Contract Law
Contract Law
Contract Law
Contract Law
Contracts evolved from the common law
Each state has its own common law precedents Dissatisfaction with differences across state led to the Uniform Commercial Code (UCC)
UCC has been adopted by all 50 states and will be discussed next chapter
Currently we are dealing with another watershed event: E-commerce Lawyers and legislators are scrambling to provide a universally accepted contract law of E-commerce
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Contract Law
A contract is:
A promise or set of promises, the breach of which the courts will provide a remedy for When the two parties agree to a contract, it creates a legally recognized duty to perform Not all agreements are recognized as legally binding
A promise to make a gift is not binding
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Elements of a Contract
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Contractual Nomenclature
Valid, void, voidable and unenforceable
A valid contract is one recognized as binding in law A void contract is not recognized at all such as a gambling contract In a voidable contract one of the parties can not perform without liability--a victim of fraud A contract is unenforceable if there are no legally enforceable remedies--an oral real estate agreement
In a bilateral contract, both parties exchange promises In a unilateral contract a promise is made for performance--e.g., reward contracts
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Types of Contracts
Executory and executed
A executory promise is a promise for future performance If the contract has been executed, both parties have performed
Quasi Contracts
The plaintiff is suing for quantum meruit (the fair market value of her services) The plaintiff performed valuable services The defendant knowingly received these services The plaintiff expected to get paid if the services were used by the def. The def. was unjustly enriched Quasi contract has been used by writers who claim movies were made based on ideas they told directorsComing to America Quasi contract is sometimes used by small firms to try to salvage an inadvertent or bungled knowledge transfer to a larger firm
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Elements of a Contract
Agreement
Offer and Acceptance
The offeror must have intent to make an offer
Intent is judged under an objective standard--What would a reasonable person believe under the circumstances? Most advertisements are an invitation to bargain as are items submitted for auction If the offer is very specific, then maybe it will be termed an offer Many advertisements made on the Internet are offers Customers can make an immediate contract
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Acceptance
Just like an offer, the acceptance must have:
Intent to be bound by the offeree Again judged by objective standard In general, silence is not deemed an acceptance unless the parties had prior dealings Acceptance must be complete and unconditional An acceptance that contains conditions or additional terms is a counteroffer and thus a rejection of the offer Acceptance must be communicated to the offeror Offeree should use the same medium used by the offeror to make the offer if nothing is said in the offer
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Acceptance
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Termination of an offer
The offeror can revoke the offer at any time (with some limited exceptions)
Thus an offeror can make an offer that is good for 10 days and then revoke it after 5 days Revocations must be communicated to the offeree Offers and revocations are effective when received
Among the exceptions to the common law rule that an offeror can revoke an offer at anytime are:
promissory estoppel and the UCC firm written offer by merchants rule (discussed in next chapter).
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Promissory Estoppel
An offer is irrevocable if the conditions for promissory estoppel take place:
(1) offeror knows or should know the offeree will rely on the offer made by the offeror (2) the offeree does rely and (3) relies to his detriment and (4) injustice can only be avoided by enforcing the promise
Consideration
Consideration
Is the exchange element in a contract In order to support a promise made by the promisor, the other party (the promisee) must do something that constitutes consideration
The promisee must incur a legal detriment Examples of consideration:
Make a promise in exchange for a promise Transfer something of value Give up something of value such as a legal claim
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Consideration
Generally the courts do not consider the adequacy of consideration
unless they decide the bargain is unconscionable Consideration does not exist if the other party has a preexisting duty to perform by law or contract
In general past consideration is not consideration
Consideration does not exist if the promise made by the promisee is illusory
If the promisee maintains an unlimited right to cancel at any time for any reason, the promise is illusory
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Consideration
There are some promises that are enforceable without consideration
A promisor is liable under the theory of promissory estoppel (PE) Note with PE it is not a contract and therefore the damages are based on reliance costs of the promisee and are generally less than if the negotiations had resulted in a contract
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Capacity
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Capacity
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Capacity
If a minor disaffirms, the minor must return the consideration if he has it
There are an increasing number of contracts that are binding on minors, though these exceptions vary from state to state
Contracts with the army, insurance contracts, educational loans, bank account agreements are examples A minor is liable for the FMV of necessaries: food clothing and shelter and tools etc for an emancipated minor
