The Complex Commercial Litigation Law Review: USA - Washington

Overview

In this chapter we endeavour to describe many of the foundational, common law contractual doctrines in Virginia and Washington, DC (DC). We consider DC and Virginia together not just because of their geographical proximity, but also because there is substantial similarity between the two jurisdictions. In fact, their core doctrines are often identical – or, at least, nearly so. We have noted differences where they exist, but differences are the exception, not the rule.

This substantial commonality is, at first glance, surprising: DC is a small jurisdiction that does not have a detailed body of contract law, whereas Virginia is a large jurisdiction with a long-standing, well-developed body of contract law. The overlap we found is likely due in part to the fact that both jurisdictions have embraced the objective view of contracts – a development that colours a number of their contractual doctrines. The similarity is also partially due to the fact that courts in DC supplement their case law by relying heavily on the Restatement (Second) of Contracts and the laws of nearby jurisdictions. Because DC courts routinely rely on the Restatement, when Virginia has embraced a position taken in the Restatement (a relatively common occurrence), its views typically line up with those taken by DC.

One of the most notable similarities between the two jurisdictions bears mentioning at the outset. Both jurisdictions robustly enforce contractual duties and limit the availability of defences that can be used to set aside the terms of a valid agreement. As our discussion shows, this has significant consequences for parties litigating in DC and Virginia.

Contract formation

i Elements

To enter into an enforceable contract in DC, the 'parties must (1) express an intent to be bound, (2) agree to all material terms, and (3) assume mutual obligations'.2 Like many jurisdictions, including Virginia, DC follows the objective view of contracts.3 Thus, both intent to be bound, and agreement to material terms, are objective inquiries.4

Intent to be bound hinges on whether the parties' 'choice of language . . . manifested a mutual intent to be bound contractually' – a requirement that is established through offer and acceptance.5 Agreement to material terms is met when each party assents to 'the essential terms of the contract'.6 Courts performing this analysis consider whether the parties' 'acts manifested agreement as to each material aspect of the [contract],' i.e., whether there was a 'meeting of the minds'.7

The third element, mutual obligations, 'exists when each party agrees to do something it otherwise is under no legal obligation to do, or to refrain from doing something it has a legal right to do'.8 'An exchange of promises provides sufficient consideration, evidencing mutual obligation'.9

The elements in Virginia are similar: 'there must be a complete agreement including acceptance of an offer as well as valuable consideration'.10 'Complete agreement' is the Virginia equivalent of 'meeting of the minds'.11 Under Virginia's objective approach,12 whether there was mutual assent (i.e., meeting of the minds) rests on the words and actions of the parties, not their 'unexpressed state[s] of mind'.13

ii Oral contracts

In both DC and Virginia, the 'proponent of an oral contract has the burden of proving all the elements of a valid and enforceable contract'.14 Both jurisdictions will enforce an oral contract so long as it does not violate the statute of frauds and the essential elements of a contract are satisfied.15 Notably, courts considering whether an oral contract was formed frequently reference the burden of proof – often to the detriment of the party seeking enforcement.16 They also vigilantly ensure 'all material terms' were agreed upon.17

iii Implied-in-fact contracts, unjust enrichment, and promissory estoppel

'An implied-in-fact contract is a true contract, containing all necessary elements of a binding agreement; it differs from other contracts only in that it has not been committed to writing or stated orally in express terms, but rather is inferred from the conduct of the parties in the milieu in which they dealt'.18 DC law provides for recovery under an implied-in-fact-contract theory when '(1) valuable services [were] rendered [by the plaintiff]; (2) for the person sought to be charged; (3) which services were accepted by the person sought to be charged, and enjoyed by him or her; and (4) under such circumstances as reasonably notified the person sought to be charged that the plaintiff, in performing such services, expected to be paid'.19 Virginia applies a slightly different standard: it will enforce an implied-in-fact contract if 'the typical requirements to form a contract are present,' and a contractual relationship can be inferred from 'consideration of [the parties'] acts and conduct'.20

Additionally, although it is not a contractual remedy, both jurisdictions provide that an aggrieved party may be able to recover under a theory of unjust enrichment. In DC, the plaintiff must show that he or she '(1) . . . conferred a benefit on the defendant; (2) the defendant retain[ed] the benefit; and (3) under the circumstances, the defendant's retention of the benefit is unjust.'21 In Virginia, a plaintiff must show that '(1) he conferred a benefit on [the defendant]; (2) [the defendant] knew of the benefit and should reasonably have expected to repay [the plaintiff]; and (3) [the defendant] accepted or retained the benefit without paying for its value'.22 In other words, in Virginia, '[o]ne may not recover under a theory of implied contract simply by showing a benefit to the defendant, without adducing other facts to raise an implication that the defendant promised to pay the plaintiff for such benefit'.23

