Meiners 10e ppt Ch. 10 - CONTRACTS CONTRACTS Chapter 10 The...

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Unformatted text preview: CONTRACTS CONTRACTS Chapter 10 The Role of Contract Law The • Provides a mechanism to deal with others • Law of contracts has evolved in commerce Law over the centuries over • The concept of freedom of contract means The freedom there are responsibilities to those who create binding relationships binding – Only laws limit the choices parties may Only make make Definition of a Contract Definition s Sir Wm. Blackstone: “An agreement, upon sufficient Sir consideration, to do or not to do a particular thing” consideration, s Modern definition--centers on a promise: “A promise Modern promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” in s The promise itself creates a manifestation of intent The intent s Contracts form legal relationships and duties Contracts between parties between s Not all promises are enforceable contracts--must Not meet the requirements of a contract to create an enforceable promise enforceable Concepts of Contract Law Law • Common Law – Judge-made law – Each state differs – There is uniformity There about general contract principles that run throughout most states’ laws most • Years ago, English Years courts began to use lex mercatoria (“the lex law merchant”) law • UCC – Uniform Commercial Uniform Code Code – All States have All adopted except Louisiana Louisiana – Covers contracts for Covers sale of goods sale • Many countries rely on Many Code Law only for their Code basic legal framework basic Express and Implied Contracts Contracts • Express Contracts – Direct statement by Direct the parties of the promises made promises – May be oral or May written written – All important terms All are expressly stated between the parties between • Implied Contract – Actions and Actions circumstances infer and define the terms of the contract the – May be words, May conduct, gestures conduct, – These contracts are These implied at law implied – Ex: At a check out counter Ex: at a grocery story, actions of the parties create offers/acceptances offers/acceptances Elements of a Contract Elements • 1. An Agreement, through -– Offer – Acceptance • 2. Consideration • 3. Contractual Capacity • 4. Legality • 5. Genuine Consent • 6. Writing (if necessary under the Statute of Frauds) • If all elements are present, the contract is generally If termed valid valid Element #1: The Agreement Element The The Offer (Mutual Understanding Between Parties) (Mutual (Made of Offer and Acceptance) Offer Acceptance) • The Offer – Creates the Offeror and Offeree Creates Offeror Offeree – 1. Manifestation of Intent • Preliminary Negotiations vs. Intent to Offer – 2. Definite – 3. Communication Terminating an Offer Terminating • Revocation – Withdrawing of offer by the Offeror • Rejection – By Offeree – Through lapse of time (Option Contracts are different) different) – Counteroffers are created by rejecting the original offer but keeping negotiations open by presenting new conditions--result is a counteroffer counteroffer • Operation of Law – Intervening Illegality – Destruction of subject matter – Death or insanity of offeror or offeree Element #1: THE AGREEMENT Element The Acceptance • The Acceptance – Expression of assent – 1. Unconditional • Must be a mirror image of the offer • If conditions are added, they create a counteroffer – 2. Unequivocal – 3. Legally 3. Communicated Communicated – See Parker v. Glosson See Parker Parker v. Glosson • Douglas and Sandy Glosson offered to sell 36 acres, including truck shop, warehouse and office. • Douglas Glosson and Parker agreed on the terms. • Two men signed the agreement. • Sandy Glosson didn’t sign; deal fell through. • Parker sued for breach of contract, requesting specific performance or damages. • Trial court dismissed suit. Parker appealed. Parker v. Glosson • HELD: Affirmed. • Contract must have mutual assent and meeting of the minds to be enforceable. • Clause 13 of Agreement provided “this agreement shall become an enforceable contract when a fully executed copy has been communicated to both parties.” (Buyer and Sellers) (Emphasis added) • This language indicates sellers did not intend to sell (nor a buyer to buy) until ALL parties signed the agreement. • At the top of the page, “Sellers” were both Douglas Glosson and Sandy Glosson. • Sandy didn’t sign; agreement was not fully executed. • No contract. Bilateral & Unilateral Contracts Bilateral (As With Other Types, Create the Offeror & (As Offeror the Offeree) Offeree • • • Bilateral Contracts 2 promises A promise in exchange promise for a promise promise • Ex: I promise to