What is a contract

1
What is a contract?

• An agreement between two or more parties
  consisting of promises which the law will enforce

2
Everyday Contracts

• Checking account or savings account or CD
• Who are the contracting parties?
• Is it an verbal or written contract?
• What is the duration of the contract?
• What if one of the parties defaults?
• Apartment lease
• Who are the contracting parties?
• Is it a verbal or written contract?
• What is the duration of the contract?
• What if one of the parties defaults?

3
What are the requirements to have an
enforceable contract?

• Proper Legal Subject Matter
• Legally Competent Parties
• Offer
• Acceptance
• Consideration

4
Examples of Improper or Illegal Subject Matter
for a Valid Contract

• Gambling and contracts to pay such debts
• Crimes such as "hit contracts"
• Anti-Trust Violations

5
When is a person competent to enter into a
contract?

• 18 years or older (Missouri)
• Exception 1 Minors (court cases) can legally
  contract for necessities, as long as
• The minor is emancipated ("out from under the
  parental roof," I.e., financially independent)
• Contract subject matter is a "necessity," defined
  by the courts to include food, clothing, and
  shelter.
• Exception 2 Missouri statute authorizes minors
  to contract (borrow) for educational loans at any
  age, as long as it is for attending an accredited
  university, college, or conservatory (but not a
  "trade school")

6

• Under the Missouri statute (431.067) authorizing
  minors to legally contract to borrow money to
  defray the necessary expenses of attending any
  accredited university, college, or
  conservatory, how much can a minor borrow to
  attend MIZZOU?
• All university fees
• All university fees and book costs
• All university fees, book costs, and room/board
  costs
• All university fees, book costs, room/board
  costs, and other necessary living expenses

7
Contracts with Minors who later ratify their
contract

• AFTER the "minor who contracted" turns 18
• Ratification Makes legally enforceable a
  contract which was not valid before the ratifying
  act
• Four Statutory Options (in Missouri)
• Written acknowledgement of or promise to pay
• Partial payment upon such debt
• Disposal or part or all of the property for which
  such debt was contracted
• Refusal to deliver property for which such debt
  was contracted upon written demand to the
  creditor

8
When is someone 18 or older NOT competent to
contract?

• When they are not able to comprehend the nature
  and consequences of entering into the contract at
  the time of its execution
• Mental Illness
• Intoxication

9
Missouri Statute

• Persons competent to contract when eighteen years
  of age (Chapter 431.055)
• The legal age at which a person becomes competent
  to contract in Missouri is eighteen years and any
  rule or provision of the common law to the
  contrary is hereby abrogated.
• (L. 1974 2d Ex. Sess. S.B. 3 2)

10
Offer

• Offeror makes the offer to the Offeree
• Three Requirements of an Offer
• Intent to make a contract
• Certain definite terms (item description,
  price, quantity)
• Offer must be communicated to the offeree
• Counteroffer Cancels the prior offer
• Only one offer at a time can exist
• Advertisements NOT usually considered to be
  "offers" but rather "inducements" to buyers to
  make offers to potential sellers
• Grocery store ads like Bananas 10-cents/lb
• Exception Ads which are very specific

11
Who can accept an offer?

• Stated persons identified in the offer
• Sometimes the offer indicates a "class" of
  possible offerees (then it becomes important to
  identify clearly which offeree was first to
  accept the offer)

12
How long is an offer effective?

• General Rule Offers are effective for a
  "reasonable time" determined by the trade customs
  and the type of goods or services being bargained
  for
• For the stated time period IF it is between
  "merchants" as defined by the U.C.C.
• Otherwise, non-merchant offerors are not bound to
  keep open their offer for the stated time (UNLESS
  the offeree pays money to keep the offer open,
  known as an "option contract")

13
Revocation of Offers

• By the expiration of a stated duration
• By the expiration of a "reasonable time"
• By a COUNTEROFFER from the offeree
• By the Offeror telling the offeree(s) that the
  offer is revoked

14
Acceptance

• Offeree must accept ALL of the offer terms
• Manner for acceptance
• Exactly as the offer requires (if specified)
• If no manner specified, then acceptance is proper
  in the manner the offer was delivered

15
Mailbox Rule for Acceptance

• Mailbox Rule Acceptance effective as soon as it
  is placed in the mailbox (outside the offerees
  control)
• Not when postmarked, received, nor read by the
  offeror

16

• March 16 Amanda sends a written offer by mail
  to Jesse, offering to buy his piano for 2,000
• March 19 Jesse received Amandas offer
• March 23 Jesse mailed his acceptance to Amanda
  
