Unit 8 Contract Law

To Do List Read Chapter 7 in your textbook Review the website on business organizations Participate in the class Discussion Board Lecture #1 Lecture #2 Take the Unit 8 Quiz Practice your vocabulary

Our plans for today’s seminar Define a contract Examine the legal terminology of contract law and why it is important Define and identify the elements of a contract Formal requirements for contracts Define and discuss a breach of contract, along with remedies for a breach of contract Examine some defenses to a claim for breach of contract Uniform Commercial Code and its effect on contract law

Contract definition A contract is an agreement between two or more parties that is enforceable by law Supporting contracts is an essential function of law Article 1 Section 10 of the Constitution states “ No State shall pass any Law …impairing the Obligation of Contracts”. Lets do a quick class poll: How many of you have entered into or participated in a contract today?

Contract terminology First distinction in contract law is an express versus an implied contract Express contracts are written or oral where the parties explicitly state the terms of their agreement Implied contracts exist where parties enter into a contract based on their conduct Both forms of contracts, express and implied are enforceable by the courts

Contract terminology Another classification in contract law is the difference between bilateral and unilateral contracts. This distinction is critical because it tells us when the contract comes into existence. A bilateral contract is a mutual exchange of promises A unilateral contract is one that can only be accepted by the completion of an act Let’s try an example and see how this can affect a contract case

Contract terminology Which of the two examples below is a bilateral and which is a unilateral contract I offer to pay you $50.00 when you mow my yard. I offer to pay you $50.00 to mow my yard. One of these is a potential bilateral contract and one is a potential unilateral contract Which is which and why does it make a difference?

Contract terminology The first example I offer to pay you $50.00 when you mow my yard is an example of a unilateral contract. The only way to accept this contract is to actually mow the yard. When you mow the yard the contract comes in existence, prior to that it is only an offer which I can withdraw with no penalty

Contract terminology The second example is a bilateral contract. You can accept that contract by promising to mow the yard. Once you accept with a return promise the contract exists and if I try to withdraw from that contract I may be liable for damages to you. Identifying the difference tells us when the obligations start in a contractual situation

Contract terminology Executory Contract is one that isn’t fully performed yet Executed Contract one that is fully completed Voidable contract is one that one party to the contract can cancel, for example, a minor Void contract is one that law will not enforce

Elements of a contract 1. Offer 2. Acceptance ( These two are referred to together as the “agreement" or “mutual assent”) 3.Consideration 4.Legal Capacity 5. Legal Purpose

Elements of a contract An offer is made by someone who intends to make a contract and who communicates the contracts terms Not every proposal is an offer. If made in jest there is no intent to contract. An advertisement is generally considered under the law as an invitation to make an offer rather than an offer itself An acceptance is made when there is a full acceptance of the proposed terms. If there are changes in the terms, it is viewed by the law as a rejection and a counteroffer.

Elements of a contract Consideration is the exchange of value. This may or may not involve money. It could involve an exchange of services of foregoing something you have a legal right to do. It might be an act or an exchange of promises The law does not require that the exchange be of equal value. Courts will not generally examine the “adequacy of consideration” in the absence of fraud. Something that happened in the past or a preexisting duty will not meet this requirement. An exception exists on this element when a court finds it would be unfair not to enforce the contract. The doctrine of “promissory estoppel” can be used to prevent an unfair situation.

Elements of a contract Generally all adults over the age of 18 have the capacity to contract unless they are under a legal guardianship or incapable of legally contracting. Please note being intoxicated is generally not enough. Under the age of 18 a person does not have the ability to contract and the minor can disaffirm a contract they make. This makes the contract “voidable” at the option of the minor. If a minor contracts for a “necessity” however, it is generally upheld.

Elements of a contract Legal purpose means that the courts will not enforce an illegal act. You could have the best written contract available but if it was to manufacture illegal drugs you can not expect the court to help you enforce it. A court will not enforce a contract which is contrary to public policy either.

Mutual mistake Mistakes happen and contract law is no exception. If the mistake is “mutual” then the court finds no contract exists. There can be no “mutual assent” if both parties have made a mistake. A “unilateral” mistake is where only one party to the contract has made a mistake. In this situation the person can not get out of the contract based on this mistake.

Formal requirements for contracts Contracts can be written or oral and both are valid However, there are certain contracts that the law says must be in writing to be enforceable The Statute of Frauds requires real estate contracts, contracts in consideration of marriage, contracts that can not be performed in a year, contracts to pay the debt of another, and contracts for sale of personal property over a set amount like $500 be in writing under the Uniform Commercial Code. Please note that the requirement of $ is a limit set under the Uniform Commercial Code and will only apply to contracts that are covered under that law. This will primarily affect merchants who are in the business of selling goods.

Breach of contract When one party doesn’t perform the contract a breach of contract occurs Remedies for breach of contract include damages, specific performance and rescission Damages is the most common remedy for a breach of contract. Damages should compensate the non breaching party for the breach and reasonably foreseeable damages. Damages are more limited in contract law than in tort law. They look to the economics of the contract. For example there are no damages for pain and suffering in contract law but those are recoverable for many tort theories. Specific performance is not often used in contract law. Under this remedy the courts would force the completion of the contract Rescission is also uncommon but may allow a contract to be cancelled when fraud is involved

Defenses to a beach of contract Primary defense is that there was no contract as one of the elements of a contract was missing You may also have defenses based on fraud or misrepresentation. Impossibility of performance “Acts of God”

Breaches of contract A broken contract may be enforced by the party who did not breach the contract A contract might also be enforced by a 3 rd party beneficiary to the contract.

Uniform Commercial Code Because of our multiple legal systems we needed some additional uniformity in contract law to make it easier for business to be conducted among various jurisdictions The Uniform Commercial Code was designed to do that for areas concerning the sale of goods, commercial dealings with banks, warehouse receipts, investment securities, and secured transactions.

UCC Article 2 deals with the sales of goods. It does not cover service contracts or real estate It loosens some of the specific requirements for an offer and acceptance especially when the parties have dealt with each other in the past. It also includes provisions to protect consumers like express and implied warranties as well as an implied warranty of merchantability and implied warranty of fitness for a particular purpose

UCC Article 3 deals with commercial paper like checks and bank drafts. Article 9 deals with security instruments in property The UCC exists in all states with the exception of Louisiana. Louisiana does have most of the major provision in its law, however. Keep in mind that the states have not all passed exactly the same version of the UCC.

Contracts Contract law affects every facet of our existence Next week we will look at different business structures and how the law can impact that choice We will also see what is happening with our good friends the Applegate’s now