Carina Cooks has been employed by Realfood Restaurant Group (RRG) for around 3 years. Cooks was first hired as a line cook. After seeing Cooks p

BLAW 2051 Unit 5

Consideration, Capacity & Legality

Elements of Contract

In Unit Four, we were introduced to contract principles and terminology, as well as the first of four elements of contract – the agreement. This Unit explores the remaining three elements of contract – consideration, capacity, and legality.

The Second Element: Consideration

Consideration in contracting is the exchange that takes place between the parties to the contract. Consideration must be legally sufficient which involves the exchange of benefits and detriments for each of the contracting parties. For example, in a bilateral contract, parties exchange a promise for a promise – so legally sufficient consideration could involve the exchange the promise of work for the promise of salary. These are the benefits of the contract, but to the party that owes the other, they are also the detriments. In other words, the employer in this scenario would receive the benefit of the work, but would be responsible for the detriment of payment. These same requirements would apply in a unilateral contract, but instead the exchange would be a promise for an action.

It is also essential that consideration be adequate. Ordinarily, courts don't question the equivalency of an exchange. This means it is possible to sell a highly valued item, such as a house, for a small amount of money, like $1.00. Courts will only review the adequacy of consideration when there is a suggestion that an imbalance in consideration has resulted from factors that call into question the fairness of the entire transaction – such as an extreme difference in the bargaining power of the parties.

When there is a lack of consideration, it is ordinarily the case that a court will not enforce a contract, declaring it void. However, there is an exception to this principle called promissory estoppel. If there is a promise made, that is reasonably relied on by the other party, and the party relying on the promise would be harmed if the promise wasn't enforced, a court may elect to enforce that promise despite a lack of consideration.

There are some common scenarios which can appear to students of contract law to satisfy the requirements of consideration, but really lack consideration. Three common scenarios are:

Past Consideration – This is an issue when one of the contracting parties is promising something in the contract that has already occurred. If consideration is in the past, it cannot be consideration for a new contract. For instance, a promise today to pay a worker for work completed last month would lack consideration.

Pre-existing Duty – This is an issue when one of the contracting parties has a pre-existing duty to perform. If a party already has a duty to do something, that duty cannot supply consideration for a new contract. For instance, a police officer in your community cannot charge you a weekly fee to patrol your neighbor since they already have a duty to protect and serve that same community.

Illusory Promises – This is an issue when a promise may sound like a promise, but is actually conditioned on another factor. A good signal that a promise may be illusory is the use of the word "if" in making the promise. An illusory promise cannot supply the benefits and detriments necessary to support consideration in a contract.

The Third Element: Capacity

Capacity, the third element required for a binding legal contract, requires that the person seeking to contract have the mental capability to understand the rights and obligations that come with the contract. Most people who enter contracts have capacity. This is why capacity, in a contracting situation, is presumed, unless capacity is questioned. For questions of capacity, it is possible to have either limited capacity or limited competency, or be incapable of contracting at all due to a lack of capacity, or incompetency.

Minors, those under the age of 18, can contract, subject to the right to disaffirm. Minors have limited capacity, and thus most of the contracts they enter into are voidable. A voidable contract is a contract that is legally enforceable unless the minor decides they no longer want the contract. The minor can then choose to disaffirm the contract, which means the minor is no longer legally responsible for the rights and obligations of the contract. This right, the right to disaffirm,

belongs only to the minor. If the other party in the contract is an adult, the adult cannot disaffirm.

Once the minor reaches the age of majority, or in some cases a reasonable time thereafter, the disability of minority is lifted, and the contract is no longer voidable. At this time, the minor can expressly ratify the contract, which involves making a statement that the now former minor still wants to receive the benefit of the contract. The former minor may also imply their ratification. This happens when the former minor takes actions consistent with wanting to continue to benefit from the contract, such as a minor continuing to drive a car after their 18th birthday.

There are some limitations on the minor's right to disaffirm, including contract for necessaries. Under the law, necessaries are items that are required for life, such as food and shelter, when an adult doesn't provide these things to the minor. A minor's contract for necessaries can still be disaffirmed, but the minor will be liable for the reasonable value of the necessary.

Intoxicated persons are those under the influence of alcohol, drugs, or another intoxicating substance to the extent that they can no longer understand the rights and obligations that come with a contract. This is a higher standard than just legally drunk or impaired. If someone who is so intoxicated that they do not understand the legal consequences of their actions manages to enter a contract anyway, that contract is voidable, and can be disaffirmed. Unlike the situation with the minor, the intoxicated person must give back the benefits of the contract they entered.

