In four chapters, we have focused on the question of whether the parties created a valid contract and have examined the requirements of (1) agreement (offer and acceptance), (2) real consent (free will, knowledge, and capacity), (3) consideration, and (4) legality.
A. The Statute of Frauds
An agreement declared illegal by statute will not be enforced by the courts. Example: wagering or gambling agreements are specifically declared unenforceable in most states. The general rule is this: a contract need not be in writing to be enforceable. The Statute of Frauds requires that some contracts be evidenced by a writing, signed by the party to be bound. Notice, of course, that this is a statute; it is a legislative intrusion into the common law of contracts. The name of the act is somewhat unfortunate: insofar as it deals with fraud at all, it does not deal with fraud as we normally think of it. It tries to avoid the fraud that occurs when one person attempts to impose on another a contract that never was agreed to.
Types of Contracts Required in Writing and the Exceptions
Promises to Pay the Debt of Another
The rule: a promise to pay the debt of another person must be evidenced by some writing if it is a “collateral promise of suretyship (or ‘guaranty’).” A collateral promise is one secondary or ancillary to some other promise. A surety or guarantor(the terms are essentially synonymous) is one who promises to perform upon the default of another.
The exception: the main purpose doctrine. The main purpose doctrine is a major exception to the surety provision of the Statute of Frauds. It holds that if the promisor’s principal reason for acting as surety is to secure her own economic advantage, then the agreement is not bound by the Statute of Frauds writing requirement.
Agreements of Executor or Administrator
The rule: the promise by an executor or administrator of an estate to answer personally for the debt or other duty of the deceased is analogous to the surety provision—it must be evidenced by some writing if it is to be enforced over an objection by the would-be obligor. For an agreement to be covered by the statute, there must have been an obligation before the decedent’s death.
The exception: the main purpose exception to the surety provision applies to this section of the Statute of Frauds as well as to the “promises to pay the debts of another” section, noted earlier.
The Marriage Provision
The rule: if any part of the marriage or the promise to marry consists also of a promise to exchange some consideration, the Statute of Frauds requires that part to be evidenced by some writing. [4] Mutual promises to marry are not within the rule. The exception: there is no “named” exception here, but courts are free to make equitable adjustments of property of the marriage to avoid an injustice.
Contracts Affecting an Interest in Real Estate
The rule: almost all contracts involving an interest in real estate are subject to the Statute of Frauds. “An interest in land” is a broad description, including the sale, mortgaging, and leasing of real property (including homes and buildings); profits from the land; the creation of easements; and the establishment of other interests through restrictive covenants and agreements concerning use. The exception: the part performance doctrine. The name here is a misnomer, because it is a doctrine of reliance, and the acts taken in reliance on the contract are not necessarily partial performances under it.
The One-Year Rule
The rule: any agreement that cannot be performed within one year from its making must be evidenced by some writing to be enforceable. The purpose of this part is perhaps more obvious than most of the statute’s provisions: memories fade regarding the terms of oral contracts made long ago; people die; disputes are not uncommon.The exception: the possibility test. The statute’s one-year rule has been universally interpreted to mean a contract that is impossible to be fully performed within one year; if there is even the slightest chance of carrying out the agreement completely within the year, an oral contract is enforceable.
Under the UCC
The rule: contracts for the sale of goods in an amount greater than $500 must be evidenced by some writing to be enforceable.
Other Writing Requirements
In addition to these requirements, the UCC provides that agreements for the sale of securities (e.g., most stocks and bonds) usually need to be evidenced by a writing, and agreements for property not included in the sales or securities articles of the UCC that exceed $5,000 in value need to be so evidenced. These include agreements to pay commissions to real estate brokers, to make a will, to pay debts already discharged in bankruptcy, to arbitrate rather than litigate, to make loans, and to make installment contracts.
Exceptions under the UCC
There are four exceptions to the UCC’s Statute of Frauds requirement that are relevant here.
The Ten-Day-Reply Doctrine
This provides that, as between merchants, if an oral agreement is reached and one party sends the other a written statement confirming it, the other party has ten days to object in writing or the agreement is enforceable.
