Fall 2012 Final Exam Review.

Fall 2012 Final Exam Review

Can “Crunchy” get trademark protection?
How about the particular way it appears on the bag?

Trademarks are Devices
Devices (that can take nearly any form) that distinguish or identify a particular good or service Slogans, logos, words, pictures, and combinations of words and pictures are all familiar “devices.” Sounds, scents and colors can also be devices in certain circumstances

Trademarks are Distinctive
There are 5 categories of distinctiveness Marks that are fanciful, arbitrary or suggestive can be trademarks Marks that are merely descriptive can be trademarks only if they have acquired “secondary meaning” Marks that are generic can’t be trademarks

Trademarks can be Strong or Weak
Suggestive Arbitrary Descriptive Fanciful Generic Mark-o-meter

Suggestive vs. Descriptive
Does the mark requires you to employ some imagination, thought or perception in order to connect the mark to the product? If not, then it’s merely descriptive “Secondary Meaning” can support a mark that merely describes its product or service. Surnames are treated the same as merely descriptive marks; they can be trademarks if secondary meaning has been achieved

Secondary Meaning This means that the marketplace recognizes the goods or services as being those of a particular provider even though the mark describes the product and even though there may be many providers of that product Digital Computers is an example; McDonalds hamburgers are another

How about this? Crunchy Krunchee! TM

Probably not…what if you advertised on the radio?
Will this work? Krunchee! TM Probably not…what if you advertised on the radio?

That was pretty amateurish.
Any other bright ideas?

Inspiration!

Duck! TM Notice of trademark claim to “Duck!”

Federal Registration (Principal Register)
You can use nationally, not just in the area where your product is marketed Better legal remedies in case of infringement Right to use the ® symbol Incontestible status after 5 years, eliminating most challenges to your exclusive use of mark Easier for others to search, so they can avoid adopting confusingly similar marks

United States Patent & Trademark Office NOTICE OF REGISTRATION
Principal Register Duck! Dear Chipco: Congratulations, your trademark has been entered on the principal register. Go out and build brand. Love, The Government

Duck! ® “Duck!” is a registered trademark!

Copyright v. Trademark Copyright protects a fixed original expression
“Fixed” is a very general term – includes computer memory or back of a napkin “Original” means independent creation, even if lacking in quality or merit. Not copied Creative effort is required. Can be bad, and doesn’t have to be much, but some minimal level of creative effort is required for copyright protection.

Copyright v. Trademark Copyright does not protect ideas or facts
Copyright gives you the exclusive right to reproduce, distribute, create adaptations of, perform or display the particular expression or “work” Can be registered, and benefits are better legal remedies to protect the copyright Registration is cheap, no search is required, and can be done by anyone

Copyright Terms General Rule now: Author’s life plus 70 years if the author owns it; if for hire, between 95 and 120 years depending on when published No © is required since March 1, 1989; earlier it was generally required Works created before 1923 are all in the public domain Best policy is to seek permission

Registration Easy and cheap Necessary to enforce in court
If done promptly enough, you may have a statutory damage remedy You don’t have to scramble around trying to register after you discover an infringer just so you can take them to court Cheap insurance

Chapters 23 Personal Property Law

Introduction Definition: Property consists of legally protected rights and interests a person has in anything with an ascertainable value that is subject to ownership. Difference Between Real and Personal Property. Ownership rights in each. Acquiring Ownership of Personal Property. Laws Governing Mislaid, Lost, or Abandoned Property.

Property Ownership Property ownership is viewed as a “bundle of rights”, including the: Right to possess. Right to sell. Right to give. Right to lease. Right to destroy.

Fee Simple Owns the entire “bundle of rights”.
Fee simple gives the owner the maximum possible estate or right of ownership of real property, continuing forever. Chapter 37 will deal with realty estates.

Concurrent Ownership Tenancy in common (Fig. 1). A and B own an undivided interest in the property. Upon B’s death interest passes to B’s heir, “C”. A B C Fig.1 Joint Tenancy (Fig. 2). A and B own an undivided interest in property but, upon B’s death, B’s interest passes to A, the surviving joint tenant. A B Fig. 2

Concurrent Ownership Tenancy by the Entirety (not common)
Usually between husband and wife. Community Property (limited # of states) Property acquired by couple during their marriage is owned as an undivided ½ interest in property (real and personal).

Acquiring Ownership of Personal Property
Possession. Capture of wild animals (wild animals belong to no one). Finding of abandoned property. Adverse Possession. Production. Writers, inventors, manufacturers, and others who produce personal property acquire title to it.

Gifts Voluntary transfer of property ownership from Donor (owner) to Donee (recipient) for no consideration. Three types Intervivos—while donor is living. Causa Mortis: -- made by donor in contemplation of imminent death. Testamentary – after death, by will/inheritance.

Gifts Three requirements for valid gift:
Delivery—actual or “constructive” (symbolic, such as keys to car). Donor must give up complete control or dominion. Delivery by a 3rd party is OK. In re Estate of Piper (1984). Donative intent on the part of the donor Acceptance by the Donee.

Acquiring Ownership of Personal Property
Will or Inheritance. Accession. Someone adds value to a piece of personal property by use of either labor or materials. Confusion. Commingling so that a person’s personal property cannot be distinguished from another’s. Fungible goods consists of identical particles such as oil or grain.

Mislaid, Lost or Abandoned Property
Mislaid Property: Voluntary placed somewhere, then inadvertently forgotten. Finder is steward for true owner. Lost Property: Involuntarily left. Property owner acquires title against whole world, except for true owner. Finder must return to true owner or be liable for conversion. Abandoned Property: Discarded by true owner with no intention of recovering. Acquires title against all the world, including the original owner.

Bailments A bailment is formed by the delivery of personal property, without transfer of title, by one person (Bailor) to another (Bailee), usually under an agreement for a particular purpose. The property must be returned by the Bailee to the Bailor, or a third party as directed by the Bailor, in the same or better condition.

Elements of a Bailment Personal Property. (Tangible or Intangible--but not persons or realty.) Delivery of Possession. Bailee given exclusive control or possession. May be actual or constructive. Bailee must knowingly accept (Bailee must intend to exercise control over chattel). Bailment Agreement. Express or Implied.

Ordinary Bailments Bailment for the sole benefit of the Bailor:
A gratuitous Bailment; Bailee owes Bailor a low duty of care, liable only for gross negligence. Bailment for the sole benefit of the Bailee: Bailee owes Bailor a high duty of care and is liable for even slight negligence. Mutual Benefit Bailment: most common. Each party owes the other a reasonable duty of care.

Rights and Duties of the Bailee
Right To Possess. Bailee may acquire or use property temporarily. Title does not pass. Right to Use Bailed Property. Rights of Compensation. Reimbursed for costs or services as provided in the agreement. Right to Limit Liability. Duty to Return bailed property in same condition to Bailor. Bailee may liable for conversion and/or negligence.

Rights and Duties of the Bailor
Right to have property protected and used as agreed. Right to have property back at end of bailment with service or repair done properly. Right to have the Bailee not convert. Right to not be bound to limitation of liability unless Bailor knows. Duty to Provide safe goods: Mutual Benefit Bailment: free from known or hidden defects; Sole Benefit of Bailee: notify if any known defect.

Special Types of Bailments
Common Carriers: Publicly licenses to provide transportation services to general public. Common Carriers are strictly liable for damages except if the damages caused by: An act of God. An act of the public enemy. An order of the public authority. An act of the shipper. The inherent nature of the goods. Shipper’s loss. Connecting Carriers.

Warehouses and Innkeepers
Owe duty of reasonable care. Can’t exculpate, can limit. Innkeepers: Owe duty of strict liability, modified by state statutes; if innkeeper provides safe and notifies guests. If parking area provided and innkeeper accepts bailment, then may be liable.

Nature of Real Property
Real property is immovable and includes: Land. Buildings. Airspace. Plant Life and Vegetation. Subsurface (mineral) rights. Fixtures.

Fixtures A fixture is personal property that becomes permanently affixed to real property. Intent that it become a fixture is necessary. Intent is determined by: The fact that the property cannot be removed without causing damage to the realty. The fact that the property is so adapted to the realty that it has become part of the realty. In re Sand & Sage Farm & Ranch, Inc. (2001).

