MGMT 311 Exam 3 Hailey

Functions of contract law

a. create expectations for future party agreements

b. court enforces contract if party doesn't live out promise... will provide a remedy of sorts

c. provides stability and predictability

Contract

An agreement that can be enforced by law between 2 or more parties who promise to do or not do act now or in the future

a breach of a promise leads to

liability

- because parties have duties to each other

Objective Theory of Contracts

the intention of a party to enter a contract is shown by the objective, outward manifestation of their approval as interpreted by a reasonable person

Objective factors (3)

1. words

2. actions AND

3. circumstances

Weston vs. Cornell University

The professor, Leslie Weston '80, horticulture, complained that Cornell did not grant her tenure after she had taught for seven years, which she claimed was in violation of her contract. However, the court ruled that the wording in Weston's contract did not necessarily imply she would be granted tenure.

Elements of Valid contract (4)

1. Agreement

2. Consideration

3. Contractual Capacity

4. Legality

(AND)

1. Agreement

the mutual agreement of the parties must be shown by an offer AND acceptance

2. Consideration

Legally sufficient and bargained for, consideration must be exchanged for contractual promises "price of the promise"

3. Contractual Capacity

each party to a contract must be seen as legally competent to enter it

- assumed unless: minor, intoxicated or mentally incompetent

4. Legality

the purpose and subject matter of the contract must not be contrary to law or public policy

Defenses to the Enforceability of a Contract (2)

1. Voluntary consent

2. Form

1. voluntary consent

consent must be voluntary not based on mistake or fraud or undue influence or duress

2. Form

some contracts must be in writing and signed by the party being sued

Offeror

A person who makes an offer.

offeree

A person to whom an offer is made.

Bilateral Contract

Promise for a promise

- reciprocal promises exchanged by parties

ex: Haley wants to sell her watch for $100 - I promise to buy she promises to sell

Unilateral contract

Promise for an act

- one party makes a promise in exchanged for the other party's actually performing/refraining from an act

- contract is formed after the act is performed

ex: after you build my fence I'll pay you $1,000 (doing it fulfills the contract)

express contracts

terms of agreement are fully and explicitly stated in oral or written words

Implied Contract (3 steps)

terms of agreement are inferred from the conduct of the parties

1. plaintiff must provide a service/good

2. plaintiff expected to be paid and defendant knew that

3. defendant had a chance to reject the goods/services but did not

ex: you go to the doctor and and serviced and are expected to pay for it

executed contracts

fully performed by both parties

executory contract

one or more parties has not performed

formal vs informal

Formal - prepared, executed

Informal - oral agreements or informally written

Valid Contract Requirements (4)

1. Agreement

2. Consideration

3. Contractual Capacity

4. Legality

How could a valid contract be unenforceable?

voluntary consent issue or didn't follow writing requirement

Voidable contract

A valid contract exists but one or more parties has the option of avoiding their contract obligation (walk away)

- party with the option can choose to void or confirm it

Void contract

no contract at all

- agreement has no legal effect

- no legal obligation exists

Agreement - requirements of the valid offer (3)

1. serious intent AND

2. reasonably certain and definite terms AND

3. communication

Intention

offeror must show his or her serious intention to be bound by terms of the offer

Lucy vs. Zehmer (1954)

Zehmer's

- own a farm don't plan on selling

- "I would take $50,000"

- was "joking"

- wrote the deal all on the napkin with the Lucy's (writes everything necessary)

- argues:

1) serious intent - tries to prove he was joking

2) Intoxicated - he remembered it all though

Lucy's

- want farm and know the Zehmer's aren't selling

- "I bet you would'nt take $50,000 for the farm."

- leaves w napkin thinking it's a contract

Situations where intent my be lacking (6)

1) expressions of opinion

2) statements of future intent - "I plan on..."

