LGS 200- Abigail Hammond- Exam 2

Contract

An agreement that can be enforced in court; formed by two parties, each of whom agrees to perform or to refrain from performing some act now or in the future.

What are the two parties involved in every contract?

1. Offeror - A person who makes an offer.

2. Offeree - A person to whom an offer is made.

When is intent important?

In determining whether a contract has been formed. The intent is determined by the objective theory of contracts.

Objective theory of contracts

A theory under which the intent to form a contract will be judged by outward, objective facts (what the party said when entering into the contract, how the party acted or appeared, and the circumstances surrounding the transaction) as interpreted by a reasonable person, rather than by the party's own secret, subjective intentions.

Objective facts might include: 1. What a party said when entering into the contract 2. How a party acted or appeared 3. The circumstances surrounding the transaction

What are the four requirements that must be met before a valid contract exists?

1. Agreement • an offer by one party to enter into the agreement and an acceptance of the terms of the offer by another party. 2. Consideration • Any promises made by the parties to the contract must be supported by legally sufficient and bargained-for consideration (something of value received or promised, such as money, to convince a person to make a deal). 3. Contractual capacity • Both parties entering into the contract must have the contractual capacity. That is, the law must recognize them as possessing characteristics that qualify them as competent parties. 4. Legality • The contract's purpose must be to accomplish some goal that is legal and not against public policy.

What are the requirements typically raised as defenses to the enforceability of an otherwise valid contract?

1. Voluntary consent • The consent of both parties must be voluntary

2. Form • The contract must be in whatever form the law requires.

(Slide 5 for examples)

Types of contracts: Formation

1. Bilateral—A promise for a promise.

2. Unilateral—A promise for an act—that is, acceptance is the completed performance of the act.

3. Formal—Requires a special form for creation.

4. Informal—Requires no special form for creation.

5. Express—Formed by words, such as oral, written, or a combination.

6. Implied—Formed by the conduct of the parties.

Types of contracts: Performance

1. Executed—A fully performed contract.

2. Executory—A contract not fully performed.

Types of contracts: enforceability

1. Valid—The contract has the necessary contractual elements: agreement (offer and acceptance), consideration, legal capacity of the parties, and legal purpose.

2. Unenforceable—A contract exists, but it cannot be enforced because of a legal defense.

3. Voidable—One party has the option of avoiding or enforcing the contractual obligation.

4. Void—No contract exists, or there is a contract without legal obligations.

Agreement Definition

A meeting of two or more minds in regard to the terms of a contract.

Agreement events

1. An offer by one party to form a contract (offeror)

2. An acceptance of the offer by the person to whom the offer is made (offeree)

Agreement decisions

1. Both parties must manifest to each other their mutual agreement to the same bargain.

2. Once an agreement is reached, if the other elements of a contract (consideration, capacity, and legality) are present, a valid contract is formed.

Offer

A promise or commitment to perform or refrain from performing some specified act in the future.

What are the three elements that are necessary for an offer to be effective?

1. The offeror must have a serious intention to become bound by the offer.

2. The terms of the offer must be reasonably certain, or definite, so that the parties and the court can make sure the terms of the contract.

3. The offer must be communicated to the offeree.

What are the ways an offer can be terminated?

• Termination by Action of the Offeror

• Termination by Action of the Offeree

• Termination by Operation of Law

Termination by Action of the Offeror

Some offers can be made irreversible, such as option contracts

Option contract

A contract under which the offeror cannot revoke his or her offer for a stipulated time period and the offeree can accept or reject the offer at any time during this period.

Termination by Action of the Offeree

•Revocation (offeror)

•Rejection (offeree)

•Counteroffer (offeree)

Termination by Operation of Law

1. Lapse of time

2. Destruction of the subject matter

3. Death or incompetence of the offeror or offeree

4. Supervening illegality (the offer becomes illegal)

Acceptance

The offeree's notification to the offeror that the offeree agrees to be bound by the terms of the offeror's proposal

Unequivocal Acceptance

To exercise the power of acceptance effectively, the offeree must accept unequivocally (no doubt)

Unequivocal Acceptance Rules/ Exceptions

1. An acceptance may be unequivocal even though the offeree expresses dissatisfaction with the contract.

Example: "I accept the offer, but can you give me a better price?"

2. An acceptance cannot impose new conditions or change the terms of the original offer; otherwise, it becomes a counteroffer, which is a rejection of the original offer. • Example: "I accept the offer but only if I can pay on ninety days' credit."

Silence as Acceptance

Ordinarily, silence cannot constitute acceptance; however, silence can constitute an acceptance when the offeree has had prior dealings with the offeror. Ex. Such as an established relationship with a distributor that notices a business of prices increases. Silence reflects that the price increase may be accepted.

Communication of Acceptance

Whether the offeror must be notified of the acceptance depends on the nature of the contract.

• In a unilateral contract, the full performance of some act is called for; thus, acceptance is usually evident and notification is unnecessary.

• In a bilateral contract, communication of acceptance is necessary, because acceptance is in the form of a promise.

