Understanding Contracts: Elements, Types, and Remedies - Prof. Jason Malone, Study notes of Business and Labour Law

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Chapter 10: Introduction to Contracts Contracts The Purpose of a Contact Exist to make business matters more predictable Judicial Activism vs. Judicial Restraint Judicial restraint: a courts reluctance to interfere with the terms of a contract Makes the law less flexible, more predictable Judicial activism: a courts willingness to change or ignore a contract that it perceives as unjust Makes the law more flexible, less predictable Issues (and Answers) Agreement: one part must make offer, other must accept Consideration: there has to be bargaining that leads to an exchange between parties Legality: the contract must be for a lawful purpose Capacity: the parties must be adults of sound mind Consent: neither party can trick/force the other into agreement Written Contracts: some must be in writing to be enforceable 3rd party interests: some contracts affect other people too Performance and discharge: if a party full accomplishes what the contract requires, then his duties are discharged Remedies: a court will award money/relief to a party injured by a breach of contract All Shapes and Sizes Contracts can be $75 or $200 billion Can involve public issues Societal interests can shape contract law Contract law can shape society – interest rates Contracts Defined =a promise that the law will enforce 1) Is it certain the defendant promised? 2) Is it fair to make her honor her word? 3) Are there unusual reasons to hold her liable? Development of Contract Law Types of Contracts Bilateral and Unilateral Bilateral: both parties make a promise Unilateral: one party makes a promise that the other party can accept only by doing something Less common “Ill pay you 20 if you mow my lawn” Express and Implied Contracts Express: explicitly state all terms Implied: words and conduct of the parties indicate that they intended an agreement Executory and Executed Contracts Article 2: Sale of Goods UCC is only guidelines for the courts, state have to adopt All states have adopted Not all have identical versions Common law statute of frauds requires any agreement for the sale of land to be in writing and SIGNED by defendant UCC requires less detail and formality in a writing UCC Basics Purpose Simplify, clarify and modernize the law governing commercial transactions Permit the continued expansion of commercial practices through custom, usage and agreement of the parties Make uniform the law among various jurisdictions Emphasizes getting the right results rather than following rigid rules of contract law Article 2: applies to the sale of goods Goods= things that are movable other than money and investment securities Hats, cars, lumber, books are goods Land, houses are not Regulates sales: one party transfers ownership to another in exchange for money Article 2A: governs the leasing of goods Mixed Contracts concerning sale AND service If sale of good is “predominant purpose”, then UCC will govern If service is, then common law will control Merchants Someone who routinely deals in the particular goods involved, OR has special knowledge OR who uses agents with special knowledge UCC holds merchants to higher standard than non-merchants Good Faith and Unconscionability Good Faith: non-merchant must act honestly (AND exercise reasonable commercial standards of fair dealing if merchant) Looks at a parties behavior Unconsionability: fundamentally unfair or onesided Rare if both are businesses More likely if one is a consumer Looks at the contract itself Contract Formation Basics Any manner that shows agreement: words, writings or even conduct Moment of making is not critical UCC doesn’t care when it was formed, common law might One of more terms may be left open Common law: parties must agree on all important terms UCC: a court may enforce a bargain, even though one or more terms were left open Statute of Frauds UCC requires a writing for any sale of goods worth $500 or more Writing does not need to completely summarize the agreement If less than 500, contract can be oral, but UCC still enforceable Writing must be SIGNED by defendant (sufficient to indicate contract) Incorrect or Omitted Terms Contract still enforceable, oral testimony will indicate correctness/what is right Enforceable Only to Quantity Stated Quantity must be stated Merchant Exception Merchants MUST object (within 10 days) Special Circumstances: may be enforceable even without a written memo if Seller is specifically manufacturing goods for buyer Defendant admits that there was a contract Goods have been delivered or paid for Added Terms Section 2-207 Common law: offer must be accepted exactly as is.. any changes are a counteroffer UCC: changes made to offer can be included.. An acceptance that adds or alters terms will often