• March 24 Amanda phoned Jesse and told him her
  offer was cancelled
• On March 27 Amanda received Jesses acceptance
• So Jesse sold his piano to another person for
  1,800
• ??? Is there a contract or not? (yes)
• ??? If there is a contract, how much in damages
  does Amanda owe Jesse for her default (breach) on
  the contract? (200)

17
Consideration

• Mutuality Benefit Detriment
• Each party must benefit, AND each party must give
  up something (detriment)
• Each party must give something of value
• A promise to do something
• A promise to refrain from doing something
• Money or other property
• NOT required that the exchange be of equal value

18
Gifts

• Why isnt a promise to make a gift legally
  enforceable as a contract?
• Because only one party gave up something of
  value, there is NO consideration
• Church pledges Is there "consideration?"
• Yes, because the churchs detriment is the
  expense of providing a meeting place (utilities,
  capital costs, ministers salary, etc). The
  church members benefit is the opportunity to
  hear the ministers sermon in the comforts of the
  church.

19
Statute of Frauds When Must A Contract Be
Written?

• If a verbal contract violates the S/F, then it is
  unenforceable
• Rationale for the Statute of Frauds  
• To help parties settle their own disputes since
  they will have a written document to refer to
• To impress upon the parties the seriousness of
  their dealings

20
Situations Governed by the Statute of Frauds

• Any contract for the sale/purchase of land
• Any contract which cannot be performed within one
  year (as judge from the date of execution)
• Any contract for goods for 500 or more (if a
  merchant is the buyer or seller)
• For non-merchants, Missouri uses 5,000 as the
  threshold for whether the contract must be in
  writing (see next slide)
• Any promise to pay for the debts of another

21
Special Missouri Statute for the Sale of
Personal Property" Between Non-Merchants

• a contract for the sale of personal property is
  not enforceable by way of action or defense
  beyond five thousand dollars in amount or value
  of remedy unless there is some writing which
  indicates that a contract for sale has been made
  between the parties at a defined or stated price,
  reasonably identifies the subject matter, and is
  signed by the party against whom enforcement is
  sought or by his authorized agent.
• Missouri Statutes, Chapter 400.001.206

22

• Which of the following ORAL agreements is
  UNENFORCEABLE because it violates the Missouri
  statute of frauds?
• Sale of a new TV from a store (merchant) for
  1,200
• Purchase of a time share in a vacation condo
  (real estate) for 400/month, indexed for
  inflation
• Sale of a 2006 Prius by Alex to his brother for
  10,500 (not merchants)
• Purchase of Joe, the camel for 2,500 at the
  Mexico auction (not a merchant, as the seller is
  the camel owner, not the auction)
• All the above violate the Missouri statute of
  frauds
• (A), (B), and (C) violate the Missouri statute of
  frauds
• (A) and (B) violate the Missouri statute of frauds

23
Exception to the Statute of Frauds Doctrine of
Part Performance (DPP)

• DPP allows a verbal contract for land to be
  enforced at court (specific performance)
• Requirements
• Verbal contract
• Possession by the buyer (at least co-possession)
• Partial payment by the buyer
• Major improvements to the land by the buyer

24

• Which of the following is NOT A REQUIREMENT under
  Missouri common law in order to argue the
  Doctrine of Part Performance to allow a buyer to
  enforce a verbal contract to buy land?
• The buyer must have started paying on the verbal
  contract
• The buyer must have the right to come on the land
• The buyer must have made major improvements to
  the land
• The buyer must have made ordinary repairs to the
  land and its buildings
• The buyer must have made significant payments
• The buyer must be living or operating a business
  on the land
• (D), (E), and (F) are not required
• (C) and (F) are not required

25
Excusal from Contract Performance Impossibility
of Performance (IP)

• Unforeseeable and intervening force majeure (act
  of God)
• Unforeseeable means outside the control of
  either party
• Exception Crops
• Exception to the exception Crops to be grown on
  specified land
• Example Soybeans to be grown on Ryans farm (or
  SW1/4 of Section 31 of T31N, R22W)

26
Excusal from Contract Performance Frustration
of Purpose (FP)

• Unforeseeable and intervening force majeure
  destroys the desired benefit for one party even
  though both parties are able to perform their
  promises
• Unforeseeable means outside the control of
  either party
• Example A landowner contracts with an
  oil-drilling company to drill an oil well for a
  specified price. But then oil prices drop by
  200, making it unprofitable to pump up oil from
  such a well.

