340 likes | 568 Views
Law For Small Business (Mgmt 349). Put It in Writing: Small Business Contracts (Chapter 20) Professor Charles H. Smith Fall 2009. Introduction. Purpose of this PowerPoint presentation is to introduce many fundamental and some specific concepts of contract law.
E N D
Law For Small Business (Mgmt 349) Put It in Writing: Small Business Contracts (Chapter 20) Professor Charles H. Smith Fall 2009
Introduction • Purpose of this PowerPoint presentation is to introduce many fundamental and some specific concepts of contract law. • Concepts introduced here will also apply to following PowerPoint presentations re Chapters 5, 10 and 13. • Therefore, this PowerPoint presentation will be fairly lengthy and the other three PowerPoint presentations which will be covered on the second exam will be relatively short.
Terminology Used in Contract Law • Unilateral contract – contract based on one party’s making a promise that calls for action. • Bilateral contract – contract based on both parties making promises to each other. • Express contract – contract is communicated in writing, orally, or both. • Implied contract – no express contract but parties’ actions/relationship support avoiding unjust enrichment.
Terminology cont. • Valid contract – enforceable in court. • Voidable contract – one party can disavow contract under certain circumstances. • Void contract – unenforceable in court due to illegal purpose. • Executory contract – contract is not yet fully performed. • Executed contract – contract has been fully performed.
Terminology cont. • Written contract – contract is in writing (recommended). • Oral contract – contract made orally (some enforcement problems). • Electronic contract – contract made electronically. • Offeror/promisor – party who makes offer. • Offeree/promisee – party(ies) who are recipient(s) of offer.
Elements of a Contract • A contract is often called an agreement, a bargain or a pact. • No matter what label is used, the following elements are required • Offer • Acceptance • Consideration
“Reasonable Expectations” and Objective “Reasonable Person” Standard • The existence of any element of a contract – or whether a contract exists at all – is often informed by two related things • The parties’ “reasonable expectations” shown by plain meaning of the contract language, surrounding circumstances and/or subsequent conduct. • Objective standard based on what a “reasonable person” (judge, jury or even you!) would conclude based on the parties’ communications and circumstances.
Contract Interpretation • Contract must be interpreted “to give effect to the mutual intention of the parties as it existed at the time of contracting” (Civil Code § 1636). • This “mutual intention” is shown by expressed intent evaluated under objective “reasonable person” standard. • Plain meaning rule – first rule of contract interpretation; what is the “plain meaning” of the words used in the contract? • Assumes words used are “clear and unambiguous” and “does not involve an absurdity” (Civil Code § 1638).
Contract Interpretation cont. • Contract can be explained by surrounding circumstances and matter to which it relates – “surrounding circumstances” evidence admissible if relevant to prove meaning of which the contract language is reasonably susceptible. • Subsequent conduct – how the parties acted after contract executed but before controversy arose.
Offer • Proposal/invitation by offeror to enter into a contract. • Objective intent by offeror to be obligated by the offer; what would a “reasonable person” think? • Terms of the offer must be reasonably definite; need not be exact. • Must be communicated to the offeree (e.g., reward case).
Termination of an Offer • After the offer is made, it can be no longer available to be accepted if • Rejection by the offeree. • Withdrawal/revocation by the offeror. • By lapse of a specified or “reasonable” time. • Counteroffer by the offeree (see next slide).
Acceptance • Must be of the offer’s terms (“mirror image rule” or “mutual assent” – see next slide). • An “acceptance” that changes an offer’s terms is an counteroffer, which is • A rejection of the original offer, and • A new offer in and of itself that can be accepted, rejected or the subject of another counteroffer; in contract negotiations, there are often many counter-offers back and forth before there is acceptance. • By an authorized method of communication – usually, any method proper, but the offer itself may require a certain method of communication for acceptance.
Mutual Assent = Offer + Acceptance • Shown by offeror’s offer and offeree’s acceptance of the offer. • Traditional inquiries are • Did the parties agree to the same thing? • Was there a “meeting of the minds?” • Both are judged by objective standard (again, what would a “reasonable person” think?).
What Can Eliminate Mutual Assent? • Fraud – also called misrepresentation or deceit. • Mistake – unilateral, which is usually not a defense, or bilateral, which is usually a defense; fact, which can be a defense, or law, which is usually not a defense. • Duress – use or threat of physical or economic harm. • Undue influence – abuse of authority, power or position. • Existence of any of the above can provide basis for or defense to a contract case.
Consideration • Each party must give up something of legal value; no consideration if party purports to give up something he or she is already obligated to do (or not do). • There is no “reasonableness” requirements, so contract does not have to be “fair” or “equal” in order to have the requisite consideration. • Be careful – many times, parties will agree to the same thing (mutual assent) but, with no consideration, there will be no contract that can be enforced in court.
Elements of a Breach of Contract Case • Plaintiff must prove all of the following or defendant will win without needing to put on any defense • Valid contract between the plaintiff and the defendant. • The defendant’s “material” breach of the contract (failure to perform) – “substantial” performance is not Br/K (common abbreviation). • The defendant’s breach of the contract causes damage (any financial loss, sometimes called injury) to the plaintiff. • Plaintiff’s performance or excuse for nonperformance. • But, even if plaintiff proves all of the above, defendant may still have some defenses (see slide re Defenses to Br/K Case).
Br/K – Remedies • Remedies at law and in equity • Damages – money (most common). • Equitable – non-monetary judgment (though may have great economic value). • Election of remedies rule – usually only one remedy available for one Br/K.
Br/K – Damages • Most common judgment sought in contract cases • Compensatory – mathematical calculation based on value of contract less value of defendant’s performance. • Consequential – loss based on consequences of defendant’s breach. • Liquidated – exact amount of damages stated in contract.
