Business and its Legal Environment (Mgmt 246) Contracts (Chapters 9, 10 and 11) Professor Charles H. Smith Spring 2011

Terminology Used in Contract Law Unilateral contract – contract based on one party’s making a promise that calls for action. Bilateral contract – contract based on both parties making promises to each other. Express contract – contract is communicated in writing, orally, or both. Implied contract – no express contract but parties’ actions/relationship support avoiding unjust enrichment.

Terminology cont. Valid contract – enforceable in court. Voidable contract – one party can disavow contract under certain circumstances. Void contract – unenforceable in court due to illegal purpose. Executory contract – contract is not yet fully performed. Executed contract – contract has been fully performed.

Terminology cont. Written contract – contract is in writing (recommended). Oral contract – contract made orally (some enforcement problems). Electronic contract – contract made electronically. Offeror/promisor – party who makes offer. Offeree/promisee – party(ies) who are recipient(s) of offer.

Elements of a Contract A contract is often called an agreement, a bargain or a pact. No matter what label is used, the following elements are required –Offer –Acceptance –Consideration

“Reasonable Expectations” and Objective “Reasonable Person” Standard The existence of any element of a contract – or whether a contract exists at all – is often informed by two related things –The parties’ “reasonable expectations” shown by plain meaning of the contract language, surrounding circumstances and/or subsequent conduct. –Objective standard based on what a “reasonable person” (judge, jury, or even you or me!) would conclude based on “reasonable expectations” factors. We will discuss these concepts in greater detail in later slides.

Offer Proposal/invitation by offeror to enter into a contract. Objective intent by offeror to be obligated by the offer; what would a “reasonable person” think? Terms of the offer must be reasonably definite; need not be exact. Must be communicated to the offeree (e.g., reward case).

Termination of an Offer After the offer is made, it can be no longer available to be accepted if –Rejection by the offeree. –Withdrawal/revocation by the offeror. –By lapse of a specified or “reasonable” time. –Counteroffer by the offeree (see next slide).

Acceptance Must be of the offer’s terms (“mirror image rule” or “mutual assent” – see next slide). An “acceptance” that changes an offer’s terms is an counteroffer, which is –A rejection of the original offer; and it is also –A new offer in and of itself that can be accepted, rejected or the subject of another counteroffer; in contract negotiations, there are often many counter-offers back and forth before there is acceptance. By an authorized method of communication – usually, any method proper, but the offer itself may require a certain method of communication for acceptance.

Mutual Assent = Offer + Acceptance Shown by offeror’s offer and offeree’s acceptance of the offer. Traditional inquiries are –Did the parties agree to the same thing? –Was there a “meeting of the minds”? –Both are judged by objective standard (again, what would a “reasonable person” think?).

What Can Eliminate Mutual Assent? Fraud – also called misrepresentation or deceit. Mistake – unilateral, which is usually not a defense, or bilateral, which is usually a defense; fact, which can be a defense, or law, which is usually not a defense. Duress – use or threat of physical or economic harm. Undue influence – abuse of authority, power or position. Existence of any of the above can provide basis for or defense to a contract case.

Consideration Each party must give up something of legal value; no consideration if party purports to give up something he or she is already obligated to do (or not do) – has each party sacrificed something? There is no “reasonableness” requirements, so contract does not have to be “fair” or “equal” in order to have the requisite consideration. Be careful – many times, parties will agree to the same thing (mutual assent) but, with no consideration, there will be no contract that can be enforced in court.

Elements of Breach of Contract Case Plaintiff must prove all of the following or defendant will win without needing to put on any defense –Valid contract between the plaintiff and the defendant. –The defendant’s “material” breach of the contract (failure to perform) – “substantial” performance is not Br/K (common abbreviation). –The defendant’s breach of the contract causes damage (any financial loss, sometimes called injury) to the plaintiff. –Plaintiff’s performance or excuse for nonperformance. But, even if plaintiff proves all of the above, defendant may still have some defenses (see slide re Defenses to Br/K Case).

Br/K – Remedies Remedies at law and in equity –At law – damages (money), which are the most common. –Equitable – non-monetary judgment, though may have great economic value. –Election of remedies rule – usually only one remedy available for one Br/K.

Br/K – Damages Most common judgment sought in contract cases –Compensatory – mathematical calculation based on value of contract less value of defendant’s performance. –Consequential – loss based on consequences of defendant’s breach. –Liquidated – exact amount of damages stated in contract.

Br/K – Equitable Remedies Not as common as damages but just as important; can have great economic value; equity means judge should do what is fair given the circumstances –Specific performance – plaintiff wants judge to order defendant to perform the contract as agreed; plaintiff must be seeking unique subject matter (e.g., real estate, custom or rare item). –Reformation – plaintiff seeks order changing written contract to correct mistake. –Rescission and restitution – plaintiff requests judgment which requires both parties return any benefit they may have received.

Defenses to Br/K Case First line of defense – one or more elements missing. Capacity – legal ability to enter into a contract (voidable); e.g., contracting party has mental disability or is under age of 18. Legality – contract must have legal purpose; contract with illegal purpose unenforceable (void). Assignment/delegation – transfer of contract rights/duties to 3 rd party. Mitigation of damages – plaintiff’s obligation to take reasonable steps to reduce damages; any mitigation that could or actually did happen will be deducted from total amount of damages. Non-compete clause in employment contract (restraint of trade) – illegal in California; subject to reasonableness rule in other states. See other slides re mutual assent, statute of frauds and parol evidence rule.

Statute of Frauds and Parol Evidence Rule Statute of frauds requires certain contracts to be in writing; e.g., promise to answer for debt of another (guarantee) or transfer of interest in real property; can electronic communication meet “writing” requirement of statute of frauds? Parol evidence rule says written contract cannot be contradicted by evidence of any prior agreement or contemporaneous oral agreement; PER’s exceptions include ambiguity, course of dealing, mistake, validity of contract in dispute; PER is substantive rule of contract interpretation.

Discharge of a Contract Discharge – no further performance per the contract required; ways to obtain discharge of a contract –By full or “substantial” performance – most common. –By subsequent agreement – accord and satisfaction (same parties, new contract); novation (same contract, new party). –By operation of law – e.g., statute of limitations expires, defendant files for bankruptcy.

Electronic Contract/Signature Under certain conditions, both federal and state laws permit contracts to be formed electronically and allow electronic signatures to satisfy statute of frauds’ “writing” and “signature” requirements. Examples – 15 U.S.C. § 7001 et seq.; California Civil Code § et seq.

Case Studies Lucy v. Zehmer (pages ) – was there an offer to be accepted? Hamer v. Sidway (page 212, footnote 19) – consideration. Jacob & Youngs, Inc. v. Kent (pages ) – substantial performance. Remedies for breach of contract – see generally pages