Contract Law
For Fun and Profit
What is a Contract?
A contract is a legally enforceable
promise
• Consequences if promise not kept
• Enforced by parties
Some first principles
• Freedom of contract
• Contract was negotiated
• Give effect to intention of parties
• No punishment—not a moral issue
Sources of contract law
• Common law
• Uniform Commercial Code (U.C.C.), article 2
•
Sales of goods
•
NOT sales of services
•
Usually, same as common law rule
• Commentators/scholars
Types of Contracts
• Express
– An agreement put into words
• Implied-in-fact
– An agreement shown by conduct
• Implied-in-law ("quasi-contract")
– Not a true contract
– An obligation imposed by a court despite the
absence of a promise
– To avoid an injustice
Elements of a contract
Every contract is made up of three
elements
• Offer
• Acceptance
• Consideration
What is an “offer?”
An offer shows your intent to make a
contract
• Creates the power to form a contract by an
acceptance.
• Shown from context
• Definite enough to know what contract would
be
These are not offers:
• Opinions about future
results
• Statements of intention
(including letters of intent)
• Invitations to submit a bid
• Requests for proposals
• Price estimates
• Advertisements, catalogs
and mass mailings
• Auctions with reserve
When is an offer effective?
Offers are effective when received
• Offer stays open for its stated time
– Attempted acceptance after that time fails
– Just a counter-offer
• If no specific time stated, offer is open for a
reasonable period of time
– If telephone or face-to-face conversation, offer
ends when the conversation ends
Usually, an offer may be revoked at
any time before it is accepted
Exceptions:
• Option contract
– Consideration was given
• A person relied to his detriment on the offer
or a promise not to revoke
– Reliance was foreseeable
• If a unilateral contract, performance was
begun
Acceptance is made by any means
reasonable
• Reasonable under the circumstances
• Unless otherwise indicated by language or
circumstances.
• What is customary in similar transactions?
• Person making offer entitled to notice of
acceptance
Acceptance by silence
Silence is not acceptance except where:
• Prior dealings make it reasonable to say if you
do not intend to accept; or
• If the offer says, or makes you understand,
that silence is acceptance
When is acceptance effective?
• The offer may specify when effective
• Otherwise, acceptance is effective when sent
•
• If sent in an unreasonable way, the acceptance
is effective upon receipt
Terms of acceptance
• “Mirror image" rule—common law
– Acceptance must conform to the terms in the
offer.
– Unequivocal acceptance of the offer's terms,
despite a suggestion of other terms.
• Contracts for the sale of goods
– Definite expression of acceptance
– May include additional or different terms
– Unless acceptance is conditioned on agreeing to
the different or additional terms. [
Rejection
A rejection of an offer is
effective when received
Consideration is the “glue” that makes
a contract binding
A bargained exchange in which each party incurs
a legal detriment
• Bargained exchange
o Performance or return promise
o Given in exchange for a promise.
• Legal detriment
o Doing something not previously required; or
o Not doing something a person had the legal right
to do
Adequate vs. sufficient consideration
• Courts do not care whether consideration is
adequate
• Courts require consideration to be "sufficient"
– Is there really a legal detriment ?
Do all contracts really have to be in writing?
Statute of Frauds
The Statute of Frauds says that certain types of
contracts must be in writing
Statute of Frauds
• Contracts for the sale of goods worth more
than a certain amount
– Usually, $500
– Goods, not services
Statute of Frauds
• Contracts in consideration of marriage
– Dowry, child support
– Not contracts to marry
Statute of Frauds
• Agreements to answer for the debt of another
– Cosign
– Guaranty
Statute of Frauds
• Contracts for the sale of land;
• Contracts for the lease of land for more than
one year
Statute of Frauds
• Contracts that must take more than one year
to perform
Statute of Frauds
• Contracts that transfer a copyright
In order to meet the requirements of the
Statute of Frauds:
• Be in a writing or record
• Be signed
• Say that a contract has been made
• Set out the essential terms
• Set out the quantity, if it’s for the sale of goods
Signature
• Signed by or on behalf of
the party against whom
enforcement is sought
• Any mark or symbol
intended to authenticate
a writing
• Written, printed,
stamped, engraved, or
otherwise marked.
