Accounting 215 Exam 3 Bootsma

Express Contract

Contracts that are stated in words or is written

Executory Contract

A contract that has not been fully performed on one side

Executed Contract

A contract that has been fully performed by both parties

Offeree

Party to whom an offer was made

Offeror

Party making an offer

Promise

(Is it a contract by itself?)

A promise is not legally enforceable in court unless it forms a contract

Promisor

Party making a promise

Promisee

Party to whom a promise was made

Elements needed to prove a contract existed

- Offer

- Acceptance

- Contractual Capacity

- Legality

Merchant (Defined by the Uniform Commercial Code)

A person who deals in the goods contracted for or holds himself out as having special knowledge or skill regarding the contracted goods

Sources of Contracts

Sources include Common law, State Statutory law, and the UCC.

What types of contracts does the UCC apply to?

Applies to contracts made for merchants and goods

Requirements for an Implied Contract

- Plaintiff furnished a service or good

- Defendant knew or should have known Plaintiff wanted to contract

- Defendant had a chance to say "no" to the services

Bilateral Contract

A promise is given in return for another promise as part of a contract. Offeror makes a promise and offeree accepts by making a return promise

Unilateral Contract

Offer can be accepted by acting without the need for a return promise

*Can be revoked before the party starts the act

Void Contract

A contract that is not valid and is no contract at all.

Voidable Contract

A contract that may be voidable at the option of one of the parties

Unenforceable Contract

Contracts that cannot be enforced in court

Quasi Contract

A legal fiction imposed by courts to prevent unjust enrichment

Carlyle v. Carbolic Smoke Ball Co.

- Carbolic Smoke Ball Company offers an award of 100 pounds to anyone who used their product three times a week and still obtained influenza.

- Plaintiff used the smoke ball three times a week and still obtained influenza.

- Company claims their advertisement was not an offer.

- Court disagrees and states this was an offer for a unilateral contract. Plaintiff accepted offer by using the smoke ball as directed.

Lucy v. Zehmer

-Lucy and Zehmer were drinking. Lucy wants to buy land from Zehmer. Zehmer agrees to sell the land to Lucy and writes down the "contract" on a piece of paper/napkin.

- Zehmer then claims it was a "joke"

- Court says Zehmer and Lucy formed a legally enforceable contract

Objective intent the standard not "subjective"

Valid Offer requirements

Must

- Be made with serious objective intent

- Be communicated to the offeree

- Be made with enough specific terms to hold the offeror liable

Objective Standard

When determining the intent of the offeror, use what?

Types of Non-Offers

- Expression of opinion

+ "I would like to"

- Statements of intention

+ "I plan"

- Solicitation of bids

+ "How much would you charge?"

Advertisements

Generally not offers unless they limit the number of people that can accept or the quantity that can be accepted (an invitation to bid)

Auction

Generally not an offer but an "invitation to bid"

"With Reserve" (Auction)

The offeror can rescind offer before gavel bangs

"Without Reserve" (Auction)

The offeror cannot rescind their offer once bidding has started

Can cause Termination of Offers

- Lapse of Time

- Destruction of subject matter

- Death or incapacity of the offeror

- Subject matter of offer becomes illegal

Revocation

Offeror rescinds their offer

- Common law: offer is revoked once notice is received by the offeree

Promissory Estoppel

A doctrine which allows the recipient of a promise to enforce a contract in court

- Needs:

+ A party makes a promise

+ Person receiving the promise (called promisee) must justifiably rely on the promise

+ A detriment (harm) must be suffered by the promisee

+ Justice must be served by enforcement of the promise

Rejections

Must be received by the offeror

- Counter-offer counts

Mirror Image Rule

Acceptance must be the mirror image of the offer. I offer to sell you my car for $2000, you can't say "I accept, but you have to fill it up with gas before delivering"

UCC 2-207

Abolished mirror image rule for the UCC

- Additional terms may be included by offeree

- If a party incorporates additional terms in their acceptance and one of the two parties is not a merchant, then the additional terms are just proposals the other party can reject or accept

