Business Law (LE 253) Exam 2 (CH 11-15)

CH-11: Introduction to Contracts

Contract

A legally enforceable agreement

7 elements That make a Contract Enforceable (Note: Writing applies only to certain kinds of contracts)

1.) Offer

2.) Acceptance

3.) Consideration

4.) Legality

5.) Capacity

6.) Consent

7.) Writing

Offer

Someone proposes a deal. It might involve buying something, selling something, doing a job, etc. — but only proposals made in certain ways amount to a legally recognized offer.

Acceptance

The receiving party must respond in a certain way to create a binding contract.

Consideration

There must be an exchange between parties — bargaining that leads to both sides receiving some measurable benefit. Contracts cannot be a one-way street.

Legality

The contract must be for a lawful purpose. Courts will not enforce agreements to sell illegal drugs or commit any other crime.

Capacity

The parties must be adults of sound mind

Consent

Certain kinds of trickery and force can prevent the formation of a contract

Writing

Some kinds of contracts must be in writing

Other Important Issues (Third-Party Interest, Performance and Discharge, Remedies)

1.) Third-Party Interest: Can a third party sue?

2.) Performance and Discharge: Contractual duties are discharged (completed) when a party fully accomplishes what the contract requires. But what if the party performs poorly, or not at all?

3.) Remedies: A court will award money or other relief to a party injured by a breach of contract

11-1a: All Shapes & Sizes

Some contracts are small, some large; competition for a contract can be fierce, the winner earning billions of dollars. Many contracts involve public issues (ex: Government spending taxes on military expenses); others concern intensely private matters (ex: Surrogacy contract).

11-1b: Contracts Defined… Contract

Contract: A legally enforceable agreement

The 3 Basic Questions in Construing Contracts (Promise? Fair? Didn’t promise and liable?)

1. Is it certain that the defendant promised to do something?

2. If she did promise, is it fair to make her honor her word?

3. If she didn't promise, are there unusual reasons to hold her liable anyway?

11-1c: Development of Contract Law… 1602 (maybe not necessary)

In 1602, courts began to enforce mutual promises — deals where neither party gave anything to the other but both promised to do something in the future.

Noncompete Agreement

A contract in which one party agrees not to compete with another.

Ex: Leave a company and agree not to open a competing business within 10 miles for a set period of time

11-1d: Types of Contracts (10 of them)

1.) Bilateral Contract

2.) Unilateral Contract

3.) Executory Contract

4.) Executed Contract

5.) Valid Contract

6.) Unenforceable Agreement

7.) Voidable Contract

8.) Void Agreement

9.) Express Contract

10.) Implied Contract

Bilateral Contract

A promise made in exchange for another promise — both parties make a promise.

• The vast majority of contracts are bilateral. (Ex: Employer promises to pay a specific wage or salary; the employee promises to do their duties.)

Unilateral Contract

A promise for an act — one party makes a promise that the other party can accept only by actually doing something.

• (Ex: "If you clear out my garage, I'll pay you $200." The other party doesn't promise to do it — they actually just do it.)

Executory Contract

An agreement in which one or more parties has not yet fulfilled its obligations

• (Ex: You order a custom couch and pay a deposit; the seller hasn't built or delivered it yet

Executed Contract

An agreement in which all parties have fulfilled their obligations

• (Ex: Buying a $3 coffee — I buy the coffee and they give it to me. Nothing left to do.)

Valid Contract

Satisfies all of the law's requirements. It has no problems in any of the seven areas, and a court will enforce it.

Unenforceable Agreement

Occurs when the parties intend to form a valid bargain, but a court declares that some rule of law prevents enforcing it.

• (Ex: An oral contract that the law requires to be in writing.)

Voidable Contract

An agreement that may be terminated by one of the parties

• (Ex: A contract signed under duress or induced by fraud — the innocent party may cancel it or choose to stay in it.)

Void Agreement

A contract that neither party can enforce, because the bargain is illegal or one of the parties had no legal authority to make it.

Express Contract

An agreement with all the important terms explicitly stated. Can be oral or written.

