8. Principles Of Contract Law. Contract Principles. Contract = legally enforceable promise or set of promises Elements that Create a Valid Contract (see Chart p. 226) Offer Acceptance Consideration Voluntary Capacity
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8 Principles Of Contract Law
Contract Principles • Contract = legally enforceable promise or set of promises • Elements that Create a Valid Contract (see Chart p. 226) • Offer • Acceptance • Consideration • Voluntary • Capacity • Some Must Be Evidenced by a Writing (e.g. Where Statute of Frauds Applies)
Uniform Commercial Code • Primary Objective: Uniformity • Concerned with rewarding legitimate expectations • Nine Articles • Article 2- Contracts for the Sale of Goods (tangible personal property) • Goods = Tangible Personal Property • Not Intangibles or Predominantly Services • Duty of Good Faith/Fair Dealing • contra: Unconscionable contracts • Implied Warranties • Higher Standard for Merchants (Regular Dealers) • International Equivalent - U.N. Convention on the International Sale of Goods
Types of Contracts • Validity • Valid = enforceable • Unenforceable = meets basic legal requirements but cannot be enforced due to some other legal rule • Voidable = may be cancelled by 1 or both parties (e.g. contract with a minor) • Void = lacks 1 or more basic legal requirements = of no legal effect
Types of Contracts • Unilateral = 1 party promise (act for a promise) • Bilateral= Both parties promise (promise for a promise) • Executed = All parties fully perform duties • Executory = Not yet fully performed • Express = Directly stated
Types of Contracts • Quasi Contract = Implied in Law to prevent unjust enrichment (keys: Fairness/Reasonable Value) • Brewer v. New York • A bankrupt estate is not allowed to collect money from the New York Department of Corrections that it knowingly received in violation of the bankruptcy laws. • If allowed to keep would constitute a detriment to other general creditors
Promissory Estoppel • Promise is made which promisor knows will likely induce reliance • Significant reliance on promise by promissee • Injustice will occur if promised not enforced
Contract • May Not Need To Be In Writing • Promise To Perform Or Not Perform • Legally Enforceable • Improves Buyer/Seller Relationship
Sources Of Contract Law • Legislation • Uniform Commercial Code • Contracts For Goods • Common Law • Judges’ Decisions • Contracts For Other Than Goods
Bilateral Contract Promise Chuck Cindy Promise
Unilateral Contract Promise Chuck Cindy Performance
Contract Classification • Express- Terms Discussed • Implied-In-Fact- Conduct Rather Than Discussion • Implied-In-Law- One Party Unduly Enriched At Expense Of Other
Contract Classification • BENNETT v. EMERSON ELECTRIC COMPANY • 2003 U.S. App. LEXIS 9443 (10th Cir. 2003) • FACTS: Curtis Bennett sought employment with Emerson Electric Company. Bennett made clear to several people with whom he interviewed that a three-year employment contract was very important to him. The president of Emerson Electric stated the three-year period would be “no problem.” Bennett was offered employment but no time period of duration was stated. Bennett began working. He was reprimanded several times during the first few weeks on the job, and he was terminated after only three months. Bennett sued Emerson Electric on the grounds that the employment contract contained an implied-in-fact period of three years. Bennett won a jury verdict of $236,707.49. Emerson Electric appealed to the 10th Circuit Court of Appeals. • ISSUE: Is there a sufficient factual basis for supporting the jury’s verdict finding an implied duration of three years in the employment of Bennett?
Contract Classification • BENNETT v. EMERSON ELECTRIC COMPANY • 2003 U.S. App. LEXIS 9443 (10th Cir. 2003) • DECISION: Yes. • REASONS: 1. An Emerson Electric representative, Tim Ferry, testified he told the plaintiff that employment would last the length, three years, of the described project. • 2. Emerson Electric provides no basis for overturning the jury’s verdict. • 3. Therefore, the jury’s verdict and judgment entered on its basis are affirmed.
Contract Enforcement • Enforceable- Court Uphold Validity • Unenforceable- Party Has Justifiable Reason For Noncompliance • Valid- Essential Requirements Present • Void- Lacks Validity/Enforceability • Voidable- Party Has Right To Withdraw
Contract Performance • Executed- Promises Performed • Executory- Promises Not Yet Performed
Breach Of Contract • Party Does Not Perform • Remedies- Mitigate Damages • Negotiated Settlement • Arbitration • Damage Award • Specific Performance • Rescission • Restitution • See Chart p. 223
Breach Of Contract • MOBIL OIL EXPORATION AND PRODUCING • SOUTHEAST, INC. v. UNITED STATES • 120 S.Ct. 2423 (2000) • FACTS: Mobil and other oil companies received the right to explore and develop oil found off the coast of North Carolina. The companies paid the United States $158 million for such rights in the form of 10 year renewal leases. Under the laws (OCSLA and CZMA) in existence at the time of these leases, the Interior Department was required to respond within 30 days of an exploration plan being filed by a lessee oil company, In August 1990 (2 days before the final exploration plan was filed), a new law (the OBPA) became effective. This law required the Interior Department to wait at least 13 months before approving an exploration plan so that an Environmental Sciences Review Panel could study and comment on any exploration plan. • The oil companies sued to have their lease payments returned since the U.S. government could not perform the contract as originally written. • ISSUE: Are the oil companies entitled to the return of the $158 million lease payments?
