Chapter 8 Contract Law

T/F: Past consideration will not support a contract

True

T/F: The UCC is not a federal law.

True

T/F: Generally, the court will not look into the adequacy of the consideration. The court does not care if you made a poor bargain.

True, because you are free to make any bargain you like even a bad one.

T/F: Contracts entered in by incompetent persons are voidable.

True, but one exception exists if the person has been appointed a guardian to handle their affairs.

T/F: Contract law areas outside of business dealings are heavily rooted in common law.

True. Contract negotiations in business dealings rather rely on more statutory provisions given by the Uniform Commercial Code (UCC).

T/F: Minors are liable for necessaries, such as housing, food, and clothing.

True; this is the only exception to all contracts being voidable by minors. Also minors can disaffirm the contract for necessaries, but they must pay the reasonable value of the goods or services they received.

Contract

- A legally enforceable agreement (either oral or written) supported by consideration. - A promise or set of promises that obliges each party to do (or not to do) a certain thing. - When breached, there are legal remedies to enforce the terms when there is a duty to perform.

Uniform Commercial Code (UCC)

- A series of model statutory provisions drafted by legal scholars. - It governs commercial transactions, and has been adopted by all states, in whole or in part. - Has special rules that apply to merchants/businesses. - Consists of 10 total articles, 4 of which deal with contracts.

UCC Article II (2)

- Applies only to the sale of goods over $500. - Does not apply to contracts for services (i.e. insurance, loans, or real estate, or employment contracts)

What are the three elements of a valid contract

1. Offer 2. Acceptance 3. Consideration

3 Circumstances for third-party rights

1. Assignment 2. Delegation 3. Third-party beneficiary

Remedies for Breach of Contract (Outline)

1. Damages a) Compensatory b) Restitution c) Consequential d) Nominal 2. Equitable Remedies a) Specific performance b) Reformation

Defenses in Contract Cases (Outline)

1. Lack of contractual capacity 2. Lack of genuineness of assent a) Fraud b) Mistake c) Undue influence d) Duress 3. Contracts that violate public policy a) Covenants not to compete b) Adhesion contracts 4. Warranties 5. Lack of proper format

The 5 Major Defenses in Contract Cases

1. Lack of contractual capacity 2. Lack of genuineness of assent 3. Contracts that violate public policy 4. Warranties 5. Lack of proper format

What are the four items that an offer must reference in order to be considered valid?

1. Parties to the contract, 2. Subject matter of the contract, 3. The nature of the consideration, 4. The time for performance. (When the time for performance is very important to the parties, as in the case of the sale of perishable fruit, then the time for performance may be stated along with the phrase "time is of the essence.")

What do courts do when asked to interpret ambiguous language?

1. Plain & Common Sense Meaning: They try to give words their plain or common sense meaning. 2. Parties' Intent: If that is not possible then they will try and see if the meaning of the words can be deciphered from the parties' intent as expressed by the contract. 3. Commonly Accepted Definitions: The court may also apply commonly accepted definitions from the relevant business or history. 4. Interpret Against the Drafter: The court may interpret the language so as to favor the party who did not draft the document.

Contract alternatives

1. Quasi-contract 2. Promissory estoppel

What are the two equitable remedies used in contract litigation?

1. Specific performance 2. Reformation

Adhesion contracts

A contract formed where the weaker party has no realistic bargaining power. Typically a form of contract is offered in a "take it or leave it" basis. These situations often turn into cases of undue influence. Example: Eminent domain; 80 year old resident was offered an amount to purchase her house so that the government could build a street. But if she does not accept she is paid far less and basically forced out into the street.

Void contract

A contract that can not be enforced at all.

Unconscionable contract

A contract that is so grossly unfair that the courts will refuse to enforce it, due to the fact that the parties are of very unequal bargaining power. And where the terms are so unfair as to "shock the conscience."

lack of genuineness of assent

A defense for challenging a contract in which a person asserts that the parties never reached an agreement as to the terms of the contract, i.e. there was never "a meeting of the minds." There are 4 ways in which this may have occurred: 1. Fraud 2. Mistake 3. Undue influence 4. Duress

Undue influence (lack of genuineness of assent)

A defense for challenging a contract in which one party is in a position of trust and abuses that power. I.e. one party was forced into it, or had more knowledge, or disadvantaged the other party due to their knowledge. This type of claim is generally limited to situations in which there is a special fiduciary relationship between the parties; such as, the relationship between a caregiver and their client.

Duress (lack of genuineness of assent)

A defense raised when a person was forced/threatened into a contract or position.

Illegal contracts

A defense used in which a contract involves illegality and is therefore unenforceable and void. A contract involves illegality if it calls for behavior that violates the criminal law, such as robbery, gambling, or prostitution.

