Business Law I Introduction to Contracts

1. Business Law I Introduction to Contracts

2. Contracts • Definition • A promise that the law will enforce. • Contracts exist to make business matters more predictable. • Judicial Activism vs. Judicial Restraint • Judicial restraint makes the law less flexible but more predictable. • Judicial activism makes the law more flexible but less predictable.

3. Elements of a Contract • Agreement • One party must make a valid offer, and the other party must accept it. • Consideration • There has to be bargaining that leads to an exchange between the parties. • Legality • The contract must be for a lawful purpose. • Capacity • The parties must be adults of sound mind.

4. Types of Contracts(or Agreements) • Bilateral and Unilateral Contracts • Bilateral-- both parties make a promise (to do something) to each other. • Unilateral-- one party makes a promise to the other that the other party can accept only by doing something specific.

5. Types of Contracts(cont’d) • Express and Implied Contracts • Express -- the two parties to the contract explicitly state all of the important terms of their agreement. • Implied -- the words and conduct of the parties indicate that the parties intended to make an agreement.

6. Types of Contracts(cont’d) • Types of Contracts by Enforceability • Valid --A contract that is legally binding and fully enforceable by the court. • Void -- A contract that has no legal effect whatsoever. • Voidable -- A contract that may be voided or canceled by one of the parties. • Unenforceable -- A contract that cannot be upheld by a court because of some rule of law.

7. Case AnalysisImplied Contracts Demasse v. ITT Corporation,Supreme Court of Arizona, 1999 • Facts • Issue – Did ITT have the right unilaterally to change the layoff policy? • Decision - No • Reasoning – An employer has the right to lay off at-will employees for virtually any reason, and to unilaterally change layoff policies with respect to such employees. When words or conduct establish an implied contract however, the employee is no longer at-will.

8. Types of Contracts(cont’d) • Executory and Executed Contracts • Executory -- when one or more parties has not fulfilled its obligations under the contract. • Executed -- when all parties to the contract have fulfilled their obligations under the contract.

9. “Equitable Remedies” created by Judicial Activism Contract Remedies Four Theories of Recovery for Breach: • Express Contract • Defendant made an explicit Promise • There is a valid Contract • Contract is enforced based on explicit terms • Implied Contract • Defendant implied a Promise by words or conduct • There is a valid Contract, but without a formal agreement • Contract is enforced based on implied terms • Promissory Estoppel • Quasi-Contact

10. Promissory Estoppel • Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that: • The Defendant made a promise knowing that the Plaintiff would likely rely on it. • The Plaintiff did significantly rely on the promise; and • The only way to avoid injustice is to enforce the promise.

11. Quasi-contract • Even when there is no contract, a court may use quasi-contract (contract-like duties imposed by the court) to compensate a Plaintiff who can show that: • He gave some benefit to the Defendant. • He reasonably expected to be paid for the benefit and the Defendant knew this; and • The Defendant would be unjustly enriched if she did not pay. • The damages awarded are called quantum meruit, meaning that the plaintiff gets “as much as he deserved.”

12. Case AnalysisQuasi-Contract Novak v. Credit Bureau Collection Service,Indiana Appeals Court, 2007 • Facts • Issue – Was the credit bureau entitled to damages based on quasi-contract? • Decision - Yes • Reasoning – A plaintiff who has supplied services to a defendant, although acting without the defendant’s consent, is entitled to restitution if he is expected to charge for such services, the services were necessary to prevent bodily harm, and it is impossible for defendant to give consent.

13. Sources of Contract Law • Common Law • Summarized for each jurisdiction in the Restatement (Second) of Contracts. • Statute • Adapted by each jurisdiction from the Uniform Commercial Code. • UCC Article 2 governs the sale of goods. “Goods” means anything moveable, except for money, securities, and certain legal rights. • In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods.

14. Choice of Law: Goods vs. Services Common Law Services (real estate, stocks, bonds and intangibles) Service element is predominant What is the nature of the transaction? Mixture (goods and services) Goods element is predominant Goods (tangible personal property) Statutory Law (UCC)

15. Analysis of Contract Issues 1. Is there a contract? 2. Is the contract enforceable? 3. Who can enforce the contract? 4. Was the contract breached? 5. What are the remedies?

