2 Business Law

04/09/23 Business Law 1

BUSINESS LAW 1LAW 201


CONTRACTS Is there a Contract?

Is there a valid: Offer Acceptance Consideration


• Is contract enforceable?Contract is not enforceable if it is:a. Voidable due to:

lack of capacity or voluntary consentb. Void due to illegalityc. Unenforceable because it lacks a written

agreement if required by law

CONTRACTS


CONTRACTS

Who can enforce the contract?a. Contracting partiesb. Assignees, and creditor or donee beneficiaries

Was the contract breached and if so, what are the remedies?

a. No breach of contract if:-conditions (set in contract) are not met-Performance is adequately completed or excused, or discharged

b. If contract was breached the remedies are:-Damages-Specific performance


Creating a Contract: Offers When a dispute arises between the parties to a

contract, there are two basic questions to answer:

Did the parties in fact have a contract? If they did, what are the terms? The deciding factor is to look for, whether the

parties entered into a contract is an agreement, or a “meeting of minds”.


Offers The basic formula for a contract is: Offer + Acceptance = Agreement An offer is the manifestation of a willingness to enter into a

contract if the other person agrees to the terms. If there is no offer, there is nothing to accept and a contract

can not be created. A person who has made the offer (the offeror) has given the

party to whom he or she has made the offer (the offeree) the power to create a binding contract by accepting. Also important is the knowledge of terms of offer, since the offer often contains all the terms of contract.


Offers The basic requirement for the creation of an

offer is presence of intent on the part of the offeror.

These requirements are met when the offer is definite and has been communicated to the offeree.


Offers When a person objectively signifies to another

his/her willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he/she is said to make an offer.

Thus an offer should have the expression of Willingness to do or abstain to another person obtaining assent


Offers If the offer is not definite it can be termed as

an “invitation to offer” or “an invitation to negotiate” and shall not have legal sanctity.

The act of communicating the offer indicates that the offeror is willing to be bound by its terms.(Refer Case ProCD, Inc. vs. Zeidenberg 1996 pg. 130 text book)


Offers Special problems with offers: Advertisements –

(Jackson v. Investment Corp. of Pal Beach 1991 pg. 131)

Rewards Auctions Bids


Offers How Long Do Offers Last? Terms of Offer Lapse of Time Revocation Firm Offers Options


Offers Revocation: Revocation of Unilateral Contracts-

Can be revoked any time, reasonable value to be paid if offeror benefits, if did not benefit-reasonable time.

Effective revocation Rejection Death or insanity of either party Destruction of subject matter Intervening illegality


Acceptance Once it is proved that one of the parties to a dispute

made an offer. The next step towards a binding contract is to look for acceptance of offer.

If all the surrounding circumstances show the same intent to contract by both the parties and the offeree in effect expresses/communicated “yes”, it is an acceptance.

The offeree must, however, accept the offer on the offeror’s terms.


Acceptance There is a valid contract if there is:1. Intent

Objectively manifested

2. ExactnessNo material changes from the offer

3. Communication-In the stipulated manner as spelled out in the offer-By an expressly or impliedly authorized means (effective when dispatched)-By a non-authorized means (effective when received)(Reddick v. Globe Life & Accident Insurance Co. 1991 pg. 148)


Consideration Consideration is a legal value, bargained

for and given in exchange for an act or promise.

The requirement for consideration should have a promise to pay the “price” the promisor asked for in order to gain the right to enforce the promisor’s promise.

A promisee’s consideration may be an act or a promise.


Consideration Consideration can have legal value in any of the

following two ways:1. If the promisee does or agrees to do something he

or she had no prior legal duty to do in exchange for the promisor’s promise that provides legal value.

2. If the promisee agrees not to do something he or she has no prior legal right to do in exchange for the promisor’s promise that also provides legal value.e.g. Quit smoking (no apparent monetary value) and the Grand mother pays $500NOTE: Refer example cases on page 160 for solving consideration related problems


Consideration Adequacy of Consideration: Legal value has nothing to do with adequacy of

consideration. Freedom to contract is the freedom to make bad bargains as well as good ones.

Exceptions: If inadequacy of consideration is apparent to

disguise a gift into a contract it can not be enforced. Nominal consideration is generally not recognized

by courts unless it was, in fact, truly bargained for.


