Unit B: Contract Law

Unit Outline: 2/14 – 3/9

Friday 2/24: Quiz (Elements of a Contract) _____

Monday 2/27: Progress Reports

Friday 3/2: Quiz (Forms of a Contract) _____

Thursday 3/8: Quiz (Characteristics of a Contract), Test review _____

Friday 3/9: Unit Test _____

Objective 3.01: Understand requirements of each element of a

contract.

Contract– any agreement enforceable by law–Ex. Every time you buy something –All 6 Elements are required in order to have a

contract

6 Elements of a contract

1. Offer– Proposal by one party to another with intent to create a

legal binding agreement

2. Acceptance– an unqualified willingness to go along with the offer

3. Genuine Agreement – if a valid offer is met by a valid acceptance then a

genuine agreement exists – Can be destroyed by fraud, misrepresentation, duress, or

undue influence

6 Elements continued

4. Capacity– Legal ability to enter into a contract– Ex Minor, mentally ill, drunk, drugs

5. Consideration– Must exchange something of value in order to

create a bond

6. Legality– Must be permitted by law– Courts will not enforce an illegal contract

Offer

• Offer–Proposal

• Offeror–Makes the offer

• Offeree–Offer made to this person

3 Requirements of an Offer

Serious Intent:– Must intend to make the offer– Advertisements?

• No serious intent• Known as an invitation to negotiate

Definite and Certain:– Must use definite words

Communicate to the Offeree:– Phone, fax, Internet, letter, etc

AcceptanceUnqualified willingness to go along with the offer

Requirements of Acceptance• Unconditional Acceptance

– Mirror Image Rule• Acceptance must “mirror” offer • Any change means there is no acceptance

– Counteroffer• Offeree makes an offer • Offeror becomes offeree

Methods of Acceptance

• Contract accepted when sent, if same method of communication used

• Contract accepted when received, if different method of communication is used

• If method is stated in offer, it MUST be used

• Action=Acceptance• Silence cannot be a method of acceptance

Example of Acceptance

Offeror Method

Offeree Method

Received or Sent?

Fax Internet

Phone Mail

Internet Internet

Mail Phone

Fax Fax

Termination of OfferRevocation:

– Taking back of an offer by offeror

Rejection:– Refusal by the offeree

Counteroffer:– Any change in the terms of the offer

Expiration of Time:– If the offer puts a time limit on the offer and it has passed

Death:– Offeror dies

Insanity:– Offeror is declared insane

Genuine Agreement

A valid offer has been made by the offeror, and a valid acceptance has

been exercised by the offeree

Mistake

Unilateral Mistake– An error on the part of one of the parties – Cannot get out of contract – Types:

• Nature of the Agreement–Signing a contract you don’t understand or have not

read –This applies to signing a contract in a language you

don’t understand • Identity of a Party

–Bound by contract with face to face meetings –May be able to void a contract made NOT face to face

Mistake

Bilateral Mistake (Mutual Mistake)– Both parties are mistaken– Types:

• Possibility of Performance– Contract is impossible to perform Either party

can void contract • Subject Matter

–Either party can void contract

Fraud

Deliberate deception for an unfair or unlawful gain

Deliberate: – Done with or marked by full consciousness of the

nature and effects; intentional

Deception: – The fact or state of being deceived

Gain: – To secure as profit or reward

• In order to prove fraud, you must prove the above 3 definitions

Proving Fraud:

1. False Representation of Fact

a) Must be a material (important) fact

b) Concealment (nondisclosure) may be considered false representation

2. Representation Known to be False

3. False Representation Intended to be Relied Upon

4. False Representation Actually Relied Upon

5. Resulting Loss

Innocent Misrepresentation

• Make an innocent statement of supposed fact that turns out to be false

• Injured party has the right to rescind (take back) the offer No rights to damages

Duress

• Overcoming a person’s will by use of force or by threat of force or bodily harm – Economic Duress

• Threats to a person’s business or income – Actual

• physical harm will void the contract – Threat

• of physical harm will make contract voidable – A threat of exercising one’s legal right is NOT

duress Ex Threatening to sue someone and you have right to sue, is NOT duress

Undue Influence

• Unfair and improper persuasive pressure within a relationship of trust

1. Doctor

2. Lawyer

3. Parents

4. Teacher

1. Student

2. Children

3. Client

4. Patient

Capacitylegal ability to enter a contract

Majority:age of legal adulthood

Minor:not yet reached legal age (minority)

NC Age of Majority = 18 years oldVoidable Contracts:

minors may disaffirm or avoid their contracts if they so choose

Capacity to Contract

Returning Merchandise:– must be returned if disaffirming a contract

Tender:– offer to return

Misrepresenting Age – fraud:– if contract disaffirmed, you may be sued for fraud

Disaffirming the Whole Contract:– can’t disaffirm parts of a contract, must disaffirm all or

none

Contracts made with Minors:– both can disaffirm contact

Ratification of Contracts with MinorsRatify:

