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L 201

by: Edward Wuckert I

L 201 BUS

Edward Wuckert I
GPA 3.89

Tim Lemper

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Tim Lemper
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This 0 page Class Notes was uploaded by Edward Wuckert I on Sunday November 1, 2015. The Class Notes belongs to BUS at Indiana University taught by Tim Lemper in Fall. Since its upload, it has received 8 views. For similar materials see /class/233453/bus-indiana-university in Business at Indiana University.


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Date Created: 11/01/15
Chapter 14 Capacity to Contract What is capacity 0 0 Capacity means the ability to incur legal obligations and acquire legal rights People who lack capacity minorsknown in legal terms as infants personas suffering from mental illnesses or defects and intoxicated persons Contract law gives them the right to avoid escape contracts that they enter during incapacity I Provide a means of protecting people who because of mental impairment intoxication or youth and inexperience are disadvantaged in the normal giveandtakeof the bargaining process Usually comes up in two ways I It is asserted by plaintiff as the basis ofa lawsuit for the money or other benefits that he gave the other party under their contract I It arises as a defense to the enforcement ofa contract when the defendant is the party who lacked the capacity Effect of Lack of Capacity I Contract where one or both parties lack capacity is considered voidable I People whose capacity is impaired are able to enter a contract and enforce it if they wish but they also have the right to avoid the contract I Some are so impaired they don t have the ability to form even a voidable contract I Bargain considered to be void if at the time of formation of bargain a court had already adjudicatedadjudged or decreed one or more of the parties to be mentally incompetent or one of more of the parties was so impaired that he couldn t even manifest assent Capacity of Minors O O O Minors Right to Disaffirm I Disaffirmance the right to avoid a contract as means of protecting minors against their own improvidence and against overreaching by adults I Is personal to a minor only the minor or legal rep such as guardian may disaffirm a contract I No formal act or written statement is required any words or acts that effectively communicate the minor s desire to cancel contract can constitute disaffirmance I If minor wishes to enforce contract adult party must perform I Minor s right to disaffirm puts any adult contracting with a minor in an undesirable position I Exceptions to the Minor s Right to Disaffirm I Cant disaffirm all contracts I Statues prevent minors from disaffirming marriage agreements to support their children educational loans life and medical contracts contracts ffor transportation by common carriers and certain types of contracts approved by courtsex Contracts to employ a child actor I Releases Signed by Parents and Guardians I Exculpatory clauses contract provisions that release a party from liability for future negligence o Releases and liability waivers 0 Extremely common ways for businesses to attempt to reduce liability I Some courts uphold such releases on the ground that parents have the fundamental liberty to make decisions concerning their children I Majority of courts have determined that parents contractual release of their children s future injuries are invalid I When a minor is a party to a lawsuit or potential lawsuit arising from an injury that has already occurred 0 Arguments over what to do Period of Minority I Common law age of majority is 21 I Age of majority has been lowered by 49 of states to 18 Emancipation I Emancipation the termination ofa parent s right to control a child and receive services and wages from him I No formal requirements I Can occur by parent s express or implied consent or by occurrence of some events such as marriage of the child I Mere fact minor is emancipated doesn t give him capacity to contract I A person younger than legal age of majority is held to lack the capacity to enter a contract even if fully employe d and married 0 Time of Disaffirmance I Contracts entered during minority that affect title to real estate cannot be disaffirmed unti majority I All other Based on special importance of real estate and on the need to protect a minor form improvidently disaffirming from a transaction involving real estate contracts entered during minority may be disaffirmed as soon as contract is formed I Minor s power to avoid contracts doesn t end on day he reaches age of majority It continues for a period of time after he reaches majority I Time after reaches majority is determined if the adult has rendered performance under the contract or relied on it o Ratification If they relied on it or has given something of value to the minor the minor must disaffirm within a reasonable time if longer he would run risk of ratifying the contract If adult has neither performed nor relied on it the former minor is likely to be accorded a longer period of time to disaffirm I The act of affirming the contract and surrendering the right to avoid the contract I Makes a contract valid from its inception I Minor cannot later disaffirm I Can bed one effectively only after the minor reaches majority Otherwise it would be as voidable as the initial contract I No formal requirements Duties upon Disaffirmance Any of the former minor s words or acts after reaching majority that indicate with reason able clarity his intent to be bound by the contract are sufficient Can be expressed in oral or written statement or can be implied by conduct on part of former minor A former minor s acceptance or retention of benefits given by other party for an unreasonable time after reaching majority can constitute ratification Former minors continued performance of his part of the contract after reaching majority imply intent to ratify the contract 0 Duty to Return Consideration I If neither party performed relationship will be canceled by disaffirmation I If performance is done each party has the duty to return to the other any consideration that the other ha s give n The minor must return any consideration given by adult that remains in his possession o If minor is unable to return the consideration most states will permit him to disaffirm the contract I Minor has the right to recover any consideration he has given the adult party Has right to recover some property that has been transferred to third parties I Exception under UCC Minor cannot recover goods that have been transferred to a good faith purchaser 0 Must the Disaffirming Minor Make Restitution A Split of Authority I Traditional rule minor who can t fully return the consideration that was given isn t obligated to pay the adult for the benefits she has received r to compensate the adult for loss or deprecation of consideration 0 Minors Obligation to Pay Reasonable Value of Necessaries I Disaffirming minors are required to pau the reasonable value of items that have been furnished t them that are classified as necessaries I A necessary is something that is essential for the minor s continued existence and general welfare that hasn t been provided by the minor s parents or guardian 0 Ex Clothes food shelter medical care tools of trade basic education votech I Minor s liability for necessaries supplied to him is quasi contractual I Minor is liable for the reasonable value of the necessaries that she actually receives she isn t liable for the entire price agreed on of that price exceeds the actual value of the necessaries and not liable for necessaries that she contracted for but dint receive I Whether item is considered a necessary is dependent on circumstances I Ex Age station in life personal circumstances I An item sold to a minor isn t considered a necessary if the minor s parent or guardian has already supplied him with similar items 0 Effect of Misrepresentation of Age I The normal rules dealing with the minor s right to disaffirm and his duties upon disaffirmance can be affected by a minor s misrepresentation of his age I Traditional rule a minor s misrepresentation about his age didn t affect his right to disaffirm and didn t create any obligations reimburse the adult for damages or pay for benefits received 0 Theory one who lacks capacity cannot acquire it merely by claiming to be of legal age I Today state law evenly divided 0 Some take position that the minor who misrepresented his age will be estopped prevented from asserting his infancy as defense 0 Some allow a minor to disaffirm regardless of his misrepresentation of age 0 Most hold the disaffirming minor responsible for losses suffered by the adult I Capacity of Mentally Impaired persons 0 Theory of Incapacity I Contract Iaw makes their contracts either void or voidable to protect them from the results of their own impaired perceptions and judgment and from others who might take advantage of them 0 Test for Mental Incapacity I quotinsanity incapacity in grounds of mental illness or defect I Encompasses a broad range of causes of impaired mental functioning such as mental illness rain damage mental retardation or senility I Mere fact that person suffers from mental illness doesn t necessarily mean they lack capacity to contract I Usual test for mental incapacity is cognitive one I Courts ask whether the person has sufficient mental capacity to understand the nature and effect of the contract I Some courts criticized the traditional test as unscientific because it doesn t take into account the fact that a person suffering from a mental illness of defect might be unable to control his conduct I Section 15 of Restatement of Contract provides that a person s contracts are voidable if he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition I Provides protection to people who understood the transaction but were unable to exercise appropriate judgment or to control their conduct effectively 0 The effect of Incapacity Caused by Mental Impairment I Severe mental or physical impairment may prevent a person from even being able to consent in such a case no contract is formed I Contract Iaw makes distinction between a contract involving a person who has been adjudicated incompetent at the time the contract was made and a contract involving a person who was suffering from some mental impairment at the time the contract was entered but those incompetency was not established until after the contract was formed If person is under guardianship at time contract is formed the contract is considered void If after a contract has been formed a court finds that a person who manifested consent lacked capacity on grounds of mental illness of defect the contract is usually voidable at the election of party who lacked capacity Right to Disaffirm I If contract is found to be voidable on ground of mental impairment one who lacked capacity has the right to disaffirm the contract I Person formally incapacitated by mental impairment can ratify a contract if regains capacity 0 If regains capacity he must disaffirm the contract unequivocally within reasonable time of he will be deemed to have ratified it I Must return any consideration given by the other party that remains in his possession I Is liable for reasonable value of necessaries in the same manner as minors I If contract is fair and other party had no reasonable cause to know incapacity the contract cannot be disaffirmed unless the other party is placed in status quothe position she was in before the creation of contract I If other party knew about incapacity the incapacitated party is allowed to disaffirm without placing the party in status quo Contracts of Intoxicated Persons 0 Intoxication and Capacity Mere fact that a party to a contract had been drinking when contract was formed wouldn t normally affect their capacity to contract Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the