Contracts Bar Review Lecture

BarStart Materials

Contracts

By Prof. Otto Stockmeyer Thomas M. Cooley Law School Sources of Contract law Primary authority includes the common law (cases) and statutes (principally Art. 2 of the UCC). There are also some secondary authorities to help figure out the law, principally the Restatement of Contracts and various Contracts hornbooks (my favorite is Farnsworth’s). I also recommend Whaley’s Contracts Review CD’s.

Formation The formula for forming an enforceable contract is O + A + C - D = K (Offer + Acceptance + Consideration [or some substitute] - Defenses = a Contract). Once we have a contract, we can consider its meaning, conditions on its performance, the rights and duties of third parties, and remedies for breaches.

Offers An offer is a manifestation of willingness to enter into a contract made in such a way that the other party (the offeree) know that assent is all that is necessary to cement the deal.

One key is the word “manifestation.” Parties are bound by their outward behavior, not their inner intention. Thus, a proposition can be an offer even if the maker is joking or bluffing, if the other party reasonably believes the maker is serious. This is referred to as the “objective theory of contracts.”

The offer must manifest animo contrahendi, an intent to be bound. Mere suggestions, statements of opinion, or equivocations will not suffice.

On the other hand, some propositions, although serious, are commonly understood not to be contractually binding, such as invitations to a dinner party, or agreements between parents relating to the care and feeding of their children.

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So, too, if the parties specify in their written agreement that it shall not be legally enforceable, it isn’t. That’s their manifestation. Such a preliminary or non-binding agreement is often called a “term sheet” or “memorandum of understanding.”

Offers must be clear, specific and unequivocal, containing all essential terms, so that all the offeree has to do to accept is express assent. Remember from our definition of an offer that an acceptance “cements the deal.” Once the offeree manifests acceptance, neither party may unilaterally add or change a term.

Advertisements and catalogs are not offers, as a general rule, because (1) they lack sufficient detail and (2) they create a potentially unlimited number of offerees. But if the reasons for the rule are overcome, so is the rule.

Example: “One black lapin stole, $1.00, first come first served.” Because the quantity, color, and price are specified, and the offer is limited to the first comer, it’s an offer despite the general rule.

If the parties reach an oral agreement, intending to reduce it to writing, when is a contract formed? When they reached agreement, or when they sign the written contract (if they ever do)? This depends on the intent of the parties as manifested by their words and actions viewed in context.

Acceptance An acceptance is a manifestation of assent to the terms of the offer, made in a manner invited or required by the offer. It can occur by promising to perform or by actually rendering a performance. The first method results in a bilateral contract (a promise for a promise). The second method results in a unilateral contract (a promise for a performance).

The offeror is master of the offer and can specify the manner of acceptance.

If the offer requires a certain manner of acceptance, only that will suffice.

But if the offer merely suggests a manner of acceptance, without making it exclusive, then any similar manner that will come to the offeror’s attention is effective. And if the offer does not specify any manner of acceptance, any expression of assent is O.K. if it makes known to the offeror that the offer has been accepted.

Silence generally is not acceptance (due to its inherent ambiguity) but there are four exceptions: 2

(1) where the offeree takes the benefit of offered services with a reasonable opportunity to reject them and reason to know that they were offered with the expectation of payment. (Like seeing someone build a fence on your property.)

(2) where the offeror has stated that assent may be manifested by silence and the offeree in remaining silent intends to accept the offer.

(3) where, because of previous dealings, the offeree should notify the offeror if she does not intend to accept. (Maybe for years the buyer has paid for all goods delivered by the seller without the formality of a contract.)

(4) where the offeree does any act inconsistent with the offeror’s ownership of offered goods.

Implicit in the objective theory of contract is the notion that the offer must be received by the offeree, and ditto for acceptances. With a few exceptions, nothing is anything until it is received. But with respect to written communications, “received” means deposited wherever a party has authorized communications to be deposited, even thought it has not been read.

An offeree cannot accept an offer that she has not received notice of, such as an offer of a reward. But here there is an exception: a reward by a governmental entity may be accepted by any citizen who performs the requested service, whether they know of the reward or not.

Whether an offer is bilateral or unilateral can be important for a number of reasons, including determining exactly when a contract comes into existence. If the offer specifies the mode of acceptance (by promise or performance), it controls. If not, some cases are nevertheless clear-cut: an offer to sell is bilateral; an offer of a reward is unilateral. Otherwise, if the offer is silent or ambiguous, it’s offeree’s choice and whatever the offeree does (promise or begin performing) is an acceptance.

On the other hand, if the offer is clearly unilateral, merely beginning performance is not an acceptance. Full performance is necessary to accept a unilateral offer. But under Restatement sec. 45, part-performance creates an option contract, which prevents the offeror from revoking the offer once performance has begun.

Thus, you should consider three possibilities:

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- that the offer is clearly bilateral (in which case a promissory acceptance is required and performance means nothing), - that the offer is unilateral (full performance is required but beginning performance makes the offer irrevocable), or - that the offer is silent or ambiguous (either a promise or beginning performance immediately creates a contract).

Offers are terminable five ways. The first “terminator” is revocation, which can be made directly by communication from the offeror; an expression of equivocation is enough. Or indirectly, by information that the offeror has changed her mind (by selling the property to another, for example). The information must be true and the source reliable.

The offer of a unilateral contract can be revoked at any time before the offeree has begun performance or tendered performance. Tender requires a manifested readiness, willingness, and present ability to perform (“ready, willing, and able”). Shouting “I revoke” before the offeree can tender the money, is enough.

Option contracts cannot be revoked (“options play by different rules”). An option contract can be formed five ways: by giving some consideration in exchange for the promise not to revoke. Or if the promise not to revoke is made in a formal writing. Or if the promise not to revoke is detrimentally relied on by the offeree. Or if the offer qualifies as a merchant’s firm offer under the UCC. Or, as indicated earlier, if the offeree begins performance of a unilateral offer.

For the UCC firm-offer provision to apply, the offer must be (1) by a merchant, (2) in a signed writing, (3) to buy or sell goods, (4) which says it will be held open. In that case, the offer is irrevocable (“firm”) for the time stated, or for a reasonable time if none is stated, but in no event more than three months. (The offer might extend beyond three months, but then it becomes revocable like any other offer.)

At auctions, the placing the item up for auction is an invitation, the bids are offers, and acceptance is signified by the fall of the hammer. So ordinarily, items can be withdrawn, and bids can be revoked, until the hammer comes down. One exception: if the auction is “without reserve” the highest bid must be accepted. Auctions are presumed to be “with reserve” unless declared otherwise.

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The second way an offer may terminate is lapse of time. Offers are not perpetual. An offer lapses at the time stated in the offer or, if no time is stated, at the end of a reasonable time. In the case of a published offer, revocation should be published in the same medium or, if it has ceased publication, in one of equal notoriety.

