Ch12 Contracts and Commercial Transactions.docx

Chapter 12—Contracts and Commercial Transactions A. Chapter Introduction This chapter introduces students to the area of contract law. Contracts pervade our daily lives. Contracts are the primary means by which individuals and business transfer goods and services. Without a legal mechanism for enforceability of contracts, commerce would grind to a halt. Contracts are private agreements between parties and become the private law surrounding the relationship of the parties and the subject matter of the contract. As such, the courts are inclined to uphold the terms and conditions of the contract, provided that it is in fact a valid contract. Sometimes courts are called upon to assist the parties in interpreting the terms of the contract and the rights and obligations of the parties thereto. Attorneys are often called upon to prepare, review, analyze, and interpret contracts for their clients. Paralegals are frequently used to help attorneys in reviewing and drafting of contracts. As such, paralegals require a thorough knowledge of contract law. After examining this chapter, the student will be able to: Delineate and explain the elements of a valid contract. Describe and distinguish express and implied contracts. Define offer and acceptance. Explain and apply the concept of consideration. Identify illegal contracts that violate statute and public policy. Identify and describe the types of contracts covered by the Statute of Frauds. Contrast compensatory, consequential, and liquidated damages. Identify and explain equitable remedies. B. Instructional Ideas Have the student draft a simple contract. Have the students keep a journal identifying the contractual situations they face in everyday life. C. Lecture and Class Discussion Outline Contract—A contract is a 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. Parties to a Contract 1. Offeror: Party who makes an offer to enter into a contract. 2. Offeree: Party to whom the offer is made. Each party possesses rights and obligation under the terms of the contract. Required Elements of a Valid Contract 1. Agreement a. Offer b. Acceptance 2. Consideration 3. Contractual capacity a. Legal capacity b. Mutual assent 4. Lawful object Agreement Offer—Manifestation by one party of a willingness to enter into a contract. Offeror—Party who makes an offer. Offeree—Party to whom the offer is made. This party has the power to create an agreement by accepting the terms of the offer. Acceptance—Manifestation by the offeree of an agreement to enter into a contract under the terms of the offer. Termination of an Offer by Action of the Parties Revocation—The offeror may revoke or withdraw an offer any time prior to its acceptance by the offeree. Rejection—An offer is terminated if the offeree rejects the offer by his or her words or conduct. Counteroffer—A counteroffer by the offeree terminates the offeror’s offer (and creates a new offer). Express and Implied Contracts Express contract—A contract expressed in oral or written words. Implied-in-fact contract—A contract implied from the conduct of the parties. Consideration—The price of the contract. Any thing of value given in exchange for a promise. May be tangible or intangible property, performance of a service, forbearance of a legal right, or another thing of value. Capacity to Contract Infancy doctrine—Minors under the age of majority may disaffirm or cancel most contracts they have entered into with adults. The contract is voidable by the minor, but not by the adult. Mental incompetence—Contracts by persons who are insane are voidable by the insane person upon return to lucidity, but not by the competent party to the contract. If the contracting party has been declared legally incompetent, then the contract is void. Intoxicated persons—Contracts by intoxicated persons are voidable by the intoxicated person upon return to sobriety, but not by the competent party to the contract. Mutual assent—The parties must be willingly entering the contract without duress or undue influence. Lawful Object An illegal contract in violation of statute or public policy is void. Therefore, the parties cannot sue for nonperformance. If the contract has been executed, the court will leave the parties where it finds them. Statute of Frauds Writing Requirement—State statutes require the following contracts to be in writing: Contracts in consideration of marriage. Contracts that cannot be performed within one year. Contracts involving the transfer of interest in real property. Executor contracts. Guarantor contracts. Contracts for the sale of goods costing $500 or more. A mnemonic device to assist in recalling the six types of contracts covered under the Statute of Frauds is the acronym M.Y.L.E.G.S. Marriage Year or more Land transfer Executor Guarantor Sale of goods for $500 or more Performance Covenant—Unconditional promise to perform. Nonperformance of a covenant is a breach of contract that gives the other party the right to sue. Conditions Precedent—Requires the occurrence or nonoccurrence of an event before a party is obligated to perform. Levels of Performance Complete performance—A party renders performance exactly as required by the contract. That party’s contractual duties are discharged. Substantial performance—A party renders performance that deviates only slightly from complete performance. There is a minor breach. The non-breaching party may recover damages caused by the breach. Inferior performance—A party fails to perform express or implied contractual duties that impair or destroy the essence of the contract. There is a material breach. The non-breaching party may either (1) rescind the contract and recover restitution or (2) affirm the contract and recover damages. Remedies Monetary Damages Compensatory damages—Damages that compensate a non-breaching party for a loss of the contract. Restore the “benefit of the bargain” to the non-breaching party as if the contract had been fully performed. Consequential damages—Foreseeable damages that arise from circumstances outside the contract and of which the breaching party either knew or had reason to know. Also called special damages. Liquidated damages—Damages payable upon breach of contract that are agreed on in advance by the contracting parties. Liquidated damages substitute for actual damages. Mitigation of Damages—The duty the law places on the non-breaching party to take reasonable efforts to avoid or reduce the resulting damages from a breach of contract. Equitable Remedies—Equitable remedies are available if the non-breaching party cannot be adequately compensated by a legal remedy or to prevent unjust enrichment. Specific performance—Court order that requires the breaching party to perform his or contractual duties. Available only if the subject matter of the contract is unique. Injunction—Court order that prohibits a person from doing a certain act. The requesting party must show that he or she will suffer irreparable injury if the injunction is not granted. Reformation—Permits the court to rewrite a contract to express the parties’ true intention. Available to correct clerical and mathematical errors. Quasi-contract – Permits the court to order recovery of compensation even though no enforceable contract exists between the parties. Used to prevent unjust enrichment. Also called an implied-in-law contract or quantum meruit. Unconscionable Contracts—Contracts that are oppressively unfair or unjust. Also called contracts of adhesion. Elements 1. The parties possessed severely unequal bargaining power. 