Tải bản đầy đủ

An introduction to the fundamentals of dynamic business law and business ethics chap012

Chapter 12
Contracts in Writing and ThirdParty Contracts


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?


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 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?

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?

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 do 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?”


Statute of Frauds
Definition: Rule of state law requiring
certain types of contract to be in writing
in order to be enforceable


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 do not agree


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
• Real estate contracts
• Contracts for the sale of goods valued at $500
or more


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


Exceptions to Statute of Frauds Writing
• 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

Statute of Frauds Writing Requirements
• Common Law--Written contract must clearly
-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
• Under common law, aforementioned elements can
be contained in a memorandum, written document,
or compilation of several written documents


Statute of Frauds Writing Requirements
• 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

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


Purpose of Parole Evidence Rule
Lends stability, predictability and
integrity to written contracts


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

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


Third Party Rights to Contracts


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


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

Contractual Rights That Cannot Be
• 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

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


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

Third Party Beneficiary Contracts:
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

Third Party Beneficiary Contracts: Definitions
• Creditor beneficiary. Third party who benefits from
contract in which promisor agrees to pay promisee’s
• 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 do not intend to
benefit incidental beneficiary. Incidental
beneficiaries cannot sue to enforce contract


Creditor Versus Donee Beneficiaries
Creditor Beneficiary
• Contractual performance
fulfills obligation to third
• Beneficiary can enforce
rights to contract if contract
valid and rights have vested
• Beneficiary can enforce
rights against promisor or

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


Tài liệu bạn tìm kiếm đã sẵn sàng tải về

Tải bản đầy đủ ngay