P R O F E S S O R K R I S T E N D A V I D A D A M S

Contracts Overview for Survey of Florida Law Course

Working Definition of Contract

Contract A set of promises, for the breach of which the law gives a remedy.

Another definition A contract is a bargained-for exchange.

Contract law is . . . . State law (not federal) Private law (not public)

Contract law is the law of private agreement. This concept is closely related to the notion of freedom of contract.

Primarily common law (not statutory) Except for Uniform Commercial Code Article 2, which governs contracts for

the sale of goods.

Sources of Contract Law

Common law

Contracts for the sale of real estate

Contracts for the sale of services

Uniform Commercial Code Article 2

Contracts for the sale of goods

Goods are those things that are moveable at the time of identification to the contract.

The “Contracts Equation”

O+A+C=K $, but not if a defense exists.

O: The Offer

A: The Acceptance

C: Consideration (the "price of the promise")

K: Contract

$: Damages

Mutual Assent: O+A

Absent mutual assent, there is no contract.

Sometimes, there are “preliminary negotiations” prior to the O+A.

Offers can be bilateral or unilateral.

Bilateral: a promise for a promise

I promise to pay you $25 if you promise to pick me up from the airport.

Unilateral: a promise for a performance.

I promise to pay you $25 if you show up at the airport to pick me up.

Most offers SOUND unilateral but are actually bilateral.

How Clear Does an Offer Have to Be?

An offer must be sufficiently definite to create the “power of acceptance” in the offeree, so as to create a contract in the event of acceptance.

This means that the offer – although it need not address everypotential issue that could arise, must be fairly specific.

In a sale of goods, look for the following, at a minimum:

Price

Description of Goods

Delivery Date

Quantity of Goods

What Can Happen to an Offer?

Actions by Offeree: Reject: “No thank you.”

Giving no response is also a rejection.

Accept: “Yes, please!”

At common law, the acceptance must be the offer's "mirror image."

Actions by Offeror: Revoke: “I changed my mind.”

Once an offer is revoked, any attempt to revive it (by either party) constitutes a new offer.

Expire: “Your time is up.”

A face-to-face offer generally must be accepted during the conversation, else it will expire.

The Evolution of Mutual Assent

Single Purpose Contract

Boilerplate Contract

“Battle of the

Forms”

The Evolution of Mutual Assent, continued

“Shrinkwrap” “Clickwrap” “Browsewrap”

Consideration

• Consideration is the “price of the promise.”

In other words, consideration is what is given in exchange for the offer.

The good news is that consideration is normally obvious.

If I offer to sell you my car for $25,000, then the $25,000 is the consideration for my offer.

U.S. contract law does not generally enforce gratuitous promises.

If I offer to give you $25,000 as a birthday gift, there is no consideration for my offer.

Contract Modification

Under the UCC, no new (additional) consideration is required for modification of an existing contract.

Under the common law, the rule was different.

Note, however, that courts will be as generous as they can be, looking to whether there is any new consideration whatsoever for the modification.

For example, was the contract changed in any way that benefited the party agreeing to the modification? If so, this is probably consideration for the modification, even if it was not denominated as such by the parties.

Verbal Promises: Statute of Frauds

Are verbal promises just as enforceable as written ones? It depends on whether the contract falls within what is called the

“Statute of Frauds.”

Some contracts require a written memorial, to be enforceable, because of the presumed higher risk of fraud.

SM1LES S – Suretyship (a promise to answer for someone else’s debt)

M – Marriage (NOT a promise to marry)

1 – Term of more than one year

L – Interest in Land

E – Executor

S – Sale of Goods for $500 or more

Statute of Frauds

Generally speaking, contracts falling within the statute of frauds need only be memorialized by a writing; they don’t actually have to be in writing.

There are, however, exceptions: credit agreements and contracts creating an interest in land must be in writing and signed by the party to be signed.

If the original contract was required to be in writing, any modification must also be in writing.

Statute of Frauds, Continued

Exceptions to the Statute of Frauds

Part Performance

Promissory Estoppel

Judicial Admission

In a sale of goods, the “merchant’s exception”

This can be used when there is a writing, but it is signed by the party trying to enforce the contract, rather than the party against whom the contract is being enforced.

All of these result in the Statute of Frauds being unavailable as an affirmative defense, despite the lack of a sufficient writing.

Interpretation: What Does the Contract Mean?

Pure Subjective Approach What did these parties actually mean at the time they entered the

contract.

The problem with this approach is that the parties may forget, or lie once they end up in litigation.

Pure Objective Approach What would a reasonable person have thought this term meant?

