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Chapter11-ContractsandSalesIntroductionFormationandConsumerProtection.pptxChapter 11 Contracts and Sales: Introduction and Formation
Its Legal, Ethical, and Global Environment
Marianne M. Jennings
Business
11th Ed.
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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What Is a Contract?
“A contract is a promise (or set of promises) for breach of which the law gives a remedy.”
Defined in Restatement (Second) of Contracts − American Law Institute (ALI)
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Sources of Contract Law
Common Law
Based on English common law
Summarized in Restatement (Second) of Contracts
Applies to contracts with subject matters of land or services
Examples: Mortgage, lease or medical services
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Uniform Commercial Code (UCC)
Drafted by ALI and National Conference of Commissioners on Uniform State Laws
Common law is not uniform from state to state
First appeared in 1940s
Adopted in part or whole in all states
Article 2 governs contracts for the sale of goods; more liberal than common law
Sources of Contract Law
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Case 11.1 Accessory Overhaul Group, Inc. v. Mesa Airlines, Inc. (2014)
Is a maintenance contract one for service or parts if both are furnished?
What facts in the case would be important in answering this question?
Does the UCC apply?
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UCC v. Common Law
| Car Horse Easement Lease Mortgage Real Estate Listing Agreement Fabric Loan Roof Repair Air Conditioner | UCC X X X X | Common Law X X X X X X |
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
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Sources of Contract Law
Uniform Commercial Code (UCC)
Article 2A leases
New addendum to UCC
Covers leases of goods − long-term leases such as car leases
Adopted in most states
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E-Commerce and Contracts
Uniform Computer Information Transactions Act (UCITA)
Not widely adopted yet (Virginia and Maryland)
Governs transactions in software
Governs shrink-wrap and click-wrap contracts
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Bilateral: First party (offeror) makes a promise in exchange for the second party’s (offeree’s) promise
Example: You promise to pay back money with interest and the bank promises to loan you the money
Unilateral: First party (offeror) makes a promise in exchange for offeree’s performance
Example: “Drive my car across the country and I’ll pay you $500 plus expenses”
Bilateral vs. Unilateral
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Express Contracts are Written or Oral Agreements
Implied-in-fact Contracts are Non-spoken, Non-written Understandings
Example: When you go into a doctor’s office, you have an implied contract to pay her for her services even though you may not sit down and organize the details
Express vs. Implied
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Implied-in-Law
Fictional contract created by a court
Elements
One party confers a benefit on another
Both are aware of the benefit
Retention of the benefit without compensation would be unfair and unjust
Quasi Contracts
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Void Contracts are Ones to Do Something Illegal or Against Public Policy − Neither Side Can Enforce
Example: Contract to buy drugs
Void Contracts are illegal and do not exist at law!
Voidable Contracts are Contracts in Which One Party has the Right to End the Contract
Example: Contracts of minors are voidable
Void or Voidable Contracts
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Executed Contract is One in Which the Promises Under the Contract Have Been Performed
Executory Contract is One That Has Been Entered Into But Not Yet Performed
Contracts Can Be Partially Executory/Executed if One Side Has Performed
Executed vs. Executory
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Consumer Credit Contracts
Equal Credit Opportunity Act
Passed to be certain credit was awarded on applicant’s merits and not on extraneous factors such as age, sex, race, color, religion, or national origin
Equal Credit Opportunity Act
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Equal Credit Opportunity Act
Cannot consider
Marital status
Receipt of public assistance income
Receipt of alimony or child support
Plans for children
Spouses have rights to individual credit applications
Equal Credit Opportunity Act
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Equal Credit Opportunity Act
Penalties
Actual damage plus punitive damages of up to $10,000
Class action − punitive damages of up to $500,000 or 1 percent of creditor’s net worth (whichever is less)
Equal Credit Opportunity Act
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Case 11.2 A.B. & S. Auto Service, Inc. v. South Shore Bank of Chicago (1997)
What, according to Bonner’s expert is the impact of considering criminal records of applicants?
Do you think a criminal record is an indication of character?
ECOA Violation?
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Consumer Credit Contracts
Subprime or Predatory Lending
Loans for those with no credit history, bankruptcies, moderate incomes, or poor credit histories
Contracts are often difficult to understand
High interest rates and fees
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Truth-in-Lending Act (TILA)
Part of Consumer Credit Protection Act
Purpose was full disclosure
Elaboration and forms are found in Regulation Z
Application
Consumer credit transactions
Open-end transactions (credit cards and lines of credit)
Closed-end transactions (loans; financing)
Consumer Credit Contracts
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Truth-in-Lending
Regulation Z was Originally Part of the Federal Reserve Regulations
Consumer Financial Protection Bureau (CFPB) is New Agency Created Under Dodd-Frank
Will be housed in Federal Reserve
Will be funded by the Federal Reserve
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CARD
Credit Card Accountability, Responsibility, and Disclosure Act
Credit terms must last for one year
Restrictions on soliciting those under 21 and restrictions on colleges and universities
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Additional Credit Protections
Liability Limitations
$50 maximum liability if you comply with notification requirements
Credit card chips and liability limitations
Credit Balance Transfer Protections
Additional disclosures and regulations on transferring balances
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Formation of Contracts
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Offer is the First Part of the Contract
Parties
Offeror = person who makes offer
Offeree = person who receives offer
Must have language that indicates intent to contract
Not just inquiry
More than negotiation
Courts use an objective, not a subjective, standard
Formation: Offer
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Formation of Contracts
Case 11.3 Leonard v. PepsiCo (2000)
Was the commercial an offer for a Harrier Jet?
