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Prepare answers to the following chapter-end Critical Legal Thinking Cases from this week’s reading.
- Case 13.5: Innocent Misrepresentation on page 230
13.5 Innocent Misrepresentation W. F. Yost, who owned the Red Barn Barbecue Restaurant (Red Barn), listed it for sale. Richard and Evelyn Ramano of Rieve Enterprises, Inc. (Rieve), were interested in buying the restaurant. After visiting and conducting a visual inspection of the premises, Rieve entered into a contract to purchase the assets and equipment of Red Barn, as well as the five-year lease of, and option to buy, the land and the building. Prior to the sale, the restaurant had been cited for certain health violations that Yost had corrected. In the contract of sale, Yost warranted that “the premises will pass all inspections” to conduct the business.
Rieve took possession immediately after the sale and operated the restaurant. After two weeks, when the Board of Health conducted a routine inspection, it cited 52 health code violations and thereupon closed the restaurant. Rieve sued to rescind the purchase agreement. Evidence established that Yost’s misrepresentations were innocently made. Can Rieve rescind the contract? Yost v. Rieve Enterprises, Inc., 461 So.2d 178, Web 1984 Fla. App. Lexis 16490 (Court of Appeals of Florida)
- Case 20.1: Cure on page 339
20.1 Cure Joc Oil USA, Inc. (Joc Oil), contracted to purchase low-sulfur fuel oil from an Italian oil refinery. The Italian refinery issued a certificate to Joc Oil, indicating that the sulfur content of the oil was 0.50 percent. Joc Oil entered into a sales contract to sell the oil to Consolidated Edison Company of New York, Inc. (Con Ed). Con Ed agreed to pay an agreed-upon price per barrel for oil not to exceed 0.50 percent sulfur. When the ship delivering the oil arrived, it discharged the oil into three Con Ed storage tanks. A report issued by Con Ed stated that the sulfur content of the oil was 0.92 percent. In the past, Con Ed had permitted a delivery of nonconforming oil to be cured by a conforming delivery. Joc Oil made an offer to cure the defect by substituting a conforming shipment of oil that was already on a ship that was to arrive within two weeks. Con Ed rejected Joc Oil’s offer to cure. Joc Oil sued Con Ed for damages for breach of contract. Does Joc Oil have a right to cure the nonconforming delivery? Joc Oil USA, Inc. v. Consolidated Edison Company of New York, Inc., 457 N.Y.S.2d 458, 443 N.E.2d 932, Web 1982 N.Y. Lexis 3846 (Court of Appeals of New York)
Your responses should be well-rounded and analytical, and should not just provide a conclusion or an opinion without explaining the reason for the choice.
For full credit, you need to use the material from the week’s lectures, text, and/or discussions when responding to the questions. It is important that you incorporate the question into your response (i.e., restate the question in your introduction) and explain the legal principle(s) or concept(s) from the text that underlies your judgment.
For each question you should provide at least one reference in APA format (in-text citations and references as described in detail in the Syllabus). Each answer should be double-spaced in 12-point font, and your response to each question should be between 300 and 1,000 words in length.
Submit this assignment as a single Word document covering both cases. Note: Please be sure you refer to the numbers that appear on the printed pages in your electronic readings, not the numbers that appear with the navigation icons.
Week 4 Lecture:
Managing Business Contracts Effectively
This lament is often heard in businesses when the other party fails to perform the contract terms we thought we negotiated. This should not be the first time that a manager looks at what the contract actually says. This is also not a good time to discover that due to some irregularity or oversight, the contract is not legally enforceable. Every business should have a contract administration process that ensures that each prospective contract is reviewed and agreed by someone in an appropriate supervisory position before the contract is signed and before performance is scheduled to begin. This is potentially an area where you could land in business; so understanding the key principles of contract law in a business context should prove invaluable to you.
In order to conduct business effectively using contracts, an organization must be able to enforce the contracts it makes with others. Sometimes, even though all contract formation elements were apparently satisfied, the resulting contract will not be enforceable. This can happen if one of the parties was induced into the contract wrongfully or if the contract was formed based on a mistake of fact. These are preventable errors, and procedures need to be in place to ensure that they do not occur. An unenforceable contract does not advance your business plan, and if litigated with the other party may result in adverse publicity. As we have seen in previous weeks, keeping these issues in mind at the contract drafting stage can be critical.
Some contracts must be in writing and signed in order to be enforceable. Even when writing is not required, written contracts have legal and practical advantages over oral contracts in that they create a tangible record of the terms of the agreement. Written agreements that appear to be final and complete statements of the parties’ agreement may preclude self-serving statements being made later by the other party, alleging that different or additional terms were part of the deal though not included in the final written agreement.
A contract may specify that performance be conditioned upon the occurrence of some act or event. In such a situation, it is essential to monitor whether and when the requisite condition occurs. Once the time for performance is due, it must be monitored. In some business contracts, periodic payments will be due at the completion of each stage of the project, so it’s essential to document performance. Sometimes, outside events, including natural disasters will make continued performance impossible, at least for a time. In order to have the best possible outcome when contract performance is delayed by factors outside the parties’ control, it is essential to regularly monitor the progress of the expected performance. If the parties can agree on where they were before an unanticipated event occurred, they are more likely to reach an agreeable resolution to modify or discharge the contract.