The problem with this approach is that it may not capture what these parties actually meant.

Modified Objective Approach What should each party have reasonably believed the other party

meant, based on both objective and subjective factors?

This is the approach favored by US contract law.

Parol Evidence: What Counts as the Contract?

Parol Evidence answers the following question:

If there is a written contract, but also phone conversations and e-mails between the parties, should we assume that the writing automatically trumps the phone conversations and e-mails?

U.S. law has gotten more liberal over time about considering “parol” (extrinsic/external) evidence rather than automatically assuming the written contract controls.

The UCC is generally more liberal than the common law with respect to parol evidence.

Parol Evidence, Continued

The extent to which parol evidence is to be considered depends on two things:

1) The nature of the parol evidence being offered – that is, explanatory parol evidence is the easiest to have admitted into evidence, followed by additive parol evidence, followed by contradictory parol evidence.

2) The extent, if any, to which the contract is fully integrated –that is, considered a full and final expression of the parties’ agreement.

A merger clause is generally considered “some evidence” of the parties’ intent to have a fully integrated contract.

Note that Article 2 has a presumption against integration.

Back to the Contracts Equation

O+A+C=K$, but not if a defense exists.

What if Consideration is missing? Then we don’t have a contract, by definition.

BUT we might be able to enforce the promise under a theory called Promissory Estoppel

New equation:

O+A+RFDR=PE $

RFDR = Reasonably foreseeable detrimental reliance

Classic examples• Family promises (I promise to take care of my parent, and she sells

her house in reliance.)

• Charitable pledges (I promise to give $1 million to Stetson, and they start building a new wing on the library with my name on it.)

Back to the Contracts Equation, Continued

O+A+C=K$, but not if a defense exists. What if there is no Offer (and thus no Acceptance or

Consideration), and yet compensation seems appropriate?

Example: Physician encounters unconscious, bleeding stranger on the side of the road and renders aid, thus saving that person’s life.

Unconscious - -no offer to pay was feasible, by definition

Then we don’t have a contract, by definition, BUT the doctor might have a claim in Restitution

New equation: • Unjust Enrichment = Claim in Restitution $

• The key is that there is a good reason no contract was possible, under the circumstances.

• The amount to be paid ("quantum meruit") is determined by equity.

$: Remedies

Contract remedies are what you get if you win in a contract case.

United States law favors “finish line” damages These put the injured party in the position it expected to be in, if the

contract had not been breached.

Expectation Damages (the lost value of the contract)

Specific Performance

“Starting line” damages may be available as an alternative. These put the injured party in the position it would have been in, had

there been no contract.

Reliance Damages

Restitution Damages

Example of Remedies

Buyer and Contractor entered into a contract to build a house, and Contractor refused to finish the house after it was 80% complete. Buyer has already paid in full. Construction costs have now gone up. What issues should be considered? Expectation damages

Specific performance

Restitution damages

Reliance damages:

Attorneys’ Fees

Consequential Damages

Incidental Damages

Anticipatory Breach

Mitigation of Damages

Materiality of Breach

Remedies, Continued

Buyer and Contractor entered into a contract to build a house, and Contractor refused to finish the house after it was 80% complete. Buyer has already paid in full. Construction costs have now gone up. Expectation damages:

Contractor must give Buyer enough $ to hire someone else to finish the job.

Put the party in the position it would have been in, had the contract been performed.

Specific performance: Contractor must finish the job. This is generally available only when the contract is for something

unique (land always qualifies).

Restitution damages: Contractor must give Buyer (20%?) of its money back?

Remedies, Continued

Buyer and Contractor entered into a contract to build a house, and Contractor refused to finish the house after it was 80% complete. Buyer has already paid in full. Construction costs have now gone up. Reliance damages:

Contractor must reimburse Buyer for the money it spent planning a party for next weekend in reliance on the house being completed.

Reliance damages return the injured party to its original, pre-contract position.

Attorneys’ Fees:

Florida statute provides that, where a contract awards attorneys’ fees to one party, if the other party prevails then that other party must also receive attorneys’ fees just as the first party would have received by contract had it prevailed.

Remedies, Continued

Consequential damages: Generally limited by the extent to which it was “reasonably

foreseeable” at the time the contract was entered into, that such damages would arise as a consequence of the breach.

Example: house was being resold to a third party.

Often involves putting the injured party in breach of a contract with a third party, or lost profits.

Incidental damages: Often those damages that are incurred in an effort to avoid

further loss.

Example: hiring another contractor to finish the job.

