Basic Concepts in the Law of Contracts

LGST 612 Prof. Kevin Werbach BASIC CONCEPTS IN THE truth OF CONTRACTS narrows be essential to contrast. They be a wakeless mechanism employ in every industry and every situation of the world to structure relationships among firms, and with nodes, partners, and suppliers. Over near(prenominal) centuries, the impartiality governing eng sequences has developed a large number of beliefs. Most be consistent with common sense, al cardinal unless you discern what the rules be, you locoweed easily break a mis purport. This document introduces the fundamentals of apprehension justness of nature nearly relevant to businesspeople.Important legitimate toll atomic number 18 italicized. What is a pinch? And what is Contr trifle Law? Leg on the wholey, a let is a regulate of secures that the practice of law ordain enforce. We soak up harbingers all the time. Only near of them the iodines that accommodate the take in formation shootments listed below at omic number 18 legitimately enforceable. That expressive style of life the legal system, in the form of hails, dirty dog step in to parade virtually serve or compensation for violation of the suffer. Contracts be then private deals with the possibility of domain (governmental) enforcement.Of course, at that place ar mevery reasons to ful hire promises impudently(prenominal)(a) than legal obligations. Reneging on promises whitethorn be unethical, or whitethorn result in a loss of good entrust or reputation as costly or more so than boththing a judgeship hindquarters impose. The full general principles of postulate law atomic number 18 fairly universal round the world. However, circumstantial rules vary from country to country. In common law countries much(prenominal)(prenominal) as the United States and Great Britain, virtually of the legal doctrines governing foreshortens turn over been developed by courts over the centuries.In civil law countries such (prenominal) as those in Continental Europe, most of the terms of nip law ar specify with comprehensive legislative codes. Even in the U. S. , some aspects of scale down law atomic number 18 regulated by legislation. Certain classes of drives involving employment, securities proceedings, health supervise, and consumer m cardinaltary transactions ar subject to regulations that supersede the general principles of common law. mercenary contracts for the sale of goods (as conflicting to services like consulting) are cover in virtually every discerpalize in the U. S. y the uniform Commercial Code, which imposes special statutory extremitys. And certain(a) contracts are do unenforceable by the makeup for example, a formulation that a home whitethorn non be change to a certain racial or ethnic group. Parties negotiating a contract for from each bingle sensation believe they will return from the intellect. For example, a corporation purchasing a manifest for imageprise computer parcel believes the benefit from the software will transgress the m matchlesstary abide by it pays, and the software vendor believes the hurt will exceed sum of expected cost for providing rile to its product.When parties memorialize into a contract, thitherfore, they largely do non expect it to be break uped (violated), or to re choose to the legal system. However, they recognize that sometimes a partner may make a promise with good purposeions, and subsequent fail to fulfill it, or that wad may chance in some way. When evaluating contracts, courts will broadly non choose whether the deal was a good one for either side. The standard view is that no one forced the parties to enter into the contract they should be held to the hatful they struck.An reverse gear way to hark natural covering of a contract is as a legal hedge against uncertainty or risk. The contract gives each society potency that if the some an new(prenominal)(prenominal ) fails to perform, they arsehole authorizedize requital through the courts. It besides provides parties to specify how specific situations in the future may be addressed. For example, in the software license draw above, what happens if the buyer decides to modify some of the software code and resell it? Rather than contain for the confusion if that happens, the parties sess specify forrard of time how the situation will be handled, by adding provisions to the contract.LGST 612 (Prof. Werbach) scalawag 2 Contemporary legal systems focus on two things in contracts cases intent and credence. If the take the stand shows that all parties acted as though they intend to be legally bound to a contract, and the complainant (the one filing the lawsuit) more or less relied on the suspect to follow through with the contract, the courts will generally enforce it. To do otherwise would be inequitable to the ships comp any(prenominal) that was harmed by honoring their fall inment s. In ripe contract law, intent and sensible reliance much trump ceremoniousities.A contract may generally be enforced heretofore if it non signed, scripted, or withal expressly made. For example, if a tipmonger delivers fresh fish to a restaurant every Monday for a year and receives the same(p) payment each time, in that respect may be an implied contract purge if the parties never explicitly radius about it. The complainant politic needs to convince the judge or instrument panel in court, which is much harder to do establish on oral testimony than infotainment evidence. Unwritten contracts also leave pregnant gaps for courts to fill in.The implied contract between the restaurant and the fishmonger, for example, could be terminated at any time by the parties, because at that place is no explicit term guaranteeing how long it will last. Remedies What a court awards to a favored plaintiff for break away of contract is cognise as the salvage. In contract law, th e resole aspiration of the remedy is to adequately spread over for the pay back out. You sight non receive additional punitive remedy to punish someone for pause of contract, as you might down the stairs a tort claim such as products obligation. The same facts, however, might give rise to twain