Attorney Steve's Contract Law Overview – “Contracts College” - Commercial Lease Workouts!
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Everyone knows what a contract is, but not everybody knows how “contracts law” works. This blog will provide you with a general legal overview of basic contract law principles. Attorney Steve Vondran “Am-Jured” contracts in law school (meaning he got the top grade out of about 150 students who took the course). So, this overview might also be good for law students taking the bar exam and who need some good language to HIGHLIGHT and UNDERLINE on their bar exams.
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What is a contract?
A contract is a “promise or set of promises which the law will enforce.” This is what my Contracts professor (from Harvard law school), taught me. As I tell our business clients, its really nothing fancy. You write down a list of things you want, for example:
1. Buyer will pay me $10,000 on or before April 1, 2015
2. When I receive the money I will ship the goods no later than May 1, 2015
This is a really basic contract. Two promises to do something. The buyer will pay the money and the seller will deliver the goods. As you can see, this is fairly straightforward. The promises are clear an unambiguous and there is a mutual obligation. Both parties are binding themselves to do something. The subject matter of the agreement is not illegal, so it looks like something the Court's will enforce in case there is a breach of contract.
A contract may also add other terms and conditions (for example, addressing contingencies that might pop up). This is something that is critical to provide for in most contracts.
1. If the buyer cannot obtain real estate financing, she gets her deposit back
2. If the goods are shipped in defective form, the buyer has 15 days to reject and ship back the defective units at the seller's cost and is not obligated to pay for them.
A great contract lawyer will ask you: “tell me the 10 things that can go wrong on this deal.” Once you understand the things that could go wrong in a deal or business relationship, you provide for these concerns in your contract.
For example, you may want to add an arbitration clause (ex. you know the party you are dealing with is litigious and you do not want to end up in Court litigating your disputes. Or say you know a party has a history of breaching agreements, you may want to insert a liquidated damages clause.
Watch Attorney Steve® explain common terms to a settlement agreement. A settlement agreement is a contract to end your case. You must do it right.
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Contracts may be oral or written
Contracts can be either oral (spoken – no writing) or written (for example an agreement written on a napkin, or something more formal like something a contracts lawyer would draft up). Either way contracts can be deemed enforceable. Note three things however:
1. Oral contracts are much tougher to prove in Court (its a “he said she said” many times)
2. Certain contracts must be in writing to be enforceable under the Statute of Frauds (statute of frauds is discussed below)
These are some important things to keep in mind. As we tell our business law clients “GET IT IN WRITING – DONT TAKE CHANCES WHEN IT COMES TO PROTECTING YOUR BUSINESS.”
Listen to Attorney Steve® explain California Statute of Frauds (certain oral contracts must be in writing to be enforceable)
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In order to be enforceable, a contract requires both an offer and an acceptance (discussed below).
The offer must be seeking something the other party has (for example, you want someone to cut your grass, build you a fence, sell you real estate, license you software, etc.). There must be a mutual exchange between the parties. Each one must bargain for what the other person has.
In addition, the offer must be unequivocal in nature (certain and definite), and contain the essential terms & conditions and must be communicated to the other party (called the offeree). The person making the offer is called the “offeror.” Fancy terms that you don't have to spend too much time memorizing.
Once the offer is made, it is available to be accepted by the other party.
The acceptance must be an unequivocal manifestation of assent to be bound by the terms and conditions of the contract.
When an offer is made, the offeree and only the offeree has the power of acceptance. This means, the offeree has the right to say “I accept your deal” and a contract is thereby created, as long as the acceptance is timely, and made in the manner set forth by the offeror (for example, if the offer says “you must accept by faxing your acceptance to fax number 555-555-1212 no later than 5 p.m. midnight on December 15, 2015” then you must accept the offer on those terms.
The “mailbox rule”
The general rule is that acceptance of an offer is effective upon DISPATCH (meaning when the offeree puts the offer in the mail). There are general exceptions to this, but the main one being when the offer tells you exactly how you must accept the offer, as set forth above.
The “mirror image rule”
When you are accepting a contract under the common law, the acceptance must be a “mirror image” acceptance. That means, if the buyer of a commercial industrial building offers “I will pay $2,000,000 for the property and it must close on July 4, 2015.” In order to accept the offer to purchase the property, the seller must so OKAY, I AGREE. If the seller say “closing date is fine but I want 2.5 million, that is not a “mirror image” acceptance, and will be treated as a “COUNTEROFFER” as opposed to creating a binding contract. So it can get a bit tricky, but if you want to accept a deal and make it a contract, don't change or add any new terms, just indicate your total acceptance of the contract on the terms written.