Consideration There is a valid consideration if there is:

1. A bargained for exchange

2. Of a promise, act or forbearance

3. That had legal value

-not preexisting duty

- not past consideration

- not illusory promise


Consideration4. A recognized exception

- Promise to perform preexisting contractual duties or unforeseen difficulties

- Accord and satisfaction of an unliquidated debt

- Past consideration recognized as a moral obligation


Capacity to Contract The law uses the word capacity to describe the

ability of a person to do a legally valid act. Three major classes of persons are given are given

this special protection in their contractual relations with others:

1. Minors

2. People who are mentally impaired &

3. Intoxicated persons


Capacity to Contract If either party entering a contract lacks

capacity to contract, the contract is void or voidable, depending upon the kind of incapacity involved.

Capacity to contract, however, is presumed, which means that the party which claims incapacity must prove it.


Capacity to Contract Minors’ Contracts The idea behind minors’ incapacity is that a minor

may not be able to bargain effectively with older more experienced persons.

The minor, thus, is given the right to disaffirm (cancel) his or her contract.

Since the idea is to protect the minor, only the minor can disaffirm; adults who contracts with minors are bound by the contract unless minor chooses to disaffirm.

(CASE: Mitchell vs. Mizerski 1995 pg. 173)


Capacity to Contract Ratification: Minors may disaffirm their contracts at any

time during their minority, and for a reasonable time after attaining majority.

If the minor’s contract involves title real estate, the minor cannot disaffirm until reaching majority.

The minor who does not disaffirm within a reasonable time after attaining majority is held to have ratified the contract and thereafter loses the right to disaffirm. Any words or conduct on the part of a minor after reaching majority that clearly indicates an intent to be bound by the contract are enough for ratification.


Capacity to Contract In case of misrepresentation of age by a minor

which is proven by the adult of such a contract, theoretically, the minor’s right to disaffirm remains unaffected.

In reality, however, the minor who misrepresents his or her age is not allowed to defraud adults by doing so.

In case an adult proves that the contract is for necessaries (food, clothing, shelter, medicine etc.), it can be disaffirmed by the minor but he/she is held liable for reasonable value of necessaries used.(REFER: Figure 11-3 Minors’ right to Disaffirm pg. 178)


Capacity to Contract Like minors, people suffering from mental

impairment can lack the capacity to contract, thus rendering the contract voidable, at the election of that person or his/her guardian or administrator.

Incapacity may mean insanity, mental illness, brain damage, retardation, senility or in some cases intoxication.

There are a few exceptions:-If adjudicated insane, contract is void-Contract for necessaries-Contract is ratified on regaining capacity


Voluntary Consent A contract is a voluntary agreement between the parties;

this is the basis of contract law Even if the circumstances surrounding a case indicate that the

parties reached an agreement, that agreement must be voluntary to be enforceable

Law recognizes several kinds of behavior that could operate to take away a person’s ability to freely enter into a contract:

Misrepresentation Fraud Duress & Undue influence Mistake


Voluntary Consent The Parties’ Duty to Care The laws regarding voluntary consent are designed to protect a party to a

contract from innocent errors on his own part and from unacceptable behavior by the other party to the agreement. A person should use reasonable care to discover everything relevant to the contract.

The Remedy A contract lacking voluntary consent is voidable. The injured party may

rescind (cancel) the contract. Both the parties return what they received. If there was no performance the injured party may notify that he/she disaffirms. The defense is lack of voluntary consent.

Ratification One who waits too long to complain has indicated satisfaction with the

agreement despite the initial lack of true consent.


Voluntary Consent Misrepresentation: any party to the contract creating in the

mind of the other party a mistaken impression about an important fact or facts concerning the subject of the contract.

Acting in reliance on this mistaken belief, the victimized party entered into a contract he or she would not otherwise have entered if the full truth had been known.

Knowledge of Falsity Materiality Fact versus Opinion Justifiable reliance

(Separu vs. Ford Motor Company 1995 pg. 187- Sarnifil Inc. vs. Peerless Insurance Co. 1994 pg.188)


Voluntary Consent Fraud: is intentional misrepresentation. To prove fraud, one

must prove all the elements of misrepresentation plus two additional elements- (1) knowingly made with the (2) intent to deceive (technically called scienter)

The courts generally infer an intent to deceive from the fact that the defendant knowledge made a misstatement to a plaintiff who was likely to rely on it.

Fraud by silence- the common law position remains that of caveat emptor (buyer beware), however, many courts today recognize that it often produced unfair results.

Fraud in execution- involves misstatements about content or legal effect of something usually contained in a form or preprinted contract. If the signer of such a document is either prevented/discouraged/or had trusted relationship resulting in not knowing the facts is being deceived (fraud).

