Unit 7 AS: Analyze a Contractual Situation

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Chapter 13

Introduction to Contracts

Chapter 13: Introduction to Contracts

Overview

LO13-1: Describe what a contract is

LO13-2: Integrate common law and UCC

LO13-3: Recognize means of classifying contracts

LO13-4: Determine the rules that guide the interpretation of contracts

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Chapter 13 Hypothetical Case 1

While having a beer and a hamburger at Rapid City, South Dakota's favorite watering hole, All the Presidents' Heads, Jake Johnson and Alan Harrison's conversation eventually leads to the topic of Johnson's cabin at Canyon Lake nearby. Johnson has owned the cabin for years, having inherited it from his father, and Harrison has always admired his friend's hideaway from the madness of the "civilized" world. Emboldened by the beer, Harrison scrawls out the following with a pen and napkin provided by the waiter: "Contract for purchase and sale of 106 Canyon Lake Drive property, purchase price—$100,000—Signed, Jake Johnson and Alan Harrison." Harrison signs the napkin and presents it to his friend with a smile. Johnson says, "Cheers," finishes his drink, and signs the napkin as well. Later that day, Harrison calls Johnson and inquires when the two should close on the property. Johnson is taken aback and says to his soon-to-be ex-friend, "Alan, I was only kidding; surely you knew it was just a joke. For crying out loud, a napkin isn't a contract, and you know how much I cherish my cabin!"

Is Jake Johnson obligated to sell his property at 106 Canyon Lake Drive to Alan Harrison? What if the fair market value of the property is $400,000?

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Chapter 13 Hypothetical Case 1: While having a beer and a hamburger at Rapid City, South Dakota's favorite watering hole, All the Presidents' Heads, Jake Johnson and Alan Harrison's conversation eventually leads to the topic of Johnson's cabin at Canyon Lake nearby. Johnson has owned the cabin for years, having inherited it from his father, and Harrison has always admired his friend's hideaway from the madness of the "civilized" world. Emboldened by the beer, Harrison scrawls out the following with a pen and napkin provided by the waiter: "Contract for purchase and sale of 106 Canyon Lake Drive property, purchase price—$100,000—Signed, Jake Johnson and Alan Harrison." Harrison signs the napkin and presents it to his friend with a smile. Johnson says, "Cheers," finishes his drink, and signs the napkin as well. Later that day, Harrison calls Johnson and inquires when the two should close on the property. Johnson is taken aback and says to his soon-to-be ex-friend, "Alan, I was only kidding; surely you knew it was just a joke. For crying out loud, a napkin isn't a contract, and you know how much I cherish my cabin!"

Is Jake Johnson obligated to sell his property at 106 Canyon Lake Drive to Alan Harrison? What if the fair market value of the property is $400,000?

[Instructor: See The Definition of a Contract in Chapter 13]

Chapter 13 Hypothetical Case 2

Zsa Zsa Tilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had been missing for three days. Having searched her estate exhaustively, Tilton decided that her next best option was to post a reward for her beloved Caboodles. Tilton carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed "Please find Caboodles—Reward—$25,000!!!" Below the heading was a color glamour shot of the animal and Tilton's contact information, including her address and cell phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Tilton displayed and distributed hundreds of posters throughout the greater Beverly Hills area. Later in the week, Dane "Bulldog" Sheppard showed up at Tilton's front door. When she answered the door, Sheppard said, "I am pleased to meet you, Ms. Tilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Tilton, and let me say in advance that I really appreciate the $25,000 bounty, um, reward money!"

Is there a contract between Dane "Bulldog" Sheppard and Zsa Zsa Tilton?

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Chapter 13 Hypothetical Case 2: Zsa Zsa Tilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had been missing for three days. Having searched her estate exhaustively, Tilton decided that her next best option was to post a reward for her beloved Caboodles. Tilton carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed "Please find Caboodles—Reward—$25,000!!!" Below the heading was a color glamour shot of the animal and Tilton's contact information, including her address and cell phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Tilton displayed and distributed hundreds of posters throughout the greater Beverly Hills area. Later in the week, Dane "Bulldog" Sheppard showed up at Tilton's front door. When she answered the door, Sheppard said, "I am pleased to meet you, Ms. Tilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Tilton, and let me say in advance that I really appreciate the $25,000 bounty, um, reward money!"

Is there a contract between Dane "Bulldog" Sheppard and Zsa Zsa Tilton?

[Instructor: See Interpretation of Contracts in Chapter 13]

What Is a Contract?