16. Elements of a Contract - Agreement

17. Meeting of the Minds The parties can form a contract only if they had a meeting of the minds. • They must understand each other and intend to reach an agreement. • A judge will make an objective assessment of any disagreements about whether a contract was made -- whether or not a reasonable person would conclude that there was an agreement, based on the parties’ conduct.

18. Offer An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms. • Elements of a valid offer are: • Present intent to contract • Definiteness of terms • Communication to the offeree

19. Offer (cont’d) • Problems with Intent • An invitation to bargain is not an offer. • A letter of intent may or may not be an offer, depending on the writer’s intent. • An advertisement is generally not an offer. • Problems with Definiteness • The term of the offer must be definite. • UCC and Open Terms • Some agreements can be binding, even with open terms if both parties intend to make a contract.

20. Case AnalysisOffer Baer v. Chase, Third Circuit Court of Appeals, 2004 • Facts • Issue – Was Chase’s promise definite enough to be enforced? • Decision - No • Reasoning – To create an enforceable agreement, the parties need to agree on all of the essential terms. One such term is price.

21. Solicitation of Offers

22. Termination of Offers • Termination by Revocation • Effective when the offeree receives it. • Termination by Rejection • If an offeree rejects an offer, the rejection immediately terminates the offer. • If an offeree counteroffers, it is a rejection that immediately terminates the offer.

23. Did the offeror pay consideration for the promise to hold the offer open? If yes Option created Options An option is a separate contract for the limited purpose of holding an offer open. • Creating an Option Did the offeror promise to hold the offer open?

24. OfferSummary • There is a valid offer if there is: • Intent – Objectively determined. • Definiteness – Sufficiently clear so that what was promised can be determined. • Communication -- Terms that are not adequately communicated (such as those in fine print) are not part of the offer. • The offer is still valid if it has not: • Been terminated by its own time limit. • Lapsed. • Been revoked. • Been rejected. • Been terminated by operation of law due to: • Death or insanity of either party. • Destruction of the subject matter. • Intervening illegality.

25. Acceptance Acceptance is the assent, either express or implied by the circumstances, to an offer that is requisite to the formation of a contract. • Elements of a valid acceptance are: • Present intent to contract • Exactness of the acceptance • Communication to the offeror

26. Acceptance (cont’d) • The offeree must say or do something to accept. • In a bilateral contract, the offeree generally must accept by making a promise. • In a unilateral contract, the offeree must accept by performing. • Mirror Image Rule (Common Law) • Requires that acceptance be on precisely the same terms as the offer.

27. UCC and the Battle of Forms Under UCC §2-207, an acceptance that adds additional or different terms may form a contract for sales of goods in certain cases. • For a sale of goods, the most important factor is whether the parties believe they have formed an agreement. • New terms added by the offeree do not void the agreement if accepted by the offeror. • If terms are changed, a court will rely on general principles of the UCC to create a fair contract. • If a party wants to contract only on his terms, the agreement must clearly state that.

28. AcceptanceExactness

29. Communication of Acceptance • The offeree must communicate his acceptance for it to be effective. • Communication may be in person or by an acceptable form of communication. • Acceptance is effective upon dispatch… meaning the moment it is out of the offeree’s control (the “mailbox rule”).

30. AcceptanceCommunication

31. AcceptanceSummary • There is a valid acceptance if there is: • Intent – Objectively determined. • Exactness – No material changes from the offer. • Communication – • In the stipulated manner as spelled out in the offer. • By an expressly or impliedly authorized means (effective when dispatched). • By an nonauthorized means (effective when received).

32. Offer? • Is there: • Intent? • Definiteness? • Communication? • Acceptance? • Is there: • Intent? • Exactness? • Communication? AgreementSummary Is there a contract? Is there a valid

33. Elements of a Contract - Consideration

34. A Bargain and an Exchange • Consideration means that there must be bargaining that leads to an exchange between the parties. • Consideration can be anything that someone might want to bargain for. • A promisor is the person who makes the promise, and promisee, the person to whom the promise is made.

35. A Bargain and an Exchange • The thing bargained for can be: • another promise. • an action without a promise. • a promise to do something or a promise to refrain from doing something. “Bargaining is obligating yourself in order to induce the other side to agree.”