E-contract

A contract that is entered into in cyberspace and is evidenced only by electronic impulses (such as those that make up a computer's memory), rather than, for example, a typewritten form. E-contracts must meet the same basic requirements

HHHH Basic Requirements

agreement, consideration, contractual capacity, and legality

Provisions to Include

1. A clause that indicates what constitutes the buyer's agreement to the terms of the offer

2. A provision specifying how payment for the goods must be made

3. A statement of the seller's refund and return policies

4. Disclaimers of liability for certain uses of the goods

5. A provision specifying the remedies available to the buyer if the goods are found to be defective or if the contract is otherwise breached

6. A statement indicating how the seller will use the information gathered about the buyer

7. Provisions relating to dispute settlement

Click-on agreement

An agreement that arises when a buyer, engaging in a transaction on a computer, indicates his or her assent to be bound by the terms of an offer by clicking on a button that says, for example, "I agree"; sometimes referred to as a click-on license or a click-wrap agreement.

Shrink-wrap agreement

An agreement whose terms are expressed in a document located inside a box in which goods (usually software) are packaged; sometimes called a shrink-wrap license. (Usually, the party who opens the box is told that she or he agrees to the terms by keeping whatever is in the box)

Browse-wrap terms

Terms and conditions of use that are presented to an Internet user at the time a product, such as software, is downloaded but that need not be agreed to before the product is installed or used.

Consideration

The value given in return for a promise or a performance.

What must be included in the consideration?

1. Something of legally sufficient value

2. Bargained for

What must you have to be legally sufficient

1. A promise to do something that one has no prior legal duty to do

2. The performance of an action that one is otherwise not obligated to undertake

3. A forbearance

Forbearance

The act of refraining from exercising a legal right

Bargained-for Exchange

The item of value must be given or promised by the promisor (offeror) in return for the promisee's promise, performance, or promise of performance.

Ways a claim may be settled

• An accord and satisfaction

• A release

• A covenant not to sue

Accord and satisfaction

An agreement for payment (or other performance) between two parties, one of whom has a right of action against the other.

Release

A contract in which one party forfeits the right to pursue a legal claim against the other party.

When is a release binding?

1. The agreement is made in good faith (honestly).

2. The release contract is in a signed writing (required in many states).

3. The contract is accompanied by consideration.

Covenant not to sue

An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim. EX. slide 28

Promissory estoppel

A doctrine that applies when a promisor makes a clear and definite promise on which the promisee justifiably relies.

Promissory Estoppel Elements

1. There must be a clear and definite promise.

2. The promisor should have expected that the promisee would rely on the promise.

3. The promisee reasonably relied on the promise by acting or refraining from some act.

4. The promisee's reliance was definite and resulted in substantial detriment.

5. Enforcement of the promise is necessary to avoid injustice.

Estopped

Barred, impeded, or precluded. (prevented)

Contractual capacity

The legal ability to enter into contracts; the threshold mental capacity required by law for a party who enters into a contract to be bound by that contract. (as when a person is young or mentally incompetent, capacity may be lacking or questionable)

Disaffirmance

The legal avoidance, or setting aside, of a contractual obligation.

How must a minor dissafirm?

A minor must express his or her intent, through words or conduct, not to be bound to the contract.

Contractural Capacity: Intoxication

A contract entered into by an intoxicated person can be either voidable or valid

Contractual Capacity: Mental Incompetence

Contracts made by mentally incompetent persons can be either void, voidable, or valid.

When is a contract void when it comes to someone that is mentally incompetent?

If a court has previously determined that a person is mentally incompetent.

When is a contract voidable when it comes to someone that is mentally incompetent?

If a court has not previously judged a person to be mentally incompetent but the person was incompetent at the time the contract was formed.

When is a contract valid when it comes to someone that is mentally incompetent?

A contract entered into by a mentally incompetent person (not previously declared incompetent) may be valid if the person had capacity at the time the contract was formed.

For a contract to be valid and enforceable, it must be formed for what?

A legal purpose.

Contracts in Restraint of Trade

Contracts that tend to reduce competition for the provision of goods or services in a market. Contracts in restraint of trade (anticompetitive agreements) generally are unenforceable because they are contrary to public policy

Contracts in Restraint of Trade: Legality

Such contracts often violate one or more federal or state antitrust statutes. An exception is recognized when the restraint is:

• Reasonable

• Contained in an ancillary (secondary or subordinate) clause in a contract

Such restraints often are included in:

• Contracts for the sale of an ongoing business

• Employment contracts

Covenant not to compete

A contractual promise to refrain from competing with another party for a certain period of time and within a certain geographic area.

Where are covenant not to compete commonly found?

• Partnership agreements

• Business sale agreements

• Employment contracts

Reformation

A court-ordered correction of a written contract so that it reflects the true intentions of the parties.

Unconscionable Contracts or Clauses

A contract or clause that is void on the basis of public policy because one party was forced to accept terms that are unfairly burdensome and that unfairly benefit the stronger party.

Exculpatory clause

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

When will courts enforce exculpatory clauses?

• They are reasonable.

• They do not violate public policy. • They do not protect parties from liability for intentional misconduct. • The language used is not ambiguous.

• The parties are in relatively equal bargaining positions.

