Low of Business
Chapter 13
Introduction to Contracts
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 13: Introduction to Contracts
Chapter 13 Case Hypothetical
Zsa Zsa Hilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had been missing for three (3) days. Having searched her estate exhaustively, Zsa Zsa decided that her next best option was to post a reward for her beloved Caboodles.
Zsa Zsa carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed “Please find Caboodles—Reward--$25,000!!!” Below the heading was a color “glamour shot” of the animal and Zsa Zsa’s contact information, including her address and cell phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Zsa Zsa displayed and distributed one thousand of the posters throughout the greater Beverly Hills metropolitan area.
Later in the week, Dane “Bulldog” Sheppard showed up at Zsa Zsa’s front door. When she answered the door chime, Dane said “I am pleased to meet you, Ms. Hilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Hilton, and let me say in advance that I really appreciate the $25,000 bounty, um, reward money!”
Is there a contract between Dane “Bulldog” Sheppard and Zsa Zsa Hilton?
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Chapter 13 Case Hypothetical: Zsa Zsa Hilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had been missing for three (3) days. Having searched her estate exhaustively, Zsa Zsa decided that her next best option was to post a reward for her beloved Caboodles. Zsa Zsa carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed “Please find Caboodles—Reward--$25,000!!!” Below the heading was a color “glamour shot” of the animal and Zsa Zsa’s contact information, including her address and cell phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Zsa Zsa displayed and distributed one thousand of the posters throughout the greater Beverly Hills metropolitan area.
Later in the week, Dane “Bulldog” Sheppard showed up at Zsa Zsa’s front door. When she answered the door chime, Dane said “I am pleased to meet you, Ms. Hilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Hilton, and let me say in advance that I really appreciate the $25,000 bounty, um, reward money!” Is there a contract between Dane “Bulldog” Sheppard and Zsa Zsa Hilton?
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Chapter 13 Case Hypothetical
Carter Morley and Erena Erickson live side by side in town homes joined together by a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a painter, Tom Sizemore, having selected his name from the classified section of the phone directory. Morley describes his address, the physical dimensions and structure of his home, and he agrees with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will only take one day to complete. Morley advises that although he will have to work a fourteen-hour day on Friday, he would like to have the work completed in his absence. In passing conversation with his neighbor Erickson, Morley advises her of his “home improvement” plans.
Early Friday morning, Sizemore and his team arrive at the address, but by mistake, they begin work on Erickson’s side of building. Although Erena is home, she does not object to the work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them fresh-squeezed lemonade and ham sandwiches, and they heartily accept.
Upon completion of the work at 7:00 p.m. Friday evening, Sizemore knocks on Erena’s door and asks if “the man of the home” is present, that he would like Morley to review the work and pay the agreed-upon price for the work. Erena chuckles, and “breaks the news” that the painting crew has made a mistake, one to her benefit. Erickson proclaims “I do not owe you one dime, because you do not have a contract with me; I will give you ten minutes to remove yourself and your materials from my property, or I will call the police.”
Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?
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Chapter 13 Case Hypothetical: Carter Morley and Erena Erickson live side by side in town homes joined together by a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a painter, Tom Sizemore, having selected his name from the classified section of the phone directory. Morley describes his address, the physical dimensions and structure of his home, and he agrees with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will only take one day to complete. Morley advises that although he will have to work a fourteen-hour day on Friday, he would like to have the work completed in his absence. In passing conversation with his neighbor Erickson, Morley advises her of his “home improvement” plans. Early Friday morning, Sizemore and his team arrive at the address, but by mistake, they begin work on Erickson’s side of building. Although Erena is home, she does not object to the work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them fresh-squeezed lemonade and ham sandwiches, and they heartily accept. Upon completion of the work at 7:00 p.m. Friday evening, Sizemore knocks on Erena’s door and asks if “the man of the home” is present, that he would like Morley to review the work and pay the agreed-upon price for the work. Erena chuckles, and “breaks the news” that the painting crew has made a mistake, one to her benefit. Erickson proclaims “I do not owe you one dime, because you do not have a contract with me; I will give you ten minutes to remove yourself and your materials from my property, or I will call the police.” Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?
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Contract (Definition):
A legally enforceable agreement
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A contract is defined as a legally enforceable agreement.
Elements Required For Contract Formation
- Agreement (Offer and Acceptance)
- Mutual Consideration (Value Given By Both Parties)
- Legal Purpose and Subject Matter (Object)
- Legal Capacity (Ability to Understand Terms and Nature of Contract; legal ability to enter into binding contract)
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Elements required for contract formation include an agreement (represented by a valid offer and a valid acceptance,) mutual consideration (meaning that both parties must give value in order to support the enforceability of the agreement,) lawful purpose and subject matter, and legal capacity (which is the ability to understand the terms and nature of the contract; as well as the legal ability to enter into a binding contract.)