The Restatement says that an offer sent by mail is timely accepted if the acceptance is mailed by midnight of the day it was received. But this is merely a “safe harbor.” Often a longer period is allowed, depending on the nature of the offer. An offer of goods which are perishable (ripe tomatoes) or whose price fluctuates daily (gold bullion) may require a more prompt response than an item of relatively constant value (residential property).

By custom, an offer made face-to-face lapses when the parties part company.

The same is true for offers by telephone unless, in either case, the parties have expressed a different intent. Be aware that a late acceptance may be effective as a new offer to the original offeror, thus keeping the possibility of a deal alive (unlike a rejection).

The mailbox rule provides that where communication takes time (like use of the mails), an acceptance is complete when it is placed in the mail, regardless of when or if it is ever delivered to the offeror. This is an exception to the objective theory of contract. There are numerous limitations.

-The acceptance must be properly stamped and addressed, and mailed before the offer has lapsed.

-The offer must not require receipt of a response (“I must hear from you by…”).

-The acceptance must be the offeree’s first response.

-If, after the acceptance is mailed, the offeree transmits an overtaking rejection, but the offeror has detrimentally relied on the rejection, the offeree is estopped from enforcing the contract.

-The mailbox rule does not apply to option contracts; the acceptance must be received within the option period (“options play by different rules”).

- The mailbox rule applies to other forms of delayed communication (like telegrams) but does not apply to instantaneous transmissions like fax and e-mail.

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The third way an offer terminates is by death or incapacity of the offeror.

This operates immediately and without notice, another exception to the objective theory of contracts, which would require knowledge on the part of the offeree. But an option contract is more durable; it survives death.

A fourth way is rejection. An offer is a delicate thing that cannot take rejection; it just withers up and dies. Thus, an offer is terminated by the offeree’s expression of rejection (“I’m not interested”) - unless the offeree manifests an intent to keep the offer under advisement. This is a good way to slip in a counteroffer while keeping the offer open (“I’m keeping your offer under advisement, but I’m willing to agree to XYZ right now”).

The fifth way is the making of a counteroffer. Under the common law “mirror-image” rule, except for option contracts, a counteroffer operates to terminate the offer, the idea being that it’s too complicated to have two offers on the table at the same time. Be aware, however, that an acceptance that merely adds an implied term (that the performer will be sober, for instance) is not a counteroffer.

For contracts involving goods, the UCC has a “battle of the forms” provision that changes the common-law mirror-image rule. The UCC applies to all contracts involving goods, being everything that is tangible and movable, and applies to all parties regardless of whether they are merchants or consumers. A few sections are limited to merchants, which are those who deal in goods of that nature.

Under UCC 2-207(1), an acceptance is effective to form a contract at the “paper stage” although it states additional or different terms, unless the offer contains a proviso that the acceptance is expressly conditional on assent to the variant terms.

If a contract is formed at the paper stage, 2-207(2) says that the additional terms are merely proposals for addition to the contract. But between merchants, such terms become part of the contract unless (a) the offer expressly limits acceptance to the terms of the offer, (b) the additional terms materially alter it, or (c) the offeror objects within a reasonable time.

If a contract is not formed at the paper stage, 2-207(3) says that a contract can still arise from the parties’ conduct (if the goods are shipped or payment is made). If there is a “contract by conduct”, the terms are those on which 6

the writings of the parties agree, plus the UCC gap-fillers. This topic was tested on the July 2007 Michigan bar exam.* So 2-207(1) acts like a railroad switch, sending us down either 2-207(2) or 2-07(3), depending on whether or not a contract was formed at the paper stage.

A transaction is complete when the parties mean it to be complete, despite failure to address all eventualities. If contracts covered all possible issues, they’d be the size of hornbooks. So courts use construction terms and gapfillers to resolve uncertainties.

“Construction terms” does not refer to construction contracts, nor are they limited to UCC contracts, but rather are rules for construing contracts.

Construction terms are usage of trade (custom in that industry), course of dealing (how the parties have deal with each other in the past), and course of performance (what the parties have done so far under this contract). Course of performance was tested on the July 2009 bar exam.

“Gap-fillers” are creatures of the UCC. They apply if a contract is silent about price (a reasonable price), place of delivery (seller’s loading dock), time for performance (a reasonable time), etc. Indeed “reasonable,” like duct-tape, can be used to patch almost anything, except quantity. Lack of a price term was tested on the July 2006 bar exam.

On the other hand, a mere agreement to agree is unenforceable. And vague terms like “based on comparative business conditions” are impossible to enforce.

Consideration Every legal system has required some talisman as a prerequisite to the enforceability of a contract. Today in Anglo-American society, it’s consideration. Consideration is the magic ingredient, or glue, that binds the parties to their deal.

Consideration is a bargained-for exchange, as opposed to a gift promise made without any quid pro quo. The Restatement defines it as a promise or performance that is bargained-for. Performance, in turn, is defined as an act or forbearance. Consideration need not run from the promisee to the promisor; it can be supplied by a third party and run to a third party, but it 7

must exist. Promise-for-a-promise consideration was tested on the February 2012 bar exam.

Forbearance can be consideration if it restricts the forbearing party’s freedom of action (such as giving up smoking). Forbearing to sue someone can be consideration if the forbearing party had a reasonable or good faith belief in the claim or defense. If a written release is sought, its execution can be consideration even without a belief in the validity of the claim.

Courts will inquire into the sufficiency of consideration, but not its adequacy. Sufficiency means that the consideration has some value in the eyes of the law. Thus something of no value, like an obvious idea, is not consideration. Love and affection is not consideration, because it is more likely to be the motive for a gift than a bargain.

Adequacy of consideration is in the eye of the beholder. As long as it has some value courts will not weigh its adequacy. The parties are free to determine the relative value of dollars and drachma, for example. But there is an exception: where there is an exchange of fungible items (pennies for dollars, or bushels of wheat for more bushels of wheat), courts will weigh adequacy and reject an unequal exchange of fungible items.

Another way of saying it is that while courts will not weigh adequacy, they cannot escape reality, and an exchange of one cent for a promise of $200 flunks the “reality test.” Courts will also say that one cent is nominal consideration; consideration “in name only.”

Nominal consideration can be sufficient to support an option contract, however, if it is recited in a signed writing proposing an exchange on fair terms. Remember that “options play by different rules.” In addition, a merchant’s firm offer is enforceable as an option contract without consideration under the UCC. If consideration takes the form of a promise, it must not be a mere illusion.

There must be a binding commitment on both sides. Either both parties are bound or neither party is bound. If one party has a “free way out,” the other one can scamper through it.

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Sometimes a return promise will be implied, Cardozo style, to make binding the contract that the parties intended to make but imperfectly expressed.

This was tested on the February 2001 bar exam.

A promise is not illusory merely because a party has an option between two alternatives, as long as either alternative would be consideration if it alone had been bargained for.

Nor are requirements contracts and output contracts illusory just because their quantity term is not fixed amount. Here you need to be able to distinguish between a requirements contract and a standing offer. Under a requirements contract, the buyer promises to buy all of her requirements from the seller. If the buyer only promises to buy all that she decides to order from the seller, the result is merely a standing or “open” offer to fill the buyer’s orders. Such an offer is revocable to the same extent as other offers.

