BUL3310-Ch.6 and 7: Contracts

Note that some offers are irrevocable:

(1) offers in the form of an option contract; (2) offers that the offeree partly performed or detrimentally relied on; and (3) so-called firm offers by a merchant under the UCC

An offer may be terminated by action of the parties in one of three ways:

(1) revocation, where the offeror revokes (withdraws) the offer prior to acceptance; (2) rejection, where the offeree rejects the offer; and (3) counteroffer, where the offeree rejects the original offer and proposes a new offer with different terms. Offers may also be terminated by operation of law

Under the theory of promissory estoppel a relying party may recover damages if

(1) the promisor makes a promise that is reasonable; (2) the promisee actually relied on the promise (the promise must have induced the act) and suffered an injury; (3) the promisee's reliance was reasonably foreseeable to the promisor (what an objectively reasonable person would have foreseen under the same circumstances); and (4) principles of equity and justice (did each party act in good faith and fair dealing?) are served by providing compensation to the reliant party

condition subsequent

A condition in a contract that operates to terminate a party's absolute promise to perform.

Legality of purpose

A contract must satisfy a legal purpose to be enforceable. Contracts that are contrary to existing laws or public policy are likely to be rendered unenforceable

Unenforceable

Although a contract may have all the required elements and be considered valid, it may be *blank* because one party asserts a legal defense to performing the contract

perfect performance

Although the good faith requirement is ordinarily met by the parties simply performing their obligations completely, the law recognizes that there are some cases in which one party does not perform completely yet has still acted in good faith and is entitled to enforce the remaining obligations in the contract against the other party.

detrimental reliance

An offer also may be rendered irrevocable if the offeree makes preparations prior to acceptance based on a reasonable reliance on the offer. For example, SubCo is a subcontractor for GeneralCo. GeneralCo relies on SubCo's bid in preparing to make an offer to renovate a commercial offce complex. After GeneralCo is awarded the renovation contract, SubCo notifes GeneralCo that its bid was too low due to the poor business forecasting of one of SubCo's partners. Because it is no longer interested in the job, SubCo attempts to revoke its offer/bid. In this case, SubCo is still required to perform even at a loss. GeneralCo reasonably relied on SubCo's bid and would suffer a signifcant detriment based on this reliance. SubCo's offer became irrevocable once GeneralCo exercised reasonable reliance on the offer.

past consideration,

Another type of consideration that is not considered to meet the bargained-for exchange requirement is a promise made in return for a detriment previously made by the promisee. This is not sufficient to meet the consideration requirement. Suppose that O'Connor has been working at her job for 40 years and is retiring. Her boss approaches her a week before her last scheduled day and tells her that because she has been such a faithful and effective employee for the past 40 years, on Friday, her last day, there will be a party and she will be presented with a gold watch. She gratefully thanks him and accepts the offer of a party and watch. On Thursday she is disappointed when informed that there will be no party and she will not receive a gold watch. Although the party and watch contract includes both an offer and an acceptance, it is unenforceable because it lacks consideration. O'Connor's contention that her 40 years of dedicated service is suffcient consideration is false because it is past consideration, performed prior to the current agreement. Thus, the offer of a party and watch is an offer of a gift and is not enforceable as a contract. Now suppose the company's employment manual, in force since she started work, states that employees receive a gold watch after 25 years of employment. In this case, O'Connor is entitled to the watch because she acted based on a promise made before she began performing.

Capacity

Both parties to the contract must have the legal standing to enter into contracts. Individuals who are minors, mentally incapacitated, or intoxicated may lack the capacity to enter into contracts, which may result in a voidable contract

What type of damages compensate the nonbreaching party for foreseeable indirect losses not covered by compensatory damages?

Consequential

Clauses

Contains promises made by each party that comprise the exchange of value. "All commissions calculated in accordance with Paragraph 5.1, above, shall be remitted to the Representative by the Company within 30 days of the Company's receipt of payment for products invoiced.

Appendices

Contains supplementary materials, such as incentive compensation formulas or confidentiality agreements. "Confidentiality and Nonsolicitation Agreement"

common law contracts

Contracts also can be categorized according to the applicable source of law. contracts for services or real estate are governed by state common law and are referred to as this. Some examples of these contracts include employment contracts, insurance contracts, rental agreements, licensing agreements, loans, and investment contracts.

