Creating Valid and Enforceable Contracts
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Creating Valid and Enforceable Contracts Contracts What is a “contract”? Where does contract law come from? A promise that the law will enforce. Common Law Uniform Commercial Code

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Presentation Transcript

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Contracts

  • What is a “contract”?

  • Where does contract law come from?

  • A promise that the law will enforce.

  • Common Law

  • Uniform Commercial Code

    • UCC Article 2 governs the sale of goods. “Goods” means anything moveable, except for money, securities, and certain legal rights.

    • In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods.


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  • The Purpose of a Contract:

  • Essential Elements of a Valid Contract

  • Agreement

    • offer, and acceptance

  • Consideration

    • There has to be bargaining that leads to an exchange between the parties.

  • Legality

    • The contract must be for a lawful purpose.

  • Capacity

    • The parties must be adults of sound mind.


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Bilateral

Unilateral

Express

Implied

Executory

Executed

Valid

Unenforceable

Voidable

Void

More Terminology:Types of Contracts (or Agreements)

vs.

vs.

  • Bilateral and Unilateral Contracts

    • Bilateral: both parties make a promise.

    • Unilateral: one party makes a promise that the other party can accept only by doing something

vs.

vs.

vs.

vs.


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Types of Contracts (cont’d)

  • Express and Implied Contracts

    • Express: the two parties explicitly state all important terms of their agreement.

    • Implied: the words and conduct indicate that the parties intended an agreement.

  • Executory and Executed Contracts

    • Executory: when one or more parties has not fulfilled its obligations.

    • Executed: when all parties have fulfilled their obligations.


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Types of Contracts (cont’d)

  • Valid, Unenforceable, Voidable, and Void Agreements

    • Valid: satisfies the law’s requirements.

    • Unenforceable: when the parties intend to form a valid bargain but some rule of law prevents enforcement.

    • Voidable: when the law permits one party to terminate the agreement.

    • Void: one that neither party can enforce, usually because the purpose is illegal or one of the parties had no legal authority.


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Terminology:Quasi-contract

  • Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show that:

    • He gave some benefit to the defendant.

    • He reasonably expected to be paid for the benefit and the defendant knew this; and

    • The defendant would be unjustly enriched if she did not pay.

  • The damages awarded are called quantum meruit, meaning that the plaintiff gets “as much as he deserved.”


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Essential Elements of Valid Contracts:Mutual Agreement = Meeting of the Minds

  • The parties can form a contract only if they had a meeting of the minds.

    • They must understand each other and intend to reach an agreement.

    • A judge will make an objective assessment of any disagreements about whether a contract was made -- whether or not a reasonable person would conclude that there was an agreement, based on the parties’ conduct.


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Deciding if a Contract has been Formed: Negotiation Terms

JOE BOB

Offer Accept, or Reject, or

Accept, or Counteroffer

Reject, or

Counteroffer


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Deciding if a Contract has been Formed: Is there an Offer?

  • An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms.

  • Problems with Intent

    • Invitation to bargain is not an offer.

    • Price quote is generally not an offer.

    • An advertisement is generally not an offer.

    • Placing an item up for auction is not an offer, it is merely a request for an offer.

  • Problems with Definiteness

    • The term of the offer must be definite.


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Offers: Definite Terms

  • 1. I’ll give a blueberry muffin and a cup of coffee to the first person who shows up next class in class wearing a top hat.

  • 2.Would you consider wearing a top hat if I gave you a blueberry muffin and a cup of coffee?

  • 3. I couldn’t accept less than $4000 for my car.

  • 4.General common law rule: all important/essential terms (price, quantity, etc.) must be specified. EXCEPTIONS: UCC situations, and where industry practice suggests how the missing terms will be filled in. E.g., seafood restaurant example.


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Termination of Offers

  • Termination by Revocation

    • Effective when the offeree receives it.

  • Firm Offers and Revocability

    • Common Law Rule

      • Revocation of a firm offer is effective if the offeree receives it before he accepts.

    • Option Contract

      • The offeror may not revoke an offer during the option period.

    • Sale of Goods/UCC

      • A writing signed by a merchant, offering to hold an offer open, may not be revoked.


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Acceptance

  • The offeree must say or do something to accept.

    • In a bilateral contract, the offeree generally must accept by making a promise.

    • In a unilateral contract, the offeree must accept by performing.

    • If the offer is ambiguous, the offeree may accept by either a promise or performance.

  • Mirror Image Rule (Common Law)

    • Requires that acceptance be on precisely the same terms as the offer.


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Mirror Image Rule

  • Stan offers Eric $100 for Eric’s brand new racing bicycle.