Consideration (the “glue” that binds the contract)
As mentioned above, in order for contracts to be binding and enforceable, there must be “consideration” on both ends. Both parties must be bargaining for what the other party has, and must be seeking the other party to exchange something valuable (note that the law will not inquire as to the “adequacy of the consideration”) but there must be some legally sufficient consideration being exchanged between the parties. Commonly recognized examples including either selling something, agreeing to perform a service, or even agreeing to forebear from something in which a party has the legal right to do (for example agreeing not to file a lawsuit).
To give you an example of something that is NOT a valid contract because there is a lack of consideration or a “want of consideration” as it is sometimes called, say you promise someone (i.e. you make an offer) “I promise to pay you $10,000 bucks if I win the horse race.” Here, this is known as a GRATUITOUS OFFER because the offeree does not have to do anything. They are not bound to do anything, and the offeror is not even seeking the offeree to do anything. In cases like this, even if the offeror wins the horse race, there is normally no legal obligation to pay the $10,000. Some exceptions to that might be if the offeree lost money by reasonably relying on the promise. This is another issue (Promissory Estoppel).
What is mutual assent? (was their a “meeting of the minds”)
So at the end of the day, in order for their to be a binding contract there must be an offer, acceptance, consideration, and a basic “meeting of the minds” as what's to be done. This is known as mutual assent. And there must be definite and certain terms so that if there is a material breach of the contract they Courts will know how it should be enforced.
That in a nutshell is how a contract is formed. Congratulations you now know more than 90% of the public will ever know about contract formation. Keep in mind these are only general rules, and under the UCC, where “goods” are the subject matter of the contract, slightly different rules apply.
Formation Defenses (to argue a contract was never formed in the first place)
There are some defenses (called “real defenses”) that the breaching party can raise to assert that no contract was formed in the first place and thus, regardless of any alleged breach, there was no valid contract. Some of these defenses are as follows:
1. Fraud (the old saying is “fraud vitiates consent”)
2. Duress (express or implied threats of mental or physical force)
3. Undue influence (breach of a confidential or fiduciary relationship)
4. Illegality (the subject matter of the contract is illegal – ex. cannot bet on cock fight, or agreement to buy or sell drugs)
5. Lack of capacity (inability to appreciate the nature and quality of the acts – arises sometimes in financial elder abuse situations)
6. Lack of consideration (as discussed above – no mutual exchange)
7. Minors under 18 (infancy). Minors can contract, but they cannot be HELD to their contracts unless it is an item considered to be a “necessity of life.” (food, clothing, shelter, etc.)
8. Mistake of fact (the parties never reached a meeting of the minds due to some material mistake of fact)
These are some of the defenses to a breach of contract that you will commonly see raised by parties in arbitration or litigation.
Watch Attorney Steve® discuss Force Majeure and the Corona Virus Outbreak (Covid-19)
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What are the terms and conditions of the contract (this is what the parties are expected to do)
The terms and conditions of a contract spell out what the obligations of each party are, for example, what they must do in order to avoid being deemed the breaching party. For example, the seller shall transfer the domain name to the buyer within 5 days of receiving payments. This tells both parties what must be done.
Conditions in a contract basically involve something that something that needs to occur before liability for non-performance arises. Let's break this down. For example, as the offeror, I can say “If the Mets win the world series, I hereby agree to purchase season tickets for the 2016 season.” As the offeror, I am the master of my offer and I have created a condition wherein if the Mets do not win, I am excused from performing on the contract, and no liability to me arises (i.e. I cannot be deemed a breaching party). So conditions in a contract need to be closely examined by skilled contracts legal counsel.
What is a “material” breach of the contract?
A lawsuit is normally filed for breach of contract (sometimes there is an “arbitration clause” requiring the parties submit to arbitration as opposing to going into state or federal court), when one party to the contract “materially breaches” the contract. This is often a question of fact. A material breach is one that goes to the “essence of the bargain.” When there is a material breach, the non-breaching party is excused from having to continue to perform other terms of the agreement. But if the breach is only a “minor” breach, then the non-breaching party must continue to perform its obligations under the contract. This is where things get tricky and hiring a breach of contract lawyer is no longer a good idea it is absolutely mandatory, although of course you can choose to handle it yourself at your own peril.
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How to tell the difference between a “minor” breach (which means you must continue performing your obligations under the terms of the contract) and “major breach” (which excuses all performance due under the contract and sets up a lawsuit for money damages)?
