BUSI506 Nature and Terminology

BUSI506

CHAPTER 11

Nature and Terminology

1. An Overview of Contract Law
2. Sources of Contract Law

Contract law is common law. The common law governs all contracts except when statutory law or administrative agency regulations have been modified or replaced it.

Statutory law—particularly the Uniform Commercial Code (UCC)—governs all contracts for the sale of goods. It should be stressed that it is essential to know when the UCC applies.

What Law Governs Contract?

1. Common Law—Set out in the Restatement of Contracts
2. UCC- Uniform Commercial Cod
3. governs the SALE of tangible personal property

sale-a contract involving the transfer of title to goods from Seller to Buyer for a price

goods-tangible personal property

personal property- any property other than interest in Real Property

examples: purchase of a television set, auto, or textbook – all sales of goods governed by the UCC

Types of Contacts Outside the Code (UCC)—governed by Common Law—general contract law

Code doesn’t apply to: (meaning apply general contract law)

1. employment contracts
2. service contracts
3. insurance contracts
4. contracts involving real property
5. contracts for the sale of intangibles such as patents and copyrights

How do you decide whether to apply UCC or general contract law when contract contains both a Service and a Sale of Goods?----- Predominate purpose test

Case- Colorado Carpet Installation v Palermo (not in textbook)

Facts: P negotiated w D for sale and installation of carpet and vinyl flooring, after D delivered the floor covering, disagreement w the installer and D contracted w another installer—P brought action against D for breach of contract

Issue: which law to apply, was it a contract for services or a contract for sale of goods

Holding: contract for sale of goods, and thus enforceable because UCC requires agreement be in writing (St of Frauds)—Court held primary purpose (or predominant purpose) of the contract was the sale of the carpet and vinyl and the installation was only incidental

1. The Function of Contract Law

Contract law is needed to ensure compliance with a promise or to entitle a nonbreaching party to re­lief when a contract is breached. All contractual relationships involve promises, but all promises do not establish contractual relationships. Most contractual promises are kept; keeping a promise is generally in the mutual self-interest of the promisor and the promisee.

1. Definition of a Contract

A contract is a promise for the breach of which the law gives a remedy or the performance of which the law recognizes as a duty (in other words, an agreement that can be enforced in court). A contract may be formed when two or more parties each promise to perform or to refrain from performing some act now or in the future. A party who does not fulfill his or her promise may be subject to sanctions, including damages or, under some circumstances, being required to perform the promise.

Def: Contract- a binding agreement that the court will enforce

Restatement of Contracts: a promise or set of promises for the breach of which the law gives a remedy

Promise- then intention to act or to refrain from acting in a specified way

May be a. contractual or b noncontractual

Breach- a failure to properly perform a contractual obligation

1. The Objective Theory of Contracts

The intent to enter into a contract is important in the formation of a contract. The objective theory of contracts determines intent. Under this theory, a party’s intention to enter into a contract is judged by outward, objective facts as a reasonable person would interpret them, rather than by the party’s own secret, subjective intentions. Objective facts include: (1) what the party said; (2) how the party acted or ap­peared; and (3) the circumstances surrounding the transaction.

1. Elements of a Contract

The four essential elements of a contract are (1) agreement, (2) consideration, (3) contractual capac­ity, and (4) legality. Defenses to the formation or enforcement of a contract include (1) genuineness of assent and (2) form.

Essentials of Contract

4 Requirements:

1. mutual assent- parties to K must show by words or conduct that they have agreed to enter into K (usual method- offer and acceptance)
2. consideration- each party to K must intentionally exchange something of value as an inducement to the other party to make a return exchange

(text states: exchange of a legal benefit or incur a legal detriment)

3. legality of object- purpose of K must not be criminal, tortious, or otherwise against public policy
4. capacity- parties must have contractual capacity

• person placed under guardianship, no legal capacity to K
• minors, intoxicated persons- limited capacity to K
• all others have full contractual capacity

* a promise meeting all of the requirements is contractual and legally binding

• most oral contracts binding and enforceable – but certain instances written contract required

III. Types of Contracts

Each of these categories signifies a legal distinction regarding a contract’s formation, performance, or enforceability

Classification of Contracts:

1. Contract Formation

These contracts are based on how and when a contract is formed.

1. Bilateral v. Unilateral Contracts

Every contract involves at least two parties: an offeror and an offeree. The offeror prom­ises to do or not to do something. Whether a contract is unilateral or bilateral depends on what the offeree must do to accept. A bilateral contract is a promise for a promise; if the offeree need only promise to perform, the contract is bilateral. A uni­lateral contract is a promise for an act; if the offeree can accept only by complete performance, the contract is unilateral. A unilateral contract’s offer becomes irrevocable once substantial performance has been completed.