pay Ex: you $25 to mow my lawn; you promise to mow my lawn. mow • If promises are broken, If there may be responsibility if losses if are incurred. are • • • Unilateral Contract Only 1 promise A promise in exchange promise for a performance performance • Ex: I promise to pay Ex: you $25 to mow my lawn; you go out and mow it. mow • Once performance has Once been made, the other party’s duty arises to fulfill his/her promise. fulfill Element #2: Consideration Element (If consideration is absent, neither party (If may enforce the promise or agreement) may • Definition: Something of value or something bargained for in exchange for a promise • This element keeps contract from being a gift • Traditional Rule: Must create-– Legal detriment to the promisee OR – Legal benefit to the promisor – Actually the legal detriment and benefit usually occur at the same time • See Caley v. Gulfstream Aerospace Corp. Adequacy of Consideration Adequacy • Adequacy of Consideration – Courts generally don’t care! – If a party bargains poorly, If courts usually won’t interfere. interfere. – Those who bargain take on Those the risk of their own errors. the – There are exceptions such There as fraud, duress, etc. as – The main concern is an The exchange of mutual promises and obligations by the parties. the – See Caley v. Gulfstream See Aerospace Corp. Caley v. Gulfstream Aerospace Corp. • Gulfstream adopted a dispute resolution policy (DRP); policy is only procedure to resolve disputes between Gulfstream and the employees. • Mailed policy to employees. • Policy said that DRP would begin in 2 weeks and would be “a condition of continued employment.” • If an employee continued work, then she accepted the DRP. • Group of employees sued, saying there was no contract and DRP could not be enforced. • District Court held for Gulfstream. Employees appealed. Caley v. Gulfstream Aerospace Corp. • HELD: Affirmed. • DRP is an offer and states it is a contract. • Terms of acceptance are continued employment by employees. • Acceptance can be through a promise or an act. • Here the action of continuing employment = acceptance of the offer and a contract. • Employees had a choice to 1) continue employment, accepting DRP or 2) terminating employment. • There is “bargained for consideration” by mutual promises and obligations. Enforceable Promises Without Consideration Without • Promissory Estoppel or Detrimental Reliance Detrimental – Use of this doctrine avoids injustice due to the promisee's Use reasonable reliance on the promisor’s promise. reasonable – Promisor is estopped (prevented) from denying a promise. Promisor estopped – Equitable doctrine. – “A promise which the promisor should reasonably expect to promise induce action or forbearance on the part of the promissee . . . and which does induce such action or forbearance is binding ifromise.” Restatement (2 onlyContracts can be avoided ) of by enforcement of the p injustice Restatement Hinson v. N&W Construction Company • N&W Construction prepared bid to submit to Mississippi Job Corps Center (MJCC) to build facility at training center. N&W received bids from plumbing subcontractors in preparing its bid to MJCC. • Hinson quoted $92,000 as bid as plumbing sub; next lowest bid was $139,000. N&W used Hinson’s bid to prepare its bid to MJCC. • N&W was low bidder and awarded contract by MJCC. Then contacted Hinson that it needed plumbing work to begin. Hinson failed to sign and return plumbing subcontract and refused to due the job. • N&W then hired next lowest bidder; paid added $47,000 to get work done. N&W sued Hinson based on promissory estoppel. • Trial court granted summary judgment to N&W, awarding $47,000. Hinson appealed. Hinson v. N&W Construction Company • Ct. of Appeals held: Affirmed. • Hinson admits he provided a verbal quote. Also testified that he reviewed plans & specs for the building, & was satisfied with his quote of $92,000. • Hinson refused to do the plumbing because, “I just had a lot of other jobs going.” • Promissory estoppel arises when “making of a promise, even though without consideration . . . “ that plaintiff (here N&W) relied. upon. • “Refusal to enforce it would be virtually to sanction the perpetuation of fraud or would result in other injustice.” Element #3 Element Capacity • Refers to the legal ability Refers to create a contract to • Some have limited Some capacity to contract capacity – – – Minors Intoxicated persons Insane persons • If there is no capacity, the If contract is void contract • If there is partial capacity, If the contract is voidable-the may disaffirm Void and Voidable Contracts • Void: Contract does not exist at law Contract – One of elements is