A set of legally enforceable promises

Elements required for contract formation

Agreement (offer and acceptance)

Consideration (value given by both parties)

Contractual capacity (legal ability to enter into a binding agreement)

Legal object (contract cannot be illegal or against public policy)

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A contract is defined as a set of legally enforceable promises. Elements required for contract formation include an agreement (represented by a valid offer and a valid acceptance), consideration (the bargained-for exchange or what each party gets in exchange for his or her promise under the contract), contractual capacity (both parties must have the legal ability to enter into a binding agreement), and legal object (the contract cannot be illegal or against public policy).

Defenses to Contract Enforcement

Lack of genuine assent (fraud, duress, undue influence, misrepresentation)

Lack of proper form (some contracts that lack a writing are not enforceable)

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Defenses to the enforceability of a contract include the lack of genuine assent as a result of fraud, duress, undue influence, or misrepresentation and lack of proper form requirements because certain types of contracts must be in writing in order to be enforceable.

Objective Theory of Contracts

Existence of a contract based on outward manifestations of intent and its interpretation based on how a reasonable person would interpret it

Subjective intent of the parties is generally irrelevant

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Contract law is based on an objective theory of contracts, which means we base the existence of a contract on the parties' outward manifestations of intent and we base its interpretation on how a reasonable person would interpret it. Thus, the subjective intent of the parties is not usually relevant; what matters is how they represented their intent through their actions and words.

Sources of Contract Law

Two most important sources

Common law

Restatement of the Law Second, Contracts

Uniform Commercial Code (UCC)

Governs contracts for the sale of goods

Convention on Contracts for International Sales of Goods (CISG)

Has become more important with increasing globalization

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The two most important sources of contract law include state common law and the Uniform Commercial Code (UCC). UCC governs contracts for the sale of goods.

Classification of Contracts: Bilateral or Unilateral

Bilateral contract

Consists of a promise in exchange for a promise

Unilateral contract

Requires a performance in order to form a contract

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Contracts can be classified as bilateral or unilateral. A bilateral contract consists of a promise in exchange for a promise, while a unilateral contract requires a performance in order to form a contract.

Classification of Contracts: Express or Implied

Express contract

Based on written or spoken words

Implied contract

Based on conduct of the parties

Quasi-contract (implied-in-law contract)

Not actually contracts, but a liability imposed by courts in order to avoid unjust enrichment

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Contracts can be classified as express or implied. An express contract is based on written or spoken words, while an implied contract is based on the conduct of the parties. A quasi-contract (implied-in-law contract) is not an actual contract, but a liability imposed by courts in order to avoid unjust enrichment.

Classification of Contracts: Valid, Void, Voidable, Unenforceable

Valid contract

All elements of contract formation satisfied

Void contract

Has an illegal object or a serious defect

Voidable contract

One or both parties can withdraw from or enforce contract

Unenforceable contract

Valid, but courts cannot legally enforce it

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Contracts can be classified as valid, void, voidable, or unenforceable. In a valid contract, all elements of contract formation have been satisfied. A void contract involves an illegal object or a serious defect. A voidable contract allows one or both parties to withdraw legally from or enforce the contract. An unenforceable contract may be valid, but a law prohibits the courts from enforcing it.

Classification of Contracts: Executed or Executory

Executed contract

All terms of contract fully performed

Executory contract

Some duties under contract not performed by one/both parties

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Contracts can be classified as executed or executory. An executed contract means that all terms of the contract have been fully performed. With an executory contract, some duties under the contract have not been performed by one or both parties.

Classification of Contracts: Formal or Informal

Formal contract

Has special form or must be created in specific manner

Types: Contracts under seal, recognizances, letters of credit, and negotiable instruments

Informal contract

No formalities required in making; a simple contract

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Contracts can be classified as formal or informal. Formal contracts have a special form or must be created in a specific manner. The Restatement (Second) of Contracts identifies the following four types of formal contracts: (1) contracts under seal, (2) recognizances, (3) letters of credit, and (4) negotiable instruments. Any contract that is not a formal contract is an informal contract, also called a simple contract.

Interpretation of Contracts

Contract should be interpreted to give effect to parties' intentions at the time they entered into contract

If multiple interpretations are possible, interpretation that would make the contract lawful, operative, definite, reasonable, and capable of being carried out should be adopted

If contract contains ambiguity, judge should interpret it against the interests of drafter

Handwritten provisions prevail over preprinted terms

Numbers written in words prevail over numerals

Specific terms prevail over general terms

Technical words are generally interpreted in accordance with industry standard

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Various rules of contract interpretation are available to a court in determining the rights and liabilities of contracting parties. For example, a contract is usually interpreted to give effect to the parties' intentions at the time they entered into the contract. If multiple interpretations are possible, the court will interpret the contract in terms of making it lawful, operative, definite, reasonable, and capable of being carried out. If the contract contains ambiguity, the judge should interpret it against the interests of the drafter. Handwritten provisions generally prevail over preprinted terms, and numbers written in words generally prevail over numerals. Specific terms prevail over general terms, and technical words are generally interpreted in accordance with industry standards.

