Legal environment

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