contracts. what is a contract? a contract is a legally enforceable promise or set of promises...
TRANSCRIPT
What Is a Contract?
A contract is a legally enforceable promise or set of promises
Contract law is state law and is generally found in the Common Law.
With some contracts, the Uniform Commercial Code may apply.
The Uniform Commercial Code
Had its beginning in the Law Merchant. Principles eventually became part of the
Common Law.
Prior uniform laws: Uniform Negotiable Instruments Act 1896 Uniform Sales Act 1906
The Uniform Commercial Code
Created by American Law Institute and the National Conference of Commissioners on Uniform State Laws (1952)
Purposes: Promote fair dealing and higher standards of
behavior in the marketplace Establish a uniform law to govern commercial
transactions that take place across state lines
UCC has 11 Articles Art 1 General Provisions and Definitions Art 3 Negotiable Instruments Art 4 Banking Art 9 Secured Transactions
Article 2 of the UCC Article 2 applies to Contracts for the Sale of Goods
Goods are Tangible Moveable
Creation of Practical Contract Rules UCC is more flexible than contract law
Good Faith and Fair Dealing All parties must act in good faith Implied Warranties Merchant
COMMON LAW OF CONTRACTSCase law rulesState law-may disagreeMay be changed by statutes
U.C.C.Not all contractsSupercedes C.L. if it appliesDoes not have a rule for every C.L. rule
SPECIAL STATE STATUTENot uniformSupercedes C.L.
RESTATEMENT OF THE LAW OF CONTRACTSNot “law,” only a private summaryGenerally followed by most courts
ELEMENTS OF A VALID CONTRACT
Offer + acceptance = agreement Consideration Competent parties True assent Legality Form required by law
Types of Contracts Valid, Unenforceable, Voidable and Void
Valid contracts meet all legal requirements Unenforceable contracts meet basic legal
requirements but will not be enforced due to some other legal rule
Voidable contracts may be canceled by one or both of the parties
Void contracts lack one or more of the basic requirements for a contract
Types of Contracts
Unilateral and Bilateral Contracts In a unilateral contract, only one of the parties
makes a promise The other party performs an act in exchange for
the promise In a bilateral contract, both parties make a
promise
Introduction
Offer + Acceptance = Agreement Did one of the parties indicate to the other party
that he or she was willing to enter into an agreement on certain terms and conditions?
Did the other party indicate that he or she was willing to agree to those terms and conditions?
Courts look at the intent of the parties objectively
PROBLEM Over the phone, Mr. Smith, of Smith Builders, Inc,
offers to build Mr. Jones a new garage for $30,000.
Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back.
Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction.
Did they have a valid contract? Why or why not? Does it matter that any agreement was verbal?
What Is an Offer? An offer is the manifestation of a willingness to enter
into a contract if the other person agrees to the terms Offeror - party makes the offer Offeree - party to whom the offer has been made
Intent Objective Present intent to contract
Not: preliminary negotiations, offers made in jest, anger, undue influence
How definite the supposed offer is Whether the offeror has communicated it to the offeree
Definiteness Did the offeror specifically indicate what he was
willing to do and what he wanted the offeree to do or agree to do in return?
The more specific the proposal, the more likely the court will call it an offer
Under UCC 2-204, if the parties are acting as though they have a contract, that is enough to create a binding agreement
Gap filling provisions in the UCC fill in the blanks for price, quantity, delivery, and time for payment
Communication to the Offeree
Act of communicating the offer indicates that the offeror is willing to be bound by its terms
Failure to communicate offer may be indication that offeror has not yet decided to enter into a binding agreement
Example: private reward
Advertisements Advertisements
Courts generally hold that ads for the sale of goods at a specified price are not offers, but are invitations to negotiate or to make an offer
Specific ads are considered offers under certain circumstances
Rewards Unilateral Contracts
Auctions Invitation to offer
Bids Invitation to offer
TERMINATION OF OFFER
How can an offer terminate? These are not the same as the ways in
which a contract terminates. A contract does not exist yet.
