USA Contract Law - Assignment Example

USA Contract Law Question The objective standard of agreement makes it impossible for a defendant to plead mistake as an excuse for non-performance. Discuss. The topic for discussion involves the US Contract Law. So, a definition of contract, as provided by the Restatement 2nd of the American Law Institute and the Uniform Commercial Code (UCC), is relevant here. The Restatement 2nd defines contract as, 'a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.' [1] The UCC defines contract as, 'the total legal obligation which results from the parties' agreement as affected by this Act and any other applicable rules of law.' [1]Hence, only those promises and agreements that can be enforced by the legal system can be defined as contracts. Contracts are fundamentally between two parties and each party has certain rights and obligations towards each other, as said in the contract. It is basically an offer and an acceptance. The contracting parties need to be of legal age and sound competence and they should agree mutually on the terms of the contract. The contract law is governed by the provisions of the UCC and the Restatement of Contracts. The UCC governs the sale of tangible and movable assets, property leases, and financial transactions. The common law principles of contract are summarised, restated and published as the Restatement of Contracts by the American Law Institute. Legal professionals quote the provisions of the Restatement in their written opinions, though this does not have the force of law.[2] When a contract is made, both parties expect some benefit from it and the terms and conditions are consensual. Since, unforeseen events in the future may create a loss for any one party, it is essential that both parties are very thorough about the meaning of the content to which they are putting their signature. The whole concept of contracts deal with the future and in many cases gives rise to problems; one or both parties may find that the events that they had anticipated had not gone their way. Problem may be due to a 'mistake.' When one or both parties, to the contract, erroneously belief that certain facts in the contract are true, then a 'mistake' is said to have occurred. In contract law, a mistake can be used to invalidate the agreement. There are two different types of mistakes, according to common law. A 'unilateral mistake' occurs when only one party is mistaken about the terms or contents of the contract. A 'mutual mistake' or a 'common mistake' occurs when both parties, to the contract, are mistaken about the same term or condition in the contract. Since these mistakes can be used as 'excuses' to invalidate a contract, the provision of 'objective standard of agreement' becomes important in contract law. 'Subjective Standard' and 'Objective Standard' are two standards that can be applicable individually or together in a contract and as such are part of the Contract and Trust Law of the US. "Where a contract requires that one party's performance under a contract be to the satisfaction of another party, the court must determine as a matter of law the standard by which that performance is to be judged. (Caldwell v. Armstrong, supra; Misano Di Navigazione, SpA v. United States, 968 F.2d 273 (2d Cir. 1992.) [3] The inclusion of a subjective or objective standard in a contract depends on the type of contract that one is making. "When a contract is to be completed to the satisfaction of a party, the satisfaction provision implicates either a subjective or an objective standard for performance. If the contract's subject matter involves questions of commercial value, operative or mechanical fitness, or quality, an objective reasonable person standard generally applies. Where the contract involves matters of fancy, taste, sensibility and judgment, a subjective standard generally applies. In cases implicating the subjective standard, the party reserving its rights as the sole judge of its own satisfaction, without regard to the reasonableness of its decision and is limited only by the duty of good faith. (Mike Naughton Ford, Inc. v. Ford Motor Co., 862 F. Supp. 264, 269 (D. Colo.1994.) [3] A majority of contracts now involve the objective standard of agreement. The reason for this will be understood from the explanations of subjective and objective standards. A subjective standard is an agreement under the 'Law of the Land.' It is based on the assumption of 'meeting of the minds.' In a way a subjective standard is not specific and much in it is left for interpretation. An objective standard of agreement, on the other hand, is an agreement under the 'law of the place called - this state.' [3] All that really matters in a contract with an objective standard of agreement is whether both parties have signed the document, since