©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 9 Contracts: Part I.

©2001 West Legal Studies in Business. All Rights Reserved.1

Chapter 9Chapter 9Contracts: Part I Contracts: Part I


IntroductionIntroduction

• A promise is an assurance that one will or will not do something in the future.

• What is a Contract?– Contract is an agreement (based on a promise) that can be

enforced in court.• What law governs? It depends on the transaction.

– Service contracts governed by common law of contracts.– Sale and lease contracts are governed by Article 2 of the

Uniform Commercial Code (UCC).


§1: §1: Elements of a ContractElements of a Contract

• ELEMENTS:– Agreement (Offer and Acceptance).– Consideration.– Contractual Capacity.– Legality.

• DEFENSES:– Genuineness of assent.– Form.


PerformancePerformance

• Executed v. Executory.– Executed: A contract that has been fully

performed by both parties. – Executory: A contract that has not been fully

performed by both parties.


EnforceabilityEnforceability• Valid Contracts.

– Elements: Agreement, consideration, contractual capacity, and legality.

• Void Contracts.– No contract.

• Voidable (or unenforceable) Contracts.– Valid contract that can be avoided or rescinded

due to a legal defense.


§2: §2: The Objective The Objective Theory of ContractsTheory of Contracts

Intention to enter into a legally binding agreement, or contract, is judged by outward, objective facts as interpreted by a reasonable person, rather than by the party’s own secret, subjective intentions.


§3: §3: Types of ContractsTypes of Contracts

• Bilateral v. Unilateral Contracts.– Bilateral Contract (“promise for a promise”)

occurs when the Offeror bargains for the Offeree’s promise to perform

– Unilateral Contract (“promise for an act”) occurs when the Offeror bargains for the Offeree’s performance; the Offeree can accept the offer only by completing the contract performance.


Types of Contracts Types of Contracts [2][2]

• Expressed v. Implied In Fact.– Express-words (oral or written).– Implied In Fact - Conduct creates and

defines the terms of the contract.


Types of Contracts Types of Contracts [3][3]

• Quasi Contracts are Implied implied in law. – Fictional contracts created by courts.– Imposed on parties for the interest of fairness

and justice.– Equitable remedies.– Quantum Meruit: amount of compensation

owed under an implied contract.


§4: Agreement§4: Agreement

• Agreement consists of an offer and an acceptance.

• Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.


Requirements of the OfferRequirements of the Offer

• Offeror’s serious intention.• Definiteness of terms.• Communication.


Offeror’s Serious IntentionOfferor’s Serious Intention• Objective theory of contracts: Contract is judged by

what a reasonable person in the Offeree’s position would conclude about the offer.

• Offers made in anger, jest, or undue excitement are usually not offers.

• Expressions of opinion are not offers.• Statements of Intention or preliminary negotiations are

are not offers.• Advertisements, Catalogues, Price Lists, and Circular

are treated as Invitations to negotiate and not as offers.


Offer-Definiteness of TermsOffer-Definiteness of Terms

Terms (Expressed or Implied):– Identification of the parties.– Object or subject matter of the contract.– Consideration to be paid.– Time of payment, Delivery, or Performance.

• Case 9.1: R.K. Chevrolet, Inc. v. Hayden (1997).

http://www.courts.state.va.us/txtops/1960943.txt

http://www.courts.state.va.us/txtops/1960943.txt


Offer-CommunicationOffer-Communication

Offeree’s knowledge of the offer can be made directly by the Offeror or by an Offeror’s agent.


Termination of the OfferTermination of the Offer

• An offer may be terminated prior to acceptance by either:– Action of the Parties; or by– Operation of Law.


Termination by Termination by Action of the Parties Action of the Parties [1][1]

• Revocation of the offer by the Offeror.– Offer can be withdrawn anytime before Offeree

accepts the offer.– Effective when the Offeree or Offeree’s agent

receives it.– Exceptions:

» Irrevocable Offers.» Option Contract: Promise to hold an offer open for a

specified period of time in return of consideration.



• Exceptions (cont’d):– Detrimental Reliance or Promissory Estoppel

where Offeree relies on offer to his or her detriment, thus Offeror is barred from revoking the offer.

• Rejection of the offer by the Offeree.– Rejection by the Offeree (expressed or implied)

terminates the offer.– Effective only when it is received by the

Offeror or Offeror’s agent.



• Rejection by Offeree (cont’d).– A counteroffer by the Offeree is a rejection of

the original offer and making of a new offer.• Mirror Image Rule states that the Offeree’s

acceptance must match the Offeror’s offer exactly.


Termination by Termination by Operation of LawOperation of Law

• Lapse of Time.– Offer terminates by law when the period of

time specified in the offer has passed.– If no time period for acceptance is specified,

the offer terminates at the end of a reasonable period of time.

• Destruction of the Subject Matter.


Termination by Termination by Operation of Law Operation of Law [2][2]

• Death or Incompetence of the Offeror or Offeree.

• Supervening Illegality of the Proposed Contract.


