Business Law I Introduction to Contracts

Contracts Definition A promise that the law will enforce. Contracts exist to make business matters more predictable. Judicial Activism vs. Judicial Restraint Judicial restraint makes the law less flexible but more predictable. Judicial activism makes the law more flexible but less predictable.

Elements of a Contract Agreement Consideration Legality Capacity One party must make a valid offer, and the other party must accept it. Consideration There has to be bargaining that leads to an exchange between the parties. Legality The contract must be for a lawful purpose. Capacity The parties must be adults of sound mind.

Types of Contracts (or Agreements) Bilateral and Unilateral Contracts Bilateral -- both parties make a promise (to do something) to each other. Unilateral -- one party makes a promise to the other that the other party can accept only by doing something specific.

Types of Contracts (cont’d) Express and Implied Contracts Express -- the two parties to the contract explicitly state all of the important terms of their agreement. Implied -- the words and conduct of the parties indicate that the parties intended to make an agreement.

Types of Contracts (cont’d) Types of Contracts by Enforceability Valid -- A contract that is legally binding and fully enforceable by the court. Void -- A contract that has no legal effect whatsoever. Voidable -- A contract that may be voided or canceled by one of the parties. Unenforceable -- A contract that cannot be upheld by a court because of some rule of law.

Case Analysis Implied Contracts Demasse v. ITT Corporation, Supreme Court of Arizona, 1999 Facts Issue – Did ITT have the right unilaterally to change the layoff policy? Decision - No Reasoning – An employer has the right to lay off at-will employees for virtually any reason, and to unilaterally change layoff policies with respect to such employees. When words or conduct establish an implied contract however, the employee is no longer at-will.

Types of Contracts (cont’d) Executory and Executed Contracts Executory -- when one or more parties has not fulfilled its obligations under the contract. Executed -- when all parties to the contract have fulfilled their obligations under the contract.

“Equitable Remedies” created by Judicial Activism Contract Remedies Four Theories of Recovery for Breach: Express Contract Defendant made an explicit Promise There is a valid Contract Contract is enforced based on explicit terms Implied Contract Defendant implied a Promise by words or conduct There is a valid Contract, but without a formal agreement Contract is enforced based on implied terms Promissory Estoppel Quasi-Contact “Equitable Remedies” created by Judicial Activism

Promissory Estoppel Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that: The Defendant made a promise knowing that the Plaintiff would likely rely on it. The Plaintiff did significantly rely on the promise; and The only way to avoid injustice is to enforce the promise.

Quasi-contract Even when there is no contract, a court may use quasi-contract (contract-like duties imposed by the court) to compensate a Plaintiff who can show that: He gave some benefit to the Defendant. He reasonably expected to be paid for the benefit and the Defendant knew this; and The Defendant would be unjustly enriched if she did not pay. The damages awarded are called quantum meruit, meaning that the plaintiff gets “as much as he deserved.”

Case Analysis Quasi-Contract Novak v. Credit Bureau Collection Service, Indiana Appeals Court, 2007 Facts Issue – Was the credit bureau entitled to damages based on quasi-contract? Decision - Yes Reasoning – A plaintiff who has supplied services to a defendant, although acting without the defendant’s consent, is entitled to restitution if he is expected to charge for such services, the services were necessary to prevent bodily harm, and it is impossible for defendant to give consent.

Sources of Contract Law Common Law Summarized for each jurisdiction in the Restatement (Second) of Contracts. Statute Adapted by each jurisdiction from the Uniform Commercial Code. UCC Article 2 governs the sale of goods. “Goods” means anything moveable, except for money, securities, and certain legal rights. In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods.

Choice of Law: Goods vs. Services Common Law Services (real estate, stocks, bonds and intangibles) Service element is predominant What is the nature of the transaction? Mixture (goods and services) Goods element is predominant Goods (tangible personal property) Statutory Law (UCC)

Analysis of Contract Issues 1. Is there a contract? 2. Is the contract enforceable? 3. Who can enforce the contract? 4. Was the contract breached? 5. What are the remedies?

Elements of a Contract - Agreement

Meeting of the Minds The parties can form a contract only if they had a meeting of the minds. They must understand each other and intend to reach an agreement. A judge will make an objective assessment of any disagreements about whether a contract was made -- whether or not a reasonable person would conclude that there was an agreement, based on the parties’ conduct.

Offer An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms. Elements of a valid offer are: Present intent to contract Definiteness of terms Communication to the offeree

Offer (cont’d) Problems with Intent Problems with Definiteness An invitation to bargain is not an offer. A letter of intent may or may not be an offer, depending on the writer’s intent. An advertisement is generally not an offer. Problems with Definiteness The term of the offer must be definite. UCC and Open Terms Some agreements can be binding, even with open terms if both parties intend to make a contract.

Case Analysis Offer Baer v. Chase, Third Circuit Court of Appeals, 2004 Facts Issue – Was Chase’s promise definite enough to be enforced? Decision - No Reasoning – To create an enforceable agreement, the parties need to agree on all of the essential terms. One such term is price.

