The Essentials of Contract Law UNIT 7 The Essentials of Contract Law SUNY CRIMINAL & BUSINESS LAW/MUSOLINO

Learning Objectives Explain the three theories of contract law. Identify the six elements of a contract. Explain the place of the UCC in contract law. Distinguish contracts from other agreements between different parties. Explain the concept of privity and contract law. Explain the nature of valid, void, voidable, and unenforceable contracts

Learning Objectives Contrast unilateral and bilateral contractual arrangements. Outline the difference between express and implied contracts. Discuss the difference between quasi-contracts and implied-in-fact contracts. Differentiate between formal and informal contracts. Explain how executory contracts differ from executed contracts.

What is an agreement between two or more competent parties? Question? What is an agreement between two or more competent parties? Deal Bond Treaty Contract The correct answer is “D” – contract. See next slide.

The Basics of Contract Law an agreement between two or more competent parties, based on mutual promises, to do or refrain from doing some particular thing that is neither illegal nor impossible results in an obligation or a duty that can be enforced in a court of law Getting Students Involved Discuss with the students what constitutes a contract and why contracts are necessary. Ask students to surmise how and when contracts originate. Suggest that they write down at least three questions they have about the nature of contracts and encourage them to refer to these questions periodically throughout the chapters on contracts to see if they have found any answers.

What is the contracting party who makes a promise? Promisee Promisor Question? What is the contracting party who makes a promise? Promisee Promisor Obligee Obligor The correct answer is “B” – promisor. See slide 7-8.

What is the contracting party to whom a party owes an obligation? Question? What is the contracting party to whom a party owes an obligation? Promisee Promisor Obligee Obligor The correct answer is “C” – obligee. See next slide.

The Basics of Contract Law Promisor the contracting party who makes a promise Promisee the one to whom the promise is made is the Obligor the party who is obligated to deliver on a promise or undertake some act of performance Obligee the contracting party to whom this party owes an obligation The contracting party who makes a promise is known as the promisor ; the one to whom the promise is made is the promisee . The party who is obligated to deliver on a promise or undertake some act of performance is called the obligor . The contracting party to whom this party owes an obligation is called the obligee

The Objectives of Contract Law The court’s goal in the remedy phase of a contract dispute is to place the injured party in as good a position as he or she would have been had the contract been carried out Mitigation Punitive damages There are built-in modifications to this theory however. For instance, the innocent party is not permitted to take advantage of the breach by deliberately raising the level of damages that the other party will have to pay as a consequence of the breach. This rule is known as the principle of mitigation . Another modification involves punitive damages. Punitive damages are damages that are designed to punish the offender.

Question? Which theory states that a contract will exist once all of the parties with the legal capacity to contract have actually accepted all obligations and benefits under the contract ? Equal value theory Equity theory Will theory Judgment theory The correct answer is “C” – will theory. See next slide.

Three Theories of Contract Law The will theory a general principle of law that states that a contract will exist once all of the parties with the legal capacity to contract have actually accepted all obligations and benefits under the contract and have exchanged, or promised to exchange, things of value At times, to outsiders, the terms of a contract may seem disproportionate or unfair. However, as long as the parties freely enter a legal agreement with equal bargaining power and full contractual capacity, a valid contract will result.

Three Theories of Contract Law The equal value theory or equity theory insisted that a contract would be valid only if the things exchanged were of equal value bartering In an era when bartering was the primary way to create a contract, the equity theory worked very well. Bartering generally involves an exchange of services and/ or goods that are equal in value, rather than a payment of money. In the nineteenth century, however, with the advent of industrial capitalism, the equity theory proved to be unworkable most of the time, because when an industrial capitalist invests money in a factory, a coal mine, or a railroad, that capitalist must make a profit to stay in business.

Three Theories of Contract Law If each element is present, then a contract exists, regardless of what the parties may argue after the fact The formalist theory of contract law the courts look to see if certain elements exist offer, acceptance, mutual, assent, capacity, consideration, and legality. Offer An offer is a proposal made by one party to another indicating a willingness to enter a contract. The person who makes an offer is called the offeror; the person to whom the offer is made is the offeree. (See Chapter 8.) Acceptance In most cases, only a specifically identified offeree or his or her authorized agent has the right to accept an offer. Acceptance means that the offeree freely agrees to be bound by the terms of the offer at the exact time that the acceptance is communicated to the offeree. (See Chapter 8.) Mutual Assent If a valid offer has been made by the offeror, and a valid acceptance has been made by the offeree, then mutual assent exists between them. Often the court will say that mutual assent exists only if there has been a “meeting of the minds” among the parties to the agreement. If mutual assent has been destroyed, the relationship that results is said to be a defective agreement. (See Chapter 9.) Capacity The fourth element necessary to a make a contract complete is capacity. Capacity is the legal ability to make a contract. (See Chapter 10.) Consideration The fifth element to any complete contract is the freely exercised mutual exchange of benefits and sacrifices. This willful exchange is called consideration. Consideration is the thing of value promised to the other party in exchange for something else of value promised by the other party. (See Chapter 11.) Legality The final element of a binding contract is legality. Parties cannot be allowed to enforce a contract that involves doing something that is illegal. (See Chapter 12.)