- If both parties are merchants then the additional terms become part of the contract unless an exception applies

-terms become part of the contract unless an exception applies

Roto-Lith case

- Plaintiff mails an order form to defendant i.e. "offer"

- Defendant prepares and mails both an acknowledgement and an invoice

- Documents disclaimed warranties related to the goods

- Plaintiff accepts foods but states the disclaimer of the warranty is not valid

- Court says Plaintiff became bound by disclaimer because they accepted the goods

UCC 1-202 (notice of revocation)

Revocation can be:

- given to offeree

- given to an agent of the offeree

- given indirectly to offeree

Options Contract

Requires:

- An offer is made with the promise for it to remain open for a period of time

- The offeree pays consideration to keep the offer open

Firm offer

- UCC 2-205

- Need a merchant

- Need a writing signed by the merchant

- Writing must state the offer is to stay open. (Doesn't need to say for how long)

Acceptance

- Creates an agreement

- Bilateral:

- Requires a return promise

- Unilateral

- Requires performance

acceptance

UCC 2-206: ____________ can be made by any means reasonable

- Acceptance of an offer for the purchase of goods may be made by prompt shipment of the goods or a promise to promptly ship the goods

- A shipment of non-conforming goods are deemed to be an acceptance and immediate breach of contract by the seller unless the seller states the goods are an accommodation

Click-on agreement

Offer is accepted by clicking on a box that certifies the person has accepted the terms of the offer

Shrink-wrap agreement

The user must agree to the terms in the shrink-wrapped box before opening the package. Once opened the product cannot be returned

Silence (acceptance)

Usually not acceptance

- Exceptions:

-Implied in fact contract situations

- Prior dealings

Mailbox rule (under common law)

- Acceptance is good as soon as it is dropped in the mail

- Default rule and can be contracted around

- Remember, under the common law revocation is only good when received by offeree

Output contract

States the buyer will buy all of the output of the seller

Requirements Contract

States the seller will sell the buyer all the required goods the buyer needs

material

Under the common law all _________ terms had to be present for mutual assent (agreement) to occur

Duty to Act In Good Faith

- UCC 1-203: requires parties to a contract to act in good faith

- UCC 1-201: Defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing"

Shelton v. Oscar Meyer Foods Corp

- Plaintiff was accused of smoking marijuana on the job at Oscar Meyer

- Plaintiff had received several handbooks

- Plaintiff alleged the firing was not in accordance with the handbook

- South Carolina Appellate Court states there is a duty of good faith and fair dealing required in this situation even though it was an employment contract

Consideration

Legal value given in return for a promise

- Promise to do something

- Promise of an action

- Refraining from an action

Hamer v. Sidway

- Uncle becomes indebted to nephew after uncle promises nephew $5,000 if he can refrain from drinking, using tobacco, swearing and playing cards or billiards for money until age 21

- Nephew fulfills promise to refrain

- Nephew gives the right to receive the money to receive the money to Louisa Hamer. - Uncle Dies

- Sidway, executor for the Estate of the Uncle refuses to pay Hamer

- Executor argues there was no consideration given in exchange for the promise to pay $5,000

- Court disagrees and says the action of refraining from a legal right is consideration

Consideration

Courts not interested in ____________ unless it is a peppercorn

Pre-existing duty (lacks consideration)

A duty that on already is required to perform (lacks consideration)

Exception: Unforeseen circumstances

Past Consideration (lacks consideration)

Consideration provided before the agreement was reached (lacks consideration)

Illusory Promises (lacks consideration)

Do not obligate the person making the promise to suffer a detriment

"I may or may not do something" (Lacks consideration)

Doctrine of Unforeseen Circumstances

Allows parties to agree to an increase in consideration if an unforeseen circumstance arises

consideration

UCC 2-209(1) allows parties to a contract governed by the UCC to change the duties required by a contract without the need to provide additional ____________

