Business Law Chapter 9

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Contract law

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Designed to provide stability and predictability, as well as certainty, for both buyers and sellers in the marketplace. this deals with the formation and enforcement of agreements between parties. This also contains a promisor and a promisee. In business agreements, the rules of contract law are often followed to avoid potential disputes. Contract law is necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

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Objective theory of contract law

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the theory is that a party's intention to enter into a legally binding agreement, or contract, is judged by outward, objective facts as interpreted by a reasonable person, rather than by the party's own secret, subjective intentions. Objective facts include (1) what the party said when entering into the contract, (2) how the party acted or appeared (intent may be manifested by conduct as well as by oral or written words), and (3) the circumstances surrounding the transaction.

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Bilateral contracts

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if the offeree can accept simply by promising to perform. This contract is a promise for a promise. No performance, such as payment of funds or delivery of goods, need to take place for a bilateral contract to be formed. This contract comes into existence at the moment the promises are exchanged.

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Unilateral contract

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if the offer is phrased so that the offeree can accept the offer only by completing the contract performance. This contract is a promise for an act. The time of contract formation in a unilateral contract is not the moment when promises are exchanged but the moment when the contract is performed.

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Express contract

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the terms of agreement are fully and explicitly stated in words, oral or written. A signed lease for an apartment or a house is an express written contract.

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Implied contract

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differs from an express contract in that the conduct of parties, rather than their words, crates and defines the terms of the contract.

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Formal contract

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these are contracts that require a special form or method of creation (formation) to be enforceable. An example is negotiable instruments. These are formal because they require a special form and language to create them.

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Informal contract

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also called simple contracts. These include all other contracts. No special form is required (except for certain types of contracts that must be in writing), as the contracts are usually based on their substance rather than their form.

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Executed contract

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a contract that has been fully performed on both sides

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executory contract

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a contract that has not been fully performed by the parties.

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Valid contract

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has the elements necessary to entitle at least one of the parties to enforce it in court. Those elements consist of (1) an agreement, including an offer and an acceptance of that offer; (2) support by legally sufficient consideration; (3) parties who have the legal capacity to enter into the contract, and (4) a legal purpose.

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voidable contracts

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a valid contract but one that can be avoided at the option of one or both of the parties. the party having the option can elect either to avoid any duty to perform or to ratify the contract. if the contract is avoided, both parties are released from it. If it is ratified then both parties must fully perform their respective legal obligations.

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unenforceable contract

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a contract that cannot be enforced because of certain legal defenses against it. it is not unenforceable because a party failed to satisfy a legal requirement of the contract, rather, it is a valid contracted rendered unenforceable by some statute or law.

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void contract

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no contract at all.

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plain meaning rule

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if a contracts words appear to be clear and unambiguous, a court cannot consider extrinsic evidence--that is, any evidence not contained in the document itself. if a contracts terms are unclear or ambiguous, however, extrinsic evidence may be admissible to clarify the meaning of the contract.

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agreement

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the parties must agree on the terms of the contract and manifest to each other their mutual assent (agreement) to the same bargain.

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offer

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a promise or commitment to do or refrain from doing some specified action in the future. three elements are necessary for an offer to be effective.

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offeror

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the one who makes an offer or proposal to another party. must have a serious intention to become bound by the offer.

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offeree

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the one to whom the offer or proposal is made.

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valid offer

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contains three parts, (1) the offeror must have a serious intention to become bound by the offer, (2) the terms of the offer must be reasonably certain, or definite, so that the parties and the court can ascertain the terms of the contract and (3) the offer must be communicated to the offeree

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advertisements

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in general, advertisements (including representations made in mail-order catalogs, price lists, and circulars) are treated not as offers to contract but as invitations to negotiate. On some occasions, courts have constructed advertisements to be offers because the ads contained definite terms that invited acceptance (such as an ad offering a reward for the return of a lost dog). So advertisements can sometimes be an offer under certain circumstances.

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terminated

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an offer may be terminated by either the offeror or the offeree by three ways: (1) revocation, (2) rejection, (3) counteroffer.

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Revocation

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the offeror's act of withdrawing (revoking) an offer, unless an offer is irrevocable the offeror usually can revoke the offer (even if he or she has promised to keep it open) as long as the revocation is communicated to the offeree before the offeree accepts.

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Option contract

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a form of irrevocable offer is an option contract. this is created when an offeror promises to hold an offer open for a specified period of time in return for a payment (consider action) given by the offeree. this takes away the offeror's power to revoke the offer for the period of time specified in the option. These are also frequently used in conjunction with the sale or lease of real estate.

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Rejection

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if the offeree rejects the offer--by words or by conduct--the offer is terminated. Any subsequent attempt by the offeree to accept will be constructed as a new offer, giving the original offeror (nor the offeree) the power of acceptance. this is effective only when it is actually received by the offeror or the offeror's agent.

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counteroffer

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this is a rejection of the original offer and the simultaneous making of a new offer.

