XIV. CONTRACTS - CONTINUED
We all have the freedom to deal or refuse to deal with anyone else. However, just as some limitations must be placed on our freedom of speech and freedom of religion to protect the public, limitations are also imposed on one’s right to contract. The necessity that any contract have a lawful purpose is fundamental in the law. Courts treat contracts based on illegal subject matter as void. Illegal subject matter is classified into three categories:
Ignorance by the parties as to what constitutes illegality cannot make valid a contract that is void because of an illegality.
If both parties intend that their contract be performed illegally, it usually will not be enforced by the courts. This is true even though actual performance was lawful. If only one of the parties intends to perform illegally, the courts will usually uphold the contract.
A contract to drive a truck, for example, may be performed either according to law or in violation of the law. If there is no evidence of an intent by both parties to perform the contract illegally, the truck driving contract would be valid.
Another extreme example is where an action to collect for the sale of a gun, where the seller knows the buyer intends to commit murder with the gun, would not be successful. If the seller had no knowledge of the intended use of the gun and complied with the law in all other respects in the sale, the contract of sale would be valid and enforceable.
If the subject matter of a contract is contrary to an existing statute or the common law, the contract is usually void. The contract may be legally void if it conflicts with the implied meaning of the statute or the intent of the legislature where the law was passed.
If a continuing contract, one in which performance will take place over some length of time, is formed and later a law is passed making such performance unlawful, the entire contract is not necessarily rendered void. Performance of the contract subsequent to the passage of the statute cannot be recovered for in the courts, but the contract can be enforced as to the parties’ performance prior to the passage of the statute. For example, after the United States entered World War II, Congress passed several regulations outlawing the sale of various items needed for the war effort. In a case resulting from these restrictions, where a new car sales agency had leased premises for the sole purpose of the display and sale of new cars, it was held that because of the government restrictions on the sale of new cars, the lease contract was terminated. By way of historical note, you will notice that you cannot get a 1942, 1943, 1944 automobile. The government restricted their manufacture and sale.
In considering the legality of a contract’s subject matter, there is a distinction between the laws passed for protection of the public and laws that have as their primary purpose the raising of revenue. If a contract violates a statute passed for the protection of the public, it is treated as void and unenforceable. If the contract violates a revenue statute, it is usually enforceable. An example is found in state licensing laws, such as those for business establishments and professionals. If the purpose of the licensing law is to protect the public and safeguard the lives, health, property and welfare of citizens, such as licensing of professional engineers, a contract for professional services made by one who is not licensed in the state will not be enforced by the courts. If the primary purpose of the law is to collect revenue, such as gasoline tax laws, the courts usually enforce the contract and impose a penalty on the violator.
If a third person would be harmed in connection with the performance of a contract, the subject matter of the contract probably would be held unlawful and not enforceable. Where the contract, for example, is an inducement to commit a crime or a tort, but the commission of such crime or tort is not necessarily required to perform the contract, the courts will examine the strength of the inducement and the general nature of the contract. Life insurance may be an inducement to murder; fire insurance an inducement to commit arson. For this reason, an insurable interest often must be shown before insurance can be obtained. A contract in the performance of which a party to the contract must breach an existing contract is usually unenforceable in the courts.
The U.S. economy is based on the principles of free enterprise and freedom of competition. Contracts that tend to create a monopoly or maintain price levels artificially, or in other ways restrain trade may be unlawful. The penalty for violation of these statutes is up to triple the amount of damages shown, plus payment of the other side’s attorneys’ fees and court costs. Such agreements include those by two competitors to fix prices, or to divide markets. In this area of law, which is also called Antitrust or Fair Trade Practices, other business practices are not so clear cut. For example, is it unlawful for a computer software manufacturer to require his customers to also buy maintenance services for the software. If so, are both the maintenance services agreement and the underlying software license agreement unenforceable? The law is not always clear in these areas. It depends on whether other service providers would be eased out of business, thus lessening competition in a relevant segment of the economy.
There are many employment agreements in which the employee agrees that he or she will not compete against their former employer once they leave such employment. Such noncompetition clauses, or covenants not to compete, are considered restraints of trade and were strictly construed against enforcement by the common law. In some states, such covenants are prohibited in certain employment relationships. Generally however, such noncompetition provisions are enforceable to the extent necessary to protect the legitimate business interests of the employer, such as involving the dissemination of trade secrets or the maintenance of goodwill. Under recent decisions, the provisions of a noncompete clause must be reasonable as to the restrictions on territory, scope of the former employee’s activity, and the time period of the restrictions. In such reasonable contracts, the provisions will be upheld and enforced, since you cannot force an employee not to be able to use the skills and knowledge learned over previous employments, so long as the new employment does not involve the divulgence or use of trade secrets learned from a former employer.
