Contracts Outline – Second Semester

I.  Third Party Beneficiaries – Performance to 3rd party part of original K

  1. Requirements : 2 must be satisfied
  2. Must be intended beneficiary, 2 prong test to establish
  3. Promisee intends to benefit 3rd party, shown by
  4. Contract language
  5. Contract requires performance directly to 3PB
  6. Legal/Social relationship of promise and 3 PB
  7. Intent is generally presumed to creditor 3 PB
  8. Intent must generally be established to Donee 3PB
  9. Promisor’s performance runs to 3rd party
  10. Rights must have vested
  11. Until vested, rights can be modified or rescinded by contracting parties
  12. Notification of modification effective upon receipt
  13. Parties may agree at time of contracting that no modification may occur w/o the beneficiary’s consent
  14. Majority Rule (2nd Rstmt) : Rights vest w/
  15. Knowledge AND
  16. Detrimental reliance OR
  17. Suit OR
  18. Assent (knowledge through “thank you” etc)
  19. A minor’s vesting may be automatic
  20. Types of Beneficiaries
  21. If intent to discharge duty owed to 3rd party, creditor beneficiary
  22. If intent to confer gift to 3rd party, donee beneficiary
  23. If partly discharge, partly gift = donee beneficiary
  24. Incidental beneficiary has no rights under K
  25. Rights and Liabilities where No Performance by Promisor
  26. Rights of 3PB against promisor
  27. When rights vest, donee or creditor can sue on K
  28. Rights of Promisor against 3PB
  29. Promisor has any defenses against 3PB which he could have asserted had he been sued by the promisee.
  30. Only defenses relating to main contract, promisor may not assert against 3PB any defenses from unrelated transactions with the promisee.
  31. Cannot assert defenses available only to the promisee.
  32. Rights of 3PB against promisee
  33. Donee has none
  34. Creditor can assert original claim against promisee
  35. Rights of promisee against promisor
  36. Can sue on K, but promisor is subject to only 1 recovery
  37. Special Cases of Note
  38. Municipality (public k) – generally not intended unless:
  39. Specific duty owed to public
  40. Contract promise to compensate public for injury
  41. Contract for gain of public members
  42. Surety Bond
  43. Performance bond – incidental
  44. Payment bond – intent to pay and benefit
  45. Indemnity Contract – usually incidental

II.  Assignment – Party added after K formation.

  1. Parties
  2. Obligor has a contract with the assignor
  3. Assignor later (after original K) describes the rights and has a present intent to transfer, thus giving his right to performance to the assignee. Thus obligor’s duty now runs to the assignee.
  4. Effective with
  5. Immediate transfer of present rights
  6. Rights that will later bear fruit do fit here
  7. Promises to later transfer do not fit – not immediate
  8. Total divestment, may divide (no other formality required – unless SOF, etc)
  9. Note: consideration is not required b/c immediate transfer
  10. Obligor must pay or perform for assignee once on notice
  11. Invalid if
  12. Materially alters obligor duty, such as:
  13. Personal services K
  14. Requirement or output K
  15. Any change in time, place or performance
  16. Alters obligor risk
  17. Insurance (proceeds okay)
  18. Credit – not anti-deficiency (where only the collateral can be recovered – by statute)
  19. Right to pay for personal services prior to performance
  20. Contract to not compete – obligor can ratify
  21. Not adequate description of rights or present words of assignment (no other formality required)
  22. Law prohibits it.
  23. No-assignment clauses
  24. Not allowed by the UCC
  25. In service contracts, destroys the right but not the power to assign. Thus, the obligor can sue to recover any damages, but the assignment will stand.
  26. Revocation
  27. If gratuitous, revocation effective upon
  28. Successive assignment
  29. Death or bankruptcy of assignor
  30. Notice to assignee or obligor
  31. Performance to assignor
  32. Unless:
  33. Detrimental reliance
  34. Obligors performance of duty to assignee
  35. Writing
  36. Token chose (a symbolic item which demonstrates intent)
  37. If consideration is given, irrevocable (note: destroys right but not power)
  38. Successive assignments, who prevails?
  39. If assignment is revocable (read gratuitous w/no d.r., writing, etc), subsequent assignee prevails
  40. If assignment irrevocable (consideration was given or d.r. writing, etc) , generally the first in time prevails – in other words, first in time to receive an irrevocable assignment wins
  41. UCC – first to file financing statement
  42. Note: Losing assignee still has tort or K action
  43. Rights of assignee (note: assignor’s rights are extinguished, assignee stand is the shoes of the assignor)
  44. Against obligor – notice of assignment binds obligor to perform only to assignee.
  45. Obligor has any defenses he would have had against assignor
  46. Against assignor – when obligor asserts defense applicable to assignor.

