by James C. Glassford, Attorney at Law

by James C. Glassford, Attorney at Law

Friday, December 30, 2011

Six Excuses for Avoiding Contract Liability: Part Two on Performance

     After the contract is made, a party might not be happy with the deal that was struck.  That party might try to avoid the contract by claiming it was never formed, the formation process was fatally flawed, or the court will not enforce it on technical grounds.  See Part One.  Failing in this effort, a party might try to duck performing his end of the deal on the excuses discussed below.


Definite Terms.
     Sometimes the terms of the contract are so indefinite or incomplete that a court would have difficulty in knowing what the parties intended.  The terms must be sufficiently definite for the court to find that a breach occurred and how to calculate damages for the breach or to scratch out some other remedy appropriate under the circumstances.  If the court cannot know what the parties intended, then it will not enforce the contract.  Indefiniteness can be fixed.  If the court believes that the parties intended to make a contract, then it will do what is allowed by law to fix the problem of indefiniteness.
     Indefiniteness may be caused by terms that are unclear or gaps in the contract.  

     When the parties use a term that is vague or ambiguous, the court will try to give meaning to that term according to the intention of the parties and enforce the contract accordingly.
     Before a court will waste a lot of time trying to decifer the meaning of a word or term in a contract, it must decide whether the term really is vague or ambiguous.  In California, this threshold question is not much of a hurdle.  The test is whether the language of the contract is reasonably susceptible to the meaning asserted.
     If the court finds that the language was susceptible to two different meanings, then the court must take evidence to determine whose meaning was intended by the parties at the time they struck their deal.
     Using the example of the trade of Milky White, the cow, for the magic beans, assume that Jack thought that the word "magic" meant that the beans would produce a golden crop.  The funny old man understood that the bean stalks would merely grow to the sky.   Upset by the enormity of the stalks, Jack demands his cow back.  The old man says, "No way."  The lawsuit is filed.
     First, the court must decide whether the word "magic" is reasonably susceptible to Jack's meaning.  On the face of it, Jack's meaning seems rather absurd.  On the other hand, the word "magic" suggests that the beans could do something in the supernatural.  A judge would likely want to look at the evidence of the understanding of the parties.
     Second, the court will attempt to determine whose meaning correctly represents the mutual understanding of the parties.
     If only the testimony of the parties is given to the court, the court will have a tough time choosing between the two meanings.  If so, the court can decline to enforce the term as it is understood by either of the parties.  This would leave the parties where they stand.  The old man would have the cow, while Jack would have the bean stalks reaching for the sky.  In the alternative, the court could declare the contract was never formed, because the parties never reached agreement on an important term.  The court would then order restitution.  The old man would return the cow to Jack, who would pay the reasonable value of the beans to the old man.
     This unsatisfactory result would not sit well with the court.  Courts like to find a way to keep the parties together in contract.  That is not to say that the court would re-write the contract for the parties.  Yet, the court has methods for finding the mutual understanding of the parties in cases of interpretation.
     The court will look at the facts and circumstances of the making of the deal.  Jack and the old man may have discussed the transaction in front of witnesses.  Jack may have asked the old man what he meant by "magic."  The old man may have explained that he meant the beans would grow into giant stalks.  If so, Jack's case would be tossed out of court.  On the other hand, Jack and the old man may have done business with each other in the past.  Every time Jack bought "magic" beans from the old man, the beans produced a golden crop.  Jack expected the new beans to do the same thing.  This evidence would tilt the scales of justice in favor of Jack.  In short, the court is looking for evidence that one party knew or had reason to know what the other party meant in the use of a word or phrase in a contract.  If found, the court will not allow a party to claim a different version of the meaning of a term.