Fixtures Trade fixtures: installed for commercial purposes by a tenant. They remain the property of the tenant and can be removed when tenant leaves, repairing any damage caused by removal.

Ownership Interests in Real Property
Ownership interests are classified as either Possessory or Non-Possessory: A Possessory interest such as a fee simple, life or leasehold estate, gives the owner a right to possess the land. A Nonpossessory interest such as an easement, profit or license, does not give the owner a right to possess the land.

Real Property & Environmental Law MULTIPLE-CHOICE QUESTION #10
Financial Advisors, Inc., signs a lease for the first floor of an office building owned by Goodrich Investments, Inc. Unlike a licensee, Financial Advisors a. has only a temporary right to go upon the property. b. is entitled to the exclusive use and possession of the property. c. is not entitled to the exclusive use of the property. d. must pay for the right to use the property.

Real Property & Environmental Law MULTIPLE-CHOICE ANSWER #10
ANSWER: B PAGE: 743 Lease is a possessory interest.

Example Deed Parts of a Deed Parties: “Grantor” and “Grantee” Words of Conveyance: “convey;” “bargain and sell;” give; grant and transfer;” etc. Description of Property: “Blackacre” Habendum: “To have and to hold…” Warranty: General, Special, other? Due Execution: Signed and Acknowledged

Ownership in Fee Simple
The Fee Simple (sometimes called fee simple absolute) gives the owner the greatest aggregation of rights, powers and privileges possible under American law and can assigned to heirs. A “conveyance” (transfer of real estate) “from A to B” creates a fee simple. A is the Grantor and B is the Grantee. Fee Simple Defeasible: grants conditional ownership to Grantee as long as he complies with condition. “A to B as long as ….”

Example Deed 2 “To A, but only for so long as he runs his liquor store on the land, then to B” “To A and his heirs, the surface only of Blackacre” “To A and his heirs, but there is reserved to Grantor ½ of all oil, gas & other minerals on, in, under and that may be produced from Redacre…”

Life Estates Estate that lasts for the life of some specified individual. “A grants Blackacre to B for B’s life” grants B a life estate in Blackacre. When B dies, Blackacre returns to A or his heirs or assigns, or a third party in the same condition, normal wear and tear excepted. Grantor A retains a “future interest” in the property. During B’s life, she can possess, use, and take the fruits of the estate, but not take from the property itself.

Non-Possessory Interests
An easement is a right of a person to make limited use of another person's real property without taking anything from the property. A profit is the right to go onto land in possession of another and take away some part of the land itself or some product of the land. Property that is benefited by easement/profit carries the the interest with the sale of land.

Beth owns a corporate office park in Ohio. Her ownership rights include the right to sell or give away the property without restriction, as well as the right to commit waste, if she chooses. Beth’s ownership interest is a. a fee simple absolute. b. a leasehold estate. c. a life estate. d. the power of eminent domain.

ANSWER: A PAGE: 734 Fee simple owner can do anything they want to, subject to laws or ordinances affecting all other property owners. These would limit ability to commit waste, for instance, if dilapidated buildings were regulated.

With respect to Adam’s land, Bob has an easement, Carol has a profit, and Don has a license. A right to possess the land is owned by a. Adam, Bob, and Carol only. b. Adam and Don only. c. Adam only. d. Bob, Carol, and Don only.

ANSWER: C PAGE: 734 Nasty question, I agree: What would answer be if Ed had a lease on Adam’s land?

Regional Construction Company has a right to drive its trucks across Standard Business Corporation’s property, which is adjacent to Regional’s office. This right is a. a leasehold estate. b. a license. c. an easement. d. a profit.

ANSWER: C PAGE: 734 Roads, pipelines, power lines, utility installations, etc. are normally on easement estates.

Wood Products Corporation, which owns no land, has a right to cut trees from Natural Resource Company’s land. Wood’s right is a. a leasehold estate. b. a license. c. an easement. d. a profit.

ANSWER: D PAGE: 734 Profit is a right to enter and take something away from land. What about a hunting arrangement?

Transfer of Ownership Ownership in real property can be transferred by: A written Deed. A Gift. A Sale. An Inheritance. Adverse Possession. Eminent Domain.

Deeds A Deed is the instrument setting forth the interests in real property being transferred. Necessary components of a Deed: Names of Grantor and Grantee. Words evidencing intent to convey. Legally sufficient description of the land. Grantor’s signature. Delivery of the Deed.

Types of Deeds Warranty Deed. Quitclaim Deed. Grant Deed.
Special Warranty Deed. Quitclaim Deed. Grant Deed. Sheriff’s Deed. Period of redemption.

Investment Properties Corporation conveys an office building to Jay with a deed that makes the greatest number of warranties and provides the most extensive protection against defects of title. This deed is a. a grant deed. b. a quitclaim deed. c. a special warranty deed. d. a warranty deed.

ANSWER: D PAGE: 735 Deed warrants property to grantee as against all claims, whether arising from things that the grantor did or things that others in the chain of title before him did. …and Grantor does hereby bind itself to warrant and forever defend all and singular the Property unto Grantee against every person whomsoever, lawfully claiming or to claim the same or any part thereof.

Opal conveys three acres of wetlands to Pristine Places, Inc., with a deed that warrants only that Opal held good title during her ownership of the property. This deed is a. a grant deed. b. a quitclaim deed. c. a special warranty deed. d. a warranty deed.

ANSWER: C PAGE: 737 The special warranty deed adds a qualifier at the end of the warranty clause to limit the grantor’s liability: and Grantor does hereby bind itself to warrant and forever defend all and singular the Property unto Grantee against every person whomsoever, lawfully claiming or to claim the same or any part thereof, by through or under Grantor but not otherwise.

Manhattan Developers, Inc., pays Northeast Trust Company to release its claim to a strip of waterfront property. Northeast gives Manhattan a deed that conveys only whatever interest Northeast has in the strip. This deed is a. a grant deed. b. a quitclaim deed. c. a special warranty deed. d. a warranty deed.

ANSWER: B PAGE: 738 Actually not a conveyance of property, but a relase of any claim to property. Effect is to give the grantee whatever interest, if any, that the grantee may have.

Recording Statutes Recording a deed (or any interest in real property) puts the public on notice of the new owner’s interest in the land and prevents the previous owner from fraudulently conveying the same interest to another buyer. Race statute. Pure notice statute. Notice-race statute.

Will or Inheritance Owner of real property dies, his property is transferred by: Will (testate). Without Will (intestate). Title is transferred at the time state law so provides in its testate and intestate laws.

Adverse Possession One person possesses the property of another for a certain statutory period of time, that person automatically acquires title to the land, just as if there had been a conveyance by deed. Must be: Actual and exclusive. Open, visible and notorious. Continuous and peaceable. Hostile and adverse.

Real Property & Environmental Law TRUE/FALSE QUESTION #3
Adverse possession has the same legal result as a tenancy at sufferance.

Real Property & Environmental Law TRUE/FALSE ANSWER #3
ANSWER: F PAGE: 738 No, it’s much stronger than that! First, what’s a tenant at sufferance? Adverse possession results in what’s called a “limitations” title which can be a fee simple.

Eminent domain refers to the ultimate right of an owner in fee simple absolute to transfer the property by will to whomever he or she wishes.

ANSWER: F PAGE: 739 Eminent domain is the right of the government to take property for public use

Eminent Domain Rights in property are not absolute. They are constrained by federal and state laws, e.g., nuisance, tax and environmental. A “Taking” By Eminent Domain: The 5th amendment gives the government the right to “take” private land for public use with just compensation.

Bay City wants to acquire undeveloped land within the city limits to convert into a public park. Bay City brings a judicial proceeding to obtain title to the land. This is a. adverse possession. b. an easement. c. constructive eviction. d. the power of eminent domain.

ANSWER: D PAGE: 739 Where in the constitution does it say the City can do this?

Leasehold Estates Anyone who rents housing to the public for commercial purposes subjects herself to various state and federal Landlord-Tenant laws. Owner of the property is the LESSOR and Tenant is LESSEE; the contract is called the LEASE. The property interest is called a leasehold estate.

