Sources of Contract Law. Common Law for all contracts except sales and leases. Sale and lease...

Sources of Contract Law.Sources of Contract Law.Common Law for all contracts

except sales and leases.Sale and lease contracts -

Uniform Commercial Code (UCC).

Function of Contract Law.Function of Contract Law.Provides stability and

predictability for commerce.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

Definition of a Contract. Definition of a Contract. Promise or set of promises,For breach of which,The law provides a remedy, orThe performance of which the law in some way recognizes as a duty.


Objective Theory of Contacts.Objective Theory of Contacts.Circumstances to determine intent of parties.

Objective Facts include: What a party said when entering into

the contract, How the party acted or appeared

(intent may be inferred), and Circumstances surrounding the

transaction.


Requirements of a Valid Requirements of a Valid Contract:Contract:Agreement (Offer & Acceptance).Consideration: bargained-for-

exchange.Contractual Capacity.Legality: purpose of contract must

be legal at the time of execution.


Defenses to Enforceability:Defenses to Enforceability:Voluntary Consent.Form: some types of contracts must be in writing.


Bilateral: Bilateral: Offeror accepts Offeror accepts Offeree’s promise to perform (“a Offeree’s promise to perform (“a promise for a promise”).promise for a promise”).

Unilateral: Unilateral: Offeror is bargaining Offeror is bargaining for performance. Offeree accepts for performance. Offeree accepts by completing contract by completing contract performance (“a promise for an performance (“a promise for an act”). act”).


Revocation of Offers for Revocation of Offers for Unilateral Contracts: Unilateral Contracts: Offeror cannot revoke promise

once performance has begun, for a reasonable time period.


Formal: Formal: must be in writing to must be in writing to be enforceable. be enforceable.

Informal: Informal: all other contracts.all other contracts.


ExpressExpress: : words (oral or words (oral or written).written).

Implied:Implied: conduct creates and conduct creates and defines the terms of the defines the terms of the contract. Requirements:contract. Requirements:

PL furnished good or service PL expected to be paid DEF had chance to reject and did not.


Contract Performance.Contract Performance.Executed - A contract that has

been fully performed on both sides.

Executory - A contract that has not been fully performed on either side.


Contract Enforceability.Contract Enforceability.Valid: agreement, consideration,

contractual capacity, and legality.

Voidable (unenforceable): Valid contract can be avoided or rescinded based on certain legal defenses.

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An essential element for An essential element for contract formation is contract formation is agreement. agreement.

The parties must mutually The parties must mutually assent to the same bargain. assent to the same bargain.

An agreement has two An agreement has two components: an components: an offeroffer and an and an acceptanceacceptance..


Requirements of the Offer.Requirements of the Offer.An offer is a promise to do or not

do something in the future.The common law requires three

elements for an effective offer: Offeror’s serious intention. Reasonably certain terms. Communication to offeree.


A contract is judged by what A contract is judged by what a reasonable person in the a reasonable person in the offeree’s position would offeree’s position would conclude about the offer.conclude about the offer.

CASE 9.1 Lucy v. Zehmer (1954). Do you think the Zehmers had a serious intention?


Expressions of Opinion: not Expressions of Opinion: not offers.offers.

Statements of Future Intent: Statements of Future Intent: not offers.not offers.

Preliminary Negotiations, or Preliminary Negotiations, or Invitations to Negotiate: not Invitations to Negotiate: not offers. offers.


Advertisements: not offers Advertisements: not offers (invitations to negotiate). (invitations to negotiate).

Agreements to Agree: can Agreements to Agree: can be enforceable if parties be enforceable if parties intended to be bound.intended to be bound.


Terms (Expressed or Terms (Expressed or Implied).Implied).Identification of the parties.Object or subject matter of the

contract.Consideration to be paid.Time of payment, Delivery, or

Performance.


An offer can require specific An offer can require specific terms to make the contract terms to make the contract definite.definite.

A court can supply missing A court can supply missing terms if the parties intend to terms if the parties intend to form a contract.form a contract.


Offeree’s knowledge of the Offeree’s knowledge of the offer:offer:Directly by the Offeror, orUse of Agents.CASE 9.2 Alexander v. Lafayette Crime Stoppers, Inc. (2010). When was the offer communicated to the plaintiff?


An offer may be terminated An offer may be terminated prior to acceptance by prior to acceptance by either:either:Action of the Parties

or by Operation of Law.


