL CODE (U.C.C.) General Damages for Commonly Made Contracts Nature of Damages

Type of Breach

Breaching Party

U.C.C. §

Measure of Damages

All possible measures of seller's BOB damages for buyer's non-performance: K - FMV, K - Resale $, Profit, K Price (only under extraordinary circumstances). BUYER'S BREACH BY NON-PERFORMANCE.

Benefit of the Bargain

Non-Performance

Buyer

§ 2-708(1)

= K Price - FMV (OR:= Get - Give)

Profit

Non-Performance

Buyer

§ 2-708(2)

= Price Paid - Cost to Make

Profit Loss (Actual)

Non-Performance

Buyer

§ 2-706(1)

= K Price - Resale Price

Reasonable & Good Faith Resell w/o Resell

Non-Performance

Buyer

§ 2-709(b)

= K Price

SELLER'S BREACH BY NON-PERFORMANCE.

Benefit of the Bargain

Non-Performance

Seller

= FMV Price - K Price OR = Cost of Cover - K Price

Last Updated: 10 May 2009

Remedies

Damages

Restitution

(see separate chart)

Coercive Equitable Remedies

Liquidation (Agreed) Damages

(Specific Performance) (see separate chart)

GR: Value of the ∆'s gain at π's expense.

Substantive Claim (Unjust Enrichment)

EXCEPTION: Applies only to a party in breach Value of the ∆'s gain minus the damages caused by the breach.

Situations where a party can recover restitution damages only

Elements (Two-Part Test of Validity)

Damages were difficult to estimate at the time that the contract was made.

Elements

The ∆ gained benefit at the π expense (enrichment)

&

The amount stated is reasonable in light of either estimated damages or the actual damages.

Without compensating would be unfair (unjust)

1. As an alternative to damages. 2. A losing contract. 3. Unjust enrichment not tied to a valid contract. a. Alternative to a tort claim. b. $ paid for performance under void or voidable contract. c. Good Samaritan (services rendered by a medical doctor by an unconscious person) 4. To a party in breach.

Ground for Claim

Measure of Restitution

Alternative to damages for K Alternate to tort Performance under a non-contract

Value of defendant's gain

Losing K Doctors to unconscious patients Restoration to party in breach

(Value of defendant's gain) minus (Damages caused by breach, general damages)

Last Updated: 10 May 2009

Remedies

Damages

Restitution

(see separate chart)

(see separate chart)

Liquidation (Agreed) Damages (see separate chart)

Adequacy Requirement

Uncertain

Coercive Equitable Remedies (Specific Performance)

Discretionary Considerations

Undue burden on the ∆. Fairness of bargain.

Irreplaceable contract subject

Undue Burden on the Court. Higher degree of certainty.

Uncollectable

Public policy.

Injunctions Against Breach 1. Analyze adequacy requirement (see chart above). 2. Analyze discretionary considerations (see chart above).

Laches and unclean hands.

Covenants Not to Compete (see p. 416) 1. Must be part of a legit agreement; 2. Must be necessary to protect legit employer interests (good will, trades secrets, or other proprietary information); and 3. Cannot be unduly burdensome regarding geography, duration, amd restricted activity. Limitation 13th Amendment: It is against the 13th Amendment for a court to order an individual to work for an employer for whom the individual does not wish to work. Last Updated: 10 May 2009

PAROL EVIDENCE RULE STEP 1: Determine if the PER applies to the evidence. The PER ONLY applies to prior or contemporaneous oral evidence or prior written evidence for which there is no separate consideration. Is it oral or written?

Was it made prior to, during or after the making of the writing?

Was it for separate consideration?

If the PER does NOT apply, STOP. The evidence is admissible.

STEP 2: Determine if the writing is integrated at all. An agreement is integrated if it is in writing and final as to at least one term. If the agreement is NOT integrated at all, STOP. The evidence is admissible. An agreement that is NOT integrated at all does not bar ANY evidence.

STEP 3: Determine if the agreement is completely integrated. There are three approaches. Apply each separately. 1. Williston Two-Part Test (Narrow). NOTE: A merger clause creates an irrebuttable presumption of complete integration. If no merger clause, then apply two-part test: a. Look at the writing and analyze whether it was adopted as a complete, exclusive statement. b. Look at the term at issue and analyze whether it was natural for the parties to have omitted it. (Analyze the six Hatley naturalness factors on page 2 of the note-taking guide.) 2. Corbin All-Evidence Test (Broad). Look at the agreement, the term and all surrounding circumstances and determine if the parties intended a complete integration. * Merger clause is evidence of complete integration. 3. U.C.C. § 2-202. (Broad, like Corbin) Intent of the parties unless it is certain that parties similarly situated would have included the term. If the agreement is completely integrated, SKIP to STEP 5. If the agreement is NOT completely integrated, the evidence is admissible depending on whether it is consistent or contradictory. GO to STEP 4.