Usually, contracts involving the sale of a business typically state that the seller agrees not to enter into the same type of business in the same market area for a given period of time. Again, if these restrictions about type of business, market area and time are all reasonable, the restrictions probably would be upheld in court. It is where these restrictions are unreasonable that they are held to be in violation of the law.
Engineers, among others, are often asked to sign preprinted employment agreements that detail their obligations as employees. These agreements contain, among other things, noncompetition clauses, provisions dealing with the employer’s duty regarding confidentiality, and provisions regarding the ownership of inventions. Such contracts normally provide that all inventions of an employee which relate to the employer’s business belong to the employer. Some forms have even indicated that inventions made by an employee within a year or so after the employment relationship ends are presumed to belong to the employer. Some states have statutes limiting the enforceability of such provisions, and in other states such provisions are considered unenforceable as contrary to public policy. In other states however such contracts are enforceable.
In some states, where usurious interest is charged, the courts will not aid in collection of principal or interest. Today, with credit providers charging upwards of 22%, 23%, it is not clear what usury is today. Some states have statutes limiting the amount of interest that can be charged on the loan of money.
In most states, wagering contracts are illegal. Thus, it usually is up to the courts to determine whether a particular contract is a legitimate business transaction or a wager. The test used by courts in making this determination centers around the creation of the risk involved. By way of example, in a business contract calling for future delivery of a commodity for the payment of a present price, risk of loss resulting from a change in price of the commodity between the present and the delivery date is assumed by at least one of the parties. Has a risk been created for the purpose of assuming it? The courts answer no, providing that future delivery is actually intended.
A contract to withhold evidence in a court case is probably unlawful. So are contracts that tend to promote litigation. This is one reason why contingency fees for lawyers or others connected with a trial are sometimes frowned upon. If the would-be plaintiff stands to lose nothing in a court case, this is an incentive to undertake the litigation. However, as you well know, the personal injury litigation area is usually embarked upon using contingency fee contracts.
A large category of unlawful contracts are those that either restrain marriage or promise divorce. The courts generally do everything within their power to promote matrimony and discourage its disillusion.
Contracts that are immoral in subject matter or tend to promote immorality will sometimes be declared by the courts to be unlawful and against public policy. The problem inherent in these types of cases is the determination of whose moral standards are to be applied. Some might argue today that a contract by a doctor to perform an abortion would be a contract against public policy. However, the Supreme Court has ruled on that issue and at present, such contracts would not be against public policy.
In addition to the requirement that contracts conform to the written and unwritten laws of the community, the courts also require conformity to public policy. Public policy is rather difficult to define because of its continuous change. For example, contracts in the past restricting the sale of real estate and houses to people of color were enforceable up until 1949. In 1949, public policy changed in a Supreme Court decision, and such contracts ever since have been unenforceable. This example indicates that public policy must change to conform to changing ideas and mores, as well as to changing technology. Just as city planning, for example, has had to change to incorporate clover leafs and jet transportation, the moral standards supporting public policy also change as time goes on. For example, I am old enough to remember that years ago there was something in the public culture known as foul language. My personal feeling is that that there is no such thing as foul language today.
Contracts that are held contrary to public policy are those that have enforced and encouraged injury to society in some way. Thus, courts have held that a contract may be unenforceable because of an evil tendency found to be present in the contract. Again, different persons’ definition of evil tendency can lead to various interpretations of this particular definition.
An "evil tendencies" type of contract is one that causes corruption of a public figure. Such a contract might be subject to censure in the courts, such as seen in the various bribery trials of public officials. However, this brings up the rather sensitive problem of lobbying. Where does bribery end and lobbying begin? The ongoing controversy regarding election reform and the lobbying industry abounding in the federal and state capitols today raise issues, in my judgment, about the theory of evil tendency and public policy in our legal system The text gives the following three examples of lobbying efforts that should be considered:
A recent example from my own observation and in the newspapers will set forth what public policy is. The leader of the majority party in the Senate was extolling the HMO industry to donate money to his party in an effort to defeat legislation that had been introduced in the House of Representatives restricting the HMO industry. The legislation was introduced by another member of his same party. I leave that to the student’s own reflection, and I will not comment further on this particular situation.