Finally, mentally incapacitated persons who cannot understand the rights and obligations of a contract may also have a right to disaffirm. In this situation, the right to disaffirm will depend on several factors. A medical diagnosis of mental or other illness impacting one's ability to think and reason is not enough. The person claiming mental incapacity must have been laboring under the defect at the time the contract is entered to render the contract voidable. If a person has had their right to contract taken away in a judicial proceeding, or adjudicated incompetent with a guardian appointed, any contracts entered by the mentally incapacitated person are void.

The Fourth Element: Legality

The final element of contract is legality, which requires that the contract have a lawful purpose. Some contracts are illegal because they are entered for the purpose of violating a state or federal law. For instance, a contract to gamble in a state where gambling is prohibited is an unlawful contract. A contract for a loan with an interest rate that violates the state usury rate is an unlawful contract. A contract to commit a crime is void as it lacks the element of legality.

In addition to contracts that violate a statute, some contracts are unlawful because they violate public policy. Such contracts are unlawful because a court will not enforce them. Some examples of contracts that violate public policy include:

Contracts in Restraint of Trade – Contracts in restraint of trade have the effect of limiting competition, so these are scrutinized by courts for their reasonableness. These contracts tend to be of two types – those that accompany the sale of a business, and those that are a part of an individual employment contract. Both types of contracts must be reasonable in terms of the length of time they limit competition, and the geographic areas in which the contract applies. If the contract is unreasonable in terms of time or location, a court may strike that contract as an unreasonable restraint of trade.

Unconscionable Contracts – Unconscionable contracts are contracts that disproportionately favor one side in the contract over the other. Normally, courts do not review contracts for their fairness outside of the determination that consideration is adequate (see above) but some contracts can be so one-sided and unfair that a court may refuse to enforce it and consider it void.

Contracts with Exculpatory Clauses – An exculpatory clause is a clause in a written contract that releases one party, usually the party that drafted the contract, from all liability to the other. When the contracting party using the exculpatory clause is in a business directly related to the public interest, courts usually favor holding such parties responsible to the public and may decline to enforce the exculpatory clause.

Valid contracts must have four elements – agreement, consideration, capacity and legality. If all four of these elements are present, the parties to the contract have created a legally binding agreement. If any one of these elements has failed, the contract is void and has failed to come into existence (or is voidable in the case of capacity).

(CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business law.

Chapter 15 – Consideration Chapter 16 – Capacity and Legality

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BLAW 2051 Unit 6

Contractual Defenses

Legal Assent

When parties enter a contract, not only must there be the required four elements of contract, but the parties must also have what the law terms a 'meeting of the minds.' Requiring that contracts have legal assent makes business transactions more dependable. There are four obstacles to legal assent: Mistake, Misrepresentation, Undue Influence, and Duress.

A mistake is an erroneous belief about a material aspect of a contract at the time a contract is made. In the case of a unilateral mistake, where only one party makes a mistake about a material fact in the contract, the contract is still valid. However, if both parties make a mistake about a material fact in a contract, legal assent is absent as the parties really didn't agree to the same deal as the other. In such a scenario, this is a mutual mistake, and it renders the contract voidable by either party. Such a contract can also be rescinded by a court.

A misrepresentation also prevents legal assent in a contract. A misrepresentation takes place when a material fact regarding a contract turns out to be untrue. Misrepresentations can be innocent, negligent, or fraudulent.

· An innocent misrepresentation is a false statement about a material fact in a contract. The party that made the statement believed the statement to be true. The party injured by the false statement can rescind the contract, but cannot collect damages as the statement was made with no knowledge of its falsity.

· A negligent misrepresentation is a false statement about a material fact in a contract, made by a party that failed to take steps to assure the statement was true. The party injured by the false statement may rescind the contract and may be entitled to damages.

· A fraudulent misrepresentation is a false statement about a material fact in a contract, made with a deceitful purpose. If the innocent party justifiably relies on the false statement in deciding to enter the contract, the innocent party is entitled to rescind the contract and recover damages.

Undue influence in contracting can result when a dominant party exploits a special relationship they have with a subservient party in an effort to induce that subservient party to contract. When a party contracts with someone to whom they have yielded a high degree of trust, undue influence can arise. The trusting nature of the relationship makes the subservient party susceptible to influence in contracting with the dominant party. If a court finds that a contract was the result of undue influence, the court will order that the contract be rescinded.

