Contracts or Property IRAC Case Brief
CHAPTER 9 Formation and Requirements of Contracts
House for Sale
The owner of this house has offered the house for sale. The owner’s offer lists the price and other terms that the owner wishes to be met before he will sell the house. An interested buyer can purchase the house by agreeing to those terms. Most likely, however, the interested buyer will make a counteroffer whereby she offers a lower price or possibly other terms that she wants met before she is obligated to purchase the house. If the parties eventually come to a mutual agreement about a price and other terms, a contract has been formed. There has been an offer and an acceptance, therefore creating an enforceable contract. Consideration has been paid by both parties: The seller has sold his property—the house—and the buyer paid money.
Learning Objectives
After studying this chapter, you should be able to:
1. Define contract and list the elements necessary to form valid traditional contracts and e-contracts.
2. Describe and distinguish among valid, void, voidable, and unenforceable contracts.
3. Describe offer, acceptance, and consideration.
4. Identify illegal contracts that are contrary to statutes and that violate public policy.
5. Describe e-commerce and define e-contract.
Chapter Outline
1. Introduction to Formation and Requirements of Contracts
3. Classifications of Contracts
1. ETHICS • Implied-in-Fact Contract Prevents Unjust Result
4. Agreement
1. CASE 9.1 • Facebook, Inc. v. Winklevoss
3. BUSINESS ENVIRONMENT • Option Contract
7. Legality
1. CASE 9.4 • Ford Motor Company v. Ghreiwati Auto
2. CASE 9.5 • Lin v. Spring Mountain Adventures, Inc.
9. E-Commerce
1. DIGITAL LAW • Electronic Contracts and Licenses
2. GLOBAL LAW • Contract Law in China
“ The movement of the progressive societies has hitherto been a movement from status to contract.”
—Sir Henry Maine Ancient Law, Chapter 5 (1861)
Introduction to Formation and Requirements of Contracts
Contracts are voluntarily entered into by parties. The terms of a contract become private law between the parties. One court has stated that “the contract between parties is the law between them and the courts are obliged to give legal effect to such contracts according to the true interests of the parties.” 1
Most contracts are performed without the aid of the court system. This is usually because the parties feel a moral duty to perform as promised. Although some contracts, such as illegal contracts, are not enforceable, most are legally enforceable . 2 Thus, if a party fails to perform a contract, the other party may call on the courts to enforce the contract.
legally enforceable contract
A contract in which, if one party fails to perform as promised, the other party can use the court system to enforce the contract and recover damages or other remedy.
A contract is a mutual promise.
William Paley
The Principles of Moral and Political Philosophy (1784)
E-commerce has become a large part of commerce and trade. Goods are sold over the Internet through commercial and other websites, using e-contracts, and parties agree to e-licenses over the Internet. In addition, e-contracts can be formed by use of e-mail. Contract law has had to develop to handle issues involving e-commerce, e-contracts, and e-licenses.
This chapter introduces the study of contract law, the formation of contracts, and the elements of a contract. Topics such as the definition of contract, offer and acceptance, consideration, capacity to contract, lawfulness of contracts, and e-commerce and e-contracts are discussed in this chapter.
Definition of a Contract
A contract is an agreement that is enforceable by a court of law or equity. A simple and widely recognized definition of contract is provided by the Restatement (Second) of Contracts: “A contract is a promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty.” 3
contract
According to the Restatement (Second) of Contracts, “A promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty.”
Parties to a Contract
Every contract involves at least two parties. The offeror is the party who makes an offer to enter into a contract. The offeree is the party to whom the offer is made (see Exhibit 9.1 ). In making an offer, the offeror promises to do—or to refrain from doing—something. The offeree then has the power to create a contract by accepting the offeror’s offer. A contract is created if the offer is accepted. No contract is created if the offer is not accepted.
offeror
The party who makes an offer to enter into a contract.
offeree
The party to whom an offer to enter into a contract is made.
Exhibit 9.1 Parties to a Contract
Example
Ross makes an offer to Elizabeth to sell his automobile to her for $10,000. In this case, Ross is the offeror and Elizabeth is the offeree.
Elements of a Contract
For a contract to be enforceable, the following four basic requirements must be met:
agreement
The manifestation by two or more persons of the substance of a contract.
offer
“The manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it” (Section 24 of the Restatement (Second) of Contracts).
acceptance
“A manifestation of assent by the offeree to the terms of the offer in a manner invited or required by the offer as measured by the objective theory of contracts” (Section 50 of the Restatement (Second) of Contracts).
consideration
Something of legal value given in exchange for a promise.
The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed.
Cardozo, Justice
Wood v. Duff-Gordon, 222 N.Y. 88, 91 (1917)
1. Agreement. To have an enforceable contract, there must be an agreement between the parties. This requires an offer by the offeror and an acceptance of the offer by the offeree. There must be mutual assent by the parties.
2. Consideration. A promise must be supported by a bargained-for consideration that is legally sufficient. Money, personal property, real property, provision of services, and the like, qualify as consideration.
3. Contractual capacity. The parties to a contract must have contractual capacity for the contract to be enforceable against them. Contracts cannot be enforced against parties who lacked contractual capacity when they entered into the contracts.
4. Lawful object. The object of a contract must be lawful. Most contracts have a lawful object . However, contracts that have an illegal object are void and cannot be enforced.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
Lewis Carroll
Alice’s Adventures in Wonderland (1865)
Defenses to the Enforcement of a Contract
Two defenses may be raised to the enforcement of contracts:
1. Genuineness of assent. The consent of the parties to create a contract must be genuine . If the consent is obtained by duress, undue influence, or fraud, there is no real consent.
2. Writing and form. The law requires that certain contracts be in writing or in a certain form. Failure of such a contract to be in writing or to be in proper form may be raised against the enforcement of the contract.
The requirements to form an enforceable contract and the defenses to the enforcement of contracts are discussed in this chapter and the following chapter.
Classifications of Contracts
There are several types of contracts. Each differs somewhat in formation, enforcement, performance, and discharge. The different types of contracts are discussed in the following paragraphs.
Bilateral and Unilateral Contracts
Contracts are either bilateral or unilateral, depending on what the offeree must do to accept the offeror’s offer. The language of the offeror’s promise must be carefully scrutinized to determine whether it is an offer to create a bilateral or a unilateral contract. If there is any ambiguity as to which it is, it is presumed to be a bilateral contract.
A contract is a bilateral contract if the offeror’s promise is answered with the offeree’s promise of acceptance. In other words, a bilateral contract is a “promise for a promise.” This exchange of promises creates an enforceable contract. No act of performance is necessary to create a bilateral contract.
bilateral contract
A contract entered into by way of exchange of promises of the parties; “a promise for a promise.”
Example
Mary, the owner of the Chic Dress Shop, says to Peter, a painter, “If you promise to paint my store by July 1, I will pay you $3,000.” Peter says, “I promise to do so.” A bilateral contract was created at the moment Peter promised to paint the dress shop (a promise for a promise). If Peter fails to paint the shop, Mary can sue Peter and recover whatever damages result from his breach of contract. Similarly, Peter can sue Mary if she refuses to pay him after he has performed as promised.
A contract is a unilateral contract if the offeror’s offer can be accepted only by the performance of an act by the offeree. There is no contract until the offeree performs the requested act. An offer to create a unilateral contract cannot be accepted by a promise to perform. It is a “promise for an act.”
New York City
New York City is the largest city in the United States. It is an international center of business, commerce, industry, and finance. Commerce in New York City and worldwide relies on business contracts. Contracts are the basis of many of our daily activities. They provide the means for individuals and businesses to sell and otherwise transfer property, services, and other rights. The purchase of goods is based on sales contracts; the hiring of employees is based on service contracts; the lease of an apartment, office, and commercial buildings is based on rental contracts; and the sale of goods and services over the Internet is based on electronic contracts. The list is almost endless. Without enforceable contracts, commerce would collapse.
unilateral contract
A contract in which the offeror’s offer can be accepted only by the performance of an act by the offeree; a “promise for an act.”
Example
Mary, the owner of the Chic Dress Shop, says to Peter, a painter, “If you paint my shop by July 1, I will pay you $3,000.” This offer creates a unilateral contract. The offer can be accepted only by the painter’s performance of the requested act. If Peter does not paint the shop by July 1, there has been no acceptance, and Mary cannot sue Peter for damages. If Peter paints the shop by July 1, Mary owes Peter $3,000. If Mary refuses to pay, Peter can sue Mary to collect payment.
Problems can arise if the offeror in a unilateral contract attempts to revoke an offer after the offeree has begun performance. Generally, an offer to create a unilateral contract can be revoked by the offeror any time prior to the offeree’s performance of the requested act. However, the offer cannot be revoked if the offeree has begun or has substantially completed performance.
formal contract
A contract that requires a special form or method of creation.
Contracts must not be the sports of an idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatever.
Lord Stowell
Dalrymple v. Dalrymple (1811)
Example
Suppose Alan Matthews tells Sherry Levine that he will pay her $5,000 if she finishes the Boston Marathon. Alan cannot revoke the offer once Sherry starts running the marathon.
Formal and Informal Contracts
Contracts may be classified as either formal or informal. Formal contracts are contracts that require a special form or method of creation. Many formal contracts require specific words. The most common forms of formal contracts are the negotiable instrument (e.g., a check needs the words “Pay to the order of”), letter of credit (e.g., a bank guarantees the payment by a buyer who purchases goods on credit from a seller if the buyer does not pay for the goods), a recognizance where someone agrees to pay a sum of money if another person does not pay it (e.g., a bail bond), and contract under seal (e.g., a wax seal is placed on the contract).
