Breach of Contract by Tod Zuckerman Esq 1

Breach of Contract by Tod Zuckerman, Esq. 1

Suggested Roadmap for Analyzing a Possible Breach of Contract Claim (adapted from Martin Frey & Phyllis Frey, Essentials of Contract Law) 1– 2– 3– 4– 5 -6 In Six Easy Steps 2

Step One What is the Applicable Law (Choice of Law)? Step Two Was a Contract Formed? Step Three Is the Contract Enforceable? Step Four Was the Contract Breached? Step Five What are the Plaintiff’s Remedies for the Defendant’s Breach of Contract? Step Six Are There any Alternative Causes of Action (Legal Theories) if the Defendant Never Made a Contract Caliber Promise? 3

Step One: Choice of Law G G G Does federal or state law control? If state law, which state? Does case law or statute apply? Elaboration: Frequently, transactions (and disputes based on such transactions) concern/include more than one state – in such situations, the result of the dispute frequently can vary depending on which state’s law applies. 4

Step One: Choice of Law Q: How can a transaction concern/include more than one state? A: The contracting parties may be from different states, and/or the contract may be performed in several states. Remember: Contract law is, by and large, state law, and the states often have different case law and statutory law as respects contract law. This is especially true regarding insurance contracts (by the way, analyzing and litigating insurance contract disputes has been your instructor’s job since 1987). 5

Step One: Choice of Law Provisions: A typical “choice of law provision” in a contract reads: “This Agreement shall be governed and interpreted under the law of the State of California. ” Courts usually defer to choice of law provisions BUT a court will not defer to the parties’ choice if: G G The chosen state has no substantial relationship to the parties of the transaction, or The result from applying the chosen state’s law would be contrary to the forum state’s public policy. 6

Step One: Choice of Law Forum State: “The forum state is the state where the lawsuit is filed. ” Public Policy: “A principle of law that holds that no person, business or branch of the government can lawfully do anything that has a tendency to be injurious to the public or against the public good. Certain acts, such as having a court enforce gambling debts, are considered to be against public policy in some states. Public policy is the legal term for the common sense and conscience of the people applied throughout the state to matters of public morale, health, safety and welfare. ” 7

Step One: Choice of Law When: a) the parties have not selected a choice of law provision, or b) the parties have selected, but their selection is ineffective, the forum state will use its own choice of law rules. The various states do not all have the same choice of law rule. Most states choose the law of the state having the most important contacts with the transaction. 8

Step One: Choice of Law Problem: After you decide what state’s law applies, how do you determine which law (the chosen state always has many laws re. contracts) controls? 9

Step One: Choice of Law Solution: The law of contracts within a state comes from two main sources: 1. the courts (case law, aka “common law”) and 2. the legislature (statutes/orders). A court cannot replace a statute with its own law to resolve a dispute. 10

Step One: Choice of Law In practice, most contract law is case law, with one exception: HUGE The law of sales (or leases) of goods governed by the Uniform Commercial Code (UCC). If the dispute concerns the sale of goods, the UCC is the source of law that must be used to resolve the dispute. 11

Step Two: Was a Contract Formed? 1. Was there an offer? Definition of offer: “A manifestation of willingness to enter into a bargain, which justifies another person in understanding that his or her assent to that bargain is invited and will conclude it. ” Three elements of an offer (for lateral contracts): a) Offeror’s promise (the unequivocal assurance of what offeror is willing to do. b) Consideration for the offeror’s promise (the offeree’s promise). c) The fact that the offeror made his/her/its promise to induce the offeree to promise. 12

Step Two: Was a Contract Formed? An offer for a unilateral contract also has (with one important difference) the same three elements: 1. The offeror’s promise. 2. The consideration for the offeror’s promise (the offeror’s performance (no-promise)). 3. The fact that the offeror made his/her/its promise to induce the offeree to perform (not to promise). Remember… 13