Assume, for example, that Green is hired as a consultant for an engineering design job with payment to depend on his ability to obtain the acceptance of the design by political officials. Green, being human, might be tempted to go beyond what is considered right and ethical to obtain the fee. In the court’s eyes, contingent fees are an inducement to the use of sinister and corrupt means of gaining the desired objective. However, contingency fees are allowed for attorneys in certain cases, with the idea that more lawyers will make their services available to persons who otherwise could not afford legal fees, such as accident victims. However, my personal experience indicates that where other attorneys have taken cases on contingent fees based upon the outcome and an award of damages, these cases are difficult to settle and compromise since the attorney wants to make his maximum fee.
Obviously any contract that practices fraud or deception on the third person is against public policy. Where one agrees to pay another a thousand dollars if that other will recommend the first party for a particular job as a nuclear engineer, without knowing anything of the first party’s qualifications for the job, that contract would be against public policy. In contrast, payment for recommendation from an employment agency will be quite enforceable. The employment agency is in the business of recommending people for jobs for a fee. Those who hire based on individual recommendations have a right to assume that such recommendations are given freely and without prejudice.
Contracts that breach a trust or a confidential relationship are against public policy and will not be supported in a court. For example, a five percent kickback agreement for the purchase of goods could not be enforced in court.
Public policy is found in the federal and state constitutions, in statutes, in judicial decisions, and in the decisions and practices of government agencies. Lacking all of these, a court must depend upon its own sense of moral duty and justice for its decisions. This brings to mind the statement of one of the Supreme Court Justices indicating that he cannot define pornography, however he knows what it is when he sees it.
Court actions based on agreements that are illegal, immoral, against public policy, intended to promote the commission of a crime, or are forbidden by statute probably will be unsuccessful. The example given is that of a member of a gang of thieves, on being cheated out of a share of the loot, went into court to try to force a split. The court would contend that the agreement amongst the thieves to split the loot is void, being based on a crime. The public interest is best served if the court does everything in its power to discourage the crime. This, of course, brings into mind the classic movie with Humphrey Bogart and John Houston titled, The Treasure of the Sierra Madre. This involved an agreement to split loot, however by the end of the movie the stolen gold dust was carried on the arms of the wind, leading to a satisfactory conclusion before the parties could enter a court. As a matter of futher interest, I recommend the movie.
The term "public interest," which is the determining factor in such cases, is based on the court’s opinion as what would be the greatest aid to the public. Thus, you will see in many judicial decisions a court going out of its way to determine what would benefit the public most. Of course, there are many decisions that seem to take the public interest and do it a disservice in favor of some individual or corporate interest. That gets into the political nature of the law, and something beyond the scope of this particular course.
An oral contract is usually as enforceable as a written one, but a written contract has at least one major advantage. Its terms are easier to ascertain since it is very hard to prove in court what one person said to another sometime ago, particularly when the two parties are now on opposite sides of a contract dispute, and each of the individuals contradicts what the other party has said. While it is true that an oral contract may be as enforceable as a written one, it is sound common sense to put in writing any contract of more than a trivial nature. Discussed now are those contracts which must be in writing.
It’s time for us to delve into history again. In the year 1677 the English Statute of Frauds was passed as an Act for the prevention of frauds and perjuries with the objective to relieve the courts of the necessity of considering certain types of contracts unless they were in writing and signed by the party against whom they were to be enforced. According to Section IV of the Statute, the only writing required was the minimum needed to establish the material provisions of the agreement. These criteria were that the writing had to accomplish the following:
The writing was not required to be all in one document, but if not, there must be connection between the various documents which was apparent from the documents themselves. Only the person sought to be charged with a contractual duty has to have signed the agreement. The signature could consist of initials, be rubber-stamped in ink or pencil, or anything else intended by the party to constitute identification and assent to the agreement. Also, the signature could appear anywhere on the document.
Section IV of the English Statute of Frauds has become law in all of the states of the United States today with only minor modifications. According to the Fourth Section, no action shall be brought on certain types of contracts unless the agreement that is the basis for the action is in writing and signed by the defendant or the defendant’s agent. The following types of contracts are subject to the written requirement:
The Seventeenth Section of the English Statute of Frauds is also in effect in all states of the United States. This section sets forth the requirements for an enforceable contract having to do with the sale of goods, wares or merchandise. The section states that unless one of the following three actions is taken to secure such a transaction where the consideration is at least 10 pounds Sterling, the contract will be unenforceable at law:
The 10-pound Sterling minimum has been changed to $500 U.S. by each of the states with the adoption of the Uniform Commercial Code in each state.
