CONTRACTS

What Is a Contract?

A contract is a legally enforceable promise or set of promises

Contract law is state law and is generally found in the Common Law.

With some contracts, the Uniform Commercial Code may apply.

The Uniform Commercial Code

Had its beginning in the Law Merchant. Principles eventually became part of the

Common Law.

Prior uniform laws: Uniform Negotiable Instruments Act 1896 Uniform Sales Act 1906

The Uniform Commercial Code

Created by American Law Institute and the National Conference of Commissioners on Uniform State Laws (1952)

Purposes: Promote fair dealing and higher standards of

behavior in the marketplace Establish a uniform law to govern commercial

transactions that take place across state lines

UCC has 11 Articles Art 1 General Provisions and Definitions Art 3 Negotiable Instruments Art 4 Banking Art 9 Secured Transactions

Article 2 of the UCC Article 2 applies to Contracts for the Sale of Goods

Goods are Tangible Moveable

Creation of Practical Contract Rules UCC is more flexible than contract law

Good Faith and Fair Dealing All parties must act in good faith Implied Warranties Merchant

COMMON LAW OF CONTRACTSCase law rulesState law-may disagreeMay be changed by statutes

U.C.C.Not all contractsSupercedes C.L. if it appliesDoes not have a rule for every C.L. rule

SPECIAL STATE STATUTENot uniformSupercedes C.L.

RESTATEMENT OF THE LAW OF CONTRACTSNot “law,” only a private summaryGenerally followed by most courts

ELEMENTS OF A VALID CONTRACT

Offer + acceptance = agreement Consideration Competent parties True assent Legality Form required by law

Types of Contracts Valid, Unenforceable, Voidable and Void

Valid contracts meet all legal requirements Unenforceable contracts meet basic legal

requirements but will not be enforced due to some other legal rule

Voidable contracts may be canceled by one or both of the parties

Void contracts lack one or more of the basic requirements for a contract

Types of Contracts

Unilateral and Bilateral Contracts In a unilateral contract, only one of the parties

makes a promise The other party performs an act in exchange for

the promise In a bilateral contract, both parties make a

promise

Introduction

Offer + Acceptance = Agreement Did one of the parties indicate to the other party

that he or she was willing to enter into an agreement on certain terms and conditions?

Did the other party indicate that he or she was willing to agree to those terms and conditions?

Courts look at the intent of the parties objectively

PROBLEM Over the phone, Mr. Smith, of Smith Builders, Inc,

offers to build Mr. Jones a new garage for $30,000.

Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back.

Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction.

Did they have a valid contract? Why or why not? Does it matter that any agreement was verbal?

AGREEMENT Express Implied in fact Implied in law/Quasi-contract

What Is an Offer? An offer is the manifestation of a willingness to enter

into a contract if the other person agrees to the terms Offeror - party makes the offer Offeree - party to whom the offer has been made

Intent Objective Present intent to contract

Not: preliminary negotiations, offers made in jest, anger, undue influence

How definite the supposed offer is Whether the offeror has communicated it to the offeree

Definiteness Did the offeror specifically indicate what he was

willing to do and what he wanted the offeree to do or agree to do in return?

The more specific the proposal, the more likely the court will call it an offer

Under UCC 2-204, if the parties are acting as though they have a contract, that is enough to create a binding agreement

Gap filling provisions in the UCC fill in the blanks for price, quantity, delivery, and time for payment

Communication to the Offeree

Act of communicating the offer indicates that the offeror is willing to be bound by its terms

Failure to communicate offer may be indication that offeror has not yet decided to enter into a binding agreement

Example: private reward

Advertisements Advertisements

Courts generally hold that ads for the sale of goods at a specified price are not offers, but are invitations to negotiate or to make an offer

Specific ads are considered offers under certain circumstances

Rewards Unilateral Contracts

Auctions Invitation to offer

Bids Invitation to offer

TERMINATION OF OFFER

How can an offer terminate? These are not the same as the ways in

which a contract terminates. A contract does not exist yet.

