UGA LEGL 2700 Chapter 8

Contract Formation

Contract formation

for a business to run smoothly, one must be able to rely on the promises of others

Contracts

• promises that are enforceable with predictable consequences for performance failures

• enable buyers and sellers to account for future risks or have confidence in exchanging valuables

• doesn’t always need to be a formal written document

• provides flexibility and precision in business dealings

• most business contracts are future

All contracts are________ but not all _________ are enforceable contracts

promises

Contract law comes from either

• legislation

• common law

legislation

• UCC (Uniform Commercial Code)

  • sale of goods is governed by article 2 of the UCC everywhere except Louisiana

• Contracts for goods

Common Law

• judges decisions

• contracts for other than goods

• state common law

  • states codify common law to create statutes

K

abbreviation for contract

Δ

abbreviation for defendant

π

abbreviation for plaintiff

Classifications of contracts

• bilateral and unilateral

• express and implied-in-fact

• implied-in-law/ quasi

Bilateral contracts

involves the exchange of promise for promise

unilateral contracts

involves the exchange of a promise for an action

express contracts

is a legally binding agreement in which the terms are explicitly stated by the parties—either orally or in writing—at the time of formation

Implied-in-fact contract

is a legally binding agreement created by the actions, conduct, or circumstances of the parties rather than by written or spoken words

Implied-in-law/ Quasi contracts

not a true agreement. It is an equitable legal obligation imposed by a court to prevent unjust enrichment when no formal contract exists

Contractual Enforcement Terminology

5 Elements

1. Enforceable

2. Unenforceable

3. Valid

4. Void

5. Voidable

Enforceable

is a legally binding agreement that a court will uphold and enforce if one of the parties fails to perform their obligations

Unenforceable

an agreement that may be valid in its formation, but a court of law will not enforce it or award damages if one party fails to perform.

Valid

enforceable

Void

Unenforceable

Voidable

a valid, binding agreement that can be rejected or canceled by one of the parties due to a legal defect in how it was formed

Contractual Performance Terminology

• executed contract

• executory contract

executed contract

all parties have performed their promises

executory contract

not all parties have performed their agreement

Requirements for an enforceable contract

• if all elements aren’t met, then the contract is void

1. Offer to enter into a contract

2. Acceptance of the offer

3. Consideration for each promise

4. Capacity of each party to enter into a binding agreement

5. Legality of subject matter

Offer to enter into a contract

• An offer in contract law is a clear proposal by one party (the offeror) to another party (the offeree) that shows a willingness to enter into a legally binding agreement on specific terms

• contains specific and definite information

• the UCC says that non quantity items specific terms can be decided later

Intent

depends on what the offeree thinks

How to terminate an offer?

• must be done before an acceptance by explicit act of one of the parties

  • revocation

  • rejection

  • counteroffer

  • lapse of time

revocation

offeror's formal withdrawal of an open offer before the offeree accepts it.

rejection

when the person receiving an offer (the offeree) refuses it.

counteroffer

a response to an initial contract offer that simultaneously rejects the original proposal and introduces a new set of terms

lapse of time

the automatic termination of an offer when the offeree fails to accept it within a stated deadline or within a reasonable period. Once an offer lapses, it becomes null and void and cannot be accepted to form a binding contract

termination by operation of law

1. Subject matter destruction

2. offeror death or insanity

3. subject matter illegality

Subject matter destruction

A contract or an open offer terminates automatically by operation of law if the essential subject matter is destroyed without the fault of either party before acceptance or performance is completed.

Offeror death or insanity

The death or insanity of the offeror (or either party) before acceptance terminates an offer by operation of law

Subject matter illegality

when a new statute, regulation, or court ruling makes the underlying purpose or performance of the agreement illegal after it has been formed

acceptance of the offer

• must have knowledge to accept

• offeree's clear and unconditional agreement to the terms of an offer, which creates a legally binding contract

mirror image rule

• a common law contract doctrine requiring that an acceptance must match an offer's terms unconditionally and exactly

• For contracts involving the sale of goods, the Uniform Commercial Code (UCC) rejects the strict common law mirror image rule.

UCC battle of the forms exception

For contracts involving the sale of goods, the Uniform Commercial Code (UCC) rejects the strict common law mirror image rule. an expression of acceptance is treated as acceptance

Paul Gottlieb & Co., Inc. v. Alps South Corp., 985 So. 2d 1 (Fla. 2d DCA 2007)

• Battle of the Forms UCC

• The Dispute: Gottlieb supplied specialty knitted fabric (TL2646 Coolmax 1) for Alps' prosthetic liners. Gottlieb later substituted a different yarn into the fabric without notifying Alps. The substitution caused the prosthetic products to fail, resulting in customer complaints and a product recall.

• The Contract & Clause: Gottlieb’s standardized "finished goods contract" included a limitation of liability clause on the back prohibiting recovery of indirect or consequential damages.

