Chapters 18 & 19Contracts in Writing & Third-Party Rights

HypotheticalOn January 2, Wabash Construction Company, a general contractor, executed a written contract with Anderson Brick, Inc., a subcontractor. The contract relates to a major “strip mall” building project in Morgantown, and Wabash faces a deadline of October 31 in its contract with The Mackie Consortium, L.L.C., the owners of the new mall. In the agreement between Wabash and Anderson, the parties stipulate that “time is of the essence” in terms of performance of the bricklaying work, and that the deadline for Anderson’s completion of the bricklaying work is July 15. There is also a “liquidated damages” clause in the contract between Wabash and Anderson, indicating that if the work is not completed by July 15, Anderson will pay $2,000 in damages for every day the bricklaying is not completed beyond July 15.

Anderson does not complete the bricklaying work by July 15. In fact, the project is not finished until August 30, and Wabash now claims liquidated damages from Anderson in the amount of $92,000 (representing 46 days beyond the July 15 deadline, multiplied by $2,000 per day.) Anderson refuses to pay the $92,000, and Wabash sues.

At trial, Anderson’s attorney seeks to introduce the following evidence: 1) the testimony of Henry Anderson, Anderson’s owner, who is willing to testify under oath that at the time of the signing of the contract, Wabash’s general manager, Fred Stein, said “Pay no attention to the July 15 deadline in the contract; if you need more time, all you have to do is ask;” and 2) a crumpled index card, purportedly in Fred Stein’s handwriting, indicating “no ‘hard and fast’ deadline on Anderson brick work.”

Should the trial court judge admit the foregoing evidence?

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Statute of Frauds

o Rule of state law requiring certain types of contract to be in writing in order to be enforceable

Purpose of Statute of Frauds

o Ease contractual negotiations by requiring sufficient, reliable evidence to prove existence and specific terms of contract

o Prevent unreliable, oral evidence from interfering with contractual relationship

o Prevent parties from entering into contracts with which they do not agree

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Contracts Covered by Statute of Frauds

o Certain types of contracts must be signed by the party against whom enforcement is sought to be enforceable.

o To be enforceable, the following types of contracts must be in writing and signed: o Contracts that cannot be performed within

one year from the date of their makingo Promises made in consideration of marriage

(Prenuptial agreements)o Secondary Obligations: Contracts to pay the

debt/default of another partyo Real estate contractso Contracts for the sale of goods valued at

$500 or more

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Exceptions to Statute of Frauds Writing Requirement

o Admission: Statement made in court, under oath, or at some state during a legal proceeding in which defendant admits that oral contract existed (even though contract was originally required to be in writing)

o Partial Performance: Action of both parties demonstrate existence of contract

o Promissory Estoppel: Legal enforcement of otherwise unenforceable contract, due to party’s detrimental reliance on contract

o Miscellaneous exceptions recognized by Uniform Commercial Code (UCC): Examples—Oral contracts between merchants, oral contracts for customized (“specially manufactured”) goods

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Statute of Frauds Writing Requirements

o Common Law--Written contract must clearly indicate:o Parties to contracto Subject matter/purpose of agreemento Consideration given by both partieso Significant terms (Price, quantity, etc.)o Signature of party plaintiff seeks to hold

responsible under contract (i.e., signature of defendant)

o Uniform Commercial Code (UCC)—Written contract for sale of goods must include:o Quantity of goodso Signature of defendant

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Parol Evidence Rule

o Common law rule stating that oral evidence of agreement made before or contemporaneously with written agreement is inadmissible when parties intended to have written agreement be complete and final version of agreement

o Purpose: Lends stability, predictability and integrity to written contracts

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Exceptions to Parol Evidence Rule

o Contracts that are subsequently modified

o Contracts conditioned on orally agreed-upon terms

o Contracts that are not final, as they are part written and part oral

o Contracts with ambiguous termso Incomplete contractso Contracts with obvious

typographical errorso Voidable or void contractso Evidence of prior dealings or

usage of trade

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Integrated Contracts

o Merger Clause: Written contracts within statute of frauds intended to be complete and final representation of parties’ agreement

o General Rule: Integrated contracts prevent admissibility of parol evidence

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Statute of Frauds & Parol Evidence Rule

o Parol evidence rule says written contract cannot be contradicted by evidence of any prior agreement or contemporaneous oral agreement; PER’s exceptions include ambiguity, course of dealing, mistake, validity of contract in dispute

o PER is substantive rule of contract interpretation.o What constitutes a legally binding

agreement?o How do we know what the agreement

is?