All contracts that do not qualify as formal contracts are called informal contracts (or simple contracts ). The term is a misnomer. Valid informal contracts (e.g., leases, sales contracts, service contracts) are fully enforceable and may be sued on if breached. They are called informal contracts only because no special form or method is required for their creation. Thus, the parties to an informal contract can use any words they choose to express their contract. The majority of the contracts entered into by individuals and businesses are informal contracts.
informal contract (simple contract)
A contract that is not formal. Valid informal contracts are fully enforceable and may be sued upon if breached.
Valid, Void, Voidable, and Unenforceable Contracts
Contract law places contracts in the following categories:
valid contract
A contract that meets all the essential elements to establish a contract; a contract that is enforceable by at least one of the parties.
void contract
A contract that has no legal effect; a nullity.
voidable contract
A contract in which one or both parties have the option to void their contractual obligations. If a contract is voided, both parties are released from their contractual obligations.
unenforceable contract
A contract in which the essential elements to create a valid contract are met but there is some legal defense to the enforcement of the contract.
1. Valid contract. A valid contract meets all the essential elements to establish a contract. In other words, it (1) consists of an agreement between the parties, (2) is supported by legally sufficient consideration, (3) is between parties with contractual capacity, and (4) accomplishes a lawful object. A valid contract is enforceable by at least one of the parties.
Example
Helen enters into a written contract to purchase a house from Marilyn for $1 million. There is legal consideration—a house in exchange for $1 million—and the object of the contract is lawful. Both Helen and Marilyn have contractual capacity. In this case, there is a valid contract. If either party fails to perform the contract when due, the other party can sue to enforce the contract against the breaching party.
2. Void contract. A void contract has no legal effect. It is as if no contract had ever been created. A contract to commit a crime is void. If a contract is void, then neither party is obligated to perform the contract and neither party can enforce the contract.
Example
Harold and Melville enter into a contract to burglarize University Bank and steal the money on deposit at the bank. If Harold refuses to perform the contract—that is, he refuses to participate in the burglary—Melville cannot sue Harold to perform the contract.
3. Voidable contract. A voidable contract is a contract in which at least one party has the option to void his or her contractual obligations. If the contract is voided, both parties are released from their obligations under the contract. If the party with the option chooses to ratify the contract, both parties must fully perform their obligations. With certain exceptions, contracts may be voided by minors; insane persons; intoxicated persons; and persons acting under duress, undue influence, or fraud; and in cases involving mutual mistake.
Example
Ida, an adult, enters into a contract with Spencer, who is 16 years old and a minor, to purchase an automobile owned by Spencer. This is a voidable contract because Spencer, the minor, can get out of the contract, but Ida, the adult, cannot get out of the contract.
4. Unenforceable contract. With an unenforceable contract , there is some legal defense to the enforcement of the contract. If a contract is required to be in writing under the Statute of Frauds but is not in writing, the contract is unenforceable. The parties may voluntarily perform a contract that is unenforceable.
Example
Elliot and Sarah enter into an oral contract whereby Elliot will sell his house to Sarah for $1 million. Because this is a contract for the sale of real estate, it is required to be in writing. Because it is an oral contract, however, neither Elliot nor Sarah can sue the other for not performing the contract. However, if Elliot and Sarah complete the contract—that is Elliot signs over the deed to his house to Sarah, and Sarah pays Elliot $1 million—the contract is performed, and neither party can undo the contract.
Executory and Executed Contracts
A contract that has not been performed by both sides is called an executory contract . Contracts that have been fully performed by one side but not by the other are classified as executory contracts.
executory contract
A contract that has not been fully performed by either or both sides.
Examples
Suppose Elizabeth signs a contract to purchase a new BMW automobile from Ace Motors. She has not yet paid for the car, and Ace Motors has not yet delivered the car to Elizabeth. This is an executory contract because the contract has not yet been performed. If Elizabeth has paid for the car but Ace Motors has not yet delivered the car to Elizabeth, there is an executory contract because Ace Motors has not performed the contract.
A completed contract—that is, one that has been fully performed on both sides—is called an executed contract .
executed contract
A contract that has been fully performed on both sides; a completed contract.
Example
If Elizabeth has paid for the car in the prior example and Ace Motors has delivered the car to Elizabeth, the contract has been fully performed by both parties and is an executed contract.
Express and Implied-in-Fact Contracts
An actual contract may be either express or implied-in-fact. These contracts are described in the following paragraphs.
An express contract is stated in oral or written words. Most personal and business contracts are express contracts.
express contract
An agreement that is expressed in written or oral words.
Examples
A written agreement to buy an automobile from a dealership is an express contract because it is in written words. An oral agreement to purchase a neighbor’s bicycle is an express contract because it is in oral words.
An implied-in-fact contract is implied from the conduct of the parties. The following elements must be established to create an implied-in-fact contract: (1) The plaintiff provided property or services to the defendant, (2) the plaintiff expected to be paid by the defendant for the property or services and did not provide the property or services gratuitously, and (3) the defendant was given an opportunity to reject the property or services provided by the plaintiff but failed to do so.
implied-in-fact contract
A contract in which agreement between parties has been inferred from their conduct.
In the following case, the court had to decide whether there was an implied-in-fact contract.
Ethics Implied-in-Fact Contract Prevents Unjust Result
“The appellants produced sufficient evidence to create a genuine issue of material fact regarding whether an implied-in-fact contract existed between the parties.”
—Graham, Circuit Judge
Thomas Rinks and Joseph Shields created the Psycho Chihuahua cartoon character, which they promote, market, and license through their company, Wrench LLC. Psycho Chihuahua is a clever, feisty cartoon character dog with an attitude, a self-confident, edgy, cool dog who knows what he wants and will not back down. Rinks and Shields attended a licensing trade show in New York City, where they were approached by two Taco Bell employees, Rudy Pollak, a vice president, and Ed Alfaro, a creative services manager. Taco Bell owns and operates a nationwide chain of fast-food Mexican restaurants. Pollak and Alfaro expressed interest in the Psycho Chihuahua character for Taco Bell advertisements because they thought his character would appeal to Taco Bell’s core consumers, males ages 18 to 24. Pollak and Alfaro obtained some Psycho Chihuahua materials to take back with them to Taco Bell’s headquarters.
Later, Alfaro contacted Rinks and asked him to create art boards combining Psycho Chihuahua with the Taco Bell name and image. Rinks and Shields prepared art boards and sent them to Alfaro, along with Psycho Chihuahua T-shirts, hats, and stickers. Rinks suggested to Alfaro that Taco Bell should use a live Chihuahua dog manipulated by computer graphic imaging that had the personality of Psycho Chihuahua and a love for Taco Bell food. Rinks and Shields gave a formal presentation of their concept of using an animated dog to Taco Bell’s marketing department. Taco Bell would not enter into an express contract with Wrench LLC, Rinks, or Shields.
Just after Rinks and Shields’s presentation, Taco Bell hired a new outside advertising agency, Chiat/Day. Taco Bell gave Chiat/Day materials received from Rinks and Shields regarding Psycho Chihuahua. Three months later, Chiat/Day proposed using a Chihuahua in Taco Bell commercials. Taco Bell aired its Chihuahua commercials in the United States, and they became an instant success and the basis of its advertising. Chiat/Day says that it conceived the advertising idea by itself. Taco Bell paid nothing to Wrench LLC or to Rinks and Shields. Plaintiffs Wrench LLC, Rinks, and Shields sued defendant Taco Bell to recover damages for breach of an implied-in-fact contract.
A federal court jury found that an implied-in-fact contract existed and that Taco Bell stole the plaintiffs’ idea for the commercial. The jury ordered Taco Bell to pay $42 million in damages to the plaintiffs. Wrench LLC v. Taco Bell Corporation, 256 F.3d 446, 2001 U.S. App. Lexis 15097 (United States Court of Appeals for the Sixth Circuit, 2001)
Ethics Questions
1. Did Taco Bell act ethically in this case? Did Chiat/Day act ethically in this case?
Implied-in-Law Contract (Quasi Contract)
The equitable doctrine of implied-in-law contract , also called quasi contract, allows a court to award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed between the parties. Recovery is generally based on the reasonable value of the services received by the defendant.
implied-in-law contract (quasi contract)
An equitable doctrine whereby a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed. The doctrine is intended to prevent unjust enrichment and unjust detriment.
The doctrine of quasi contract is intended to prevent unjust enrichment and unjust detriment. It does not apply where there is an enforceable contract between the parties. A quasi contract is imposed where (1) one person confers a benefit on another, who retains the benefit, and (2) it would be unjust not to require that person to pay for the benefit received.
Example
Heather is driving her automobile when she is involved in a serious accident in which she is knocked unconscious. She is rushed to Metropolitan Hospital, where the doctors and other staff members perform the necessary medical procedures to save her life. Heather comes out of her coma and, after recovering, is released from the hospital. Subsequently, Metropolitan Hospital sends Heather a bill for its services. The charges are reasonable. Under the doctrine of quasi contract, Heather is responsible for any charges that are not covered by her insurance.
CONCEPT SUMMARY Classifications of Contracts
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Formation |
1. Bilateral contract. A promise for a promise. 2. Unilateral contract. A promise for an act. 3. Express contract. A contract expressed in oral or written words. 4. Implied-in-fact contract. A contract inferred from the conduct of the parties. 5. Implied-in-law contract (quasi contract). A contract implied by law to prevent unjust enrichment. 6. Formal contract. A contract that requires a special form or method of creation. 7. Informal contract. A contract that requires no special form or method of creation. |
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Enforceability |
1. Valid contract. A contract that meets all the essential elements of establishing a contract. 2. Void contract. No contract exists. 3. Voidable contract. A contract in which at least one party has the option of voiding the contract. 4. Unenforceable contract. A contract that cannot be enforced because of a legal defense. |
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Performance |
1. Executed contract. A contract that is fully performed on both sides. 2. Executory contract. A contract that is not fully performed by one or both parties. |
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Agreement
Agreement is the manifestation by two or more persons of the substance of a traditional or e-contract. It requires an offer and an acceptance. Often, prior to entering into a contract, the parties engage in preliminary negotiations about price, time of performance, and such. At some point, one party makes an offer to the other party. The person who makes the offer is called the offeror, and the person to whom the offer is made is called the offeree. The offer sets forth the terms under which the offeror is willing to enter into the contract. The offeree has the power to create an agreement by accepting the offer.