- approve contract - Once, a minor can ratify a contract made a minor

- ratification ends all rights given to a minor

Contracts for Necessities:- food, clothing, shelter, and medical care

- responsible for the fair value of item

- renting apartment is a necessity

Special Statutory Rules:

- minors have capacity to buy car/life insurance

- married = adult

- limited capacity if you own a business

Other Contractual Capacity Rules

Mentally impaired persons (if declared insane):– Prior to guardian being appointed – Contract is voidable– After guardian appointed - all contracts are void

Intoxicated person:– must understand the purpose and nature of the

transaction – fair value of necessities

Others with limited capacity:– Convicts: have certain limitations– Aliens: people who live in U.S. without citizenship

Consideration Exchange of benefits and detriments by the

parties to an agreements

Benefits• Something that a party was not previously entitled to

receive

Detriments• Any loss suffered

Gratuitous Contracts:• The law does not enforce any gratuitous contracts • Gratuitous contracts are free agreements

Types of Detriments

• Give up or promise to give up something you are entitled to receive

• Doing or promising to do something you have a legal right to do

• Forbearance– Not doing something you have a legal right to do

Agreements without Consideration

• Promise to make a gift– Gifts have no consideration– Cannot be enforced

• Gift that has been given?– Doesn’t have to be returned– Donor – Gives the gift– Donee – Accepts the gift

• Promise to obey the law – No detriment– You are obligated to obey the law

Agreements without Consideration

• Preexisting Duty– If a person is already under legal duty to do

something, a promise to do that same thing does not furnish consideration

• Past Consideration– Consideration cannot already have been completed

• Promise to attend a social agreement– No consideration– However, in some instances (prom) there may be

grounds for a lawsuit You must show a loss

Adequacy of Consideration

• Courts don’t look at adequacy or value of an agreement unless it is unconscionable

• Unconscionable?– So lopsided that the average person would not

agree to terms

Special Applications

• Partial Payment of Debt– Must have new consideration in order to relieve

entire debt• Settlement of Disputed Claims

– Examples: Fixing your car or visit the doctor• Extension of Time

– To extend time, one party must offer new consideration

Promises Enforceable Without Consideration

• Pledges and subscriptions• Promissory Estoppel

– Rely on what a person said – Elements:

• Promise must bring action or forbearance• One who gave no consideration must have relied on

the promise• Injustice can be avoided only enforcing the promise

LegalityAgreements that Violate Statutes• Civil & Criminal Statutes

– Agreements to commit a crime/tort are illegal

• Usury Statutes– State sets a max interest rate

• Usury– Charging too high of an interest rate

• Truth in Lending Act– Lender is required to disclose the annual percentage rate.

• Sunday Statutes– Illegal to perform certain contracts on Sunday

• Licensing Statute– legal document giving permission to perform a certain trade

Agreements Contrary to Public Policy:Agreement in unreasonable restraint of trade

1) Outright contracts not to compete:– seller of a business may sign a restrictive covenant

which would be upheld by the court

Restrictive covenant:– agreement not to compete in a region for a period of

time

*Only legal for a short period of time and small geographic region

Agreements Contrary to Public Policy

2) Price Fixing:– Competitors agree on certain price ranges

within which they will sell their on prices –Competitors may agree to sell a product at a

particular price –Manufacturers may set a price at which a

product must be sold (MSRP)–Price fixing is NOT enforced by the court

Agreements Contrary to Public Policy

3) Agreements to defeat competitive bidding –Bid:

• offer to buy or sell goods or services at a stated price

–Law often requires govt to contract public works or buy goods or services through competitive bidding

–Agreement to bid above a certain price is illegal

Agreements Contrary to Public Policy

4) Agreements to obstruct justice: – any agreement to interfere with administration of

justice – (Example - protect someone from arrest; giving

false testimony; bribing)

5) Agreements Inducing Breach of Duty or Fraud:– contracts that try to influence public officials

6) Agreements Interfering with Marriage:– contracts that discourage, harm, or interfere with

good family relations

Effect of Illegality

• If the legal part can be separated from illegal part, the court will separate

• If the legal part can’t be separated from illegal part, the contract is void

Obj. 3.02: Organize the Required Parts and Forms of a Contract

Breach of Contract• Wrongful failure to

perform one or more promises of a contract.

Writing must identify:

1. Date

2. Parties

3. Price

4. Intent of parties

5. Place

6. Subject Matter

7. Terms

8. Signature of both parties

Contradictory/Ambiguous Terms

• Contradictory – Handwritten terms prevails over typed terms– Handwritten numbers prevails over figures

• Ambiguous Clauses– Can be interpreted two different ways– Court favors the one who didn’t draft the

contract

Statute of Frauds

Requires that certain contracts must be in writing– Relates to executory contracts

Must be in writing:• Contracts to pay debts of others• Contracts to pay debts of deceased persons• Contracts requiring more than a year to perform• Contracts to sell real property

– (Exception: Equitable Estoppel – must rely on promise.)

• Contracts for sale of goods over $500• Prenuptial contract (contemplation of marriage)

Parol Evidence Rule

• Courts assure ALL terms are written into the agreement.