1. Bilateral or Unilateral Contracts

Bilateral- K in which BOTH parties exchange promises

Examples: Adelle says to Bryon, if you will mow my law- I will pay you $10.00 and Bryon agrees— each party is a PROMISOR and a PROMISEE—both made mutual promises—Adelle agreed to pay 10 dollars, Bryon agreed to mow the law

Example: Tom tells Jane, I will pay you $50.00 if you promise to repair my stereo next Saturday—Jane says okay, I’ll fix it next Saturday,--still a bilateral contract, even though promise won’t be acted upon until the future

Unilateral- K in which only one party makes a promise (promise exchanged for an act)

Example: Adele say to Bryon- If you will mow my lawn, I will pay you $10.00, Bryon doesn’t say anything, but mows the lawn—unilateral contract is formed

Was Bryon under any duty to mow the lawn? No he made no promises, would Adele have a cause of action for breach of contract if Bryon did not mow the lawn? No

Was Adele obligated to pay Bryon? Yes, after he mowed the lawn, a contract was formed—if Adele fails to pay Bryon can he sue her for breach of contract ? Yes

2. Formal v. Informal Contracts

Formal contracts require a special form or method of formation to be enforceable. Formal contracts include contracts under seal, which are writings with a special seal at­tached. All other contracts are informal contracts, or simple contracts. For these, no special form is required (except for certain types of contracts that must be in writing).

2. Formal or Informal Contracts

Formal- contracts that are legally binding simply because they have certain legal characteristics and a particular form prescribed by law

Example: negotiable instrument such as checks

Informal- K that is legally binding but doesn’t require a particular form or mode of expression

3. Express v. Implied-in-Fact Contracts

An express contract is one in which the terms are expressed in words, oral or written.

A contract that is implied from the conduct of the parties is an implied-in-fact contract, or simply an implied contract. The parties’ conduct reveals that they intended to form a contract and creates and defines its terms.

`To establish an implied-in-fact contract: (1) the plaintiff must have furnished some ser­vice or property; (2) the plaintiff must have expected to be paid and the defendant knew or should have known that payment was expected; and (3) the defendant had a chance to reject the service or property and did not.

3. Express or Implied

Express- an agreement that is stated in words either in writing or orally

Implied in fact-contract in which an agreement is inferred from their conduct

Examples: Dan owner of a hardware store orders 100 hammers from his supplier- nothing is said by either party about PRICE or method of payment, supplier ships hammers as ordered—CONTRACT is implied—Dan must pay supplier

Example: Regular customer known to have an account at a drugstore, picks up item at drugstore, shows it to clerk, Valid K? yes, clerk familiar w conduct—implied in fact contract

1. Contract Enforceability

A valid contract results when all of the ele­ments necessary to contract formation exist—when the parties agree, through an offer and an acceptance, to form a contract; the contract is supported by consideration; the contract is for a legal purpose; and the parties had legal capacity to contract.

4. Valid, Void, Voidable, or Unenforceable Contracts
5. Voidable Contracts

A voidable contract is a valid contract in which one or both of the parties have the option of avoiding his or her legal obliga­tions. If the contract is avoided, both parties are released. If it is ratified, both par­ties must perform.

Voidable K- (defective contract)—it is a contract but because of the way it is formed—the law permits one or more of the parties to avoid legal duties the contract creates making it unenforceable

Example: Thomas convinces Regina to enter into a K through fraud- Regina upon discovery of the fraud can “avoid” the contract—contract is not VOID but VOIDABLE at Regina’s choice (Thomas is the fraudulent party and can not elect to avoid the contract- if Regina wishes to go forward Thomas must also)

Example: Dave makes a material misrepresentation regarding his car (ie the car has only 12,000 miles on it, when in fact it has 112,000 miles on it—Nancy buys the care based upon that misrepresentation—the contract is VOIDABLE—Can Nancy avoid the K? yes, what if she goes through w contract, can she recover damages from Dave? Yes – Can Dave avoid the K? no

2. Unenforceable Contracts

An unenforceable contract is a valid contract that cannot be enforced due to certain defenses. For example, a valid contract barred by a statute of limitations is an unen­forceable contract.

Unenforceable K- K for which there is no remedy for a breach

Example: K for services for more than 1 year under the Statute of Frauds must be in writing in order to be enforceable, if parties enter into K w/o a writing—contract is unenforceable

3. Void Contracts

A contract that is void is no contract. A void contract gives rise to no legal obligation on the part of any party. An illegal contract is, for example, a void contract.

