An Overview of Contracts
By Tom Weygandt
Contracts - Today’s Lesson
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What is a contract and how is it made?
What must be included in a contract?
What are the consequences of
breaching a contract?
Are there any special rules a farmer
should follow?
Other related issues.
What Is a Contract?
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A legally enforceable agreement between two or
more persons which creates an obligation to do or
not to do something
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Promises or sets of promises
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Legal remedy for breach
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Bad deals are OK
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May not be against public policy or illegal
Some Types of Contracts
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Sale of goods
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Sale of land
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Exculpatory agreements
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Insurance
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Requirement
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Unilateral / bilateral
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Under seal
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Production
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Open-end
Negotiable instruments
Employment / non-compete
Prenuptial
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Adhesion
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Input / output
Glossary
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Acceptance
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Performance
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Assignor/assignee
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Privity
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Breach
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Remedy
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Cognovit judgment
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Repudiation
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Consideration
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Rescission
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Contractor
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Severability
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Damages
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Unconscionable
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Mutuality
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Accord & satisfaction
Elements of a Contract
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Offer
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Acceptance
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Capacity
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Consideration
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Legality
Offer
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A manifestation of intent to contract by
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A reasonable person
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Serious intent
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Complete and definite terms
Offer – complete and definite terms
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Parties
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Subject matter
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Price
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Time for performance
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Communication
Offer – UCC exceptions
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Allows some terms to be omitted
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Policy is to encourage free flow of trade
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Course of dealings
Course of performance
Trade usage
Offer - Revocation
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Termination by offeror
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statement or conduct
offeree must be aware
Lapse of time
Revocation sent via mail is not effective
until received
Offer - Always Irrevocable
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Options contract
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promise to keep offer open
must have consideration
Merchant under UCC rules
Detrimental reliance
Unilateral
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if performance has begun
Acceptance
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Agreement to the terms of the offer
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By a person who knows of the offer
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By the person to whom it is made
Acceptance - Methods
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Completion of performance
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Promise to perform
Mailbox Rule
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unilateral
effective when mailed, unless the contract
provides otherwise
Silence is not acceptance
UCC
Acceptance - UCC
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Acceptance then breach
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shipped the wrong goods
Accommodation
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offeror may
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accept and pay list price
reject the shipment
Acceptance – Other Issues
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Mirror Image Rule
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Any change from the original = a new offer
Unordered merchandise
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Mail = offer to sell
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Other delivery = reasonable care for a
reasonable time
Rejection
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Termination by the offeree
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Counter-offer v. bargaining
Conditional acceptance
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final, can’t later accept
by mail is effective when received
direct or indirect
= rejection
Death
Rejection - UCC Exceptions
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Both parties are merchants
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Offer not limited to its terms
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Must be rejected within a reasonable
time
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Any additional terms are not material
Revocation
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Communication
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Automatic
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Passage of time
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Incapacity
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Destruction of subject matter
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Subsequent illegality
Mutuality
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Freely made by contracting parties
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“Meeting of Minds”
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No reason for courts to interfere unless
there’s a problem
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The court will try to determine the intent of the
parties
Mutuality – Destruction
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Fraud
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Misrepresentation
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Mutual mistake
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Duress
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Undue influence
Mutuality – Fraud
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Fraud in the factum
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Intended wrongful statement
Concealment of facts
Knows will materially affect the contract
Contract is void
Fraud in the inducement
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Problem in the creation
Contract is voidable
Mutuality
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Misrepresentation
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Wrong facts, without intent
Mutual mistake of material fact
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Both parties make the mistake
Basic assumption
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Description, existence, price, no excuse for
