Contracts and Warranties

Why Do I Need To Know This?

1. Because you will sign thousands of contracts in your lifetime.

2. Because you will make offers to enter into thousands of additional contracts.

3. Because you will be held to the terms and promises made in each and every contract that you enter, and can be sued for damages if you fail to fulfill them.

• Contracts

• Elements of the Contract

• Minors and Contracts

• Written and Oral contracts

• Illegal Contracts

• Contract Damages

Contracts• A contract is a binding agreement

between two or more people or two or more legal entities.– A person can enter into a

contract with a business and a business can enter into a contract with a business.

• A contract is a promise by one party to perform a service or give something of value to another party to perform a service or give something of value.

• All the parties in a contract will be held to the promises made in a contract.– If a party fails to perform or

deliver the items of value in the contract, that party can be sued in court.

Elements of a Contract• A legally binding contract is

formed whenever there is an:

1. Offer

2. Acceptance

3. Consideration

• As long as those 3 elements are present, a contract is legal, binding, and enforceable—regardless of whether the contract is made orally or in writing.

• There are some exceptions for oral contracts that we will learn about later.

Elements of a Contract—Offer• An offer must be directed at a

specific person.– Something like a menu in a

restaurant is not an offer—it’s an invitation to the customer to make an offer.

• An offer must contain all the terms of the contract, and, at a minimum must specify the parties, the subject matter of the contract, and the date of performance.

• An offer ends whenever it is withdrawn before acceptance, it is rejected, or it is countered.

– A counteroffer is a rejection of the first offer and the creation of a new offer.

Elements of a Contract—Acceptance• An offer can only be accepted by

the person towards whom the offer was made.

• Generally, there is no legal language required in order to accept an offer.

– Courts can even interpret a person’s silence as acceptance if s/he begins to act in accordance with the contract or begins to accept the benefits of the contract!

• Generally, an acceptance is valid the moment the acceptance is received by the person making the offer.

– This is particularly important when dealing with the mail and faxes.

Elements of a Contract—Consideration

• Consideration is anything of legal value and can be:

1. Money2. A Promise To Do

Something3. A Promise NOT To Do

Something• Both sides must give and

receive consideration in any contract.

• The courts will generally not care about the value of the consideration given or received—so if you get a bad deal, that is often too bad.

Elements of a Contract—Gifts• If one side gives consideration and does

not receive any in return, then it is considered a gift.

• A gift or a promise of a gift is not legally enforceable.

– If your rich aunt promises you $1,000 when you turn 21, you can’t sue her if she doesn’t give you the money since you did not give her any consideration.

• However, if you promise to do something that you legally can do in order to accept a gift, then you have a contract.

– If your rich aunt, however, promises you $1,000 if you promise not to drive until you are 21, you can sue her if she doesn’t give you the money since you could legally drive before age 21 and not driving was your consideration!!

Minors and Contracts• In General, a minor cannot be held to the terms of any

contract.– In most states, a minor is anyone under the age of 18.– As a result, most people who do business with a minor

require an adult to cosign the contract (such as a parent) so that the terms can be enforced against the adult.

• If a minor cancels a contract, the minor must return any remaining consideration that s/he has.

• A contract can be enforced against a minor if:– The minor ratifies the contract by continuing to make

payments or perform the promises in the contract; or– The contract is for necessities.

• Necessities are:1. Food2. Clothing3. Shelter4. Medical Care

Written and Oral Contracts• In general, a contract does not have to

be in writing in order to be valid.– As a general rule of thumb, it is

ALWAYS better to have a contract in writing as a court can easily identify what each party to the contract had to do in order to complete the contract.

• Many lawsuits are won or lost based on what evidence a person can bring if there is a lawsuit over a broken contract.

• However, according to a law called the Statute of Frauds, a contract must be in writing if:

1. It is for an object worth more than $500.00

2. It is for the sale of real estate3. It is an agreement to pay another

person’s debts4. The contract cannot be completed

within 1 year of the date of the contract

Written and Oral Contracts• What can and cannot be

performed in a year is rather tricky to understand.

• Almost all employment contracts do NOT have to be writing because in most states you can be fired at any time for any reason.

– So even a lifetime employment contract most likely does not have to be in writing because the employee could die the next day!

• A contract signed on New Years Eve for a rockstar to perform a midnight show the following New Years Eve would have to be in writing since it cannot be performed within a year even though the rockstar will only work for a few hours!

Illegal Contracts• A court will NEVER enforce a contract

to perform an illegal act.– There was a famous case where a

hitman who was hired by the mafia and arrested before killing the victim sued the mafia from jail for breach of contract since they never paid up!

• A court will NEVER enforce a contract for an act that violates public policy. – An example of a contract for

something against public policy would be a person hiring someone to advocate the violent overthrow of the government.

• A court WILL, however, enforce a deal—even a BAD deal, as long as it is legal and does not violate public policy.– So, if you negotiate a bad deal, the

courts will still hold you to the terms of that deal.

Unconscionable Contracts• At times a court will invalidate a contract if it

finds that the contract is unconscionable.• In order to determine if a contract is

unconscionable, the courts will look to see if: 1. The contract is presented on a take-it-or-

leave it basis.2. There is a great imbalance of power or

contracting knowledge between the parties.