Contract doctrines do not apply to landlord-tenant relationships.

ANSWER: F PAGE: 741 Leases are heavily governed by contracts…

Tenancy Interests Tenancy for Years. Periodic Tenancy.
Created by an express contract. Property is leased for a specified period of time. Periodic Tenancy. Does not specify how long lease lasts. But rent paid at certain intervals. Tenancy at Will. For as long as both agree. Tenancy at Sufferance. Wrongful possession without the right to possess.

A periodic tenancy is created by an express contract under which property is leased for a specified period of time.

ANSWER: F PAGE: 740 No, what’s described here is a tenancy for years (even if it’s only months). You may think of a periodic tenancy as measured by the rent period, in a sense, since you are entitled to one rent period’s notice to leave.

A tenancy for years is created by a lease that does not specify how long it is to last but does specify that rent is to be paid at certain intervals.

ANSWER: F PAGE: 740 Didn’t we just talk about this?

Landlord-Tenant Relationships
Lease Agreement can be oral or written (oral may not be enforceable). Lease gives Tenant the temporary right to exclusively possess the property. Sources of Law: Common Law. State and Local Statutes, and The Uniform Residential Landlord and Tenant Act (URLTA) which has been adopted by 1/4 of the states.

Lease Agreement Form of the Lease:
Must express intent to establish the lease. Provide for transfer of possession to the Tenant. Provide for the Landlord’s “reversionary” interest. Describe the property. Indicate length of the term, amount of rent, when and where rent paid. Illegality. Osborn v. Kellogg (1996).

Dora leases a house from Evan for a two-year term. To ensure the validity of their lease, it should include a. a description of the premises. b. a due date for the payment of the property taxes. c. a requirement that Dora perform structural repairs to the house. d. a requirement that Evan carry liability insurance.

ANSWER: A PAGE: 741 Read the question – only A is necessary to the validity of the lease; the other things are all very good ideas and examples of the many things that need to be addressed in a lease.

Rights and Duties Trend in the law is to curtail, by contract and real estate law, the immense freedom that Landlords had in the past. Possession. Using the Premises. Maintaining the Premises. Rent.

Rights and Duties Landlord has a duty to deliver actual physical possession under URLTA or legal right to possession (“American” rule). Tenant’s right to exclusive possession is only subject to Landlord’s limited right to come unto the property. Tenant has a “covenant of quiet enjoyment” by which Landlord promises Tenant’s peace and enjoyment of the property.

Under the covenant of quiet enjoyment, a landlord promises that a tenant will not be disturbed in the use of the premises.

ANSWER: T PAGE: 743 How might a landlord breach this covenant?

Rights and Duties Eviction occurs when Landlord:
Deprives Tenant of possession of the leased property; or Interferes with this use or enjoyment of the property to the extent that Tenant cannot use or enjoy. Constructive eviction occurs when Landlord: Breaches lease or covenant or quiet enjoyment; and Makes it impossible for the Tenant to use and enjoy the property.

Rights and Duties Residential property -- Landlord must furnish premises in habitable condition. Landlord is responsible for maintaining common areas such as stairs, parking lots, elevators and swimming pools. Commercial property -- may still require Tenant to maintain depending on the lease.

Rights and Duties Implied Warranty of Habitability applies to major (substantial) defects if Landlord knew or should have known about & he had a reasonable time to repair. To determine breach, Courts consider: Whether Tenant caused damage. How long defect existed and age of building. Defects impact on Tenant’s safety and health. Whether defect contravenes relevant statutes.

Rent Rent is Tenant’s payment to the Landlord for the Tenant’s occupancy or use of the Landlord’s real property. Payment based on agreement, custom, state statute, waiver. Security Deposits. A deposit by Tenant which Landlord may retain for non-payment of rent or damage to premises. URLTA has specific provisions as to when it may be kept and when it must be returned.

Tenant’s Remedies If Landlord breaches the warranty of habitability, depending on state law, Tenant may: Withhold rent -- put in escrow. Repair and Deduct -- notify, repair, and deduct repair from rent. Cancel the Lease -- must be constructive eviction or breach of habitability. Sue for Damages -- difference between what paid for and what received.

When a landlord sells leased premises to a third party, any existing leases terminate automatically.

ANSWER: F PAGE: 744 Leases usually* are encumbrances that remain in place when property is sold. It is said that the property is sold “subject to” the lease. The buyer simply becomes the landlord. *Depends on the contract, however!

Transferring Rights to Leased Property
Transferring Landlord's Interest. Landlord may sell any and all of his rights in the real property. New owner buys “subject to the lease,” if lease is recorded. Transferring Tenant’s Interest. Landlord’s consent may or may not be required by statute or the lease itself.

Transferring Rights Transferring the Tenant’s Interest (cont’d)
Assignments: Tenant transfers his entire interest in the lease to a third person. Original Tenant is not released from liability under the lease. Subleases: Tenant transfers all or part of his interest in the lease for a shorter period of time than the lease. Original Tenant is not relieved of liability under the lease.

Allen owns a duplex that he leases to Brad and Cora. Allen may sell a. the duplex at any time. b. the duplex, but only after the lease term expires and Brad and Cora have moved out. c. the duplex, but only with Brad and Cora’s permission. d. the lease, but not the duplex.

ANSWER: A PAGE: 744 He can sell the duplex “subject to” the lease. What rights do Brad and Cora have to dispose of the leasehold interests that they have?

Bill leases an apartment from Cathy. Two months later, Bill moves out, and arranges with Dian to move in and pay the rent to Cathy for the rest of the term. This is a. an assignment. b. an easement. c. an eviction. d. a sublease.

ANSWER: A PAGE: 745 How is a sublease different than this?

Nature, Classification, Offer/Acceptance and Consideration
Contracts – Unit 1 Nature, Classification, Offer/Acceptance and Consideration

Promises Why are promises important to society?
How do markets depend on promises? What would the economy be like without enforceable promises?

Promise vs. Contract Promise: an assertion that something will or will not happen in the future Contract: an agreement that can be enforced in court

Law Governing Common Law Restatement Statutes
- Uniform Commercial Code (UCC) - Other statutory provisions

Promise v. Contract I promise that tomorrow, there will be $10,000 in cash on that table. I promise Francis that tomorrow I’ll pay her $10,000 in cash. I promise Francis that tomorrow I’ll pay her $10,000 in cash if she’ll give me her champion dachshund. Francis gave me the dog today, when I told her that I’d pay her $10,000 in cash tomorrow. Francis said she’d give me the dog tomorrow, and I said I’d pay her $10,000 in cash tomorrow.

If the promise is not fulfilled,
Enforcement If the promise is not fulfilled, what can happen? Party breaching may be required to pay money In certain circumstances, the breaching party may be required to perform

Elements of a Contract Offer and Acceptance (agreement; at least two parties required) Consideration (something of value given in exchange for the other party’s promise or performance) Contractual Capacity (all parties must be legally competent to contract) Legal Object (cannot be for an illegal end)

Elements, cont’d If any of those four elements is missing, then there is no contract. In addition, there will be no contract if: There is not genuine assent (absence of certain mistaken beliefs; a meeting of the minds), or The contract is in the required form, if there is a required form (in writing, if required to be in writing, for instance)

Classification based on Contract Formation

Bilateral and Unilateral
Offeree must make a return promise in order to accept the offer Unilateral Offeree must perform in order to accept the offer

Ardito v. City of Providence
Facts: During process of hiring police officers, City of Providence sent letters to best candidates stating that if the recipients successfully completed medical and psychological exams, then they would be allowed to attend the Police Academy. Academy training was the last step to being hired by the city. The letters stated that they were “conditional offers of employment.” New police chief had come in during the middle of the selection process and determined that certain people sent the letter would not be offered a job, even though they had completed the exams. Alito was one of those. He was one of 14 applicants who got the letter and then were rejected. They sued to have the City stop holding the academy unless they were admitted.

