Notes for Chapters 11,12, and 13
Notes for Chapters 11,12, and 13 ACCT 2730
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This 10 page Class Notes was uploaded by Savannah Masucci on Friday April 15, 2016. The Class Notes belongs to ACCT 2730 at Auburn University taught by Robert H. Cochran in Spring 2016. Since its upload, it has received 13 views. For similar materials see Business Law in Accounting at Auburn University.
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Date Created: 04/15/16
Final : Chapters 1119 No Reading 1719 Chapter 13 Important Chapter 11 Contracts Prevalence of Contracts ❖ Everywhere, foundational part of any business, everyone needs to worry about contracts, Business’ rely on contracts to succeed ❖ Why are contracts important? ➢ Sanctity of Promises ■ Rooted in our Western Tradition promises, fulfilment of promises ● Man’s word is his bond, immoral to break promises ■ Morally important ■ Economic necessity Contracts and Businesses Responsibility and “Taking Care of Your own SelfInterest” ❖ No one will care about your selfinterest more than you ❖ Demands for you to take care of your own business Overview of Contract Law ❖ Sources ➢ Common Law governs all contracts except if modified/replaced by Statutory law or by administrative agency regulations ■ Contracts relating to services, real estate, employment, and insurance ➢ Sales and Leases contracts Uniform Commercial Code (UCC) Best contracts we have (only a small amount) ❖ Functions of Contract Law ➢ Provides stability and predictability for commerce ■ Ex. Personal investment know that it is protected in a bank or you won’t invest ❖ Definition of a Contract ➢ Promise/set of promises ➢ For breach of which the law provide a remedy or the performance of which the law in some way recognizes a duty ■ Remedy: Breach of a contract costs you money, lost your investment, Damages ■ OR: Court makes sure the other side does what they promised they would do ● Contract disputes arise when there is a promise of future performance ◆ If promise is not fulfilled, party who made it, is subject to the sanctions of the court ➢ Required to pay damages for failing to perform ➢ May be required to perform the promised act ❖ Objective Theory of Contracts Intent ➢ Determine what a contract is all about by what they did, not by what they said ■ Actions speak louder than words ■ What a contract is or what it means can be inferred from the parties conduct ■ Determined by the “Reasonable Person” standard ● What would a reasonable person think the contract wants one to do? Most important reason courts enforce contracts is: Contracts are a foundation of our economy Court Law emphasises personal responsibility and accountability ⭐Elements of a Contract ❖ Agreement (Not all agreements rise to the level of contracts) ➢ Offer and acceptance ❖ Consideration (Value) (Most important) ➢ Any promises made must be supported by legally sufficient and bargained for consideration (something of value) ❖ Contractual capacity (Parties abilities to contract, parties are competent) ❖ Legality (Legal service) (Ex. No cocain sale) Types/Forms of Contracts ❖ Bilateral typical, exchange of a promise for a promise ❖ Unilateral one party makes a promise for the other person’s act ➢ Ex. If you cut my grass, I’ll pay you $50, Contests, Lotteries ■ Formed, not when promises are exchanged, but at the moment when the contract is performed ❖ Formal Specified by a law exactly, special form for creation ❖ Informal Most are informal, Ex. Car financing ❖ Express Terms are clearly expressed (oral or written) Ex. signed lease ❖ Implied Not stated, but doing the work, Ex. Restaurant supplier see what the restaurant needs (Food wise), brings it and sends a bill, no talking to a boss Contract Performance ❖ Executed Fully performed ➢ can have it on one party's behalf (½ fully performed, this is still normally considered an executory contract) ❖ Executory Not fully performed Contract Enforceability ❖ Valid Agreement, Consideration, Contractual capacity, and Legality (No legal defenses against it) ➢ If all there, valid contract ❖ Void No contract (If all about are not there), can avoid duty or ratify/make valid ❖ Voidable Unenforceable, has all 4 of the above, but 1 party has a legal reason to get out