its a business law assignment

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CHAPTER 9: CONTRACTS AND THECHAPTER 9: CONTRACTS AND THE UNIFORM COMMERCIAL CODEUNIFORM COMMERCIAL CODE ARTICLE 2ARTICLE 2

UNIVERSITY OF TOLEDO LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS Cohen

Contract

Case 9.1

Contract types by de�nition

O�er

Termination of an O�er. Revocation, Lapse, Rejection, CounterO�er

Acceptance

Rejection, Counter-O�er, and Quali�ed Acceptance

The Mirror-Image Rule

Consideration

Defenses to Contract Formation

Capacity

Mistake, Misrepresentation, N li t

Contract O�er Acceptance Consideration Defenses to Contract Formation Performance Breach Remedy Conclusion  

CONTRACT Contracts form the basis for commerce and permeate our personal and professional lives. Thus, understanding how contracts are formed is essential in understanding business and business law. This chapter provides a high- level overview of the types of contracts and how these are formed, defenses to contracts, contract performance, breaches, and remedies. Traditional contract law is governed and developed from common law and precedent established by judges. Conversely, the Uniform Commercial Code (UCC) Article 2 governs contracts involving the sale of goods, which is a statutory document that has been adopted by 49 states. The lone holdout for adopting the UCC Article 2 is Louisiana.   To wit, “A contract is generally de�ned as a promise, or a set of promises, actionable upon breach. Essential elements of a contract include an o�er, acceptance,

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contractual capacity, consideration (the bargained for legal bene�t and/or detriment), a manifestation of mutual assent and legality of object and of consideration.” Perlmuter Printing Co. v. Strome, Inc. (N.D. Ohio 1976), 436 F. Supp. 409, 414.   “A meeting of the minds as to the essential terms of the contract is a requirement to enforcing the contract.” Episcopal Retirement Homes, Inc. v. Ohio Dept. of Indus. Relations (1991), 61 Ohio St. 3d 366, 369, 575 N.E.2d 134.   So under Ohio common law (see above cases referencing Ohio precedent), as it is with many other states, a contract requires o�er, acceptance, consideration, and therefore a “meeting of the minds” between the parties. The irony, however, is that a “meeting of the minds” contemplates the subjective thinking between the contracting parties, whereas judges actually evaluate what parties say and do (not what they think) to determine if a contract exists. Thusly, one might consider a contract to be more of a “meeting of the minds as evidenced by words and actions not thoughts.”   With that stated, the �rst question to ask when evaluating a contract is: Is the subject matter for the sale of goods or for the sale of services? The UCC Article 2 – SALES cover contracts for the sale of goods, whereas contracts for the sale of services are dictated by common law. The rules governing the sale of goods versus the sale of services vary, and the outcomes can be signi�cantly di�erent based on the distinction.   “Goods” are de�ned in UCC §2-105 as all things, which are movable at the time of identi�cation to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identi�ed things attached to realty as described in the section on goods to be severed from realty (§2-107).  

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Examples of “goods” include cars, televisions, horses, and desks. The sale of services includes legal services, accounting services, building contracting, and taxi services among other in�nite examples.  

Case 9.1 The construction industry is large and represents a signi�cant portion of the domestic gross product at around 13% of the current U.S. GDP. Construction contracts pose a unique problem as both goods and services can be contracted for in a construction contract, which means that both common law and the UCC Article 2 could apply to analyzing the contract for terms and breach. When both common law and UCC Article 2 are used to examine a contract, this is called the hybrid approach. The courts use the predominant factor test to review hybrid-type contracts. But this type of standard is in fact subjective, and determining whether common law or UCC should apply to resolving the con�ict is subject to judicial interpretation and thus the challenge.  

Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974)1 Plainti� had entered into two contracts with the Cox brothers for the sale and installation in defendants’ bowling alley of bowling equipment. The dispute arose when Simek (Bonebrake is Simek’s estate administrator) died. At that time, the delivery and installation were incomplete and less than half of the purchase price paid. The defendants obtained equipment elsewhere and hired others to �nish the installation. Plainti�’s suit to recover the balance of the contract price was met by defendants’ counterclaims for damages su�ered. The Special Master rejected defendants’ counterclaims and their defense that Simek or his estate had breached the contracts �rst, and awarded plainti� the amount paid on the contracts of ($28,000) less the value to the seller of unaccepted goods ($1,000).   JUDICIAL OPINION Judge Talbott Smith (Portions Omitted and Edited)

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  As the Special Master points out, this section is divided into two parts: the �rst a�rmative, de�ning the scope and reach of Article 2; and the second negative, excluding certain transactions. To come within the a�rmative section, the articles (the “things”) must be movable, and the movability must occur at the time of identi�cation to the contract. The applicability of the Code to the April contract is clear from and within its four corners. The “things” sold are all items of tangible property, normally in the �ow of commerce, portable at the time of the contract. They are not the less “goods” within the de�nition of the act because service may play a role in their ultimate use. The Code contains no such exception. “Services,” continues the Special Master, “always play an important role in the use of goods, whether it is the service of transforming the raw materials into some usable product or the service of distributing the usable product to a point where it can easily be obtained by the consumer. The 554.2105(1) de�nition should not be used to deny Code application simply because an added service is required to inject or apply the product.” In short, the fact that the contract “involved substantial amounts of labor” does not remove it from inclusion under the Code on the ground, as the Special Master found that “the Code was (not) meant to cover … non-divisible mixed contracts of this type.”   The harshness of the result is conceded by the Special Master, but he felt himself constrained to such result by the provisions of the the “Code.” It is indeed harsh that the defendants be required to pay the full contract price for the goods, and be denied in toto their counterclaim for damages arising from their grossly defective condition. We are satis�ed that the Code mandates no such result and that it has been misconstrued. Moreover, we are of the opinion with respect to an implied holding on a combined question of fact and law (anticipatory breach by Simek’s estate) that although there is some evidence to support the ruling, on the entire record we are “left with the de�nite and �rm conviction that a mistake has been

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committed,” and thus we are confronted with clear error. We reverse and remand.   In this example, the court essentially held that hybrid contracts where both goods and services are provided, the UCC may apply. Whether common law or the UCC applies is relevant, speci�cally to this case, because common law and the UCC treat warranties di�erently. Under common law, for example, warranties are treated on a jurisdictional basis based on precedent. Under UCC, warranties are treated as indicated in the code. And in a breach of warranty case, the treatment under common law or UCC could greatly change the result. And further, general interpretation of the UCC itself can impact the outcome. As it is in this case, under the UCC, the trial court and appellate court came to two di�erent conclusions as the outcome based on the same statutory language in the UCC.  

Contract types by de�nition: Unilateral contract is a promise for a performance. “If you mow my lawn, then I will pay you $20.” To accept the o�er, the o�eree must actually mow the law. Bilateral contract is a promise in exchange for a promise. “If you agree to mow my lawn, then I will pay you $20.” To accept the o�er, then the o�eree simply must agree to mow the lawn. The o�eror has the option of paying the o�eree the $20 at any time.   In an executory contract, performance of the contract terms is not complete by one or both of the parties to the contract. In an executed contract, on the other hand, performance is complete by both parties. For example, a lawn gets mowed, but the payment has not been made. This is an executory contract. Once the payment has been made, then the contract is executed. Now in a unilateral contract (promise for performance), if the lawn has not been mowed, then it is neither executory nor executed, because the only way to accept the o�er is to mow the lawn. In a bilateral contract, once both parties agree to the terms, then it becomes an executory contract. It will not

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be an executed agreement until the lawn is mowed and the $20 is paid.   Contracts can also be express or implied. An express contract is an agreement, either oral or in writing, where the material and relevant terms are known or understood by the parties.   In some instances where the terms are not fully known or understood, the parties might form an implied-in-fact contract. This situation might arise when requesting professional services from a doctor, where you are seeking medical attention without fully understanding the full scope of the services to be provided. But as it is customary for payment to be forthcoming after treatment, the courts will consider the doctor and patient to have an implied-in-fact contract.   The courts might also create a quasi- or implied-in-law contract when in fact the parties do not have an actual contract. This occurs when (1) one party provides a bene�t to another party; (2) both parties are fully aware of the bene�t to the other; and (3) there is unjust enrichment to one party to the unjust expense of the other. As an example, if you came home and your neighbor had painted your white picket fence, then you would not owe the neighbor any money for painting the fence. But if you drove by the house and saw your neighbor painting the white picket fence, but kept on driving by but did not stop the neighbor, then the court might impose a quasi- contract because it seems like you wanted your fence painted.   Lastly, contracts can be void, voidable, or unenforceable. Contracts are void when the subject matter of the contract is illegal (selling meth) or against public policy (contracts by people who don’t have mental capacity (dementia)). Contracts that are voidable can be canceled by one of the parties to the contract, such as the case with minors. Minors can cancel contracts entered into unless the contracts are for necessities, or student loans or agreements to join the military. A contract would

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be unenforceable in instances where statutory requirements are not met, such as an agreement for the sale of land that needs to be in writing but no writing exists or enforcement of an agreement that is past the statute of limitations for enforcement. Statute of limitation is a standard time frame in which a court will recognize a cause of action. If beyond that time frame, then the court will conclude that the agreement is not enforceable. An unenforceable contract, which has been completed, is in fact an executed contract.  