Requirements of an Offer
Section 24 of the Restatement (Second) of Contracts defines an offer as “the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” Three elements are required for an offer to be effective: (1) The offeror must objectively intend to be bound by the offer, (2) the terms of the offer must be definite or reasonably certain, and (3) the offer must be communicated to the offeree.
objective theory of contracts
A theory stating that the intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties.
The terms of an offer must be clear enough for the offeree to be able to decide whether to accept or reject the terms of the offer. If the terms are indefinite, the courts usually cannot enforce the contract or determine an appropriate remedy for its breach. Generally, an offer (and contract) must contain the following terms: (1) identification of the parties, (2) identification of the subject matter and quantity, (3) consideration to be paid, and (4) time of performance. Complex contracts usually state additional terms. The making of an offer is shown in Exhibit 9.2 .
Exhibit 9.2 Offer
Critical Legal Thinking
1. Why is the objective theory of contracts applied in determining whether a contract has been created? Why is the subjective intent of the parties not considered?
Objective Intent
The intent to enter into a contract is determined using the objective theory of contracts —that is, whether a reasonable person viewing the circumstances would conclude that the parties intended to be legally bound.
Example
The statement “I will buy your building for $2 million” is a valid offer because it indicates the offeror’s present intent to contract.
Example
A statement such as “Are you interested in selling your building for $2 million?” is not an offer. It is an invitation to make an offer or an invitation to negotiate.
Offers that are made in jest, anger, or undue excitement do not include the necessary objective intent.
Example
The owner of Company A has lunch with the owner of Company B. In the course of their conversation, Company A’s owner exclaims in frustration, “For $200, I’d sell the whole computer division!” An offer such as that cannot result in a valid contract.
In the following case, the court enforced a contract.
CASE 9.1 FEDERAL COURT CASE Contract Facebook, Inc. v. Winklevoss
640 F.3d 1034, 2011 U.S. App. Lexis 7430 (2011) United States Court of Appeals for the Ninth Circuit
“At some point, litigation must come to an end. That point has now been reached.”
—Kozinski, Circuit Judge
Facts
Mark Zuckerberg, Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra were schoolmates at Harvard University. The Winklevoss twins, along with Narendra, started a company called ConnectU. They alleged that Zuckerberg stole their idea and created Facebook, and in a lawsuit they filed claims against Facebook and Zuckerberg. The court ordered the parties to mediate their dispute. After a day of negotiations, the parties signed a handwritten, one-and-one-third-page “Term Sheet & Settlement Agreement.” In the agreement, the Winklevosses agreed to give up their claims in exchange for cash and Facebook stock. The Winklevosses were to receive $20 million in cash and $45 million of Facebook stock, valued at $36 per share.
The parties stipulated that the settlement agreement was confidential and binding and “may be submitted into evidence to enforce it.” The agreement granted all parties mutual releases. The agreement stated that the Winkelvosses represented and warranted that “they have no further right to assert against Facebook” and have “no further claims against Facebook and its related parties.” Facebook became an extremely successful social networking site, with its value exceeding over $30 billion at the time the next legal dispute arose.
Subsequently, in a lawsuit, the Winklevosses brought claims against Facebook and Zuckerberg, alleging that Facebook and Zuckerberg had engaged in fraud at the time of forming the settlement agreement. The Winklevosses alleged that Facebook and Zuckerberg had misled them into believing that Facebook shares were worth $36 per share at the time of settlement, when in fact an internal Facebook document valued the stock at $8.88 per share for tax code purposes. The Winklevosses sought to rescind the settlement agreement. The U.S. district court enforced the settlement agreement. The Winklevosses appealed.
Issue
Is the settlement agreement enforceable?
Language of the Court
The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world’s fastest-growing companies. They brought half-a-dozen lawyers to the mediation. When adversaries in a roughly equivalent bargaining position and with ready access to counsel sign an agreement to “establish a general peace,” we enforce the clear terms of the agreement.
There are also very important policies that favor giving effect to agreements that put an end to the expensive and disruptive process of litigation. For whatever reason, the Winklevosses now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.
Decision
The U.S. court of appeals upheld the decision of the U.S. district court that enforced the settlement agreement.
Ethics Questions
1. Should the Winklevosses have had their claims of fraud decided by the court? Did anyone act unethically in this case?
Auctions
In an auction , the seller offers goods for sale through an auctioneer. Unless otherwise expressly stated, an auction is considered an auction with reserve —that is, it is an invitation to make an offer. The seller retains the right to refuse the highest bid and withdraw the goods from sale. A contract is formed only when the auctioneer strikes the gavel down or indicates acceptance by some other means. The bidder may withdraw his or her bid prior to that time.
auction with reserve
An auction in which the seller retains the right to refuse the highest bid and withdraw the goods from sale. Unless expressly stated otherwise, an auction is an auction with reserve.
Example
If an auction is an auction with reserve and an item is offered at $100,000, but the highest bid is $75,000, the auctioneer does not have to sell the item.
If an auction is expressly announced to be an auction without reserve , the participants reverse the roles: The seller is the offeror, and the bidders are the offerees. The seller must accept the highest bid and cannot withdraw the goods from sale. However, if the auctioneer has set a minimum bid that it will accept, the auctioneer has to sell the item only if the highest bid is equal to or greater than the minimum bid.
auction without reserve
An auction in which the seller expressly gives up his or her right to withdraw the goods from sale and must accept the highest bid.
Termination of an Offer
An offer may be terminated by certain acts of the parties. The acts of the parties that terminate an offer are:
revocation
Withdrawal of an offer by the offeror that terminates the offer.
rejection
Express words or conduct by the offeree to reject an offer. Rejection terminates the offer.
counteroffer
A response by an offeree that contains terms and conditions different from or in addition to those of the offer. A counteroffer terminates the previous offer.
· Revocation of an offer by the offeror. Under the common law, an offeror may revoke (i.e., withdraw) an offer any time prior to its acceptance by the offeree. Generally, an offer can be so revoked even if the offeror promised to keep the offer open for a longer time. The revocation may be communicated to the offeree by the offeror or by a third party and made by (1) the offeror’s express statement (e.g., “I hereby withdraw my offer”) or (2) an act of the offeror that is inconsistent with the offer (e.g., selling the goods to another party). Generally, a revocation of an offer is not effective until it is actually received by the offeree.
· Rejection of an offer by the offeree. An offer is terminated if the offeree rejects it. Any subsequent attempt by the offeree to accept the offer is ineffective and is construed as a new offer that the original offeror (now the offeree) is free to accept or reject. A rejection may be evidenced by the offeree’s express words (oral or written) or conduct. Generally, a rejection of an offer is not effective until it is actually received by the offeror.
· Counteroffer by the offeree. A counteroffer by the offeree simultaneously terminates the offeror’s offer and creates a new offer. Offerees’ making of counteroffers is the norm in many transactions. A counteroffer terminates the existing offer and puts a new offer into play. The previous offeree becomes the new offeror, and the previous offeror becomes the new offeree. Generally, a counteroffer is not effective until it is actually received by the offeror.
Example
Fei says to Harold, “I will sell you my house for $700,000.” Harold says, “I think $700,000 is too high; I will pay you $600,000.” Harold has made a counteroffer. Fei’s original offer is terminated, and Harold’s counteroffer is a new offer that Fei is free to accept or reject.
The following case involves the issue of a counteroffer.
CASE 9.2 STATE COURT CASE Counteroffer Ehlen v. Melvin
823 N.W.2d 780, 2012 N.D. Lexis 252 (2012) Supreme Court of North Dakota
“The parties’ mutual assent is determined by their objective manifestations, not their secret intentions.”
—Kapsner, Justice
Facts
Paul Ehlen signed a document titled “Purchase Agreement” (Agreement) offering to purchase real estate owned by John M. and LynnDee Melvin (the Melvins) for $850,000, with closing to be within twelve days. Two days after the offer was made by Ehlen, the Melvins modified the terms of the Agreement by correcting the spelling of LynnDee Melvin’s name and the description of the property, adding that the property was to be sold “as is,” that the mineral rights conveyed by the Melvins were limited to the rights that they owned, and that the property was subject to a federal wetland easement and an agricultural lease. The Melvins handwrote all of the changes on the Agreement, initialed each change, signed the Agreement, and returned it to Ehlen. When the Melvins had not heard from Ehlen on the date of the proposed closing, they notified Ehlen that the transaction was terminated. Ehlen sued the Melvins to enforce the Purchase Agreement as modified by them, alleging that there was a binding and enforceable contract. The trial court held that the Melvins had made a counteroffer that had not been accepted by Ehlen, and therefore there was no contract. Ehlen appealed.
Issue
Was a counteroffer made by the Melvins that was accepted by Ehlen?
Language of the Court
The parties’ mutual assent is determined by their objective manifestations, not their secret intentions. We conclude the evidence supports the court’s finding that the parties did not agree to the essential terms of the agreement and the Melvins’ modifications to the agreement constituted a counteroffer. Ehlen argues he accepted any counteroffer the Melvins made. It is a general rule that silence and inaction do not constitute an acceptance of the offer. Ehlen did not sign the modified agreement or initial the changes. The evidence supports the court’s finding that Ehlen did not accept the Melvins’ counteroffer.
