© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 9: Contracts—Nature and Classification

2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What is a contract? What is the objective theory of contracts? What are the four basic elements necessary to a valid contract? What is the difference between an implied- in-fact and implied-in-law (quasi) contract? How does a void contract differ from a voidable contract? What is an unenforceable contract? What rules guide the courts in interpreting contracts?

3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. An Overview of Contract Law Sources of Contract Law. –Common law governs all contracts except when modified by statutory law such as the UCC. Function of Contracts: –Fundamental to business. –Creates rights and duties between parties. –Provides stability and predictability. Parties: Promisor (makes the promise) and Promisee (accepts the promise). –Good faith in commercial agreements

4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Agreement that can be enforced in court. Formed by two or more parties. Failure to perform results in breach and damages. Objective Theory of Contracts. –Intent is interpreted by a reasonable person. Definition of a Contract

5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Elements of a Contract A valid, enforceable contract includes: –Agreement. –Consideration. –Capacity. –Legality. Defenses to the Enforceability of a Contract: –Genuineness of Assent. –Form.

6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contract Formation

7 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bilateral vs. Unilateral Contracts Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee). Bilateral Contracts: –Offeror and Offeree exchange promises to each other. –A contract is formed when Offeree promises to perform.

8 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Unilateral Contracts: –Offeror wants performance in exchange for his promise. –Contract is formed when Offeree performs. –Contests and lotteries are examples. –Revocation of Offers for Unilateral Contracts: modern view is that offer is irrevocable once the Offeree substantially performs. Bilateral vs. Unilateral Contracts

9 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Formal vs. Informal Contracts Formal: require special form or method to be enforceable, e.g., under seal. Informal: all other contracts.

10 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Express vs. Implied Contracts Express: terms of contract are set forth either in writing or orally. Implied-in-Fact: based on conduct. –Plaintiff furnished service or product. –Plaintiff expects to be compensated. –Defendant had a chance to reject and did not. Case 9.1 Uhrhahn Construction & Design, Inc. v. Hopkins. Parties created an enforceable implied-in-fact contract when both parties waived the written requirement for changes.

11 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contract Performance Contract Performance: Executed vs. Executory. –Executed: fully performed by both sides. –Executory: at least one of the parties has not performed.

12 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contract Enforceability

13 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contract Enforceability Valid Contract. –Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity. Voidable Contract. –Valid contract that is legally defective and can be avoided (rescinded) by one of the parties. Void Contract. –No contract at all.

14 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Quasi Contracts Fictional, created by court to avoid unjust enrichment. Limitations on Quasi-Contractual Recovery. When an actual contract already exists, quasi contract cannot be used.

15 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Interpretation of Contracts Plain Language Laws. –If language is clear from face of contract, court will enforce a contract according to plain terms. –If language clear, court cannot consider extrinsic evidence.

16 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Rules of Interpretation

17 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Interpretation of Contracts Plain Meaning Rule. –If language is clear from face of contract, court will enforce a contract according to plain terms. –If language clear, court cannot consider extrinsic evidence. Case 9.2 Wagner v. Columbia Pictures Industries, Inc.. Parties created an enforceable implied-in-fact contract when both parties waived the written requirement for changes.

18 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Interpretation of Contracts Other Rules of Interpretation. –What did the parties WRITE in the contract? –Courts will generally not remake the contract into what the parties’ claim their intent was when they made the contract. –Ordinary usage of terms. –Trade Usage, Custom, Prior Dealings. Case 9.3 U.S. Bank, N.A. v. Tennessee Farmers Mutual Insurance Co. Primary rule of interpretation is to give effect to the intent of the parties. “Increase of hazard” did not include commencement of foreclosure proceedings.