OFFER To form a contract, the parties engaged in discussions or negotiations �rst need an o�er. “An o�er is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” This de�nition of o�er comes from the Restatement (Second) of Contracts §24 (1981), which is an often cited, nonbinding legal treatise used by both judges and lawyers to gain comprehension of contract common law.   So to further explain, the parties to a contract must understand the di�erence between what an actual o�er is and what an o�er is not. An o�er must be express and clear, and include certain terms such as the subject matter involved. An invitation to bargain is NOT an o�er, and

without an o�er, there can be no contract.2 Below is an example:   I am looking to sell my car for $6,000 (Invitation to bargain).   I will sell you my car for $6,000 (O�er) for pick up within a week at my home.   So, in the o�er above, the o�eror (person making the o�er) identi�ed the subject matter, “my car” as well as the price “$6,000” and speci�cally indicated a willingness to sell the car to the o�eree (person receiving the o�er) now.

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  Thus some key terms, under common law, are required in the o�er, in order for it to be valid:

1. Subject Matter; 2. Parties; 3. Price; 4. Payment Terms; 5. Performance Times; and, 6. Delivery Times.

  For an easy acronym to remember, try SPPPPD. Thus, to be an o�er under common law is a high threshold, as many terms need to be identi�ed. So under common law, if the o�er is not de�nite and complete with the above terms, then it is probably not an o�er.   The requirements for an o�er under the UCC are much easier to �ll, as only the identity of the parties, identity of the subject matter, and the quantity need to be expressed to form an o�er.

1. Parties, 2. Subject Matter, and, 3. Quantity.

  The courts will �ll in the rest of the details per the UCC guidelines, such as pricing, which would be market rate and reasonable based on current quoted rates or past business dealings between the parties.   Some areas to consider that create o�er paradigms include mail solicitations and advertisements. Generally, mail solicitations and advertisements are not o�ers because the solicitations or advertisements lack speci�city

or lack the intent to be bound.3 Speci�cally with an advertisement, the ad is inde�nite because it won’t identify who may accept the ad. And for example, advertisements for the sale of a car might require �nancing approval and thus the advertisement is subject to �nancing, which may exclude unidenti�ed persons and

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is thus not an o�er. In instances like this, however, the FTC has made it mandatory for the advertiser to provide proper disclosures in the ad to warn the viewer of the restrictions on the ad. The FTC states that contingent conditions and obligations of an o�er must be set forth clearly and conspicuously at the outset of the o�er, and that disclosure of the terms of the o�er set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the o�er is not regarded as making disclosure at the outset. (16 CFR 251.1)   The following is an example of such a disclosure, which is usually in very �ne print or read quickly during the trail end of a commercial:   Advertising for large print “80% Savings”: (Fine Print) Save Up to 80%. The �ne print is in a 6-point font while the main ad headline is in 24 point font print.   Advertising for large print “50 pounds of weight loss”: (Fine Print) Individual results will vary. Average weight loss in 6 weeks is 18.8 pounds. Weight loss requires strict adherence to the exercise plan as well as the meal plan. Again, the ad headline, which promotes 50 pounds of weight loss, is in 20-point font while the �ne print disclaimer is in barely readable 8-point font.   By putting disclaimers in the ads, these ads are not seen as speci�c o�ers for savings or weight loss.   Further, when an advertisement is an o�er, the presumption may be that the o�er is only good while supplies last. But if the o�eree accepts the o�er in a “reasonable time,” then the o�eror must provide a rain check, substitute goods, or pay damages. Advertisements may be fraudulent advertising where bait and switch is utilized to draw in the buyer with the promise of lower priced goods when the seller has very low supply or no supply of such goods. Bait and switch occurs when the seller tries to substitute a higher priced good for the nonexistent or very limited quantity lower priced goods,

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and this practice is illegal as a deceptive sales practice.4

This is a challenge in legal circles because traditional contract law would simply state that the advertisement is not an o�er and therefore not an illegal bait and switch while consumer protection and unfair trade statutes have been instituted to provide consumer protection for unscrupulous advertising that has been historically protected by traditional contract law. See Stewart Macaulay, Bambi Meets Godzilla: Re�ections on Contracts Scholarship and Teaching v. State Unfair and Deceptive Trade Practices and Consumer Protection Statutes, 26 Hous. L. Rev. 575, 582-89 (1989).   Critical Thinking: In newspaper advertisements, why do car dealers often provide a VIN or stock numbers for the cars that they are advertising for sale? Consider the following language: “Two Units Available STK#DU711558/DU711565.” Car dealers want to avoid being accused of what illegal activity, and by providing the above language in the advertisement, the car dealer can achieve what desired goal but still be within the law?  

Termination of an O�er. Revocation, Lapse, Rejection, CounterO�er An o�er can be revoked at any time prior to acceptance, but the revocation must be communicated to the o�eree. If the o�er is made to a large population, then the revocation must be in similar form as the o�er. An option where the o�eree has paid consideration to keep an o�er open for a period of time and “�rm o�ers” subject to UCC §2-205 made by a merchant, signed in writing cannot be revoked.   An o�er may also lapse if a stated period of time for acceptance has been included in the o�er, or after a reasonable period of time has passed, if no speci�c time frame for acceptance has been so stated in the o�er. Lapse also occurs when either the o�eror or o�eree dies prior to acceptance. The fourth way an o�er lapses is when the o�er is either illegal (e.g. sale of illegal goods) or impossible (e.g. the goods have been destroyed).

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  An o�er may also simply be rejected, “not interested,” which terminates an o�er.   And lastly, under common law, an o�er is also rejected when the o�eree provides a counter-o�er. A counter- o�er is usually some form of modi�cation to the original o�er, like a price change. A true counter-o�er under common law becomes a new o�er.   Under the UCC, the result is di�erent because a modi�cation to the terms of the o�er when accepting the o�er won’t necessarily be a counter-o�er. This is a di�erent outcome than common law.   Under the UCC if a non-merchant is involved and additional terms are added to the acceptance, then the parties have a contract without the additional terms.   Hobbyist Rick: “I will sell you my collector’s soda machine for $2,000.”   Hobbyist Mark: “I accept, with all the soda still in the machine.”   The two will have a binding contract under the UCC without the soda.   Conversely, merchants under the UCC will have a contract with the additional terms included, unless the o�eror objects, the o�er is limited to the terms o�ered, or the modi�cations are material. If either of these three conditions exists, then there is a contract without the modi�ed terms.   Collector Rick: “I will sell you my collector’s soda machine for $2,000.”   Collector Mark: “I accept, with all the soda still in the machine.”  

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In this situation, Mark gets the machine, with the soda, unless Rick objects to the modi�cation, provided only a limited o�er, or the soda represents an additional material price to the deal. These are probably all factual questions with some legal interpretation. For example, if the soda is $50, then is it material to the $2,000 transaction? $50 is not that much money and related to the total transaction of $2,000,it represents only 2.5% of the total value of the transaction so it is probably not material. If the soda had a value of $200, then it might start getting closer to a material amount of money and therefore excluded.  

ACCEPTANCE The o�eree may accept the o�er prior to revocation or lapse using the same means of communication as the o�eror or as described in the o�er. So if the o�er is presented in writing via mail, then the proper acceptance unless otherwise expressed in the o�er would be an acceptance in writing via mail.   Generally, the acceptance must also mirror the o�er and any deviance in the acceptance from the o�er is a quali�ed acceptance.  

