Understanding Contract Law: Formation, Terms, and Enforceability, Study notes of Law

Download Understanding Contract Law: Formation, Terms, and Enforceability and more Study notes Law in PDF only on Docsity! School of Government/Lewandowski/June 2020 1 A Basic Introduction to Contract Law Although contract law can become extremely complicated, at heart it is really very simple. A contract is nothing more than an agreement between two or more people that each will do something in exchange for receiving something. Regardless of whether a contract has hundreds of pages of fine print or consists of a few words and a handshake, there are four broad categories of legal issues that come up again and again. Contract Formation More often than one might think, fact situations may raise an issue about whether the parties actually have entered into a contract. The critical factors are (1) that the parties each agreed to a deal in which (2) each of them gives something up and gets something in return. See what you think about the following fact situations: contract or no? 1. I promise to give my daughter a pony for her birthday. Contract? Yes No 2. Luna and I agree that I will pay her $35 if she will cut my grass, and she agrees to do so. Contract? Yes No 3. I make an appointment to see my doctor, and she diagnoses a cold. Contract? Yes No 4. I put an ad in the paper saying “sofa for sale—best offer.” Before Phil shows up at my door saying he’d like to buy it, though, I change my mind. Contract? Yes No 5. I agree to pay Samantha $1500 for her gently-used computer, but decide on the way to pick it up that I’d be better off buying a new one. Contract? Yes No 6. I agree to pay Samantha $1500 for her gently-used computer, but discover after I get home with it that the same computer costs $400 if I buy it new. Contract? Yes No Answers and Explanations: 1. No contract. I promised to make a gift, but my daughter didn’t give up anything—there was no agreement or bargain here. It would be different, though, if I had said, “If you do all the work in the garden this summer, I’ll buy you a pony” and my daughter said, “Deal!” School of Government/Lewandowski/June 2020 2 2. Contract. I agreed to give up money for the benefit of getting my grass cut, and Luna agreed to do the work for the benefit of being paid. 3. Contract. Even though there was no negotiation between me and my doctor, it is common knowledge throughout our society that when you seek out treatment by a doctor, you will be charged a reasonable fee. There was agreement here, but it was implied from our behavior, rather than being a verbal agreement. 4. No contract. By putting an ad in the paper, I indicated my willingness to consider offers for the sofa, but I didn’t enter into an agreement with Phil. The result might be different, though, if my ad said, “I’ll sell my sofa to the first person who shows up at my door with $150 cash.” In that case, I’ve made an offer, and indicated that a contract will come into existence if Phil shows up at my door with $150. If I change my mind, I will have to withdraw my offer before Phil accepts—I may need to put a sign in my front yard saying, “I withdraw my offer. Keep your money. I love my sofa.” 5. Contract. Because Samantha and I have entered into an agreement, in which I give up money and get a computer, and she gives up her computer and gets money, I’ve lost the right to change my mind. Even though the actual performance of the contract has not yet occurred, the agreement has, and so a contract has been formed. Quite often a contract consists of an exchange of promises to perform, with performance occurring at a later date. 6. Contract. Whether a bargain is a good one or a bad one doesn’t affect whether a contract has been formed. (Although in some extreme cases, it may affect whether the law will enforce that contract.) Freedom of contract means that we are all free to make a bad bargain. Be sure to note the questions you missed and pay particular attention to the rule in those situations. Be sure to ask the instructor if you’re puzzled. Note: An important step in analyzing contract cases is determining WHO is liable under the contract. One common situation involves spouses who together enter into a contract, promising to pay the amount owed. Example: Luna and Jane have been married for a little over a year, and they’ve decided it’s time to buy furniture. They both sign an installment sales contract provided for 12 easy monthly payments of $135. If they fail to pay the amount owed, the furniture store has a choice under the legal principle of joint and several liability. It can sue Luna and Jane together, or either of them separately. If the store sues one of them separately, it can sue for the entire amount due—each of them has promised to pay the entire amount due. School of Government/Lewandowski/June 2020 5 Question #2: In this situation, Luna and Sol have entered into the same written agreement, but this time Sol wants to testify that, two weeks after they signed the contract, he asked Luna to include trimming the shrubbery, and Luna agreed, with the understanding that the she would have five extra days to do the work. The judge can consider this testimony. Can you figure out why? [See p.10 for