Implied Contract

The words and conduct of the parties indicate that they intended an agreement, even though the terms were never explicitly stated.

• Ex: “You mow my lawn every friday for 2 months and i’ll pay you. For 3 weeks he gets paid. They dont speak, but he keeps mowing for the rest of the 2 months.

11-2: Sources of Contract Law

11-2a: Common Law… Common Law

Common Law: Express and implied contracts, promissory estoppel, and quasi-contract were all crafted over centuries by courts deciding one contract lawsuit at a time. Many contract lawsuits continue to be decided using common law principles today

11-2b: Uniform Commercial Code (UCC)… UCC

Uniform Commercial Code (UCC): The Code governs the sale and leasing of good, negotiable instruments, bank deposits, letters of credit, investment securities, secured transactions, and other commercial matters; every state has adopted at least part of the UCC

Article 2 (of the UCC)/Goods, Mixed Contract

• Article 2 (of the UCC)/Goods: Article 2 is the most important part of the UCC for contracts; it governs the sale of goods. Goods = anything movable, except for money, securities, and certain legal rights.

  • (Ex: pencils, commercial aircraft, books, Christmas trees.)

• Mixed Contract: A contract for goods and services (e.g., an oil change: part new oil, part labor). Courts must determine the primary purpose of the contract — Article 2 governs only if the primary purpose was the sale of goods.

There’s a difference between state common law and UCC. If selling a house, state common law takes over. If selling 10,000 sneakers, UCC law takes over. UCC is for goods. Common Law is for everything else (land, services, etc.)

11-3: Enforcing Non-Contracts… Enforcing Non-Contracts

Enforcing Non-Contracts: Sometimes courts enforce agreements even if they fail to meet the usual requirement of a contract. These are remedies (not enforcement of a contract) because there is no contract to enforce — the injured plaintiff just gets relief anyway to avoid unfairness.

11-3a: Promissory Estoppel

Promissory Estoppel: the defendant made a promise that the plaintiff relied on. It’s a possible remedy for an injured plaintiff in a case with no valid contract, when the plaintiff can show a promise, reasonable reliance, and injustice.

• Ex: House burnt down. Insurance agents were helping them through the process thinking they had the insurance. Turns out their insurance expired 6 weeks prior to fire. They sued due to the agents making a promise that their insurance covered it (even though there was no contract)

The 3 Elements of Promissory Estoppel

1.) The defendant made a promise knowing the plaintiff would likely rely on it

2.) The plaintiff reasonably relied on the promise, and

3.) The only way to avoid injustice is to enforce the promise

11-3b: Quasi-Contract

Quasi-Contract: the defendant received a benefit from the plaintiff and retaining that benefit would be unfair. A possible remedy for an injured plaintiff in a case with no valid contract, when the plaintiff can show benefit to the defendant, reasonable expectation of payment, and unjust enrichment.

The 3 Elements of Quasi-Contract

1.) The plaintiff gave some benefit to the defendant

2.) The plaintiff reasonably expected to be paid for the benefit and the defendant knew this

3.) Not compensating the plaintiff would lead to the defendant’s unjust enrichment

Quantum Meruit

“As much as he deserves” — the damages awarded in a quasi-contract case: the value of the goods or services the plaintiff conferred. Awarding money the courts believe the plaintiff morally ought to have

CH-12: The Agreement: Offers & Acceptances

12-1: Offer

12.1a: Meeting of the Minds

Offer

An act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms.

Objective Assessment

Courts make objective assessments when evaluating offers and acceptances; they dont consider what the parties meant to say, or thought they said. They focus on the parties’ actual words and conduct, deciding how a reasonable person would interpret them

Offeror

The person who makes an offer

Offeree

The person to whom an offer is made

2 Questions That Determine Whether a Statement Is an Offer

1.) Do the offeror’s words and actions indicate an intention to make a bargain?

2.) Are the terms of the offer reasonably definite?

Definite: means the terms are clear and specific enough that a court can determine exactly what each party is obligated to do — and enforce it.