Can also be those damages incurred in receiving and inspecting goods that were rightfully rejected.

Anticipatory Repudiation

This is a breach that arises before contract performance is due.

When this occurs, the injured party has two options:

Anticipatory repudiation can be treated as an immediate breach.

Injured party also has the option of suspending its own performance but waiting until performance is due before suing, while also urging the breaching party to perform.

Mitigation of Damages

A party must refrain from running up damages that could have been avoided.

For example, an employee who has been fired who refuses a comparable job in the area cannot recover the salary she could have earned had she taken the job.

A party can, however, recover the costs of mitigation.

In our employment example above, this would include any costs of job-seeking.

Materiality of the Breach

Material breach: relationship-ending breach that terminates the injured party’s duties under the contract.

Immaterial breach: injured party may receive damages but is not relieved of her own duty of performance. The key is whether the injured party has received the substantial

benefit of her bargain.

Questions to consider:

Would damages be adequate to compensate for the breach?

Has there been part performance?

How much benefit has been received?

Was the breach intentional?

How likely is it that the breaching party can complete performance?

Is the contract divisible?

Back to the Contracts Equation Once More

O+A+C=K$, but not if a defense exists.

What kind of defense might exist?

Fraud (omission – nondisclosure; or commission –misrepresentation)

Duress (threats)

Mutual mistake

Impossibility, impracticability, or frustration of purpose

Illegality

Unconscionability

Incapacity

Defenses, Continued

Fraud (omission – nondisclosure; or commission – misrepresentation) “You didn’t tell me this house was being built above toxic waste.” Where there is justifiable reliance on a materially fraudulent representation,

the contract will be voidable at the election of the injured party. Note, however, that a misrepresentation can be ratified, and if this has

occurred, the contract is no longer voidable.

Duress (threats) "I had no choice but to sign the contract." The key is the existence of a wrongful or improper threat inducing a contract.

Exercising a legal right may be a threat, but it is not wrongful. Contract signed at gunpoint is an example of physical duress (contract is void) Most other duress (economic, imprisonment) renders a contract merely

voidable

Mutual mistake "We both thought this land was zoned residential, not commercial". The key is showing that the mistake (1) went to a basic assumption of the

contract, (2) had a material effect on the agreed exchange, and (3) neither party assumed the risk of the mistake, as a matter of contract.

Defenses, Continued

Undue Influence

"I was manipulated into buying the property."

One very vulnerable party; one exercising excessive pressure.

Classic examples include elderly persons being exploited.

In determining whether the defense exists, look at the unfairness of the resulting exchange and whether independent advice was available to the weaker party.

Illegality

The land was to be used for a casino, which is illegal.

If the illegality existed when the contract was made, no contract was formed.

If the illegality arose later (supervening illegality), then performance is discharged.

Defenses, Continued

Discharge by Impossibility, impracticability, or frustration of purpose Impossibility: the contractor dies or is incapacitated; can’t be forced

to perform. Death or physical incapacity of person necessary to the contract.

Impracticability: an embargo prevents the contractor from receiving the necessary raw materials for the contract. Mere increases in cost are rarely sufficient. War, strike, embargo, catastrophic crop failure Test is whether the circumstances are so vitally different than

anticipated that the contract cannot reasonably be thought to govern.

Frustration of purpose: the building was being built for the Olympics, which have now been cancelled. A supervening act, not reasonably foreseeable, that has almost or

totally destroyed the central shared purpose of the contract.

Defenses, Continued

Unconscionability

The fine print of the contract increased the sales price tenfold.

The deal was grossly unfair to the weaker party.

Look for procedural and substantive unconscionability

Procedural: absence of meaningful choice

Substantive: shocks the conscience

Incapacity

Mental Incapacity

The person buying the property had been adjudicated incompetent.

Voidable contract

Minority Incapacity (Infancy)

A 14 year-old was buying the property.

Voidable contract except for "necessary items"

Under the age of 18 and unmarried

Third Parties as Beneficiaries

Only intended (not incidental) third parties have standing to sue under a contract.

To sue, the third party beneficiary must show that its rights have vested.

To show that one’s interests as a third party beneficiary have vested, a party must prove one of the following:

The beneficiary assented to the contract;

The beneficiary brought suit under the contract; or

The beneficiary detrimentally relied on the contract.

Equitable Conversion

This doctrine applies to a contract for the sale of real estate.

Equitable title passes to the purchaser after a contract has been signed, although legal title remains with the seller.

If the seller refuses to convey legal title, the buyer can argue that it already has equitable title, such that the seller should be required to convey legal title also.