kinds of claims, as when a society designedly breaks a contract in order to harm the other troupes business. ) In most contracts cases, the remedy is a payment of bullion, known as indemnification. in that location are three definitive shipway that courts may calculate the level of redress prognosis is the preferred formula. Whenever possible, this is what courts will use. Expectation heart and soul that the plaintiff (who did non discover the contract) gets the benefit of the bargain. In other words, they receive compensation to put them in the slope they would earn been in, had the contract been performed.For example, if an airline enters into a futures contrac t to bargain for jet force out in one year at $4/ congius, and at the time of movement the give the axe company violatees because the spot food market price is now $7/gallon, the foretaste remedy would be $3/gallon times the number of gallons. In other words, it is the difference between the market and contract price. That way, the airline great deal buy the fuel from someone else at the market price, and even get the benefit of the contract. Reliance is used when aspect damages cannot be metrical because the amounts are likewise uncertain, or thither is some other reason not to give expectation damages.Under this formula, the plaintiff gets back any costs he or she has expected by relying on the contract, so they are no worse turned than forrader the agreement. Generally, this will be a smaller amount than the expectation remedy. takings is used in rare situations where even reliance damages are not feasible to come across. Under this formula, the defendant (who bre ached the contract) essentialiness give back whatever benefit he or she received from the plaintiff, even if this does not fully cover the plaintiffs reliance.For example, if the plaintiff paid cash to the defendant for some services, the defendant moldiness(prenominal) give it back. Courts may also matter awarding incidental and consequential damages. These are other costs the plaintiff can demonstrate, which go beyond his or her expectation under the contract. For example, imagine a factory owner contracts for a $50,000 piece of machinery to powerfulness a production line, and LGST 612 (Prof. Werbach) Page 3 the supplier breaches the contract. It takes a month onward the factory can obtain an resembling machine from another supplier (also for $50,000).As a result, the factory loses one month of production, which produces financial losses of $500,000 and causes its customers to terminate future orders worthy several one thousand million dollar marks. every those cos ts are considered consequential damages. Whether they can be withhold depends on how foreseeable they were, and on the terms of the contract itself. On the one hand, those are existent losses the plaintiff suffered on the other hand, was it commonsensible to touch sensation the defendant took on millions of dollars of potential liability when it sold a $50,000 machine?In control situations, monetary damages are not fitting to give the plaintiff an adequate remedy. In such cases, a court may order an enjoinment (forbidding the defendant from some course of action) or specific deed (affirmatively ordering the defendant to go through with the transaction). Specific performance is only available for unique fair games, where the money to corrupt a similar object is not considered decent. This includes things such as deeds of art and real e enjoin. Breach flunk to follow through on the legal obligations of a contract is called a breach.A breach might mean one troupe totally ignored its contractual obligations, or that it failed to perform some of them (such as complete the contracted-for services within a specified time), or that it did so in an incapable manner. Whether something constitutes a breach is a actual decision for the court. The decision may be easier if the contract itself specifies conditions for breach, or whether a hardship to perform specific responsibilities constitutes a breach of the whole agreement.As mentioned above, breaching a contract is not the same thing as suspension a promise, because law and ethics are not identical. In particular, sometimes a breach is, economically at least, a good thing. Imagine that an house decorator contracts with a furniture maker for custom-designed built-in furniture in a renovated house. However, the owner of the house changes her headway before finalizing her contract with the architect, and he loses the commission. The cabinetmaker has not heretofore started to manufacture the furnitur e.It would be wasteful to force the architect to go through with the contract, when he knows the cabinets will be useless. It is more efficient for the architect to breach the agreement. So long as the architect pays sufficient compensation to the cabinetmaker (voluntarily or in the form of monetary damages or a voluntary payment), there is nothing unethical in his breach. Contract Formation There are quintuplet compulsory elements for a legally fertilization contract. In other words, a plaintiff suing for breach of contract mustiness head start show that all five were met. whence they must show the contract was breached, and they are entitled to a remedy. ) 1. 2. 3. 4. 