Mutual Rescission

Both parties to a contract under which they still both have duties to perform (executory) agree to return to their pre-contracting positions

Novation of Contract

A new contract supersedes the old contract (aka modification)

Novation of party

A new party is substituted in the place of an existing party

Accord (offer) and Satisfaction

Must be a dispute as to the amount owed

- Cannot have a liquidated debt

- A loan is a liquidated debt

Release

Needs:

- Good faith

- Writing

- Consideration

(Car loan)

Contractual Capacity

A contract requires the parties bound by it have contractual capacity

- Requires a person understand the consequences of entering into contract

Ratification

The act of accepting and giving force to an obligation that previously was not enforceable

Minors

(Voidable)

- Can disaffirm a contract by just expressing intent to do so

- Can disaffirm until they reach age of majority or a reasonable amount of time after

- Most states require that merchandise be returned

- Can't disaffirm if emancipated

- Can disaffirm contract for necessities

- Still liable for goods used

- Two part test: 1) Item must be necessary to sustain a minors existence 2) minor must not have guardian who is willing to provide the necessary

Shields v. Gross

- Actress/model Brooke Shields was photographed a child

- Photographs were of her in a bathtub

- Photographs were embarrassing

- Shields tried to prevent the republication of these photos

- New York law allowed her mother to consent on her behalf

- Contract for the photos was not voidable at the option of Shields under New York state law

The intoxicated

General Rule: If a person is sufficiently intoxicated then the contract is voidable

- If intoxicated but still able to understand consequences of actions contract is not voidable

First State Bank of Sinai v. Hyland

- First State Bank sued defendant Hyland for payment on a promissory note

- Hyland had signed a promissory note, the proceeds of which, had been released to his son who did not make the required payments

- Defendant claims he was intoxicated at the time he signed the promissory note. Court agrees that the contract was voidable at his option because of intoxication

- Court finds the defendant ratified the contract by making payment of interest

- Court states disaffirmance must be prompt after regaining one's faculties

Mentally Incompetent

- Void-If person is adjudicated mentally incompetent

- Voidable-If its proven that the person is mentally incompetent at time of contracting but now is lucid

- Not voidable if person had a lucid moment and have not been adjudged as being mentally insane by a court

Illegality

Usually the court will just ignore a contract which is meant to accomplish an illegal purpose

- Contract subject matter can be made illegal by statute of common law principle

- Violation of Public Policy may result in illegality

Restraining Trade & Public Policy

Contracts in restraint of trade may be found to violate public policy

- Usually involve covenant not to compete

- Employment contracts often contain covenants not to compete

- Covenants in restraint of trade must be:

- Reasonable in length

- Reasonable in geography

- Reasonable in scope

Licensing Statutes

- If a contract violates a licensing statute the contract will be void if the licensing statute was meant to protect the public

- If a contract violates a licensing statute which is primarily designed to raise revenue, then it might become enforceable (Unlicensed cab driver is owed $120)

Procedural Unconscionability

"Process or procedure is unconscionable (unfair)"

- No time to read the terms

- Too much legalese

- No time to ask questions

- Adhesion contract

Adhesion Contract

Contract in which one party has superior bargaining power

Substantive Unconscionability

"Subject matter is unconscionable"

- Must "shock the conscious" of the court

Exculpatory Clause

A clause that relieves a contracting party from liability in the event of monetary or physical harm

- Often seen in employment contract

- Often used by amusement parks or other type of recreational based companies

- Can be found as contrary to public policy

- Adhesion contract

Tunkl v. Regents of University of California

- Mr. Tunkl was a patient at a university hospital

- Mr. Tunkl dies at the hospital and his wife bring a lawsuit

- Mr. Tunkl had signed a contract with the hospital that contained an exculpatory clause

- Court says it is permissible in California to shift risk through a contract

- However, court found the exculpatory clause used by the hospital violated the public interest (public policy)

UCC 2-201(2)

UCC 2-201(2) doesn't require any signatures if both parties were merchants and a written confirmation was sent and no objection was made within 10 days

Wright v. Wright

- Plaintiff gives birth to a son.

