Contracts Issue Checklist

CONTRACTS ISSUE CHECKLIST

UNCONSCIONABILITY—relieves a party’s duty to perform

Modern Law requires both procedural and substantive unconscionability.
Procedural is an interference with the process of assent
Substantive is a gross disparity in values exchanged.
UCC § 302 authorizes a court to find as a matter of law that a contract or a clause thereof was unconscionable at the time it was made.
The court may refuse to enforce the contract OR
Excise the objectionable clause OR
Limit the application of the clause to avoid an unconscionable result.
Burden of Proof rests on the party who claims the unconscionability, then shifts to the opposing party to show
Commercial setting and reasonableness of the provision
Reasons for the provision and
Good faith
Consumer Transactions including warrant of attorney provisions are only enforceable if expressly assented. The duty of reading is relaxed when this provision is included in fine print or in the boilerplate. Assent to the boilerplate is assent to anything that is not indecent.
Commercial Transactions including hold harmless clauses are unconscionable. Subjective determinations of a party’s assent to the clause is permitted if in light of the commercial background and needs of the trade, the clauses are so one-sided under the circumstances existing at the time the contract was made.
Non-Conditional Termination Clauses are permitted under the UCC § 3-309 if reasonable notice is given in good faith and enforcing the contract would not be unconscionable.

ILLEGALITY—CONTRACTS ARE UNENFORCEABLE IF AGAINST PUBLIC POLICY

Restatement § 178 restricts the enforcement of a promise or term if the legislature provides that it is unenforceable or its enforcement is against public policy under the circumstances
Private Interests considered in favor of enforcement include the parties justified expectations, resulting forfeiture, or any special public interest in its enforcement.
The parties justified expectations concern the benefits involved.
Although courts disfavor forfeiture, the court will allow complete forfeiture in light of serious misconduct.
Public Interests considered against the enforcement include the strength of the policy, non-enforcement furthers the policy, deliberateness and seriousness of the misconduct, and the direct connection between the misconduct and the term.
The policy will be great if the misconduct is criminalized by statute or prevented by the legislature or judicial decisions.
The misconduct is against public policy if it harms the protected classes in light of the purpose of the statute.
The misconduct is against public policy if the a party requires the aid of the illegal transaction to establish his case against the party claiming a void contract.
The misconduct is serious if inherently evil or wrongful.
Under Common Law, Covenants not to Compete are void unless the covenant is reasonable in terms of protecting a party’s interest in relation to time, scope, and geographic area. The party wishing to enforce the covenant may not go further than necessary to protect his interests.

Performance of the contract requires defining the terms thereof.

The contract must be Integrated in light of an express integration clause, the four corners of the agreement, and all surrounding circumstances showing the parties’ intent. If not, parol may be admissible.
In Interpreting an ambiguous term, common law will allow parol evidence if it is reasonably susceptible to the writing.
Alternatively, the UCC § 2-202 allows parol evidence for the purposes of explaining or supplementing the writing by trade usage and industry or course of dealings, which objectively show the meaning of the ambiguity.
Under the Restatement § 201, one party’s interpretation of an ambiguous term prevails if that party did not know or have reason to know of any other interpretation, and the opposing party knew or should have known the first party’s interpretation.
Finally, the parol evidence must be Consistent with the writing. At common law, Parol evidence is inconsistent if there is no reasonable harmony between the parol and the writing.
If the parol and the writing are reasonably harmonious, the Restatement allows the parol evidence if it would naturally be in a separate writing.
Alternatively, parol evidence is inadmissible under UCC if the oral agreement would certainly be in the writing at issue. Under the Restatement, parol is admissible if the agreement would naturally be in a separate writing.
Parol Evidence is always allowed when the writing or an oral agreement includes a condition precedent because the parties are not yet bound and the contract may not be integrated.
Parol evidence is allowed for anything that interferes with the contract, such as fraud, duress, illegality, lack of consideration, assent, or avoidance issues.
An adhesion contract is always interpreted against the drafter and must be a clear and plain statement of the terms.