The Six Elements of a Contract

Contracts and the UCC The Uniform Commercial Code (UCC) is a unified set of statutes designed to govern almost all commercial transactions Article 2 of the UCC sets down the rules that govern sale-of-goods contracts All other types of contracts, including employment contracts and real property contracts, are governed by common law rules and certain special statutory provisions

Contracts and Other Agreements All contracts are agreements, but not all agreements are contracts. To be enforceable, an agreement must conform to the law of contracts. The courts have never been agreeable to the enforcement of social agreements: dates, dinner engagements, or the like. Many states have extended this concept to include agreements to marry and agreements to live together without the benefit of a marriage contract.

Contractual obligation Gordon defense Question? When both parties have a legally recognized interest in the subject of the contract it is called ________. Privity Judgment Contractual obligation Gordon defense The correct answer is “A” – privity. See next slide.

Privity Contracts and Privity both parties have a legally recognized interest in the subject of the contract if they are to be bound by it Terms When an offer is accepted and there is consideration, the process is called “objective manifestation of mutual assent.” This process is commonly referred to as “making a deal.” The word deal comes from the Middle English deel, through the Old English dael or dal, meaning division or portion, which in turn is derived from the Old High German teil, meaning part. Before the twelfth century, engaging in bargaining or trade was known as dealing. In the late sixteenth century, a deal came to mean what it does today—a transaction for mutual benefit.

Contractual Characteristics Valid contract one that is legally binding and fully enforceable by the court Void contract one that has no legal effect whatsoever A valid contract is one that is legally binding and fully enforceable by the court. In contrast, a void contract is one that has no legal effect whatsoever. For example, a contract to perform an illegal act would be void.

Contractual Characteristics Voidable contract one that may be avoided or canceled by one of the parties Unenforceable contract one that, because of some rule of law, cannot be upheld by a court of law A voidable contract is one that may be avoided or canceled by one of the parties. Contracts made by minors or induced by fraud or misrepresentation are examples of voidable contracts. An unenforceable contract is one that, because of some rule of law, cannot be upheld by a court of law. An unenforceable contract may have all the elements of a complete contract and still be unenforceable.

What type of contract is one in which both parties make promises? Question? What type of contract is one in which both parties make promises? Voided contract Unilateral contract Express contract Bilateral contract The correct answer is “D” – Bilateral contract. See next slide.

Contractual Characteristics Unilateral contract an agreement in which one party makes a promise to do something in return for an act of some sort Bilateral contract one in which both parties make promises Breach of contract occurs when one of the two parties fails to keep the promise The classic example of a unilateral contract is a reward contract. A person who promises to pay $5 to the finder of a lost compact disk does not expect a promise in return. Rather, the person expects the return of the lost CD. When the CD is returned, the contract arises and the promisor owes the finder $5.

Contractual Characteristics Express contract requires some sort of written or spoken expression indicating a desire to enter the contractual relationship Implied contract created by the actions or gestures of the parties involved in the transaction When contracting parties accept mutual obligations, either through oral discussion or written communication, they have created an express contract. Oral negotiations in many cases will be reduced to writing, but this is not always necessary. One who knowingly accepts benefits from another person may be obligated for their payment, even though no express agreement has been made. An agreement of this type can be either implied-in-fact or implied-in-law.

Contractual Characteristics Informal contract Any oral or written contract that is not under seal or is not a contract of record Formal contract has to be (1) written; (2) signed, witnessed, and placed under the seal of the parties; and (3) delivered Contract of record An informal contract generally has no requirements as to language, form, or construction. It comprises obligations entered into by parties whose promises are expressed in the simplest and usually most ordinary, non-legal language. A seal is a mark or an impression placed on a written contract indicating that the instrument was executed and accepted in a formal manner. The UCC removed the requirement for a seal in sale-of-goods contracts. Some states, however, still require the use of the seal in agreements related to the sale and transfer of real property.

Contractual Characteristics Executory contract A contract that has not yet been fully performed by the parties is called an Executed contract When a contract’s terms have been completely and satisfactorily carried out by both parties Background Information Early Roman law, like Anglo-Saxon law and other early legal systems, recognized only executed contracts that involved face-to-face dealings and an exchange of property at the moment the deal was made. With the expansion of the Roman Empire and increased foreign trade, rules to address unfulfilled promises developed, allowing new flexibility in commerce.