Contract Formation

1. Contract Formation

2. Question for Class After Debate: What contracts have you entered into recently? Did you read them? Why? Group Debate – Internet “Click Through Contract

3. Contract/Negotation Assignment

4. Odd # Groups = UFLOW Even # = Hospital Objectives and Structure of Assignment • Improve your understanding of contract law in the international arena. • Increase your awareness of the terms and conditions that should be in an international contract. • Introduce you to negotiation and the skills involved in negotiation. • Enhance your appreciation of cross cultural business dealings. • Refine your oral and written communication skills. • Negotiation Strategy. Upon receiving the confidential information, the partners will meet and decide their strategy. You must document your strategy and submit a paper. Include in your paper your negotiation approach, your cross-cultural approach, and your target goals (what would you consider a “win” for your company). • Negotiate a Deal. After you plan a strategy, the parties will meet to negotiate an agreement. You must submit a paper detailing your negotiation. Include the details on your cross cultural negotiation approach (how did it work) and accomplishments compared to planning goals (how did you do compared to how you thought you would do and why). • Draft a Contract. When an agreement is reached, each team should write a contract documenting the agreement. • Sign a Contract. The parties should meet to discuss and compare the written contracts. One of the written contracts should be selected for the basis of the final agreement. After any necessary negotiations and changes, the contract should be signed at the bottom as follows: Objectives Structure

5. Deliverables of Assignment • Strategies Document. • Negotiation Document (how did the negotiations go?) • Preliminary Contract. • Signed Contract. Deliverables

6. Contract Negotiation Exercise - Handouts

7. Some Contracts Basics • Heading/Name • Identify Parties • Recitals • Definitions • Agreement – “NOW, THEREFORE, in consideration of the above recitals, the terms and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, and for their mutual reliance, the parties agree as follows:” • Contract Clauses usually broken down by section • Price/Compensation • Product • Misc • Signature block – next slide Sample

8. How to sign a legal document - when you are an agent/employee Add company name - it’s usually printed in the agreement Signature Printed Name Title Effective Date of Agreement: This is newer style signature block that is simpler to understand

9. Common Contract Clauses- focusing on sale of goods Standard Clauses • Product (quality, etc.) • Price • Quantity • Time of payment • Time and place of delivery • Cost of delivery/Arrangement • Risk of Loss (next slide) • Term/Termination • Tax Obligations • Representations and Warranties • Title/Insurance (next slide) • Documents required (e.g. Letter of Credit) Especially Important for Int’l Contracts • Choice of language • Choice of forum • Choice of law (CISG v. U.S. law – next slide) • Force Majeure • Arbitration • Currency • Letters of Credit (separate contracts – next slide) Boilerplate • Titles/Headings Clause • Severability • Integration/Entire Agreement • Notices • Counterparts • Announcements/Confidentiality • Assignment/ Delegation Start here thursday

10. Additional Detail • Letters of Credit • Reps and Warranties • ROL • FOB Seller’s Place of Business • FOB Buyer’s Place of Business • Title

11. United Nationals Convention on Contracts for the International Sale of Goods (CISG) • Expert Agreed to Provisions. Compromise between common law, civil law, and socialist law. • Compared to U.S.’s UCC Article 2 • Mirror image rule under common law • Changes accepted under UCC • Most changes considered “material” under CISG • Statute of Frauds • UCC - $500 • USIG – no writing required • Price – required under CISG – not under UCC • Acceptance – mailbox rule under common law and UCC – when received under CISG.

12. CISG Signatories

13. Business Law Points – Grading Rubric

14. Negotiation Basics • Know what you want • Know when you are better off walking away • Plan a strategy/Do your homework • Win-Win • Listen to the other side • Give/Get

15. Contracts – Promise • Benefits Society to Enforce Promises Candy Bar Example: Miller v. McCleskey Suppose that McCleskey, a local businessperson, is a friend of Al Miller. The owner of a local candy store. Every day on his lunch hour, McCleskey goes into Miller’s candy store and spends about five minutes looking at the candy. After examining Miller’s candy and talking with Miller, McCleskey usually buys one or two candy bars. One afternoon, McCleskey goes into Miller’s candy shop, looks a the candy, and picks up a $1 card bar. Seeing that Miller is very busy, he catches Miller’s eye, waves the candy bar at Miller without saying a word, and walks out. Is there a contract? Contract An agreement that can be enforced in court, formed by two or more parties who agree to perform or to refrain from performing some act now or in the future.

16. Fully and explicitly stated in writing or orally Examples finance agreement for a car bargained for item at a garage sale Conduct creates a contract Implied in Fact Implied In Law (covered at end of unit – skip here) Quasi Contract unjust enrichment Express v. Implied Contracts Express ContractImplied Contract

17. Bilateral Contract Promise for a promise Example: John agrees to buy Sara’s horse for $500, but neither John does not have the money on him and Sara’s horse is at a distant farm. Unilateral Contract Promise for an Act Example: I will pay $1,000 if you paint my house. Revocation Substantially Undertaken Types of Contracts Examples of Contracts IRA Contract Credit Card

18. Executed versus Executory • Executed is a completed contract • Executory is a contract that still must be completed

19. Requirements of a Contract The four requirements that constitute what are known as the elements of a contract are: CONSIDERATION AGREEMENT LEGALITY CAPACITY

20. Case 9.2 Lucy v. Zehmer, p. 283 • Sale of Farm. Lucy and Zehmer had known each other for 15-20 years. Lucy always wanted to buy Zehmer’s farm, but Zehmer never wanted to sell. One night they met at a restaurant, and while consuming alcohol, wrote up an agreement on the purchase of the farm. Lucy then went to court to enforce the agreement, but Zehmer argued he was intoxicated at the time. • Objective Theory of Contracts. How does the court’s decision in this case relate to the objective theory of contracts? Contract written on restaurant’s bill form.