business at hand Section 16 of Restatement of Contracts intoxication is a ground for lack of capacity only if the other party has reason to know that the affected person is so intoxicated that heshe cannot understand or act reasonable in relation to the transaction Same rules as mentally impaired I Right to disaffirm duties upon disaffirmance and possibility of ratification Courts less sympathetic than with minors and mental impairments Difficultrare for person to escape contractual obligations on ground of intoxication May be bound to their contract if they fail to disaffirm in a timely manner Chapter 20 Product Liability Continued 0 Disclaimers and Remedy Limitations 0 OO O O O O OO O A product liability disclaimer is a clause in the sales contract whereby the seller attempts to eliminate liability it might otherwise have under the theories of recovery A remedy limitation is a clause attempting to block recovery of certain damages If a disclaimer is effective no damages of any sort are recoverable under the legal theory attached by the disclaimer A successful remedy limitation prevents the plaintiff from recovering certain types of damages but doesn t attack the plaintiff s theory of recovery Damages not excluded still may be recovered because the theory is left intact The main justification for enforcing disclaimers and remedy limitations is freedom of contract Sellers need not insure against lawsuits for defective goods accompanied by an effect disclaimer or remedy limitation they should be able to sell those goods more cheaply Enforcing such clauses allows buyers to obtain a lower price by accepting the economic risk of a product defect For purchases by ordinary consumers and other unsophisticated buyer this argument is often is illusory Sellers normally present the disclaimer or remedy limitation in a standardized takeitorleaveit fashion It is also doubtful whether many consumers read disclaimers and remedy limitations at the time of purchase or would comprehend them fthey did read the As a result there is little or no genuine bargaining over disclaimers or remedy limitations in consumer situations They are effectively dictated by a seller with superior size and organization 0 These observations are less valid when the buyer is a business entity with the capability to engage in genuine bargaining with sellers lmplied Warranty Disclaimers I The Basic Tests of UCC Section 23162 0 Makes it relatively easy for sellers to disclaim the implied warranties of merchantability and fitness for a particular purpose The section states that to exclude or modify the implied warranty of merchantability a seller must 0 Use the word merchantability 0 Make the disclaimer conspicuous if it is written To exclude or modify the implied warranty of fitness a seller must 0 Use a writing 0 Make the disclaimer conspicuous A disclaimer is conspicuous if it is written so that a reasonable person ought to have noticed it 0 Capital letter larger type contrasting type and contrasting colors usually suffice Unlike the fitness warranty disclaimer a disclaimer of the implied warranty of merchantability can be oral Although disclaimers of the later warranty must use the word merchantability no special language is needed to disclaim the implied warranty of fitness I Other Ways to Disclaim lmplied Warranties Section 23163 0 Sellers may also disclaim either implied warranty by using such terms as llwith all faults llas is and llas they stand 0 Some courts have held that these terms must be conspicuous to be effective as disclaimers o Other courts have allowed such terms to be effective disclaimers only in sales of used 0 Describes two situations in which the buyer s inspection of the goods or her refusal to inspect may operate as a disclaimer o If a buyer examines the goods before the sale and fails to discover a defect that should have been reasonably apparent to her there can be no implied warranty claim based on that defect o If a seller requests that the buyer examine the goods and the buyer refuses the buyer cannot base an implied warranty claim on a defect that would have been reasonably apparent had she made the inspection 0 the definition of a reasonably apparent defect varies with the buyer s expertise 0 unless the defect is blatantly obvious ordinary consumers may have little to fear from section 23163b 0 An implied warranty may be excluded or modified by course of dealing the parties previous conduct course of performance the parties previous conduct under the same contract or usage of trade any practice regularly observed in the trade I Unconscionable Disclaimers o A sellers ability to disclaim implied warranties sometimes is restricted by the doctrine of unconscionably established by the UCC o In appropriate instances courts apply unconscionably standards to implied warranty disclaimers even though those disclaimers satisfy UCC section 23162 0 Despite a growing willingness to protect smaller firms that deal with corporate giants however courts still tend to reject unconscionably claims where business parties have contracted in a commercial context 0 lmplied warranty disclaimers often are declared unconscionable however in personal injury cases brought by ordinary consumers I The Impact of MagnusonMoss o MagnusonMoss Act limits a seller s ability to disclaim implied warranties o If a seller gives a consumer a full warranty on consumer goods whose price exceeds 10 the seller may no disclaim modify or limit the duration of any implied warranty If limited warranty is given the seller may not disclaim or modify any implied warranty buy may limit its duration to the duration of the limited warranty if this is done conspicuously and if the limitation is not unconscionable O 0 These significant limitations on a seller s power to disclaim implied warranties o A seller still can disclaim by refusing to give a written warranty while placing the disclaimer on some writing 0 Express Warranty Disclaimer I UCC section 23161 says that an express warranty and a disclaimer should be read consistently if possible but that the disclaimer must yield if such a reading is unreasonable I Because it is unreasonable for a seller to exclude with one hand what he has freely and openly promised with the other it is quite difficult to disclaim an express warranty 0 Disclaimers of Tort Liabilities I Disclaimers of negligence liability and strict liability are usually ineffective in cases involving ordinary consumers I Some courts enforce such disclaimers where both parties are business entities that o Dealt in a commercial setting 0 Had relatively equal bargaining power 0 Bargained over the product s specifications 0 Negotiated the risk of loss from product defectseg the disclaimer itself I Even though it has a provision that seems to bar all disclaimers the same should be true under the Restatement Third o Defenses 0 Various matters ex the absence of privity or valid disclaimer can be considered defenses to a product liability suit 0 Traditional Defenses I Three main defense in a product liability suit have been the overlapping trio of product misuse assumption of risk and contributory negligence o Compar Product misuseor abnormal use occurs when the plaintiff uses the product in some unusual unforeseeable way and this causes the loss for which he sues If the defendant had reason to foresee the misuse and failed to take reasonable precautions against it there is no defense Product misuse traditionally has been a defense in warranty negligence and strict liability cases Assumption of risk is the plaintiffs voluntary consent to a known danger It can occur anytime the plaintiff willingly exposes herself to a known product hazard Assumption of risk ordinarily has been a defense in warranty negligence and strict liability cases Contributory Negligence is the plaintiff s failure to act reasonably and prudently ln product liability context most common example is the simple failure to notice a hazardous product defect Contributory negligence is a defense in a negligence case but courts have disagreed about whether or when it should be a defense in warranty and strict liability cases 0 O O O ative Principles Where they are allowed and proven the 3 traditional product liability defenses completely absolve the defendant from liability Dissatisfaction with this allornothing situation has spurred the increasing use of comparative principles in product liability cases Rather than letting the traditional defenses completely absolve the defendant nearly all states now require apportionment of damages on the basis of relative fault They do so by requiring that the fact finder establish the plaintiff s and the defendant s percentage shares of the total fault for the injury and then award the plaintiff his total provable damages times the defendant s percentage share of the fault Not always clear what kinds of fault will reduce the plaintiff s recovery Some state comparative negligence statues have been read as embracing assumption of risk and product misuse and state comparative fault statues usually define fault broadly Comparative principles may assume either the pure or mixed forms Mixed state the defendant has a complete defense when the plaintiff was much more at fault than the defendant O o Formati O Nonde O O Authori 0 Chapter 35 The Agency Relationship Creation of an Agency and Related Subjects on An agency is created by the manifested agreement of two parties that one party the agent will act for the benefit of the other the principal under the principal s direction As the term manifested suggests the test for an agency s existence is objective If the parties behavior and the surrounding facts and circumstances indicate an agreement that one person is to act for the benefit and under the control of another the relationship exists lf facts establish an agency neither party need know about the agency s existence or subjectively desire that it exists In fact an agency may be present even where the parties expressly say that they don t intend to create it or intend to create some other legal relationship instead Often parties create an agency by written contract but may be oral unless state law provides otherwise The agency relation need not be contracted at all thus consideration required to form a contract is not necessary to form an agency Capacity A principal or agent who lacks the necessary mental capacity when the agency is formed ordinarily can release himself from the agency at his option Examples include those who are minor or mentally incapacitated when the agency is created 0 o Incapacity may occur during the agency relationship Corporations can and must appoint agents In a partnership each partner normally acts as the agent of the partnership in transacting partnership business and partnerships can appoint nonpartner agents as well Corporations partnerships and other business organizations themselves can act as agents legable Obligations Certain duties or acts must be preformed personally and cannot be delegated to an agent Examples making statements under oath voting in public elections and signing a will Same is true of service contracts in which the principal s personal performance is crucial Examples certain contracts by lawyers doctors artists and entertainers Agency Concepts Definitions and Types t l An agent can bind his principal only when the agent has authority to do so Authority is an agent s ability to affect his principal s legal relations Two main forms actual authority and apparent authority Each based on the principal s manifested consent that the agent may act for and bind the principal For actual authority this consent must be communicated to the agent For apparent authority it must be communicated to the third party Actual Authority comes in two forms Express authority and implied authority Express authority is created by the principal s actual words whether written or oral I Thus an