L10DB

hendersonal

Ch06.pdf

Home >Business & Finance homework help >L10DB

The Legal and Ethical Environment of Business - Version 2.0 Terence Lau and Lisa Johnson

Published by:

Flat World Knowledge, Inc.

1133 15th St NW

Washington, DC 20005

© 2014 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http://www.flatworldknowledge.com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement.

http://www.flatworldknowledge.com/legal

Contracts Chapter 6

Introduction Part - 6.0

Introduction

• Implied Covenant: Promise the law requires in all contracts, regardless of whether the parties state it or not

• Contract: Legally enforceable promise • Damages: Compensable loss • Breach: Failure to perform duties and obligations required

by contract

• Private law: Legally binding agreement between consenting parties that does not apply to the public at large

Introduction

• Terms: Elements of contracts that specify important matters – Quantity

– Price

– Time for performance

• Mutual assent: In common-law contracts, comprises offer and acceptance

• Noncompete clause: Contract clause that restricts competition for a specified period of time, within a certain geographic region, and for specified activities

Formation Part - 6.1

Learning Objectives

• Find out when the Uniform Commercial Code (UCC) is the appropriate law to apply and when the common law is the appropriate law

• Learn the elements of contract formation • Identify the difference between common-law contracts and

contracts between merchants

Formation

• In common-law, it refers to offer, acceptance, and consideration

• In the United States, primary sources of law govern our contracts – Common law

– Uniform commercial code

Uniform Commercial Code

• Model statute that seeks to provide uniformity to contracts law among the different states – Not a law until state legislatures adopt it as law

• Contains sets of rules for contracts – One set for everyone

– One set for merchants

• Common law governs contracts for services and contracts not otherwise governed by the UCC – Elements of common-law contract formation are more

stringent than the requirements for formation between merchants under the UCC

Common-law Contract

• If all elements of common-law contract formation do not exist, then the contract may be void or voidable – Void: Contract that is not valid on its face because it suffers

from some fatal flaw

– Voidable: Refers to the status of a contract that may be terminated due to some defect

Common-law Contract

• Consists of: – Offer: Creates the power of acceptance in another party and

includes the agreement’s essential elements, which must be definite and certain

– Acceptance: Must be a mirror image of the offer

– Consideration: Bargained-for exchange

• Offer and acceptance together form mutual assent, and can be referred to as the agreement

Common-law Contract

• To be enforceable, the contract must be for a legal purpose and parties to the contract must have capacity to enter into the contract

– Legal purpose: Subject matter of a contract must have lawful purpose consistent with public policy. If the subject matter of a contract does not have a legal purpose, contract formation will fail

– Capacity: Legal ability to enter into a contract • Mirror image: Requirement for acceptance in common-law

contracts – Acceptance must be precisely the same as the offer

Common-law Contract

• Counteroffer: Rejection of an offer, It is a new offer – Addition to being rejected and limiting the time that an offer is

valid • Offers can terminate through a reasonable lapse of time

• Revocation: Retraction of an offer before it is accepted • Invitation to bargain: When a party invites others to

make offers to buy – Example - Advertisements

• Types – Bilateral: Contract in which both parties make a promise

– Unilateral: Contract in which the accepting party may accept only through an action

Common-law Contracts

• Must contain valid consideration – There must be a bargained-for exchange of acts or promises,

and both parties must incur new legal detriment or obligations as a result of the contract

• Noncompete agreement: Contract or clause limiting the time, place, and scope of future competition

Illusory Promise

• Statement that looks like a promise but is actually only an illusion of a promise due to its conditional nature or its otherwise lack of a firm commitment

• For a contract to be valid, the subject matter of the contract must be for a legal purpose

• Minor who enters into a contract with a party who has capacity may void the contract, but the other party may not – Any contract with a minor is voidable by the minor under the

infancy doctrine • Infancy doctrine: Legal doctrine that allows minors to disaffirm

contracts

• Common law governs contracts for services and contracts not governed by the UCC

Difference between Common-law Contracts and Contracts between Merchants

• Contracts between merchants do not always contain offers that include definite terms, and acceptances are not always mirror images – Article 2 of the UCC governs the sale of goods

– UCC provides more flexibility in contract formation than exists in common-law contracts

– Merchants frequently use boilerplate language in their individual purchase orders and invoices

