Bus Law 340 Ch 7 CONTRACT BASICS
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- Promise: A promisor’s declaration, made to one or more promisees, that the promisor will perform or refrain from performing some present or future act.
- Contract: An agreement between two or more competent parties in which an offeror agrees, in exchange for valuable consideration, to perform or refrain from performing some present or future act, and one or more offeree to whom the offeror made its offer accepts the offer’s terms. n
- Offer: The offeror’s promise or commitment to perform or refrain from performing some specified act. *In contract law, offers normally are revocable (capable of being taken back, or canceled)until accepted.
- Acceptance: An offeree’s voluntary act – either in the form of words or conduct – indicating assent to the offer’s terms. n
- Delayed Acceptance: Unless the offer’s terms or the circumstances otherwise dictate, an offeree’s acceptance need not occur in immediate response to the offeror’s offer.
- Consideration: Something of value given or promised in exchange for the offer or the acceptance.
- Capacity: Both parties must be legally competent to enter into the agreement. n
- Purpose: Generally speaking, parties are free to contract about anything on mutually agreed terms. n
- Legality: The contract’s purpose must be to accomplish some goal that is legal and not contrary to public policy. n
- Genuineness of Assent: The apparent consent of both parties must be genuine. n
- Objective Theory of Contract: The parties’ assent is judged not by the subjective intent of each party, but by the objective intent that a similarly situated reasonable person would understand the parties to have. n
- Form: The agreement must be in whatever form (e.g., written, under seal) the law requires.
- Bilateral Contract: A bilateral contract arises when the offeror gives her promise in exchange for the offeree’s return promise (e.g., X promises to deliver a car to Y, and Y promises to pay X an agreed price).
- Example: Javier offers to buy Ann’s digital camera for $200. Javier tells Ann that he will give her the cash for the camera on the following Friday, when he gets paid. Ann accepts Javier’s offer and promises to give him the camera when he pays her on Friday. Javier and Ann have formed a bilateral contract.
- Unilateral Contract: A unilateral contract arises when the offeree can only accept the offer by performance (e.g., X delivers a car to Y, who promises to pay X an agreed price). n
- Once the offeree of a unilateral contract begins to perform, the offeror loses the ability to revoke her offer (e.g., if Y offered to pay X an agreed price in exchange for X delivering a car to Y, once X delivered the car, Y could not revoke her offer to pay X).
- Example: Reese says to Celia, “If you drive my car from New York to Los Angeles, I’ll give you $1,000.”Only on Celia’s completion of the act—ringing the car to Los Angeles—does she fully accept Reese’s offer to pay $1,000. If she chooses not to accept the offer to drive the car to Los Angeles, there are no legal consequences.
- Example: Contests *an agreement can be made during the contest with the contestant.
- Formal Contract: A contract that requires a special form or method of formation (creation) in order to be enforceable. n
- Informal Contract: A contract that does not require a specified form or method of formation in order to be valid. n
- Executed Contract: A contract that all parties have completely performed. n
- Executory Contract: A contract that has not yet been fully performed by one or more parties.
EXPRESS AND IMPLIED CONTRACTS
- Express Contract: A contract in which the terms of the agreement are explicitly stated orally or in writing. n
- Implied-in-Fact Contract: A contract formed in whole or in part by the conduct (as opposed to the words) of the parties. In order to establish an implied-in-fact contract,
- (1) the plaintiff must have furnished some service or property to the defendant,
- (2) the plaintiff reasonably expected to be paid and the defendant knew or should have known that a reasonable person in the plaintiff’s position would have expected to be paid for the service or property rendered, and
- (3) the defendant must have had the opportunity to reject the service or property and failed to do so.
- Example: You need an accountant to fill out your tax return, so you find a local accounting firm and drop by to talk to an accountant and learn what fees will be charged. The next day, you return and give the receptionist all the necessary information and documents, such as W-2 forms. Then you walk out the door without saying anything expressly to the accountant. In this situation, you have entered into an implied-in-fact contract to pay the accountant the usual and reasonable fees for her services. The contract is implied by your conduct and by hers. She expects to be paid for completing your tax return. By bringing in the records she will need to do the work, you have implied an intent to pay for her services.