agent has express authority to bind her principal in a certain fashion only when the principals has made a fairly precise statement to that effect lmplied Authority an agent is given and allow an agent to do whatever it is reasonable to assume the principal wanted him to do given the principal s express statements and the surrounding circumstances 0 O O O I Relevant factors include the principal s express statements the nature of the agency the acts reasonably necessary to carry on the agency business and the acts customarily done when conducting that business Sometimes an agent who lacks actual authority may still appear to have such authority and third parties may reasonably rely on this appearance of authority To protect third parties agency law lets agents bind the principal on the basis of their apparent authority Apparent Authority arises when the principal s behavior causes a third party to believe reasonably that the agent is authorized to act in a certain way 0 Depends on what the principal communicates to the 3rd party either directly or through the agent 0 Communications to the agent are irrelevant unless they become known to the third party or affect the agent s behavior Agents cannot give themselves apparent authority and apparent authority doesn t exist where an agent creates an appearance of authority without the principal s consent The 3rd party must reasonably believe in the agent s authority 0 Trade customs and business practices can help courts determine whether such a belief was reasonable I Authority helps determine a principal s liability on contracts made by his agent 0 General and Special Agents I General agent is continuously employed to conduct a series of transactions I Special agent is employed to conduct a single transaction or a small simple group of transactions I A continuously employed general manager construction project supervisor or purchasing agent would normally be a general agent I A person employed to buy or sell a few objects on a one shot basis is usually a special agent I General agents often serve for longer periods perform more acts and deal with more parties than special agents 0 Gratuitous Agents an agent who receives no compensation for his services I Have the same power to bind their principals as do paid agents with the same authority I Fact that agent is gratuitous sometimes lowers the duties principal and agent owe each other and also may increase the parties ability to terminate the agency without incurring liability o Subagent I A subagent is basically an agent of an agent 0 A person appointed by an agent to perform tasks that the agent has undertaken to perform for his principal I For a subagency to exist an agent must have the authority to make the subagent his agent for conducting the principal s business I A party appointed by an agent is not a subagent because the appointing agent only had authority to appoint agents for the principal I When an agent appoints a true subagent the agent becomes a principal with respect to the subagent hi agent 0 The legal relations between agent and subagent closely parallel the legal relations between principal and agent A subagent is also the original principal s agent here thought the normal rules governing principals and agents don t always apply 0 Employees and Independent Contractors I No sharp lines separate employees from independent contractors 0 Most important fact in determining is the principal s right to control the physical details of the work I Employees typically are subject to such control I Independent contractors generally contract with the principal to produce a result and determine for themselves how that result will be accomplished I Many employees perform physical labor or are paid on an hourly basis corporate officers who do no physical work and receive salaries are usually employees I Professionals such as brokers accountants and attorneys often are independent contractors I Franchisees usually are independent contractors The distinction between employeeindependent contractor is crucial in determining the principal s liability for agent s tort Duties of Agent to Principal O 0 If an agency is created by contract agent must perform according to its terms Agency law also establishes fiduciary duties that the agent owes the principal I These duties supplement the duties created by an agency contract I They exist because agency is a relationship of trust and confidence The principal s many remedies for an agent s breach of her fiduciary duties fiduciary duties include termination of the agency and recovery of damages if any from the agent A gratuitous agent usually has same fiduciary duties as a paid agent but need not perform as promised I Can usually terminate the agency without incurring liability and her fiduciary duties cease once the agency ends They are liable for failing to perform as promised when her promise causes the principal to rely upon her to undertake certain acts and the principal suffers losses because he refrained from performing those acts himself A subagent owes the agenthis principal all the duties agents owe their principals I A subagent who knows of the original principal s existence also owes that principal all the duties agents owe their principals except for duties arising solely from the original principal s contract with the agent I The agent who appointed the subagent is liable to the original principal when the principal is harmed b the subagent s conduct Agent s Duty of Loyalty I Duty of Loyalty is owed to principal because agency is a relationship of trust and confidence I An agent must subordinate his personal concerns by 0 Avoiding conflict of interest with the principal 0 Not disclosing confidential information received from the principal I Conflicts of Interest 0 An agent whose interests conflict with the principal s interests may be unable to represent his principal effectively 0 When conducting the principal s business an agent is forbidden to deal with himself 0 Many courts extend the rule to include transactions with the agent s relatives of business associates or with business organizations in which the agent has an interest 0 An agent may engage in selfdealing transactions if the principal consents o For consent to be effective the agent must disclose all relevant facts to the principal before dealing with the principal on his own behalf 0 Unless the principal agrees otherwise an agent also is forbidden to compete with the principal regarding the agency business so long as he remains an agent 0 An agent ordinarily may not solicit customers for a planned competing business while still employed by the principal 0 An agent who is authorized to make a certain transaction cannot act on behalf of the other party to the transaction unless the principal knowingly consents 0 One ordinarily cannot act as agent for both parties to a transaction without first disclosing the double role to and obtaining the consent of both principals o The agent must disclose to each principal all the factors reasonably affecting that principal s decision 0 An agent who acts as a middleman may serve both parties to a transaction without notifying either I Confidentiality Unless otherwise agreed an agent may no use or disclose confidential information acquired through the agency Confidential information is the principal s information entrusted by the principal o the agent It includes facts that re valuable to the principal because they aren t widely known or that would harm the principal s business if they became widely known 0 Examples business plans financial condition contact bids technological discoveries manufacturing methods customer files and other trade secrets In the absence of an agreement to the contrary after the agency ends an agent may compete with her principal after termination of the agency Duty not to use or disclose confidential information continues after the agency ends The former agent may utilize general knowledge and skills acquired during agency 0 Agent s Duty to Obey Instructions I Because an agent acts under the principal s control and for the principal s benefit she has a duty to obey the principal s reasonable instructions for carrying out the agency business I Exceptions to the duty to obey instructions A gratuitous agent need not obey his principal s order to continue to act as an agent Agents generally have no duty to obey orders to behave illegally or unethically I Usually a principal s instructions are clear and can be easily followed Sometimes instructions are ambiguous 0 When a principal s instructions are unclear the agent has a duty to communicate with the principal to clarify the instructions 0 When instructions are unclear it is not proper for the agent to act without clarification o Agent s Duty to Act with Care and Skill I A paid agent must possess and exercise the degree of care and skill that is standard in the locality for the kind of work the agent performs I A gratuitous agent need only exercise the care and skill required of nonagents who perform similar gratuitous undertakings I Paid agents who represent that they possess a higher than customary level of skill may be held to a correspondingly higher standard of performance I An agent s duty may change if the principal and the agent agree that the agent must possess and exercise greater or lesser than customary care and skill o Agent s Duty to Notify the Principal I An agent must promptly communicate to the principal matters within the agent s knowledge that are reasonably relevant or material to the agency business and that he knows or should know are of concern to the principal The basis for duty to notify is the principal s interest in being informed of matters that are important to the agency business I There is no duty to notify where the agent receives privileged or confidential information o Agent s Duties to Account I An agent s duty of loyalty and care require that she give the principal any money or property received in the course of the agency business This includes profits resulting from the agent s breech of the duty of loyalty or other duties It also includes incidental benefits received through the agency 0 Examples are bribes kickbacks and gifts from parties with whom the agent deals on the principal s behalf The principal and the agent may agree that the agent can retain certain benefits received during the agency Courts may imply such an agreement when it is customary for agents to retain tips or accept entertainment while doing the principal s business Duty to Account concerns agents whose business involves collections receipts or expenditures 0 Such agents must keep accurate records and accounts of all transactions and disclose these to the principal once the principal makes a reasonable demand for them 0 An agent who obtains or hold property for the principal usually may no commingle that property with her own property 0 Duties of Principal to Agent 0 O O O 0 If an agency is formed by a written contract the contract normally states the duties the principal owed the agent The law implies certain duties from the existence of an agency relationship however formed I The most important of these duties are the principal s obligations to compensate the agent to reimburse the agent for money spent in the principal s service and to indemnify the agent for losses suffered in conducting the principal s business These duties generally can be eliminated or modified by agreement between the parties Duty to Compensate Agent I If the agency contract states the compensation the agent is to receive it usually controls questions about the agent s pay The relationship of the parties and the surrounding circumstances determine whether and in what amount the agent is to be compensated Where compensation is due but its amount is not expressly stated the amount is the market price or the customary price for the agent s services or if neither is available their