21. Three Requirements of the Offer Intent There must be a serious, objective intention by the offeror to become bound by the offer. Nonoffer situations include: (a) expressions of opinion; (b) statements of intention; (c) preliminary negotiations; and (d) advertisements, catalogues, and circulars. 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.

22. How Intent to Form a Contract Is Measured in Other Countries • Courts in some nations give more weight to subjective intentions. • U.S.—routinely adhere to the objective theory of contracts. • France—French law civil code prefers the subjective interpretation of contracts. • What problems may arise when a court attempts to look at the subjective basis of a contract?

23. Termination of the Offer Drama in the law An offer can be terminated 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. Operation of Law An offer can terminate by (a) lapse of time, (b) destruction of the specific subject matter of the offer, (c) death or incompetence of the parties, or (d) supervening illegality.

24. Example: Ball writes Sullivan and asks about land Sullivan owns. Sullivan writes back “I will not take less than $60,000 for the land.” Ball sends a letter: “I accept your offer for $60,000.” Do they have a deal? Acceptance • Unequivocal Acceptance (mirror image rule) • Communication of Acceptance • Mode and Timeliness of acceptance (mail box rule) Offers Bike to Jill for $100 Jill John Tia Accepts Tia Start here on tuesday

25. Consideration • Legally Sufficient • Bargained for Exchange • Detrimental to the Promisee or Beneficial to the Promisor • Gifts Example: Campbells rented land from Carr. Carr inherited the land and only visited it once as a child. Carr was schizophrenic and had depression. Carr contacted Campbells about selling the land. Campbells said it was assessed at $54,000 but that was the agricultural value and it was actually worth $103,700. A real estate appraiser found the real value at $162,000. Carr sold for $54,000. Will a court look at this? “in consideration for … agreed to be legally adequate” INSERT FROM ACTUAL CONTRACT

26. Hamer v. Sidway (1891) • Uncle agreed to pay nephew $5,000 if nephew agreed to stop drinking, smoking, & gambling until he reached 18. • Is there a contract? Consideration? • In refusing to pay, the executor of the estate argued that the promise resulted in neither a benefit to the uncle nor a detriment to the nephew (since it was good for him). What did the court rule? • How might one argue that this contract also benefited the promisor (Story, Sr.)?

27. Sufficiency of Consideration • To be legally sufficient, consideration must involve a legal detriment to the promisee, a legal benefit to the promisor, or both. • One incurs a legal detriment by doing something that one had no prior legal duty to do.

28. Contracts Lacking Consideration • A number of so-called contracts may lack the necessary consideration to make them legally binding. • These include: • Contracts to perform a Preexisting Duty • Contracts based on Past Consideration • Contracts containing Illusory Promises

29. Capacity • The third element required for the formation of a contract is contractual capacity, the legal ability to enter into a contractual relationship. • Three types of people who do not have the capacity to enter a contract are: Minors Intoxicated Persons Mentally Incompetent Persons

30. Minors -- • Return of Goods • Necessity • Ratification • Disaffirmance

31. Intoxicated Persons • Lack Mental Capacity • Impaired to the extent that the person did not comprehend the legal consequences

32. Mentally Incompetent Persons • Contract Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. • Contract Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. • Contract Valid: If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

33. Contracts Contrary to Statuteare void USURY Occurs when a lender makes a loan at an interest rate above the lawful maximum. The maximum rate of interest varies from state to state. GAMBLING Gambling contracts that contravene (go against) state statutes are deemed illegal and thus void. SABBATH LAWS Laws prohibiting the formation or the performance of certain contracts on Sunday. Such laws vary 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 unless the underlying purpose of the statute is to raise government revenues.

34. Contrary to Public Policy and Quasi Contract • Contrary to Public Policy • Restraint of trade • Covenant not to compete • Cannot be unreasonable as to scope or duration • unconscionable • Adhesion Contract • Exculpatory Clauses (covered in remedies) • Quasi Contract - Implied In Law • Quasi Contract • unjust enrichment

35. Third Party Rights(In Remedies Chapter 10 in Book) There are two important exceptions to the rule of privity of contract: • Assignment • Delegation

36. Assignments • Assignor/Assignee. An assignment is the transfer of rights under a contract to a third party. The party assigning the rights is the assignor, and the party to whom the rights are assigned is the assignee. • Assignee Can Demand Performance. The assignee has a right to demand performance from the other original party to the contract. • Generally, all rights can be assigned, except in the following circumstances: • When assignment is expressly prohibited by statute (for example, worker’s compensation benefits). • When a contract is personal in nature (unless all that remains is a money payment). • Where the assignment will materially increase or alter the risk or duties of the obligor. • If a contract stipulates the right cannot be assigned, then ordinarily it cannot be assigned.

37. Delegation • Defined.A delegation is the transfer of duties under a contract to a third party (the delegate), who then assumes the obligation of performing the contractual duties previously held by the one making the delegation (the delegator). • Delegator Still Obligated.A valid delegation of duties does not relieve the delegator of obligations under the contract. • If the delegatee fails to perform, the delegator is still liable to the obligee.

38. Intended beneficiary One for whose benefit a contract is created. When the promissor fails to perform as promised, the third party can sue the promissor directly. (Examples of third party beneficiaries are creditor beneficiaries and donee beneficiaries.) Incidental beneficiary A third party who indirectly benefits from a contract but for whose benefit the contract was not specifically intended. Incidental beneficiaries have no rights to the benefits received and cannot sue to have the contract enforced. Third Party Beneficiaries