Chapter 11: Requirements for a Contract

Illegal contracts

are void and unenforceable. Claims of illegality often arise concerning non-compete clauses and exculpatory clauses.

The essential UCC rule:

contract for the sale of goods worth $500 or more is not enforceable unless there is some writing, signed by the defendant, indicating that the parties reached an agreement.

The two most common settings for legitimate non-competition agreements are:

1. the sale of a business 2. an employment relationship

An exploratory clause is generally unenforceable:

1. when it attempts to exclude an intentional tort or gross negligence 2. when the affected activity is in the public interest, such as medical care, public transportation, or some essential service 3. when the parties have greatly unequal bargaining power 4. unless the clause is clearly written and readily visible

Exculpatory Clauses

A contract provision that attempts to release one party from liability in the event the other party is injured A contract clause intended to relieve one party from potential tort liability

In which case is a court most likely to enforce an exculpatory clause? (a) Dentistry (b) Hang gliding (c) Parking lot (d) Public transportation (e) Accounting

B

Mistake of Value

Here is one case in which it pays to know less. Suppose that Fiona the flea market vendor sold the nineteenth century masterpiece for $100 to Marguerite, a financial analyst with no inkling of its real worth. Both Fiona and Marguerite shared the same mistake in their estimate of the painting's market value. Sadly for Fiona, Marguerite will reap the benefit of her bargain, because a mistaken value alone is not enough to take back a deal.

Plaintiff's Remedies for Fraud

In the case of fraud, the injured party generally has a choice of rescinding the contract or suing for damages or, in some cases, doing both. The contract is voidable, which meant that the injured party is not forced to rescind the deal but may if he wants. Fraud permits the injured party to cancel. Alternatively, the injured party can sue for damages—the difference between what the contract promised and what it delivered.

capacity

Minors, mentally impaired persons, and intoxicated persons generally may disaffirm contracts.

Conscious Uncertainty

No rescission is permitted when one of the parties knows he is taking on a risk, that is, he realizes there is uncertainty about the quality of the thing being exchanged.

Exchange

The two parties must have bargained for whatever was exchanged and struck a deal: "If you do this, I'll do that."

Promise made in consideration of marriage

This is not the stuff of fairy tales: Barney is a multimillionaire with the integrity of a gangster and the charm of a tax collector. He proposes to Li-Tsing, who promptly rejects him. Barney then pleads that if Li-Tsing will be his bride, he will give her an island he owns off the coast of California. Li-Tsing begins to see his good qualities and accepts. After they are married, Barney refuses to deliver the deed. Li-Tsing will get nothing from a court either, because a promise made in consideration of marriage must be in writing to be enforceable.

The Writing Requirement and Electronic Signatures

Today, an "electronic signature" could mean a name typed (or automatically included) at the bottom of an e-mail message, a retinal or vocal scan, or a name signed by electronic pen on a writing tablet, among others. E-signatures are valid in all 50 states. A federal statute, the Electronic Signatures in Global and National Commerce Act (E-SIGN) extends UETA's principles to interstate and foreign commerce

Non-Compete Agreements: Sale of Business

When a non-compete agreement is ancillary to the sale of a business, it is enforceable if reasonable in time, geographic area, and scope of activity. In other words, a court will not enforce a non-compete agreement that lasts an unreasonably long time, covers an unfairly large area, or prohibits the seller of the business from doing a type of work that she never had done before.

Intoxication

When one party is so intoxicated that he cannot understand the nature and consequences of the transaction, the contract is voidable If you go out drinking and make a foolish agreement, you are probably stuck with it. Even if you are too drunk to drive, you are probably not nearly too drunk to make a contract.

Promise to pay the debt of another

When one person agrees to pay the debt of another as a favor to that debtor, it is called a collateral promise, and it must be in writing to be enforceable

Bargained for

When something is sought by the promisor and given by the promisee in exchange for their promises

Adjudicated insane

a judge has made a formal finding that a person is mentally incompetent and has assigned the person a guardian

Value can be ________,_________, or ___________.

an "act," a "forbearance," or a promise to do either of these.