missing--lacks a requirement of One a contract contract – i.e. contract with a legally insane person – i.e. contract for an illegal subject matter – Courts won’t accept disputes • Voidable: One party to the contract has right to avoid legal obligation legal • Is valid but capable of being voided by a Is circumstance circumstance – i.e. minors contracts – i.e. contracts with person under influence of drugs i.e. or alcohol or – i.e. fraud by one of the parties Minors • General Rules • • • • • • Defined as a person under Defined the legal age of majority the Traditionally, the age of Traditionally, majority was 21 Now it is 18 years old in Now all states for most contracts contracts Minors have partial Minors capacity capacity Contract is voidable Contract voidable Legal policy to protect the Legal young from the “results of their own folly” their – #1: Minors may disaffirm Minors contracts at their option option – #2: If a minor disaffirms a If contract after receiving benefits, restitution must be paid for the benefit paid – Some contracts may not be Some disaffirmed, i.e • Enlistment contracts • Marriage contracts Marriage • Educational loans • Insurance loans • Medical care After reaching majority, the After minor may ratify the contract ratify • International Perspective: “Problems Enforcing Contracts” • Study by World Bank looked at problem of enforcing a contract in countries around the world • Problem: Lack of effective contract law • Problem: Lack of honest and efficient judicial enforcement • Effect: discouragement of foreign firms from investing in poor countries • Effect: discouragement of foreign firms even to do business in poor countries • See examples of comparisons of number of legal procedures, duration and costs in China, India, Mexico, Germany, Canada, U.K. and U.S. Element # 4: Legality Legality • If a contract is lacking legality, courts will not If legality, enforce it enforce • Subject Matter Must Be Lawful Subject – Criminal activities; sale of prohibited drugs; Criminal gambling activities in some states gambling • Interest rates on loans that violate usury usury laws laws – Court may strike entire bargain as unenforceable Court or only a part that concerns illegal subject matter Unenforceable Contracts • Contract is actually valid Contract when made, but courts won’t enforce it won’t – i.e. unconscionable i.e. contracts contracts – i.e. exculpatory i.e. agreements agreements – Ex: Company agrees to Ex: ship wheat to Iran. After shipment is at sea, U.S. government declares no U.S. firms may trade with Iran. – Result: unenforceable Result: under U.S. law even if seen as legal in Iran seen Legality & Contracts Contrary to Public Policy (Unenforceable) (Unenforceable) • Exculpatory Agreements (contracts written to escape liability) liability) • Unconscionable Agreements (unequal bargaining power) – Outcome is grossly unfair to an innocent party. • Contracts in Restraint of Trade – That restrain trade or unreasonably restrict competition – Covenant not to compete may be restraint of trade unless • Limited by time, territory and ancillary to the contract • Different states differ significantly on this subject – Covenants not to compete often used in sale of business or employment contracts DCS Sanitation Management v. Castillo v. • DCS is DE company w/ main office in Ohio -- operates in 13 DCS states. Cleans food processing plants, including Tyson Foods in Dakota City, Nebraska. Dakota Castillo and other employees signed noncompete agreements Castillo with DCS for “one year following the date of termination of employment for any reason, I will not directly or indirectly engage in, or in any manner be concerned with or employed by any person, firm or corporation in competition with [DCS] or engage in providing contract cleaning services within a radius of 100 miles of any customer of [DCS]. . . .” miles DCS lost contract with Tyson to a competitor. Competitor hired Castillo and other former DCS employees to Competitor work for it, doing about the same work as before. work DCS sued employees for breach of contract. District court held for Castillo. DSC appealed. • • • • • DCS Sanitation Management DCS v. Castillo • HELD: Affirmed. • The Nebraska court will not reform an agreement to The make it enforceable. make • Noncompete agreement is valid if 1) does not injure Noncompete public; 2) is not greater than reasonably necessary to protect the employer’s interests; and 3) “is not unduly harsh and oppressive to the employee.” harsh • These noncompete agreements were overbroad and These unenforceable. unenforceable. • Breadth of agreements effectively put former Breadth employees out of cleaning