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LAW, BUSINESS, &

SOCIETY
11th
Edition

McGraw-Hill

2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part..

Learning Objectives

Explain the importance of contracts to


a capitalist, free-market system
Determine whether the Uniform
Commercial Code or common law
governs a contract dispute
Identify the elements of a legally
enforceable contract

6-2

Learning Objectives

Classify a contract as bilateral or


unilateral; express or implied;
executory or executed
Distinguish between valid,
unenforceable, void, and voidable
contracts
Describe the elements of a valid offer

6-3

Learning Objectives

Describe the elements of a valid


acceptance
Explain the significance of
consideration as an element of a
legally enforceable contract
Compare and contrast the rights and
duties arising in contractual
assignment and delegation
6-4

Learning Objectives

Compare and contrast different types


of third-party beneficiaries to a
contract
Explain how a contract may be
discharged
Describe the remedies available for
breach of contract

6-5

Role of Contracts in a
Complex Society

Capitalist, free market system cannot


operate effectively and fairly without a
reliable foundation in contract law
People are defined by their contractual
choices
Contract law protects the choices

6-6

Uniform Commercial Code

Body of rules that render commercial


law consistent across the United States
Developed by:
National Conference of Commissioners on

Uniform State Laws (NCCUSL)


American Law Institute (ALI)

Addresses potential issues that arise in


complex commercial practice

6-7

Uniform Commercial Code

Article 2, Sales - Governs transactions


involving the sale of goods
Section 2-105 - Defines goods as
tangible, movable, things
Article 2A - Governs leases of goods
Controls:
If the transaction is addressed by them
If a UCC rule applies to the issue in

question

6-8

Features of a Legally
Enforceable Contract
Agreement
Parties agree based on an offer by one and an acceptance by the
other
Consideration
Bargained-for legal value that one party agrees to pay or provide
to secure the promise of another
Capacity
Legal ability of the parties to enter into a contract
Genuineness of assent
Parties must agree to the same thing
Legality of purpose
Object of the contract must not violate the law or public policy
6-9

Figure 6.1 - Classification of


Contracts

6-10

Agreement: Offer

Promise to do something or to refrain


from doing something in the future
Elements of a valid offer
Present intent to enter a contract
Reasonable definiteness in the terms of

the offer
Communication of the offer to the offeree

6-11

Case: Definiteness

Case
Vian v. Carey
1993 U.S. Dist. Lexis 5460 (U.S. Dist. Ct.

S.D.N.Y. 1993)

Issue
Vian claimed that Mariah Carey agreed

orally that he would have a license to


market Mariah dolls
Do the objective circumstances indicate that
the parties intended to form a contract?
6-12

Duration of an Offer - Rules

Offeror can revoke the offer anytime


prior to acceptance
Offer may be specifically open for an
express period
Offer is presumed to be open for a
reasonable period if the time limit is
not specified
Offer expires if rejected or on receipt of
a counteroffer
6-13

Irrevocable Offers
Option contracts
Offeror promises to keep an offer open for a
specified period
Offeree pays consideration in return
Firm offers
Offeree is bound to the promise even without the
paying the consideration
Offers for unilateral contracts
Offeror attempts to revoke a unilateral offer after
the offeree has begun to perform
6-14

Agreement: Acceptance

Terms of an effective acceptance must


match those in the offer
Communication of acceptance
Acceptance of a bilateral contract is not

effective until communicated


Mailbox rule
An acceptance stands effective when sent
even if never received

6-15

Agreement: Acceptance
Authorization
Offeror can specify an exclusive manner to
communicate the acceptance
Express authorization
Implied authorization
Modern view
Under UCC, offeree is free to accept in any
reasonable manner within a reasonable
period if there are no specific instructions

6-16

Consideration

Used by the courts to distinguish a


contract from a gratuitous promise
Consists of a detriment to the promisee
that is bargained for by the promisor

6-17

Case: Consideration

Case
Hamer v. Sidway
27 N.E. 256 (N.Y. 1891)
Court of Appeals

Issue
W.E. Story Sr. had promised $5,000 to W.E.

Story II if he refrained from liquor, tobacco,


swearing, playing cards but died without
paying
Hamer sued Sidway on behalf of W.E. Story II
6-18

Consideration

Adequacy
Legal sufficiency depends on whether the

promisee suffered a detriment


Court can question a contract on the
grounds of fraud, duress, or
unconscionability

Appearance
Certain agreements can be accompanied

by consideration which can be an illusion


6-19

Consideration

Substitutes
Doctrine of promissory estoppel - Requires:
Promise on which the promisor should
expect the promisee to rely
Promisee justifiably relied on the promise
Injustice can be avoided by enforcing the
promise

6-20

Capacity
Intoxication
Contract can be nullified if the person was sufficiently
intoxicated
Mental incompetence
Agreement involving a mentally incompetent person is
void or voidable in most cases
Minority
Minors have the right to rescind contracts and the right
of recovery for everything given up in meeting the
terms of the contract
6-21

Case: Minority

Case
Dodson v. Shrader
824 S.W.2d 545 (Tenn. S.Ct. 1992)
Circuit court

Issue
Dodson sued Shraders to rescind the

contract and recover the amount paid for


the truck which became inoperable

6-22

Genuineness of Assent

The innocent part can rescind a deal on


the account of:
Misrepresentation and fraud
Duress
Undue influence
Mistake
Mutual or unilateral

6-23

Case: Misrepresentation

Case
Stambovsky v. Ackley et al.
169 A.D.2d 254 (S.Ct. N.Y., App. Div., 1st

Dept. 1991)