Chapter 13 Hypothetical Case 3

Carter Morley and Erena Erickson live side by side in townhomes with a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a painter, Jerome Sizemore, having selected his name from the phone book. Morley provides his address, the physical dimensions and structure of his home, and agrees with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will only take one day to complete. Morley advises that although he will have to work a 14-hour day on Friday, he would like to have the work completed in his absence. In passing conversation with Erickson, Morley advises her of his plans. Early Friday morning, Sizemore and his team arrive, but by mistake, they begin work on Erickson's side of building. Although Erickson is home, she does not object to the work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them freshly squeezed lemonade and ham sandwiches, and they heartily accept. Upon completion of the work on Friday evening, Sizemore knocks on Erickson's door and asks if "the man of the home" is present, for he would like Morley to review the work and pay him. Erickson chuckles and breaks the news that the painting crew has made a mistake. She proclaims, "I do not owe you a dime, because you don't have a contract with me. You have 10 minutes to remove yourself and your materials from my property, or I will call the police."

Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?

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Chapter 13 Hypothetical Case 3: Carter Morley and Erena Erickson live side by side in townhomes with a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a painter, Jerome Sizemore, having selected his name from the phone book. Morley provides his address, the physical dimensions and structure of his home, and agrees with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will only take one day to complete. Morley advises that although he will have to work a 14-hour day on Friday, he would like to have the work completed in his absence. In passing conversation with Erickson, Morley advises her of his plans. Early Friday morning, Sizemore and his team arrive, but by mistake, they begin work on Erickson's side of building. Although Erickson is home, she does not object to the work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them freshly squeezed lemonade and ham sandwiches, and they heartily accept. Upon completion of the work on Friday evening, Sizemore knocks on Erickson's door and asks if "the man of the home" is present, for he would like Morley to review the work and pay him. Erickson chuckles and breaks the news that the painting crew has made a mistake. She proclaims, "I do not owe you a dime, because you don't have a contract with me. You have 10 minutes to remove yourself and your materials from my property, or I will call the police."

Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?

[Instructor: See Classification of Contracts in Chapter 13]

Chapter 13 Hypothetical Case 4

Rock star Byron Haddon's manager wanted to create some buzz about Haddon's new album, Wingmaster. He decided to hire a videographer to follow Haddon around for a couple of days while two videos were being shot for the album, thinking they'd release the behind-the-scenes video on YouTube just before the videos came out.

The videographer, Lori Breck, shows up, and Haddon's manager tells her that the video she shoots will be the property of Haddon's production company, and that he'll send a nondisclosure agreement via email after the shoot is complete. Breck agrees.

Three hours into the shoot, with Breck's camera trained on him, Haddon receives a text from Samantha Virdo, a young and very popular actress he has been dating. In the text, Virdo tells Haddon she never wants to see him again. He flies into a rage, and in a ten-minute rant, he divulges intimate details of their relationship, Virdo's ongoing relationships with other celebrities (some of whom are married), and Virdo's drug use. As Haddon's manager tries to calm him down, Breck slips away.

Breck sells the video to a website that specializes in embarrassing celebrity videos. A gig that would have earned her $800 for the two-day shoot is suddenly a $50,000 windfall. Haddon's production company files suit against Breck, stating that it is the true owner of the video and that a verbal contract existed between Breck and the production company. Will the production company prevail?

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Chapter 13 Hypothetical Case 4: Rock star Byron Haddon's manager wanted to create some buzz about Haddon's new album, Wingmaster. He decided to hire a videographer to follow Haddon around for a couple of days while two videos were being shot for the album, thinking they'd release the behind-the-scenes video on YouTube just before the videos came out.

The videographer, Lori Breck, shows up, and Haddon's manager tells her that the video she shoots will be the property of Haddon's production company and that he'll send a nondisclosure agreement via email after the shoot is complete. Breck agrees.

Breck sells the video to a website that specializes in embarrassing celebrity videos. A gig that would have earned her $800 for the two-day shoot is suddenly a $50,000 windfall. Haddon's production company files suit against Breck, stating that it is the true owner of the video and that an oral contract existed between Breck and the production company. Will the production company prevail?

[Instructor: See Definition of a Contract and Interpretation of a Contract in Chapter 13]