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

robot