Fundamentals of Contracts

1. Fundamentals of Contracts Mr. Valanzano Business Law

2. Contracts • Contract – _____________________________________ • Requirements for a transaction to be recognized as a contract: • 1) _________________________________ • 2) ________________________________ • 3) _____________________ • 4) ____________________ • 5) ________________________ • 6) _______________________ • Some contracts are required to be in writing.

3. Requirements of an Offer • Offer – a proposal by an ___________ to do something, provided the _____________ does something in return • Offeror – ________________________________________ ________________________________________________ • Offeree – ________________________________________ • To create a valid offer: • The offeror must appear ___________________________ ___________________________________ • The terms must be ________________________________ • The offer must be _________________________________

4. The “Test of the Reasonable Person” • The law will only recognize that an offer exists when the offeror ____________________________________________. • If a reasonable person would ________________________as indicating you intend to contract, _____________________. • If a reasonable person would interpret your conduct as not serious or as a joke, ___________________________. • This gives jurors and judges an _______________ test rather than a subjective test based on what you say you were thinking.

5. Complete and Clear Offers • All offers must identify the __________, ____________, and ________________, either directly or indirectly. • The amount of information which is essential depends upon the complexity of the transaction. • Example: real estate sale • Identity of the specific lot • Price • Full terms for payment • Date for delivery of possession • Date for delivery of the deed • If any of the above terms were missing, there would not be a valid offer

6. Implied Terms and Advertisements • In some contracts, a term might not be implied by law or common practice. • Example: In a sale of good between merchants, when price is not specified, current market price is the basis for the contract. • Advertisements in newspapers, magazines, on radio or TV, or in the mail are generally not offers. Courts treat them as _______________ to customers to make offers. • Ads become offers when they are worded in ways that ________________________________________________ or if it asks the offeree to _______________________________.

7. Termination of Offers • Revocation by the Offeror – __________________________ ________________________________ • An offer can be terminated if the offeror has a ___________ ___________ the offer must be accepted by. • If there is nothing in the offer about a length of time to accept, a reasonable amount of time is determined depending on the type of offer. • The offeree _________________________. • The offeree can ___________________________. • Death or insanity of either the offeror or offeree

8. Acceptance • Acceptance – ____________________________________ ________________________________________ • If an offer is made to only one person, only that person can accept the offer. If an offer is made to a group of people, anyone in that group that knows of the offer can accept it. • To create an enforceable contract, the acceptance must: • _________________________________________________ • __________________________________ • __________________________________

9. Acceptance Must Match Offer • Mirror Image Rule – ____________________________ _____________________________; if it varies any term, it is a ____________________ • The mirror image rule applies to contracts for services such as tax preparation and realty. • By statute (___________), the mirror image rule has been changed for the sale of goods

10. Types of Contracts • An _______________ contract is a contract that may be oral or written. • When a contract is formed through the actions of the parties, this is called a _______________ contract. • A ______________ contract contains two promises. • A ______________ contract contains a promise by only one person to do something, if and when the other party performs an act. • All contracts may be _________ or ____________. • _____________________: a law stating certain contracts must be in writing to be enforceable

11. Genuine Agreement (Assent) • Genuine Agreement – ___________________________ ______________________________________ • The absence of genuine agreement will make what appears to be a contract voidable (the injured party can rescind). • Rescission – ____________________________________ ________________________________________ • Ratification – __________________________________ ____________________________________

12. Duress • Duress – _______________________________________ _________________________________________ • A contract resulting from duress is voidable. • Types of threats used to force agreements resulting in duress: • __________________________ • __________________________ • _________________________ • _________________________

13. Undue Influence • Undue Influence – ______________________________ ________________________________________________________________________ • The two key elements of undue influence are the _________________ and the ______________________. • Unfair terms within a contract is usually a strong sign of unfair persuasion.