III.  Delegation – subsequent to the original K, unilateral

  1. Parties
  2. Delegor has a contract with the obligee
  3. Delegor later (after original K) transfers the duty to perform to the delegate.
  4. Effective with
  5. Delegor identifies duties
  6. Promise by delegate to perform
  7. At C/L – express
  8. Under UCC or R/S, acceptance of benefits (failure to reject) is an implied performance to perform.
  9. If delegate fails to perform
  10. Obligee’s cause of action is against the delegor, the delegor remains as a surety
  11. Unless: Delegation for consideration in effect creates a 3PB contract, and 3PB rules apply, Obligee can recover from delegate
  12. Delegate may assert any defenses against the obligee that he could assert against the delegor.
  13. Invalid if
  14. Personal duties requiring
  15. Unique skills OR
  16. Trust and confidence
  17. Output contracts
  18. Q is: could the delegate perform w/equal and materially indistinguishable skill – AOK, if not, not OK
  19. Contract provision prohibiting
  20. Note: A delegation that would generally be invalid may be made valid if the obligee accepts or begins to accept performance by the delegate.
  21. No-delegation clauses
  22. Binding
  23. Note: an attempt to delegate a non-delegable duty may be anticipatory repudiation of K and a material breach

IV.  Conditions or Covenants

  1. Covenant – A promise to do or not to do something, failure to perform a covenant is a breach of contract.
  2. Condition – Conditions set the time and order of performance. There is no absolute duty to perform a condition. The satisfaction or excuse of a condition matures the other party’s obligation to perform. The failure to perform a matured obligation is a breach of contract which excuses counter-performance and is subject to contract remedies.
  3. When in doubt
  4. “If” “on condition that” and “provided that” are common words of conditions.
  5. Interpret against the drafter.
  6. Business custom
  7. Note: some provisions can be both a condition and a covenant
  8. Types of conditions (
  9. Time Conditions
  10. precedent
  11. concurrent
  12. subsequent AND
  13. Creation Condition
  14. Express conditions
  15. Satisfied by strict compliance
  16. The UCC rule of perfect tender is a c/p
  17. Imperfect tender can be remedied by the seller if:
  18. It was reasonable to believe that the buyer would accept the item AND
  19. The seller notifies the buyer, within a reasonable time, of his intent to conform
  20. Thus, if the product purchased is not acceptable, the buyer must inform the seller before having any right to sue. Must give notice and opportunity to rectify
  21. Implied conditions
  22. One necessary to K or inherent in promises given
  23. They are satisfied by strict compliance
  24. Acting in good faith is always an implied condition
  25. Test = What reasonable person would think necessary
  26. Constructive conditions
  27. Condition implied by court in interest of fairness and justice.
  28. They are satisfied by substantial performance, Factors:
  29. Was there a willful deviation?
  30. Has the injured party obtained benefits?
  31. Is there adequate compensation in damages, such as a set-off?
  32. How much of the performance has occurred?
  33. What is the hardship to the breaching party if no recovery?
  34. Burden of Proof on Conditions
  35. Defendant has duty to prove a condition subsequent has not been satisfied
  36. Plaintiff has duty to prove all conditions concurrent have been satisfied or excused.
  37. Plaintiff has duty to prove all conditions precedent have been satisfied or excused.
  38. Condition will be excused if
  39. Prevention – One party preventing the other from performing their condition.
  40. Estoppel – Someone tells you that you do not have to conform to the condition before the condition was supposed to be satisfied and you rely on that statement. The condition can be reinstated prior to the end of the time the condition was supposed to be satisfied if the other party has not changed their position in reliance on the statement.
  41. Waiver – waiving the condition after the condition was supposed to be performed. Prior waiver may excuse current breach
  42. Election
  43. Forfeiture (relief from) – If there is unintentional and minor non-compliance with the condition, the court may grant relief and the aggrieved party can only recover damages.
  44. Impossibility – The condition becomes impossible to satisfy (ie death of a person which must be satisfied for payment, etc) the entire contract is not set aside but only this condition is excused.
  45. Repudiation
  46. When one party expressly repudiates the contract the other party’s stopping performance is not breach.
  47. Voluntary disablement – conduct (acts) which indicates intent to not perform. Must request reassurances, if not given, then repudiation.
  48. Conditions of satisfaction
  49. Personal
  50. Issue of personal taste
  51. Test is good-faith subjective but need specific reason
  52. Non-personal
  53. Issues of utility, fitness or purpose
  54. Test is objective or reasonable
  55. 3rd party judge
  56. Test is good faith but need specific reason
  57. In the absence of anything else, the longer performance generally comes first.
  58. Breach
  59. Adequate notice of breach must be given or the non-breaching party must still perform.
  60. If minor breach
  61. Of express condition, counter perf is discharged unless
  62. Construed as covenant
  63. Relief from forfeiture for sub. performance
  64. Of constructive condition
  65. Substantial performance = damages (set- off)
  66. If material breach
  67. Excuses obligation for counter-perf and receive damages
  68. Parties in fault may recover only by
  69. Divisibility -A party may recover for those easily divisible parts that they have performed. (contractor builds only 5 of 10 houses he contracted for. Contractor can recover for the five, less any difference in cost of having the other 5 built) OR
  70. Quasi contract – recovery of costs less damages
  71. Social policy = non breaching party should not receive a windfall from breach
  72. Time – if time is a condition “time is of the essence” is key phrase