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Capacity
A contract is voidable if at the time the contract was agreed to, a party was too intoxicated to understand the terms of the contract
If a person has been judged incompetent, then all contracts with the person are void If the person is, in fact, insane, the person can claim lack of capacity even though the courts have not ruled the person is incompetent by appointing a guardian
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Legality
Contracts can be illegal by statute or by public policy
In either event, the agreement is void There are a number of agreements that have been ruled illegal by statute in various states: Gambling, illegal drug sales, usurious loan agreements, contracts with unlicensed professionals Increasingly, illegal contracts are taking place in cyberspace-- e.g., prescriptions drugs sold online. Under public policy a number of bargains are void Exculpatory agreements such as agreements not to sue employers under workmens compensation Contracts to excuse intentional actions
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Legality
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Genuineness of Assent
A contract is voidable if
It is the product of duress
A party signed a contract because of threat of force, criminal prosecution, or blackmail
Writing requirements
Oral contracts in general are enforceable
For certain contracts, the contract must be in writing
Contracts involving real estate Contracts that cannot be performed within one year Surety contracts Marriage contracts Contracts for the sale of goods where the value exceeds $500 Contracts where an executor is personally liable for the debts of the deceased
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Writing Requirements
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Writing Contracts
Sufficiency of the writing
The agreement must have all material terms Must be signed by the defendant Names of the parties, consideration, and the subject matter of the contract are required terms
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Delegations of Duties
If the promisor is a company, it may delegate responsibility for performance to employees
If the contract performance is inadequate, the business, not the employee, is liable for breach of contract Most contracts can be delegated except if the personality or talents of the promisor are unique In some cases there are statutory or public policy constraints on delegations Delegations are a very common event
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Assignments
In general, contracts can be assigned unless the assignment or delegation would make performance by the third party more difficult or disagreeable
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If the soccer camp did not perform, you or your parents could sue If you are an incidental beneficiary, you have no right to sue if the promisor breaches
A garden store has no right to sue if a supplier of a beekeeper fails to deliver
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Discharge by Agreement
The parties can decide to rescind the contract
Each party agrees not to perform and neither party is liable A novation occurs when a new party is substituted
If A and B have a contract, and A agrees that C can fulfill Bs obligations under the contract, a novation takes place
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Impossibility
If performance is objectively impossible due to war or embargoes, the promisor is discharged without liability If there is a subjective impossibility due to events that are foreseeable, the obligation to perform is not discharged
If the promisor made a bad bid, he cannot claim he cannot perform because he is not making any money
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Remedies
Generally the remedy in contract law is money damages The theory of compensatory damages is to put the nonbreaching party in the position he would have occupied if the contract had been performed
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Remedies
Damages: Compensatory
In sale of goods contracts, damages are often calculated as the difference between the market price and the contract price time quantity: Damages = (Pm - Pk)Qk in this case, the seller is likely to be the defaulting party
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Consequential Damages
Consequential damages
Damages that are the result of the contract breach but are unusual in some way
Lost profits are an example of consequential damages The non-breaching party must apprise the breaching party of the consequential damages in order to recover In some cases there is an obligation to notify the breaching party before the breach of the possibility of consequential or unusual damages
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Liquidated Damages
Liquidated Damages
In many contracts damages are difficult to calculate so the parties agree in advance what damages are If the parties provide a reasonable estimate of damages, liquidated damages clauses are enforceable If the liquidated damages clause is judged excessive it will not be enforced as a penalty
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Remedies
Punitive damages in contracts are very rare The nonbreaching party is expected to mitigate damages
Landlords whose lease has been breached cannot refuse to lease to another tenant Wrongfully discharged employees cannot turn down comparable job offers from 3rd parties
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Equitable Remedies
Specific Performance
The remedy is appropriate if the promisee attaches great value to the consideration
The consideration must be unique Jewelry, works of art, real estate, family heirlooms
Injunctions
The courts will freeze the action if irreversible damage may occur with a continued breach The plaintiff generally has to demonstrate that he will likely prevail in trial that the defendant is breaching the contract
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