12.1b: Statements That Usually Do Not Amount to Offers

1.) Invitations to Bargain

2.) Price Quotes

3.) Letters of Intent

4.) Advertisements

• Consumer Protection Statute

5.) Auctions

1.) Invitations to Bargain

An invitation to bargain isn’t an offer, it’s an invitation to negotiate, not a promise to sell.

Ex: Joe says “There’s mp way I could sell the condo for less than $350,000” — That’s just an invitation to negotiate, not an offer.

2.) Price Quotes

an invitation for other people to make offers (A solicitation of offers). Those giving price quotes can reject offers.

Ex: Leviton sent Litton a price list; the court held it was not an offer, so Litton’s order was the offer

3.) Letters of Intent

A letter that summarizes negotiating progress. They merely state what the parties are considering, not what they have actually agreed to.

(But it can bind if its language indicates the parties intended to be bound)

4.) Advertisements

An advertisement is merely a request for offers. Advertisers can reject offers from consumers.

But an ad can be an offer if its specific enough. Ex: $100 reward ad is a valid unilateral offer

Consumer Protection Statute

Laws protecting consumers from fraud (deceitful retailers). It outlaws false advertising.

Ex: A car dealer who advertises a remarkably low price but has only one car at that price has probably violated a consumer protection statute

5.) Auctions

Placing an item up for auction is not an offer — it's merely a request for an offer. The bids are the offers.

12.1c: Problems with Definiteness… Definiteness

Definiteness: The terms of the offer must be definite. If the terms are vague, even if the offeree agrees, a court doesn’t have enough information to enforce it, and there is no contract

12.1d: The UCC and Open Terms

UCC and Open Terms: Sometimes the UCC changes the common law rule. Under the UCC, many indefinite contracts are allowed to stand — a contract for the sale of good doesn’t fail for indefiniteness if the parties intend to make a contract and there is a reasonably certain basis for giving a remedy.

Gap-Filler Provisions and The Types

UCC rules for supplying missing terms. These fill in a missing price or a missing quantity

Types:

1.) Open Price

2.) Output Price

3.) Requirements Contract

Open Price

A gap-filler provision. If the parties do not settle on a price, the Code establishes a reasonable price (usually market value or a price set by a neutral expert or agency).

Output Contract

A contract in which the seller guarantees to sell all of its output to one buyer, and the buyer agrees to accept the entire quantity. (UCC gap-filler — fills a missing quantity. Also the exception to the illusory promise rule.)

Ex: A cotton grower agrees to sell all of its next crop to a textile firm.

Requirements Contract

A contract in which a buyer agrees to purchase all of her goods from one seller. (UCC gap-filler — fills a missing quantity. Also the exception to the illusory promise rule: the buyer's good faith is the consideration.

Ex: A vineyard agrees to buy all of its wine bottles from one supplier.

Note: Output and Requirements contracts

Output and requirements contracts are incomplete by definition since quantity is unspecified — the Code requires both parties to act in good faith; neither may demand/offer a quantity disproportionate to past dealings or reasonable estimates.

12-1e: Termination of Offers

An offer has only two possible fates: it can be terminated or accepted. If terminated, it can never be accepted. Offers can be terminated in four ways:

1.) revocation

2.) rejection

3.) expiration

4.) operation of law.

1.) Revocation

The offeror may revoke the offer any time before it has been accepted

Making Contracts Temporarily Irrevocable and different Types

Offers cannot be revoked, at least for a time. Taking this action gives the parties time to evaluate offers

Types:

1.) Option Contract (all types of contracts)

2.) Firm Offer (UCC contracts only)

Option Contract (All types of contracts)

The offeror may not revoke an offer during the option period

Ex: You pay the car dealer $250 to hold its offer open until February 2 — the dealer can't revoke during that period.

Firm Offer (UCC contracts only)

If a promise in writing signed by a merchant promises to hold the offer open for a period, it may not be revoked during that period.

The open period may not exceed three months

2.) Rejection

If an offeree rejects an offer, the rejection immediately terminates the offer.