answers.] There’s another situation in which a contract may have important terms even though the parties didn’t discuss them, much less agree to them. These terms are automatically part of contracts involving the sale of goods under a comprehensive statute known as the Uniform Commercial Code. These special terms are called implied warranties, and there are two of them: The implied warranty of merchantability is a term automatically inserted in a contract for the sale of goods to the effect that the seller promises (or “warrants”) that the product it will do what it is ordinarily expected to do. An iron will get hot; a refrigerator will get cold. It doesn’t matter that the contract doesn’t say that explicitly (although often the contract will, and that’s called an express warranty, or guarantee). If a person buys a a new television set that doesn’t work, he has a legal claim that an implied term of the contract has been breached— the term that says the TV set I’m buying from you will work. Note that this implied term applies only when the seller is a merchant. If you buy an iron at a yard sale, you’re on your own! The implied warranty of fitness for a particular purpose is another term that makes good sense. That term says that if I consult a merchant who is in a specialized business or otherwise purports to be someone who has some expertise about which product is best for some particular purpose, there is an implied promise that the goods I buy based on that advice will be suited to that particular purpose. Let’s say I go to a store that sells running shoes and tell the clerk I’m going to run the Boston Marathon, and I buy a pair of running shoes based on the advice of the salesman. Two weeks into my training, the shoes start to fall apart. I now have a legal claim that an implied term of the contract has been breached— the term that says these shoes will be suited for marathon running. The rules about warranties are the first examples we’ve discussed of an important aspect of contract law: consumer protection legislation. This is a subject we’ll return to in a few pages. For now, just notice that the law sometimes inserts or deletes a contract term, despite our society’s commitment to the ideal of freedom of contract, in order to protect consumers. There are exceptions and qualifications to the rules about implied warranties. One of the best known is that, when a seller sells something “as-is,” the seller makes no warranty about the condition of the goods. If you are confronted with a case involving a technical School of Government/Lewandowski/June 2020 6 legal dispute about a question such as whether an attempted waiver of warranty was legally effective, or some similar complex question, it would be best to reserve judgment and consult reference material or otherwise seek assistance. Is the Contract One That the Law Will Enforce? So far, I have indicated several times that common sense is a generally reliable guide in arriving at a correct legal answer in contract cases. That statement is much less true when it comes to the rules about legal enforcement of contracts. While there are sound reasons for the legal principles to which we will now turn our attention, sometimes the result of their application in particular cases may seem to contradict common sense. The usual reason for this is that the principle is based on a policy decision made by our society that works well most of the time but may yield surprising or unfair results in a particular case. Remember: This situation comes up after you have decided that the parties have entered into a contract, you have ascertained its terms, and you have determined that one party has breached the contract. Under what circumstances might the court, in this situation, nevertheless refuse to give the complaining party a remedy? First, the law will usually refuse to enforce a contract in which one of the parties was not able (i.e., lacked capacity) to give legal consent. Stop here and ask yourself: what is an example of a party not able to give legal consent to a contract? _________________________________ If you said minors or persons who are mentally incompetent, you were correct. The general rule is that a contract by a minor or mentally incompetent person is not enforceable against that person. [Note that the law is perfectly willing to enforce a contract against another person on behalf of a minor or incompetent—we don’t worry about protecting the interests of those who can protect themselves.] Similarly, a person who contracts because he has been tricked or misled, or who has been coerced in an illegal way, does not truly consent to the contract, and the law will not hold him to it. This is one of those general principles that have a lot of exceptions. Let’s look at the rule, and at some of the exceptions, in the examples below. Example #1: Luna is 17 and looks 22. When she bought a car from Fast Eddie, she assured him she was 21. After she wrecks the car, she wants to return it and get a complete refund of her money. Can she? Example #2: Jane is a quiet woman with a sweet smile who gives no outward sign that she suffers from Alzheimer’s and has been declared mentally incompetent. She goes to Sears and buys a School of Government/Lewandowski/June 