- **Note that a contract can be a mixture of an express contract and an implied-in-fact contract. In other words, a contract may contain some express terms, while others are implied.
- Example: During the construction of a home, the homeowner often asks the builder to make changes in the original specifications. When do these changes form part of an implied-in-fact contract that makes the homeowner liable to the builder for any extra expenses? That was the issue in the following case.
- Case 7.4 Example: FACTS Uhrhahn Construction was hired by Lamar Hopkins and his wife for several projects in the building of their home. Each project was based on a cost estimate and specifications. Each of the proposals accepted by Hopkins said that any changes in the signed contracts would be made only “upon written orders.” When work was in progress, Hopkins made several requests for changes. There was no written record of these changes, but Uhrhahn performed the work and Hopkins paid for it. A dispute arose after Hopkins requested that Uhrhahn use Durisol blocks rather than cinder blocks in some construction. The original proposal specified cinder blocks, but Hopkins told Uhrhahn that the change should be made because Durisol was“easier to install than traditional cinderblock and would take half the time. ”Hopkins said the total cost would be the same. Uhrhahn orally agreed to the change, but demanded extra payment when it discovered that Durisol blocks were more complicated to use than cinder blocks. Hopkins refused to pay, claiming that the cost should be the same. Uhrhahn sued. The trial court held for Uhrhahn, finding that the Durisol blocks were more costly to install. The homeowners appealed. ISSUE Did the homeowners and the builder have an implied-in-fact contract regarding the substitution of Durisol blocks for the cinder blocks specified in the contract?
- DECISION Yes. The Utah appeals court affirmed the decision of the trial court, finding that there was a valid contract between the parties and that both parties had agreed to oral changes in the contract. The changes created an implied-in-fact contract by which the builder agreed to provide extra work in exchange for additional compensation from the homeowners.
- REASON The court found that the elements of a contract were present—offer and acceptance, competent parties, and consideration. The terms were clearly specified in the proposals accepted by Hopkins. Uhrhahn promised to perform work in exchange for payment. Although the contract stated that any changes would be in writing, both parties waived that term in the contract when they orally agreed on some changes in the work performed. As often happens in construction, changes were requested that were outside the contract. The builder did the work, and the buyer accepted the work. Such oral modification of the original contract creates an enforceable contract, and payment is due for the extra work. This is an implied-infact contract. Hopkins asked Uhrhahn to perform certain work. Uhrhahn expected to be compensated for the work, and Hopkins knew or should have known that Uhrhahn would expect to be paid for work that was outside the specifications of the original contract. FOR
VOIDABLE, UNENFORCEABLE,AND VOID CONTRACTS
- Valid Contract: A contract satisfying the requisites discussed earlier – agreement, consideration, legal purpose, capacity, and form. By contrast,
- a voidable contract is an otherwise valid contract that one of the parties may legally avoid, cancel, or annul (e.g., a contract entered into under duress or under false pretenses);
- an unenforceable contract is an otherwise valid contract rendered unenforceable by some statute or law (e.g., an oral contract that, due to the passage of time, must be evidenced by a writing to be enforceable); and
- a void contract is a contract having no legal force or binding effect (e.g., a contract entered into for an illegal purpose).
- Quasi Contract: A legal fiction a court may invoke, in the interests of fairness and justice, to
- (1) prevent a party from being unjustly enriched at another’s expense, and
- (2) allow a party whose actions would otherwise unjustly enrich another to recover the value of the unjust enrichment.
- Courts typically will not allow a person to recover in quasi contract if the person conferring the benefit did so
- officiously (e.g., a car dealership cannot recover the value of a more expensive paint job it applied to your car without your asking or agreeing to have it do so) or
- as a result of misconduct (e.g., a distant cousin’s murderer cannot sue you to recover a portion of what the cousin left you in her will) or
- negligence (e.g., a driver who falls asleep and loses control of his car, which ends up on the sidewalk preventing you from falling into an open manhole, cannot sue you in quasi-contract for saving you from injury or death).
