Terms in this set (35)

Definition of a Contract

Sir William Blackstone, a famous English jurist, defined a contract as "an agreement, upon sufficient consideration, to do or not to do a particular thing." Modern definitions of contract center on a promise. It is the element common to all contracts. Section I of the Restatement (Second) of Contracts defines a contract as "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty." It defines a promise as "a manifestation of the intention [of a party] to act or refrain from acting in a specified manner."

A contract, then, is the legal relationship consisting of the rights and duties of the agreeing parties that arise from promises exchanged. Contract law governs that relationship. Contracts are particularly important for businesses as they usually concern arrangements that are more complex than the simultaneous exchange of money for goods.

Not all promises are enforceable contracts. A promise may be binding (contractual) or nonbinding (noncontractual). For a promise to be binding and enforceable, it must meet the essential requirements of a contract. If a party fails to perform a nonbinding promise, contract law will not provide a remedy. This makes clear the need to meet the requirements of a contract when parties want their exchange of promises to be legally binding.

Formal writing or oral discussions may create contracts or contracts may be inferred by the actions of the parties. A contract is called an express contract if there is a written or oral expression of intent by the parties to enter into a legally binding agreement. A contract is an implied contract if it arises from the actions rather than the expressions of the parties. That is, given the way the parties have acted with respect to each other, the court may infer that a contract exists. As we saw in the discussion of torts, the law may also imply particular terms into contracts, such as implied warranties of safety. The essence of a contract is illustrated in Exhibit 10.1, regardless of whether the contract is express or implied.
10-2a Offer and Acceptance

The essence of a contract is a legally binding agreement, that is, a mutual understanding between the parties as to the substance of the contract. This agreement between the parties is reached through a process of offer and acceptance.
The Offer

An offer is a promise to do something or to refrain from doing some specific thing. As defined in the Restatement (Second) of Contracts, "An offer 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." The party making an offer is called the offeror or offerer; the offeree is the party to whom the offer is made.

You offer to obligate yourself through a contract. Because the offeror is allowing the offeree the opportunity to create a binding promise by making a valid acceptance of the offer, the offeror controls the terms of the offer. To be an effective offer, three requirements must be met:

There must be a clear intent by the offeror to become contractually bound.

The basic terms and conditions of the offer must be clear and certain.

The offer must be properly communicated.

Manifestation of Intent

To make an offer, the offeror must have the intent to be bound to the contract, and that intent must be clearly expressed or manifested. Preliminary negotiations are not offers but are invitations to negotiate or to make an offer. Dickering with a salesperson about the price of a car is negotiation, not an offer.

A person's intent is tested by an objective standard. The court decides from the evidence whether a reasonable person familiar with the business being transacted would be justified in believing an offer had been made. If, under the circumstances, the court decides that intent was lacking, a contract could not be formed. For example, if Shakira says, "I would like to sell my car for $," there is no offer to sell that allows Sean Paul to form a contract by saying, "Sold. I will pay you $."

Many things that are stated as being for sale are not definite offers that can be accepted to create a contract. For example, when a jacket worn by Beyoncé is put on the auction block, unless otherwise stated, it is an invitation for people to submit offers on the jacket. Under common auction rules, such as one with a reserve price, the owner of the jacket can withdraw it if the highest price offered is not sufficient. However, if the auction rules say that the highest bid must be accepted, then putting the jacket up for auction is an offer.

Similarly, most advertisements are regarded as invitations for others to submit offers to buy. If a company website lists a particular model of laser printers for $, it is likely that if you order one, the order will be accepted and a contract formed. But the seller listing the printers for sale can reject offers to buy, as ads are legally generally considered to be requests for offers to buy, rather than offers themselves. No seller wants to give up profitable sales, but if inventory is not adequate, offers by customers to buy will be rejected unless they are willing to wait for the next shipment from China.
Definite Terms and Conditions

Not every tiny detail of an offer must be present for it to be a valid offer. If you order a laptop on the Internet, the contract does not have to say it will be properly packed for shipment; that is presumed. Under common law, however, terms of an offer must be sufficiently detailed so each party's promises are certain. An offer that has unclear major terms or is missing important terms cannot be the basis for a contract. Sometimes the courts supply minor missing terms, so the offer does not fail because it is indefinite. By doing this, the courts prevent a party from backing out of a contract after the fact by claiming that there never was an offer because
some trivial point was not clear.

Communication of the Offer

Exhibit 10.3 summarizes the timing of communication of offer and acceptance. An acceptance requires knowledge of the offer by the offeree. The case of a person who finds and returns a lost dog and later learns of a reward is an example of an offer failing for lack of communication. Because communication of the offer occurred after the act of acceptance (returning the dog to its owner), a proper acceptance did not take place. We cannot form a contract by accepting an unknown offer.
Exhibit 10.3
Legal Effect of Offer and Acceptance Communications

COMMUNICATION


TIME EFFECTIVE


LEGAL EFFECT

By Offeror

1.

Offer



When received by offeree


Offeree has the power to accept

2.

Revocation



When received by offeree


Ends offeree's power to accept

By Offeree

1.

Rejection



When received by offeror


Terminates the offer

2.

Counteroffer



When received by offeror


Terminates the offer

3.

Acceptance



When sent by offeree


Forms a contract
© Cengage Learning
Terminating an Offer

Termination of an offer can occur by the action of the parties or by the operation of law. The parties can terminate an offer by withdrawing it (by the offeror), rejecting it (by the offeree), or through lapse of time (by the inaction of the offeree).

An option contract is different because it is a binding promise to keep an offer open for a specified period of time. For example, one may pay $ to have an option to buy a house for $ any time in the next ten days. The offer to sell the house may not be withdrawn during that time; there is an exclusive right to exercise the option to buy at $ for ten days. Of course, the option contract itself must have been formed through an offer and acceptance.
Termination by the Parties

Offerors can terminate most offers by withdrawing the offer before it has been accepted by the offeree. The withdrawal of the offer by the offeror is a revocation. To be effective, the revocation must be communicated to the offeree before acceptance. An offer can state that it must be accepted within a designated time period. The end of that time period terminates the offer.

After an offer has been made, the offeree can create a contract by accepting the offer or can terminate the offer by rejecting it. One important form of rejection is a counteroffer, a proposal by the offeree to change the terms of the original offer. For example, if Johnny Depp offers to buy Brad Pitt's old laptop for $, and Pitt says that he will sell it for $, a counteroffer has been made. The original offer by Depp is terminated by the counteroffer. By making a counteroffer, Pitt became the offeror and Depp became the offeree. Depp's original offer no longer exists, although it can be revived.

An offer may also terminate by lapse of time. If an offer does not state a specific time for acceptance, the passage of a reasonable length of time after the offer has been made terminates it. What is reasonable depends upon the circumstances. An offer to buy stock in a company at a set price terminates by lapse of time almost immediately, while an offer to sell a car expires after a longer time. It depends on the normal practices of the businesses involved.
Termination by the Operation of Law

An offer may terminate by operation of law through intervening illegality. That occurs when a court decision or, usually, legislation makes an offer illegal. Suppose Lindsay Lohan has an Internet-based business that offers to take bets on college football games. Congress then enacts a law forbidding gambling by Internet. Lohan's offer to take bets is terminated by an intervening illegality.

An offer also terminates by law if the subject matter is destroyed. Suppose Shakira offers to sell Rihanna her car. Before Rihanna accepts Shakira's offer, the car is wrecked in an accident. The offer terminated when the accident occurred. Note that if Shakira had offered to sell Rihanna a type of car rather than a particular car, the offer would not have been terminated by the accident.