Unjust enrichment claims operate in the absence of a valid contract.24 'One who has entered into a valid contract cannot be heard to complain that the contract is unjust, or that it unjustly enriches the party with whom he or she has reached agreement.'25 As an equitable remedy, unjust enrichment's use generally 'depends on whether it is fair and just for the recipient to retain the benefit, not on whether the person or persons who bestowed the benefit had any duty to do so'.26

Of the two, only DC recognises the doctrine of promissory estoppel.27 In DC, the doctrine applies when a promise has been made to the plaintiff that (1) the plaintiff detrimentally relied on, and (2) that reasonably induced the plaintiff's reliance.28 Like unjust enrichment, promissory estoppel is an equitable remedy.29 Courts will only apply it if 'injustice otherwise [would] not [be] avoidable.'30 Although 'injustice' is an inherently malleable standard, past decisions have shed some light on its contours. For example, the DC Court of Appeals has held that injustice is not otherwise unavoidable when a plaintiff has already been 'fully compensated' for the alleged injury.31 Similarly, DC has also held that justice does not require use of a promissory estoppel claim when the estoppel claim merely 'restates' a breach of contract claim.32 A promissory estoppel claim must, therefore, rely on a non-contractual promise to succeed.33

Contract interpretation

Because DC and Virginia follow the objective view of contracts, '[w]here the terms in a contract are clear and unambiguous, the contract is construed according to its plain meaning',34 'unless it is repugnant to some rule of law or public policy'.35 A threshold issue then is whether the contract is ambiguous. If the contract is unambiguous, it 'speaks for itself and binds the parties without the necessity of extrinsic evidence'.36

Ambiguity is often a central issue at summary judgment. Because unambiguous contracts 'bind[] the parties without the necessity of [considering] extrinsic evidence',37 courts frequently award summary judgment if the contract is unambiguous.38 Conversely, because ambiguous contracts often require considering 'the credibility of extrinsic evidence', courts will usually reserve summary judgment if the contract is ambiguous.39

Contractual ambiguity is a question of law. Courts in Virginia and DC give contractual language its plain meaning and hold that a contract is ambiguous only when it is 'reasonably or fairly susceptible of different constructions or interpretations, or of two or more different meanings'.40 It is unambiguous when 'the court can determine its meaning without any other guide than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends'.41

Courts use the parol evidence rule to cabin the use of extrinsic evidence. Generally, the rule establishes that when an agreement has been put into writing, extrinsic evidence is inadmissible if the contract is unambiguous.42 It also prohibits courts from resorting to extrinsic evidence that would contradict the 'the terms of a valid, and plain and unambiguous, written contract'.43

Notably, DC courts have struggled to consistently define what qualifies as extrinsic evidence.44 Language from some cases indicates that anything outside of the contractual language is extrinsic, while other cases allow evidence of 'context'.45 The cases that allow contextual evidence do so by defining context as non-extrinsic evidence.46 In the view of those cases, context is 'evidence of the general situation, [such as] the relations of the parties, the subject matter of the transaction, preliminary negotiations and statements made therein, usages of trade, and the course of dealing between the parties.'47 They then define extrinsic evidence narrowly, as 'direct evidence as to what a particular party intended the language to mean, a subjective question.'48 At least one recent case indicates that the DC Court of Appeals is likely to take this approach, of distinguishing context from extrinsic evidence, in the future.49

Lastly, both jurisdictions courts apply contra proferentem – the canon that ambiguities in a contract are construed against the drafter.50 In the DC hierarchy of interpretative tools, the canon is low on the list: it is 'inferior to extrinsic proof of the parties' agreement, or to other authority revealing that understanding'.51 Virginia courts will apply the canon only '[i]f the plain meaning is undiscoverable'.52 The canon is commonly referenced by Virginia courts in insurance cases.53