Remedy for Fraud- the party can rescind the contract or a defrauded buyer can also affirm the contract and sue in tort for damages.(Stambovsky vs. Ackley 1991 pg. 191- Figure 12-3 pg.192)


Voluntary Consent Duress & Undue Influence: these are terms used to describe situations in

which one party to an agreement interfered with the other party’s ability to resist entering into the agreement.

The basic idea of duress is that one of the parties, by making some threat of harm, forced the other party to enter an agreement he/she would not otherwise have entered.

Undue influence is closely related to duress but it exists only when the parties had some confidential relationship at the time of the contract.

Contracts made under duress and undue influence are voidable because the injured party has been deprived of the ability to make a free choice.

Their promise is not voluntary as required by contract law.(CrossTalk Productions, Inc. vs. Jacobson 1998 pg. 194)


Voluntary Consent Mistake: the term is used in contract law to describe the

situation in which one or both the parties to an agreement acted under an untrue belief about the existence or nonexistence of a material fact.

In mistake cases unlike fraud or misrepresentation cases in which the victim is also acting under a mistaken belief about the facts, the mistaken belief is not a product of a misstatement by the other party.

Mistake in this sense does not include errors of judgment, ignorance, or a party’s mistaken belief that he/she will be able to fulfill certain obligations under a contract.

Mistakes prevent the ‘meeting of minds’.


Voluntary Consent Mistakes can be mutual or unilateral. Mutual mistakes are always a basis for granting rescission of

the contract at the request of either party. Clearly no meeting of minds took place so no contract. (e.g. pg.196)

Unilateral mistakes are committed by one party acting under a mistaken belief. This can not be a ground for rescission, however, it appears that courts have often granted rescission if they are convinced that a person was truly mistaken and that a serious injustice would result. (figure 12-5 pg.197)

(Wilkin vs. 1st Source Bank 1990 pg.196)


Illegality Even if the parties to an agreement have met every other

requirement for a valid contract, their contract is unenforceable if either its formation or its performance is illegal or contrary to public interest.

An agreement is illegal if it calls for behavior that violates a statute or a rule of common law.

An agreement that is contrary to a general rule of public policy is also illegal.

A court will not enforce illegal agreements. No recovery will be allowed. As a rare exception, only if it is proved that both the parties were ignorant of the facts that made a bargain illegal, there is possibility of recovering as much as was needed for performance till then.


Illegality Public policy is best served by any rule that encourages people not to

commit illegal acts. To encourage such people to cancel illegal agreements, the courts allow

one who rescinds the contract before any illegal act has been performed to recover any consideration given (example paragraph 1 pg. 204-sale of trade secret).

A contract can call for the performance of several promises, some legal and some illegal. If the contract is divisible –that is, if legal part can be separated from the illegal parts- the courts enforce the legal parts of the contract (example pg.204 & 210-ban for competition).

A contract is illegal and hence void if it is:1. To commit illegal acts2. Made illegal by Statute (wagering statutes etc.)3. Contrary to public policy

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(example paragraph 1 pg. 204-sale of trade secret).

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(example pg.204 & 210-ban for competition).


The Form and Meaning of Contracts

Oral contracts are, as a general rule, equally binding and enforceable as are the written contracts.

There are, however, some exceptions to this rule. Depending upon a statute a contract is required to be

written for becoming enforceable, for example statute of frauds in the U.S. (lists areas under which there is higher possibility of fraud and thus require a written agreement) and property related contracts in the UAE.

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lists areas under which there is higher possibility of fraud and thus require a written agreement


The Form and Meaning of Contracts Even if a contract that is not required to be written it is more

desirable than oral contracts for several reasons such as:1. The parties are less likely to misunderstand the terms of

their agreement if they have reduced it to written form.2. If a dispute about the parties’ obligations should arise at a

later date, the written agreement is a better evidence.3. The existence of a written agreement may provide

protection against intentional misstatements about the terms of the contract.

Parties to a written contract should make it complete and as unambiguous as possible.


Third Parties’ Contract Rights There are two kinds of situations in which persons

who were not originally parties to a contract may claim some interest in it:

1. Assignees

2. Third party beneficiaries A contract consists of both rights and duties. A

contracting party has the duty to perform his/her own promise and the right to receive the other party’s promised performance.


Third Parties’ Contract Rights

The rights and duties can usually be transferred to third persons. When rights under a contract are transferred, this is called an

assignment. The transfer of duties is called delegation. The person who makes an assignment is called the assignor, and the

person who accepts the assignment is called the assignee. After an assignment, the assignee is entitled to whatever performance

the assignor had a right to under the original contract. (See figure 15-2 pg. 235)

No particular formalities are required to create an assignment. It can be done orally or in writing, so long as the assignors intent to assign is clear.

