Chapter One Contracts

ELEMENTS OF A CONTRACT................................................................................................................ 1-1

OFFERS AND ACCEPTANCE.................................................................................................................. 1-1

When Offers End

When Acceptances Are Effective

TYPES OF CONTRACTS .......................................................................................................................... 1-3

CONSIDERATION..................................................................................................................................... 1-3

STATUTE OF FRAUDS ............................................................................................................................ 1-4

COMPETENT PARTIES: MINORS, DRUNKS & THE INSANE........................................................... 1-5

ILLEGAL CONTRACTS ........................................................................................................................... 1-5

FRAUD AND INNOCENT MISREPRESENTATIONS ........................................................................... 1-5

MISTAKES, DURESS AND UNDUE INFLUENCE ................................................................................ 1-6

PAROL EVIDENCE RULE........................................................................................................................ 1-7

THIRD PARTY RIGHTS AND ASSIGNMENTS..................................................................................... 1-7

Third Party Beneficiary Contracts

Assuming and Buying Subject To a Mortgage

Assignments and Delegations

DISCHARGE AND CONTRACT REMEDIES ......................................................................................... 1-8

Performance & Discharge of Contract Duties

Contract Remedies

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Chapter One Contracts ELEMENTS OF A CONTRACT 1. A contract is an agreement, a meeting of the minds. 2. A contract contains the following six essential elements:

a. an offer b. an acceptance c. consideration d. in proper form (i.e. the Statute of Frauds may require a writing) e. for a lawful object f. by two or more competent parties

Memory Device: Only Accuracy Can Pass Law Candidates

6 Elements of a Contract Only = Offer Accuracy = Acceptance Can = Consideration Pass = Proper form (Statute of Frauds may require a writing) Law = Lawful object Candidates = 2 or more Competent Parties

OFFERS AND ACCEPTANCES 1. An agreement requires both an Offer and an Acceptance 2. An Offer has 3 elements

a. it must be seriously intended (the test is whether a reasonable person would consider it to be a serious offer)

b. it must be communicated by either words or actions c. it must be definite in its terms (must include a price)

3. Advertisements and price quotes are not usually offers; they are invitations to deal 4. An Acceptance has 3 elements

a. an acceptance must be unconditional - the offeree must comply with all of the offeror's terms or a counteroffer is created

b. an acceptance must be communicated by words or actions (e.g. silence is rarely an acceptance unless there is a long course of dealing between the parties)

c. an acceptance may only be accepted by the party to whom it's made (e.g. offeree cannot assign his/her right to accept to accept an offer to a 3rd party)

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WHEN OFFERS END 1. Counteroffers end offers but they are only effective when they are received Example: A mails an offer to B on April 1 which is received on April 3. On April 3 B mails a counteroffer

to A. On April 4 B changes her mind and telephones an acceptance. On April 5 the counteroffer arrives. There is a contract between A and B because the offer was accepted on April 4 before the counteroffer took effect.

a. requests and inquiries are not counteroffers b. on the exam an inquiry will usually end in a question mark, not a period

2. Rejections end offers but they are only effective when received 3. Revocations end offers but they are only effective when received. Offeror may usually revoke anytime

before acceptance even if (s)he promises the offer will be held open a. exception: Option Contracts can't be revoked

1). the offeree pays consideration to keep offer open (note: there is no option contract until the consideration is actually paid by the offeree)

2). counteroffers will not end an option contract Example: A pays X $1,000 for the right to buy X's house for the price of $250,000 anytime prior to June 1.

An option contract has been created and X may not revoke the offer to sell for $250,000. If on May 1 A offers X $225,000 for the house, the option contract will not end and A will still have until June 1 to buy for $250,000

b. exception: In UCC Sales Firm Offers are irrevocable without consideration if: made by a merchant,

in writing, and a guarantee the offer will be held open 4. Offers end at the time stated (if no termination time is stated, it ends at reasonable time) 5. Death or insanity ends offers immediately, but does not end most contracts Example: X purchases goods on credit from A and dies prior to payment. The contract is still valid and X's

estate owes A the balance of the purchase price) 6. Destruction or sale of the subject matter will end an offer

a. destruction of the subject matter ends the offer immediately b. sale of the subject only revokes the offer when the offeree learns of it, not when the subject is sold