A breach of contract always triggers certain rights in the nonbreaching party. Judgment calls must be made as to whether and when to declare a breach and what remedy to pursue. Business people need to negotiate and draft contracts so that damages will be measurable if a breach of contract occurs. They need to know their own financial risk for breaching the contract. Again, being proactive in this process and exploring these contingencies up front can make all the difference in the event that a breach occurs.
Contract Formation Defenses
Sometimes the parties appear to have formed a valid contract with the acceptance of an offer that involves consideration, and there are no capacity or legality issues, but the contract is unenforceable because a contract formation defense exists. Contract formation defenses fall into two categories: Unfair conduct during contract formation, or lack of a written agreement in certain circumstances.
Contract law requires a meeting of the minds to form a valid contract. The law considers that if acceptance was based on fraud, undue influence, or duress, no free and voluntary meeting of the minds occurred. A person can be induced into a contract fraudulently in two different ways.
- Misrepresentation, an actual lie about a material (important) fact in the transaction.
- Nondisclosure, the failure to tell the whole truth about a material fact in the transaction.
For misrepresentation to exist as a defense, the party making the false statement must know it is false, a requirement known as scienter, and the innocent party must reasonably rely upon the falsehood.
Jayne is a real estate developer. Todd is selling several acres of undeveloped land. He knows there are unmarked graves on the property, but when questioned by Jayne about this, he says he knows of no graves. Jayne checks public records to determine if the property was ever listed as a cemetery. She finds no such records. Jayne signs a contract to purchase the land. She later discovers unmarked graves on the property, which state law now requires be relocated before any development may go forward. Jayne may rescind (undo) the real estate sale and receive restitution (return of the purchase price) by asserting the formation defense of misrepresentation.
Undue influence involves using one’s influence to induce someone into a contract that is not in that person’s interest. It often occurs in situations when someone is relying upon another person as an advisor or caretaker. Duress occurs when someone is pressured into a contract under threat of force. Undue influence and duress are also grounds for rescission of a contract.
The other major contract formation defense is not about unfair conduct. It’s about the lack of a signed writing. By law, some contracts must be in writing and signed or they are not enforceable. The law that governs this issue is called the Statute of Frauds, though it has nothing to do with the misrepresentation or nondisclosure fraud discussed above. The Statute of Frauds is named because it deals with contracts that historically posed great potential for fraudulent claims involving oral contracts. The contracts that must be in writing and signed are as follows. Contracts involving an interest in land (sales, leases, mortgages, etc.); contracts that cannot by their terms be performed within one year from the date formed; collateral contracts, in which one person promises to pay for someone else’s debt or perform someone else’s duty if the first person fails to do so; promises made in consideration of marriage, and contracts for the sale of goods priced at $500 or more. Some states may require additional contracts to be in writing and signed.
In determining the Statute of Frauds’ applicability, perhaps the most difficult category is that of a contract that by its terms cannot be performed within one year. If a term of performance is specified in the contract, it’s not difficult to understand the concept. A contract to employ someone for a fixed term of six months is clearly within one year (need not be in writing), whereas a contract to employ someone for a fixed term of 18 months is clearly not within one year (must be in writing and signed). The real problem occurs when a contract is for a term not measured in days, weeks, months, or years, such as a contract for life. If the person involved is young and healthy, it’s tempting to say that this is a contract that will require performance for more than a year and is therefore governed by the Statute of Frauds. However, most states use an objective test to determine whether a contract requires performance for more than one year. A young and healthy person entering into a contract for life could be struck by lightning and die in less than one year. Therefore, such a contract does not, by its terms, require performance for more than one year. An oral contract for life is enforceable.
The Statute of Frauds requires that certain contracts be in writing and signed to be enforceable, but the writing need not be on paper, and it might consist of several different writings. The writing need not contain all the terms of the contract, as long as it contains the essential terms: The names of the parties, the subject matter, the consideration, the quantity, and the price. Both parties should preferably sign the writing, but if only one party signs it, it is enforceable against that party.
Carrolton agrees to work as a marketing manager for Gordon for 18 months, an agreement that by its terms requires more than a year to perform. Carrolton writes a memorandum listing the parties, his job title and duties, the 18-month duration, and the agreed-upon compensation. He then signs his name below the statement “I accept this employment offer,” and sends it to Gordon. Gordon never signs it. Carrolton works for six months before quitting to take another job elsewhere. When Gordon sues for breach of contract, Carrolton raises the Statute of Frauds as a defense, on the basis that no binding contract was formed because Gordon didn’t sign the memorandum. The defense is invalid and Gordon will be entitled to damages resulting from Carrolton’s breach of contract. Carrolton signed a statement evidencing the agreement; therefore, Carrolton is bound, even though Gordon, who didn’t sign, is not bound.