mistake of law
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Exc. = law of other states
Material to the contract
Mutuality
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Unilateral mistake
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Usually the contract will be valid, unless
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The other party knows of the mistake
And could have avoided significant reliance
Mutuality
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Duress
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Physical or emotional
Economic or business compulsion
Undue influence
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Dominant party
Confidential relationship
Mutuality – Effects of Destruction
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Voidable contracts
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Rescission
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By the innocent party
Wrongdoer is liable
Fraud
Damages
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Mutual mistake
Capacity
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Rebuttable presumption of capacity
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Incapacity may result in:
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Voidable contract
Repudiation
Radification
Capacity
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Minor
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Until the day before the 18th birthday
Not voidable for necessities
Minority ends with:
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Emancipation
Abandonment
Marriage
Enlistment
Capacity
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Mental impairments
Intoxication
Insanity
Consideration
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Bargained for legal detriment
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Forebearance
Money or property
Services
Promise not to sue
Settlement of claims
Charitable pledges
Promissory estoppel
What’s not Consideration
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Past consideration
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Unless expressly requested & expectation
of payment
Pre-existing legal duty
Part payment to forgive balance of debt
Illusory promises
Gifts
Illegality
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Criminal or tortious
acts
By statute
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Usury
Gambling
Unconscionable
Unlicensed
Blue laws
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By public policy
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Obstruction of justice
or public services
Defraud creditors
Exculpatory
agreements
Restraint of trade
Restrictive
employment
agreements
Form of the Agreement
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Oral
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Written
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Difference is in the enforceability
Statute of Frauds, 1677
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Requires a written document for:
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Performance not to be completed within
one year
Sale of land
Sale of goods over $500
Executors and administrators
Guaranty the debts of third parties
Contracts in consideration of marriage
Elements of the Writing
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Names and identification of the parties
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All material terms
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Identification of the subject matter
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Statement of the consideration
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Signature of the party to be charged
Parol Evidence Rule
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Four Corners Doctrine
Requires
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Written contract
Terms are integrated
No contemporaneous agreements may be
added, no outside evidence
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Exception is statement of collateral
Other exceptions
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defect in formation, typos
explanations may supplement but not contradict
Modification
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Under common law
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requires consideration
usually included in original contract terms
Under UCC
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good faith
Third Parties in Contracts
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Beneficiaries
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Intended
Insurance
Donees
Incidental
Obligor, Obligee
Assignor, Assignee
Assignments
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Transfer of rights under a contract
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Consideration is not required
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May not substantially change the duties of
the obligor
Warranty of assignment if consideration
given
Must give written notice of subsequent
assignments
Assignments
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Most are revocable
Restrictions
Delegation = transfer of duties
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May not delegate special skills or special
reputation
Don’t need consent of obligor
Novation, substitution
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Releases assignor of all liability
How does a contract end?
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Discharge
Performance
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Complete
Substantial
Satisfactory
Nonperformance
Tender of performance
Conditions
Breach
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Contract is usually an economic
transaction so the decision to breach is
also an economic decision
Remedies
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Damages
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compensatory, incidental, punitive, Quantum
Meruit Doctrine
Specific performance
Injunctive
Damages
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Usually nominal if no actual damages
Liquidated damages are determined
when the contract is made
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For difficult to estimate circumstances
Reasonable forecast of costs
Use an expectation analysis
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What would it take to make me whole?
What is avoidable? Foreseeable?
Excuse for nonperformance
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Destruction of subject matter
Casualty to identified goods
Incapacity of a necessary person
Supervening illegality
Extreme and unreasonable increase in
cost
Frustration of purpose
Excuse by Unforeseen Event
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After the contract was formed but
before completed
Unforeseen
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Affects the ability to perform or the value
of the contract
Impossibility
Impracticability
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extreme hardship
Uniform Commercial Code
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Provides exceptions to the Statue of
Frauds
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Defines how business people work
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Streamlines the flow of commerce
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National system enacted by state
legislatures
UCC
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1, General
2, Sales
2A, Leases
3, Negotiable
Instruments
4, Bank Deposits
4A, Funds Transfers
5, Letters of Credit
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6, Bulk Transfers
7, Documents of
Title
8, Investment
Securities
9, Secured
Transactions
10 Administrative
UCC
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Merchants are held to a higher standard
of knowledge of commercial law
Written conformations only
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10 days to object
Relaxes rules for acceptance
Court will fill in terms of the contract
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Course of dealings
Course of performance
Trade usage
The Cautious Farm Manager
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READ and UNDERSTAND!
Know what is expected of you.
Know the consequences for breach.
Preprinted contracts ARE negotiable!
DON’T RELY ON ORAL
REPRESENTATIONS!
DON’T SIGN IF YOU’RE
UNCOMFORTABLE!