Introduction to Contracts

1. Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide. CHAPTER 9 Introduction to Contracts

2. Quote of the Day “The whole duty of government is to prevent crime and to preserve contracts.” Lord Melbourne, British Prime Minister

3. ThePurpose of a Contract • Contracts exist to make business matters more predictable. • Judicial Activism vs. Judicial Restraint • Judicial restraint makes the law less flexible but more predictable. • Judicial activism makes the law more flexible but less predictable.

4. Elements of a Contract • Agreement • One party must make a valid offer, and the other party must accept it • Consideration • There has to be bargaining that leads to an exchange between the parties. • Legality • The contract must be for a lawful purpose. • Capacity • The parties must be adults of sound mind.

5. Contracts • Definition • A promise that the law will enforce. • Development of Contract Law • Common law once required all contracts to be in writing, with a seal affixed. • Later, some payment was required before a contract could be enforced. • Mutual promises became enforceable in the 1600’s. • By the 1900’s, courts began to consider the fairness of contracts before enforcing them.

6. Bilateral Unilateral Express Implied vs. Executory Executed Valid Unenforceable Voidable Void vs. vs. vs. vs. vs. DO NOT CLICK! Let slide “build” on its own. Types of Contracts (or Agreements)

7. Types of Contracts (or Agreements) • Bilateral and Unilateral Contracts • Bilateral: both parties make a promise (to do something) to each other. • Unilateral: one party makes a promise to the other that the other party can accept only by doing something specific.

8. Types of Contracts (cont’d) • Express and Implied Contracts • Express: the two parties to the contract explicitly state all of the important terms of their agreement. • Implied: the words and conduct of the parties indicate that the parties intended to make an agreement.

9. Types of Contracts (cont’d) • Executory and Executed Contracts • Executory: when one or more parties has not fulfilled its obligations under the contract. • Executed: when all parties to the contract have fulfilled their obligations under the contract.

10. Types of Contracts (cont’d) • Valid, Unenforceable, Voidable, and Void Agreements • Valid: satisfies the law’s requirements. • Unenforceable: when the parties intend to form a valid bargain but some rule of law prevents enforcement. • Voidable: when the law permits one party to terminate the agreement. • Void: one that neither party can enforce, usually because the purpose is illegal or one of the parties had no legal authority.

11. Promissory Estoppel • Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that: • The defendant made a promise knowing that the plaintiff would likely rely on it. • The plaintiff did rely on the promise; and • The only way to avoid injustice is to enforce the promise.

12. Quasi-contract • Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show that: • He gave some benefit to the defendant. • He reasonably expected to be paid for the benefit and the defendant knew this; and • The defendant would be unjustly enriched if she did not pay. • The damages awarded are called quantum meruit, meaning that the plaintiff gets “as much as he deserved.”

13. Sources of Contract Law • Common Law • Uniform Commercial Code • UCC Article 2 governs the sale of goods. “Goods” means anything moveable, except for money, securities, and certain legal rights. • In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods. • Restatement (Second) of Contracts

14. Meeting of the Minds • The parties can form a contract only if they had a meeting of the minds. • They must understand each other and intend to reach an agreement. • A judge will make an objective assessment of any disagreements about whether a contract was made -- whether or not a reasonable person would conclude that there was an agreement, based on the parties’ conduct.

15. Offer • An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms. • Problems with Intent • Invitation to bargain is not an offer. • An advertisement is generally not an offer. • A letter of intent may or may not be an offer, depending on the writer’s intent. • Problems with Definiteness • The term of the offer must be definite.

16. Termination of Offers • Termination by Revocation • Effective when the offeree receives it. • Termination by Rejection • If an offeree rejects an offer, the rejection immediately terminates the offer. • Termination by Counteroffer • If an offeree counteroffers, it is a rejection that immediately terminates the offer.

17. Termination of Offers (cont’d) • Termination by Expiration • When an offer specifies a time limit for acceptance, that period if binding. • If the offer specified no time limit, the offeree has a reasonable period in which to accept. • Termination by Destruction • Destruction of subject matter terminates offer.

18. Acceptance • The offeree must say or do something to accept. • In a bilateral contract, the offeree generally must accept by making a promise. • In a unilateral contract, the offeree must accept by performing. • Mirror Image Rule (Common Law) • Requires that acceptance be on precisely the same terms as the offer.

19. UCC and the Battle of Forms • Under UCC §2-207, an acceptance that adds additional or different terms may form a contract for sales of goods in certain cases. • For a sale of goods, the most important factor is whether the parties believe they have formed an agreement. • New terms added by the offeree do not void the agreement if accepted by the offeror. • If terms are changed, a court will rely on general principles of the UCC to create a fair contract. • If a party wants to contract only on his terms, the agreement must clearly state that.