Ardito Case, cont’d Question:
Was the letter valid contract that was accepted by Alito and the others when they completed the medical and psych exams? Answer: YES – CLASSIC UNILATERAL CONTRACT. CITY PROMISED THAT IF THEY SUBMITTED TO THE EXAMINATIONS, THEY’D HAVE A SPOT IN THE ACADEMY TRAINING, AND THUS A SHOT AT THE JOB. THEY DID THEIR PART, THE CITY MUST DO ITS PART.

Special Problems: Revocation of Offer in Unilateral Contract
Roberta offers to buy Ed’s sailboat if he’ll sail it down to Newport Beach from its regular mooring at San Francisco. He leaves; the trip takes three days. While he’s in route, Roberta decides to revoke her offer and notifies him by radio. What result?

Revocation of Offer in Unilateral Contract, cont’d
Traditional View. No acceptance until the offeree completes performance, so Roberta prevails – she can revoke or withdraw the offer anytime before it is accepted. Modern View. Once performance has been substantially undertaken, then the offer becomes irrevocable. Up to a judge or jury to determine what that means.

Formal Contracts Certain contracts require particular forms. Examples:
-- Contracts under seal -- Recognizances -- Negotiable instruments -- Letters of Credit (Probably others as well) Contracts not requiring a particular form are – you guessed it – informal contracts. Most contracts are informal under this definition

Express and Implied Contracts
Basic difference is that an express contract is one whose terms are stated in words, whether written or oral. In a contract implied-in-fact some of the terms are established by one or more of the parties’ conduct or actions instead of their words.

Requirements for Implied-in-Fact Contract
Plaintiff furnished some goods or services Plaintiff expected to be paid, and Defendant knew or should reasonably have expected to pay Defendant had a chance to reject the goods or services, but didn’t

Performance Executed Contract – one that has been fully performed by all its parties Executory Contract – one for which performance by some or all of its parties still remains to be completed

Contract Enforceability
Contract may be: Enforceable Voidable Unenforceable Void

Voidable A valid contract that one or more of the parties can – at its option – either avoid or enforce. An example is a contract made with a minor; the minor has the option to either perform it or not.

Unenforceable Also a valid contract, but one that a party has a defense to. The parties may perform it, but a court will not enforce it. Important thing to remember is that this kind of contract is not unenforceable because one of the four basic elements is missing – that wouldn’t be a contract, would it? It’s not enforceable for some other reason. Example would be an oral lease of real property for more than a year. The statute of frauds requires that such a lease be in writing or it’s not enforceable.

Void A void contract is no contract at all. No party has any legal obligation at all. Example – a contract to have a romantic rival “eliminated” a la the Sopranos would be a void contract, because it did not have a lawful object.

Quasi-Contract Quasi-contract = contract implied –in-law
Distinguish from a contract implied-in-fact “Quasi” means “as-if.” Quasi-contract is an equitable device. It’s not a real contract; there is no agreement between the parties. It is a fictional contract imposed by the law in order to remedy unjust enrichment.

DCB Construction v. Central City Development Co.
FACTS Central City Development (“Landlord”) leased building to Tenant for 5 years. Tenant (who was responsible for all repairs, maintenance and alterations under the lease) hired DCB Construction to remodel the premises at a cost of about $300M. Landlord told DCB that it would not be responsible for any of those costs. Tenant stopped paying rent and stopped paying DCB. Landlord evicted Tenant.

Tenant went into bankruptcy, so DCB sued the Landlord for the remaining $280,000 that Tenant owed it, saying that the work DCB had done had increased the value Landlord’s property. Unless the Landlord paid DCB for that work, the Landlord would be unjustly enriched. Would Landlord be unjustly enriched?

Court said no, the Landlord was not unjustly enriched. Why not? No fraud or mistake here; DCB did the work for Tenant specifically, and not for the Landlord; and Landlord advised DCB that it would not be responsible for payment. DCB could have protected itself by not doing the work if it didn’t have another responsible party to look to for payment.

Offer and Acceptance (Agreement)
The agreement of the parties essential to the formation of a contract is composed of: 1. OFFER; and 2. ACCEPTANCE

Before we talk about offers – consider: Objective Theory of Contracts
Objective v. Subjective When interpreting a contract, court’s will look at a party’s words and conduct from the perspective of a reasonable person in the circumstances of the parties, not the subjective intention of one of the parties.

Objective Theory Consider this from Judge Learned Hand in Hotchkiss v. National City Bank of New York, 200 F. 287 (2d Cir. 1911): “A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake, or something else of the sort. Of course, if it appear by other words, or acts, of the parties, that they attribute a peculiar meaning to such words as they use in the contract, that meaning will prevail, but only by virtue of the other words, and not because of their unexpressed intent.” BOTTOM LINE: "The manifestation of a party's intention, rather than the actual or real intention, is controlling."

Three Requirements of a valid Offer
Serious objective intention of the offeror – it must be clear (objectively, or to a reasonable person – not subjectively, to him alone) that offeror intends to form a binding contract Terms of the offer must be reasonably definite and certain – It must be clear to the offeree what the contract is going to be if he or she were to accept it. The offer has to be communicated to the offeree. Duh. Once a valid offer is accepted, a contract is formed.

Elements of an Offer – Objective Intention to Contract
Mr. Martinez drives a $750,000 Ferrari. While it’s indeed awesome when it runs, it is persistently hard to start. After class, in the parking lot it, sure enough, won’t. Out of frustration, Mr. Martinez yells out “Whoever’ll give me $10 can have this son-of-a-Testarossa.” Hilary Clinton, who happened to have a little cash burning a hole in her pocket, immediately says “I accept! Here’s the ten bucks, now hand me the keys and your mechanic’s phone number.” Do we have a contract? What would a reasonable observer think?

The other side of the question: Lucy v. Zehmer ( Page 211)

Expressions of Opinion Ms. Karl, whose mechanical abilities are legendary, takes a look at Mr. Martinez’s temperamental Ferrari, and makes a few adjustments to the ravioliator for him. She says that it will probably make it start better for him in the future. However, it doesn’t work. Contract?

Statements of Future Intent Ms. Karl, seeking to capitalize on her mechanical abilities, announces that she’s thinking about opening her own garage (which will only work on Ferraris) and she tells Mr. Byrnes that she will need some first class talent to schmooze her uppity clientele. Mr. Byrnes, quits his lucrative position as Martha Stewart’s bail bondsman and tells Ms. Karl that he’s ready to start work for her in the new job. Has Ms. Karl made an offer to Mr. Byrnes?

Preliminary Negotiations If Ms. Gordon asks Mr. Martinez if he’d consider selling his Ferrari for $700,000 and he says “yes,” is there a contract formed? No, an invitation to negotiate is not an offer.

Advertisements, Catalogs and Circulars The general rule is that an advertisement does not constitute an offer. The Restatement (Second) of Contracts explains that: Advertisements of goods by display, sign, handbill, newspaper, radio or television are not ordinarily intended or understood as offers to sell. The same is true of catalogues, price lists and circulars, even though the terms of suggested bargains may be stated in some detail. It is of course possible to make an offer by an advertisement directed to the general public, but there must ordinarily be some language of commitment or some invitation to take action without further communication. The exception to the rule that advertisements do not create any power of acceptance in potential offerees is where the advertisement is “clear, definite, and explicit, and leaves nothing open for negotiation,” in that circumstance, “it constitutes an offer, acceptance of which will complete the contract.”