The one-year time period starts to run from the time of making of the agreement. For example, an oral contract to work for another for a year starting two days from now would be unenforceable under the Statute of Frauds. If a contract is made today, time will start to run on that contract tomorrow, since most courts hold that parts of a day do not count in the running of time.
An example sets forth how this provision of the Statute of Frauds is enforced. Suppose White promises orally to pay Black $80,000 if Black will build a certain house for White. This is a service contract, not one for real property. No time limit is set on the construction. The fact that actual construction took place over a two-year period would not bring the contract under the Statute of Frauds. If the contract could be completed within one year no matter how improbable this may be, an oral contract for its performance is binding. By the same reasoning, a contract to work for someone "for life" or to support someone "for life" is capable of being performed in one year and need not be in writing.
Take the situation where an oral contract cannot be fully performed within a year, but if one of the parties nonetheless fully performs, is that party unable to enforce the contract against the other. The majority of courts treat full performance by a party as removing the contract from the effect of the one year requirement of the Statute of Frauds, even though the party took more than a year to perform. While most courts would enforce such a contract, some courts still hold that one party’s full performance does not remove the contract from the written requirement of the Statute of Frauds. This is also an example of how the law is different from state to state.
In situations where the statute of frauds applies and there has been at least a partial performance, most courts allow the party who has partially performed to recover the value of the services already rendered. This is because courts will refuse to allow the Statute of Frauds to be used as a defense by someone who uses it to secure an unfair advantage and thus defraud the other party to the agreement.
A large majority of the states have adopted the Uniform Commercial Code governing the sale of goods within those states. The drafters of the UCC adopted the rule of the Seventeenth Section of the English Statute of Frauds in slightly altered wording.
If a transaction involves goods of a value great enough to be governed by the Statute of Frauds, an oral agreement will be valid only if:
In the case of a contract for the purchase of goods not now in existence but to be made by the seller, there’s a question whether this is a contract for services to be performed and not for goods. If the contract is primarily for services rather than goods, the Statute of Frauds under the UCC will not apply. Moreover, an oral sales contract is enforceable if the seller has begun making the goods or has made commitments for procuring the raw materials to make the goods.
An executor is a person appointed in a will by a testator to enforce the terms of the will. An administrator serves a somewhat similar function where the deceased died without a will. The administrator is appointed by a court to collect the assets of the estate of the deceased, pay the estate’s debts, and distribute the remaining estate to the heirs, those persons entitled to it by law.
If the executor of an estate agrees to pay the debts of the deceased from the executor’s own estate, the executor is acting as a surety for the debt of another. Thus the executor is saying if the estate of the deceased is insufficient to pay you, I will pay the debt. These contracts have to be in writing.
A promise to act as a surety for another’s debts is quite similar to an executor’s promise to pay the debts of the deceased. The requirement that a contract to answer for the debt default or miscarriage of another person must be in writing covers all types of guaranty and surety contracts. Lending institutions frequently require either collateral or a responsible co-signer as security for a loan. Such contracts again must be in writing. In an indemnity agreement, one person agrees to pay another’s debts to third persons. For example, your insurance company agrees to pay your debts to persons injured in an automobile accident as a result of your negligence.
Marriage is said to be the highest consideration known under the law. The Statute of Frauds applies particularly to situations in which the agreement to marry is based on consideration such as a marriage settlement. If Mr. White agreed to give Black $10,000 in consideration of Black’s marriage to White’s daughter, the contract would have to be in writing to be enforceable. This does not mean that when a man and woman simply agree to get married with neither giving up anything but their unmarried status, such an agreement will have to be in writing. Oral promises to marry are actionable under the Common Law if one of the parties attempts to breach the promise to marry the other.
Transactions involving "lands, tenements and hereditaments," that is real property, must be in writing to be enforceable at law. Real property is anciently defined as consisting of land and those things permanently attached to the land, or immovables. Personal property, then, includes removables or things not firmly attached to the land. A house or building is considered as real property.
