Chapter 8: Contract Formation

Lawful purpose: covenant not to compete

-can be legal or illegal depending how they're written -important in protecting employers from having the employees they train leave them and compete against them; they also protect the buyer of a business from having the seller set up a competing business.

Mirror Image Rule

For an acceptance to create a binding contract, standard contract law requires that the acceptance must "mirror" the offer, that is, match it exactly -if the acceptance changes the terms of the offer or adds new terms, it is not really an acceptance, it's a counteroffer which kills the original offer

What is the exception UCC Article 2 makes for merchants in regards to the Mirror Image Rule?

For the sale of goods, an expression of acceptance or a written confirmation is treated as an acceptance even if such communication adds or changes terms in the offer *(basically saves merchants from the mirror image rule)*

Vassilkovska v. Woodfield Nissan inc.

Plaintiff: Vassilkovska Defendant: Woodfield V bought a used car from Nissan and signed an agreement that said she promised to arbitrate any claim against them instead of suing in court. However, Woodfield on the other hand still retained the right to sue the plaintiff for a number of reasons. She ended up suing them for misrepresenting the price of the car in the financing agreement. The court had to address whether the arbitration agreement was valid. The court found it not valid. Key points: -contracts require consideration for both promises. The amount of consideration is generally not an issue, but it must be more substantial than simply an acknowledgement or statement

Contract

Promises that are enforceable, with predictable consequences for performance failures -All contracts are promises but not all promises are viable contracts

Judicial Admission

a judge does not want the burden of deciding which party is telling the truth about the existence or nonexistence of an oral contract -most important when the acknowledged oral contract is for the sale of goods -look at pg 255

Consideration in different situations: Option contract

a promise to keep an offer open for a certain time period must be supported by the offeree's consideration. Such agreement to not revoke an offer is called an option. ex: in real estate a seller of land may promise to let a prospective buyer have two weeks to study the deal and accept the offer at a specific price. The buyer must provide some consideration ($) to the seller or the seller's offer is not an enforceable option because it can be revoked.

Acceptance: Mailbox Rule

acceptance becomes legally binding if the offeree releases it into the mail, email, etc. -the offeror cannot revoke the offer once the offeree releases the acceptance in the mail box. Even if the offeror puts the revocation in the mail earlier and the offeree puts the acceptance in the mail later; unless the offeree gets the revocation first, the offer still stands

Bilateral contracts

agreement containing mutual promises; a promise-for-promise exchange ex: Paul promises to sell his laptop to Pearl in exchange for her promise to pay $1000 to Paul for the equipment

Unilateral contracts

agreement with only one promise, only one party is committed to perform; a promise is made in exchange for performance (if the promised action doesn't occur there is no breach) ex: Gloria offers to pay Travis $600 for making all A's this semester. Travis is not committed to make all A's but if he does, Gloria is bound to pay the promised amount

Implied-in-fact contract

arise from the conduct of the parties rather than from words ex: asking a person such as a lawyer for professional advice implies a promise to pay the going rate for this advice even though you do not make an express promise to pay for it

Most business contracts take the bilateral form; however, if there is any doubt on whether the contract is bilateral or unilateral, the court is going to assume a _____________ contract every time.

bilateral

Void

cannot be enforced EVER; unenforceable ex: an apparent agreement that has an illegal purpose

Consideration in different situations: Promise to make a gift

the promise to give something to another is not binding as a contract because no bargained-for consideration supports the promise -sometimes a promise to make a gift may be enforceable under a non-contract theory called promissory estoppel

Part performance (sometimes called promissory estoppel)

when a buyer of land has made valuable improvements in it, or when the buyer is in possession of it and has paid part of the purchase price, even an oral contract to sell is enforecable

Unenforceable

when a nonperforming party has a justifiable reason for noncompliance with a promise; denies the legal enforcement of an agreement (void)

____________ enable buyers and sellers to be able to account for future risks or have confidence in exchanging valuable property interests.