Mutual Mistake

occurs when both parties negotiate based on the same fundamental factual error If the contract is based on a fundamental factual error by both parties, the contract is voidable by either one. The defense of mistake is not a cure-all for all bad deals. Courts will not rescind contracts on the basis of a prediction error, a mistaken value, or where the parties assume the risk of error.

Unilateral Mistake

occurs when only one party negotiates based on a factual error To rescind for unilateral mistake, the mistaken party must demonstrate that he entered the contract because of a basic factual error and that the no mistaken party knew or had reason to know of the error. In many contract negotiations, one party knows more, which helps him secure favorable deals. The law of unilateral mistake draws the line where one party takes unfair advantage of what he knows to be another's error. If the non-mistaken party knows or has reason to know of the other party's error, courts will not allow him to profit by snapping it up.

The Statute of Frauds

requires certain contracts to be in writing It is important to remember, as we examine the rules and exceptions, that Parliament and the state legislatures all had a commendable, straightforward purpose in passing their respective statutes of fraud: to provide a court with the best possible evidence of whether the parties intended to make a contract.

restitution

restoring the other to its original position

prediction error

the difference between the expected and actual outcomes The error must be factual

Consideration

the inducement, price, or promise that causes a person to enter into a contract and forms the basis for the parties' exchange The idea that contracts must be a two-way street

Element One of Fraud: Intentional or Reckless Misrepresentation of Fact

the injured party must show a false statement of fact. Notice that this does not mean the statement was necessarily a "lie." If a homeowner says that the famous architect Stanford White designed her house, but Bozo Loco actually did the work, it is a false statement. Opinions and "puffery" do not amount to fraud. An opinion is not a statement of fact. A seller says," I think land values around here will be going up 20 or 30 percent for the foreseeable future." That statement is pretty enticing to a buyer, but it is not a false statement of fact. The maker is clearly stating her own opinion, and the buyer who relies on it does so at his peril. A close relative of opinion is something called "puffery."

Ancillary

the non-competition agreement must be part of a larger agreement. Free trade is the basis of the American economy, and any bargain that restricts it is suspect. To be valid, an agreement not to compete must be ancillary to a legitimate bargain.

Disaffirmance

to give notice of refusal to be bound by an agreement. A minor who wishes to escape from a contract generally may disaffirm.

Restitution

to restore the other party to its original position. A minor who disaffirms a contract must return the consideration he has received, to the extent he is able.

Contracts must be a _________________

two-way street

Unenforceable

when two parties make an agreement covered by any one of these six topics, it must be in writing to be enforceable 1. For any interest in land; 2. That cannot be performed within one year; 3. To pay the debt of another; 4. Made by an executor of an estate; 5. Made in consideration of marriage; 6. and For the sale of goods of $500 or more.

Three Rules of Consideration

1. Both parties must get something of measurable value from the contract 2. A promise to give something of value counts as consideration 3. The two parties must have bargained for whatever was exchanged and struck a deal: "If you do this, I'll do that"

Five "Deal Breakers" of a contract

1. Consideration—Each party must gain some value from a contract 2. Legality— illegal bargains are not enforceable 3. Capacity— both parties must have the legal ability to form a contract 4. Fraud and certain types of mistake make a contract enforceable 5. Writing is required for some contracts

Contracts that must be in writing

1. For any interest in land; 2. That cannot be performed within one year; 3. To pay the debt of another; 4. Made by an executor of an estate; 5. Made in consideration of marriage; 6. and For the sale of goods of $500 or more.

Two basic elements of Consideration:

1. Value 2. Exchange

In February, Chuck orally agrees to sell his hunting cabin, with 15 acres, to Kyle for $35,000, with the deal to be completed in July, when Kyle will have the money. In March, while Chuck is vacationing on his land, he permits Kyle to enter the land and dig the foundation for a new cottage. In July, Kyle arrives with the money, but Chuck refuses to sell. Kyle sues. (a) Chuck wins because the contract was never put in writing. (b) Chuck wins because the contract terms were unclear. (c) Kyle wins because a contract for vacation property does not need to be written. (d) Kyle wins because Chuck allowed him to dig the foundation. (e) Kyle wins because Chuck has committed fraud.