of a contract ⭐Quasi Contracts implied in law (Does not occur when real contract is present) ❖ About Equitable contracts rather than legal contracts ❖ No actual contract, judge creates a contract to prevent unfairness ➢ Ex. Badly injured in a car accident, person in a coma, taken to the ER and extensive treatment unit, $50,000 a day, but never agreed to pay that expense, court will ask did you want us to leave you there?, if person is capable of paying, you will pay even if you didn’t agree ■ Limitations: If party who has conferred a benefit on someone else unnecessarily or as a result of misconduct or negligence, they cannot invoke the principle of Quasi contract An otherwise valid contract may still be unenforceable Interpretation of Contracts “Plain Meaning” Rule ❖ Written document only ❖ Meaning of contract in everyday language, plain language laws ❖ However, if terms are unclear or ambiguous → court may admit “extrinsic” (external) evidence ➢ Evidence outside the document testimony, communication between parties, ➢ Apply wellestablished rules of interpretation ❖ Contracts are interpreted as a whole, overall performance ➢ Ex. Created an aircraft, but painted it the wrong color, never decided on exactly what paint color, but contract was about building the aircraft so can’t sue ❖ Terms that are negotiated separately are given greater weight ➢ If specific things are discussed or certain words are used they are more important than the none specified part of the contract. ❖ Words given ordinary common meaning ➢ Specific wording given more weight than general language ➢ WRITE A CONTRACT YOURSELF ➢ Written is given a greater weight than preprinted contracts ➢ Ambiguous terms interpreted against the drafter ➢ Trade usage / prior dealing how they did it in the past matters A bilateral contract is an exchange of a promise for a promise Consideration is the respect you pay the other person in a contract False (Value) Chapter 12 Agreement in Traditional and EContracts Agreement Agreement offer and acceptance ❖ Offeror Initiates the offer ❖ Offeree To whom the offer has been made ❖ Parties must show mutual assent (Both parties in agreement) to terms of contract ❖ Once agreement is reached, if the other elements of a contract are present, you have a valid contract Agreement : Offer Requirements of the Offer ❖ Offeror’s Serious Intention judged by reasonable person’s intention ➢ Not : Advertisements, opinion based, future offer, preliminary negotiations ➢ Ex. Lucy vs. Zehmer (1954) ■ Neighbors, lifelong friends, farmers, Old Thompsons place in between them, both Lucy and Zehmer have tried to buy the lot, Lucy went away on vacation, Old Thompson's’ sons sell property to Zehmer for $5,000, Lucy is pissed when she gets back, Asked Zehmer to buy it, Zehmer wasn’t doing anything with the property, hung out on Christmas Eve, Lucy asks again, offers 50,000, found pencil and paper napkin, wrote contract in wrong form, threw it out, wrote it in the right form, next day Zehmer says they were just joking around, wrote it twice intended contract ❖ Definiteness of Terms reasonably certain or definite ➢ Identification of the parties ➢ Identification of subject matter ➢ Consideration to be paid ➢ Time of payment/delivery/performance ❖ Communication of Offeree Offeror made offer to Joe, Joe can’t take the deal but tells his brother about it, Joe’s brother was not offered the contract so Offeror does not have to uphold that offer ➢ Special Offer situations: ■ Advertisements invitations to negotiate, not offer ■ Auctions invitation for offers ● With reserve can withdraw goods, minimum bid required ● Without reserve highest bid gets it no matter what A court may supply missing terms if the parties intend to form a contract ❖ Will find something that is reasonable, don’t want this to happen ❖ People didn’t take care of their own self interest Where intent may be lacking ❖ Expressions of opinion : not an offer ❖ Statements made inject, frustration, or anger : BMW for sale for $100 ❖ Statements of Future Intent : not offers, know I’m going to give you a bonus, if we have a good summer, Cochran determines what a good summer is ❖ Preliminary Negotiations or Invitations to negotiate Debating house costs, turns into an offer when both parties agree on