TERMINATION OF OFFER
REVOCATION BY OFFEROR REJECTION BY OFFEREE COUNTEROFFER LAPSE OF TIME DEATH OF DISABILITY OF EITHER
PARTY DESTRUCTION OF SUBJECT MATTER. OPERATION OF LAW
LAPSE OF TIME I offer to sell you my home for
$100,000. I will keep the offer open until October 15.
On September 20, someone makes me an offer of $120,000.
I accept the $120,000 offer, and revoke the offer I made to you.
Can I do that?
But consider… I am an antique car dealer, and you are a
customer. I send you a letter in which I offer to sell you a
particular car for $100,000. I will keep the offer open until October 15.
On September 20, someone makes me an offer of $120,000.
I accept the $120,000 offer, and revoke the offer I made to you.
Can I do that? What is different about this example?
Under the UCC, you can create a FIRM OFFER If the seller is a MERCHANT (someone in
the business of selling the product. Not a casual seller.)
The offer is made in writing AND It will be kept open for up to 3 months.
A FIRM OFFER is enforceable w/o any consideration being paid.
What Is an Acceptance?
Present intent to contract on the part of the offeree Assent may be express or
implied Offeree must accept offer on
offeror’s terms
What Is an Acceptance? Accepting an Offer for a Unilateral Contract
Performance of requested act or making the requested promise
Accepting an Offer for a Bilateral Contract Make promise requested in offer
Silence as Acceptance The law generally requires some affirmative indication of
assent In some cases, silence is viewed as acceptance
Who Can Accept an Offer? Original offeree or agent
MIRROR IMAGE RULE Acceptance must “mirror” the offer. Offeree must accept the offeror’s terms exactly. UCC Exception: The Battle of the Forms
MANNER OF ACCEPTANCE: Offeror can specify the manner of
acceptance, and offeree must use. If don’t use offeror’s terms – becomes a
counteroffer. Acceptance by Shipment
An order requesting prompt or current shipment of goods impliedly invites acceptance by a promise to ship or by prompt shipment of the goods
WHEN IS ACCEPTANCE EFFECTIVE?
When parties negotiate by correspondence, communications have crossed in the mail. So the courts developed the MAILBOX RULE.
MAILBOX RULE. Acceptance takes place at the time the
message is given to the transmitting agency for delivery.
Acceptance is effective when mailed, so a K is formed at that time
See Morrison v. Thoelke, 155 So. 2d 889; 1963 Fla. App. LEXIS 3084 (1963). B.s (of real estate) made a written offer (by
signing a K) and mailed it to S.s in another state.
S.s signed it and mailed it back. Before the K is received, the S.s called and canceled. Can they do that?
Another Example: 12/23 S, by letter, through his attorney, offered
to sell B property for $240,000 1/10 B, by his attorney, sent a written reply offering
$230,000 Same day… B’s attorney phoned S’s attorney
and in the course of the conversation, informed him of B’s reply
Later the same day… B sent a telegram purporting to accept S’s original offer of $240,00
Telegram was delivered the same day, prior to the receipt of the reply offering $230,000.
Was a contract formed?
EXCEPTIONS TO MAILBOX RULE. (Acceptance will not be effective when mailed, but only if and when it is received.)
1. Incorrect address or insufficient postage.
2. Offeror protects him/herself – Say in offer: Acceptance is not effective until it is received.
EXCEPTIONS 3. Offeree doesn’t use proper form
If offeror specifies means, and offeree doesn’t use it, response is not an acceptance but a counteroffer.
If offeror hasn’t specified means, offeree can use any reasonable means. Usually, same form as the offer was in, or
anything faster. (But if offer was by mail, and the acceptance
cannot be mailed and received within the time limit, that form is not reasonable.)
EXCEPTIONS
4. §40 of the Restatement of Contracts If offeree first mails a rejection & then tries to
accept, the 2nd response is a counteroffer unless it is received first.