Minerals in the soil, water rights and trees on the land are usually considered by the courts as real property requiring a writing for their sale. An exception exists in dealing with the natural fruits of the land. When the contract contemplates immediate severance or removal of these things, an oral contract to such effect will be enforceable. Thus, the sale by the land owner of a stand of timber to be cut and sold by the purchaser, with the owner to receive payments, is an enforceable oral contract if cutting is to begin immediately. However if the cutting is to begin 10 months from now, the contract is unenforceable because the trees are considered as being firmly attached to the land, and the contract must be writing. Also, an oral contract to sell the fruit in an orchard as it ripens would be enforceable under the Statute of Frauds. Also, an oral lease for a year or less is valid but a lease must be in writing if it is to run longer than an year.
In certain states, contracts are void unless in compliance with the Statute of Frauds. In most states, however, a contract failing to comply with the statute is merely voidable, meaning that the parties may void the contract if they so desire. In these states, the Statute of Frauds operates as a defense to the enforcement of the contract. However if the Statute of Frauds is not raised as a defense, the court will enforce the contract.
When one party has completed performance under an oral contract, that party has probably enriched the other party. Thus a court of equity may recognize the obligation created by such performance and enforce payment by the other party under a quasi-contract theory of recovery. Generally when the result will be inequitable or grossly unfair, the courts will not allow the Statute of Frauds to stand as a defense.
We now begin dealing with the exceptional situations where a party has bargained away more than intended, or where performance became more difficult than expected. Public attention is usually called to these exceptional cases; they are publicized in court cases and in newspaper articles. Keep in mind, however, that these cases are the exception to the general rule and that the vast majority of contracts are performed satisfactorily and with benefit to both parties. For example, each time you walk into the store, purchase something and pay for it and walk out, you have successfully performed a contract.
In this portion of the lecture, we shall see how parties are held to their bargains, what constitutes performance of a contract, or constitutes a real offer to perform. This takes into account the fact that the law will discharge a persons obligations or, in effect, excuse that person’s performance under certain circumstances.
In theory, one to whom a contractual obligation is owed has a right to precise performance of the obligation by the other party. Anything short of that performance constitutes a breach of the agreement. Obviously the nature of the obligation undertaken determines the required performance. For example, when a stated amount of money is owed, payment of a lesser amount will not satisfy the obligation. Take those situations, however, where a contract requires the construction of an office building where exact performance may not always occur and cannot seriously be expected. This is particularly true where research and development is to be part of the performance of the contract, as is the case in many engineering contracts.
Many contracts are written so that the parties intend that performance by one party will be followed by performance by the other party. For example, one may contract to have a machine built and installed at a plant with payments to be made when the installation is complete and the machine is successfully operating. A condition such as the installation and successful operation would constitute a condition precedent in the contract, where payment is not due until that condition precedent is satisfied. One type of condition precedent is obtaining an architect’s certificate upon the completion of a building.
A frequent source of confusion is the distinction between a condition precedent and a condition subsequent. A condition subsequent is a condition that, when it occurs, ends an existing contract. For example, the insurance policy states that if the house is ever left vacant for a period of 30 days or more, the insurance will no longer be in effect. Such conditional event is defined as a condition subsequent.
In those contracts where an architect’s approval is required as a condition precedent to the owner’s duty to pay the contractor, the courts usually enforce this type of contract. However, we must recognize that architects are human also, and are capable of human error. For example, the architect may have become deceased, or become insane at the time the certificate is required, or the architect may unreasonably or fraudulently refuse to issue the certificate. Under these extreme circumstances, the court ordinarily dispenses with the requirement of the architect’s certificate. If there is any sound reason for the architect’s objections though, the court will probably enforce the requirement.
The purchaser of the performance under the contract may include a provision that the performance must be satisfactory to the personal taste of the buyer. In contracts like these, the person who is paid to perform may have to continue performing until the personal taste of the buyer is satisfied. Of course, if the buyer is never satisfied, the courts may determine that the contract is illusory and void the contract.
The nature of the contract may also be such that even though satisfaction of the buyer is specified, the contract requires mechanical or operational suitability. If performance is such that it would satisfy a reasonable person, the court will then deem the conditions satisfied despite the arguments of the purchaser that they personally were not satisfied. Thus, where one agrees to install an air-conditioning system for another to the other’s satisfaction, and after the installation if the purchaser is not satisfied, the installer may still be able to collect by proving that the air-conditioning system will do that which a reasonable person would expect it to do.