Dispute resolution

i Forum selection clauses

Both jurisdictions have embraced the modern rule for enforcement of forum selection clauses: forum selection clauses are 'prima facie valid and [will] be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances'.54 DC courts will generally treat dismissals on the basis of a forum selection clause as a 'non-merits ruling[] which do[es] not preclude filing in the proper jurisdiction'.55 Because it is a non-merits ruling, DC courts may 'bypass [ ] questions of subject-matter and personal jurisdiction, when considerations of convenience, fairness, and judicial economy so warrant'.56

ii Arbitration clauses57

In 2008, DC adopted the Revised Uniform Arbitration Act (RUAA).58 Under the RUAA, DC courts will enforce an agreement to arbitrate unless 'a ground . . . exists at law or in equity for the revocation of a contract'.59 The party seeking arbitration bears the burden of showing the agreement is valid.60 Challenges to the validity of an arbitration clause are typically for a court to decide.61 But challenges to the contract generally will likely be resolved by an arbitrator.62 Notably, the RUAA 'preserves the . . . severability doctrine'.63 'Under that doctrine, even if another provision of the contract, or . . . the contract as a whole, is invalid, unenforceable, voidable, or void, that does not prevent a court from enforcing a specific agreement to arbitrate.'64

Virginia, on the other hand, has not adopted the RUAA.65 Virginia's arbitration statute (the Virginia Uniform Arbitration Act, or VUAA) is an adoption of the Uniform Arbitration Act.66 Additionally, in Virginia, '[t]he law of contracts governs the question whether there exists a valid and enforceable agreement to arbitrate'.67 A valid agreement to arbitrate must contain 'the essential elements of a valid contract at common law'.68 Moreover, Virginia applies 'no presumption in favour of arbitrability'.69 'Rather, the party seeking arbitration has the burden of proving the existence of the agreement.'70

Breach of contract claims

To establish a breach of contract claim, a plaintiff must show (1) a valid contract, (2) a contractual duty, (3) a breach of that duty, and (4) damages.71 The third element – breach – is satisfied if 'a party fails to perform when performance is due'.72 When a contract fails to specify a time for performance, DC law implies that performance must be made within a 'reasonable time'.73 Additionally, DC and Virginia recognise the doctrine of anticipatory repudiation, under which '[a]n aggrieved party . . . may be entitled to sue prior to breach if the other party has . . . communicated, by word or conduct, unequivocally and positively its intention not to perform'.74

Defences to enforcement

i Indefinite material terms

A contract 'must be sufficiently definite as to its material terms (which include, e.g., subject matter, . . . payment terms, quantity, and duration) that the promises and performance to be rendered by each party are reasonably certain'.75 But courts are wary not to push this requirement to 'extreme limits'.76 They recognise that '[a]ll agreements have some degree of indefiniteness and some degree of uncertainty'.77 Thus, the material terms need not be 'fixed with complete and perfect certainty.'78 Rather, an enforceable contract need only have '[r]easonable definiteness in [its] essential terms'79 – essential terms must be sufficiently concrete for a 'court to determine whether a breach has occurred and to identify an appropriate remedy'.80

ii Statute of limitations

The statute of limitations is frequently raised as a defence in contract litigation.81 Subject to exceptions, the limitations period begins to run when the breach of contract occurs.82 In DC, an aggrieved party generally has three years from that time to file a lawsuit.83 Virginia applies a three-year limit to unwritten contracts, and a five-year limit to written contracts 'signed by the party to be charged'.84

iii Duress

Proving duress is challenging. The party seeking the benefit of a duress theory must show '(1) an improper threat and (2) the lack of a reasonable alternative'.85 Both jurisdictions will limit the range of conduct that constitutes an improper threat.86 Additionally, DC courts will typically hold that litigation is a reasonable alternative.87 Parties in DC seeking to show that it was not must provide 'facts establishing specific financial harm' that made it an unreasonable alternative.88

iv Contracts against public policy

Absent a situation where a contract is in direct violation of the law, DC courts are extremely reluctant to void contracts on public policy grounds.89 Indeed, two main instances in which DC courts have been willing to void contracts on the basis of public policy could be characterised as violation-of-the-law cases.90