TERMINATION OF OFFER

REVOCATION BY OFFEROR REJECTION BY OFFEREE COUNTEROFFER LAPSE OF TIME DEATH OF DISABILITY OF EITHER

PARTY DESTRUCTION OF SUBJECT MATTER. OPERATION OF LAW

LAPSE OF TIME I offer to sell you my home for

$100,000. I will keep the offer open until October 15.

On September 20, someone makes me an offer of $120,000.

I accept the $120,000 offer, and revoke the offer I made to you.

Can I do that?

OPTION CONTRACT Consideration is paid to keep an option

open.

But consider… I am an antique car dealer, and you are a

customer. I send you a letter in which I offer to sell you a

particular car for $100,000. I will keep the offer open until October 15.

On September 20, someone makes me an offer of $120,000.

I accept the $120,000 offer, and revoke the offer I made to you.

Can I do that? What is different about this example?

Under the UCC, you can create a FIRM OFFER If the seller is a MERCHANT (someone in

the business of selling the product. Not a casual seller.)

The offer is made in writing AND It will be kept open for up to 3 months.

A FIRM OFFER is enforceable w/o any consideration being paid.

What Is an Acceptance?

Present intent to contract on the part of the offeree Assent may be express or

implied Offeree must accept offer on

offeror’s terms

What Is an Acceptance? Accepting an Offer for a Unilateral Contract

Performance of requested act or making the requested promise

Accepting an Offer for a Bilateral Contract Make promise requested in offer

Silence as Acceptance The law generally requires some affirmative indication of

assent In some cases, silence is viewed as acceptance

Who Can Accept an Offer? Original offeree or agent

MIRROR IMAGE RULE Acceptance must “mirror” the offer. Offeree must accept the offeror’s terms exactly. UCC Exception: The Battle of the Forms

MANNER OF ACCEPTANCE: Offeror can specify the manner of

acceptance, and offeree must use. If don’t use offeror’s terms – becomes a

counteroffer. Acceptance by Shipment

An order requesting prompt or current shipment of goods impliedly invites acceptance by a promise to ship or by prompt shipment of the goods

WHEN IS ACCEPTANCE EFFECTIVE?

When parties negotiate by correspondence, communications have crossed in the mail. So the courts developed the MAILBOX RULE.

MAILBOX RULE. Acceptance takes place at the time the

message is given to the transmitting agency for delivery.

Acceptance is effective when mailed, so a K is formed at that time

See Morrison v. Thoelke, 155 So. 2d 889; 1963 Fla. App. LEXIS 3084 (1963). B.s (of real estate) made a written offer (by

signing a K) and mailed it to S.s in another state.

S.s signed it and mailed it back. Before the K is received, the S.s called and canceled. Can they do that?

Another Example: 12/23 S, by letter, through his attorney, offered

to sell B property for $240,000 1/10 B, by his attorney, sent a written reply offering

$230,000 Same day… B’s attorney phoned S’s attorney

and in the course of the conversation, informed him of B’s reply

Later the same day… B sent a telegram purporting to accept S’s original offer of $240,00

Telegram was delivered the same day, prior to the receipt of the reply offering $230,000.

Was a contract formed?

EXCEPTIONS TO MAILBOX RULE. (Acceptance will not be effective when mailed, but only if and when it is received.)

1. Incorrect address or insufficient postage.

2. Offeror protects him/herself – Say in offer: Acceptance is not effective until it is received.

EXCEPTIONS 3. Offeree doesn’t use proper form

If offeror specifies means, and offeree doesn’t use it, response is not an acceptance but a counteroffer.

If offeror hasn’t specified means, offeree can use any reasonable means. Usually, same form as the offer was in, or

anything faster. (But if offer was by mail, and the acceptance

cannot be mailed and received within the time limit, that form is not reasonable.)

EXCEPTIONS

4. §40 of the Restatement of Contracts If offeree first mails a rejection & then tries to

accept, the 2nd response is a counteroffer unless it is received first.