business within an extensive region. extensive Element #5 Element Reality of Consent/Genuine Reality Consent Consent • This deals with the choice of entering into agreements • If real consent is missing, there is no meeting of the If minds minds – If there is unilateral mistake over a simple error, then contract If unilateral usually can be avoided (i.e., typographical error - $20,000 instead of $200,000) instead • Without reality of consent, the contract is void or Without voidable (depending on the circumstances) voidable • Examples: Examples: – – – – Fraud Misrepresentation Duress Undue influence L&L Doc’s, L.L.C. v. Florida Division of Alcoholic Beverages and Tobacco • Leuders and Latte formed L&L and bought Doc’s Saloon from Carlbob for a promissory note for $125,000. • Doc’s had slot machines in it. Soon after, police arrested Latte for engaging in illegal gambling for having the slots. • L&L defaulted on paying the note, so Carlbob, owned by Dressel, sued. • L&L claimed Dressel engaged in fraud by representing slots were a good source of revenue, when they were actually illegal. • Further Dressel had cheated on liquor taxes by illegally refilling bottles to avoid liquor taxes. • Trial court gave summary judgment for Carlbob. L&L appealed. L&L Doc’s, L.L.C. v. Florida Division of Alcoholic Beverages and Tobacco • HELD: Affirmed. L&L lose. • The case does not look to the actual misrepresentation. In this case, even if there was fraud, L&L “knew or should have known” the gambling activities were illegal. • The fact that they are from another country, does not absolve them of the constructive notice given to them under Florida laws of the illegality of their activities. • Ignorance of the law is no excuse. • Buyers also have no action on the contract since the activity was illegal. Contracts in violation of public policy are void and unenforceable. Element #6 (Sometimes Needed) (Sometimes The Statute of Frauds (1677) The Statute • Contracts do not have to be in writing to be Contracts enforceable, HOWEVER enforceable, • Written contracts are always good as evidence of the Written agreement, MOREOVER agreement, • Some contracts require a writing – Sale of land or interests therein – Contracts that cannot be performed within 1 year Contracts cannot – Promise to pay the debt of another, including Promise debts of an estate debts – Promises made in consideration of marriage Sufficiency of the Writing Sufficiency and The Parole Evidence Rule The • Sufficiency of Writing – Writing must set out the material terms of contract – Names of parties – Consideration – Subject matter, etc. – Invoices, E-mails, sales orders, checks, confirmations may satisfy this requirement – See “Digital Signatures” See • Electronic Signatures in Electronic Global & National Commerce Act (E-Sign) 2000 federal law. • Technology & contracts Technology • Parole Evidence Rule – Restricts use of oral evidence when that evidence is contrary to terms of written contract. – Oral evidence cannot contradict, change or add terms to written contracts. – IF a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, THEN – Oral evidence may explain the problems. – See Issue Spotter: “Liars’ Contest?” “Contracting With The Contracting Japanese” Japanese” • U.S. contracts tend to try to cover everything. • Japanese view contracts as secondary to the Japanese ongoing relationships of the parties. ongoing • Contracts with the Japanese should be brief Contracts and flexible, not detailed. and • Detailed contracts may be seen with suspicion. • Strong statement (“That just won’t work”) Strong likely to be viewed as an insult. likely • The Japanese often want “good faith clauses” The in contracts with Westerners. in • Consensus among the negotiating teams is Consensus very important. very Performance • Substantial Performance (Usually in good faith) – Usual remedy is the contract price minus damages resulting from lack of complete performance • Material Breach – Performance substantially less than required – Damages now due to non-breaching party • Executed Contract • Executory Contract – Fully performed; nothing left undone – If you have fully performed, damages for the price of If performance may be sought as a remedy performance • – Not fully performed – If partial delivery of widgets, buyer need not pay total If contract price contract See Issue Spotter: “Do You Have to Eat the Loss?” Discharge of Contracts Discharge (Terminating Contractual Obligations) • Assignment (transfer of rights to another) and delegation delegation (transfer of duties to another) (transfer – Many contracts can be assigned or delegated; although exceptions occur in contracts for