Breach Of Contract • MOBIL OIL EXPORATION AND PRODUCING • SOUTHEAST, INC. v. UNITED STATES 120 S.Ct. 2423 (2000) • DECISION: Yes. • REASONS: 1. Due to the change in laws, the United States in fact delayed in responding to the exploration plan for 4 years. • 2. This delay essentially acted as a repudiation of the original commitment to respond within 30 days of a plan being presented. • 3. The appropriate remedy for this repudiation of its obligation is to pay restitution by returning to the oil companies the $158 million in lease payments.
Offer • Intent/Commitment • Definite Terms • Termination • Acceptance • Bilateral- Promise • Unilateral- Performance • Mirror Image Rule • Silence = Acceptance • Deposited Acceptance • Mailbox Rule
What is an Valid Offer? • Offer = the manifestation of a willingness to enter into a contract if the other party agrees to the terms • Offeror makes the offer • Offeree receives (may accept) the offer
What is an Valid Offer? • Intent? • Present • Definite • Communicated • Considers all the circumstances
What is an Valid Offer? • Definiteness? • The more specific the proposal the more likely the court is to call it an offer • Behavior, acting as though a contract, may lead to finding a contract
What is an Valid Offer? • Solicitations of Offers? • Advertisements • Courts have generally held that ads for the sale of goods at a specified price are not offers, but invitations to negotiate • Under certain circumstances courts have found highly specific ads to be offers
What is an Valid Offer? • Solicitations of Offers? • Rewards (e.g for the return of lost property) • Generally held to be offers for unilateral contracts • Auctions • Sellers generally held to be making an invitation to offer • Bidders are treated as offerors • Therefore items can be withdraw prior to acceptance unless auction is advertised as being “without reserve”
What is an Valid Offer? • Solicitations of Offers? • Bids (e.g. in construction) • Advertisement for bid generally held to be invitation to offer • Bid Submitters = Offerors
What are the Terms of an Offer? • If actual notice (e.g. offeree read) or reasonable person should have been put on notice = bound
Offer Termination • An offer is terminated by: • A specific provision • Lapse of time to accept per terms of the offer (e.g. “this offer expires on 10/24/03”) • If no time specified = “a reasonable time”
Offer Termination • An offer is terminated by: • Revocation • Offerors generally can revoke offers prior to acceptance • Exceptions: • Firm offers • signed writing • by a merchant • containing assurances that offer will be held open • Options • Where something of value has bee given in exchange for a promise not to revoke • Effective upon actual receipt by the offeree
Offer Termination • An offer is terminated by: • Rejection • A Counter Offer is a Rejection
Offer Termination • An offer is terminated by: • Operation of Law • Death/Insanity • Destruction of Subject Matter • Intervening Illegality
Acceptance • Present Intent • “Mirror Image” Rule • Materially alter terms = counteroffer
Acceptance • “Mirror Image” Rule • Exception: Battle of Forms • Timely expression of acceptance creates a contract even if different terms in forms • Where both merchants, additional terms apply unless: • Expressly limited acceptance • Materially alter offer • Notice of objection
Acceptance • VENTURE MEDIA LIMITED PARTNERSHIP v. • COLTS PLASTICS COMPANY, INCORPORATED 168 F.3d 484 (4th Cir. 1999) FACTS: Venture sells cosmetic products, and Colt manufactures and sells plastic containers for cosmetic products. Through a series of interactions, these companies did business over many months. Following discussions about problems, Venture sent a purchase order for $339,996.65 worth of containers. A dispute arose about Venture’s failure to pay for containers that were delivered and Colt’s failure to deliver specially manufactured containers. • ISSUE: Which party is liable for breach of contract?
Acceptance • VENTURE MEDIA LIMITED PARTNERSHIP v. • COLTS PLASTICS COMPANY, INCORPORATED • 168 F.3d 484 (4th Cir. 1999) • DECISION: Venture is liable. • REASONS: 1. The offer to contract was made by Colt through its Proposal Form. • 2. The acceptance was made by Venture when it submitted its Purchase Order. • 3. The terms of the Purchase Form govern making Venture liable for nonpayment upon deliveries and for the containers specially manufactured for Venture by Colt.