WHEN ACCEPTANCES ARE EFFECTIVE 1. MAILBOX RULE (also called the deposited acceptance rule) an acceptance is valid when sent if the

offeree uses either of the following means of communication: a. the express means (the form of communication the offeror said to use) OR b. any reasonable means if none is specified (the same means offeror used or faster)

Example: A mails an offer to B without specifying how acceptances are to be sent. If B mails a valid acceptance, the acceptance is effective when sent. If B telegraphs an acceptance, it is still effective when sent because a telegram is faster than the mail. There would be a valid contract even if the acceptance were lost or never arrived.

c. if a slower means of communication is used, it is valid when received

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2. Exceptions when the mailbox rule does not apply a. if an offer states an acceptance must be received by a specified date, then the acceptance must be

received by that date to be valid and cannot be effective when sent (reason: the offeree must comply with all of the offeror’s terms)

b. if the offeree has sent a previous rejection of the offer, for a later acceptance to be effective it must be received before the prior rejection

TYPES OF CONTRACTS 1. Bilateral and Unilateral contracts

a. a bilateral contract is a promise for a promise (most contracts are bilateral) b. a unilateral contract is a promise for an act (e.g. a reward)

1). note: the offeree must know of the reward to accept 2). if the offeree has made a substantial start on performing a unilateral offer, the offeror cannot

revoke the offer 2. Requirement and Output contracts

a. in a requirement contract, one party agrees to purchase all their requirements from another. The contract is valid if the amounts requested are made in good faith and reasonable to normal amounts

b. in an output contract, one party agrees to purchase the entire output of a factory or manufacturer. The contract is valid if the amounts are produced in good faith and reasonable to normal amounts

3. Executed and Executory contracts

a. executed contracts are those that have been fully performed by both parties b. executory contracts are those that have not been fully performed by both

4. Valid, Void and Voidable contracts

a. a valid contract is legally binding and enforceable against both parties b. a void contract is not enforceable against either party (e.g. it's not a legal contract) c. a voidable contract is a legal contract wherein one or both of the parties has the right to disaffirm or

rescind the contract (e.g. minor contracts are voidable by the minor and most fraud is voidable by the injured party)

***CONSIDERATION*** 1. An essential element of a contract is that it be supported by adequate consideration

a. consideration is giving up of a legal right (e.g. something you're legally free not to do) b. consideration must be mutually bargained for (e.g. one promise was given in exchange for the other

party's promise or act) and legally sufficient 2. Courts aren't usually concerned with the adequacy of consideration, only that it be present for both parties

a. thus, there is no requirement that the consideration be of equal value b. exception: courts will consider the adequacy of consideration if the contract is unconscionable (so

grossly one sided that it shocks the conscience of a court) 3. Two cases where consideration is not present

a. past consideration is no good (e.g. an employer promises a cash payment to a deceased employee's family in recognition of the employee's years of service)

b. there is no consideration when a party is already contractually or legally obligated to perform 4. Additional consideration is needed from both parties to modify a contract exception: in UCC Sales contracts can be modified without additional consideration

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5. Exceptions: some promises are enforceable without any consideration: a. promises to donate to charity are often enforceable without consideration b. a written promise to pay a debt barred by the Statute of Limitations can be enforced without

consideration c. promissory estoppel: a promise by one party relied upon by another can be enforced without

consideration if the reliance was: 1). reasonable: a reasonable person would have relied on the promise 2). detrimental: party relying on the promise would be substantially harmed

***STATUTE OF FRAUDS*** 1. There are 6 types of contracts that require some type of writing to be enforceable

6 TYPES OF CONTRACTS = GRIPE + MARRIAGE

G sale of Goods of $500 or more - the writing must state a quantity

R Real estate contracts

I contracts Impossible to perform in 1 year - begin measuring from when the contract is made - not when performance is to begin

P Promise to answer the debt of another

E Executor's promise to be liable for the debt of an estate

Marriage contracts where Marriage is the consideration 2. Any type of writing that states the major contract terms can satisfy the Statute of Frauds

a. the writing need only be signed by one party but it is only enforceable against the one who signed b. the terms may be stated in more than one document

3. Exceptions: no writing is required even though it is one of the 6 types if:

a. the contract is fully performed by both parties (executed) b. a contract impossible to perform in one year is enforceable without a writing if one side has fully

performed (e.g. X orally promises an employee a $25,000 bonus, if the employee will remain with her for 4 years. If the employee works for X for the 4 years, X's oral promise is enforceable)

c. an oral real estate contract is enforceable in two different cases: 1). if the buyer is in possession of the land and has made a substantial payment or substantial

improvements or 2). if the seller has completely performed (e.g. delivered the deed to the buyer)

d. a promise to answer the debt of another is enforceable if the main or primary purpose of the promise was to benefit the promisor and not the debtor