Issue
Plaintiff discovered the house he

contracted to purchase was reputed to be


possessed by poltergeists
Sought rescission of the contract of sale
6-24

Legality of Purpose

Illegality - Bargains that are forbidden


by statute or violate public policy
Categories of illegal agreements
Contracts that violate statutes
Unconscionable contracts
Contracts that violate public policy

6-25

Case: Public Policy

Case
Hanson v. America West Airlines
544 F.Supp.2d 1038 (U.S. Dist. Ct. Central

Dist. Cal. 2008)


California state court

Issue
David Hanson lost his valuable robotic head

in a West Airlines plane and sued the


defendant for conversion, negligence, and
involuntary bailment
6-26

Interpreting and Enforcing


Contracts

Oral contracts are fully enforceable


Subject to misunderstanding or being

forgotten, and fraudulent claims

Contracts that must be in writing to be


enforceable
Collateral contract
Sale of land
Promises that cannot be performed within

one year
6-27

Interpreting and Enforcing


Contracts
Contracts for the sale of goods at a price of

$500 or more
Contracts in consideration of marriage
Executor/administrators promise

Failure to comply
Incomplete oral contracts that fail to

comply with the Statute of Frauds are


unenforceable

6-28

Parol Evidence Rule

Parol evidence - Oral or written words


outside the agreement
A contract represents a complete and
final integration of the parties
intentions
Parties cannot introduce parol evidence to

modify, or contradict a written contract

6-29

Parol Evidence Rule

Exceptions
Adding missing terms to an incomplete

written contract
Explaining ambiguities in a written
contract
Proving circumstances that would
invalidate a written contract

6-30

Third Parties

Parties not part of a contract but hold


legally recognizable interests
Interests arise when:
Contract rights are assigned to others
Contract duties are delegated to others
Contracts have third-party beneficiary

provisions

6-31

Figure 6.3 - Assignment of


Rights

6-32

Figure 6.4 - Delegation of


Duties

6-33

Third-Party Beneficiary
Contracts

Third parties may be assigned rights or


delegated duties under a contract
Types of beneficiaries
Creditor and donee beneficiaries
Enforce contracts made by others for their
benefit
Incidental beneficiary
Benefit was not the contracting parties
primary purpose or intent
6-34

Case: Third-Party Beneficiary


Contract

Case
Jimenez v. Gilbane Building Company, et al.
693 S.E.2d 126 (Ga. Ct. App. 2010)
Trial court

Issue
Belfor and Gilbane have claims against Gill

Plumbing
Gill has a third-party claim against Jimenez
for the for the costs of remediation and repair
of a plumbing installation
6-35

Discharge

Duties of the contracting parties are


discharged when the obligations of a
contract come to an end
Methods of contract discharge
Conditions
Performance or breach
Lawful excuses
Agreement
Operation of law
6-36

Discharge by Conditions
Conditions precedent
Clause specifies that an event must occur before
the parties to the contract are obliged to perform
Conditions subsequent
Clause excuses performance if a future event
transpires
Conditions concurrent
Contract specifies that the parties are to perform
their duties at the same time
6-37

Discharge by Conditions
Express conditions
Explicitly agreed to by the parties
Implied-in-fact conditions
Derived by court from the conduct of parties and
circumstances surrounding the bargain
Implied-in-law conditions
Imposed by the court on the contract to avoid
unfairness
6-38

Discharge by Performance or
Breach of Contract
Complete performance
No breach of contract
Substantial performance
Nonmaterial breach of contract
Unacceptable performance
Material breach of contract
Advance refusal to perform
Anticipatory breach of contract
6-39

Case: Breach of Contract

Case
Castillo v. Tyson
701 N.Y.S. 2D 423 (N.Y. S.Ct. App. Div. 2000)
Motion court

Issue
Pay-per view customers sued Tyson, fight

promoters and telecasters as the match


ended with Tysons disqualification in the
3rd round
6-40

Discharge by Lawful Excuses

Contracts can be discharged lawfully in


the event of non-performance
Impossibility
Contracted-for performance cannot be

accomplished by anyone

Commercial impracticability
Exceptional and unforeseeable events

render performance thoroughly impractical


Specified in UCC 2-615
6-41

Discharge by Agreement and


Operation of Law

Discharge by agreement
Achieved when a new agreement is arrived

to after entering the original contract


Forms
Accord - Parties agree to modify the
performance from the previous contract
Satisfaction - Performance of the accord

Discharge by operation of law


Through a bankruptcy decree
Through statute of limitations
6-42

Remedies in Law
Compensatory damages
Plaintiff is entitled to recover a sum equal to the
actual damages suffered
Consequential damages
Victim can recover direct and indirect losses
incurred due to the breach
Incidental damages
Costs incurred by the victim in arranging a
substitute performance or reducing sustained
damages
6-43

Remedies in Law
Nominal damages
Court awards an insignificant sum to illustrate the
wrongfulness of the breach
Punitive damages
Awarded to the injured party when the breaching
partys conduct is reprehensible
Rescission
Returning the parties to the positions they occupied
before entering the agreement
6-44

Remedies in Law
Restitution
Returning goods and property that were transferred
under the contract
Mitigation
Nonbreaching party is required to take reasonable
steps toward minimizing damages
Liquidated damages
Parties agree in advance about the measure of
damages
6-45

Specific performance
Court orders the breaching party to perform its obligations
as per the contract
Injunction
Court may require or forbid a party to perform a specified
act
Reformation
Court rewrites the contract where parties true intentions
are imperfectly expressed
Quasi-contract
Court implies a contract as a matter of law to prevent
unjust enrichment
6-46

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