Contracts Part I

1
ContractsPart I

• Life marches on, with new conditions and new
  interests, causing constant judicial
  development.
• Arthur L. Corbin

2
The Function and Definition of Contracts

• Contract
• A set of promises constituting an agreement
  between parties, giving each a legal duty to the
  other
• An agreement that can be enforced in a court of
  law

3
Types of contracts

• Bilateral
• A promise for a promise
• Unilateral
• A promise for an act - acceptance is the
  completed performance of the act

4
Types of contractsContinued

• Express
• Formed by words oral, written or combination
• Implied-in-fact
• Formed by the conduct of the parties
• Quasi contract
• Implied in law - Imposed by law to prevent unjust
  enrichment

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Types of contractsContinued

• According of their state of performance
• Executed - A fully performed contract
• Executory - A contract not fully performed

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Types of contractsContinued

• According to their Enforceability
• Valid - The contract has the necessary
  contractual elements of offer and acceptance,
  consideration, parties with legal capacity, and
  it is made for a legal purpose
• Void - No contract exists
• Voidable - One party has the option of avoiding
  or reinforcing the contractual obligation
• Unenforceable - A contract exists, but it cannot
  be enforced because of some legal defense

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Requirements of a Contract

• The four required elements of a contract are
• Agreement
• Consideration
• Capacity
• Legality

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Agreement

• Agreement exists when an offer made by
  one party is accepted or assented to by
  the other.
• Offer - Requirements
• Intent -There must be a serious, objective
  intention by the offeror to be bound by the offer
• Definiteness - The terms of the offer must be
  sufficiently definite to be ascertainable by the
  parties or by a court
• Communication -The offer must be communicated to
  the offeree

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Agreement

• Offer-Termination
• By action of the parties - An offer can be
  revoked or rejected at any time before acceptance
  without liability. A counteroffer is a rejection
  of the original offer and the making of a new
  offer
• By operation of law - An offer can terminate by
• lapse of time
• destruction of the specific subject matter of the
  offer
• death or incompetence of the parties
• supervening illegality

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Agreement

• Acceptance
• Can be made only by the offeree or the offeree's
  agent
• Must be unequivocal. Under the common law (mirror
  image rule), if new terms or conditions are added
  to the acceptance, it will be considered a
  counteroffer

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Consideration

• Legal Sufficiency of consideration
• Consideration is not legally sufficient if one is
  either by law or by contract under a preexisting
  duty to perform the action being offered as
  consideration for a new contract. Past
  consideration (action or event that has already
  taken place) is not legally sufficient
  consideration.

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Consideration

• Adequacy of consideration
• Adequacy of consideration relates to "how much"
  consideration is given and whether a fair bargain
  was reached. Courts generally do not inquire into
  the adequacy of consideration if the
  consideration is legally sufficient.

13
Consideration

• Promissory Estoppel
• When a promisor reasonably expects a promise to
  induce definite and substantial actions or
  forbearance by the promisee, and the promisee
  does act in reliance, the promise is binding if
  injustice can be avoided only by enforcement of
  the promise.

14
Capacity

• Minors
• Contracts with minors are voidable at the option
  of the minor. When disaffirming executed
  contracts, the minor has a duty of restitution to
  return received goods if they are still in the
  minor's control or (in some states)to pay their
  reasonable value.

15
Capacity

• Intoxicated persons
• A contract entered into by an intoxicated person
  is voidable at the option of the intoxicated
  person if the person was sufficiently intoxicated
  to lack mental capacity, even if the intoxication
  was voluntary
• A contract with an intoxicated person is
  enforceable if, despite being intoxicated, the
  person understood the legal consequences of
  entering into the contract

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Capacity

• Mentally Incompetent person
• A contract made by a person adjudged by a court
  to be mentally incompetent is void
• A contract made by a mentally incompetent person
  not adjudged by a court to be mentally
  incompetent is voidable at the option of the
  mentally incompetent person

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Legality

• Contracts contrary to statute
• Gambling - Gambling contracts that contravene
  state statutes are deemed illegal.
• Sabbath(Sunday) laws - Prohibit the formation or
  the performance of certain contracts on Sunday.
  Such laws very widely from state to state, and
  many states do not enforce them.
• Licensing statutes - Contracts entered into by
  persons who do not have a license, when one is
  required by statute, will not be enforceable if
  the underlying purpose of the statute is to
  protect the public from unauthorized
  practitioners.