Defenses to Enforcement of Contract
- Lack of genuine assent (fraud, duress, undue influence, misrepresentation)
- Lack of proper form requirements (statute of frauds writing requirement)
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Defenses to the enforceability of a contract include the lack of genuine assent as a result of fraud, duress, undue influence, or misrepresentation, and lack of proper form requirements, usually indicating non-compliance with the statute of frauds, a rule of law requiring that certain types of contracts be in writing in order to be enforceable.
The Objective Theory of Contracts
- Existence and interpretation of contract based on outward manifestations of intent by parties (objective, “reasonable person” standard of contract formation and interpretation)
- Subjective (individual) intent generally irrelevant
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Courts generally use the objective theory of contract interpretation, meaning that the existence and interpretation of a contract will be based on outward manifestations of intent by the parties. This is an objective, “reasonable person” standard of contract formation and interpretation; subjective, or individual, intent is generally irrelevant.
Sources of Contract Law
- State common law
- The Uniform Commercial Code (Article 2)
- Governs contracts for the sale of goods
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Sources of contract law include state common law, as well as Article 2 of the Uniform Commercial Code, which governs contracts for the sale of goods.
Classification of Contracts:
Bilateral or Unilateral
- “Bilateral” Contract: Exchange of promises
- “Unilateral” Contract: Promise in return for performance of act
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Contracts can be classified as either “bilateral” or “unilateral.” A bilateral contract involves an exchange of promises between contracting parties, while a unilateral contract involves the exchange of a promise in return for the performance of an act.
Classification of Contracts:
Express or Implied
- “Express” Contract: Based on written or spoken words
- “Implied” Contract: Based on conduct or actions
- “Quasi-Contract” (“Implied-in-law” contract): Imposed in certain cases to avoid unjust enrichment, even if all elements of contract formation not satisfied
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Contracts can be classified as “express” or “implied.” An express contract is based on written or spoken words, while an implied contract is based on the conduct or actions of the parties. A “quasi-contract,” also referred to as an “implied-in-law” contract, is imposed in certain cases to avoid unjust enrichment, even if all elements of contract formation are not satisfied.
Classification of Contracts:
Valid, Void, or Voidable
- “Valid” Contract: All elements of contract formation satisfied
- “Void” Contract: Illegal purpose/subject matter; unenforceable
- “Voidable” Contract: One or both parties can withdraw from contract
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Contracts can be classified as “valid,” “void,” or “voidable.” In a valid contract, all elements of contract formation have been satisfied. A void contract involves an illegal purpose and/or subject matter, and is therefore unenforceable. A voidable contract allows one or both parties to withdraw legally from the contract.
Classification of Contracts:
Executed or Executory
- “Executed” Contract: All terms of contract fully performed
- “Executory” Contract: Some duties under contract not performed by one/both parties
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Contracts can be classified as “executed” or “executory.” An executed contract means that all terms of the contract have been fully performed. With an executory contract, some duties under the contract have not been performed by one or both parties.
Classification of Contracts:
Formal or Informal
- “Formal” Contract: Must meet special form requirements
- Examples: Contracts under seal, “recognizances,” letters of credit, and negotiable instruments
- “Informal” Contract: No formalities required in making; a “simple” contract
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Contracts can be classified as “formal” or “informal.” A formal contract must meet special form requirements. Examples of formal contracts include contracts under seal, “recognizances,” letters of credit, and negotiable instruments. An informal contract requires no formalities; it is a “simple” contract.
Interpretation of Contracts
- Contract interpreted to give effect to parties’ intentions at time they entered into contract
- If multiple interpretations possible, adopt interpretation that would make contract lawful, operative, definite, reasonable, and capable of being effected
- If contract contains ambiguity, judge should interpret it against interests of drafter
- Handwritten provisions prevail over preprinted terms
- Numbers written in words prevail over numerals
- Specific terms prevail over general terms
- Technical words are generally interpreted in accordance with industry standard
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Various rules of contract interpretation are available to a court in determining the rights and liabilities of contracting parties. For example, a contract is usually interpreted to give effect to the parties’ intentions at the time they entered into the contract. If multiple interpretations are possible, the court will interpret the contract in terms of making it lawful, operative, definite, reasonable, and capable of being effected. In the event of contractual ambiguity, the judge should interpret it against the interests of the drafter. Handwritten provisions generally prevail over preprinted terms, and numbers written in words generally prevail over numerals. Specific terms prevail over general terms, and technical words are generally interpreted in accordance with industry standards.