What obligations come with a contract? 

Many of my students, all graduate engineers and having real world experience, appear to incorrectly believe  that a contract is meant to be less than the law and more akin to being a mere guide. What are your observations of your younger (and quite a few older) colleagues?  An example question, and some very interesting answers, from my midterm provides an insight into the world view of these students. 

On 3/15/12, A orally agrees to pay $500 in return for B's providing snow plowing services for the 2012-13 season from 11/1/12 to 4/1/13.  On 10/15/12, B sends a letter to A stating that due to the breakdown of his truck, the prior oral agreement (terms are stated) is canceled.  A does not reply, but hires C's snowplow service agreeing orally to pay $600.  At the end of the season, A pays C the $600 and sues B for the additional $100 expense.   

I was hoping for a discussion of Statute of Frauds (for an oral contract, for services and 3/15/12 to 4/1/13 being more than one year and since not for goods the amount does not matter), overcome by B’s “writing” acknowledging the terms of the contract, and that the subjective “impossibility” or rather anticipated extra cost to B is no excuse. Some of my students found differently:  

(1) An orally agreed statement is considered a contract if it could be proven in court.  Therefore, the court will accept this case on that basis.  However, the contract was cancel in writting by ‘B’ 16 days before the original contract was to take place.  This contract is void as ‘B’ took the proper action before the contact started by using a third party agent. Also, as ‘B’ was telling us the truth about the truck breaking down, this will make impossible for ‘B’ to be able to perform the obligation stated orally.  My ruling is for ‘B’ which is not obligated to make any payments to ‘A’ because the proper steps were taken to cancel the contract properly and before the contract started.  In addition, ‘A’ did not suffer any loses due to ‘B’ canceling the contract before it started. 

(2) A would win the suit due to a breach in contract but would be awarded $0.  B notified A in advance that his truck broke down and he could not longer be able to provide the agreed service due to circumstances outside of B’s control.  B breached the verbal contract but the breach was not intentional.  B notified A well in advance allowing A to contract snow plowing services from another party.  Because A did not reply to B’s notification and hired new snow plowing services, and by doing so accepted the contract cancellation. 

(3) The question of fact in this situation is whether A and B created an enforceable contract for plowing services. If so, we must also answer whether B has breached that contract and whether A is entitled to damages. This court finds B prevails in this case and is not required to pay the additional $100 expense because this is a unilateral, not a bilateral contract. No enforceable contract has been created based on the facts and therefore no breach.   

(4) B wins. Neither A or B get payment. B had cancelled the contract, before the contract went into effect, due to circumstances which would make the task listed in the contract impossible to be carried out by B, and the cancellation of the contract was done so in writing which gives precedence over an oral agreement. Additionally, notice of intent not to perform is legal. 

(5) B wins the case because the contract was already broken. B performed his obligation and contacted A regarding breaking the contract prior to its beginning. However, A didn’t reply back and hired C’s snowplow service. Looking at the facts, it appears that A did receive a letter because if he didn’t then he would hire C’s snowplow service without contacting B. Looking at the facts, it appears that A never contacted B before hiring C so this case appears fraud and A is not entitled to retrieve additional $100 from B. 

(6)  In this case it appears that B is acting in good faith by informing A of the situation before the contract performance is started, and is truly unable to perform due to impossibility.  B is unable to plow the snow due to the truck breaking down.  While it may be possible for B to buy a new truck and still fulfill the contract, this is not a feasible action based on the small size of this contract and would not refute the claim of impossibility.  B would win this case and there would be no money awarded to either party.  

Wow! And I thought the excuses from my client’s subcontractor were convoluted and insincere.  

For the record, the model (but not the only acceptable) answer I provide my students is: 

I noted this is an oral contract which should alert all to check the Statute of Frauds.  The Statute applies not because the contract is for $500 (as the contract is for services and not goods) but because the contract when made obligated the parties for a period greater than one year.  (The 11/1/12 date is a red herring.)  Notwithstanding that A could not enforce such an oral contract, B's letter provided the evidence in writing that such existed and making such enforceable. 

The breakdown of B's truck (or even of B) does not constitute impossibility.  The fact that A was able to get somebody else to perform means B could have done likewise (and probably at a lower cost.)  A has no duty to respond to B's letter.  This is a sticking point of many students.  But what would you have A do, call B and beg?  If after the first snowfall, B did not appear and a pedestrian broke her leg on A's icy parking lot, would you feel better?  A has a duty upon learning of B's unreliability to immediately change service providers.

Seeing as my graduate students hail from industries across the spectrum, some supervising projects valued at many millions of dollars, I have to wonder at how this “common wisdom” as expressed in the answers above meshes with the orderly flow of business. Perhaps a friendly discussion between owner and contractor, prime and sub, and quite a few vendors, may be useful. And do invite a local judge to the meeting to answer the many questions of these sincere but perhaps unknowing team members.