reasonable value Sometimes an agent s compensation depends on the accomplishment of a specific result 0 In such cases the agent is not entitled to compensation unless he achieves the result within the time stated or if no time is stated a reasonable time This is true no matter how much effort or money the agent expends The principal must cooperate with the agent in achieving the result and must not do anything to frustrate the agent s efforts 0 Otherwise the agent it entitled to compensation despite the failure to perform as specified A principal generally isn t required to pay for undertaking that she didn t request services to which she didn t consent and tasks that typically are undertaken without pay A principal usually need not compensate an agent who has materially breached the agency contract or has committed a serious breach of fiduciary duty There is no duty to compensate a gratuitous agent An agents duties to a subagent are the same as a principal s duties to an agent o If there is no agreement to the contrary the original principal has no contractual liability to a subagent o A principal must reimburse and indemnify subagents as he would agents Duties of Reimbursement and lndemnity I If an agent makes expressly or impliedly authorized expenditures while acting on the principal s behalf the agent normally is entitled to reimbursement for those expenditures 0 Unless otherwise agreed A principal s duty of reimbursement overlaps with her duty of indemnity Agency law implies a promise by the principal to indemnify an agent for losses that result from the agent s authorized activities 0 These include authorized payments made on the principal s behalf and payments on contracts on which the agent was authorized to become liable I A principal may also have to indemnify an agent if the agent s authorized acts constitute a breach of contract or a tort for which the agent is required to pay damages to a third party I So long as the principal didn t benefit from such behavior he isn t required to indemnify an agent for losses resulting 0 From unauthorized acts 0 Solely from the agent s negligence or other fault I Even where the principal directed the agent to commit a tortuous act there is no duty to indemnify if the agent knew the act was tortuous o The principal must indemnify the agent for tort damages resulting from authorized conduct that the agent didn t believe was tortuous Chapter 11 The Agreement Acceptance I Acceptance is vitally important because it is with the acceptance that the contract is formed I What is an Acceptance 0 Acceptance is quota manifestation of assent to the terms of the offer made by the offeree in the manner invited or required by the offer o In determining if an offeree accepted an offer and created a contract a court will look for evidence of three factors I The offeree intended to enter the contract I The offeree accepted on the terms proposed by the offeror I The offeree communicated his acceptance to the offeror o Intention to Accept I Court is looking for the same present intent to contract on the part of the offeree that is found on the part of the offeror I Judged by objective standards I The offeree must objectively indicate a present intent to contract on the terms of the offer for a contract to result I As master of the of the offer the offeror may specify in detail what behavior is required of the offeree to bind him to a contract I If offeree does so the offeree must ordinarily comply with all the terms of the offer before a contract results 0 Intent and Acceptance on the Offeror s terms I Common law traditional quotmirror image rule I Acceptance must be the mirror image of the offer I Attempts by offerees to change terms of the offer or to add new terms to it are treated as counteroffers because they impliedly indicate an intent by the offeree to reject the offer instead of being bound by its terms I Recently mirror image rule in a more liberal fashion by holding that only materialimportant variances between an offer and a purported acceptance result in an implied rejection of the offer I Under mirror rule no rejection is implied if an offeree o merely asks about the terms of the offer without indicating its rejectionan inquiry regarding terms 0 Accepts the offer s terms while complaining about themgrumbling acceptance I Difficult to distinguish between I UCC Standard for Acceptance on the Offeror s Terms The quotBattle of the Formsquot I Many people use standard order forms prepared by their lawyers and offerees use standard acceptance or acknowledgement forms drafted by their counsel I Usually don t match up exactly but read only important parts goods ordered price delivery date and if they are agreeable there is a contract I Code allows for the formation of a contract even when there is some variance between the terms of the offer and the terms of the acceptance o It also makes it possible under some circumstances for a term contained in the acceptance form to become part of the contract I Code provides that a definite and timely expression of acceptance creates a contract even if it includes terms that are different from those stated in the offer or even if it states additional terms that the offer didn t address I An attempted acceptance that was expressly conditioned on the offeror s agreement to the offeree s terms wouldn t be a valid acceptance I The additional terms contained in the offeree s form are treated as quotproposals for addition to the contract I If parties are both merchants the additional terms become part of the contract unless o The offer expressly limited acceptance to its own terms 0 The new terns would materially alter the offer 0 The offeror gives notice of objection to the new terms within a reasonable time after receiving the acceptance I No contract created if when offeree made his acceptance expressly conditional on the offeror s agreement to the new terms or when the offeree s response to the offer is clearly not quotan expression of acceptance I Contract will result when the parties engage in conduct that quotrecognizes the existence of a contract such as exchange ofa performance I The offeror who accepts performance in the face of an express rejection or expressly conditional acceptance is not bound to all of the terms contained in the offeree s response 0 Under Code provides that the terms of a contract created by such performance are those on which the parties writings agree supplemented by appropriate gapfilling provisions from the code I Contact will consist of those terms on which the parties writings agree plus any appropriate gap filling presumptions of the Code 0 Communication of Acceptance I To accept an offer for a bilateral contract the offeree must make the promise requested by the offer I Offeree must communicate his intent to be bound by the offer before a contract can be created I To accept an offer for a unilateral contract the offeree must perform the requested act I Traditional contract law assumes that the offeror will learn of the offeree s performance and holds that no further notice from the offeree is necessary to create a contract unless the offeror specifically requests notice I Manner of Communication I Stipulation The offeror as master of the offer has power to specify the precise time place and manner in which acceptance must be communicated I if communication merely suggests a method or place of communication or is silent on such matters the offeree may accept within a reasonable time by any reasonable means of communication I When is acceptance communicated o Acceptances by instantaneous forms of communication I When parties are dealing facetoface by telephone of by other means of communication that are virtually instantaneous there are few problems determining when the acceptance was communicated I As soon as offeree says quotI accept or words to that effect a contract is created assuming that the offer is still in existence 0 Acceptance by noninstantaneous forms of communication I Ex mail telegraph other means that creates a lag between dispatching and receipt I Offeror may be attempting to revoke the offer while the offeree is attempting to accept it I An acceptance my get lost and never received I quotmailbox rule properly addressed and dispatched acceptances can become effective when they are dispatched even if they are lost and never received by the offeror I Protects the offeree s reasonable belief that a binding contract was created when the acceptance was dispatched I It exposes the offeror to the risk of being bound by an acceptance that they never received Offeror has ability to minimize risk by stipulating in her offer that she must actually received the acceptance for it to be effective I Offerors who don t maximize the time that they have to revoke their offers and ensure that they will never be bound by an acceptance that they haven t received I Operation of the Mailbox Rule Common Law of Contracts 0 Effective if communication was expressly or impliedly authorizedinvited by the offeror 0 Any manner of communication used by the offeror in making the offer would impliedly authorized Nonauthorized would be effective when received RestatementSecond an offer that doesn t indicate otherwise is considered to invite acceptance by any reasonable means of communication and properly dispatched acceptance sent by a reasonable means of communication within a reasonable time is effective on dispatch I Operation ofthe Mailbox Rule UCC OO 0 Provides that an offer that doesn t specify a particular means of acceptance is considered to invite acceptance by any reasonable means of communication 0 A properly dispatched acceptance sent by a reasonable means of communication within a reasonable time is effective on dispatch I What is reasonable depends on circumstances where offer was made I Includes speed and reliability of the means used by offeree the nature of the transaction the existence of any trade usage governing transaction existence of prior dealings between parties 0 An acceptance sent by an unreasonable means would be effective on dispatch if it is received within the time that an acceptance by a reasonable means would have normally arrived 0 Stipulated means of communication I An acceptance by the stipulated means of communication is effective on dispatch I The acceptance by other than the stipulated means doesn t create a contract because it is an acceptance at variance with the terms of the offer I Special Acceptance Problem Areas 0 Acceptance in Unilateral Contracts I To accept an offer to enter such a contract the offeree must perform the requested act I Courts applying modern contract rules may prevent an offeror from revoking such an offer once the offeree has begun performance I Achieved by holding either that a bilateral contract is created by the beginning of performance or that the offeror s power to revoke is suspended for the period of time reasonably necessary for the offeree to complete performance 0 Acceptance in Bilateral Contracts I To accept offer to enter such a contract an offeree must make the promise requested by the offer I Acceptance can be expressly accepted saying quotI accept your offerquot I Implied Acceptance offerees who take action that objectively indicates agreement risk the formation of a contract 0 Silence as Acceptance I General rule an offeree s silence without more is not an acceptance I It is generally held that an offeror cannot impose on the offeree a duty to respond to the offer I Circumstances of a case sometimes impose a duty on the offeree to reject the offer affirmatively or be bound by its terms I These are cases in which offeree s silence objectively indicates an intent to accept I Customary trade practice or prior dealings between parties am indicate silence signas acceptance I An offeree s silence can also operate as an acceptance if the offeree has indicated that it will I Offerees who accept an offeror s performance