Electronic signatures are
valid
The parol evidence rule
Parol=Outside the Contract
• When someone may introduce evidence of
other agreements to prove the existence of
other terms
• Operates where there is a writing that is the
final agreement
If allowed, outside evidence may be
used:
•
•
•
•
To help interpret existing terms
To show if a writing is complete
To show later agreements or modifications
To show something that makes the contract
invalid
If a writing is a complete integration, no outside
evidence is allowed
• Cannot contradict writing
• No additional terms
When is a writing complete?
• “Four corners" or "plain meaning" rule
– If writing appears complete and final, it is a
complete integration.
• “Reasonable person"
– Writing appears to be a complete expression of
the agreement
– Would additional terms would be in a separate
agreement?
– Majority approach
• “Intention of the parties"
– All relevant evidence on the issue of intent
Merger Clauses
• Establish that writing is the complete
expression of the agreement
• Usually conclusive
Interpreting contracts
Three main approaches to interpreting
contracts
• "Plain meaning"
– Written contracts interpreted solely from the writing
– Majority rule
• “Reasonable person"
– Meaning of a written contract is that of a reasonably
intelligent person in the circumstances
• "Reasonable expectations of the parties"
– All relevant evidence to assist in interpretation
– Includes subjective intent of the parties.
Other Factors
• "Course of performance"
– Pattern in the performance of a contract
• "Course of dealing"
– Previous contracts between the parties
– Common basis of understanding
• "Usage of trade"
– Practice employed in a place or industry
– Justifies expectation that practice will be followed
Rules of interpretation
Courts have developed rules to aid
interpretation:
• Words and conduct are interpreted in light of all
circumstances
• Give weight to the main purpose of the parties
• Interpret a writing as a whole
• Language is interpreted according to its usual
meaning
• Technical terms and terms of art are given effect.
• Manifestations of parties' intentions are
consistent with each other
Ambiguous terms
• A term has two or more
different, reasonable
meanings.
– Not confusing, or complicated
– Reasonable in context
• Only if meaning of term is in
dispute
• Read the term in a way least
favorable to the party who
wrote the contract
• Whole contract or
ambiguous clause not void
An interpretation which gives a reasonable,
lawful and effective meaning is preferred
Some Miscellaneous Points
A Few Items of General Importance that Fit
Nowhere Else
Duty of Good Faith
• Implied in every contract
• Obligation to perform/attempt to perform
• Don’t interfere with other party
Choice of Law
• Optional clause
• Says disputes will be governed by law of one
state
• Upheld if some connection to contract
Void and voidable contracts
All the elements are in place, but still
no contract
• Voidable
– Can be enforced by “innocent party”
– Cannot be enforced against them
– May be affirmed by innocent party if reasons for
making contract voidable no longer exist
• Void
– Not enforceable by either party
– Like no contract ever existed
Minors
• Voidable
• Under eighteen
• Unless for necessities
Mental impairment
• Voidable
• Senility, insanity,
retardation
Intoxication
• Voidable
• Only if the other party
had reason to know
– Unable to understand
transaction or
– Was unable to act in a
reasonable manner
Duress
• Voidable
• Threat of harm that
induces the other party to
agree to contract
– Would harm the recipient
and not benefit person
making the threat
– Significantly more effective
because of prior unfair
dealing; or
– Otherwise a use of power
for illegitimate ends.
Undue influence
• Voidable
• Taking advantage of
another’s position of
weakness
– Prevents exercising free
will in the transaction; or
– Breach of a fiduciary
relationship
Mistake
An erroneous belief related to the facts as they exist at
the time the contract is made.
Mutual mistake
• Makes contract voidable where:
– The mistake concerned a basic assumption on
which contract made
– The mistake materially affects agreement
– The adversely affected party does not bear the
risk of the mistake
Unilateral mistake
• Other party knew or had reason to know of
the mistake
– E.g., price listed in is wrong
• Enforcement of the contract against mistaken
party would be unconscionable; and
• Avoiding contract would not result in
substantial hardship to the non-mistaken
party
Also . . .