Step Two: Was a Contract Formed? …a bilateral contract is a promise for a promise, …a unilateral contract is a promise for a performance. 1. Bilateral contracts: a) form the great majority of contracts (even more so in business) 2. Unilateral contracts: a) are usually non-commercial b) frequently involve family/friends. 14

Step Two: Was a Contract Formed? Q: How do you determine whether a statement is actually an offer, or just the start of negotiations? A: By the “reasonable person” standard. “The reasonable person standard is the measure used by an unbiased nonparticipating hypothetical observer. ” It is an objective standard. 15

Step Two: Was a Contract Formed? The issue of whether an offer was made occurs in many scenarios – let’s focus on two common business situations: Advertisements and Auctions 16

Step Two: Was a Contract Formed? General Rule re: Advertisements are NOT offers, but just invitations to bargain. WHY? Because ads do not contain sufficient words of commitment to sell. 17

Step Two: Was a Contract Formed? Advertisements For example: “AM/FM Cassette Radios $30 each” Too vague re. quantity, duration, etc. to be an offer 18

Step Two: Was a Contract Formed? If the ad contains specific words of commitment, particularly a promise to sell a certain number of units, then it MAY BE an offer: “ 100 Men’s Alpaca sweaters at $150. 00 apiece; first come, first served starting Saturday, October 8, at 9. a. m. ” This is so specific that a court would consider this ad to be an offer. 19

Step Two: Was a Contract Formed? “Send three Cheerios box tops plus $2. 95 to cover shipping/handling for your free Tiger Woods cotton T-shirt. ” Though this is an ad, it is also an offer – the advertiser is committing itself to take certain action in response to the consumer’s action. 20

Step Two: Was a Contract Formed? Auctions An item put up for auction - generally not an offer but a mere solicitation of offers (bids) from the audience. Unless the sale is expressly said to be “without reserve” (the magic words), the auctioneer may withdraw the item(s) from the sale even after the start of bidding. In an auction without reserve, the auctioneer must sell to the highest bidder. An auction is without reserve unless a contrary intention is evident. 21

Step Two: Was a Contract Formed? Requests for Bids: An ad for bids for construction work or the sale of property is an invitation for offers and so is not an offer. Jokes: An offer made as a joke never appeared to a reasonable person to be anything more than a joke and so is not an offer. Prizes: An offer of a prize in a contest may become a contract for a successful contestant who complies with the terms of the offer. Rewards: Like other unilateral contracts, performance of the requested act by a person who had no knowledge of the offer when she performed the act does not form a contract. The act must be performed with knowledge of the offer. 22

Step Two: Was a Contract Formed? Illusory Promises: A misnomer – an offeror’s promise must not be illusory, or else there is no promise. Indefinite promises: A misnomer – an indefinite promise is not a promise. What must be specified to make an offer definite? 1. 2. 3. 4. 5. Identity of offeror Subject matter Offer price Time of payment, delivery or performance Nature of work to be performed (for service contracts). 23

Step Two: Was a Contract Formed? Gap Fillers: Under the UCC, if the partners have intended to make a contract but have failed to supply key terms, the UCC may supply these terms. 24

Step Two: Was a Contract Formed? Consideration: Definition of consideration: “Consideration is something of value (and a mere promise is something of value) that is transferred from one person to another. ” Consideration is an element of the offer AND an element of the acceptance. 25

Step Two: Was a Contract Formed? Communicating the offer: Most courts rule that the offeror is bound by any mistakes in the transmission of the offer. If the offeree knows or should know of the mistake, she may not take advantage of it by accepting the offer. No contract would be formed as she capitalized on an unfortunate error. 26

Step Two: Was a Contract Formed? Option Contract: 1. 2. 3. 4. An offer made for consideration – a contractual obligation. Irrevocable during the time specified in its terms. Lapses after the specified time. May be rejected by the person holding the option until the option time lapses. 27

