CONTRACTS.

CONTRACTS

What Is a Contract? A contract is a legally enforceable promise or set of promises Contract law is state law and is generally found in the Common Law. With some contracts, the Uniform Commercial Code may apply.

The Uniform Commercial Code
Had its beginning in the Law Merchant. Principles eventually became part of the Common Law. Prior uniform laws: Uniform Negotiable Instruments Act 1896 Uniform Sales Act 1906

The Uniform Commercial Code
Created by American Law Institute and the National Conference of Commissioners on Uniform State Laws (1952) Purposes: Promote fair dealing and higher standards of behavior in the marketplace Establish a uniform law to govern commercial transactions that take place across state lines

UCC has 11 Articles Art 1 General Provisions and Definitions
Art 3 Negotiable Instruments Art 4 Banking Art 9 Secured Transactions

Article 2 of the UCC Article 2 applies to Contracts for the Sale of Goods Goods are Tangible Moveable Creation of Practical Contract Rules UCC is more flexible than contract law Good Faith and Fair Dealing All parties must act in good faith Implied Warranties Merchant

ELEMENTS OF A VALID CONTRACT
Offer + acceptance = agreement Consideration Competent parties True assent Legality Form required by law

Types of Contracts Valid, Unenforceable, Voidable and Void
Valid contracts meet all legal requirements Unenforceable contracts meet basic legal requirements but will not be enforced due to some other legal rule Voidable contracts may be canceled by one or both of the parties Void contracts lack one or more of the basic requirements for a contract

Types of Contracts Unilateral and Bilateral Contracts
In a unilateral contract, only one of the parties makes a promise The other party performs an act in exchange for the promise In a bilateral contract, both parties make a promise

Introduction Offer + Acceptance = Agreement
Did one of the parties indicate to the other party that he or she was willing to enter into an agreement on certain terms and conditions? Did the other party indicate that he or she was willing to agree to those terms and conditions? Courts look at the intent of the parties objectively

PROBLEM Over the phone, Mr. Smith, of Smith Builders, Inc, offers to build Mr. Jones a new garage for $30,000. Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back. Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction. Did they have a valid contract? Why or why not? Does it matter that any agreement was verbal?

AGREEMENT Express Implied in fact Implied in law/Quasi-contract

What Is an Offer? An offer is the manifestation of a willingness to enter into a contract if the other person agrees to the terms Offeror - party makes the offer Offeree - party to whom the offer has been made Intent Objective Present intent to contract Not: preliminary negotiations, offers made in jest, anger, undue influence How definite the supposed offer is Whether the offeror has communicated it to the offeree

Definiteness Did the offeror specifically indicate what he was willing to do and what he wanted the offeree to do or agree to do in return? The more specific the proposal, the more likely the court will call it an offer Under UCC 2-204, if the parties are acting as though they have a contract, that is enough to create a binding agreement Gap filling provisions in the UCC fill in the blanks for price, quantity, delivery, and time for payment

Communication to the Offeree
Act of communicating the offer indicates that the offeror is willing to be bound by its terms Failure to communicate offer may be indication that offeror has not yet decided to enter into a binding agreement Example: private reward

Advertisements Advertisements Rewards Auctions Bids
Courts generally hold that ads for the sale of goods at a specified price are not offers, but are invitations to negotiate or to make an offer Specific ads are considered offers under certain circumstances Rewards Unilateral Contracts Auctions Invitation to offer Bids

TERMINATION OF OFFER How can an offer terminate?
These are not the same as the ways in which a contract terminates. A contract does not exist yet.

TERMINATION OF OFFER REVOCATION BY OFFEROR REJECTION BY OFFEREE
COUNTEROFFER LAPSE OF TIME DEATH OF DISABILITY OF EITHER PARTY DESTRUCTION OF SUBJECT MATTER. OPERATION OF LAW

LAPSE OF TIME I offer to sell you my home for $100,000. I will keep the offer open until October 15. On September 20, someone makes me an offer of $120,000. I accept the $120,000 offer, and revoke the offer I made to you. Can I do that?

OPTION CONTRACT Consideration is paid to keep an option open.

But consider… I am an antique car dealer, and you are a customer.
I send you a letter in which I offer to sell you a particular car for $100,000. I will keep the offer open until October 15. On September 20, someone makes me an offer of $120,000. I accept the $120,000 offer, and revoke the offer I made to you. Can I do that? What is different about this example?

Under the UCC, you can create a FIRM OFFER
If the seller is a MERCHANT (someone in the business of selling the product. Not a casual seller.) The offer is made in writing AND It will be kept open for up to 3 months. A FIRM OFFER is enforceable w/o any consideration being paid.