Rejection, Counter-O�er, and Quali�ed Acceptance Aside from “revocation” and “lapse,” most courts will look to see if the o�eree’s response to an o�er accepts the o�er or terminates the o�eree’s right to accept the o�er.   The law of o�er and acceptance deals with this problem through a series of rules established over time, which are now precedent. These rules are obviously subject to factual interpretation of the interaction between the parties. But speci�cally under common law, a rejection, a counter-o�er, or a quali�ed acceptance by an o�eree usually terminates the o�eree’s power of acceptance. In some cases such as an option whereby the o�er is open for a speci�cally stated period of time, rejection, counter- o�er, or quali�ed acceptance will not terminate the

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o�eree’s right to accept, because the o�er is open until the speci�c date in the option. In evaluating these rules related to rejection, counter-o�er, or quali�ed acceptance, the main question is posed as follows: Using objective interpretation of the parties’ language or actions, is it understood that the o�er is no longer valid?  

i. Rejection A rejection is an expression whereby the o�eree turns down an o�er, or rephrased: A rejection terminates the o�eree’s power of acceptance even though the rejection is communicated before the o�er would otherwise have terminated or lapsed.   Example: O�er: I will sell you my Honda Accord for $3,000. Rejection: Not interested. The original o�er can no longer be accepted by the o�eree, unless it is revived by the o�eror, for example, by simple words such as: “I’ll let you think about.”  

ii. Counter-O�er  On the other hand, a counter-o�er is response to an o�er that becomes an o�er made by the original o�eree to an o�eror regarding the same subject matter as the original o�er but with material terms di�ering, in a manner that terminates the original o�eree’s power of acceptance.   Example, Z says to T: “I will sell you my bike for $1,000.” T responds, “I will o�er you $800 for the bike.” In this instance, it seems that T’s counter-o�er terminates T’s power to accept the previously made o�er by Z and is therefore a “counter,” or reply, in the negotiation. Conversely, this could be simply seen as part of the haggling process to gain better terms but not necessarily an outright rejection of the �rst o�er. However, contract theory simply rejects this claim and considers the counter- o�er to be a rejection – not a haggle that keeps the o�er open.  

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It is worth mentioning that an “inquiry” or “request” regarding the possibility of di�erent terms is not a counter-o�er and does not terminate the power of acceptance. Also, a counter-o�er that includes a statement requesting that the o�er is under consideration may not terminate the power of acceptance, either.   These three exceptions above regarding “inquiry,” “request,” and “under consideration” are often di�cult to judge because the line between a counter-o�er, an inquiry, a request, and a statement that the o�er is being held under consideration is blurred. For example, if Z o�ers to sell his car to T for $6,000, getting a response such as “I'll pay you $5,500” is in fact a counter-o�er, while the response “Will you take less?” serves as an inquiry. This sounds remarkably close to “Will you take $5,500?” or “How about $5,500?” or “At this time, I can only o�er $5,500, but will get back to you before Friday?”  

iii. Quali�ed Acceptances and the Mirror-Image Rule When an acceptance accepts the o�er but adds terms that are not in the o�er, then it is considered “quali�ed.” The quali�ed-acceptance rule is treated like a counter-o�er and is therefore a termination of the o�eree’s power to accept. But the quali�ed-acceptance rules are subject the same exceptions as the counter-o�er rule exceptions, and also to several additional exceptions, including a new term in a purported acceptance does not make the acceptance quali�ed if the term is implied in the original o�er. These exceptions to the quali�ed-acceptance rule get blurry as with the case Ardente v. Horan where the Buyer's attorney sent to Seller an executed copy of a contract prepared by Seller, together with a down payment of $20,000 and a note from the buyers requesting certain furniture be included in the deal – and the court held that the statement about the furnishings made the note a quali�ed acceptance. Conversely, Valashinas v. Koniuto was regarding an o�er to purchase an interest in a partnership for a designated price. The o�eree accepted the price with the additional statement, “I will be ready, willing and able to give you a complete Bill

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of Sale ... as of December 31st ... or sooner if you so choose,” which in this case the court held that the statement was a suggestion as opposed to additional term so that a contract was formed.   Or in Panhandle Eastern Pipe Line Co. v. Smith, Panhandle �red Smith but wanted him back if Smith agreed to terms. Smith agreed to terms but added a request to see his personnel �le. The court held that Smith's acceptance was not quali�ed, because he had the right to inspect his �les under company policy and “an acceptance is still e�ective if the addition only asks for something that would be ... immaterial.” Asking for something that you are already entitled to is legally “immaterial.”   As rules related to quali�ed acceptance have been hard to administer across jurisdictions in a consistent manner, many legal authorities have suggested that the rules regarding quali�ed acceptance be dropped.  

The Mirror-Image Rule The rule governing quali�ed acceptance has a corollary known as the mirror-image rule. Under this rule, an acceptance must not deviate from the o�ered terms and if it does, then it becomes a a quali�ed acceptance. In other words, the application of the mirror-image rule determines whether or not there is a quali�ed acceptance.   The most relevant application of the mirror-image rule exams when merchants selling goods utilize business forms to conduct business and these forms di�er. Generally, the forms will be similar if not identical in the area of key terms such as subject matter, quantity, and price; but some other terms captured in what is considered traditional boilerplate language might materially diverge. The seller, for example, might always say in its contracts that shipping is Freight on Board (FOB) Shipment (the buyer pays for shipping), whereas the buyer may use in its standard contract language the term FOB Destination (the seller pays for shipping). And because these di�erences might be signi�cant, under the

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mirror-image rule, no contract is formed by the exchange of such forms. However, under most circumstances, the mirror-image rule notwithstanding, the responsive (acceptance) form might well constitute an acceptance, either because both parties subjectively regard the form as an agreement.  

CONSIDERATION Contract law has long established precedent that to have an enforceable agreement there must be o�er, acceptance, and consideration. Of the three elements to a contract, consideration is often the most challenging concept to describe because it is essentially the exchange of value between the parties that justi�es imposing a legal remedy when there is a breach of duty by either party. Thus, the age old question: What is value?   Examples of consideration might be when a party to the agreement foregoes a legal right currently held or assumes a legal duty not presently obligated to. Classic case law examines this very issue in Hamer v. Sidway 124 N.Y. 538, 27 N.E. 256 (N.Y. 1891) where William E. Story II, quit drinking, using tobacco, swearing, and playing cards or billiards until age 21 because his uncle promised to pay him $5,000 to do so. Story’s assignee (Hamer) attempted to collect the debt out of the dead uncle’s estate but was rejected by the trustee Sidway. Sidway asserted that there was no contract between Story II and his uncle because there was no consideration between the uncle and his nephew. The issue before the court was whether the nephew’s “quitting drinking, using tobacco, swearing, and playing cards or billiards until age 21” – all things he was legally allowed to do – was su�cient consideration to support the uncle’s promise to pay the $5,000. The court held, yes, forbearance from pursuing legal activities asked for in exchange for a commitment is su�cient consideration to support a valid contract.   Critical thinking question: What if the nephew intended to quit all those vices anyway?  

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The courts have also spoken on areas which don’t qualify as consideration, as well, and performance of a preexisting obligation or payment for past consideration is not consideration. For example, a skydiving student promises to pay the instructor $100 bonus if he survives the jump. This is not consideration because the sky diving instructor already has a preexisting obligation to get the student to the ground safely. Or in the next example, assume a neighbor gathers your newspapers and mail while you are on vacation without being asked. Upon return, you thank him and promise to pay him $100. There is no exchange of value and thus no consideration as the neighbor already gathered your mail and newspapers without any legal obligation. Thus, no consideration has been provided for your promise and therefore there is no agreement.  

DEFENSES TO CONTRACT FORMATION After o�er, acceptance, and consideration have been identi�ed, a contract will usually exist between the parties. However, a contract may be void or voidable if either party has a defense to the formation of the contract. This section discusses the various defenses to contract formation which include capacity, misrepresentation, fraud, duress, undue in�uence, mistake, illegal purpose, or in violation of public policy, or lastly, the statute of frauds.  