  • Eric answers, “I’ll take $100 plus your old, broken bike.” (Worth $10).

  • Stan responds, “Let’s meet back here in 20 minutes.”

  • In 20 minutes Stan returns with $100 and a different used bicycle (worth $30).

  • Eric refuses to make the trade.

    DID STAN AND ERIC HAVE A DEAL?


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Exception to the Mirror Image Rule:UCC and the “Battle of Forms”

  • In sale of goods, offeree may include in the acceptance terms that are additional to or different from those in the offer.

    • Additional terms are those that bring up new issues.

      • If both parties are merchants, the additional terms will generally become part of the contract.

    • Different terms are those that contradict terms in the offer.

      • The majority of states hold that different (contradictory) terms cancel each other out

        -- Court uses UCC and its judgment to fill gaps


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Communication of Acceptance

  • Medium and Manner of Acceptance

    • If an offer demands acceptance in a particular medium or manner, the offeree must follow those requirements.

    • If the offer does not specify a type of acceptance, the offeree may accept in any reasonable manner and medium.

  • Time of Acceptance: The Mailbox Rule

    • An accceptance is generally effective upon dispatch, meaning the moment it is out of the offeree’s control.


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Essential Elements of a Valid Contract: Consideration

  • Def’n: “Consideration means that there must be bargaining that leads to an exchange between the parties.”

  • Consideration can be anything that someone might want to bargain for. It is theinducement to make the deal, or the thing that is bargained-for.

  • Consideration must be present to make any promise enforceable, but courts do not generally inquire into adequacy of consideration.


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What is the consideration supporting each promise?

1. Stan agrees to pay Eric $100 for Stan’s bicycle; exchange to take place next Tuesday.

  • Professor promises to give a cup of coffee and a blueberry muffin to the first person to come into class in a top hat.

  • I agree to pay you $500 for your record collection.

    4. I promise to pay my son $100 if he does not watch MTV for one year.


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“Bargaining is obligating yourself in order to induce the other side to agree.”

  • The thing bargained for can be:

    • another promise or action.

    • a benefit to the promisor or a detriment to the promisee.

    • a promise to do something or a promise to refrain from doing something.

    • Hamer v. Sidway

  • Must be more than an “Illusory Promise”

    • If one party’s promise is conditional, the other party is not bound to the agreement.


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  • REAL CASE

  • Mr. C offers to sell his land to Mr. B, who is interested in the land’s mineral rights.

  • They agree to a sale contract under which Mr. B will put up a $5000 “earnest money” check to be deposited in a bank for 60 days while Mr. B performs engineering and other studies on the property.

  • If the studies indicate the mineral rights aren’t valuable, Mr. B may decide not to buy the land, the earnest money will be returned to Mr. B.

  • Mr. B decides he wants to buy, but Mr. C refuses to sell.

  • CAN MR. B FORCE MR. C TO SELL?


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Past consideration

CASE: Promise to pay in return for past favors. Old man says, “Since you have been so nice to me these past seven years, I will provide for you in my will.” Then he dies without leaving money to plaintiff.

  • Is this consideration?

  • Was it bargained-for?


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What is the courts’ attitude toward evaluating the adequacy of consideration?

  • Courts seldom inquire into the adequacy of consideration.

  • Eric agreed to pay $5 for Stan’s $100 bicycle, and Stan agreed. Stan later changes his mind and argues that his promise to deliver the bike is not enforceable because the $5 is insufficient consideration.


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Exceptions to the Requirement of Consideration: adequacy of consideration?Promissory Estoppel

Goff-Hamel case:

  • Did the plaintiff and the defendant have an enforceable contract? Were all the essential elements of a contract present?

  • What exactly made the defendant’s promise to pay enforceable in this case?


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Exceptions to the Requirement of Consideration: adequacy of consideration?Promissory Estoppel

  • Promise meant to induce action,

  • On which the promisee reasonably relies

  • To his/her detriment

    Is enforceable in the absence of consideration

    NOTE: All 3 of these factors must be present for the promissory estoppel rule to apply


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Promissory Estoppel adequacy of consideration?(cont’d)

  • Supervisor was pleased with employee’s work

  • In March, Supervisor promised employee that she would get 5% of the company stock as a Christmas bonus

  • Employee turns down several higher paying job offers between March and December

  • Supervisor never made good on that promise

  • Employee sues to enforce the promise.

    RESULT?


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Capacity and Consent adequacy of consideration?

  • One seven year old says to another, “I will give you a $10 if you give me your baseball glove tomorrow at noon.” Second child agrees.