STEP 4: Determine if term is consistent with or contradictory to the writing. There are two approaches. Apply each separately. Reasonable Harmony Test: Courts look at what the parties have already agreed to and use as evidence to see if any contradictions. (Narrow - bars more evidence)

Complete Negation Test: Evidence is consistent as long as it does not completely negate any term in the agreement. (Broad - bars less evidence)

If the term is consistent or NOT contradictory, STOP. The evidence is admissible. If the term is inconsistent or contradictory, GO to STEP 5.

STEP 5: Determine if the evidence is of a type that is always admissible. Evidence of contract defenses, of an oral condition precedent, or to help resolve an ambiguity is always admissible. There are two approaches to identifying ambiguities. Apply each separately. Four Corners Rule: An agreement is ambiguous only if it appears so on its face. (Narrow - bars more evidence)

P, G & E Rule: An agreement that is unambiguous on its face can be shown to be ambiguous by extrinsic evidence, so long as the agreement is reasonably susceptible of the alleged meaning. (Broad - bars less evidence)

If the evidence falls into any of the above categories, the evidence is admissible.

Categories of K Ambiguities

CONTRACT INTERPRETATION ISSUES

1. Patent

General Ambiguity Problems

Recurring Ambiguity Problems

(Appearing on the face of document) 2. Latent

Grammatical Problems (Sloppiness) (e.g. commas, modifiers)

Words or Phrases with Multiple Meanings

Conflicts Among Terms

Same as General Problems BUT Arise in Special Contexts

(Ambiguity revealed only after learning additional info) 3. Gap in K (Contract is silent or incomplete regarding an issue)

NAME OF CONTEXT

Creation of an Constructive Condition

Creation of an Express Condition

Force Majeure Clauses

Time of the Essence Clauses

Construe narrowly and "other such causes" must be within the same category

Express Condition? Pro: It is so central that, without it, nothing important is left so it must be an EC. Con: Boilerplate - time is important but not so important to mean if performance is late, the K is over.

* Preference to find CC *

USE SPECIAL RULES

Preference for a promise & Against unclear and ambiguous language

1. Following stated or relative dates. 2. If the parties can perform at the same time, they must. 3. "Work before Pay." 4. Nature of Transaction.

Divisibility

TEST 1. K divided into pairs; and 2. Parties agree that each item in each part is an agreed equivalent of the other item in that part.

EFFECT 1. If divisible, breach of one party generally not excuse further performance. 2. If not divisible, breach of one party may excuse performance of dependent obligation.

AND

USE GENERAL CONTRACT INTERPRETATION RULES (IN ORDER OF PRECEDENCE) 2

1 Course of Performance (Performance of the K at issue and neither party has objected)

Negotiations between parties

3 Course of Dealing (Performance of past Ks between the same parties)

4

5

6

7

Trade Usage (Parties must be in the trade and usage is so prevalent that anyone in the trade would know it.)

© 2009, Carolina Academic Press - Used with Permission

Interpreting Ks to make them reasonable

Interpret the K to reconcile any inconsistencies

8 Contra Proferentem

Public Policy (Interpret against the drafting party)

Checklist for Identifying Patent Ambiguity 1. Try the easy way first. Look at the parties’ contract and their dispute and try to figure out what each party would say the contract means. 2. Focus on what you know about the dispute between the parties. Look for a basis in the contract itself for either party claiming the other party breached the contract. 3. Look for ambiguous words or phrases. Use your dictionary to help you develop alternative and competing meanings for what you believe to be the key words in the contract provision at issue. 4. Look for grammatical ambiguity. Make sure you understand what word in the contract each modifying phrase is modifying. If you discover that a phrase may modify more than one word, you may have found the ambiguity. 5. Look for conflicts between terms. 6. Try to translate the contract term(s) into your own words. If you cannot find the ambiguity, the act of translating may reveal it. At least, translating contract into your own words will demonstrate your ability to articulate at least one party’s contract meaning contentions.

© 2009, Carolina Academic Press - Used with Permission

Conditions

Express Conditions

GR: Courts prefer promises when the language is ambiguous.

Was the express condition accomplished?