one way to contract, ‘get down to final offer’ ❖ Termination of Offer ➢ Offer may be terminated prior to acceptance by either: ■ Action of the Parties can terminate in 3 ways 1. Revocation Offeror’s act of withdrawing (revoking) an offer a. Contract can be irrevocable “Firm Offers” b. Withdraw anytime before offeree accepts the offer must revoke in the same way you offered it (talking, in writing) i. Ex. Bill and Joe at bar, Bill is very successful, has a boat, Joe is not, Bill bought his fast boat for 25,000 but never uses it, offers boat for 15,000 to Joe, Joe is very interested but he wants to check with his wife, Bill’s wife says he’s an idiot and needs to revoke the offer, must revoke before Joe accepts 2. Rejection of the offer by the Offeree a. Rejection terminates the offer b. Effective once it is received by the Offeror’s agent i. Ex. Husband and wife made their dream house, want to see after husband dies, market for 750,000 firm deal, gets an offer for 700,000, tells seller answer is no and don’t want to sell to that guy anymore even if he offers 1 million 3. Counteroffer by the Offeree (becomes new offeror) a. Previous offer rejected, making a new offer b. Mirror Image Rule acceptance has to match the offer EXACTLY i. Common Law ii. Any change in terms automatically terminates the offer and substitutes the counteroffer Mirror the offer ■ Operation of Law can terminate due to the following events: ● Lapse of time period of time specified in the offer has passed or ‘reasonable period of time’ if time period not specified ● Destruction of the Subject Matter if specific subject matter of the offer is destroyed before the offer is accepted ● Death or Incompetence of the Offeror or Offeree automatically terminates unless it is an irrevocable offer What the parties intend to do matters in determining what a contract means False Agreement Acceptance Acceptance ❖ Voluntary act (expressed or implied) by the Offeree that shows assent (agreement) to the terms of an offer ➢ Acceptance must be unequivocal Mirror image rule ➢ Silence as acceptance normally cannot constitute acceptance, Offeree should not be legally obligated to reject an offer (can just be silent reject) Communication of Acceptance ❖ Mode and Timeliness ➢ Acceptance is timely if made before offer is terminated ➢ ⭐Mailbox rule acceptance takes effect at the time the acceptance is put in the mailbox ■ Offeree sends or delivers the communication Any communication between parties have been received to have valid ➔ Except acceptance (mailbox) ➢ Substitute Method of Acceptance ■ If offer calls for a specific way of acceptance that should be the only way you accept ● Use an alternative/substitute AT YOUR OWN RISK ◆ Ex. Mode of acceptance: send it Fedex, sent it UPS, not accepted ● Ex. California warehouse had a lease for 3 years, $1 million a year, can renew in 3 years, but must have acceptance in writing by July 31st at 12, 3 years later, renting houses goes up in cost, landlords calls and reminds tenant every month, got no contract by 12, landlords picks new tenant, old tennant mad, said it was unfair, ◆ Won in California EContracts ❖ Full contract should be available to both parties (at least a hyperlink) ❖ Terms of acceptance should be clear : ➢ ForumSelection clause ➢ Choice of Law clause ➢ ClickOn Agreements: “I Accept” or “I Agree” ❖ Any electronic means of agreeing (x, initials, typing your name) to an electronic contract is valid, if it clearly indicated “intent to be bound” Chapter 13 Contracts Consideration Elements of Consideration Value Contract law, consideration refers to the serious thought that underlies a party's intent False If a promise is made, it will be enforced False Something promised, given, or done that has the effect of making an agreement a legally enforceable contract Must have: ❖ Legally Sufficient Value ➢ Value, promise, performance, or Forbearance (Not doing something can have value) ■ Ex. Hamer v. Sidway ● Hamer farm boy from Iowa, got into Yale, uncle Sidway promises to pay him $10,000 if he didn’t drink, smoke, or womanize, Sidway dies, sons say that they don’t own Hamer the money, he’s not supposed to be doing those things (all those things are legal), but Hamer gave up his right to do those things so he deserves the $10,000 Bargained for exchange (On test, extremely simple) ➢ Where there is a choice, yes or no, Ex. where you buy gas could have gone somewhere else ➢ Right to accept or reject ➢ Must provide basis for bargain ➢ Both parties have the ability to say ‘yes’ or ‘no’ , Both parties must get and give (not consideration if not) ➢ Something of legal value must be exchanged between the parties ■ Things of value don’t have to have direct economic or financial value Adequacy of consideration: Doctrine of freedom of court ❖ Leave it up to the parties to decide what something is worth, does not protect people from entering into an unwise contract ❖ Rarely court will look at the contract if there is a ‘shockingly inadequate’ disparity in the amount of consideration exchanged was there really consent? Fraud? Agreements that Lack Consideration ❖ Preexisting Duty a promise to do what one already has a legal duty to do ➢ Does not constitute legally sufficient consideration (Not a contract) ■ Ex. Brick masons, have a job to do and are in a contract, given an opportunity to complete another job after this one for $100,000, sign a contract, then another job comes along for $200,000, Brick masons go to first contractors and ask if they can get $200,000 for the job or they will do the other job, but they have a preexisting duty to honor their past contract, can sign a new contract for $200,000 but first contract will be honored ❖ Past consideration is not consideration (Bc past contracts/complete contracts do not expand the money supply, bargained for exchange element is missing) ➢ Exceptions : Unforeseeable Difficulties, Recession and New Contract (Never asked on test) ❖ Illusory Promises promisor has not definitely promised to do anything (no promise at all, lacking consideration and unenforceable) ❖ Gift Promises One person provides consideration for the other, courts do not consider this a contract, especially to family members Where is the consideration in a contract? When both parties bring consideration, If one is missing, not a contract, Courts will not get involved if both parties don’t bring consideration Why do we have to have consideration in a contract? Economy expands exponentially if two people in a contract pay each other, contracts are great from the economy, even better when there is consideration Courts don’t get involved if contracts are unfair, just if it affects the economy, Consideration has to be essentially equal in any contract False Most important consideration in determining value is the cost involved False Past consideration is consideration False You agree to pay Eddie $1,000 if he quits smoking. This is a valid contract. Settlement of Claims ❖ Accord and Satisfaction ➢ A debtor offers to pay a lesser amount that the creditor purports to be owed, different contract than they originally came up with, dispute between both, normally, an issue in the contract ➢ Accord New Agreement, one party agrees to perform, and the other accepts something other than was initially offered ➢ Satisfaction Payment, that takes place after the accord is executed (Release) ➢ The debt (amount owed) must be in dispute. ■ Ex. Bill and Jennifer, Jenn wants to sell her bike for $100, Bill rejects and says if you paint it blue I’ll buy it for $100, Jenn paints it Carolina Blue, Bill doesn’t think that is a manly blue, if he wanted a specific blue he should have specified, now he won’t buy it, that is a breach of contract, but over a dispute, solve the dispute, will repaint for $110, new agreement is an accord, performing the accord satisfied the old contract, Exceptions to the Consideration Requirement (NOT ON TEST) ❖ Promissory Estoppel (detrimental reliance): recovery if reliance on promise of another. ➢ Requirements to State a Claim: ■ Must be definite promise ● Promisee must justifiably rely on the promise. ● Reliance is substantial ● Justice will be served by enforcing promise. ❖ Promises to Pay Debts Barred by Statute of Limitations. ➢ A promise by a debtor to pay a previous debt barred by the statute of limitations is enforceable – no additional consideration is necessary. ❖ Charitable Subscriptions. ➢ Generally, enforceable, but courts now rely on promissory estoppel if reliance.
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