What Is an Acceptance? Present intent to contract on the part of the offeree Assent may be express or implied Offeree must accept offer on offeror’s terms

What Is an Acceptance? Accepting an Offer for a Unilateral Contract
Performance of requested act or making the requested promise Accepting an Offer for a Bilateral Contract Make promise requested in offer Silence as Acceptance The law generally requires some affirmative indication of assent In some cases, silence is viewed as acceptance Who Can Accept an Offer? Original offeree or agent

MIRROR IMAGE RULE Acceptance must “mirror” the offer.
Offeree must accept the offeror’s terms exactly. UCC Exception: The Battle of the Forms

MANNER OF ACCEPTANCE: Acceptance by Shipment
Offeror can specify the manner of acceptance, and offeree must use. If don’t use offeror’s terms – becomes a counteroffer. Acceptance by Shipment An order requesting prompt or current shipment of goods impliedly invites acceptance by a promise to ship or by prompt shipment of the goods

WHEN IS ACCEPTANCE EFFECTIVE?
When parties negotiate by correspondence, communications have crossed in the mail. So the courts developed the MAILBOX RULE.

MAILBOX RULE. Acceptance takes place at the time the message is given to the transmitting agency for delivery. Acceptance is effective when mailed, so a K is formed at that time

See Morrison v. Thoelke, 155 So. 2d 889; 1963 Fla. App
See Morrison v. Thoelke, 155 So. 2d 889; 1963 Fla. App. LEXIS 3084 (1963). B.s (of real estate) made a written offer (by signing a K) and mailed it to S.s in another state. S.s signed it and mailed it back. Before the K is received, the S.s called and canceled. Can they do that?

Another Example: 12/23 S, by letter, through his attorney, offered to sell B property for $240,000 1/10 B, by his attorney, sent a written reply offering $230,000 Same day… B’s attorney phoned S’s attorney and in the course of the conversation, informed him of B’s reply Later the same day… B sent a telegram purporting to accept S’s original offer of $240,00 Telegram was delivered the same day, prior to the receipt of the reply offering $230,000. Was a contract formed?

EXCEPTIONS TO MAILBOX RULE
EXCEPTIONS TO MAILBOX RULE. (Acceptance will not be effective when mailed, but only if and when it is received.) Incorrect address or insufficient postage. Offeror protects him/herself – Say in offer: Acceptance is not effective until it is received.

EXCEPTIONS 3. Offeree doesn’t use proper form
If offeror specifies means, and offeree doesn’t use it, response is not an acceptance but a counteroffer. If offeror hasn’t specified means, offeree can use any reasonable means. Usually, same form as the offer was in, or anything faster. (But if offer was by mail, and the acceptance cannot be mailed and received within the time limit, that form is not reasonable.)

EXCEPTIONS 4. §40 of the Restatement of Contracts
If offeree first mails a rejection & then tries to accept, the 2nd response is a counteroffer unless it is received first.

PROBLEM 1/1 Tom mails an offer 1/3 Mary receives the offer
1/5 Mary mails a rejection 1/6 Mary mails an acceptance 1/7 Tom receives the rejection 1/8 Tom receives the acceptance

PROBLEM Apply the Mailbox Rule as if the Restatement exception did not exist. Is there a contract? When is the rejection effective? When is the acceptance effective? Apply the Restatement exception.

PROBLEM (Over the phone, Mr. Smith, of Smith Builders, Inc, offers to build Mr. Jones a new garage for $30,000. Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back. Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction. Did they have a valid contract? Why or why not?) Mr. Jones is at home when Smith Builders arrive. He knows he has never authorized the work, but decides he will say nothing until the garage is completed. Then he hopes he will not have to pay.

PROBLEM When Ms. Williams is 12 years old, her wealthy uncle gives her a document in which he promises to transfer to her Blackacre estate when she turns twenty-one. She accepts his offer. Ms. Williams turns twenty-one, but her uncle refuses to give her the property. Was there a valid contract?