14. Mistakes • _______________________ – when one party holds an incorrect belief about the facts related to a contract (usually will not affect validity of a contract) • ___________________________ – both parties have an incorrect belief about an important fact (recognized or induced) • Material Facts – ________________________________ ______________________________________________ (subject matter or law)

15. Misrepresentation • Misrepresentation – ______________________________ __________________________ • ________________ – the offeror using details they thought were true but are actually not • __________________ – the offeror knowingly using untrue statements • Statements are considered misrepresentation if: • The statement is one of fact or there is active concealment (substitute for false statement of fact) • The statement is material to the transaction or fraudulent • The victim reasonably relied on the statement

16. Fraud • All elements of misrepresentation must be proven in order for fraud to be present. • The misrepresentation must be ____________________ or __________________________. • The misrepresentation or concealment ________________ _________________________________. • Remedies for fraud: • ______________________ • ______________________ • ______________________ (money awarded in order to punish the fraudulent party)

17. Consideration • Consideration – ________________________________ _______________________________________________ • To be consideration, a promise must _______________ _________________________________. • The 3 Requirements of Consideration: • Each party must give an act or promise to the other party • Each party must trade what they contribute to the transaction for the other party’s contribution • What each party trades must have legal value (be worth something in the eyes of the law)

18. Common Consideration Terms • Output Contract - _________________________________________ _____________________________________________________________ • ____________________________ - when a seller agrees to supply all of the needs for a particular buyer • Liquidated Debt – _______________________________________________ _______________________________________ • ______________________________ – an agreement where both sides agree to compromise on the terms of a contract • Release – _______________________________________________________ • _________________________________ – when someone in debt pays their combined creditors less than the total of what is owed to all of them in exchange for agreeing not to file for bankruptcy

19. Capacity • Capacity – _____________________________________ _______________________________________________ __________________________________________________ • Minors, mentally handicapped, and the intoxicated lack contractual capacity. • Minors gain contractual capacity by being emancipated, getting married, moving out, joining the armed forces, giving birth, and/or getting employed full time • __________________________ – when people who work for an organization have the power to bind the organization to a contract

20. Disaffirming Contracts • Disaffirmance – ____________________________________ _______________________________ • Types of contracts that can be disaffirmed by those who lack capacity: • Contracts for non-necessities • Contracts to pay fair price for necessities • Types of contracts that can NOT be disaffirmed: • Court-approved contracts • Major commitments (enlist in army; student loan) • Banking Contracts • Insurance Contracts • Work-related contracts • Sale of realty • Apartment rental

21. Legality • Agreements can be void and unenforceable if they involve contracting for an illegal act. • Types of contracts that are voidable if illegal acts are involved: • Contracts made illegal by specific statute - Illegal gambling, Charging more than maximum interest rate (usury), Discrimination • Agreements that obstruct legal procedure – bribing jurors, paying for false testimony, refraining from informing on an alleged crime • Agreements made without a required license – agreements with doctors, lawyers, brokers, contractors, etc. • Agreements that affect marriage negatively – an illegal immigrant paying someone to marry them so they can gain citizenship • Agreements that restrain trade unreasonably – price fixing, bid rigging, resale price maintenance, allocation of markets, covenants not to compete

22. How Courts Help Parties to Illegal Contracts Under Common Law • Courts will not enforce the agreement. • Courts will leave the parties where they are. • Restitution – ____________________________________ • Under common law, restitution will not be paid in most instances. • Exceptions: • If the law that was violated was designed to protect an injured party • The victim is excusably ignorant (victim does not know contract is illegal, other party does, minor illegality) • A party rescinds before the illegal act occurs • Only legal parts of the contract will be enforced (divisible contract)

23. How Courts Help Parties to Illegal Contracts Under the UCC • Under the UCC governing the sale of goods, it makes agreements or contract clauses that are unconscionable unenforceable. • Unconscionability – ______________________________ ________________________________________________________________________ • Procedural – shown by _______________________________ • Substantive – established by ___________________________ • Most courts require both types on unconscionability to be present to determine a contract illegal. • When a court finds a contract illegal for unconscionability it can: • Refuse to enforce the contract • Enforce only the legal parts of the contract • Modify the terms of an agreement to make it fair

