Contract Formation
Offer - Acceptance - Consideration - Capacity - Legality - Meeting of the Minds
Contract examples:
College tuition/scholarships
Car payments
Lease
Insurance
Employment
Work to earn a paycheck
What is a contract?
Legally enforceable promise or exchange of promises
Contract law enables private agreements to be legally enforceable
Important because you need to make sure both parties abide by the contract. Assurance to rely on promises made between two people or businesses.
Sources of contract law
Common law
Decidsions from courts/judges
Legislation
Uniform Commerical Code (UCC): deals with sale of goods
Goods are tangible moveable items of personal property
Ciode applies t obusinesses and inviduduals
Attempt to make relatively uniform in the area of goods and contracts
Do all contracts need to be in writing? No, but it makes sense to get it in writing to make it easier to enforce.
Different types of contracts
Bilateral contract
Containing mutual promises
Contains two promises, two rights, two duties
Ex: i will sell my car to my best friend for $5000.
Most business contracts are bilateral
Unilateral contract
Agreement wihh 1 promise
Maker of a promise seeks an action in return rather than promise in return
Only one party is committed to perform
If the action does not happen, no breach
Ex: if you sell 300 units, you get bonus of $1000. If you don’t reach the goal, they don’t have to pay you
Ex: asking a lawyer for professional advice implies promise to pay for the service even though an express promise to pay was not made
Express
Parties to a contract actually discuss the proposed terms
Implied in fact
Contracts that arise from the conduct of the parties rather than words
Relying on implied terms is risky so a written contract is preferable
Implied in law or Quasi contracts
When one party is unstrictly enriched at the expense of the other, the law
May apply a duty on the first party to pay the second party even though there is no written contract
If I paid property taxes for 5 years on properttyy i believed i owned but then my neighbor says its actually his, then he should repay me
Overpaid on a debt
Goal is to have contracts that are enforceable in a court of law
Enforceabkle contract
Contract whose essential requirements are present, thus a valid contract
Unenforceable contract
Contract where the non performing party has a valid reason for noncompliance with the promise a defenese going forward
Void contract
Agreement that lacjks an essential requirement for validity or enforcement
Ex: contracts involving illegal goods / gambling debt
Voidable contract
Agreement where one party has the right to get out of the contract without incurring legal liability
Ex: age/mistake (under age of 18, signature comes from parent since minor can get out of contract saying its voidable)
Contract formation
Essential elements for making a valid and enforceable contract
Making an offer
Offer = specific promise&demand
Made by offerer to offeree
Ex: I will pay you $5K for 2 Superbowl tickets
Offers need to be clear
Terms must be definite and specific
Ex: I will sell you these clubs for $1000
How is an offer terminated
Revocation
Offeror retracts offer before acceptance is given
Rejection: no, does not agree with terms
Counteroffer: no, but I will pay you …
Lapse of time: offeree fails to accept by a defined deadline or after a reasonable period of time has elapsed
Termination of offer by law
Subject matter destruction
If painting is destroyed, contract is gone because there is no painting to be sold anymore
Death or insanity of offeror
No longer able to give offer
Subject matter illegality
Change in law renders agreement illegal (ex prohibition)
Acceptance of offer
Necessary to create valid enforceable contract
Bilateral contract - how is this accepted?
Ex: offers to sell car for 5000 and he promises to pay the 5000
Mirror image rule - acceptance must match offer directly otherwise it is a counteroffer inviting further negotiations
Unilateral contract
By performing a requested act
Offeree’s failure to reject an offer does not imply acceptance
Battle of the forms
Change to mirror image rule between merchants (sale of goods)
Purpose is to promote commerce
Merchants exchanging form documents such as purchase orders and invoices with different terms, what terms apply?
Is there a material alteration of the offer? Did offer expressly limit acceptance to its terms? Failure to object within a reasonable time?