Contracts

T or F: oral contracts generally are not valid and enforcable

FALSE: Oral contracts generally ARE as enforceable as written ones. Many of our everyday transactions involve informal contracts (buying fast food, vending machines) -exceptions: sale of land has to be in writing

Fraud

the intentional misstatement of facts to get a party to go into a contract; the other party relied on this statement and there was injury resulting from reasonable reliance -prediction of something isn't fraud -if you have fraud in the execution then the contract is void -fraud in inducement then the contract is voidable

T or F: Contracts that require commission of a crime or tort or violate accepted standards of behavior are void

True: Courts typically take no action on a void contract and they will leave the parties to a contract where they have put themselves

A mutual understanding of the essential terms and underlying facts is called___________. What happens if this is lacking?

-"meeting of the minds" -if it's clear that the parties had fundamentally different beliefs about the contract, it may be voidable

What are the contractual classifications?

-Bilateral and unilateral contracts: based on how contract is accepted by offeree -Express and implied-in-fact contracts: based on how contract was formed -Implied-in-law or quasi contracts

Contract law comes from either ______________ or ______________

-Common law -Legislation

Capacity of parties: intoxicated or mentally incompetent persons

-Contracts are voidable depending on the person's capability to understand the contract's nature and purpose -except when a court has judged an adult to be mentally incompetent, that adult does not lose capacity to contract simply because of intoxication or mental impairment, courts measure capacity by whether the adult was capable of understanding the nature and purpose of the contract

Why is it good that contract law enables private agreements to be legally enforceable?

-Enforceability gives people the certainty they need to rely on promises contained in agreements; it helps make buyers and sellers willing to do business together.

What key-points did the Montz v. Pilgrim Films case bring up about implied-in-fact agreements?

-Enforcing these agreements is an important means of ensuring that one party doesn't get the benefit of a contract without compensating to the other party -These agreements must contain the same elements as express contracts, including acceptance and consideration

What are the contractual performance terminology?

-Executed contract: parties have performed their promises -Executory contract: one or more parties have not yet performed their agreement

How do contracts provide flexibility and precision in business dealings? What is an example?

-It provides flexibility in that you can agree to anything that is not illegal or against public policy; it gives precision in that with careful thinking you can make another agree to exactly the requirements that accomplish even a very complex business purpose -ex: confidentiality agreements when people first take a job contains precise use of contractual language to keep employees from spreading company secrets if that employee chooses to leave

Capacity of parties: Minors

-Minors have the power -can't be legally bound to contractual promises -Contract is voidable at the election of the minor -can enter contract at 16 but considered voidable until they turn 18 or a reasonable period thereafter (depends on the state) -exception: minors can contract for 'necessities' (food, clothes, education) and can't come back and declare it void

What does Article 2 of the UCC cover? Where has it been adopted?

-ONLY covers the sale of goods -adopted by all states except Louisiana; applies to individuals and firms When looking at a contract ask- Does the contract deal with the sale of goods? yes-UCC; no-state common law

What are the characteristics of an offer?

-Offer must be *definite and specific* -Offeror (person making the offer) *must intend to make the offer* by making a commitment to the offeree (the person to whom the offer is made) -Offer must be *communicated* to the offeree

What are the elements of an enforceable contract?

-Offer: to enter a contract -Acceptance: of the offer -Consideration: for each promise -Capacity: of each party to enter into a binding agreement -Legality: of subject matter

What acts are able to terminate offers?

-Revocation: when the offeror retracts the offer before the acceptance -Can't always do this: when there is a unilateral offer and the offeree has already performed then the offeror can't take back the offer -Rejection: when the offeree rejects the offer, the offer is dead and can't be revived by the offeree -Counteroffer: when the offeree makes a counterproposal, the original offer is terminated -it's both a rejection and counter at the same time -Lapse of time: when the offeree fails to accept by a deadline defined in the offer or after a reasonable time

What operations of law terminate offers?

-Subject matter destruction: when the object of the contract is destroyed or legally eliminated -Offeror death or insanity: when the offeror no longer has the capacity to make the offer -Subject matter illegality: when a change in the law renders the agreement illegal, acceptance is no longer possible

Rules involving goods

-UCC creates a number of situations that allow the enforcement of oral agreements involving the sale of goods -in essence, the law strives to facilitate transactions involving goods as long as the parties cannot deceive the judge who is asked to determine a contract's validity

Lawful purpose: What are the exceptions to the general rule that courts will take no action on an illegal contract?