“Past consideration is no consideration” because if it happened in the past it cannot be the subject of a present bargain. But there is an exception: a promise made in recognition of a moral obligation can be consideration.

The moral obligation can arise from another’s care for a stranded child, or having one’s life saved, or a debt barred by infancy, bankruptcy, or the statue of limitations. In such cases, it is the new promise that is enforceable, not the old debt (which might be of a greater amount). But an unqualified part payment does resurrect the old debt.

The preexisting duty rule was tested on the July 2010 bar exam. The rule says that doing, or promising to do, something that you are already under a legal duty to do is not consideration. Five exceptions are: (1) Mutual rescission. If both parties agree to rescind their preexisting contract and then enter into a new one that is just like the old one but with additional duties or payments for one party, the preexisting duty is discharged by the rescission.

(2) Unforeseen circumstances. A promise modifying an executory contract is binding if the modification is fair in view of unforeseen circumstances.

(3) Duty owed to a third party. The preexisting duty rule only applies to duties owed to the promisor. Duties owned to a third party do not count.

(4) Detrimental reliance. If one party has detrimentally relied on the modification, it is enforceable despite lack of consideration.

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(5) The UCC provides that an agreement modifying a contract involving goods needs no consideration to be binding. Michigan has a statute dispensing with consideration where a contract is modified in a signed writing. Both provisions were tested on the July 2002 bar exam.

The preexisting duty rule applies to past due debts. Thus, a promise to discharge a $1,000 debt upon the payment of a lesser amount (say $750) is not enforceable. Exceptions: (1) The rule does not apply if existence of the debt, or its amount, is in reasonable or good faith dispute.

(2) The rule does not apply to an agreement to pay in a different medium of exchange (in drachmas rather than dollars), or in a different location, or at an earlier time than due.

(3) Some states (New York is one) do not require consideration if the debt-settlement agreement is in writing.

Calling an agreement an accord or substituted contract does not dispense with the need for consideration or the preexisting duty rule. An accord is a contract to accept a stated performance in satisfaction of an existing duty; performance of the accord discharges the original duty and is called a satisfaction. A substituted contract is a contract that itself is accepted in satisfaction of an existing duty; it immediately discharges the original duty.

So an accord suspends the original duty, whereas a substituted contract discharges the original duty. If an accord is breached by the obligee, the obligor may either enforce the original duty or the accord. If a substituted contract is breached by the obligee, the obligor’s only remedy is to enforce the substituted contract (because it discharged the original duty).

How do you tell whether an agreement is an accord or a substituted contract?

By the intent of the parties, if possible. Otherwise, the presumption is that the agreement is an accord, thus preserving more rights in the obligor.

The payment-in-full check is called the poor person’s accord. Again, the preexisting duty rule applies. But if one of the exceptions applies (such as the debt being in dispute), a check tendered in full satisfaction is an offer of an accord, and cashing it with notice of the terms of its tender is an acceptance. Crossing out the “full satisfaction” has no effect, nor does cashing the check “under protest.” Paid-in-full check issues were tested on the February 2005 and February 2007 bar exams.

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Finally, if one form of consideration fails but another is valid, that is sufficient to support the contract. This issue arose on the July 2010 bar exam.

Promissory Estoppel Promissory estoppel (also called “detrimental reliance,” or merely “Section 90”) is a consideration substitute. Despite its attractiveness, always try to find real honest-to-goodness consideration first. Less than one-third of promissory estoppel claims are successful in court, and even then the remedy is likely to be less.

On the other hand, promissory estoppel is spreading beyond its original role as a substitute for consideration and is becoming a super-doctrine, used as an independent cause of action beyond traditional contract law.

It has five elements: (1) a promise (as previously discussed), that was (2) relied upon by the promisee, where the reliance was (3) foreseeable to the promisor, and was (4) detrimental to the promisee. If those elements are established, (5) the remedy “may be limited as justice requires,” which is generally understood to mean that recovery is limited to the promisee’s reliance (out-of-pocket) loss, not full expectation damages.

In addition, the Second Restatement says that two kinds of promises are enforceable even without reliance: charitable pledges and marriage settlements. They have become “super promises.”

Also, the Second Restatement applies promissory estoppel to make offers (including bids on construction contracts) into option contracts, to make modifications of contracts enforceable despite the preexisting duty rule, and as a substitute for a writing under the Statute of Frauds. In addition, the bar exam has tested whether promissory estoppel can be used to avoid the parol evidence rule (February 2001) or the Statute of Limitations (July 2001 and February 2012).

Remedies Contract remedies fall into three categories: damages, restitution, and specific performance. On an exam, consider them in that order.

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Damages come in two flavors: expectation and reliance. Expectation damages seek to put the injured party in as good a position as if the contract had been fully performed, according to its terms, by both parties. They can be measured either by the cost of performance or diminution in value (usually less). The measurement of expectation damages in various contexts has been tested three times over the past ten years (July 2002, February 2003, and February 2009).

Obviously if the injured party has received a partial payment, or retains items of value, that needs to be deducted from damages otherwise due.

Reliance damages seek to restore the injured party to the position it was in before the contract was entered into. Thus, expectation damages look forward, and reliance damages look backward, attempting to restore the status quo ante. They are measured by losses incurred in reliance on the contract.

Losing contract: If full performance of the contract would have caused the injured party a loss, that loss must be deducted from the reliance recovery.

The idea is that the loss was not caused by the breach, and reliance damages should not put the injured party in a better positing than full performance. In other words, reliance cannot exceed expectation.

Limitations on damages include certainty, foreseeability, avoidability (mitigation), and the effect of liquidated-damages clauses.

Certainty: Damages must be proven with reasonable certainty, and not be based on speculation. Thus, new businesses usually have a hard time proving future lost profits, and putative authors cannot get lost future royalties. They might get reliance damages, of course. The certainty limitation was tested on the July 2002 bar exam.

Every victim of a breach is entitled to at least nominal damages, which have the valuable attribute of shifting the plaintiff’s court costs - but not attorney fees - onto the defendant. And don’t overlook the “value of a chance” doctrine; if the injured party had a one-in-five chance of winning $25,000, a jury might find her lost chance to be worth around $5,000. That sure beats nominal damages.

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Foreseeability: Under Hadley v Baxendale, damages must either arise naturally from such breaches (general damages) or be reasonably foreseeable at the time of contracting (special damages). It’s not the breach that must be foreseeable, but rather the nature of the damages that would be suffered if the breach occurred. What Hadley was trying to do is determine how far ripple-effect damages should extend. No one since 1854 has come up with a better solution. The foreseeability limitation was tested on the February 2001 bar exam.

Mental distress damages do not arise naturally from most breaches, so they are recoverable only if (1) the breach caused bodily harm or (2) serious mental distress was a particularly likely result (as where a funeral parlor breaches its contract by losing the body of a loved one).