UCC sales contracts

Contracts dealing with the sale of goods are governed by state UCC statutes and are referred to as this. The purchase of inventory, raw materials, machinery, or finished goods would all involve this.

impossibility

Death, incapacity, destruction, and supervening illegality are all examples of what many courts refer to as this

Definitions

Defines terms used by the parties. "'Current existing sales accounts' means KitchenCraft, Mid-Continent Cabinetry, Norcraft Canada Corporation, Pro Link, and StarMark."

Recitals

Explains why the parties are entering into the agreement. "WHEREAS, the Company wishes to enter into a contract with the Representative for sales representation services for its products."

A condition subsequent requires that an event must occur before performance under a contract is due.

False

For most contracts, the remedy at law will be specific performance awarded by the court to the nonbreaching party.

False

An offer may also be terminated by certain happenings or events covered by operation of law

Generally, these include (1) lapse of time, (2) death or incapacity of the offeror or offeree, (3) destruction of the subject matter of the contract before acceptance, and (4) supervening illegality.

Preamble

Identifies the name of the agreement, dates, and party names. "Sales Representative Agreement"

preexisting duty rule

If a party does or promises to do what she is already legally obligated to do, the law generally does not recognize this as a legal detriment and, thus, the contract is unenforceable. One classic example is that a police officer cannot collect the reward for arresting a fugitive because the officer has a preexisting duty to find and arrest fugitives. More often, however, the this rule applies in circumstances where one party claims he wishes to modify an existing contract because of unforeseen difficulties in performing his obligations.

rescission

If neither party has fully performed, the parties may agree to cancel the contract. This cancellation is known as this, and each party gives up rights under the contract in exchange for the release by the other party from performing their obligations.

Businesses favor explicit, written contracts for various reasons.

One reason is to reduce ambiguity in a "handshake" oral deal. This can prevent future misunderstandings and the risk that the other party will disavow the deal's existence. Oral contracts may be valid and enforceable as long as the statute of frauds does not apply and all the required contract elements are present; however, they are difficult to prove and enforce in court. Experienced businesspeople tend to work with legal counsel to negotiate the terms of their deals in writing to minimize risk and uncertainty.

relational contracts

Other business relationships are long term and create strong interdependencies between the contracting parties. These relationships are likely to yield what is known as this. Due to the parties' stronger interdependence, this tend to place a higher value on ethical business norms such as trust, loyalty, reputation, and reciprocity

transactional contracts

Some business relationships are based on short-term, impersonal interactions. These relationships are likely to yield what are known as this.

the statute of frauds

Some contracts are not enforceable unless they are in writing and satisfy a rule

illusory promises

Some promises do not support a bargained-for exchange and will not support contractual consideration. . Examples are (1) deathbed promises, in which you make a promise to a friend or loved one just prior to her death to comfort her; (2) promises of a gift, in which a promise is made but no reciprocal promise is exchanged; (3) promises of love and friendship; and (4) promises that by their terms are not binding. For example, a manager announces to his employees that each may have three personal days in December if he can get it approved by senior management. This is an illusory promise because neither the manager nor the company is bound by his statement. Since gift promises are not enforceable and contract promises are, it is important to understand the precise difference. A performance or return promise is "bargained for" only if it was exchanged for another promise.

consequential damages

Special damages that compensate for a loss that is not direct or immediate (for example, lost profits). The special damages must have been reasonably foreseeable at the time the breach or injury occurred in order for the plaintiff to collect them.

Thomas, an attorney, enters into a contract of representation with Cybil to represent her in a probate matter. Which body of law applies to this contract?

State common law

Termination

States the provisions that govern how and when the contract ceases to be in effect. "This Agreement will automatically renew for a like period unless Representative or the Company gives notice of termination. This Agreement may be terminated at any time without cause by either party upon thirty (30) days' written notice to the other party.

valuable consideration

Suppose that a neighbor's teen throws a ball through your front window. You and your neighbor agree that if he pays for the cost of replacement, you'll promise not to sue him. Your promise is called forbearance

Good faith

The law imposes an affirmative duty of this in performing contract obligations. In every contract, the parties have this duty in performance and enforcement.

Mutual assent

The parties to a contract must indicate through words or behavior that they willingly agree to enter into a contract. A valid offer and acceptance is usually how parties demonstrate this

Consideration

This element requires both sides to obtain something of value (legal benefit) and to give up something of value (legal detriment).

If neither party has fully performed, the parties may agree to cancel the contract. This cancellation is known as rescission

True

In order to prevail in a substantial performance case, the party trying to enforce the contract must show that she acted in good faith and that any deviation from the required performance was not material.