Capacity In order to enter into a contract, a person must have legal capacity. This legal issue arises where a contract is formed, but one party is a minor or one party may have a mental condition that makes understanding the terms and conditions of the agreement impossible (e.g. dementia, extreme intoxication).   Minors (Infant): The term minor, inclusive of the term infant, is used in law to describe a person under the age of majority, which in most cases is 18. An “adult” is generally described as a person who has reached the age of 18 and thereafter. 

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  Voidable Contract: In general, when a minor enters into a contract, the contract is voidable by the minor. This rule has been established to protect younger persons who are believed to lack the capacity to contract for lack of understanding. Conversely, a minor may know exactly what they are doing and so precedent and corresponding statutes give minors the ability to complete a contract as well, at their own discretion. The other party does not have the same right as the minor, to make the contract voidable. To ensure that minors do not abuse this legal loophole, the courts have carved out exceptions whereby a minor’s contract is not voidable.   Necessaries, Bank Accounts, Employment Contracts, Other Contracts, Student Loans, Military: If every single contract with a minor could be voided, then minors would never be able to enter into a contract because other parties would refuse to enter into a contract with them. The laws vary jurisdiction to jurisdiction on the application

of these rules. For example, California and New York5

have very explicit laws regarding minors entering into entertainment contracts.   These laws essentially make it impossible for a minor to disa�rm an entertainment agreement, unless other factors are involved. For example, federal law under the Fair Labor Standards Act regulates the employment of minors and may play a role in the resolution of these types of entertainment contracts in California and New York. Minors must have access to education while employed and working, and in the event that access to education is denied to the working performer, and then

the performer may disa�rm an the agreement.6

  Aside from the glitzy agreements signed by child celebrities, other areas where minors cannot disa�rm agreements include necessities for the minor’s health and safety like food, lodging, shelter, clothing, medical care, and cars under some conditions. Courts will consider the minor’s and parent’s economic status in determining whether an item is considered “necessary.” Whether or

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not the minor may disa�rm none, any or all the contract varies state to state.   Most courts will require minors to honor banking agreements and pay the same fees and penalties as the typical banking customer. Some minors may purchase and be the bene�ciary of life insurance policies and be beholden to the terms. Under most instances, minors will have to ful�ll student loan obligations as well as military agreements signed while a minor.   Rati�cation: A general common law rule is that if the minor does not disa�rm an agreement within 6 months of commencement of the agreement or turns 18 prior to disa�rming the contract, then the contract is rati�ed. Under this circumstance, a court may refuse to void the contract on behalf of the minor. However, not all states follow this common law principle, such as Maine, where its statutory provisions require that a minor must ratify a contract in writing even after reaching the age of 18. In Foss v. Circuit City Stores, Inc., 521 F. Supp. 2d 99, 2007 U.S. Dist. LEXIS 83184 (D. Me., Nov. 8, 2007), the minor child never rati�ed the agreement in writing even after the age of 18, and the court held that the agreement was therefore invalid. Thus, Circuit City’s request to have the lawsuit settled through arbitration, which was a clause in the contract, was considered invalid. Naturally, when asked whether a minor has rati�ed an agreement or not, it is extremely important to understand the law in the jurisdiction where the contract was formed. The results will vary greatly depending on the state. Voiding the Contract: In order to void the contract, then the minor will probably have to �le a lawsuit and ask the court to void the contract, or in the converse, raise the a�rmative defense of lack of capacity if the other party has sued to enforce the contract. Also, the minor must void the entire contract and may be required to pay restitution for the bene�t of the goods received and to return the subject matter of the contract.   Mental capacity is often related to disease states such as Dementia or Alzheimer’s, which impact the validity of a

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contract. Mental capacity may also refer to diminished capacity, which may occur in people with lower IQs or people that are deemed intoxicated. Non compos mentis is the Latin term describing a state of mind in which the contracting party lacks the competence to enter into a contract. In Ohio, for example, “Mental capacity to a contract is a question of fact for the jury under proper instruction (from the judge).” Brown v. Kiechler Mfg. Co. (1918), 98 Ohio St. 440, 441, 121 N.E. 901. So in instances in Ohio where the jury determines that one of the contracting parties is in fact incompetent and therefore lacks capacity to enter into an agreement, an agreement will be treated as if it never existed – void.   These issues are very prevalent in society where insanity, mental retardation, autism, senility, strokes, or drug addiction are on the rise, making it more and more frequent that people with questionable capacity are entering into contracts for goods and services.  

Mistake, Misrepresentation, Negligent Misrepresentation, Fraudulent Misrepresentation Mistake, Misrepresentation, Negligent Misrepresentation, Fraudulent Misrepresentation represent a�rmative defenses to a contract. There is some overlap between the four categories of defenses, which is why the categories are covered under the same section. In general, however, the courts usually consider three categories: mistake, misrepresentation, and fraud.   In the most basic sense, a mistake could be as simple as forming an agreement and putting a decimal point in the wrong spot on a number. The agreement is for $11.00 a Unit, but the actual contract sates $1.10, which is clearly a mistake. The parties can either agree to the $11.00 per Unit or the agreement is canceled.   Misrepresentation occurs when (1) a party misleads another party by misstating a fact or failing to make a disclosure about a material fact; (2) the other party detrimentally relies on the misstatement or omission; and

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(3) the party in reliance su�ers damages. The key factor here is that the party accused of misrepresentation is not necessarily aware of the misrepresentation. For example, in the sale of a house, the seller might state: “This basement has never �ooded.” While this may be true during the time of the seller’s ownership of the house, the statement might not be true for previous owners. If the buyer’s basement �oods 6 months later in an epic �ood, then the buyer can sue the seller for misrepresentation.   Fraud occurs when (1) a party knowingly makes a material misstatement or omission;(2) the other party relies on the material misstatement or omission; and (3) the party in reliance su�ers damages as a result thereof. Same example as above, except now the seller knows that the basement has �ooded previously and has failed to disclose that the basement has �ooded previously. In the sixth month, the basement �oods and now the buyer has a cause of action for breach of contract based on fraud, an intentional failure to disclose a material fact (omission) when knowledge of the previous �ooding was known.   These types of breach or defenses to a contract often provide interesting fact patterns to review. For example, does a seller of a home have to disclose to the buyer of a home that people were murdered in the home? This has sometimes been referred to as a “stigmatizing” event.   Cases dating back to the 1980s began to appear dealing with the issue of whether a seller had a duty to disclose a “stigmatizing” event associated with the real property during the course of a residential real estate transaction.

Two well-known cases, Reed v. King7 and Stambovsky v.

Ackley8, led to several states enacting code to speci�cally addressing such events and enforcing a seller’s duty to disclose same.   In Reed, the buyer purchased a home where a woman and her four children were murdered in the house 10 years earlier, but the seller failed to disclose that fact. Buyer/plainti� learned of the incident post sale and sought rescission. The court of appeals stated that the

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murders were material facts that the seller had a duty to

disclose.9 In Stambovsky, a buyer sought rescission of a contract to purchase a home in New York upon learning that it was haunted. The court held that the seller could not deny that the house was haunted and granted relief to the buyer.   The courts in Reed and Stambovsky dealt with buyer expectations and real property defects (which were more psychological in nature rather than physical (�ooding basement)), and the seller’'s duty was to disclose those defects that stigmatized the property. But each case relied on a di�erent set of facts to determine when the duty to disclose was owed. Today, courts in di�erent jurisdictions would likely use di�erent sets of facts to determine whether a seller owed a duty to disclose these types of events. And, as a result, there is no consistency in this

area of the law.10

  Many states today have seller disclosure laws for real estate transactions. These state laws generally require that the seller disclose physical defects of the property to the buyer prior to closing the transaction. Most of these laws do not speci�cally address psychological damage or stigmatized damage in their statutes and therefore it is up to the judges in each jurisdiction to exam the facts and decide whether or not a failure to disclose is a fraud, a misrepresentation, or neither.  