Avoidability: Usually referred to as the duty to mitigate, this limitation prohibits piling up damages, by requiring the victim to take reasonable measures to minimize the loss, usually by stopping performance. They do not have to stop, but their damages will be measured as if they had done so.

They can recover their costs to date plus anticipated profit on the contract or - the contract price minus the costs saved by stopping. These two formulas should produce the same result, unless the contract was a losing one. Various aspects of the duty to mitigate have been tested on the bar exam six times in the past ten years (three questions in July 2002, and one each in February 2004, February 2009, and February 2012).

The rule is slightly different with employment contracts: a wrongfully discharged employee is entitled to her full salary for the duration of the contract minus whatever the employee actually earned in substitute employment -or- whatever she might have earned in substitute employment that is comparable.

Liquidated damages clauses: These are enforceable if (1) actual damages at the time of breach would be difficult to calculate (the “difficulty” element) and (2) the parties made a reasonable estimate at the time of contracting of the likely damages (the “reasonableness” element). A fixed sum or a formula can be used. But a shotgun clause that applies a fixed sum to several breaches of varying severity is invalid. If the clause is valid, no actual damages need be proven, and the duty to mitigate does not apply.

Liquidated damages clauses figured in the July 2001 and July 2007 bar exams.

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Finally, punitive damages (meant to punish) are inconsistent with the purpose of contract law (which is to fulfill expectations) and thus are not recoverable unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

Restitution Restitution is not based on the intent of the parties but on a desire to prevent unjust enrichment. It arises whenever one party is (1) unjustly (2) enriched (3) at the expense of one of the parties. It comes up in tort law as well, but in contract law, restitution can be had in four situations: (1) As an independent theory of recovery where there is no enforceable contract (called “quasi-contract”). An example is services rendered on the property of another (perhaps by mistake) in the expectation of payment.

Unless they were bestowed by an officious intermeddler (the “volunteer” limitation) or gratuitously (the “gift” limitation), their value can be recovered. It can be measured by either the value of the services (“quantum meruit”) or the increase in value of the property.

Emergency medical services are not recoverable by good Samaritans, because they have no expectation of payment. But quasi-contract is permitted for (1) emergency medical services (2) performed by a professional (3) with an intent to charge.

(2) As an alternative measure of recovery for breach of contract. An example is where a contract is a losing one; quantum meruit might afford a better recovery because, unlike reliance damages, restitution is not reduced by the loss. Even the contract price is not a limitation on restitution in this situation. But restitution is not available if the contract has been fully performed (the “full-performance” exception). There the only remedy is recovery of the contract price.

(3) As an independent remedy for the contract breacher. Breachers can’t recover damages, but they can recover restitution for whatever part performance they rendered prior to the breach. This was tested on the February 2010 bar exam. The classic example is the employee who wrongfully quits but has not been paid. As a breacher, she cannot recover back wages, but she can recover quantum meruit for the value of her services. Here the contract price cannot be exceeded, because then the law 14

would be rewarding a breacher. And the breacher must pay damages for the breach. So the recovery is measured by the value conferred minus any damages caused by the breach.

(4) As an independent theory of recovery where a contract is unenforceable due to some defect such as lack of writing under the Statute of Frauds, mutual mistake, impossibility, etc. Here courts usually engage in rescission (another remedy, actually) and restitution (R & R). That will be covered later.

Specific performance The key here is that specific performance is an extraordinary, equitable remedy that is only available if the legal remedy (usually damages) is inadequate to protect the plaintiff. For our purposes here, contracts can be broken down into contracts involving land, goods, and services.

Land is conclusively presumed to be unique, so money damages are not an adequate substitute. And under the doctrine of mutuality, if a buyer of land is entitled to specific performance automatically, it should be automatic for sellers of land, too. So the rule in most states is that either party to a contract to buy or lease land is entitled to specific performance. The availability of specific performance of a contract for land was tested on the July 2008 bar exam.

Watch out for a liquidated damages clause in a real estate contract; it could be regarded as a stipulation that damages are an adequate remedy, thus defeating specific performance. And the parties may provide in their land contract that specific performance shall not be granted; these are called “norecourse” clauses.

Goods contracts are specifically enforceable by the buyer if the goods are unique or unattainable elsewhere. The seller may maintain an “action for the price” if the buyer breaches after the goods have been accepted, or have been lost after the risk of loss has passed, or for goods that the seller is unable to resell at a reasonable price.

Services contracts are not enforceable against the performer, on the ground that it would amount to involuntary servitude. But if the performer has unique skills, sometimes a court will issue a negative injunction prohibiting her from working elsewhere during the term of the contract. This can have 15

the effect of persuading the performer to return to work. Courts won’t grant specific performance in favor of performers, either, due to concerns over forced association.

So in a nutshell, the rule for specific performance is: Land, always; Goods, sometimes; and Services, never. It should be mentioned that there are several other reasons why a court might deny specific performance in a particular case, including uncertainty of the contract terms and the difficulty of judicial supervision. If you have taken Remedies, you know all about such things.

Statute of Frauds Six kinds of contracts are “within” the Statute’s scope, easily remembered by the mnemonic MY LEGS. Then there are the exceptions, of course. The key to them is to know that the courts are not sympathetic to the Statute (it is a statute, after all, not a creature of the common law) and so they strive to limit its application and create exceptions that sometimes have no basis in the language of the statute itself.

M is for marriage. More specifically, contracts in consideration of marriage, i.e., where marriage is the consideration for the contract (like, “marry my son and I’ll buy you a house to live in”). Reciprocal promises to marry, although enforceable in a majority of states, are not within the statute.

Y is for year. Contracts covered are those that cannot possibly be performed within one year from the making thereof (generally the date the acceptance is effective, not the date the contract is to take effect or performance is to begin). The one-year period ends at midnight of the anniversary of the date the contract was made and thus is actually a year-and-a-day. A restatement of the terms starts a new one-year period running. Oral contracts for more than a year were in issue on the bar exam in July 2009 (an oral 18-month contract extension), July 2010 (an oral two-year employment contract) and February 2012 (a 25-month employment contract).

Lifetime contracts are not within the statute, because the promisor could die within a year, thus fulfilling the contract. And a contract promising two or more performances is not within the statute if any one of them could be fully performed within one year.

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Contracts of uncertain duration are not covered; thus a huge building construction contract that does not state a date for completion is not within the statute even thought it is likely to take several years to complete.

L is for land contracts. All transfers of interests in land are within the statute, including leases of more than a year; also mortgages and the assignment, extension or modification of a mortgage. A contract for growing crops is a contract for goods, not land. A contract for minerals depends on who is to sever them. If it’s the buyer, the contract is for land; if it’s the seller, it’s for goods.

E is for executors. Contracts by an executor to be responsible for the debts of a decedent out of the executor’s own funds must be in writing. The reasoning seems to be that it’s such an unusual thing to agree to that we want to see it in writing. The same thinking explains inclusion of suretyship contracts.

G is for goods of $500 or more ($1,000 in Michigan). This is governed by the UCC of course. There were Statute of Frauds questions involving contracts for goods on the February 2007, July 2009, and July 2011 bar exams.