Leonard v. Pepsico – The Commercial
The commercial opens upon an idyllic, suburban morning, where the chirping of birds in sun-dappled trees welcomes a paperboy on his morning route. As the newspaper hits the stoop of a conventional two-story house, the tattoo of a military drum introduces the subtitle, “MONDAY 7:58 AM.” The stirring strains of a martial air mark the appearance of a well-coiffed teenager preparing to leave for school, dressed in a shirt emblazoned with the Pepsi logo, a red-white-and-blue ball. While the teenager confidently preens, the military drumroll again sounds as the subtitle “T-SHIRT 75 PEPSI POINTS” scrolls across the screen. Bursting from his room, the teenager strides down the hallway wearing a leather jacket. The drumroll sounds again, as the subtitle “LEATHER JACKET 1450 PEPSI POINTS” appears. The teenager opens the door of his house and, unfazed by the glare of the early morning sunshine, puts on a pair of sunglasses. The drumroll then accompanies the subtitle “SHADES 175 PEPSI POINTS.” A voiceover then intones, “Introducing the new Pepsi Stuff catalog,” as the camera focuses on the cover of the catalog. The scene then shifts to three young boys sitting in front of a high school building. The boy in the middle is intent on his Pepsi Stuff Catalog, while the boys on either side are each drinking Pepsi. The three boys gaze in awe at an object rushing overhead, as the military march builds to a crescendo. The Harrier Jet is not yet visible, but the observer senses the presence of a mighty plane as the extreme winds generated by its flight create a paper maelstrom in a classroom devoted to an otherwise dull physics lesson. Finally, the Harrier Jet swings into view and lands by the side of the school building, next to a bicycle rack. Several students run for cover, and the velocity of the wind strips one hapless faculty member down to his underwear. While the faculty member is being deprived of his dignity, the voiceover announces: “Now the more Pepsi you drink, the more great stuff you're gonna get.” The teenager opens the cockpit of the fighter and can be seen, helmetless, holding a Pepsi. “[L]ooking very pleased with himself,” the teenager exclaims, “Sure beats the bus,” and chortles. The military drumroll sounds a final time, as the following words appear: “HARRIER FIGHTER 7,000,000 PEPSI POINTS.” A few seconds later, the following appears in more stylized script: “Drink Pepsi-Get Stuff.” With that message, the music and the commercial end with a triumphant flourish.

Auctions In an auction, a seller “offers” items for sale via an auctioneer. However, this is not an “offer” for purposes of contract formation. For contract formation purposes, an auction is considered an invitation to submit offers to buy. The bidder is the offeror; the offer is accepted only when the bid is struck off. At any time before that, the bid can be revoked or the auctioneer can reject any bid received. Mr. Martinez puts up his Ferrari for sale at auction. Mr. Rodriguez is the auctioneer. The price has quickly risen from an initial bid of $500 up to well over $500,000. Expecting that her bid will easily be surpassed, but wanting to give Mr. Martinez a hand, Ms. Molina bids $600,000. Shortly after, Mr. Morris bids $625,000, which Mr. Rodriguez takes. The momentum quickly subsides, however, and while Mr. Rodriguez is looking around the now silent room for other bids, Mr. Morris realizes that his wife will kill him if he came home in that thing, and he withdraws his bid. Mr. Rodriguez looks at Ms. Molina and says “SOLD, for $500,000. Does Ms. Molina have a new car?

Agreements to Agree Because the auction was such a disaster, Mr. Martinez and Mr. Dunn enter into a valid written agreement for Mr. Dunn to lease the car for one year. The lease provides that Mr. Dunn has the option to renew the lease at the end of it’s term, for a lease payment to be mutually agreed to by he and Mr. Martinez at that time. Is Mr. Dunn’s option worth the paper it’s written on? NOPE – an agreement to agree won’t be enforced as a contract. The lease may be valid, but the option to renew is not enforceable.

Elements of an Offer – Definiteness
An offer must have reasonably definite terms; if not, a court cannot determine if a breach has occurred nor can it give an appropriate remedy. The UCC relaxes the requirements for definiteness in some areas, calling for the court to supply certain missing or indefinite terms with “reasonable” terms. The UCC is intended to govern commercial relationships involving the sale of goods, often among merchants, and has as a primary purpose the facilitation of commerce

Elements of an Offer –Communication of Offer
If we don’t tell the offeree how are we going to have a contract? One type of advertisement that is often held to be an offer is one offering a reward for, say the return of a lost pet. Suppose Mr. Black places an ad offering a $100 reward for his lost cat. Mr. White, not seeing the ad, but recognizing the cat as Mr. Black’s, finds it wandering around and returns it to Mr. Black. The offer has not been communicated to Mr. White. Is there a valid unilateral contract? Does he get the reward? No, there’s no contract…but Mr. White may still get the reward in some jurisdictions based on equity, but not on contract theory.

Termination by Act of the Parties Terminated by operation of law
Termination of Offers A valid offer is made but not yet accepted; what can happen to the offer before acceptance, and prevent a contract from coming into existence? Termination by Act of the Parties Revoked by Offeror (unless irrevocable) Rejected by Offeree Counteroffer by Offeree Terminated by operation of law Lapse of time Destruction of subject matter Death or incompetence of a party Supervening illegality of the object of the contract

Termination of Offers Revocation by Offeror
Generally, offers are revocable as long as the revocation is communicated to the offeree before he or she accepts. If before accepting, offeree learns from another source information indicating the offer has been revoked, what happens? Generally revocation can be communicated in the same way the offer was communicated. Now that Mr. White had reunited Mr. Black with his cat, how might he communicate that the reward is no longer being offered?

Termination of Offers Irrevocable Offers – some offers can be made irrevocable If offeree has substantially changed position in reliance on an offer (for example, the guy who began sailing his boat from San Francisco) it may be held to be irrevocable. Option Contracts are irrevocable; offeror has received payment or consideration in exchange for giving up his right to revoke for a specified time.

Termination of Offers Rejection by Offeree
If an offeree rejects an offer, it is terminated; the offeree cannot thereafter change his mind. Rejection is effective when received by the offeror. Merely inquiring about an offer doesn’t constitute a rejection Now that the lease on Mr. Martinez’s Ferrari is up, Kobe Bryant makes an offer of $600,000. Mr. Martinez asks, “is that the best you can do?” Is the offer rejected? What if he says “I was really looking for $650,000”? How about “I’ll take $650,000”?

Termination of Offers Counteroffer
Now, Mr. Martinez has made a counteroffer. A counteroffer is a rejection of the first offer and a new offer by the former offerree. If Kobe Bryant says no, Mr. Martinez cannot then take him up on his first offer…that offer was terminated by the counteroffer. Common law employs “mirror image” rule: if the acceptance doesn’t match the offer exactly, it’s a counteroffer, and the original offer is terminated.

Termination by Operation of Law
Termination by Lapse of Time An offer may specify that it expires after a given period of time. If a number of days is specified, but the specific starting date is not, it will normally be held to start on the day the offer is received, and terminate at midnight on the expiration date. If not specified, then an offer will expire after a “reasonable” time.

Termination by Operation of Law
Other ways offers can be terminated: Destruction of Subject Matter – A offers to sell B a cow; before B accepts, cow struck by lightning Death or Incompetence of Party. Unless irrevocable, an offer terminates if the offeror or offeree dies or becomes incompetent. Supervening Illegality. A bank offers to loan A money at 17% interest. Before A accepts, the legislature passes a law limiting interest rates to 10%. The law terminates the offer.

Acceptance A voluntary act by the offeree that shows assent to the terms of the offer. Must be unequivocal Must be communicated to the Offeror

Acceptance Mr. Martinez offers to sell his Ferrari to Kobe Bryant for $600,000. If Kobe Bryant doesn’t respond right away, can Ms. Karl accept the offer? No…Only an offeree – the person or one of the persons to whom the offer was intended to be made – may accept (their agents may also accept)

Acceptance Kobe Bryant is considering Mr. Martinez’s offer to sell the Ferrari. He decides to accept, but wants Mr. Martinez to put a trailer hitch on it so he can pull his cutting horse trailer behind it. Has he accepted? No…this is the other half of the “mirror-image” rule we talked about earlier. By adding terms, Kobe Bryant has made a counteroffer. If Mr. Martinez refuses to add the trailer hitch, can Kobe Bryant back-up and say, “well, OK I’ll take it without the trailer hitch”?