Where performance of a contract is to take place by a certain date, and performance extends beyond that date, any of several situations can result. If the time for performance is not important, there may not even be a breach of the contract. Thus, many contracts include provisions for liquidated, or specific, damages, sometimes called penalty clauses that state an amount to be paid for each day’s delay in performance beyond the date set forth in the contract. If the amount specified is a reasonable estimate of the difficult-to-calculate damages to be caused by delay, the provision is usually enforced. However, if the specified amount of liquidated damages is excessive, the courts will hold that the clause is really a penalty clause and will refuse to enforce it. If there is no liquidated damage clause in the contract and performance runs beyond the time agreed on, the party aggrieved can sue the other party for damages due to the delay. Ordinarily nothing but an unreasonably late performance gives the buyer sufficient grounds to terminate the contract and pay nothing. Where the performance is not unreasonable, the buyer must accept the performance but at a price reduced by the damages suffered.
In certain circumstances, the time of performance of a contract is critical. Thus, you will see a clause in many contracts to the effect that "time is of the essence". In such instances, courts generally will allow termination of the contract for late performance.
This completion date provision is usually in construction contracts, and that is why you usually see highway construction projects being worked on day and night towards the end of the contract period to complete the job within the time specified.
Many building contracts, or contracts where machinery or equipment is to be built and installed, are performed in a manner that deviates from the exact terms of the agreement. Obviously, if variations from specifications are not allowed, few projects could be undertaken and fewer yet would ever be paid for. If the result accomplished under the contract performance approximates closely the results specified, the contractor can still recover the contract price since the performance has been substantially the same as that specified.
In cases of gross inaccuracies, or substitutions that do not fit specifications, the claim is no longer substantial performance. Just where the line is to be drawn between substantial performance and an outright breach is a question of fact and is usually submitted to a jury, where experts testify as to whether or not the final product will work for its intended purpose.
The extent of damages in such instances is usually determined by the value of the performances rendered compared with the value of the performance as specified, or the cost of additional work to complete the performance properly. If the performer under the contract willfully abandons the performance or the work is unreasonably poor, then there has been a breach of the contract and not substantial performance.
When anyone undertakes a contractual obligation, that person assumes certain risks. However, one can hedge against such risks in various ways. Contract clauses can state that if certain things occur, you will be excused from performance. A contractor can add enough money to the price to cover contingencies. You can purchase insurance against the risks you assume. However, you cannot cover liability for your performance if the public is injured by your performance. For example, injuries resulting from the collapse of a public building caused by the contractor’s negligence could allow recovery against the contractor by either the injured person or the insurance company. Presumably the contractor will have its own liability insurance to cover such claims. There is no way that one party to a contract can excuse itself from liability due to its own negligence. Such clauses are prohibited as a matter of public policy.
Usually the death or illness of a party to a contract does not discharge that contract. That person’s estate or those appointed to act for that person must take over and complete the obligations. Only where a contract is such that personal services are involved, such as a performer, will death or incapacity due to an illness serve as a lawful excuse for non-performance. By way of example, the death or illness or insanity of a freelance consulting engineer would discharge the engineer’s remaining obligations to its clients.
This means that something is destroyed without which the contract cannot be performed. Suppose for example that a construction company is hired to build an addition to a plant, but before the work can begin, the plant is destroyed by fire without the fault of either party. The obligation to perform is terminated. If construction had begun, however, and work had been half finished, the obligation to complete the structure would still be ended by the fire. However, the construction company could collect for the work completed, in addition to any materials that had been accepted. However, if the contract had been for the construction of a building by itself, not an addition to an existing structure, and if a fire destroyed the construction project when it was half finished with no one at fault, the construction company’s obligation would not be ended, and the contractor would have to rebuild and complete the project.
On new contracts, the parties run the risk that conditions may not remain as they were when the contract is entered into, and that conditions also may not be as they seem. Material price increases or wage increases usually cut deeply into the profit margin of a contract. If the cause of hardship is anything the contractor reasonably could have anticipated, courts will not relieve the contractor of his duties. Where the difficulties are such that no one reasonably could have anticipated them, the court will probably relieve the burden or lighten the load on the contractor.
This results when a contract is made to take advantage of some future event not controlled by either party. The event is then called off or cancelled and as a result the purpose of the contract is said to have been frustrated. In this case, the courts would probably allow the parties to void the contract.
Each contract implies that the parties will allow the other to perform his or her obligations. If one party prevents or stifles the other party’s performance of the contract, then that party will discharge the other party’s obligation. The interfering party also has breached the contract and may be sued for damages.