In Virginia, '[t]he meaning of the phrase public policy is vague and variable; courts have not exactly defined it'.91 Virginia courts have in the past defined it as 'the principle which declares that no one can lawfully do that which has a tendency to be injurious to the public welfare' – an approach that is significantly broader than DC's.92 However, this broad approach is not without limits, and modern Virginia courts caution that they are not likely to void an agreement unless the 'illegality' of it 'is clear and certain'.93 For example, although Virginia courts have held that 'pre-injury release provisions relating to personal injury' are void,94 they have not been willing to void provisions that indemnify a party from personal injury liability.95

v Impossibility96

Impossibility is rarely applied in either jurisdiction. Generally though, it provides that if 'a promisor's contractual performance is made impossible by a change in character of something to which the contract related, or which by the terms of the contract was made a necessary means of performance, the promisor will be excused, unless he . . . expressly agreed in the contract to assume the risk of performance'.97 The defence will be successful only in limited circumstances: a 'mere inconvenience or unexpected difficulty' is not enough to excuse contractual obligations under this defence.98

vi Accord and satisfaction

The last defence we highlight is accord and satisfaction. Accord and satisfaction occurs after formation. When parties to a contract have a dispute but agree to resolve their differences through payment of an amount other than what was originally agreed upon, the 'new' payment 'satisfies' the debtor's original obligation under the contract.99 A common example of this doctrine is cashing a check that says 'payment in full'.100 In that situation, the creditor's decision to cash the check may operate as acceptance of the alternative payment.101 Importantly though, a genuine dispute is a prerequisite.102 An accord and satisfaction defence will not be successful if a creditor cashes a check that says payment in full, but the parties have not legitimately disputed the amount due before the creditor cashes the check.103 When an accord and satisfaction claim fails, courts will likely deduct the amount paid from the plaintiff's damages.104

Fraud, misrepresentation and other claims

The general rule for fraud in the inducement is that '[i]f a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient'.105 DC courts impose a 'very high standard on sophisticated business entities claiming fraudulent inducement in arms-length transactions'.106 Such parties must 'establish by clear and convincing evidence that the defendant made a false representation, in reference to material fact, with knowledge of its falsity, and an intent to deceive, and that the plaintiff's reliance [on the alleged material misrepresentations] was reasonable'.107

Remedies

i Compensatory damages, restitution, and punitive damages

Both states recognise restitution and compensatory damages. Generally, restitution is 'available as an alternative to an action for damages on the contract'.108 Restitution 'is based upon the principle of unjust enrichment' and 'require[s] the wrongdoer to restore what he has received'.109 Compensatory damages, on the other hand, do not focus on the unfair gain the wrongdoer received, but rather on the loss the innocent party has incurred.110 Compensatory damages are generally limited to those damages that 'are the natural consequence and proximate result of [the breaching party's] conduct'.111 Additionally, although 'mathematical certainty' is not required, 'there must be some reasonable basis on which to estimate damages'.112

Punitive damages are 'rare, [but] they may be recovered in' Virginia and DC.113 They carry a demanding showing: 'the acts of the breaching party' must have been 'malicious, wanton, oppressive or with criminal indifference to civil obligations' and have 'merge[d] with and assume[d] the character of a willful tort'.114 The second half of this test will likely be strictly enforced: if the breach of contract did not merge with (i.e., constitute) a wilful tort, no claim for punitive damages lies.115

ii Liquidated damages

DC and Virginia recognise liquidated damages provisions and will enforce them if they do not constitute a 'penalty'.116 In Virginia, courts will hold that a provision is a penalty if the 'damage resulting from a breach of contract is susceptible of definite measurement, or where the stipulated amount would be grossly in excess of actual damages'.117 In DC, the primary inquiry is whether the provision was reasonable 'compensation for breach, viewed as of the time and under the circumstances when it was agreed'.118 The trend in DC is for courts to recognise liquidated damages provisions so long as 'they do not clearly disregard the principle of compensation'.119 This is especially true '[w]hen a liquidated damages provision is the product of fair arm's length bargaining, particularly between sophisticated parties'.120 Lastly, both DC and Virginia have joined the jurisdictions that hold 'the party challenging the enforceability of a liquidated damages clause has the burden of proving that it is a penalty'.121

iii Specific performance

Specific performance is an 'extraordinary equitable remedy' that 'rests in the discretion of the court'.122 It is most often employed in land-sale transactions,123 and is generally not available in addition to damages.124 Moreover, courts require that the party seeking specific performance 'must show that he was ready, willing and able to perform the contractual obligations', or that he already performed his obligations.125

Conclusions

As we noted at the outset, there is significant overlap between DC and Virginia's core contractual doctrines. These jurisdictions take similar approaches to contract interpretation and enforcement. They take an objective view and are extremely reluctant to allow a party to escape contractual obligations simply because performance is inconvenient or burdensome. They have also limited the circumstances in which classic common law defences such as impossibility, public policy and duress apply. Parties litigating in these forums should, therefore, be cautious when seeking to set aside contractual duties; Virginia and DC courts will likely enforce them if they are valid.

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