create a contract Intention: parties must still INTEND to create a contract If the differing forms indicate that the parties never reached agreement, there is no contract Additional or Different Terms When both parties are merchants, additional terms generally become part of the bargain Terms raise issues no covered in the offer Even though a term is left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving a remedy “gap-fillers” Open Price: UCC establishes a reasonable price Output and Requirements: must be in good faith Delivery, Time and Payment Delivery: seller’s business Time: reasonable Payment: due when buyer receives goods Warranties Implied Warrant of Mechantability Goods must be of average, passable quality Implied Warranty of fitness for a particular purpose Goods must be fit for that purpose Termination of Offers Revocation: offeror may reject any time before its accepted Firm Offers and Revocability: if date is included Common Law: revocation is effective if the offeree receives it before he accepts Option contract: offeror may not revoke an offer during the option period Sale of Goods: offer can not be revoked during offer period (cannot exceed 3 months) Rejection: if offeree rejects, then offer is terminated immediately A counteroffer is a rejection Expiration: a time limit is binding Otherwise, offeree has a reasonable period in which to accept Operation of Law death or mental incapacity destruction of subject matter Acceptance The offeree must say or do something to accept Bilateral: offeree accepts by making a promise Unilateral: offeree must accept by performing Ambiguous: offeree may aceept by either Mirror Image Rule Acceptance must be on same terms as the offer If it doesn’t, then it’s a counteroffer UCC and the Battle of Forms An acceptance that adds additional or different terms will often create a contract **SEE UCC NOTES** Communication of Acceptance Medium and Manner of Acceptance If an offer demands acceptance in a particular medium or manner, the offeree must follow those requirements If the offer does NOT specify a type, then offeree may accept in any reasonable manner The Mailbox Rule Acceptance is generally effective upon dispatch Chapter 12: Consideration A Bargain and an Exchange Consideration: must be some bargaining that leads up to an exchange between the parties Consideration can be anything that someone might want to bargain for Promisor: person who makes the promise Promise: person to whom a promise is mad The thing bargained for can be another promise or action The thing bargained for can be a benefit to the promisor or a detriment to the promise The thing bargained for can be a promise to do something or a promise to refrain from doing something Adequacy of Consideration Aka fairness doesn’t really matter if the promise accepted by doing something not worth it Mutuality of Obligations Both sides must be committed to the agreement to make it enforceable An illusory promise is NOT consideration Sales Law: Requirements and Output Contracts Must be in good faith blah blah blah Past Consideration: generally not consideration Preexisting Duty A promise to do something the promisor is already obligated to do is NOT consideration Exceptions Condition Subsequent: condition must occur AFTER the particular duty arises Defendant has burden of proof Concurrent Conditions Each performance is the condition for the others performance Public Policy Sometimes permitting enforcement would hurt society Performance Strict Performance A party is generally not required to rendered strict perf. Unless the contract expressly demands it and such a demand is reasonable Substantial Performance Will receive the full contract price, minus the value of any defect Personal Satisfaction Requires a subjective standard Personal feelings, taste or judgment not allowed Some exceptions: art But generally, court applies an objective standard to the promisee’s decision Good Faith Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement Time of the Essence Clauses Makes contract dates strictly enforceable Merely including a date for performance does not make the time of the essence.. need to state clause Breach When one party breaches a contract, the other party is discharged Material Breach Courts will only discharge a contract if a party committed a material breach A breach that substantially harms the innocent party and for which it would be hard to compensate without discharging the contract Anticipatory Breach Making it unmistakably clear that it will not honor the contract Ex. Finding out the company you’re supposed to work for went out of business Statue of Limitations Oral Contracts 3 years Sale of goods 4 years Written contracts 5 years Impossibility True Impossibility means that something has happened making it utterly impossible to do what the promisor said he would do Limited to Destruction of the Subject