In addition consideration is generally not required. Rights can be given away as well as sold.


Third Parties’ Contract Rights Not all contracts are assignable Any assignment that would materially alter the duties of the

promisor is unenforceable. (Peterson Case pg.233 &236)

Contracts involving personal rights are also generally not assignable. These are contracts in which some element of personal skill, credit, character or judgment is an essential part of the agreement.

Assignments contrary to public policy are also not effective. An assignee is entitled to all the rights his assignor had under

the assigned contract, including the right to promisor’s performance.


Third Parties’ Contract Rights Generally, those who are not parties to the contract have no

rights in the contract even though they may benefit from its performance

If the parties to a contract intended to benefit a third party, however, the third party can enforce the contract

There are two classes of third party beneficiaries that have such enforcement rights:

1. Donee beneficiaries2. Creditor beneficiaries

(A possible incidental beneficiary, not intended to be beneficiary, can not enforce it)


Third Parties’ Contract Rights A third person is a donee beneficiary if the promisee’s

primary purpose in contracting was to make a gift of the contracted performance to the third party, who too can sue the promisor for non performance. (Figure 15-3 pg. 240)

If the promisor’s performance will satisfy a legal duty that the promisee owes a third party, the third party is a creditor beneficiary. The creditor beneficiary has rights against both the promisor and the promisee. ( figure 15-4 pg 241)

Incidental beneficiaries cannot enforce rights even though they benefit from another’s contract. Members of the general public are usually incidental beneficiaries of governmental contracts of goods and services.


Performance and Remedies Contracts are legally enforceable agreements. Thus if an

agreement meets all the requirements/elements of a contract it is enforceable.

If a dispute arises between the parties to a contract several questions regarding duties of the parties may be raised:

Are there any conditions in the contract? If so, have these conditions been met? Have the parties completed the duties or there is a material breach of

such duties? Has any party some legal excuse for not performing? Has this duty been discharged in any way? Even if one of the parties has materially breached the

contract, a dispute may arise about the available remedies.


Performance and Remedies Conditions: Generally a party’s contractual duty to perform

arises at the time the contract is formed. The parties may, however, provide that a party’s duty to perform is qualified by the happening of some event, or condition. (examples pg.247)

Types of Conditions:1. Condition precedent2. Condition subsequent3. Concurrent conditions

The creation of conditions:1. Express conditions2. Constructive (implied) conditions


Performance and Remedies Standards of Performance: A common source of dispute between

contracting parties is whether the parties have fulfilled their duties of performance under the contract. The courts have attempted to create practical, commonsense standards for evaluating the parties’ performance.

They recognize three basic degrees of performance:1. Complete or Satisfactory Performance- Promisors who completely

perform their duties are entitled to receive full contract price in return.2. Substantial Performance- is performance that falls short of complete

performance in minor respects but does not deprive the promisee of a material part of the consideration that was bargained for.

3. Material Breach- The promisor is guilty of material breach if his/her performance fails to reach the degree of perfection the other party is justified in expecting under the circumstances, such a promisor is liable for damages.


Performance and Remedies Excuses for Nonperformance: Promisors who fail to perform

satisfactorily may be able to avoid liability for breach of contract if they can show some legal excuse for their failure.

1. Prevention of performance: A promisee who causes the promisor’s failure of performance cannot complain about the failure. Promisee owes a duty of cooperation to promisor and if this delays or hinders the performance relieving the promisor of further performance.

2. Impossibility: If it becomes impossible for a promisor to perform his/her contractual duties, the duty to perform is discharged and the promisor is not liable for material breach of duty.

Incapacitating Illness or Death of Promisor in a personal service contract

Intervening Illegality Destruction of Subject Matter Commercial Impracticability or Commercial Frustration


Performance and Remedies Discharge: Parties who have been released from their

obligations under a contract are said to be discharged. Normally both parties to a contract are discharged when they have completely performed their contractual duties. There are, however, several other possibilities for a discharge, these are in addition to what ever discussed so far, e.g. conditions precedent, subsequent, concurrent etc.

Discharge by agreement Discharge by waiver Discharge by alteration Discharge by limitations (delay as per statue/time barred)


Performance and Remedies Remedies: If a party does not perform as promised under a

contract, and performance has not been excused or discharged, then the other party is entitled to a remedy for breach of contractual promise. The remedy tries to put the injured party in the same position he/she would have been if the contract had been performed. If the loser does not pay he/she can enforce the judgment by writ of execution.

