Business Law Introduction to Contracts Chapters 9, 10 and 11 Class 1

What is “Business Law”?  Course topics Introduction to Contracts Contracts for Sale or Lease of Goods (UCC 2 & 2A) Introduction to Business Forms Property Law (Personal, Intellectual & Real) Transferring ownership interests in property  Before and After death Negotiable Instruments and Secured Transactions (UCC 3 & 9) Laws Affecting the Employment Relationship

Review of the Basics Sources of Law Constitutions (federal and state) Legislation (federal, state and local) Judge-made law (federal and state appellate courts – published decisions) Agency regulations (federal and state)

A Brief Review (cont.)  The court system: The usual 3-tiered system  Trial court  Intermediate court of appeals  Supreme Court This occurs in both federal and state court systems

A Brief Review (cont.)  The prima facie case Elements of the case  Where do they come from?  Defenses What are the usual defenses?  IRAC Issue Rule Application of rule to facts Conclusion

A Brief Review (cont.)  Primary Authority What is it? Why is it necessary?  How does it work in the federal system?  In the state system?

A Brief Review (cont.)  Secondary Authority What is it? What are Restatements? What are uniform laws? What is it good for?

The Purpose of Government  The whole duty of government is to prevent crime and preserve contracts. Lord Melbourne (1779 – 1848) British Prime Minister

Introduction to Contracts  Contracts Provide stability, predictability, clarity and certainty for buyers and sellers of goods and services. Businesses could not function without them. Necessary to ensure compliance with a promise or entitle the innocent party to some form of relief. ibbeandeadmanschest/teaser_large.html

Remedies: Contract v. Tort  The Hairy Hand Case

What is a Contract?  A contract is a promise that the law will enforce. ~ Restatement (Second) of Contracts

Contracts: Sources of Law  Common law Importance of the Restatement  Constitution Fundamental right recognized in both state and federal constitutions  Uniform Commercial Code Why is this a good idea?

Formation of a Contract  In order for there to be a contract there must be: An Agreement  Offer and  Acceptance of the offer Consideration Contractual Capacity Legality

Types of Contracts  Bilateral or unilateral  Express or implied  Executory or executed

Bilateral vs. Unilateral  Bilateral – Both parties make a promise.  Unilateral – One party makes a promise that can only be accepted by the other party actually doing something.

Express vs. Implied  Express – Terms of the agreement are explicitly stated. Does it matter if the contract is oral?  Implied – Words or conduct indicate the parties intended to agree.

Executory vs. Executed  An “executory” contract is one that is not yet fully performed.  Executed refers to a contract whose terms have been fully completed.  Executed also refers to the act of signing a written agreement.

Equitable “contracts”  To promote fairness (or equity), courts will create remedies to enforce a promise. These include: Promissory Estoppel Quasi-Contract (quantum meruit)

Promissory Estoppel  Requirements: Defendant made a promise or statement knowing that the plaintiff would likely rely on it. The plaintiff did rely on it. The only way injustice can be avoided is to enforce the promise.

Quasi Contracts  Quasi contracts are implied in law Fictional “contracts” (not really contracts) created by courts Equitable remedy imposed on parties in the interest of fairness and justice  Plaintiff must show He gave some benefit to the defendant He reasonably expected to be paid Defendant would be unjustly enriched if he did not pay

Why Study Contracts Decisions?  If you understand how courts read contracts and you understand the issues that courts scrutinize, the agreement you draft is more likely to be enforced.

Contract Interpretation  Contracts are interpreted by courts only when there is a dispute between the parties.  Rules of Construction The plain meaning rule (What it says is what it means – words are clear.) The context rule (Words don’t have just one meaning – what did the parties mean by these words? Look to circumstances.)

Why Look at Context?  The meaning of words – Words are used as conventional symbols of mental states, with standardized meanings based on habitual or customary practice. Unless a different intention is shown, language is interpreted in accordance with its generally prevailing meaning. However, there are substantial differences between English and American usages and between usages even in different parts of the United States.

Why Look at Context?  The primary search in interpreting contracts is for the common meaning of the parties, not a meaning imposed on them by the law or by a court. Ordinarily the mutual understanding of the parties prevails.