Parol Evidence.
     When the parties put their contract in writing, the writing is often the final statement of the agreement.  If a party claims that a term agreed upon by the parties was left out, he will have an uphill battle.  The reason people put their contracts in writing is to have a record of the agreement.  Later, neither party can claim something was missing.  The record gives them an accurate statement of the contract down the road when memories fade and remorse seeks for a loophole.  The purpose of putting the agreement in writing is to avoid going to court later.  If everything that was agreed upon is right there in writing, the parties are protected against the unnecessary expense of hiring lawyers and fighting it out in court.  The courts traditionally have given much credence to the written contract and have turned a deaf ear to a party who wants to add something to the contract after signing it.  Of course, no contract is entirely complete.
     A party might claim that the parties agreed to a term that was left out of the contract, because they forgot to include it or it was a separate deal.  When this happens, a court will look at two questions.
     First, was the writing the final expression of the parties' agreement?  The law calls such a writing an integration, because it brings together all of the parties discussions and agreements and collects them into one document and tosses out what the parties did not agree to.  If the writing is not an integration, it is pretty much useless.  The court will give the party looking to add a term to the agreement his day in court.  If it is the final expression of the agreement, the court will ask a second question.
     Second, was the writing a partial or total (integration) expression of the parties?
     If total, the court will not allow evidence of the term allegedly left out of the agreement.
     If partial, the court will allow in evidence the new term, so long as it does not contradict any of the terms in the writing.
     Again, using the agreement between Jack and the funny old man, assume that the old man had Jack sign a 28-page agreement, which stated that it was the final and complete agreement of the parties.  Not satisfied, Jack wants to get his cow back.  He now claims that the old man promised that he could come back any time within five days and get his cow back for any reason whatsoever.  You guessed it.  The oral part of the agreement was not included in the writing.
     As to the first question, the court will likely find that the writing was an integration.  The parties signed it and immediately exchanged the beans for the cow.  A written contract followed by performance looks like a final expression of the parties.
     As to the second question, the court again would likely find that the writing is a total integration, rather than partial.  After all, it was 28 pages long and even said it was the complete agreement of the parties.  Realizing that no contract is really totally and conclusively complete, it might look at the evidence of the term itself and ask another question.  Is the term one that the parties would naturally omit under the circumstances?  If the old man had intended to be bound by such a cooling-off period, it is almost certain that the term would have been included in the contract.  Again, Jack would lose.
     Suppose the old man orally promised Jack he could get his cow back for any reason for the additional payment of five dollars.  This would be considered a separate contract, because it is supported by its own consideration.  Under these facts, a court would enforce this oral agreement.  Jack would be entitled to get his cow back on tendering the payment of five dollars to the old man.

Gap Filling. 
     In many cases, the parties leave out essential terms for various reasons.  They may have forgotten about it or assumed it would be part of the contract without actually discussing it.  Although the parties never agreed to one or more essential terms, they did intend to be bound in contract.  Without an essential term, the court will be unable to enforce the contract.  Yet courts are reluctant to throw up their hands and turn the parties loose without a resolution of the problem.  In many cases, the court can fill a gap in a contract with any number of off-the-shelf standard terms.  In other words, the court can fill a gap in a contract by implying a term that by law has been accepted for this purpose.  Sometimes, these are called "default" terms.  The Uniform Commercial Code, which has been adopted in California, has many "default" terms, such as price, delivery time and place, and payment time and place.
     A term that is implied in every contract is the duty of good faith and fair dealing.  The purpose of this term is to ensure that each party fully receives the benefits promised by the other party.  Using the transaction between Jack and the funny old man again, assume that the old man did in fact promise to return the cow to Jack in five days for any reason whatsoever.  The old man must in good faith protect against the theft of the cow, even though the contract says nothing about the old man's duty to prevent theft.  He cannot just leave the barn door unlocked and allow his brother to walk away with the cow.  When Jack comes to retake the cow on the fifth day, the old man cannot merely state that the cow was stolen.  When Jack comes back on the seventh day and sees the cow is back in the old man's barn, the old man cannot merely say you are too late.  Jack would have a good claim for the return of his cow, even though the contract said nothing about the old man's duty to secure the cow from theft.