V.  Discharge of K (Big three and misc.) – Note IIF only if no risk allocation in K

  1. Impossibility – unforeseeable supervening physical or legal obstacle prevents performance without fault.
  2. Must be objectively impossible – no one could perform
  3. Must arise after K, impossible at formation = no K
  4. Types : illegality, death, destruction of subject matter
  5. Impracticability – unforeseeable impairment of ability, risks or expenditures become grossly disproportionate to original consideration.
  6. Unforeseeable circumstances
  7. Burden grossly disproportionate to original consideration
  8. Generally must be extreme – even 10 times cost not enough – there is always a risk in business contracts
  9. Frustration of Purpose – unforeseeable destruction of the value of contract
  10. Occurs where performance is possible, but event makes the value of the K virtually worthless
  11. Requires
  12. Supervening act or event
  13. Not reasonably foreseeable

3.  Purpose of the K is known to both sides

  1. Rescission – mutual or unilateral (if contract allows it) with right to do so where neither party has fully performed (does not need to be writing, but good idea to).
  2. Occurrence of condition subsequent
  3. Novation – instead of adding someone to the K, substitutes one party in for one party that is completely removed. All parties must agree.
  4. Written release – usually requires consideration to be binding (modification).
  5. Account stated – agreement of parties with several accounts to fix final balance due – merges and discharges all
  6. Accord and Satisfaction – see outline 1
  7. Defenses as in outline 1
  8. Statute of limitations
  9. 4 years if in writing
  10. 2 years if oral
  11. Judgment in a court of law

VI.  Damages

  1. Purpose - to put the aggrieved party in the same position as if the K had been performed (benefit of bargain)
  2. Types
  3. Expectancy – gains prevented (lost profits)
  4. Reliance – losses sustained (preparation, partial performance)
  5. Loss Volume Seller -
  6. Cover –
  7. Foreseeable
  8. Those that naturally flow out of the breach
  9. Expectancy or lost profits
  10. Reliance or out of pocket
  11. Incidental such as re-advertising
  12. If given special knowledge, damages that might not normally be foreseeable now are foreseeable – on notice. “Special Damages”
  13. Unavoidable
  14. Must use all reasonable means to avoid (duty to mitigate)
  15. Damages that were avoidable will not be awarded
  16. Breaching party has BOP that non-breaching party did not mitigate
  17. Certain
  18. Must be reasonably certain, speculative damages not OK
  19. UCC
  20. If during manufacture or delivery the buyer breaches the seller is entitled to get the difference between resale and contract price + incidentals
  21. If the buyer breaches after delivery (by insolvency) seller can reclaim goods and entitled to get the difference between resale and contract price + incidentals
  22. Must make reasonable effort to resell, must give notice to buyer of resale.
  23. If seller breaches, must give notice and opportunity to correct.
  24. Seller, although was able to resell, may recover contract price if they are a Lost Volume Seller, such as a car lot. Thus, they would have made both sales if no breach b/c virtually inexhaustible supply.
  25. If unique goods, seller can recover under a Price action – suing for the price because cannot resell (such as portrait)
  26. Restitution
  27. If one party breaches before the other has completely performed, the recovery comes in quantum meruit
  28. If one party breaches after the other has completely performed, the recovery comes in contract price
  29. Liquidated damages (clause must be included in K)
  30. Requirements:
  31. Must be reasonable estimate of the damages
  32. Damages are difficult to ascertain
  33. Cannot be a penalty
  34. If requirements are not met – viewed as penalty
  35. Penalties are most likely found where amount is large
  36. Limitations on damages
  37. Damages for economic harms or property loss can be limited
  38. Limitations on damages for personal injury are considered unconscionable per se and will not be upheld.

VII.  Enforcement

  1. Specific Performance – usually relates to the transfer of a unique item
  2. Breach
  3. Contract
  4. Certain – must be very certain (terms, subject matter)
  5. Inadequate legal remedies – money won’t do it, usually a unique item or service
  6. Feasible
  7. Balances interests of the parties
  8. Injunctive Relief – order to do or not do something
  9. Inadequate legal remedies (money won’t do it) AND
  10. Feasible AND
  11. Parties are identifiable AND
  12. Irreparable injury if not granted AND
  13. Balances interests of the parties
  14. Defenses to Specific Performance and Injunctive Relief
  15. Laches – no unreasonable delay.