S is for suretyship contracts. A promise to pay the debt of another must be in writing, but there is an exception: the “leading object” exception. The statute does not apply if the promisor’s primary purpose was to benefit herself, not the debtor. Also, the statute only applies to promises to a creditor. A promise to a debtor to pay her debts is not within the statute.

What will satisfy the Statute? The Restatement requires “any writing” which (1) identifies the subject matter of the contract, (2) indicates that a contract with respect to it has been made, and (3) states with reasonable certainty the “essential terms,” which at common law would include the price. For goods, the UCC is the same, except it only requires a quantity term (because “reasonable” does not work well for that). In a majority of states, reformation may not be used “save” a contract by adding a missing essential term.

In both cases the writing only has to be signed by the party to be charged (not both parties), which is an exception to the rule that either both parties are bound or neither party is). This was tested on the July 2010 and July 17

2011 bar exams. “Signed” can consist of letterhead stationary, if used to authenticate the writing, also tested on the July 2011 exam.

Notice that the contract itself need not be in writing, just “any writing” - for example, a cocktail napkin, as was the case on the July 2010 exam. Even a letter repudiating the contract can serve as the writing if it is otherwise sufficient. And even if a once sufficient writing has been lost, it can still satisfy the Statute.

If the parties to an existing contract agree to modify it, the new contract must comply with the Statute only if the contract as modified falls within the Statute. So a written contract for $600 in goods can be orally modified to change the price to $400. But an agreement to renew a short-term contract for 18 months must be supported by a writing, as was the case on the July 2009 bar exam. And a contract that satisfies the Statute nevertheless can be rescinded by oral agreement.

Exceptions: Restitution. The Statute prohibits contract enforcement, but not restitution.

So one who has partly performed an invalid contract can recover restitution for the value it conferred on the other party. It would be measured by quantum meruit for services performed or the reasonable value of goods delivered.

Part performance. This is limited to (1) specific performance of (2) contracts for land. It involves the 3 P’s. If the buyer of land has made a part Payment, gone into Possession, and made valuable imProvements (an “impacted P”) on the property, that is sufficient proof that a contract exists, and a court can grant specific performance to protect the buyer. Some courts only require 2 of the 3 P’s, as long as one of them involves improvements (since that’s what most clearly distinguishes a tenant from a purchaser).

For goods, the UCC also has a part-performance exception. An invalid contract is nevertheless enforceable with respect to which payment has been made or goods have been delivered. This was tested on the February 2001 bar exam.

Full performance. There is also a full-performance exception that applies to land, goods, and contracts for more than one year. Full performance by one

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party (full payment, or full delivery) allows full enforcement. This was implicated in a question on the February 2012 exam.

Admissions. No writing is required if the party to be charged admits in a pleading or testimony that a contract was made.

Waiver. The Statute of Frauds defense must be raised in a party’s first response pleading or it is waived. Also, a NOM (“no oral modification”) clause can be waived by subsequent conduct. This point has been tested three times in the past ten years (July 2003, February 2005, and July 2009).

Estoppel. Both equitable estoppel and promissory estoppel can take a contract out of the Statute. Equitable estoppel arises where a party has engaged in a misrepresentation (they said no writing was required, or that they had signed the contract when they hadn’t). Promissory estoppel has the same elements discussed earlier, except here it serves as a substitute for a signed writing rather than a substitute for consideration. Equitable estoppel as a way around the Statute of Frauds was tested on the July 2003 bar exam, and promissory estoppel as a way around the Statute was on the February 2007 and February 2012 exams.

Finally, the UCC has a couple of additional exceptions. The “merchants must read their mail” provision says that a sufficient confirmation of the contract is binding on the other party if not objected to within 10 days of receipt. This exception was tested on the July 2009 exam. And a contract for specially manufactured goods not suitable for resale that does not satisfy the Statute of Frauds is enforceable once production has begun. This exception was tested on the February 2007 and July 2009 exams.

Conditions A promise is a contractual undertaking to perform a duty. A condition is an event that determines if or when a party must perform that duty. Conditions come in three varieties: Express, Implied, and Constructive, just like contracts come in three varieties, express, implied, and quasi.

Express conditions are conditions expressed in the contract itself.

Sometimes it is difficult to determine whether a clause is a promise or a condition. Certain words have been held to be words of condition, like “on the condition that,” “provided that,” “subject to,” and “if.” Other words are clearly promissory: “promises,” “agrees to,” and “shall (do something).”

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Express conditions were implicated in questions on the July 2008 and February 2010 bar exams.

If the parties have not clearly expressed their intent, courts use certain “tie breakers” such as (1) construe against the drafter, (2) prefer a promise, and (3) construe to avoid a forfeiture. A forfeiture is where a party has begun performing their duty and then loses their right to the agreed exchange due to non-occurrence of a condition.

The issue is not always whether a clause is an express condition or a promise; it could be both. We call that a “promissory condition.” It has the double-whammy effect of denying a party the right to the agreed exchange and also making them liable for damages suffered by the other party.

Example: “Sports Facilities promises to complete the bobsled run by October 1 (a promise) and unless it does so the City shall not be liable for any amount (express condition).”

Conditions can also be classified as precedent, concurrent, and subsequent.

A condition precedent must occur before a duty is due; it triggers a duty. A condition subsequent terminates a duty (“if X doesn’t happen, the duty to pay is void”). Why do we care? Because the burden to prove that the condition occurred is on the plaintiff if the condition is precedent (because it’s part of the plaintiff’s case) but on the defendant if the condition is subsequent (because it’s a defense). The distinction between a condition precedent and condition subsequent was tested on the July 2004 bar exam.

Conditions of satisfaction are common and are judged by an objective (reasonable person) standard except in four cases: where (1) it concerns a matter of personal taste, (2) the language mandates a subjective (good faith) standard, (3) an objective standard would be impractical, or (4) the decision is entrusted to a neutral third party. The July 2008 bar exam involved a condition of satisfaction by a party’s attorney.

“Pay when paid” clauses are common in construction contracts and are generally construed as merely fixing the time for payment, not as a condition on the right to payment. But they have been upheld as conditions, even if they cause a forfeiture, if the language used is unmistakable.

At common law, timely performance is presumed not to be essential unless a clause in the contract makes it so. A “time-of-the-essence” clause makes 20

timely performance an express condition, so there is no room for substantial performance. The UCC’s perfect-tender rule makes all terms of a goods contract “of the essence" including the time for performance.

An implied condition, like an implied contract, is based on the facts and circumstances, not on the language of the contract. They act like an express condition.

Constructive conditions, like quasi-contracts, are really a legal fiction. They are not true conditions, but rather legal rules designed to answer two questions if the contract is silent: Who goes first? and What’s good enough?

Who goes first is answered by the constructive conditions of exchange.

They provide that if duties can be performed concurrently, they are due concurrently (they are constructive concurrent conditions). In that case, until at least one party tenders performance neither party is in breach. If the duties cannot be performed concurrently, then the duty that takes time is a constructive condition precedent to the other.