PROBLEM 1/1 Tom mails an offer 1/3 Mary receives the offer 1/5 Mary mails a rejection 1/6 Mary mails an acceptance 1/7 Tom receives the rejection 1/8 Tom receives the acceptance

PROBLEM

1. Apply the Mailbox Rule as if the Restatement exception did not exist.

1. Is there a contract?

2. When is the rejection effective?

3. When is the acceptance effective?

4. Apply the Restatement exception.

2. Apply the Restatement exception.1. Is there a contract?

PROBLEM (Over the phone, Mr. Smith, of Smith Builders, Inc,

offers to build Mr. Jones a new garage for $30,000. Mr. Smith says that they can begin work on June 15. Mr. Jones says he needs time to think about it, and will call back. Mr. Jones never calls back, but on June 15, Smith Builders arrive to begin construction. Did they have a valid contract? Why or why not?)

Mr. Jones is at home when Smith Builders arrive. He knows he has never authorized the work, but decides he will say nothing until the garage is completed. Then he hopes he will not have to pay.

PROBLEM

1. When Ms. Williams is 12 years old, her wealthy uncle gives her a document in which he promises to transfer to her Blackacre estate when she turns twenty-one. She accepts his offer. Ms. Williams turns twenty-one, but her uncle refuses to give her the property.

Was there a valid contract?

The Idea of Consideration

Legal Value Promisee does or agrees to do something he or

she had no prior legal duty to do in exchange for the promisor’s promise

Promisee agrees not to do something he or she has a legal right to do in exchange for the promisor’s promise

Adequacy of Consideration Bargained for and Given in Exchange

Valid Consideration

There is valid consideration if there is: A bargained for exchange Of a promise, act, or forbearance That had legal value

Not preexisting duty Not past consideration Not illusory promise or

A recognized exception

Rules of Consideration

Preexisting Duties Promises to Discharge Debts for Part Payment Past Consideration

Moral Obligations

Forbearance to Sue Mutuality of Obligation

COMPETENT PARTIES Capacity

Ability of a person to do a legally valid act Three major classes of persons with limited capacity

include: Minors People who are mentally impaired Intoxicated persons

Contracts are VOIDABLE by the incompetent

Minors’ Contracts The Reason for Minors’ Incapacity

May not be able to bargain effectively with older, more experienced persons

Ability To Disaffirm Minors may disaffirm their contracts at any time during their

minority and for a reasonable time after attaining majority

Ratification A minor who does not disaffirm within a reasonable time

after attaining majority is held to have ratified the contract and loses the right to disaffirm

Minors’ Contracts

The Consequences of Disaffirming Minors who successfully disaffirm a contract are

entitled to the return of any consideration they have given the adult party to the contract

Barriers to Disaffirmance Because of potential unfairness to adults, some

courts have created exceptions to the general rule that minors can disaffirm their contracts

Minors’ Contracts

Emancipation Misrepresentation of Age by Minors Necessaries

Things essential to a minor’s continued existence and general welfare

Minors are generally liable on a quasi contract basis for the reasonable value of necessaries furnished to them

Contracts of Mentally Impaired and Intoxicated Persons

Theory of Incapacity The Test of Incapacity

Whether the party at the time the contract was entered into, had sufficient mental capacity to understand the nature and effect of the contract

The Effect of Incapacity Contract is voidable at the election of that person

Contracts of Mentally Impaired and Intoxicated Persons

Necessaries Liability is for the reasonable value of necessities

The Right to Disaffirm People lacking mental capacity can disaffirm their contracts, and

on disaffirmance, must return any consideration they received that they still have

Ratification People who regain their capacity can ratify their contracts

PROBLEM1. Attorney White has been the wealthy Widow

Black's financial advisor for years. Attorney White has recently gone into the real estate development business and persuades Widow Black that it would be a wise investment to purchase from him, land in Florida that he is planning to develop into a resort area. Two years later, when no work is even begun, Widow Black discovers that the land is unfit for such a development.

