Contracts

1. Contracts Chapter 10 Meiners, Ringleb & Edwards The Legal Environment of Business, 12th Edition

2. Contract Law • Provides a mechanism to deal with others • Law of contracts hasevolved in commerce over the centuries • The concept of freedom of contract means there are responsibilities to those who create legally binding relationships

3. Contract Law • UCC • Uniform Commercial Code • All States have adopted in its entirety except Louisiana • Covers contracts for sale of goods • Many countries rely onCode Law only for their basic legal framework • Common Law • Judge-made law • Each state differs • There is uniformity about general contract principles that run throughout most states’ laws • Years ago, English courts began to uselex mercatoria (“the law merchant”) • Roman law of contracts was surprisingly sophisticated covering the Roman Empire

4. Definition of a Contract • Sir Wm. Blackstone: “An agreement, upon sufficient consideration, to do or not to do a particular thing.” • Modern definition--centers on a promise: “A promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” • The promise itself creates a manifestation of intent • Contracts form legal relationships and duties between parties • Not all promises are enforceable contracts – must meet the requirements of a contract to create an enforceable promise

5. Express and Implied Contracts Express Contracts • Direct statement by the parties of the promises made • May be oral or written • All important terms are expressly stated between the parties Implied Contracts • Actions and circumstances infer and define the terms of the contract • May be words, conduct, gestures • These contracts are implied at law • Ex: At a check out counter at a grocery store, actions of the parties create offers/ acceptances

6. Elements of a Contract 1. An Agreement, through • Offer • Acceptance 2. Consideration 3. Contractual Capacity 4. Legality 5. Genuine Consent 6. Writing • If necessary under the Statute of Frauds RULE: If all elements are present, the contract is generally termed valid • See Exhibit 10.1

7. Offer and Acceptance • The Offer • Creates the Offeror and Offeree • 1. Manifestation of Intent • Preliminary Negotiations vs. Intent to Offer • 2. Definite Terms & Conditions • 3. Communication • Person returns a dog but does not know of an award • Sometimes terms will be presumed • i.e. mailed computer is packed properly • Restatement (2nd) of Contracts: “the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it.”

8. Terminating an Offer • Revocation • Withdrawing of offer by the Offeror • Rejection • By Offeree • Through lapse of time (Option Contracts are different) • Counteroffers are created by rejecting the original offer but keeping negotiations open by presenting new conditions – result is a counteroffer • Operation of Law • Intervening Illegality • Destruction of subject matter • Death or insanity of offeror or offeree

9. The Acceptance • The Acceptance – Expression of Assent • 1. Unconditional • Must be a mirror image of the offer • If conditions are added, they create a counteroffer • 2. Unequivocal • 3. Legally Communicated • Bilateral contracts versus unilateral contracts • See Certified Fire Protection v. Precision Construction • See also Exhibit 10.4

10. CaseCertified Fire Protection v. Precision Construction • Precision Construction is general contractor that bid on job. • Solicited bids from subcontractors for things such as design & installation of a sprinkler system for fire prevention. Based on specifications, Certified Fire submitted a bid of $480,000. Won the bid. Precision began construction. • December 5: Certified got a copy of the contract from Precision, along with set of construction plans and sprinkler requirements. • Contract required Certified to have preliminary design draws for system within 2 weeks and provide an insurance certificate. • January 19: No signed contract or insurance certificate, but Certified billed Precision for $33,575, although plans were not yet ready for Certified. • January 26: Precision told Certified that it was holding up the project and it would move ahead without Certified. • February 1: Certified submitted drawings but objected to terms in contract. • February 8: Precision was informed of mistakes in sprinkler system drawings. • February 16: Precision told Certified that it was ending relationship: Because contract wasn’t signed; There was no insurance certificate; Drawings were incorrect. • Certified sued for breach of contract. • Contended it was due payment for the sprinkler system drawings. • Trial court held for Precision -- no contract existed. Certified appealed. (Continued)

11. CaseCertified Fire Protection v. Precision Construction • A contract requires offer & acceptance, meeting of minds and consideration. Meeting of the minds: When parties have agreed upon contract’s essential terms. Essential“depends on the agreement and its context and also on the subsequent conduct of the parties, including the dispute which arises and the remedy sought. • Certified argued progress bill it sent to Precision established the price term. Said Precision’s urging that Certified get started on designs established scope of work for express design-work-onlycontract. • Testimony establish that Precision would not execute a contract for only design drawings. Such drawings are specifically tailored for company – not useful to another installer. • Price and scope of work terms missing. Parties never agreed to performance time. • Certified also argued it should recover under implied contract. • Such a contract must be “manifested by conduct” – showing intent by parties to contract, i.e. promises were exchanged and obligations were clear. Not true here. • HELD: Affirmed. No contract was ever made. Too many gaps to fill. • Precision never agreed to a contract for only design-related work. This was a design and install contract for sprinkler system. No agreed upon price; disputes included time of performance. The designs are installer-specific.

