An Overview of Contracts

1. An Overview of Contracts By Tom Weygandt

2. What is a contract and how is it made? What must be included in a contract? What are the consequences of breaching a contract? Are there any special rules a farmer should follow? Other related issues. Contracts - Today’s Lesson

3. What Is a Contract? • A legally enforceable agreement between two or more persons which creates an obligation to do or not to do something • Promises or sets of promises • Legal remedy for breach • Bad deals are OK • May not be against public policy or illegal

4. Sale of goods Sale of land Exculpatory agreements Negotiable instruments Employment / non-compete Prenuptial Adhesion Input / output Insurance Requirement Unilateral / bilateral Under seal Production Open-end Some Types of Contracts

5. Acceptance Assignor/assignee Breach Cognovit judgment Consideration Contractor Damages Mutuality Performance Privity Remedy Repudiation Rescission Severability Unconscionable Accord & satisfaction Glossary

6. Elements of a Contract • Offer • Acceptance • Capacity • Consideration • Legality

7. Offer • A manifestation of intent to contract by • A reasonable person • Serious intent • Complete and definite terms

8. Offer – complete and definite terms • Parties • Subject matter • Price • Time for performance • Communication

9. Offer – UCC exceptions • Allows some terms to be omitted • Policy is to encourage free flow of trade • Course of dealings • Course of performance • Trade usage

10. Offer - Revocation • Termination by offeror • statement or conduct • offeree must be aware • Lapse of time • Revocation sent via mail is not effective until received

11. Offer - Always Irrevocable • Options contract • promise to keep offer open • must have consideration • Merchant under UCC rules • Detrimental reliance • Unilateral • if performance has begun

12. Acceptance • Agreement to the terms of the offer • By a person who knows of the offer • By the person to whom it is made

13. Acceptance - Methods • Completion of performance • unilateral • Promise to perform • Mailbox Rule • effective when mailed, unless the contract provides otherwise • Silence is not acceptance • UCC

14. Acceptance - UCC • Acceptance then breach • shipped the wrong goods • Accommodation • offeror may • accept and pay list price • reject the shipment

15. Acceptance – Other Issues • Mirror Image Rule • Any change from the original = a new offer • Unordered merchandise • Mail = offer to sell • Other delivery = reasonable care for a reasonable time

16. Rejection • Termination by the offeree • final, can’t later accept • by mail is effective when received • direct or indirect • Counter-offer v. bargaining • Conditional acceptance • = rejection • Death

17. Rejection - UCC Exceptions • Both parties are merchants • Offer not limited to its terms • Must be rejected within a reasonable time • Any additional terms are not material

18. Revocation • Communication • Automatic • Passage of time • Incapacity • Destruction of subject matter • Subsequent illegality

19. Mutuality • Freely made by contracting parties • “Meeting of Minds” • No reason for courts to interfere unless there’s a problem • The court will try to determine the intent of the parties

20. Mutuality – Destruction • Fraud • Misrepresentation • Mutual mistake • Duress • Undue influence

21. Mutuality – Fraud • Fraud in the factum • Intended wrongful statement • Concealment of facts • Knows will materially affect the contract • Contract is void • Fraud in the inducement • Problem in the creation • Contract is voidable

22. Mutuality • Misrepresentation • Wrong facts, without intent • Mutual mistake of material fact • Both parties make the mistake • Basic assumption • Description, existence, price, no excuse for mistake of law • Exc. = law of other states • Material to the contract

23. Mutuality • Unilateral mistake • Usually the contract will be valid, unless • The other party knows of the mistake • And could have avoided significant reliance

24. Mutuality • Duress • Physical or emotional • Economic or business compulsion • Undue influence • Dominant party • Confidential relationship

25. Mutuality – Effects of Destruction • Voidable contracts • By the innocent party • Wrongdoer is liable • Rescission • Fraud • Damages • Mutual mistake

26. Capacity • Rebuttable presumption of capacity • Incapacity may result in: • Voidable contract • Repudiation • Radification