AcceptanceAcceptance

• An acceptance is a:– Voluntary act (expressed or implied) – by the Offeree that – shows assent (agreement) – to the terms of an offer.


Mode and Mode and Timeliness of AcceptanceTimeliness of Acceptance

• Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance.– Offeror specifies (expressly or impliedly) how

acceptance should be made.– Effective when dispatched (mailed, shipped)


Means of AcceptanceMeans of Acceptance• Exceptions:

– If acceptance is not properly dispatched by the Offeree.

– If Offeror specifies that acceptance will not be effective until it is received.

– If acceptance is sent after rejection, whichever is received first is given effect.

• Unauthorized Means of Acceptance.– Not effective until it is received by the Offeror.

If timely sent and dispatched it is considered to have been effective on its dispatch.


§5: Consideration§5: Consideration• Consideration is legal value given in return for a

promise or performance.– Must have something of legal value or sufficiency.– Must be a bargained-for exchange.

• Consideration for a promise must be either:– Legally detrimental to the Promisee;

or– Legally beneficial to the Promisor.

• Case 9.2: Hamer v. Sidway (1891).


Adequacy of ConsiderationAdequacy of Consideration

A Court will not question the fairness of the bargain if legally sufficient.– The law does not protect a person for entering

into an unwise contract.– In extreme cases, a court may find that a party

lacks legal capacity or that contract was unconscionable.


Adequacy of Consideration Adequacy of Consideration [2][2]

• Preexisting Duty.– Promise to to what one already has a legal duty to do does

not constitute legally sufficient consideration.– Exceptions:

» Unforeseen Difficulties » Recession and New Contract

• Past Consideration is no consideration because the bargained-for exchange element is missing.


Detrimental Reliance and Detrimental Reliance and Promissory EstoppelPromissory Estoppel

• A court may enforce an otherwise unenforceable promise to avoid an unjust result if the court finds there was a promise, the promisee substantially relied on the promise and justice demands enforcement of the promise.

• Promisor is “estopped” from asserting there was no consideration.

• Case 9.3: Goff-Hamel v. Obstetricians & Gynecologists, P.C. (1999).


§6:§6: Capacity Capacity• Contractual Capacity.

– The legal ability to enter into a contractual relationship.

» Full competence.» No competence.» Limited competence.

• Minors.• Intoxication.• Mentally Incompetent.


MinorsMinors

• In most states, a person is no longer a minor for contractual purposes at the age 18.

• A minor can enter into any contract that an adult can.

• A contract entered into by a minor is voidable at the option of that minor.


Minors Minors [2][2]

• A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.

• Minor must disaffirm the entire contract.• Disaffirmance can be expressed or implied.


Minors Minors [3][3]

• In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control.

• In increasing number of states, the minor must restore the adult to the position held before the contract was made.


IntoxicationIntoxication• Intoxicated persons lack of contractual

capacity at the time the contract is being made.

• Contract can be either voidable or valid.– Courts look at objective indications to

determine if contract is voidable.• If voidable:

– Person has the option to disaffirm.– Person may ratify the contract expressly or

impliedly.


Mentally Incompetent PersonsMentally Incompetent Persons• Void Contract: Signed contract is void.

– If a person has been adjudged mentally incompetent by a court of law only a guardian may sign a contract.

• Voidable Contract:– If the person does not know he or she is entering into

the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.

• Valid Contract:– If person is able to understand the nature and effect of

entering into a contract yet lack capacity to engage in other activities.

– Lucid Interval.


§7: §7: LegalityLegality

• A contract (or a clause in a contract) to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).– Contract that calls for for a tortious act.– Contract that calls for an act contrary to public

policy such as a covenant not to compete. – Case 9.4: Brunswick Floors Inc. v. Guest (1998).


§8: Genuineness of Assent §8: Genuineness of Assent

Contract may be unenforceable if the parties have not genuinely assented to its terms by:– Mistake.– Misrepresentation.– Undue Influence.– Duress.


MistakesMistakes• Mistake of Value vs. Mistake of Fact.• Mistake of Value:

– Contract is enforceable by either party.– Unilateral or Bilateral mistake are not basis for

avoiding a contract.» Exception: Mistake of value because of a mistake of

material fact.


Mistakes Mistakes [2][2]• Unilateral Mistakes of Fact: One party

mistaken as to some Material Fact.– Does not afford the mistaken party any right to

relief from the contract.– Exceptions

» If other party to the contract knows or should have known that a mistake of fact was made.

» If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.


Mistakes Mistakes [3][3]

• Bilateral Mistakes of Fact.– Mutual mistake as to some Material Fact, the

contract can be rescinded by either party.

• Case 9.5: Raffles v. Wichelhaus (1864).


FraudFraud

• Contract Voidable by Innocent Party.• Elements:

– Misrepresentation of Material Fact;– Intent to Deceive;– Reliance on Misrepresentation; and– Injury to the Innocent Party.


