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Basic Contract Law

Contract Law
Contracts evolved from the common law
Each state has its own common law precedents Dissatisfaction with differences across state led to the Uniform Commercial Code (UCC)
UCC has been adopted by all 50 states and will be discussed next chapter

Currently we are dealing with another watershed event: E-commerce Lawyers and legislators are scrambling to provide a universally accepted contract law of E-commerce

Contract Law

A contract is:
A promise or set of promises, the breach of which the courts will provide a remedy for When the two parties agree to a contract, it creates a legally recognized duty to perform Not all agreements are recognized as legally binding
A promise to make a gift is not binding


Elements of a Contract

Valid contracts possess the following:

An agreement between the parties: an offer and acceptance Consideration--each party must do something that they were not previously obligated to do Both parties have capacity to contract Formation and performance of the contract are legal and not against public policy


Contractual Nomenclature
Valid, void, voidable and unenforceable
A valid contract is one recognized as binding in law A void contract is not recognized at all such as a gambling contract In a voidable contract one of the parties can not perform without liability--a victim of fraud A contract is unenforceable if there are no legally enforceable remedies--an oral real estate agreement

In a bilateral contract, both parties exchange promises In a unilateral contract a promise is made for performance--e.g., reward contracts

Types of Contracts
Executory and executed
A executory promise is a promise for future performance If the contract has been executed, both parties have performed

Express and Implied

An express contract can be written or oral
In an express contract the duties of the parties are clearly elucidated

An implied contract is implied by conduct

After receiving treatment from a doctor, you will be asked to make arrangements for payment

Quasi Contracts
The plaintiff is suing for quantum meruit (the fair market value of her services) The plaintiff performed valuable services The defendant knowingly received these services The plaintiff expected to get paid if the services were used by the def. The def. was unjustly enriched Quasi contract has been used by writers who claim movies were made based on ideas they told directorsComing to America Quasi contract is sometimes used by small firms to try to salvage an inadvertent or bungled knowledge transfer to a larger firm

Elements of a Contract

Offer and Acceptance
The offeror must have intent to make an offer
Intent is judged under an objective standard--What would a reasonable person believe under the circumstances? Most advertisements are an invitation to bargain as are items submitted for auction If the offer is very specific, then maybe it will be termed an offer Many advertisements made on the Internet are offers Customers can make an immediate contract


Offer and Acceptance

The terms of the offer must be clear and definite
Under the common law of contracts, at a minimum the offer must contain Price, Quantity, the Parties and the Subject Matter of the contract. Must contain all material terms

The offer must be communicated to the offeree

and the offeree knows of the offer before performing If an offer is made to the offeree, a third party cannot accept the offer Offers can be directed to classes of offerees


Just like an offer, the acceptance must have:
Intent to be bound by the offeree Again judged by objective standard In general, silence is not deemed an acceptance unless the parties had prior dealings Acceptance must be complete and unconditional An acceptance that contains conditions or additional terms is a counteroffer and thus a rejection of the offer Acceptance must be communicated to the offeror Offeree should use the same medium used by the offeror to make the offer if nothing is said in the offer



An acceptance must be timely

If the offeror accepts in the manner invited by the offer or uses the same medium if there is no specified method
The acceptance is effective upon dispatch by the offeror Mailbox rule has been made irrelevant generally by faxes and E-commerce


Termination of an offer
The offeror can revoke the offer at any time (with some limited exceptions)
Thus an offeror can make an offer that is good for 10 days and then revoke it after 5 days Revocations must be communicated to the offeree Offers and revocations are effective when received

Among the exceptions to the common law rule that an offeror can revoke an offer at anytime are:
promissory estoppel and the UCC firm written offer by merchants rule (discussed in next chapter).


Promissory Estoppel
An offer is irrevocable if the conditions for promissory estoppel take place:
(1) offeror knows or should know the offeree will rely on the offer made by the offeror (2) the offeree does rely and (3) relies to his detriment and (4) injustice can only be avoided by enforcing the promise

Damages under P.E. are based on costs of reliance


Termination of the offer

If the offeree rejects the offer or makes a counteroffer, the offer is terminated Will occur when the offer is deemed lapsed after a reasonable period of time
What is reasonable depends upon the industry

An offer could expire by operation of law

Death or incapacity of offeror or offeree Supervening illegality Destruction of the subject matter


Is the exchange element in a contract In order to support a promise made by the promisor, the other party (the promisee) must do something that constitutes consideration
The promisee must incur a legal detriment Examples of consideration:
Make a promise in exchange for a promise Transfer something of value Give up something of value such as a legal claim