3) preliminary negotiations (requests to negotiate)

4) Invitations to bid (NOT offers)

5) ads, catalogs, price listings

6) live and online auctions (invitations to bid)

homeowner ask three pool companies for prices/bids and three submit bids...

Who is the offeror and offeree?

offeror - pool companies

offeree - homeowner

Definiteness of Terms

offer must have reasonably definite terms so court can recognize breach

Definiteness of terms required (4)

1) identify parties

2) identify subject matter

3) identify consideration AND

4) time of payment/delivery of performance

what are the courts willing to supply?

missing reasonable terms when the parties have clearly shown their intent to form a contract

- but if the term is too vague... court will not supply "reasonable" terms in its place

Communication

a) offeror must have intention of making terms known to the offeree and they must be received by the offeree

b) offeree must have knowledge of terms OR

offer may be specific to the offeree

d) offers can be public

communication case ex:

lost dog reward $500

- someone finds dog but didn't see poster

- they cannot receive reward bc no communication

Termination of Offer (2)

1. termination by actions of the parties

- revocation

- rejection by offeree

- counter offer by offeree

2. termination by operation of law

revocation is effective when

RECIEVED

1. termination by the actions of the parties - Revocation

- offer may be revoked before acceptance by offeror (expressly or by acts inconsistent w/ offer)

ex: golden doodle story

- revocation by offeree is effective when received (not read)

ex: email reception story

irrevocable offers

Option Contracts:

separate contract that exists when an offeror has promised to hold the offer open AND offeree has given consideration for the promise

- irrevocable for the period of time stated/reasonable period of time if not stated

1. termination by the actions of the parties - rejection of offer by offeree

offeree shows they don't want the offer

- rejection effective when received

- inquiry made by offeree is distinguished from rejection and doesn't terminate the offer (is that your best offer? can I get more info?

1. Termination by the actions of the parties - counter offer by offeree

rejection of an offer AND simultaneous making of a new offer

- "I'll buy ___ if you throw in ______"

- terminates original offer

- mirror image rule

mirror image rule

a) offeree's acceptance must match offeror's offer

b) a communication from the offeree which contains a material change in addition to the terms of the original offer IS A COUNTEROFFER and terminates original offer

2. Termination by operation of law (4)

1. Lapse of time

2. Destruction of subject matter of offer (ex: dog dies)

3. Deal or incompetency of offeror or offeree (ex: one party dies) OR

4. supervening illegality of proposed contract as a result of legislation or judicial decision (ex: weed legality)

Acceptance

offeree accepts the offer when the offeree unequivocally shows their willingness and intention to agree to terms

- must be unequivocal or mirror image (NO conditions)

Silence as acceptance

ordinarily, the offeree must exhibit his agreement to be bound with words or other clear conduct

EXCEPTIONS

- implied contract (ex: ordering food at restaurant) OR

- there was a similar prior course of dealings

Communications of acceptance - bilateral

acceptance is effective when the offeree GIVES the required promise

communications of acceptance - unilateral

acceptance is effective when the PERFORMANCE IS COMPLETED ... notification of acceptance is not necessary

Mode and Timelessness of Acceptance in bilateral contracts

acceptance effective when sent by offeree prior to the termination of the offer (mailbox rule)

exception to bilateral contract acceptance

acceptance will NOT be effective until the acceptance is received by the offeror IF the acceptance is sent in a manner that is not expressly or impliedly authorized

E contracts (2)

1. online contract formation

- online offers

- online acceptances

2. e-signatures

- e-sign act

- UETA

1. Online contracts - online offers

- under control of sender

- less opportunity to negotiate

- offers must be very clear

2. Online contracts - online acceptances (2)

a) click-on agreements: check a box saying "I accept" = binding

b) Browse-wrap terms:

you take action first to get product/service and then term pops up not valid acceptance

E-sign act

a. no contract, record or signature may be denied legal effect because it's electronic

b. parties must agree to sign electronically

c. contract must be able to be reproduced and retained

exceptions to E-sign act (Test question: which is NOT an exception) (7)