2020 7 refrigerator for $900. She has purchased 3 other refrigerators this week. Sears wants to enforce its contract against Jane. Can it? Example #3: Susan signed a contract with Better Bodies as part of her New Year’s resolution to finally knock off some weight, but she’s thought better of it now. Better Bodies has sued Susan in small claims court for money owed on the contract, but Susan claims that Better Bodies should not be allowed to enforce the contract. She says they used glitzy machinery and a cool smoothie bar to talk her into signing a contract when they know very well that 9 out of 10 people who sign up stop coming within 6 weeks. Susan says she was tricked. Can Better Bodies enforce the contract? Example #4: Robbie Robber kidnapped Abe’s sweet Petunia pug dog and demanded $1,000 for ransom. Not only did Abe pay, but he also solemnly swore that he wouldn’t cooperate in any prosecution of Robbie. Robbie says that because Abe breached the contract by going to the police after recovering Petunia, Robbie has been severely injured—he’s out dog and money, and in jail! Abe doesn’t dispute that he broke his promise to Robbie. Does Robbie have a good case? Example #5: After showing Miranda several sheets of fine print and explaining them to her, Snidely closes the deal on a rental agreement by asking her to sign a rental contract that he has kept concealed until now that contains a very high rental fee, covering the contents with other papers and talking quickly so Miranda doesn’t notice. Snidely has filed an action against Miranda, but she says she never laid eyes on the contract that bears her signature, and you believe her. Is the contract enforceable? [Look at pp. 10-12 for answers and discussion.] There are three other common reasons for a court to refuse to enforce a contract. Although they have legal-sounding names, they’re pretty straightforward. As a general rule, these reasons are affirmative defenses, which means the defendant is responsible for bringing them to the attention of the judge and persuading the judge of their validity. The Statute of Frauds. Some contracts are required to be written, dated, and signed by the debtor to be enforceable. The ones you are likely to see most often are retail installment sales contracts when the seller is furnishing the buyer credit so that he can buy the goods or services. School of Government/Lewandowski/June 2020 10 Answer: No. Since the display was varied, and I refused to select a particular sweater, there is no evidence to support a finding that the color of the sweater was a term of this particular contract. Pages 4 & 5 [Parol evidence rule]: Luna and Sol sign a written agreement that says, “I, Sol, will pay Luna $50 for performing yard work on my yard. Luna will complete this work between the 1st and the 5th each month, and I will pay her upon completion.” Question #1: Luna has brought an action for money owed against Sol after Sol refused to pay her. Sol says that’s because Luna didn’t trim the shrubbery. Luna wants to introduce evidence that, at the time they negotiated the agreement, she asked Sol what he meant by “yard work” and Sol said, “Mowing and raking the grass, edging the lawn, and using the weedeater in places where you can’t get the mower.” In this case, the judge can consider Luna’s testimony. Can you figure out why? Explanation: The term in the contract that refers to “yard work” is not clear—we don’t know what the parties meant when they included that in the contract. Evidence about discussions they had before or at the time they negotiated the agreement may be considered by the judge in deciding what the term means. The judge may or may not believe Luna’s testimony, of course, but this is an example of a case when the parol evidence rule does not apply to prevent the judge from even hearing the evidence. Rule: Parol evidence is properly admitted to explain a term in the contract that is ambiguous. Question #2: In this situation, Luna and Sol have entered into the same written agreement, but this time Sol wants to testify that, two weeks after they signed the contract, he asked Luna to include trimming the shrubbery, and Luna agreed, with the understanding that the time for her performance would be increased from 5 days to 10. The judge can consider this testimony. Can you figure out why? Explanation: This evidence is not about the original agreement, but about a change in the agreement that happened later. Obviously, we can’t expect later agreements (called modifications) to be included in the original writing. The parol evidence rule applies only to evidence about events that happened before or at the same time as the contract. Pages 6 & 7 [Reasons not to enforce a contract]: Example #1: Luna is 17 and looks 22. She bought a car from Fast Eddie, and she assured Fast Eddie that she’s over 18. After she wrecks the car, she wants to return it, and get a complete refund of her money. Can she? Answer: Yes. Luna is a minor and had no legal ability to enter into this contract—as far as the law is concerned, Luna can enforce it against Fast Eddie if she wants to, but she can also School of Government/Lewandowski/June 2020 11 change her mind and cancel the contract at any point. If this seems unfair to you, remember