Acceptance Let’s say that Mr. Martinez transmits his offer to sell the Ferrari to Kobe Bryant and the offer says “unless I hear from you within 10 days, I’ll assume that you have accepted my offer.” Kobe Bryant remains silent. We got a deal? No – generally, silence cannot be an acceptance. However, in what circumstances might silence operate as an acceptance? (1) where the parties have an established course of dealing between them, there can be a duty to speak, and (2) where the circumstances are such that silence can create an implied-in-fact contract

Acceptance Communication of Acceptance
In a unilateral contract, acceptance is communicated by performance In a bilateral contract, it has to be communicated separately from performance (unless the offer itself dispenses with the requirement of communication of the acceptance). If the offer specifies how acceptance is to be made, then that’s how it has to be accepted

George Bush sends a letter to Mr. Martinez offering $700,000 for his Ferrari, but stating that his offer expires on October 15. Mr. Martinez writes a letter back, saying “I accept your offer.” He puts it in the mail on October 12 (properly addressed and with proper postage). It doesn’t arrive until the 17th. Meanwhile, George Bush has heard about the starting problem, and has found a nice cherry Yugo that he’d rather spend his money on. Has George Bush bought the Ferrari? Yup…’fraid so. This is the “mailbox rule.” What if Mr. Martinez used the wrong address or didn’t use enough postage on his letter? Different result?

Mailbox Rule: Revocation of an Offer is effective when actually received; but acceptance of an offer is effective when placed in the mail (assuming it’s properly addressed and posted). WHY? It’s to prevent confusion that can occur when revocations and acceptances cross each other in the mail – If the revocation were effective when mailed, then the offeree could accept it without knowing it had been revoked. It’s a rule that is designed to facilitate the formation of contracts.

Authorized means of communication of acceptance – Can be expressly stated or implied by the facts or implied by law If the offeror chooses one means (say mail) to transmit the offer, then the offeree may accept in the same way or by a faster means. When the parties are at a distance, mailing is impliedly authorized. Exceptions: (1) If not properly addressed or posted or (2) if the offer explicitly says it won’t be effective until received.

So what happens if an offeree screws up the mailbox rule – for instance, he sends a rejection first, but then transmits an acceptance? Here, the law cancels the rule that says the acceptance is valid on deposit in the mail, and whichever is first received by the offeror is effective.

Consideration, Capacity, Legality, Assent and Form
CONTRACTS UNIT 2 Consideration, Capacity, Legality, Assent and Form

Definition: “the value given in return for a promise”
Consideration Definition: “the value given in return for a promise” Two Elements: Legal Value. Bargained-for Exchange.

Consideration Hamer v. Sidway
Mr. Story told his nephew that, if he would not smoke, drink or play cards or pool until he was 21, that he’d give him $5,000. Nephew did not smoke, drink or play cards or pool for six years, when he became 21. Nephew reported to Uncle that he had fulfilled his end of the deal, and Uncle responded, saying that Nephew would have his reward, and could consider the money to be invested with interest. Nephew left the money with Uncle for 12 years. At some point, he assigned the money to another person. After Uncle died, Nephew’s assignee asked the Uncle’s executor to pay. The executor refused, saying there was no consideration for Uncle’s promise. What result?

Consideration Court held that the executor had to pay the nephew’s assignee because the promise was an enforceable promise. The court said: “The promisee used tobacco, occasionally drank liquor, and he had a legal right to do so…that right he abandoned for a period of years upon the strength of the testator that for such forbearance, he would give him $5,000.” The court said the issue was not how difficult this was for the nephew, the issue was that he had a legal right to indulge, which he gave up because of the Uncle’s promise. The consideration was legally sufficient.

Consideration Legal Value
Must be something of “legally sufficient” value A promise to do something that one is not otherwise legally bound to do Performance of an action one is not otherwise legally required to perform Refraining from action one is otherwise legally authorized to take

Consideration Key Concept:
To give “legally sufficient” value, the party has to do something he or she is not otherwise legally required to do This assures that the consideration is indeed intended to support or be exchanged for the promise by the other party

Consideration “Legally sufficient” is not a mathematical concept. The inquiry as to “sufficiency” is not into how much consideration is offered. The court’s don’t evaluate what the consideration is worth. Why is this? If it were, then people wouldn’t have the freedom to contract as they wish.

Bargained-for Exchange
Consideration Bargained-for Exchange Kobe Bryant has become fabulously wealthy, and now he has ungrateful children that won’t come see him. In a conversation with his son, he says, “My boy, Lattimore, in consideration of the fact that you don’t have enough money to come see me very often, I am going to give you $500 a month for the next year.” Has Kobe Bryant made an enforceable contract with little Lattimore?

Consideration No…Despite the fact that Lattimore really doesn’t come see his dad very often, he’s not been asked to do anything, forbear from doing something, or to incur any “legal detriment.” What if Kobe Bryant had instead said, “Little Lattimore, my son, if you will come see me three times a year, I’ll give you $500 a month.” Contract here? Yes. Why? Because now, Lattimore has been asked to do something for the promised money…he has to come and see his dad

Consideration Change it up: Little Lattimore is a minor; he’s 16, and a royal pain. Some of Lattimore’s wealthy friends parents are afraid that because of Lattimore’s bad attitude that Kobe Bryant is about to boot him out of the house; if that happens, they’re afraid that he’ll want to live with them. They offer to pay Kobe Bryant $500 per month if he’ll agree to continue to support Little Lattimore. Can Kobe Bryant enforce the promise? No…why not?

Consideration Since Little Lattimore is a minor, Kobe Bryant has a legal duty to support him, whether he gets the money from the neighbors or not. There’s no legally sufficient consideration. He has a “pre-existing duty.” This matters why? If you pay someone to do something they are obliged to do anyway, then there’s no consideration.

Consideration Mr. White contracts with Ms. Karl to build a building for him. The contract requires her to build the building for a fixed sum of $1 million. In the middle of doing the work, she encounters problems that double her cost of doing the work. She tells Mr. White that she needs more money or she’ll stop work. Mr. White, needing to have the building ready because his lease is expiring, agrees. Can Ms. Karl enforce the amendment to the contract?

Consideration Generally No. Why?
Because Ms. Karl had a preexisting duty to build the building for the agreed price. If this weren’t the rule, what injustice would result? This would facilitate extortion, wouldn’t it? That being said, are there still a kind of unforeseen difficulties that may justify an amendment like Ms. Karl made with Mr. White? What might those be? Extraordinary and completely unforeseen; also NOT the kind of risks ordinarily assumed by builders.

Consideration Mr. Black is a real estate agent. He sells Mr. Rodriguez’s house for him, but because they are friends, does not charge a commission. Mr. Rodriguez later on tells Mr. Black that, because he did such a good job selling the house, that he will give him $3,000 out of his next paycheck. If Mr. Rodriguez doesn’t pay, can Mr. Black sue him for breach of contract? No. Why not? Past consideration is no consideration. Mr. Rodriguez’s offer is merely a statement that he intends to make a gift.

Consideration Hilary Clinton is president of Floormart. She tells her employees that if they gain an additional 10% in market share against their close competitor, Wallmart, she’ll give them all a 10% bonus, if management approves it. Can the employees hold her to this? No, there’s really no promise here, is there? This is called an “illusory promise.”

Consideration Hilary Clinton offers to hire Ms. Molina as Vice President of Floormart for one year. She offers her $10,000 a month, but reserves the right to terminate her at will (at any time and for any reason or no reason – employment at will). What’s the effect? Again, it’s an illusory promise. Does this mean there’s no contract? What is the contract that results?

Consideration Same situation, except that this time, Hilary Clinton offers to hire Ms. Molina for a year, but she provides that the company can terminate the employment on 30 days notice. Any difference in your answer? Yes – this is not illusory; Floormart is giving up the right to hire somebody else as VP for at least the 30 day period during which Ms. Molina is entitled to notice.

Consideration Can you think of a class of contracts where it makes a difference whether an employment contract is illusory or not? Non-competition agreements are often entered into in connection with employment. Normally, a simple at will employment agreement won’t provide adequate consideration for a Non-Compete.

Consideration Settlement of Claims – All require consideration
Accord & Satisfaction: Literally a settlement and payment. Used to settle “unliquidated” claims or debts. What is the difference between a liquidated claim and an unliquidated claim? Why may a liquidated claim not be settled via the use of an accord & satisfaction? Release: An agreed forfeiture of a right, such as the right to pursue a claim against another. Can a Release be used to resolve a liquidated claim? Why? Covenant not to Sue: An agreement not to enforce a claim by suit. If the consideration given for the covenant fails, then a suit may still ensue. How about this? Liquidated or Unliquidated?