knowing what the offeror expects in return for his performance have impliedly accepted the offeror s terms 0 Acceptance when a writing is anticipated I Parties often intend to prepare written draft of agreement I Good idea law requires written evidence of some contracts but also provides written evidence of the terms of the agreement if a dispute arises later I If dispute arises before writing is prepared and signed a question may arise concerning whether the signing of the agreement was necessary condition to creation of contract I A party to the agreement who now wants out may argue the parties didn t intent to be bound until both signed writing I A clear expression of such intent by parties during negotiation prevents formation of contract I In absence of clear intent courts ask whether reasonable person familiar with circumstances would conclude that the parties intended to be bound only when a formal agreement was signed I If it appears that the parties had concluded their negotiations and reached agreement on all the essential aspects of the transaction most courts would probably find a contract at the time agreement was reached even though no formal agreement had been signed 0 Acceptance of Ambiguous Offers I Often an offer is unclear about which form ofacceptance is necessary to create contract I Offer may be accepted in any manner that is reasonable in light of circumstances surrounding the offer I Either a promise to perform or performance if reasonable creates a contract I Acceptance by shipment I Code states that an order requesting prompt or current shipment of goods may be accepted either by a prompt promise to ship or by a prompt or current shipment of the goods I Nonconforming goods goods different from what the buyer ordered I Code says that prompt shipment of either conforming goodswhat the order asked for or non conforming goodssomething else operates as an acceptance of the order o Protects buyers because sellers who ship the wrong goods have simultaneously accepted their offers and breached the contract by sending wrong merchandise I Code says that no contract is created if the seller notifies the buyer within a reasonable time that the shipment of nonconforming goods is intended as an accommodationan attempt to help the buyer 0 Who can accept an offer I As masters of their offers offerees have the right to determine who can bind them to a contract I Only person with legal power to accept an offer and create a contract is the original offeree I An attempt to accept by anyone else is treated as an offer because the party attempting to accept is indicating a present intent to contract on the original offer s terms Chapter 16 Writing I Significance of Writing in Contract Law Purposes of Writing 0 0 Oral contracts are legally enforceable assuming that they can be proven I More easily misunderstood of forgotten than written contracts I More subject to the danger that a person might fabricate terms or fraudulently claim to have made an oral contract when none exists Writing is important in contract law I When people memorialize their contracts in writing they are enhancing their chances of proving that an obligation was undertaken and making it harder for other party to deny making promise I A signature on a written contract allows a basis for the contract to be authenticated or proved to be genuinely the contract of the signer o Signing also communicated to any of us entering the contract the seriousness of the occasion Writing and Contract Enforcement There are certain situations where a promise that isn t in writing can be denied enforcement I In such situations an otherwise valid contract can become unenforceable if it doesn t comply with the formalities required by state law I These situations are controlled by a type of statue called the Statue of Frauds I Overview of the Statues of Frauds History and Purposes O O Statues require certain kinds of contracts to be evidenced by a signed writing are exceptions to the general rule that oral contracts are enforceable Statues of fraud have produced a great deal of litigation due in part to the public s ignorance of their provisions Effect of Violation of the Statue of Fraud Applies only to executor contracts If an executor contract is within statue of frauds but hasn t been evidenced by the type of writing required it isn t treated as an illegal contract rather the contract fails to comply and is unenforceable I Although contract will not be enforced a person who has conferred some benefit on the other party to the contract can recover the reasonable value of his performance in an action based on quasicontract I Contracts Covered by the Statute of Frauds A contract is said to be quotwithinquot covered by the statue if the statue requires that sort of contract to be evidenced by writing Following types of contracts are within the statue of frauds O O O O Collateral contractswhere a person promises to perform the obligations of another person Contracts for the sale of an interest in real estate Bilateral contracts that cannot be performed within a year from date of their formation Contracts for the sale of goods for a price of 500 or more Contracts in which an executoradministrator promises to be personally liable for the debt of an estate Contracts in which marriage is the consideration Col lateral Contracts Is a contract in which one personthe guarantor agrees to pay the debt of obligation that a second personthe principal debtor owes to a third personthe oblige if the principal debtor fails to perform Involves at least three parties and 2 promisees The guarantor promises to pay only if the principal debtor fails to do so Original obligation When a person undertakes an obligation that isn t conditioned on the default of another person and the debt is his own rather than that ofanother person When contract is determined collateral it is unenforceable unless it is evidenced by a writing Exception Main purpose of Leading Object Rule I Main PurposeLeading Object Rule no writing is required where the guarantor makes a collateral promise for the main purpose of obtaining some personal economic advantage 0 When the consideration given in exchange for coatera promise is something the guarantor seeks primarily for his own benefit rather than for the benefit of primary debtor the contract is outside the statue of frauds and doesn t have to be in writing Interest in Land Any contract that creates of transfers an interest in land is within the statute of frauds Require written evidence ofany transaction that will affect the ownership of an interest in land A contract to sell or mortgage must be evidenced by writing Exception Full Performance by the Vendor An oral contract for the sale of land that has been completely performed by the vendorseller is quottaken out of the statue of frauds that is is enforceable without writing Exception Part Performance Action in Reliance by the Vendee When the vendeepurchaser of land does an act in clean reliance on an oral contract for the sale of land an equitable doctrine known as quotpart performance doctrinequot permits the vendee to enforce the contract notwithstanding the fact that it was oral Doctrine based on both evidentiary and reliance considerations recognizes that a person s conduct can quotspeak louder than wordsquot and can indicate the existence of a contract almost as well as in writing Restatement of Contracts a contract for the transfer of an interest in land can be enforced even without a writing if the person seeking enforcement 0 Has reasonably relied on the contract and on the other party s assent 0 Has changed his position to such an extent that an enforcement of the contract is the only way to prevent injustice Part performance doctrine will not permit the vendee to collect damages for breach of contract but it will permit him to obtain the equitable remedy of specific performance a remedy whereby the court orders the breaching party to perform his contract Many states have required that the vendee pay part or all of the purchase price and either make substantial improvements on the property or take possession of it 0 Contracts that Cannot be Performed within One Year A bilateral executory contract that cannot be performed within 1 year from day It came into existence is within the statue of fraud and must be evidenced in writing Guard against the risk of faulty of willfully inaccurate recollection of long term contracts If a contract is fully performed by one of the parties it is taken out of statute and is enforceable without writing Apply when terms of contract make it impossible to be completed within one year If contract for indefinite period of time not within statue of frauds Computing Time If the date is more than one year from the date the contract came into existence the contract falls within statue of frauds and must be evidenced by a writing to be enforceab e 0 Sale of Goods for 500 or More 0 Promise of ExecutorAdministrator to Pay a Decedent s Debt Personally Provides that contracts for the sale of goods for the price of 500 or more are not enforceable without a writing or other specified evidence that a contract was made Modifications of Existing Sales Contracts No writing is required when an a ti g in r pay the decedent s debt from the funds of the decedent s estate Agreements to modify existing sales contracts can fall within the statue of frauds if the contract as modified is for a price of 500 or more UCC provides that the requirements of the statue of frauds must be satisfied if the contract as modified is within its provisions l capacity promises to Statue of frauds requires writing if the executor acting in her capacity as a private individual rather than in her representative capacity promises to pay one of the decedent s debts out of her own the executor s funds 0 Contract in which Marriage is the Consideration Statue of frauds requires a writing when marriage Is the consideration to support a contract Marriage provision has been interpreted to be inapplicable to agreement that involve only mutual promises to marry Can apply to any contract in which one party s promise is given in exchange for marriage or the promise to marry on the part of the other party This is true whether the promisor is one of the parties to marriage or a third party Prenuptialor ante nuptial agreements present a common contemporary application of the statue of frauds They are within the statue of frauds and must be evidenced by writing Meeting the Requirements of the Statue of Fraud Nature of the Writing Required 0 0 States not uniform in their formal requirements Most states require only a memorandum of the parties agreement they don t require that the entire contract be in writing I Essential terms must be stated in writing I Memorandum must provide written evidence that a contract was made but it doesn t have to be created with the intent that the memorandum itself would be binding In some cases written offers that were accepted orally have been held sufficient to satisfy the writing requirement I Ex Letters telegraphs receipts or any other writing indicating that the parties had a contract Memorandum doesn t have to be made at same time as contract can be made any time before suit is filed f memorandum of the parties agreement is lost its loss and its contents may be proven by oral testimony Contents of Memorandum I Must include the essential terms of the contract I The identity of parties must be indicated I The subject matter of the contract must be identified with reasonable certainty o This causes many problems in contracts for the sale of land since many statutes require a detailed description of property to be sold Contents of Memorandum under the UCC I Writing must be sufficient to indicate that a contract for a sale has been made between the parties but a writing can be sufficient even if it omits or incorrectly states a term agreed on I Not enforceable for more