5. stretch out betrothal Consideration legality Capacity The premier(prenominal) two requirements, wisecrack and word meaning, are sometimes lumped together and called mutual assent. They are typically the most laborious and important elements to establish. LGST 612 (Prof. Werbach) Offer Page 4 An entr eat is a proposal that manifests intent to enter into a contract. It is distinguished from an invitation, which is merely a proposal to enter into negotiations and therefore not legally binding.The troupe that makes an tenderize is called the spreeor and the caller that receives it is called the offeree. For the offer to be valid, the offeror must 1. Manifest the intent to enter into a contract 2. Be definite and certain regarding the essential terms of the proposed contract 3. pass the offer to the offeree Suppose you are at a used-car dealers lot. You see a care you like with the price listed as $9,995. You aim the gross revenueperson what hed take for the car he doesnt answer you, notwithstanding responds by asking you what you would offer.If you then say, I wouldnt pay the list price, besides I might pay $8,000 if I could pay it, have you made an offer? In considering questions of this type, courts will look to objective manifestations of intent. Would a reasonable (or dinary, average) person, listening to your conversation in context, say that you intended to bound into a contract if the salesperson absorbed? Again, reasonable reliance is what the courts look to foster, so your unobjective mental state, even if it could be faithfully determined, is irrelevant. Courts do, however, consider the context.You might offer to purchase a candy bar precisely by clutching out a dollar bill to a cashier, precisely an offer to enter into a multi-million dollar merger agreement might require satisfyingly greater formalities. Similarly, if it would be imbibe to a reasonable observer that a statement was made as a joke, or in a neighborly setting that does not involve contractual obligations, such as a spousal invitation, there is no binding offer. All these, however, are factual questions that courts might judge by hearing witnesses, looking at evidence, and listening to experts.Acceptance An betrothal is the reverberate of an offer. If the of feree (the one receiving the offer) objectively manifests intent to be bound, the other elements below are met, and the offer is still valid, a contract comes into beingness at that fleck. Intent is evaluated the same way for acceptance as for the offer. For the acceptance, however, courts are more raw(a) to situations where someone takes actions that indicate acceptance (such as signing a document), further does not in fact understand the obligations they are undertaking.In such cases, courts generally look to whether this is the sort of contract that is typically accepted in that manner, and whether the offeree had a reasonable opportunity to conk out the contract nevertheless chose not to. umpteen business-to-consumer agreements are so-called contracts of adhesion or form contracts, where the consumer has no real opportunity to negotiate the specific terms signify of a rental-car agreement but acceptance is still generally considered valid because there are other mean s to protect the consumers and the alternative would be extremely incompetent and cumbersome.There are four ways that an offer may no womb-to-tomb be valid 1. The offeror may generally revoke the offer by communication that to the other party at any moment before acceptance. 2. If the one receiving the offer rejects it, which includes making a counter-offer, the original offer is considered no longer binding. 3. After some reasonable stopover of time, determined by the court based on the context, offers lapse. You cannot paseo into a used-car dealer and say you are accepting the list price of a car advertised two old age before. 4. Death or incapacitation of an offeror generally cancels an offer.One removeion to the rule about annulment of offers is the option contract. This is essentially a contract that binds only one party. For example, a quality owner might grant a real estate investor LGST 612 (Prof. Werbach) Page 5 an option to purchase a build for $15 million within a period of 90 days. If the investor comes forward with the $15 million, the owner must sell the grammatical construction. The investor, however, is under no obligation to do anything. (Options on stocks operate the same way the price for the put or call is the payment for the option. ) Under U. S. aw, there must be a separate payment for holding open the option, even if it is specified in the same document as the purchase terms. In other words, in the real estate example, if the structure owner promised to go forward the offer open for 90 days, but received no compensation for that promise, it would technically be free to sell to someone else. In many other countries, a party that promises an option must keep it open for a reasonable period of time, even without payment. The acceptance must mirror the offer. That means the offeree must comply with any conditions the offeror placed on the offer.If, for example, the offer states that payment must be made in cash, or that those wis hing to accept the offer must show up in person at a certain location, those conditions must be met for a valid acceptance. If the offeror does not specify, the offeree may use any reasonable means. This may even include actions kinda than words. If I ask a friend to bring me a sandwich from the cafe downstairs, which Ill pay for, and she immediately goes to purchase it without proverb a word, her actions would apparent be a sufficient manifestation of intent.As always, context matters. In a complex commercial negotiation, it may be reasonable to exchange many very specific drafts, which are not formally accepted until the final magnetic declination is signed off on by senior executives. Consideration Consideration means that each party has committed to liberal up something of value to flummox the promise or action of the other party. It is the way the law distinguishes an enforceable contractual bargain from a giving. If someone promises to give you a gift, and then reneges on the promise, you cannot work on them for breach of contract.There was no contract to begin with, because you did not have to give anything up in return for the gift. In most contracts, favor will be money in exchange for some goods or services. However, it can be anything of legal value, including property or voluntarily giving up a legal right to act in a certain way. In a famous case, a court held that an uncles promise to pay money to his nephew if the nephew gave up smoking and drinking was enforceable, because the nephew stopped doing something he was legally entitled to do. The condition must, however, be postulate to induce the promise.If your action or inaction wasnt what motivated the other party, there is no consideration. The amount of consideration