FraudFraud

• Scienter == Intent to Deceive.– Party’s knowledge that fact is not as stated.– Party makes a reckless statement with disregard

of the truth.– Party implies that statement is based on

personal knowledge or investigation.• Gross negligence is considered intent.


Nonfraudulent Nonfraudulent MisrepresentationMisrepresentation

• Innocent Misrepresentation.• Negligent Misrepresentation.

– Equal to Scienter.– Is treated as fraudulent misrepresentation, even

though the misrepresentation was not purposeful.


Undue InfluenceUndue Influence

• Contract is Voidable. • Undue influence occurs in the context of a

confidential or fiduciary relationship:– Relationship of dependence that involves

influence or persuasion.– Weak party talked into doing something not

beneficial to herself.


DuressDuress

• Forcing a party to enter into a contract under fear or threat of force. The Contract is Voidable.

• Threatened act must be wrongful or illegal.

• Threat to exercise legal rights (criminal or civil suit) is not duress.


Adhesion Contracts Adhesion Contracts and Unconscionabilityand Unconscionability

• Adhesion Contracts.– Preprinted contract in which the adhering party has no

opportunity to negotiate the terms of the contract.• Unconscionability.

– One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract.

» “Standard-form”.» “Take-it-or-leave-it” adhesion contracts.


§9:§9: The Statute of Frauds The Statute of Frauds

To be enforceable, the following types of contracts must be in writing and signed: – Contracts involving interest in land.– Contracts involving “One year rule”.– Collateral or Secondary Contracts.– Promise made in consideration of marriage.– Contracts for the sale of goods priced at $500

or more.


Contracts Involving Contracts Involving An Interest in LandAn Interest in Land

• Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself.

• All contracts for the transfer of other interest in land: mortgages and leases.


The One-Year RuleThe One-Year Rule• A contract that cannot, by its own terms, be

performed within one year from the date it was formed must be in writing to be enforceable.

• One-year period begins to run the day after the contract is made.– Test: Whether performance is possible

(even if unlikely) within one year from date of execution.


Contracts for the Sale of GoodsContracts for the Sale of Goods

• UCC requires a writing or memorandum for the sale of goods priced at $500 or more.

• Exceptions:– Partial Performance.– Admissions.– Promissory Estoppel.– Special Exceptions under the UCC.


§10§10: Third Party Rights: Third Party Rights

• Only the Parties to a contract have rights and liabilities under the contract.

• Exceptions:– Assignment or Delegation.– Third party beneficiary contract.


AssignmentsAssignments

• How Assignments Function.• Form of the Assignment.• Consideration.• Rights that Cannot be Assigned.• Notice of Assignment.• Case 9.6: Reynolds v. Hardee (1996).


Assignments Assignments [2][2] Assignment - Transfer of rights in bilateral

contract to 3rd party.

Obligee/Assignor Obligor

Assignee

Original Contract Formed

Assignment

Duties Owed After Assignment


Assignments Assignments [3][3]

• Rights cannot be assigned:– If the assignment is contrary to statute– When a contract is personal in nature– If the assignment materially changes the rights

or duties of the obligor.– If the contract stipulates the right cannot be

assigned.• Valid notice must be given to all parties.


DelegationDelegation• Contractual duties in a bilateral contract that

are delegated to a 3rd party.

Obligee Obligor

Delagatee

Original Contract Formed

Duties Owed After Delegation


Duties That Duties That Cannot be DelegatedCannot be Delegated

• When special trust has been placed on the obligor.

• When performance requires personal skill or talents.

• When performance will vary materially from obligee expectations.

• When the contract expressly prohibits delegation.


Effect of a DelegationEffect of a Delegation

• Delegator remains liable.• Delegatee liable if delegation contract

creates a third party beneficiary relationship in the obligee.


Third Party BeneficiariesThird Party Beneficiaries

Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person.


Intended v. IncidentalIntended v. IncidentalBeneficiariesBeneficiaries

• Incidental beneficiary has no rights in the contract.

• Intended Beneficiary:– Promisee intended to confer on the beneficiary

the right to bring suit to enforce the contract.– Factors:

» Performance is rendered directly to 3rd party.» 3rd party’s right to control contract details.» 3rd party expressly designated as beneficiary.


The Vesting of an Intended The Vesting of an Intended Beneficiary’s RightsBeneficiary’s Rights

For 3rd Party beneficiary contract to be effective, rights under the contract must vest:– Third party’s manifesting assent to the contract.– Third party’s materially altering position in

detrimental reliance on the contract.


Emerging TrendsEmerging Trends

• Online Contract Forms:– Lectric Law Library.– FindForms.– LegalWiz.com.– Washburn University School of Law.– Bornstein & Naylor.

• Legal Research Exercises on the Web.


Law on the WebLaw on the Web

• ‘Lectric Law Library on Contracts.• “SmartAgreements” website.• Law Office’s Website.• Lectric Law’s Sample Contracts.• History of Statute of Frauds.• Contract Case Law at Cornell U.

• Legal Research Exercises on the Web

©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 9 Contracts: Part I.

Documents

Transcript of ©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 9 Contracts: Part I.