-a contract may have both legal and illegal provisions to it. in this case, courts will often enforce the legal provisions and refuse to enforce the illegal ones. -courts will allow an innocent party to recover payment made to a party who knows that a contract is illegal

Promissory estoppel (aka detrimental reliance)

-an exception to the rule requiring consideration to support a promise -used to prevent a party who has made a unilateral offer from withdrawing the offer after the requested work has begun -arises when a promisee justifiably relies on a promisor's promise to their economic injury.

What are the characteristics for consideration?

-because not all promises are enforceable through legal action, there must be some incentive or inducement for a person's promise or it is not binding -to be valid, a contract must involve the exchange of consideration between the parties (both parties have 'skin in the game') -must be 'bargained' for; must be contemporaneous and a part of both parties' understanding of the contract terms

What does acceptance look like for bilateral and unilateral contracts?

-bilateral: accepted by the offeree's making of the required promise -unilateral: accepted by performing a requested act, not by making a promise

What are the contractual enforcement terminology?

-enforceable -unenforceable -valid -void -voidable

What are examples of when mutual agreement is lacking?

-fraud -mistake -duress or undue influence

Mistake

-if it's clear that there has been a mutual mistake as to a material fact relating to the contract, rescission by either party is appropriate -*applies to fact NOT value* -mutual mistake: both parties must be mistaken in their understanding in order to make a contract void or voidable -unilateral mistake: one party is mistaken about some aspect of the contract, no remedy is generally available and they can't go back and declare the contract void or voidable

Common law comes from the decisions of ______________ and through common law, courts have developed principles controlling contract _____________, performance, breach, and remedies.

-judges -formation common law contracts include everything (real property, service, employment) except goods

What are the characteristics of acceptance?

-necessary to create a valid, enforceable contract -has to be communicated to the offeror and silence does NOT apply -exception: silence may imply acceptance if the parties have a history of doing business together (a prior course of dealing) -mirror image rule

What are the exceptions to the writing requirement?

-part performance -rules involving goods -judicial admission

What are the characteristics of Capacity?

-refers to a person's ability to be bound by a contract -three classes of persons lack capacity (so as to not take advantage of these persons) -minors (under 18) -intoxicated persons -mentally incompetent persons

What are the business contracts required in writing?

-sale of an interest in land: includes contracts for mortgages, mining rights, and easements -collateral promise to pay another's debt: a business shareholder promises to repay the loan of the corporation if and only when that organization does not make payment -contracts that cannot be performed within one year: the contract must specify a period of performance longer than one year -sale of goods $500 or more: hand and hand with the UCC; contracts involving the sale and purchase of goods that are less than $500 usually are preformed quickly but as the dollar amount increases the need for a written agreement also increases -electronic contracts are also generally as enforceable as paper contracts -other contracts based on state statutes: most states require insurance policies to be written

What is the statute of frauds?

-the law requiring that certain contracts be in writing

What happens when an offer is terminated? When does termination happen?

-the offeree's legal power to bind the offeror ends -The offer can only be killed BEFORE the acceptance of the offer

Consideration in different situations: Agreement not to sue

-when reasonable grounds for a lawsuit exist, an agreement not to sue is consideration to support a promise (ex: if Peter accepts $100 from Maria as full compensation for damages on the spot, he has surrendered his right to sue maria) -Accord and satisfaction: payment of money, or other thing of value, usually less than the amount demanded, in exchange for cancellation of a debt that is uncertain in amount (each party has surrendered the right to have a court determine exactly what amount is owed)

What specific elements are needed to establish fraud?