than the quantity of goods stated in memorandum o A writing that doesn t indicate quantity of goods to be sold wouldn t satisfy Code writing requirement Signature Requirement I Memorandum must be signed by the party to be charged or his authorized agent 0 The party to be charged is the person using the statute of frauds as a defense generally the defendant unless the statute is asserted as a defense to a counterclaim I Not necessary for both parties signatures I In their best interest to both sign otherwise the contract is enforceable only against the signing party I Unless statute expressly provides that the memorandum or contract must be signed at the end the signature may appear anyplace on the memorandum 0 Any writing mark initial stamp engraving or other symbol placed or printed on a memorandum will suffice as a signature as long as the party to be charged intended it to authenticateindicate the genuineness of the writing Memorandum Consisting of Several Writings I Many situations the elements required for a memorandum are divided among several documents I Can combine the documents to meet statute o This can be shown by physical attachmentstapled or bound or by references in the documents themselves that indicate that they all apply to the same transaction I In some cases it has been shown by the fact that the various documents were executed at the same time UCC Alternative Means of Satisfying the Statue of Frauds in Sale of Goods Contracts Confirmatory memorandum between merchants I UCC permits such confirmatory memoranda to satisfy the statute even though the writing is signed by the party who is seeking to enforce the contract rather than the party against whom enforcement is sough I Exception applies only when both of the parties to contract are merchants I Memo must be sent within a reasonable time after the contract is made and must be sufficient to bind the person who sent it ifenforcement were sought against him 0 That is it must indicate that a contract was made state a quantity and be signed by the sender o Promiss I If party against whom enforcement is sought receives the memo has reason to know its contents and ye fails to give written notice of objection to the contents within 10 days after receiving it the memo can be introduced to meet the requirements of the statute of frauds Pa rt payment or part delivery I UCC permits part payment or party delivery to satisfy the statue of frauds but only for the quantity of goods that have been delivered or paid for Admission in pleadings or court I When the party being sued admits the existence of the oral contract in his trial testimony or in any document that he files with the court it will satisfy statute under UCC Exception is justified by the strong evidence that such an admission provides When admission is made the statute of frauds is satisfied as to the quantity of goods admitted Specially manufactured goods I An oral contract within the UCC statue of fraud can be enforced without writing in some situations involving the sale of specially manufactured goods Exception will only apply if the nature of the specially manufactured goods is such that they are not suitable for the sale in the ordinary course of the seller s business Completely executory oral contracts are not enforceable under exception The seller must have made a substantial beginning in manufacturing the goods for the buyer or must have made commitments for their procurement before receiving notice that the buyer was repudiating the sale The specially manufactured goods provision is based both on the evidentiary value of the seller s conduct and on the need to avoid the injustice that would otherwise result from the seller s reliance ory Estoppel and the Statue of Frauds It can easily be used to defeat a contract that was actually made as to defeat a fictitious agreement Some courts have allowed to the use of doctrine of promissory estoppel to enable some parties to recover under oral contracts that the statute of frauds would ordinarily render unenforceable I Hold that when one of the parties would suffer serious losses because of their reliance on an oral contract the other party is stopped from raising the statute of frauds as a defense Restatement of Contracts provides that a promise that induces action or forbearance can be enforceable notwithstanding the statute of frauds if the reliance was foreseeable to the person making the promise and if injustice can be avoided only by enforcing the promise UCC have construed the provisions listing specific alternative methods of satisfying section formal requirements to be exclusive precluding the creation of any further exceptions by the courts Chapter 12 Consideration 0 Elements of Consideration 0 Consideration is legal value bargained for and given in exchange for an act or a promise 0 Legal Value Promise generally cannot be enforced against promisor unless the promise has given up something of legal value in exchange fro promise 0 Requirement of consideration means a promisee must pay the price that the promisor asked to gain the right to enforce the promisor s promise o If promisor didn t ask for anything in exchange for making promise or if what the promisor asked didn t have legal valuebecause it was something to which she was already entitled her promise isn t enforceable against her 0 Can have legal values in one of two ways If in exchange for the promisor s promise the promisee does or agrees to do something he had no prior legal duty to do that provides legal value If in exchange for the promisor s promise the promisee refrains from doing or agrees not to do something she has a legal right to do this provides legal value 0 Doesn t have to have monetary value 0 Adequacy of Consideration As long as the promisee s act or promise satisfies the legal value test the courts do not ask whether that act r promise was worth what the promisor gave or promised to give in return for it Reflects the laisseZfaire assumptions underlying classical contract law Rule against considering the adequacy of consideration can promote certainty and predictability in commercial transactions by denying legal effect to what would otherwise be a possible basis for challenging the enforceability of a contract Several Qualifications 0 lnadequacy of consideration is apparent on the fact of the agreement most courts conclude that the agreement was a disguised gift rather than an enforceable bargain 0 Gross inadequacy of consideration can give rise to inference of fraud duress lack of capacity unconscionability or some other independent basis for setting contract 0 lnadequacy of consideration standing alone is never sufficient to prove lack of true consent or contractual capacity Nominal consideration o If no other consideration is actually exchanged o Are attempts to make gratuitous promises look like true bargains by reciting a nonexistent consideration 0 Most courts refuse to enforce o BargainedFor Exchange 0 The promisee s act or promise must have been bargained for an given in exchange for the promisor s promise o It must be the price that the promisor asked for in exchange for promise o Exchanges That Fail to Meet Consideration Requirements 0 lllusory Promises If the promisee s promise is illusory because it really doesn t bind the promisee to do or refrain from doing anything such a promise couldn t serve as a consideration Said to lack the mutuality of obligation required for an agreement to be enforceable Effect of Cancellation or termination clauses 0 Just because an agreement allows one or both parties to cancelterminate their contractual obligations doesn t mean that the party with the power to cancel has given an illusory promise 0 issue is whether a promise subject to cancellation or termination actually represents a binding obligation 0 Right to cancelterminate at anytime for any reason without notice would clearly render illusory any other promise by the party possessing such a right 0 Limit on circumstances that cancellations may occur 0 Dealers failure to live up to obligations Time in which cancellation may occur Requirement of advance notice of cancellation All would effectively remove a promise from the illusory category because each party has bound themselves to do something in exchange for the other parties promise 0 Parties duty of good faith and fair dealing can limit the right to terminate and prevent its promise from being considered illusory I Effect of Output and Requirements Contracts 0 Output contracts contracts where one party to the agreement agrees to buy all of the other party s production of a particular commodity 0 Requirements contracts contracts where one party to the agreement agrees to supply all of another s need for a commodity 0 Prior to UCCcourts used to refuse to enforce such agreements o The Code legitimizes requirements and output contracts o It addresses the concerns about the potential for exploitation by limiting a party s demands to those quantity needs that occur in good faith and are not unreasonably disproportionate to any quantity estimate contained in the contract or to any normal prior output or requirements if no estimate is treated I Effect of Exclusive Dealing Contracts 0 The code recognizes that unless the parties agree to the contrary an exclusive dealing contract imposes a duty on the distributor to use her best efforts to sell the goods and imposes a reciprocal duty on the manufacturer to use his best efforts to supply the goods 0 Preexisting Duties I General rule performing or agreeing to perform a preexisting duty isn t consideration 0 This is fair because the promisor in such a case has effectively made a gratuitous promise since she was already entitled to promisee s performance I Preexisting Public Duties 0 Every member of society has duty to obey the law and refrain from committing crimes 0 A promisee s promise not to commit such an act can never be consideration 0 Public officials have a preexisting legal duty to perform their public responsibilities I Preexisting Contractual Duties and Modifications of Contracts under Common Law 000 o Contractual duties 0 Generally occur when the parties to an existing contract agree to modify that contract 0 General common law rule on contract modification hold that an agreement to modify an existing contract requires some new consideration to be binding 0 Rule can protect a party to a contract from being pressured into paying more because the other party to the contract is trying to take advantage of his situation by demanding an additional amount for performance 0 Courts may enforce an agreement to modify an existing contract if the modification resulted from unforeseen circumstances that a party couldn t reasonably be expected to have foreseen and which make that party s performance far more difficult than the parties originally anticipated 0 Court enforce far modification agreements by holding that the parties mutually agreed to terminate their original contract and then entered a new one I Preexisting Duty and Contract Modification under the UCC 0 Code doesn t require consideration for firm offers o The code provides that an agreement to modify a contract for the sale of goods needs no consideration to be binding 0 Modification agreements under code are still under the general code principles of good faith and unconscionability so unfair agreements that are the product of coercion are unlikely to be enforced o If the original agreement requires any modification to be in writing an oral modification in unenforceable o Regardless of what original agreement says if the price of goods in the modified contract is 500 or more the modification is unenforceable unless the requirements of the Code s statute of frauds section are satisfied I Preexisting Duty and Agreements to Settle Debts o Liquidated Debts o A liquidated debt is a debt that is both due and certain the parties have no good faith dispute about either the