Express Conditions.
     Although a contract is made up with promises, sometimes promises are conditional.  A condition is an event must happen before a party must perform on his promise.  Conditions can be express, meaning stated in words whether orally or in writing.  They can also be implied or constructive.
     A good example of an express condition is seen in your car liability insurance policy.  The insurance company promises to pay damages you owe to an injured person due to an accident caused by your negligence.  The event that must occur is an auto accident.  Not just any accident will qualify.  Your negligence must be the cause of the accident.  For this protection, you pay the insurance company a premium for coverage for the policy period, usually six months or a year.  If you have no accident during the policy period, your insurance company will pay you nothing.  The reason you get nothing back from the insurance company is that a condition did not happen.  The condition was an accident.  Another way of looking at it is the insurance company pockets your premium and you get nothing in return.
     You might wonder how insurance can be a contract.  It seems like nothing is exchanged.  Actually, there is an exchange.  You pay a premium in exchange for a promise.  The promise made by the insurance company is that they will stand behind you and protect you against economic ruin if a claim is made against you.
     Insurance is an example of an aleatory contract, one that is conditioned on a fortuitous event.  Such events are not certain to occur.  As a matter of law, a condition is an event that is not certain to occur.  Yet many conditions can be under the control of a party, even the promisor, or under the control of a third party, meaning a person not a party to the contract.
     A good example of a condition under the control of a party crops up in contracts for the sale of real property, like a home.  The buyer promises to pay the seller the purchase price for the home, if the buyer can get financing.  The terms of the financing, such as interest at 4.5% max, are spelled out in the contract.  If he does not get the financing, the condition does not occur, and the buyer will be discharged from the contract.  The law imposes an obligation on the buyer to use reasonable efforts or due diligence to get the financing.  He cannot just blow off the purchase of the house by doing nothing.  Therefore, the financing condition was not under the complete control of the buyer.  If it were, no contract would exist.
     If a party can decide whether or not to perform under a contract, the contract may lack consideration.  As explained in Part 1, almost all contracts must have consideration to make them binding and, therefore, enforceable.  If a party has the absolute power to back out of a contract for no reason at all, the promise made by that party is labeled illusory.  The contract lacks consideration and cannot be enforced.
     If a condition does not and cannot occur, then the party who made the conditional promise will be discharged from the contract.  That party, however, could waive the condition.  Take for example the purchase of a home subject to the financing condition.  If the best interest rate available to the buyer was 5%, the condition would fail, and the buyer would be discharged.  On the other hand, the buyer might be willing to pay 5% to get the home of his dreams.  If so, he could waive the condition and go through with the sale.  Unless a timely retraction of the waive is made by the buyer, the contract would be enforceable by the seller.
     A court might even excuse a condition under the proper circumstances.  Excuse means the condition will be deemed satisfied.  A court might look at a number of factors in judging whether to excuse a condition.  A party asserting the condition might act to prevent it from occurring or fail to cooperate to make it occur.  If so, the condition will be excused.  Moreover, the failure of the condition may cause a party to suffer a forfeiture.  In a case of extreme forfeiture, a court may excuse the condition, especially when the occurrence of the condition is no longer possible due an unexpected turn of events.
     A party may act in bad faith in asserting the condition.  In one case, a buyer of potatoes to be used in making potato chips specified that the potatoes chip to his satisfaction.  When the price of potatoes took a nose dive, the buyer refused to accept delivery, claiming that the potatoes were unsatisfactory.  He said "I can buy potatoes all day for $2.00" per hundredweight (the lower price).  By objective standards, the court found that the potatoes could be chipped, the buyer acted in bad faith, and ruled in favor of the seller.