2. The dominant party unreasonably used its power to obtain oppressive or manifestly unfair contract terms. 3. The adhering party had no reasonable alternative. Remedies Where a contract or contract clause is found to be unconscionable, the court may do one of the following: 1. Refuse to enforce the contract. 2. Refuse to enforce the unconscionable clause but enforce the remainder of the contract. D. Internet Resources www.law.cornell.edu/topics/contracts www.law.cornell.edu/uniform/ucc http://cori.missouri.edu/index http://cisgw3.law.pace.edu E. Suggested Answers Questions for Critical Legal Thinking and Writing An offer is an invitation to enter into a contract. An acceptance is an assent to the invitation. A contract is made upon acceptance of the terms of the offer. A contract based upon the actions of the parties. The law recognizes it as a contract via inference of the elements of a valid contract. No. Absence of mutuality of consideration. The infancy doctrine provides that minors may disaffirm most contracts during their minority, as minors are presumed to lack capacity. The Statute of Frauds requires certain contracts be in writing. This requirement relates to contracts of great importance where the written terms serve to prevent confusion as to the parties’ rights and obligations. Contracts that are oppressively unfair or unjust. The law recognizes this doctrine to rectify a situation where the parties have unequal bargaining power. Complete performance occurs when a party renders performance exactly as required by the contract. Substantial performance occurs when a party renders performance that deviates only slightly from complete performance. There is a minor breach for which the non-breaching party may recover damages caused by the breach. Inferior performance occurs when a party fails to perform express or implied contractual duties that impair or destroy the essence of the contract. There is a material breach and the non-breaching party may either rescind the contract and recover restitution or affirm the contract and recover damages. Equitable remedies are available if the non-breaching party cannot be adequately compensated by a legal remedy or to prevent unjust enrichment. Ethics Questions for Analysis and Discussion Such forms may not be applicable to the client’s situation or conform to state statute. No, it is a violation of copyright law. Yes, to do so is deceitful, unethical, and a violation of the law of notary. Cases for Discussion The Court of Appeals held that where buyer purchased automobile when he was 17 years old, and buyer continued to possess and operate automobile after his 18th birthday and continued to make monthly payments as required by note for ten months after becoming 18, buyer’s acceptance of benefits and continuance of payments under the contract constituted ratification of contract, precluding his subsequent disaffirmance. The Court of Appeals held that evidence supported finding that defendants conspired to breach contract and that evidence supported finding that contract was breached in bad faith. The United States District Court for the Eastern District of Wisconsin, granted permanent injunction enforcing exclusivity clause in lease wherein landlord promised not to lease space in mall to competing pharmacy. Landlord and competitor appealed. The Court of Appeals, Posner, Circuit Judge, held that tenant was entitled to permanent injunction enforcing exclusivity clause. As such, the decision of the District Court is affirmed. Case for Briefing Whether the public policy of Texas prevents the enforcement of gambling debts. Texas law as the bank drafts were drawn on a Texas Bank. The parties are placed back in the position they were prior to the contract. In this instance, Aubin does not owe Carnival. F. Feedback Multiple Choice—Circle the letter immediately to the left of the best answer. 1. Express contracts are based on: a. the actions of the parties. b. a specific form that must be signed, sealed, and witnessed. c.* oral or written expressions of the terms. d. speed. 2. Implied contracts are based on: a.* the actions of the parties. b. a specific form that must be signed, sealed, and witnessed. c. oral or written expressions of the terms. d. psychic impressions. 3. To be valid, an offer must: a. manifest a present contractual intent. b. be written. c. be communicated to the offeree. d. be certain and definite as to the terms of the offer. e.* all of the above, except b f. both a and c only 4. The person who is empowered to create a contract by acceptance is the: a. offeror. b. assignee. c. obligee. d.* offeree. e. obligor. 5. A contract entered into by an intoxicated person is: a. void. b. voidable by the intoxicated person when he/she becomes sober. c. can be affirmed by the intoxicated person when he/she becomes sober. d.* either b or c e. none of the above 6. Guido gives to Sarducci $1,000.00 as a down payment to kill Fonzarelli and promises $5,000.00 upon completion of the job. Sarducci takes the $1,000.00, but refuses to kill Fonzarelli. Does Guido have legal recourse against Sarducci based on breach of contract? a.* No, the contract failed to have a legal purpose b. No, Guido did not pay adequate consideration for the job c. Yes, Sarducci accepted the offer, thus it is a valid contract d. Yes, Sarducci received valid consideration thus he must perform the contract 7. An absolute promise to perform within a contract is a: a. contract. b. condition. c.* covenant. d. commandment. 8. All of the following are forms of legal remedy for breach of contract, except: a.* specific performance. b. consequential damages. c. compensatory damages. d. liquidated damages.