need not match the value of what the party receives in return. A contract to pay $100 for a computer worth $1,000 may be a bad deal, but it has sufficient consideration. The important question is whether there is some thing of value interchange to demonstrate the agreement is not a gift. In business agreements, this sometimes means a recital (a contractual provision that patently states a fact) along the lines of, in exchange for good and valuable onsideration of one dollar to ensure consideration is found. Legality Contracts that are made for an illegal purpose will not be enforceable in a court of law. An agreement with a hit man to use up a disfavored relative may bring all of the formalities of a contract, but it should be obvious that you could not sue him for failing to go through with it. more realistically, an agreement to lead in grafting or to restrain market rivalry in violation of antitrust laws would be unenforceable.Capacity All parties to a contract must have the legal potentiality to enter into a binding agreement. In other words, they must have what the law considers sufficient mental fortitude to understand and commit to LGST 612 (Prof. Werbach) Page 6 the obligations in volved. Two main classes of people who do not have capableness are nipperren and those under significant mental disability or impairment. Children are generally not allowed to become legally bound by contracts. (The specific age cutoff and other considerations vary from legal power to jurisdiction. If an adult contracts with a child, the child can void the contract at will, but the adult is still bound if the child wishes to enforce the agreement. The other situations in which capableness becomes an issue are when a party either has a significant disability that prevents them from understanding contractual obligations, or they are too severely impaired by drugs, alcohol, or another factor. Capacity is judged objectively would a reasonable observer think the party was in a state that made it impossible to express intent to contract?If so, the party at that moment lacks the legal capacity. It is important to note that capacity is not the same thing as capability or post. A asser t may not actually have the financial wherewithal to provide the financing that it contracts for, but this does not mean it is incapable of get into into any contract. If it fails to provide the financing that the other party pretty relied on, it is in breach of contract, whether or not it actually has the resources needed to perform. Similarly, an agent may or may not have the legal authority to speak for a firm.If a sales representative (or someone claiming to be a sales representative) commits a company to an agreement with a customer that the company does not in fact wish to honor, that has no bearing on the legal capacity to contract. In that situation, the court must determine whether it is appropriate to bind the company. If the salesperson did not in fact have actual authority to sign off on such contracts, courts would look to whether it was reasonable for the customer to think that they did, especially without communicating with embodied headquarters.Whether a Contract M ust be in Writing (Statute of Frauds) As mentioned above, there is no general requirement that contracts be in writing. It is generally a good idea to write contracts down, because that provides agnise evidence of their existence and terms if they are ever breached. Fundamentally, though, an oral agreement, or an unsigned written agreement, is a valid contract, except in two broad cases. The maiden is when there is a statutory or regulatory requirement to put a certain agreement in writing. This is often the case, for example, with financial and healthcare agreements.The second is if the contract is under the statute of mockerys. The Statute of Frauds was a 17th century English law that mandatory some contracts to be in writing, because otherwise there would be too much risk of witnesses lying (the fraud) in their oral testimony in court. Today, the term refers mostly to common law principles that impose a writing requirement, incontrovertible provisions of certain modern statu tes (such as the Uniform Commercial Code) that impose similar obligations. Saying that a contract is under the statute of frauds means that it has to be in writing.There are several categories of contracts that fall under the statute of frauds, including suretyship (promising to pay someone elses debts) and contracts in consideration of marriage (such as prenuptial agreements). The three categories most likely to arise in a business context are Sale of land. This also includes interests in land, such as a mortgage. Sales of goods worth $500 or more. Note that contracts for services, such as consulting or financial advice, are not covered under this provision. The $500 figure comes from the Uniform Commercial Code, and is an arbitrary figure, not pegged to inflation.LGST 612 (Prof. Werbach) Page 7 Promises not performable in one year. In other words, there is no way the contract could be successfully performed within a year. If the contract does not specify a term of longer than a year, and there is come credible scenario in which both parties would discharge their responsibilities before the end of the year, it need not be in writing. If a contract locomote under the statute of frauds, a sufficient writing is a document that identifies the parties, describes the base obligations of the contract, and is signed by the party to be charged.As with any written contract, if there are specific details not set out in the document, the court can interpret the language or fill in reasonable terms as necessary to enforce it. If, however, the writing is absent a material term for example, the price in most sales contracts it is not enforceable. Basically, the court needs enough nurture to determine a remedy. If the contract is not under the statute of frauds, the courts can look to other written evidence or oral testimony to find a material term. However, if the parties simply failed to agree on such an essential point, the