“Specially Manufactured Goods”
This exception provides that a seller who has manufactured goods to the buyer’s specifications or who has made “either a substantial beginning of their manufacture or commitments for their procurement” will not be stuck if the buyer repudiates, assuming that the goods are unsuitable for sale to others.
The “Admission” Exception
This exception arises—reasonably enough—when the party against whom enforcement is sought admits in testimony or legal papers that a contract was in fact made.
The “Payment or Delivery and Acceptance” Exception
The UCC provides that an oral contract for goods in excess of $500 will be upheld if payment has already been made and accepted, or if the goods have been received and accepted.
Sufficiency of the Required Writing - At Common Law
We have been careful not to say “the contract needs to be in writing.” We have said, “a contractual intention must be evidenced by some writing, signed by the party to be bound.” A signed contract is not required. In a few states, consideration for the promise must be stated in writing, even if the consideration has already been given.
Under the UCC
In contracts for the sale of goods, the writing must be signed by the party to be charged, and the parties must be sufficiently identified.
Electronic Communications
One of the primary purposes of the Electronic Signatures in Global and National Commerce Act, S. 761, popularly referred to as ESign, is to repeal state law requirements for written instruments as they apply to electronic agreements and to make almost anything reasonably indicative of a signature good enough electronically.
Effect of Noncompliance and Exceptions; Oral Rescission
The basic rule is that contracts governed by the Statute of Frauds are unenforceable if they are not sufficiently written down. The Statute of Frauds can work injustices. In addition to the exceptions already noted, there are some general exceptions.
Full Performance
Having fulfilled its function (neither side having repudiated the contract), the agreement cannot be rescinded on the ground that it should have been, but was not, reduced to writing.
Detrimental Reliance
Second, some relief may be granted to one who has relied on an oral contract to her detriment (similar to the part performance doctrine mentioned already). For a partially performed contract unenforceable under the Statute of Frauds, restitution may be available.
Oral Rescission
Third, most contracts required to be in writing may be rescinded orally. The new agreement is treated in effect as a modification of the old one, and since a complete rescission will not usually trigger any action the statute requires to be in writing, the rescission becomes effective in the absence of any signed memorandum.
Contract Modification
Fourth, contracts governed by the Statute of Frauds may be modified orally if the resulting contract, taken as a whole, falls outside the statute. The same rule applies under the UCC.
B. The Parol Evidence Rule
Unlike Minerva sprung forth whole from the brow of Zeus in Greek mythology, contracts do not appear at a stroke memorialized on paper. Almost invariably, negotiations of some sort precede the concluding of a deal. People write letters, talk by telephone, meet face-to-face, send e-mails, and exchange thoughts and views about what they want and how they will reciprocate. In the course of these discussions, they may reach tentative agreements, some of which will ultimately be reflected in the final contract, some of which will be discarded along the way, and some of which perhaps will not be included in the final agreement but will nevertheless not be contradicted by it. Whether any weight should be given to these prior agreements is a problem that frequently arises.
Parol Evidence at Common-Law
The rule at common law is this: a written contract intended to be the parties’ complete understanding discharges all prior or contemporaneous promises, statements, or agreements that add to, vary, or conflict with it. The parol evidence rule (parol means oral; it is related to parliament and parly—talking) is a substantive rule of law that operates to bar the introduction of evidence intended to show that the parties had agreed to something different from what they finally arrived at and wrote down.
The Exemptions and Exceptions
Despite its apparent stringency, the parol evidence rule does not negate all prior agreements or statements, nor preclude their use as evidence.
Not an Integrated Contract
If the document is fully integrated, no extrinsic evidence will be permitted to modify the terms of the agreement, even if the modification is in addition to the existing terms, rather than a contradiction of them. If the contract is partially integrated, prior consistent additional terms may be shown.
Void or Voidable Contracts
Parol evidence is admissible to show the existence of grounds that would cause the contract to be void. Such grounds include illegality, fraud, duress, mistake, and lack of consideration. And parol evidence is allowed to show evidence of lack of contractual capacity.