A Counteroffer also terminates an offer by switching the roles of offeror and offeree

Counteroffer

A different proposal made in response to an original offer. The change in role goes from offeree to offeror. (A counteroffer is a rejection.)

3.) Expiration

When an offer specifies a time limit for acceptance, that period is binding. If the offer specifies no time limit, the offeree has a reasonable period in which to accept.

4.) Operation of Law

If an offeror dies or becomes mentally incapacitated, the offer terminates automatically and immediately. Also, destruction of the subject matter terminates the offer. (Ex: The house gets destroyed by natural causes — there's no longer anything to sell or buy.)

12-2: Acceptance… Acceptance

Acceptance: An offeree accepts by saying or doing something that a reasonable person would understand to mean that he wants to take the offer. The offeree must say or do something to accept.

When there is a valid offer outstanding, it remains effective until it's terminated or accepted.

Ex: You can't leave a message making an offer and say "I'll assume you agree unless I hear from you" — silence is not acceptance.

12-2a: Mirror Image Rule… Mirror Image Rule

Mirror Image Rule: Requires that acceptance be on precisely the same terms as the offer.

If the acceptance adds or contradicts terms, even in minor ways, courts generally consider it a counteroffer.

Ex: Foster accepted a job but changed the start date from July 1 to July 15 — that was a counteroffer, not an acceptance, so no contract.

12-2b: UCC and the Battle of Forms… UCC and the Battle of Forms

UCC and the Battle of Forms: UCC section 2-207 dramatically modifies the mirror image rule for the sale of goods; an acceptance that adds additional or different terms often will create a contract. But, if the offeree states that her acceptance is conditional on the offeror’s assent to the new terms, there is no contract.

Additional Terms

Those that bring up new issues (e.f., interest rates not in the original offer). Additional terms are proposals to add to the contract; assuming both parties are merchants, they generally become part of the contract

The 3 Circumstances Where New (Additional) Terms Do NOT Become Part of the Contract

1.) If the offeror insisted on its own terms

2.) If the additional terms materially alter the original offer

3.) If the offeror receives the new terms and promptly objects

Different Terms

Those that contradicts terms in the offer. The majority of states hold that different (contradictory) terms cancel each other out; Instead, the neutral terms from the Code are “read into” the contract (the gap-filler terms).

12-2c: Clickwrap and Browsewrap Agreements

Clickwrap Agreement

Requires users to accept proposed terms by clicking an “agree” button; but everyone knows, no one reads them. Nevertheless, courts have concluded they are binding.

Browsewrap Agreement

Websites seek to bind users to their terms just by posting them somewhere on their sites or making them accessible through a hyperlink. (Courts have held browsewraps are not enforceable unless the website can prove users at least knew the agreement existed)

12.2d: Communication of Acceptance

Method and Manner of Acceptance

If an offer demands acceptance in a particular method or manner, the offeree must follow those requirements. If the offer doesn't specify a type of acceptance, the offeree may accept in any reasonable manner and method.

Time of Acceptance: The Mailbox Rule

Acceptance is generally effective upon dispatch (the moment it is communicated and out of the offeree's control). Terminations are effective when received. (For email/text: the contract is formed the moment the offeree presses "send.")

• Acceptance is effective on dispatch (when mailed

• Revocation is effective on receipt (when the offeree gets it).

CH-13: Considerations

13-1: What Is Consideration…

Consideration: The inducement, price, or promise that causes a person to enter into a contract and forms the basis for the parties’ exchange

• Central idea: contracts must be a two-way street — if one side gets all the benefit and the other gets nothing, there's no consideration and no enforceable contract. Consideration is proof the parties intended to be bound.

The 2 Basic Elements of Consideration: (Value (Legal Benefit, Legal Detriment), Bargain-For Exchange)

1.) Value: Each party receive a legal benefit and incur a legal detriment in exchange.

• Legal benefit: means receiving something of measurable value. Ex: Groceries, money, insurance, a promise not to sue, etc

• Legal Detriment: is an obligation, loss, or other disadvantage that a party incurs or agrees to incur in exchange for the legal benefit.