There is also a presumption that contracts are “entire” and that the duty that takes time must be totally completed before the other party’s duty (usually to pay money) becomes due. But sometimes contracts are interpreted to be “divisible,” in which case the parties’ respective performances are apportioned into corresponding parts.

What’s good enough is answered either by the constructive conditions of performance: either substantial performance or the perfect-tender rule. The rule of substantial performance is that a minor breach is not grounds for the other party to refuse to perform. Rather, one who substantially performs is entitled to recover the contract price minus damages for the breach. Three questions have involved the distinction between a material breach and a minor breach (two in the July 2002 exam and one on the February 2010 exam).

On the other hand, if performance was less than substantial, the breach is called material. A material breacher cannot sue for damages, because they have not satisfied the constructive condition necessary to trigger the duty to pay. They can still recover restitution (generally quantum meruit) for the value (if any) of their defective performance, minus damages for the breach.

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Keep in mind here that the doctrine of substantial performance does not apply to express conditions; there must be strict compliance with express conditions (including, for example, time-of-the-essence clauses).

For contracts involving goods, the UCC perfect-tender rule allows a buyer to reject goods that fail to conform to the contract terms “in any respect.” Due to the potential severity of the perfect-tender rule, the UCC recognizes four limitations: (1) the rejection must be in good faith (not just because the price has dropped), (2) the seller has a right to cure the defect(s) by making a conforming delivery, (3) the goods don’t have to be perfect, they only have to perfectly conform to the contract, and (4) it only applies up to the point of acceptance of the goods. Application of the perfect-tender rule has arisen on the February 2004 and July 2009 bar exams.

Once the goods have been accepted (which includes a reasonable time for inspection), a buyer may revoke acceptance of defective goods, but only if the defect “substantially impairs” their value to him. The July 2010 bar exam tested the right to revoke acceptance of nonconforming goods.

Under the UCC, a buyer who rightfully rejects or revokes acceptance of goods can cancel the contract and recover whatever was paid. The buyer may also sell the defective goods publicly or privately and credit the proceeds to the amount owed. If the goods are to be sold privately, the buyer must notify the seller of the buyer’s intent to resell the goods.

Conditions can be excused on several grounds: (1) where the other party prevented the condition from occurring (tested in February 2003), (2) where the condition would cause a disproportionate forfeiture and was not a material part of the exchange, (3) where the condition was waived (tested in July 2007), (4) where a party is estopped from, or has elected not to, enforce the condition. The difference between waiver, estoppel, and election here is that a condition that has been waived can be reinstated (with adequate notice) but if estoppel or election applies, the condition cannot be reinstated.

Finally, a condition can be excused (5) due to impossibility if the condition was not a material part of the exchange and a forfeiture would otherwise result.

Anticipatory Repudiation A contract cannot be breached until the date that performance is due (“law day”). But an anticipatory repudiation can occur earlier. An anticipatory 22

repudiation is (a) a statement by the obligor to the obligee that the obligor will commit a material breach, or (b) a voluntary affirmative act that renders the obligor unable or apparently unable to perform. Then the obligee has the option to sue immediately or wait until law day and sue then. However, the duty to mitigate still applies, which might affect the obligee’s decision.

Anticipatory repudiation was tested on the July 2004 and February 2009 bar exams.

Where an anticipatory repudiation has not occurred, but there are reasonable grounds to believe that the obligor will commit a material breach (what the law calls “prospective inability to perform”), the obligee may demand adequate assurance of due performance and may suspend performance until it is received. Failure to provide such assurance within a reasonable time can then be treated as an anticipatory repudiation. Prospective inability to perform was tested on the February 2002 and July 2006 bar exams.

Insolvency cannot be treated as a repudiation but is grounds to seek adequate assurance of due performance. A party is insolvent if it cannot pay its debts as they become due (cash-flow insolvency) or has more debts than assets (balance-sheet insolvency). A party who is herself in breach may not seek adequate assurance from the other party.

The doctrine of anticipatory repudiation does not apply to unilateral contracts or bilateral contracts that have become unilateral because one party has fully performed. This usually manifests itself in the rule that courts will not accelerate a unilateral duty to pay money in future installments (unless the contract contains an acceleration clause). This exception was implicated in a February 2012 bar exam question.

Parol Evidence Rule and Contract Interpretation There are two ways to state the parol evidence rule. The usual way is to incorporate most of the limitations in the rule itself, making it ungainly and difficult to grasp. I prefer to state the bare bones of the rule and incorporate the limitations into the rule’s exceptions.

My parol evidence rule is simple: Parol evidence cannot be used to prove terms additional to or inconsistent with an integrated contract. “Parol” means all matters, written or oral, that occurred prior to a written contract.

“Integrated” simply means final (what the parties agreed to was integrated into the contract).

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Here come the exceptions. Parol evidence can be used: - To prove a subsequent modification of the contract - To prove a collateral agreement (one that is independent of the contract) - To prove an agreement supported by separate consideration - To prove terms additional to (but not inconsistent with) a partial integration (this exception was tested on the February 2001 bar exam) - To add “construction terms” - To prove grounds for avoidance of the contract (fraud, mistake, etc.)

- To prove grounds for reformation of the contract - To prove a condition precedent to formation of the contract - To resolve (or, in some states, to create) an ambiguity.

In determining whether a contract is a complete or partial integration, there are two views: Williston’s “four corners” approach (just read the contract itself) and Corbin’s surrounding-circumstances approach (consider all that was said and done during contract negotiations). The two scholars also advocated these differing approaches to the determination of whether a contract was ambiguous.

A “merger clause” is sufficient to establish a contract as completely integrated according to the model answers to two bar exam questions, in July 2004 and February 2009.

With regard to subsequent modifications, while they are not barred by the Parol Evidence Rule, they may be barred by “no oral modification (NOM)” clauses, which require all contract modifications to be in writing. Although they are often unenforceable at common law, the UCC validates NOM clauses in contracts involving goods.

Interpretation of a written contract is a matter of law for the judge. In resolving conflicts between competing terms, express terms control over construction terms, and within that category handwritten additions control over typed terms, which control over pre-printed terms. Within the construction terms, course of performance controls over course of dealing, which controls over usage of trade.

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Third-Party Rights and Duties Certain folks who are not parties to a contract may nevertheless sue to enforce it if they are third-party beneficiaries, assignees, or delegatees. The difference is that third-party beneficiary rights arise from the contract itself; the rights of assignees and delegates arise from assignments, delegations, or transfers of the contract after it was formed. There were third-party beneficiary questions on the July 2010 and July 2011 bar exams.

Third-party beneficiaries: In labeling the parties, the promisor is the person whose promise we seek to enforce (usually the defendant). The promisee is the other original contracting party. The beneficiary is a stranger to the original contract who would benefit from its performance (usually the plaintiff). The question usually is whether the beneficiary can sue the promisor to enforce the contract.

The First Restatement classified contract beneficiaries as creditor, donee, or incidental. The terms are fairly self-explanatory. Creditors and donees can sue, incidentals cannot. The Second Restatement combined the creditor and donee categories into intended beneficiaries.