- Case: 7.1:
- Facts: Seawest Services Associate owned and operated a water-distribution system that served homes both inside and outside a housing development. Seawest had two classes of members. Full members owned property in the housing development, and limited members received water services for homes outside the development. Both full and limited members paid water bills and, as necessary, assessments for work performed on the water system. In 2001, the Capenhavers purchased a home outside the housing development. They did not have an express contract with Seawest, but they paid water bills for 8 years and paid once $3950 assessment for water system upgrades. In 2009, a dispute arose between the parties, and the Capenhavers began refusing to pay their water bills and assessments. Seawest sued the Capenhavers in a Washington state court. The trial court found that the Vapenhavers were limited members of Seawest and thus were liable for the unpaid water bills and assessments. The Capenhavers appealed.
- Issue: Did the Capenhavers have a quasi contract with Seawest?
- Decision: Yes. The Washington appellate court affirmed the decision of the trial court, holding that the Capenhavers were liable to Seawest for breach of a quasi contract.
- Reason: The court explained that a quasi contract exists when a person knowingly receives a benefit from another party and it would be "inequitable for the person to retain the benefit without the payment of its value" The Capenhavers enjoyed the benefits of Seawest's water services and even paid them before their dispute arose. The court found that "the Capenhavers would be unjustly enriched if they could retain benefits provided by Seawest without paying for them" After all, the court reasoned, they purchased a home that received water services, and they knew that they cold not receive water without being a limited member at Seawest.
- Example:A vacationing physician finds Emerson lying unconscious on the side of the road and renders medical aid that saves his life. Although the injured, unconscious Emerson did not solicit the medical aid and was not aware that the aid had been rendered, Emerson received a valuable benefit, and the requirements for a quasi contract were fulfilled. Here, the law normally will impose a quasi contract, and Emerson will have to pay the physician for the reasonable value of the medical services provided.
- Limitations: Qwest Wireless, LLC, provides wireless phone services in Arizona and thirteen other states. Qwest marketed and sold handset insurance to its wireless customers, although it did not have a license to sell insurance in Arizona or in any other state. Patrick and Vicki Van Zanen sued Qwest in a federal court for unjust enrichment based on its receipt of sales commissions for the insurance. The court agreed that Qwest had violated the insurance-licensing statute, but found that the sales commissions did not constitute unjust enrichment because the customers had, in fact, received the insurance. Qwest had not retained a benefit (the commissions) without paying for it (providing insurance); thus, the Van Zanens and other customers did not suffer unfair detriment.
- The offeror must seriously, and objectively, intend to perform or refrain as offered.
- The terms of the offer must be reasonably certain or definite.
- The offeror or its agent must communicate the offer to the offeree.
- A variety of common statements related to consensual transactions are not offers, including:
- expressions of opinion;
- statements of intent;
- preliminary negotiations;
- auctions and other invitations to bid, negotiate, or contract, including most forms of advertisement;
- agreements to agree to one or more material contract terms or conditions at some later date.
- Example: If Samir says, “I plan to sell my stock in Novation, Inc., for $150per share,” no contract is created if John “accepts” and tenders $150 per share for the stock. Samir has merely expressed his intention to enter into a future contract for the sale of the stock. If John accepts and tenders the $150 per share, no contract is formed, because a reasonable person would conclude that Samir was only thinking about selling his stock, not promising to sell it.
REVOKING AN OFFER
- Revocation: The withdrawal of an offer, communicated to the offeree or its agent prior to the offeree’s acceptance. Unless an offer is irrevocable, the offeror may revoke an unaccepted offer without liability.
- Examples of irrevocable offers:
- offers on which the offeree has justifiably relied to her detriment (a.k.a. “promissory estoppel”).
- firm offers for the sale or purchase of goods made by a merchant and subject to the provisions of the Uniform Commercial Code (“UCC”);
- option contracts, under which the offeror, in exchange for valuable consideration from the offeree, cannot revoke her offer for a stipulated time period during which the offeree has the sole right of acceptance.
- The offeree must give the offeror valuable consideration to make an option contract irrevocable.
REJECTION AND COUNTEROFFER
- Rejection: The offeree may reject the offer, in which case the offer terminates when the offeror receives notice of the rejection.