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acceptance

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this is a voluntary act by the offeree that shows assent (agreement) to the terms of an offer. The offeree's act may consist of words or conduct. the acceptance must be unequivocal and must be communicated to the offeror. this is unequivocal acceptance, silence as acceptance, communication of acceptance, and mode and timeless of acceptance.

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unequivocal acceptance

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to exercise the power of acceptance effectively, the offeree must accept, unequivcally. this is also known as the mirror image rule.

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mirror image rule

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requires the offeree's acceptance to match the offeror's offer exactly--to mirror the offer.

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silence as acceptance

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ordinarily, silence cannot constitute acceptance, even if the offeror states, "by your silence and inaction, you will be deemed to have accepted this offer." this rule applied because an offeree should not be obligated to act affirmatively to reject an offer when no consideration has passed to the offeree to impose such a duty. in some instances the offeree does have a duty to speak. in these situations, her or his silence or inaction will operate as an acceptance.

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mailbox rule

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acceptance takes effect, thus completing formation of the contract, at the time the offeree sends or delivers the communication via the mode expressly or impliedly authorized by the offeror, under this rule, if the authorized mode of communication is the mail, then an acceptance becomes valid when it is dispatched--not when it is received by the offeror.

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consideration

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generally, the value given in return for a promise or a performance. the consideration, which must be present to make the contract legally binding, must be something of legally sufficient value bargained for.

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legal value

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the "something of legally sufficient value" may consist of (1) a promise to do something that one has no prior legal duty to do, (2) the performance of an action that one is otherwise not obligated to undertake, or (3) the refraining from an action that one has legal right to undertake.

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bargained-for-exchange

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distinguish contracts from gifts. The item of value must be given or promised by the promisor (offeror) in return for the promisee's promise, performance, or promise of performance.

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preexisting duty rule

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under most circumstances, a promise to do what one already has legal duty to do does not constitute legally sufficient consideration. the preexisting legal duty may be imposed by law or may arise out of a previous contract. a sheriff, for example, cannot collect a reward for providing information leading to the capture of a criminal if the sheriff already has a legal duty to capture the ciminal. this rule is meant to prevent extortion and the so-called holdup game.

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past consideration

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promises made in return for actions or events that have already taken place are unenforceable. these promises lack consideration in that the element of bargained-for-exchange is missing. in short, you can bargain for something to take place now or in the future but not for something that has already taken place.

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Recession

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the unmaking of a contract so as to return the parties to the position they occupied before the contract was made.

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Contractual capacity

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historically, the law has given special protection to those who bargain with the inexperience of youth and those who lack the degree of mental competence required by law. a person who has been determined by a court to be mentally incompetent, for example, cannot form a legally binding contract with another party. for example, minors--or infants, as they are commonly referred to in legal terminology--usually are not legally bound by contracts.

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disaffirmance

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the legal avoidance, or setting aside, of a contractual obligation. a minor must express his or her intent, through words or conduct, not to be bound to the contract. to avoid a contract, a minor need only manifest an intention not to be bound by it.

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minor's obligations on disaffirmance

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a minor must express his or her intent, through words or conduct, not to be bound by the contract. the minor must disaffirm the entire contract, not merely a portion of it. for example, the minor cannot decide to keep part of the goods purchased under a contract and return the remaining goods. a contract can ordinarily be disaffirmed at any time during minority or for a reasonable period after reaching majority. two months would probably be considered reasonable, but except in unusual circumstances.

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emancipation

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occurs when a child's parent or legal guardian relinquishes the legal right to exercise control over the child.

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necessaries

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include whatever is reasonably needed to maintain the minor's standard of living. in general, food, clothing, shelter, and medical services are necessaries.

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ratification

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the act of accepting and giving legal force to an obligation that previously was not enforceable.

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intoxication

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a condition in which a person's normal capacity to act or think is inhibited by alcohol or some other drugs. a contract entered into by an intoxicated person can be either voidable or valid. if the person was sufficiently intoxicated to lack mental capacity, then the agreement may be voidable even if the intoxication was purely voluntary. if the person understood consequences of the agreement, the contract will be enforceable.

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mentally incompetent valid

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a contract entered into a mentally incompetent person may be valid if the person had capacity at the time the contract was formed. an otherwise incompetent person who understands the nature, purpose, and consequence of a contract at the time of entering into it is bound by it.

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mentally incompetent void

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if a court has previously determined that a person is mentally incompetent and has appointed a guardian to represent the individual, any contract made by the mentally incompetent person is void--no contract exists.

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mentally incompetent voidable

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if a court has not previously judged a person to be mentally incompetent but in fact the person was incompetent at the time the contract was formed, the contract may be voidable. A contract is voidable if the person did not know he or she was entering into the contract or lacked the mental capacity to comprehend its nature, purpose, and consequences.

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mistake

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an action or judgment that is misguided or wrong.

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mistake of value

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if a mistake concerns the future market value or quality of the object of the contract.

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mistake of fact

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occur in two forms--bilateral and unilateral. A bilateral, or mutual, mistake is made by both of the contracting parties. A unilateral mistake is made by only one of the parties.

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unilateral mistake

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occurs when only one of the contracting parties is mistaken about a material fact. generally this mistake does not afford the mistaken party any right to relief from the contract. normally, the contract is enforceable.