Decision
The supreme court of North Dakota held that no agreement existed between Ehlen and the Melvins.
Ethics Questions
1. Did Ehlen act ethically in trying to enforce the purported contract? What would be the consequence if silence were considered acceptance?
An offer expires at the lapse of time of an offer. An offer may state that it is effective only until a certain date. Unless otherwise stated, the time period begins to run when the offer is actually received by the offeree and terminates when the stated time period expires. If no time is stated in an offer, the offer terminates after a “reasonable time,” dictated by the circumstances.
lapse of time
A stated time period after which an offer terminates. If no time is stated, an offer terminates after a reasonable time.
Examples
If an offer states, “This offer is good for 10 days,” the offer expires at midnight of the 10th day after the offer was made. If an offer states, “This offer must be accepted by January 1, 2017,” the offer expires at 11:59 p.m. on January 1, 2017.
The following feature discusses the use of an option contract to require that an offer be kept open for a specified period of time.
Business Environment Option Contract
An offeree can prevent the offeror from revoking his or her offer by paying the offeror compensation to keep the offer open for an agreed-on period of time. This creates what is called an option contract . In other words, the offeror agrees not to sell the property to anyone except the offeree during the option period. An option contract is a contract in which the original offeree pays consideration (usually money) in return for the original offeror giving consideration (time of the option period). The death or incompetency of either party does not terminate an option contract unless the contract is for the performance of a personal service.
Example
Anne offers to sell a piece of real estate to Hal for $1 million. Hal wants time to investigate the property for possible environmental problems and to arrange financing if he decides to purchase the property, so he pays Anne $20,000 to keep her offer open to him for six months. At any time during the option period, Hal may exercise his option and pay Anne the $1 million purchase price. If Hal lets the option expire, however, Anne may keep the $20,000 and sell the property to someone else. Often option contracts are written so that if the original offeree purchases the property, the option amount is applied to the sale price.
An offer can be terminated by operation of law. An offer is terminated by operation of law if, prior to the acceptance of the offer, one of the following events occur: (1) The subject matter of the offer is destroyed through no fault of either party, (2) either the offeror or the offeree dies or becomes incompetent, or (3) the object of the offer is made illegal by law.
Acceptance
Acceptance is “a manifestation of assent by the offeree to the terms of the offer in a manner invited or required by the offer as measured by the objective theory of contracts.” 4 Recall that generally (1) unilateral contracts can be accepted only by the offeree’s performance of the required act and (2) a bilateral contract can be accepted by an offeree who promises to perform (or, where permitted, by performance of) the requested act. The acceptance of an offer is illustrated in Exhibit 9.3 .
Exhibit 9.3 Acceptance of an Offer
An offeree’s acceptance must be unequivocal . For an acceptance to exist, the offeree must accept the terms as stated in the offer.
Example
Abraham says to Caitlin, “I will sell you my iPad for $300.” Caitlin says, “Yes, I will buy your iPad at that price.” This is an unequivocal acceptance that creates a contract.
Mirror Image Rule
For an acceptance to exist, the offeree must accept the terms as stated in the offer. This is called the mirror image rule . To meet this rule, the offeree must accept the terms of the offer without modification. Any attempt to accept the offer on different terms constitutes a counteroffer, which rejects the offeror’s offer.
legal value
Support for a contract when either (1) the promisee suffers a legal detriment or (2) the promisor receives a legal benefit.
Critical Legal Thinking
1. What is the mirror image rule? Why is this rule applied strictly in determining whether a contract has been made?
mirror image rule
A rule stating that, for an acceptance to exist, the offeree must accept the terms as stated in the offer.
Examples
A seller offers to sell a specific automobile she owns for $30,000. The automobile is a certain brand, model, year, color, and condition. The automobile contains a radio. A buyer accepts the exact terms of the offer. Under the mirror image rule, a contract has been created. On the other hand, if the potential buyer agrees to all of the terms of the seller’s offer but demands that an XM satellite radio be installed to replace the regular radio and that a five-year subscription be paid for the satellite service, the mirror image rule has not been met, and no contract is created.
Mailbox Rule
Under the common law of contracts, acceptance of a bilateral contract occurs when the offeree dispatchesthe acceptance by an authorized means of communication. This rule is called the acceptance-upon-dispatch rule or, more commonly, the mailbox rule. An acceptance must be properly addressed, packaged in an appropriate envelope or container, and have prepaid postage or delivery charges. Under common law, if an acceptance is not properly dispatched, it is not effective until it is actually received by the offeror.
acceptance-upon-dispatch rule (mailbox rule)
A rule stating that an acceptance is effective when it is dispatched, even if it is lost in transmission.
Generally, an offeree must accept an offer by an authorized means of communication . Most offers do not expressly specify the means of communication required for acceptance. The common law recognizes certain implied means of communication. Implied authorization may be inferred from what is customary in similar transactions, usage of trade, or prior dealings between the parties. Section 30 of the Restatement (Second) of Contracts permits implied authorization “by any medium reasonable in the circumstances.” Thus, in most circumstances, a party may send an acceptance by mail, overnight delivery service, fax, or e-mail.
An offer can stipulate that acceptance must be by a specified means of communication (e.g., registered mail, telegram). Such stipulation is called express authorization . If the offeree uses an unauthorized means of communication to transmit the acceptance, the acceptance is not effective, even if it is received by the offeror within the allowed time period, because the means of communication was a condition of acceptance.
Consideration
Consideration must be given before a contract can exist. Consideration is defined as something of legal value given in exchange for a promise. Consideration can come in different forms. The most common types consist of either a tangible payment (e.g., money, property) or the performance of an act (e.g., providing legal services). Less usual forms of consideration include the forbearance of a legal right (e.g., accepting an out-of-court settlement in exchange for dropping a lawsuit) and noneconomic forms of consideration (e.g., refraining from “drinking, using tobacco, swearing, or playing cards or billiards for money” 5 for a specified time period). Written contracts are presumed to be supported by consideration. This rebuttable presumption, however, may be overcome by sufficient evidence.
Consideration consists of two elements: (1) Something of legal value must be given (e.g., either a legal benefit must be received or legal detriment must be suffered) and (2) there must be a bargained-for exchange. Under the modern law of contracts, a contract is considered supported by legal value if (1) the promisee suffers a legal detriment or (2) the promisor receives a legal benefit. A contract must arise from a bargained-for exchange . The commercial setting in which business contracts are formed and the formation of most personal contracts usually involve a bargained-for exchange.
bargained-for exchange
Exchange that parties engage in that leads to an enforceable contract.
Gift Promise
Gift promises , also called gratuitous promises, are unenforceable because they lack consideration. To change a gift promise into an enforceable promise, the promisee must offer to do something in exchange—that is, in consideration—for the promise. Gift promises cause considerable trouble for persons who do not understand the importance of consideration.
gift promise (gratuitous promise)
A promise that is unenforceable because it lacks consideration.
Example
On May 1, Mrs. Colby promises to give her son $10,000 on June 1. When June 1 arrives, Mrs. Colby refuses to pay the $10,000. The son cannot recover the $10,000 because it was a gift promise that lacked consideration. If, however, Mrs. Colby promises to pay her son $10,000 if he earns an A in his business law course and the son earns the A, the contract is enforceable and the son can recover the $10,000.
Critical Legal Thinking
1. Why are gift promises unenforceable if they are not supported by consideration? Do you think that many gift promises are made without the parties realizing that the promise is unenforceable?
A completed gift promise cannot be rescinded for lack of consideration.
Example
On May 1, Mr. Smith promises to give his granddaughter $10,000 on June 1. If Mr. Smith actually gives the $10,000 to his granddaughter on or before June 1, it is a completed gift promise. Mr. Smith cannot thereafter recover the money from his granddaughter, even if the original promise lacked consideration.
The case that follows involves the issue of whether a giver can recover gifts that he made.
CASE 9.3 STATE COURT CASE Gifts and Gift Promises Cooper v. Smith
800 N.E.2d 372, 2003 Ohio App. Lexis 5446 (2003) Court of Appeals of Ohio
“Many gifts are made for reasons that sour with the passage of time. Unfortunately, gift law does not allow a donor to recover/revoke a gift simply because his or her reasons for giving it have soured.”
—Harsha, Judge
Facts
Lester Cooper suffered serious injuries that caused him to be hospitalized for an extended time period. While he was hospitalized, Julie Smith, whom Cooper had met the year before, and Janet Smith, Julie’s mother, made numerous trips to visit him. A romantic relationship developed between Cooper and Julie. While in the hospital, Cooper proposed marriage to Julie, and she accepted. Cooper ultimately received an $180,000 settlement for his injuries.
After being released from the hospital, Cooper moved into Janet’s house and lived with Janet and Julie. Over the next couple of months, Cooper purchased a number of items for Julie, including a diamond engagement ring, a car, a computer, a tanning bed, and horses. On Julie’s request, Cooper paid off Janet’s car. Cooper also paid for various improvements to Janet’s house, such as having a new furnace installed and having wood flooring laid in the kitchen.
Several months later, the settlement money had run out, and Julie had not yet married Cooper. About six months later, Julie and Cooper had a disagreement, and Cooper moved out of the house. Julie returned the engagement ring to Cooper. Cooper sued Julie and Janet to recover the gifts or the value of the gifts he had given them. The magistrate who heard the case dismissed Cooper’s case, and the trial court affirmed the dismissal of the case. Cooper appealed.
Issue
Can Cooper recover the gifts or the value of the gifts he gave to Julie and Janet Smith?
Language of the Court
Unless the parties have agreed otherwise, the donor is entitled to recover the engagement ring (or its value) if the marriage does not occur, regardless of who ended the engagement. Unlike the engagement ring, the other gifts have no symbolic meaning. Rather, they are merely “tokens of love and affection” which the donor bore for the donee. Many gifts are made for reasons that sour with the passage of time. Unfortunately, gift law does not allow a donor to recover/revoke a gift simply because his or her reasons for giving it have soured. Thus, the gifts are irrevocable gifts and Cooper is not entitled to their return.