Contracts Subject to a Condition Precedent
When the parties orally agree that a written contract is contingent on the occurrence of an event or some other condition (a condition precedent), the contract is not integrated and the oral agreement may be introduced.
Untrue Recital or Errors
The parol evidence rule does not prevent a showing that a fact stated in a contract is untrue. The rule deals with prior agreements; it cannot serve to choke off inquiry into the facts. Thus the parol evidence rule will not bar a showing that one of the parties is a minor, even if the contract recites that each party is over eighteen.
Ambiguity
To enforce a contract, its terms must be understood, so parol evidence would be allowed, but a claim of ambiguity cannot be used to alter, vary, or change the contract’s meaning.
Postcontract Modification
Ordinarily, an additional consistent oral term may be shown only if the contract was partially integrated. The parol evidence rule bars evidence of such a term if the contract was fully integrated. However, when there is additional consideration for the term orally agreed, it lies outside the scope of the integrated contract and may be introduced.
The UCC Approach
Under Section 2-202 of the UCC, a course of dealing, a usage of trade, or a course of performance can be introduced as evidence to explain or supplement any written contract for the sale of goods. A course of dealing is defined as “a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” A course of performance is the conduct of a party in response to a contract that calls for repeated action (e.g., a purchase agreement for a factory’s monthly output, or an undertaking to wash a neighbor’s car weekly).
C. Interpretation of Agreements: Practicalities versus Legalities
The General Problem and the Purpose of Contractual Interpretation
The General Problem
As any reader knows, the meaning of words depends in part on context and in part on the skill and care of the writer. word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.” Words and phrases can be ambiguous, either when they stand alone or when they take on a different coloration from words and phrases near them.
The Basic Rule of Interpretation
Courts attempt to give meaning to the parties’ understanding when they wrote the contract.
The intention of the parties governs, and if their purpose in making the contract is known or can be ascertained from all the circumstances, it will be given great weight in determining the meaning of an obscure, murky, or ambiguous provision or a pattern of conduct.
Tools of Interpretation
The policy of uncovering purpose has led to a number of tools of judicial interpretation:
· More specific terms or conduct are given more weight than general terms or unremarkable conduct. Thus a clause that is separately negotiated and added to a contract will be counted as more significant than a standard term in a form contract.
· A writing is interpreted as a whole, without undue attention to one clause.
· Common words and terms are given common meaning; technical terms are given their technical meaning.
· In the range of language and conduct that helps in interpretation, the courts prefer the following items in the order listed: express terms, course of performance, course of dealing, and usage of trade.
· If an amount is given in words and figures that differ, the words control.
· Writing controls over typing; typing controls over printed forms.
· Ambiguities are construed against the party that wrote the contract
These rules fall within three general headings: the Statute of Frauds, the parol evidence rule, and the rules of interpretation. Nevertheless, it is generally true that a written contract has at least three benefits over oral ones, even those that by law are not required to be in writing. (1) The written contract usually avoids ambiguity. (2) It can serve both as a communications device and as a device for the allocation of power, especially within large companies. By alerting various divisions to its formal requirements, the contract requires the sales, design, quality-control, and financial departments to work together. By setting forth requirements that the company must meet, it can place the power to take certain actions in the hands of one division or another. (3) Finally, should a dispute later arise, the written contract can immeasurably add to proof both of the fact that a contract was agreed to and of what its terms were.
Third-Party Rights
To this point, we have focused on the rights and duties of the two parties to the contract. In this chapter, we turn our attention to contracts in which outsiders acquire rights or duties or both. Three types of outsiders merit examination:
1. Assignees (outsiders who acquire rights after the contract is made)
2. Delegatees (outsiders who acquire duties after the contract is made)
3. Third-party beneficiaries (outsiders who acquire rights when the original contract is made)
A. Assignment of Contract Rights
The Concept of a Contract Assignment
Contracts create rights and duties. By an assignment, an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person (assignee); the obligee then becomes an assignor (one who makes an assignment).