    • Offer and acceptance?

    • Consideration?

    • Valid contract?


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Capacity adequacy of consideration?

  • What is “capacity”? How does it relate to contract law?

  • What happens if one party to a contract lacks capacity?


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Minors adequacy of consideration?

  • Valid contract voidable by minor party (< 18)

  • Disaffirmance

    • A minor generally may disaffirm a contract, either by notifying the other party he refuses to be bound by the agreement, or by filing a suit to rescind the contract, that is, to have a court formally cancel it.

  • Restitution

    • A minor who disaffirms a contract must return the consideration he has received, to the extent he is able.

    • What if consideration is destroyed through minor’s negligence? Intentional act?


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REAL CASE adequacy of consideration?

  • P, a minor, bought two pairs of chinchillas from D, for a total of $1850. They multiplied, producing a total of 8.

  • While still a minor, P disaffirmed the contract, and offered to return the 6 chinchillas that were still alive at the time.

  • D refused. P sued.

  • At the time of trial, only 2 chinchillas were still alive, thanks to P’s careless failure to “water them properly.”

    RESULT?


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Minors -- Exceptions adequacy of consideration?

  • Timing of disaffirmance & Ratification

    • Minors may disaffirm a contract up to a reasonable time after turning 18, unless they ratify the contract after turning 18.


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Mentally Impaired Persons adequacy of consideration?

  • Definition

    • A person with mental illness or defect, who is unable to understand the nature and consequences of a transaction.

    • Impairment must be more than mere eccentricity or volatility.

    • E.g., insanity, dementia, schizophrenia, mental retardation.

    • Generally creates only a voidable contract.

  • Restitution

    • A mentally infirm party who seeks to void a contract must make restitution.


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Mentally Impaired Persons adequacy of consideration?(cont’d)

  • Intoxication

    • When an intoxicated person makes a contract, it is voidable.

    • Must be so intoxicated as to be unable to understand the nature and consequences of the transaction.

  • Mental Incapacity may be temporary

    • Senile Not senile Senile

    • Ratification


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Illegality adequacy of consideration?

Why is the contract in Brunswick Floors unenforceable? Weren’t offer, acceptance and consideration all present?

What sorts of contracts are illegal?

Covenant not to compete is so broad that it violates our public policy in favor of free mobility of labor.

Illegal/criminal purpose (e.g. gambling debts), contrary to public policy (covenant not to compete)


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  • Mistake adequacy of consideration?

  • Raffles v. Wichelhaus:

  • Why was the contract to ship cotton unenforceable?

  • In what sense was this a “mutual” mistake?


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Mistake -- Bilateral adequacy of consideration?

  • A bilateral mistake occurs when both parties negotiate based on the same factual error.

    • If the parties contract based on an important factual error, the contract is voidable by the injured party.

  • Conscious Uncertainty

    • No rescission is allowed where one of the parties knows she is taking a risk.


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Mistake -- Unilateral adequacy of consideration?

  • Sometimes only one party enters a contract under a mistaken assumption, a situation called unilateral mistake.

    • to rescind for unilateral mistake, a party must demonstrate that she entered the contract of a basic factual error and that either

      • (1) enforcing the contract would be unconscionable or

      • (2) the nonmistaken party knew of the error.


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Other Facts Undermining Consent: Misrepresentation and Fraud

  • Innocent misrepresentation

    • means the owner believes the statement to be true and has a good reason for that belief.

  • Fraudulent misrepresentation

    • means the owner knows that the statement is false.

  • Remedy may depend upon speaker’s intent


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Misrepresentation and Fraud Fraud(cont’d)

  • To rescind a contract based on misrepresentation or fraud, a party must show three things:

    • (1) there was a false statement of fact;

    • (2) the statement was fraudulent or material; and

    • (3) the injured person justifiably relied on the statement.


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Misrepresentation and Fraud Fraud(cont’d)

  • Statements of fact vs. Opinion and “Puffery”

    • Salesperson says: “This vacation property is beautiful waterfront property that your family will love.” In fact it is mostly swampland.

    • Salesperson says: “For my money, the Maytag XKG-47 is the finest washing machine ever made because owning it will make your life hassle-free. Owning one will make you a happier person.”


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Fraudulent or Material Fraud

  • Fraudulent: without regard to truth or falsity

    • Seller says “The air conditioning in this house is working fine” knowing that is untrue.

    • Seller says “This house is built on solid rock” without any reasonable belief that is true.

  • Material: integral to other party’s agreement

    • Seller says “This roof is only two years old.” Seller believed that was true, but roof was actually 14 years old (beyond normal useful life of shingles).