Example: X hires a contractor to build a house and the contractor subcontracts with a plumber. The

plumber threatens to quit due to contractor's nonpayment. X, fearing the house will not be finished on time, orally promises to pay the plumber if the contractor doesn't. Although X's oral promise to pay the plumber is a promise to pay the debt of another, it is enforceable because the main purpose was to benefit X, not the contractor.)

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COMPETENT PARTIES: MINORS, DRUNKS & THE INSANE 1. A contract must be made by two or more competent parties note: the exam normally tests competent parties with minors, drunks and the insane 2. Minors may disaffirm contracts anytime while a minor or a reasonable time thereafter (thus, minor contracts

are voidable because the minor has the right to rescind) a. minors cannot disaffirm real estate contracts while they are still a minor b. minors cannot disaffirm necessary contracts (things like food, clothing or shelter)

3. To disaffirm a minor need only return what (s)he possesses or controls at that time 4. Minor may ratify a contract by words or actions (i.e. use of the object)

a. minors can only ratify after becoming an adult; they can't ratify while still a minor b. minors must ratify the entire contract - they can't ratify part and disaffirm part

5. Minors may disaffirm contracts, but they are liable in damages for torts (civil wrongs) Example: A minor buys a car by misrepresenting that (s)he was an adult. After putting 200,000 miles on the car,

the minor attempts to disaffirm. The minor may disaffirm the contract, but must pay damages for the tort of fraud. 6. A drunk may disaffirm only if (s)he was incapable of understanding what (s)he did 7. Insane may usually disaffirm, but once adjudicated insane all future contracts are void ILLEGAL CONTRACTS 1. Illegal contracts are void - courts won't aid either party in an illegal contract

2. Failure to have a required license makes all your contracts void exception: the contract is enforceable if the license was a mere revenue raising measure

3. Covenants not to compete in a sale of business or employment contract are valid if reasonable. They must meet 3 tests of reasonableness: a. must be reasonably needed to protect a legitimate business interests b. must be reasonable as to time c. must be reasonable as to distance

***FRAUD*** and INNOCENT MISREPRESENTATIONS 1. Actual Fraud has 5 elements - MS RID

5 Elements of Fraud = MS RID

M Must have a Material Misrepresentation of fact or a deliberate concealment - must be a fact (opinions don't count unless made by experts) - no duty to disclose unless there is a known hidden defect, or to correct a previous representation later found out to be false or if the parties are in a fiduciary relationship

S Must have Scienter (an intent to deceive - made knowingly or intentionally)

R Must have Reasonable Reliance (justifiable reliance)

I Must have Intent to rely

D Must have Damages

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2. Constructive Fraud - has the same 5 elements as actual fraud but the intent to deceive element is fulfilled by a reckless disregard for the truth (making a statement without knowing if the statement is true or false) not scienter - MR RID

5 Elements of Constructive Fraud = MR RID

M Must have a Material Misrepresentation of fact

R Must have Reckless disregard for the truth ( making a statement without knowing if it is true or false )

R Must have Reasonable Reliance (justifiable reliance)

I Must have Intent to rely

D Must have Damages 3. Fraud in the execution is void (defrauded party didn't know a contract was made) 4. Fraud in the inducement (party knows they made a contract but one or more terms are misrepresented) makes

a contract voidable. This means the injured party has 2 choices: a. rescission: cancel the contract and restore parties to their former positions b. or the injured party may accept the contract and sue in tort for money damages c. note: in UCC Sales a party may rescind and sue for money damages

5. An Innocent Misrepresentation has 4 of the elements of fraud but no scienter or reckless disregard for the

truth - the injured party may only rescind and cannot sue for damages - MR ID 4 Elements of Innocent Misrepresentation = MR ID

M Must have Material Misrepresentation of fact R Must have Reasonable Reliance (justifiable reliance) I Must have Intent to rely D Must have Damages

