Business and its Legal Environment (Mgmt 246)

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Business and its Legal Environment (Mgmt 246)

• Professor Charles H. Smith
• Contracts (Chapters 9, 10 and 11)
• Spring 2010

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Terminology Used in Contract Law

• Unilateral contract contract based on one
  partys making a promise that calls for action.
• Bilateral contract contract based on both
  parties making promises to each other.
• Express contract contract is communicated in
  writing, orally, or both.
• Implied contract no express contract but
  parties actions/relationship support avoiding
  unjust enrichment.

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Terminology cont.

• Valid contract enforceable in court.
• Voidable contract one party can disavow
  contract under certain circumstances.
• Void contract unenforceable in court due to
  illegal purpose.
• Executory contract contract is not yet fully
  performed.
• Executed contract contract has been fully
  performed.

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Terminology cont.

• Written contract contract is in writing
  (recommended).
• Oral contract contract made orally (some
  enforcement problems).
• Electronic contract contract made
  electronically.
• Offeror/promisor party who makes offer.
• Offeree/promisee party(ies) who are
  recipient(s) of offer.

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Elements of a Contract

• A contract is often called an agreement, a
  bargain or a pact.
• No matter what label is used, the following
  elements are required
• Offer
• Acceptance
• Consideration

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Reasonable Expectations and Objective
Reasonable Person Standard

• The existence of any element of a contract or
  whether a contract exists at all is often
  informed by two related things
• The parties reasonable expectations shown by
  plain meaning of the contract language,
  surrounding circumstances and/or subsequent
  conduct.
• Objective standard based on what a reasonable
  person (judge, jury, or even you or me!) would
  conclude based on reasonable expectations
  factors.
• We will discuss these concepts in greater detail
  in later slides.

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Offer

• Proposal/invitation by offeror to enter into a
  contract.
• Objective intent by offeror to be obligated by
  the offer what would a reasonable person
  think?
• Terms of the offer must be reasonably definite
  need not be exact.
• Must be communicated to the offeree (e.g., reward
  case).

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Termination of an Offer

• After the offer is made, it can be no longer
  available to be accepted if
• Rejection by the offeree.
• Withdrawal/revocation by the offeror.
• By lapse of a specified or reasonable time.
• Counteroffer by the offeree (see next slide).

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Acceptance

• Must be of the offers terms (mirror image rule
  or mutual assent see next slide).
• An acceptance that changes an offers terms is
  an counteroffer, which is
• A rejection of the original offer and it is also
• A new offer in and of itself that can be
  accepted, rejected or the subject of another
  counteroffer in contract negotiations, there are
  often many counter-offers back and forth before
  there is acceptance.
• By an authorized method of communication
  usually, any method proper, but the offer itself
  may require a certain method of communication for
  acceptance.

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Mutual Assent Offer Acceptance

• Shown by offerors offer and offerees acceptance
  of the offer.
• Traditional inquiries are
• Did the parties agree to the same thing?
• Was there a meeting of the minds?
• Both are judged by objective standard (again,
  what would a reasonable person think?).

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What Can Eliminate Mutual Assent?

• Fraud also called misrepresentation or deceit.
• Mistake unilateral, which is usually not a
  defense, or bilateral, which is usually a
  defense fact, which can be a defense, or law,
  which is usually not a defense.
• Duress use or threat of physical or economic
  harm.
• Undue influence abuse of authority, power or
  position.
• Existence of any of the above can provide basis
  for or defense to a contract case.

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Consideration

• Each party must give up something of legal value
  no consideration if party purports to give up
  something he or she is already obligated to do
  (or not do) has each party sacrificed
  something?
• There is no reasonableness requirements, so
  contract does not have to be fair or equal in
  order to have the requisite consideration.
• Be careful many times, parties will agree to
  the same thing (mutual assent) but, with no
  consideration, there will be no contract that can
  be enforced in court.

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Elements of Breach of Contract Case

• Plaintiff must prove all of the following or
  defendant will win without needing to put on any
  defense
• Valid contract between the plaintiff and the
  defendant.
• The defendants material breach of the contract
  (failure to perform) substantial performance
  is not Br/K (common abbreviation).
• The defendants breach of the contract causes
  damage (any financial loss, sometimes called
  injury) to the plaintiff.
• Plaintiffs performance or excuse for
  nonperformance.
• But, even if plaintiff proves all of the above,
  defendant may still have some defenses (see slide
  re Defenses to Br/K Case).

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Br/K Remedies

• Remedies at law and in equity
• Damages money (most common).
• Equitable non-monetary judgment (though may
  have great economic value).
• Election of remedies rule usually only one
  remedy available for one Br/K.

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Br/K Damages

• Most common judgment sought in contract cases
• Compensatory mathematical calculation based on
  value of contract less value of defendants
  performance.
• Consequential loss based on consequences of
  defendants breach.
• Liquidated exact amount of damages stated in
  contract.

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Br/K Equitable Remedies

• Not as common as damages but just as important
  can have great economic value equity means judge
  should do what is fair given the circumstances
• Specific performance plaintiff wants judge to
  order defendant to perform the contract as
  agreed plaintiff must be seeking unique subject
  matter (e.g., real estate, custom or rare item).
• Reformation plaintiff seeks order changing
  written contract to correct mistake.
• Rescission and restitution plaintiff requests
  judgment which requires both parties return any
  benefit they may have received.

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Defenses to Br/K Case

• First line of defense one or more elements
  missing.
• Capacity legal ability to enter into a contract
  (voidable) e.g., contracting party has mental
  disability or is under age of 18.
• Legality contract must have legal purpose
  contract with illegal purpose unenforceable
  (void).
• Assignment/delegation transfer of contract
  rights/duties to 3rd party.
• Mitigation of damages plaintiffs obligation to
  take reasonable steps to reduce damages any
  mitigation that could or actually did happen
  will be deducted from total amount of damages.
• Non-compete clause in employment contract
  (restraint of trade) illegal in California
  subject to reasonableness rule in other states.
• See other slides re mutual assent, statute of
  frauds and parol evidence rule.

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Statute of Frauds and Parol Evidence Rule

• Statute of frauds requires certain contracts to
  be in writing e.g., promise to answer for debt
  of another (guarantee) or transfer of interest in
  real property can electronic communication meet
  writing requirement of statute of frauds?
• Parol evidence rule says written contract cannot
  be contradicted by evidence of any prior
  agreement or contemporaneous oral agreement
  PERs exceptions include ambiguity, course of
  dealing, mistake, validity of contract in
  dispute PER is substantive rule of contract
  interpretation.

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Discharge of a Contract

• Discharge no further performance per the
  contract required ways to obtain discharge of a
  contract
• By full or substantial performance most
  common.
• By subsequent agreement accord and satisfaction
  (same parties, new contract) novation (same
  contract, new party).
• By operation of law e.g., statute of
  limitations expires, defendant files for
  bankruptcy.

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Electronic Contract/Signature

• Under certain conditions, both federal and state
  laws permit contracts to be formed electronically
  and allow electronic signatures to satisfy
  statute of frauds writing and signature
  requirements.
• Examples 15 U.S.C. 7001 et seq. California
  Civil Code 1633.1 et seq.

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Case Studies

• Lucy v. Zehmer (pages 200-01) was there an
  offer to be accepted?
• Hamer v. Sidway (page 212, footnote 19)
  consideration.
• Jacob Youngs, Inc. v. Kent (pages 231-33)
  substantial performance.
• Remedies for breach of contract see generally
  pages 239-48.