The Idea of Consideration
Legal Value Promisee does or agrees to do something he or she had no prior legal duty to do in exchange for the promisor’s promise Promisee agrees not to do something he or she has a legal right to do in exchange for the promisor’s promise Adequacy of Consideration Bargained for and Given in Exchange

Valid Consideration 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

Rules of Consideration
Preexisting Duties Promises to Discharge Debts for Part Payment Past Consideration Moral Obligations Forbearance to Sue Mutuality of Obligation

COMPETENT PARTIES Capacity Contracts are VOIDABLE by the incompetent
Ability of a person to do a legally valid act Three major classes of persons with limited capacity include: Minors People who are mentally impaired Intoxicated persons Contracts are VOIDABLE by the incompetent

Minors’ Contracts The Reason for Minors’ Incapacity
May not be able to bargain effectively with older, more experienced persons Ability To Disaffirm Minors may disaffirm their contracts at any time during their minority and for a reasonable time after attaining majority Ratification A minor who does not disaffirm within a reasonable time after attaining majority is held to have ratified the contract and loses the right to disaffirm

Minors’ Contracts The Consequences of Disaffirming
Minors who successfully disaffirm a contract are entitled to the return of any consideration they have given the adult party to the contract Barriers to Disaffirmance Because of potential unfairness to adults, some courts have created exceptions to the general rule that minors can disaffirm their contracts

Minors’ Contracts Emancipation Misrepresentation of Age by Minors
Necessaries Things essential to a minor’s continued existence and general welfare Minors are generally liable on a quasi contract basis for the reasonable value of necessaries furnished to them

Contracts of Mentally Impaired and Intoxicated Persons
Theory of Incapacity The Test of Incapacity Whether the party at the time the contract was entered into, had sufficient mental capacity to understand the nature and effect of the contract The Effect of Incapacity Contract is voidable at the election of that person

Contracts of Mentally Impaired and Intoxicated Persons
Necessaries Liability is for the reasonable value of necessities The Right to Disaffirm People lacking mental capacity can disaffirm their contracts, and on disaffirmance, must return any consideration they received that they still have Ratification People who regain their capacity can ratify their contracts

PROBLEM Attorney White has been the wealthy Widow Black's financial advisor for years. Attorney White has recently gone into the real estate development business and persuades Widow Black that it would be a wise investment to purchase from him, land in Florida that he is planning to develop into a resort area. Two years later, when no work is even begun, Widow Black discovers that the land is unfit for such a development.

TRUE ASSENT/GENUINESS OF ASSENT/REAL CONSENT
The Need for Real Consent Agreement must be voluntary to be enforceable The Parties’ Duty of Care Parties who enter into contracts are required to exercise reasonable caution and judgment The Remedy Contracts entered into as a result of misrepresentation, fraud, duress, undue influence, and certain kinds of mistake are voidable: RECISSION Ratification One who waits too long to complain has indicated satisfaction with the agreement despite the initial lack of consent

Misrepresentation Knowledge of Falsity Materiality Fact versus Opinion
Misrepresentation can result from an honest mistake or negligence Materiality A material fact is one that would contribute to a reasonable person’s decision to enter the contract Fact versus Opinion An actionable misrepresentation must concern a present or past fact Justifiable Reliance Reliance must be justified Detriment Party was harmed by reliance

Fraud What is a “Knowingly Made” Misstatement? Intent to Deceive
Scienter refers to the mental state of the defendant Fraud by Silence caveat emptor Fraud in the Execution The Remedy for Fraud

Duress and Undue Influence
General Nature One party to an agreement interfered with the other party’s ability to resist entering into the agreement Duress Wrongful threat Plaintiff’s free will was overcome Undue Influence Confidential relationship Plaintiff was induced to make an unfavorable agreement

Mistake The Nature of Mistake Mutual Mistake Unilateral Mistake
Untrue belief by both parties about a material fact Either party can rescind Unilateral Mistake Mistaken party may be able to rescind if meets certain conditions, or If other party knew or should have known of the mistake and is trying to take unfair advantage of it

PROBLEM Washington hires Jefferson to kill his (Washington's) wife. They execute a formal written agreement, which indicates that Washington will pay Jefferson $5,000 down and $10,000 when the job is done. Jefferson has until September 18 to complete the job. September 18 comes and goes, and Washington's wife is still very much alive. Jefferson has gotten cold feet, but has spent the $5,000. Washington comes to Attorney Ogden, and wants to sue Jefferson for breach of contract.

LEGALITY OF THE SUBJECT MATTER
Illegality Agreement is unenforceable if either its formation or its performance is illegal or contrary to public policy Types of Illegality Requires commission of an illegal act Made illegal by statute Contrary to public policy Unconscionable The Presumption of Legality Doubts are resolved in favor of legality unless parties clearly intended an illegal bargain

Contracts to Commit Illegal Acts
Agreements to Commit Crimes An agreement that calls for the commission of a crime is illegal Agreements to Commit Torts A contract that cannot be performed without committing a tort is illegal

Contracts Made Illegal by Statute
Wagering Statutes Most states prohibit or regulate gambling Agreements in violation of these are illegal Statutes Declaring Bargains Void or Voidable Examples of statutes passed by states making certain agreements void or voidable are usury laws and Sunday laws