• Boilerplate language - Standard legal language used in contracts or other legal documents

Difference between Common-law Contracts and Contracts between Merchants

– Battle of the forms - Term that describes inconsistent elements of an agreement between merchants

– Contracts between merchants are also governed by article 2 of the UCC

– Contracts law is a state law issue, therefore each state can have different laws related to contracts

Difference between Common-law Contracts and Contracts between Merchants

• UCC embodies elements of the Statute of Frauds – Statute of Frauds: Requires certain types of contracts to be

in writing to be enforceable

– Requires contracts to be in writing for goods priced at five hundred dollars or more and signed by the defendant, for those contracts to be enforceable

Table 6.1 - Differences between Contract Formations by Type of Law

Performance and Discharge, Breach, Defenses, Equitable Remedies

Part - 6.2

Learning Objectives

• Learn what constitutes performance • Understand what it means to discharge obligations in a

contract • Explore different standards of performance • Examine breach • Explore defenses to breach • Learn about equitable remedies

Contract Terms

• When the promise is fulfilled, then the contract terms have been satisfied – Refers to the parties who are discharged from the contract

• Discharged: When parties to a contract have fulfilled their duties under the contract and they are released from further requirements to perform under the contract

Performance

• Undertaking the legal duties imposed on us by the terms of the contract

• When parties enter into a contract they hope for: – Successful execution of the terms of the contract

– Subsequent discharge from it

Complete Performance

• Full and perfect performance of the promises, obligations, and duties contained in a contract

• Easy to determine whether the contract terms have been performed – Form a contract

– Fully performed the obligations under it (known as complete performance)

– Get discharged from further duties arising under that contract

Breach of Contract

• When a party fails to perform under the terms of the contract without a legally justifiable reason, the party is said to be in breach of the contract – Breach: Failure to perform duties and obligations required by

contract

• In a service contract, the standard of performance is substantial performance

Substantial Performance and Strict Performance

• Substantial performance: Performing party acted in good faith and conveyed enough benefit of the contract to the other party – Other party can use it for its intended purpose and that the

defects arising under the contract may be remedied by money damages

• Strict performance: Standard of performance in a contract that requires perfect performance – Requires express terms in the contract to that effect and

circumstances where such a high standard is reasonable

Personal Satisfaction

• Standard of performance in a contract that means that the performance is scrutinized subjectively, either by a party to the contract or by a third-party beneficiary specified in the contract

• Reasonable person standard: Objective standard based on reasonableness, against which actions are measured to determine sufficiency

• When the promises in a contract have been fulfilled based on the appropriate standard then the parties are discharged – When a material breach occurs, the injured party may bring a

claim for damages

Breaching Party

• Defenses to contract - Valid reasons for breaching the contract

• Formation problems in common-law contracts relate to whether the offer, acceptance, and consideration were valid

Equitable Remedy

• When all elements of the contract are not present, the court will enforce the promise through an equitable remedy to avoid a perceived injustice – Equitable Remedy: Remedy imposed by the court to prevent

injustice, which allows the court to enforce the terms of a contract, even though, technically speaking, there was no contract to begin with

Types of Equitable Remedy

• Quasi-contract: Type of equitable remedy that may be imposed on parties to avoid unjust enrichment to one party at the expense of the other – Unjust enrichment: Benefit that is conferred or expected to

be conferred unjustly – Quantum meruit: Name for damages awarded in quasi-

contract cases, which means as much as is deserved

• Promissory estoppel: Type of equitable remedy that may be imposed on parties to avoid injustice, when one party detrimentally relied on another party’s promise

Defenses to a Contract

• Following defenses are relevant if the contract is validly formed, but voidable by a party – When people lack the mental ability to understand, they lack

capacity

– If the subject matter of a contract or the terms of the contract are illegal, then the contract may be void

– Impossibility is a defense that can be used when performing the contract has become truly impossible

– Minor can understand the terms of a contract, they lack the legal capacity to be bound to it. They can disaffirm the contract if they wish

• Disaffirm: Option that can be exercised by a minor who is a party to a contract to render the contract void

Economic Duress

• Defense to contract that can be exercised when one party had no other reasonable alternative but to enter into a contract due to economic threat or pressure

• Force majeure: Unforeseen act of God that prevents one or both parties from fulfilling their obligations under the contract

