CONTRACTS – Spring 2007 I. INTRODUCTION – CONTRACTS A. What is it? An enforceable promise… B. Types of Contracts: 1. EXPRESS (words) vs. IMPLIED (conduct) 2. Bilateral (promise for promise) or Unilateral (find dog). 3. VOID () vs. VOIDABLE (everything else) 4. Common Law vs. UCC: a. UCC: Sale of Goods (tangible, movable items) b. Common Law: Services, Loans, Real Estate c. CISG: Convention for the International Sale of Goods (the “international UCC”). C. Elements of Contract: All of the following must be established: 1. Agreement: Consists of Offer and Acceptance 2. Consideration - Value to both sides 3. No Defenses D. Defenses: That can help a party avoid an otherwise enforceable contract. We will cover these later on: 1. Invalid Consent: You agreed under wrong assumption (e.g. Fraud, Misrepresentation, Mistake, Undue Influence, Duress) 2. Not Written: Violates the Statute of Frauds 1 3. No Capacity: No kids, crazies or drunks 4. Illegal: Crime, unlicensed or E. Sometimes courts will enforce a promise even though there is no contract… 1. Quasi Contract: Unjust enrichment 2. Promissory Estoppel: Detrimental reliance II. ELEMENTS OF A CONTRACT A. Offer: 1. Explain Offeror vs. Offeree 2. Elements: a. Must be certain: Normally must include ID of parties Price Subject (inc. time & what is contracted for) b. Made with intent – Measure objectively c. Communicated 3. Termination of Offers: a. Revocation: Offeror, took the offer back (can be by selling it to someone else, if offeree knows) b. Rejection/Counter-offer: (distinguish “Inquiry”) c. Time 2 d. Operation of Law (an event): (1) Death or insanity (2) Destruction of S. M. (3) Illegality 4. Offers are usually REVOCABLE….exceptions: a. Option Contract b. UCC Firm Offer (2) Offeror = Merchant (in the business) (3) Offer Written (4) Promise to “keep the offer open” (for stated time or 3-months if no time stated) c. Performance begins (Unilateral Contracts only) 5. NOT an offer…. Ads (unless manner of acceptance specified) Price Quotes Opinions Auctions (unless “without reserve”) B. Acceptance: 1. Elements: a. Meet Offeror’s Demand (mirror image rule) b. By Proper Means (specified or same/faster) c. With Intent… d. Offer Still Exists (timely) 3 2. Meet Offeror’s Demand…. a. Any changes violates the Mirror Image Rule and is considered a Counter offer. b. UCC Exception: Variances in the acceptance become part of the contract, unless the variances are… (“M.O.P.”) (1) MATERIAL in nature (2) OBJECTED to within a reasonable time (3) PROHIBITED in original offer 3. By Proper Means… a. Specified in the offer b. Common Law: Same or faster (penalty) c. UCC: Any reasonable means 4. Offer Still Available? When are these communications effective? a. General Rule: When received (offers, counteroffers,rejections, revocations) b. Exception: Mail Box Rule – Acceptances are valid when dispatched c. Exceptions to Mail Box Rule: (1) Slower means – Common Law (on receipt) (2) Specified in offer (e.g. upon receipt) (3) Rejection first (then acceptance) C. CONSIDERATION: 1. Requires something of value and bargained for exchange. 4 2. But watch out... a. Can be a benefit for both sides, or a burden/benefit for one side. (Hamer case) b. Doesn't have to be fair - no such thing as inadequate consideration c. Can't use past consideration as basis for consideration d. Can't use pre-existing obligation as basis for consideration. Presents a special issue regarding MODIFICATIONS: (1) Common Law: Modifications require separate consideration. (2) UCC: All modifications are valid if entered into in good faith. 3. Liquidated vs. Unliquidated Debts: (1) Liquidated: Amount is known (so if the Creditor unilaterally reduces the debt, the modification is not binding & Creditor can legally renegue. (2) Unliquidated: Amount is in dispute (then if the parties “settle” the dispute, the modification is enforceable as an ACCORD & SATISFACTION). 4. Valid Contracts: Even though consideration may be questionable, these contracts are enforceable: a. Charitable Subscriptions b. Release (covenant not to sue) c. Creditors Composition Agreement 5 d. Exclusivity Contracts: E.g. Output or Requirements contracts). e. Renewal of an Extinguished Debt: If debt is “renewed” after bankruptcy or expiration of statute of limitations. D. LEGAL PURPOSE: An illegal contract is VOID - not valid from the beginning and never can be enforced by either party. 