1. Its Legal, Ethical & Global Environment 6 th Ed. Its Legal, Ethical & Global Environment 6 th Ed. B U S I N E S S MARIANNE M. JENNINGS Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. Chapter 13 Contracts and Sales: Introduction and Formation

2. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 2 What is a Contract?  “A Contract is a promise (or set of promises) for breach of which the law gives a remedy.” Defined in Restatement (Second) of Contracts—American Law Institute (ALI)  “A Contract is a promise (or set of promises) for breach of which the law gives a remedy.” Defined in Restatement (Second) of Contracts—American Law Institute (ALI)

3. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 3 Sources of Contract Law  Common Law Based on English common law Summarized in Restatement (Second) of Contracts Applies to contracts with subject matters of land or services Examples: Mortgage, lease or medical services  Common Law Based on English common law Summarized in Restatement (Second) of Contracts Applies to contracts with subject matters of land or services Examples: Mortgage, lease or medical services

4. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 4  Uniform Commercial Code (UCC) Drafted by ALI and National Conference of Commissioners on Uniform State Laws Common law is not uniform from state to state First appeared in 1940s Adopted in part or whole in all states Article 2 governs contracts for the sale of goods More liberal than common law  Uniform Commercial Code (UCC) Drafted by ALI and National Conference of Commissioners on Uniform State Laws Common law is not uniform from state to state First appeared in 1940s Adopted in part or whole in all states Article 2 governs contracts for the sale of goods More liberal than common law Sources of Contract Law

5. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 5  Case 13.1 Cook v. Dowing (1995) Was the dentist a merchant? Did the fitting for dentures constitute a sale of goods? What public policy issues does the dissenting judge raise?  Case 13.1 Cook v. Dowing (1995) Was the dentist a merchant? Did the fitting for dentures constitute a sale of goods? What public policy issues does the dissenting judge raise? Sources of Contract Law

6. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 6 Sources of Contract Law  Uniform Commercial Code (UCC) Article 2A leases New addendum to UCC Covers leases of goods—long-term leases such as car leases Adopted in about ten states  Uniform Commercial Code (UCC) Article 2A leases New addendum to UCC Covers leases of goods—long-term leases such as car leases Adopted in about ten states

7. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 7 Types of Contracts  Bilateral vs. Unilateral Contracts Bilateral: First party (offeror) makes a promise in exchange for the second party’s (offeree’s) promise Example: You promise to pay back money with interest and the bank promises to loan you the money Unilateral: First party (offeror) makes a promise in exchange for offeree’s performance Example: “Drive my car across the country and I’ll pay you $500 plus expenses”  Bilateral vs. Unilateral Contracts Bilateral: First party (offeror) makes a promise in exchange for the second party’s (offeree’s) promise Example: You promise to pay back money with interest and the bank promises to loan you the money Unilateral: First party (offeror) makes a promise in exchange for offeree’s performance Example: “Drive my car across the country and I’ll pay you $500 plus expenses”

8. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 8  Express vs. Implied Express contracts are written or oral agreements Implied-in-fact contracts are non-spoken, non- written understandings Example: When you go into a doctor’s office, you have an implied contract to pay her for her services even though you may not sit down and organize the details  Express vs. Implied Express contracts are written or oral agreements Implied-in-fact contracts are non-spoken, non- written understandings Example: When you go into a doctor’s office, you have an implied contract to pay her for her services even though you may not sit down and organize the details Types of Contracts

9. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 9  Implied-in-Law (Quasi Contract) Fictional Contract created by a court Elements: one party confers a benefit on another Both are aware of the benefit and Retention of the benefit without compensation would be unfair and unjust.  Implied-in-Law (Quasi Contract) Fictional Contract created by a court Elements: one party confers a benefit on another Both are aware of the benefit and Retention of the benefit without compensation would be unfair and unjust. Types of Contracts

10. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 10  Void, Voidable and Void Void contracts are ones to do something illegal or against public policy—neither side can enforce Example: Contract to buy drugs Voidable contracts are contracts in which one party has the right to end the contract Example: Contracts of minors are avoidable Void Contracts are illegal and do not exist at law!  Void, Voidable and Void Void contracts are ones to do something illegal or against public policy—neither side can enforce Example: Contract to buy drugs Voidable contracts are contracts in which one party has the right to end the contract Example: Contracts of minors are avoidable Void Contracts are illegal and do not exist at law! Types of Contracts

11. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 11  Executed vs. Executory Executed contract is one in which the promises under the contract have been performed Executory contract is one that has been entered into but not yet performed Contracts can be partially executory/executed if one side has performed  Executed vs. Executory Executed contract is one in which the promises under the contract have been performed Executory contract is one that has been entered into but not yet performed Contracts can be partially executory/executed if one side has performed Types of Contracts

12. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 12 Formation of Contracts

13. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 13  Offer is the first part of the contract Parties Offeror = person who makes offer Offeree = person who receives offer Must have language that indicates intent to contract Not just inquiry More than negotiation Courts use an objective, not a subjective, standard  Offer is the first part of the contract Parties Offeror = person who makes offer Offeree = person who receives offer Must have language that indicates intent to contract Not just inquiry More than negotiation Courts use an objective, not a subjective, standard Formation of Contracts

14. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 14 Formation of Contracts  Case 13.2Leonard v. Pepsico (2000) Was the commercial an offer for a Harrier Jet? What was the acceptance? Does the commercial satisfy the statute of frauds?  Case 13.2Leonard v. Pepsico (2000) Was the commercial an offer for a Harrier Jet? What was the acceptance? Does the commercial satisfy the statute of frauds?

15. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 15  Offer Under common law offer must contain essential terms of the contract Parties Subject matter of the contract Price and Payment Terms Delivery Terms Performance Times Under UCC Article 2 offer need only contain the parties, the subject matter and quantity  Offer Under common law offer must contain essential terms of the contract Parties Subject matter of the contract Price and Payment Terms Delivery Terms Performance Times Under UCC Article 2 offer need only contain the parties, the subject matter and quantity Formation of Contracts

16. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 16  Offers Under the UCC, the court can consider industry custom and course of dealing in determining whether terms are sufficient.  Communication to offeree Offeree cannot accept offer that never arrives Ads are generally considered invitations for offers—not offers  Offers Under the UCC, the court can consider industry custom and course of dealing in determining whether terms are sufficient.  Communication to offeree Offeree cannot accept offer that never arrives Ads are generally considered invitations for offers—not offers Formation of Contracts

17. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 17  Termination of an Offer by Revocation Offer can be revoked any time prior to acceptance Exception is option Offeror is paid to hold offer open It is a separate contract for time UCC merchant’s firm offer UCC 2-205 Offer by merchant signed in writing states it will be kept open (irrevocable) for period stated (maximum of three months)  Termination of an Offer by Revocation Offer can be revoked any time prior to acceptance Exception is option Offeror is paid to hold offer open It is a separate contract for time UCC merchant’s firm offer UCC 2-205 Offer by merchant signed in writing states it will be kept open (irrevocable) for period stated (maximum of three months) Formation of Contracts

18. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 18  Termination of an Offer by Rejection Offeree indicates “no” Rejection by changes in terms—counteroffer  Termination by counteroffer - UCC 2-207 Non-merchants-addition of terms in acceptance does not equal a counteroffer. Acceptance results but additional terms are not part of contract  Termination of an Offer by Rejection Offeree indicates “no” Rejection by changes in terms—counteroffer  Termination by counteroffer - UCC 2-207 Non-merchants-addition of terms in acceptance does not equal a counteroffer. Acceptance results but additional terms are not part of contract Formation of Contracts

19. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 19  Termination by counteroffer - UCC 2-207 Merchants --‘battle of the forms’ Acceptance with additional terms = contract Additional terms are part of contract unless: Material—price, warranties (immaterial = shipment or payment terms) Offer limited—“This offer is limited to these terms” Objection to new terms  Termination by counteroffer - UCC 2-207 Merchants --‘battle of the forms’ Acceptance with additional terms = contract Additional terms are part of contract unless: Material—price, warranties (immaterial = shipment or payment terms) Offer limited—“This offer is limited to these terms” Objection to new terms Formation of Contracts

20. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 20 Formation of Contracts UCC Rules for Acceptance of Additional Terms

21. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 21  Case 13.3 Schulze and Burch Biscuit Co. v. Tree Top, Inc. (1987) Is arbitration a ‘material’ change? Was the offer limited to the terms of the offer?  Termination by Offer Expiration Time for offer expires Every offer expires (lapses) after a reasonable time  Case 13.3 Schulze and Burch Biscuit Co. v. Tree Top, Inc. (1987) Is arbitration a ‘material’ change? Was the offer limited to the terms of the offer?  Termination by Offer Expiration Time for offer expires Every offer expires (lapses) after a reasonable time Formation of Contracts

22. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 22  Acceptance: Offeree’s Response Offeree’s positive response Must be communicated to offeror Using proper means of acceptance Only offeree has power to accept  Acceptance: Offeree’s Response Offeree’s positive response Must be communicated to offeror Using proper means of acceptance Only offeree has power to accept Formation of Contracts

23. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 23  Acceptance: Offeree’s Response The mailbox rule Timing rule in contract acceptances that provides that acceptance is effective upon mailing if properly done. Acceptance by stipulated means Mailbox rule applies If offeree does not use means stipulated, then counteroffer and/or rejection  Acceptance: Offeree’s Response The mailbox rule Timing rule in contract acceptances that provides that acceptance is effective upon mailing if properly done. Acceptance by stipulated means Mailbox rule applies If offeree does not use means stipulated, then counteroffer and/or rejection Formation of Contracts

24. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 24  Acceptance with no stipulated means Mailbox rule if same means or stipulated means used Arrival if different (slower) method used If non-stipulated means used, it is a counteroffer and a rejection  Acceptance with no stipulated means Mailbox rule if same means or stipulated means used Arrival if different (slower) method used If non-stipulated means used, it is a counteroffer and a rejection Formation of Contracts

25. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 25  Case 13.4 Cantu v. Central Education Agency (1994) Who was the offeror? Does the UCC apply in this case? What is the distinction between the Davis case and the McKinney case?  Case 13.4 Cantu v. Central Education Agency (1994) Who was the offeror? Does the UCC apply in this case? What is the distinction between the Davis case and the McKinney case? Formation of Contracts

26. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 26  E-Commerce and Contract Formation Formation by ‘Clickon’, ‘Clickthrough’ or ‘Clickwrap’ agreements. Offeree agrees to terms contained in an online agreement. Offeree accepts by clicking the “I Agree” button.  E-Commerce and Contract Formation Formation by ‘Clickon’, ‘Clickthrough’ or ‘Clickwrap’ agreements. Offeree agrees to terms contained in an online agreement. Offeree accepts by clicking the “I Agree” button. Formation of Contracts

27. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 27  Case 13.5Mortenson v. Timberline (2000) When did Mortenson agree to the limitation on damages? How does the liability limitation square with UCC 2-207? Is the damage limitation clause unconscionable?  Case 13.5Mortenson v. Timberline (2000) When did Mortenson agree to the limitation on damages? How does the liability limitation square with UCC 2-207? Is the damage limitation clause unconscionable? Formation of Contracts

28. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 28  Consideration Distinguishes gifts from contracts The bargained-for exchange What each party is willing to give up for the other parties promise Courts are not concerned with the adequacy of consideration, only the legal sufficiency of consideration  Consideration Distinguishes gifts from contracts The bargained-for exchange What each party is willing to give up for the other parties promise Courts are not concerned with the adequacy of consideration, only the legal sufficiency of consideration Formation of Contracts

29. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 29  Consideration Unique consideration issues Charitable subscriptions are enforceable even though detriment is one-sided Reliance (promissory estoppel) provides element of detriment for contracts not yet begun  Consideration Unique consideration issues Charitable subscriptions are enforceable even though detriment is one-sided Reliance (promissory estoppel) provides element of detriment for contracts not yet begun Formation of Contracts

30. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 30  Contract Form: When Writing is Required Statute of Frauds (1677) controls what must be written Types for contracts Real property Contracts that can not be performed in one year Contracts to pay the debt of another UCC-contracts for sale of goods for $500 or more  Contract Form: When Writing is Required Statute of Frauds (1677) controls what must be written Types for contracts Real property Contracts that can not be performed in one year Contracts to pay the debt of another UCC-contracts for sale of goods for $500 or more Formation of Contracts

31. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 31  Statute of Frauds: Exception Performance  What Form of Writing is Required? Need not be one formal document—can be pieced together Merchant’s confirmation memorandum- 2-201  Statute of Frauds: Exception Performance  What Form of Writing is Required? Need not be one formal document—can be pieced together Merchant’s confirmation memorandum- 2-201 Formation of Contracts

32. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 32  Case 13.6 Rosenfeld v. Basquiat (1996) Did the contract comply with the statute of frauds? What is the effect of not complying with the statute of frauds? Was the writing void?  Case 13.6 Rosenfeld v. Basquiat (1996) Did the contract comply with the statute of frauds? What is the effect of not complying with the statute of frauds? Was the writing void? Formation of Contracts

33. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 33  The Writing Requirement in the Electronic Contract Allows for the identification of electronically transferred documents using encryption technology Digital signatures help authenticate users E-SIGN and UETA  The Writing Requirement in the Electronic Contract Allows for the identification of electronically transferred documents using encryption technology Digital signatures help authenticate users E-SIGN and UETA Formation of Contracts

34. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 34  The effect of the Written Contract: Parol Evidence Contract reduced to its final and unambiguous form cannot be contradicted with extrinsic evidence Exceptions include evidence on fraud, misrepresentations, and ambiguities  The effect of the Written Contract: Parol Evidence Contract reduced to its final and unambiguous form cannot be contradicted with extrinsic evidence Exceptions include evidence on fraud, misrepresentations, and ambiguities Formation of Contracts

35. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 35 Issues in Formation of International Contracts  UN’s Convention on Contracts for the International Sale of Goods (CISG) Adopted in 1980 United States has adopted  Party Autonomy Still Controlling in International Contracts Must Provide for Additional Risks  UN’s Convention on Contracts for the International Sale of Goods (CISG) Adopted in 1980 United States has adopted  Party Autonomy Still Controlling in International Contracts Must Provide for Additional Risks

36. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 36 Issues in Formation of International Contracts  Case 13.7 Intershoe, Inc. v. Bankers Trust (1991) Is the memo a final writing? What dangers would the court introduce if orders such as this were contradicted by oral testimony?  Case 13.7 Intershoe, Inc. v. Bankers Trust (1991) Is the memo a final writing? What dangers would the court introduce if orders such as this were contradicted by oral testimony?