The mental or physical incapacity or death of the offeror or the offeree also terminates an offer by operation of law. An offer is terminated because the person does not have the mental capacity to enter into a contract; or physical limitations, such as a severe injury, may make a party unable to perform a contract that requires certain skills. Similarly, an offeror or offeree who dies cannot execute a contract.
The Acceptance

In contract law, acceptance is an offeree's expression of assent or agreement to the terms of an offer. In most contracts, this means the offeree accepts by making a promise in exchange for the original promise. To be effective, an acceptance must be unconditional, unequivocal, and properly communicated. A supposed acceptance that lacks one of these elements generally does not bring about a binding contract.

Most contracts are called bilateral contracts when there is an exchange of promises. For example, you say to a friend, "I will sell you my car for $"; he responds, "Fine, I will pay that." In some states, certain contracts are referred to as unilateral contracts when there is acceptance by performance. For example, your neighbor says to you, "I will pay you $ to mow my lawn." You say nothing in response, but the next day you mow the lawn—so the offer was accepted by performance. Such contracts are valid whether they are called unilateral or bilateral.
Must Be Unconditional

An offeree must accept an offer as presented by an offeror. Traditionally, it was said that the acceptance must be the mirror image of the offer. In other words, the key parts of the offer must be in the acceptance. The common-law rule is that a supposed acceptance that adds conditions to the original offer is a counteroffer. By changing the terms of the offer, there is not unconditional acceptance; the offeree rejects the offer. Failure of the parties to clearly agree is seen in the Certified Fire Protection case.
Certified Fire Protection, Inc. v. Precision Construction, Inc.
Supreme Court of Nevada 283 P.3d 250 (2012)

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Case Background

Precision Construction is a general contractor that bid on a construction job. It solicited bids from subcontractors for, among other things, the design and installation of a sprinkler system for fire suppression. Based on the specifications, Certified Fire submitted a bit of $. Precision later notified Certified that it had won the bid and that Precision was beginning construction. On December 5, Certified got a copy of the contract from Precision along with a set of construction plans and sprinkler requirements. The contract required Certified to have the preliminary design drawings of the sprinkler system within two weeks and to provide an insurance certificate.

Over the next several weeks, Precision told Certified it must have the documents. Certified objected to certain terms of the contract. On January 19, with no signed contract or insurance certificate, Certified billed Precision for $ for its work on the sprinkler plans, although the plans were not yet ready for Certified. On January 26, Precision told Certified that it was holding up the whole project and that it would move ahead without Certified. Certified submitted drawings on February 1, but still objected to terms in the contract. On February 8, Precision was informed of mistakes in the sprinkler system drawings. On February 16, it told Certified that it was ending its relationship because the contract was not signed, there was no insurance certificate, and the drawings were incorrect.

Certified sued for breach of contract, contending it was due payment for the drawings on the sprinkler system. The trial court held for Precision as no contracted existed. Certified appealed.
Case Decision

Pickering, Justice

*

Basic contract principles require, for an enforceable contract, an offer and acceptance, meeting of the minds, and consideration. A meeting of the minds exists when the parties have agreed upon the contract's essential terms. Which terms are essential "depends on the agreement and its context and also on the subsequent conduct of the parties, including the dispute which arises and the remedy sought." Restatement (Second) of Contracts § 131 comment g (1981). Whether a contract exists is a question of fact, requiring this court to defer to the district court's findings unless they are clearly erroneous or not based on substantial evidence.

Certified argues that the progress bill it sent to Precision established the price term and Precision's urging that Certified get started on the designs established the scope of work for the express design-work-only contract it claims. But the record does not establish that Precision agreed to pay a sum certain for the design-related work. Certified's $ progress bill—which represented seven percent of the whole subcontract—went unpaid, and Precision told Certified it would not make a progress payment until the whole subcontract had been executed. Beyond this, witness testimony established that a party in Precision's position would not execute a contract for only design drawings; such drawings are specifically tailored for the company rendering them and not useful to another installer. Thus, Certified's argument that Precision was parceling out the work—with Certified doing the designs only—makes no sense.

Not only were price and scope of work terms missing from the claimed design-work contract, the parties never agreed to a time for performance. Certified objected to Precision's proposed two-week timeline for producing the design drawings as "not realistic," and the parties never agreed to another time frame. That the time-for-performance term mattered is demonstrated by Precision's repeated prompting of Certified to complete the designs and Certified's refusal to bind itself to Precision's desired two-week turnaround. When essential terms such as these have yet to be agreed upon by the parties, a contract cannot be formed.

And while the district court's judgment on partial findings does not reference a design-only contract, the record substantially supports its conclusion that no enforceable contract existed.

Next, Certified argues that absent an express contract, it should be able to recover under a theory of implied contract. ...

A contract implied-in-fact must be "manifested by conduct," it is a true contract that arises from the tacit agreement of the parties. To find a contract implied-in-fact, the fact-finder must conclude that the parties intended to contract and promises were exchanged, the general obligations for which must be sufficiently clear. ...

Certified maintains that it had an implied contract with Precision for the design-related work. As discussed above, however, substantial evidence supports the district court's finding that there was no contract, express or implied, for the design work standing alone. There are simply too many gaps to fill in the asserted contract. ... Precision never agreed to a contract for only design-related work, the parties never agreed to a price for that work, and they disputed the time of performance. When Precision selected Certified, it did so on the basis that Certified would design and install the fire suppression system, not that it would draft the designs and leave installation to someone else. The evidence established that design drawings are installer-specific and so not useful to a replacement subcontractor. Accordingly, the district court properly denied recovery ... for an implied-in-fact contract. ...

Affirmed.
10-2b Consideration

Consideration is something of value or something bargained for in exchange for a promise; that is, both parties to a contract get something and give up something. Consideration is what distinguishes contracts from gifts. If consideration is absent, neither party can enforce the promise or agreement.

The traditional rule is that an exchange is consideration if it creates a legal detriment to the promisee (the party to whom a promise is made) or a legal benefit to the promisor (the party making a promise). A legal detriment is an act, a promise to act, or a promise to refrain from acting, such as giving up a legal right. For example, if you are hit by a careless driver and accept an out-of-court settlement of $, you give up the right to sue in court for damages. A legal benefit to the promisor exists when the promisor acquires some legal right through the promisee's act, promise to act, or promise to refrain from doing some act.

Consideration requires either a legal detriment to the promisee or a legal benefit to the promisor, although both usually occur at the same time. Suppose Def Jam buys a watch from Seiko for $. Def Jam suffers a legal detriment (gives up the right to keep $) in exchange for a benefit (the watch). Seiko suffers a legal detriment (gives up the watch) in exchange for a benefit ($). As the following case illustrates, courts use this detriment-benefit test to determine whether there is consideration for a contract.
Adequacy of Consideration

For the most part, courts do not inquire into the adequacy of consideration given in a contract. The bargaining is the responsibility of the parties to the contract. Even if one party bargains poorly, and the values of the items to be exchanged are very unequal, the courts generally do not interfere. Courts support contracts that are bargained for, even if the consideration is not related to market value. The main concern for the courts is to see that there was a trade of mutual promises and obligations as discussed in the Caley case.
Enforceable Promises without Consideration

Under certain circumstances, the courts do not require consideration for a promise to be enforceable. The doctrine used by the courts is called promissory estoppel (or detrimental reliance). The rationale for the doctrine is that it will avoid an injustice resulting from the promisee's reasonable reliance on the promisor's promise.

Under the doctrine, the promisor is estopped (prevented) from denying a promise. The Restatement (Second) of Contracts explains promissory estoppel this way: "A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promise ... and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." We see an application of this doctrine in the Hinson case, which also notes that oral promises can be the basis of a contract.