12. Consideration • Definition: Something of value or something bargained for in exchange for a promise • This element keeps contract from being a gift. • If consideration is absent, neither party may enforce the promise or agreement • Traditional Rule: Must create – • Legal detriment to the promisee OR • Legal benefit to the promisor • Actually the legal detriment and benefit usually occur at the same time.

13. Adequacy of Consideration • Courts do not examine much. • If a party bargains poorly, courts usually won’t interfere. • Those who bargain take on the risk of their own errors. • There are exceptions such as fraud, duress, etc. • The main concern is an exchange of mutual promises and obligations by the parties. • SeeCaley v. Gulfstream Aerospace Corp.

14. CaseCaley v. Gulfstream Aerospace Corp. • Gulfstream adopted a dispute resolution policy (DRP) as only procedure to resolve disputes between Gulfstream and the employees. Mailed policy to employees. • Policy said that DRP would begin in 2 weeks and would be “a condition of continued employment.” If an employee continued work, then she accepted the DRP. • Group of employees sued, saying there was no contract and DRP could not be enforced. • District Court held for Gulfstream. Employees appealed. • HELD: Affirmed. • DRP is an offer and states it is a contract. • Terms of acceptance are continued employment by employees. • Acceptance can be through a promise or an act. • Here the action of continuing employment = acceptance of the offer and a contract. • Employees had a choice to (1) continue employment, accepting DRP or (2) terminate employment. • There is “bargained for consideration” by mutual promises and obligations.

15. Enforceable Promises without Consideration • Promissory Estoppel or Detrimental Reliance • Use of this doctrine avoids injustice due to the promisee's reasonable reliance on the promisor’s promise. • Promisor is estopped (prevented) from denying a promise. • Equitable doctrine. • “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promissee . . . and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” Restatement (2nd) of Contracts • Courts don’t impose the rule lightly. • Sometimes used in promises to charities, especially if organizations rely on the donation to act in some way. • e.g. Beginning construction based on promises of charitable contribution. • See Hinson v. N&W Construction Company, Inc.

16. CaseHinson v. N&W Construction Company, Inc. • N&W Construction prepared bid to submit to MJCC to build kitchen facility at training center. N&W received oral bids from plumbing subcontractors in preparing its bid to MJCC. • Hinson quoted $92,000 as bid as plumbing sub; next lowest bid was $139,000. N&W used Hinson’s bid to prepare its bid to MJCC. N&W was low bidder and awarded contract by MJCC. Then contacted Hinson that it needed plumbing work to begin. Hinson failed to sign and return plumbing subcontract and refused to due the job. • N&W then hired next lowest bidder; paid additional $47,000 to get work done. N&W sued Hinson based on promissory estoppel. • Trial court granted summary judgment to N&W, awarding $47,000. Hinson appealed. • Ct. of Appeals held: Affirmed. • Hinson admits he provided a verbal quote. Also testified that he reviewed plans & specs for the building, & was satisfied with his quote of $92,000. • Hinson refused to do the plumbing because, “I just had a lot of other jobs going.” • Promissory estoppel arises when “making of a promise, even though without consideration . . . “ that plaintiff (here N&W) relied upon. • “Refusal to enforce it would be virtually to sanction the perpetuation of fraud or would result in other injustice.”

17. Capacity to Contract • Refers to the legal ability to create a contract • Some have limited capacity to contract • Minors • Intoxicated persons • Insane persons • If there is no capacity, the contract is void • If there is partial capacity, the contract is voidable – may disaffirm • NOTE: Until the mid 19th century, married women did not have capacity to make contracts independent of their husbands.