- Any subsequent attempt by the offeree to “accept” will be construed as a new offer, which the original offeror (now the offeree) may accept.
- An offeree typically rejects by words or conduct evidencing its intent not to accept.
- To be effective, the offeror must receive the rejection before receiving any contrary writing from, or being made aware of any conduct evidencing acceptance by, the offeree.
- Counteroffer: The offeree’s rejection of the original offer, coupled with the original offeree’s new offer to the original offeror.
- “Mirror Image” Rule: An offeree’s acceptance must match the offeror’s offer exactly. If the offeree’s acceptance materially changes, adds to, or deletes any terms in the original offer, the offeree’s attempted acceptance is deemed to constitute a counteroffer, not an acceptance.
TERMINATION BY LAW
- Lapse of Time: An offer terminates automatically when the time period specified in the offer expires.
- If no time period is stated in the terms of the offer, then the offer will terminate after a reasonable period of time has expired.
- Destruction of Subject Matter: An offer terminates automatically if the subject matter of the contract (i.e., goods, property) is destroyed prior to acceptance.
- Death or Incompetence: An offeree’s power to accept is terminated when the offeree or the offeror dies or is deprived of legal capacity to enter into the contract, unless the offer is irrevocable, in which case only the offeree’s death or incompetence will terminate the offer.
- Supervening Illegality: A statute or court action that makes a previously valid offer illegal will automatically terminate the offer.
- Power to Accept: Only an offeree or its agent can accept an offer.
- The offeree must accept unequivocally (i.e., satisfy the “mirror image” rule) and the offeree or its agent must communicate the acceptance to the offeror.
ACCEPTANCE BY SILENCE
- Acceptance by Silence: Silence or inaction typically cannot constitute acceptance – even if the offeror indicates it would construe silence or inaction as acceptance. There are exceptions:
- Acts Consistent with Acceptance: If the offeree, despite having an opportunity to reject, takes the benefit of offered goods or services, he is implied to have accepted the goods or services and agreed to compensate the offeror according to the terms of the offer.
- Prior Dealings: If the offeror and offeree have prior dealings, pursuant to certain standard terms and conditions, the offeree has the duty to reject or risk being bound by his silence.
- Unilateral Contract: Because a unilateral contract requires the offeree to act in order to accept, the offeree need not typically notify the offeror – unless the offeror has specifically requested notification or has no means to determine whether the offeree has performed.
- When the offeror and offeree do not deal face to face, acceptance is effective when communicated by the offeree to the offeror by an authorized means.
- The “Mailbox Rule”: An acceptance is generally effective when the offeree dispatches it by an authorized means of communication.
- By contrast, a revocation, rejection, or counteroffer becomes effective when the other party receives it.
- If the offeree does not communicate its acceptance by an authorized means, it will be effective when the offeror receives it.
- In addition to any modes of acceptance expressly stated in the offer, common law recognizes the following impliedly authorized methods:
- (1) any means that is as fast or faster than the slowest method the offeror identified as acceptable; and
- (2) U.S. Mail, if the parties are bargaining in any manner other than face to face.
- A contract formed electronically must meet the same requirements (except as to form) as a traditional contract.
- An offer to form a contract electronically should clearly and conspicuously state:
- (1) whether the offer is to sell, lease, or license,
- (2) how the offeree may accept,
- (3) how and how much the offeree may pay, including applicable taxes and shipping costs,
- (4) the offeror’s return and refund policy (if applicable),
- (5) any liability disclaimers or limitations,
- (6) the offeree’s remedies (and limits thereon), and
- (7) how the offeror will handle information it gathers, or the offeree provides, before and after acceptance.
- Pre-Dispute Planning: The offeror may also want to include provisions addressing governing law, choice of forum, and alternative dispute resolution.
- Click-On Agreement: An agreement that arises when a buyer/lessee/licensee completing a transaction online indicates her assent to be bound by the terms of an offer by clicking on a button or checking a box that says, e.g., “I accept” or “I agree.” The terms of the agreement may appear on the screen or on a related Web page or site.
- Browse-Wrap Terms: Terms and conditions of use presented to an Internet user at the time she is using or downloading a product, to which she need not actively assent before she can use or download the product.