Br/K – Equitable Remedies • Not as common as damages but just as important; can have great economic value • Specific performance – plaintiff wants judge to order defendant to perform the contract as agreed; plaintiff must be seeking unique subject matter (e.g., real estate, custom or rare item). • Reformation – plaintiff seeks order changing written contract to correct mistake. • Rescission and restitution – plaintiff requests judgment which requires both parties return any benefit they may have received.
Defenses to Br/K Case • First line of defense – one or more elements missing. • Capacity – legal ability to enter into a contract (voidable); e.g., contracting party has mental disability or is under age of 18. • Legality – contract must have legal purpose; contract with illegal purpose unenforceable (void). • Assignment/delegation – transfer of contract rights/duties to 3rd party.
Defenses cont. • Mitigation of damages – plaintiff’s obligation to take reasonable steps to reduce damages; any mitigation that could or actually did happen will be deducted from total amount of damages. • Non-compete clause(restraint of trade) – illegal for employment contracts in California (subject to reasonableness rule in other states); legal for sale of “goodwill” as part of sale of business (reasonableness). • See other slides re mutual assent, unconscionability, statute of frauds and parol evidence rule.
Unconscionability • Relatively new type of challenge to enforceability of a contract – typical scenario is consumer argues that stronger party (e.g., employer, large retailer, etc.) took advantage of superior bargaining position to impose unreasonable and/or “hidden” terms on weaker consumer. • Common challenge to enforceability of arbitration agreements so that will be our emphasis in this area of contract law.
Unconscionability cont. • In order for unconscionability defense to succeed, both of the following must be present though not necessarily to same degree • Substantive unconscionability – harsh, one-sided nature of contract; e.g., prohibition of or limits on remedies otherwise available in court. • Procedural unconscionability – manner on which contract negotiated when there is unequal bargaining power; contract presented on “take-it-or-leave-it” basis or arbitration clause “buried in the fine print” (commonly called “adhesion” contracts).
Statute of Frauds • Statute of frauds requires certain contracts to be in writing; examples include • Promise to answer for debt of another (co-signing loan or personal guarantee for corporation’s debt). • Transfer of any interest in real property. • Contract cannot be performed within one year.
Statute of Frauds cont. • What is a “writing” for statute of frauds purposes? • California Evidence Code § 240 provides a rather broad definition. • California Civil Code § 1624(a) requires the “writing” to be “subscribed by the party to be charged” – can an electronic communication meet the “writing” requirement?
Statute of Frauds cont. • When oral contract will be enforceable even if writing required by statute of frauds • Partial performance. • Admission – must occur in court proceedings; e.g., during deposition or trial testimony, or in papers filed with court. • Promissory estoppel – detrimental reliance on oral contract; however, any reliance must be reasonable.
Parol Evidence Rule • Old common law rule now in C.C.P. § 1856 – writing intended as final expression of parties’ agreement cannot be contradicted by evidence of prior agreement or contemporaneous oral agreement. • Policy is to uphold written contract that is intended to be final statement of parties’ agreement. • Therefore, written contract should correctly and fully reflect parties’ agreement.
Parol Evidence Rule cont. • However, extrinsic evidence (other writings or oral communications) as to contract terms considered such as • Course of dealing between the parties. • Usage of trade in which parties involved. • Validity of contract in dispute. • Ambiguity – very broad definition.
Parol Evidence Rule cont. • Sample integration clause • “All prior or contemporaneous discussions, negotiations, communications and agreements between the parties are superseded by this contract, which constitutes a complete and exclusive expression of the parties’ agreement and may not be contradicted by evidence of any prior or contemporaneous discussions, negotiations, communications and agreements between the parties.”
Discharge of a Contract • Discharge – no further performance per the contract required; ways to obtain discharge of a contract • By full or “substantial” performance – most common. • By subsequent agreement – accord and satisfaction (same parties, new contract; sometimes called “renegotiating a contract”); novation (same contract, new party). • By operation of law – e.g., statute of limitations expires, defendant files for bankruptcy.
Other Details re Written Contracts • Parties’ contact information for any notices to be given; e.g., default, termination. • Effective date – may be different than signing date. • Details of parties’ respective promises; examples include • Any action by any party; e.g., services to be performed, money to be paid, etc. • Deadlines. • Payment schedule. • Best to have more details than you might think necessary – see slides re Parol Evidence Rule.
Other Details cont. • “Boilerplate” provisions or other “routine” contract matters – often overlooked but can have substantial impact; these can include • Handwritten revisions to a typewritten contract before signing (interlineation) – acceptable but should be initialed. • Use of copy acceptable under secondary evidence rule. • Attachments or exhibits to contracts. • Past waiver of rights does not waive same rights in future.
Other Details cont. • More boilerplate • Revision of written contract after it is signed – usually by signed writing only, but good to put in contract anyway. • Choice of law and venue – traps for the unwary since may result in application of unfamiliar law or requirement that any lawsuit under contract must be filed in faraway place. • Arbitration agreement – see next slide. • Attorney’s fees clause – see next slide.
Other Details cont. • Sample arbitration agreement • “The parties agree that any claim in law or equity relating to this contract shall be decided by binding arbitration pursuant to California Code of Civil Procedure § 1280 et seq. Judgment on the arbitration award may be entered in any court having jurisdiction. By agreeing to binding arbitration, the parties expressly waive their right to a jury trial.” • Sample attorney’s fees clause • “In any arbitration or other legal action between the parties relating to this contract, the prevailing party shall be entitled to an award of reasonable attorney’s fees.”