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Electronic Contract/Signature

o Under certain conditions, both federal and state laws permit contracts to be formed electronically and allow electronic signatures to satisfy statute of frauds’ “writing” and “signature” requirements.

o Examples – 15 U.S.C. § 7001 et seq.; California Civil Code § 1633.1 et seq.

Third-Party Rights Hypotheticalo Barbara Hastings has no children of her own, but she does have a

beloved niece named Ellen Laughridge. Attentive to the future financial needs of Ellen, Barbara secures a $500,000 life insurance contract from Chameleon Insurance Company, listing Ellen as the sole beneficiary. Barbara has every intention to inform Ellen of her new life insurance policy, but “life gets in the way,” and she neglects to do so.

Hastings dies on January 15, 2005. As part of her estate distribution, Ellen receives a chest-of-drawers from her dear aunt. On August 29, 2007, while rearranging her clothing in the chest-of-drawers, Ellen comes upon a secret compartment. In the secret compartment is an original copy of the life insurance contract. Ellen is overjoyed to see her name listed as beneficiary, and she contacts Chameleon Insurance Company immediately.

Upon review of the policy, Chameleon denies coverage. Chameleon’s claims representative points to Section 15(b) of the policy, which specifically requires notification of the insured’s death no later than one year after death. It has been over two years and seven months since Barbara Hastings died.

Will Ellen recover the $500,000 in insurance proceeds? Is it ethical for an insurance company to deny a claim on the basis of a “technicality?”

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Terminology

o Obligor: Contractual party who owes duty to other party in privity of contracto Party who agreed to do something for the

other party

o Obligee: Contractual party owed duty from other party in privity of contracto Party who agreed to receive something

from the other partyo Assignment: Transfer of rights under

a contract to a third partyo Assignor: Party to contract who transfers

his/her rights to a third partyo Assignee: Party (not in privity of contract)

who receives transfer of rights to a contract

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Third Party Rights

o Only the Parties to a contract have rights and liabilities under the contract.

o Exceptions:o Assignment or Delegation.o Third party beneficiary contract.

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Assignments

Transfer of rights in a bilateral contract to 3rd party.

Obligee/Assignor

Obligor

Assignee

Original Contract Formed

Assignment

Duties Owed After Assignment

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Assignments

o Rights cannot be assigned:o If the assignment is contrary to statute.

o Prohibited by law/public policy

o When a contract is personal in nature.o Assignment materially changes rights or

duties of obligor.o Rights would increase obligor’s risks/duties

o If the contract stipulates the right cannot be assigned.

o Valid notice must be given to all parties.

Delegation

o Delegation: Transfer of duty under a contract to a third party

o Delegator: Party to a contract who transfers his/her duty to a third party

o Delegatee: Party (not in privity of contract) who receives transfer of duty to a contract

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Third-Party Beneficiary Contractso Intended Beneficiary: Third party to contract whom

contracting parties intended to benefit directly from contract. Intended beneficiaries can sue to enforce contract obligations

o Promisor: Party to contract who made promise that benefits third party

o Promisee: Party to contract who owes something to promisor in exchange for promise made to third-party beneficiary

o Creditor beneficiary. Third party who benefits from contract in which promisor agrees to pay promisee’s debt

o Donee beneficiary: Third party who benefits from contract in which promisor agrees to give a gift to third party

o Vesting: Maturing of rights, such that a party can legally act on the rights

o Incidental Beneficiary: Third party who unintentionally gains benefit from contract between other parties. Contracting parties do not intend to benefit incidental beneficiary. Incidental beneficiaries cannot sue to enforce contract obligations

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