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III. Chapter 6 – Contracts

A. Contract = a legally enforceable promise

1. Can be in writing but many every day transactions are not

2. When a legally enforceable promise is broken, the injured party can seek damages = compensable loss.

3. Breach = the failure to perform duties or obligations required by the contract.

4. Recall from Chapter 1 that contracts are a form of private law between the parties to the agreement and not to the public at large.

5. Terms = the elements of contracts that address specific matters (ie quantity, price, delivery, etc.)

B. Formation of Contracts

1. Two sources- a. common law and b. Uniform Commercial Code(UCC)= model statute that provides uniform terms for contracts between merchants for the sale of goods. Helps avoid a battle of the forms scenario.

2. Common Law Formation= includes offer, acceptance, and consideration

a. Offer = common law function of setting forth something to which another party can accept

b. Acceptance= common law agreement as a mirror image of the offer.

c. If the acceptance alters the terms/conditions at all it is considered a counter offer= a rejection of the offer and a new offer made

d. Consideration= a bargained for exchange- often stipulated

3. For an offer to be valid, the contract must be for a legal purpose

4. And the parties must have the requisite capacity to enter into a contract.

a. Minors lack legal capacity

b. Cognitive defects

c. Involuntary impairment due to drugs or alcohol

d. These parties can disaffirm a contract.

C. Types of Contracts

1. Unilateral contract = the acceptance is only through action

2. Bilateral contract = a contract where both parties make a promise

3. Non-compete agreement= employer term preventing you from working for a competitor if you end your employment.

a. If part of the original negotiation, it is binding. If made only after you accept the position, then technically they owe additional consideration to make that binding.

b. Other limitations- geographical boundaries and reasonable time limitations.

D. Not Contracts at all-

1. Advertisements = simply an invitation to bargain= requests for people to make offers

Example- Pepsi Point promotion to buy a military jet for $700k- court found commercial was not an offer

2. Illusory Promise = a statement that make look like a contract, but because it is conditional, it lacks a firm commitment. ie- I agree to buy your car for $10K if I don’t find one cheaper.

E. Performance

1. Performance = undertaking the legal duties imposed by the terms of the contract.

2. When all parties have successfully fulfilled their contractual obligations the parties are discharged= released from additional requirements

3. When parties do not fulfill their contractual obligations they are said to be in breach= failure to perform duties and obligations required by the contract

4. Complete performance= fully performed the obligations

5. Substantial performance= acted in good faith and conveyed enough benefit to the other party to keep a valid contract with any defects to be remedied by monetary damages

6. Strict performance= a standard that requires complete and perfect performance

7. Personal Satisfaction= when a contract requires it, you can have a subjective standard govern performance

F. Defenses to contract performance/breach of contract- valid reasons why a contract cannot be performed:

1. Formation problems- lack of capacity

2. Illegal subject matter- gambling, assassination, drugs, etc.

3. Impossibility- ie if you agree to do business in a country that is under a trade embargo

4. Duress- a party was coerced into an agreement

5. Unconscionability- markedly unfair terms against a party with less sophistication

6. Undue influence- when one party is unable to exercise free will because of the influence of another- ie an agreement to transfer wealth by an elderly person

7. Violation of the Statute of Frauds- certain contracts must be in writing to be valid:

c. Real property

d. Promise to pay the debt of another

e. Contracts that cannot be performed within 1 year

8. Mistake

9. Misrepresentation

10. Statute of limitations- affirmative defense for waiting too long to bring a claim- 8 years in Ohio (this is a recent adjustment down from 15 years)

IV. Other practical considerations of contracts

A. As a matter of law, contracts are assignable and delegable unless the contract itself expressly restricts this.

1. Assignment = the ability to transfer contract rights to another party

2. Delegation = the ability to transfer contract duties to another party

3. Restriction on assignment= the clause in the contract that transfers the contract to another party. An example of this is a no sublease clause in a lease agreement.

B. Exculpatory Clauses = express limitation of actual or potential liability.

1. Types:

a. Hold harmless = you agree not to hold the other party responsible.

b. Indemnification = you agree to stand in the shoes of the other party and defend them.

c. Limitation of liability= you agree to a cap on the amount you can recover to a specific dollar amount or up to the amount paid under the contract.

2. Very common as a risk transfer method.

3. Read these clauses carefully and in business transactions, seek to negotiate to at least an even application.

C. Other contract clauses to be mindful of

1. Mandatory arbitration clause- a specified way to resolve disputes outside the court system.

2. Acceleration clause- clause that accelerates all payments due upon breach (seen in loan agreements)

3. Liquidated damages – clause that sets the amount of damage in the event of a breach.

4. Exclusivity clause- in vendor agreements, a requirement that you can only use that vendor for a particular service Macy’s v. Martha Stewart

5. Jurisdiction- requirement that disputes be resolved in a certain state (or country) using that state’s (or country’s laws)

6. Intellectual Property- transfer of IP to one party

7. Termination clause- always know your exit strategy