with such a standard it is presumed that both parties have all the understanding necessary for signing the contract. The Restatement (Second) of Contracts 228 (1981) states a preference for an objective standard as, 'When it is a condition of an obligor's duty that he be satisfied with respect to the obligee's performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied.' [3] The entire concept of an objective standard is based on the 'Reasonable Person Approach,' where a reasonable person is one who is considered by the court to be a US citizen and hence like an US citizen will have a SSN, drivers license, bank account, a TIN etc. [3] The inherent understanding with an objective standard of agreement is that it is presumed that the signing parties understand the meaning and consequence of what he signs even if he subjectively does not. Under a subjective standard it is relevant to ask, "Did you understand the agreement to mean that" Under an objective standard, this same question is not of any consequence and all that matters is whether the agreement exists. And if the agreement exists, then both parties are presumed to know what they have signed. All that matters in an objective standard is the signature on the dotted line, which signifies that the signing parties have agreed to the terms of the contract. [3] So, the inherent presumption of an objective standard rules out a situation where one party can claim to have made a 'mistake' and use it as an excuse for 'non-performance.' The main strength in the objective standard is that the agreement includes the term 'this state.' When an agreement is signed with 'this state,' one becomes obligated to perform. The court of law will hold any defaulter to this agreement. [3] This essentially means that since the signing party takes state benefits, they have some obligation to the state. This will be clearly explained when one understands the different types of obligation that is connected to different benefits. Using a SSN means one has agreed to be a 'beneficiary' within the Social Security Program. Using a 'TIN' means one has agreed to be a 'fiduciary' within the Federal Income Tax scam, etc. [3] When contracts come under disagreement, the importance of objective standards come into the picture. Any disagreement boils down to a contest of wills. However, with objective standards there is fairness and legitimacy, independent of the will of both parties and which both respect. Objective standards are powerful tools for producing fair, wise, and amicable agreements in a negotiation. Let's discuss a case here to understand how objective standards can be helpful in steering a negotiation from a no-win to a win-win situation. Mike Hall, partner in an IT consulting firm, wants to increase their consulting fee by 12 percent and in this regard meets the VP of one of their large clients. However, when the VP hears this he is outraged and says that they have been considering only a 2 percent increase in fees. The consultant and the VP, in all probability, will get engaged in a contest of wills ending with the VP threatening to recruit new consultants and the consultant threatening to sue the client for breach of a three-year contract. Now, if objective standards were introduced in this argument, the results can be quite different. Let's assume that the consultant instead of giving a random figure of 12 percent had presented his case in a different way; he may have said that his consulting firm needed to raise their fees and wanted it to be fair for both parties. A 12 percent raise, the consultant can explain, will still be below the national average of fees paid by other clients. In this way Mike could have shielded his position by introducing an objective standard based on fairness, namely, the average fee that other clients are paying. This stance would have made it much harder for the VP to counter with his position of 2 percent. Mike could have also used an objective standard agreement to pierce the client's position. When the VP said that they were contemplating a 2 percent hike in fees, Mike could have asked him how the company had arrived at this figure of 2 percent. If, to this, the VP had replied that the board of directors had hiked the employee salary by this amount and hence the standard, then Mike could have asked what the hike in employee salaries was in the previous two years. Mike could discover that his consultancy firm had not hiked fees in the last two years, in which time the employee's salaries had gone up by, say, 10 percent. Then Mike can use the VP's objective standard (employee salaries) to bargain his position. Hence, before any negotiation or contract is entered into, it is important that objective standards of agreement are brought in. [6] Hence, an objective standard agreement precludes that a 'mistake,' in