RevocationRevocation of the Offer by of the Offer by the Offeror:the Offeror:Offer can be withdrawn anytime

before Offeree accepts the offer.Effective when the Offeree or

Offeree’s agent receives it.


Irrevocable OfferIrrevocable Offer: : offeree has offeree has changed position based on changed position based on justifiable reliance on the offer. justifiable reliance on the offer.

Option ContractsOption Contracts: : promise to promise to hold an offer open for a hold an offer open for a specified period of time in specified period of time in return of consideration.return of consideration.


RejectionRejection of the Offer by the of the Offer by the Offeree:Offeree:Rejection by the Offeree

(expressed or implied) terminates the offer.

Effective only when it is received by the Offeror or Offeror’s agent.


Counteroffer Counteroffer by the Offeree: by the Offeree: rejection of original offer and rejection of original offer and the simultaneous making of a the simultaneous making of a new offer. new offer. Mirror Image Rule: At common

law, any change in terms automatically terminates the offer and substitutes the counteroffer.


Lapse of TimeLapse 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.


DestructionDestruction of the Subject of the Subject Matter: Matter: before acceptance of before acceptance of offer, terminates the offer.offer, terminates the offer.

DeathDeath or Incompetence of the or Incompetence of the Offeror or Offeree: Offeror or Offeree: automatically automatically terminates unless irrevocable terminates unless irrevocable offer. offer.


Supervening Supervening IllegalityIllegality of the of the Proposed Contract: Proposed Contract: legislation legislation or court decision automatically or court decision automatically terminates offer or renders terminates offer or renders contract unenforceable.contract unenforceable.


Acceptance is a: Acceptance is a: voluntary act voluntary act (expressed or implied) by the (expressed or implied) by the Offeree that shows assent Offeree that shows assent (agreement), to the terms of an (agreement), to the terms of an offer.offer.Unequivocal Acceptance: the

“Mirror Image” Rule.


Silence as Acceptance:Silence as Acceptance:General Rule: offeree should not

be legally obligated to affirmatively reject an offer.

When Offeree Has Duty to Speak: He takes benefit of services with opportunity to reject.

Prior dealings with Offeror. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32

BilateralBilateral Contract: Contract: communication of acceptance is communication of acceptance is necessary because there is a necessary because there is a mutual exchange of promises.mutual exchange of promises.

UnilateralUnilateral Contract: Contract: acceptance is evident, acceptance is evident, notification not necessary.notification not necessary.


General Rule: General Rule: in bilateral in bilateral contracts, acceptance is contracts, acceptance is timely if done before offer is timely if done before offer is terminated. terminated. The Mailbox Rule.


Acceptance is effective when Acceptance is effective when offeree uses authorized offeree uses authorized means of acceptance. means of acceptance. If U.S. Mail, acceptance is effective upon dispatch.

If no means specified, acceptance can be by any reasonable means.


ExceptionsExceptions to Mailbox Rule: to Mailbox Rule: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.


Substitute Method of Substitute Method of Acceptance.Acceptance.Effective if the substitute serves

the same purpose (Fed-Ex vs. UPS).

Not effective on dispatch.Effective when received by the

Offeror.


Generally, consideration Generally, consideration must have:must have:“Legally Sufficient Value” and a “Bargained-for-Exchange.”


Legally Sufficient Value can Legally Sufficient Value can mean:mean:Promise,Performance, orForbearance.


Bargained-for-Exchange: Bargained-for-Exchange: must must provide basis for the bargain.provide basis for the bargain.Something of legal value (a

promise, or a performance) must be exchanged between the parties.

The promise must be either legally detrimental to the promisee, or legally beneficial to the promisor.


Adequacy of Consideration:Adequacy of Consideration:Courts typically will not consider.Law does not protect a person

from entering into an unwise contract.

Cases of “shockingly inadequate consideration” may raise a red flags, and be ruled unconscionable .


Agreements That Lack Agreements That Lack Consideration.Consideration.Preexisting Duty: promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. Unforeseen Difficulties. Recession and New Contract.


Agreements That Lack Agreements That Lack Consideration (continued):Consideration (continued):Past Consideration is no

consideration because the bargained-for exchange element is missing.


Promissory Estoppel Promissory Estoppel (detrimental reliance).(detrimental reliance).Elements:

Must be definite promise. Promisee must justifiably rely on the promise.

Reliance is substantial. Justice will be served by enforcing promise.