TRUE ASSENT/GENUINESS OF ASSENT/REAL CONSENT The Need for Real Consent

Agreement must be voluntary to be enforceable The Parties’ Duty of Care

Parties who enter into contracts are required to exercise reasonable caution and judgment

The Remedy Contracts entered into as a result of misrepresentation,

fraud, duress, undue influence, and certain kinds of mistake are voidable: RECISSION

Ratification One who waits too long to complain has indicated

satisfaction with the agreement despite the initial lack of consent

Misrepresentation Knowledge of Falsity

Misrepresentation can result from an honest mistake or negligence

Materiality A material fact is one that would contribute to a reasonable

person’s decision to enter the contract Fact versus Opinion

An actionable misrepresentation must concern a present or past fact

Justifiable Reliance Reliance must be justified

Detriment Party was harmed by reliance

Fraud What is a “Knowingly Made” Misstatement? Intent to Deceive

Scienter refers to the mental state of the defendant

Fraud by Silence caveat emptor

Fraud in the Execution The Remedy for Fraud

Duress and Undue Influence

General Nature One party to an agreement interfered with the other

party’s ability to resist entering into the agreement

Duress Wrongful threat Plaintiff’s free will was overcome

Undue Influence Confidential relationship Plaintiff was induced to make an unfavorable agreement

Mistake The Nature of Mistake Mutual Mistake

Untrue belief by both parties about a material fact Either party can rescind

Unilateral Mistake Mistaken party may be able to rescind if meets

certain conditions, or If other party knew or should have known of the

mistake and is trying to take unfair advantage of it

PROBLEM Washington hires Jefferson to kill his

(Washington's) wife. They execute a formal written agreement, which indicates that Washington will pay Jefferson $5,000 down and $10,000 when the job is done. Jefferson has until September 18 to complete the job. September 18 comes and goes, and Washington's wife is still very much alive. Jefferson has gotten cold feet, but has spent the $5,000. Washington comes to Attorney Ogden, and wants to sue Jefferson for breach of contract.

LEGALITY OF THE SUBJECT MATTER

Illegality Agreement is unenforceable if either its formation or its

performance is illegal or contrary to public policy

Types of Illegality Requires commission of an illegal act Made illegal by statute Contrary to public policy Unconscionable

The Presumption of Legality Doubts are resolved in favor of legality unless parties clearly

intended an illegal bargain

Contracts to Commit Illegal Acts

Agreements to Commit Crimes An agreement that calls for the commission of a

crime is illegal

Agreements to Commit Torts A contract that cannot be performed without

committing a tort is illegal

Contracts Made Illegal by Statute

Wagering Statutes Most states prohibit or regulate gambling Agreements in violation of these are illegal

Statutes Declaring Bargains Void or Voidable Examples of statutes passed by states making

certain agreements void or voidable are usury laws and Sunday laws

Contracts Made Illegal by Statute

Regulatory Statutes Agreements by unlicensed persons to perform

regulated services or engage in regulated businesses are illegal and unenforceable

The failure to obtain a license required by a statute whose sole purpose is to raise revenue does not affect the legality of unlicensed persons’ agreements

Contracts Contrary to Public Policy The Idea of Public Policy

What courts believe is in the best interest of society

Contracts Injurious to Public Service Bribes

Contracts to Influence Fiduciaries Prizes, rewards, or other inducements May be enforced if full disclosure to, and

agreement of beneficiary

UNCONSCIONABLE CONTRACTS Parties possess severely unequal

bargaining power The dominant party unreasonably uses its

unequal bargaining power to obtain oppressive or manifestly unfair contract terms

Adhering party has no reasonable alternatives

Examples Fine print that hides oppressive contract

terms. Standard pre-printed contracts that are

used industry-wide that contain oppressive terms. Confession of judgment clauses

Contracts that exploit underprivileged, unsophisticated, uneducated, or illiterate consumers

Examples (cont’d) Contracts written in language

incomprehensive to laypersons Contracts that deny rights and remedies to

consumers Exculpatory clauses

PROBLEM Mr. Thomas and Mr. Johns agree orally that Mr.

Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed.

Two days before the three years is up, Mr. Johns changes his mind and indicates that he will not pay for the warehouse.