Compensatory Damages Consequential Damages Nominal Damages Liquidated Damages Punitive Damages


Performance and Remedies Equitable Remedies: If the legal remedies

for breach of contract (usually money damages) are not adequate to fully remedy a party’s injuries, a court has the discretionary right to grant an equitable remedy.

Specific Performance (mostly in Real Estate Cases)

Injunctions


Sales: Formation & Terms of Sales Contracts The sale of goods is the transfer of ownership of

tangible property in exchange for money, other goods, or the performance of services.

Laws of Sales of Goods are, for all practical purposes, an extension to the Contract Law. Thus all elements of a contract have to be present in the contract of any sales of goods.

As separate from the contract law, though, in most cases the Law of Sales of Goods includes only sales of movable goods/property.


Sales: Formation & Terms of Sales Contracts In sales the title passes to the buyer when the seller has completely performed

his/her duty concerning physical delivery of goods. Transportation of goods from seller to buyer is a risky business. There is

possibility of loss or damage to goods in transit for various reasons. Usually the risk of such loss has to be covered by the agreement itself by either

specifying clearly or by accepting commonly used shipping terms. Law can also provide specific rules to govern that risk by fixing responsibility to

the party that is best able to protect the loss. Shipping Contracts1. F.O.B. (Free on Board- free of expenses)2. C.I.F. (Cost, Insurance, Freight by seller)3. C & F (Cost & Freight only) Destination Contracts1. FOB Destination (with risks till delivery of seller)2. Ex-Ship (seller until unloaded from ship)3. No Arrival – No Sale


Sales: Warranties & Product Liability In general, a warranty is a contractual promise by

the seller regarding the quality, character or suitability of the goods sold.

If the seller through words or behavior, makes promises about the goods, he has created an Express Warranty. The critical elements for creation of an express warranty are that the seller make a statement of fact or a promise to the buyer concerning the goods that become part of the bargain between buyer and seller. Example pg. 283, Case: Cipollone vs. Ligget Group Inc. 1990)


Sales: Warranties & Product Liability In addition law imposes certain responsibilities for the quality of goods

sold, on the seller. These warranties arise whether or not the seller has made express promises. The warranties imposed by law are known as Implied Warranties.

Implied warranties imposed by law are not absolute. They arise only under certain circumstances, and the seller may include a clause in the contract that excludes them.

There can be two implied warranties of quality:1. Implied Warranty of Merchantability - Goods are fit for the ordinary

purpose for which these goods are used (e.g.. Pg. 285 Case-Denny vs. Ford Motor Co. 1995 pg.286).

2. Implied Warranty of Fitness for a particular Purpose – (Klein vs. Sears Roebuck & Co. 1985 pg. 289)

Implied Warranty of Title- Unlike in warranty of quality there can be an implied warranty for title. In any contract of for sale of goods the sellers warrants the buyer that he has the right to sell (Marino vs. Perna 1995 pg.290)


The Agency Relationship- Creation, Duties & Termination An agency relationship arises when one person (the agent) works on

behalf of and under the direction of another (the principal). Agency law especially focuses on the relations between principals &

agents and the third persons with whom agents deal in making contracts on behalf of principals.

Agency relationships are usually formed by contract, although they may be found in the absence of a contractual agreement.

An agency may be either written or oral and either compensated or uncompensated.

An agency results from any indication of consent by the principal that the agent may act on the principal’s behalf and under her control. Case: Lang vs. Consumers Insurance Service 1991 pg. 346,

Robert Hicks Case pg. 344


The Agency Relationship- Creation, Duties & Termination Creation of an Agency TEST- Is one party (agent) acting :

For the benefit of and Under the control of another (principal)

Evidence- Look at the parties’ words, actions, and the surrounding circumstances.

Formalities- Generally, none are required: No contract is necessary Agreement may be verbal Agent need not be compensated

Capacity- No legal capacity necessary to sere as an agent (some regulatory exceptions, incapacitated agent may avoid agency agreement)

1. Any person with legal capacity may be a principal Power- Agent may do any thing that the principal could do (with some

exceptions)


The Agency Relationship- Creation, Duties & Termination

Duties of Agents to Principals: The duties of an agent to the principal normally derive from either the contract, if any, between them or from the common law of agency. In case the contract is silent on duties the following are the common duties:

1. Duty of loyalty2. Duty to obey instructions3. Duty to exercise care and skill4. Duty to communicate information5. Duty to account for funds and property


The Agency Relationship- Creation, Duties & Termination

Duties of Principals to Agents: The following duties are generally imposed on the principal by the common law:

1. The duty to compensate

2. The duty to reimburse and indemnify

3. The duty to keep accounts

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