the common sense of the word, cannot be used as an excuse for non-performance or a defence to contractual liability. For if this was allowed, then a contracting party could easily sight 'mistake' as an excuse for non-performance. Let's look at the Tamplin v James case (Campbell, 2004), to understand the matter more clearly. In Tamplin v James the purchaser bid at auction for a plot of land. The purchaser 'had known the property from the time he was a boy' and made his bid without consulting the plans which the vendor had made available at the auction. The purchaser thought the plot being sold was twice as big as it actually was, and, presumably for this reason he offered more than other bidders, and was successful at the auction. When he found out that the plot was half the size that he actually believed it to be, he refused to complete the purchase because, in sum, he had made a mistake. It was accepted that he had made a subjective mistake, but as that mistake, caused by his failure to consult the plans, was unreasonable, it was given no objective weight and the contract was enforced. As Baggallay J. put it in Tamplin v James case, 'The defendant cannot be allowed to evade performance by the simple statement that he has made a mistake. Were such to be the law the performance of a contract could rarely be enforced upon an unwilling party who was also unscrupulous.' It obviously follows that if the contracting parties are sufficiently scrupulous to perform lawfully, then the law would not be necessary. Another case that can be discussed here, to bring out when and how a 'mistake' can be used as an excuse for non-performance; in the Scriven Bros and Co v. Hindley and Co. case, a consignment of tow, a textile, was sold at an auction. The buyer 'mistakenly' thought that what he was buying was hemp, which is costlier than tow. However, on finding out that it was tow, he sought to escape the contract and was allowed to do so. In this case, the 'mistake' was used as an excuse for non-performance. The question now is why it was allowed to use this 'mistake' as an excuse when the 'mistake' in the Tamplin v. James case was not allowed to be used as an excuse. The similarity of the two cases ends with the fact that in both of them the defendant had made a 'mistake.' However, in the Tamplin case the defendant's mistake was brought about from an unreasonable failure to consult the land plans, while in the Scriven Bros case, the defendant's mistake was due to the seller's (or the auctioneer, as his agent) negligence, which would have misled any 'reasonable person' about the good for sale. Hence, the buyer was misled. [4] [5] The use of objective standard agreement makes it difficult for a defendant to sight 'mistake' as an excuse for non-performance. However, in cases where the 'mistake' rises from a deliberate intent by the contracting partner or negligence of the partner to furnish complete information, whether by intent or not, then a defendant can use a 'mistake' as an excuse for non-performance, subject to how the court of law deems the situation to be. Reference List: 1. US Contract Law - Wikibooks, collection of open-content textbooks. Legal Theories of Contracts [Internet] (Updated 30 Sep 2009) Available at: http://www.google.co.in/#hl=en&ei=NtknS46lKZeXkQWWu_j1DA&sa=X&oi=spell&resnum=0&ct=result&cd=1&ved=0CAgQBSgA&q=US+contract+law&spell=1&fp=9ebc5a1dc1efdb7e [Accessed 16 Dec 2009.] 2. Law Library - American Law and Legal Information. Free Legal Encyclopedia - Conference to Earned Income [Internet] (Updated NA) Available at: http://law.jrank.org/pages/12504/Contract-Law.html [Accessed 16 Dec 2009.] 3. Agreement Evaluation Standards of Contracts and Agreements. T. Thetford. [Internet] (Updated NA) Available at: http://freedom-school.com/admiralty/agreement-evalution-standards-of-contracts-and-agreements.pdf [Accessed 16 Dec 2009.] 4. The social institutions of capitalism: evolution and design of social contracts. Pursey Heugens, Hans van Oosterhout, Jack J. Vromen. [Internet] (Updated NA) Available at: http://books.google.co.in/booksid=ObtaA9PN2VUC&pg=PA42&lpg=PA42&dq=explain+the+objective+standard+of+agreement&source=bl&ots=TrVwuFmZj7&sig=JDyUpessvaQ4rOZ0OnVkTEABErw&hl=en&ei=Yg8pS7rhHdGTkAWCr_D8DA&sa=X&oi=book_result&ct=result&resnum=8&ved=0CCcQ6AEwBw#v=onepage&q=&f=false [Accessed 16 Dec 2009.] 5. CDAMS Discussion Paper March 2004. The Relational Constitution of Contractual Agreement .David Campbell. [Internet] (Updated NA) Available at: http://www.cdams.kobe-u.ac.jp/archive/dp04-2.pdf [Accessed 16 Dec 2009.] 6. Silicon Valley/San Jose Business Journal. Enterprise. Negotiate objective standards to avoid contest of wills. Raphael P.Lapin. [Internet] (Updated NA) Available at: http://www.conflict-management.net/Bizjournal_Nov_06.pdf [Accessed 16 Dec 2009.] Read More