This is not a burden imposed lightly by the courts, because they do not want to impose obligations that were not really agreed to. Promissory estoppel also arises in some cases of promises to charities. Suppose an art museum is raising $ million for an expansion. It collects promises from various donors, but none of the money is collected until there are enough promises to make the project feasible and construction begins. Once that happens, if a big donor backs out, the courts may rule that promissory estoppel applies, and the gift must be made; because the building contract was entered into on reliance of the donation being made.
Hinson v. N&W Construction Company
Court of Appeals of Mississippi 890 So.2d 65 (2004)

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Case Background

N&W Construction prepared a bid for the Mississippi Job Corps Center (MJCC) to build a kitchen facility at a training center. In preparing the bid, N&W received oral bids from several plumbing contractors. Hinson quoted $ as his bid for the plumbing job. The next-lowest plumbing subcontractor bid was $. N&W used Hinson's bid in preparing its general contracting bid for the whole project.

N&W was the low bidder and was awarded the MJCC contract. N&W notified Hinson that he was needed to do the plumbing work when construction began. Hinson refused the job. N&W had to hire the next-lowest bidder and pay an additional $ to get the plumbing work done.

N&W sued Hinson on the basis of promissory estoppel. The trial court granted summary judgment to N&W and awarded $ in damages. Hinson appealed.
Case Decision

Irving, Justice

*

The doctrine of promissory estoppel has been stated as follows:

An estoppel may arise from the making of a promise, even though without consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetuation of fraud or would result in other injustice.

A review of the undisputed facts of this case and the evidence submitted by the parties to N&W's motion for summary judgment ... clearly indicate that the circuit court correctly granted N&W's motion for summary judgment on the theory of promissory estoppel....

Hinson admits that he provided a verbal quote to N&W in the amount of $ for plumbing work on the building....

Hinson testified that he reviewed the plans and specifications for the building, worked on his quote for approximately a week, and was satisfied with his price of $. ...

Moreover, Hinson does not dispute that N&W used his quote for the plumbing work in its bid for the building contract. ... Hinson later explained ... that he refused to do the plumbing work. ... "I just had a lot of other jobs going." ...

Affirmed.
Questions for Analysis
Caley v. Gulfstream Aerospace Corp
United States Court of Appeals, Eleventh Circuit, 28 F.3d 1359 (2005)

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Case Background

Gulfstream adopted a dispute resolution policy (DRP). It mailed the policy to all employees. It said the DRP would be the only procedure to resolve disputes between Gulfstream and employees. It would begin in two weeks and would be "a condition of continued employment." For employees to continue to work at Gulfstream, they had to accept the DRP as a condition of employment. A group of employees sued, contending that there was no contract, so the DRP could not be enforced. The district court held for Gulfstream. The employees appealed.
Case Decision

Hull, Circuit Judge

*

Offer The plaintiffs argue that the DRP does not constitute an "offer." We disagree. "An offer 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." Restatement (Second) of Contracts, § 24. The DRP clearly states that it is a contract, establishes the terms of the contract, and explains the means of accepting the contract. Thus, the DRP plainly constituted an offer....

Acceptance The plaintiffs also contend that they cannot be deemed to have accepted the terms of the DRP simply by their continued employment, even though the DRP expressly provides that continued employment is the proper means of acceptance. However, we agree with the district court that the employees accepted the DRP through continued employment....

An offer maybe accepted ... either by a promise to do the thing contemplated therein, or by the actual doing of the thing. However, the offer must be accepted in the manner specified by it; and if it calls for a promise, then a promise must be made; or if it calls for an act, it can be accepted only by the doing of the act....

By specifying the manner of acceptance as continued employment and announcing that the DRP was a condition of employment, the DRP and accompanying letter plainly set forth two options for Gulfstream employees:

continue in employment, thereby accepting the DRP, or

terminate employment.

Thus, given these two options, the employees remaining in Gulfstream's employ after notice of the DRP was an unambiguous act of acceptance of the DRP....

Consideration The plaintiffs next argue that the arbitration agreement is unenforceable because there is no "bargained for consideration" for their relinquishment of trial rights. They argue that the employees got nothing in return.

This argument is unavailing. Georgia law provides that mutual promises and obligations are sufficient consideration to support a contract. Here, the plaintiffs received reciprocal promises from Gulfstream to arbitrate and be bound by arbitration in covered claims. In addition, the DRP provides that Gulfstream will pay the arbitration and mediation costs. These promises constitute bargained-for consideration....

Affirmed.
Capacity to Contract

One element of a contract is contractual capacity, or legal ability, to create a contract. Capacity refers to a party's ability to perform legally valid acts, acquire legal rights, and incur legal liabilities. Generally, minors, intoxicated persons, and the mentally disabled have limited capacity to contract. Until the mid-nineteenth century, most states added married women to that list. They did not have the capacity to contract independent of their husbands. A party claiming incapacity has the burden of proving it.

Most adults have complete capacity to contract. If a person, perhaps as a result of mental disability, does not have capacity to contract, a contract entered into is not enforceable. If a person has partial capacity, the contract is enforceable unless the person with partial capacity exercises the right to disaffirm the contract. Contracts created by those with partial capacity are voidable.
Void and Voidable Contracts

A contract that does not exist at law, and so cannot be enforced, is a void contract. A contract is void if it concerns illegal subject matter, such as a contract to sell cocaine. The courts do not accept disputes over such matters.

A voidable contract is when one party to the contract has the right to avoid a legal obligation. As we discuss below, this can be the case when minors or persons with limited mental ability enter into contracts. If a person is so stoned when he makes a contract that he does not know what he is doing, then because he did not have the capacity to contract, he may later have the right to have the contract declared voidable. A contract is also voidable if there is fraud involved in making the contract.
Minors

A minor is a person under the legal age of majority. The age of majority is for most contracts and younger for some. The general rule is that a minor may enter into contracts but the contracts are voidable at the option of the minor. A company that contracts with a minor may find itself with relatively few rights if the minor disaffirms the contract. If a minor has received benefits, such as a -year-old buying a car on credit and driving it for six months, restitution must be paid by the minor for the value of the benefit received, even if the minor is not liable on the contract itself.

After a minor reaches the age of majority, the person may ratify contracts made while a minor. Ratification may be expressed through words, in writing, or implied by conduct, such as continued use of a car. There are some contracts that minors may not disaffirm. Enlistment contracts to join the Army and marriage contracts are nonvoidable contracts. Some states have statutes that do not allow minors to disaffirm certain other type of contracts as well, such as contracts for insurance, educational loans, medical care, and bank account agreements.
Unenforceable Contracts

Some contracts were legal and enforceable when they were made, but a change in the law made them unenforceable contracts. For example, suppose a company agreed to sell a shipload of wheat to the government of Iran. While the shipment is at sea, the U.S. government declares that no U.S. firms may trade with Iran. The contract at that point becomes unenforceable under U.S. contract law, even if it is seen as legal in Iran. The seller must end the effort to sell the goods or face prosecution for trying to fulfill a contract about a matter that is now illegal.
Contracts Contrary to Public Policy

Some contracts are unenforceable because their subject matter is contrary to public policy. Some contracts may not violate any particular statute yet may injure public welfare. Some contracts that courts have held to be contrary to public policy are exculpatory agreements, unconscionable contracts, and contracts in restraint of trade.
Exculpatory Agreements

An exculpatory agreement (or exculpatory clause) releases one party from the consequences brought about by wrongful acts or negligence. An example is an employment contract stating that the employee will not hold the employer liable for any harm to her caused by the employer while on the job. With such a clause, the employer is no longer concerned about being sued for intentional torts. Such clauses generally violate public policy and are not enforceable.
Unconscionable Contracts

The courts usually do not concern themselves with the fairness of a bargain struck by contracting parties. But in some cases, if a contract is grossly unfair to an innocent party, the courts, in equity, will not enforce it. These are called unconscionable contracts and occur when one of the parties, being in a strong position, takes advantage of the other party. The stronger party convinces the other party to enter into a contract contrary to his well-being. Such agreements may violate public policy and may not be enforceable.