Solicitation of Offers Advertisements Auctions Bids Solicitations: general ads, price lists, goods displayed in stores. Solicitations: offering the item at auction. Solicitations: advertising for bids. Construed as an offer if specific acts are required of offeree and unfairness would result if not enforced. Becomes an offer if advertised as “without reserve”. Even though a subcontractor’s bid is an offer, it generally cannot be withdrawn if the general contractor has relied on it.

Termination of Offers Termination by Revocation Effective when the offeree receives it. Termination by Rejection If an offeree rejects an offer, the rejection immediately terminates the offer. If an offeree counteroffers, it is a rejection that immediately terminates the offer.

Options An option is a separate contract for the limited purpose of holding an offer open. Creating an Option Did the offeror promise to hold the offer open? Did the offeror pay consideration for the promise to hold the offer open? Option created If yes

Offer Summary There is a valid offer if there is: Intent – Objectively determined. Definiteness – Sufficiently clear so that what was promised can be determined. Communication -- Terms that are not adequately communicated (such as those in fine print) are not part of the offer. The offer is still valid if it has not: Been terminated by its own time limit. Lapsed. Been revoked. Been rejected. Been terminated by operation of law due to: Death or insanity of either party. Destruction of the subject matter. Intervening illegality.

Acceptance Acceptance is the assent, either express or implied by the circumstances, to an offer that is requisite to the formation of a contract. Elements of a valid acceptance are: Present intent to contract Exactness of the acceptance Communication to the offeror

Acceptance (cont’d) The offeree must say or do something to accept. In a bilateral contract, the offeree generally must accept by making a promise. In a unilateral contract, the offeree must accept by performing. Mirror Image Rule (Common Law) Requires that acceptance be on precisely the same terms as the offer.

UCC and the Battle of Forms Under UCC §2-207, an acceptance that adds additional or different terms may form a contract for sales of goods in certain cases. For a sale of goods, the most important factor is whether the parties believe they have formed an agreement. New terms added by the offeree do not void the agreement if accepted by the offeror. If terms are changed, a court will rely on general principles of the UCC to create a fair contract. If a party wants to contract only on his terms, the agreement must clearly state that.

Acceptance Exactness Common Law Rule (for sale of real estate and services, primarily) Acceptance cannot materially vary from the offer. If it does, it is a rejection of the offer and a counteroffer. UCC Rule (2-207) (for the sale of goods) – when contract made by exchange of forms Acceptance form can have terms additional to or different from the offer. A contract can result, but the differing terms may not be part of the contract. UCC Rule - when forms are not exchanged

Communication of Acceptance The offeree must communicate his acceptance for it to be effective. Communication may be in person or by an acceptable form of communication. Acceptance is effective upon dispatch… meaning the moment it is out of the offeree’s control (the “mailbox rule”).

Acceptance Communication Stipulated Means of Communication Time, place, or method of communication spelled out in offer. Full compliance required for effective acceptance. Authorized Means of Communication Spelled out in offer, implied by way offer communicated, or implied by trade usage. Acceptance effective when dispatched. Reasonable Means of Communication (rule of UCC and some courts) Any means deemed reasonable by the court in light of the circumstances. Unauthorized Means of Communication Generally, a means slower than the way the offer is communicated. Acceptance not effective until received.

Acceptance Summary There is a valid acceptance if there is: Intent – Objectively determined. Exactness – No material changes from the offer. Communication – In the stipulated manner as spelled out in the offer. By an expressly or impliedly authorized means (effective when dispatched). By an nonauthorized means (effective when received).

Agreement Summary Is there a contract? Is there a valid Offer? Intent? Definiteness? Communication? Acceptance? Is there: Intent? Exactness? Communication?

Elements of a Contract - Consideration

A Bargain and an Exchange Consideration means that there must be bargaining that leads to an exchange between the parties. Consideration can be anything that someone might want to bargain for. A promisor is the person who makes the promise, and promisee, the person to whom the promise is made.

A Bargain and an Exchange “Bargaining is obligating yourself in order to induce the other side to agree.” The thing bargained for can be: another promise. an action without a promise. a promise to do something or a promise to refrain from doing something.

A B Bargain OR AND Which causes.. There is consideration to support a contract between A and B, when they bargain... Bargain A B and their bargaining causes BOTH parties ... Which causes.. OR A to suffer a detriment AND …to either give a benefit to the other or to suffer a detriment themselves. A to give B a benefit B to give A a benefit B to suffer a detriment Consideration supports a contract. The amount of consideration is not as important as its mere presence!

Adequacy of Consideration Courts seldom inquire into the adequacy of consideration. A previously paid benefit is generally not consideration because it was not meant to induce the other side to agree. Under the doctrine of promissory estoppel, a court may enforce a promise without consideration if a party relied on a promise to his detriment and only enforcement will prevent an injustice.

Mutuality of Obligations Illusory Promise If one party’s promise is conditional, the other party is not bound to the agreement. Sales Law: Requirements and Output Contracts Section 2-306 of the UCC expressly allows output and requirements contracts in the sale of goods.