Again, this is always the “million dollar question” so do not risk it, seek a business attorney who can properly review and advise on your case. Don't be penny wise and pound foolish. There is the old saying “the person who represents themselves has a fool for a client.”
What is an “anticipatory breach” of contract?
This is when one party makes clear that it will not be performing as required under the contract. This allows the non-breaching party to file a lawsuit or initiate the arbitration.
What damages are available when there is a breach of contract?
The general measure of damages where a party has breached a contract is CONSEQUENTIAL DAMAGES, which is the amount of MONEY to put the non-breaching party in the position it would have been had the contract been performed.
Of course, there are other types of damages that might arise, however, punitive damages are normally not available for a breach of contract (other than a bad faith insurance failure to pay or defend case.
Are there any defenses the breaching party can raise in a breach of contract lawsuit?
There are many recognized defenses to a breach of contract case. For example:
1. Contract is VOID for vagueness / ambiguity: (there is no meaningful way to understand what the parties were obligation to do).
2. Substantive / Procedural Unconscionability: (terms are harsh, one-sided, oppressive, shocking, violative of public policy).
3. Frustration of Purpose: (unforeseeable event which could not be anticipated, or predicted at the time of contracting makes the return performance of the other party worthless. The contract should not be enforced).
4. Impossibility of performance: (something has happened, not caused or created by the breaching party, that makes it impossible to perform the obligations under the contract.
5. Commercial impracticability: (intervening event makes performing the contract commercially impractical and neither party assumed the risk).
6. Discharge by Accord & Satisfaction: (the parties reached a new agreement or accord and satisfied it, making the duties under the original contract discharged).
7. UCC defenses (failure to provide a perfect tender / damaged goods / failure to provide adequate reasonable assurances, etc.)
8. Novation (there was an agreement between two or more parties that discharged the legal obligations of the alleged breaching party). A third party is thus responsible to perform.
9. Statute of frauds – California civil code section 1624
There are other defenses that might apply, so if not sure, contact your contract lawyers.
COVID CONTRACT ISSUES - LEASE WORKOUT
I am not allowed to run my business, does that make the subject matter of the contract ILLEGAL and the contract potentially VOID AS A MATTER OF LAW (Public Policy)?
California Civil Code § 1608 codifies the doctrine of illegality and states:
“[i]f any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void.”
Under Civil Code § 1667 , “unlawful” is broadly defined as that which is contrary to an express provision of law; contrary to the policy of express law, though not expressly prohibited; or, otherwise contrary to good morals.
In determining illegality, the extent of enforceability and the remedy granted depends upon a variety of factors, including the policy of the transgressed law, the kind of illegality and the particular facts. See Asdourian v. Araj (1985) 38 Cal.3d 276, 282.
"The rule against enforcement of contracts made in violation of a regulatory statute is not an inflexible one to be applied in its fullest rigor under any and all circumstances. The rule is not applicable when the penalties imposed by the Legislature exclude by implication the additional penalty of holding the contract void, and illegal contracts will be enforced to avoid unjust enrichment to defendant at the expense of the plaintiff. In each case the extent of enforceability and the kind of remedy granted depends on a variety of factors, including the policy of the transgressed law, the kind of illegality and the particular facts."
If the local city government, state government or federal government declares by la, rule, regulation, or executive order that your business must be shut down, in essence, they are considering any running, operating or opening of the business to be ILLEGALl. This MIGHT provide grounds to cancel out your lease.
It is well settled that "a party to an illegal contract cannot come into a court of law and ask to have his [or her] illegal objects carried out.'"' (Wong v. Tenneco, Inc. (1985) 39 Cal.3d 126, 135, 216 Cal. Rptr. 412, 702 P.2d 570.) In a case like the one before us, the law will leave the parties as it finds them." (Yoo v. Jho (2007) 147 Cal.App.4th 1249, 1251, 55 Cal. Rptr. 3d 243.). See Ambroselli v. Anapolsky, No. C080751, 2017 Cal. App. Unpub. LEXIS 6592, at *11 (Sep. 26, 2017).
One important aspect to consider in each case will be weighing whether the default was solely due to unavoidable consequences from COVID-19 and not the fault of the person asserting it.
ANOTHER case from the California courts that illustrates (the contract breach defense of illegality) is Espinoza v. Calva, 169 Cal. App. 4th 1393, 1400, 87 Cal. Rptr. 3d 492, 497 (2008). In this case, the court discussed a lease that amounted to an illegal use of the property.