18. Void and Voidable Contracts Void Contracts • Contract does not exist at law • One of elements is missing – lacks a requirement of a contract • i.e. Contract with a legally insane person • i.e. Contract for an illegal subject matter • Courts won’t accept disputes Voidable Contracts • One party to the contract has right to avoid legal obligation • Is valid but capable of being voided by a circumstance • i.e. Minors contracts • i.e. Contracts with person under influence of drugs or alcohol • i.e. Fraud by one of the parties

19. Minors • Defined as a person under the legal age of majority • Traditionally, the age of majority was 21 • Now it is 18 years old in all states for most contracts • Minors have partial capacity • Contract is voidable • Legal policy to protect the young from the “results of their own folly” • General Rules • #1: Minors may disaffirm contracts at their option • #2: If a minor disaffirms a contract after receiving benefits, restitution must be paid for the benefit • Some contracts may not be disaffirmed, i.e. • Enlistment contracts • Marriage contracts • Educational loans • Insurance loans • Medical care • After reaching majority, the minor may ratify the contract

20. International Perspective“PROBLEMS ENFORCING CONTRACTS” • Study by World Bank looked at problem of enforcing a contract in variouscountries • Problem: Lack of effective contract law • Problem: Lack of honest and efficient judicial enforcement • Effect: Discouragement of foreign firms from investing in poor countries • Effect: Discouragement of foreign firms even to do business in poor countries • See examples of comparisons of number of legal procedures, duration and costs in China, India, Mexico, Germany, Canada, U.K. and U.S.

21. Legality • If a contract is lacking legality, courts will not enforce it • Subject Matter Must Be Lawful • Criminal activities; sale of prohibited drugs; gambling activities in some states • Interest rates on loans that violate usury laws • Court may strike entire bargain as unenforceable or only a part that concerns illegal subject matter

22. Unenforceable Contracts • Contract is actually valid when made, but courts won’t enforce it • i.e. Unconscionable contracts • i.e. Exculpatory agreements • Ex: Company agrees to ship wheat to Iran. After shipment is at sea, U.S. government declares no U.S. firms may trade with Iran. • Result: Unenforceable under U.S. law even if seen as legal in Iran

23. Contract Contrary to Public Policy • Exculpatory Agreements (types of those contracts written to completely escape liability) • Unconscionable Agreements (unequal bargaining power) • Outcome is grossly unfair to an innocent party. • See Walker v. Walker-Thomas Furniture • Contracts in Restraint of Trade • Contracts that restrain trade or unreasonably restrict competition • Covenant not to compete may be restraint of trade unless • Limited by time, territory and ancillary to the contract • Different states differ on this subject • Covenants not to competeoften used in sale of business or employment contracts • See Arthur J. Gallagher & Co. v. Babcock

24. CaseArthur J. Gallagher & Co. v. Babcock • Arthur J. Gallagher & Co. is in the insurance business. Subsidiary, GBSI, handles employee-benefit insurance programs. GBSI purchased a Louisiana insurance broker, Babcock. • Paid almost $3 million for his business • Part of the deal: Babcock & several employers went to work for GBSI • Agreed to a restrictive covenant. If they left, they would not compete with GBSI in Louisiana for 2 years • Few years later: Babcock and others quit GBSI and went to work for a competitor. Drew away 13 clients to their new employer. • Gallagher sued Babcock for violating agreement that contained a non-solicitation agreement and non-competition agreement. • Gallagher contended that Babcock & the employees solicited GBSI clients in competition with their former employer. • Trial court upheld agreements, but limited the geographic restriction to 9 parishes in which Babcock could not compete with GBSI. • This was rather than restricting Babcock to the whole state. • Jury awarded Gallagher $1.2 million in damages + attorneys fees. • Babcock and other GBSI employees appealed. (Continued)

25. CaseArthur J. Gallagher & Co. v. Babcock • Defendants said non-competition provisions were not valid because (1) Their language (2) Their geographic scope • Agreements unambiguously prohibited defendants from competing against Gallagher or soliciting its clients for 2 years after employment was terminated. • Employees agreed they would not “serve,” “sell to,” “market,” “accept,” “aid,” “consult,” “place,” “counsel,” or “consult” re: insurance services with customers or prospective customers of Gallaher • Provisions in this agreement is less restrictive than allowed under state law. • Gallagher allowed former employees to work in similar business, just not on accounts they worked on while employed with Gallagher. • In Louisiana non-compete clauses are limited to geographic areas under “a like business” and agreement must specify “parishes, municipalities or parts thereof” in which employer operates. • Court may rely on contractual severability clause to excise the geographic areas in which an employer does not conduct such business. • District court agreed with Defendants. Eliminated 55 parishes where Gallagher did not provide insurance service. This was not an error by the District Court • HELD: District Court decision was AFFIRMED.

