Breach of Contract by Tod Zuckerman, Esq.

1. Breach of Contract by Tod Zuckerman, Esq.

2. 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

3. 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?

4. Step One: Choice of Law • 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.

5. 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).

6. Step One:Choice of Law • 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. 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:

7. 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.”

8. Step One: Choice of Law When: • the parties have not selected a choice of law provision, or • 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.

9. 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?

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

11. Step One: Choice of Law In practice, most contract law is case law, with one HUGE exception: 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 thesource of law that must be used to resolve the dispute.

12. Step Two: Was a Contract Formed? • 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): • Offeror’s promise (the unequivocal assurance of what offeror is willing to do. • Consideration for the offeror’s promise (the offeree’s promise). • The fact that the offeror made his/her/its promise to induce the offeree to promise.

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

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

15. 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.

16. 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

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

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

19. 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.

20. 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.

21. 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.

22. Step Two: Was a Contract Formed? Requests for Bids:An ad for bids for construction work or the sale of property is aninvitationfor 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 actmust be performed with knowledge of the offer.

23. Step Two: Was a Contract Formed? Illusory Promises:A misnomer – an offeror’s promisemust 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? • Identity of offeror • Subject matter • Offer price • Time of payment, delivery or performance • Nature of work to be performed (for service contracts).

24. 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.

25. 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.

26. Step Two: Was a Contract Formed? 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. Communicating the offer:   

27. Step Two: Was a Contract Formed? • 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. Option Contract:

28. Step Two: Was a Contract Formed? Termination of an offer: • 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. • If an essential element of the contract is destroyed. • If the proposed contract is or becomes illegal.

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

30. Step Two: Was a Contract Formed? • Stated refusal to accept an offer. • Counter-offer. • Conditional acceptance. Rejection of an offer: 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.

31. Step Two: Was a Contract Formed? • 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. Acceptance of an offer: Definition of acceptance: “An assent to an offer according to its terms.”

32. Step Two: Was a Contract Formed? • 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. Silence does not constitute acceptance unless:

33. 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 out of the offeree’s possession, without regard to whether it ever reaches the offeror.” (the “Mailbox Rule”)

34. 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.

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

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

37. Step Three: Is the Contract Enforceable? 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. C. Protecting a party against mistake:

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

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

40. 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.”)

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

42. 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.”

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

50. 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.