Step Two: Was a Contract Formed? Termination of an offer: 1. 2. Time limit specified – offer continues until the end. Time limit not specified – offer continues until a reasonable period of time has passed. Reasonable period of time: What a reasonable person would consider sufficient time to accept the offer under the circumstances of the case. 3. If an essential element of the contract is destroyed. 4. If the proposed contract is or becomes illegal. 28

Step Two: Was a Contract Formed? Lapse of an offer: 1. If either party becomes insane or dies before acceptance is communicated. 2. Once the offer has been accepted, the contract is binding, even if one of the parties becomes insane or dies. 29

Step Two: Was a Contract Formed? Rejection of an offer: 1. 2. 3. Stated refusal to accept an offer. Counter-offer. Conditional acceptance. Effect of rejection: When an offer is rejected, the party who rejected it cannot later accept it without obtaining the offeror’s renewed consent. i. e. The offeror has to revive the offer. 30

Step Two: Was a Contract Formed? Acceptance of an offer: Definition of acceptance: “An assent to an offer according to its terms. ” 1. 2. 3. 4. Offeree (recipient) must know of the offer. Offeree must show an intention to accept. The acceptance must be unconditional. The acceptance must be made according to the terms of the offer. 31

Step Two: Was a Contract Formed? Silence does not constitute acceptance unless: 1. 2. 3. Offeror observes offeree acting in response to the offer, but says nothing. Parties agree that silence means acceptance (i. e. record and book clubs) Parties have customarily treated silence as an acceptance. 32

Step Two: Was a Contract Formed? When is acceptance effective? “Unless the offer provides otherwise, an acceptance made in a manner and by a mechanism invited by an offer is operative and complete at the manifestation of mutual assent when it is put of the offeree’s possession, without regard to whether it ever reaches the offeror. ” (the “Mailbox Rule”) 33

Step Two: Was a Contract Formed? Acceptance of unsolicited goods: Formerly, under common law: The recipient of unsolicited goods through the mail was obliged to accept or return them. Currently, under modern statutes: The recipient of unsolicited goods may keep the goods without paying for them. 34

Step Three: Is the Contract Enforceable? A. • • • Protecting a vulnerable class: Minority (Infancy). – Defense to Breach of Contract Action (Minority as a shield) – Offensive Weapon (Minority as a sword) Mental Incapacity because of alcohol/drugs. 35

Step Three: Is the Contract Enforceable? B. • • • Protecting a party against overreaching: Adhesion contracts (unless “unconscionable”, absent fraud, duress, etc. they ARE enforceable. Unconscionability. Fraud and misrepresentation. Duress (physical and economic). Undue influence. 36

Step Three: Is the Contract Enforceable? C. Protecting a party against mistake: Generally, courts permit disaffirmance of contracts based on mistake ONLY if the contracts involve “identity” or “existence of the subject matter” NOT “quality” or “value. ” The distinction is not always clear. 37

Step Three: Is the Contract Enforceable? D. • • • Protecting the judicial process: Statute of Frauds. Illegality as a defense to a breach of contract action. Forum selection provision. 38

Step Four: Was the Contract Breached? A. B. Plaintiff’s allegation of Defendant’s breach. Defendant’s response to Plaintiff’s allegation of breach: a) No breach – I complied. b) No breach – I was excused. c) No breach – I was justified. d) No breach – my duty terminated. e) I admit I breached, but you have no damages, or your damages are less than you claim. 39

Step Four: Was the Contract Breached? Countering Plaintiff’s allegation of breach of contract – Defendant has the following four responses: No breach – compliance: (“You are wrong, I complied with the terms of the contract. ”) No breach – excuse: (“I did not comply with the terms of the contract, but my nonperformance of the contract was excused. ”) No breach – justification: (“I did not comply with the terms of the contract, but my nonperformance was justified by your breach of the contract. ”) No breach – termination of duty: (“I did not comply with the terms of the contract, but my duty to perform the contract has been terminated. ”) 40