MISTAKES, DURESS & UNDUE INFLUENCE 1. Most mistakes have no effect on a contract. There are 2 exceptions:

a. mutual mistakes of material facts make a contract voidable b. with material unilateral mistakes, one may disaffirm only if the other party knew or should have

known a mistake was being made 2. Duress is forcing someone into a contract by wrongful acts or improper threats of violence, economic

devastation or criminal action a. to constitute duress, it must actually induce the other party to enter the contract b. forcing someone into a contract by actual physical force makes the contract void c. forcing someone into a contract by improper threats makes a contract voidable

1). threat of economic devastation or criminal prosecution is voidable 2). threat of civil litigation is not duress, only threat of criminal action

3. Undue Influence is an unfair use of a position of trust, confidence or affection to overcome another's free

will in contract. It makes a contract voidable

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PAROL EVIDENCE RULE 1. Evidence (oral or written) that contradicts a written contract is inadmissible in court

a. evidence of what occurred prior to or during (contemporaneous with) the writing is inadmissible if it contradicts the written agreement

b. note: may always introduce evidence of what took place after the date of the writing (even if it contradicts) because the parties may have agreed to change the writing

c. writing must have been intended to be the complete contract between the parties 2. The parol evidence rule does not preclude the introduction of evidence if any of the following apply

(evidence is admissible) FAME

Evidence is admissible if: FAME F can always introduce evidence of Fraud or other circumstances that would invalidate the contract (e.g.

illegality, duress, undue influence) A can always introduce evidence of what took place After the date of the contract even if the evidence

contradicts the writing M can always introduce evidence of Mistakes E can always introduce evidence to Explain the writing or to clear up ambiguities - parol evidence rule

only precludes the introduction of contradictory evidence

THIRD PARTY BENEFICIARY CONTRACTS 1. A & B make a contract with the intent of benefiting a third party 2. For a 3rd party to have rights under the contract they must have been an intended beneficiary. There are

two types of intended beneficiaries a. donee beneficiary - someone you make a gift to (e.g. beneficiaries in most life insurance contracts

are donee beneficiaries) b. creditor beneficiary - may sue either A or B or both if there is a breach

Example: A owes X $500. A agrees to perform services for B for the sum of $500 with B to pay the money

to X. If A performs the services and X does not receive the $500, X may sue either A or B or both of them because X is a creditor beneficiary

3. Incidental beneficiary obtain no rights under the contract ASSUMING & BUYING SUBJECT TO A MORTGAGE 1. Assuming a Mortgage: buyer purchases land already encumbered by a mortgage

a. buyer agrees to take over mortgage and the buyer is liable for the mortgage b. seller (original mortgagor) is still liable for mortgage c. the creditor (mortgagee) is a 3rd party creditor beneficiary and may sue either buyer or seller if there

is a breach 2. Buying Subject to a Mortgage: buyer purchases land encumbered by a mortgage

a. buyer doesn't agree to take over the mortgage and is not liable b. seller (original mortgagor) is the only one liable for mortgage c. buyer runs the risk of foreclosure if the seller doesn't pay

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ASSIGNMENTS & DELEGATIONS 1. Most contract rights can be assigned and duties delegated

a. a writing is not usually required to assign b. an assignment does not usually require consideration

2. Although there is a technical difference between an assignment and a delegation, an “assignment of all

rights under the contract” is usually interpreted to be both an assignment of rights and a delegation of duties 3. You may not assign or delegate if the basic obligations of the parties would be changed Contracts that cannot be assigned - PIPI

P cannot assign Personal service contracts calling for special skill I cannot assign if it would Increase risk or duty or materially alter performance P cannot assign if it is Prohibited by the contract or by law

exception: the right to receive money is assignable even if prohibited by contract I cannot assign Insurance contracts

4. Assignee or delegatee "stands in the shoes" of the assignor or delegator. They gain all of the assignor’s rights

and have all of the assignor’s liability a. if there is a breach, both the assignee and the assignor are liable b. a defense that is good against the assignor is also good against the assignee

5. When a creditor assigns out his right to receive money (e.g. selling a receivable)

a. if the debtor is notified of the assignment, debtor must pay assignee not assignor b. if the debtor isn't notified and pays the assignor, the assignee may only collect from the assignor and

may not collect from the debtor 6. An assignor makes certain implied warranties

a. the claim assigned is valid (e.g. no fraud, duress, illegality, etc.) b. assignor has good title and all documents are genuine c. assignor has no knowledge of facts that would impair the value of the assignment d. assignor will do nothing to defeat or impair the assignment