A

Louise emails Sonya,"I will sell you my house at 129 Brittle Blvd. for $88,000, payable in one month. Best, Louise."Sonya emails back,"Louise, I accept the offer to buy your house at that price. Sonya."Neither party prints a copy of the two emails. (a) The parties have a binding contract for the sale of Louise's house. (b) Louise is bound by the agreement, but Sonya is not. (c) Sonya is bound by the agreement, but Louise is not. (d) Neither party is bound because the agreement was never put in writing. (e) Neither party is bound because the agreement was never signed.

A

Sarah, age 17, uses $850 of her hard-earned, summer-job money to pay cash for a diamond pendant for the senior prom. She has a wonderful time at the dance, but decides the pendant was an extravagance, returns it, and demands a refund. The store has a"no refund"policy that is clearly stated on a sign on the wall. There was no defect in the pendant. The store refuses the refund. When Sarah sues, she will: (a) win $850. (b) win $425. (c) win, but only if she did not notice the"no refund"policy. (d) win, but only if she did not think the"no refund"policy applied to her. (e) lose.

A

Signature

A Statute of Frauds typically states that the writing must be "signed by the party to be charged therewith," in other words, the defendant. Judges define "signature" very broadly. Using a pen to write one's name, though sufficient, is not required. A secretary who stamps an executive's signature on a letter fulfills this requirement. Any other mark or logo placed on a document to indicate acceptance, even an "X," will likely satisfy the Statute of Frauds. Electronic commerce creates new methods of signing—and new controversies

Agreements for an interest in Land

A contract for the sale of any interest in land must be in writing to be enforceable. Exception: Full Performance by the Seller If the seller completely performs her side of a contract for an interest in land, a court is likely to enforce the agreement even if it was oral. Exception: Part Performance by the Buyer The buyer of land may be able to enforce an oral contract if she paid part of the purchase price and either entered upon the land or made improvements to it.

non-compete agreement

A contract in which one party agrees not to compete with another in a stated type of business. Example: an anchorwoman for an NBC news affiliate in Miami might agree that she will not anchor any other Miami station's news for one year after she leaves her present employer.

Act

A party commits an act when she does something she was not legally required to do in the first place. She might do a job, deliver an item, or pay money, for example. An act does not count if the party was simply complying with the law or fulfilling her obligations under an existing contract.

Mentally impaired persons

A person suffers from a mental impairment if, by reason of mental illness or defect, he is unable to understand the nature and consequences of the transaction. The mental impairment can be insanity that has been formally declared by a court, or mental illness that has never been ruled on but is now evident. A party suffering a mental impairment generally creates only a voidable contract. The impaired person has the right to disaffirm the contract, just as a minor does. But again, the contract is voidable, not void. The mentally impaired party generally has the right to full performance if she wishes.

A promise to ACT or FORBEAR

A promise to do (or not do) something in the future counts as consideration. When evaluating whether consideration exists, the promise to mow someone's lawn next week is the equivalent of actually doing the yardwork.

Promise Made by an Executor of an Estate

An executor is the person who is in charge of an estate after someone dies. The executor's job is to pay debts of the deceased, obtain money owed to him, and disburse the assets according to the will. In most cases, the executor will use only the estate's assets to pay those debts, but occasionally she might offer her own money. An executor's promise to use her own funds to pay a debt of the deceased must be in writing to be enforceable.

Minors

Because a minor lacks legal capacity, she normally can create only a voidable contract. A voidable contract may be cancelled by the party who lacks capacity. Notice that only the party lacking capacity may cancel the agreement. So a minor who enters into a contract generally may choose between enforcing the agreement or negating it. The other party, however, has no such right.

Value

Both parties must get something of measurable value from the contract. Examples include money, groceries, agreement promise not to sue, or anything else that has real value.