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Legality

• Contracts Contrary to public policy
• Contracts in restraint of trade - Contracts to
  reduce or restrain free competition are illegal.
  An exception is a covenant not to compete. It is
  usually enforced by the courts if the terms are
  ancillary to a contract and are reasonable as to
  time and area of restraint.
• Unconscionable contracts and clauses - when a
  contract or contract clause is so unfair that it
  is oppressive to one party, it can be deemed
  unconscionable by society as such, it is illegal
  and cannot be enforced.

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Defenses to contract formation or enforceability

• Genuineness of Assent
• Mistakes
• Unilateral - The mistaken party is bound by the
  contract
• Bilateral - when both parties are mistaken about
  the same material fact, such as identity, either
  party can avoid the contract. If the mistake
  concerns value or quality, either party can
  enforce the contract.

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Genuineness of AssentContinued

• Fraudulent misrepresentation
• When fraud occurs, usually the innocent party can
  enforce or avoid the contract. For damages, the
  innocent party must suffer an injury.

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Genuineness of Assent...continued

• Three elements of fraud
• 1. A misrepresentation of a material fact
• 2. An intent to deceive
• 3. The innocent party must justifiably rely on
  the misrepresentation.

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Genuineness of Assentcontinued

• Undue influence
• Undue influence arises from a special
  relationship, such as a fiduciary or confidential
  relationship, in which one party's free will has
  been overcome by the undue influence exerted by
  the other party. Usually, the contract is
  voidable.

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Genuineness of AssentContinued

• Duress
• Forcing a party to enter into a contract under
  the fear of a threat -- for example, the threat
  of violence or serious economic loss. The party
  forced to enter into the contract can rescind the
  contract.

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Defenses to contract formation or enforceability
Continued

• Statute of Frauds
• Applicability - The following types of contracts
  fall under the Statute of Frauds, which requires
  a signed writing to be enforceable
• contracts involving interests in land
• contracts whose terms cannot be performed within
  one year
• collateral promises
• promises made in consideration of marriage
• contracts for the sale of goods priced at 500 or
  more

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Defenses to contract formation or enforceability
Continued

• Form
• Exceptions
• partial performance
• admissions
• promissory estoppel
• specially manufactured goods
• written confirmation between merchants

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Ways to discharge a contract

• Performance -
• a contract may be discharged by complete (strict)
  or substantial performance. In some cases,
  performance must be to the satisfaction of
  another. Totally inadequate performance
  constitutes a material breach of contract.
  Anticipatory repudiation of a contract allows the
  other party to sue immediately for breach of
  contract.

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Ways to discharge a contractContinued

• Agreement of the parties -- Parties may agree to
  discharge their obligations in several ways
• by mutually agreeing to rescind (cancel) the
  contract
• by novation, in which a new party is substituted
  for one of the primary parties to a contract
• by accord and satisfaction, in which the parties
  agree to render performance different from that
  originally agreed upon.

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Ways to discharge a contractContinued

• Impossibility of performance
• Parties may be discharged from their contractual
  obligations when performance becomes commercially
  impracticable.
• It cant be done. vs. I cant do it.

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Common remedies available to nonbreaching party

• Damages--A legal remedy designed to compensate
  the nonbreaching party for the loss of the
  bargain. By awarding money damages, the court
  tries to place the parties in positions that they
  would have occupied had the contract been fully
  performed. The nonbreaching party frequently has
  a duty to mitigate (lessen or reduce) the damages
  incurred as a result of the contract's breach.

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Common remedies available to nonbreaching
partyContinued

• Rescission and Restitution
• Rescission - an action by prompt notice to cancel
  the contract and return the parties to the
  positions that they occupied prior to the
  transaction. Available when fraud, a mistake,
  duress, or failure of consideration is present.
• Restitution - when a contract is rescinded, both
  parties must make restitution to each other by
  returning the goods, property, or money
  previously conveyed.

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Common remedies available to nonbreaching
partyContinued

• Specific performance
• An equitable remedy calling for the performance
  of the act promised in the contract. Only
  available in special situations - such as those
  involving contracts for the sale of unique goods
  or land - and when monetary damages would be an
  inadequate remedy.

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Common remedies available to nonbreaching
partyContinued

• Reformation
• An equitable remedy allowing a contract to be
  "reformed" or rewritten to reflect the parties'
  true intentions. Available when agreement is
  imperfectly expressed in writing.