Acceptance • Form- Offeree’s Acceptance Included in Contract Unless: • Expressly Limited Acceptance • Materially Alter Offer • Notice of Objection • Unilateral Contract • Offeree must perform to accept • Bilateral Contract • Offeree must make promise requested • Can be explicit or implicit • Silence • Generally not = acceptance • Some excepts based upon circumstances • Only Original Offeree or his agent can accept an offer
Acceptance • SHARP ELECTRONICS CORPORATION v. • DEUTSCHE FINANCIAL SERVICES CORPORATION 216 F.3d 388 (4th Cir. 2000) • FACTS: Sharp Electronics sold merchandise to Montgomery Ward. Deutsche Financial loaned money to Montgomery Ward by paying Sharp for the merchandise shipped after approving the invoice faxed by Sharp. Essentially Deutsche Financial agreed to pay for the merchandise shipped by Sharp within 30 days following receipt of the faxed invoice. • Montgomery Ward changed financial services manager and lender from Deutsche Financial to G.E. Capital. After being informed of this change by Montgomery Ward, Deutsche Financial informed Sharp that related to a May 23 invoice it was agreeing to finance, Deutsche Financial would pay only for merchandise shipped by Sharp on or prior to May 28. • Sharp shipped $1.3 million worth of merchandise to Montgomery Ward on May 31. When Sharp was not paid for this merchandise, it sued Deutsche Financial claiming the agreement relative to the May 23 invoice covered thirty days. • ISSUE: Is Deutsche Financial liable to Sharp for the $1.3 million worth of merchandise shipped after May 28?
Acceptance • SHARP ELECTRONICS CORPORATION v. • DEUTSCHE FINANCIAL SERVICES CORPORATION 216 F.3d 388 (4th Cir. 2000) • DECISION: No. • REASONS: 1. Whether the contract between Deutsche Financial and Sharp was bilateral or unilateral in nature is critical to determine. • 2. The 4th Circuit Court of Appeals concludes that the relationship results in a unilateral contract – Sharp faxes an invoice which Deutsche Financial accepts by its financing. • 3. Since each transaction is of a unilateral nature, Deutsche Financial can and did state the limitation of its financial commitment. • 4. Thus, the May 23 invoice by the language of Deutsche Financial’s limited acceptance (financing shipments on or before May 28) relieves Deutsche Financial of liability to pay for the merchandise shipped on May 31.
Acceptance • Where writing anticipated, courts look at intent as determined by reasonable person familiar with the circumstances
Acceptance UNIVERSITY EMERGENCY MEDICINE FOUNDATION v. RAPIER INVESTMENTS, LTD. and MEDICAL BUSINESS SYSTEMS, INC. 197 F.3d 18 (1st Cir. 1999) • FACTS: Emergency Medicine provides doctors to emergency rooms at hospitals. It contracted with Rapier to have MBS (a subsidiary of Rapier) perform coding, billing, collection, and account receivable services. The contract between Emergency Medicine and MBS was to renew on an annual basis unless either party gave 4 month notice of nonrenewal. The contract, which was to expire on September 30, required notice of nonrenewal on or before May 31. On May 30, Emergency Medicine mailed letters of nonrenewal to offices of Rapier and MBS. The letter to Rapier was returned as not deliverable. The letter to MBS was delivered on June 2. MBS argued that the contract was renewed for another year since the May 31 deadline was not satisfied. • ISSUE: Did the mailing on May 30 satisfy the requirement that notice of nonrenewal be delivered on or before May 31?
Acceptance UNIVERSITY EMERGENCY MEDICINE FOUNDATION v. RAPIER INVESTMENTS, LTD. and MEDICAL BUSINESS SYSTEMS, INC. 197 F.3d 18 (1st Cir. 1999) • DECISION: Yes. • REASONS: 1. The contract between Emergency Medicine and MBS specifically stated that nonrenewal notice had to be mailed. • 2. The mailbox (or deposited acceptance) rule permits the effective date of delivery to be the date of mailing. • 3. The letter mailed on May 30 satisfied the May 31 deadline; thus, the contract was not automatically renewed.
Communication • Unilateral Contract - When Performed = accepted
Communication • Normally Acceptance must be communicated • Offer May Stipulate Manner • If so, Material Deviation = ineffective
Communication • When - unless specified, look at circumstances • Generally effective when dispatched • Authorized Means • Same means as offer • Trade Usage • Reasonable • Prompt Shipment
Consideration • Receipt Of Legal Benefit • Suffering Of Legal Detriment • Bargained For • Agreement Not To Sue • Preexisting Obligation • Consideration Unnecessary • Sale-Of-Goods • Firm Offer • Option • Promissory Estoppel
Consideration? • Consideration = something of legal value, bargained for and given in exchange for an act or promise
Consideration? • Legal Value- Monetary value not necessary • Promise • Perform an act where no prior legal duty to • Refrain from performing an act where prior legal right to do (e.g. quit smoking)
Consideration? Adequacy • Courts generally not concerned with whether equal value so will allow “bad bargains” based on freedom of contract idea • Exception: • Inequality on the face of the agreement • Assume attempt to hide gift as a contract • Nominal • Generally not adequate unless truly bargained for • Gross inadequacy may suggest fraud, undue influence, lack of capacity, etc. • Gross inadequacy may result in finding contract unconscionable under the U.C.C. • Courts may refuse to grant “equitable remedies” to those who seek to enforce a grossly inadequate bargain and instead grant some measure of damages
Consideration? • Bargained for/Given = consideration that promisor requested (i.e. his price)
Consideration? • Analysis • Which promise is at issue? • Who is the promisee of that promise? • Has promisee given the requested consideration?