existence or amount of original debt 0 Unliquidated Debts 0 An unliquidated debt a good faith dispute about either the existence or the amount of a debt I Accord and satisfaction the settlement of an unliquidated debt 0 When it has occurred the creditor cannot maintain an action to recover the remainder of the debt that he alleges is due 0 Composition agreements 0 Composition agreements are agreements between a debtor and two or more creditors who agree to accept as full payment a stated percentage of their liquidated claims against the debtor at or after the date on which those claims are payable I Are generally enforceable by courts despite the fact that enforcement appears to be contrary to the general rule on the part of payment of liquidated debt 0 Creditors agree to compositions because they fear that by not doing so they may force debtor into bankruptcy and receive less 0 Forbearance to Sue 0 An agreement by a promisee to refrain from pursuing a legal claim against a promisor can be valid consideration to support a return promise by promisor 0 Past Consideration 0 Past consideration is an act or other benefit given in the past that was not given in exchange for the promise in question I Because past act wasn t given in exchange for present promise it cannot be consideration 0 Moral obligations I General rule promises made to satisfy a preexisting moral obligation are unenforceable for lack of consideration 0 Exceptions to the Consideration Requirement 0 Promissory Estoppel I Relying on I Some courts in early century began to protect such relying promisees by stopping promisor s from raising the defense that their promises were not supported by consideration 0 Ex Gratuitous agency promises bonuses and pensions for employees and land began to use a promisee s detrimental reliance on a donative promise as a substitute for consideration Promissory estoppels a promise that the promisor should reasonably expect to induce reliance reliance on the promise by the promisee and injustice to the promisee as a result of that reliance 0 Used as consideration substitute 0 Promises to Pay Debts Barred by Statues of Limitations 0 Many states enforce a new promise by a debtor to pay a debt even though technically such a promise isn t supported by consideration because the creditor has given nothing in exchange for the new promise 0 Most states afford debtors some protection 0 Promises to Pay Debt Barred by Bankruptcy Discharges 0 Once bankrupt debtor is granted a discharge creditors no longer have legal right to collect discharged debts 0 Most states enforce a new promise by the debtor to pay the debt regardless of whether the creditor has given an consideration to support it o Charitable Subscriptions 0 Promises to make gifts for charitable or educational purposes are often enforced despite the absence of consideration when the institution or organization to which the promise was made has acted in reliance on the promised gift 0 Justified on basis of promissory estoppels or public policy Chapter 10 The Agreement Offer Requirements for an Offer 0 O O O 0 Offer is the critically important first step in the contract formation process Person who makes offerofferor gives the person to who she makes the offer offeree the power to bind her to a contract simply by accepting the offer Three requirements for an offer I Look for some objective indication ofa present intent to contract on the part of offeror I Look for specificity or definiteness in terms of the alleged offer I They look to see whether the alleged offer has been communicated to the offeree Intent to Contract I Means the intent to enter the contract upon acceptance I The objective standard if intent I Following objective theory of contracts an offeror s intent will be judged by an objective standard that is what his words acts and the circumstances signify about his intent I If a reasonable person familiar with all the circumstances would be justified in believing that the offeror intended to contract a court would find that the intent requirement of an offer was satisfied even if the offeror himself says that he didn t intend to contract Definiteness of Terms I One reason for requirement of definiteness and specificity in an offer tend to indicate an intent to contract I Another reason courts need to know the terms on which the parties agreed in order to determine if a breach of contract has occurred and calculate a remedy if it has I Definiteness Standards under Common Law I Took position that courts are contract enforcers not makers I Require a relatively high standard of definiteness for offers requiring that all the essential terms ofa proposed contract be stated in the offer I Can prevent person from being held to an agreement when none was reaches of being bound by a contract term to which he never assented I Can frustrate expectations of parties who intend to contract but for whatever reason fail to procure an agreement that specifies all terms of contract Definiteness Standards under the UCC I Often creates contractual liability in situations where no contract would have resulted at common law I Example if parties are acting as though they have a contract by delivering or accepting goods or payment this may be enough to create binding contract even if it is impossible to point to a particular moment in time when contract was created I The fact that parties left open one of more terms of their agreement doesn t necessarily mean that their agreement is too indefinite to enforce I A sales contract is created if the court finds that the parties intended to make a contract and that their agreement is complete enough to allow the court to reach a fair settlement of their disputes I If term is left open in contract meets two standards above that open term or quotgapquot can be quotfilledquot by inserting a presumption found in Code s quotgapfillingquot rules 0 quotgapfillingquot rules allow courts to fill contract terms left open on matters of price quantity delivery and time for payment when such terms have been left open by parties I If term was left out because the parties were unable to reach agreement about it this would indicate that the intent to contract was absent and no contract would result even under the Code s more liberal rules I Intention is still at the heart of these modern contract rules the difference is that courts applying Code principles seek to further the parties underlying intent to contract even though the parties have failed to express their intention about specific aspects of their agreement Communication to Offeree I When offeror communicates terms of an offer to offeree he objectively indicates an intent to be bound by those terms I Fact that offer has not been communicated may be evidence that the offeror has not yet decided to enter into a binding agreement Special Offer Problem Areas 0 Advertisements I For the sales of goods consider to be invitations to offer or negotiate I Same rule applied to signs handbills catalogs price lists and price quotations I Based on presumed intent of sellers involved I Not reasonable to conclude that a seller who has limited number of items to sell intends to give every person who sees her ad sign or catalog the power to bind her to contract I Some ads have been held to amount to offers I Usually highly specific about nature and number of items offered for sale and what is requested in return 0 Rewards I Offers for rewards for lost property information or capture of criminals are generally treated as offers for unilateral contract I Some courts have held that only offerees who started performance with knowledge of the offer are entitled to reward I Some courts have indicated the only requirement is that the offeree know of the reward before completing performance 0 Auctions I Sellers at auctions are generally treated as making an invitation to offer I Those who bid on offered goods are treated as making offers that the owner of the goods may accept or reject I Acceptance occurs only when auctioneer strikes the goods off to the highest bidder I Auctioneer may withdraw the goods at any time before acceptance I When an auction is advertized as being quotwithout reservequot the seller is treated as having made an offer to sell the goods to the highest bidder and the goods cannot be withdrawn after a call for bids has been make unless no bids are made within a reasonable time 0 Bids I Bidding process ifa fertile source of contract disputes I Advertisements for bids are generally treated as invitations to offer I Those who submit bids are treated as offerors I According to general contract principles bidders can withdraw their bids at any time prior to acceptance by the offeree inviting the bids and the offeree is free to accept or reject any bid I Promissory estoppels may operate to prevent bidders from withdrawing their bids I Bids for governmental contracts are generally covered by specific statutes rather than by general contract principles I Such statues ordinarily establish the rules governing the bidding process often require that the contract be awarded to lowest bidder and frequently establish special rules or penalties governing the withdrawal of bids 0 Which terms are included in the offer I Originally courts tended to hold that offerees were bound by all the terms of the offer on the theory that every person had a duty to protect himself by reading agreements carefully before signing them I Modern courts tend to recognize the fact that may people often sign agreements that they haven t fully read or understand by saying that offerees are bound only by terms of which they had actual or reasonable notice I If the offeree actually read the term in question or ifa reasonable person should have been aware of it it will probably become part of parties contract I Termination of offers 0 Terms of the offer I Offeror is often said to be quotthe master of the offer I Means that offerors have the power to determine the terms and conditions under which they are bound to a contract I An offeror may include terms in the offer that limit its effective life I General timelimitation language in an offer can raise difficult problems of interpretation for courts trying to decide whether an offeree accepted before the offer terminated o Lapse of Time I Offers that fail to provide a specific time for acceptance are valid for a reasonable time I Reasonable time depends on circumstances surrounding the offer I Offers involving things subject to rapid fluctuations in value such as stocks bonds or commodities futures have a very brief duration same is true of offers involving goods that may spoil I Context of parties negotiations determining the duration of offer O O Revocation Ex face to face or over the phone bargains the normal time for acceptance doesn t extend past the end of the conversation unless the offeror indicates a contrary intention Ex mail or telegram the time for acceptance would be at least the normal time for communicating the offer and a prompt response by offeree Ex where parties have dealt with each other on a regular basis in past the timing of their prior transactions would be highly relevant in measuring the reasonable time for acceptance I General rule offers are revocable As the masters of their offers offerors can give offerees the power to bind them to contracts by making offers they can also terminate that power by revoking their offers the general common law rule on revocations is that offerors may revoke their offers at any time prior to acceptance even if they have promised to hold the offer open for a stated period of time I Exceptions to the General Rule Offerors are not free to revoke their offers 0 Options an option is a separate contract in which an offeror agrees not to revoke her offer for a stated time in exchange for some valuable consideration a contract in which an offeror ses her right to revoke her offer 0 Offers for unilateral contracts once the