Consideration Mr. Gray’s aging uncle, Mr. Blue, is very wealthy and enjoys spending time with his nephew. Mr. Gray likewise enjoys spending time with Mr. Blue. One day, Mr. Blue promises to pay Mr. Gray $35,000 a year so that Mr. Gray won’t have to work anymore. In reliance on the promise, Mr. Gray quits his job (which paid him $30,000/yr). Mr. Blue doesn’t pay. Is there a Contract? No, no consideration. Is there anything that Mr. Gray can do?

Consideration Promissory Estoppel
Sometimes when there has been justifiable and reasonable reliance by a person upon a promise made without consideration, courts will hold that the promisor should be prevented, or estopped, from failing to make good on the promise. This is the doctrine of Promissory Estoppel. In our example with Mr. Gray, Uncle Blue may be estopped to deny his promise of payment. What does it take for the doctrine of promissory estoppel to apply?

Elements of Promissory Estoppel
Consideration Elements of Promissory Estoppel Clear and definite promise Promisee must justifiably rely on the promise The reliance must be of a substantial and definite character Justice will be served by enforcing the promise

Persons who sometimes lack capacity to enter into Contracts:
Minors (aka “infants”) Intoxicated persons Mentally incompetent persons There are exceptions to all of the above

Capacity Minors Powell Keeling is 16 but looks like he’s 22. He buys a computer at Walmart. The next day, he returns the computer to Walmart and says that he doesn’t want it anymore. Can he do this? Yes. Powell has “disaffirmed” his contract.

Capacity What if on the way back home from Walmart, somebody runs a stop sign and hits his car at an intersection. The computer is smashed. Can he still return it? Yes, in most states, he can even if it’s damaged.

Capacity Change facts a bit. What if Powell bought a car for $2,500 from a used car dealer. He drives it for a year, at which time it begins to smoke and run poorly. Powell ignores this, and keeps driving it until the engine blows up. He goes back to the dealer and says, “I am returning this car; I disaffirm my contract to buy it on the basis that I am a minor.” What happens here? Depends on the state. A Tennessee court under similar circumstances said that he could disaffirm and return the car, but he had to compensate the dealer for the depreciated value (not the purchase price) of the car. In Texas…maybe not.

the Fragile Chinchillas
Capacity Texas Law – the Case of the Fragile Chinchillas

Capacity-Minors In general, minors can enter into contracts just as adults can and those contracts are valid and enforceable up to the point that the minor chooses to disaffirm. Thus, they are voidable at the option of the minor...but not at the option of the adult. Generally, the minor disaffirming the contract has to return the consideration or property received by them, if it is still in their possession. Courts differ from state to state about the effect of damage to the property or what causes the damage. Disaffirmance can normally occur at any time up to the time of reaching majority, and for a reasonable time thereafter. Once majority is reached, the person can ratify the contract, making it no longer voidable.

Capacity-Minors Misrepresentation of Age: Generally has no effect. Some states have statutes or have adopted common law rules that limit or prevent disaffirmance where minor misrepresents his or her age (for instance, allowing disaffirmance only if the minor can return the consideration or property) Others will hold the minor liable in tort for fraud. But this is a minority view; most won’t hold a minor liable in tort as a way to “bootstrap” into contract liability. Contracts for Necessaries: Almost all states recognize an exception where the minor contracts for things that are necessary to sustain the minor’s existence. Are chinchillas “necessaries?”

Capacity-Minors Chinchillas aren’t but consider this case:
Young boy named Fountain was accidentally shot in the head by a playmate. He required extensive emergency lifesaving medical treatment. One provider, Yale Diagnostics, billed Fountain’s mother for the services. She did not pay, and filed for bankruptcy, which discharged all her debts, including the one to Yale. However, Fountain’s mother did sue the playmate’s family on behalf of her injured son, and received a settlement, which was paid to the son’s estate. Yale Diagnostics, being unable to continue to try to collect from the mother, made a claim for payment from the son’s estate, which now had some money. Could Yale recover payment from the minor son?

Capacity-Minors The Connecticut Supreme Court said yes. Why?
There is a longstanding rule that a minor can’t avoid contract liability for goods or services necessary to the minor’s health Rule is based on Quasi Contract (implied-in-law contract; not a real contract) When a necessary medical service is provided to a minor, two contracts arise. One is a real one between the provider and the parents who are responsible for the minor’s care; the other is a contract implied in law between the provider and the minor to prevent unjust enrichment. Do you agree with this? Why or why not?

Capacity-Minors Necessaries
Basic needs: food, clothing, shelter, medical services. Not chinchillas. Some element of appropriateness of the need to the particular minor’s station in life; value may be up to the level required to maintain current living standards Is minor in the care of someone else who is obliged to provide? If so, then it may not be “necessary” for minor to acquire from the seller Unless all elements are met, the contract can be disaffirmed, usually without the minor being responsible for the value of the goods

Capacity-Minors Recall that Powell, our minor, bought a computer at Walmart. Say that Powell keeps the computer and uses it until he turns 18, then sends an to Walmart telling it that he likes the computer and believes that he’ll keep it. What effect? Powell has expressly ratified the contract; it’s binding on him now. Now assume that he doesn’t Walmart, but he just continues to use the computer well beyond his 18th birthday. What effect? Same thing. He’s ratified the contract, but he’s done so by implication…this is implied ratification.

CONTRACTS UNIT 3 Capacity and Legality

Capacity Intoxicated Persons
Sufficiently intoxicated to lack mental capacity; i.e. intoxication impaired reason and judgment so severely that the person did not comprehend the legal consequences of entering into the contract. The intoxicated person must be able to return the consideration received

Capacity Mentally Incompetent Persons
Can be void, voidable or valid, depending on the circumstances. If a court has declared a person to be mentally incompetent, a contract made by that person is simply void…no contract exists If a court has not declared the person incompetent, but the person was in fact unable to understand the nature, purpose or consequences of his contract, then the contract is voidable. The person will have to return the consideration received, however. A mentally incompetent person can make a valid contract if at the time the contract was formed, the person had the capacity to make a contract. Sometimes called a lucid interval.

Legality To be enforceable, a contract must have a lawful end or purpose. A contract to do something that violates law or public policy will have enforceability issues. It may or may not be void; it may be voidable by either party. Some may be enforceable, though penalties may attach.

Legality Some Common Areas of Contract Illegality are: Gambling Usury
Licensing Statutes Blue Laws; Sunday Laws Public Policy

Legality Al, Beth, Cathy, Don and Ed all worked together in a Waffle House in Alabama. A regular customer who frequently traveled to Florida often brought them Florida lottery tickets from time to time. They all agreed to split any winnings that any of them might have on these tickets. One of the tickets, Cathy’s, is a $10 million winner, but Cathy seems to have forgotten about their agreement. Al, Beth, Don an Ed sue her for a share of the loot. Are they likely to be successful?

Legality In Dickerson v. Deno, the court held that this contract was “an exchange of promises to share winnings from the parties’ individually owned lottery tickets upon the happening of an uncertain event” meaning that this was “a contract founded on a gambling consideration.” Gambling in Alabama is illegal, and thus the contract was void.

Legality Al agrees to loan Bob $10,000. Bob is seriously desperate, and agrees to pay Al an interest rate of 48% per year on the loan. Applicable state usury law provides that the highest lawful rate of interest is 24%, and prescribes penalties for violations. Enforcement issues here are what? Generally, the statutory penalties apply. They may involve a forfeiture by Bob of some or all the interest and some or all of his principal; they may also require him to pay penalties or attorneys’ fees. In any event, the loan won’t be enforced as originally written.

Legality Contracts with Unlicensed Person may or may not be enforced. Depends upon the type of licensing statute that’s been violated: Regulatory – these licensing statutes are designed to protect the public from unskilled or unqualified practitioners, such as medical providers, accountants, pest control applicators, etc. Revenue Raising – these are primarily designed to raise revenue; they are more like a tax and don’t really impose any particular qualification or skill requirements on licensed persons.