MBE answers are based on the Second Restatement, but you still need to distinguish between creditor and donee beneficiaries at least in one regard: The right of the beneficiary to sue the promisee (both can sue the promisor).

A creditor beneficiary can sue the promisee on the preexisting debt between them. But a donee beneficiary can’t sue the promisee because the promisee owed no debt to the third party and was not the one who made the promise.

The fact that the promisor has promised to perform the promisee’s duty does not absolve the promisee, absent a novation. A novation is an agreement that discharges one party and substitutes another party, by agreement of all three parties. Generally, creditor beneficiaries will not agree to a novation that would discharge the promisee. Why should they? Two debtors are better than one.

The third-party beneficiary’s rights derive from the original contract, so the beneficiary is subject to all defenses to its enforcement. This includes formation defects (lack of mutual assent, lack of consideration, Statute of Frauds, mistake, duress, and the like) and post-formation defenses (impossibility, non-occurrence of a condition, material breach, and so forth).

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Vesting: The original parties are free to modify or rescind the contract unless vesting occurs. That is the only effect of vesting; it is NOT a prerequisite to bringing suit. Vesting occurs when the beneficiary relies on the contract, expresses assent to it, or brings suit on it.

These vesting rules are “default” rules that apply if the contract is silent on the topic. A contract can have a clause that makes vesting automatic or one that prohibits vesting (which is common in life insurance policies, so the policyholder can change beneficiaries at will).

Assignment and Delegation Contract rights are assigned, contract duties are delegated. If both are transferred, we call that a transfer. There were assignment and/or delegation issues on three bar exams (February 2002, February 2008, and July 2009).

Rights can be assigned unless (1) the assignment materially changes the obligor’s duty or increases the burden or risk on the obligor, (2) the assignment is forbidden by statute, or the assignment is validly precluded by contract. Some states limit or prohibit wage assignments, for example. It says “validly” precluded by contract because anti-assignment clauses involving goods or accounts receivable (promises to pay for goods or services) are invalid under the UCC. What’s left? Contracts involving land.

Duties can be delegated unless they involve unique personal services or delegation is precluded by contract. Anti-delegation clauses are valid. A delegation does not relieve the delegator of the duty, and obligee’s acceptance of the delegatee’s performance does not create a novation. A promise made by the delegatee to perform a delegated duty is called an assumption.

The word “assignment” is used in both a narrow sense (assignment of a right) and a broad sense (assignment of the contract). Both the Restatement and UCC provide that a general assignment (assignment in the broad sense) is also a delegation of duties, and that acceptance of the assignment by the assignee operates as a promise to perform the duties, creating third-party beneficiary rights in the obligee.

Thus if I assign my contract to you, you get my rights but you also become bound to perform my duties, and the party I owe the duties to can sue you as 26

a third-party beneficiary of the assignment. I am still liable too, of course, in the absence of a novation. If I merely assign you my rights, none of the rest of that happens.

Gratuitous assignments (where no consideration changes hands) are revocable unless (1) made in writing or (2) accompanied by delivery of evidence of the right assigned. A gratuitous assignment can also be made irrevocable by promissory estoppel. A revocable gratuitous assignment is terminated by (1) the assignor’s death or incapacity, (2) a subsequent assignment, or (3) notification of revocation by the assignor.

A partial assignment is operative to the same extent as if the part had been a separate right (i.e., the same rules apply to partial assignments).

The rights of an assignee, like those of a third-party beneficiary, are derivative; the assignee gets no better rights than the assignor had, and the obligor can assert all valid contract defects and defenses against the obligee.

Recoupment and set-off: If a debtor is sued to enforce an assigned debt, the debtor has a right to make certain deductions from the amount due. The debtor can recoup all claims related to the assigned debt regardless of when they accrued. And the debtor can set off other, unrelated claims against the creditor if they accrued before the debtor received notice of the assignment.

The UCC provides that with respect to accounts receivable (promises to pay for goods or services), the parties to the contract can make good faith modifications without the assignee’s consent. So there’s no vesting with assignments.

Grounds for Avoidance Mistake A mistake is a belief not in accord with existing fact. It has to be an affirmative belief, not ignorance or inattention; it must concern fact rather than law; and it must relate to an existing fact, not a future development. If it is a mutual mistake (a shared belief) and basic to the transaction (not merely material), then the contract can be rescinded. The prototypical example is that of the barren cow, “Rose of Aberlone.” Mutual mistake was tested in July 2001 and February 2008.

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A unilateral mistake is not grounds for rescission unless (1) the other party knew of the mistake, or (2) caused it, or (3) if the facts fit the “mistaken bidder” profile (a clerical mistake caught before any loss occurred).

Where the parties attach materially different meanings to their words, as in the famous case of the two ships named Peerless, the result is that no contract is formed. (Parol evidence can be used to prove the different meanings, because grounds for avoidance are one of the rule’s exceptions.)

Conscious ignorance is not a mistake and is not grounds for avoidance of a contract, as in Wood v Boynton where neither party know what the pretty little stone was that the woman sold for $1. It turned out to be the largest uncut diamond ever found in America at that time. Too bad for her; one who contracts in ignorance assumes that risk.

A mistake in expression of the contract is grounds for reformation, a judicial re-writing of the contract to conform to the parties’ intention. Grounds for reformation must be proven by clear and convincing evidence. Most states will not permit reformation to be used to add a term to satisfy the Statute of Frauds. Reformation was tested in July 2001 and February 2008.

Fraud/Misrepresentation Fraud shows up in law school as a crime, a tort, and a ground for avoidance of a contract. For avoidance, the elements are (1) existence of a misrepresentation or concealment of a fact (or, sometimes, silence); that either (2) the misrepresentation was intentional (fraud) or (3) the fact was material; that (4) it was relied on; and that (3) the reliance was justifiable.

Silence can be a misrepresentation (“silent fraud”) if there is a duty to speak up because (1) there is a position of trust and confidence between the parties, (2) a party has made an assertion and later learns that is false, (3) a party knows that the other party is laboring under a basic mistake (unilateral mistake + knowledge), or (4) where silence will allow a dangerous condition to go undiscovered.

Reliance must be established, and it must be justifiable. But a buyer may rely on a seller’s misrepresentation (intentional or innocent), unless failure to discover it was irrational, preposterous, or in bad faith.

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Election of remedies. Because fraud is also a tort, the victim has to elect whether to affirm the transaction and sue for damages or disaffirm the transaction and recover restitution (called “waiving the tort”). One advantage of a tort suit is the possibility of punitive damages.

Other weapons against consumer fraud are consumer protection statutes, which usually permit recovery of actual attorney fees, and “cooling off” legislation in the case of in-home sales.

Duress and Undue Influence Duress can consist of a physical threat or confinement, but more often takes the form of economic duress. It consists of wrongful acts or threats coupled with no reasonable alternative. “Wrongful” in this sense can be illegal, tortuous, or immoral. Bankruptcy is not regarded as a reasonable alternative.