offeree has begun to perform the offeror s power to revoke is suspended for the amount of time reasonably necessary for the offeree to complete performance another approach to the unilateral contract dilemma is to hold that a bilateral contract is created once the offeree begins performance Promissory estoppels o In cases where the offeree relies on the offer being kept open the doctrine of promissory estoppels can operate to prevent offerors from revoking their offers prior acceptance 0 Used successfuy many times to prevent revocation of offers involve the bidding process Firm offers for the sale of goods this applies to offers for the sale of goods ONLY 0 Recognizing the concept of firm offer Firm offer is irrevocable for a period of time doesn t require consideration to be given in exchange for the offeror s promise to keep the offer open To be a firm offer an offer must I Be made by an offeror who is a merchant I Be contained in a signed writings I Give assurances that the offer will be kept open An offer to buy or sell goods that fails to satisfy these three requirements is governed by the general common law rule and is revocable at any time prior to acceptance f offer does meet requirements it will be irrevocable for the time stated in the offer if no specific time is stated in offer it will be irrevocable for a reasonable time Regardless of the terms of the firm offer the outer limit on a firm offer s irrevocability is 3 months To prevent unfairness the Code requires that assurance terms on forms provided by a offerees be separately signed by the offeror to effect a firm offer I Time of effectiveness of Revocations Rejection The question of when a revocation is effective to terminate an offer is often a critical issue in the contract formation process General rule is that revocations are effective only when they are actually received by the offeree Only major exception to general rule on effectiveness of revocations concerns offers to the general public because it would be impossible in most cases to reach every offeree with a revocation it is generally held that a revocation made in the same manner as the offer is effective when published without proof of communication to the offeree I An offeree may expressly reject an offer by indicating that he is unwilling to accept it I May also impliedly reject it by making a counter offer an offer to contract on terms materially different from the terms of the offer As general rule either form of rejection by the offeree terminates his power to accept the offer this is so because an offeror who receives a rejection may rely on the offeree s expressed desire not to accept the offer by making another offer to a different offeree Exception to general rule that rejections terminate offers concerns offers that are subject of an option contract I Some courts hold that a rejection doesn t terminate an option contract and that the offeree who rejects still as the power to accept the offer later so long as the acceptance is effective within the option period Time of effectiveness of rejection As a general rule rejections like revocations are effective only when actually received by the offeror therefore an offeree who has mailed a rejection could still change her mind and accept if she communicates the acceptance before the offeror receives the rejection 0 Death or insanity of either party The death or insanity of either party to an offer automatically terminates the offer without notice A meeting of the minds is obviously impossible when one of the parties has died or become insane o Destruction of Subject Matter If prior to an acceptance of an offer the subject matter ofa proposed contract is destroyed without the knowledge or fault of either party the offer is terminated o Intervening egaity An offer is terminated if the performance of the contract it proposes becomes illegal before the offer is accepted Chapter 9 Contracts 0 Contracts enforcement of promises 0 Not every promise is legally enforceable 0 Contract is a legally enforceable promise or set of promises o Hen a set of promises has the status of contract a person injured by a breach of that contract is entitled to call on the governmentcourts to force the breaching party to honor contract 0 Functions of Contracts 0 Give us ability to enter into agreements what others with confidence that we may call on the law to make sure agreement is honored 0 Contracts allow us to create a type of private law 0 Facilitate the planning that is necessary in a modern industrialized society 0 Evolution of Contracts 0 Freedom on contract the idea that contracts should be enforced because they are the products of the free wills of their creators who should within broad limits be free to determine the extent of their obligations 0 Role of courts enforce but otherwise adopt a hands off stand 0 As long as voluntarily entered into contact it could be enforced against him 0 Methods of contracting 0 Unless the law specifically requires a certain kind of contract to be in writing an oral contract that can be proven is as legally enforceable as a written one o Standardized form contracts are preprinted by one party and presented to the other party for signing I Usually party who drafts and presents the contract is the one with most bargaining power or sophistication in transaction Terms are nonnegotiable Advantage of providing efficient method of standardizing common transactions Present danger that party who signs the contract will not know what he is agreeing to and that the party who drafts and presents the contract will take advantage of his bargaining power to include terms that are oppressive or abnormal in that kind of transaction 0 Basic elements of a contract 0 To qualify as a contract a set of promises must be based on a voluntary agreement which is made up of an offer and an acceptance of that offer 0 There usually must be consideration to support what party s promise 0 Must be between parties who have capacity to contact and the objective and performance of contract must be legal 0 Basic Contract Concepts and Types 0 Bilateral and unilateral contracts I Unilateral contracts only one party makes a promise 0 Examples frequent buyer card where business promises to give a free gift after ten purchases I Bilateral contracts both parties exchange promises and the contract is formed as soon as the promises are exchanged 0 Example promises to pay 1000 a month if the mall will lease building 0 Formed bilateral contract even before parties begin performing any of the acts they have promised to do 0 Valid Unenforceable Voidable and Void Contracts I Valid contact one that meets all legal requirements for a binding contract they are enforceable in court I Unenforceable contract one that meets basic legal requirements but not enforceable because of some other legal rule 0 Ex if requires writing but no writing is made it is unenforceable Or a valid contract whose enforcement is barred by applicable contract statute of limitations I Voidable Contracts where one of more of the parties have the legal right to cancel their obligations under the contract o Injured person has right to cancel contract if he chooses right belongs only to injured arty and if he doesn t cancel the contract it can be enforced by either party I Void contracts agreements that create no legal obligations and for which no remedy will be given 0 Examples hit contracts or others to commit crimes 0 Express and lmplied Contracts I Express contract parties have directly stated the terms of their contract orally or in writing at the time the contract was formed I lmplied contractscontract implied in fact when the surrounding facts and circumstances indicate that an agreement has in fact been reached 0 Executed and Executory Contracts I Executed when all parties have fully preformed their contractual duties I Executory until all such duties have been fully preformed 0 Sources of Law Governing Contracts 0 Article 2 of Uniform Commercial Code and the common law of contractsgovern contracts today I UCC is statutory law in every state I Common law is court made law that is in constant evolution 0 Uniform Commercial Code Origin and Purpose I Adopted by all states except Louisiana which adopted parts I Purposes establish uniform set of rules to govern commercial transactions create a body of rules that would realistically and fairly solve the common problems occurring in everyday commercial transactions formulate rules that would promote fair dealing and higher standards in marketplace I Contains 9 articles most important article 2sale of goods I Continually changing in response to changes in technology and business transactions 0 Application of Article 2 I Applies only to contracts for the sale of goods 0 Goods are tangible moveable personal property 0 Ex cars books appliances clothing 0 Application of Common Law of Contracts I Govern sale of real estate or intangibles like stocks and bonds and services 0 Law governing quothybridquot contracts I Mixture of goods and services I Ask which element goods or services predominates in the contract what is the major purpose 0 Relationship of the UCC and the Common Law of Contracts I 2 important qualifications must be made concerning the application of Code contract principles 0 The Code doesn t change all of the traditional contract rules 0 Where no specific Code rule exists traditional contract law rules apply to contracts for the sale of goods 0 The courts have demonstrated a significant tendency to apply Code contract concepts by analogy to some contracts that are not technically covered by Article 3 0 Code is an important influence in shaping the evolution of contract law in general I Basic Differences in the Nature of Article 2 and the Common Law of Contracts 0 Code is more concerned with rewarding peoples legitimate expectations than with technical rules it is generally more flexible than common law 0 llreasonable commercially reasonable and seasonably are found throughout 0 Court using more likely to be concerned with what people really do in marketplace o Drafters wanted to promote fair dealing and higher standards in the marketplace imposed a duty of good faith 0 Means honest in fact which required of all parties to sales contracts 0 Unconscionable contract one that is grossly unfair or onesided o llNonco o Distinguishes between merchants and nonmerchants by holding merchants to higher standard Influence of RestatementSecond of Contracts o Is an attempt to reflect the significant changes that have occurred in contract law in the years following the birth of the first Restatement Reflects the llshift from rules to standards in modern contract law Doesn t have the force of law It can be and has been influential in shaping the evolution of contract law because courts have the option of adopting a restatement approach to the contract issues presented in the cases that come before them ntract Obligations lmpose the duty on a person to pay for a loss or benefit yet they don t meet the criteria for formation of a contract Gives a person who cannot establish the existence of a contract a chance to obtain compensation QuasiContract 0 Contract implied in law because it represents an obligation imposed by law to avoid injustice not a contractual obligation created by voluntary consent Quasicontract liability is imposed when one party confers a benefit on another who knowingly accepts it and retains it under circumstances that make it unjust to do so without paying for it Promissory Estoppels o Developed to deal with the unfairness that would sometimes result from the strict application of traditional contract principles Stopped equitably prevented Elements of promissory estoppels are a promise that the promisor should foresee is likely t induce reliance reliance on the promise by the promise and injustice as the result of that reliance o Protects reliance


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