Legality Mickey is a bartender. The state requires him to maintain a license, but doesn’t require that he pass a test or take a course of any kind – only requires him to be 21. Gerald is 20. He’s an adult for most purposes, but he’s not to be served alcohol. Gerald runs up a big tab in Mickey’s bar. Mickey demands payment. Gerald counters that because Mickey doesn’t have a license and Gerald’s underage, the contract is not enforceable. IS IT? Probably enforceable; Gerald will have to pay his bar tab. Gerald may have committed a criminal offense, however.

Legality The bartender licensing statute is probably not regulatory. It doesn’t require anything other than that Mickey be 21. Where statute is not regulatory, the courts generally don’t void contracts with unlicensed persons, though they may sanction those persons who violated the statute by not obtaining a license. On the other hand, where the statute is regulatory, contracts made with unlicensed persons are generally illegal and unenforceable. Also many times the statutes themselves provide that the agreements can’t be enforced.

Legality Out of work, about to lose his home, and desperate for money, Larry decided to sell the youngest of his 3 children through a videotaped ad to show to potential purchasers. A babysitter alerted police, who set up a sting operation. Larry accepted a $10,000 down payment on a $60,000 contract. Larry was arrested, but at th time there was no state statute outlawing what Larry tried to do (there sure is one now). What if this had been a contract? Enforceable? No state law was violated. Does that matter? No – Clearly this is against public policy. No way this contract would have been enforced.

Legality Old man Everett is aware that Mr. Ashley and his daughter are becoming quite an “item,” as they are showing up weekly in the local newspaper’s social columnist’s description of fancy parties held around town. Thinking Mr. Ashley to be a something of a rake and a heartbreaker (a mistaken assumption, no doubt), he offers to pay Mr. Ashley $10,000 if he’ll agree not to marry his daughter. Mr. Ashley, in love, marries the daughter and Everett sues him. Can he win? Why? Public policy favors marriage, and an agreement prohibiting marriage is contrary to that policy.

Legality Mr. and Mrs. Jones agreed to purchase a freezer for $900 from a door to door salesman. With taxes and financing charges, the total came to $1, The same freezer is available at a store for $300. After having made payments of over $600, the Jones’ sued, seeking a declaration that the contract was not enforceable. Any luck? Actually, yes. Ordinarily a court won’t look beyond the bargain struck by the parties. However, sometimes they are so oppressive that the courts will intervene, on the grounds that the contract is unconscionable.

Legality Unconscionability can be of two kinds:
Procedural. This has to do with how the contract came to be. Things like extremely unequal bargaining power; overly complicated contract documents; adhesion contracts. Substantive. This has to do with terms that are just overly oppressive or harsh. Tremendous disparities in value changing hands. Which of these did we have in the prior example with the Jones? Procedural or Substantive?

Legality Crusher Mfg. makes its laborers sign off a document before they get their first paycheck. It says: In consideration of my continued employment by Crusher, I agree to be responsible for any injury that may occur to me, no matter what, and I will never hold Crusher liable for anything that may happen at the factory, regardless of whose fault, and even if due to defective machinery or negligence or misconduct of myself or some other employee. DO YOU THINK THEY CAN ENFORCE THIS? WHY? This is known as an “exculpatory” clause. Sometimes in an effort to avoid liability, a party will go so far as to create an unconscionable shifting of risk. This is easier to find in some contexts than in others.

Legality The Kansas attorney general was concerned about out-of-state physicians who offered to contract with Kansas residents to prescribe medications for them over the internet. He sued to stop them, claiming these contracts were unconscionable and therefore against public policy. Think he got anywhere with this?

Legality The court said it couldn’t find any evidence that the doctors had deceived, oppressed, or misused superior bargaining power. The patients were advised how the deal was going to work on the website, they consented to it, and they got exactly what they bargained for. The contracts were not unconscionable.

Legality Nabisco and Keebler agree with one another that each will keep the price of their saltine crackers at $3.99 a package or more. Anything wrong with this? Yes, lots. It’s called price-fixing, and it’s a federal felony. Why is this bad, though? Because it is anti-competitive. Agreements like this have an anti-competitive effect and are therefore against public policy and unenforceable. This one is not just against public policy, it’s illegal per se. It has criminal implications.

Legality Victoria Oilwell Supply is owned by Cooter, and has been in business for 25 years, selling oilfield supplies throughout Texas. Compare: VOS sells its assets and business to Newcomer Supply. As a part of the deal, VOS and Cooter agree not to engage in the sale of oilfield supplies anyplace in Texas for 5 years. VOS’s salespeople (who are “at will” employees) all sign agreements with Newcomer that, if they cease to work for Newcomer, they won’t go to work for any competitor in South Texas during the 3 years after their employment terminates

Legality Questions: Don’t both affect competition and restrain trade?
Does one do so more than the other? Which do you think is more likely to be enforceable? Why? Contracts in restraint of trade are against public policy and not enforceable unless they are reasonable. Usually, this means that they are tied to another valid agreement (said to be “ancillary” to that other agreement).

Legality In these examples, both are connected to other agreements.
Why is it reasonable to have a non-compete in connection with the sale of a business? Why is it reasonable to have a non-compete in connection with an employment relationship?

Legality The non-compete in connection with the sale of the business is likely to be enforced to protect the “goodwill” or the “going-concern value” of the business being sold. If Cooter or VOS could set up shop next door and keep their old customers, then they would not have transferred that goodwill to Newcomer. OK, now think about the employment situation. Is it any different? One thing is that the employees are at will employees. What did we say about the consideration in an at will employment situation?

Legality Remember? It’s illusory – it doesn’t really bind the employer (or the employee). So first, there is the question of whether the non-compete is really connected to another valid agreement. Courts are uncomfortable enforcing an agreement against the employee, when the employer doesn’t really make any commitment. The employer has the right to end the employment, then hold the employee to the non-compete. Seems like a kind of one-way street. In Texas, courts require some specific consideration flowing from the employer to the employee…in other words, something to guarantee that the employer has some skin in the game. More than an illusory promise of future employment.

Legality Texas has very stringent requirements for what that consideration must be. It must somehow support the need for the non-compete. Courts have held that when the employer makes a non-illusory and enforceable promise to provide the employee with things like specialized training or access to trade secrets or proprietary methods, it becomes reasonable to use a non-compete to protect that investment or that information. However, the employer must bind itself to provide these things, and not be able to avoid providing them by terminating at will. Can’t be illusory. Finally, in the employment context, the time and geographic elements have to be no greater than required to protect those legitimate interests of the employer.

General Rule: Contract won’t be enforced
Effect of Illegality General Rule: Contract won’t be enforced Courts won’t aid either party; let the chips fall where they may. If the contract is executory, neither party can enforce it; if it is executed, there’s no recovery. Unjust enrichment is not a concern. Policy behind this is to provide a deterrent. Remove the predictability so that parties won’t contract in violation of the law. There are exceptions…of course!

Effect of Illegality Ted Trucker contracts to ship a box to the Port of Victoria for his regular charge of $500. Ted didn’t know it, but it turned out the box is packed with contraband, the transportation of which was illegal. This is one exception to the general rule: Justifiable Ignorance. Ted can probably still collect his fee, if he was justifiably ignorant of the box’s contents.

Effect of Illegality Ted Trucker works for a trucking company. Against state law, it requires its truck drivers to drive more than a set number of hours per day. Would the courts enforce Ted’s claim for payment for the entire number of hours he actually drove, even though it was an illegal amount? Sure…this is another exception – Ted’s a member of the protected class, the people who are benefited by the statute that is violated.

Effect of Illegality Ted and Bob decide to place an illegal bet on the first game of the Red Sox and Rockies World Series. They each put up $100 with Mary. Before the game, can Ted withdraw? Yes, the illegality isn’t complete until the bet is paid. Until then, a party can generally withdraw from an illegal contract and the courts will enforce that withdrawal.

Effect of Illegality An employment contract contains a non-compete that is clearly unreasonable – requires the employee not to work for a competitor anywhere in the galaxy for the entire remainder of time. But, the contract has this language in it: The determination that one or more provisions of this agreement is invalid, void, illegal or unenforceable shall not affect or invalidate any other provision of this agreement. Another exception: This is called a severability clause; they are generally enforceable. The rest of the employment contract may be enforced even if the non-compete part is not.

Fall 2012 Final Exam Review.

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