Allocation of risk includes conditions and warranties.

A Condition is an event not certain to occur, which must occur before performance under a contract becomes due.
Express conditions require strict or literal compliance unless there is no reasonable notice of the condition, focusing on the party assuming the risk and mindful of any change in the allocation of risk.
Constructive conditions determine which party must perform first. Courts construe conditions to be dependant unless a contrary intention clearly applies. Strict compliance with the condition is required before the second party’s duty matures.
Under the Restatement, if the exchange of promises can be rendered simultaneously they are due simultaneously unless the parties’ intention shows otherwise.
If one party must perform within a time period, performance is due earlier than the other party unless the parties’ intention shows otherwise.
Conditions will be excused where there will be forfeiture.
Under Cardozo’s approach, a condition may be excused after balance the purpose of the condition, the excuse for deviation, whether deliberate or inadvertent, amount of forfeiture, and the value of the breach.
If the party substantially performed according to the requirements of the condition but did not strictly comply, the result is an immaterial breach. The opposing party can sue for the breach but cannot refuse to pay for the substantial performance.
Where a constructive condition does not occur, the non-breaching party does not have a duty to pay and can sue for breach.
The court uses several devices to avoid forfeiture.
Where performance occurs in stages, the court can divide the contract where one party has substantially performed part of the contract.
For labor contracts, quantum meruit allows restitution or compensation for the service actually performed.
Where the benefit received exceeds the cost of a party’s breach, the defaulting party is entitled to compensation for his substantial performance. The defaulting party has the burden of proving the net benefit. Under the Restatement, the net benefit theory does not apply if the agreement expressly provides for liquidated damages or customs and usages show that the party is not entitled to compensation for substantial performance.
Express warranties provide that the goods represented fit the description.
Where a professional merchant is the seller, there is an implied warranty of merchantability that the goods are of average quality.
Where a seller has reason to know a buyer is relying on the seller’s expertise for a particular purpose for which the goods are required, there is an implied warranty that the goods will be fit for that use.

Existing impracticability may excuse performance.

At common law, promises ought to be performed regardless of impossibility. The modern approach provides where the parties assume a certain state of facts exist, and they in fact do not exist, the promise or performance may be excused.
Where both parties assumed the source and availability of the product and it does not exist, the promise to perform is excused.
Where the promisor assumes the risk, the promise will be enforced.

Supervening Impracticability may excuse performance.

Where an event makes performance impracticable and the nonoccurrence of that event was a basic assumption on which the contract was made, through no fault of the party seeking discharge, and that party assumed no greater obligation, the supervening event may excuse performance.
Where an event making performance impracticable is foreseeable, the basic assumption test does not apply because the party assumed the risk.

Frustration of purpose may excuse performance.

Though limited, performance may be excused if one party’s purpose, understood by both parties, is prevented by severe impracticability that was unforeseeable by both parties.

Good Faith is required in the performance of all contracts.

For consumers, good faith requires honesty in fact.
For merchants, good faith requires honesty in fact AND observance of reasonable commercial standards and fair dealing.
Fair dealing requires observance of the agreed common purposes between the parties and consistency with the justified expectations of the other parties.
If the contract gives one party discretion, such as a general term requirement of output or satisfactory performance, discretion must be reasonable given the purpose of the parties to the contract, must not exceed the limits of reasonableness, and the party with discretion must not be the cause of damage to meet the good faith requirement.
Alternatively, the Burton Test defines bad faith as trying to reclaim foregone opportunities resulting from the contract by broad use of discretion.
Where one party reserves discretion, the UCC allows a good faith rejection of non-conforming goods unless the rejection is objectively unreasonable. The only exception is where the contract is clearly personal in nature.
Where a cancellation notice exists in the agreement, the notice acts as a risk allocation device and overcomes any discretion.

REMEDIES

A party can suspend or cancel performance for anticipatory repudiation.

