Illegality

Contracts are not enforceable if they are:

• contrary to statutes

• contracts to commit crimes

• contrary to “public policy”

What does that mean?

Illegality

• exculpatory clauses

• unconscionable contracts

Mistake -- Bilateral• Konic International v. Spokane Computer

Services• A bilateral mistake occurs when both

parties negotiate based on the same factual error.– If the parties contract based on an important

factual error, the contract is voidable by the injured party.

• Conscious Uncertainty– No rescission is allowed where one of the

parties knows she is taking a risk.

Mistake -- UnilateralSometimes only one party enters a contract

under a mistaken assumption, a situation called unilateral mistake.– to rescind for unilateral mistake, a party

must demonstrate that she entered the contract of a basic factual error and that either (1) enforcing the contract would be unconscionable

or

(2) the nonmistaken party knew of the error.

Other Facts Undermining Consent: Misrepresentation and Fraud

• Innocent misrepresentation

– means the owner believes the statement to be true and has a good reason for that belief.

• Fraudulent misrepresentation

– means the owner knows that the statement is false.

• Remedy may depend upon speaker’s intent

Misrepresentation and Fraud (cont’d) • To rescind a contract based on

misrepresentation or fraud, a party must show three things: – (1) there was a false statement of

fact; – (2) the statement was fraudulent or

material; and – (3) the injured person justifiably

relied on the statement.

Fraudulent or Material

• Fraudulent: without regard to truth or falsity– Seller says “The air conditioning in this house is

working fine” knowing that is untrue.– Seller says “This house is built on solid rock” without

any reasonable belief that is true.

• Material: integral to other party’s agreement– Seller says “This roof is only two years old.” Seller

believed that was true, but roof was actually 14 years old (beyond normal useful life of shingles).

– What if the roof is two years and three months old?

Plaintiff’s Remedy for Misrepresentation or Fraud

• If the maker’s statement is fraudulent, the injured party generally has a choice of rescinding the contract or suing for damages.

• Sale of Goods– UCC §2-721 permits a party to rescind a

contract and then sue for damages whether the misrepresentation was fraudulent or innocent.

Nondisclosure of a Fact• Is misrepresentation only:

– To Correct a Previous Assertion– To Correct a Basic Mistaken Assumption

• A seller must report any known latent defect that the buyer is not expected to discover himself.

– To Correct a Mistaken Understanding about a Writing

– In A Relationship of Trust• When one party naturally expects openness and

honesty, based on a close relationship, the other party must act accordingly.

Duress

• What does it mean for a contract to be created under “duress”? What sorts of circumstances constitute the sort of duress that would render an otherwise valid contract voidable?

• What is “economic duress”? Does economic duress make a contract voidable too?

• Totem Marine v. Alyeska

Discharge

• What does it mean to say that a party to a contract “is discharged”?

• Generally, a party is discharged when she has no more duties under a contract.

• How does discharge occur?• Either by full performance, or by mutual

agreement.• General rule: parties must perform as

promised. A breach is a failure to perform as promised.

• Continental Dredging v. De-Kaizerized

Performance & Breach• Strict Performance

– Performance that is exactly what promised; is usually not expected and failure to do so does not cause for discharge.

• Substantial Performance– A party that substantially performs its obligations will

receive the full contract price, minus the value of any defects.

– A party that fails to perform substantially receives nothing on the contract.

– Performance that falls short of substantial performance constitutes a material breach of the contract.

Performance & Breach (cont’d)

In a contract for the construction of a home that specified the size of decorative exposed beams, beams in the finished house are smaller than specified, by 5%? Material breach?How much money does buyer owe builder, if

any?

What if the beams are load supporting beams?Material breach?How much money does buyer owe builder, if

any?

Performance & Breach (cont’d)

• Whether a breach is material depends upon the circumstances:– I order keg of beer to be delivered “Thursday by 5pm”. Keg

arrives at 7pm.– I order keg of beer to be delivered “Thursday in time for my

party at 5pm”.

• To determine if breach is material, look to: – Whether buyer can use imperfect performance for intended

purpose– Whether adjustment to price/damages can remedy the problem– Whether breaching party acted in good faith

Performance & Breach (cont’d)

• Parties can define terms as essential such that strict performance of those terms is required, and breach of those terms is a material breach.

• What if contract for construction of house specifies hardwood floors made of oak, with clear stain. Buyer gets hickory, with oak-colored stain.– Contract specifies that oak floors are an essential

element of the contract.– Filing cabinet delivery example.

• Conditions vs. essential terms

Time of the Essence Clauses

• A time of the essence clause will generally make contract dates strictly enforceable.

• Merely including a date for performance does not make time of the essence.

Breach (cont’d)• Anticipatory Breach

– Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the contract.

– A delivers widgets to B’s factory weekly; B is obligated to pay monthly for previous month’s deliveries. B’s bank accounts are seized by the court to pay creditors.

– A need not make next delivery and may sue for payment for deliveries made, even though time for payment under the contract has not yet arrived.

• Norcon v. Niagara Mohawk: demands for assurance of performance

Impossibility• When is performance excused due to change in

circumstances? That is, must promisor make good on promise (through own or substitute performance), or is s/he excused?

• True Impossibility– Something has happened making it utterly impossible to fulfill

the promise.– Portrait painter becomes ill and cannot paint your portrait as

required by the contract?• Must/can painter provide substitute performance?

– House painter can’t paint your house because his employees go on strike?• Must/can painter provide substitute performance?

Force Majeure

• Spells out the kinds of impossibility that will excuse performance. For example:

– Performance under this agreement shall be excused if prevented by unforeseeable acts beyond the parties’ control, including acts of God, acts of a public enemy, labor disputes, fires, insurrections, floods, acts of government.

• Parties can define force majeure narrowly or broadly, to include all sorts of disruptions.

Breaching the Contract

• Someone breaches a contract when he fails to perform a duty without a valid excuse.

• A remedy is the method a court uses to compensate an injured party.

• An order forcing someone to do something, or refrain from doing something, is an injunction.

Compensatory Damages

• Compensatory damages are the most common monetary awards.

• They generally flow directly from the contract, such as an order to pay what was promised or to pay for expenses caused by the breach.

• Serve expectation interest; give parties the direct “benefit of the bargain”. E.g., out of pocket losses; certain profits lost.

Consequential Damages

• Consequential damages (a/k/a “special damages) are those resulting from the unique circumstances of this injured party.

• Plaintiff can recover consequential damages only if the breaching party should have foreseen them.

Law and Equity

• Restitution in Cases of a Valid Contract– Restitution is a common remedy in contracts

involving fraud, misrepresentation, mistake, and duress. It means giving back the benefits received.

– Rescission = undoing the contract

Other Equitable Interests

• Specific Performance– A court will order the parties to

perform the contract only in cases involving the sale of land or some other asset that is unique.

• Injunction– An injunction is a court order that

requires someone to do something or refrain from doing something.