Contract Formation

Quiz on Contracts

Contracts - Promise

Benefits Society to Enforce Promises Common law based on state law Common Law v. UCC 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.

A college freshmen whose boyfriend broke their prom date sued the boyfriend for the cost of her unused prom dress. MN case.

Should MN court enforce this promise, why or why not? What about the promise to take her to the dance? What about a promise to call someone after a first date?

Contract law reflects society’s decisions on what promises will be enforced and what promises will not.

$200

Express v. Implied Contracts

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 Contract Implied Contract

Types of Contracts

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

LEASE

Executed versus Executory

Executed is a completed contract Executory is a contract that still must be

completed

Requirements of a Contract

The four requirements that constitute what are known as the elements of a contract are:

AGREEMENT CONSIDERATION

CAPACITY LEGALITY

Lucy v. Zehmer

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.

Three Requirements of the Offer

IntentThere 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.

DefinitenessThe terms of the offer must be sufficiently definite to be ascertainable by the parties or by a court.

CommunicationThe offer must be communicated to the offeree.

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?

Termination of the Offer

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.

Drama in the law Drama in the law

Acceptance

Unequivocal Acceptance (mirror image rule) Communication of Acceptance Mode and Timeliness of acceptance (mail box rule)

John

Tia

JillOffers Bike to Jill for $100

Tia Accepts

Current Events Report – Environmental Law – Ban Styrofoam ContainersBridgetSteph

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Bad?

Consideration

Legally Sufficient Bargained for Exchange Detrimental to the Promisee or Beneficial to

the Promisor– Gifts

“in consideration for …agreed to be legally adequate”

Start here week 4

Hamer v. Sidway (1891)

$5,000 for no drinking, smoking, 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.)?

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.

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

Heye v. American Golf Corp. , p. 212• Heye signed a 20 page employment agreement that stated she agrees to arbitrate claims. • Heye sued for sexual discrimination in court and American Golf filed motion to compel arbitration• Employment agreement also stated that “the Company reserves the right to amend .. Rescind... Any policy…• What is the consideration?

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:

MinorsIntoxicated

Persons

Mentally Incompetent

Persons

Minors --

Disaffirmance Return of Goods Damages Necessity Ratification

Intoxicated Persons

Lack Mental Capacity Impaired to the extent that the person did not

comprehend the legal consequences

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.

Contracts Contrary to StatuteUSURY

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.

GAMBLINGGambling contracts that

contravene (go against) state statutes are deemed illegal and

thus void.

LICENSING STATUTESContracts 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.

SABBATH LAWSLaws 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.

Atkins v. Swimwest, p. 222

CASE 7.4 Atkins v. Swimwest Family Fitness Center (2005). , p. 222• Waiver Release Statement:

I AGREE TO ASSUME ALL LIABLITY FOR MYSELF WITHOUT REGARD TO FAULT, WHILE AT SWIMWEST FAMILY FITNESS CENTER. I FURTHER AGREE TO HOLD HARMLESS SWIMWEST FITNESS CENTER, OR ANY OF ITS EMPLOYEES FOR ANY CONDITIONS OR INDURY THAT MAY RESULT TO MYSELF WHILE AT THE SWIMWEST FITNESS CENTER. I HAVE READ THE FOREGOING AND UNDERSTAND ITS CONTENT.

Contrary to Public Policy and Quasi Contract

Contrary to Public Policy– Restraint of trade

Covenant not to compete– Unconscionable

Procedural Element (contracts of adhesion). Substantive Element (very bad deal).

– Exculpatory Clauses (covered in remedies) Quasi Contract - Implied In Law

– Quasi Contract– unjust enrichment

Ethical Considerations, p. 273• Merchants sell on credit to low-income customers• Charge very high interest rate• Justify it by statistics that show customer base more

likely to default.Ethical? Should there be a limit? Pay-day loans?

Tobacco Case in Book, p. 220• Settled for $11 Billion• 12 attorneys 25% share = $2.8 billion• $7,716 per hour for every hour since they took the case – 24 hours a day, 7 days a week• “patently ridiculous”

New Roof• Fisher was on vacation when he received a call saying

that a roofer had taken off his roof by mistake.• Does roofer owe him a new roof?• What if roofer put on the new roof and sued for payment

– what’s the claim? Should the roofer win?

Third Party Rights

There are two important exceptions to the rule of privity of contract:– Assignment– Delegation

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.

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.

Third Party Beneficiaries

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.

– Pop’s Cones, Inc. Case

CASE 7.2 Pop’s Cones, Inc. v. Resorts International Hotel, Inc. (1998). , p. 216• Can a Party to failed lease negotiations successfully assert a claim for promissory estoppel based

on pre-contractual negotiations and acts taken in reliance thereon?• Lease was never signed and the offer said “This letter is not intended to be binding upon Resorts.” • Pop’s, the TCBY franchisee, asked if he should renew his lease or if the new lease was going to

work, Resorts told him to not renew the lease.

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Promise: there must be a promise. Justifiable Reliance: the promise must cause the

promisee to take an action that he or she would not otherwise have taken.

Foreseeability: the action taken in reliance on the promise must be reasonably foreseeable by the promisor.

Promissory Estoppel

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Promissory Estoppel

Injustice: a promise that has been reasonably relied on will give rise to relief only if the failure to do so would cause injustice.

Current Events Report – Hydroxy (consumer protection)Ryan KaraschAaronWeek 4