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Contract Law. Formation and Legality Class 2. The whole duty of government is to prevent crime and to preserve contracts. . Lord Melbourne British Prime Minister (1779-1848). What is a Contract? . A contract is a promise that the law will enforce. ~ Restatement (Second) of Contracts.

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contract law

Contract Law

Formation and Legality

Class 2


The whole duty of government is to prevent crime and to preserve contracts.

Lord Melbourne

British Prime Minister (1779-1848)

what is a contract
What is a Contract?
  • A contract is a promise that the law will enforce.

~ Restatement (Second) of Contracts

what does a contract do
What Does a Contract Do?
  • Establishes the terms of the parties’ relationship
  • Goal is to accurately memorialize the business deal
  • Reflects the parties’ agreement as to the rules that will govern their transaction
what are the usual rules
What Are The Usual Rules?
  • Statement of material facts
  • Each party’s promise as to its future performance
  • Each party’s rights
  • Conditions
  • Discretionary authority
  • How the contract will end
  • General policies that govern the relationship
sources of contract law
Sources of Contract Law
  • Common law
    • Importance of the Restatement
  • Constitution
    • Fundamental right recognized in both state and federal constitutions
  • Uniform Commercial Code
    • Article 2 (RCW 62A.2-)
types of contracts
Types of Contracts
  • Bilateral or unilateral
  • Express or implied
  • Executory or executed
the making of of a contract
The Making of of a Contract
  • In order for there to be a contract there must be four things:
    • An Agreement (meeting of the minds or a bargain)
        • Offer and
        • Acceptance of the offer
    • Consideration
    • Contractual Capacity
    • Legality
the offer
The Offer
  • A promise to do (or not do) something in the future
  • Requirements:
    • Offeror’s serious intention
    • Definiteness of terms
    • Communication
definite terms
Definite Terms
  • Terms (expressed or implied) that must be included in the offer:
    • Parties
    • Subject matter
    • Consideration (usually price)
    • Time for performance
communication of offer
Communication of Offer
  • An offer must be communicated in some way to the offeree
  • Once communicated, the offeree has the right to make a contract
termination of an offer
Termination of an Offer
  • An offer may be terminated before it is accepted
    • By action of either party
    • By operation of law
  • An offer invites the offeree to
    • Accept
    • Reject or
    • Make a counteroffer
mirror image rule
Mirror Image Rule
  • Offeree’s acceptance must match the offeror’s offer exactly or it will be treated as a rejection and counteroffer.
    • UCC 2-207
  • Mail Box Rule
    • Acceptance is effective on dispatch – provided an authorized method of communication is properly used.
  • However, the offeror may specify how and when acceptance should be made.
  • A bargained for exchange – each side is inducing the other to agree.
    • The thing bargained for can be a promise or action.
    • The thing bargained for can be a benefit to the promisor or a detriment to the promisee.
adequacy of consideration
Adequacy of Consideration
  • Court will generally not weigh the value of the promise.
  • If the parties are satisfied with the bargain initially, then the value of the bargain will not be considered by a court.
  • A gift is not supported by consideration.
  • A promise to make a gift may be revoked at any time before it is given.
equitable contracts
Equitable “Contracts”
  • Promissory Estoppel
      • Defendant made a statement knowing that the plaintiff would likely rely on it;
      • Plaintiff did rely on it
      • To his detriment
      • Justice requires the statement be enforced
equitable contracts20
Equitable “Contracts”
  • Quasi-Contracts
      • Plaintiff gave some benefit to the defendant
      • Reasonably expected to be paid
      • Defendant would be unjustly enriched if plaintiff is not paid
legality of the contract
Legality of the Contract
  • An illegal contract is void
  • A contract is illegal if:
    • It violates a federal or state statute
    • It violates public policy
applicable statutes
Applicable Statutes
  • Many statutes expressly prohibit certain contracts or contract terms
  • Some of these are:
    • Gambling statutes
    • Insurance statutes and regulations
    • Usury statutes
    • Consumer protection statutes
    • Statutes protecting vulnerable individuals
gambling in washington
Gambling in Washington
  • Gambling is authorized or criminalized by RCW 9.46.
    • Certain kinds of gambling activities are authorized.
      • Some Bingo
      • Fishing Derby
      • Charitable chance
      • State lottery
  • Tribal Gaming

insurance a wager
Insurance – a wager?
  • Life insurance
    • Requires insured to have an insurable interest in the subject of the policy
    • The objection to these policies “was not the temptation to murder but the fact that such wagers came to be regarded as mischievous kind of gaming.”
  • In re Estate of D’Agosto, 134 Wn. App. 390 (2006)
usurious contracts
Usurious Contracts
  • Usury laws prohibit charging excess interest on loans.
    • Excess interest is generally defined in the statute.

usury in washington
Usury in Washington
  • Washington’s usury statute is RCW 19.52
    • RCW 19.52.030 permits enforcement of usurious contracts, but only allows the creditor to collect the principal – less twice the interest paid and minus the accrued but unpaid interest. Attorneys fees and costs also are assessed against the creditor.
licensing statutes
Licensing Statutes
  • Statutes to Protect the Public: Only licensed practitioners/providers may enforce a contract
  • Regulatory or Revenue Statutes: Contract with an unlicensed individual is generally enforceable.
public policy violations
Public Policy Violations
  • A court may refuse to enforce a contract if, based on common law principles, it violates “public policy"
restraint of trade
Restraint of Trade
  • Restraint of Trade
    • Free trade is the basis of the American economy and any bargain not to compete is suspect and, generally, unenforceable. There are two common exceptions:
        • Sale of a business
        • Employment
sale of a business
Sale of a Business
  • The buyer of an existing business may ask the seller to agree not to compete with the business. This agreement is enforceable if it is reasonable:
    • In Time
    • Geographic Area
    • Scope of Activity
employment clauses
Employment Clauses
  • A noncompetition clause in a contract for employment is generally enforceable if it is essential to the employer, fair to the employee, and harmless to the general public.
washington law
Washington Law
  • Washington courts will enforce noncompete clauses if they are validly formed (i.e., supported by consideration), are of legitimate concern to employer’s business, and are reasonable as to
    • Time
    • Geographic limits
    • Scope of Activity

Labriola v. Pollard Group, Inc., 152 Wn.2d 828 (2004)

exculpatory clauses
Exculpatory Clauses
  • Basically a contract that releases one of the parties from liability if the other party is injured.
  • Generally unenforceable only if:
    • Attempts to avoid liability for intentional torts or gross negligence
    • Parties have greatly disparate bargaining power
    • Clause is not clearly written or visible

Exculpatory clauses in contracts for bailments are generally enforceable - if they are reasonable, clear and obvious

unconscionable contracts
Unconscionable Contracts
  • An unconscionable contract is one that the court refuses to enforce because of fundamental unfairness.
    • A contract is unconscionable if it one that “no man in his senses and not under delusion would make . . . and no honest and fair man would accept.”
contract drafting
Contract Drafting
  • Goals:
    • Accurately state the business deal
    • Be clear and unambiguous
    • Resolve problems in a practical way
    • Be sufficiently specific
    • Advice the client’s goals and reduce its risks
    • Prevent litigation