26. Reality and Genuineness of Consent • This concept deals with an individual’s choice of entering into agreements. • If reality is missing, there is no meeting of the minds. • If there is unilateral mistake over a simple error, then contract usually can be avoided. (typographical error - $20,000 instead of $200,000). • Without this element, the contract is void or voidable (depending on the circumstances). • Examples: • Fraud • Misrepresentation • Duress • Undue influence • Statutory Exceptions: Pressure by salesperson, i.e. Federal Trade Commission’s Cooling-Off Rule re: door-to-door sales

27. Contracts in Writing and the Statute of Frauds • Contracts do not always have to be in writing to be enforceable, however • Written contracts are always good as evidence of the agreement, and • Some contracts require a writing • Sale of land orinterests therein • Contracts that cannot be performed within 1 year • Promise to pay the debt of another, including debts of an estate • Promises made in consideration of marriage

28. Sufficiency of the Writing • Writing must set out the material terms of contract • Names of parties • Consideration • Subject matter, etc. • Invoices, E-mails, sales orders, checks, confirmations may satisfy this requirement • See “Digital Signatures” • Electronic Signatures in Global & National Commerce Act (E-Sign) 2000 federal law. • Technology & contracts

29. The Parole Evidence Rule • Restricts use of oral evidence when that evidence is contrary to terms of written contract. • Oral evidence cannot contradict, change or add terms to written contracts. • IF a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, THEN • Oral evidence may explain the problems. • See Issue Spotter “Liars’ Contest?”

30. CaseDeschamps v. Treasure State Trailer Court • In 2003, Rasmussen agreed to sell Deschamps a mobile home trailer park in Great Falls, Montana. 96 residential spaces for $1,445,000. • Contract explained howRasmussen would be paid over time. • After sale was completed, Rasmussen died. His estate inherited the asset. • Deschamps found significant problems with park’s water system. Required $400,000 in repairs. • In 2006, Deschamps stopped making payments to the estate. • Claimed the cost of the water system repairs made payments impossible. • Estate sued; Deschamps countersued: contract breach/fraud. • Deschamps contended • Rasmussen said that water system was in good condition and that occupancy rate was higher than in fact it was. • Trial Court held for estate, finding Deschamps’ claims were precluded by parol evidence rule. He appealed. (Continued)

31. CaseDeschamps v. Treasure State Trailer Court • HELD: Affirmed. When language of contract is clear and unambiguous, look at the substance of the contract itself. • Here contract clearly, expressly stated that Deschamps did not rely on any oral assurances or presentations by Rasmussen. • Deschamps cannot now claim otherwise. • Deschamps signed a contract prepared by his real estate agent, containing statement that Deschamps had not relied upon assurances by Rasmussen. • Agreement provided • (1) Rasmussen had not conducted an inspection nor warranted property’s condition. • (2) Deschamps had right/duty to inspect property prior to purchase. • (3) Special disclaimer of reliance on Rasmussen’s assurances. • (4) Inspection was waived or satisfied. • (5) Clause in agreement said this was entire agreementand superseded any oral agreements. • (6) Agreement could only be amended by a writing.

32. Performance • Substantial Performance (Usually in good faith) • Usual remedy is the contract price minus damages resulting from lack of complete performance • Material Breach • Performance substantially less than required • Damages now due to non-breaching party • Executed Contract • Fully performed; nothing left undone • If you have fully performed, damages for the price of performance may be sought as a remedy • Executory Contract • Not fully performed • If partial delivery of products, buyer need not pay total contract price • See Issue Spotter “Do You Have to Eat the Loss?” • See Exhibit 10.5

33. Assignment and Delegation • Assignment(transfer of rights to another) andDelegation(transfer of duties to another) • Many contracts can be assigned or delegated; although exceptions do occur in contracts for services. • Third-Party Beneficiaryis party not part of original contract who acquires rights under the contract. • Usually occurs in credit contracts

34. Breach • Breach(non-breaching party is discharged) • Material breach: Performance is substantially less than the contract provides • Anticipatory breach or repudiation: A party indicates inability or lack of desire to perform • Discharge by Agreement of the Parties:rescission, novation, accord & satisfaction • Discharge by Impossibility • Anunforeseeable, unanticipated eventoccurs that makes performance impossible • The impossibility doctrine has been extended tocommercial impracticabilityorfrustration