Decision
The court of appeals held that the gifts made by Cooper to Julie (other than the engagement ring) and to Janet were irrevocable gifts that he could not recover simply because his engagement with Julie ended. The court of appeals affirmed the judgment of the trial court, allowing Julie and Janet Smith to keep these gifts.
Ethics Questions
1. Did Julie and Janet Smith act ethically in keeping the gifts Cooper had given them? Did Cooper act ethically in trying to get the gifts back?
Contracts That Lack Consideration
Some contracts seem as though they are supported by consideration even though they are not. These contracts lack consideration and are therefore unenforceable. Several types of contracts that fall into this category are contracts based on:
illegal consideration
A promise to refrain from doing an illegal act. Such a promise does not support a contract.
illusory promise (illusory contract)
A contract into which both parties enter but in which one or both of the parties can choose not to perform their contractual obligations. Thus, the contract lacks consideration.
preexisting duty
Something a person is already under an obligation to do. A promise lacks consideration if a person promises to perform a preexisting duty.
past consideration
A prior act or performance. Past consideration (e.g., prior acts) do not support a new contract. New consideration must be given.
· Illegal consideration. A contract cannot be supported by a promise to refrain from doing an illegal act because that is illegal consideration . Contracts based on illegal consideration are void.
Example
A person threatens a business owner, “I will burn your business down unless you agree to pay me $10,000.” Out of fear, the business owner promises to pay the money. This agreement is not an enforceable contract because the consideration given—not to burn a business—is illegal consideration. Thus, the extortionist cannot enforce the contract against the business owner.
· Illusory promise. If parties enter into a contract but one or both of the parties can choose not to perform their contractual obligations, the contract lacks consideration. Such promises, which are known as illusory promises (or illusory contracts ), are unenforceable.
Example
A contract that provides that one of the parties has to perform only if he or she chooses to do so is an illusory promise.
· Preexisting duty. A promise lacks consideration if a person promises to perform an act or do something he is already under an obligation to do. This is called a preexisting duty . The promise is unenforceable because no new consideration has been given.
Example
Statutes prohibit police officers from demanding money for investigating and apprehending criminals and prohibit firefighters from demanding payment for fighting fires. If a person agrees to such a demand, she does not have to pay it because public servants are under a preexisting duty to perform their functions.
· Past consideration. Problems of past consideration often arise when a party promises to pay someone money or other compensation for work done in the past. Past consideration is not consideration for a new promise; therefore, a promise based on past consideration is not enforceable.
Example
Felipe, who has worked in management for the Acme Corporation for thirty years, is retiring. The president of Acme says, “Because you were such a loyal employee, Acme will pay you a bonus of $100,000.” Subsequently, the corporation refuses to pay the $100,000. Unfortunately for Felipe, he has already done the work for which he has been promised to be paid. The contract is unenforceable against Acme because it is based on past consideration.
Capacity to Contract
Generally, the law presumes that the parties to a contract have the requisite contractual capacity to enter into the contract. Certain persons do not have this capacity, however, including minors, insane persons, and persons under the influence of alcohol or drugs. The common law of contracts and many state statutes protect persons who lack contractual capacity from having contracts enforced against them. The party asserting incapacity or his or her guardian, conservator, or other legal representative bears the burden of proof.
There is grim irony in speaking of freedom of contract of those who, because of their economic necessities, give their service for less than is needful to keep body and soul together.
Harlan Fiske Stone
Morehead v. N.Y. ex rel. Tipaldo
298 U.S. 587, 56 S.Ct. 918, 1936 U.S. Lexis 1044 (1936)
Infancy Doctrine
Minors do not always have the maturity, experience, or sophistication needed to enter into contracts with adults. Most states have enacted statutes that specify the age of majority . The most prevalent age of majority is 18 years of age for both males and females. Any age below the statutory age of majority is called the period of minority .
minor
A person who has not reached the age of majority.
To protect minors, the law recognizes the infancy doctrine , which gives minors the right to disaffirm (or cancel) most contracts they have entered into with adults. This right is based on public policy, which reasons that minors should be protected from the unscrupulous behavior of adults. Under the infancy doctrine, a minor has the option of choosing whether to enforce a contract (i.e., the contract is voidable by a minor). The adult party is bound to the minor’s decision. If both parties to a contract are minors, both parties have the right to disaffirm the contract.
infancy doctrine
A doctrine that allows minors to disaffirm (cancel) most contracts they have entered into with adults.
disaffirm
The act of a minor to rescind a contract under the infancy doctrine. Disaffirmance may be done orally, in writing, or by the minor’s conduct.
If a minor has transferred consideration—money, property, or other valuables—to a competent party before disaffirming the contract, that party must place the minor in status quo. That is, the minor must be restored to the same position he or she was in before the minor entered into the contract. This restoration is usually done by returning the consideration to the minor. If the consideration has been sold or has depreciated in value, the competent party must pay the minor the cash equivalent. Generally, a minor is obligated only to return the goods or property he or she has received from the adult in the condition it is in at the time of disaffirmance.
The right of a minor to disaffirm his contract is based upon sound public policy to protect the minor from his own improvidence and the overreaching of adults.
Justice Sullivan
Star Chevrolet v. Green 473 So.2d 157, 1985 Miss. Lexis 2141(1985)
Example
When Sherry is 17 years old (a minor), she enters into a contract to purchase an automobile costing $10,000 from Bruce, a competent adult. Bruce, who believes that Sherry is an adult and does not ask for verification of her age, delivers ownership of the automobile to Sherry after he receives her payment of $10,000. Subsequently, before Sherry reaches the age of 18 (the age of majority), she is involved in an automobile accident caused by her own negligence. The automobile sustains $7,000 worth of damage in the accident (the automobile is now worth only $3,000). Sherry can disaffirm the contract, return the damaged automobile to Bruce, and recover $10,000 from Bruce. In this result, Sherry recovers her entire $10,000 purchase price from Bruce, and Bruce has only a damaged automobile worth only $3,000.
Minors are obligated to pay for the necessaries of life that they contract for. Otherwise, many adults would refuse to sell these items to them. There is no standard definition of what is a necessary of life. The minor’s age, lifestyle, and status in life influence what is considered necessary.
Examples
Items such as food, clothing, shelter, and medical services are generally understood to be necessaries of life. Goods and services such as automobiles, tools of trade, education, and vocational training have also been found to be necessaries of life in some situations.
Justice is the end of government. It is the end of civil society. It ever has been, and ever will be pursued, until it be obtained, or until liberty be lost in the pursuit.
James Madison
The Federalist No. 51 (1788)
Mentally Incompetent Persons
Mental incapacity may arise because of mental illness, brain damage, mental retardation, senility, and the like. The law protects people suffering from substantial mental incapacity from enforcement of contracts against them because such persons may not understand the consequences of their actions in entering into a contract. The law has developed two standards concerning contracts of mentally incompetent persons: (1) adjudged insane and (2) insane but not adjudged insane.
In certain cases, a relative, a loved one, or another interested party may institute a legal action to have someone declared legally (i.e., adjudged) insane. If, after evidence is presented at a formal judicial or administrative hearing, the person is adjudged insane , the court will make that person a ward of the court and appoint a guardian to act on that person’s behalf. Any contract entered into by a person who has been adjudged insane is void. That is, no contract exists. The court-appointed guardian is the only one who has the legal authority to enter into contracts on behalf of the person who has been adjudged insane.
adjudged insane
Declared legally insane by a proper court or administrative agency. A contract entered into by a person adjudged insane is void.
If no formal ruling has been made about a person’s sanity but the person suffers from a mental impairment that makes him or her legally insane—that is, the person is insane but not adjudged insane —any contract entered into by this person is voidable by the insane person. Unless the other party does not have contractual capacity, he or she does not have the option to void the contract. A person who has dealt with an insane person must place that insane person in status quo if the contract is either void or voided by the insane person.
insane but not adjudged insane
Being insane but not having been adjudged insane by a court or an administrative agency. A contract entered into by such person is generally voidable. Some states hold that such a contract is void.
Intoxicated Persons
Most states provide that contracts entered into by certain intoxicated persons are voidable by those persons. The intoxication may occur because of alcohol or drugs. The contract is not voidable by the other party if that party had contractual capacity at the time the contract was formed.
intoxicated person
A person who is under contractual incapacity because of ingestion of alcohol or drugs to the point of incompetence.
Under the majority rule, a contract is voidable only if the person was so intoxicated when the contract was entered into that he or she was incapable of understanding or comprehending the nature of the transaction. In most states, this rule holds even if the intoxication was self-induced. The amount of alcohol or drugs that must be consumed for a person to be considered legally intoxicated to disaffirm contracts varies from case to case. The factors that are considered include the user’s physical characteristics and his or her ability to “hold” intoxicants.
A person who disaffirms a contract based on intoxication generally must be returned to the status quo. In turn, the intoxicated person generally must return the consideration received under the contract to the other party and make restitution that returns the other party to status quo. After becoming sober, an intoxicated person can ratify the contracts he or she entered into while intoxicated.
Las Vegas, Nevada
Gambling is illegal in many states. However, the state of Nevada permits lawful gambling. A casino must obtain a license from the Nevada Gaming Commission before it can engage in the gambling business
Legality
One requirement to have an enforceable contract is that the object of the contract must be lawful. Most contracts that individuals and businesses enter into are lawful contracts that are enforceable. These include contracts for the sale of goods, services, real property, and intangible rights; the lease of goods; property leases; licenses; and other contracts.