Duress Duress is a defense that may be raised when a party is suing for a contract to be enforced or for contract damages or both. The party using the duress defenses may seek contract enforcement, rescission, or damages due to a wrongful pressure that coerced him or her to enter into the contract. There are three di�erent types of duress, which all use the same legal standard which is that the coercive action was such that it deprived the other party of free will and that the party had no other reasonable alternative than to agree to the contract. The

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three types of duress are physical force, emotional, and economic.   Physical Force, which may also include criminal assault and battery, is the most serious form of duress used to coerce someone into entering or rescinding a contract. This type of duress arises when one party threatens physical harm to the other. A contract would be considered void under physical force duress as there is no meeting of the minds, which is a required legal element to form a contract in all 50 states.   Emotional Duress may include threatening to disgrace the other party or his or her family or threatening to pursue criminal prosecution or a lawsuit against the defendant without such legal authorization. Blackmail is one example of emotional duress.   Economic Duress arises when one of the parties uses improper coercion as opposed to legitimate bargaining techniques to gain an advantage. The cases often involve parties already under contract with each other. For example, one party disputes a cell phone bill, and the other party (cell phone company) threatens to turn o� the cell phone unless the bill is paid in full, even though some of the charges on the bill are legitimately in question. The duress is caused because there is no reasonable alternative than to simply pay.   The e�ect of the latter two forms of duress other than physical force is that the contract becomes voidable whereby the party who was coerced under duress can either keep the contract or cancel it. The coercing party has no such power to void the contract.  

Undue In�uence In contracts, undue in�uence implies that the parties to a contract have some relationship that bares examination in the context of a contract. And upon examination of that relationship, seemingly one party has misused their in�uence over the other in such a manner that the

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contract cannot be explained by the relationship and thus calls for further examination. For example, if an attorney is writing a will and the testator bequeaths her estate to the attorney’s daughter and not her own children, then this is hardly explainable. It would seem then that the attorney used his position of in�uence over the testator to bequeath the money to his daughter rather than natural heirs for no apparent reason other than he exercised undue in�uence over the writing of the will to get the money. If on further review, however, it is determined that the testator’s children are in fact all dead and the attorney’s daughter happens to be the testator’s only living heir as a niece, then this result is now explainable and less likely to be undue in�uence. To determine whether under in�uence is present, precedent has been established in each state. In Ohio, for example, in estate and donor cases related to undue in�uence, the courts have examined and de�ned the essential elements of undue in�uence, which are: (1) a susceptible donor, (2) the donee’s opportunity to exert undue in�uence on the donor, (3) the fact of improper in�uence exerted or attempted, and (4) the result showing the e�ect of such in�uence. Sferra v. Shepherd, 11th Dist. Trumbull No. 2014-T-0123, 2015-Ohio-2902, ¶36, citing West v. Henry,

173 Ohio St. 498, 501, 184 N.E.2d 200 (1962).11

Mistake When contracts are drafted, mistakes occur. A mistake can be physical or intellectual. For a physical example, simply typing 76 when the number should be 67 would su�ce. An example of an intellectual mistake might be where a computation is required and rather than coming up with the correct answer of 67, you calculate 76. In either case, a mistake has been made and the courts have examined how to deal with these types of errors. These physical or intellectual types of mistakes most often take the form of mistaken computations, mistaken payments, misidenti�cations of property that is to be bought and sold, auditory or visual misperceptions, and misunderstandings of speci�cations, formulas, or plans.  

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Three typical examples of a mistake in a contract are:

i. One Party Is Aware of the Mistake but does nothing to correct it

ii. One Party Had Reason to Know of the Mistake but does nothing to correct it

iii. The Non-mistaken Party did not know nor had reason to know

  Under the �rst scenario, the aware party’s expectation that the mistake would be upheld is unjusti�ed. This would be analogous to a person who �nds his neighbors lost property but thinks that he is entitled to bene�t from his neighbor’s carelessness. Furthermore, there is little debate that people can exploit their knowledge to gain a competitive advantage, but it is another thing entirely to take deliberate advantage of an oversight by a contracting party. But taking advantage is not the exploitation of superior knowledge, but rather unethical dealing. This is more like theft and the result usually bene�ts the “mistaken” party. This position is adopted in §153 of the

Second Restatement and in many cases.12

  Under the second scenario, where the party had reason to know or should have known the mistake, the courts are fairly clear. In this “reason-to-know” scenario, the non- mistaken party is at fault for his “negligence” in failing to realize that a mistake was made when a reasonable person would have done so. And as only the non-mistaken party knows with certainty whether he was actually aware of a mechanical error, the courts tend to think that where the non-mistaken party had reason to know of a mistake, he probably did know. So in “reason-to-know” cases, the courts tend to treat them like the “aware” cases.   In the �nal example of mistake, presume that neither party was aware of the mistake. This kind of case presents two issues. First, should A be liable for B’s reliance damages? Second, should A be liable for B’s expectation damages?  

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If party B is not aware the mistake, then party A is at fault. B has probably formed an expectation as a result of A’s fault. But this still does not entitle B to capitalize on A’s mistake. For instance, assume A arbitrarily makes the wrong payment to B in excess of what is due, and B neither knows nor has reason to know that a payment is mistaken. So the result of A’s mistake is that B may form a justi�ed expectation that the additional payment is his to keep. But legal precedent does not protect that

expectation.13

Illegal Purpose or in Violation of Public Policy Contracts with an illegal purpose or that violate public policy are void. A contract for the sale of illegal steroids or hard drugs or the import of endangered species is void because the subject matter is illegal. On the other hand, contracts that are a violation of public policy require a little more examination.   For example, Ohio is an “at-will” employment state, which historically means that an employee can be �red for any reason or no reason and would have no cause of action against the employer for being terminated. The “at-will” doctrine often is part of the employee’s contract, which is memorialized via the employee handbook. Despite conventional wisdom, and although agreed to by the employee vis-à-vis the employee handbook, an employee cannot be �red for a reason that is against public policy.   As such, the Supreme Court of Ohio set forth the elements of a viable cause of action for wrongful termination in violation of public policy as follows:

1. That a clear public policy existed and was manifested in a state or federal constitution, statute or administrative regulation, or in the common law (the clarity element).

2. That dismissing employees under the circumstances like those involved in the plainti�s dismissal would jeopardize the public policy (the jeopardy element).

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3. The plainti�'s dismissal was motivated by conduct related to the public policy (the causation element).

4. The employer lacked the overriding legitimate business justi�cation for the dismissal (the

overriding justi�cation element).14

  So, for example, if an employee complained to Occupational Safety and Health Administration (OSHA) about a hazardous work site, and the company retaliated against the employee for the whistleblowing, then the Ohio court would use this four-pronged test to determine whether there was a violation of public policy.   This also applies in instances where non-compete clauses are signed by employees and the region covered by the non-compete is too big (more than 50 miles in radius) or to long (more than 3 years). Courts will void those non- compete clauses because ultimately it’s a good public policy to have people working rather than not working.  

Statute of Frauds The statute of frauds applies to certain contracts that are required to be in writing and with a signature, in order to

be enforceable. These types of contracts include15:

1. The sale or exchange of real property; 2. Agreements that take more than one year to

complete; 3. Agreements to pay for the debt of another; and 4. Contracts for the sale of goods in excess of $500,

UCC §2-201 Formal Requirements; Statue Frauds.

  The original intent of the statute of frauds was the prevention of fraud or perjury under certain contract claims, and therefore the writing itself served as reliable evidence of the existence and terms of the contract.   Some exceptions have been made to the statute of frauds such as when contracts have been partially or fully performed and estoppel is used to deny a statue of frauds

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defense. For example, I agree to buy my neighbor’s car for $1,000, which falls under the statute of frauds in the UCC. I pay the $1,000, and he gives me the auto title. Although there is no written agreement and signature enforceable under the statute of frauds, the fact that the agreement is executed prevents either party from using the statute of frauds to rescind the deal.  

PERFORMANCE Once determined that a contract has been formed without any valid defenses (discussed in the previous section), then the parties must perform under the terms of the contract. Failure to perform on the duties created by the contract, unless the performance is excused, can lead to a breach of contract for which damages may be assessed. Sometimes the legal system will not assess damages to a party but compel (injunction) a party to perform on the contract. The goal of the legal system is to provide a remedy to the non-breaching party that makes her whole, which usually involves awarding monetary damages. Before damages are addressed, the courts will �rst examine performance, speci�cally measurement of the performance. In some instances, performance may be excused even though a contract does exist. In the end analysis, a party may be in breach of the contract in which case damages are measured.  