Repudiation is an express and unequivocal statement OR an act that renders the other party’s performance impossible. The breach occurs at the repudiation, excuses the condition of performance, and allows the non-breaching party to sue or wait to see whether the breaching party will perform. If the aggrieved party waits, he must be ready willing and able to perform.
When one party is reasonably insecure that another party will not perform because of his statements or actions, the first party may demand assurance of performance in writing. A failure to respond to the demand within 30 days acts as a repudiation. Reasonable insecurity is a question of fact for the jury.

Compensatory Damages

The normal measure for damages is the difference between the contract price and the fair market value.
Alternatively, the  is liable for all actual damages he did or should have foreseen.
Seller’s remedy for resale after breach is the difference between the original contract price and costs for resale.
Seller is also entitled to lost profits for breach before the sale of an unlimited supply of goods at market price.
Buyer can cover after a breach and purchase goods elsewhere. Buyer is entitled to his out of pocket costs had the original contract been performed.
Party is entitled to incidental damages flowing from the handling of goods.
Party is entitled to consequential damages if naturally, normally, or directly flowing from the breach, foreseeable to the breaching party, or under special circumstances.
Under the UCC § 715, a party is entitled to consequential damages if reasonably foreseeable, ascertainable, unavoidable by cover or otherwise, or when an injury to person or property occurs.
Party is only entitled to punitive damages if serious misconduct is present, and the damages must bear a reasonable relation to actual damages.

Equitable Remedies

Equitable remedies are proper if remedies at law are inadequate.
Typical output contracts and requirement contracts require specific performance if the goods are unique, the parties are unable to ascertain future damages, quantity, price or other relief, and the buyer is unable to cover.
Court can enjoin an employee from working for others if there is an express, reasonable covenant not to compete and the employee has another valid source of income.
Posner’s economic analysis for injunction considers ’s burden to show damages are inadequate and costs for issuing injunctions.
Factors include costs, competition in the market, problems of supervising the injunction, forfeiture and any possible negotiations of damages.

Liquidated Damages can be enforced by foresight and hindsight.

Party can recover liquidated damages if they are a reasonable forecast of anticipated damages at the time the contract was entered into and damages are difficult or impossible to ascertain at the time of contracting unless the intent is to penalize the other party.
Alternatively, a party can recover liquidated damages if they are a reasonable forecast in light of actual damages at the time of breach unless the intent is to penalize to other party.
Parties can limit or modify remedies under the UCC § 719 with repair or replace clauses unless the remedy fails of its essential purpose.

Intent of the parties governs arbitration agreements.

Parties consenting to delegate power to a 3rd party is binding on the parties to the contract.
If the agreement expressly provides for arbitration or the language is sufficiently broad to cover the issue in dispute, the court and the parties are bound to arbitration.

Assignment of Rights

Common law and the UCC allows assignments of rights if notice is given to the obligor.
Assignments are improper where the obligor’s duty, burden, or risk is materially changed by the assignment unless consent to the assignment is given.
Anti-assignment clauses are ineffective under the UCC and are interpreted as preventing the delegation of duties.
Common law requires strict interpretation of anti-assignment clauses.
Modifications by the original parties after an assignment is allowed if necessary and legitimately called for between original parties. UCC and Restatement require good faith and observance of reasonable commercial standards in modifications.
Assignee is vulnerable to all defenses that the obligor has against assignor.
An implied warranty is created after an assignment preserving the right to recover from the assignor if the obligor fails to pay the assignee.

Delegation of Duties

Under the UCC, delegation of duties is permitted unless the obligor has a substantial interest in having the original party perform because the contract calls for specific type of performance or is personal in nature.
If the contract calls for performance that is commercially standard, delegation is usually not questioned.
Delegation never relieves the original party from its duty to perform.

Third Party Beneficiaries

The intent to benefit test necessarily requires the promisor to confer a benefit to a 3rd person and performance must run directly to that party.
Both promisor and promisee must understand the intent to benefit the third party.