Contract Formation

Quiz on Contracts Contract Formation

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

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 v. Implied Contracts Express ContractImplied Contract

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 Types of Contracts 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: CONSIDERATION AGREEMENT LEGALITY CAPACITY

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 Intent There 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. Definiteness The terms of the offer must be sufficiently definite to be ascertainable by the parties or by a court. Communication The 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 Drama in the law Drama in the law 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.

Acceptance • Unequivocal Acceptance (mirror image rule) • Communication of Acceptance • Mode and Timeliness of acceptance (mail box rule) Offers Bike to Jill for $100 Jill John Tia Accepts Tia

Current Events Report – Environmental Law – Ban Styrofoam ContainersBridgetSteph 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: Minors Intoxicated 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 Statute USURY 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. GAMBLING Gambling contracts that contravene (go against) state statutes are deemed illegal and thus void. LICENSING STATUTES Contracts 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 LAWS Laws 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 7.4Atkins 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.

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? 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 • 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? • 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”

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.

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. Third Party Beneficiaries

– Pop’s Cones, Inc. Case • CASE 7.2Pop’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.

Promissory Estoppel • 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 • 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

Contract Formation