Matter Death of the Promisor in a Personal Services Contract Illegality Courts will discharge the agreement Commercial Impracticability Some even has occurred that neither party anticipated and fulfilling the contract would now be extraordinarily difficult and unfair one party Frustration of Purpose Some event has occurred that neither party anticipated and the contract now has no value for one party Hard to predict Limits: Financial difficulties will never suffice Event must have been truly unexpected If the promisor must use a different, much more increased cost, then valid claim exists The UCC permits discharge for major, unforeseen disruptions Chapter 18: Remedies Breaching the Contract Someone fails to perform a duty without a valid excuse A remedy is a courts method to compensate an injured party Injunction: an order forcing someone to do something, or refrain from doing something Expectation Damages: the money required to put one party in the position she would have been in had the other side performed the contract Specific Performance: forces both parties to complete the deal Liquidated damages clause: A provision in the contract that declares in advance what one party will receive if the other side breaches Identifying the “interest” to be protected Interest: legal right in something Expectation: what the injured party thought they would have gotten Reliance: the injured party relied on the contract Restitution: the other party receives a benefit from not performing Ordering the parties to perform the contract, only in cases involving the sale of land or some other asset that is unique Used when money damages would be inadequate When subject is unique and irreplaceable Injunction A court order that requires someone to do something or refrain from doing something “cease” to stop “desist” to refrain from Usually stated in the negative.. “to not sell” Preliminary Injunction An order issued early in a lawsuit to stop a party from doing something DURING the lawsuit Reformation A process in which the court will “rewrite” a contract If it includes a simply mistake Special Issues of Damages Mitigation of Damages A party injured by a breach of contract may not recover for damages that he could have avoided with reasonable efforts Injured party must try to prevent unnecessary loss Keep damages as low as he reasonably can=mitigate Mitigation and the Sale of Goods If the buyer FAILS to cover, she will be denied for consequential damages Nominal Damages A token sum given to a plaintiff who demonstrates that the defendant breached the contract but cannot prove serious injury Small amount – a dollar Liquidated Damages Can be difficult/impossible to prove how much damage was suffered A provision stating in advance how much a party must pay if it breaches 1) At the time of the contract it was difficult to estimate actual damages 2) The liquidated amount is reasonable If not, penalty clause = court refuses to enforce Punitive Damages Punishes breaching party Court must consider Reprehensibility of the defendants conduct Ration between harm suffered and the award Difference between punitive award and civil penalties in other cases Chapter 22: Performance and Remedies Good Faith Seller’s Obligations (and a Few Rights) The seller must TENDER the goods, or make conformed goods available to the buyer Perfect Tender Rule The buyer may reject the goods if they fail in ANY respect to conform to the contract Restrictions on the Perfect Tender Rule Usage of Trade: any practice that members of an industry EXPECT to be a part of their dealings May not permit a buyer to reject goods with minor flaws Course of dealing: refers to previous commercial transactions between the same parties Current contract be interpreted in the light of any past dealings that have created reasonable expectations Course of Performance Refers to the history of dealings between the parties in this ONE contract, and thus assumes that it is the kind of contract demanding an ongoing relationship Parties Agreement Can draft a contract that permits imperfection in the goods Cure When a buyer rejects non-conforming goods, the seller has the right to cure, by delivering conforming goods before the contract deadline The seller may even cure AFTER the deadline if Reasonably believed the original goods were acceptable Promptly notified the buyer of his intent to cure within a reasonable time Substantial Impairment A buyer who claims goods are non-conforming must show that the defects substantially impair their value if The buyer is revoking acceptance of goods The buyer is rejecting an installment Destruction of the Goods If identified goods are totally destroyed before risk passes to the buyer, the contract is void If identified goods are partially destroyed, the buyer may choose whether to accept the goods at a reduced price or void the contract Commercial Impracticability