Constructive Conditions

Clauses

CREATION

Magic Words (See Page 2)

OR

K Interpretation Rules

Perfect Performance: Express conditions must perfectly occur, for example: 1. Happen when suppose to happen; 2. Done in the correct manner

1. Pay when Paid: Ambiguous— must use the surrounding circumstances. 2. Time is of the Essence * FOR EC: If something is of the essence, it is so central that without it nothing important is left. * AGAINST EC: Boilerplate clause used by the parties to mean that time is important BUT do not mean that if performance is a day late, the contract is over. 3. Satisfaction: Creates an express condition. Standards to evaluate: * Fancy, Taste, or Judgment: made in "good faith." * Commercial Value: reasonable person in determining satisfaction. (operative fitness or mechanical utility).

GR: Preference for finding constructive conditions.

Did the non-breaching party get most of what he was supposed to get? (Core Assessment)

Types & Purpose

RULES (In order of precedence)

1. Follow stated or relative dates. 2. If parties can perform at the same time, they must. 3. "Work before pay." 4. Courts consider the nature of the transaction.

SUBSTANTIAL PERFORMANCE EFFECT 1. If an insubstantial performance, then a material breach and CC has not occurred. 2. If a substantial performance, then NO material breach and CC has occurred.

Rest. (2d) Contracts § 241 1. Extent non-breaching party did not get her essential K benefit. 2. Extent non-breaching party can get damages to substitute for loss of the K benefit. 3. Extent breaching party will have wasted time and money. 4. Likelihood breaching party will cure deficiencies.

CC help courts determine order of performance. 1. CC Precedent: second party has no duty to perform, unless other party performs. 2. CC Concurrent: parties' performances are due simultaneously—each must render/tender performance in order to claim a breach by the other party. 3. Independent: Terms are unconditional and parties must perform.

5. Extent breaching party acted in good faith.

Last Updated: 10 May 2009

Express Condition Language Chart (1) Language which all courts would agree create express conditions: 1. Conditional (-ed) on 2. Contingent upon ╚ Dependent upon* 3. Expressly conditioned on 4. If 5. If and only if 6. On the condition that 7. Only if 8. Provided that ╚ With the understanding that* 9. Satisfy or Satisfied or Satisfaction ╚ Adequate* ╚ Please (-ing)* ╚ Suffices (-ive)* 10. Shall be a condition precedent to 11. Subject to ╚ Subjugate to* ╚ Predispose* 12. Unless 13. Unless and until

(2) Language which all courts would agree do not create express conditions: 1. Covenant 2. For 3. Pledge 4. Promise or Promising ╚ Assure or Assurance ╚ Expect ╚ Warrant 5. Shall (or Shall Not) ╚ Expect you to ╚ Must ╚ Ought to ╚ Will (have to / be able to) 5. Swear 6. Time is of the essence 7. Vow

(3) Language about which reasonable lawyers could argue either way: 1. After ╚ Afterwards ╚ Behind ╚ Later ╚ Subsequently 2. As 3. As soon as 4. Pay when paid 5. So that 6. Time is of the essence 7. Until 8. Upon 9. Upon receipt of payment 10. Warranty 11. When ╚ Although ╚ At which time ╚ Considering that 12. While

* - Weaker variation found in the dictionary. A practitioner runs a risk that a court may find these terms ambiguous (see e.g. column 3).

Last Updated: 10 May 2009

Excuses

Nonoccurrence of a prior condition

Waiver

GR: Condition due before the condition at issue did not occur

GR: Beneficiary of a condition intentionally gives up the right to enforce the condition.

EFFECT

EFFECT

Discharge or Breach

Performance Excused

Prevention (Bad Faith)

Estoppel

GR: Beneficiary of a condition takes action indicating an intent not to enforce the condition and that action causes the other party to rely.

GR: Beneficiary of a condition causes the condition NOT to occur, or otherwise has breach her duty of good faith.

EFFECT

EFFECT

Performance Excused

Discharged Excused (depending on significance)

Force Majeure Clause

Impracticability / Impossibility

(Act of God)

GR: Impracticability clause. Lists circumstances in which a party can avoid having to perform the K without penalty.

EFFECT 1. If material part, then performance excused, remainder of K discharged. 2. If NOT material part, then that performance is excused, remainder of K is NOT discharged

EFFECT #1 Narrowly construe and "other such causes" must be within the same category to be effective.

ELEMENTS For Express Conditions Only

Occurrence is unforeseen event.

EFFECT #2

For Express & Constructive Conditions

Event makes performance impracticable (must radically change the obligation).

Shell: ⅓x increase (33% increase) (finding increased cost is NOT excessive or unreasonable). Howard: 10 to 12x increase (1000% to 1200% increase) (finding increased costs is excessive and unreasonable).

Nonoccurrence of event is basic assumption.

If something in the list happens, then you do NOT need to prove impracticability or impossibility.

Party had no fault in the occurrence.

K assigned the risk

Party has not assumed the risk, unless:

Event was foreseeable

Event was within the party's control

Last Updated: 10 May 2009