27

• Which of the following is the LEAST LIKELY to be
  excused under either the doctrine of
  impossibility of performance or the doctrine of
  frustration of purpose?
• Storm blows a big tree down on Kevins truck
  being sold to George. The exchange was to have
  taken place tomorrow, but now the truck is
  totaled. George wants to be excused from the
  written contract. (IP)
• Shannon has a written one-year health club
  contract with Wilsons. But Shannons job is
  eliminated and he cant keep up the payments.
  Shannon wants to be excused from his contract.
  (FP)
• Derek has a written agreement to stay at the K.C.
  Marriott Hotel to attend a three-day professional
  conference. But the conference is canceled.
  Derek wants to be excused from his contract.
  (FP)
• Ryan has a written contract to provide music as a
  DJ at Jordans wedding reception. But the
  wedding is cancelled because Jordan decides not
  to get married. Jordan wants to be excused from
  her contract.

28
Remedies for Breach of Contract

• Money Damages Preferred remedy
• Money damages are used to make the injured party
  "whole," I.e., putting the innocent party in the
  position s/he would have been in had the contact
  been performed as agreed
• Specific Performance (SP) Not available unless
  money damages are inadequate compensation
• Requires each party to perform as per the
  contract
• For LAND the buyer can always get SP
• For personal property, the buyer cannot get SP
  unless the specific property is very unique and
  almost impossible to find in the marketplace
• Rescission Cancels the contract, and puts the
  parties back into their original positions.
• Usually involves "fraud"

29
Liquidated Damages Clause (LDC)

• Rationale To avoid litigation
• Defined The amount agreed upon by parties to a
  contract for the amount of damages to be paid in
  the event either party breaches the contract
• The jury decides whether a liquidated damages
  clause was reasonable or a penalty
• For class purposes, let's presume a jury would
  find "unreasonable and a penalty" any LDC
  exceeding 50 of the contract price

30
How Do You Calculate Damages?

• Look at the contract and identify what the
  non-defaulting (innocent) party was to pay in
  exchange
• If the non-defaulting party is the seller, ask
  what the seller was going to get paid under the
  contract.
• If the non-defaulting party is the buyer, ask
  what the buyer was going to pay under the
  contract.
• Next find out what the non-defaulting party had
  to pay (if the buyer) or to sell for (if the
  seller) elsewhere, meaning to another person.
• This is called the cover price (to do the
  contract deal but with a third party)
• The difference between the contract price and
  cover price is what the law calls damages
• This is the amount of money it takes to give the
  non-defaulting party the deal they would have had
  had the contract been fully performed.

31
How Does A Liquidated Damages Clause Change the
Damages Remedy?

• If the liquidated damages clause (LDC) is not
  challenged in court or is found by a jury to be
  reasonable (not a penalty), then it is
  specifically enforced.
• What does that mean? That the only (exclusive)
  remedy for the non-defaulting party is the amount
  of the LDC.
• It makes no difference whether the real damages
  were more or less
• It makes no difference whether the non-defaulting
  party covered by buying (or selling) from (to)
  a third party
• Why do the courts allow LDCs?
• To avoid litigation (to free up the courts for
  other litigants)
• To encourage advance settlements between the
  parties (should there be a default)
• To promote and to respect the Right To Contract
• That persons are free to voluntarily (consent)
  enter into binding legal agreements (and agree to
  whatever clauses they want to, as long as it is
  not for an illegal purpose)

32
If the LDC is a Penalty, What Happens?

• If a LDC is taken to court and the jury finds it
  to be unreasonable as an early estimate of
  damages (before the real damages occurred), then
  it is called a penalty
• This means the LDC itself is NOT enforceable
• BUT the rest of the contract provisions (clauses)
  are still enforceable
• The contract as a whole is not invalidated only
  the LDC
• What are the damages if the LDC is thrown out for
  being a penalty?
• Follow the default damages formula What amount
  is required to make the non-defaulting party
  whole under the contract
• What puts the innocent party in the same position
  they would have been in had the contract been
  fully performed

33
Application 1

• Nathan tells Stacie she can have his used car for
  1,200 cash.
• Stacie says its a deal.
• Is there a contract?
• Yes
• Will the courts enforce this contract against
  the non-defaulting party?
• Yes

34
Application 2

• Drew has a written contract to sell his horse to
  Alex for 2,500.
• But Alex decided not to go through with the deal.
• Will the courts grant a remedy for breach of
  contract?
• Drew sold the horse for 2,000
• Alex bought another horse for 3,000
• Yes. Drew will be awarded damages of 500 (what
  he would have gotten under the contract, when
  combined with the money he got from selling the
  horse to a third party)