• Appellate Holding: The Florida Second District Court of Appeal reversed, holding that the limitation of liability clause did not cause unreasonable surprise or hardship as a matter of law because Alps failed to previously disclose the special risks of product failure to Gottlieb. The appellate court enforced the clause, barring consequential damages, and remanded the case to allow Alps to seek direct or incidental damages instead

Silence does not equate acceptance

• no duty to respond

• except when:

  • companies have been working together for a very long time

  • its in the contract

  • you continue to use an app after receiving an email regarding new conditions

Mailbox rule

a contract law principle stating that an offerree's acceptance of an offer becomes legally effective the moment it is properly dispatched (such as dropped in the mail or sent via an authorized medium), rather than when the offeror actually receives it

• creates an acceptance, even if revocation is in the mail

• revocation must be received to be in affect

consideration

• the mutual exchange of something of value between the parties—often called the "price" of the promise or a quid pro quo (such as money, goods, services, or a promise to refrain from doing something)

• something of value given by a party in a contract

• receipt of a legal benefit or the suffering of a legal detriment

• both parties must give consideration

accord and satisfaction

a legal method to discharge a pre-existing debt or contract obligation through a new agreement (the accord) and its performance (the satisfaction)

prior consideration

does not equal consideration

preexisting obligation

• does not apply to UCC 2 Ks

• performing—or promising to perform—an obligation you are already legally bound to do does not count as valid consideration

option contract

something of value given by the option holder (offeree) to the offeror in exchange for a binding promise to keep an offer open and irrevocable for a specific period of time

• firm offer/ UCC 2 exception (says rules of consideration don’t apply)

Negotiable instruments (article 3) UCC

checks

UCC article 2

• governs contracts for the sale of goods across the United States.

• pre existing obligation doesn’t apply

Doctrine of Promissory Estoppel

states that a party who justifiably relies on a gratuitous promise can ask a judge to award compensation for that reliance

elements of promissory estoppel

• promise significant enough to cause the promisee to act on it

• promisee justifiably relied on the promise

• promisee suffered significant detriment

• relief can only come from fulfilled promise

elements that effect the capacity of parties

• minors

• intoxicated

• mentally incompetent

minors

• cannot be legally bound to contractual promises with exceptions for necessaries of life

• contract is voidable at the election of the minor

  • the minor has all the power

Intoxicated or Mentally Incompetent Persons

• contracts are voidable depending on the person’s capability to understand the contracts nature & purpose

to be mentally incompetent, the person must be:

incapacitated at the definition of law

any property they own, a statement of their incompetence must be stapled to the deed

Lawful Purpose

• contracts that require commission of a crime or tort, or violate accepted standards of behavior are void

• courts typically dont take action on such contracts

• this protects ndas and non competes

  • valid for 4-5 years but are usually 2-3

  • 1 in 5 americans are affected by non competes

  • they must be within a reasonable time and distance

severability clause in contracts

if one or more parts of the agreement are found illegal, invalid, or unenforceable by a court, the rest of the contract remains in full force and effect.

Defenses to contract enforcement

• improper form when a writing is required

• no true meeting of the minds due to fraud or mistake

meeting of the minds

the requirement that all parties to a contract share a common understanding and agreement regarding the essential terms and conditions

when a “meeting of the minds” is lacking…

• fraud or misrepresentation

• mistake

  • mutual mistake

  • unilateral mistake

• duress

• undue influence

Fraud

is an intentional or reckless deception used to trick another party into signing or agreeing to a contract, causing them financial or legal injury

misrepresentation

an unintentional false statement of fact made by one party during negotiations that tricks the other party into entering into a contract

mutual mistake

• when both parties share the same erroneous belief about a basic assumption that has a material effect on the agreement

• has to be a fact of the contract

• assumed risk

unilateral mistake

• when only one party is wrong about a fundamental term, fact, or assumption of a contract, while the other party is not mistaken

• the unmistaken party will not be punished for the lack of knowledge of the mistaken party

duress

when a party is forced to sign or enter into an agreement through wrongful threats or psychological coercion, leaving them with no reasonable alternative.

undue influence

an equitable defense that occurs when one party uses a position of power, trust, or authority to excessively persuade another person, overriding their free will and resulting in an unfair agreement

fraud in execution

occurs when a person is tricked into signing a document while being fundamentally deceived about its true character or nature. Because there is no real intent to form the agreement, the contract is completely void from the outset

oral contracts

• generally just as enforceable as written contracts if they have all 5 elements

• informal

• ex.) buying fast food or vending machines

Statute of frauds

• legal requirement that certain contracts be in writing

• every state has one but they vary

Business contracts required in writing

• sale of an interest in land

• collateral promise to pay another’s debts

• contracts that cannot be performed in a year

• sale of goods of $500 or more

• other contracts based on state statutes

exceptions to the writing requirement

• part performance

• rules involving goods

• judicial admission