Step Four: Was the Contract Breached? No breach – compliance: Defendant may argue that he/she/it complied with the terms of the contract because: a) The contract does not include the duty the promisee (plaintiff) alleges the promisor (defendant) has breached, or b) Even if the contract includes such a duty, the promisor (defendant) did not breach this duty. 41

Step Four: Was the Contract Breached? Example of “No Breach – Compliance” Response Betty and Dan Roberts of New Orleans contracted with State Farm Mutual Insurance Co. for homeowners insurance. The Roberts promised to pay the premiums for State Farm’s promise to pay for repairs to the Roberts’ house caused by natural disaster. However, as the Roberts’ house was located in a flood zone, the policy specifically excluded damage due to flooding. After the Roberts paid their annual premium, Hurricane Katrina destroyed their house. The Roberts will hire an attorney to sue State Farm – the attorney will allege that State Farm breached the contract by not paying the claim, State Farm’s response will be “no breach, compliance. ” 42

Step Four: Was the Contract Breached? State Farm will respond: “We have a clear, specific exclusion for damage caused by floods, and since your damage was caused by flooding, we have no contractual duty to pay for this loss. We are complying with the contract. ” Another example of a “No breach, compliance” response: Travelers Insurance Company’s response to Gordon Vann’s lawsuit. 43

Step Four: Was the Contract Breached? No breach – excuse: • Defendant (promisor) admits that he/she/it is not performing the contract, but claims a supervening external event that happened after the contract formation and before full performance of the contract. • The contract does not mention the occurrence of the supervening external event. 44

Step Four: Was the Contract Breached? Time of contract formation Occurrence of external event Time defendant’s performance was due Event was unexpected The unexpected event occurred The occurrence of the unexpected event rendered the defendant’s performance impossible or impractical The risk of the occurrence of the unexpected event was not allocated by contract or custom If the occurrence of the unexpected event destroys a basic assumption on which the contract was made, defendant should be excused from performing his/her/its duty. 45

Step Four: Was the Contract Breached? Example of “No Breach – Excuse” Response Famous singer Beyonce contracts with the Aladdin Hotel in Las Vegas for six weeks of performances, beginning January 1, 2006. On October 1, 2005, Beyonce’s physician finds polyps on Beyonce’s vocal cord, and orders her not to sing for six months, lest she risk permanently injuring her vocal cord. Beyonce follows her physician’s orders and immediately notifies the Aladdin Hotel. Q: Can the Aladdin Hotel maintain a successful lawsuit against Beyonce for breach of contract? A: No, it cannot – a court would rule she is excused from performing. The risk of permanent injury is disproportionate to the ends to be obtained by performance. 46

Step Four: Was the Contract Breached? Example of “No Breach – Excuse” Response The Claremont Hotel promises to pay a monthly sum to the Richmond Country Club for permitting hotel guests to play on the club’s golf course. The hotel then burns down. The hotel’s duty to pay is excused. 47

Step Four: Was the Contract Breached? Example of “No Breach – Excuse” Response Jerry promises to pay Bob $1000 for advertising Jerry’s hotel in a souvenir program, and Bob promises to print and sell the program as a souvenir of a ski jump competition in San Francisco’s Pacific Heights neighborhood, organized by Olympic gold medalist Johnny Mosely. However, the neighborhood residents are adamantly opposed to the idea of a ski jump competition in their neighborhood, and, in response, San Francisco’s Board of Supervisors indefinitely postpones the event. Nevertheless, Bob publishes the program. Jerry’s duty to pay is excused because cancellation of the event totally destroyed the value of advertising in the program. 48

Step Four: Was the Contract Breached? Example of Ineffective “No Breach – Excuse” Response Tenant leases a building in San Francisco in which to sell new cars. However, due to a war, new cars are no longer available. Tenant refuses to pay rent under the lease because the leased space is no longer of value to him. The court will rule against the tenant, as the lease’s value is not totally destroyed – the tenant can either sell used cars, or sublet the building and lot to someone else to use for a different purpose. 49