Minors: Minors: at 18 years, a person is at 18 years, a person is emancipated, and has the legal emancipated, and has the legal capacity to enter into any capacity to enter into any contract that an adult can.contract that an adult can.However, a contract entered into by a minor is voidable at the option of that minor, and can be disaffirmed.


Minors (continued).Minors (continued).A contract can be disaffirmed at

any time during minority, or for a reasonable period after minor is emancipated.

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


Intoxication.Intoxication.Lack of capacity at the time the

contract is being made. Contract is either voidable or valid, depending on circumstances.

Disaffirmance (voidable).Ratification: after ‘sobering up.’


Mental Incompetence.Mental Incompetence.Void: person is adjudged mentally incompetent by a court of law and a guardian has been appointed.


Mental Incompetence Mental Incompetence (cont’d).(cont’d).Voidable: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.


Mental Incompetence Mental Incompetence (cont’d).(cont’d).Valid: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).


A contract must be formed A contract must be formed for a legal purpose.for a legal purpose.

A specific clause in contract A specific clause in contract can be illegal, but rest of can be illegal, but rest of contract can be enforceable.contract can be enforceable.

Contract to commit a Contract to commit a tortious act is illegal.tortious act is illegal.


Prohibited by federal or Prohibited by federal or state statutory law is illegal state statutory law is illegal and therefore and therefore voidvoid (never (never existed).existed).Contracts to Commit a Crime.Contracts for Usury.


Gambling: Gambling: distribution of distribution of property based on chance property based on chance among persons who have among persons who have paid valuable consideration.paid valuable consideration.

Licensing Statutes: Licensing Statutes: contract’s enforceability contract’s enforceability depends on purpose.depends on purpose.


Contracts contrary to public Contracts contrary to public policy are void.policy are void.

Contracts in Restraint of Contracts in Restraint of Trade are generally Trade are generally voidvoid..Exception: Covenant not to Compete and Sale of an Ongoing Business.


Covenant not to Compete in Covenant not to Compete in Employment: Employment: is enforceable as is enforceable as long as time and geographic long as time and geographic terms are reasonable.terms are reasonable.CASE 9.3 Comedy Club, Inc. v. Improv West Associates (2009). What factors did the court consider?


Procedural Unconscionability: inconspicuous print or legalese. Depends on a party’s lack of knowledge or expertise.

Substantive Unconscionability. Contracts are oppressive or overly harsh; that deny a remedy for nonperformance.


Release a party from liability Release a party from liability in the event of monetary or in the event of monetary or physical injury – no matter physical injury – no matter who is at fault.who is at fault.Enforceable when they are not

against public policy, are not ambiguous, and do not shield parties from intentional conduct.


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


Mistakes of Fact: Mistakes of Fact: allow a allow a contract to be canceled. contract to be canceled. Bilateral (Mutual) Mistake:

concerns the same material fact, and can be rescinded by either party.


Mistakes of Fact: Mistakes of Fact: allow a allow a contract to be canceled. contract to be canceled. Unilateral Mistakes cannot be

canceled unless: Other party to the contract knows or should have known, OR

Mistake was due to an inadvertent mathematical mistake and was not gross negligence.


Mistakes of Value:Mistakes of Value:Generally, contract is

enforceable by either party.Exception: Mistake of value

because of a mistake of material fact.


Contract is Voidable by Contract is Voidable by Innocent Party.Innocent Party.

Consists of the following Consists of the following Elements:Elements:Misrepresentation of Material Fact.Intent to Deceive.Reliance on Misrepresentation.Injury to the Innocent Party.


Statement of Fact vs. Statement of Fact vs. Statement of Opinion.Statement of Opinion.Statement of Opinions are not

actionable. Opinions from Experts can be

actionable, and injured party can seek rescission or reformation.


Misrepresentation by Misrepresentation by Conduct: Conduct: occurs when a party occurs when a party takes specific action to conceal takes specific action to conceal a fact that is material to the a fact that is material to the contract.contract.

Misrepresentation of Law: Misrepresentation of Law: does not entitle a party to relief.does not entitle a party to relief.


Misrepresentation by Misrepresentation by Silence.Silence.Ordinarily neither party has duty to disclose facts.

However, seller will be liable if she knows of material defect that cannot be reasonably discovered by buyer.


Misrepresentation by Silence.Misrepresentation by Silence.When parties are in a fiduciary relationship, failure to disclose material facts may be fraud.