True

The law imposes an obligation on the parties in a contract to take appropriate steps to avoid incurring damages and losses.

True

Valid

When a contract has the required elements

Void

When an agreement lacks one of the required elements or has not been formed in conformance with the law from the outset

bargained-for exchange

When someone goes to a store to purchase a sweater, the exchange of goods (the sweater) and cash paid is the contract consideration. When a homeowner hires someone to mow her lawn, the exchange of the cash paid and the service rendered (mowing the lawn) is the contract consideration.

Timothy contracts with Howard Construction Company to build him a new house for $350,000. In the contract, there is a provision indicating that Timothy must obtain "suitable financing" (defined by the contract as a 3.75 percent annual percentage rate of interest or lower interest rate, for the entire purchase price of the home) before his obligation to purchase the house arises. The "suitable financing" provision in this contract is known as __________.

a condition precedent; the "suitable financing" provision in this contract is known as condition precedent.

noncompete contract

a contract in which one party agrees not to compete with another. Most states require these agreements to further a legitimate business interest and be reasonable in length, geographical coverage, and scope.

What is forfeited must be

a legal right. For example, suppose that nervous parents tell their 19-year-old daughter, a college freshman leaving home for the frst time, that if she refrains from drinking alcohol for the entire year, they will give her $1,000. Even if she does forgo alcohol for the year, because a 19-year-old is not legally allowed to drink alcohol, she has not given up a legal right and thus has not provided valuable consideration. In one famous decision from 1891, an appellate court in New York held that one party's promise to abstain from the then-legal practices of drinking, smoking, and gambling until age 21, in exchange for a promise by his uncle to pay him $5,000,11 was sufficient legal detriment for both parties and thus was an enforceable contract.12 The nephew had given up a legal right that was sufficient to satisfy the legal detriment required (forbearance).

objectivity in impossibility

a reasonable person would consider the obligation impossible to perform

substantial performance

a term used in contract law to refer to a degree of performance of a contract which isn't full and complete performance, but is so nearly equivalent that it would be unfair to deny the contractor the payment agreed upon in the contract.

Under the doctrine of __________, one party agrees to render a substitute performance in the future, and the other party promises to accept that substitute performance in discharge of the existing performance obligation. Once the substitute performance has been rendered, this acts as a __________ of the obligation.

accord and satisfaction; satisfaction

Suppose that on December 15, 2020, Manager Yang enters into an agreement with Consultant Anderson to provide operation-consulting services for a period of six months to commence on January 2, 2021. On December 20, 2020, Manager Yang is instructed by upper management to cut costs, so he contacts Consultant Anderson the same day by the following e-mail: "Dear Consultant Anderson: We don't require your services. Sorry.—Manager Yang." As of December 20, 2020, Manager Yang has __________ the contract with Consultant Anderson.

anticipatorily repudiated

Shrink-wrap agreements

are formed when a purchaser opens the packaging after notification by the seller via a printed notice on the packaging or on a document included with the package. The notice provides that the purchaser agrees to the seller's terms by opening the package and/or keeping whatever is in the container (e.g., a box) for a certain period of time. For the most part, courts have held that such agreements are enforceable. This is true even if there is a notion that the purchaser never actually read the shrink-wrap terms before opening the package.7 As one court has said: "Competent adults are bound by such documents, read or unread."

Explicit contracts

are those where the terms are explicitly defined by the parties, either orally or in writing. For example, an apartment lease is typically an *blank* agreement evidenced by a comprehensive contract with various detailed terms such as the amount of rent, length of the lease, payment due dates, security deposit, penalties, and other promises.

Implied contracts or "handshake deals" can generate

bad business and legal consequences

mutual mistake

both parties hold an erroneous belief, may be the basis for canceling a contract (also called avoiding the contract). For the adversely affected party to cancel the contract, the mistake must concern a basic assumption on which the contract was made. Another example is the existence of the subject matter (e.g., parties agree to the sale of goods, but the goods were already destroyed by fre at the time of the contract) and the quality of the subject matter (e.g., parties agree to the sale of a rare first edition book that turns out to be a second edition and not nearly as valuable). Courts will not generally consider market conditions (such as the fair market value of a piece of real estate) or financial ability (such as relying on one party's representation that she can receive adequate credit to purchase the real estate) as a mistake that allows a contract to be avoided.