    • What if the roof is two years and three months old?


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Justifiable Reliance Fraud

  • What if buyer agreed to buy house before the seller misled him about the age of the roof?

  • What if it was obvious that the roof was much older than two years old, because it was decayed and falling apart?

  • No duty to investigate


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Nondisclosure of a Fact Fraud

  • Is misrepresentation only:

    • To Correct a Previous Assertion

    • To Correct a Basic Mistaken Assumption

      • A seller must report any known latent defect that the buyer is not expected to discover himself.

    • To Correct a Mistaken Understanding about a Writing

    • In A Relationship of Trust

      • When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly.


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Other Reasons for Voiding Contracts Fraud

Duress: A signs contract at the insistence of B, who is holding a gun to his head.

Economic Duress:Pursuant to their contract, A owed B a delivery of widgets on July1. On June 29, A tells B he won’t deliver unless B agrees to pay more than the contract price for the widgets. B agrees.



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Discharge Fraud

  • What does it mean to say that a party to a contract “is discharged”?

  • How does discharge occur?

Generally, a party is discharged when she has no more duties under a contract.

Either by full performance, or by mutual agreement. General rule: parties must perform as promised. A breach is a failure to perform as promised.


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Conditions Fraud

  • A condition is an event that must occur before a party becomes obligated under a contract.

  • Conditions

    • No special language is necessary to create the condition, but it must be understood clearly somehow.

    • I agree to do X if you do Y.

    • I will pay you $500 for your car provided that you get me a mechanic’s certification that it is in good working order.

    • Landlord’s duty to fix problems with the premises is conditioned upon tenant notifying landlord of problem.


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Performance & Breach Fraud

What is the difference between complete (or “strict”) performance and substantial performance?

What is the significance of this distinction?


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Performance & Breach Fraud

  • Complete (or “strict”) Performance

    • Performance that is exactly what is promised

  • Substantial Performance

    • A party that substantially performs its obligations will receive the full contract price, minus the value of any defects.

    • A party that fails to perform substantially receives nothing on the contract.

    • Performance that falls short of substantial performance constitutes a material breach of the contract.


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Performance & Breach Fraud(cont’d)

In a contract for the construction of a home that specified the size of decorative exposed beams, beams in the finished house are smaller than specified, by 5%?

Material breach? Remedy?

How much money does buyer owe builder, if any?

What if the beams are load supporting beams?

Material breach? Remedy?

How much money does buyer owe builder, if any?


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Performance & Breach Fraud(cont’d)

  • What if contract for construction of house specifies hardwood floors made of oak, with clear stain. Buyer gets hickory, with oak-colored stain.

  • Contract specifies that oak floors are an essential element of the contract.

  • Filing cabinet delivery example.

Parties can define terms as essential such that strict performance of those terms is required, and breach of those terms is a material breach.


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Performance & Breach Fraud(cont’d)

  • Jacobs and Young case

  • Van Steenhouse case


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Time of the Essence Clauses Fraud

Is untimely performance a material breach of contract?

  • A time of the essence clause will generally make contract dates strictly enforceable.

  • Merely including a date for performance does not make time of the essence.

  • Complicated construction contracts: In this context, even with time of the essence clauses, courts may not excuse payment if breaching party has substantially performed.


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Material and Non-material Breach: Recap Fraud

  • Courts won’t enforce strict performance, but will instead grant injured party damages = contract price minus the value of the defects

  • But if performance falls short of substantial performance, injured party’s duty to perform is excused.


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Breach Fraud(cont’d)

  • Anticipatory Breach

    • Anticipatory breach is committed by one party making it unmistakably clear that he will not honor the contract.

    • A delivers widgets to B’s factory weekly; B is obligated to pay monthly for previous month’s deliveries. B’s bank accounts are seized by the court to pay creditors.

    • A need not make next delivery and may sue for payment for deliveries made, even though time for payment under the contract has not yet arrived.


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 Remember the problem of economic duress

Usually to discharge an outstanding disputed debt for less than the amount the creditor believes s/he is owed.


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Discharge by Law: Impossibility Fraud

  • When is performance excused due to change in circumstances? That is, must promisor make good on promise (through own or substitute performance), or is s/he excused?

  • True Impossibility

    • Something has happened making it utterly impossible to fulfill the promise.

    • Objective vs. subjective determination

    • Courts will ask whether substitute performance will fulfill the parties’ original intentions.


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Impossibility Fraud(cont’d)

  • Portrait painter becomes ill and cannot paint your portrait as required by the contract?

    • Must painter provide substitute performance?

