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
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? • 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 • 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 • Bilateral or unilateral • Express or implied • Executory or executed
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 • A promise to do (or not do) something in the future • Requirements: • Offeror’s serious intention • Definiteness of terms • Communication
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 • 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 • An offer may be terminated before it is accepted • By action of either party • By operation of law
Acceptance • An offer invites the offeree to • Accept • Reject or • Make a counteroffer
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
Timeliness • 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.
Consideration • 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 • 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.
Gifts • 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” • 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 “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 • An illegal contract is void • A contract is illegal if: • It violates a federal or state statute • It violates public policy
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 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 http://apps.leg.wa.gov/RCW/default.aspx?cite=9.46
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 • Usury laws prohibit charging excess interest on loans. • Excess interest is generally defined in the statute. www.dfi.wa.gov/consumers/interest_rates_exception.htm
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 • 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 • A court may refuse to enforce a contract if, based on common law principles, it violates “public policy"
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 • 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 • 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 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 • 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
Bailments Exculpatory clauses in contracts for bailments are generally enforceable - if they are reasonable, clear and obvious
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 • 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