1. If agreement is itself a crime (e.g. a “hit” contract) 2. Practicing without a license (professionals) 3. Usurious loans E. CAPACITY: (1) Tested: Minors & Drunks (2) Can ratify or reaffirm the contract when capacity returns (majority, or you sober up) III. DEFENSES A. REALITY OF CONSENT: 1. Contrast void vs. voidable 2. Primary Issues: a. Misrepresentation: Must be material and cause reliance b. Can be INNOCENT, NEGLIGENT, INTENTIONAL (1) If made with scienter (intent to deceive) then = FRAUD 6 (2) Misrep. can be "non-fraudulent" (with no intent to deceive) c. Duress: If extreme contract VOID (only one of these defenses that involves void). If not extreme, or merely economic, then VOIDABLE. d. Undue Influence: Trust taken advantage of through unfair persuasion. (1) Elements: A susceptible party Perpetrator exercises “unfair persuasion” Unnatural result (party commits to an unfair deal). (2) If Contract is with a FIDUCIARY (person of trust), then the “victim” only needs to prove that the deal was unfair, then the BURDEN SHIFTS, and the “perpetrator” has to then DISPROVE unfair persuasion. (3) Not all cases of Undue Influence involve a fiduciary, however. Give school employee example. e. Mistake: Must be… (1) Material (2) Of Fact (3) Mutual, unless the other party knew of mistake or it involves a computational error. 7 B. STATUTE OF FRAUDS: 1. Tested area - Contract must be in writing if it’s got legs, specifically MY REDS… M - Marriage Y - Year of more (only if Impossible to perform in < 1 year) R - Real Estate (unless either party performs) E - Executor personally guarantees an estate debt D - Debt of Another (only the Secondary Obligor) S - Sale of Goods of $500+ ** **Note: 4 exceptions: SWAP) S – Special Goods W – Written Memo by Merchants (no objection with 10 days) A – Admission in Court P – Performed by either party 2. Writing: Must be signed by the defendant. 3. Can be contained in more than 1 writing. 4. Main Purpose Rule: On the “debt of another” – if the contract has a financial benefit for the “secondary obligor”, then agreement need not be in writing. C. Minor Defenses: These will sometimes come up… 1. Statute of Limitations (2 yrs: oral; 4 yrs: written) 2. Impossibility of Performance (destruction, disasters) 3. Novation (replacement substitute contract) 4. Failure of conditions – Precedent, concurrent, subsequent 8 III. REMEDIES A. Breach – Can be actual (sue now) or anticipatory (sue now or wait for actual breach, then sue). Two types of remedies… Legal – Money B. Equitable - Other Legal Damages…. 1. Compensatory (normal damages) – ALWAYS 2. Consequential (foreseeable) – SOMETIMES 3. Punitive – NEVER 4. SOME LIMITATIONS/SPECIAL ISSUES: a. Liquidated Damages Clause: Pre-set damages are valid IF note excessive (a penalty) b. Attorneys Fees – Recoverable ONLY if a clause is in the written contract. c. Mitigation of Damages – Damaged party must minimize their damages (e.g. the landlord must try and find a new tenant) C. Equitable: Where LEGAL DAMAGES ARE INADEQUATE and IRREPERABLE HARM would result. 1. Specific Performance… a. Land – ALWAYS b. Goods – SOMETIMES (when unique) c. Services – NEVER (slavery) 2. Rescission (cancel the contract): Usually based on Fraud, duress, etc. or other party’s Breach. 9 3. Reformation: Redraft the contract. 4. Constructive Trust/Equitable Lien: Defendant buys property with Plaintiff’s money – Plaintiff can ask for the property entirely (Constructive Trust) or a portion (E.L.). 5. Declaratory Relief – Ask for an explanation. 6. DEFENSES: a. Laches: Unreasonable delay b. Unclean Hands: Plaintiff acted wrongfully also. IV. CONTRACTS IN CYBERSPACE A. 2000 – Electronic Signatures in Global and National Commerce Act (E-SIGN Act): 1. Electronic Signature is a valid signature. 2. There must be an agreement in the contract that an esignature is valid. 3. N/A to certain documents, such as Wills, Court papers, foreclosures, etc. 4. Only applies to FEDERALLY REGULATED transactions though. 5. DOES NOT APPLY to recorded conversations (as a “signature”) B. UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT (UCITA) 1. Few states have passed it, lots of criticisms. 10 2. More comprehensive covering internet contracts, licensing issues, etc. 3. For e-signatures, has “attribution procedures” where we can ensure that the person signing IS that person. C. UETA – Uniform Electronic Transactions Act. 1. Adopted by 1/3 of the states roughly. 2. Adds electronic signatures to the Statute of Frauds. 3. Requires “attribution procedures” like UCITA. 4. Recorded conversation CAN BE a “signature.” 11