Constructive Conditions.
     In many contracts, the promises made by the parties may be deemed dependent.  This means that what one party has promised to do is a condition of the duty of the other party to perform his return promise.  In an employment contract, the employee's doing the work is a condition to getting paid by the employer.  Usually, when the performance of one party will take time to complete, it must be done before the other party must pay.  In a real estate transaction, the buyer's paying for the property is a condition to the seller's duty to transfer title to the buyer.  Since both performances can be done in an instant, these conditions are concurrent.  In a real estate transaction, an escrow is set up to make sure both parties perform at the same time.
     With concurrent constructive conditions, neither party can be in breach until one has performed or tendered performance.  This highlights another benefit of an escrow in a real estate transaction.  If the buyer fails to put the purchase price in escrow and the seller fails to put the deed in escrow, the buyer is not in breach.  The seller's constructive condition, his promise to transfer title, has not occurred.  The seller must put the buyer in breach by tendering the deed, putting it in the hands of the escrow agent.  Once the deed is placed in escrow, then the buyer would be in breach.  At that point, the constructive condition of transferring title would be satisfied.  The buyer would be under an absolute duty to pay.  Failing payment, the seller would be in a position to sue the buyer for breach of contract.
     The flip side of this scenario occurs when the seller sells the property to a third party before the close of escrow.  Suppose the sale's price was $100,000 more than the contract price with the buyer.  The buyer would have plenty of incentive to sue seller for breach of contract.  Damages would be the loss of the benefit of the bargain.  This would be easy to calculate.  It would equal the $100,000 gain to the seller on the second sale.  The question would be can the buyer sue for breach of contract and recover his damages.  Not necessarily.  Buyer's performance is still a condition to the seller's duty to transfer title.  Buyer need not deposit the purchase price into escrow or even tender the purchase price.  The law does not require idle acts.  It would be an idle act in light of the fact that seller cannot perform.  All buyer must be able to prove, however, is that he was ready, willing, and able to pay the purchase price.  If he did not have the cash and was not able to get financing, he would lose his lawsuit.  In other words, the seller's duty to transfer title was still conditional upon the buyer having the capacity to pay the purchase price.  Unless that condition was satisfied, seller could not be put in breach.
     As long as promises made in contract are conditional, the promisor cannot be in breach.  When conditions have occurred, then promissory duties become absolute.  You should be in a position to sue and win your lawsuit--but not necessarily.

Impracticability and Frustration of Purpose.  
     Other events might occur that make performance under a contract impracticable to perform.   Sometimes an event might occur that substantially frustrates the principal purpose of the contract.  Either way such an event might discharge the promisor's duty to perform.
     Suppose a building contractor enters into a contract with the owner of a theater to refurbish a theater inside and out.  Two days later before work starts, the theater burns down.  The cause of the fire was unknown.  The theater is an old art deco structure from the 1930s and cannot be replaced.  From the point of view of the contractor, performance has been made impossible from the happening of the event.  From the point of view of the owner, the purpose of the contract has been frustrated.  Both might be able to raise a defense based on the the occurrence of fire.
     Both defenses, impracticability or frustration, depend on proof that the non-occurrence of the event was a basic assumption of both parties.  Proof of basic assumption here should be no problem.  Both parties expected the theater to continue to exist.  Otherwise they would not have entered into the contract.
     In addition, the party asserting the defense must show that he was not at fault in the cause of the event.  Here, the cause of the fire was unknown.  Either party should have no difficulty dodging this obstacle to their defense.
     Lastly, a party must show that he did not assume the risk of the happening of the event.  The court would look at the contract and other circumstances to see whether or not the parties assigned the risk of loss to one or the other.
     If a party can show all of the elements of the defense applicable to him, then a court would discharge the party from the contract.  The other party would be free from the contract as well.          

Breach of Contract.
     When all conditions have been satisfied or excused and duty has not been discharged by impracticability or frustration of purpose, the duty to perform what was promised becomes absolute.  A party's failure to perform an absolute duty when due is a breach of contract.  A party can breach by repudiation as well.  A repudiation is merely a clear statement or act indicating that the promisor will not perform.  A good example of a repudiation is the seller mentioned above who sells the property to a third party before close of escrow with the buyer.


Specific Performance and Injunction versus Damages.
     Generally, a court will not order a party to do what he promised (specific performance) or stop him from doing an act (injunction), unless the legal remedy is inadequate.  The legal remedy is money damages.  In other words, for breach of contract, the court will usually award the plaintiff a sum of money to compensate him for the breach.  The law does not want to force a person to serve a master involuntarily.  The rule is based upon the assumption that in most cases the plaintiff will be able to buy the goods and services from another source.  The court will award enough money for the plaintiff to get what he contracted for from someone else, even if it will cost more that the contract price.  Therefore, the goal of contract damages is to put the plaintiff in the same position he would have been in had the breaching party fully performed.  In other words, the law will make the innocent party whole.
     Specific performance and injunction are call equitable remedies.   When a substitute performance cannot be bought on the open market or damages are difficult to calculate or possibly the breaching party cannot pay damages, the court will turn to these equitable remedies.  A breach of contract for the sale of unique property is an example of case when damages would not be adequate.  Simple, the innocent party cannot take a sum of money and replace the property.  The property is unique and cannot be replaced.  It is often thought the real property is unique, and specific performance would be ordered to remedy a breach of contract for the sale of real property.   Keep in mind that money damages is the preferred remedy.