When a party to an agreement owes a duty to perform and fails to fulfill her obligation, she has __________ the contract.

breached

partial performance

can render an offer temporarily irrevocable. There are certain offers whereby the offeree may, prior to actual formation of the contract, take some action that relies on the offer; for example, the offeree begins to perform based on a unilateral offer. Recall that a unilateral offer is one in which the offer makes clear that acceptance can occur only through performance and not through a promise

Suppose that Cromartie is involved in an automobile accident with Frazier, and Frazier is clearly at fault for the accident. Cromartie sustains $4,650 in damages to his car. Cromartie's loss is known as __________.

compensatory damages

In a contract claim, money damages are primarily limited to __________

compensatory damages, consequential damages, restitution, and liquidated damages

liquidated damages

damages that parties to a contract agree in advance should be paid if the contract is breached

When one party uses unequivocal language to repudiate a contract, the other party may __________.

file suit immediately

One way to make an offer irrevocable is

for the offeror to grant the offeree an option to enter a contract. Typically, the offeror agrees to hold an offer open (not enter into a contract with another party) for a certain period of time in exchange for something of value (known as consideration, discussed later in this chapter)

Riots, threats of terrorism, fires, earthquakes, wars, and embargoes are often mentioned in __________ clauses as events that will discharge the duties of the parties.

force majeure

The mailbox rule

governs common law contracts and is a rule that determines when a contract is considered to be accepted by the offeree, thus depriving the offeror of the right to revoke the offer. In essence, the this provides that the acceptance of an offer is generally effective upon dispatch of the acceptance when sent in a commercially reasonable manner (e.g., when the offeree places the acceptance in the mailbox, sends it by overnight mail, or faxes it) and not when the acceptance is received by the offeror. The time of acceptance depends on whether the offeror has specified a method of acceptance or not

Legally astute managers

have superior knowledge of the law as it relates to their business, realize that there are substantial gray areas in the law, and work proactively with legal counsel to find ethical and value-creating solutions to business challenges. The failure to achieve legal astuteness may result in legal avoidance and a culture within an organization that views the law as a constraint rather than as a source of advantage.

Under the common law, the offeree's response operates as an acceptance only

if it is the precise mirror image of the offer.

novation

is a kind of substitute agreement that involves a substitute third party rather than a substitute promise.

The Restatement (Second) of Contracts

is a model law that many state courts have adopted to govern contracts involving services or real estate. Likewise, every state has in whole or in part adopted the Uniform Commercial Code, a model code for the sale of all types of goods, new or used.

A click-wrap agreement

is based on an Internet transaction where a website provider posts terms and conditions (such as their warranty terms or an arbitration clause) and the user clicks an "I Accept" button located on the web page of the purchase. Are not automatically enforceable

Revocation

is consummated through an express repudiation of the offer (e.g., "I revoke my offer of May 1 to paint your office building for $1,000") or by some inconsistent act that would give reasonable notice from the offeror to the offeree that the offer no longer exists. One important issue with this is the timing of the *blank*. Most states follow the rule that this is effective only upon receipt by the offeree or the offeree's agent. For example, on Monday, Adams sends, via same-day courier, a letter of revocation to Bell's offce. Bell's administrative assistant receives the revocation on that same day, but Bell is traveling in Japan and never actually sees the letter. On Wednesday, from his hotel room in Tokyo, Bell calls Adams and accepts Adams's initial offer. No contract exists because the revocation would be deemed effective upon receipt by Bell's administrative assistant. At that point, even though Bell had no actual knowledge of the revocation by Adams, the offer is revoked and Bell may no longer accept the offer.

mistake

is defined in contract law as a belief that is not in accord with the facts. not all erroneous beliefs are classified as this. an erroneous belief about an existing fact, not an erroneous belief as to what will happen in the future.

browse-wrap agreement

is one where the terms of an agreement are located on a website, but the user does not have the opportunity to click "I agree." Instead the terms are only posted via a hyperlink at the bottom of the page (or even on the next page). It is not necessary to click on the "Terms" link to use the website, so the user consents to the agreement simply by using the website. Courts have held that a crucial factor in determining the validity of this agreement is whether the user was given actual notice or constructive notice of the website's terms and conditions.

Implied contracts

lack explicit terms and are solely implied by the parties' behavior or through social custom. The purchase of a textbook at a campus bookstore, on the other hand, is an implied contract. The act of entering the store, taking the book made available on the shelf, and paying at the cash register comprises an *blank* contract through the circumstances and the parties' behavior.

contract

legally enforceable promise or set of promises. Under freedom of contract, parties are free to craft whatever bargains suit the parties' best interests and to structure the terms of the deal to best represent their intentions.