CASE 14.2 Rosenweig v. Givens (2009). What factors did the court consider in its decision?


Contract lacks voluntary Contract lacks voluntary consent and is consent and is voidablevoidable..Confidentiality, Fiduciary, or

Relationship of Dependence.Undue Influence or Persuasion is

presumed if a weaker party talked into doing something not beneficial to him or herself.


Forcing a party to enter into a Forcing a party to enter into a contract under fear or threat contract under fear or threat makes the contract makes the contract voidablevoidable..Threatened act must be wrongful

or illegal and render person incapable of exercising free will.

Threat of civil suit is not duress.


Some contracts must be in Some contracts must be in writing to be enforceable:writing to be enforceable:Contracts with an Interest in Land.Contracts involving “One-Year Rule.”Collateral or Secondary Contracts.Promises made in consideration of

marriage.Contracts For Sales of Goods over

$500.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 69

Privity of Contract: only Privity of Contract: only original parties to a contract original parties to a contract have rights and liabilities have rights and liabilities under the contract.under the contract.Exceptions: Assignments,

Delegations, and Third party Beneficiary Contracts.


Terminology:Terminology:Assignor: party assigning rights

to third party.Assignee: party receiving rights.Obligee: person to whom a duty

or obligation is owed.Obligor: person who is obligated

to perform the duty.


Effect of An Assignment: when Effect of An Assignment: when rights of assignor are rights of assignor are unconditionally assigned, her unconditionally assigned, her rights are extinguished. rights are extinguished.

The third party (assignee) has The third party (assignee) has right to demand performance right to demand performance from original party to contract.from original party to contract.


Rights That Cannot be Rights That Cannot be Assigned: Assigned: (i) when a statute (i) when a statute expressly prohibits assignment, (ii) expressly prohibits assignment, (ii) when a contract is personal in when a contract is personal in nature, (iii) when the assignment nature, (iii) when the assignment materially changes rights or duties of materially changes rights or duties of obligor, (iv) when an assignment will obligor, (iv) when an assignment will significantly change the risk or duties significantly change the risk or duties of the obligor.of the obligor.


Exceptions to Prohibition of Exceptions to Prohibition of Assignment of Rights:Assignment of Rights:Cannot prevent right to receive money.

Cannot prevent rights in land.Negotiable instruments.Damages in sales of goods.


Contractual Contractual dutiesduties in a bilateral contract in a bilateral contract that are delegated to a third party. that are delegated to a third party.

Terminology:Terminology:Delegator: party making the delegation of duty.Delegatee: party to whom the duty is owed.


Delegations are Prohibited:Delegations are Prohibited:When the Duties are Personal in

Nature (special trust).When Performance by a Third

Party Will Vary Materially From that Expected by the Obligee.

When the Contract Prohibits Delegation.


Delegator remains liable, Delegator remains liable, even after delegation.even after delegation.

Delegatee is liable if Delegatee is liable if delegation contract creates a delegation contract creates a third party beneficiary third party beneficiary relationship in the obligee.relationship in the obligee.


22ndnd Exception Exception to Privity of to Privity of Contract. Contract.

Original parties to the Original parties to the contract intend contract intend at the time at the time of contracting of contracting to directly to directly benefit a third person.benefit a third person.


CreditoCreditor beneficiary benefits r beneficiary benefits from a contract in which from a contract in which promisor promises the promisor promises the promisee to pay a debt the promisee to pay a debt the promisee owes to a third promisee owes to a third party (creditor beneficiary).party (creditor beneficiary).


DoneeDonee Beneficiary: contract is Beneficiary: contract is made for the express purpose made for the express purpose of promisor giving a gift to a of promisor giving a gift to a third party (donee), the donee third party (donee), the donee can sue the promisor directly if can sue the promisor directly if the promisor breaches the the promisor breaches the contract.contract.


IntendedIntended : promisee : promisee intended to confer on the intended to confer on the beneficiary the right to bring beneficiary the right to bring suit to enforce the contract.suit to enforce the contract.


IncidentalIncidental : a third party : a third party beneficiary’s benefit from beneficiary’s benefit from contract between two parties contract between two parties is unintentional.is unintentional.Incidental beneficiary cannot

sue to enforce the contract.


Sources of Contract Law. Common Law for all contracts except sales and leases. Sale and lease...

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Transcript of Sources of Contract Law. Common Law for all contracts except sales and leases. Sale and lease...