24. The Statute of Frauds • Requires certain contracts to be _______________ and _____________ in order to be enforceable in court. • When a contract has been fully performed it is considered ______________. If there are still parts to be done by either or both parties it is considered _________________. • Contracts that must be in writing: • Purchase or sale of goods valued at $500 or more • Buying and selling of real estate • Contracts that will take more than 1 year to complete • Promises to pay the debt or answer for a legal obligation of another person • Promises to give something of value in return for a promise of marriage

25. Content Requirements Under Common Law • Essential terms required to create a valid offer and acceptance: • Names of the parties • Description of the subject matter • Price • Quantity • Other essential terms (method of delivery, terms of payment, method of financing, date of transfer, etc.) • Signature • Evidence of a contract (the writing indicates the existence of a contract)

26. Content Requirements Under the UCC • Under the UCC, the writing must indicate only: • The quantity of goods • A contract has been created between the parties • Signature • A writing signed and sent by 1 party is treated as the writing of the other party if not objected to within 10 days of receiving • The signature may be written, stamped, engraved, or printed • A signature may be any mark that is intended as a signature or authentication of the writing • The purpose us to prevent frauds by requiring proof on the contract’s existence that is hard to fake

27. Exceptions to the Statute of Frauds • Exceptions with contracts to pay a debt or answer for the legal obligation of someone else: • when there is a primary promise • when the executor of a deceased person’s estate agrees to pay the unpaid debts personally instead of using the deceased’s assets • when a 3rd party promises to pay another’s debt (main purpose rule) • Under the UCC, a writing and signature is not required for sale of goods of $500 or more when goods: • are ordered to be specially manufactured • have been ordered, paid for, and payment was accepted • have been received and accepted by the buyer • Exceptions with contracts to buy or sell real estate: • when the seller delivers the deed • if the buyer made partial or full payment, has occupied the land, and made substantial improvements to the land

28. The Parol Evidence Rule • Integration Clause – _____________________________________ _______________________________________________________ • Parol Evidence Rule – keeps out ___________________________, _____________________, ______________, and other discussions that are not __________________________________ • Parol evidence or statements are usually not admissible in court except: • To clarify unclear terms in the writing • If the written contract was not intended to be a complete agreement • If a condition necessary to the contract never occurred • If fraud, forgery, illegality, mistake, or misrepresentation occurred • To show the parties reached an another agreement or terminated the contract • To show the contract is voidable because one party lacked capacity

29. How are conflicts in written terms interpreted? • When a contract refers to an amount of money in both words and numbers, the words will be relied on if they do not match. • __________________________ – when courts interpret contracts, they look at the main objectives to see which clauses should prevail over others • The plain and normal meaning of ordinary words will be used to determine the meaning of a contract. • ______________________ – contracts written by a stronger party (_________) with the help of lawyers who favor the interests of their clients; the weaker party (_______) must “take it or leave it” and the terms of the contract are non-negotitable • Examples: purchasing something on credit, life insurance

30. Transfer of Contractual Obligations • Contractual Rights – ____________________________ _______________________________ • Contractual rights can be transferred to others. The transfer of contractual rights is called an ________________. • The party who transfers the contractual right is the ______________and the party who receives it is called the __________________.

31. Assignable and Non-assignable Rights • A party may assign contractual rights as long as performance will not be materially changed. • Performance – ________________________________________________ • State statutes require that certain assignments be in writing, but no consideration is necessary to make a valid assignment. • Contractual rights may not be assigned if performance would be materially changed or if performance would become substantially more difficult. • Rights that may not be transferred include: • A right created under a contract that prohibits the transfer of contractual rights • Claims for damages for personal injuries • Claims against the United States • Rights to personal services, especially those of a skilled nature, or when personal trust and confidence are involved • Assignments of future wages, as limited by state statutes

32. Delegating Contractual Duties • Contractual Duties – __________________________________ • The transfer of duties is know as _______________________. • Obligor – ___________________________________________ • “__________________________________________________.” – this means that the assignee receives exactly the same contractual rights and duties as the assignor had. • If the obligor breaches, the assignee, not the assignor, must sue for the breach.