27. Capacity • Minor • Until the day before the 18th birthday • Not voidable for necessities • Minority ends with: • Emancipation • Abandonment • Marriage • Enlistment

28. Capacity • Mental impairments • Intoxication • Insanity

29. Consideration • Bargained for legal detriment • Forebearance • Money or property • Services • Promise not to sue • Settlement of claims • Charitable pledges • Promissory estoppel

30. What’s not Consideration • Past consideration • Unless expressly requested & expectation of payment • Pre-existing legal duty • Part payment to forgive balance of debt • Illusory promises • Gifts

31. Criminal or tortious acts By statute Usury Gambling Unconscionable Unlicensed Blue laws By public policy Obstruction of justice or public services Defraud creditors Exculpatory agreements Restraint of trade Restrictive employment agreements Illegality

32. Form of the Agreement • Oral • Written • Difference is in the enforceability

33. Statute of Frauds, 1677 • Requires a written document for: • Performance not to be completed within one year • Sale of land • Sale of goods over $500 • Executors and administrators • Guaranty the debts of third parties • Contracts in consideration of marriage

34. Elements of the Writing • Names and identification of the parties • All material terms • Identification of the subject matter • Statement of the consideration • Signature of the party to be charged

35. Parol Evidence Rule • Four Corners Doctrine • Requires • Written contract • Terms are integrated • No contemporaneous agreements may be added, no outside evidence • Exception is statement of collateral • Other exceptions • defect in formation, typos • explanations may supplement but not contradict

36. Modification • Under common law • requires consideration • usually included in original contract terms • Under UCC • good faith

37. Third Parties in Contracts • Beneficiaries • Intended • Insurance • Donees • Incidental • Obligor, Obligee • Assignor, Assignee

38. Assignments • Transfer of rights under a contract • May not substantially change the duties of the obligor • Consideration is not required • Warranty of assignment if consideration given • Must give written notice of subsequent assignments

39. Assignments • Most are revocable • Restrictions • Delegation = transfer of duties • May not delegate special skills or special reputation • Don’t need consent of obligor • Novation, substitution • Releases assignor of all liability

40. How does a contract end? • Discharge • Performance • Complete • Substantial • Satisfactory • Nonperformance • Tender of performance • Conditions

41. Breach • Contract is usually an economic transaction so the decision to breach is also an economic decision • Remedies • Damages • compensatory, incidental, punitive, Quantum Meruit Doctrine • Specific performance • Injunctive

42. Damages • Usually nominal if no actual damages • Liquidated damages are determined when the contract is made • For difficult to estimate circumstances • Reasonable forecast of costs • Use an expectation analysis • What would it take to make me whole? • What is avoidable? Foreseeable?

43. Excuse for nonperformance • Destruction of subject matter • Casualty to identified goods • Incapacity of a necessary person • Supervening illegality • Extreme and unreasonable increase in cost • Frustration of purpose

44. Excuse by Unforeseen Event • After the contract was formed but before completed • Unforeseen • Affects the ability to perform or the value of the contract • Impossibility • Impracticability • extreme hardship

45. Uniform Commercial Code • Provides exceptions to the Statue of Frauds • Defines how business people work • Streamlines the flow of commerce • National system enacted by state legislatures

46. 1, General 2, Sales 2A, Leases 3, Negotiable Instruments 4, Bank Deposits 4A, Funds Transfers 5, Letters of Credit 6, Bulk Transfers 7, Documents of Title 8, Investment Securities 9, Secured Transactions 10 Administrative UCC

47. UCC • Merchants are held to a higher standard of knowledge of commercial law • Written conformations only • 10 days to object • Relaxes rules for acceptance • Court will fill in terms of the contract • Course of dealings • Course of performance • Trade usage

48. The Cautious Farm Manager • READ and UNDERSTAND! • Know what is expected of you. • Know the consequences for breach. • Preprinted contracts ARE negotiable! • DON’T RELY ON ORAL REPRESENTATIONS! • DON’T SIGN IF YOU’RE UNCOMFORTABLE!