Business Law Day 7
Objective Theory of Contracts
Analysis of contracts relies upon the Objective Theory of Contracts. This principle dictates that the legal system cannot investigate the internal thoughts or private intentions of an individual (similar to the approach in Tort law).
Instead, the law evaluates the external manifestations of an individual’s actions. Legal inferences are drawn from what a third person would reasonably believe actually happened based on those actions.
Consequences of this theory include:
It is possible to legally make an offer without intending to do so, provided your external actions suggest an offer.
Conversely, it is possible to accept an offer even if there was no internal intent to accept, solely based on the actions taken.
Unilateral Contracts and Performance Issues
Defining Feature: A unilateral contract is characterized by a promise made in exchange for an act. Acceptance of the offer and performance occur through the same act.
Exchange Structure: No formal exchange of a "promise for a promise" occurs. One party makes a promise (the offer), and the other party fulfills the terms presented to accept.
Performance Challenges:
Incomplete Performance: Significant issues arise if a performer starts but fails to complete the act. This is critical if the performance spans a week or a month.
Withdrawal of Offer: If a performer completes half the performance before the other side withdraws, remedies such as promissory estoppel are utilized. This allows the performer to recover costs and expenses based on their reliance on the promise, even if the full deal remains unfulfilled.
Notification Obligations in Unilateral Contracts
The Notification Problem: A question arises regarding the offeror’s liability if they are unaware the performance has occurred.
Example Scenario: Hiring an individual to mow a lawn while the owner spends months in Arizona. The owner has no immediate way to know if the task was completed.
The Predominant/Majority Rule: If the offeror has reason to know they have no adequate means of learning of the performance, the performer must exercise reasonable diligence in giving notice. Failure to do so discharges the offeror from liability.
Logical Basis for the Rule:
Prevents potential fraudulent claims about performance.
Protects the promisor from incurring double liability. Without notice, the owner might assume the first person (e.g., Bill) failed to show and hire a second person (e.g., Joe) to perform the same task.
Contract Analysis: Single vs. Successive Performances
Scenario A (Single Contract): A signed agreement for the delivery of reams of paper every month for a -month period for a set price (). This is viewed as one single contract with multiple performance obligations. The buyer is committed for the full year even if their needs change.
Scenario B (Series of Contracts): A conversation to lock in a price where the buyer agrees to submit a Purchase Order every month for a year. This is generally viewed as a series of individual contracts.
Implication: If it is a series of contracts, the buyer can stop sending purchase orders at any time without further obligation; the deal is considered done for that period.
Agency Relationships and Contractual Commitment
In a business or startup environment, executives must hire individuals (contract managers) who understand these nuances.
Employees acting as agents can legally bind a company if they appear to have the authority to act. Mismanagement of contract structures can lead to overcommitment for products or services the company did not intend to purchase.
Acceptance by Silence and the Unsolicited Goods Statute
General Rule: Silence typically does not constitute acceptance.
Exceptions (Fact-Specific): This rule can be overridden if the offeror has given the offeree reason to believe silence will act as acceptance.
Example: An agreement where materials are delivered by truck on a regular basis. Silence implies a request to continue "the usual" unless interrupted by specific notice.
Unsolicited Goods: Historically, unscrupulous merchants would send goods unilaterally and demand payment. Many states have passed specific consumer statutes to address this. While the concept of unjust enrichment exists, these specific statutes designate such goods as gifts or otherwise limit the sender’s ability to collect payment.
Equitable Remedies: Promissory Estoppel and Unjust Enrichment
Promissory Estoppel: Used as a remedy when a contract is missing a necessary element, such as consideration. It is based on the performer’s reliance on a promise.
Unjust Enrichment: Used when a contract is missing an explicit promise.
Example: A builder constructs a building twice as fancy as expected. The buyer watches the construction happen without objection and then refuses to pay for the extra value. The builder may be compensated via unjust enrichment to prevent the buyer from receiving an unfair windfall.
The Master of the Offer and Conditions of Expiration
Concept: The offeror is always the "master of the offer."
Strategic Application: Buyers and sellers should specify conditions and expiration dates (e.g., "this offer is only good for days") to avoid being legally bound to a response that arrives too late. An offer that is not formal or signed is still legally binding once accepted.
Revocability of Offers and the Elements of Options
Revocable vs. Irrevocable: Most offers are revocable until accepted. An irrevocable offer is generally an Option.
Enforceable Options: For an option to be enforceable, it must be supported by consideration.
Example Case: SpaceX entered into an option to buy an AI company for approximately . For this to be legally binding, there must be an exchange of value (consideration) for the right to keep the offer open.
Termination of Offers: Reasonable Time and the Death of the Offeror
Lapse of Time: If no expiration is specified, an offer terminates after a "reasonable time." This is a fact-intensive legal argument.
Face-to-Face Negotiations: The general rule is that an offer made in direct negotiation is only open while the parties are conversing. If a -hour negotiation ends without acceptance, the offer typically expires unless otherwise stated.