36. Bargain A B There is consideration to support a contract between A and B, when they bargain... and their bargaining causes BOTH parties ... Which causes.. …to either give a benefit to the other or to suffer a detriment themselves. A to give B a benefit B to give A a benefit OR AND OR A to suffer a detriment B to suffer a detriment Consideration supports a contract. The amount of consideration is not as important as its mere presence!

37. Adequacy of Consideration • Courts seldom inquire into the adequacy of consideration. • A previously paid benefit is generally not consideration because it was not meant to induce the other side to agree. • Under the doctrine of promissory estoppel, a court may enforce a promise without consideration if a party relied on a promise to his detriment and only enforcement will prevent an injustice.

38. Mutuality of Obligations • Illusory Promise • If one party’s promise is conditional, the other party is not bound to the agreement. • Sales Law: Requirements and Output Contracts • Section 2-306 of the UCC expressly allows output and requirements contracts in the sale of goods.

39. Case AnalysisConsideration You Be the Judge - Culbertson v. Brodsky, Texas Court of Appeals, 1990 • Facts • Issue – Did Brodsky give valid consideration that makes Culbertson’s promise enforceable? • Decision? • Reasoning? Lower court Ruling REVERSED

40. Preexisting Duty A promise to which the promissor is already obligated is not consideration. Exceptions: • If the scope of the promisor’s task increases, that increase is consideration. • When unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is valid consideration. • If both parties agree to cancel a contract, then form another one in its place, the new contract is valid. • Modification of a sale of goods is allowable without consideration, unless there is a written agreement forbidding such modifications.

41. Preexisting Duties

42. Preexisting Duties(cont’d)

43. Preexisting Duties(cont’d)

44. Settlement of DebtsLiquidated Debt A liquidated debt is one in which there is no dispute about the amount owed. • In cases of liquidated debt, if the creditor agrees to take less than the full amount as full payment, her agreement is not binding. • If the debtor offers a different performance to settle the debt and the creditor agrees, the agreement is binding.

45. Settlement of DebtsUnliquidated Debt • A debt is unliquidated if: (1) the parties dispute whether any money is owed, or (2) the parties agree that some money is owed but dispute how much. • The parties may agree to settle for less than what is owed; this “accord and satisfaction” will be enforced if the debtor pays the agreed amount.

46. ConsiderationSummary • There is valid consideration if there is: • A bargained for exchange • Of a promise, act, or forbearance • That had legal value • Not preexisting duty • Not past consideration • Not illusory promise • Or a recognized exception: • Promise to perform preexisting contractual duties under UCC 2-209, or unforeseen difficulties • Accord and satisfaction of a liquidated debt • “Payment in full” check for goods cashed with reservation under UCC 1-207 • Composition agreement • Past consideration recognized as moral obligation • Promissory estoppel • Relied on charitable subscription • New promise to pay discharged debt if in writing or meets requirements of Bankruptcy Act

47. Quasi-contract Implied contract Express contract Promissory estoppel Bilateral contract An agreement with all terms stated explicitly. A judicial remedy based on a defendant’s promise on which the plaintiff reasonably relied. An agreement based on one promise in exchange for another. A judicial remedy based on a benefit given by the plaintiff to the defendant. An agreement based on the words and actions of the parties. QuizMatching Questions

48. Mirror image rule Letter of intent Gap-filler Counteroffer Clickwrap A communication between negotiating parties that summarizes their progress and may imply a binding agreement. An agreement made online by a consumer who may not understand its terms. One method of rejecting an offer. A common law principle requiring the acceptance to be on exactly the terms of the offer. Terms supplied by the UCC for use in sale-of-goods contracts. QuizMatching Questions

49. Liquidated debt Consideration Accord and satisfaction Illusory promise Preexisting duty A promise made by one party which in reality obligates him to do nothing. Something the promissor is already obligated to do. A debt in which the amount is undisputed. Payment of an agreed upon sum that is less than what the creditor originally claimed. Bargaining that leads to an exchange between the parties. QuizMatching Questions

50. QuizTrue/False Questions F • An express contract is an example of judicial activism. • To be enforceable, all contracts must be in writing. • Maria agrees to photograph Caitlin’s children, and Caitlin agrees to pay $800 for the pictures. This is a bilateral contract. • Abdul hires Sean to work in his store, and agrees to pay him $9 per hour. This agreement is governed by the UCC. • A principal purpose of contracts is to make business matters more predictable. F T F T