A famous case on unconscionability is Williams v. Walker-Thomas Furniture, (350 F.2d 445, 1965). A furniture store sold many items on credit to an unsophisticated, low-income person. Under the contract, none of the goods were paid for until every item had been paid for. When the buyer failed to make payments on the last thing bought, the store wanted to repossess everything, not just the last item purchased. The appeals court held that the contract was unconscionable and that the trial court would not enforce it.
Contracts in Restraint of Trade

Contracts that restrain trade or unreasonably restrict competition are considered contrary to public policy and are not enforced by the courts. Part of the common law on this subject became part of modern antitrust law, discussed later in the text.

Even if a contract does not violate a statute, it still may be an unenforceable restraint of trade. A covenant not to compete, for example, may be unenforceable if it does not meet certain guidelines. These usually arise in contracts for the sale of a business and for employment. The seller (or employee) agrees not to compete with the buyer (or employer).

Suppose you buy a restaurant. You do not want the previous owner to move across the street and open up a new restaurant in competition with you, so the sale is likely to have a provision that the former owner will not open a restaurant within five miles for three years. Such restrictions are usually upheld if reasonable. A restriction on national competition would not make sense in a case like this, but local restrictions would.

More controversial, and an area in which state law varies quite a bit, are restrictions on competition by former employees. In states where such restrictions can be legal, many employers have employees sign an agreement not to work for a competitor, or go into competition against the employer, for a certain length of time after leaving. For example, when a senior sales manager left Nike to go to work for Reebok, the court held that a one-year noncompete agreement in the athletic footwear market was enforceable.

In the Gallagher case, we see such a contractual restriction upheld. In the decision, we also see that states may differ in their rules. The court explains that under Louisiana law, as in other states, courts may "reform" a noncompete agreement. In some other states, if the noncompete agreement is too broad, it is rejected, not reformed.
Arthur J. Gallagher & Co. v. Babcock
United States Court of Appeals, Fifth Circuit, 703 F.3d 284 (2012)

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Case Background

Arthur J. Gallagher & Co. is in the insurance business. A subsidiary, GBSI, handles employee-benefit insurance programs. GBSI purchased a Louisiana insurance broker, Babcock, paying almost $ million for his business. As part of the deal, Babcock and several of his employees went to work for GBSI and agreed to a restrictive covenant that if they left GBSI, they would not compete with GBSI in Louisiana for two years. A few years later, Babcock and the others quit GBSI and went to work for a competitor, drawing away clients to their new employer.

Gallagher sued Babcock for violating his agreement that contained a non-solicitation agreement and a non-competition agreement. Gallagher contended that Babcock, and the employees he took with him, solicited GBSI clients in competition with their former employer. The trial court upheld the agreements, but limited the geographic restriction to nine parishes (counties) in which Babcock could not compete with GBSI, rather than the whole state. The jury awarded Gallagher $ million in damages plus attorneys' fees. Babcock and the other former GBSI employees appealed.
Case Decision

Higgenbotham, Circuit Judge

*

Defendants argue that their employment agreements do not contain valid and enforceable non-competition provisions, both because of

their language and

their geographic scope.

We are not persuaded. ...

The agreements unambiguously prohibit Defendants from competing against Gallagher or soliciting its clients for two years after the termination of their employment. Defendants agreed not to "solicit" certain of Gallagher's existing and prospective clients. And they agreed they would not "serve," "sell to," "market," "accept," "aid," "consult," "place," "counsel" or "consult" regarding insurance-related services with customers (or prospective customers) of Gallagher on whose accounts they had worked while employed by Gallagher. ...

Louisiana does, of course, restrict and narrowly construe non-competition agreements. As the Louisiana Supreme Court has explained, this policy "is based upon an underlying state desire to prevent an individual from contractually depriving himself of the ability to support himself and consequently becoming a public burden." But over time, the Legislature has broadened the kinds of non-competition agreements into which employers and employees may enter.

The provisions at issue here are less restrictive than allowed under state law. Instead of preventing its former employees from engaging in a similar business, Gallagher prohibits employees from competing for accounts on which they actually worked while at Gallagher, a restriction perhaps uncommon, but not unenforceable. ...

Under Louisiana law, non-solicitation and non-competition clauses must be limited to geographic areas in which the employer conducts "a like business," and the agreement must make this limitation clear by specifying the "parish or parishes, municipality or municipalities, or parts thereof" in which the employer operates. A court may, however, rely on a contractual severability clause to excise the geographic areas in which an employer does not conduct such business. ...

The district court agreed with Defendants and eliminated the fifty-five parishes in which Gallagher did not provide life and health insurance services. This was not error. We have already made clear that these provisions were not invalid merely because they attempted to reach every Louisiana parish. Similarly, Defendants may not defeat restrictions on competition in these nine parishes by showing that the restrictions were not enforceable in other parishes. ...

We affirm the judgment insofar as it directs a verdict against the Defendants.
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Chapter Contents
10-2e Reality and Genuineness of Consent

Freedom of contract is based on the right of individuals to enter freely into the bargains of their choice. As part of this, the parties must mutually consent to the proposed terms of a contract for it to be enforceable. The manifestation of the intent of the parties to be bound to terms of an agreement is discerned from their conduct or exchanges.

Under some circumstances, a person may enter into an agreement without knowing key information about the real nature of the transaction. Without knowledge, there is no reality of consent (or genuine consent) by the parties, and the contract may be void. This may happen for different reasons.

It is possible that a contract is not formed because of a mistake. A unilateral mistake occurs when one party to a contract enters into it with false information or accidentally makes an error in a significant matter. If, for example, a contract to buy a house says the price is $, when the buyer knows it should be $, the contract cannot be enforced at the lower price because of the mistake made in typing the contract (as happened in the sale of televisions at the start of the chapter).

In general, if the other party should have known of the error, the contract cannot be enforced to allow one party to profit from a simple error. A bilateral mistake is when both parties are wrong about presumed facts important to the making of a contract. This does not happen often, but can be the basis for finding that no contract was ever entered into by the parties. In such a situation, either party has the right to rescind (terminate) such a contract.
Fraud and Misrepresentation

A person who "agrees" to a contract as a result of fraud, misrepresentation, duress, or undue influence has the right to disaffirm the contract because there was not genuine consent. Duress occurs when someone is "forced" to sign a contract; that is, the contract is made because of a threat that presented no sensible way out. In the case of undue influence, a person enters into a contract because they are so dominated by another person or have so much trust in that person that they are subject to improper persuasion. This happens sometimes to elderly people who rely on a trusted caretaker.

Fraud or intentional misrepresentation, as discussed in Chapter 7, is an effort by a party to induce another party to enter into a contract based on false information. This may be either negligent misrepresentation or intentional misrepresentation (fraud). If so, there never was a good contract. The injured party may sue in tort and is likely to seek punitive damages.