Step Four: Was the Contract Breached? No breach – justification: This response combines defendant’s admission of nonperformance with the assertion that the nonperformance was justified by plaintiff’s breach of the contract. 50

Step Four: Was the Contract Breached? Example of “No Breach – Justification” Response Starving Students Painting Co. contracted to paint Ted’s apartment for $2000. Ted contracted to supply the paint. When Starving Students arrived to paint Ted’s apartment, Ted refused to provide the paint. Starving Students refused to paint Ted’s apartment. Ted then hired Bob’s Painters to paint, and paid Bob $2500. Ted sued Starving Students for breach of contract, alleging they breached by not painting his apartment. Starving Students responded, “No breach, justification” – our nonperformance (not painting) was justified. Court will rule for Starving Students 51

Step Four: Was the Contract Breached? No breach – terminated duty: By this response, defendant (promisor) is saying, “Although I am not complying with the terms of the contract, my duty to perform the contract has been terminated. ” A contract may be terminated in several ways – one way is operation of law: 52

Step Four: Was the Contract Breached? Example of “No Breach – Terminated Duty” Response Felix’s TV & Appliances contracted to buy 25 big screen TVs from TV Warehouse, a wholesaler, for the Christmas season. The televisions were to be delivered by November 23, but they were actually delivered on January 9, too late for Christmas. On March 1, five years later, Felix’s sues TV Warehouse for breach of contract. The Statute of Limitations is four years for breach of written contracts. Therefore, TV Warehouse’s response of “no breach, terminated duty” is appropriate. 53

Step Four: Was the Contract Breached? Admission of breach: Occasionally, a defendant will admit breach. Usually, it occurs when defendant (promisor) can make a lot of money by selling goods to someone else, or performing services for someone else. 54

Step Four: Was the Contract Breached? Example of Admission of Breach Velma, a fashion designer, contracted to work for Calvin Klein for two years at $20, 000/month. After working for Calvin Klein for two months, Velma receives an offer to work for Tommy Hilfiger for $30, 000/month. Velma accepts Hilfiger’s offer and leaves Calvin Klein, who replaces her with another fashion designer at a salary of $22, 000/month. Velma owes Calvin Klein $2000/month for 22 months ($44, 000), but by working for Tommy Hilfiger, she gains an additional $176, 000 – even after paying Calvin Klein damages for her breach of contract. 55

Step Five: Plaintiff’s Remedies Q: What are plaintiff’s remedies for the defendant’s breach of contract? A: Damages 1. Plaintiff’s Expectation Remedy 2. Plaintiff’s Reliance Remedy 3. Plaintiff’s Restitution Remedy Specific Performance 56

Step Five: Plaintiff’s Remedies • • Plaintiff may seek damages (money) for the breach but may not seek punitive damages. Exception: concerning insurance companies that breach insurance contracts (“policies”). Rarely, plaintiff will be awarded the specific goods – this is “specific performance”, which: – – Mandates delivery of the item in dispute but is only available when the remedy of damages (money) is inadequate. Is not available in personal service contracts – involuntary servitude violates the Thirteenth Amendment to the U. S. Constitution. 57

Step Five: Plaintiff’s Remedies Expectation damages: • • • Victorious plaintiff is compensated for what he/she/it expected to receive under the contract – “expectation damages. ” Plaintiff usually obtains a greater monetary recovery based on lost expectation. In certain situations, plaintiff could actually obtain more damages (money) based on a “reliance interest” or “restitution damages. ” 58

Step Five: Plaintiff’s Remedies Reliance damages: • Victorious plaintiff is compensated for what he/she/it gave up and received in reliance on the defendant’s promise. The formula is: What plaintiff (non-breaching party) gave in reliance on the breaching party’s (defendant’s) promise minus What plaintiff (non-breaching party) received in reliance on the breaching party’s (defendant’s) promise = Reliance Damages 59