EXHIBIT 9.1 CONTRACT PERFORMANCE

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The two main measures of contract performance are perfect tender or substantial performance. Perfect tender is exact performance. For example, Seller A sells Green Car to Buyer B for $2,000. Seller A delivers Green Car to Buyer B, and Buyer B gives the Seller A $2,000. Both parties get exactly what is bargained for and thus the parties have perfect tender. Perfect tender is most often provided in transactions related to the sale of goods. If Seller A shows up with the Green Car and Buyer B only has $1,950 in his or her hands, then Buyer B is not providing perfect tender. Sometimes, depending on the industry and whether merchants are involved, a party may deliver something short of perfect tender. An example might be in the delivery of fruit where typical spoilage in a delivery might be 2%, but the buyer still pays full price. So the seller of the fruit might only be e�ectively delivering 98% of the ordered fruit that is not spoiled; this �gure might be in line with the industry standard and thus acceptable “perfect tender.”   Although most people desire perfect tender, sometimes this might not be feasible and thus substantial performance is acceptable. Substantial performance is thus short of perfect, but it is legally permitted and that party is discharged from its contractual duty.   Substantial performance is accepted when the party made a good faith e�ort to satisfy the conditions of the contract, and a reasonably prudent person would �nd the performance reasonable enough to accept.   Substantial performance was born out of common law and exists to reduce the harsh results that result from the

concept of implied conditions.16 The court will read that performance by a party is an express condition to the other party’s duty to perform. So as an example, A must paint B’s bedroom with Sherman Williams paint to get paid $500. A paints the bedroom but with an equal replacement of “Smith” paint. B refuses to pay A the $500 because A used the wrong paint, which is strict compliance with the contract terms.17 This minor deviation in the delivery of the service would result in a

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complete forfeiture of money. The substantial performance doctrine, however, would aid the painter in preserving the contract price, thus, preventing a forfeiture of the $500.   In Jacob & Youngs, Inc. v. Kent 129 N.E. 889 (N.Y. 1921) a similar argument was made when Kent would not pay Jacob & Youngs for building a house because the latter put in the wrong plumbing, using Cohoes pipe rather than Reading pipe. When hearing that the pipe was incorrect, Kent demanded that the plainti�s replace the pipe and tear down many walls to do so. The plainti� refused and when Kent did not pay, they sued for their payment. Justice Cardozo’s opinion characterized the deviation in building materials as insigni�cant and wrote that “trivial and innocent (deviations) … will not always be the breach

of a condition to be followed by a forfeiture.”18 Minor departures from collateral contract terms would not

justify forfeiture (non-payment).19 For forfeiture or non- payment to result, where Kent would not have to pay, the departure or deviation would have to serve “in any real or substantial measure to frustrate the purpose of the

contract.”20

  Courts will often examine the following factors to determine whether the purpose of the contract has been achieved: (1) the non-breaching party will be deprived of expected bene�ts; (2) the non-breaching party can be adequately compensated for the deprived bene�t; (3) the breaching party will su�er forfeiture; (4) the breaching party is likely to cure; and (5) the breaching party performs

in good faith.21 So minor breaches that minimally depart from contract terms likely indicate the breaching party has substantially performed. Conversely, major departures from contract terms likely represent material breaches

that preclude a �nding of substantial performance.22

These �ve factors play a major role in determining whether there is a minor breach with substantial performance or a material breach without substantial performance and thus forfeiture and potentially other damages.

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  People and businesses often enter into contracts, but circumstances change, and these changes require contracts to change. For example, I am a builder, and I am remodeling a home. I decide to take a full-time job in a di�erent city, and so I cannot do the remodel. I contact the homeowner and notify her that I took a job in a di�erent city. The homeowner may release me from any further obligation under the agreement, and the release simply validates a new agreement, which is that I am no longer doing the remodeling. If I have received any payments for the remodeling but have not done any work, then I may have to pay back these funds as part of the release. A contract rescission is similar in that both parties to a contract go back to the status quo. In a release and rescission, both parties should seek to get the agreements in writing.   A novation releases or excuses one party from an obligation under a contract, who is replaced by a new party to the contract to ful�ll those obligations. Mark is supposed to paint house and breaks his leg. He contacts the owner of the house and says that Betsy is going to paint the house. The parties sign a novation stating that Betsy is painting the house instead of Mark.   An accord and satisfaction often occurs when a contract is partially performed and neither party wants to continue doing business with the other party. For example, you get divorced and receive a �nal legal bill for $3,000. You don’t agree with the bill and send in a check to the lawyer stating, “here is a $1,000, payment in full for disputed bill.” The lawyer cashes the check. Therefore, the $1,000 was to pay a disputed bill (“the accord”), and by signing and cashing the check, the attorney is stating that he is “satis�ed” with the settlement.   Performance may also be excused when there is a condition precedent prior to required performance. I will give you a car, but only if you graduate college by the next fall. If the student does not graduate college by the next

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fall, then the condition precedent is not met and therefore providing the car is excused.   Other examples where performance may be excused by operation of law are bankruptcy, statute of limitations (the time for �ling a breach of contract has elapsed), material alteration of contract (fraud), intervening illegality (doing business becomes illegal in Cuba after the contract is signing), impossibility (the car for sale is destroyed/force majeure) and commercial impracticability (unforeseen or unforeseeable to a reasonable person, performance is impracticable and both parties missed it).  

BREACH So, when a contract exists (o�er/acceptance/consideration), and no defenses are present to negate the contract (e.g. fraud), performance has not been excused by operation of law (e.g. bankruptcy) or agreement between the parties (e.g. release) and performance has not been properly dispensed, then we have a breach of contract.   And thus, the non-breaching party has several courses of action to pursue, but the main consideration herein is pursing timely legal action in court by seeking all available legal and equitable remedies. The process for pursuing a breach and its various remedies are di�erent as between the UCC and common law. For example, sometimes a breach of contract is obvious – the color of the house was supposed to be white not pink. In other instances, the breach might not be as transparent. Oftentimes, parties in a contract are expecting a breach but do not know whether the breach is really going to occur. Under the UCC §2-609, if either party to a contract (sale of goods) has reason to believe that the other party is not going to perform, then the concerned party may request assurances and suspend performance. The response must be provided within 30 days and if the party requesting the assurances does not receive the assurance in a timely manner, then UCC §2-610 provides the non-breaching

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party to treat the contract as repudiated and seek legal remedies.   Note on Arbitration: Many contracts today, especially contracts of adhesion (see cell phone contract), have mandatory arbitration clauses, which require the parties to settle disputes in arbitration not the courts. The remedies available in arbitration are similar to remedies available in court.  

REMEDY EXHIBIT 9.2 REMEDIES

  At Law

Compensatory Damages are designed to compensate the non-breaching party for their losses and involve two types of damage awards: General damages and Speci�c damages. General damages usually cover losses that are directly related to the subject matter of the contract, such as failing to meet a time deadline. Speci�c damages compensate the plainti� for losses related to the breach, but does not result directly from the contract itself, such as damage to a business’ reputation or failure for the non- breaching company to pay a bill on time. State laws and precedent vary as to the amount of compensation that a party can receive.  

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In these types of cases, the plainti� must speci�cally request compensatory damages (as well as special damages) in the complaint. Special damages involve losses that are not addressed in the contract such as damage to reputation. Failure to request damages in the complaint can lead to the complaint being dismissed for failure to state a legal claim.   Factors the court considers in evaluating the

complaint: Causation: The defendant’s breach must have caused, either directly or indirectly (special damages), the plainti�’s economic losses. Foreseeability: Similar to negligence claims, losses must be foreseeable at the time of contract formation otherwise compensatory damages will not be issued. Calculable: The losses must be capable of being calculated into speci�c monetary amounts using fair market values at the time of contract formation, and if not determinable or reduced to dollars, damages will not be considered. Unavoidable: If the non-breaching party could have prevented the losses but failed to do so, then compensatory damages will not be allowed under “the doctrine of avoidable consequences.”   Liquidated Damages are often stipulated in a contract involving money, or the promise of performance has a liquidated damages stipulation. The purpose of this stipulation is to establish a predetermined sum that must be paid if a party fails to perform as promised. Liquidated damages clauses are appropriate in a contract when injury is “uncertain” or “hard to quantify,” the amount speci�ed is reasonable, considering the actual or anticipated harm caused by the contract breach, the di�culty of proving the loss, and the di�culty of �nding remedy, and the damages are not structured as a penalty. A court will void liquidated damages clause if these criteria are not met as established by the American Law Reports annotation which states that “damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach. A term �xing unreasonably large liquidated damages is unenforceable

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on grounds of public policy as a penalty” (12 A.L.R.4th 891, 899).   Punitive Damages are designed to punish bad behavior and are a very rare damage allocation in a contract breach. Even so, punitive damages in a contract breach require an independent tort, such as fraud. Section 355 of the Restatement (Second) of Contracts states this rule: “Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.” Few exceptions to this rule exist where an independent tort is not required, mainly related to breach of �duciary duty.