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mutual mistake

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this is a mistake where both parties are mistaken about the same material fact. the contract can be rescinded by either party. normally, the contract is voidable by the adversely affected party.

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legal result of mutual mistake of value

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no legal significance because the value is a variable.

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elements of fraudulent misrepresentation

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(1) a misrepresentation of a material fact must occur. (2) there must be an intent to deceive. (3) the innocent party must justifiably rely on the misrepresentation. to collect damages, a party must have been harmed as a result of the misrepresentation.

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Misrepresentation has occurred

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the first element of proving fraud is to show that misrepresentation of a material fact has occurred. this can occur by words or actions. Example: the statement "this sculpture was created by Michelangelo" is a misrepresentation of fact if another artist sculpted the statue.

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misrepresentation by conduct

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misrepresentation also arises when a party takes specific action to conceal a fact that is material to the contract. therefore, if a seller, by his or her actions, prevents a buyer from learning of some fact that is material to the contract, such behavior constitutes misrepresentation by conduct.

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misrepresentation of law

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this ordinarily does not entitle a party to relief from a contract.

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intent to deceive

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the second element of fraud is knowledge on the part of the misrepresenting party that facts have been falsely represented. this element, normally called scienter, or "guilty knowledge," signifies that there was an intent to deceive. this exists if a party knows a fact is not as stated.

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innocent misrepresentation

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if a person makes a statement that he or she believes to be true but that actually misrepresents material facts. when this occurs, the aggrieved party can rescind the contract but usually cannot seek damages.

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negligent misrepresentation

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if the party fails to exercise reasonably care in uncovering or disclosing the facts or does not use the skill and competence that her or his business or profession requires.

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reliance on misrepresentation

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the third element of fraud. the deceived party must have a justifiable reason for relying on the misrepresentation, and the misrepresentation must be an important factor in inducting that party to enter into the contract.

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undue influence

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arises from special kinds of relationships in which one party can greatly influence another party, thus overcoming that party's free will. a contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable. Minors and elderly people are often under the influence of guardians. if a guardian induces a younger or elderly ward to enter into a contract that benefits the guardian, the guardian may have exerted undue influence.

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fiduciary relationships

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physician-patient, parent-child, husband-wife, guardian-ward.

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duress

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the use of threats to force a party to enter into a contract. in addition, blackmail or extortion to induce consent to a contract constitutes duress. this is both a defense to the enforcement of a contract and a ground for the rescission of a contract.

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unconscionability

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standard-form contracts often contain fine-print provisions that shift a risk ordinarily borne by one party to the other. to avoid enforcement of the contract or of a particular clause, the aggrieved party must show that the parties had substantially unequal bargaining positions and that enforcement would be manifestly unfair or oppressive.

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adhesion contract

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written exclusively by one party and presented to the other party on a take-it-or-leave-it basis.

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Assignment

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the transfer of contractual rights to a third party. Important because they are involved in many types of business financing. Banks, for example, frequently assign their rights t receive payments under their loan contracts to other firms, which pay for those rights.

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Delegation

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the transfer of contractual duties to a third party. just as a party can transfer rights throughout an assignment, a party can also transfer duties. Duties are not assigned, however, they are delegated.

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Rights which may not be assigned

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as a general rule, all rights can be assigned. Exceptions are made, however, under certain circumstances. when a statute prohibits assignment, when a contract is personal in nature, when an assignment will significantly change the risk of duties of the obligor, and when the contract prohibits assignment.

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when a statute prohibits assignment

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when a statute expressly prohibits assignment of a particular right, that right cannot be assigned.

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when a contract is personal in nature

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if a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.

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when an assignment will significantly change the risk or duties of the obligor

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a right cannot be assigned if the assignment will significantly increase or alter the risk to or the duties of the obligor.

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when a contract prohibits assignment

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when a contract specifically stipulates that a right cannot be assigned, then ordinarily it cannot be assigned.

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effect of an assignment

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when rights under a contract are assigned unconditionally, the rights of the assignor are extinguished. the third party (the assignee) has a right to demand performance from the other original party to the contract. the assignee takes only those rights that the assignor originally had.

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third party

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when the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person, the third person becomes an intended third party.

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duties which may not be delegated

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when the duties are person in nature, when performance by a third party will vary materially from that expected by the oblige, when the contract prohibits delegation.

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when duties are personal in nature

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when special trust has been placed in the obligor or when performance depends on the personal skill or talents of the obligor, contractual duties cannot be delegated.

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when performance by a third party will vary materially

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when performance by a third party will vary materially from that expected by the oblige under the contract, contractual duties cannot be delegated.

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when the contract prohibits delegation

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when the contract expressly prohibits delegation by including an antidelegation clause, the duties cannot be delegated.

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effect of delegation

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if a delegation of duties is enforceable, the obligee must accept performance from the delegatee.

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third party beneficiary

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when the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person, the third person becomes an intended third party beneficiary.

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incidental beneficiary

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the benefit that an incidental beneficiary receives from a contract between two parties is unintentional.