Principles of Contract Law

Principles of Contract Law
Finance 270
Summer 2009
Contracts - ‘Legally enforceable promises’. Contracts establish the
legal relationship between two or more parties.
I. Contract Basics
A. Written vs. Verbal
B. Sources of Contract Law
• Common Law - formation, performance, breach & remedies
• Legislation - Statues (UCC - sale of goods)
C. Classifications
1. Bilateral vs. Unilateral contracts
• Bilateral - an exchange of promises by two or more
• Unilateral - a promise conditioned on the performance
of an act
Principles of Contract Law
C. Classifications
Finance 270
Summer 2009
2. Express vs. Implied contracts
• Express - Actual discussion of promised terms takes place
• Implied - terms arise from conduct rather than words
3. Quasi-contracts - a judicial remedy to prevent one party
from receiving ‘unjust enrichment’.
D. Contract Terminology
1. Enforcement terminology
• Valid- All essential requirements are present (‘Enforceable’)
• Void - Lacks an essential requirement (‘Unenforceable’)
• Voidable - one party has the right to withdraw
Principles of Contract Law
D. Contract Terminology
Finance 270
Summer 2009
2. Performance terminology
• Executed - all parties have performed their promises
• Executory - when promises have yet to be performed
E. Breach of Contract (Figure 7.3 - pg. 196)
1. Remedies
• Negotiated Settlement
• Arbitration
• Compensatory Damages
• Consequential Damages
• Liquidated Damages
• Nominal Damages
• Rescission
• Specific Performance
Principles of Contract Law
E. Breach of Contract
Finance 270
Summer 2009
2. Mitigation - the requirement of a victim to take reasonable
steps to ‘purposefully reduce the damages’
II. Essential Requirements of a Contract
• Offer
• Acceptance
• Consideration
• Capacity
• Lawful Purpose
Principles of Contract Law
A. Offer -
Finance 270
Summer 2009
A statement made by one person (Offeror) of what
that person will give in return for some act or
promise of a second person (Offeree). The offer
must contain a specific promise and specific demand.
1. Two Parts: The ‘Promise’ & ‘Communication’
• Promise - the promise ‘must be sufficiently clear and
definite in its terms to satisfy the standards of contract law’.
• Communication - the promise must be communicated to
the offeree
2. ‘Counteroffer’ - an offer made in response to another offer. A
counteroffer results in a rejection of the original
Principles of Contract Law
Finance 270
Summer 2009
B. Acceptance - A ‘meeting of the minds’. A simple assent to he
terms of the offer with no changes or additions. An
acceptance is necessary to create a valid contract.
1. Two Parts: ‘Unequivocal’ acceptance & ‘Communication’
• ‘Unequivocal’ acceptance - no changes or additions
• Communication - the acceptance must be
communicated to the offeror
2. ‘Mirror Image Rule’ - the acceptance must ‘mirror’ the offer
3. Acceptance & ‘Silence’ - generally**, an offeree’s failure to
reject an offer does not imply acceptance.
** Exception: Future shipment agreements
4. ‘Mailbox Rule’ - offer is bound when deposited in mailbox
Principles of Contract Law
Finance 270
Summer 2009
C. Consideration - The ‘thing of value which is committed by each
party on their side of the agreement without which
they cannot hold the other side to their promise’.
D. Legal Capacity - Each party to a contract must have the legal
capacity or power to enter into it and to commit
himself or herself to the performance of its terms.
1. Potentially ‘Voidable’
• Minors
• Intoxicated persons
• Mental incapacity
• Duress - force or threat of personal injury
• Undue Influence - unfair advantage
• Fraud - intentional mis-statement of material fact
• Misrepresentation - unintentional mis-statement
• Mutual or Unilateral ‘mistake’
Principles of Contract Law
Finance 270
Summer 2009
D. Lawful Purpose - A valid contract must have legality of purpose
1. Potentially ‘Voidable’ (Sidebar 7.10 pg. 205)
• Criminal act
• Violation of public policy
• Restraint of trade
• Injurous to third parties
Principles of Contract Law
Finance 270
Summer 2009
III. Contract issues
A. Written vs. Verbal - ‘Statute of Frauds’
• Contracts involving an interest in real property
• Collateral contracts to pay the debt of another person
• Contracts that cannot be performed within one year
• Sale of goods contracts for $500 or more
• Written by statute
• Exceptions: Sidebar 7.11 (pg. 208)
B. Parole Evidence Rule - Prohibits testimony about the oral
negotiation that results in a written contract
Principles of Contract Law
Finance 270
Summer 2009
C. Contract Interpretation
• Common words
• Trade ‘terminology’
• Handwritten/’typed’ amendments
• Source of contract
D. Assignment of Contracts - transfer of rights
• Assignor vs. Asignee
• ‘Notice’ - the assignee should immediately notify obligor
• Contracts that cannot be assigned
1. No increase in burden
2. Wages
3. Performance of duty
Principles of Contract Law
Finance 270
Summer 2009
E. Performance of Contracts - a ‘valid’ contract requires the duty to
• The ‘order’ of performance - Which promise comes first?
• ‘Degree’ of performance - Partially completed contracts
F. Discharge of Contracts - a party is ‘discharged’ when the party is
released from all further obligation of
• Completion of all promises
• Breach by a party
• Waiver
• Mutual agreement to rescind
• Expiration of statute of limitations
• Impossibility of performance
• Commercial Impracticability
Principles of Contract Law
Finance 270
Summer 2009
G. Termination of Offers
• Anytime prior to an acceptance
• End of specified or ‘reasonable’ time period
• Rejection of the offer or counteroffer
• Destruction of promised subject
• Operation of Law - Death, bankruptcy, loss of license,
mental incompetence, illegality