“Exhibits attached to the engrossed statement show that no certificate of occupancy had been issued for the rented building. The engrossed statement also contains this evidence. Section 110.1(1) of the Santa Ana Building Code (see Santa Ana Mun. Code, § 8-112) prohibits the use or occupation of a building “until the building official has issued a certificate of occupancy.” Thus the occupancy was unlawful and the lease constitutes an illegal contract.
The California Supreme Court held in Tri-Q, Inc. v. Sta-Hi Corp. (1965) 63 Cal.2d 199 [45 Cal. Rptr. 878, 404 P.2d 486]:
“There is no doubt that the general rule requires the courts to withhold relief under the terms of an illegal contract or agreement which is violative of public policy. It is also true that … ‘when the evidence shows that … [a party] in substance seeks to enforce an illegal contract or recover compensation for an illegal act, the court has both the power and duty to ascertain the true facts in order that it may not unwittingly lend its assistance to the consummation or encouragement of what public policy forbids.'
These rules are intended to prevent the guilty party from reaping the benefit of his wrongful conduct, or to protect the public from the future consequences of an illegal contract."
Frustration of Purpose / Commercial Impracticability explained
VIDEO: Learn contract defenses from Attorney Steve® "Contracts College."
Judge decides is there is "Frustration of Purpose" as a matter of law
Certain defenses are decided as questions of law, not as questions of fact. These defenses include frustration of purpose, impossibility, and impracticability. Oosten v. Hay Haulers Dairy Employees and Helpers Union (1955) 45 Cal.2d 784, 788 [291 P.2d 17]; Mitchell v. Ceazan Tires, Ltd. (1944) 25 Cal.2d 45, 48[153 P.2d 53]; Autry v. Republic Productions, Inc. (1947) 30 Cal.2d 144, 157[180 P.2d 888]; Glen Falls Indemnity Co. v. Perscallo (1950) 96 Cal.App.2d 799, 802 [216 P.2d 567].)
Can you file for Declaratory Judgment under California law to have the Judge declare whether or not the judge is enforceable
CODE OF CIVIL PROCEDURE
SECTION 1060-1062.5 1060.
"Any person interested under a written instrument, excluding a will or a trust, or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property, or with respect to the location of the natural channel of a watercourse, may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract.
He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time. The declaration may be either affirmative or negative in form and effect, and the declaration shall have the force of a final judgment. The declaration may be had before there has been any breach of the obligation in respect to which said declaration is sought."
Keep in mind to have your lease reviewed by a competent real estate law firm BEFORE you take this step. You need to consider things such as:
1. Does the contract contain an attorney fees clause (if so, if you lose on Declaratory Judgment you may wind up paying the landlord's attorney fees
2. Was their a sublease provision (perhaps the property has value if you can try to sublease it)
3. Was their a requirement to have "business loss insurance" (I have seen these)
4. What does the law, rule or regulation say? Does it TOTALLY and PERMANENTLY prohibit the use set forth in your lease (I have seen some leases with very broad uses such as "can be used for a salon or any other office or retail use (perhaps those uses should be explored.
5. Did the landlord commit any material breaches?
6. Does the lease agreement have a "force majeure" or "act of god" provision? If so, what does it say?
In many cases what you are looking at is a workout letter to your property manager or landlord. However, if your lease has absolutely no commercial value, Declaratory Judgement may be appropriate if the landlord refuses to budge. Again, contact us to review your lease (low flat rate fees apply). We can be reached at (877) 276-5084 or send us an email through our contact form.
Watch Attorney Steve explain the Statute of Frauds defense
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Does contract law differ where you are dealing with a contract for “goods” versus a contract for “services”?
Yes. As discussed herein, the UCC (Uniform Commercial Code) governs contracts for the sale of “goods”.
ATTORNEY STEVE TIP: If you miss this on the bar exam, and fail to apply the UCC rules you will probably fail the bar exam.
VIDEO: What is "Choice of law" clause in a Contract by Attorney Steve®
What is the "Duty to Mitigate Damages?"
Contact a breach of contract law firm (CA and AZ cases)
When you have questions about contract interpretation, or need a contract drafted or reviewed, or are facing a breach of contract arbitration or litigation case, contact our law firm to discuss your case. We will speak in plain English (and also Habla Espanol) so you understand what is going on, and we do not “triple bill” you like some law firms might. In many cases, we can structure low flat rate fees. We fight hard for individuals and businesses in business, real estate, intellectual property, entertainment, and insurance bad faith clients.
We can be reached at (877) 276-5084, or fill out the contact form below to have a California and Arizona licensed contract lawyer contact you, usually within the hour.
We have very flexible legal fee arrangements.