See Breach of a contract to marry23; breach of a contract

by a public service company24; breach of a contract that is

also a breach of a �duciary duty25; as well in bad faith

breach of an insurance contract26 Each of these exceptions exists in multiple states and is governed more or less by precedent and not statutory language.   Nominal Damages refers to a damage award issued by a court when a breach of contract has occurred, but there is no �nancial loss. The awards can be as little as $2, which seem remarkably stupid, but often serve other purposes. Often times a plainti� wants to sue but did not su�er any actual �nancial loss. In order to sue, the plainti� needs a remedy/relief and nominal damages can be used to serve as that relief. A plainti� may sue for nominal damages when there is no real remedy and the desire is to be vindicated by the court, to simply be “right, in a dispute” or in an attempt to go after other damages that might be applicable such as punitive damages, which are very speculative.  

In Equity Restitution is a means the court uses to prevent the unjust enrichment of a party. This occurs when one party has conferred a bene�t on another party but cannot collect payment because the contract isn’t enforceable or no actual contract exists. For instance, assume that a

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person builds a barn on the property of another person, which requires a writing because it involves real property. Assume further that the structure is not erected by verbal agreement and that the owner of the property on which the barn sits will not pay the builder for the barn because there is no agreement in writing as required by the statue of frauds. A court can order the owner to pay the builder for labor and materials under restitution.   Speci�c Performance is an equitable remedy that requires a party to execute a contract according to the precise terms agreed upon or to execute it substantially. Speci�c performance grants the plainti� what he actually bargained for in the contract as opposed to damages, which is why it is an equitable remedy. In general, speci�c performance is applied in breach of contract actions where monetary damages aren’t su�cient like in a case of real property or a speci�c good or chattel. For example, a buyer might have negotiated the purchase of a rare Indian motorcycle where suitable replacement is not available and monetary damages simply don’t exist to cover the loss. So the court will mandate that the motorcycle be delivered to the buyer.   Rescission and Reformation (Release) are the undoing and or changing of a contract respectively. A rescission might occur when there is a voidable contract. A reformation might occur when there is a voidable contract but the parties want to rea�rm the agreement.   Quasi-Contract exists by court order and are created only to avoid the unjust enrichment of a party in a dispute over payment for a good or service. To avoid an unjust result, a court may create an enforceable agreement where none legally exists. The criteria and facts that create a quasi- contract are unique on a jurisdictional basis, and not easy to determine, as is evidenced by the following case.   Baer v. Chase, 177 Fed. Appx. 261, 2006 U.S. App. LEXIS 10833 (3d Cir. N.J., 2006)  

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FACTS (In two previous courtroom dramas) ….this Court set forth a comprehensive summary of the facts of this case.  See Baer v. Chase, No. 02-2334, 2005 U.S. Dist. LEXIS 44977, 2005 WL 1106487, at *1-3 (D.N.J. Apr. 29, 2005); Baer v. Chase, No. 02-2334, 2004 U.S. Dist. LEXIS 3954, 2004 WL 350050, at *2-4 (D.N.J. Feb. 20, 2004); see also Baer v. Chase, 392 F.3d 609, 612-15 (3d Cir. 2004). In the interest of brevity, the Court will discuss only those facts that are relevant to Defendants’ motion.   Baer, a former prosecutor in the Union County Prosecutor’s O�ce in Elizabeth, New Jersey, and Chase, a writer, director, producer, and creator of television programs, met in June 1995, around the time Chase was developing an idea for a television series about a mob boss in therapy.   During their initial meeting, Baer told Chase some New Jersey crime stories, all of which were factual and true. Baer, apparently unaware of the fact that Chase had previously worked on projects involving northern New Jersey mobsters, suggested that Chase shoot movies or television shows about crime in New Jersey and the northern New Jersey mob. Also, according to Baer, he mentioned some facts and locations concerning organized crime in New Jersey, but provided no “detail or drama.”   In July 1995, as Chase began to devote more attention to the “mob boss in therapy idea,” he contacted Baer to see if he would be willing to help Chase compile information about the inner workings of the mob. To obtain some of the desired information, Baer reached out to Detective Lieutenant Robert Jones (“Jones”), an organized crime expert in the Union County Prosecutor’s O�ce. After speaking with Jones, Baer sent Chase some notes discussing mob involvement in gambling and in the garbage business, and Morris Levy, the Jewish mobster and record producer who had been jailed for defrauding MCA Records. In August 1995, Chase pitched the idea for a show about a mob boss in therapy to Fox Broadcasting

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(“Fox”) and, in early September, Fox agreed to �nance the creation of a pilot story.   In October, Chase visited New Jersey for three days to conduct research for the show. During his visit, Chase spent many hours with Baer, who arranged for Chase to meet with individuals whom Baer thought could provide useful information about organized crime. Speci�cally, Chase and Baer met with Jones, Detective Thomas Koczur (“Koczur”), an Elizabeth homicide detective and close friend to Baer, and Antonio Spirito (“Spirito”), a waiter at an Italian restaurant, whom Koczur knew to be a good storyteller. Baer and Koczur, who served as tour guide, drove Chase to several locations in northern New Jersey, including local landmarks, known mob hangouts, and locations of mob signi�cance in Elizabeth and Newark. Additionally, Koczur arranged for the group to have lunch with Spirito, who shared some true and sometimes personal crime stories. Finally, Chase met with Jones who provided him with access to wiretaps that were used in local criminal trials and information about organized crime, including facts about Morris Levy and the mob’s in�ltration of MCA Records. As Baer has acknowledged, virtually all of the information provided to Chase during his visit exists in the public record.   At the end of October 1995, Chase returned to Los Angeles and completed a draft pilot of The Sopranos, which he delivered to Fox in early December 1995. After completing the pilot script,Chase sent a copy to Baer. Fourteen months later, Baer sent Chase his written comments on the script, but had no further involvement with Chase or The Sopranos. Though the issue of compensation came up on a few occasions, Chase never paid Baer for his services and the two never entered into a contract of any kind. Chase, recognized as creator, writer, director, and producer of the series, continued working on The Sopranos, which �rst aired on HBO in 1999. The Sopranos, now in its �nal season, has enjoyed widespread critical and �nancial success.  

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Opinion PISANO, District Judge.   Plainti� Robert v. Baer (“Plainti�” or “Baer”) brought this action against Defendants David Chase (“Chase”) and DC Enterprises, Inc. (together “Defendants”) asserting a number of claims arising out of Baer's alleged involvement in the creation and development of the well- known television series, The Sopranos. After two orders from this Court granting summary judgment to Defendants and two appeals to the U.S. Court of Appeals for the Third Circuit, all that remains from Baer's Complaint is a single quasi-contract claim. Currently before the Court is Defendants' Motion to Limit Damages Recoverable in Quasi-Contract in which Defendants argue that Baer should be (1) precluded from recovering in quasi-contract for any ideas he claims he provided to Chase; (2) barred from seeking discovery, including expert discovery, concerning the value of any idea he alleges he provided to Chase; and (3) prohibited from o�ering evidence, including expert opinions, reports, and testimony, regarding the value of those ideas. For the reasons expressed below, the Court grants Defendants’ motion.   A quasi-contract, which is not a contract at all, is based upon an equitable principle through which courts “prevent unjust enrichment or unconscionable bene�t or advantage.” As such, quasi-contract and contract, whether express or implied, are mutually exclusive theories of recovery. Du�y, 123 F. Supp. 2d at 814.   Under New Jersey law, to recover in quasi-contract for the use of an idea, the plainti� must demonstrate that the idea for which he seeks compensation was novel. Id. at 815 (denying plainti�'s quasi-contract claim for non-novel idea); Bergin v. Century 21 Real Estate Corp., No. 98-8075, 2000 U.S. Dist. LEXIS 2088, 2000 WL 223833, at *9 (S.D.N.Y. Feb. 25, 2000) (stating that novelty is required for quasi- contract claim for misappropriation of an idea under New Jersey law).  