Void K- an agreement that doesn’t meet all of the requirements of a binding contract— NOT A CONTRACT—merely a promise or agreement w no legal effect

Example: agreement entered into by person whom the courts have declared incompetent—lacks the capacity to contract—no K

Valid K- K which meets all of the requirements of a binding K- it is an enforceable promise or agreement

1. Contract Performance

Contracts are also classified according to their stage of per­formance. A contract that has been performed is an executed contract. A con­tract that has not been performed is an executory con­tract. If one party has fully performed but the other has not, the contract is said to be exe­cuted on the one side and executory on the other, and it is classified as executory.

5. Executed or Executory Contracts

Executed K- contract that has been fully carried out by all parties—it completed

Example—lawn mower example—Bryon has mowed the lawn, and Adele has paid him the $10.00—executed contract

Executory K- contract that is still partially or entirely unperformed by one or more of the parties

Example: Sam enters into K with Bill- Sam is to pay Bill $50.00 and Bill is to 1. Repair broken chair, 2. Change oil in his car and 3. Walk his dog—Bill doesn’t get the chair fixed yet- what type of contract is in existence? Executory

When chair fixed and Sam pays Bill $50.00—what type of contract in existence? Executed

Noncontractual Obligations

1. Quasi Contracts

A quasi contract is not based on an express promise to pay for a bene­fit received or on conduct imply­ing such a promise. Quasi contracts, or contracts implied in law, are imposed by courts to avoid un­just enrichment.

Quasi Contract—not a contract but Court will enforce obligations to avoid injustice (not a contract because it is based neither on an express or implied promise

-- Per book quasi K used to provide a remedy when parties enter into Void K, unenforceable K, or voidable K

3 elements must be present:

1. benefit given to D by P
2. an appreciation by D of benefit
3. retention of benefit by D which would make it unfair for D to keep w/o compensating P

Example: John involved in car accident and is injured- while unconscious, police take him by ambulance to the hospital, he is treated and released 2 days later, hospital sends him a bill for $500.00- John refuses to pay- state he didn’t consent to treatment and bill too high--- COURT will hold John responsible for paying Bill as a Quasi Contact

Example: Willard by mistake delivers to Roy a plan unaddressed envelope containing $100 intended for Lucia—Roy is under not CONTRACTUAL obligation to return it—but Willard is permitted to recover the $100 from Roy

1. Limitations on Quasi Contractual Recovery

There are situations in which the re­cipient of a benefit is not liable. People cannot normally be forced to pay for benefits thrust on them, for ex­ample.

1. When an Actual Contract Exists

A quasi contract will not normally be imposed when there is a contract that covers the matter.

General rule: promises are not enforceable if they do not meet all requirements of a contract—exceptions to that rule

Promissory Estoppel—doctrine where Courts enforce noncontractual promises that are made in a way that leads the promisee to act in a certain way, based on the promise--- PURPOSE OF PROMISSORY ESTOPPEL—to avoid injustice

Example: Gordon promises Constance he will not foreclose for a period of 6 months on a mortgage Gordon owns on Constance’s land, in reliance on that representation, Constance then spends $100,000 to construct a house on the land--- in this example—there was no consideration (element of contract) so otherwise not an enforceable contract but Court under a promissory estoppel theory will NOT allow Gordon to foreclose and hold promise enforceable as valid contract

1. Interpretation of Contracts

The most important principle to keep in mind in considering these rules is that the law attempts not just to enforce a contract but to enforce the contract the parties made.

1. The Plain Meaning Rule

When a contract is in writing that is not subject to conflicting meanings, a court will enforce the writing according to its plain meaning. Under this plain meaning rule, the meaning of the words must be determined from the face of the instrument—a court cannot consider evidence extrinsic to the document.

1. Other Rules of Interpretation

When the writing is ambiguous, a court will interpret the language to give effect to the parties’ intent as expressed in their contract. A court will not make or remake a contract nor interpret the language according to what the parties claim their intent was when they made it. In inter­preting ambiguities

1. A reasonable, lawful, and effective meaning will be given to all of a contract’s terms.
2. A contract will be interpreted as a whole; individual clauses will be considered subordinate to the contract’s general intent. All writings that are part of the same transaction will be interpreted together, although terms that were negotiated separately will be given greater consideration than standardized terms and terms that were not negotiated separately.
3. A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the par­ties clearly intended something else.
4. Specific and exact wording will be given greater consideration than general language.
5. Written or typewritten terms prevail over printed ones.
6. When the language used has more than one meaning, it will be interpreted against the party who drafted the contract.
7. When evi­dence of trade usage, prior dealings between the parties, and previous course of performance under the contract is admitted, what each of the parties does in pursuance of the contract will be interpreted as consistent with what the other does and with any rele­vant usage of trade and course of dealing and performance. In these cir­cumstances, ex­press terms are given the greatest weight, followed by course of performance, course of dealing, and usage of trade, in that order. When considering cus­tom and usage, a court will look at the customs and usage of trade of the particular busi­ness and the locale where the contract was made or is to be performed.