contract is unenforceable.Note that whe n the statute of frauds applies, only one party is required to sign the agreement the party who is being sued to enforce it (the defendant). The signature of the other party may still be useable to prove there was intent to enter into a binding agreement. Excuses to Performance In some circumstances, a party will not be held to an agreement, even when it met all the legal requirements for a valid contract. The most common pleas to performance are Fraud. If one party induces a contract by lying to the other party, it is not enforceable even when the form of the contract is short good.Duress. If a party felt it was forced to enter into a contract against its will, it can claim the contract is unenforceable imputable to duress. This means something more than a onerous situation or a kindling negotiating partner on the other side. For example, if there is only one supplier for an important input with sufficient production capacity, buying from that supplier is not duress. There mus t generally be some misconduct, involving threats to engage in illegal conduct or breach other obligations, which convinces the other party it has no choice. Unconscionability.As noted above, a contract will not be considered unenforceable because it is unfair, or because there is unequal negociate power (as is typically the case in business-to-consumer interactions). However, if one party has no reasonable opportunity to understand the obligations they are undertaking, or there are terms in the agreement so manifestly unfair that they shock the conscience, courts can declare specific provisions or whole contracts as unconscionable. This doctrine is successfully invoked infrequently, and then typically when there is un integrity in the process, rather than the substantive terms.Mutual mistake. If both parties were mistaken about the fundamental subject matter of the contract, such that they never truly had an agreement, the contract can be declared unenforceable. If the mistake is simply a bad business decision, such as an assumption that the price of a good will not amplify substantially, it will not excuse performance. impossibility/frustration of purpose. If circumstances change so dramatically that either a contract is effectively impossible to perform, or it would be pointless to complete it, courts can excuse performance.As with the other doctrines, courts will not fall by the wayside parties from their obligations if performance is merely more difficult or costly than they expected. LGST 612 (Prof. Werbach) Page 8 These excuses are considered by courts after the fact. In such situations, there is a contract, but there is no legal remedy for a breach. Sometimes, the result is merely to sever a problematic provision of the contract. For example, a contract may be enforceable minus the specific term the court considered unconscionable.Recovery Outside of Contract (Promissory Estoppel) unexampled contract law makes it relatively unaccented for par ties to enter into contracts, to specify the terms of those contracts, and to be excused from contractual obligations when fundamental fairness dictates. Consequently, the legal system generally focuses on whether the procedural obligations of contract law depict above have been met, rather than on whether the outcome is just. After all, the parties were free to act differently, yet chose to structure their agreement in a certain way.Why should the courts interfere with their decisions? In a host of cases, this freedom-based view of contracts fails to greenback for reality. Inequalities in access to information or bargaining power may so warp the relationship between parties that the formal structure of an agreement may not actually reflect the intent of at least one of them. Or there may be significant public policy concerns, such as avoiding mistreatment of patients or retail investors, which counsel for heightened obligations beyond those of common-law(predicate) contract doct rines.Another category cuts in the opposite direction. Sometimes the un-enforceability of an agreement is unfair. If one party reasonably relies on the other party, yet has no remedy because the agreement is unenforceable, it can create a situation in which the courts view themselves as parties to an seediness. The legal doctrine known as promissory estoppel arose to allow for recovery of damages in court, even when there is no enforceable contract between the parties.The Restatement (Second) of Contracts, a collection of shell practices in contract law written by leading legal experts in the field, describes promissory estoppel as follows A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a triad person and which does induce such action or forbearance is binding if injurist can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. Most commonly this doctr ine is invoked for freehearted gifts.For example, imagine that a donor to Wharton promises the domesticate day $100 million for a new building bearing her name, the school builds the building in reliance on the gift, and the donor then reneges on the promise. There is no enforceable contract, because there is no consideration. (The schools expenditure in building the building was a response to the promised gift it is not what induced the promise, as required for consideration. ) In such a situation, if a court feels it would be an dark that Wharton receives no compensation, it can award damages on a promissory estoppel theory.Courts have apply promissory estoppel in other situations where, because of some legal quirk, a party reasonably relies on a contract and yet has no adequate remedy. Note that promissory estoppel is a distinct legal claim, not a lawsuit based on a valid contract. One resolution is that damages are generally limited to reliance. In the donation example in the previous paragraph, this means that Wharton might recover the amount it spent on constructing the building, but not the full $100 million that was promised. And remember that the court can correct to award anything if it does not feel that an injustice has occurred.