1. court papers

2. divorce decrees

3. evictions

4. foreclosures

5. health insurance terminations

6. prenuptial agreements

7. wills

The Uniform Electronic Transactions Act (UETA)

a. e-signature= "an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record"

b. record = "info inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form"

c. applies only to electronic records and signatures

E-sign act says that if the state has adopted UETA without modification...

then state law stands

- if state does modify UETA then E-sign prevails if state law is inconsistent with it

Consideration

Legally sufficient consideration exists when

1. promisee incurs legal detriment OR

2. promisor recieves legal benefit

(OR both)

1. promisee incurs legal detriment

- by doing or promising to do something that he has no prior legal duty to do

- OR by refraining or promising to refrain from doing something that she has no prior legal duty to refrain from doing

2. promisor receives legal benefit

- received by a promisor if the promisor received something to which he is not entitled, but for the contract

- NOT necessary that economic or material loss be insured by promise or benefit to promisor

Hamer v. Sidway

- rich man believes in "righteous living" (no drinking, smoking)

- there were no laws against any of that

- rich man comes to 15 year old nephew and says he'll pay him $15,000 for living righteous until he's 21

- nephew gets money and puts it in bank and goes crazy and gambles it all

- Hammer (his creditor) is assigned his gambling debt

- uncle dies but Sidway wants to know who owns the account

- was the deal a contract? or does his uncle still own the money

- court said it was a contract (because nephew refrained in exchange of money)

- creditor got the $

CONSIDERATION WAS PRESENT

bargained-for exchange

you get something out of it and I get something too

-separates it from a gift

Agreements that lack consideration

- preexisting duty rule (2)

1. doing something that one ALREADY has a legal duty to do/not do

ex: giving 5k reward to 25 year old today for not drinking...no consideration bc its his preexisting duty already

2. if a party is already bound by a contract to perform a certain duty, that duty cannot serve as a consideration for a second contract

ex: prof says he wont turn in grades unless he gets $2k... nope... preexisting duty is IMPLIED

Exceptions to pre existing duty rule (2)

1. unforeseen difficulties

2. rescission and new contract

1. unforeseen difficulties

- PRIOR to entering into the relationship

-EXAM- Texas- only construction scenarios

2. rescission and new contract

-undoing a contract, walk away

-form a new on with new terms ONLY after recission

Past Consideration

= not consideration

- now or future ONLY!

non compete agreements: new vs existing employee

New- consideration is present

Existing- consideration is not present unless given partial ownership

Consideration - illusory promise

promises that depend solely upon the whim or wish of the promisor and are not enforceable

- looks like a contract/promise but it's not

ex: if profits continue to remain high, you get a bonus if management agrees

Settlement of claims (3)

1. accord and satisfaction

2. release

3. covenant not to sue

1. Accord and Satisfaction

UNLIQUIDATED debts between creditor and debtor may be settled by the debtor offering to PAY and the creditor accepting LESS than creditor originally claimed

- reasonable people may disagree on how much debt is worth

2. Release (3 requirements)

1. good faith

2. signed

3. consideration present

- can be used for ANY legal issue

3. Covenant not to sue

ex: car crash, here's $500 don't sue me

promissory estoppel (detrimental reliance)

used with promises which are otherwise UNENFORCABLE; like promises without consideration

ex: we have a promise not supported by consideration but the court prevents us from denying a contract exists

5 elements for promissory estoppel

1. clear and definite promise

2. promisor expected the promisee to rely on the promise

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

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

5. enforcement of promise is necessary to avoid injustice

ex: Texas uses it to make sure people live out their donation promises

Capacity

legal ability to enter into a contractual relationship

Capacity is lacking or questionable with (3)

minors, intoxicated persons, and mentally incompetent

minors - capacity

-usually under 18

-general rule: a minor can enter into ANY contract an adult can as long as not against the law for minors