- Courts are less receptive to browse-wrap agreements than to click-on agreements because browse-wrap does not require that the offeree manifest assent to its terms.
- Shrink-Wrap Agreement: An agreement whose terms are expressed inside the box containing the goods, such that an offeree cannot make herself fully aware of the terms of her purchase until after she has purchased/leased the goods and opened the box.
- Typically, shrink-wrap agreements indicate that the offeree must return the goods if she does not consent to be bound by the contract/license terms inside the box.
- Courts are generally receptive to shrink-wrap terms
- (1) if the offeror presents the terms before the offeree has accepted,
- (2) particularly where the exterior of the box or some other information provided to the offeree before she completes acceptance clearly indicates that the purchase/lease/license is subject to additional terms contained in the box or to be delivered with the goods, and
- (3) the offeror gives the offeree adequate time to review the terms, inspect the goods, and decide whether to keep them and be bound.
- Electronic Signature: An electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record.
- Digitized Signature: A graphical image of a handwritten signature, created by using a digital pen and pad and specialized software.
- Signature Dynamic: An encrypted biometric token that allows a recipient to compare a signature created with a stylus and an electronic digitizer pad to a stored exemplar.
- Digital Signature: An asymmetric cryptosystem that creates a digital signature using two different “keys” – one private to the signer and the other which a recipient may use, with the aid of a third party cybernotary, to verify the source of the digital signature.
- Partnering Agreement: An agreement between a seller and a buyer who frequently do business with each other on the terms and conditions that will apply to all subsequently formed electronic contracts. The partnering agreement can also establish special access and identification codes to reduce the risk of fraud or other unauthorized activity.
UETA AND E-SIGN
- Uniform Electronic Transactions Act (UETA): Model state law – enacted by 47 states and the District of Columbia – that recognizes the validity of electronic contracts, records, signatures, and notarization.
- UETA applies only if all parties to a transaction have explicitly or impliedly agreed to conduct the transaction using electronic means.
- UETA provides statutory rules governing attribution, the effects of procedural and substantive errors in an electronic record, and the effective time for sending and receiving electronic records relating to a transaction.
- UETA recognizes encrypted digital signatures, names (intended as signatures) at the end of e-mail messages, and clicks on a Web page intended to identify the person making the click.
- Electronic Signatures in Global and National Commerce Act (E-SIGN): Federal legislation recognizing the validity of electronic contracts, records, and signatures.
- By its terms, E-SIGN yields to UETA if the state whose law governs a contract has enacted UETA.
- Consideration: Value given in return for a promise to perform or refrain from performing some present or future act. Consideration must be (1) legally sufficient and (2) something for which the party receiving it bargained.
- Legally sufficient consideration may take the form of:
- (1) promising to do something that the promisee has no prior legal duty to do (e.g., promising to pay money for the promisor’s goods);
- (2) performing an action that the promisee is not otherwise obligated to undertake (e.g., painting the promisor’s house); or
- (3) refraining from exercising a legal right that the promisee is otherwise entitled to exercise (e.g., dismissing a viable lawsuit against the promisor).
- Consideration is bargained for if promisor sought it in exchange for the promisor’s promise and the promisee gave it in exchange for the promisor’s promise.
- Courts will generally not inquire into the adequacy of the consideration, as long as the promisor bargained for it.
- Preexisting Duty: A promise to do (or refrain from doing) what one already has a legal duty to do (or refrain from doing) generally does not constitute legally sufficient consideration.
- However, under the “unforeseen difficulties” doctrine, an existing contract may be modified to account for unforeseen difficulties that arise during the course of performance. In such a case, the promisee’s obligation under the modified contract is new consideration.
- Likewise, if the parties agree to replace an existing contract with a new, superseding contract, the promise to perform the new contract is a new promise; and, thus, not a promise to perform a pre-existing legal duty.
- Past Consideration: Promises made in return for acts or events that have already taken place are unenforceable for lack of sufficient consideration.
- Illusory Promise: If the terms of a contract call for performance in such uncertain terms that the promisor has not definitely promised to do (or refrain from doing) anything, the contract is unenforceable for lack of sufficient consideration.