Over the course of a business life cycle, it is inevitable that a manager involved in a contract will

make a mistake (or contract with a mistaken party).

For most contracts, the remedy at law will be __________.

money damages

For most contracts, the remedy at law will be

money damages awarded by the court to the nonbreaching party. This is simply a legal mechanism for compelling the breaching party to compensate the innocent party for losses related to the breach.

A valid contract has four basic required elements:

mutual assent, consideration, legality of purpose, and capacity

Contracts may be based on

nominal consideration, that is, consideration that is stated in a written contract even though it is not actually exchanged.

The first step in determining whether a valid offer exists is analyzing the offeror's

objective intent

When encountering a situation in which one party is claiming impossibility of performance, the impossibility must be __________ rather than __________ in order for the obligation to be discharged.

objective; subjective

anticipatory repudiation

occurs when, before performance is due, one party makes an unequivocal and definite statement that they will not perform. Typically, the non-repudiating party may elect to treat the repudiation as a total breach and terminate the agreement immediately.

A valid offer creates the power of acceptance for the

offeree. An acceptance is the offeree's expression of agreement to the terms of the offer. An offeree typically communicates the acceptance in writing or orally but, in some cases, may accept via some action or conduct (as in a unilateral contract). So long as the offer is still in force (has not yet been terminated), the offeree may accept the terms of the offer, thereby forming an agreement.

subjectivity in impossibility

one party decides unilaterally that performance is impossible

In a unilateral contract

one party's legal detriment arises from its action or inaction rather than a promise. For example, a homeowner's promise to pay a contractor $10,000 to install a new roof on a specific date is a 'promise-for-action' contract if and when the contractor installs the new roof on that date

In a unilateral mistake

only one party has an erroneous belief about a basic assumption in the terms of the agreement. Courts are much less willing to allow a mistaken party to cancel a contract for a unilateral mistake than they are in the case of a mutual mistake.

restitution

payment for an injury; compensation

If contracting parties perform their obligations completely, this is known as __________.

perfect performance

A condition __________ requires that an event must occur before performance under a contract is due

precedent

There are three types of contractual conditions:

precedent, subsequent, and conducive.

The UCC statute of frauds

requires a written and signed contract when the sale of goods is worth more than $500.

The common law statute of frauds

requires evidence of a written and signed contract for agreements that involve real estate, the payment of another's debt, or services that cannot be performed in less than one year.

condition precedent

requires that an event must occur before performance under a contract is due

compensatory damages

respond to the plaintiffs loss

Legalese

s characterized by long, complex sentences written in a passive voice with many embedded clauses that employ obscure archaic terms such as "hereby," "sayeth," or "witnesseth."

concurrent condition

something that must occur simultaneously with another condition. Each party's obligation acts as a condition precedent for the other. When there is this, the parties' obligations are mutually dependent on each other.

Drafting Contracts with a Strategically Qualified Attorney

strategically qualified attorneys who have the skills and qualifications to work with managers to generate opportunities and value. During the contracting process, strategically qualified attorneys view themselves as an important part of the deal-making process. These attorneys play an active role in helping the businessperson translate the important terms of the deal into the legal terms in a contract.

A novation is a(n) __________ agreement that involves a substitute __________ rather than a substitute __________.

substitute; third party; promise

Under modern case law, the importance of the parties' intention, or lack of intention, to form a contract depends largely upon

the context of the agreement.

the core value chain activities

the different business functions that generate value and are referred to as this in most businesses.

In a bilateral contract

the legal detriment is incurred through the mutual promises the parties make to each other. For example, an employer promises to hire an employee in exchange for the employee's promise to satisfy the required job duties. Similarly, if you rent an apartment, your promise to pay the stipulated rent on a certain date in exchange for the landlord's promise to offer the unit at the agreed-upon monthly rent for the duration of the lease.

If the response conflicts with the original offer even slightly,

the original offer is terminated and the new offer is substituted. This principle is called the mirror image rule.

Suppose that Tamara offers to paint Jamal's house next week for $8,000, and Jamal attempts to accept for $7,500. Under the common law:

there is no contract between Tamara and Jamal due to a violation of the mirror image rule.

The status of these four essential contract elements will determine whether a contract is

valid, void, voidable, or unenforceable

Voidable

when the law gives one or more parties the right to cancel an otherwise valid contract under the circumstances.