Changing the Writing

• Read entire document• If you don’t agree with something, then

cross it out and both parties initial it• Write in promises• Refuse to sign if you don’t agree contract

Obl. 4.01: Analyze the Characteristics, Methods of Termination and Transferring or Breaching

Contracts and Remedies.

Characteristics of a Contract• Valid

– Legally good• Void

– No legal force• Voidable

– Not void, but may be voided by one party• Unenforceable

– Some rule of law can not be enforced by the court.

Express vs. Implied

• Express–Stated in words–Written or spoken

• Implied–Based on actions (not words)

Bilateral vs.. Unilateral

• Bilateral–Contains two promises

• Unilateral –Contains one promise

Oral vs.. Written

• Oral–Spoken words

• Written–Write out exact terms

Obj. 4.02Methods to Terminate a Contract

Discharge by Performance• Complete

– All terms have been carried out properly and completely.

• Time– Court will honor time request, if it is deemed “of the

essence.” – If not mentioned in contract, then a reasonable time

will be assumed.

Discharge by Performance

Satisfactory– Law requires that services be completed in a

satisfactory manner.– Reasonable person test

• Would a reasonable person consider the work to done in satisfactory manner?

Substantial– Slightly less than full performance

• Must meet the following rules:–Acted in Good Faith–Completed Major Components of Contract–Only Minor Details Incomplete.

Discharge by Performance

• Tender of Performance–Tender:

• Offer to Perform

–Must make tender even if you know the other party will not perform their part of the contact.

Discharge By Agreement

• Mutual Release– Each side releases the other side from the

contract.

• Accord and Satisfaction– Substitute one contract for another.

Discharge By Impossibility of Performance

• Death or Illness in a Personal Service Contract– Only allowed in Personal service contracts.– What is personal service?

• Photographer• Artist

– Any other contract must be completed.

Discharge By Impossibility of Performance

• Destruction of the Exact Subject Matter– If the subject matter is essential to the contract

then it will be discharged.

• Illegality– Any illegal contract is void.

Discharge by Operation of Law• Wrongful Alteration

– Any altering or changing of a contract will discharge parties to the agreement.

• Statute of Limitations– Individual states have a time limit on lawsuits to be

filed.– Only crime/tort that doesn’t have a time limit = Murder

• Bankruptcy – Debtors can be discharged from contracts after filing for

bankruptcy.

Assignment

• Legally transferring your RIGHTS in a contract.–Assignor – party who transfers the right.–Assignee – party to whom the right is

transferred.• No consideration needed.• Must not change the obligations in the contract.• Must be a RIGHT not a DUTY.• Assignor is responsible for contract fulfillment.

Delegation

• Transfer a duty.• Delegating party is still responsible for the

contract being fulfilled.• Contracts that CANNOT be delegated:

–Promise to perform service personally.–Exercise of personal skill or judgment.–Contract prohibiting delegation.

Novation

• Replacing a party to a contract with a new one.

• The other terms to the contract remain the same.

Third Parties• Privity of Contract

– Determines who can sue who over a breach of contract.

• Third-Party Beneficiary– A person who is not a party to a contract but benefits

from it.– Has the right to sue over breach of contract.

Breach of Contract

• Wrongful failure to perform one or more promises in a contract.

• Anticipatory Breach–Notified that a party to the contract will not

fulfill their part of the contract prior to the required time of fulfillment.

–Lawsuit may be filed early in this case. Exception to the rules: Refusal to pay money owed at a future date.

Remedies/Damages

• Acceptance of Breach–Accept the breach of contract and discharge

the other party without asking for damages.• Why?

–Must show damages in order to win monetary damages.

–Not worth the party’s time to file lawsuit.

Money DamagesActual:

• Damages DIRECTLY related to breach.Compensatory:

• Award only for injuries suffered nothing more.

Consequential:• Damages that DO NOT flow directly from

breach.Incidental:

• Reasonable expenses that INDIRECTLY from breach of contract.

Money Damages

Liquidated:• Anticipated damages agreed prior to contract being

signed.Nominal:

• Award to proved legal injury but no actual damages caused.

Punitive :• Damages in excess of losses suffered in order to

punish party for breach.Speculative:

• Damages awarded not on fact but on expectations from contract fulfillment.

Specific Damages– Ask court to order the other party to do what they

agreed to do.– Subject matter must be unique in nature.– Which of the following is unique?

• Real Estate• Stocks of General Electric• ’65 Ford Mustang with 44,000 miles• A brand new Ford F-150• Dozen Eggs

Answers: Real Estate and Mustang are unique.

Injunction

• Court order that prevents a party from performing an act.

• Temporary or Permanent.• Violators are in contempt of court.

Minimizing Damages

• Injured party must try to reduce the damages by all means possible (mitigation of damages).

• What could you do to mitigate damages if a tenant breaks the lease and moves out early?

Possible answers:Advertise for rent sign in yard, put sign up at local university,and place an advertisement in the local newspaper.