ACCORD AND SATISFACTION
- Accord and Satisfaction: An agreement between an obligor (debtor) and obligee (creditor), by which the obligor agrees to pay the obligee some amount owed under the contract (generally less than the amount in dispute) in exchange for a discharge of all obligations owed by the obligor to the obligee.
- For accord and satisfaction to occur, the amount of the obligor’s debt to the obligee must be in dispute, or unliquidated.
- Liquidated Debt: A debt the amount of which has been ascertained, fixed, agreed on, settled, or exactly determined.
- Unliquidated Debt: A debt about the amount of which reasonable persons may disagree.
RELEASES AND COVENANTS NOT TO SUE
- Release: An agreement whereby one party forfeits its rights to pursue a legal claim against another party.
- Releases are generally binding if they are:
- (1) given in good faith,
- (2) written, and
- (3) accompanied by consideration.
- Covenant Not to Sue: An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.
- Promissory Estoppel: When a promisor makes a clear and definite promise on which the promisee justifiably relies, the promisor may be bound by the promise, even if it was insufficient to form the basis of a valid, legally binding contract.
- Promissory estoppel requires the following elements:
- (1) the promise was clear and definite;
- (2) the promisor should have expected the promisee to rely on the promise;
- (3) the promisee reasonably relied on the promise;
- (4) the promisee’s reliance was substantial and of a definite character; and
- (5) enforcing the promise will serve the best interests of justice.
In contract law, the withdrawal of an offer by an offeror. Unless the offer is irrevocable, it can be revoked at anytime prior to acceptance without liability.
Objective Theory of Contracts
A principle under which the intent to form a contract will be judged by outward, objective facts as interpreted by a reasonable person, rather than by the party's own secret, subjective intentions.
A promise or commitment to perform or refrain from performing some specified act in the future.
An offeree's response to an offer in which the offeree makes a new offer which works as a rejection of the original offer.
Generally, the value given in return for a promise; involves two elements - the giving of something of legally sufficient value and a bargained-for exchange.
A rule providing that an acceptance of an offer becomes effective on dispatch (on being placed in an official mailbox), if mail is, expressly or impliedly, an authorized means of communication of acceptance to the offeror.
Mirror Image Rule
A common law doctrine that requires that the terms of the offeree's acceptance adhere exactly to the terms of the offeror's offer for a valid contract to be formed.
In contract law, a voluntary act by the offeree that shows assent, or agreement, to the terms of an offer.
A contract that results when an offer can be accepted only by the offeree's performance.
A type of contract that arises when a promise is given in exchange for a return promise.
An acceptance that materially changes a term in the offer will still be considered an acceptance.
Clay offers to pay Dot $50 for a golf lesson for Eula. They agree to meet the day after tomorrow to exchange the cash for the lesson. These parties have
1. a bilateral contract.
2. a trilateral contract.
3. a unilateral contract.
4. no contract.
a bilateral contract
One of the requirements of a valid contract is its acceptance.
Rescission is the substitution of one party to a contract for a third party, who agrees to assume the contractual duties.Question 4 options:
Resolving whether a promise should be enforced is the essence of contract law.Question 5 options:
Fabio, a user of GameCenter.com's Web site, can download gaming software for free if he first clicks on "I accept" after viewing certain terms. This is
1. a contract that does not include the terms.
2. a contract that includes the terms.
3. not a contract but the terms are enforceable.
a contract that includes the terms.
Contract law shows what excuses our society accepts for breaking certain types of promises.Question 7 options:
Some promises are not legally binding contracts.Question 8 options:
A bargained-for exchange is one of the elements of consideration.Question 9 options:
Dave's Hobby Town and Eva's Yarn Shoppe are adjacent stores with adjoining parking lots. Dave offers Eva a discount on purchases from Dave's store if Eva will not tow the cars of Dave's customers who park in Eva's lot. Refer to Fact Pattern 8-1. Eva's forbearance from towing is legally sufficient considerationQuestion
1. because it is a promise of something of value.
2. only if Dave's customers park in Eva's lot.
3. only if Eva's customers cannot park in her lot because it is full.
4. under no circumstances.
1. because it is a promise of something of value.
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