The Washington Rule  What is the rule in Washington? Plain meaning? Context? Hybrid?  Does Hearst v. Seattle Times clarify the rule that will be applied? oalinks.htm

The Agreement  In order to have an “agreement” parties must have a bargain (“meeting of the minds”).  The parties must understand each other and intend to reach an agreement.

Reaching an Agreement  Offer  Acceptance  Once an agreement is reached, a valid contract is formed (if the other elements of a contract are present).

The Offer  An offer is a promise to do something in exchange for the other party’s promise to do something.  An offer is a manifestation of a willingness to enter into a bargain – and creates a power of acceptance in another party.

Requirements of the Offer  Offeror’s serious intention  Definiteness of terms  Communication

Seriousness of Intent  Offers made in anger, jest or undue excitement are usually not valid offers.  Expressions of opinion are not offers.  Statements of intention to make an offer or preliminary negotiations are not offers.  Advertisements, catalogues, price lists, auctions are treated as invitations to negotiate – not as offers.

Objective Manifestation Theory  The parties’ intent to enter into a contract – to be bound by the agreement – is determined by what a reasonable person would believe, based on the outward, objective manifestations of intent. It is not determined by the unexpressed, subjective intent of the parties.

Definite Terms  Terms (expressed or implied) that must be included: Identification of parties Subject matter of the contract Consideration Terms of payment, delivery, performance, time of performance

Communication of Offer  Offeree must have knowledge of the offer: Made directly by offeror Made through use of agents

Termination of an Offer  An offer may be terminated before it is accepted By action of either party By operation of law

Termination by Offeror  Revocation of the offer by the Offeror: Offer can be withdrawn at any time before offeree accepts the offer Revocation is effective when the offeree or his or her agent receives the withdrawal.

Exceptions to the Rule  Irrevocable offers  Option contracts – promise, supported by consideration, to hold the offer open for a specified period of time  Promissory estoppel – where offeree relies to his or her detriment on the offeror’s express or implied statement that the offer would remain open.

Termination by Offeree  Rejection of the offer (express or implied) by the offeree Terminates the offer Is effective when received by the offeror or the offeror’s agent  A counteroffer is a rejection of the original offer and the making of a new offer (offeree becomes the offeror).

Mirror Image Rule  Offeree’s acceptance of an offer must match the offeror’s offer exactly or it will be treated as a rejection and counteroffer. This rule has been significantly eroded by the UCC Art. 2.

By Operation of Law  Neither party acts. Instead, a legal event results in the end of the offer. Lapse of time  Offer terminates when the period for acceptance (or reasonable period if none is specified) ends. Destruction of subject matter Death or incompetence of offeror/offeree Supervening illegality of the proposed contract

Acceptance  An offer invites the offeree to Accept Reject or Make a counteroffer

Acceptance  Must be a voluntary act (expressed or implied) by the offeree that Shows unequivocal assent (agreement) to the terms of the offer.  Additional terms may constitute rejection.  Generally silence is not acceptance.

Mode/Timeliness  Mail Box Rule – Acceptance is effective on dispatch, providing that an authorized method of communication is used and that it is properly used. However, the offeror may specify how and when acceptance should be made. Note that technology has all but eliminated the “mail box” rule.

Mail Box Rule Exceptions  The acceptance will not be valid if: Not properly dispatched; Offeror has specified a particular means of acceptance; Acceptance is sent after a rejection has been sent (whichever is received first is given effect).  If an unauthorized means is used, acceptance occurs when it is received by the offeror.

Consideration  A bargained for exchange – each side is inducing the other to agree. The thing bargained for can be a promise or action. The thing bargained for can be a benefit to the promisor or a detriment to the promisee.

Adequacy of Consideration  Court will generally not weigh the value of the promise.  If the parties are satisfied with the bargain initially, then the value of the bargain will not be considered by a court.

Contracts Lacking Consideration  Preexisting duty  Past consideration  Illusory promises

Gifts  A gift is not a contract – because it is not supported by consideration.  Therefore, a promise to make a gift may be revoked at any time before it is given.

Settlement of Claims  Accord and satisfaction: Debtor offers to pay a lesser amount than the creditor believes is owed. Liquidated debt (amount has been ascertained, fixed or agreed on) Unliquidated debt (parties give up legal right to contest amount in dispute – this is consideration as it is giving or giving up something of value) Results in release, covenant not to sue