A waiver consists of a voluntary giving up or relinquishment of a right to which one is legally entitled. The person must have intended to give up the right. If a machine contracted for varies significantly from the description in the contract, the recipient has a right to refuse to accept the machine. However, with knowledge of the differences involved, the purchaser agrees to accept the machine for a slightly lower price, and then keeps the machine and uses it, they have waived their right to return the machine and get one according to specifications. In a personal vain, several years ago I was selling a car at its 10 year anniversary, and the purchaser asked whether he could take the car to a garage and have it inspected. I agreed. Upon returning, the purchaser indicated that the car had a cracked engine block of which I was unaware. I then asked the purchaser whether he still wanted to purchase the car. He said yes he did, and I sold it to him for a 25% discount off the agreed price. Thus, that person has waived the right to return the machine to me, and in all truth I haven’t seen that person, or the car, in several years.
In a contractual situation, where there are no rights of a third party involved, the parties to the contract may discharge their contract by mutual agreement without performance in several ways. The parties may agree not to be bound by the terms of the original agreement, where they may make a new contract agreement discharging the old one. Both of the parties may ignore their rights under the contract, each going about their respective business in such a manner that a waiver of performance may be implied from their actions. The release of one party constitutes a consideration for the release of the other.
This occurs when a party agrees to accept a substitute performance for the one to which that party was entitled. This is the "settlement out of court" that one frequently hears about in connection with both contract, tort and other cases. The term "accord" refers to a separate agreement substituted for the original one, and "satisfaction" occurs when the conditions of that accord have been met.
A novation replaces one of the parties to a contract, and all the parties to the contract must agree to it. A common example of a novation occurs when a person buys a house or a car from another, substituting himself or herself as a mortgagor, and agreeing to make the loan payments to the lending institution. Usually the consent by the lending institution to the substitution of parties is required.
In many state and federal court actions it is possible to substitute a procedure known as arbitration for a form of court action. In such instances, a dispute is submitted to an impartial umpire or board of umpires whose decision on the matter is final and binding. Arbitration is used by the courts today as a means of relieving crowded court dockets, and many of the court rules set up the procedure to give arbitration decisions almost the same force as a court judgment.
One of the main advantages of arbitration is that the disputing parties decide who the person is to act as a judge and jury. They can if they desire select someone who has a specialized knowledge in the field involved, and some consider that this often results in a more equitable decision than a judge and jury might render in court. The other side of that coin is that you may want someone who knows nothing about the subject matter in question so that the lawyer can educate the person making the decision in the way that would be most beneficial to your case. Additional advantages of the use of arbitration stem from the speed of the procedure and the cost savings involved. Arbitration can afford an immediate solution, and if the costs are controlled, a cost savings will benefit.
An ancillary to arbitration is the use of mediation to resolve a dispute, where a third party is brought in as a referee to try to move the parties towards a settlement position that they can both agree upon. The mediators function is merely to enhance a settlement of the dispute. If the mediation is not successful, the parties then continue on their way to court, or if they decide, through arbitration. I personally have acted as a mediator recently in a matter and to be quite honest with you I believe the parties were further away from settlement at the end than when I started the process. However, that was due to outside circumstances and I cannot take the blame for that myself. As the cost of litigation and dispute resolution increases in our society, the popularity of arbitration and mediation as a means of resolving disputes has increased considerably.
The tender of performance under an agreement, if refused, could discharge the obligations of the party tendering performance. A lawful tender of performance consists of the following:
1. The party offering to perform must be ready, willing and able to perform the obligation.
2. The offer to perform must be made in a reasonable manner at the proper time and place according to the contract; and
3. The tender must be unconditional.
There is one notable exception to the rule by which a tender of performance discharges an obligation. If the tender is an offer to pay a debt that is due and payable in money, the debt is not discharged by refusal of the payment. However, there are two important effects: (1) the accrual of interest is stopped, and (2) any liens used to secure the debt are discharged.
If a debt is payable in money, and an offer is made to pay with something else, such as a check, the creditor has no duty to accept the check. If the offer to pay is made before maturity of the debt, the creditor also need not accept payment. This would occur in situations where there is a substantial interest payment to be made the longer the debt is in existence. Thus, in mortgage agreements, you usually find a penalty clause for prepayment of the mortgage because the bank is then deprived of interest over the length of the remaining portion of the mortgage.
A contract may be breached before the time the performance has arrived. If the party who is to perform the contract notifies the other party that they cannot or will not perform when the time comes, that party is said to have repudiated the contract. This constitutes an anticipatory repudiation of the contract giving the other party several choices of action:
1. The non-repudiating party may accept the repudiation and immediately sue the other party for whatever damages may have been caused.