Once it is clear the parties have formed an enforceable contract, the focus is on contract performance. Sometimes contracts contain conditions, such as a conditional precedent, an act or event that must occur before the obligation to perform the contract will arise. For example, in a contract to operate a restaurant on a certain premises, one condition might be that the appropriate zoning change is approved by a stated date. If the local zoning board refuses to allow zoning to allow change for the restaurant to operate, the contract will never be performed because the condition was not satisfied. There cannot be a breach of contract if the duty to perform never arises. The contract is discharged by the failure of the condition.
Assuming that all conditions are satisfied, the parties have a duty to perform as agreed. If both parties perform, the contract is discharged. If one party substantially performs so that the performance does not vary considerably from what was promised, the other party must also perform, but is entitled to compensation for any damages or losses from the lack of complete performance. In this way, substantial performance can also discharge a contract.
In the performance of a contract to paint an office, the contract specifies that a certain brand of paint will be used. The painting contractor cannot obtain that brand of paint, and the business owner who hired the contractors cannot be reached. In order to complete the painting by the contract deadline, the painting contractor decides to use a different brand of paint, of similar quality, but less durability. As a result, the office will need repainting in five years rather than eight years. The additional cost of having to repaint sooner is about $1,000. The painting contractor has substantially performed the contract, but will receive $1,000 less than the original contract amount, and the contract is discharged.
Sometimes the parties undertake performance and then decide to modify their contract. They might mutually decide to rescind the contract, perhaps because economic conditions make it impracticable. They might mutually decide that a new party will be substituted for one of the original parties, an agreement known as a novation. They might agree to change the terms of contract so that a different act or consideration will satisfy the remaining performance duties, known as an accord and satisfaction. All of these change agreements discharge the original contract.
In the course of performing the contract, an unforeseeable event sometimes makes continued performance impossible. Storms, floods, hurricanes, tornadoes, droughts, and other acts of nature fall into this category. Whether these events will discharge the contract depends on whether the impossibility is objective or subjective. Subjective impossibility involves a situation in which I can’t perform. Objective impossibility involves a situation in which no one can perform. Only objective impossibility will discharge a contract.
In the performance of a contract to provide catering services for a hotel, workers declare a strike against the caterer. The caterer is unable to replace the striking workers. Though it may be impossible for the caterer to continue to perform, the impossibility is subjective if other caterers are able to provide the catering services. If another available caterer is hired to replace the caterer with labor problems, the higher cost of the replacement caterer will be subtracted from the amounts owed to the original caterer who was unable to perform.
Sometimes, one of the parties to a contract simply fails to perform though no defense or excuse from performance exists. This creates a breach of contract, and gives the other party (the nonbreaching party) certain rights. If a breach of contract is material, meaning substantial, the nonbreaching party is excused from performance and, in addition, may sue for damages caused by the breach. If a breach of contract is minor, meaning not substantial, the nonbreaching party may suspend his or her own performance until the breach is remedied, but must thereafter resume performance.
In the performance of a contract to paint an office, the contract specifies that a certain brand of paint will be used. The painting contractor decides to use a different brand of paint, of lesser cost, quality, and durability. The owner discovers this unauthorized change as the painting is being completed. The use of the inferior paint, an intentional and fraudulent performance, is a material breach of the contract. The owner need not perform by paying the painting contractor. The owner may hire another painting contractor to repaint the office and pay that contractor instead.
Using the same scenario as above, consider that the contractor used the proper brand of paint but used the wrong paint color. This is a minor breach of contract. The owner may suspend payment to the painters until they cure the breach by repainting with the correct color, but once the repainting is completed, the owner must perform by paying for the (one) proper paint job.
One particular type of breach of contract is called anticipatory repudiation. This occurs when a party announces that he or she will not perform, prior to performance being due. The nonbreaching party may treat this as a material breach of contract, and immediately sue for damages. Until the nonbreaching party takes action, however, the breaching party may retract the anticipatory repudiation by giving notice.
Flossie’s Fashion House agrees to provide 100 pair of black leather pants to Sackcloth, a retail clothing store, delivery promised on July 1. On May 1, Flossie’s informs Sackcloth that it will not be honoring the contract. This is anticipatory repudiation and Sackcloth may sue for damages immediately, even though the delivery date is two months away. If Flossie’s decides on May 1 that it can honor the contract with Sackcloth, and Sackcloth has not yet taken action, Flossie’s can inform Sackcloth that it retracts its anticipatory repudiation and will perform as promised. If Flossie’s does this, Sackcloth must honor the retraction and wait for performance (delivery) on July 1.
You will find additional information about all these topics, and more, in your reading. We’ll be exploring many of these issues on the threads this week. These concepts can be dense and may take a few passes to fully understand, but they are worth understanding considering the impact they could have on you and/or your company in the business world. I look forward to your input in the discussions this week!
Third Party Rights
Once a contract is formed, the people forming the contract are “in privity of contract.” Each has some duty to preform. However, they also have the right to sell or transfer that duty to a third party. The duty to pay or duty to perform under a contract can usually be assigned to someone else.
This usually won’t apply to a personal services contract because this is specific on who is discharging the contract. Even future rights may be assigned, such as a payment from a trust.