Unconscionability

• Defense used when the contract contains markedly unfair terms against the party with less bargaining power or sophistication than the party who created the terms and induced the other party to sign it

• Undue influence can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted over that party by the other

Statute of Frauds

• If the contracts required by statute of frauds are not in writing, that can be used as a defense to performance

• If there is a dispute arising under the contract, it will not be enforced because it violates the Statute of Frauds requirement for a writing

• Statute of limitations can be raised by a defendant to argue that the complaint is being brought too late, by law, to do anything about it

Statute of Frauds

• Mistake is a successful defense

• Misrepresentation and fraud are defenses to contract

• Commercial impracticability is a defense that can be used when fulfilling a contract has become extraordinarily difficult or unfair for one party

Bankruptcy

• In unforeseen circumstances, a party to a contract files for bankruptcy protection – Automatic stay: Order by the court to stop all collection

activities of prepetition debts owed by a debtor in bankruptcy

– Bankruptcy is a defense to performance of contract for debtors who file for bankruptcy protection

Remedies

• Monetary damages are remedies for breach of contract – Expectation damages, including compensatory (such as the

finding substitute goods at a higher price) and consequential damages (such as such as lost wages or lost profit), can be recovered

– Specific performance will be required under certain types of contracts

• Specific performance: Remedy that requires complete performance in a breach, rather than (or in addition to) monetary damages

– On breach, the injured party has a duty to mitigate his damages

• Duty to mitigate: Duty placed on a party injured by breach, requiring that party to avoid damages by making reasonable efforts

Assignment, Delegation, and Commonly Used Contracts Clauses

Part - 6.3

Learning Objectives

• Learn about assignment and delegation • Examine novation • Explore restrictions on assignment, exculpatory clauses,

noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses

• Explore the parol evidence rule

Assignment and Delegation

• Contract elements are important – Contracts possess certain qualities that prohibit parties from

acting in certain ways, unless those qualities are expressly waived

• Contracts are assignable and delegable by law – Assignment: Ability to transfer rights conveyed by a contract

to another party

– Delegation: Ability to transfer duties imposed on a party by a contract to another party

Restriction on Assignment

• Clause that prohibits parties from transferring the rights conveyed by a contract to another party

• Way to excuse oneself from this liability is to form a three- way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract – Novation: Agreement that transfers all rights and duties to a

new party to the contract and releases the previous party from any further obligation arising from the original contract

• Exculpatory clause: Express limitation on potential or actual liability arising under the subject matter of the contract

Other Clauses

• Mandatory arbitration clause: Contractual clause that requires the parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract – Frequently foreclose any possibility of appealing arbitration

awards in court

• Acceleration clause: Type of clause that accelerates all payments due under the contract on breach

• Liquidated damages clause: Type of clause that sets the amount of damages in the event of breach

Assumption of a Written Contract

• Legal assumption made about contracts that they contain the entire expression of the parties’ agreement

• Major assumption made about a written contract is that it is integrated – Integrated: Legal assumption made about contracts that they

contain the entire expression of the parties’ agreement • Parol evidence: Statements or actions that are not

captured within the four corners of the contract – Statements or actions that are not captured in the contract are

considered parol evidence, and they will not be used to interpret the meaning of the contract

The Legal and Ethical Environment of �Business - Version 2.0
Slide Number 2
Contracts
Introduction
Introduction
Introduction
Formation
Learning Objectives
Formation
Uniform Commercial Code
Common-law Contract
Common-law Contract
Common-law Contract
Common-law Contract
Common-law Contracts
Illusory Promise
Difference between Common-law Contracts and Contracts between Merchants
Difference between Common-law Contracts and Contracts between Merchants
Difference between Common-law Contracts and Contracts between Merchants
Table 6.1 - Differences between Contract Formations by Type of Law
Performance and Discharge, Breach, Defenses, Equitable Remedies
Learning Objectives
Contract Terms
Performance
Complete Performance
Breach of Contract
Substantial Performance and Strict Performance
Personal Satisfaction
Breaching Party
Equitable Remedy
Types of Equitable Remedy
Defenses to a Contract
Economic Duress
Unconscionability
Statute of Frauds
Statute of Frauds
Bankruptcy
Remedies
Assignment, Delegation, and Commonly Used Contracts Clauses
Learning Objectives
Assignment and Delegation
Restriction on Assignment
Other Clauses
Assumption of a Written Contract