Discriminatory Contracts

Contracts in which a party promises to discriminate on the basis of race, color, national origin, religion, gender, age, or disability are contrary to both statute and public policy and are thus unenforceable.

Statute of Frauds

A state statute under which certain types of contracts must be in writing to be enforceable.

What contracts are generally required to be written or electronically recorded?

1. Contracts involving interests in land

2. Contracts that cannot by their terms be performed within one year from the day after the date of formation

3. Collateral, or secondary, contracts. EX. Promises by the administrator or executor of an estate to pay a debt of the estate personally—that is, out of her or his own pocket

4. Promises made in consideration of marriage

5. Under the UCC, contracts for the sale of goods priced at $500 or more

Privity of contract

The relationship that exists between the promisor and the promisee of a contract

What are the exceptions to the rule of privity contracts?

1. Allows a party to a contract to transfer the rights or duties arising from the contract to another person through an assignment (of rights) or a delegation (of duties).

2. A third party beneficiary contract—a contract in which the parties intend that the contract benefit a third party.

Assignment

The act of transferring to another all or part of one's rights arising under a contract.

Delegation

The transfer of a contractual duty to a third party.

Voluntary consent

Knowing and voluntary agreement to the terms of a contract.

What will make voluntary consent lacking?

• A mistake

• Misrepresentation

• Undue influence

• Duress

Issues with voluntary consent: Mistakes

To make a contract voidable, a mistake must:Be a mistake of fact

• Mistakes of value or quality do not make a contract voidable.

• Mistakes of fact occur in two forms: 1. Bilateral 2. Unilateral

Issues with voluntary consent: Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable. Mistakes of value do not affect the enforceability of contracts

Issues with voluntary consent - Fraudulent Misrepresentation

When an innocent party is fraudulently induced to enter into a contract

Fraudulent Misrepresentation Elements

1. A misrepresentation of a material fact must occur.

2. There must be an intent to deceive.

3. The innocent party must justifiably rely on the misrepresentation.

4. To collect damages, the innocent party must have been harmed as a result of the misrepresentation.

Undue influence

Persuasion that is less than actual force but more than advice and that induces a person to act according to the will or purposes of the dominating party.

Issues with voluntary consent: Undue Influence

A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.

What are the most common types of relationships you will see if one party may have the opportunity to dominate and unfairly influence another party?

• Physician and patient

• Parent and child

• Husband and wife

• Guardian and ward

Duress

Unlawful pressure brought to bear on a person, causing the person to perform an act that he or she would not otherwise perform (or refrain from doing something that he or she would otherwise do)

What are ways that are used to force a party into a contract?

Threats, blackmail, or extortion

Issues with voluntary consent: Duress

Duress is both:

• A defense to the enforcement of a contract

• A ground for the rescission of a contract

How is duress established?

There must be proof of a threat to do something that the threatening party has no right to do.

Generally what must happen for duress to occur?

• Be wrongful or illegal

• Render the person who is threatened incapable of exercising free will

Discharge

The termination of an obligation occurs when the parties to a contract have fully performed their contractual obligations.

Performance

The fulfillment of one's duties arising under a contract; the normal way of discharging one's contractual obligations.

Tender

An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so

EX. A seller who places goods at the disposal of a buyer has tendered delivery and can demand payment.

What would happen once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract and the other party refuses to pay?

If the other party refuses to perform, the party making the tender can sue for breach of contract.

What are the two types of performance?

1. Complete performance

2. Substantial performance

Complete Performance

When a party performs exactly as agreed, the party's performance is said to be complete.

Discharge by Performance: Complete Performance

• Conditions expressly stated in a contract must fully occur in all respects for complete (strict) performance of the contract to take place.

• Any deviation breaches the contract and discharges the other party's obligation to perform.

Substantial Performance

A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance.

What are the basic requirements for performance to qualify as substantial?

1. The party must have performed in good faith.

2. The performance must not vary greatly from the performance promised in the contract.

3. The performance must create substantially the same benefits as those promised in the contract.

Discharge by Performance: Substantial Performance

Because substantial performance is not perfect, the other party is entitled to damages to compensate for the failure to comply with the contract.

Performance to the Satisfaction of Another

Contracts often state that completed work must personally satisfy one of the parties or a third person. EX. Contracts for portraits, works of art, and tailoring

What happens when the subject matter of the contract is personal?

• The obligation is conditional.

• Performance must actually satisfy the party specified in the contract.

Breach of contract

The failure, without legal excuse, of a promisor to perform the obligations of a contract.

Discharge by Performance: Material Breach

The contract is discharged, no further duty to perform, nonbreaching party can sue the breaching party immediately for breach.

Waiver

An intentional, knowing relinquishment of a legal right.

Can you waiver a breach and then take later action?

No

Where does the waiver of the breach extend to?

Only to the matter waived and not to the whole contract

Is the party, who has been rendered defective, liable for the damages?

The party who has rendered defective or less-than-full performance remains liable for the damages caused by the breach of contract.

Time for Performance

•If no time for performance is stated in a contract, a reasonable time is implied

• If a specific time is stated, the parties must usually perform by that time