MBA/MSL 646 The Legal Environment of Business Belhaven University Unit 5 Contract Formation and Performance Sources of C ontract L aw Contract Formation Types of Contracts Defenses to F ormation 2 Unit Topics Biblical Foundation Psalm 119:116 Uphold me according unto thy word, that I may live: and let me not be ashamed of my hope . Numbers 30:2 When a man makes a vow to the L ORD or takes an oath to obligate himself by a pledge, he must not break his word but must do everything he said. What Is a Contract?
A contract is a promise or set of promises for the breach of which the law provides a remedy and the performance of which the law recognizes as a duty. – Restatement (Second) of Contracts 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 – mortgages, leases, or medical services Uniform Commercial Code (UCC) Developed as a response to non -uniform common laws from state to state Article 2 governs contracts for the sales and leasing of goods UCC v. Common Law Accessory Overhaul Group, Inc. v. Mesa Airlines, Inc., 994 F.Supp . 2d 1296 (N.D. Ga. 2014) Here the court analyzed the “fundamental nature of the transaction” to decide whether the contract in question was a service contract (and therefore governed under the common law) or a goods contract (and therefore governed under the UCC). The court held that the “primary purpose of a repair transaction is not to sell or purchase parts, but to change or improve the item and return it to the owner. In such cases, the provision of goods is incidental, and the UCC does not apply. Contract Classifications 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.” Contract Classifications, cont.
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 Implied -in -law contracts (Quasi contracts) are fictional contracts created by a court Necessary elements One party confers a benefit on another Both are aware of the benefit of the benefit without compensation would be unfair and unjust (unjust enrichment) Contract Classifications, cont.
Void contracts are ones to do something illegal or against public policy Neither side can enforce Example – contract to purchase illegal drugs These 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 Contract Classifications, cont.
Unenforceable contracts are contracts that cannot be honored because of some procedural problem Example – a contract was not in writing to comply with the statute of frauds Executed contracts are contracts in which the promises under the contract have been performed Executory contracts are contracts that have been entered into but not yet performed Contracts can be partially executory and part executed Equal Credit O pportunity A ct Equal Credit Opportunity Act (ECOA) 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 Penalties Actual damage plus punitive damages of up to $10,000 Class action – punitive damages of up to $500,000 or 1% of creditor’s net worth (whichever is less) A.B. & S. Auto Service, Inc. v. South Shore Bank of Chicago, 962 F.Supp . 1056 (N.D. Ill. 1997) – Here the court held that a bank could inquire into a credit applicant’s criminal history because it relates to the applicant‘s judgment and character. Consumer Credit C ontracts Subprime or Predatory Lending Loans for those with no credit history, bankruptcies, moderate incomes, or poor credit histories Contracts are often difficult to understand – the fine print High interest rates and fees Truth -in -Lending Act (TILA) Part of the Consumer Credit Protection Act Purpose was full disclosure Application Consumer credit transactions Open -end transactions (credit cards and lines of credit) Closed -end transactions (loans; financing) L ending Consumer Financial Protection Bureau (CFPB) Newly created under Dodd -Frank Will be housed in the Federal Reserve Will be funded by the Federal Reserve 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 Lending, cont.
Liability Limitations $50 maximum liability if you comply with notification requirements Credit Card C hips and Liability L imitations Credit Balance Transfer Protections Additional disclosures and on transferring balances Formation – Offer Offer Offer is the first part of the contract Parties Offeror – person who makes offer Offeree – person who receives the offer Must have language that indicates intent to contract Not just inquiry More than negotiation Courts use an objective, not a subjective standard Leonard v. PepsiCo, 210 F.3d 88 (2d Cir. 2000) – the court held that the offer must be one of serious intention and not made in jest – reasonable person standard Communication of the offer to the offeree Ads are considered invitations for offers and not actual offers Formation – Offer, cont. Under common law, the offer must contain the following essential terms:
Parties Subject matter Price and payment Delivery terms Performance times Under the UCC, the offer must contain the following essential terms:
Parties Subject matter Quantity *courts can consider industry custom and course of dealing in determining whether the terms are sufficient Formation – Offer Termination Revocation – offer can be revoked any time prior to acceptance Option contracts are an exception Offeror is paid to hold the offer open It is a separate contract for time UCC Merchant’s Firm Offer Makes an offer irrevocable Offer by a merchant signed in writing states it will be kept open (irrevocable) for a period stated (maximum of 3 months) Termination of an offer by Rejection Offeree indicates “no” Rejection by change of terms is a counteroffer Formation – Offer Termination, cont. Termination by Counteroffer under the UCC Non -merchants -addition of terms in acceptance does not equal a counteroffer Acceptance results but additional terms are not part of the contract Merchants (both parties) Battle of the Forms Additional terms are part of the contract unless Material terms Offer limited Objection to new terms Checklists Drafting Contracts 1. ID the parties 2. Define all terms 3. Answer “what if” questions Contract Preliminaries 1. Do your homework Background checks Learn the nature of the business/industry 2. Negotiate details Agree on terms that help you accomplish your purpose Make sure the written agreement is complete Formation – Acceptance Acceptance – offeree’s response Offeree’s positive response Must be communicated to the offeree using the proper means of acceptance Only offeree has the power to accept Silence is generally not a valid form of acceptance Mailbox Rule This a time rule Provides that acceptance is effective upon mailing Acceptance by stipulated means Mailbox rule applies If offeree does not use means stipulated, then counteroffer and/or rejection results Kass v. Grias , 887 N.Y.S. 2d (N.Y. Div. One 2009) – the court held that the mailbox rule did not extend to documents delivered by FedEx Formation – E Contracts Contracts formed through “Clickon ” “ clickthrough ” or “ clickwrap ” agreements Offeree agrees to terms contained in the online agreement Offeree accepts by clicking “I Accept” Formation – Consideration Distinguishes gifts from contracts The bargained -for exchange What each party is willing to give up for the other party’s promise Courts are generally not concerned with the adequacy of consideration, only its legal sufficiency Unique issues Charitable subscriptions are enforceable even though detriment is one -sided Reliance (promissory estoppel) provides element of detriment for contracts not yet begun Statute of Frauds Statute of Frauds When record is required Statute of frauds controls what must be recorded Types of contracts Real property Contracts that cannot be performed in a single year Contracts to pay the debt of another UCC contracts for the sale of goods for $5,000 or more (increased from $500) Writing and E -Commerce Uniform Electronic Transaction Act (UETA) – adopted in almost all states Electronic Signatures in Global and National Commerce Act of 2000 (ESIGN) UETA is the state recognition of the ESIGN act Must give legal effect to contracts that are entered into electronically The effect of the record contract – Parole Evidence 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 International Contracts UN’s Convention on Contracts for the International Sale of Goods (CISG) Adopted in 1980 Applies to those contracts in which buyer and seller have their businesses in different countries unless the parties agree otherwise Complete reading assignments Complete writing assignments Answer discussion questions Complete unit quiz 24 What’s Next ? Jennings , M. (2017 ). Business; It’s Legal, Ethical, and Global Environment . (11 th ed.). South -Western Cengage Learning . The Holy Bible 25 References