Late Acceptance: Governed by individual state rules; there are generally three distinct approaches states take regarding late acceptance.
Death of the Offeror: The death of an individual offeror immediately terminates the offer.
Business Entity Exception: This rule is often irrelevant in modern business because corporations and Limited Liability Companies (LLCs) do not "die." If a sole business owner incorporates, the entity continues regardless of the shareholder's death.
The Statute of Frauds: History and Application
Purpose: The Statute of Frauds exists to prevent individuals from perpetrating fraud by lying about oral agreements. Certain categories of contracts are deemed so important or complex that they must be in writing to be valid.
Common Law vs. UCC: The Uniform Commercial Code (UCC) applies to Goods, while Common Law applies to services, real estate, and other intangibles.
Classes of Transactions Subject to the Statute of Frauds
Suretyship (Guarantors): A promise to answer for the debt of another.
Example: Parents acting as guarantors for a student's tuition or rent. Banks use specific guarantee forms to ensure these are in writing.
Real Property: Any transfer of interest in real property must be in writing. This includes sales, easements, and licenses.
Licensees: Kiosks in the middle of a shopping mall are typically licensees (revocable right) rather than lessees.
Fixtures: Items attached to the land (e.g., toilets) are treated as real property. Once disconnected (e.g., cutting a tree into lumber), they may become goods.
The One-Year Rule: Any contract that, by its own terms, cannot be performed within one year must be in writing.
Example: An oral promise made on for a promotional appearance in April 2023 is unenforceable without a writing.
Marriage: Promises made in consideration of marriage. In modern times, this applies to prenuptial agreements regarding the division of wealth.
Sale of Goods ( Rule): Under the UCC, any sale of goods for a price of or more must be in writing.
UCC Article 2: Definitions and Scope
Merchant: A person who deals in goods of the kind or otherwise by occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved.
Goods: All things movable at the time of identification to the contract, including the unborn young of animals and growing crops.
Future Goods: Goods that do not yet exist but will be manufactured.
Fungible Goods: Goods that are indistinguishable from one another (e.g., grain in a silo, iron ore, or copper). Owners have an undivided share in the bulk.
UCC Statute of Frauds and Merchant Exceptions
UCC 2-201: Requires a writing sufficient to indicate a contract was made, signed by the party against whom enforcement is sought.
Between Merchants: If an oral agreement is reached and one merchant sends a written confirmation within a reasonable time, it binds the recipient unless written notice of objection is given within days of receipt.
Specific Exceptions: Performance (shipping and accepting goods), specially manufactured goods, or an admission in court that a contract existed will bypass the writing requirement.
Formation of Contracts Under the UCC
UCC 2-204: A contract for the sale of goods can be made in any manner sufficient to show agreement, including conduct. It does not fail for indefiniteness even if terms are left open, as long as there is a "reasonably certain basis" for a remedy.
UCC 2-206: Offers can be accepted in any reasonable manner. Shipping goods (even nonconforming ones) operates as an acceptance.
UCC 2-207: The Battle of the Forms and the Mirror Image Rule
Mirror Image Rule (Common Law): To form a contract, the acceptance must exactly match the offer. Any deviation is a counteroffer/rejection.
Elimination of Mirror Image Rule: The UCC 2-207 allows for a contract to exist even if the acceptance contains additional or different terms.
The Problem of Boilerplate: Most commercial deals involve a Purchase Order (Buyer) and an Order Acknowledgment (Seller) with contradictory "boilerplate" text.
Battle of the Forms Criteria:
Additional terms become part of a contract between merchants unless: (a) the offer limits acceptance to its own terms, (b) the terms materially alter the deal, or (c) objection is given in a reasonable time.
Last Shot Rule (Common Law): The last paper sent before performance governed the deal. The UCC inverts this to favor the buyer.
Conduct Rule: If writings don't establish a contract but parties act like one exists, the contract consists of the terms they agreed on plus "gap filler" provisions.
Questions & Discussion
Question: What is the defining feature of the unilateral contract?
Response: The acceptance and the performance of the promises accepted in the same act.
Question: What does it mean that the author is the master of the author?
Response: It means you should specify the conditions (e.g., time limits) under which people can accept your offer to avoid unintended liabilities.
Question: Why do we have a rule that discharge of liability occurs if notice of performance is not given?
Response: To prevent double liability where an owner might hire a second person because they haven't heard from the first.
Class Logistics:
Torts Quiz: Due today by midday. It is primarily multiple choice.
Business Plan Assignment: In two weeks, students will pick a business, find people, and institute systems (influenced by contract law knowledge).
Class on the 14th: Students should reach out to assigned teammates to prepare efforts.
Makeup Class: Discussion of a potential makeup class on May 7 (Reading Day).
Statistics/Complexity: Approximately of the world’s daily transactions occur in the US under these legal scenarios.
Theoretical Comparison: Contract law is compared to a computer program or a series of formulas in calculus or matrix mechanics (multiplying charts of numbers), requiring logic-driven navigation through a labyrinth of rules.