Introduction to Contract Law MBAD 5191: Legal Environment in Business

Key Questions What are contracts? Why are contracts formed? Why should contracts be enforced? When is a valid contract created? When can a party avoid the requirements of a contract?

Contract Terminology Oral vs. Written Express vs. Implied Bilateral vs. Unilateral Entire vs. Divisible Executory vs. Executed Valid vs. Void vs. Voidable

Evaluating Contract Claims I. Identify the applicable body of contract law II. Determine if the legal elements of a contract are present III.Consider Non-Contract obligations IV.Consider legal doctrines of contract avoidance

Applicable Body of Contract Law Uniform Commercial Code (UCC) -Statutory law -Governs commercial transactions -Article 2 deals with the sale of goods Common Law of Contracts -Product of judicial decisions -Constantly evolving -Guided by the Restatement of Contracts

Common Law vs. Uniform Commercial Code Sale of Goods? YES: UCC UCC on Point? YES: UCC Applied NO: Common Law NO: Common Law UCC can be applied by analogy

Contract for Goods or Services??? Hybrid Contracts -Include both goods and services -Difficult to identify appropriate body of law Test: -Is the major purpose of the contract for goods or services? -Contact must be viewed in its entirety to identify predominant factor

II. Elements of a Contract 1. Offer and Acceptance -Willingness to enter contract/willingness to be bound by the terms 2. Mutual Agreement -Meeting of the minds 3. Consideration -Something of legal value given up by all parties in the contract 4. Competent Parties -Legal age and normal mentality 5. Legality of Purpose -Contract formed for a legal purpose 6. Proper Form -Satisfies requirements regarding writing, signatures, etc.

Elements of an Offer 1. Definite and Certain Terms Definite enough to signal intent/provide for enforcement Different standards for UCC and common law 2. Communication of the Offer Must be communicated directly to the offeree 3. Intent to Contract Governed by the objective standard of intent

UCC Gap-Fillers Price: Reasonable at the time of delivery Quantity: Output contracts Exclusive dealing Time for Performance: Reasonable time for performance Indefinite term contracts cancelled with reasonable notice

Place of Delivery: Sellers place of business; if no place of business, sellers home Buyers Right of Inspection: Reasonable time, place and manner Payment: Check acceptable, but seller may demand cash within a reasonable period of time No obligation to extend credit UCC Gap Fillers

Offers- Special Situations Advertisements -General Rule: not considered offers due to multiple acceptance problem -Exception: Ads written with enough clarity to avoid multiple acceptance Rewards (Public Offer): -Offer to enter a unilateral contract requiring full performance Bids and Auctions: -Treated as an invitation to offer

Termination of an Offer General Rule: An offer can be revoked at any time up until acceptance. Exceptions include: -Option Contracts -Unilateral Contracts -Promissory Estoppel -Firm Offers (UCC) Rejection: Terminates an offer and is effective at the time received by the offeror. Lapse of Time: defined in the contract or reasonable based on circumstances Counteroffer: Terminates original offer and acts as a new offer. Special Situations: death or insanity of the offeror, destruction of the property that is the subject of the offer, and intervening illegality terminate an offer.

Elements of Acceptance 1. Communicated to Offeror: -Manner of Acceptance: any reasonable manner unless specified in the offer -Time of Acceptance: reasonable time, before revocation of offer, unless specified -Only Offeree Can Accept: unless agent accepts on offerees behalf 2. Unconditional (acceptance of terms offered): -Mirror Image vs. Material Terms

Acceptance- Special Situations UCC Battle of the Forms: - Governs the exchange of standardized forms between merchants for the purchase of goods. - Additional terms included in the contract, unless: Acceptance expressly limited to offerors terms New terms materially alter the offer Objection to new terms raised within a reasonable period of time. Mailbox Rule: -Acceptance effective at the time it is dispatched. Common Law: faulty dispatch makes acceptance valid upon receipt UCC: faulty dispatch only matters if it increases time before acceptance is received

Consideration Consideration may be: Something given up that a party has a legal right to keep OR Performing an action that a party has no legal responsibility to do OR Refraining from an action a party has the legal ability to do

Characteristics of Consideration Legality -Refraining from illegal activities cannot serve as consideration -Pre-existing contractual obligations cannot serve as consideration Adequacy -Courts generally do not determine adequacy of consideration Possibility of Performance -An action must be possible to perform to serve as consideration Past Consideration -Benefit already received cannot act as new consideration Illusory Promises -Promises that dont create a real obligation to act or refrain are not consideration

Contract Modification & Consideration Common Law -General Rule: contract modification must be supported by new consideration -Exceptions: Unforeseen circumstances Mutually agreeable termination and formation of a new contract Uniform Commercial Code -General Rule: written modification does not require new consideration -Safeguards: Neither party has a duty to agree to the modification Good faith and fair dealings requirements of UCC applied Settlement of Debts -Liquidated debts: due and certain; modification requires new consideration -Unliquidated debts: not due and certain; new consideration not required

Capacity and Legality Legal Capacity -Age of majority -Mental competent -Not impaired by controlled substance Legality of Purpose -Consistent with common law -Consistent with statutory requirements -Consistent with public policy

Proper Form Statute of Frauds- contracts pertaining to the following must be in writing: 1. Agreements by executor/administrator to pay debts of estate 2. Agreements to answer for debts of another 3. Agreements that cannot be completed in less than one year 4. Agreements made in contemplation of marriage 5. Agreements to sell any interest in real property 6. Agreements to sell personal property for $500 or more

III. Non-Contract Obligations Quasi-Contract: Prevents unjust enrichment 1. One party conveys benefit to another 2. Benefit is knowingly accepted 3. Unjust to deny injured party compensation Promissory Estoppel: Protects reasonable expectations 1. Promise made, which was foreseeable to induce reliance 2. Reliance by the recipient of the promise 3. Damages as a result of the reliance

IV. Doctrines of Contract Avoidance Misrepresentation Fraud Mistake Duress Undue Influence

Misrepresentation Misstatement or nondisclosure of a material fact Reasonable reliance by the complaining party Induces contract formation Contract is voidable by the complaining party, although some states do not allow recovery for additional damages

Fraud Intentional misstatement or nondisclosure of a material fact intended to induce the formation of a contract Misstatement or misrepresentation relied upon by complaining party Contract is voidable by the complaining party and recovery may be available for additional damages

Mistake Contract may potentially be voidable by the complaining party if the mistake was bilateral (both parties mistaken) Mistake must pertain to a material fact present at the time the contract was formed, not a mistake about conditions in the future Mistakes regarding facts readily observable or available to the public do not generally make a contract voidable

Undue Influence Contract voidable if person of influence improperly uses position to encourage contract formation in an unfair manner Examples: -Parent/Child -Doctor/Patient -Lawyer/Client -Teacher/Student -Employer/Employee

Duress Contract voidable if improper pressure used to encourage contract formation Victim had no reasonable alternative but to enter contract Examples: -Physical threat -Threat to property -Threat to reputation

Conclusions Defending a Contract - Identify appropriate body of contract law - Demonstrate all elements of a valid contract exist - If element missing, explore non-contract obligations Challenging a Contract - Identify appropriate body of contract law - Demonstrate the absence of a required element - If all elements are present, explore doctrines of contract avoidance