MBAD 5191: Legal Environment in Business

1. MBAD 5191: Legal Environment in Business Introduction to Contract Law

2. Key Questions • What are contracts? • Why are contracts formed? • Why should contracts be enforced? • When is a valid contract created? • When can a party avoid the requirements of a contract?

3. Contract Terminology • Oral vs. Written • Express vs. Implied • Bilateral vs. Unilateral • Entire vs. Divisible • Executory vs. Executed • Valid vs. Void vs. Voidable

4. Evaluating Contract Claims I. Identify the applicable body of contract law II. Determine if the legal elements of a contract are present III. Consider “Non-Contract” obligations IV. Consider legal doctrines of contract avoidance

5. Applicable Body of Contract Law • Uniform Commercial Code (UCC) -Statutory law -Governs commercial transactions -Article 2 deals with the sale of goods • Common Law of Contracts -Product of judicial decisions -Constantly evolving -Guided by the Restatement of Contracts

6. Common Law vs. Uniform Commercial Code

7. Contract for Goods or Services??? • Hybrid Contracts -Include both goods and services -Difficult to identify appropriate body of law • Test: -Is the “major purpose” of the contract for goods or services? -Contact must be viewed in its entirety to identify “predominant factor”

8. II. Elements of a Contract • Offer and Acceptance -Willingness to enter contract/willingness to be bound by the terms • Mutual Agreement -Meeting of the minds • Consideration -Something of legal value given up by all parties in the contract • Competent Parties -Legal age and normal mentality • Legality of Purpose -Contract formed for a legal purpose • Proper Form -Satisfies requirements regarding writing, signatures, etc.

9. Elements of an Offer • Definite and Certain Terms • Definite enough to signal intent/provide for enforcement • Different standards for UCC and common law • Communication of the Offer • Must be communicated directly to the offeree • Intent to Contract • Governed by the “objective standard of intent”

10. UCC “Gap-Fillers” • Price: • Reasonable at the time of delivery • Quantity: • Output contracts • Exclusive dealing • Time for Performance: • Reasonable time for performance • Indefinite term contracts cancelled with reasonable notice

11. UCC “Gap Fillers” • Place of Delivery: • Seller’s place of business; if no place of business, seller’s home • Buyer’s Right of Inspection: • Reasonable time, place and manner • Payment: • Check acceptable, but seller may demand cash within a reasonable period of time • No obligation to extend credit

12. Offers- Special Situations • Advertisements -General Rule: not considered offers due to multiple acceptance problem -Exception: Ads written with enough clarity to avoid multiple acceptance • Rewards (Public Offer): -Offer to enter a unilateral contract requiring full performance • Bids and Auctions: -Treated as an invitation to offer

13. Termination of an Offer • General Rule:An offer can be revoked at any time up until acceptance. Exceptions include: -Option Contracts -Unilateral Contracts -Promissory Estoppel -Firm Offers (UCC) • Rejection: Terminates an offer and is effective at the time received by the offeror. • Lapse of Time: defined in the contract or “reasonable” based on circumstances • Counteroffer: Terminates original offer and acts as a new offer. • Special Situations: death or insanity of the offeror, destruction of the property that is the subject of the offer, and intervening illegality terminate an offer.

14. Elements of Acceptance • Communicated to Offeror: -Manner of Acceptance: any reasonable manner unless specified in the offer -Time of Acceptance: reasonable time, before revocation of offer, unless specified -Only Offeree Can Accept: unless agent accepts on offeree’s behalf • Unconditional (acceptance of terms offered): -Mirror Image vs. Material Terms

15. Acceptance- Special Situations • UCC “Battle of the Forms”: • Governs the exchange of standardized forms between merchants for the purchase of goods. • Additional terms included in the contract, unless: • Acceptance expressly limited to offeror’s terms • New terms materially alter the offer • Objection to new terms raised within a reasonable period of time. • Mailbox Rule: - Acceptance effective at the time it is dispatched. • Common Law: faulty dispatch makes acceptance valid upon receipt • UCC: faulty dispatch only matters if it increases time before acceptance is received

16. Consideration Consideration may be: • Something given up that a party has a legal right to keep OR • Performing an action that a party has no legal responsibility to do OR • Refraining from an action a party has the legal ability to do

17. Characteristics of Consideration • Legality -Refraining from illegal activities cannot serve as consideration -Pre-existing contractual obligations cannot serve as consideration • Adequacy -Courts generally do not determine adequacy of consideration • Possibility of Performance -An action must be possible to perform to serve as consideration • Past Consideration -Benefit already received cannot act as new consideration • Illusory Promises -Promises that don’t create a real obligation to act or refrain are not consideration

18. Contract Modification & Consideration • Common Law -General Rule: contract modification must be supported by new consideration -Exceptions: • Unforeseen circumstances • Mutually agreeable termination and formation of a new contract • Uniform Commercial Code -General Rule: written modification does not require new consideration -Safeguards: • Neither party has a duty to agree to the modification • Good faith and fair dealings requirements of UCC applied • Settlement of Debts -Liquidated debts: due and certain; modification requires new consideration -Unliquidated debts: not due and certain; new consideration not required

19. Capacity and Legality • Legal Capacity -Age of majority -Mental competent -Not impaired by controlled substance • Legality of Purpose -Consistent with common law -Consistent with statutory requirements -Consistent with public policy

20. Proper Form • Statute of Frauds- contracts pertaining to the following must be in writing: • Agreements by executor/administrator to pay debts of estate • Agreements to answer for debts of another • Agreements that cannot be completed in less than one year • Agreements made in contemplation of marriage • Agreements to sell any interest in real property • Agreements to sell personal property for $500 or more

21. III. Non-Contract Obligations • Quasi-Contract:Prevents “unjust enrichment” • One party conveys benefit to another • Benefit is knowingly accepted • Unjust to deny injured party compensation • Promissory Estoppel:Protects “reasonable expectations” • Promise made, which was foreseeable to induce reliance • Reliance by the recipient of the promise • Damages as a result of the reliance

22. IV. Doctrines of Contract Avoidance • Misrepresentation • Fraud • Mistake • Duress • Undue Influence

23. Misrepresentation • Misstatement or nondisclosure of a material fact • Reasonable reliance by the complaining party • Induces contract formation • Contract is voidable by the complaining party, although some states do not allow recovery for additional damages

24. Fraud • Intentional misstatement or nondisclosure of a material fact intended to induce the formation of a contract • Misstatement or misrepresentation relied upon by complaining party • Contract is voidable by the complaining party and recovery may be available for additional damages

25. Mistake • Contract may potentially be voidable by the complaining party if the mistake was bilateral (both parties mistaken) • Mistake must pertain to a material fact present at the time the contract was formed, not a mistake about conditions in the future • Mistakes regarding facts readily observable or available to the public do not generally make a contract voidable

26. Undue Influence • Contract voidable if person of influence improperly uses position to encourage contract formation in an unfair manner • Examples: -Parent/Child -Doctor/Patient -Lawyer/Client -Teacher/Student -Employer/Employee

27. Duress • Contract voidable if improper pressure used to encourage contract formation • Victim had no reasonable alternative but to enter contract • Examples: -Physical threat -Threat to property -Threat to reputation

28. Conclusions • Defending a Contract • Identify appropriate body of contract law • Demonstrate all elements of a valid contract exist • If element missing, explore non-contract obligations • Challenging a Contract • Identify appropriate body of contract law • Demonstrate the absence of a required element • If all elements are present, explore doctrines of contract avoidance