Misrepresentation can be intentional, in which case it is fraud or much like it—different states use different names for this. But misrepresentation can also be based on negligence, as we saw in the Squish La Fish case in Chapter 6. Incorrect information can be made innocently in ignorance. If a false statement is made innocently, it is possible that the contract may be rescinded if the misstatement was material, or key, to the decision to make the contract and the value of the contract. If losses were incurred, there may also be a cause of action to recover the losses suffered as a result of the false information. But there would be less reason for punitive damages because the use of false information was not willful.
Statutory Exceptions

Some statutes deal with high-pressure selling techniques by some door-to-door salespeople. These "home solicitation" statutes allow contracts to be cancelled if the buyer entered into the contract under pressure by a salesperson. For example, the Federal Trade Commission's Cooling-Off Rule allows buyers in door-to-door sales with a value more than $ to void the contract in writing within three business days. An employer subject to the law may want to structure its compensation for sales representatives to count only sales that are not cancelled.
Contracts in Writing and the Statute of Frauds

Contracts do not always have to be in writing to be enforceable. Written contracts are generally a good idea, because they are difficult to deny, and courts prefer written documents over conflicting oral claims. Some contracts must be evidenced by a writing to be enforceable. They are subject to the Statute of Frauds, which evolved from a 1677 English statute called "An Act for the Prevention of Frauds and Perjuries." The purpose is to prevent parties from claiming that a contract existed when in fact it did not. To reduce such fraud, the statute requires that for certain contracts to be enforceable, they must be in writing.

In most states, several types of contracts are covered by the Statute of Frauds and must be evidenced in writing to be enforced by a court in the event of a dispute:

Contracts for the sale of real property (land).

Contracts that cannot be performed within one year.

Promises to pay the debt of another, including the debts of an estate.

Promises made in consideration of marriage.

Sufficiency of the Writing

For a writing to be sufficient under the Statute of Frauds, it must give the material terms of the contract and be signed by at least the defendant. Courts usually also require the writing to have the names of the parties, the consideration offered, the subject matter of the contract, and other material terms. The writing need not look like a contract. Confirmations, invoices, e-mails, sales orders, and even checks may satisfy the writing requirement.

Parol Evidence Rule

Negotiations often come before contracts. The parties may exchange e-mails or other communications before signing the actual contract. Parties may omit from the final contract some terms agreed upon in negotiations. Later, the parties may disagree about those terms.

The parol evidence rule restricts the use of oral (parol) statements in a lawsuit when the evidence is contrary to the terms of a written contract. Oral evidence cannot contradict, change, or add terms to a written contract. Parol evidence may be introduced when the written contract is incomplete or ambiguous; when it proves fraud, mistake, or misrepresentation; or when the parol evidence explains the written instrument through previous trade usage or course of dealing. We see these issues arise in the Deschamps case.
eschamps v. Treasure State Trailer Court, Ltd.
Supreme Court of Montana 230 P.3d 800 (2010)

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Case Background

In 2003, Rasmussen agreed to sell Deschamps a mobile home trailer park in Great Falls, Montana, with 96 residential spaces, for $. The contract explained how Deschamps would pay Rasmussen over time. Right after the sale was completed, Rasmussen died and his estate inherited his assets. Deschamps found significant problems with the trailer park water system that required $ in repairs. In 2006, he quit making payments to the estate, claiming that the cost of the water system repairs made payments impossible.

The estate sued for payment; Deschamps sued for breach of contract and fraud, contending that Rasmussen told him the water system was in good condition and that the occupancy rate was higher than it was in fact. The trial court held for the estate, finding that Deschamps' claims were precluded by the parol evidence rule. He appealed.
Case Decision

Justice Patricia O. Cotter

*

The parol evidence rule, codified [in Montana law], states: "The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the oral negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument." The District Court determined this rule precluded Deschamps' claims for

negligent misrepresentation of the water system's condition,

breach of implied covenant of good faith and fair dealing as to the condition of the water system, and

both fraud claims pertaining to the water system.

The court ruled that the Agreement ... memorialized the parties' buy/sell transaction and Deschamps could not introduce evidence of oral agreements or statements ostensibly made by Rasmussen that were not included in the Agreement. Therefore, Deschamps was not allowed to claim that Rasmussen told him the water system was in "good" or "fine" condition, when Rasmussen, according to Deschamps, knew that was untrue. Deschamps also was constrained from testifying that Rasmussen claimed the Park had at least 90 percent occupancy with a low turnover rate.

In its legal analysis, the court referenced several relevant clauses in the Buy-Sell Agreement upon which it relied. Without repeating lengthy portions of the Agreement, it is undisputed that the Agreement provided:

that Rasmussen had not conducted an inspection and did not warrant the property's condition,

Deschamps had the right and obligation to inspect the property prior to purchase,

a special disclaimer of reliance on any assurances given by Rasmussen as to the condition of the property,

an inspection contingency waiver provision that indicated the inspection was satisfied or waived,

a merger clause specifying that the Agreement was the entire agreement and superseded any oral agreements between the parties, and

that the Agreement could only be amended in writing.

The District Court ... noted that Deschamps had signed a contract prepared by his real estate agent that contained an unequivocal statement that Deschamps had not relied "upon any assurances by ... the Seller as to the condition of the property..." The court concluded that Deschamps, by claiming Rasmussen had misled him as to the condition of the water supply system, was now arguing that he had relied, to his detriment, on Rasmussen's assurances. This argument was a direct contradiction to the express content of the contract and therefore was precluded under the parol evidence rule.

It is well established that when the language of a contract is clear and unambiguous, we are "to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted or to omit what has been inserted." Here, the contract drafted by Deschamps and presented to Rasmussen for signature clearly and expressly stated that Deschamps did not rely on any oral assurances or representations by Rasmussen. Deschamps cannot now claim otherwise. Therefore, in that his allegations of reliance on alleged fraudulent statements specifically contradict the language of the Agreement, consideration of them is barred under the parol evidence rule.

*

Affirmed.
Performance

Most contracts come to an end by performance of the parties' obligations under the contract. Contracts may be for one sale or for provision of a service. If a contract is to be completed over time, such as for NightStaff to clean the offices in BigBank's office building for two years, once NightStaff has done the cleaning for two years and BigBank has paid, the contract terminates. No further obligation is owed by either party.
Substantial Performance

Suppose Microsoft delivers a computer program written specifically for HP. The product is delivered on time, but a couple of bugs in the program are discovered. Has Microsoft performed its obligation so that HP must pay, or is there a lack of performance such that HP may refuse or can sue Microsoft for breach of contract? Generally, substantial performance means that the contract basically has been fulfilled, and payments must be made. The parties are expected to act in good faith. Refusing to pay when most of the contract was properly completed would not be acceptable. HP could delay final payment to Microsoft until the bugs were worked out, but there is no justification to rescind the agreement for lack of performance. Of course, if HP incurs costs as a result of the bugs, Microsoft is liable for those damages.

The difference between a breach where there has been substantial performance and a material breach (significant breach) of contract can be a judgment call. If a party wants to make sure things are done to perfection, that fact must be made clear in the contract. Many business contracts specify milestones that trigger payment obligations so there is a way for the parties to measure performance along the way. Construction contracts usually include provisions for the buyer to give the builder a list of all things that must be done for performance to be complete after the buyer has inspected a new building.
Assignment and Delegation

Some contracts may be performed by a third party. A transfer of contract rights to another party is an assignment; a transfer of contractual duties to a third party is a delegation. Many contracts are for services (duties) that cannot be assigned. Kobe Bryant cannot delegate his duty to play for the Los Angeles Lakers to any other person. If a dentist has agreed to cap your teeth, you cannot assign your right to have your teeth capped to someone else. However, many contracts are capable of being assigned or delegated to third parties.