PROBLEM 1/1 Tom mails an offer 1/3 Mary receives the offer 1/5 Mary mails a rejection 1/6 Mary mails an acceptance 1/7 Tom receives the rejection 1/8 Tom receives the acceptance
PROBLEM
1. Apply the Mailbox Rule as if the Restatement exception did not exist.
1. Is there a contract?
2. When is the rejection effective?
3. When is the acceptance effective?
4. Apply the Restatement exception.
2. Apply the Restatement exception.1. Is there a contract?
PROBLEM (Over the phone, Mr. Smith, of Smith Builders, Inc,
offers to build Mr. Jones a new garage for $30,000. Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back. Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction. Did they have a valid contract? Why or why not?)
Mr. Jones is at home when Smith Builders arrive. He knows he has never authorized the work, but decides he will say nothing until the garage is completed. Then he hopes he will not have to pay.
PROBLEM
1. When Ms. Williams is 12 years old, her wealthy uncle gives her a document in which he promises to transfer to her Blackacre estate when she turns twenty-one. She accepts his offer. Ms. Williams turns twenty-one, but her uncle refuses to give her the property.
Was there a valid contract?
The Idea of Consideration
Legal Value Promisee does or agrees to do something he or
she had no prior legal duty to do in exchange for the promisor’s promise
Promisee agrees not to do something he or she has a legal right to do in exchange for the promisor’s promise
Adequacy of Consideration Bargained for and Given in Exchange
Valid Consideration
There is valid consideration if there is: A bargained for exchange Of a promise, act, or forbearance That had legal value
Not preexisting duty Not past consideration Not illusory promise or
A recognized exception
Rules of Consideration
Preexisting Duties Promises to Discharge Debts for Part Payment Past Consideration
Moral Obligations
Forbearance to Sue Mutuality of Obligation
COMPETENT PARTIES Capacity
Ability of a person to do a legally valid act Three major classes of persons with limited capacity
include: Minors People who are mentally impaired Intoxicated persons
Contracts are VOIDABLE by the incompetent
Minors’ Contracts The Reason for Minors’ Incapacity
May not be able to bargain effectively with older, more experienced persons
Ability To Disaffirm Minors may disaffirm their contracts at any time during their
minority and for a reasonable time after attaining majority
Ratification A minor who does not disaffirm within a reasonable time
after attaining majority is held to have ratified the contract and loses the right to disaffirm
Minors’ Contracts
The Consequences of Disaffirming Minors who successfully disaffirm a contract are
entitled to the return of any consideration they have given the adult party to the contract
Barriers to Disaffirmance Because of potential unfairness to adults, some
courts have created exceptions to the general rule that minors can disaffirm their contracts
Minors’ Contracts
Emancipation Misrepresentation of Age by Minors Necessaries
Things essential to a minor’s continued existence and general welfare
Minors are generally liable on a quasi contract basis for the reasonable value of necessaries furnished to them
Contracts of Mentally Impaired and Intoxicated Persons
Theory of Incapacity The Test of Incapacity
Whether the party at the time the contract was entered into, had sufficient mental capacity to understand the nature and effect of the contract
The Effect of Incapacity Contract is voidable at the election of that person
Contracts of Mentally Impaired and Intoxicated Persons
Necessaries Liability is for the reasonable value of necessities
The Right to Disaffirm People lacking mental capacity can disaffirm their contracts, and
on disaffirmance, must return any consideration they received that they still have
Ratification People who regain their capacity can ratify their contracts
PROBLEM1. Attorney White has been the wealthy Widow
Black's financial advisor for years. Attorney White has recently gone into the real estate development business and persuades Widow Black that it would be a wise investment to purchase from him, land in Florida that he is planning to develop into a resort area. Two years later, when no work is even begun, Widow Black discovers that the land is unfit for such a development.