35. Remedies • Equitable Remedies • Specific Performance • Injunction • Restitution • Mitigation of Damages • Injured party is required to make efforts to mitigate or lessen losses • Monetary Damages ($$) • Compensatory Damages • Actual Damages • Expectancy Damages • Liquidated Damages • Nominal Damages • Punitive Damages (if there is tort related to breach of contract) • Special Damages

36. Economic Loss Rule • In breach of contract case, if there is no tort involved, damages are only those related to economic losses suffered by the breach. • Rule based on three policies • 1. Maintain fundamental distinction between tort and contract law • 2. Protect commercial parties’ freedom to allocate risks by contract • 3. Encourage the party best situated to assess the risk of economic loss • Damages are only those related to lost profits and costs due to the breach. • Accounting evidence and specific calculations are necessary evidence to be presented. • No punitive damages or mental distress awards. (Parties often try to assert a tort along with breach of contract in order to get these damages.)

37. CaseDeRosier v. Utility Systems of America, Inc. • DeRosier owned land on a hillside. Before house could be built, lot needed to be filled with dirt. Asked Utility Systems of America (USA), working on nearby construction, if it would dump excess fill dirt on his lot. USA saved money doing this instead of hauling the dirt away. • DeRosier obtained permit from city to allow 1,500 cubic yards of fill to be dumped on his property. Gave permit to USA. • Later Rosier found USA dumped 6,500 cu. yd., so 5,000 cu. yd. had to be removed since permit was violated. • USA denied responsibility; offered to remove the excess for $9,500. • DeRosier sued. • Trial Court granted him $22,829 damages paid to another company to remove the dirt. Also awarded him $8,000 in consequential damages for delay of time lost in constructing new house. • USA appealed, saying DeRosier failed to mitigate damages by not having USA move the dirt for only $9,500 rather than $22,829 paid to another contractor. (Continued)

38. CaseDeRosier v. Utility Systems of America, Inc. • Consequential damages usually refers to items of damages which can be distinguished from general damages. • Special or consequential damages flow naturally from the breach, but are not recoverable unless they are reasonably foreseeableby parties at time of breach. • USA contended no claim for delay damages was in pleading and no evidence of monetary loss caused by delay was introduced at trial. • HELD: District Court erred in awarding DeRosier $8,000 in consequential damages. • HELD: District court had sufficient basis for calculating and granting $22,829 in general damages. • HELD: Regarding DeRosier’s duty to mitigate: Non-breaching DeRosier could decline the offer of USA to remove dirt for $9,500. • Did not unreasonably reject USA’s offer and did not fail to mitigate his general damages. • HELD: Reversed in part; affirmed in part.

39. International Perspective“CONTRACTING WITH THE JAPANESE” • U.S. contracts tend to try to cover all contingencies. • Japanese view contracts as secondary to the ongoing relationships of the parties. • Contracts with the Japanese should be brief and flexible, not detailed. • Long, detailed contracts may be viewed with suspicion. • Strong statement(“That just won’t work”) likely to be viewed as an insult. • The Japanese often want “good faith clauses”in contracts with Westerners. • Consensus among the negotiating teams is very important.

40. Quasi Contracts • Quasi (means “almost”) – not a true contract • Closely related to quantum meruitrecovery • Legal concept used by courts to prevent injustice • Courts apply this classification in equity (out of a sense of fairness) to give relief to innocent parties • Example: You watch as a crew (in good faith) come to your house and pave your driveway. • Do you have to pay the bill when it is sent to you? Yes, under quasi contract.

41. CaseScheerer v. Fisher • Scheerer, a real estate agent. Helped arrange to buy commercial real estate for $20 million. • Seller & Fisher each promised to pay Scheerer 2% commission. Deal fell apart. • Fisher formed a new company, & had 3rd party, Antonio, buy the property & then sell it to Fisher’s new company. • Scheerer learned of deal (had gotten no commission from it) & sued for breach of contract on quantummeruitcompensation. • Trial Court held no contract or basis of payment. Scheerer appealed. • HELD: Reversed. • Defendants took action to deny Scheerer compensation for services rendered. • Although original contract failed, law implies a promise to pay some reasonable compensation for services rendered. • Allegations state a valid quantum meruitclaim.