FORM REQUIRED BY LAW : The Statute of Frauds

The Effect of Failure to Comply In most states, the statues of frauds makes oral

contracts that come within its provision unenforceable

Contracts Covered by the Statute of Frauds

Contracts to Answer for the Debt of Another (co-signor)

Contracts Transferring an Interest in Land Bilateral Contracts Not Capable of Being

Performed within One Year Construe as possible to perform within a year

UCC: contracts for sale of goods where price is $500 or more

Contracts Covered by the Statute of Frauds

UCC: contracts for sale of goods where price is $500 or more

The Code’s Statute of Frauds Specially manufactured goods Admission Part performance Merchant’s failure to object to memo within 10

days

Interpreting Contracts

The Necessity of Interpretation Interpretation of uncertain or ambiguous terms is

a question for the jury Courts attempt to give the agreement the

meaning that a reasonable person would be expected to give it in light of the surrounding facts and circumstances

Interpreting Contracts

Rules of Construction The court attempts to determine the principal

objective of the parties If parties are both members of the same trade,

courts presume the parties intended words’ meanings to be controlled by trade usage

Written terms control over printed terms Ambiguities are resolved against the party who

drafted the contract

4 Corners Rule The writing constitutes the entire

agreement The contract is “integrated.” It may contain a merger

clause.

The Purpose of the Rule Writing it the best evidence of

intent

Exceptions to the Parole Evidence Rule Lack of Voluntary Consent Ambiguous Contracts Incomplete Writings Subsequent Oral Contracts Conditions Precedent

The Parole Evidence Rule

PROBLEM (Mr. Thomas and Mr. Johns agree orally that Mr.

Thomas will build a new warehouse for Mr. Johns at a cost of $100,000. Construction is set to begin in three years with no payment due until the construction is completed. Two days before the three years is up, Mr. Johns changes his mind and indicates that he will not pay for the warehouse.)

What if Mr. Thomas had already purchased all the supplies needed to build the warehouse?

PROMISSORY ESTOPPEL (DETRIMENTAL RELIANCE)

Promise induces action on the part of another in reliance of that promise

Reliance must be reasonable and foreseeable under the circumstances

Promissor is “estopped” from denying the existence of a contract.

See SUN-PACIFIC ENTERPRISES, INC. v. GIRARDOT, 251 Ga. App. 101; 553 S.E.2d 638; 2001 Ga. App. LEXIS 932 (2001)

PROBLEM Mr. Simpson purchases a fire insurance policy on his home for 3 years at a

cost of $300. At the end of 3 years, his house has not caught

fire, but the insurance company still has his $300.

He feels that the insurance company should have to reimburse him the $300, since they have paid nothing on the policy.

Conditions Definition

Party’s duty to perform is qualified by the happening of some event or condition

Types of Conditions Condition Precedent

Performance excused unless condition occurs Condition Subsequent

Performance excused if condition occurs Concurrent Conditions

Tender of performance precedes right to demand performance

Conditions

The Creation of Conditions Express Conditions

Created by oral or written statements in the contract

Implied Conditions (Constructive) Nature of parties’ contract lead courts to imply a

condition on the parties’ duties of performance

Standards of Performance Complete or Satisfactory Performance

Some kinds of contractual duties can be completely and perfectly performed

Payment of money

Substantial Performance Performance that falls short of complete performance in

minor respects but does not deprive the promisee of a material part of the consideration that was bargained for

Material Breach Performance fails to reach the degree of perfection the other

party is justified in expecting under the circumstances

Standards of Performance Anticipatory Breach

Promissor, prior to the time for performance, indicates an intent not to perform his or her duties under the contract

PROBLEM1. Mr. Brown enters into an agreement with Mr.

Green in which Mr. Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green’s warehouse to the ground destroying his supply of the siding. When Mr. Green fails to perform, can Mr. Brown recover from him in a breach of contract action?