33. How are contracts discharged? • Discharge – _________________________________________ ____________________________ • Breach of Contract – __________________________________ _______________________ • When one party commits a major breach, the other party can consider their obligation discharged. When this happens in a sales contract under the UCC, it is called ________________. • ___________________________ – when most duties are performed, but only a minor duty remains (contract not discharged) • Defaults – _____________________________ • When a party notifies the other party that they will default before the time of performance, this is called an _____________________.

34. Other Ways a Contract is Discharged • By ______________________: • On a specified date of termination • Upon the occurrence or failure of a specified event to happen • At the free will of either party upon giving ample notice • If both parties agree to rescission, they will attempt to be put back into the position they were in prior to contracting. • Substitution – replacing an existing contract with a new one • An agreement to change the obligations of the original contract is called accord and the performance of the new obligation is called satisfaction. • Novation – a party releasing the other from their duty and accepting a substitute party • By _______________________________: • Destruction of the subject matter • Performance declared illegal • Death or disability

35. Discharging Contracts by Operation of Law • A contract can be discharged by operation of law in the following ways: • Promisor’s debts are ______________________________ • Time for performance elapsed due to ________________ ___________________ • __________________ – a material change in the terms of a written contract without consent of the other party (must be material, intentional, made by a party or authorized agent of a party to the contract, and without consent of the other party)

36. Tender of Performance • Tender – ___________________________________________ • If the duty requires the doing of an act, a tender made in good faith but is rejected will discharge the obligation of the one offering to perform. • If the obligation requires the payment of money, rejection of an offer to pay the money does not discharge the debt or prevent the creditor from collecting. • Legal Tender – ____________________

37. Breach of Contract and Remedies • The law divides breaches of contract into 2 categories: ________________________ and ________________. • Remedy – __________________________________________ ______________________________________________ • The significance of the breach in relation to the entire contract will determine if the breach is major or minor. • Basic remedies for a major breach: • _____________________________ • _____________________________ • _____________________________

38. Rescission and Restitution • How does a minor breach affect the victim’s duties? • The party injured by a minor breach usually must continue to perform their contractual duties. • Most likely, the victim will receive money damages to recover the cost of completing their duty. • Recovering damages to recover lost costs is called recovering through offset. • How does a major breach affect the victim’s duties? • The injured party does not need to continue performing their contractual duties. • The victim can also choose a remedy such as: restitution, money damages, and specific performance. • What are rescission and restitution? • Rescission – _________________________________________________ • Restitution – ___________________________________________ ___________________________________________________________

39. Types of Money Damages • _____________________ – seeks to place the injured party in the same financial position they would have been in if there had been no breach • Consequential – ____________________________________ __________________________________________________ • __________________ – used when the parties agree that a certain amount of money will be paid if a certain breach occurs • Punitive – ______________________________________________ _________________ (used in cases of fraud and intentional torts) • _______________ – a small damage awarded to punish the failure to perform a contractual duty even when there is not actual injury

40. Specific Performance • When money damages are not an adequate remedy for breach of contract a court may issue a _____________ ______________________. • Under this decree, the court orders the breaching party to __________________________________________________. • Specific performance is an ___________________________. • “___________________” – the injured party that is seeking damages is blameless for the breach and acted reasonably throughout the transaction

41. Denial of Remedies • An injured party must elect a remedy when suing. Specific performance and damages can’t be recovered for the same breach. • Specific performance is not available when damages are an adequate remedy. • Combining rescission and restitution and damages can only happen under a contract for the sale of goods governed by the UCC.

42. Other Ways to Eliminate Remedies • If the injured party does not act to minimize their injuries or ___________________________. • By intentionally and explicitly giving up a contractual right by using a ________________. • If a lawsuit to recover damages is not in place within the time stated by a state’s ______________________________. • If the debtor’s assets are cleared through _______________. This is where the debts are evenly shared by each creditor they are owed to.

43. Breach of Contract Rescission & Restitution Specific Performance Damages Waiver Injunction Compensatory Consequential Nominal Punitive Liquidated • Injunction - ___________________________________________ ______________________________________________________