Generally the courts do not consider the adequacy of consideration
unless they decide the bargain is unconscionable Consideration does not exist if the other party has a preexisting duty to perform by law or contract
In general past consideration is not consideration

Consideration does not exist if the promise made by the promisee is illusory
If the promisee maintains an unlimited right to cancel at any time for any reason, the promise is illusory


There are some promises that are enforceable without consideration
A promisor is liable under the theory of promissory estoppel (PE) Note with PE it is not a contract and therefore the damages are based on reliance costs of the promisee and are generally less than if the negotiations had resulted in a contract



Both parties to a contract must have capacity to contract

There are three categories of people who do not have capacity
Minors--under 18 Intoxicated people--must not comprehend the transaction Mentally deficient either due to age or disease



Minors can enter into a contract but

The contract is voidable at the option of the minor
When a minor voids a contract it is called disaffirming a contract Upon turning 18 the minor has a limited right to disaffirm or else the contract is deemed ratified
If the minor makes a payment after turning 18 the contract is ratified A minor cannot ratify a contract while still a minor


If a minor disaffirms, the minor must return the consideration if he has it
There are an increasing number of contracts that are binding on minors, though these exceptions vary from state to state
Contracts with the army, insurance contracts, educational loans, bank account agreements are examples A minor is liable for the FMV of necessaries: food clothing and shelter and tools etc for an emancipated minor


A contract is voidable if at the time the contract was agreed to, a party was too intoxicated to understand the terms of the contract
If a person has been judged incompetent, then all contracts with the person are void If the person is, in fact, insane, the person can claim lack of capacity even though the courts have not ruled the person is incompetent by appointing a guardian


Contracts can be illegal by statute or by public policy
In either event, the agreement is void There are a number of agreements that have been ruled illegal by statute in various states: Gambling, illegal drug sales, usurious loan agreements, contracts with unlicensed professionals Increasingly, illegal contracts are taking place in cyberspace-- e.g., prescriptions drugs sold online. Under public policy a number of bargains are void Exculpatory agreements such as agreements not to sue employers under workmens compensation Contracts to excuse intentional actions


Public policy constraints

The contract is unconscionable
Look at superior education and legal representation one side and relative ignorance on the other side A contract by a third party to pay a governmental employee is illegal Contracts in restraint of trade
Covenants not to compete agreed to in employment contracts must be reasonable Must be reasonably limited in time and space Cyberspace may make spatial obsolete


Taints on an Agreement: Mistake

An agreement is voidable if there is a mutual mistake of a material fact
A fact is material if knowledge of the true fact would have changed the decision of the parties to contract If one party knows or should have known the other party was mistaken, then the agreement is voidable Often occurs when bids are submitted and there is a typo


Taints on an Agreement: Fraud

If a contract is fraudulent, it is voidable at the option of the victim Fraud in contract has the same elements as fraud in tort:
Misrepresentation of an important fact Scienter Intent to defraud Justifiable reliance by the victim Damages are caused by the fraud

An innocent misrepresentation of a material fact makes the contract rescindable


Genuineness of Assent

A contract is voidable if
It is the product of duress
A party signed a contract because of threat of force, criminal prosecution, or blackmail

It is the product of undue influence

The victim is either in a weakened mental state or the other party has a confidential relationship The bargain is objectively unfair There was no consultation with outside counsel

Writing requirements
Oral contracts in general are enforceable
For certain contracts, the contract must be in writing
Contracts involving real estate Contracts that cannot be performed within one year Surety contracts Marriage contracts Contracts for the sale of goods where the value exceeds $500 Contracts where an executor is personally liable for the debts of the deceased

Writing Requirements

There are some exceptions to the exceptions

Oral promises of sureties to obligors are enforceable by obligees In some states there are part performance exceptions for oral real estate agreements,
where the buyer takes possession, makes improvements, and pays some or all of the purchase price Promissory estoppel UCC exceptions--discussed in next chapter


Writing Contracts
Sufficiency of the writing
The agreement must have all material terms Must be signed by the defendant Names of the parties, consideration, and the subject matter of the contract are required terms


Parol Evidence Rule

Excludes prior or contemporaneous evidence that conflicts with a written agreement If the written agreement is incomplete, oral evidence may be introduced
The corporate party often tries to negate an inference that the agreement is incomplete by putting in an integration clause A party can always introduce evidence of fraud or misrepresentation or mistake