that one purpose of this law is to encourage adults like Fast Eddie think twice before entering into a contract with a young person who may not be mature enough to make a good business decision. Example #2: Jane is a quiet woman with a sweet smile who gives no outward sign that she suffers from Alzheimer’s and has been declared mentally incompetent. She goes to Sears and buys a refrigerator for $900—one of the less expensive ones on the sales floor. She has purchased 3 other refrigerators this week. Sears wants to enforce its contract against Jane. Can it? Answer: Maybe. We have a slightly different rule for contracts by people who are mentally incompetent, perhaps because the law realizes that, unlike young people, there may be no way for a merchant to tell if Jane is capable of giving legal consent. If Sears had no reason to know that Jane was incompetent, and there’s no evidence that the contract was unfair or that Sears was taking advantage of Janet, courts will enforce the contract. Example #3: Susan signed a contract with Better Bodies as part of her New Year’s resolution to finally knock off some weight, but like most of us, she’s thought better of it now. Better Bodies has sued Susan in small claims court for money owed on the contract, but Susan claims that Better Bodies should not be allowed to enforce the contract. She says they used glitzy machinery and a cool smoothie bar to talk her into signing a contract when they know very well that 9 out of 10 people who sign up stop coming within 6 weeks. Susan says she was tricked. Can Better Bodies enforce the contract? Answer: Yes. This is the classic example of a bad bargain. Susan was not deceived by Better Bodies; the company may not have provided her with facts about how many customers change their minds, but it is under no duty to do so. The law distinguishes between active deception and a passive failure to inform. This situation reminds us of the old saying: Let the buyer beware. Example #4: Robbie Robber kidnapped Abe’s sweet Petunia pug dog and demanded $1,000 for ransom. Not only did Abe pay, but he also solemnly swore that he wouldn’t cooperate in any prosecution of Robbie. Robbie says that because Abe breached the contract, he’s been severely injured—he’s out dog and money, and IN jail! Abe doesn’t dispute that he made the promise to Robbie, and agrees as well that he broke it. Does Robbie have a good case? Answer: I sure hope you said no. There are several problems with this contract, in addition to the main point of the question, which is that contracts made as a result of coercion or extortion are not enforceable. Neither are illegal contracts, of course. Finally, there was no real exchange here. Robbie gave up Petunia, but he had no right to her to begin with—she belonged to Abe! School of Government/Lewandowski/June 2020 12 Example #5: After showing Miranda several sheets of fine print and explaining them to her, Snidely closes the deal on a rental agreement by asking her to sign a rental contract that he has kept concealed until now that contains a very high rental fee, covering the contents with other papers and talking quickly so Miranda doesn’t notice. Snidely has filed an action against Miranda, but she says she never laid eyes on the contract that bears her signature, and you believe her. Is the contract enforceable? Answer: No. This is an example of a contract in which there was no real consent—Miranda’s signature was obtained by a trick, and so it is not a meaningful sign that she agreed to this contract. Page 9 [Determining damages]: I buy a pure-bred puppy from Super Intelligent Pets. I tell the salesperson I want the smartest dog in the store, and he tells me about the special Doggy IQ Test that all their dogs must take before being matched with an equally-smart owner. I agree to pay $500 over a one-year period, with interest at 10%. I also agree that if SIP has to take me to court, I will pay an attorney fee of $200. After I take Einstein home, I discover he’s dumb as dirt and I stop paying SIP. SIP sues me for breach of contract, and I counter-sue for breach of implied warranty of fitness for a particular purpose. Assume you rule in favor of SIP and against me on my counterclaim. What will the damages consist of? [I’m not looking for a specific amount of money—just tell me in words what you’d be thinking about.] Answer: SIP is entitled to whatever portion of $500 I haven’t yet paid, with 10% interest up to the date of judgment. In addition, assuming SIP properly gave me notice of its intent to seek attorney fees, I will have to pay attorney fees, but only up to 15% of the outstanding balance. Assume you rule against SIP and for me. How will you determine damages? Answer: Damages on a breach of warranty claim are determined based on the difference between the fair market value of Einstein as warranted and as she actually is. It will be my burden to prove to you the current fair market value of a super-intelligent puppy of Einstein’s breed and the FMV of an ordinary dog of that breed. I will be entitled to that amount, plus interest of 8% (the legal rate, which applies unless a contract specifies a different rate) from the date of breach (which in this case would be the same as the date of sale).