PERFORMANCE & DISCHARGE OF CONTRACT DUTIES 1. Discharge by performance or prevention of performance

a. performance or tender of performance of contractual duties discharges that party b. prevention of performance by one party is a material breach and discharges the other party

2. Discharge by breach

a. a material breach by one side of a contract releases the other side from performing b. exception: if one party has substantially performed, no discharge occurs

1). the breach must be minor (i.e. the party substantially performed) 2). the breach must usually be unintentional 3). breaching party may still collect under the contract, but damages are subtracted for the

minor breach c. an anticipatory breach or anticipatory repudiation occurs when one party, before the time of

performance, indicates they won't perform 1). injured party may sue immediately OR 2). wait until the time of performance and then sue if there is a breach

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Example: A contractor agrees to build a house for $150,000 and complete construction by August 15. If the contractor informs the homeowner on July 15 that the house will not be completed on time, the homeowner may immediately sue the contractor on July 15, or wait until August 15 and sue if the house is not completed.

3. Discharge by agreement

a. mutual rescission: both parties agree to cancel the contract b. in a novation, the parties agree to replace one party in a contract with a new party

1). the creditor agrees to release the old party (i.e. old party is discharged) 2). the creditor agrees to look only to the new party for performance

Example: X owes 1st National Bank $200,000 on a mortgage and is in default. Y agrees to assume liability

for the mortgage. If 1st National agrees to release X from the mortgage and look only to Y for payment, a novation has occurred

c. in an Accord & Satisfaction the parties agree to change a contract by substituting a new performance

for an existing one (frequently on the exam, a promise of a debtor to pay a lesser amount than what is owed at an earlier date) 1). the Accord is the promise to change performance 2). the Satisfaction is the satisfactory performance of the accord 3). no discharge of the old contract until the accord is satisfactorily performed

Example: X owes Y $15,000 on a promissory note payable on December 1. Y agrees to accept $12,000 on

June 1 in full satisfaction of the debt. The Accord is the agreement to pay the lesser amount 6 months early. The debt will not be discharged until X actually pays the $12,000. (Satisfaction).

4. Discharge by operation of law

a. if a contract becomes absolutely impossible to perform, both parties are discharged (e.g. Death of a party to perform services discharges the personal service contract and destruction of the subject matter through no fault of either party discharges both parties)

b. the statute of limitations limits the time which a law suit may be brought 1). the statute of limitations does not discharge contractual obligations or make the contract void.

It merely bars access to judicial remedies 2). the time period is measured from the date of the breach, not the contract date and is usually six

years in most states 3). a debt barred by the statute of limitations can be revived in most states by a new written

promise to pay by the debtor 5. A condition is an event whose occurrence may affect the promisor's duty to perform

a. a condition precedent is an event that must occur before performance is due (e.g. X agrees to purchase Y's house for $200,000 providing that X can obtain suitable financing within 60 days)

b. a condition subsequent is an event that will terminate a duty to perform (e.g. in a sale or return, the buyer may terminate the contract within a specified period of time if not satisfied with the goods)

c. concurrent conditions occur when the mutual duties of the parties are to take place at the same time (e.g. in UCC sales, unless otherwise agreed, the buyer's duty to pay and the seller's duty to deliver occur at the same time)

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CONTRACT REMEDIES 1. Compensatory damages are monetary damages to compensate for all harm done

a. includes loss in value, consequential damages (e.g. lost profit or injury to property caused by the breach) and incidental damages (e.g. expenses to avoid further loss)

b. punitive damages are rarely awarded for contract or sales breaches c. mitigation of damages: injured party is required to use reasonable efforts to keep damages low (e.g.

if a buyer breaches, the seller should use reasonable efforts to resell the goods because this will lessen the amount of damages the buyer must pay)

2. Liquidated damages occur when the contract states what damages will be for a breach

a. most often involves forfeiture of a down payment by a buyer if there is a breach b. the damages must be reasonable to the harm actually done and not a penalty

3. Specific performance is an equitable remedy where the breaching party is required by court order to perform

the contractual duties as promised a. it is available only when money damages are an inadequate remedy b. thus, it may only be used with rare and unique property and never in personal service contracts (e.g. land

or any "one of a kind item") c. if specific performance is available a party will recover either specific performance or compensatory

damages, but not usually both 4. Rescission cancels the contract and restores the parties to their former position 5. Reformation: a court rewrites a contract to make it conform to the agreement of the parties