For example, if HP contracted with Microsoft to develop some software for HP, unless prohibited in the contract, Microsoft may delegate some of the software creation to a company that does contract work for it. When that company delivers the software, Microsoft can integrate it into the final product it delivers to HP. Similarly, if NightStaff has contracted to provide cleaning services for BigBank for two years, it may assign the contract to another cleaning company, unless the contract prohibits that, perhaps for security reasons. NightStaff is liable for problems that arise as a result of poor performance by the other company, however.
Third-Party Beneficiaries

A third-party beneficiary is a party who is not part of an original contract who acquires rights under the contract. This happens mostly in credit contracts. For example, suppose Sting loans Bono $. In consideration for the loan, Bono promises to pay $ to Diddy, to whom Sting already owes $. If Bono fails to pay Diddy, then Diddy may sue Bono to collect the $, even though Diddy and Bono did not enter into a contract. Diddy is a third-party beneficiary of the contract between Sting and Bono.
Breach

When a party to a contract does not perform as required, there is a breach of contract. If one party prevents or hinders the other party to a contract from performing her duties, then a breach occurs. The party injured by the breach may be entitled to a remedy (discussed below). To determine the remedy that may be provided, the court looks at the extent of the breach.
Material Breach

If the performance provided by a party is substantially less than the requirements of the contract, there is a material breach. Suppose Microsoft fails to deliver the program to HP on time, or it delivers seriously defective software. As a result, HP cannot deliver its computers. HP would have a cause of action against the breaching party, Microsoft, for damages. HP would be discharged from the performance promised under the contract, i.e., HP would not have to accept delivery of the defective program nor accept the corrected version if it arrived too late to be useful.
Anticipatory Breach

Before the performance of a contract takes place, an anticipatory breach, or repudiation, occurs if one party indicates inability or lack of desire to perform the contract. Sometimes the breaching party does not volunteer information that it is going to breach, but the fact that the contract is not performed becomes clear. If Microsoft was scheduled to ship the program to HP by August 1, but HP learns on July 15 that Microsoft forgot to assign anyone to work on the program and has not completed any code, HP does not have to wait until August 1 to look for replacements, because HP already knows that Microsoft cannot deliver on time. HP may be able to sue Microsoft for costs it incurred as a result of Microsoft's failure to deliver on time.
Discharge by Agreement of the Parties

Just as parties have the freedom to contract, they are also free to agree to modify or to terminate—that is, discharge—their obligations under the contract. Discharge by agreement between the parties can take various forms. Among the most important are rescission, novation, and accord and satisfaction.
Rescission

A rescission occurs when both parties agree that the contract should be terminated without performance. A rescission discharges the obligations of both parties under the contract. For example, Avon contracted with Sears to sell cosmetics at Sears' stores. Sears decided to cancel the deal and paid Avon $ million to agree to terminate the arrangement. The parties agreed to rescind, or cancel, the contract.
Novation

In a novation, all the parties agree to discharge one party from the contract and create a new contract with another party, who becomes responsible for the discharged party's performance. Suppose JLo was contracted to star in a movie, but decides she does not want to. She asks Beyoncé if she would like the part instead. If the movie studio agrees on that replacement, then the new agreement is a novation, and JLo is released from liability for not doing the movie.
Accord and Satisfaction

Another way parties may agree to discharge their duties to one another under a contract is through accord and satisfaction. An accord is an agreement by the parties to offer and accept performance that differs from the original agreement. Satisfaction is the actual performance of the new obligation. The original obligation is discharged when the consideration for the accord is provided.

Suppose Spielberg owes DiCaprio $. If Spielberg offers to direct a movie for DiCaprio in place of paying him the $, and DiCaprio accepts, then there is an accord. If Spielberg then directs a movie for DiCaprio, there is accord and satisfaction. The new consideration discharges the original claim. If Spielberg fails to direct the movie, then DiCaprio could still sue him for the $, because there was no satisfaction of the accord.
Damages

The most common remedy for breach of contract is monetary damages. The party who suffered from a breach seeks a judgment for lost profits and for other expenses particular to the breach. A variety of types of damage awards may be awarded by the courts under different circumstances, including compensatory, expectancy, liquidated, nominal, and special damages.
Economic Loss Rule

The economic loss rule means that when a breach of contract does not include a tort, such as injury to persons, the damages only relate to economic losses suffered from a breach. As the Wisconsin Supreme Court explained (573 N.W.2d at 846), the "application of the economic loss doctrine to tort actions between commercial parties is generally based on three policies...

to maintain the fundamental distinction between tort law and contract law;

to protect commercial parties' freedom to allocate economic risk by contract; and

to encourage the party best situated to assess the risk of economic loss."

Because the damages should be related only to lost profits and costs incurred as a result of a breach, which require accounting evidence and specific calculations, i.e., not punitive damages or mental distress awards, it is common to try to assert that a tort occurred in a breach of contract case. Look back at the complaint in the Wynn v. Lloyd's case in Chapter 3's Exhibit 3.1. There is a claim the defendant acted "intentionally" and "maliciously." This is an effort to try to wriggle a tort claim into a breach of contract case in an effort to obtain higher damages.
Calculating Damages

Suppose you arrange for Lil Wayne and Justin Bieber to appear together at a concert. That is an odd pairing, but you think it is a great idea. They will each get percent of the gate and a $ guarantee, plus all revenues from t-shirt sales at the concert. The concert arena will hold fans; average ticket price will be $, so revenues will be $ if you sell out, of which $ will go to the performers. The concert hall charges a flat $ to host the show. That would leave you $ for other expenses and profit. You get local radio stations to hype the concert. A week before the concert, both artists cancel because they decide the idea is insane. The arena charges you a $ cancellation fee. You have sold tickets that must be refunded. You sue the performers for breach of contract.

You win, but what are the damages? First, you have the market value of your time spent, say hours. What is your usual wage rate? At $ an hour, it would be an $ cost you incurred by devoting time to event planning. You spent $ having the tickets printed. Each ticket costs $ to process and mail, so there is another $, plus the $ arena fee, plus the cost of mailing refunds, which would likely be $, or $ in direct costs incurred. Those costs are covered by compensatory damages or actual damages. These damages, in contract cases, are to allow the party suffering the breach to recover costs incurred as a result of relying on the promise of the other party.

What about lost profits? If you only sold tickets by the time of the concert, there would likely have been no profit, in which case you could not claim expectancy damages. These damages cover the profits you reasonably expected to make if the contract had been fulfilled. However, if you could show that most tickets for a concert are usually sold in the last days, and selling out was likely, then you would have suffered lost profits and may collect expectancy damages. What about the fact that you cannot sleep nights worrying about this and feeling that your career as a concert promoter has been ruined? Too bad; there is no recovery for mental distress or some other tort. It was a business deal gone bad. The rule is to stick to measurable costs.

The DeRosier case discusses damage calculation, the issue of mitigation of damages, and why a party may not want to have a breaching party correct a problem.
DeRosier v. Utility Systems of America, Inc.
Court of Appeals of Minnesota 780 N.W.2d 1 (2010)

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Case Background

DeRosier owned land on a hillside. Before a house could be built, the lot needed to be filled with dirt. DeRosier saw Utility Systems of America (USA) doing road construction nearby. He asked USA if it would be willing to dump excess fill dirt on his lot. Because DeRosier's land was close to the construction, USA saved money by doing that instead of hauling the dirt further away. DeRosier obtained a permit from the city that would allow cubic yards of fill to be dumped on his property, which was the amount needed for the lot to be made level. DeRosier gave the permit to USA.

Later, DeRosier found that USA dumped cubic yards of fill, so yards had to be removed because the amount violated the fill permit and was way too much to be useful for construction. USA denied responsibility but offered to move the excess dirt for $.