TRUE ASSENT/GENUINESS OF ASSENT/REAL CONSENT The Need for Real Consent
Agreement must be voluntary to be enforceable The Parties’ Duty of Care
Parties who enter into contracts are required to exercise reasonable caution and judgment
The Remedy Contracts entered into as a result of misrepresentation,
fraud, duress, undue influence, and certain kinds of mistake are voidable: RECISSION
Ratification One who waits too long to complain has indicated
satisfaction with the agreement despite the initial lack of consent
Misrepresentation Knowledge of Falsity
Misrepresentation can result from an honest mistake or negligence
Materiality A material fact is one that would contribute to a reasonable
person’s decision to enter the contract Fact versus Opinion
An actionable misrepresentation must concern a present or past fact
Justifiable Reliance Reliance must be justified
Detriment Party was harmed by reliance
Fraud What is a “Knowingly Made” Misstatement? Intent to Deceive
Scienter refers to the mental state of the defendant
Fraud by Silence caveat emptor
Fraud in the Execution The Remedy for Fraud
Duress and Undue Influence
General Nature One party to an agreement interfered with the other
party’s ability to resist entering into the agreement
Duress Wrongful threat Plaintiff’s free will was overcome
Undue Influence Confidential relationship Plaintiff was induced to make an unfavorable agreement
Mistake The Nature of Mistake Mutual Mistake
Untrue belief by both parties about a material fact Either party can rescind
Unilateral Mistake Mistaken party may be able to rescind if meets
certain conditions, or If other party knew or should have known of the
mistake and is trying to take unfair advantage of it
PROBLEM Washington hires Jefferson to kill his
(Washington's) wife. They execute a formal written agreement, which indicates that Washington will pay Jefferson $5,000 down and $10,000 when the job is done. Jefferson has until September 18 to complete the job. September 18 comes and goes, and Washington's wife is still very much alive. Jefferson has gotten cold feet, but has spent the $5,000. Washington comes to Attorney Ogden, and wants to sue Jefferson for breach of contract.
LEGALITY OF THE SUBJECT MATTER
Illegality Agreement is unenforceable if either its formation or its
performance is illegal or contrary to public policy
Types of Illegality Requires commission of an illegal act Made illegal by statute Contrary to public policy Unconscionable
The Presumption of Legality Doubts are resolved in favor of legality unless parties clearly
intended an illegal bargain
Contracts to Commit Illegal Acts
Agreements to Commit Crimes An agreement that calls for the commission of a
crime is illegal
Agreements to Commit Torts A contract that cannot be performed without
committing a tort is illegal
Contracts Made Illegal by Statute
Wagering Statutes Most states prohibit or regulate gambling Agreements in violation of these are illegal
Statutes Declaring Bargains Void or Voidable Examples of statutes passed by states making
certain agreements void or voidable are usury laws and Sunday laws
Contracts Made Illegal by Statute
Regulatory Statutes Agreements by unlicensed persons to perform
regulated services or engage in regulated businesses are illegal and unenforceable
The failure to obtain a license required by a statute whose sole purpose is to raise revenue does not affect the legality of unlicensed persons’ agreements
Contracts Contrary to Public Policy The Idea of Public Policy
What courts believe is in the best interest of society
Contracts Injurious to Public Service Bribes
Contracts to Influence Fiduciaries Prizes, rewards, or other inducements May be enforced if full disclosure to, and
agreement of beneficiary
UNCONSCIONABLE CONTRACTS Parties possess severely unequal
bargaining power The dominant party unreasonably uses its
unequal bargaining power to obtain oppressive or manifestly unfair contract terms
Adhering party has no reasonable alternatives
Examples Fine print that hides oppressive contract
terms. Standard pre-printed contracts that are
used industry-wide that contain oppressive terms. Confession of judgment clauses
Contracts that exploit underprivileged, unsophisticated, uneducated, or illiterate consumers
Examples (cont’d) Contracts written in language
incomprehensive to laypersons Contracts that deny rights and remedies to
consumers Exculpatory clauses
PROBLEM Mr. Thomas and Mr. Johns agree orally that Mr.
Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed.
Two days before the three years is up, Mr. Johns changes his mind and indicates that he will not pay for the warehouse.
FORM REQUIRED BY LAW : The Statute of Frauds
The Effect of Failure to Comply In most states, the statues of frauds makes oral
contracts that come within its provision unenforceable
Contracts Covered by the Statute of Frauds
Contracts to Answer for the Debt of Another (co-signor)
Contracts Transferring an Interest in Land Bilateral Contracts Not Capable of Being
Performed within One Year Construe as possible to perform within a year
UCC: contracts for sale of goods where price is $500 or more
Contracts Covered by the Statute of Frauds
UCC: contracts for sale of goods where price is $500 or more
The Code’s Statute of Frauds Specially manufactured goods Admission Part performance Merchant’s failure to object to memo within 10
days
Interpreting Contracts
The Necessity of Interpretation Interpretation of uncertain or ambiguous terms is
a question for the jury Courts attempt to give the agreement the
meaning that a reasonable person would be expected to give it in light of the surrounding facts and circumstances
Interpreting Contracts
Rules of Construction The court attempts to determine the principal
objective of the parties If parties are both members of the same trade,
courts presume the parties intended words’ meanings to be controlled by trade usage
Written terms control over printed terms Ambiguities are resolved against the party who
drafted the contract
4 Corners Rule The writing constitutes the entire
agreement The contract is “integrated.” It may contain a merger
clause.
The Purpose of the Rule Writing it the best evidence of
intent
Exceptions to the Parole Evidence Rule Lack of Voluntary Consent Ambiguous Contracts Incomplete Writings Subsequent Oral Contracts Conditions Precedent
The Parole Evidence Rule
PROBLEM (Mr. Thomas and Mr. Johns agree orally that Mr.
Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed. Two days before the three years is up, Mr. Johns changes his mind and indicates that he will not pay for the warehouse.)
What if Mr. Thomas had already purchased all the supplies needed to build the warehouse?
PROMISSORY ESTOPPEL (DETRIMENTAL RELIANCE)
Promise induces action on the part of another in reliance of that promise
Reliance must be reasonable and foreseeable under the circumstances
Promissor is “estopped” from denying the existence of a contract.
See SUN-PACIFIC ENTERPRISES, INC. v. GIRARDOT, 251 Ga. App. 101; 553 S.E.2d 638; 2001 Ga. App. LEXIS 932 (2001)
PROBLEM Mr. Simpson purchases a fire insurance policy on his home for 3 years at a
cost of $300. At the end of 3 years, his house has not caught
fire, but the insurance company still has his $300.
He feels that the insurance company should have to reimburse him the $300, since they have paid nothing on the policy.
Conditions Definition
Party’s duty to perform is qualified by the happening of some event or condition
Types of Conditions Condition Precedent
Performance excused unless condition occurs Condition Subsequent
Performance excused if condition occurs Concurrent Conditions
Tender of performance precedes right to demand performance
Conditions
The Creation of Conditions Express Conditions
Created by oral or written statements in the contract
Implied Conditions (Constructive) Nature of parties’ contract lead courts to imply a
condition on the parties’ duties of performance
Standards of Performance Complete or Satisfactory Performance
Some kinds of contractual duties can be completely and perfectly performed
Payment of money
Substantial Performance Performance that falls short of complete performance in
minor respects but does not deprive the promisee of a material part of the consideration that was bargained for
Material Breach Performance fails to reach the degree of perfection the other
party is justified in expecting under the circumstances
Standards of Performance Anticipatory Breach
Promissor, prior to the time for performance, indicates an intent not to perform his or her duties under the contract
PROBLEM1. Mr. Brown enters into an agreement with Mr.
Green in which Mr. Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green’s warehouse to the ground destroying his supply of the siding. When Mr. Green fails to perform, can Mr. Brown recover from him in a breach of contract action?