-courts want to protect minors

-MINORS HAVE RIGHT TO DISAFFIRM

disaffirm

words or conduct can be used by minor to express intent not to be bound

are parents liable for minors breach of contract or torts committed by minors

No.

minors emancipation

now treated as adult

- legally married; enlists in military; declaration of emancipation (= 14, living separate from parents with consent, managing finances w/income not derived from criminal activity, in minor's best interest)

Minors: Disaffirmance

1) words or conduct can be used by minor to express intent (can't be bound)

2) minors may disaffirm contract during minority and for a reasonable period of time after attaining age of majority

3) a minor who is exercising his or her right of disaffirmance must disaffirm the ENTIRE contract

4) the contract is voidable by minor, not adult

Answer on test =

assume the most unfair result for the adult

Minor's Obligations on Disaffirmance

- each party must make restitution by returning the consideration of the other party

- majority of states (Tx) that the minor can return goods even if damaged

- less states say... you get a "reasonable amount" back if goods are damaged

what if minor faked their age?

adult should've checked

What if the minor bought "necessaries" like food?

Can disaffirm but liable for reasonable value

intoxicated persons

A contract is voidable if it was made by a person who was SO intoxicated that his or her judgment was impaired AND he or she did not comprehend the nature of the transaction and the legal consequences of entering into the contract.

- Lucy case

(two issues - serious intent and capacity affected)

-if contracting party understands consequences of contract even if intoxicated...contract is NOT voidable

-it will be voidable of the other party fraudulently induced the person to become intoxicated

how can a contract be disaffirmed while a person is intoxicated

-within reasonable time after he becomes sober

-restitution must be made

-an intoxicated person must pay reasonable value for necessaries that were furnished

mentally incompetent person (2)

1. court declared (adjudicated)

-appointed guardian

-contract entered into by him are void

2. a person not so adjudicated

-can be considered mentally incompetent if judgement is impaired and cannot understand nature or comprehend effect of transaction

-if test is proven, contract is voidable

non adjudicated incompetent person -lucid intervals

they can have lucid intervals where EVERY contract formed is valid

- Alzheimers

sometimes you are able to make decisions

- ratification can occur after incompetent period and during lucid interval

a contract for necessaries may be _____ but mentally incompetent party is liable for ______

disaffirmed, reasonable value of necessaries supplied

Legality: Contracts Contrary to Statute (4)

1. contracts to commit crimes

2. usury

3. gambling

4. licensing statutes

Legality - 1. Contracts to commit crimes

agreements are void

-if purpose of contract becomes illegal bc of new law AFTER contract has been entered into...parties are discharged from obligations by operation of law

ex: contract to sell weed in tx

Legality - 2. Usury (& exceptions)

a law that sets an upper limit on the interest rate that can be charged on certain types of loans

Exceptions: allows banks to justify higher int rate

2) when borrower is a corp. (riskier)

3) when borrower needs a small loan (huge credit risk: $5,000-$10,000)

Legality - 3. Gambling

creation of risk and distribution of property by chance among persons who have given consideration in order to participate

-illegal and void

-all states have statutes that regulate gambling...but in some states its lawful (ex: Texas allows lottery and horse racing)

Legality - 4. Licensing statutes

all states have statutes that require licenses to be obtained into order to engage in certain trades, professions, or businesses

4. Licensing statutes - enforceability of contracts made by UNLICENSED persons (3)

1. void and unenforceable

2. If purpose is REGULATORY.. to protect the public from unauthorized practitioners...void and unenforceable

3. if purpose is REVENE RAISING....to raise gov revenue....enforceable

contracts contrary to public policy

an agreement which hurts an established interest of society or which has a negative effect on society is void and will not be enforced

contracts in restraint of trade

contracts in restraint of trade

If two or more parties enter into an agreement in which they exchange mutual promises NOT to compete with each other and their only objective is to restrict competition, the agreement is VOID because it is against a strong public policy favoring free, fair competition