Some contracts have illegal objects. A contract with an illegal object is void and therefore unenforceable. These contracts are called illegal contracts . Because illegal contracts are void, the parties cannot sue for nonperformance. Further, if an illegal contract is executed, the court will generally leave the parties where it finds them. The burden of proving that a contract is unlawful rests on the party who asserts its illegality.
illegal contract
A contract that has an illegal object. Such contracts are void.
Critical Legal Thinking
1. Why is an illegal contract void? Does the rule that the court “will leave the parties where it finds them” ever cause unfair results?
Illegal Contracts
Both federal and state legislatures have enacted statutes that prohibit certain types of conduct. Administrative agencies adopt rules and regulations to enforce statutory law. And the president of the United States can issue executive orders making certain conduct illegal. Contracts to perform activities that are prohibited by law are illegal contracts. Contracts contrary to law include gambling contracts, contracts that provide for usurious rates of interest, and contracts that violate licensing statutes.
In the following case, the court addressed the legality of contracts.
CASE 9.4 FEDERAL COURT CASE Illegal Contract Ford Motor Company v. Ghreiwati Auto
2013 U.S. Dist. Lexis 159470 (2013) United States District Court for the Eastern District of Michigan
“A contract that violates an executive order or law is unlawful and discharges performance of the contract.”
—Edmunds, District Judge
Facts
Ford Motor Company manufactures automobiles, trucks, and other vehicles. In 2004, Ford entered into a dealership agreement with Ghreiwati Auto (Auto), a Syrian corporation, whereby Auto would sell and service Ford vehicles in Syria. Auto invested more than $20 million creating a dealer network and brand representation, and sold and serviced Ford vehicles in Syria. In 2011, after civil and military hostilities developed in Syria, the president of the United States issued an executive order that imposed widespread sanctions against Syria, including prohibiting American companies from selling products and services in Syria. Violation of the executive order carries both civil and criminal penalties. Pursuant to the executive order, Ford immediately terminated its dealership agreement with Auto. Ford filed an action in U.S. district court, requesting a declaratory judgment that it did not terminate the dealership agreement improperly because the executive order made Ford’s performance of the contract illegal. Auto alleged that Ford breached the dealer agreement and was liable for damages.
Issue
Did the presidential executive order make the dealership contract illegal for Ford to perform?
Language of the Court
Ford argues that the executive order renders performance of the agreement illegal, thereby permitting Ford to immediately terminate Auto’s dealership agreement and discharges Ford from any duties under the agreement. The Court agrees with Ford and its arguments. A contract that violates an executive order or law is unlawful and discharges performance of the contract.
Decision
The U.S. district court held that the executive orderrendered the Ford–Auto dealership agreement illegal and that Ford had therefore terminated the agreement properly.
Ethics Questions
1. Did Ford have any other course of action in this case? Did Ford have an ethical duty to reimburse Auto for its losses? Would such reimbursement have been legal?
Certain contracts are illegal because they are contrary to public policy. Contracts contrary to public policy are void. Although public policy eludes precise definition, the courts have held contracts to be contrary to public policy if they have a negative impact on society or interfere with the public’s safety and welfare.
Exculpatory Clause
An exculpatory clause (also called a release of liability clause) is a contractual provision that relieves one (or both) of the parties to a contract from tort liability. An exculpatory clause can relieve a party of liability for ordinary negligence. It cannot be used in a situation involving willful conduct, intentional torts, fraud, recklessness, or gross negligence. Exculpatory clauses are often found in leases, sales contracts, sporting event ticket stubs, parking lot tickets, service contracts, and the like. Such clauses do not have to be reciprocal (i.e., one party may be relieved of tort liability, whereas the other party is not).
exculpatory clause (release of liability clause)
A contractual provision that relieves one (or both) of the parties to a contract from tort liability for ordinary negligence.
Example
A person voluntarily enrolls in a parachute jump course and signs a contract containing an exculpatory clause that relieves the parachute center of liability for ordinary negligence. If that person is injured in a jump because of the ordinary negligence of the jump center, the exculpatory clause would be enforced against the parachute jumper
Example
If a department store has a sign above the entrance stating “The store is not liable for the ordinary negligence of its employees,” this would be an illegal exculpatory clause and would not be enforced.
In the following case, the court had to determine whether a release of liability contract was enforceable.
CASE 9.5 FEDERAL COURT CASE Release Contract Lin v. Spring Mountain Adventures, Inc.
2010 U.S. Dist. Lexis 136090 (2010) United States District Court for the Eastern District of Pennsylvania
“It is a well established rule that failure to read a contract does not relieve a party of their obligation under such contract . . .”
—Tucker, District Judge
Facts
Dong Lin went skiing at the Spring Mountain ski area in Pennsylvania, which was owned by Spring Mountain Adventures, Inc. (Spring Mountain). Prior to renting her equipment and going skiing, Lin signed a release form that included the following title line on the front page in bold capital print: “EQUIPMENT RENTAL FORM AND RELEASE FROM LIABILITY.” Above the signature line the contract stated in capital print: “PLEASE READ THE AGREEMENT ON THE BACK OF THIS FORM BEFORE SIGNING. IT RELEASES US FROM CERTAIN LIABILITY.” Directly between the instruction to read the release and the signature line was the following statement: “I, the undersigned, have carefully read and understood the Acceptance of Risk and Liability Release on the back of this paper.” Lin did not read the contract before signing it.
As Lin was skiing, she lost control and fell or slid into a padded snowmaking machine that was on the slopes. As a result of her collision, Lin suffered several permanent and many disfiguring injuries to her face and body and injuries to her brain, bones, muscles, and nerves. Lin underwent surgical procedures and incurred medical expenses. Lin sued Spring Mountain in U.S. district court for negligence to recover damages for her injuries, current and future medical costs, pain and suffering, and emotional harm. Spring Mountain made a motion to dismiss the lawsuit based on the release of liability form signed by Lin.
Issue
Is the release of liability form signed by Lin enforceable?
Language of the Court
Plaintiff Lin signed the release form herself, and such form contained the bolded front-page title “EQUIPMENT RENTAL FORM AND RELEASE FROM LIABILITY,” giving Plaintiff Lin notice of the form’s purpose and intent. At the bottom of the page is the following bolded statement “I have carefully read and understood the Acceptance of Risk and Liability Release and have signed the front of this form.” Plaintiff Lin signed the form, which provided her with ample notice of the release terms. It is a well established rule that failure to read a contract does not relieve a party of their obligation under such contract that they sign, and such parties will be bound by the agreement without regard to whether the terms were read and fully understood.
Decision
The U.S. district court held that the release form signed by Lin was enforceable and granted Spring Mountain’s motion to dismiss.
Ethics Questions
1. Is it ethical for companies to use release of liability forms? What would be the consequences if persons were held not to be bound by contracts they did not read?
Unconscionable Contracts
The general rule of freedom of contract holds that if the object of a contract is lawful and the other elements for the formation of a contract are met, the courts will enforce the contract according to its terms. However, when a contract is so oppressive or manifestly unfair as to be unjust, the law has developed the equity doctrine of unconscionability to prevent the enforcement of such contracts. The doctrine of unconscionability is based on public policy. A contract found to be unconscionable under this doctrine is called an unconscionable contract .
unconscionable contract
A contract that courts refuse to enforce in part or at all because it is so oppressive or manifestly unfair as to be unjust.
The courts are given substantial discretion in determining whether a contract or contract clause is unconscionable. There is no single definition of unconscionability. This doctrine may not be used merely to save a contracting party from a bad bargain. Unconscionable contracts are sometimes found where there is a consumer contract that takes advantage of uneducated, poor, or elderly people who have been persuaded to enter into unfair contracts.
The following elements must be shown to prove that a contract or a clause in a contract is unconscionable: (1) The parties possessed severely unequal bargaining power, (2) the dominant party unreasonably used its unequal bargaining power to obtain oppressive or manifestly unfair contract terms, and (3) the adhering party had no reasonable alternative.
An unconscionable contract is one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept on the other.
Fuller, Chief Justice
Hume v. United States
132 U.S. 406, 10 S.Ct. 134, 1889 U.S. Lexis 1888 (1889)
If the court finds that a contract or a contract clause is unconscionable, it may (1) refuse to enforce the contract, (2) refuse to enforce the unconscionable clause but enforce the remainder of the contract, or (3) limit the applicability of any unconscionable clause and thus avoid any unconscionable result. The appropriate remedy depends on the facts and circumstances of each case. Note that because unconscionability is a matter of law, the judge may opt to decide the case without a jury trial.
In the following case, the court found that a provision of a contract was unconscionable.
CASE 9.6 STATE COURT CASE Unconscionable Contract Stoll v. Xiong
241 P.3d 301, 2010 Okla. Civ. App. Lexis 89 (2010) Court of Civil Appeals of Oklahoma
“The actual price Buyers will pay under the paragraph Stoll included in the land sale contract is so gross as to shock the conscience.”
—Hetherington, Judge
Facts
Chong Lor Xiong and Mee Yang are husband and wife. Xiong, who is from Laos, became a refugee due to the Vietnam War. He spent three years in a refugee camp in Thailand before coming to the United States. He understands some English but can read only a few words of English. His wife Yang is a Hmong immigrant from Laos. She received no education in Laos but took a few adult courses in English in the United States.
Ronal Stoll contracted to sell Xiong and Yang (Buyers) a 60-acre parcel of real estate he owned in Delaware County, Oklahoma, for $130,000. The purchase price represented $2,000 per acre plus $10,000 for a road. Nearby land sold for approximately $1,200 per acre. The written land sale contract described the property and the price, but Stoll added a provision that the Buyers were obligated to deliver to Stoll for 30 years the litter from chicken houses that the Buyers had on the property. Stoll then planned on selling the litter.