Consideration
Receipt of a legal benefit or the suffering of a legal detriment
Courts will not enforce contract unless there is consideration (money, refrain from doing something one has a legal reight to do)
Bilateral contract
Each party promises to eachother
Binding promises are the consideration
Unilateral
Consideration of one party is a promise and other is a performance of the act
Must be bargained
Other consideration issues
Option contract
Agreement not to revoke an offer for a certain period of time
Promissory Estoppel
Detrimental reliance
Promisee justifiably relies on the promise of another to their own detriment
Ex: promise to pay off student loan if student enrolls in grad school
Capacity of parties to contract
Persons ability to be bound by a contract
Those lacking capacity (minors, voidable, intoxicated poeople, mentally incompetent persons (dementia, legally declared incompetent)
Covenant not to compete
Not allowed to work for competitors or in the same area for a certain amount of time. Purpose is to protect company’s secrets, etc. Potentially limits employee options after leaving
Protect employers from having the employees they train leave and work for competitors
Must have valid business reason
Overreaching covenant not to compete
Meeting of the minds
Offer - Acceptance - Consideration - Capacity - Legality - Meeting of the Minds
Parties to a contract must have a mutual understanding of the essential terms and underlying facts
Reason for lack of the meeting of minds
Fraud: intentional misstatement of fact that induces another to act, internet to deceive, justified relatiance on the misstatement by the innocent party, damage (ex: covering up mold and not disclosing it, etc)
Mutual mistake: Mutual mistake to a material fact relating to the contract
Recission by either party is appropriate
What is a material fact
Denver dime example (sale of a Denver dime for $500 but later it was deemed to be counterfeit)
Unilateral mistake: one party is mistaken about some aspect of the contract
No remedy is generally available
Duress
Force or threat of force (economic, physical)
Undue influence
Taking unfair advantage of someone (like elderly relative)
Oral/written contracts
Oral contracts are as enforceable as written ones, but written ar preferred for important transactions
Law required require certain contracts to be in writing
Statute of frauds
Written contracts reduce the potential for confusion, fraud, and deceit
Contracts required to be in writing:
Sale of real estate
Collateral promise to pay for the debt of another
Contract that cannot be performed within one year of its making
Lease for 24 months service contract for 3 years
Sale of goods of $500 or more
UCC / between merchants
Chapter 9 What does a contract mean?
Meaning of contract is a question of law?
Judges
How do judges decide the meaning of a contract?
Rules of interpretation
Common words are given their general meaning
Trade words are given their meaning in a business context (rose v rose)
Courts will interpret amibquous or vague terms against the party drafting the contract
Parole Evidence Rule
Rule that parties to a final written contract cannot introduce oral evidence that changes the written meaning of the terms (applies to oral agreements/discussions made prior of the written contract being agreed upon)
Oral testimony could be given to explain the meaning of the written terms without changing the terms
Performance
What contacting parties want is to assure the performance of the action desired
A party to a contract is discharged when that party is relieved from all further responsibility of performance
What happens when there is a lack of performance?
Conditions of performance
Three forms of classifications for conditions of performance
Condition precedent: something must take place before a party has a duty to perform
I will buy this land when the city annexes this land
Failure to satisfy a condition precedent excuses performance, even if the condition is a minor part of the transaction
Condition subsequent: Excused performance if some future event takes place
Insurance policy may say there is no coverage for damage if war is declared
The insurance policy says there is a duty to notify the company of damage to your vehicle within a set amount of days and if timely notice is not given, then the insurance company will claim it is relieved of its duty to provide coverage/payment
Discharge of duties through performance
The degree or amount of performance can become an issue
A party of a contract may not always perfectly perform the duties owed
3 levels of performance:
Complete performance
When one party completely performs its obligations under a contract it is entitled to complete performance by the other party
Material breach
When performance is materially deficient or non existent
Non breaching party is relieved from performance and may sue for damages from breach
Substantial performance
Techincal breach of contract but non-breaching party is still required to perform but may sue to recover any damages
Excuses valid for nonperformance
Force Majeure
Specifically negotiated contract provision that excuses or delays a party’s obligation
Ex: acts of god, etc
Impossibility of performance
If the subject matter of the contract is destroyed
Frustration of purpose
When it is still technically possible for a party to perform, but the result would be dramatically different than the parties intended, then one can assert the doctrine of frustration of purpose
Mere increased difficulty or reduced profitability does not constitute impossibility of performance/frustration of purpose
Commercial impractibility
UCC sale of goods contracts: not as difficult to meet as the impossivility standard
Manufacturers source of raw goods is suddenly interrupted then this could meet it
Waiver
Party intentionally releases a right to enforce a contract
Usually occurs after a contracting party fails to perform (landlord waives late fee if only a few days late when you have been consistently paying on time)
Release
When a party announces the other does not have to perform as promised
Breach of contract
Breach occurs, non breaching party looks for damages
Money and equitable remedies
Theory is to place the damaged person in the same financial position as if the contract had been fully performed
Compensatory damages
Contract price (failure of defendant to pay for goods/services provided)
Lost profits (defendant fails to pay but plaintiff makes a replacement sale for a lower price)
Difference in market price vs contract price
Consequential damages
Damages that flow from the breach itself, damages for impact of breach
New stove for restaurant kitchen was not delivered and restaurant was forced to close for a week
Liquidated damages
When real damages for a breach of contract are unknown or uncertain, parties may specify an amount that the damages would be
Home builder fails to have home done on time, liquidated damage would be that there isa penalty of 500 a day
Mitigation
Equitable remedies:when money damages are not satisfactory as a remedy, then one can request an equitable remedy
Rescission or restitution
Non breaching parry mightr request return of value given
Injunction
ORder to compel another party to do or refrain from doing something
Specific performance
Request that breaching contract