- Defendant's son was the father

- Defendant agrees to pay plaintiff if she will marry his son and the son forsakes her (leaves her)

- Son leaves plaintiff and child (forsakes her)

- Defendant argues he should not have to pay plaintiff because there was no consideration and this type of contract violates public policy

- Court disagrees and holds for plaintiff

Statute of Frauds

Requires:

- Certain contracts have to be in writing to be enforceable in court

- Must be signed by the opposing party against whom the contract is being enforced

Contracts that have to be in writing

- Interests in land or anything permanently attached to land

- Contracts that cannot be performed within one year from date of formation

- Promises to pay for the debt of another

-Gratuitous guarantors only

- Promises made in consideration of marriage

- Under UCC 2-201(1) - contracts for goods priced $500 or more

Exceptions to Statute of Frauds

(Exceptions to Statute of Frauds)

Common Law:

- Partial Performance

- Promissory Estoppel

UCC:

- Admission in Court

- Acceptance (or partial acceptance) of goods costing $500 or more

- Specially manufactured goods

Parol Evidence Rule

If parties intended a writing to contain their final, fully integrated agreement, then the court will exclude all other evidence if that evidence is offered to contradict the terms of the contract.

Exceptions to Parol Evidence Rule

Exceptions:

- Subsequent Modification

- Ambiguous terms

- Court may look at course of dealings, course of performance, and usage of trade.

Parol Evidence Rule & the UCC

UCC 2-202 prohibits evidence of contemporaneous agreements if the agreements are being entered as evidence to contradict the terms of the signed agreement

- Contemporaneous agreements are agreement which occur as the same time

- Subsequent agreements are allowed

Course of Performance

Court looks how the parties have been interpreting the contract terms to date as they have performed under the contract (this contract)

Course in Dealings

Court looks at how parties in question have transacted in the past and interpreted similar terms (prior contracts)

Usage of Trade

How do others involved in the trade in question interpret terms such as those in dispute (other businesses)

Consent

As a general rule: parties cannot enter into an agreement if they have not consented to the terms of the agreement because they were mistaken, tricked or threatened

Bilateral Mistake

- Both parties are mistaken

- Cannot have a meeting of the minds

Unilateral Mistake

Only one party makes a mistake.

- Courts not interested in unilateral mistakes

- Exceptions:

- One party knows or should have known the other party was mistaken

- Mathematical or bookkeeping errors

law, value

Courts don't generally consider mistakes of ___ and _____ (separate words with comma)

Aydin Corp. v. U.S.

- NAVALEX solicited orders for radio sets

- Aydin submits a bid for $158,800 per radio

- Plaintiff learns of a competitor's higher bid

- Plaintiff claims unilateral mistake in calculating bid

- Court states the plaintiff appears to have made an error in judgment not calculation per se

- No relief for errors in judgment

Scienter

Intent by the defendant to tell deceiving lie

Fraudulent Misrepresentation

+ No mutual assent when fraudulent misrepresentation has occurred.

- Puffing up a product or service is not fraud

+ Test for intention misrepresentation

Fraudulent Misrepresentation: Test for intention misrepresentation

- Misrepresentation of a material fact

- Material: makes a difference in the decision making process

- Must be an intent to deceive

- Scienter: intent by the defendant to tell deceiving lie

- The innocent party must rely on misrepresentation

Misrepresentation of Law

Don't generally care as parties should be informed of the law (exception when one party is considered an expert in that area of law)

(Type of misrepresentation)

(Not a defense)

Misrepresentation by silence

Just as good a defense as verbal misrepresentation in some situations

Misrepresentation by conduct

Similar to misrepresentation by silence

Innocent Misrepresentation

The party did not intentionally lie

- No meeting of the minds - no contract

- Example: Amy believes she is selling an antique to Phillip. Phillip buys the antique then finds out it is not. Amy was not negligent in believing it was an antique.