DeRosier sued. The trial court granted him $ in general damages to pay another company to remove yards of fill. It also awarded him $ in consequential or delay damages for the time lost to be able to construct a new house while waiting for the dirt to be moved. USA appealed, contending that DeRosier failed to mitigate the damages by not having USA move the dirt for only $ rather than the $ he paid another contractor.
Case Decision

Minge, Judge

*

General damages, as opposed to special damages, naturally and necessarily result from the act complained of. Minnesota courts have stated, "the term 'consequential damages' usually ... refers to those items of damages which, because of particular circumstances, are to be distinguished from 'general' damages." Consequential damages are commonly called special damages. Special damages are the natural, but not the necessary, result of a breach. Although special or consequential damages flow naturally from the breach, they are not recoverable unless they are reasonably foreseeable to the parties at the time of the breach. ...

USA's counsel pointed out that there was no claim for delay damages in the pleadings or discovery. Perhaps most significantly, no evidence of monetary loss caused by delay was introduced at trial. Although the district court observed that DeRosier's attorney specifically mentioned delay in his pre-litigation demand, that did not constitute evidence of such damages. ...

Because consequential (or delay) damages were not pleaded and not supported by any evidence in the record, we conclude that the district court erred in awarding DeRosier $ as consequential damages for delay in construction and we reverse that portion of the judgment.

*

Based on the record and the deference we afford the fact finder, we conclude the district court had a sufficient basis for calculating and did not abuse its discretion in granting $ in general damages.

The third issue is whether DeRosier had a duty to mitigate damages that was breached by his failure to accept USA's offer to remove excess fill for $. USA claims that, even if the actual-damage award was supported by the evidence, recoverable damages are limited to its $ offer. DeRosier responds that he was not obligated to do business with USA after its breach and that such an arrangement would have jeopardized his ability to sue by acting as a form of settlement. ...

We conclude that when one party to the contract defectively performs and subsequently offers to correct the breach through a new contract, the nonbreaching party may generally decline the offer and still recover its full damages. Special circumstances may rebut the reasonableness of the rejection and call for exceptions to this rule. The facts before us support DeRosier's decision:

the $ payment demanded was substantial;

DeRosier was not unreasonable in believing that acceptance could constitute an accord and satisfaction;

other hauling services were readily available; and

DeRosier's relationship with USA was strained as USA was blaming DeRosier. ...

Although the district court erred in awarding DeRosier $ in consequential damages, the district court did not abuse its discretion in awarding DeRosier general damages. DeRosier did not unreasonably reject USA's $ offer, and therefore did not improperly fail to mitigate his general damages. We modify the judgment to the amount of the award for general damages: $.

Affirmed in part and reversed in part.
Equitable Remedies

If money damages are inadequate to compensate for the injury caused by a breach of contract, or if they do not resolve the problem properly, equitable remedies, such as specific performance or an injunction, may be available. These remedies are available to injured parties only at the discretion of the court. They generally are not granted if an adequate damage remedy exists, or where enforcement would impose a great burden on the defendant. The remedy of equity requires the party seeking such remedy to have "clean hands" and to have not engaged in any bad behavior.
Specific Performance

Specific performance is an order by a court requiring a party who created a wrong to perform the obligations promised in a contract. The remedy is granted for breach of a contract when the payment of money damages is inadequate. Contracts for the sale of a particular piece of real property (land) or of a unique good, such as a piece of art, are the types of contracts in which specific performance may be granted by the courts.

Courts do not order people to perform personal service or to do some particular job, because that would be involuntary servitude. Moreover, it would be very hard for a court to monitor the quality of performance in such cases—judges do not want to listen to disputes over whether Lil Wayne's decision to rap seventeenth-century poetry was a breach or not. That is, a court would not force Lil Wayne and Justin Bieber to appear at a concert and perform. Damages would be imposed instead for their failure to appear.
Injunction

As with specific performance, the remedy of an injunction is allowed when the payment of damages does not offer a satisfactory substitute for the performance promised. An injunction is a court order requiring a party to perform or to refrain from performing certain acts.

Suppose a partnership agreement stated that a partner who quits to go into business for herself or with another firm would not compete against the partnership for three years. If a partner then quits the partnership to start a new competing firm, the payment of damages may be an inadequate remedy for the partnership. The court, through the granting of an injunction, may order the departing partner not to compete with the partnership. Violating the injunction can subject a party to contempt of court penalties, including jail time.
Scheerer v. Fisher
Court of Appeals of North Carolina 688 S.E.2d 471 (2010)

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Case Background

Scheerer, a real estate agent, helped arrange for Fisher to buy some commercial real estate for $ million. The seller and Fisher, the buyer, each promised to pay Scheerer a percent commission, but the deal fell apart before it was completed. Fisher then formed a new company and had a third party, Antonio, buy the property and sell it to Fisher's new company. Scheerer learned of the deal, from which he got no commission, and sued for breach of contract or quantum meruit for reasonable compensation. The trial court held there was no contract or basis for payment to Scheerer. He appealed.
Case Decision

Calabria, Judge

*

Plaintiffs argue that the trial court erred in dismissing their claim of quantum meruit for failure to state a claim upon which relief can be granted. We agree.

Under Rule 8(a)(2) of the North Carolina Rules of Civil Procedure, plaintiffs are entitled to seek alternative forms of relief.... If plaintiffs' allegations in their claim for quantum meruit are accepted as true, no contract exists and quantum meruit is not excluded as a remedy per se.

Recovery in quantum meruit will not be denied where a contract may be implied from the proven facts but the express contract alleged is not proved. The rationale for allowing a plaintiff to plead both breach of express contract and breach of implied contract is that if the plaintiff fails to prove the existence of an express contract, he or she is not foreclosed from recovery in quantum meruit if a contract can be implied and the reasonable value of his or her services can be drawn from the evidence.

To recover in quantum meruit, plaintiffs must show:

services were rendered to defendants;

the services were knowingly and voluntarily accepted; and

the services were not given gratuitously.

In short, if plaintiffs alleged and proved acceptance of services and the value of those services, they were entitled to go to the jury on quantum meruit....

In the instant case, as to their claim for quantum meruit, plaintiffs alleged that:

defendants had a prior professional relationship with Scheerer and therefore knew Scheerer was a real estate agent;

defendants knew plaintiffs were working on behalf of defendants to find property suitable for defendants to purchase;

plaintiffs told defendants that such property was for sale;

both parties expected plaintiffs to be paid a commission for their work; and

defendants were ready, willing, and able buyers and in fact purchased the properties located by plaintiffs.

... The undisputed facts establish conduct demonstrating that defendants took action to deny Scheerer compensation that was earned for the services he rendered. Although the original contract he negotiated failed to close, the law implies a promise to pay some reasonable compensation for services rendered. Plaintiffs' allegations state a valid claim for relief in quantum meruit....

Reversed.
Acceptance
the offeree's notification or expression to the offeror that he agrees to be bound by the terms of the offeror's proposal, thereby creating a contract. The trend is to allow acceptance by any means that reasonably notifies the offeror of the acceptance.

Accord
in a debtor/creditor relationship, an agreement between the parties to settle a dispute for some partial payment. The creditor has a right of action against the debtor.

Accord and satisfaction
in a debtor/creditor relationship, an agreement between the parties to settle a dispute and subsequent payment. The agreement is an accord because the creditor has a right of action against the debtor. Accord and satisfaction are complete when payment has been tendered.

Anticipatory breach
the assertion by a party to a contract that she will not perform a future obligation as required by the contract.

Assignment
a transfer of one's interest in property or a contract to another person.

Bilateral contract
a contract formed by the mutual exchange of promises of the parties.

Breach of contract
failure, without a legal excuse, of a promisor to perform the terms agreed to in a contract.

Consideration
in a contract, the thing of value bargained for in exchange for a promise; the inducement or motivation to a contract; the element that keeps the contract from being gratuitous and, therefore, makes it legally binding on the parties.