What was the acceptance?
Does the commercial satisfy the statute of frauds?
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Formation: Essential Terms
Under Common Law Offer Must Contain Essential Terms Of The Contract:
Parties
Subject matter
Price and Payment Terms
Delivery Terms
Performance Times
Under UCC Article 2 Offer Need Only Contain:
Parties
Subject matter
Quantity
Courts can consider industry custom and course of dealing in determining whether terms are sufficient
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Communication to Offeree
Offeree cannot accept offer that never arrives
Ads are generally considered invitations for offers − not offers
Formation: Offer
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Revocation: Offer Can be Revoked any Time Prior to Acceptance
Exception is option
Offeror is paid to hold offer open
It is a separate contract for time
UCC merchant’s firm offer UCC 2-205
Offer by merchant signed in writing states it will be kept open (irrevocable) for period stated (maximum of three months)
Offer: Termination
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Termination of an Offer by Rejection
Offeree indicates “no”
Rejection by changes in terms − counteroffer
Offer: Termination
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Offer: Termination (UCC)
Termination by Counteroffer – UCC 2-207
Non-merchants-addition of terms in acceptance does not equal a counteroffer
Acceptance results but additional terms are not part of contract
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Termination by Counteroffer – UCC 2-207
Merchants – “Battle of the forms”
Acceptance with additional terms = contract
Additional terms are part of contract unless:
Material − price, warranties (immaterial = shipment or payment terms)
Offer limited − “This offer is limited to these terms”
Objection to new terms
Offer: Termination (UCC)
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UCC Contract Formation
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Contract Formed
In Meeting of Minds on
Subject Matter
Parties Act
as if
Contract Exists
Parties Create
Record of
Contract
Terms
In Record
Control
Terms
Are Those in
Both Records
UCC Terms
Terms
They Agree
On
Court
Decides
Terms
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Additional Terms Under New UCC Section 2-207
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Contract Formation
Case 11.4 C9 Ventures v. SVC-West, L.P. (2011)
Explain how tense physical circumstances affect contract signatures and validity
Discuss why whether this is a contract governed by UCC or common law is important to the decision
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Checklist for Drafting Contracts
Identify both parties clearly. Be certain corporate names are correct. Make sure the parties have the proper authority to enter into the transaction. (Are copies of board resolutions approving the contract available?)
Define the terms used in the contract, including industry terms.
List all terms: price, subject matter, quantity, delivery, payment terms.
Answer “what if” questions. (What if payment is not made? What if deliveries are late?)
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Checklist for Contract Preliminaries
Do your contract homework
a. Do background checks – check references, complaints at state and private agencies, court dockets
b. Learn the nature of the business and industry custom – learn to use the language
Negotiate details
a. Agree on terms that held you accomplish your purpose (“apple powder for bakery equipment,” not just “apple powder”)
b. Make sure your written agreement is complete
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Acceptance: Offeree’s Response
Offeree’s positive response
Must be communicated to offeror
Using proper means of acceptance
Only offeree has power to accept
Formation: Acceptance
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Acceptance: Offeree’s Response
The Mailbox Rule
Timing rule in contract acceptances that provides that acceptance is effective upon mailing if properly done
Acceptance by stipulated means
Mailbox rule applies
If offeree does not use means stipulated, then counteroffer and/or rejection
Formation: Acceptance
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Acceptance With No Stipulated Means
Mailbox rule if same means or stipulated means used
Arrival if different (slower) method used
If non-stipulated means used, it is a counteroffer and a rejection
Formation: Acceptance
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Timing Rules for Acceptance
| TYPE OF OFFER No means given No means given Means specified (specified or stipulated means) Means stipulated (specified or stipulated means) | METHOD OF ACCEPTANCE Same or reasonable method of communication Slower or unreasonable method of communication Stipulated means used Stipulated means not used | ACCEPTANCE EFFECTIVE? When properly mailed, dispatched (mailbox rule) When received, is offer still open Mailbox rule Counteroffer and rejection |
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Second level
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Fifth level
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Case 11.5 Kass v. Grais (2009)
Discuss the FedEx issue in the case
What could the parties have done differently to avoid this confusion?