20. A Bargain and an Exchange • Consideration means that there must be bargaining that leads to an exchange between the parties. • Consideration can be anything that someone might want to bargain for. • A promisor is the person who makes the promise, and promisee, the person to whom the promise is made.

21. A Bargain and an Exchange • The thing bargained for can be: • another promise. • an action without a promise. • a promise to do something or a promise to refrain from doing something. “Bargaining is obligating yourself in order to induce the other side to agree.”

22. Bargain A B Which causes... There is consideration to support a contract between A and B, when they bargain... A to give B a benefit B to give A a benefit and their bargaining causes BOTH parties ... OR OR AND AND AND AND A to suffer a detriment B to suffer a detriment …to either give a benefit to the other or to suffer a detriment themselves. Consideration supports a contract!

23. Mutuality of Obligations • Illusory Promise • If one party’s promise is conditional, the other party is not bound to the agreement.

24. Legality • A contract that is illegal is void and unenforceable. For example… • A gambling contract is illegal unless it is specifically authorized by state statute. • A court will not assist either party in an illegal agreement, even if its refusal leaves one party clearly shortchanged.

25. Restraint of Trade • To be valid, an agreement not to compete must be ancillary to a legitimate bargain. • Sale of a Business • When a noncompete agreement is ancillary to the sale of a business, it is enforceable if reasonable in time, geographic area, and scope of activity. • Employment • A noncompete clause in an employment contract is generally enforceable only to the extent necessary to protect trade secrets, confidential information and customer lists developed over an extended period.

26. Exculpatory Clauses Part of a contract that attempts to release you from liability for injury to another party. • Generally unenforceable when • it attempts to exclude an intentional tort or gross negligence. • the affected activity is in the public interest, such as medical care, public transportation, or some essential service. • the parties have greatly unequal bargaining power. • it is not clearly written and readily visible.

27. Unconscionable Contracts • An unconscionable contract is one that a court refuses to enforce because of fundamental unfairness. • The two factors that most often led a court to find unconscionability were: • oppression -- meaning that one party used its superior power to force a contract on the weaker party; and • surprise --meaning that the weaker party did not fully understand the consequences of its agreement.

28. Capacity • Capacity is the legal ability to enter into a contract. • Minors (under age 18) and those with mental impairment usually lack capacity. • A voidable contract may be canceled by the party to the contract who lacks capacity. • In some cases, lack of capacity creates a void contract.

29. Minors • Disaffirmance • A minor generally may disaffirm a contract; that is, he may notify the other party he refuses to be bound by the agreement. • The minor also has the option of filing a suit to rescind the contract, that is, to have a court formally cancel it. • Restitution • A minor who disaffirms a contract must return the consideration he has received, to the extent he is able.

30. Mentally Impaired Persons • Definition • A person with mental illness or defect, who is unable to understand the nature and consequences of a transaction. • Generally creates only a voidable contract. • Intoxication • When an intoxicated person makes a contract, it is voidable.

31. Misrepresentation and Fraud • Innocent misrepresentation • means the owner believes the statement to be true and has a good reason for that belief. • Fraudulent misrepresentation • means the owner knows that the statement is false.

32. Misrepresentation and Fraud • To rescind a contract based on misrepresentation or fraud, a party must show three things: • (1) there was a false statement of fact; • Puffery (exaggerated “sales talk”) is not a statement of fact. • (2) the statement was fraudulent or material; and • (3) the injured person justifiably relied on the statement.

33. Plaintiff’s Remedy for Misrepresentation or Fraud • If the maker’s statement is fraudulent, the injured party generally has a choice of rescinding the contract or suing for damages.

34. Special Problem: Silence • Nondisclosure of a fact is misrepresentation only when disclosure is necessary: • To Correct a Previous Assertion • To Correct a Basic Mistaken Assumption • To Correct a Mistaken Understanding about a Writing (such as a deed) • In A Relationship of Trust • When one party naturally expects openness and honesty, based on a close relationship, the other party must act accordingly.

35. Mistake -- Bilateral • A bilateral mistake occurs when both parties negotiate based on the same factual error. • If the parties contract based on an important factual error, the contract is voidable by the injured party. • Conscious Uncertainty • No rescission is allowed where one of the parties knows she is taking a risk.

36. Mistake -- Unilateral • Sometimes only one party enters a contract under a mistaken assumption, a situation called unilateral mistake. • to rescind for unilateral mistake, a party must demonstrate that she entered the contract of a basic factual error and that either: • (1) enforcing the contract would be unconscionable or • (2) the nonmistaken party knew of the error.

37. “If you understand the contract issues that courts scrutinize, the agreement you draft is likelier to be enforced. You thus achieve greater control over your affairs -- the very purpose of a contract.”

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