Performance, Discharge and Breach of Contracts

Most contractual obligations are discharged by performance If performance fails in its essential purpose, it is material breach
A material breach relieves the non-breaching party from the obligation to pay the breaching party By inserting a time is of the essence clause, late performance becomes a breach


Delegations of Duties
If the promisor is a company, it may delegate responsibility for performance to employees
If the contract performance is inadequate, the business, not the employee, is liable for breach of contract Most contracts can be delegated except if the personality or talents of the promisor are unique In some cases there are statutory or public policy constraints on delegations Delegations are a very common event



Many contracts can be assigned

Once the assignment takes place the assignee can enforce the contract against the obligee
The assignee takes the benefits of the contract subject to the defenses the obligor has against the assignor Assignments are common in car loans. The car dealer is the assignor, the customer is the obligor and the bank is the assignee

In general, contracts can be assigned unless the assignment or delegation would make performance by the third party more difficult or disagreeable

Third Party Beneficiaries

If your parents pay a soccer camp to provide soccer training for you
You are the 3rd party beneficiary
The purpose of the contract is to benefit you

If the soccer camp did not perform, you or your parents could sue If you are an incidental beneficiary, you have no right to sue if the promisor breaches
A garden store has no right to sue if a supplier of a beekeeper fails to deliver


Material Breach and Obligation to Perform

If a promisor materially breaches a contract, the promisee is absolved of her obligation to perform
Same is true if there is an anticipatory breach- contractual obligations of the non-breaching party are eliminated, but If a party announces it will not be able to perform, the other contracting partner need not pursue legal action immediately, but instead could continue performing in hopes that the anticipatory breacher will in fact perform


Discharge by Agreement
The parties can decide to rescind the contract
Each party agrees not to perform and neither party is liable A novation occurs when a new party is substituted
If A and B have a contract, and A agrees that C can fulfill Bs obligations under the contract, a novation takes place

Satisfaction and Accord

The same parties change the agreement The accord is the new agreement and the satisfaction occurs when the new consideration is received


Discharge Due to Impossibility

If performance is objectively impossible due to war or embargoes, the promisor is discharged without liability If there is a subjective impossibility due to events that are foreseeable, the obligation to perform is not discharged
If the promisor made a bad bid, he cannot claim he cannot perform because he is not making any money


Discharge Due to Operation of Law and Conditions

By Operation of Law
Bankruptcy, death of a party, destruction of the subject matter Discharge by condition
Condition precedent--if the condition does not take place the promisor does not have to perform Condition subsequent--if the condition takes place the obligation to perform ceases Most executory bilateral contracts have concurrent conditions If one party does not perform, the other partys obligation to perform ceases

Impracticability and Compensatory Damages

The UCC equivalent of impossibility
It is more liberal and allows for more excuses for nonperformance
Strikes and bad weather may qualify

Generally the remedy in contract law is money damages The theory of compensatory damages is to put the nonbreaching party in the position he would have occupied if the contract had been performed

Damages: Compensatory
In sale of goods contracts, damages are often calculated as the difference between the market price and the contract price time quantity: Damages = (Pm - Pk)Qk in this case, the seller is likely to be the defaulting party

In addition reliance and restitution costs are sometimes recoverable

Reliance: Costs associated with relying on promises of the promisor Restitution: Recovering consideration


Consequential Damages
Consequential damages
Damages that are the result of the contract breach but are unusual in some way
Lost profits are an example of consequential damages The non-breaching party must apprise the breaching party of the consequential damages in order to recover In some cases there is an obligation to notify the breaching party before the breach of the possibility of consequential or unusual damages


Liquidated Damages
Liquidated Damages
In many contracts damages are difficult to calculate so the parties agree in advance what damages are If the parties provide a reasonable estimate of damages, liquidated damages clauses are enforceable If the liquidated damages clause is judged excessive it will not be enforced as a penalty



Punitive damages in contracts are very rare The nonbreaching party is expected to mitigate damages
Landlords whose lease has been breached cannot refuse to lease to another tenant Wrongfully discharged employees cannot turn down comparable job offers from 3rd parties


Equitable Remedies
Specific Performance
The remedy is appropriate if the promisee attaches great value to the consideration
The consideration must be unique Jewelry, works of art, real estate, family heirlooms

The courts will freeze the action if irreversible damage may occur with a continued breach The plaintiff generally has to demonstrate that he will likely prevail in trial that the defendant is breaching the contract