Formation: Timing
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E-Commerce and Contract Formation
Formation by ‘Clickon’, ‘Clickthrough’ or ‘Clickwrap’ agreements
Offeree agrees to terms contained in an online agreement
Offeree accepts by clicking the “I Agree” button
Formation: E-Contracts
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Case 11.6 Home Basket Co., LLC v. Pampered Chef, Ltd. (2005)
How were the orders placed?
How were the terms communicated?
What do you learn about on-going terms in transaction?
Formation: E-Contracts
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Distinguishes Gifts From Contracts
The Bargained-For Exchange
What each party is willing to give up for the other parties promise
Courts are not concerned with the adequacy of consideration, only the legal sufficiency of consideration
Formation: Consideration
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Unique Consideration Issues
Charitable subscriptions are enforceable even though detriment is one-sided
Reliance (promissory estoppel) provides element of detriment for contracts not yet begun
Formation: Consideration
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When Record is Required
Statute of Frauds (1677) controls what must be recorded
Types for contracts
Real property
Contracts that can not be performed in one year
Contracts to pay the debt of another
UCC-contracts for sale of goods for $5,000 or more
Statute of Frauds
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Exception: Performance
What Form of Record is Required?
Need not be one formal document − can be pieced together
Merchant’s confirmation memorandum-2-201
Statute of Frauds
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Case 11.7 Sununu v. Philippine Airlines, Inc. (2011)
What mistakes did the parties make in their communications?
Why is the court not sympathetic to Mr. Sununu?
Statute of Frauds
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The Recording Requirement in the Electronic Contract
Allows for the identification of electronically transferred documents using encryption technology
Digital signatures help authenticate users
Statute of Frauds
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Statute of Frauds
Uniform Electronic Transactions Act (UETA)
Contracts formed on the internet
Law in 47 states and D.C.
Electronic Signatures in Global and National Commerce Act of 2000 (E-sign)
Federal law
Requires parity for electronic signatures
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Statute of Frauds
Case 11.8 Rosenfeld v. Basquiat (1996)
Did the contract comply with the statute of frauds?
What is the effect of not complying with the statute of frauds?
Was the writing void?
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Statute of Frauds
Case 11.9 Brooks Peanut Co., Inc. v. Great Southern Peanut, LLC (2013)
Explain the back-and-forth paperwork between the parties
Is there a sufficient record of a contract?
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Common Law vs. UCC Rules on Formation
| Area | UCC | Common Law |
| Application Offers Options Acceptance Consideration Writing Requirement Defenses | Sales of goods Need subject matter (quantity), Code gives details Merchant’s firm offer – no consideration needed Can have additional terms; Mailbox rule works for reasonable means of acceptance Required for contracts but not for modification or firm offers Sale of goods $500 or more Must be free of all defenses for valid contract | Services, real estate, employment contracts Need subject matter, price, terms, full details agreed upon Need consideration Mirror image rule followed; must use same/faster method for mailbox rules to get mailbox rule (old rule: same method) Always required Real estate contracts not to be performed in one year; paying the debt of another Must be free of all defenses for valid contract |
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Third level
Fourth level
Fifth level
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The Effect of the Record Contract
Contract reduced to its final and unambiguous form cannot be contradicted with extrinsic evidence
Exceptions include evidence on fraud, misrepresentations, and ambiguities
UCC exceptions: merchant’s confirmation memorandum
Parol Evidence
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UN’s Convention on Contracts for the International Sale of Goods (CISG)
Adopted in 1980
United States has adopted
Party Autonomy Still Controlling in International Contracts
Must Provide for Additional Risks
International Contracts
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Avoiding Legal Pitfalls in International Transactions
Use short, simple contracts. The tendency to place all possibilities in a contract is a U.S. tradition. In Germany, for example, the parties have a one-page agreement that references and incorporates terms and conditions of one of the parties.
Watch unconscionability protections. While the U.S. focuses its unfairness protections on consumers, other countries afford these same protections to commercial transactions.
Some disclaimers are void in other countries. For example, the clause, “We are only liable for loss of data which is due to a deliberate act on our part. We are not responsible for lost profits in any event,” would be valid in the U.S. but void in Germany. In Germany, sellers of software must assume liability for at least gross negligence.
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Avoiding Legal Pitfalls in International Transactions
One party’s attempt to limit liability would be void in Germany. Any liability limitation must be specifically addressed and negotiated for such a clause to be valid.
Unusually long periods for performance are typical in the U.S. but void in Germany.
Price increase limitations are typical in non-U.S. contracts.
In other countries, parties can refuse to pay on a current contract if performance on an earlier contract was less than satisfying and damages are owed.
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Case 11.10 Intershoe, Inc. v. Bankers Trust (1991)
Is the memo a final writing?
What dangers would the court introduce if orders such as this were contradicted by oral testimony?
International Contracts
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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