The Buyers thought they were buying the real estate for $130,000. When the Buyers failed to deliver the litter to Stoll, he sued the Buyers for breach of contract. The Buyers defended, alleging that the 30-year litter provision was unconscionable. The trial court calculated that the value of the litter added more than $3,000 per acre to the original purchase price of the land. The trial court held that the litter provision was unconscionable and therefore unenforceable. Stoll appealed.
Issue
Is the 30-year litter clause unconscionable?
Language of the Court
Here, the consideration actually to be paid under the contract far exceeds that stated. The parties to be surcharged with the extra expense were, due to language and education, unable to understand the nature of the contract. The actual price Buyers will pay under the paragraph Stoll included in the land sale contract is so gross as to shock the conscience.
Decision
The court of appeals affirmed the trial court’s finding that the litter provision of the land sale contract was unconscionable and unenforceable. The Buyers owned the real estate free of that provision.
Ethics Questions
1. Did Stoll act ethically in this case? Were the buyers taken advantage of? Should the buyers have employed a lawyer to represent them to protect against unethical conduct?
E-Commerce
During the past few decades, a new economic shift brought the United States and the rest of the world into the information age. Computer technology and the use of the Internet increased dramatically. A new form of commerce— electronic commerce , or e-commerce —is flourishing. All sorts of goods and services are now sold over the Internet. You can purchase automobiles and children’s toys, participate in auctions, purchase airline tickets, make hotel reservations, and purchase other goods and services over the Internet. Companies such as Microsoft Corporation, Google Inc., Facebook, Inc., and other technology companies license the use of their software over the Internet.
electronic commerce (e-commerce)
The sale and lease of goods and services and other property and the licensing of software over the Internet or by other electronic means.
Much of the new cyberspace economy is based on electronic contracts (e-contracts) and electronic licenses (e-licenses) . Electronic licensing is usually of computer and software information. E-commerce has created problems for forming e-contracts over the Internet, enforcing e-contracts, and providing consumer protection. In many situations, traditional contract rules apply to e-contracts. Many states have adopted rules that specifically regulate e-commerce transactions. The federal government has also enacted several laws that regulate e-contracts. Contract rules that specifically apply to e-commerce are discussed in Chapter11 .
electronic contract (e-contract)
A contract that is formed electronically.
electronic license (e-license)
An electronic contract that licenses the use of computer and software information.
The following feature discusses a uniform law that provides rules for the formation and performance of computer information contracts.
Digital Law Electronic Contracts and Licenses
The National Conference of Commissioners on Uniform State Laws (a group of lawyers, judges, and legal scholars) drafted the Uniform Computer Information Transactions Act (UCITA) .
The UCITA establishes uniform legal rules for the formation and enforcement of electronic contracts and licenses. The UCITA addresses most of the legal issues that are encountered while conducting e-commerce over the Internet.
The UCITA is a model act that does not become law until a state legislature adopts it as a statute for the state. Although most states have not adopted the UCITA, the UCITA has served as a model for states that have enacted their own statutes that govern e-commerce. Because of the need for uniformity of e-commerce rules, states are attempting to adopt uniform laws to govern the creation and enforcement of cyberspace contracts and licenses.
The following feature discusses contract law in China.
Global Law Contract Law in China
Beijing, China
This is a photograph of the Forbidden City, Beijing, China. In 1999, China dramatically overhauled its contract laws by enacting the Unified Contract Law (UCL) . This new set of laws changed many outdated business and commercial contract laws. The UCL was designed to provide users with a consistent and easy-to-understand set of statutes that more closely resembled international business contracting principles. It also provides for resolution of contract disputes by the application of the rule of law. The UCL covers all the parts of contract law that should be familiar to Western businesses, including the definitions of contract, acceptance, agreement, consideration, breach of contract, and remedies.
Key Terms and Concepts
1. Acceptance ( 200 )
2. Acceptance-upon-dispatch rule (mailbox rule) ( 210 )
3. Actual contract ( 203 )
4. Adjudged insane ( 214 )
5. Age of majority ( 213 )
8. Auction without reserve ( 207 )
9. Auction with reserve ( 207 )
10. Authorized means of communication ( 210 )
11. Bargained-for exchange ( 211 )
12. Bilateral contract ( 200 )
13. Consideration ( 200 )
15. Contract contrary to law ( 215 )
16. Contract contrary to public policy ( 216 )
17. Contractual capacity ( 200 )
18. Contract under seal ( 202 )
19. Counteroffer ( 207 )
21. Electronic commerce (e-commerce) ( 219 )
22. Electronic contract (e-contract) ( 219 )
23. Electronic license (e-license) ( 219 )
24. Exculpatory clause (release of liability clause) ( 216 )
25. Executed contract ( 203 )
26. Executory contract ( 203 )
27. Express authorization ( 210 )
28. Express contract ( 203 )
30. Formal contract ( 201 )
31. Genuineness of assent ( 200 )
32. Gift promise (gratuitous promise) ( 211 )
33. Illegal consideration ( 212 )
34. Illegal contract ( 215 )
35. Illusory promise (illusory contract) ( 212 )
36. Implied authorization ( 210 )
37. Implied-in-fact contract ( 203 )
38. Implied-in-law contract (quasi-contract ( 204 )
39. Infancy doctrine ( 213 )
40. Informal contract (simple contract) ( 202 )
41. Insane but not adjudged insane ( 214 )
42. Intoxicated person ( 214 )
43. Lapse of time ( 208 )
44. Lawful contract ( 215 )
45. Lawful object ( 200 )
46. Legally enforceable ( 199 )
47. Legal value ( 210 )
48. Letter of credit ( 202 )
50. Mirror image rule ( 210 )
51. Necessaries of life ( 214 )
52. Negotiable instrument ( 202 )
53. Objective theory of contracts ( 205 )
57. Option contract ( 209 )
58. Past consideration ( 212 )
59. Period of minority ( 213 )
60. Preexisting duty ( 212 )
61. Recognizance ( 202 )
62. Rejection of an offer ( 207 )
63. Restatement (Second) of Contracts ( 205 )
64. Revocation of an offer ( 207 )
65. Unconscionable contract ( 218 )
66. Unenforceable contract ( 202 )
67. Unequivocal acceptance ( 209 )
68. Unified Contract Law (UCL) ( 220 )
69. Uniform Computer Information Transactions Act (UCITA) ( 219 )
70. Unilateral contract ( 201 )
71. Valid contract ( 202 )
72. Voidable contract ( 202 )
73. Void contract ( 202 )
Law Case with Answer City of Everett, Washington v. Mitchell
1. Facts Al and Rosemary Mitchell owned a small secondhand store. The Mitchells attended Alexander’s Auction, where they frequently shopped to obtain merchandise for their business. While at the auction, they purchased a used safe for $50. They were told by the auctioneer that the inside compartment of the safe was locked and that no key could be found to unlock it. The safe was part of the Sumstad estate. Several days after the auction, the Mitchells took the safe to a locksmith to have the locked compartment opened. When the locksmith opened the compartment, he found $32,207 in cash. The locksmith called the city of Everett police, who impounded the money. The city of Everett commenced an action against the Sumstad estate and the Mitchells to determine the owner of the cash that was found in the safe. Who owns the money found in the safe?
Answer
The Mitchells, who purchased the locked safe at the auction, own the money found in the safe. Under the objective theory of contracts, the outward manifestation of assent made by each party to the other is conclusive of the contract. The subjective intention of the parties is irrelevant. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. The Mitchells were aware of the rule of the auction that all sales were final. Furthermore, the auctioneer made no statement reserving rights to any contents of the safe to the Sumstad estate. Under these circumstances, reasonable persons would conclude that the auctioneer manifested an objective intent to sell the safe and its contents and that the parties mutually assented to enter into that sale of the safe and the contents of the locked compartment. Under the objective theory of contracts, a contract was formed between the seller and the buyer of the safe. Judgment should be rendered in favor of the Mitchells. City of Everett, Washington v. Mitchell, 631 P.2d 366, 1981 Wash. Lexis 1139 (Supreme Court of Washington)
Critical Legal Thinking Cases
1. 9.1 Agreement The movie Flashdance tells a story of a female construction worker who performs at night as an exotic dancer. She performs an innovative form of dancing that includes a chair dance. Her goal is to obtain formal dance training at a university. The movie is based on the life of Maureen Marder, a nightclub dancer. Paramount Pictures Corporation used information from Marder to create the screenplay for the movie. Paramount paid Marder $2,300, and Marder signed a general release contract, which provided that Marder “releases and discharges Paramount Picture Corporation of and from each and every claim, demand, debt, liability, cost and expense of any kind or character which have risen or are based in whole or in part on any matters occurring at any time prior to the date of this Release.” Marder also released Paramount from claims “arising out of or in any way connected with either directly or indirectly, any and all arrangements in connection with the preparation of screenplay material and the production, filming and exploitation of Flashdance.”
Paramount released the movie Flashdance, which grossed more than $150 million in domestic box office receipts and is still shown on television and distributed through DVD rentals. Subsequently, Sony Music Entertainment paid Paramount for release of copyright and produced a music video for the Jennifer Lopez song “I’m Glad.” The video featured Lopez’s performance as a dancer and singer. Marder believes that the video contains re-creations of many well-known scenes from Flashdance. Marder brought a lawsuit in U.S. District Court against Paramount, Sony, and Lopez. Marder sought a declaration that she had rights as a coauthor of Flashdance and a co-owner with Paramount of the copyright to Flashdance. She sued Sony and Lopez for allegedly violating her copyright in Flashdance.