Undue influence can take one of two forms: (1) abuse of a fiduciary or confidential relationship, or (2) application of excessive persuasion against a person of undue susceptibility. Under the first form of undue influence, the burden is on the defendant to prove that he took no unfair advantage of his position of trust. Under the second, the burden is on the plaintiff to prove that unfair advantage was taken of him.

Duress is a legal remedy; undue influence is an equitable one. An important difference is that jury trials are not available in equitable matters. Unlike fraud, duress and undue influence do not give rise to a cause of action for damages. The only remedy for duress and undue influence is rescission and restitution.

Illegality Guilty parties to an illegal contract cannot bring an action to enforce it or to recover restitution for the benefits they conferred under it. They are truly “outlaws.” Innocent parties, on the other hand, can at least recover restitution. If both parties are guilty they are said to be in pari delicto (of equal fault) and the law will aid neither of them.

When unmarried cohabitants split up, the question may arise whether one party can recover compensation for services rendered during the relationship. Courts will enforce express contracts between live-ins as long as they are not made in consideration of a meretricious relationship (which 29

would be illegal). (Some states have added such contracts to their Statute of Frauds, which would require a signed writing.) Most courts will not recognize an implied or quasi contract for domestic services, which are presumed to be gratuitous.

Where a license is required, services by unlicensed parties are illegal and need not be paid for contractually or quasi-contractually.

Non-competition agreements are an illegal restraint of trade except when entered into ancillary to the sale of a business or to an employment contract.

Even then, the employee must have unique talents, skills, or knowledge and the restraint must be reasonable in time and space. They must be no more than is necessary to protect the employer from unfair competition. The validity of a non-competition clause was tested on the February 2004 bar exam.

Courts will “blue pencil� (reform) overly broad non-competes in business contracts, but not in employment contracts. The reason is that businesspeople are presumed to be on equal footing, whereas an employer is the dominant party in an employment relationship. To encourage employers to draft reasonable non-competes, courts will not trim them to save them.

Non-competes are invalid as to lawyers (and doctors, in some states).

Incapacity Minors. Those below the age of majority (18 in must jurisdictions) may disaffirm their contracts unless they are for necessaries (food, clothing, shelter, etc.). Even then, minors only have to pay for the reasonable value of necessaries, not necessarily the contract price.

In most states, the disaffirming minor need only return whatever the minor has retained and need not pay for what the minor has used, wrecked, or consumed. But in a minority of states, minors who disaffirm must pay restitution for the reasonable value of what they received under the contract.

The right to disaffirm extends for a reasonable time after the minor reaches majority unless the minor ratifies the contract. Only the minor can disaffirm; this is another exception to the rule that either both parties are bound or neither party is. If an adult co-signs the contract, the adult is liable even if the minor disaffirms. In must cases, a minor’s fraud in claiming to be of age has no effect on the right to disaffirm.

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Mental infirmity can be grounds for avoidance of a contract entered under its influence. Much will depend on whether the other party had grounds to suspect mental infirmity, whether the status quo can be restored, and whether a guardian has been appointed for the person.

Intoxication can also be grounds for avoiding a contract but only if (1) the party was intoxicated to the extent of being unable to comprehend the nature and consequences of his actions and that (2) upon becoming sober the party can restore the status quo (3) by immediately tendering back the consideration received. The law is not as tolerant of drunks as the mentally infirm, because intoxication is voluntary.

Unconscionability Unconscionability is something so unfair that it shocks the conscience of the court. It has been tested three times (February 2001, February 2003, and February 2006). Unconscionability is an issue for the judge, not a jury, and it must exist at the time the contract was entered into. Most courts require both procedural and substantive unconscionability. Procedural goes to the fairness of the contracting process. Substantive goes to the fairness of the contract terms.

Remedy. A judge who finds a contract or term unconscionable may deny or limit enforcement, or reform the contract. About the only relief a judge cannot award is damages (as is true with most grounds for avoidance).

“Adhesion contracts” are those that are offered on a non-negotiable, take-itor-leave-it basis, often with lots of boilerplate. “Boilerplate” refers to standardized terms, often in fine print. Adhesion contracts and boilerplate clauses are not per se unconscionable, but they may help establish procedural unconscionability. Most substantive unconscionability claims relate to either warranty disclaimers or limitations on remedies.

Exculpatory contracts or clauses (denying liability for negligence, for example) are not per se unconscionable. Similarly, indemnification clauses are not inherently unconscionable. But a toxic combination of exculpatory and indemnity clauses in a form contract presented to a high-school dropout who was without legal representation may be found to be unconscionable.

Impossibility and Frustration 31

If a problem occurs before a contract is formed, the law of mistake applies.

If the event occurs after a contract is formed, impossibility or frustration is more appropriately used. Aspects of impossibility or frustration of purpose were tested on four bar exams (February 2004, July 2005, February 2006, and February 2009).

Impossibility. Where there is a positive contract to do a thing, a party must perform or pay damages even if it becomes difficult or even impossible (for example, a contract to build a building that burns down before completion).

But if performance of a contract is dependent on the continued existence of some person or thing, further performance is excused if (1) the person or thing perishes, (2) due to unanticipated circumstances, (3) through no fault of the parties (for example, a contract to repaint the walls of a building that burns down before completion).

Remedy. In that case, a party who has partly performed is entitled to recover for what was done, by pro-rating the contract price (if the paint job was half done, the painting contractor is entitled to recover half the contract price).

Parties can protect themselves beyond the common-law grounds of death of a person or destruction of a building by using a force majeure clause. Such clauses can excuse non-performance for all sorts of other problems like strikes, defaulting suppliers, flu epidemics, loss of financing, etc. Without a force majeure clause, loss of a source of supply, for example, is not an excusing event.

Farmers are treated differently from manufacturers. Destruction of a crop to be grown on a farmer’s own land is an excusing event as long as the farmer is without fault.

Frustration of purpose is the flip side of impossibility. Impossibility excuses the seller; frustration excuses the buyer. As in the prototypical coronation case, performance of the contract was not impossible (the apartment was still standing) but the purpose of the contract (to see the coronation parade) was frustrated by postponement of the coronation).

Because the postponement was unanticipated, and not the fault of the parties, the contract was excused and the renter was entitled to return of the deposit, unless it was stated to be non-refundable.

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The purpose of the contract can be shown by parol evidence because grounds for avoidance are one of the rule’s exceptions. Indeed, most avoidance issues depend on parol evidence. In such cases, do not forget to do a parol-evidence analysis as well as an analysis of fraud, mistake, or whatever. Too many students overlook this and only earn half credit for their answer.

Conclusion I asked my daughter Claire what final piece of advice I should give people about to take the bar exam. She passed two of the most difficult bar exams on the first try, so I figured she would have some good advice to share. Her answer? “Daddy, tell them to just ‘Don’t freak out!’”

I think that’s good advice. Over fifteen thousand Cooley grads have passed a bar exam, and you can too.

* All highlighted exam references are to Michigan bar exam essay questions (2001 - 2012).

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