• A great imbalance of power or knowledge occurs when one side hires a large number of lawyers or has a large number of business people to negotiate the contract with a consumer.

• When a court finds a contract to be unconscionable, it may eliminate any part of the contract that it finds offensive or the entire contract!– An example of an unconscionable contract

would be a loan with an interest rate of 30% or more.

– Loans with interest rates that high are considered usurious.

Contracts—Fraud• Fraud occurs when a person intentionally

misrepresents a material fact about an item.– An example would be a person stating that

an item is a genuine antique when the person knows it is a fake.

• Not all statements are considered material or facts.– For example, a sales person can say “I love

this product” or “It is the best” since those are only opinions.

• A sales person does not have to reveal all the problems or negatives about a product in order to avoid fraud.– You can say the car works and let the

customer test-drive it, and, if they fail to discover a broken radio, that is not fraud.

– However, if you say there is a new and working radio in the car and there is not one, that becomes fraud.

• When a person is the victim of fraud, s/he can cancel the contract and sue for punitive damages.– Courts hate fraud and will often award far

more money to the victim of fraud.

Contracts—Fraud• Related to fraud is a

negligent misrepresentation in which the person is careless or reckless with the truth and that leads another person into making a contract.– An example would be

saying “I think it is an antique based on my college degree” when the person never went to college.

Contracts—Damages• When a contract is breached, the courts

will have to determine how much money to pay the person who did not breach the contract.

• Generally, if the contract is for a unique item, such as an original piece of art, a piece of real estate, or a famous person’s performance, the court will enforce the contract and force the sale or performance.

• If the contract is for anything else, the court will award one of 3 types of money damages depending on the circumstances and the type of contract:1. Expectation Interest2. Restitution Interest3. Reliance Interest

• A court will almost NEVER award punitive damages for breach of contract unless the breach was caused by fraud.

Contracts—Damages• A person’s expectation interest is how much profit s/he would have

made if the contract was performed fully.– For example, if a shopkeeper makes only $47 on the sale of an

$1800 item, then the expectation interest is only $47. • A person’s restitution interest is what would make the person

“whole” under the contract.– An example would be a painter who was fired halfway through a

job. The court would have to figure out how much of the job the painter did before being fired.

• A person’s reliance interest is how much the person spent in order to perform his/her part of the contract.– An example would be a person hired to move some furniture

and goes and rents a U-Haul vehicle and hires some workers to do the labor.

– All the expenses were in reliance on the contract and can be recovered.

• In all cases, both sides have a duty to try and minimize the damages once the contract has been breached.– For example, a landlord has to try and re-rent an apartment if

the tenant moves out before the end of a lease.

Warranties

• Warranties

• Express Warranties

• Implied Warranties

• Disclaimers

Warranties• A warranty is a promise or

guarantee about the product made by the seller about the product being sold or the service being performed.

• A warranty may include statements about what the seller will do to fix the problem if the promise or guarantee is broken.

• A warranty may be express or implied.

Express Warranties• An express warranty is a statement

about the quality or performance of a product by the seller.

• An express warranty may be in writing, it may be oral, or it may be by demonstration.

• Not everything the seller says becomes an express warranty. Statements of opinion, such as “it’s the best!” are considered puffing--or just attempts to sell a product.

• One important thing about express warranties: words or actions at the end of a contract mean more than words or actions at the beginning of the contract.

Full Warranties vs. Limited Warranties

• All warranties are either Full Warranties or Limited Warranties.

• A Full Warranty must state that:1. A defective product will be fixed or replaced at no cost

(including removal and installation);2. The consumer will not have to do anything

unreasonable to get the warranty;3. The product will be fixed within a reasonable amount

of time;4. If the product cannot be fixed after a reasonable

number of attempts, the consumer can get a full refund or replacement;

5. The warranty applies to anyone who owns the product during the warranty period.

• Anything less than that is considered a Limited Warranty.

Implied Warranties• Implied warranties are warranties created by

law.• Implied warranties only apply to bona fide

sellers of the product (people who usually sell that product).

• There are 3 types of Implied Warranties:1. Warranty of Merchantability2. Warranty of Fitness For a Particular

Purpose3. Warranty of Title

Warranty of Merchantability• The warranty of

merchantability is an unwritten promise that the product sold to the consumer will be at least as good as the average quality for that type of item.

• The warranty of merchantability can be disclaimed by a bona fide seller by using the magic legal words “as is” or “with all faults” or “final sale”.

Warranty of Fitness For a Particular Purpose

• A Warranty of Fitness For a Particular Purpose applies when the seller knows that product will be used in a particular way.

• An example is a consumer who buys a waterproof watch and the watch leaks underwater.

Warranty of Title

• The Warranty of Title is the promise that the seller actually legally owns or has the legal right to sell the property.

Disclaimers• A disclaimer is an attempt by the seller to limit his/her

responsibilities if something goes wrong with the product.– Disclaimers are typically used when the seller is selling a

used item or wants to limit the risk of getting sued• To disclaim the implied warranty of merchantability, the

disclaimer must:1. Be in writing;2. Be displayed prominently on the product;3. Use words such as “as is”; “with all faults”; or “final

sale”. • Once they are in place, warranties cannot be disclaimed or

modified without additional consideration.