Step Five: Plaintiff’s Remedies Restitution damages: • Victorious plaintiff is compensated based on: – – The benefit that plaintiff conferred on breaching party (defendant) What plaintiff received for conferring that benefit. i. e. plaintiff receives the reasonable value of the benefit he/she/it conferred on defendant minus What plaintiff already recovered (if anything) for conferring that benefit 60

Step Five: Plaintiff’s Remedies Restitution in a contract scenario is based on three basic situations: • • • Where plaintiff has conferred a benefit to defendant under a contract that is unenforceable because of some defense – i. e. contract was oral but needed to be in writing under the Statute of Frauds. Where there was an enforceable contract which was breached, but the contract was a losing contract for plaintiff – i. e. if defendant had not breached, plaintiff would have lost money, and he/she/it is better off with restitution damages than expectation damages Where no contract was formed, but a benefit was conferred on defendant in a precontractual stage, when the parties believed they had, or would conclude, a contract. 61

Step Six: Alternative Causes of Action Promissory estoppel (aka “detrimental reliance”): • If a party acts (or refrains from acting) because he/she/it is relying on the other party’s encouragement, a reliance interest may possibly exist although no offer (a contract caliber promise – (unequivocal definite assurance) has been made). • A lesser promise (one too uncertain, indefinite, etc. to be an offer) could be the basis of a promissory estoppel cause of action if the following elements exist: 62

Step Six: Alternative Causes of Action Elements required for promissory estoppel: Ø Promise by defendant (promisee). Ø Promisor should reasonably expect his/her/its promise to induce action or forbearance on the promisee’s part. Ø The promise does induce such action or forbearance. Ø Injustice can be avoided only by enforcement of the promise. 63

Step Six: Alternative Causes of Action Example of Promissory Estoppel Jerry owned and operated a bakery in a small California town, where his success led him to consider expanding his business to include a grocery store. A few months later, Jerry bought a small grocery store in the same town. A short time after that, Jerry contacted Eight-Twelve, to discuss establishing an Eight-Twelve franchise store. After initial negotiations, the following events occurred on Eight. Twelve’s insistence: • • June 6, 2001 – Jerry sold his grocery store. Summer 2001 – Jerry bought an option to buy a building site in another small California town (for eventual building of an Eight-Twelve store). 64

Step Six: Alternative Causes of Action • • • September 15, 2001 – Jerry exercised his option to buy the building site by paying $30, 000 down. November 6, 2001 – Jerry sold his bakery business and bakery building. November 2001 – Jerry (and his family) moved to another small California town and obtained employment at an Eight-Twelve, to gain experience. Q: Is this a breach of contract? A: No, as Eight-Twelve made no definite promise (no offer). However, Jerry could bring a lawsuit for promissory estoppel. 65

Step Six: Alternative Causes of Action Restitution: • • Based on the policy of preventing unjust enrichment. Referred to by many different names: 1. 2. 3. 4. 5. 6. A contract implied by law (implied by law contract) A contract implied in law (implied in law contract) Constructive contract Quasi-contract An implied contract (implied in law, not fact) Quantum-meruit (Latin: “for what it’s worth” – especially confusing as the term may also refer to a remedy for a 66 breach of contract)

Step Six: Alternative Causes of Action Whatever the name, these elements are required for a restitution cause of action: Ø A benefit conferred by one party on another (the enrichment). Ø The retention of the benefit without compensating the party conferring the benefit would be unjust. 67

Step Six: Alternative Causes of Action • • • The Easy Part: finding the enrichment. The Hard Part: deciding whether it would be unjust to allow the benefit to be retained without compensating the party conferring the benefit. Meddlers cannot confer an unnecessary or unwanted benefit and then successfully sue for restitution. A physician performs first aid on an injured stranger who was thrown from a streetcar with such force that he hit his head on the sidewalk and was rendered unconscious. The physician is entitled to restitution. 68