Case Analysis Consideration You Be the Judge - Culbertson v. Brodsky, Texas Court of Appeals, 1990 Facts Issue – Did Brodsky give valid consideration that makes Culbertson’s promise enforceable? Decision? Reasoning? Lower court Ruling REVERSED

Preexisting Duty A promise to which the promissor is already obligated is not consideration. Exceptions: If the scope of the promisor’s task increases, that increase is consideration. When unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is valid consideration. If both parties agree to cancel a contract, then form another one in its place, the new contract is valid. Modification of a sale of goods is allowable without consideration, unless there is a written agreement forbidding such modifications.

Preexisting Duties Type Reason Exception Promises not to commit crimes or torts Since every member of society has this duty, the promise lacks consideration. Promises by public officials to perform ofrficial duties Since public officials are bound to perform their official duties, these promises lack consideration

Preexisting Duties (cont’d) Type Reason Exception Promise to perform preexisting contractual duties Common law rule UCC Rule (2-208) Since the promisee is already under contract to perform the promise, it lacks consideration. If commercially reasonable and freely agreed to, promise to alter existing contract for sale of goods is enforceable. Unforeseeable difficulties that make performance impossible or highly impractical can make promise unenforceable. No additional consideration is needed.

Preexisting Duties (cont’d) Type Reason Exception Promises to pay part of a debt Liquidated debt Unliquidated debt Since the amount is due and certain, a promise to pay less lacks consideration. Since the amount is genuinely in dispute, an agreement resulting in accord and satisfaction is enforceable. Composition agreements enforced without additional consideration. Under UCC 1-207, some courts allow collection of the remainder if checks marked “payment in full are cashed with reservation.

Settlement of Debts Liquidated Debt A liquidated debt is one in which there is no dispute about the amount owed. In cases of liquidated debt, if the creditor agrees to take less than the full amount as full payment, her agreement is not binding. If the debtor offers a different performance to settle the debt and the creditor agrees, the agreement is binding.

Settlement of Debts Unliquidated Debt A debt is unliquidated if: (1) the parties dispute whether any money is owed, or (2) the parties agree that some money is owed but dispute how much. The parties may agree to settle for less than what is owed; this “accord and satisfaction” will be enforced if the debtor pays the agreed amount.

Consideration Summary There is valid consideration if there is: A bargained for exchange Of a promise, act, or forbearance That had legal value Not preexisting duty Not past consideration Not illusory promise Or a recognized exception: Promise to perform preexisting contractual duties under UCC 2-209, or unforeseen difficulties Accord and satisfaction of a liquidated debt “Payment in full” check for goods cashed with reservation under UCC 1-207 Composition agreement Past consideration recognized as moral obligation Promissory estoppel Relied on charitable subscription New promise to pay discharged debt if in writing or meets requirements of Bankruptcy Act

Quiz Matching Questions Quasi-contract Implied contract Express contract Promissory estoppel Bilateral contract An agreement with all terms stated explicitly. A judicial remedy based on a defendant’s promise on which the plaintiff reasonably relied. An agreement based on one promise in exchange for another. A judicial remedy based on a benefit given by the plaintiff to the defendant. An agreement based on the words and actions of the parties.

Quiz Matching Questions Mirror image rule Letter of intent Gap-filler Counteroffer Clickwrap A communication between negotiating parties that summarizes their progress and may imply a binding agreement. An agreement made online by a consumer who may not understand its terms. One method of rejecting an offer. A common law principle requiring the acceptance to be on exactly the terms of the offer. Terms supplied by the UCC for use in sale-of-goods contracts.

Quiz Matching Questions Liquidated debt Consideration Accord and satisfaction Illusory promise Preexisting duty A promise made by one party which in reality obligates him to do nothing. Something the promissor is already obligated to do. A debt in which the amount is undisputed. Payment of an agreed upon sum that is less than what the creditor originally claimed. Bargaining that leads to an exchange between the parties.

Quiz True/False Questions An express contract is an example of judicial activism. To be enforceable, all contracts must be in writing. Maria agrees to photograph Caitlin’s children, and Caitlin agrees to pay $800 for the pictures. This is a bilateral contract. Abdul hires Sean to work in his store, and agrees to pay him $9 per hour. This agreement is governed by the UCC. A principal purpose of contracts is to make business matters more predictable. F T F T

Quiz True/False Questions Shrinkwraps are typically enforceable even if the buyer does not bother to read them. An acceptance must be made in the same manner as the offer, that is, in writing, by phone, etc.. If an offer demands a reply within a stated period, the absence of a reply indicates acceptance. An offer may generally be revoked at any time before it is accepted. Without a meeting of the minds there cannot be a contract. F F T T

Quiz True/False Questions As long as one party gives consideration, there is a binding contract. Valid consideration requires that each party suffer a detriment and give benefit to the other. An illusory promise is no consideration. Promising to do something that one is already obligated to do is generally not consideration. A creditor who agrees to take less than the full amount of a liquidated debt is not bound by his/her agreement. T T T T