CONTRACTS

1. CONTRACTS

2. 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.

3. 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

4. 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

5. UCC has 11 Articles • Art 1 General Provisions and Definitions • Art 3 Negotiable Instruments • Art 4 Banking • Art 9 Secured Transactions

6. 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

8. ELEMENTS OF A VALID CONTRACT • Offer + acceptance = agreement • Consideration • Competent parties • True assent • Legality • Form required by law

9. 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

10. 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

11. 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

12. 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?

13. AGREEMENT • Express • Implied in fact • Implied in law/Quasi-contract

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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?

21. OPTION CONTRACT • Consideration is paid to keep an option open.

22. 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?

23. 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.

24. 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

25. 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

26. MIRROR IMAGE RULE • Acceptance must “mirror” the offer. • Offeree must accept the offeror’s • terms exactly. • UCC Exception: The Battle of the Forms

27. 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

28. WHEN IS ACCEPTANCE EFFECTIVE? • When parties negotiate by correspondence, communications have crossed in the mail. So the courts developed the MAILBOX RULE.

29. 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

30. 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?

31. 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?

32. EXCEPTIONS TO MAILBOX RULE. (Acceptance will not be effective when mailed, but only if and when it is received.) • Incorrect address or insufficient postage. • Offeror protects him/herself – Say in offer: Acceptance is not effective until it is received.

33. 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.)

34. 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.

35. 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

36. PROBLEM • Apply the Mailbox Rule as if the Restatement exception did not exist. • Is there a contract? • When is the rejection effective? • When is the acceptance effective? • Apply the Restatement exception. • Apply the Restatement exception. • Is there a contract?

37. 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.

38. PROBLEM • 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?

39. 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

40. 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

41. Rules of Consideration • Preexisting Duties • Promises to Discharge Debts for Part Payment • Past Consideration • Moral Obligations • Forbearance to Sue • Mutuality of Obligation

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. PROBLEM • 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.

49. 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

50. 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