  • House painter can’t paint your house because his employees go on strike?

    • Must painter provide substitute performance?

  • Key: Can will of the parties be met?


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Impossibility: related doctrines Fraud

  • Commercial Impracticability

    • Some event has occurred that neither party anticipated, making the contract extra-ordinarily difficult and unfair to one party.

    • Wartime examples vs. Gulf War example

    • Distinguish market volatility/contemplated risk in long term contracts

  • Frustration of Purpose

    • Some event has occurred that neither party anticipated and the contract now has no value for one party.

    • Coronation cases

    • I agree to meet the day of the concert and pay $50 for front row seat. Concert is cancelled.


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Impossibility and Force Majeure Fraud

  • Spells out the kinds of impossibility that will excuse performance. For example:

    • Performance under this agreement shall be excused if prevented by unforeseeable acts beyond the parties’ control, including acts of God, acts of a public enemy, labor disputes, fires, insurrections, floods, acts of government.

  • Parties can define force majeure narrowly or broadly, to include all sorts of disruptions.


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Remedies for Breaching the Contract Fraud

  • Someone breaches a contract when he fails to perform a duty without a valid excuse.

  • A remedy is the method a court uses to compensate an injured party.

  • Damages, or an order forcing someone to do something

  • Damages are most common remedy


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Compensatory Damages Fraud

  • Compensatory damages are the most common monetary awards.

  • They generally flow directly from the contract, such as an order to pay what was promised or to pay for expenses caused by the breach.

    • We agree that I will paint your house for $500, and you pay in advance; I paint 80% of the house.

  • The injured party must prove the breach caused damages that can be quantified with reasonable certainty.


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Incidental Damages Fraud

  • Incidental damages are the relatively minor costs incurred when the injured party responds to the breach (obtaining cover), such as the extra cost of buying replacement goods.

Big Bob can recover incidental damages of the extra $250 from Acme.

Acme agrees to sell 1000 widgets to Big Bob’s for $1 each, but fails to deliver.

Big Bob has to buy 1000 widgets from ConCo for $1.25 each.


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Consequential Damages Fraud

  • Consequential damages (a/k/a “special damages) are those resulting from the unique circumstances of this injured party.

  • Plaintiff can recover consequential damages only if the breaching party should have foreseen them. Hadley v. Baxendale

  • EXAMPLE: Hauler’s truck is stolen; he files insurance claim; insurer delays payment, causing lost profits. Agent knows that this is Hauler’s only truck.

    WHAT RESULT?


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Consequential Damages Fraud(cont’d)

  • Examples:

    • Lost profits

    • Damages paid on related contracts

  • Because damage calculation can be complex, there are companies that specialize in doing the work on behalf of litigants or other interested parties.


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Special Issues of Damages Fraud

  • Mitigation of Damages

    • A party may not recover for damages that could be avoided with reasonable efforts.

    • Lease agreements

    • Employment agreements: Parker v. Twentieth Century Fox

  • Nominal Damages

    • Nominal damages are a token sum, such as $1, given to a plaintiff who demonstrates that the defendant breached the contract but cannot prove damages.


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Liquidated Damages Fraud

  • A liquidated damages clause, is a provision stating in advance how much a party must pay it if it breaches.

  • A court will generally enforce a liquidated damages clause if :

    • (1) at the time of creating the contract it was very difficult to estimate actual damages, and

    • (2) the liquidated amount is reasonable.

  • Court will not enforce if it is clearly a penalty for breaching contract.


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Punitive Damages Fraud

  • Designed not to compensate the injured party, but to punish the breaching party.

  • In awarding punitive damages, a court must consider three “guideposts”:

    • The reprehensibility of the conduct,

    • The ratio between the harm suffered and the award; and

    • The difference between the punitive award and any civil or criminal penalties used in similar cases.

    • BMW v. Gore


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Law and Equity Fraud

  • Restitution in Cases of a Valid Contract

    • Restitution is a common remedy in contracts involving fraud, misrepresentation, mistake, and duress. It means giving back the benefits received.

    • Rescission = undoing the contract, and often accompanies restitution.

  • Restitution in Cases of Quasi-Contract

    • A court may award restitution, even in the absence of a contract, where one party has conferred a benefit on another and it would be unjust for the other party to retain the benefit.


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Other Equitable Interests Fraud

  • Specific Performance

    • A court will order the parties to perform the contract only in cases involving the sale of land or some other asset that is unique.

  • Injunction

    • An injunction is a court order that requires someone to do something or refrain from doing something.

  • Reformation (rare): to correct error in contract and better give effect to original intent of parties


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