2. The non-repudiating party may treat the repudiation as inoperative, await performance, and if there is no performance hold the breaching party responsible for any resulting damages.
3. The non-repudiating party may accept the repudiation and obtain performance from someone else if it is possible to do so.
Anticipatory repudiation does not apply to the payment of a debt. Although a debtor may notify a creditor that the debt will not be paid when due, the creditor must wait until the duty to pay has actually been breached before taking action.
Laws and rules have been promulgated to provide for the discharge of a contract as a matter of law. These are alterations of the contract, the Statute of Limitations, and bankruptcy.
If a contract is intentionally altered by one of the parties without the consent of the other, the obligations of the other parties under the contract could be discharged. A party cannot be held to the other’s later changes in the contract terms if that party never consented to the changes.
When one party materially alters a written contract without the other’s consent, the contract is rendered unenforceable. However, if the non-consenting party later finds out about the alteration and then continues to treat the contract as if it were in force, then the alteration may be said to have been ratified and accepted. If the alteration is ratified, the contract will be enforceable even by the party who made the alteration. For example, if one pays off a debt in scrip, rather than legal tender, if the scrip is accepted, then the contract is presumed to have been ratified and accepted.
Each state has adopted a law that limits the time during which a lawsuit can be brought for breach of contract. Many of the states specify a certain length of time for oral contracts, normally two years, a longer time for written contracts, sometimes as much as five years, and still a longer time for contracts under seal, sometimes 20 years. The State of Florida specifies four years for oral contracts and five years for written contracts. A party who has a right of action on a contract must take such action within the time limits stated in the Statute of Limitations otherwise the party will lose their right to take such action. The time is figured from the date the cause of action accrued, which is usually when the contract was breached. However, there is the possibility of renewal of the time period whenever the debt is acknowledged, such as by partial payment. Under most statutes, time does not continue to run while the person who has breached the contract is outside the state.
Another situation under the Statute of Limitations is that reacknowledgment by the debtor of a debt discharged in bankruptcy serves to reinstate its legal life despite the discharge.
When a person owes more than that person can pay, should the law step in to help, or leave that person to fend for himself or herself? This is a matter of public policy. Should one creditor be allowed to receive payment for that creditor’s entire debt at the expense of other creditors?
These questions, as you may understand, have plagued society for many, many centuries. Thus, it is not surprising that the United States Constitution includes a provision giving Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States". Recall from your history courses that debt was the greatest single cause of imprisonment at the time of the American Revolution. The inability to pay one’s debt was a prison offense. The concept of forgiving a debtor’s obligations and allowing the debtor to begin again with a clean slate is somewhat a recent innovation in the law. Bankruptcy proceedings for the propose of paying off creditors are not new, but it is only recently that the debtor could receive a discharge of the debtor’s obligations in a bankruptcy action.
Three federal bankruptcy laws were initially passed and repealed, after very short lives. A major Bankruptcy Act was passed in 1898, and 80 years later it was replaced by the Bankruptcy Reform Act of 1978, which is the present law. This law has two main purposes: (1) to pay off to the greatest reasonable extent the obligations of the debtor to the debtor’s creditors, either by selling off the assets of the debtor or by continuing the operation of a business or by devoting a portion of wages for that purpose; (2) to discharge an honest debtor from future liability on those obligations.
The legal machinery enacted to carry out these functions is quite lengthy and complicated, and to be honest goes well beyond the scope of this particular course. If you are ever faced with a bankruptcy-type situation, it will be more than wise to seek the services of one skilled in bankruptcy law to initially give your advice, and second, to ensure appropriate action based upon that advice.
In the realm of patent law, a patent license usually includes a provision that the license will be cancelled upon the bankruptcy of the licensee. However, when the licensee declares bankruptcy, the bankruptcy court asserts a strong jurisdiction over all the assets of the bankrupt licensee. Instead of canceling the license agreement, that license may be sold or transferred to a creditor or to someone else who pays valuable consideration for that license. Thus, when entering into a license agreement under a patent, the patent owner must realize that in the case of bankruptcy of the licensee, that license may be purchased by the licensor’s largest competitor. This has become a major problem lately in the law, and patent attorneys are seeking various ways to handle that situation. Because of the relatively strong powers of the bankruptcy court, it is difficult to include a clause in a contract that would prevent that license agreement from being sold to a creditor or other bidder in a bankruptcy proceeding who happens to be a major competitor of the licensor.