Is the general release Marder signed an enforceable contract? Marder v. Lopez, 450 F.3d 445, 2006 U.S. App. Lexis 14330 (United States Court of Appeals for the Ninth Circuit, 2006)
2. 9.2 Mirror Image Rule Norma English made an offer to purchase a house owned by Michael and Laurie Montgomery (Montgomery) for $272,000. In her offer, English also proposed to purchase certain personal property—paving stones and a fireplace screen worth a total of $100—from Montgomery. When Montgomery received English’s offer, Montgomery made many changes to English’s offer, including deleting the paving stones and fireplace screen from the personal property that English wanted. When English received the Montgomery counteroffer, English accepted and initialed all of Montgomery’s changes except that English did not initial the change that deleted the paving stones and fireplace screen from the deal.
Subsequently, Montgomery notified English that because English had not completely accepted the terms of Montgomery’s counteroffer, Montgomery was withdrawing from the deal. That same day, Montgomery signed a contract to sell the house to another buyer for $285,000. English sued Montgomery for specific performance of the contract. Montgomery defended, arguing that the mirror image rule was not satisfied because English had not initialed the provision that deleted the paving stones and fireplace screen.
Is there an enforceable contract between English and Montgomery? Montgomery v. English, 902 So.2d 836, 2005 Fla. App. Lexis 4704 (Court of Appeal of Florida, 2005)
3. 9.3 Illegal Contract Andrew Parente had a criminal record. He and Mario Pirozzoli, Jr., formed a partnership to open and operate the Speak Easy Café in Berlin, Connecticut, which was a bar that would serve alcohol. The owners were required to obtain a liquor license from the state of Connecticut before operating the bar. Because the state of Connecticut usually would not issue a liquor license to anyone with a criminal record, it was agreed that Pirozzoli would form a corporation called Centerfolds, Inc., to own the bar, sign the real estate lease for the bar in his name, and file for the liquor license in his name only. Pirozzoli did all of these things. Parente and Pirozzoli signed a partnership agreement acknowledging that Parente was an equal partner in the business. The state of Connecticut granted the liquor license, and the bar opened for business. Parente and Pirozzoli shared the profits of the bar. Six years later, Pirozzoli terminated the partnership and kept the business. Parente sued Pirozzoli for breach of the partnership agreement to recover the value of his alleged share of the business. Parente’s share would have been $138,000. Pirozzoli defended, arguing that the partnership agreement was an illegal contract that should not be enforced against him.
Is the partnership agreement an illegal contract that is void and unenforceable by the court? Parente v. Pirozzoli, 866 A.2d 629, 2005 Conn. App. Lexis 25 (Appellate Court of Connecticut, 2005)
4. 9.4 Counteroffer Wilbert Heikkila listed eight parcels of real property for sale. David McLaughlin submitted written offers to purchase three of the parcels. Three printed purchase agreements were prepared and submitted to Heikkila with three earnest-money checks from McLaughlin. Writing on the purchase agreements, Heikkila changed the price of one parcel from $145,000 to $150,000, changed the price of another parcel from $32,000 to $45,000, and changed the price of the third parcel from $175,000 to $179,000. Heikkila also changed the closing dates on all three of the properties, added a reservation of mineral rights to all three, and signed the purchase agreements.
McLaughlin did not sign the purchase agreements to accept the changes before Heikkila withdrew his offer to sell. McLaughlin sued to compel performance of the purchase agreements under the terms of the agreements before Heikkila withdrew his offer. The district court granted Heikkila’s motion to dismiss McLaughlin’s claim. McLaughlin appealed.
Does a contract to convey real property exist between Heikkila and McLaughlin? McLaughlin v. Heikkila, 697 N.W.2d 231, 2005 Minn. App. Lexis 591 (Court of Appeals of Minnesota, 2005)
5. 9.5 Contract Mighty Morphin’ Power Rangers was a phenomenal success as a television series. The Power Rangers battled to save the universe from all sorts of diabolical plots and bad guys. They were also featured in a profitable line of toys and garments bearing the Power Rangers logo. The name and logo of the Power Rangers are known to millions of children and their parents worldwide. The claim of ownership of the logo for the Power Rangers ended up in a battle in a courtroom.
David Dees is a designer who works as d.b.a. David Dees Illustration. Saban Entertainment, Inc. (Saban), which owns the copyright and trademark to Power Rangers figures and the name “Power Ranger,” hired Dees as an independent contractor to design a logo for the Power Rangers. The contract signed by the parties was titled “Work-for-Hire/Independent Contractor Agreement.” The contract was drafted by Saban with the help of its attorneys; Dees signed the agreement without the representation of legal counsel.
Dees designed the logo currently used for the Power Rangers and was paid $250 to transfer his copyright ownership in the logo. Subsequently, Dees sued Saban to recover damages for copyright and trademark infringement. Saban defended, arguing that Dees was bound by the agreement he had signed.
What is the concept “A contract is a contract is a contract”? Does the doctrine of equity save Dees from his contract? Is Dees bound by the contract? Dees, d/b/a David Dees Illustration v. Saban Entertainment, Inc., 131 F.3d 146, 1997 U.S. App. Lexis 39173 (United States Court of Appeals for the Ninth Circuit)
Ethics Cases
1. 9.6 Ethics Case The United Arab Emirates (UAE), a country in the Middle East, held a competition for the architectural design of a new embassy it intended to build in Washington DC. Elena Sturdza, an architect licensed in Maryland and Texas, entered the competition and submitted a design. After reviewing all of the submitted designs, UAE notified Sturdza that she had won the competition. UAE and Sturdza entered into contract negotiations, and over the next two years, they exchanged multiple contract proposals. During that time, at UAE’s request, Sturdza modified her design. She agreed to defer billing UAE for her work until the execution of their contract. At last, UAE sent Sturdza a final agreement. Sturdza informed UAE that she assented to the contract. Without explanation, however, UAE stopped communicating with Sturdza. UAE hired another architect to design the embassy. Sturdza filed suit against UAE to recover damages for breach of contract or, alternatively, under equity, to prevent unjust enrichment to UAE. UAE defended, alleging that, because Sturdza did not have an architectural license issued by Washington DC, she could not recover damages. Sturdza v. United Arab Emirates, 11 A.3d 251, 2011 D.C. App. Lexis 2 (District of Columbia Court of Appeals, 2011)
1. What is an illegal contract?
2. Was it ethical for UAE not to pay Sturdza? Could UAE have paid Sturdza without violating the law?
3. Who wins this case and why?
2. 9.7 Ethics Case A landlord leased a motel he owned to lessees for a 10-year period. The lessees had an option to extend the lease for an additional 10 years. To do so, they had to give written notice to the landlord 3 months before the first 10-year lease expired. The lease provided for forfeiture of all furniture, fixtures, and equipment installed by the lessees, free of any liens, upon termination of the lease. For almost 10 years, the lessees devoted most of their assets and a great deal of their energy to building up the business. During this time, they transformed a disheveled, unrated motel into an AAA three-star operation. With the landlord’s knowledge, the lessees made extensive long-term improvements that greatly increased the value of both the property and the business. The landlord knew that the lessees had obtained long-term financing for the improvements that would extend well beyond the first 10-year term of the lease. The landlord also knew that the only source of income the lessees had to pay for these improvements was the income generated from the motel business.
The lessees told the landlord orally in a conversation that they intended to extend the lease. The lessees had instructed their accountant to exercise the option on time. Despite reminders from the lessees, the accountant failed to give the written notice within 3 months of the expiration of the lease. As soon as they discovered the mistake, the lessees personally delivered written notice of renewal of the option to the landlord, 13 days too late. The landlord rejected it as late and instituted a lawsuit for unlawful detainer to evict the lessees. The lessees asked the court to invoke the doctrine of equity and save them from their error. Romasanta v. Mitton, 189 Cal. App.3d 1026, 234 Cal. Rptr. 729, 1987 Cal. App. Lexis 1428 (Court of Appeal of California)
1. What does the doctrine of equity provide?
2. Did the landlord act unethically in this case?
3. Should the doctrine of equity be applied to save the lessees from their contractual error?
CHAPTER
9
Formation and
Requirements of Contracts
House for Sale
The owner of this house has offered the house for sale. The owner’s offer lists the price and other
terms that the owner wishes to be met before he will sell the house. An interested buyer
can
purchase the house by agreeing to those terms. Most likely, however, the interested buyer will
make a counteroffer whereby she offers a lower price or possibly other terms that she wants met
before she is obligated to purchase the house. If the parties
eventually come to a mutual
agreement about a price and other terms, a contract has been formed. There has been an offer and
an acceptance, therefore creating an enforceable contract. Consideration has been paid by both
parties: The seller has sold his pr
operty
—
the house
—
and the buyer paid money.
Learning Objectives
After studying this chapter, you should be able to:
1.
Define
contract
and list the elements necessary to form valid traditional contracts
and e
-
contracts.
2.
Describe and distinguish among valid, vo
id, voidable, and unenforceable contracts.
3.
Describe offer, acceptance, and consideration.
4.
Identify illegal contracts that are contrary to statutes and that violate public policy.
CHAPTER 9 Formation and
Requirements of Contracts
House for Sale
The owner of this house has offered the house for sale. The owner’s offer lists the price and other
terms that the owner wishes to be met before he will sell the house. An interested buyer can
purchase the house by agreeing to those terms. Most likely, however, the interested buyer will
make a counteroffer whereby she offers a lower price or possibly other terms that she wants met
before she is obligated to purchase the house. If the parties eventually come to a mutual
agreement about a price and other terms, a contract has been formed. There has been an offer and
an acceptance, therefore creating an enforceable contract. Consideration has been paid by both
parties: The seller has sold his property—the house—and the buyer paid money.
Learning Objectives
After studying this chapter, you should be able to:
1. Define contract and list the elements necessary to form valid traditional contracts
and e-contracts.
2. Describe and distinguish among valid, void, voidable, and unenforceable contracts.
3. Describe offer, acceptance, and consideration.
4. Identify illegal contracts that are contrary to statutes and that violate public policy.