2.) Bargained-For Exchange: The promise must induce the detriment and the detriment must induce the promise — meaning each side gives up something because of the other side's promise. It's reciprocal.

13.1a: What is Value?… Types of Value

1.) Act

2.) Forbearance

3.) Promise to Act or Forbear

Act

Any action that a party wasn't legally required to take in the first place.

Doesn't count if the party was just complying with the law or fulfilling an existing contract obligation — e.g., Professors refusing to post grades unless paid extra. It’s their obligation to do this, so there’s no valid consideration

Forbearance

Refraining from doing something that one has a legal right to do.

Ex: Your neighbor says, "I'll pay you $50 if you stop parking in front of my house for a month." You have the legal right to park there, but you agree not to — that's forbearance, and it's valid consideration for the $50

Promise to Act or Forbear

A promise to do (or not do) something in the future counts as consideration.

Ex: When evaluating whether consideration exists, the promise to mow someone's lawn next week is the equivalent of actually doing the yard work.

13.1b: What Is Bargained-For Exchange?

Bargained For

When something is sought by the promisor and given by the promisee in exchange for their promises. The parties must bargain for the consideration — it's reciprocal: "If you do this, I'll do that."

Ex: If you just deliver a cake to your neighbor without her knowing, that's value but not bargained for — no contract.

Adequacy of Consideration

For consideration to be adequate in the eyes of the law, it must provide some benefit to the promisor or some detriment to the promisee — but these need not amount to much

Courts do not analyze the economic terms of an exchange to determine whether consideration was adequate (ex: Someone gets what is considered a ‘bad deal’ from the perspective of economic).

13.1c: What Consideration Is Not… Three exceptions to the rules of consideration

1.) Illusory Promise

2.) Preexisting duties

3.) Past Consideration

1.) Illusory Promise

A promise that lets the promisor back out for any reason, so they haven't actually committed to anything. It's not consideration. (If one side can escape at will, there's no real promise and no contract.)

Ex: Jimmy says "If I like it, I'll pay you" — Jimmy is the promisor, and he can back out for any reason.

Exception: Requirements and Output Contracts under the UCC

The common law frowned on these as illusory, but UCC section 2-306 expressly allows them in the sale of goods. The limitation: Both partied must act in good faith. (The buyer’s good faith is the consideration — by agreeing to act in good faith, the buyer limits its options and creates an obligation)

2.) Preexisting Duty

If someone provides a service that she is already obligated to do, that act does not count as consideration.

Ex: A lifeguard can't demand $100 to save you — that's his job.

Exception: Additional Work

When a party agrees to do something above and beyond what he is obligated to do, his promise is generally valid consideration

Ex: If the seamen had agreed to work overtime or a longer season for the extra pay, the second contract would have been upheld.

Exception: Modification

Under the common law, additional consideration is necessary for a modification of contract terms, because it's unfair for one party to get something more while the other doesn't.

(But UCC §2-209 changes this for the sale of goods: an agreement modifying a contract needs no consideration to be binding. Caveat: if the original contract requires modifications to be in a signed writing, an oral modification won't work.)

Rescind

To cancel. If both parties agree a modification is necessary, the surest way to accomplish that result is to rescind the original contract and draft a new one.

(Should be done in writing; courts generally enforce a rescission and modification if both parties voluntarily entered into it in good faith.)

Exception: Unforeseen Circumstance

When unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is generally valid consideration.

Ex: Hal's trucks sink in subsurface mud neither party knew about; Hal's promise to finish for 35% more is valid consideration — it's almost as though he were undertaking a new project.

3.) Past Consideration

A completed act cannot be the basis for consideration.

Ex: Parents promise a car after their son earns an "A" — unenforceable, because it's based on something already done. Promise it early in the semester and it's valid — his future work is the detriment.

Exception: Parties Agree in Advance

Past consideration is valid consideration when the parties agree that it will be in advance.

Ex: Bryce's earlier free work couldn't support Sunil's later 2% promise, but when Sunil agreed to accept that past consideration plus Bryce's agreement to continue consulting, a valid contract was created.