The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights"). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment.
Method of Assignment
Manifesting Assent
To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to theassignee for nothing (not likely in commercial transactions, of course).
Acceptance and Revocation
For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment.
Notice
Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged.
Effect of Assignment
General Rule
An assignment of rights effectively makes the assignee stand in the shoes of the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor.
Exceptions
The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course (covered in detail (Reference mayer_1.0-ch23 not found in Book)). Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor.
Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.
When Assignments Are Not Allowed
The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.
Material Change in Duties of the Obligor
When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments.
Assignment of Personal Rights
When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right that cannot be assigned. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights", Nassau Hotel Co. v. Barnett & Barse Corp., is an example of the nonassignability of a personal right.
Assignment Forbidden by Statute or Public Policy
The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties.
Contracts That Prohibit Assignment
Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties. Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods.
Future Contracts
The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract.
Partial Assignments
An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable.
Successive Assignments
It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments"). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable.
Assignor’s Warranties
An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it.
B. Delegation of Duties
Basic Rules Regarding Delegation
General Rule
To this point, we have been considering the assignment of the assignor’s rights (usually, though not solely, to money payments). But in every contract, a right connotes a corresponding duty, and these may be delegated. A delegation is the transfer to a third party of the duty to perform under a contract. The one who delegates is the delegator. In most states, at common law, duties must be expressly delegated.
Effect on Obligor
An obligor who delegates a duty (and becomes a delegator) does not thereby escape liability for performing the duty himself. The obligee of the duty may continue to look to the obligor for performance unless the original contract specifically provides for substitution by delegation. The obligee (again, the one to whom the duty to perform flows) may also, in many cases, look to the delegatee, because the obligee becomes an intended beneficiary of the contract between the obligor and the delegatee, as discussed in Section 14.3 "Third-Party Beneficiaries".
Nondelegable Duties
Personal Services
Personal services are not delegable. If the contract is such that the promisee expects the obligor personally to perform the duty, the obligor may not delegate it.
Public Policy
Public policy may prohibit certain kinds of delegations. A public official, for example, may not delegate the duties of her office to private citizens, although various statutes generally permit the delegation of duties to her assistants and subordinates.
C. Third-Party Beneficiaries
The General Rule
The general rule is this: persons not a party to a contract cannot enforce its terms; they are said to lack privity, a private, face-to-face relationship with the contracting parties. But if the persons are intended to benefit from the performance of a contract between others, then they can enforce it: they are intended beneficiaries.
Two Types of Third-Party Beneficiaries
In the vocabulary of the Restatement, a third person whom the parties to the contract intend to benefit is an intended beneficiary—that is, one who is entitled under the law of contracts to assert a right arising from a contract to which he or she is not a party. There are two types of intended beneficiaries.
Creditor Beneficiary
A creditor beneficiary is one to whom the promisor agrees to pay a debt of the promisee.
Donee Beneficiary
The second type of intended beneficiary is a donee beneficiary. When the promisee is not indebted to the third person but intends for him or her to have the benefit of the promisor’s performance, the third person is a donee beneficiary (and the promise is sometimes called a gift promise). If a person is not an intended beneficiary—not a creditor or donee beneficiary—then he or she is said to be only an incidental beneficiary, and that person has no rights.
Modification of the Beneficiary’s Rights
Conferring rights on an intended beneficiary is relatively simple. Whether his rights can be modified or extinguished by subsequent agreement of the promisor and promisee is a more troublesome issue. The general rule is that the beneficiary’s rights may be altered as long as there has been novesting of rights (the rights have not taken effect).
Government Contracts
The general rule is that members of the public are only incidental beneficiaries of contracts made by the government with a contractor to do public works. A promisor under contract to the government is not liable for the consequential damages to a member of the public arising from its failure to perform (or from a faulty performance) unless the agreement specifically calls for such liability or unless the promisee (the government) would itself be liable and a suit directly against the promisor would be consistent with the contract terms and public policy.A minor’s contract, whether executory or executed, is generally voidable at his option.
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