Contracts that violate public policy

A defense used in which a contract violates public policy and is therefore unenforceable and void. Examples include: covenants not to compete or adhesion contracts.

Promissory estoppel

A doctrine that applies when a promisor makes a clear and definite promise, but were not definite enough to amount to consideration, on which the promisee justifiably relies. Occurs when the courts allow detrimental reliance to substitute for consideration.

Contract vs. Gift

A gift is one sided, only one person gives something of value with no expectation of receiving anything in return. A contract is two sided, it is an exchange, both people give up something of value in exchange for something of value.

Compensatory damages a.k.a. expectation damages

A monetary award equivalent to the actual value of injuries or damage sustained by the aggrieved party. The purpose is to place the injured party in the same position that party would have been in had the contract been performed.

Merchant

A person who routinely deals in the goods that are the subject of a contract.

Covenant not to compete

A promise not to compete within a given geographic area for a specific time period. These violate public policy in that they restrict the right of the individual to earn a living or they tend to decrease competition. However, they can also be a form of necessary business protection. Ex: Fired pizza worker signed a covenant not to compete before being fired, and now he can not work in any food preparing service in his state for 2 years.

Offer

A promise to do something (ex: to sell a product or provide a service) that is conditioned on the other party's promising to do something in return (ex: pay money or provide some other type of goods or services). - It is an indication of a firm desire to enter into an agreement. - Sets parameters of agreement, and gives the other party the power to bind them to a contract. (Ex: Sara tells Wanda that she will sell her old stereo system for $200.)

Quasi-contract

A situation where a real contract does not exist but is treated as if there was one (Quasi means "as if"). Usually this type situation arises when there is no agreement, but in order to avoid unjust enrichment, the court orders the party that benefited to pay. ex: guy who accepted his lawn being mowed even though he was not the one who agreed to services.

Statute of Frauds

A statutory requirement that certain types of contracts be in writing to be enforceable.

Voidable contract

A valid contract that can be set aside at the option of one of the parties.

When can a defendant raise defenses in a contractual suit?

After the plaintiff has proven the existence of an offer, acceptance, and consideration.

Restitution damages

Compensates non-breaching party for what they gave as consideration.

T/F: Punitive damages are allowed in contract negotiation

False, they are NOT allowed

Third-party beneficiary

Although not a party to the contract, someone the contracting parties intended to benefit. Ex: trust fund babies

Implied warranty of fitness (UCC Section 2-315)

An implied promise that the goods being sold will satisfy a special purpose. (Ex: If you go to the hardware store and ask the clerk for electrical wiring and say nothing more, the wire will be warranted for its usual purpose of carrying household current. If instead you want the wire for outside use, you tell the clerk your special purpose, and you rely on the clerk's expertise in picking out the wire, then there will be an implied warranty of fitness for that particular purpose.)

What happens if someone enters into a contract if they have been adjudged mentally incompetent and the court has assigned a guardian to handle the incompetent's affairs?

Any contract that the incompetent tries to enter is void. Only the guardian can enter into valid contracts.

Assignment terms

Assignor: person who assigns their rights to an assignee Assignee: person who now shares rights with obligor Obligor: person under a contractual obligation

Why are duress defenses so difficult to prove?

Because the defendant must show that the pressure exerted was so great as to overwhelm his or her ability to make a free choice.

Warranties

Can be used as a defense in contract cases. A guarantee made by the seller or implied by law regarding the character, quality, or title of the goods being sold. For example a buyer can refuse to pay if the seller's guarantee fails, and the product does not work as they claimed. The buyer would be relieved of his or her obligations under contract and the seller must compensate the buyer for any losses incurred as a result of misrepresentation.

Specific performance

Court order requires party to perform their obligations as agreed in the contract (often last resort in court).

Liquidated damages

Damages agreed to in advance of breach, in the contract itself. Used in order to avoid having to litigate damage issues.

Cover

Finding substitute goods

Elements of a Valid Contract (Outline)

I.) Offer 1) Parties 2) Subject matter 3) Nature of consideration 4) Time for performance II.) Acceptance 1) Mirror image rule III.) Consideration

UCC Section 2-314

If a merchant is the seller, any contract of sale automatically includes an implied warranty of merchantability, an implied promise that the goods being sold will be usable for the ordinary purpose for which they are sold.

Mistake (lack of genuineness of assent)

In order for a court to consider that a true mistake was made upon entering into a contract, both parties need to have made a mistake. If the mistake is unilateral and only one party is mistaken, both parties are bound. The only exception to this is if the party knew or should have known of the mistake and if the mistake was the result of a mathematical error.

Goods

Items purchased to satisfy needs and wants (ex: car, furniture)

UCC Article III (3)

Negotiable instruments (ex: checks): - Deals with contracts that are transferrable. - Promise or oder to pay (i.e., check) that can be passed along like cash.