Contract
a legal relationship consisting of the rights and duties of contracting parties; a promise or set of promises constituting an agreement between the parties that gives each a legal duty to the other and also the right to seek a remedy for the breach of those duties. The elements of a contract include agreement, consideration, legal capacity, lawful subject matter, and genuine consent.

Contractual capacity
the mental capacity required by law for a party entering into a contract to be bound by that contract. Minors, intoxicated persons, and the insane generally lack capacity to contract.

Counteroffer
an offeree's response to an offeror rejecting the offeror's original offer and at the same time making a new offer.

Covenant not to compete
part of an agreement in the sale of a business for the seller not to compete with the buyer for a given time in a given market; in employment law, it is an agreement, not enforceable in all states, for an employee not to go to work for a competitor for a certain time after leaving current employment.

Delegation
the legal transfer of power and authority to another to perform duties.

Detrimental reliance
see Promissory estoppel.

Discharge
the termination of one's obligation. Under contract law, discharge occurs either when the parties have performed their obligations in the contract, or when events, the conduct of the parties, or the operation of law releases parties from performing.

Duress
when coercion or threats are used to get another person to act in a way, such as sign a contract, that the person would not otherwise agree to.

Economic loss rule
the principle that a plaintiff cannot sue in tort to recover for purely monetary loss (damages) that occur in breach of contract instances. An exception to this rule is when the defendant commits fraud or negligent misrepresentation, which brings in a tort cause of action to what would otherwise only be a contract matter.

Exemplary damages
see Punitive damages.

Expectancy damages
compensation awarded in litigation, usually in contract cases, for the loss of what a party reasonably anticipated from a transaction that was not completed.

Express contract
a contract that is oral or written, as opposed to being implied from the conduct of the parties. See Implied contract.

Frustration
a doctrine in contract law that allows a party to be relieved of a duty to perform because the purpose of the contract no longer exists. Circumstances occurred after the contract was formed that make performance irrelevant or impossible.

Genuine consent
see Reality of consent.

Implied contract
a contract formed on the basis of the conduct of the parties.

Impossibility of performance
a doctrine used to discharge the obligations of parties to a contract when an eventsuch as a law being passed that makes the contract illegal or the subject matter of the contract is destroyed (called objective impossibility) makes performance impossible for one or both parties.

Impracticability
an interpretation of the doctrine of impossibility in contracts that allows a party to a contract to be relieved of the duty to perform, when the basis of the contract no longer exists due to un-forseen events.

Law merchant
in commercial law, the rules devised by merchants in Europe over several centuries to govern their trade; many of these rules were formally adopted into law.

Legal detriment
when a promisee gives up the right to retain control of something he was entitled to keep, or to give up the right to do something, in exchange for a promise by the other party to the contract.

Liquidated damages
amounts specified in a contract to be paid in the event of a breach. They represent a reasonable estimation by the parties of the damages that will occur in the event of breach.

Material breach
see Breach of contract.

Mirror-image rule
the common-law principle that the acceptance of a contract offer must be positive, unconditional, and clear, and must not change the terms of the offer.

Mistake
in contracts, when the parties to a contract did not mean the same thing, or one party had an incorrect belief about the facts or law. May be grounds for voiding a contract.

Mitigation of damages
doctrine that imposes a duty upon an injured party to exercise reasonable diligence in attempting to minimize damages after being injured.

Novation
an agreement between the parties to a contract to discharge one of the parties and create a new contract with another party to be responsible for the discharged party's obligations.

Offer
a proposal to do or refrain from doing some specified thing by a party, called the offeror, to another party, called the offeree. The proposal creates in the offeree a legal power to bind the offeror to the terms of the proposal by accepting the offer.

Offeree
the party to whom an offer is made.

Offeror
the party making an offer to another party to enter into a contract.

Option contract
in contract law, an offer that is included in a formal or informal contract that creates an obligation to keep an offer open for a specified period, so that the offeror cannot revoke the offer during that period. To be valid, the option must be supported by consideration.

Parol evidence rule
a rule that prohibits the introduction into a lawsuit of oral evidence that contradicts the terms of a written contract intended to be the final and complete expression of the agreement between the parties.

Penalty
excessive damages specified in a contract that are to be impose on a breaching party. Courts often reject enforcement of such clauses, which are treated as punishment, not actual damages, regardless of the terminology given in the contract.

Performance
in contract law, the fulfilling of obligations or promises according to the terms agreed to or specified by parties to a contract. Complete performance of those obligations or promises by both parties discharges the contract.

Promise
a statement or declaration that binds the party making it (the promisor) to do or refrain from doing a particular act or thing. The party to whom the declaration is made (the promisee) has a right to demand or expect the performance of the act or thing.

Promisee
party to whom a promise is made.

Promisor
party who makes a promise.

Promissory estoppels
a doctrine that allows promises to be enforced in the absence of consideration, if a promise is made which the promisor reasonably expects will induce action or forbearance on the part of the promisee and, which in fact, does cause such action or forbearance to the detriment of the promisee.

Quantum meruit
a concept in equity that a party should not be unjustly enriched by not paying for goods or services received that do not clearly fall under a contract; it is the recovery a plaintiff is allowed to be granted under an implied contract to pay for the reasonable value of services provided.

Quasi contract
a contract imposed by law, in the absence of an actual contract, to prevent unjust enrichment. A contract implied in law.

Ratification
in contract law, the act of accepting responsibility for a previous act that would not constitute an enforceable contractual obligation but for the ratification. Ratification causes the obligation to be binding as if it were valid and enforceable in the first place.

Reality of consent
in contract law, a contract must have been entered into freely based upon correct information about the matter to be valid; if duress, misrepresentation, or fraud was present when the agreement was made, there is no contract.

Remedy
the legal means by which a right is enforced or the violation of a right is prevented or compensated.

Repudiation
a rejection, disclaimer, or renunciation of a contract before performance is due, but which does not operate as an anticipatory breach, unless the promisee elects to treat the rejection as a breach and brings a suit for damages.

Rescission
to cancel or nullify a contract; it is the unmaking of a contract, as if it never existed. It may occur because both parties agree to avoid the contract, or because one party gives the other party grounds for canceling the contract, such as by an act that would create grounds for not fulfilling the obligations.

Restitution
a remedy in equity to restore a person to his original position had there been no loss or injury or to the position he would have enjoyed had there been no breach of contract.

Revocation
the recall of some power, authority, or thing granted; in contract law, the withdrawal by the offeree of an offer that had been valid until withdrawn.

Satisfaction
the performance of a substituted obligation in return for the discharge of the original obligation.

Statute of Frauds
a statutory requirement that certain types of contracts be in writing to be enforceable.

Substantial performance
a doctrine that recognizes that a party that performs a contract, but with a slight deviation from the contract'sterms, is entitled to the contract price less any damages caused by the deviation.

Termination
in contract law, the ending of an offer or contract, usually without liability.

Unconscionable contract
a contract, or a clause in a contract, that is grossly unfair to one of the parties because of stronger bargaining powers of the other party; usually held to be void as against public policy.

Undue influence
the misuse of one's position of confidence or relationship with another individual to overcome that person's free will thereby taking advantage of that person to affect decisions.

Unenforceable contract
a contract that was once valid but, because of a subsequent illegality, will not be enforced by the courts.

Unilateral contract
an offer or promise of an offeror that is binding only after completed performance by the offeree. The offeree's completed performance serves as acceptance of the offer and performance of the contract.

Usury
the practice of lending money and requiring the borrower to pay a high amount of interest, considered to be illegal by law.

Void contract
a contract that does not exist at law; a contract having no legal force or binding effect.

Voidable contract
a contract that is valid but which may be legally voided at the option of one of the parties.
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