Chapter 12 Contracts in Writing and ThirdParty Contracts McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc All rights reserved Chapter 12 Ethical Dilemma Assume two (2) parties enter into an oral agreement that must generally be in writing in order to be enforceable (The “statute of frauds” indicates that the following four (4) types of agreements must be in writing: 1) contracts whose terms prevent possible performance within one year; 2) promises made in consideration of marriage; 3) contracts for one party to pay the debt of another if the initial party fails to pay; and 4) contracts related to an interest in land According to the Uniform Commercial Code, contracts for the sale of goods totaling more than $500 must also be in writing.) From an ethical standpoint, even though the parties have entered into an oral agreement, is it permissible for one of the parties to deny liability based on the statute of frauds or Uniform Commercial Code writing requirement? In your reasoned opinion, should a party honor an oral contract, even though the law technically requires the agreement to be in writing? 12-2 Chapter 12 Case Hypothetical On 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 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? 12-3 Chapter 12 Case Hypothetical Michael Angelo is a renowned “House Painter for the Stars.” His craft is well-known throughout Hollywoodland, he is in high demand, and he has limited his work to celebrity homes valued at $2 million or more Sandra Aniston, a “star of the screen,” commands at least $20 million per film Her net worth is rumored to be in excess of $100 million Sandra has sought and secured Michael’s services to paint her new home nestled in the Hollywoodland hills When completed, Sandra’s new home will be worth an estimated $2.25 million Michael Angelo is extremely busy He is currently painting three (3) homes for three (3) different movie stars: Damian Gyllenhaal, Tommy Depp, and Brad DiCaprio He would like to have his associates, Jim Beavis and Buddy Head, perform the painting of Sandra’s house Jim is twenty-one years old and has three (3) years of house painting experience, while Buddy is twenty-seven and has four (4) years of experience From a contractual standpoint, may Michael Angelo have his associates, Jim Beavis and Buddy Head, paint Sandra Aniston’s house? Would such an arrangement require Sandra Aniston’s approval? 12-4 Chapter 12 Case Hypothetical and Ethical Dilemma 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 so Hastings dies on January 15, 2005 As part of her estate distribution, Ellen receives a chest-ofdrawers from her dear aunt On August 29, 2007, while rearranging her clothing in the chestof-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?” 12-5 Statute of Frauds Definition: Rule of state law requiring certain types of contract to be in writing in order to be enforceable 12-6 Purposes of Statute of Frauds • Ease contractual negotiations by requiring sufficient, reliable evidence to prove existence and specific terms of contract • Prevent unreliable, oral evidence from interfering with contractual relationship • Prevent parties from entering into contracts with which they not agree 12-7 Contracts Subject to Statute of Frauds • Contracts that cannot be performed within one year from the date of their making • Promises made in consideration of marriage (Prenuptial agreements) • Contracts to pay the debt/default of another party • Real estate contracts • Contracts for the sale of goods valued at $500 or more 12-8 The “Equal Dignity” Rule • Recognized in a minority of jurisdictions • Requires contracts negotiated by an agent, that would normally fall under the Statute of Frauds if negotiated by the principal, to still be in writing 12-9 Exceptions to Statute of Frauds Writing Requirement • 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) • Partial Performance • Promissory Estoppel: Legal enforcement of otherwise unenforceable contract, due to party’s detrimental reliance on contract • Miscellaneous exceptions recognized by Uniform Commercial Code (UCC): Examples—Oral contracts between merchants, oral contracts for customized (“specially manufactured”) goods 12-10 Statute of Frauds Writing Requirements • Common Law Written contract must clearly indicate: -Parties to contract -Subject matter/purpose of agreement -Consideration given by both parties -Significant terms (Price, quantity, etc.) -Signature of party plaintiff seeks to hold responsible under contract (i.e., signature of defendant) • Under common law, aforementioned elements can be contained in a memorandum, written document, or compilation of several written documents 12-11 Statute of Frauds Writing Requirements (Continued) • Uniform Commercial Code (UCC)—Written contract for sale of goods must include quantity of goods • UCC allows variety of written documents to constitute a writing, including faxes, emails, invoices, bills of lading, sales slips, checks, or any combination of these documents 12-12 Parole Evidence Rule Definition: 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 12-13 Purpose of Parole Evidence Rule Lends stability, predictability and integrity to written contracts 12-14 Exceptions to Parole Evidence Rule • Contracts that are subsequently modified • Contracts conditioned on orally agreedupon terms • Contracts that are not final, as they are part written and part oral • Contracts with ambiguous terms • Incomplete contracts • Contracts with obvious typographical errors • Voidable or void contracts • Evidence of prior dealings or usage of trade 12-15 Integrated Contracts • Definition: Written contracts within statute of frauds intended to be complete and final representation of parties’ agreement • General Rule: Integrated contracts prevent admissibility of parole evidence 12-16 Third Party Rights to Contracts 12-17 Obligor and Obligee (Definitions): • Obligor: Contractual party who owes duty to other party in privity of contract • Obligee: Contractual party owed duty from other party in privity of contract 12-18 Assignment (Definitions): • Assignment: Transfer of rights under a contract to a third party • Assignor: Party to contract who transfers his/her rights to a third party • Assignee: Party (not in privity of contract) who receives transfer of rights to a contract 12-19 Contractual Rights That Cannot Be Assigned • Rights that are personal in nature • Rights that would increase obligor’s risks/duties • Rights in a contract that, by its terms, expressly forbids assignments • Rights whose assignment prohibited by law/public policy 12-20 Delegation (Definitions): • Delegation: Transfer of duty under a contract to a third party • Delegator: Party to a contract who transfers his/her duty to a third party • Delegatee: Party (not in privity of contract) who receives transfer of duty to a contract 12-21 Contractual Duties That Cannot Be Delegated • Duties personal in nature • Duties resulting in performance substantially different from that which obligee originally contracted (i.e., delegatee’s performance will vary significantly from delegator’s) • Duties in a contract that expressly forbids delegation 12-22 Third Party Beneficiary Contracts: Definitions Intended Beneficiary: Third party to contract whom contracting parties intended to benefit directly from contract Intended beneficiaries can sue to enforce contract obligations Promisor: Party to contract who made promise that benefits third party Promisee: Party to contract who owes something to promisor in exchange for promise made to third-party beneficiary 12-23 Third Party Beneficiary Contracts: Definitions (Continued) • Creditor beneficiary Third party who benefits from contract in which promisor agrees to pay promisee’s debt • Donee beneficiary: Third party who benefits from contract in which promisor agrees to give a gift to third party • Vesting: Maturing of rights, such that a party can legally act on the rights • Incidental Beneficiary: Third party who unintentionally gains benefit from contract between other parties Contracting parties not intend to benefit incidental beneficiary Incidental beneficiaries cannot sue to enforce contract obligations 12-24 Creditor Versus Donee Beneficiaries Creditor Beneficiary • Contractual performance fulfills obligation to third party • Beneficiary can enforce rights to contract if contract valid and rights have vested • Beneficiary can enforce rights against promisor or promisee Donee Beneficiary • Contractual performance gives a gift to third party • Beneficiary has limited ability to enforce contract (depending on jurisdiction) • Beneficiary can enforce rights against promisor 12-25 ... 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. .. $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. .. for the Stars.” His craft is well-known throughout Hollywoodland, he is in high demand, and he has limited his work to celebrity homes valued at $2 million or more Sandra Aniston, a “star of the