Finally, duress may interfere with legal assent. In a situation where a party enters a contract under duress, they are no longer acting of their own free will. Duress can result from physical harm, financial or economic harm, or unlawful threats. In a situation where a party enters a contract under duress, that party can void the contract, or a court can order that the contract be rescinded.

Written Contracts

Many of the contracts that we enter in our lives, and that businesses enter through their operations, are oral. Students of business law are often surprised to learn that contracts need not be written, but quickly identify the many examples of oral contracts they've experienced in their own personal and work lives. Even so, written contracts provide several advantages over oral contracts, including that they are just easier to prove in court. For this and many other reasons, some contracts are required to be in writing to be enforceable.

The Statute of Frauds

When a contract is subject to the statute of frauds, that contract must be written. The statute of frauds originated in English common law, with the purpose of preventing fraud in contracting. The "statute of frauds" is the term given to contracts that must be written, but there isn't a single statute of frauds. Instead, these statutes are codified under state law, and often appear in several different statutes within the state statutory codes.

Since the statute of frauds is state law, there are differences in treatment among the several states. There are, however,

common areas of contracting that may be governed by the state statute of frauds.

· Contracts that Cannot Be Completed within a Year – Commonly called the "one-year rule" this statute requires that a contract that cannot possibly be completed within one-year from the time the contract is created must be written. Note that this is a bright line; the one-year rule does NOT apply to contracts that can be completed within the year, even if such performance is unlikely.

· Contracts Made in Consideration of Marriage – Contracts that promise something other than a promise to marry must be written to be enforced. For instance, if a couple decides to marry, that promise need not be written. However, if one of the parties promises the other party a car in exchange for marriage, that contract must be written. This aspect of the statute of frauds relates to pre-nuptial agreements where the agreement to marry is accompanied by several other agreements pertaining to property within the marriage or on dissolution of marriage.

· Contracts to Pay the Debt of Another Party – Contracts where one party agrees to pay a debt for another party must be written. Students of business law typically think of these agreements as those that require a co-signor, but here they are called 'secondary obligations' or 'secondary promises.' Such contracts will bind the secondary obligor to pay a debt even when that party gets no benefit from the original contract.

· Contracts Relating to Interests in Land – Contracts relating to interests in land, including the soil, structures, improvements, etc. must be written.

· Contracts for the Sale of Goods in Excess of $500.00 – The Uniform Commercial Code (UCC) requires that sales of goods totaling in excess of $500.00 require a written contract. This contract must recite the quantity of the goods, and the signature of the party against whom enforcement is sought.

Generally speaking, if a contract must be written, a court will not enforce that contract unless it is, in fact, written. But, there are some important exceptions to the statute of frauds. If a party, under oath, admits that a contract exists, that admission can serve to prove a contract to the satisfaction of the court even if there is no written version of the contract. The doctrine of promissory estoppel, which was introduced in the chapter on Consideration, can operate to allow a court to enforce an oral promise that was otherwise subject to the Statute of Frauds. There are special exceptions under the UCC for specially manufactured goods. And finally, partial performance of an oral contract can be the proof that a court requires to enforce an oral agreement.

Conclusion

Legal assent is an essential aspect of contract law, as it provides that a meeting of the minds has occurred in a contract. The Statute of Frauds similarly operates to bring a different type of trustworthiness to contracts.

(CSLO 1, CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business law.

Chapter 17 – Legal Assent Chapter 18 – Contracts in Writing

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BLAW 2051 Unit 4

Introduction to Contracts

Introduction to Contracts

The next several units will explore the law of contracts, a topic at the core of Business Law. Some of the most important business relationships are contractual. Businesses enter contracts to sell products or services, to purchase inventory, to lease premises for business operations. Businesses can even have contracts with their employees. So, having a functional understanding of contracts is a must for any successful business person.

What is a Contract?

Simply put, a contract is a "set of legally enforceable promises" (Kubasek, 2015). A contract is made up of four elements:

Agreement – An offer that has been accepted forms an agreement. An offer is a proposal to contract by an offeror, and an acceptance is the consent to the offer by the offeree.

Consideration – This is a mutually bargained-for exchange.

Capacity – This is the legal ability to enter a contract. Capacity is presumed, but there are some situations where we prevent people from entering contracts, mostly as a means of protection.

Legal object – This requires that the contract is formed for a lawful purpose.