Contracts Made Illegal by Statute
Regulatory Statutes Agreements by unlicensed persons to perform regulated services or engage in regulated businesses are illegal and unenforceable The failure to obtain a license required by a statute whose sole purpose is to raise revenue does not affect the legality of unlicensed persons’ agreements

Contracts Contrary to Public Policy
The Idea of Public Policy What courts believe is in the best interest of society Contracts Injurious to Public Service Bribes Contracts to Influence Fiduciaries Prizes, rewards, or other inducements May be enforced if full disclosure to, and agreement of beneficiary

UNCONSCIONABLE CONTRACTS
Parties possess severely unequal bargaining power The dominant party unreasonably uses its unequal bargaining power to obtain oppressive or manifestly unfair contract terms Adhering party has no reasonable alternatives

Examples Fine print that hides oppressive contract terms.
Standard pre-printed contracts that are used industry-wide that contain oppressive terms. Confession of judgment clauses Contracts that exploit underprivileged, unsophisticated, uneducated, or illiterate consumers

Examples (cont’d) Contracts written in language incomprehensive to laypersons Contracts that deny rights and remedies to consumers Exculpatory clauses

PROBLEM Mr. Thomas and Mr. Johns agree orally that Mr. Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed. Two days before the three years is up, Mr Johns changes his mind and indicates that he will not pay for the warehouse.

FORM REQUIRED BY LAW : The Statute of Frauds
The Effect of Failure to Comply In most states, the statues of frauds makes oral contracts that come within its provision unenforceable

Contracts Covered by the Statute of Frauds
Contracts to Answer for the Debt of Another (co-signor) Contracts Transferring an Interest in Land Bilateral Contracts Not Capable of Being Performed within One Year Construe as possible to perform within a year UCC: contracts for sale of goods where price is $500 or more

Contracts Covered by the Statute of Frauds
UCC: contracts for sale of goods where price is $500 or more The Code’s Statute of Frauds Specially manufactured goods Admission Part performance Merchant’s failure to object to memo within 10 days

Interpreting Contracts
The Necessity of Interpretation Interpretation of uncertain or ambiguous terms is a question for the jury Courts attempt to give the agreement the meaning that a reasonable person would be expected to give it in light of the surrounding facts and circumstances

Interpreting Contracts
Rules of Construction The court attempts to determine the principal objective of the parties If parties are both members of the same trade, courts presume the parties intended words’ meanings to be controlled by trade usage Written terms control over printed terms Ambiguities are resolved against the party who drafted the contract

4 Corners Rule The writing constitutes the entire agreement
The contract is “integrated.” It may contain a merger clause.

The Parole Evidence Rule
The Purpose of the Rule Writing it the best evidence of intent Exceptions to the Parole Evidence Rule Lack of Voluntary Consent Ambiguous Contracts Incomplete Writings Subsequent Oral Contracts Conditions Precedent

PROBLEM (Mr. Thomas and Mr. Johns agree orally that Mr. Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed. Two days before the three years is up, Mr. Johns changes his mind and indicates that he will not pay for the warehouse.) What if Mr. Thomas had already purchased all the supplies needed to build the warehouse?

PROMISSORY ESTOPPEL (DETRIMENTAL RELIANCE)
Promise induces action on the part of another in reliance of that promise Reliance must be reasonable and foreseeable under the circumstances Promissor is “estopped” from denying the existence of a contract.

See SUN-PACIFIC ENTERPRISES, INC. v. GIRARDOT, 251 Ga. App. 101; 553 S
See SUN-PACIFIC ENTERPRISES, INC. v. GIRARDOT, 251 Ga. App. 101; 553 S.E.2d 638; 2001 Ga. App. LEXIS 932 (2001)

PROBLEM Mr. Simpson purchases a
fire insurance policy on his home for 3 years at a cost of $300. At the end of 3 years, his house has not caught fire, but the insurance company still has his $300. He feels that the insurance company should have to reimburse him the $300, since they have paid nothing on the policy.