Certainty of Damages.
     For the court to make an award of money damages, the amount must be calculated.  Sometimes the calculation might be difficult or even speculative.  The law merely requires that damages be reasonably certain.  Exact calculations are not required as long as guesswork is avoided.  The benefit of the doubt will be given to the party not in breach.

Benefit of the Bargain.
     Keeping in mind that the law seeks to make the innocent party whole, first the law will give the innocent party the benefit of what he bargained for in the contract.  For example, if the buyer of a home agreed to pay $500,000 for the property with a market value of $600,000, the benefit of the bargain is $100,000.  The court would award the buyer $100,000 for the seller's breach of contract.  You might wonder why a court would award money damages in a case for the sale of real property.  If the buyer intended to buy on speculation and sell the property for a profit, then money should be adequate to compensate him for the loss.
Consequential Damages.
     Sometimes other damages flow from the breach of contract above and beyond the loss of the benefit of the bargain.  These are called consequential damages.  They must be foreseeable at the time of the making of the contract.  Damages are foreseeable in many cases when they naturally flow from the breach in the ordinary course of event.  If not, then the breaching party must be aware at the time of the making of the contract of special circumstances that might cause damages or losses.
     Returning to the example of the contract for the purchase of a home for $500,000, assume that the home is fully fitted out for use by a handicapped person and that the buyer is married to a handicapped spouse  The seller never meets or is told about the handicapped spouse.  After the breach, the buyer finds another home and buys it for the same price.  The home is not handicapped friendly, so the buyer spends $100,000 to upgrade the home.  Can the buyer recover the $100,000 as consequential damages?  These facts raise many thorny issues of fact that could make it difficult for the buyer to recover any damages.
     The first question that must be resolved is whether or not the claimed damages follow the breach in the ordinary course of events.  Perhaps they do.  The house was built to accommodate a handicapped person.  It may be reasonable for the seller to expect that a buyer of such a home was induced to buy because of the handicapped-friendly feature.  It might follow that the breaching seller would expect the buyer to spend money fixing up a substitute house for a handicapped person.  If not, the buyer might have to prove that the seller was aware of special circumstances that bare on this issue.  Although the seller knew that the house was handicapped friendly, the facts show that the seller was not aware of the buyer's handicapped spouse.  This absence of seller's knowledge could mean the difference between buyer proving his case for consequential damages or having to settle for just the loss of the benefit of the bargain.  We assumed that the substitute house was purchased for the same price as the contract price.  If the second house was a true substitute, buyer would have no damages for loss of the benefit of the bargain.    

Avoidance of Damages.
     Another limitation on recovery of damages is that the innocent party must take reasonable steps to avoid damages after the breach.  For example, seller agrees to sell a used BMW car for $25,000.  Buyer  fails to pay thereby breaching the contract.  Seller must use reasonable care to protect that car from loss.  He cannot just park the car on the street unlocked with the keys in the ignition, allowing the car to be stolen and wrecked by a joyrider.  If the car is a total loss, the court will not award the full value of the car to the careless seller.  Seller will be entitled to recover only the difference between the contract price and the market price.  If there is no difference, seller will absorb the entire loss of the car or submit a claim to his insurance company.

     In conclusion, although many defenses and obstacles can hinder or prevent your recovery in a lawsuit for breach of contract, the great majority of them will in all probability not work.  The basic policy of the law is to enforce contracts as written.  The policy encourages economic activity by providing security to contracting parties that the courts will stand behind them and enforce their bargains.

    Should you have any questions about contract law, please feel free to contact me at your convenience.

James C. Glassford
Attorney at Law            

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1 comment:

  1. It provides details about many of the different factors engaged with contracts.