Ted's wallet is as empty as his bank account, and he needs $3,500 immediately. Fortunately, he has three gold coins that he inherited from his grandfather. Each is worth $2,500, but it is Sunday, and the local rare-coin store is closed. When approached, Ted's neighbor Andrea agrees to buy the first coin for $2,300. Another neighbor, Cami, agrees to buy the second for $1,100. A final neighbor, Lorne, offers"all the money I have on me"—$100—for the last coin. Desperate, Ted agrees to the proposal. Which of the deals is supported by consideration? (a) Ted's agreement with Andrea, only (b) Ted's agreements with Andrea and Cami, only (c) All three of the agreements (d) None of the agreements

C

Tobias is selling a surrealist painting. He tells Maud that the picture is by the famous French artist Magritte, although in fact Tobias has no idea whether that is true or not. Tobias's statement is: (a) bilateral mistake. (b) unilateral mistake. (c) fraud. (d) innocent misrepresentation. (e) legal, so long as he acted in good faith.

C

Agreements that Cannot Be Performed within One Year

Contracts that cannot be performed within one year are unenforceable unless they are in writing. This one-year period begins on the date the parties make the agreement. The critical phrase here is "cannot be performed within one year." If a contract could be completed within one year, it need not be in writing.

Part Performance

Entry onto land, or improvements made to it, by a buyer who has no written contract

An agreement for the sale of 600 plastic cups, worth $0.50 each, must be in writing to be enforceable.

F

An agreement for the sale of a house does not need to be in writing if the deal will be completed within one year.

F

Exception for mentally impaired persons

If a person has been adjudicated insane, then all of his future agreements are void.

innocent misrepresentation

If all elements of fraud are present except the misrepresentation of fact was not made intentionally or recklessly, then innocent misrepresentation has occurred. Misrepresentation= A statement that is factually wrong

Reasonable Certainty

Suppose Garfield and Hayes are having lunch, discussing the sale of Garfield's vacation condominium. They agree on a price and want to make some notation of the agreement even before their lawyers work out a detailed purchase and sales agreement. A perfectly adequate memorandum might say,"Garfield agrees to sell Hayes his condominium at 234 Baron Boulevard, apartment 18, for $350,000 cash, payable on June 18, 2004, and Hayes promises to pay the sum on that day."They should make two copies of their agreement and sign both.

A contract may not be rescinded based on puffery.

T

A court is unlikely to enforce an exculpatory clause included in a contract for surgery.

T

A seller of property must generally disclose latent defects that he knows about.

T

Non-compete clauses are suspect because they tend to restrain free trade

T

Sale of Goods

The UCC requires a writing for the sale of goods priced at $500 or more. This is the sixth and final contract that must be written, although the Code's requirements are easier to meet than those of the common law.

What the writing must contain:

The contract or memorandum: - must be signed by the defendant, and It -must state with reasonable certainty: the name of each party, the subject matter of the agreement, and all of the essential terms and promises.

adequacy

The courts will seldom inquire into the adequacy of consideration. This is the "peppercorn" rule.

Element Three of Fraud: Justifiable Reliance

The injured party must also show that she actually did rely on the false statement and that her reliance was reasonable.

Element Two of Fraud: Materiality

The injured party must demonstrate that the statement was material, or important.

What constitutes exchange?

The parties must bargain for the consideration. Something is bargained for if it is sought by the promisor and given by the promisee in exchange for their respective promises.

Non-Compete Agreements: Employment Contracts

highly scrutinized for fairness. Generally, a non-compete clause in an employment contract is enforceable only to the extent necessary to protect (1) trade secrets, (2) confidential information, or (3) customer lists developed over an extended period. In general, other restrictions on future employment are unenforceable.

Fraud

intending to induce the other party to contract, knowing the words are false or uncertain that they are true. An injured person must show the following: 1. The defendant knew that his statement was false or he made the statement recklessly and without knowledge of whether it was false; 2. The false statement was material; and 3. The injured party justifiably relied on the statement.

Forbearance

is the opposite of an act. A plaintiff forbears if he agrees not to do something he had a legal right to do. An entrepreneur might promise a competitor not to open a competing business, or an elderly driver (with a valid driver's license) might promise concerned family members that he will not drive at night.

Capacity

legal ability to enter into a contract