Excuses for Nonperformance Prevention

Promisee who causes promisor’s failure of performance cannot complain about the failure

Impossibility If it is impossible to perform, the duty to perform is

discharged and the promissory is not liable for material breach

Intervening Illegality Destruction of Subject Matter Commercial Impracticability Commercial Frustration

Commercial Impracticability Due to something unforeseeable More than just an increase in prices See SWIFT TEXTILES, INC. v. LAWSON,

135 Ga. App. 799; 219 S.E.2d 167; 1975 Ga. App. LEXIS 1831 (1975)

Discharge and Rescission The Nature of Discharge

Parties are released from their obligations under a contract

Discharge by Agreement Discharge by Waiver Discharge by Alteration Discharge by Statute of Limitations

Remedies

The Theory of Remedies If a party does not perform as promised under

the contract, and performance has not been excused or discharged, then the other party is entitled to a remedy for the breach of the contractual promise

Remedies at law Damages in Contract Cases

Compensatory Damages Loss in value of promised performance

Consequential Damages Foreseeable losses from special circumstances of

particular contract Nominal Damages

Award for purely technical breach of contract Liquidated Damages

Damages specified in contract for breach Punitive Damages

Damages to punish, usually unavailable

Remedies

The Duty to Mitigate Damages

PROBLEM1. (Mr. Brown enters into an agreement with Mr. Green in which Mr.

Green will supply him with specially treated siding Mr. Brown uses in his construction business. Despite the existence of an alarm system and security guards, an arsonist burns Mr. Green warehouse to the ground destroying his supply of the siding.)

Suppose Mr. Brown later discovers that Mr. Green burned his own warehouse. Additionally, Mr. Green is the only one in the country that manufactures this specially treated siding, and he has ample supplies and facilities to manufacture more. Can Mr. Brown now sue for breach of contract? If so, what might be an appropriate remedy?

Equitable Remedies Specific Performance

Promissor ordered to perform contract where subject matter is unique

Injunctions Ordered to prevent irreparable injurySee QUADRON SOFTWARE INTERNATIONAL

CORPORATION v. PLOTSENEDER. 256 Ga. App. 284; 568 S.E.2d 178; 2002 Ga. App. LEXIS 890 (2002)

Third-Party Beneficiary Contracts Donee Beneficiaries

Promisee’s primary purpose is contracting was to make a gift of the contracted performance to the third party

Creditor Beneficiaries Promisor’s performance will satisfy a legal duty

that the promisee owes to a third party

Donee and Creditor Beneficiaries can enforce the contract

A contracts with B to put a roof on B’s house upon B’s promise to pay C $5000 (because A owes C $5000).

K

B A(Obligor) Roof on house (Assignor)Promise To Pay$5000 Assignment of Rights C 3rd Party Beneficiary (Assignee)

Third-Party Beneficiary Contracts

Incidental Beneficiaries Performance of contract intended solely for the

benefit of the promisee also incidentally benefits a third person

Incidental beneficiaries acquire no rights under the contract

Incidental beneficiaries cannot enforce rights even though they benefit from another’s contract

Assignment of Contracts

Definitions An assignment is a transfer of rights under a

contract The assignor is the person who makes an

assignment The assignee is the person who accepts the

assignment

Assignment of Contracts

What Contracts Are Assignable? Assignments that do not involve personal

relationships or increase the promisor’s burden are enforceable

Contracts that are nonassignable include: Contracts that expressly forbid assignment Assignments contrary to public policy Contracts involving personal rights

The Consequences of Assignment

The Rights and Duties of Assignees An assignee is entitled to all the rights his or her

assignor had under the assigned contract Assignee can enforce implied guarantees

against assignor Assignee may be liable for duties expressly or

impliedly delegated with the assignment

The Consequences of Assignment The Rights and Duties of Assignees

Assignors who are paid for making an assignment are potentially liable to assignees for certain implied guarantees

The assigned claim is valid The assignor has good title to the rights assigned The assignor will not do anything to impair the

value of the assignment Any written instrument representing the assigned

claim is genuine

The Consequences of Assignment

Delegation of Duties When a promisor appoints another to perform his

duties under a contract, this is called a delegation

Duties cannot be delegated if the performance depends on the personal skill, character, or judgment of the promisor