1. a misrepresentation of fact (as opposed to an opinion) 2. an intent to deceive 3. justified reliance on the misstatement by the innocent party 4. injury resulting from the reliance -here it specifically functions as a tort that acts as a barrier to formation of a legitimate contract

Duress and undue influence

Duress: force or threat of force -person subjectively feels like they had no choice but to sign Undue influence: occurs when one is taken advantage of unfairly through a contract by a party who misuses a position of relationship or legal confidence (like when someones weakened by age)

T or F: Under contract law in private enterprise, a contract needs to be a formal, written document.

False: In private enterprise, contracts don't need to be a formal written document and those who make such an agreement don't have to use the word contract to recognize they have made a legally enforceable promise. -ex: a restaurant that promises that its food is fit to eat and then serves a meal that gives the buyer food poisoning, could be liable for the injury by breaking it's promise

What is the problem with businesses receiving unsolicited ideas?

If businesses receive an unsolicited idea there is a concern that the creation of an unintended implied-in-fact contractual obligation may occur.

Gottlieb & co. v. Alps South corp.

Plaintiff: Alps Defendant: Gottlieb Gottlieb produced fabrics that Alps used in the lining of their prosthetics. Gottlieb changed the yarn they used for the fabric and Alps received several complaints from customers and suffered big economic loss. In the contract Gottlieb included that they would not be liable for consequential damages. However, this was only included in Gottlieb's form (not Alps) and was not specifically discussed by the parties. According to the courts, Alps' failure to read Gottlieb's forms was irrelevant and if Alps had foresaw the likelihood of certain outcomes they should have discussed with Gottlieb in the first place.

Montz v. Pilgrim films and television inc.

Plaintiff: Montz Defendant: Pilgrim films Montz pitched a tv show idea to NBC Universal to which they expressed no interest in Montz' idea. NBC Universal then partnered with Pilgrim Films to produce a series for the sci-fi channel called Ghost Hunters that was derived from Montz' idea. Montz' sued alleging that they breached an implied-in-fact contract to pay for the use of the reality show concept. The courts ruled in favor of Montz

In what situation is it acceptable for an offer to be indefinite?

Under the UCC, contracts for the *sale of goods* can leave open non quantity terms to be decided at a future time ex: an agreement for the sale of 200 hats will bind the parties even though they leave open the price to be decided on delivery in six months

When does the provision of the mirror image rule of the UCC often come into play?

When merchants exchange form documents such as purchase orders and invoices with different terms. -However this can sometimes be a problem if the terms don't match up -Gottlieb & co. v. Alps South corp.

Implied-in-law or quasi-contracts

a judicial remedy to prevent one party from receiving unjust enrichment; when one party is unjustly enriched at the expense of the other, the law may imply a duty on the first party to pay the second even though there is no contract between the two parties ex: if a debtor over pays a creditor $5000, the debtor can force the creditor to return that amount by suing under a quasi-contract

Consideration in different situations: Preexisting Obligation

a party to an agreement does not give consideration by promising to do something that he or she is already obligated to do -exception: does not apply to a sales of goods contract; UCC states that parties to a sale-of-goods contract may make binding modifications to it without both parties giving new consideration -firm offer rule: if a merchant offering goods promises in writing that the offer will not be revoked for a certain period of time, then the promise will be enforceable against the merchant even if the other side didn't give consideration

Valid

enforceable contracts

Voidable

enforceable until a party with the right to do so elects to void the agreement -usually occurs when a party to the contract lacks capacity or is disadvantaged by specific situations

Express contracts

interactions in which parties actually discuss the promised terms of their agreement; parties are intentional about making the contract and delineate all the terms in writing or talking ex: a negotiated purchase of land for construction of a manufacturing plant

Consideration in different situations: Prior consideration

prior consideration is no consideration; performance made before the parties discuss their agreement does not count (ex: when a company promises to give a long time worker a car, one year later they rescind this vote, they are not obligated to give the worker the car)

A basic requirement of a valid contract is legality of ____________.

purpose

What is the most important example of state-based legislation impacting contract law?

the Uniform Commercial Code

Enforceable

the agreement will be upheld in courts, a valid contract

What happens when parties try to avoid consideration by drafting one-sided contracts?

the court may determine that a one-sided contract is illusory because one party is not truly bound -ex: Vassilkovska v. Woodfield Nissan inc.