Statute of Frauds (lack of proper writing)

MY LEGS M: Marriage contracts Y: Year; contracts that cannot be performed on one year. L: Land; contracts in which land is an investment E: Executor; contracts by the executor of a will to pay debts of an estate. G: Goods; contracts for the sale of goods with a purchase price of $500 or more. S: Surety; contracts where one party becomes a surety (guarantor) for another party's debt or obligation (e.g, insurance)

Merchant's obligation of good faith

Merchants are expected not only to deal honestly but also be aware of the normal business practices for their trade.

Is the following scenario considered a valid offer? Sam says, "I am thinking of selling my car. What would you give me for it?" John replies, "I will give you $750 for it."

No, Sam's comment is just a statement of intent to begin negotiations and is not binding.

When determining whether a contract was entered into by fraud can the misrepresentations be based on opinion or sales puffery?

No, the misrepresentations must be material and must be made regarding a factual statement.

Fraud (lack of genuineness of assent)

One of the members had no intention to either deliver an offer or to accept it. In order for the concept to be proved, it must be demonstrated that the other party made intentional misrepresentations or intentional nondisclosures of material facts, during the course of the negotiations. Furthermore, it must be shown that the defendant did not know about the fraud and had no way to find out.

Reformation (blue penciling)

When a court rewrites what was said because it was not actually reflecting on what was agreed and revisions need to be made.

Delegation terms

Obligee: person owed a contractual benefit Delegator: Person who delegates their duty to a delegatee. Delegatee: Person who now owes obligation to the obligee

Assignment

Occurs when one of the original parties to a contract transfers part or all contractural rights to a third party. (Can not assign services)

Delegation

Occurs when one of the original parties to a contract transfers part or all of their DUTIES (obligations) to a third party. Ex: Delegating your boyfriend to pay the rent. (However if boyfriend does not pay you are still required to pay)

Counteroffer

Offeree's response to an offer which modifies it. It takes away the power of the offeree to accept the original offer.

When is a contract binding?

Once both parties have reached their agreement.

Calculating compensatory damages

Promised performance - Actual performance - Mitigation + Expenses (incidental damages)

UCC Article IX (9)

Secured transactions: - Where interest in personal property is taken to secure performance of an obligation or debt (ex: car loan, if you forget to pay they take the loan back). - Does NOT regulate security interests in real property (mortgages) unless it's a promissory note secured by a deed of trust on real property.

Contract law

Sets out the basic elements that must be present for an agreement to be considered legally enforceable. It also spells out when the court will excuse one of the parties for not living up to that side of the agreement.

UCC Article I (1)

Sets the general language and provisions common in all contracts within the UCC: - Expectation of Good faith. - Performance expected within reasonable time based on the nature, purpose, and circumstances. - Course of dealing: past business practices between parties establish the basis for interpreting their current terms and conduct (similar to stare decisis in common law)

Nominal damages

Sometimes, awarded where there has been a breach but no provable damages.

Consequential damages

Special circumstances foreseeable to other party. Typically this is handled by notifying the other party.

Lack of contractual capacity

The defense used in which an individual is considered incapable of contracting if that person is a child, mentally retarded, or under the influence of drugs or alcohol. Because these individuals lack the contractual capacity to enter into a contract, these contracts are deemed voidable.

Consideration

The exchange of something of value; it is the thing of value that both sides are giving up. It can be money, services, goods, or anything else that is a benefit to one party or a detriment to the other. It cannot be illusory, for example, someone saying that they will pay you "what you're worth."

What happens when the offeree decides to accept the offer?

The mirror image rule requires that the acceptance exactly mirror the offer.

What happens when there is an offer, acceptance, and consideration, but the parties disagree about the legal effect of the contract's terms (i.e. they cannot determine the language)

The parties may turn to the courts for assistance.

Mirror image rule

The requirement that the acceptance exactly mirror the offer. The offeree cannot add new terms or vary the original terms otherwise the acceptance becomes a counteroffer.

Acceptance

The second element of a contract. An offer can be accepted either by sending notification of such acceptance or by performing the act requested.

What is the difference between these two acceptances? 1. "I accept; please send a written contract" 2. "I accept if you send a written contract"

The second phrase is a counteroffer, it changes the conditions/terms of the original contract. (If..then statements are conditional statements)

T/F: If Alice offers to pay Bruce $10 for Bruce's bicycle, Bruce's acceptance can take the form of making a telephone call stating that he will sell her the bike or by delivering the bike to her.

True

Lack of proper format

When contracts are unenforceable because of writing/wording issues.

Mitigation of damages

the requirement that the non-breaching party take reasonable steps to limit his or her damages.