Conditions Definition Types of Conditions
Party’s duty to perform is qualified by the happening of some event or condition Types of Conditions Condition Precedent Performance excused unless condition occurs Condition Subsequent Performance excused if condition occurs Concurrent Conditions Tender of performance precedes right to demand performance

Conditions The Creation of Conditions Express Conditions
Created by oral or written statements in the contract Implied Conditions (Constructive) Nature of parties’ contract lead courts to imply a condition on the parties’ duties of performance

Standards of Performance
Complete or Satisfactory Performance Some kinds of contractual duties can be completely and perfectly performed Payment of money Substantial Performance Performance that falls short of complete performance in minor respects but does not deprive the promisee of a material part of the consideration that was bargained for Material Breach Performance fails to reach the degree of perfection the other party is justified in expecting under the circumstances

Standards of Performance
Anticipatory Breach Promissor, prior to the time for performance, indicates an intent not to perform his or her duties under the contract

PROBLEM Mr. Brown enters into an agreement with Mr. Green in which Mr. Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green’s warehouse to the ground destroying his supply of the siding. When Mr. Green fails to perform, can Mr. Brown recover from him in a breach of contract action?

Excuses for Nonperformance
Prevention Promisee who causes promisor’s failure of performance cannot complain about the failure Impossibility If it is impossible to perform, the duty to perform is discharged and the promissory is not liable for material breach Intervening Illegality Destruction of Subject Matter Commercial Impracticability Commercial Frustration

Commercial Impracticability
Due to something unforeseeable More than just an increase in prices See SWIFT TEXTILES, INC. v. LAWSON, 135 Ga. App. 799; 219 S.E.2d 167; 1975 Ga. App. LEXIS 1831 (1975)

Discharge and Rescission
The Nature of Discharge Parties are released from their obligations under a contract Discharge by Agreement Discharge by Waiver Discharge by Alteration Discharge by Statute of Limitations

Remedies The Theory of Remedies
If a party does not perform as promised under the contract, and performance has not been excused or discharged, then the other party is entitled to a remedy for the breach of the contractual promise

Remedies at law Damages in Contract Cases Compensatory Damages
Loss in value of promised performance Consequential Damages Foreseeable losses from special circumstances of particular contract Nominal Damages Award for purely technical breach of contract Liquidated Damages Damages specified in contract for breach Punitive Damages Damages to punish, usually unavailable

Remedies The Duty to Mitigate Damages

PROBLEM (Mr. Brown enters into an agreement with Mr. Green in which Mr. Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green warehouse to the ground destroying his supply of the siding.) Suppose Mr. Brown later discovers that Mr. Green burned his own warehouse. Additionally, Mr. Green is the only one in the country that manufactures this specially treated siding, and he has ample supplies and facilities to manufacture more. Can Mr. Brown now sue for breach of contract? If so, what might be an appropriate remedy?

Equitable Remedies Specific Performance
Promissor ordered to perform contract where subject matter is unique Injunctions Ordered to prevent irreparable injury See QUADRON SOFTWARE INTERNATIONAL CORPORATION v. PLOTSENEDER. 256 Ga. App. 284; 568 S.E.2d 178; 2002 Ga. App. LEXIS 890 (2002)

Third-Party Beneficiary Contracts
Donee Beneficiaries Promisee’s primary purpose is contracting was to make a gift of the contracted performance to the third party Creditor Beneficiaries Promisor’s performance will satisfy a legal duty that the promisee owes to a third party Donee and Creditor Beneficiaries can enforce the contract

A contracts with B to put a roof on B’s house upon B’s promise to pay C $5000 (because A owes C $5000). K (Obligor) Roof on house (Assignor) Promise To Pay $ Assignment of Rights C 3rd Party Beneficiary (Assignee) B A

Third-Party Beneficiary Contracts
Incidental Beneficiaries Performance of contract intended solely for the benefit of the promisee also incidentally benefits a third person Incidental beneficiaries acquire no rights under the contract Incidental beneficiaries cannot enforce rights even though they benefit from another’s contract

Assignment of Contracts
Definitions An assignment is a transfer of rights under a contract The assignor is the person who makes an assignment The assignee is the person who accepts the assignment

Assignment of Contracts
What Contracts Are Assignable? Assignments that do not involve personal relationships or increase the promisor’s burden are enforceable Contracts that are nonassignable include: Contracts that expressly forbid assignment Assignments contrary to public policy Contracts involving personal rights

The Consequences of Assignment
The Rights and Duties of Assignees An assignee is entitled to all the rights his or her assignor had under the assigned contract Assignee can enforce implied guarantees against assignor Assignee may be liable for duties expressly or impliedly delegated with the assignment

The Rights and Duties of Assignees Assignors who are paid for making an assignment are potentially liable to assignees for certain implied guarantees The assigned claim is valid The assignor has good title to the rights assigned The assignor will not do anything to impair the value of the assignment Any written instrument representing the assigned claim is genuine

Delegation of Duties When a promisor appoints another to perform his duties under a contract, this is called a delegation Duties cannot be delegated if the performance depends on the personal skill, character, or judgment of the promisor

CONTRACTS.

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