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Indeed, it is not “unjust” to use a non-novel idea without compensating the one who supplied the idea. Du�y, 123 F. Supp. 2d at 815; see also Blackmon v. Iverson, 324 F. Supp. 2d 602, 613 (E.D. Pa. 2003) (“In the absence of novelty and concreteness, the plainti� cannot show that he enriched the defendant; the defendant has only received an idea that he was already free to use.”). In earlier opinions, both this Court and the Third Circuit concluded that Baer did not communicate any novel ideas to Chase. As the Third Circuit stated, “it is clear that virtually all of Baer's alleged contributions either existed in the public domain or concerned stories and facts that he did not provide.” Baer, 392 F.3d at 629.   Further, the Third Circuit concluded that, under New Jersey law, “ideas lose their novelty if they are in the domain of public knowledge before use.” Id. Thus, it is law of the case that the ideas Baer conveyed to Chase were either not novel or not Baer's ideas – indeed, the so-called ideas were stories told by Koczur, Jones, and Spirito, and facts and information that existed in the public domain. As a result, Baer cannot recover in quasi-contract for Chase’s use of those ideas. See Du�y, 123 F. Supp. 2d at 815; Bergin, 2000 U.S. Dist. LEXIS 2088, 2000 WL 223833, at *9.   (Author’s note: On previous occasions, Baer sued Chase for implied-in-fact contract and that case was found in favor of Chase, too.)  

CONCLUSION Based on a reading of the last case, one could state that anyone can sue anyone for anything. Baer and Chase had a couple of meetings. They spent a day or two together and that was it. But Baer felt that Chase owed him something, so he sued the creator of The Sopranos for money. And he lost. Referring back to alternative dispute resolution, perhaps Baer would have been better o� negotiating some form of settlement rather than going through ten years of litigation to get rejected on his claim.  

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When a breach of contract or a perceived breach of contract occurs, it is usually better to discuss it directly with the other party to the agreement. When litigants end up in court over bad feelings, usually the only parties that win in those type of breach of contract lawsuits are the lawyers.  

Footnotes

1. Special thanks to OpenJurist.org for providing access to this case law.

2. A quasi-contract may be formed without an o�er but that is not a contract and will be discussed later.

3. Mesaros v. United States, 845 F.2d 1576, 1580-81 (Fed. Cir. 1988); Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116, 122 (S.D.N.Y. 1999), a�'d, 210 F.3d 88 (2d Cir. 2000) (per curiam); Brown v. 1995 Tenet ParaAmerica Bicycle Challenge, 959 F. Supp. 496, 500 (N.D. Ill. 1997); Donovan v. RRL Corp., 27 P.3d 702, 709 (Cal. 2001); 111 Whitney Ave., Inc. v. Comm'r of Mental Retardation, 802 A.2d 117, 123 (Conn. App. Ct. 2002); Zanakis-Pico v. Cutter Dodge, Inc., 47 P.3d 1222, 1236-37 (Haw. 2002); Steinberg v. Chi. Med. Sch., 371 N.E.2d 634, 639 (Ill. 1977); O'Keefe v. Lee Calan Imps., Inc., 262 N.E.2d 758, 759 (Ill. App. Ct. 1970); I & R Mech., Inc. v. Hazelton Mfg. Co., 817 N.E.2d 799, 802 (Mass. App. Ct. 2004); Ford Motor Credit Co. v. Russell, 519 N.W.2d 460, 463 (Minn. Ct. App. 1994); Ziglin v. Players MH, L.P., 36 S.W.3d 786, 789 (Mo. Ct. App. 2001); Craft v. Elder & Johnston Co., 38 N.E.2d 416, 419 (Ohio Ct. App. 1941); Bourke v. Kazaras, 2000 PA Super. 29, P 9, 746 A.2d 642, 644 (2000); Trotter v. State Farm Mut. Auto. Ins. Co., 377 S.E.2d 343, 347 (S.C. Ct. App. 1988); Chang v. First Colonial Sav. Bank, 410 S.E.2d 928, 930 (Va. 1991).

4. See Federal Trade Commission Act 15. U.S.C. §45(A) (2006).

5. California Family Code §6750-6753 (Cal.Fam. Code) & New York Arts & Cultural A�airs Law §35.03 (Arts & Cult. A�. Law).

6. 29 U.S.C. §212 (2000).

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7. Reed v. King, 145 Cal App 3d 261; 193 Cal Rptr 130 (1983).

8. Stambovsky v. Ackley, 169 AD2d 254; 572 NYS2d 672 (1991).

9. Reed, supra, 193 Cal Rptr at 133. 10. Michigan Bar Journal (February, 2006), 85 MI Bar Jnl.

34 11. Some critical thinkers believe that Fraud and Undue

In�uence fall under a broader category termed Unconscionable. Unconscionable contracts are so lopsided in one party’s favor that they are voidable by that party.

12. See, e.g., United States v. Braunstein, 75 F. Supp. 137, 139 (S.D.N.Y. 1947); Speckel v. Perkins, 364 N.W.2d 890 (Minn. Ct. App. 1985); see also 1 Samuel Williston & George J. Thompson, A Treatise on the Law of Contracts §94, at 297 (rev. ed. 1936).

13. See, e.g., Glover v. Metro. Life Ins. Co., 664 F.2d 1101, 1105 (8th Cir. 1981) (“In all the circumstances, it would be unjust, in our view, for [an unknowing mistaken payee] to keep the money. This result disappoints an expectation on her part that she had every reason to believe, at one time, to be legitimate, but to decide otherwise would be intolerably unfair to [the mistaken payor].").

14. Collins v. Rizkana (1995), 73 Ohio St.3d 65, 69-70, 652 N.E.2d 653.

15. See §110 of the Restatement (Second) of Contracts. (1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception: (a) a contract of an executor or administrator to answer for a duty of his decedent (the executor- administrator provision); (b) a contract to answer for the duty of another (the suretyship provision); (c) a contract made upon consideration of marriage (the marriage provision); (d) a contract for the sale of an interest in land (the land contract provision); (e) a contract that is not to be performed within one year from the making thereof (the one-year provision). (2) The following classes of

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contracts, which were traditionally subject to the Statute of Frauds, are now governed by Statute of Frauds provisions of the UCC: (a) a contract for the sale of goods for the price of $500 or more (UCC §2- 201). 

16. Vincent A. Wellman, Conceptions of the Common Law: Re�ections on a Theory of Contract, 41 U. MIAMI L. REV. 925, 952 (1987).

17. See E. FARNSWORTH, CONTRACTS §8.9 (1982). 18. Jacob & Youngs, 129 N.E. at 890. 19. Id. 20. Id at 819. 21. RESTATEMENT (SECOND) OF CONTRACTS

§241 (1979). 22. Ahlers Bldg. Supply Inc. v. Larsen, 535 N.W.2d 431,

435 (S.D. 1995); ADC-I, Ltd., v. Pan American Fuels, Ltd., 525 N.W.2d 190, 192 (Neb. 1994); Lange Indus. Inc. v. Hallum Grain Co., 507 N.W.2d 465, 473 (Neb. 1993). 

23. Newton v. Standard Fire Ins. Co., 229 S.E.2d 297, 301 (N.C. 1976) (“North Carolina follows the general rule that punitive or exemplary damages are not allowed for breach of contract, with the exception of breach of contract to marry ...”), but 11 states have prohibited suits for breach of promise to marry by statute, see Rebecca Tushnet, Note, Rules of Engagement, 107 Yale L.J. 2583, 2586 & n.13 (1998) (tracing this development).

24. See Stevenson v. John J. Grier Hotel Co., 251 S.W. 355, 355 (Ark. 1923); Milner Hotels v. Brent, 43 So. 2d 654, 656 (Miss. 1949).

25. See, e.g., Brown v. Coates, 253 F.2d 36, 40 (D.C. Cir. 1958) (�duciary in real estate); Newton v. Hornblower, Inc., 582 P.2d 1136, 1149 (Kan. 1978) (�duciary in general); Balsemides v. Perle, 712 A.2d 673, 685 (N.J. Super. Ct. App. Div. 1998) (breach of trust).

26. At least 45 states recognize bad faith breach of an insurance contract as a tort in third-party cases. See Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 Seton Hall L. Rev. 74, 80 n.33 (1994) (listing cases).

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