Sources of Contract Law

Contract law comes from two sources. The majority of contract law is common law, made through the resolution of disputes in the courts. The Restatement (Second) of Contracts serves as a summary of the majority rule of law on contracts, but isn't law itself. Each state has its own law within its judicial decisions. A second source of contract law is the Uniform Commercial Code (UCC). Businesses rely on contracts, and having different laws in different states posed a barrier to uniformity in contracting. To address this, the Uniform Commercial Code was drafted as a proposal for a series of statutes to govern a commercial transaction for the sale or lease of goods. For the UCC to become law in any state, that state's legislative body must adopt it as part of the state's statutes.

Classifications of Contracts

Contracts are classified in different ways, and in order to understand the rights and obligations created by a contract, one should understand the way in which the contract can be classified.

All contracts are either bilateral or unilateral. In a bilateral contract, the parties each exchange a binding promise with the other. In a unilateral contract, one party exchanges a binding promise for another parties' action. In a bilateral contract, if one party does not complete their promise, the contract is breached. In a unilateral contract, however, if the action is not completed, there is no breach. The lack of action prevents the contract from being fully formed as the element of agreement is missing.

All contracts are either express or implied. Express contracts are contracts that are expressed in words – whether oral or written. In contrast, implied contracts (or implied-in-fact) arise from actions of both parties. At times, there are situations where neither an express nor an implied contract exists, but a court wants to hold parties responsible to an obligation as if that party had entered a contract because of unjust enrichment. This is called a quasi-contract (or implied-in-law contract).

All contracts are valid, void, voidable or unenforceable. People enter contracts aiming for them to be valid, which means that all of the elements required of a contract are present. A valid contract is also called an enforceable contract. A void contract is an effort at contracting but there is a failure of one or more of the required elements. A contract is voidable if one of the parties has the ability to withdraw from the contract without the consent of the other. An unenforceable contract is an otherwise valid contract that is subject to a defense rendering the contract unable to be enforced by a

court.

All contracts are either executed or executory. Contracts that are executory are in the process of being performed. When the terms of a contract are fully performed, the contract is executed.

Finally, most contracts are simple contracts, or informal contracts, unless the contract falls under one of the four types of formal contracts. Formal contracts are (1) contracts under seal, (2) recognizances, (3) letters of credit, and (4) negotiable instruments.

First Element of Contract: The Agreement

The element of agreement requires two components – the offer and the acceptance. These two components come together to form an agreement.

An offer has three elements. An offer requires a serious intention to be bound to a promise, clear and reasonably definite terms of the promise, and communication to the offeree.

Serious intention – This is determined with reference to objective indications of the offeror's intent. Intention is what a reasonable person would believe the offeree meant given the facts and circumstances under which the offer is made.

Definite Terms – This requires that the material terms of the contract are known or can be ascertained. Terms that should be definite include the parties to the contract, the subject matter of the contract, and the exchange in return.

Communication – The offeree must know of an offer in order to accept it. So, the offer must be communicated to the offeree.

As a general rule, an offer can be revoked any time before it is accepted, and a revocation is effective when the offeree becomes aware of the revocation. So, if an offer is revoked via U.S. mail, the revocation will be effective when the mail is received by the offeree. When an offer is rejected, or when the offeree makes a counteroffer, the original offer is terminated.

To form an agreement, an acceptance must follow the offer. The acceptance should be the mirror image of the offer, including the same serious intention to be bound to the same terms, communicated to the offeror. Acceptance can be communicated via any reasonable means, unless a method of communication is required by the offer.

An acceptance is effective when the acceptance is placed in the mail (when using this method for acceptance) even though the offeror may not yet know that their offer has been accepted. This is called the mailbox rule. The mailbox rule certainly applies to acceptances via U.S. Mail, but whether it applies to other means of communication of acceptance may vary depending on the state and the method of communication.

At this time, you may be asking yourself what happens when an offer is revoked via mail (effective on receipt) and an offeree thereafter mails an acceptance (effective on dispatch). In this case, a valid contract is formed, and the revocation, once received by the offeree, has no effect. The import of these rules may lead contracting parties to more instantaneous forms of communication, say via phone, to place another party on notice of a revocation or an acceptance.

Conclusion

Businesses rely heavily on contracting, and as such must keep abreast of contract law. To communicate with other contracting parties and with legal advisors about contracts, it is important to learn the various contract terms, and use them. In addition, being able to classify contracts is essential in determining the rights and duties under those contracts, an issue that will be important in the next few units.

(CSLO 1, CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business

law.

Chapter 13 – Introduction to Contracts Chapter 14 – The Agreement

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BLAW 2051 Unit 7

Discharge and Remedies

Generally, only the parties to a contract have a right to enforce that contract. There are important exceptions to this rule for third parties pertaining to assignment and delegation, and third-party beneficiaries.