• Agreement must not have been completed
• Mistake is substantial and
• Mistake is a clerikal or computational error or
similar mistake
Mistakes that are not a defense
• Assumed the risk of mistake
• At fault for mistake
• Did not read the contract
Misrepresentation
• Assertion was material
or fraudulent
– Assertion of fact
• Other person relied to
his detriment on
misrepresentation
Material misrepresentation
• Likely to induce a reasonable person to agree
• Party who made misrepresentation knew it
was likely to induce the other party
– Doesn’t matter if they knew it would induce
reasonable person
Fraudulent misrepresentation
• Intended other party would rely on it
• Knew it was false; or
• Knew their were no grounds for
representation
Remedies for a voidable contract
What happens when a contract is
voidable?
Reformation
• Record does not reflect the
agreement
• Reforms recorded
agreement
• May not affect third-parties
• Does not remake bargain
Restitution
• When enforcement avoided
• Paid to party who
performed
– Full or partial performance
Unconscionability
• Voids agreement
• Courts may enforce
parts of agreement that
are not unconscionable
• Procedural and
substantive
unconscionability
Procedural unconscionability
• Unfair surprise
– Small print
– Unintelligible language
– No opportunity to read
– Illiteracy
– Unequal bargaining power—adhesion contracts
• Relates to presentation of agreement
Substantive unconscionability
• Unfair or oppressive
• Burdens one party only
– No adequate remedy
– No benefit of bargain
– No relation to risk involved
– Great disadvantage to one party, no benefit to
other
– Disparity in price vs. cost, for no good reason
Illegal-against public policy
Illegal contracts, or contracts against
public policy, will not be enforced
•
•
•
•
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Crimes
Torts
Violate other agreements
Restraint of trade
Not to be bound by consumer protection laws
Impairs family relations
Performing a contract
Timing
• If possible, duties will be performed at the
same time
• If one party needs a period of time to
perform, they perform first
• If contract calls for a series of acts and
payments, performance of one is a condition
to the payment
– Payment is a condition to next performance
Conditions create or erase contractual
duty
• Condition precedent
– Promise that must be performed before other
promise
• Concurrent conditions
– Can be performed at the same time
– Neither party must perform until other performs
• Conditions subsequent
– After duty is created
– Discharge of duties
Approval may be a condition
• One party does not have to accept
performance unless they approve
• Majority rule
– Must be honest dissatisfaction
• Minority (Minnesota) rule
– No inquiry into dissatisfaction
If performance is rejected for
dissatisfaction, you get nothing
• Possible to negotiate remedy
– Kill fee
– Pay for work in stages
– Cost of materials
– Do over, etc
• Must be negotiated
– Will not be put in by court
Breach of Contract
•Non-performance of
a duty under a
contract
•Repudiating
obligations in advance
Suit for breach of contract
• Contract
• Breach of contract
– By other party
• Damage
– Caused by breach
Consider for breach:
• Deprived of benefit reasonably expected
• Can party be adequately compensated?
• Will breach be cured?
• Good faith/fair dealing?
Non-breaching party may
• Material breach—major part of bargain
– Cancel contract
– Sue for all damages
• Non-material
– Partial damages
– Contract not cancelled
Repudiation
• Making a statement that contract will be
breached
• Does something voluntarily that makes it
impossible to perform
• Fails to assure other party of performance
– Requested when it seems contract will be
breached
– Other party may suspend performance waiting for
assurance
Remedies for breach of contract
Purpose of contract remedies
• Make non-breaching party whole
– Same position as if contract not breached
– Loss must not be remote
– Loss must be quantifiable
• No punishment, deterrence
Specific enforcement
• Equitable remedy
• Breaching party ordered to perform
• Ordered when paying money is not adequate
compensation
– Sale of unique goods
– Real estate
– Shareholder voting agreements
• Courts do not want to supervise performance