Chapter 13 Introduction to Contracts Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13-2 Chapter 13 Case Hypothetical and Ethical Dilemma While having a beer and a hamburger at Rapid City, South Dakota’s favorite watering hole, “All the Presidents’ Heads,” Jake Johnson and Alan Harrison’s conversation eventually leads to the topic of Jake’s cabin at nearby Canyon Lake. Jake has owned the cabin for years, having inherited it from his father, and Alan has always admired his friend’s hideaway from the madness of the “civilized” world. Emboldened by the beer, Alan scrawls out the following with a pen and napkin provided by the waiter: “Contract for purchase and sale of 106 Canyon Lake Drive property, purchase price--$100,000--signed, Jake Johnson and Alan Harrison.” Alan signs the napkin and presents it to his friend with a smile. Jake says “Cheers,” finishes his own “liquid spirit,” and signs the napkin as well. Later that day, Alan calls Jake and inquires when the two should “close” on the property. Jake is taken aback, and says to his soon-to-be ex-friend, “Alan, I was only kidding; surely you knew it was just a joke. For crying out loud, a napkin isn’t a contract, and you know how much I cherish my cabin!” Is Jake Johnson obligated to sell his property at 106 Canyon Lake Drive to Alan Harrison? What if the fair market value of the property is $400,000?

13-3 Chapter 13 Case Hypothetical Zsa Zsa Hilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had been missing for three (3) days. Having searched her estate exhaustively, Zsa Zsa decided that her next best option was to post a reward for her beloved Caboodles. Zsa Zsa carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed “Please find Caboodles—Reward--$25,000!!!” Below the heading was a color “glamour shot” of the animal and Zsa Zsa’s contact information, including her address and cell phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Zsa Zsa displayed and distributed one thousand of the posters throughout the greater Beverly Hills metropolitan area. Later in the week, Dane “Bulldog” Sheppard showed up at Zsa Zsa’s front door. When she answered the door chime, Dane said “I am pleased to meet you, Ms. Hilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Hilton, and let me say in advance that I really appreciate the $25,000 bounty, um, reward money!” Is there a contract between Dane “Bulldog” Sheppard and Zsa Zsa Hilton?

13-4 Chapter 13 Case Hypothetical Carter Morley and Erena Erickson live side by side in town homes joined together by a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a painter, Tom Sizemore, having selected his name from the classified section of the phone directory. Morley describes his address, the physical dimensions and structure of his home, and he agrees with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will only take one day to complete. Morley advises that although he will have to work a fourteen-hour day on Friday, he would like to have the work completed in his absence. In passing conversation with his neighbor Erickson, Morley advises her of his “home improvement” plans. Early Friday morning, Sizemore and his team arrive at the address, but by mistake, they begin work on Erickson’s side of building. Although Erena is home, she does not object to the work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them fresh-squeezed lemonade and ham sandwiches, and they heartily accept. Upon completion of the work at 7:00 p.m. Friday evening, Sizemore knocks on Erena’s door and asks if “the man of the home” is present, that he would like Morley to review the work and pay the agreed-upon price for the work. Erena chuckles, and “breaks the news” that the painting crew has made a mistake, one to her benefit. Erickson proclaims “I do not owe you one dime, because you do not have a contract with me; I will give you ten minutes to remove yourself and your materials from my property, or I will call the police.” Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?

Contract (Definition): A legally enforceable agreement 13-5

13-6 Elements Required For Contract Formation Agreement (Offer and Acceptance) Agreement (Offer and Acceptance) Mutual Consideration (Value Given By Both Parties) Mutual Consideration (Value Given By Both Parties) Legal Purpose and Subject Matter (Object) Legal Purpose and Subject Matter (Object) Legal Capacity (Ability to Understand Terms and Nature of Contract; legal ability to enter into binding contract) Legal Capacity (Ability to Understand Terms and Nature of Contract; legal ability to enter into binding contract)

13-7 Defenses to Enforcement of Contract Lack of genuine assent (fraud, duress, undue influence, misrepresentation) Lack of genuine assent (fraud, duress, undue influence, misrepresentation) Lack of proper form requirements (statute of frauds writing requirement) Lack of proper form requirements (statute of frauds writing requirement)

13-8 The Objective Theory of Contracts Existence and interpretation of contract based on outward manifestations of intent by parties (objective, “reasonable person” standard of contract formation and interpretation) Existence and interpretation of contract based on outward manifestations of intent by parties (objective, “reasonable person” standard of contract formation and interpretation) Subjective (individual) intent generally irrelevant Subjective (individual) intent generally irrelevant

13-9 Sources of Contract Law State common law State common law The Uniform Commercial Code (Article 2) The Uniform Commercial Code (Article 2) Governs contracts for the sale of goods Governs contracts for the sale of goods

13-10 Classification of Contracts: Bilateral or Unilateral “Bilateral” Contract: Exchange of promises “Bilateral” Contract: Exchange of promises “Unilateral” Contract: Promise in return for performance of act “Unilateral” Contract: Promise in return for performance of act

13-11 Classification of Contracts: Express or Implied “Express” Contract: Based on written or spoken words “Express” Contract: Based on written or spoken words “Implied” Contract: Based on conduct or actions “Implied” Contract: Based on conduct or actions “Quasi-Contract” (“Implied-in-law” contract): Imposed in certain cases to avoid unjust enrichment, even if all elements of contract formation not satisfied “Quasi-Contract” (“Implied-in-law” contract): Imposed in certain cases to avoid unjust enrichment, even if all elements of contract formation not satisfied

13-12 Classification of Contracts: Valid, Void, or Voidable “Valid” Contract: All elements of contract formation satisfied “Valid” Contract: All elements of contract formation satisfied “Void” Contract: Illegal purpose/subject matter; unenforceable “Void” Contract: Illegal purpose/subject matter; unenforceable “Voidable” Contract: One or both parties can withdraw from contract “Voidable” Contract: One or both parties can withdraw from contract

13-13 Classification of Contracts: Executed or Executory “Executed” Contract: All terms of contract fully performed “Executed” Contract: All terms of contract fully performed “Executory” Contract: Some duties under contract not performed by one/both parties “Executory” Contract: Some duties under contract not performed by one/both parties

13-14 Classification of Contracts: Formal or Informal “Formal” Contract: Must meet special form requirements “Formal” Contract: Must meet special form requirements Examples: Contracts under seal, “recognizances,” letters of credit, and negotiable instruments Examples: Contracts under seal, “recognizances,” letters of credit, and negotiable instruments “Informal” Contract: No formalities required in making; a “simple” contract “Informal” Contract: No formalities required in making; a “simple” contract

13-15 Interpretation of Contracts Contract interpreted to give effect to parties’ intentions at time they entered into contract Contract interpreted to give effect to parties’ intentions at time they entered into contract If multiple interpretations possible, adopt interpretation that would make contract lawful, operative, definite, reasonable, and capable of being effected If multiple interpretations possible, adopt interpretation that would make contract lawful, operative, definite, reasonable, and capable of being effected If contract contains ambiguity, judge should interpret it against interests of drafter If contract contains ambiguity, judge should interpret it against interests of drafter Handwritten provisions prevail over preprinted terms Handwritten provisions prevail over preprinted terms Numbers written in words prevail over numerals Numbers written in words prevail over numerals Specific terms prevail over general terms Specific terms prevail over general terms Technical words are generally interpreted in accordance with industry standard Technical words are generally interpreted in accordance with industry standard