services. • Third-Party Beneficiary is party not part of original contract who acquires rights under the contract. – Usually occurs in credit contracts • Performance – Total performance = discharge and payment accordingly – Substantial performance: Usual remedy is the contract price minus damages resulting from lack of complete performance • Discharge by breach (non-breaching party is discharged) Discharge (non-breaching – Material breach: Performance is substantially less than the contract provides – Anticipatory breach or repudiation: A party indicates inability or lack of desire to perform • Discharge by Agreement of the Parties: recission, novation, accord & satisfaction Discharge by Impossibility Discharge by Impossibility – An unforeseeable, unanticipated event occurs that makes performance impossible • One party dies or is incapacitated • Law passed making performance illegal • Subject matter of contract is totally destroyed – The impossibility doctrine has been extended to commercial impracticability or frustration (unforeseen event creates an “extreme or unreasonable difficulty, expense, injury or loss”) • Wartime shortages • Crop failures • Loss of needed supplies due to sudden internat’l embargoes • VERY DIFFICULT to be enforced in courts – often courts generally expect at least part performance REMEDIES REMEDIES • Monetary Damages ($$) – Compensatory Compensatory Damages Damages – Actual Damages – Expectancy Damages – Liquidated Damages – Nominal Damages – Punitive Damages (iif f there is tort related to breach of contract) breach – Special Damages • Equitable Remedies – Specific Specific Performance Performance – Injunction – Restitution • Mitigation of Damages – Injured party is Injured required to make efforts to mitigate or mitigate lessen losses lessen • See Logan v. D.W. Sivers Co. Co. Economic Loss Rule • • In breach of contract case, if there is no tort involved, damages are only those related to economic losses suffered by the breach. Rule based on three policies – 1. maintain fundamental distinction between tort and contract law – 2. protect commercial parties’ freedom to allocate risks by contract – 3. encourage the party best situated to assess the risk of loss • • • Damages are only those related to lost profits and costs due to the breach. Accounting evidence and specific calculations are necessary evidence to be presented. No punitive damages or mental distress awards. (Parties often try to assert a tort along with breach of contract in order to get these damages.) Logan v. D.W. Sivers Co. Logan • • • • • • • • • In 2003, Logan sold a piece of property for $3.9 million. She could avoid paying taxes under Section 1031 of the tax code, if she bought another piece of property of equal or greater value. To get tax break, Logan had to ID another property within 45 days and purchase it with 180 days. If not, she would pay taxes of $919,652 on the gain. She found a piece of property owned by Sivers; worked out a deal. Before purchase was complete, Sivers sold property to another. It was too late for Logan to ID another property to buy and she had to pay the taxes. Logan sued Sivers for breach and monetary losses. Jury found for her and awarded consequential damages of $919,652. Judge overturned the jury verdict, holding Sivers was not responsible for the tax liability. Logan appealed. Logan v. D.W. Sivers Co. Logan • HELD: Reversed and remanded to reinstate the jury’s verdict in Logan’s favor. • Jury determined that plaintiff had been damaged by the breach. • Damages were foreseeable by Sivers. • Logan’s broker told the defendant’s president that Logan was a 1031 buyer and on a short timeline. (Evidence showed the president was familiar with the idea of a “1031” buyer.) • Reasonable people would know that if this contract failed, Logan could suffer damages. • Jury’s finding that Sivers could have foreseen the damages is upheld. Quasi Contract (Also called quantum meruit) • • • Quasi (means “almost”)--not a Quasi true contract—an equity holding true Legal concept used by courts to Legal prevent injustice prevent Courts apply this classification Courts in equity (out of a sense of fairness) to give relief to innocent parties Example: You watch as a crew Example: (in good faith) comes to your house and paves your driveway. Do you have to pay the bill when it is sent to you? Yes, under quasi contract. under quasi • ...
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This note was uploaded on 09/01/2010 for the course LAW 567 taught by Professor A.moorty during the Spring '10 term at Anna University Chennai - Regional Office, Coimbatore.

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