Assignment and Delegation

An assignment within a contract is when a contracting party transfers the benefit of the contract to a third party outside the contract. The party to the contract, called the assignor, essentially assigns the right to the performance to a third- party, the assignee. Both the assignor and the assignee are entitled to enforce the contract. Most contract rights can be assigned, but there are some exceptions, including those rights where assignment is prohibited by law, public policy, by the language of the contract itself, or because the right is personal in nature.

A delegation within a contract is when a contracting party transfers the obligations to perform the contract promises to a third party outside the contract. The party to the contract, called the delegator delegates the duty to perform to a third- party, the delegatee. Both the delegator and the delegate remain liable under the original contract to perform the duty. As with assignment, there are some duties that can't be delegated, including instances where the delegation is prohibited by the contract, is personal in nature, or would materially vary the contract performance.

Third-Party Beneficiary Contracts

Some contracts are entered for the purpose of benefiting a third-party. Take, for example, the purchase and sale of life insurance. The intention of a person purchasing life insurance is to leave the money paid from the policy to their beneficiaries. This is a classic example of a third-party beneficiary contract. Not only can the parties to the contract enforce the contract, but so can the named third-party beneficiaries.

In order for someone to be an intended third-party beneficiary under a contract, they must be intended by the contracting party to benefit from the contract. At times, people that aren't parties to a contract may benefit from a contract even when they weren't even a thought when the contracting parties made their agreement. When this occurs, the third-party benefiting from the contract is called an incidental beneficiary, and may not enforce the original agreement.

Discharge and Remedies

People and organizations enter contracts because they want the benefits of the contracts they enter. Because of this, most contracts are successfully performed, and then discharged.

When a contract is discharged, it means that the obligations of the parties under the contract have come to an end. Performance of the contract is the method of discharge that contracting parties hope for, but there are ways to discharge a contract without performance.

Discharge by Performance

Discharge by performance occurs when parties do what they have promised to do under the contract. The offer of performance is known as 'tender.' At common law, perfect tender only discharged a contract. Today, a contract can be discharged with performance in these ways:

· Complete Performance (or Perfect Tender) – When the promises within a contract are performed with no defects at all. This type of performance is hard to achieve, practically speaking.

· Substantial Performance – When promises within a contract are performed with minor defects, also called minor breaches. Since there are defects in performance, a party can still be required to compensate the injured party for the effects of the breach, but the contract itself is still considered performed, as opposed to breached.

· Satisfactory Performance – When the promises within a contract are subject to the satisfaction of one of the parties. The contract is discharged when the other party accepts performance. In a TV infomercial you may hear the announcer say "Satisfaction guaranteed or your money back." This is an illustration of a contract that can be discharged through

satisfactory performance.

Discharge without Performance

When a contract is breached, the contract is discharged without performance. A breach occurs when one of the contracting parties fails to complete their promises under a contract. A material breach occurs when the failure pertains to a material aspect of a contract. When a breach of contract occurs, the non-breaching party is discharged from its obligation of continued performance. Moreover, the non-breaching party is most likely going to be entitled to damages from the breaching party.

There are several other ways that a contract may be discharged without performance. These include discharge by conditions, discharge by mutual agreement, and the many ways a contract may be discharged by operation of law.

Remedies

When a contract is breached, the non-breaching party may be entitled to remedies. There are several remedies associated with contract actions. Generally, these remedies are divided into two types – legal remedies (commonly monetary damages) and equitable remedies (commonly court ordered actions). Courts tend to look first at legal remedies to see if there is some amount of money that will compensate the injured party for the breach. In some instances, money won't suffice to cure the injury, and so equitable remedies might be appropriate.

The most commonly awarded form of damages are compensatory damages. This is an amount of money that will compensate the injured party from the effects of the breach. Compensatory damages are intended to put the Plaintiff in the position they would have been had the contract been performed. In other words, if the Plaintiff would have made

$500.00 had a contract been fully performed and discharged, the amount of compensatory damages is equal to

$500.00.

In addition to compensatory damages, it is possible, although less likely, for a court to award other types of damages. Consequential damages are special damages that are awarded for damages that are the indirect result of the breach. Imagine that a buyer and a seller agree to the sale of a car, but the buyer later breaches the contract. As a result, the seller pays $40.00 to an auto trader magazine to list the car for sale. These $40.00 are consequential damages to the breach of the automobile purchase contract.

Two other forms of monetary damages in contract actions are punitive damages and nominal damages. Punitive damages are damages awarded to punish the defendant for particularly reprehensible conduct in a cont

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