Excuses for Nonperformance Prevention
Promisee who causes promisor’s failure of performance cannot complain about the failure
Impossibility If it is impossible to perform, the duty to perform is
discharged and the promissory is not liable for material breach
Intervening Illegality Destruction of Subject Matter Commercial Impracticability Commercial Frustration
Commercial Impracticability Due to something unforeseeable More than just an increase in prices See SWIFT TEXTILES, INC. v. LAWSON,
135 Ga. App. 799; 219 S.E.2d 167; 1975 Ga. App. LEXIS 1831 (1975)
Discharge and Rescission The Nature of Discharge
Parties are released from their obligations under a contract
Discharge by Agreement Discharge by Waiver Discharge by Alteration Discharge by Statute of Limitations
Remedies
The Theory of Remedies If a party does not perform as promised under
the contract, and performance has not been excused or discharged, then the other party is entitled to a remedy for the breach of the contractual promise
Remedies at law Damages in Contract Cases
Compensatory Damages Loss in value of promised performance
Consequential Damages Foreseeable losses from special circumstances of
particular contract Nominal Damages
Award for purely technical breach of contract Liquidated Damages
Damages specified in contract for breach Punitive Damages
Damages to punish, usually unavailable
PROBLEM1. (Mr. Brown enters into an agreement with Mr. Green in which Mr.
Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green warehouse to the ground destroying his supply of the siding.)
Suppose Mr. Brown later discovers that Mr. Green burned his own warehouse. Additionally, Mr. Green is the only one in the country that manufactures this specially treated siding, and he has ample supplies and facilities to manufacture more. Can Mr. Brown now sue for breach of contract? If so, what might be an appropriate remedy?
Equitable Remedies Specific Performance
Promissor ordered to perform contract where subject matter is unique
Injunctions Ordered to prevent irreparable injurySee QUADRON SOFTWARE INTERNATIONAL
CORPORATION v. PLOTSENEDER. 256 Ga. App. 284; 568 S.E.2d 178; 2002 Ga. App. LEXIS 890 (2002)
Third-Party Beneficiary Contracts Donee Beneficiaries
Promisee’s primary purpose is contracting was to make a gift of the contracted performance to the third party
Creditor Beneficiaries Promisor’s performance will satisfy a legal duty
that the promisee owes to a third party
Donee and Creditor Beneficiaries can enforce the contract
A contracts with B to put a roof on B’s house upon B’s promise to pay C $5000 (because A owes C $5000).
K
B A(Obligor) Roof on house (Assignor)Promise To Pay$5000 Assignment of Rights C 3rd Party Beneficiary (Assignee)
Third-Party Beneficiary Contracts
Incidental Beneficiaries Performance of contract intended solely for the
benefit of the promisee also incidentally benefits a third person
Incidental beneficiaries acquire no rights under the contract
Incidental beneficiaries cannot enforce rights even though they benefit from another’s contract
Assignment of Contracts
Definitions An assignment is a transfer of rights under a
contract The assignor is the person who makes an
assignment The assignee is the person who accepts the
assignment
Assignment of Contracts
What Contracts Are Assignable? Assignments that do not involve personal
relationships or increase the promisor’s burden are enforceable
Contracts that are nonassignable include: Contracts that expressly forbid assignment Assignments contrary to public policy Contracts involving personal rights
The Consequences of Assignment
The Rights and Duties of Assignees An assignee is entitled to all the rights his or her
assignor had under the assigned contract Assignee can enforce implied guarantees
against assignor Assignee may be liable for duties expressly or
impliedly delegated with the assignment
The Consequences of Assignment The Rights and Duties of Assignees
Assignors who are paid for making an assignment are potentially liable to assignees for certain implied guarantees
The assigned claim is valid The assignor has good title to the rights assigned The assignor will not do anything to impair the
value of the assignment Any written instrument representing the assigned
claim is genuine