Module 12

http://jec.unm.edu/education/online-training/contract-law-tutorial/introduction http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2 Sources of Contract Law* There are two sources of contract law in the United States. The common law of contracts developed over years through a series of court decisions regarding the formation and enforcement of agreements. The other source of contract law is the Uniform Commercial Code (UCC), which was drafted by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. One of the main purposes of the UCC was to establish a uniform system of rules to govern commercial transactions. Article 2 of the UCC applies to contracts for the sale of goods. While the UCC applies only to contracts for the sale of goods, the common law applies to contracts involving services, real property, and intangible property (things like intellectual property rights and shares of stock). The primary difference between the UCC and the common law of contracts is that the UCC relaxes many of the requirements of contract formation under the common law. In addition, the UCC distinguishes between merchants and consumers, and holds merchants to a different or more demanding standard in some instances. A “merchant” is a person who deals in goods of the kind or otherwise by their occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction. Furthermore, the UCC seeks to promote fair dealing and reasonableness in the commercial transactions by imposing a duty of good faith in the performance and enforcement of every contract. *Adapted with permission from Valerie Flugge & Kurt M. Saunders, A Contract Depending on How You Slice It: Serving up the Common Law, The Uniform Commercial Code, and Business Ethics. All rights reserved. Hybrid Contracts* The UCC applies only to contracts for the sale of goods. The term “goods” means tangible, movable things. The common law governs contracts involving the sale of all other subject matter, including real estate, services, investment securities, and licensing. Some contracts involve transactions for goods as well as services or other subject matter not governed by the UCC, such as real estate. Such contracts are known as “hybrid” or “mixed” contracts. The UCC is silent on whether it applies to a contract that involves both the sale of goods and services. Therefore, the courts have been left to decide what law governs a hybrid contract. Whether a hybrid contract is governed by the UCC or common law is determined by the majority of courts by asking if the goods or services aspect of the contract predominates in the transaction. In applying the predominant purpose test, the courts focus on four factors: (1) the language of the contract; (2) the nature of the business of the supplier of goods and services; (3) the reason the parties entered into the contract; and (4) the amounts paid for the rendition of the services and goods. If the court determines that the parties are predominantly contracting for the sale of goods, then Article 2 of the UCC governs the contract. However, if the parties are predominantly agreeing to the sale of services, then the UCC does not apply. Another test that some courts apply is the “gravamen” test, which focuses on whether the issue in the case involves a dispute with the goods or with services or some other aspect of the agreement. If the dispute relates to the goods, then Article 2 of the UCC applies, but if the dispute involves the services aspect of the contract, then the UCC does not apply. Another approach used by a minority of courts is to separate the contract, and to apply the UCC to the goods portion of the agreement, and the common law to the non-goods portion. *Adapted with permission from Valerie Flugge & Kurt M. Saunders, A Contract Depending on How You Slice It: Serving up the Common Law, The Uniform Commercial Code, and Business Ethics. All rights reserved. Offers* An offer is “a manifestation of willingness to enter into a bargain so made as to justify another person in understanding his assent to that bargain is invited and will conclude it.” To prove that an offer was made, there must be evidence that (1) the offeror presently intended to make an offer, (2) the terms of the offer were definite, and (3) the offeror communicated the essential terms of the offer to the offeree. Courts measure intent using an objective standard by examining the offeror’s statements and actions, along with the surrounding circumstances. At common law, an offer must be sufficiently definite such that, if accepted, there would be a sufficient “basis for determining the existence of a breach and for giving an appropriate remedy.” This standard of definiteness suggests that the offer must specify such essential terms as subject matter, price, and quantity. Finally, an offer becomes effective once it has been received by the offeree. As with the common law, the UCC requires that, in making an offer, the offeror manifest present intent to contract in order for a contract to be formed. Article 2 explains that a contract can be created “in any manner sufficient to show agreement, including conduct which recognizes the existence of a contract.” In addition, the standard of definiteness is more relaxed than what is required by common law. A contract for the sale of goods will not fail for indefiniteness if the parties intend to make a contract and the courts have a reasonably certain basis for providing an appropriate remedy. If terms are left open in a contract that nevertheless meets the standards of intent and ability to provide a remedy, then the open terms or “gaps” can be filled in by the presumptions found in the UCC’s “gap-filling” rules. An offeror may revoke an offer at any time prior to acceptance, even if the offeror has promised to hold the offer open for a stated period of time. Nevertheless, an offer can become irrevocable if it is accompanied by an option, a separate contract in which an offeror agrees not to revoke the offer for a stated time in exchange for separate consideration. An option contract affords the offeree the right to consider the offer for a certain period of time without the risk that the offeror will revoke it. Similarly, the UCC allows a merchant to make an irrevocable or “firm” offer for the sale of goods, but this can be done without the necessity of separate consideration to support the promise not to revoke the offer. A merchant’s firm offer must be include an assurance to hold open the offer, and must be made in writing, and signed by the merchant. Such an offer is irrevocable for the time stated or, if no time is stated, for a reasonable time not to exceed three months. *Adapted with permission from Valerie Flugge & Kurt M. Saunders, A Contract Depending on How You Slice It: Serving up the Common Law, The Uniform Commercial Code, and Business Ethics. All rights reserved. Acceptance* The offer gives the offeree the power of acceptance. According to the Restatement (Second) of Contracts, an acceptance is “a manifestation of assent to the terms [of the offer] made by the offeree in the manner invited or required by the offer.” As the “master” of the offer, the offeror may prescribe the method by which the offeree can accept the offer. Sometimes, in business-to-business transactions, an offeree responds to an offer with a purported acceptance that contains additional or different terms than those found in the offer. Between businesses, this situation is referred to as the “battle of the forms,” which arises in the exchange of standard preprinted forms between the parties. In the typical situation, the offeror will submit a purchase order to the offeree, who will reply with a confirmation form containing different or additional terms. Does this result in a contract and, if so, are the terms part of the contract? Under the common law, the “mirror image” rule provides the answer. An acceptance must be the mirror image of or identical to the offer. As such, a purported acceptance with additional or different terms is not an acceptance. Changes to the terms of the offer by the offeree is treated as a counter-offer and an implied rejection of the offer. As such, no contract is formed. Under the UCC, such a reply to an offer operates as an acceptance, unless it is expressly made conditional on the offeror’s agreement to the different or additional terms. If so, then it is treated as a counter-offer and a rejection so that no contract results unless the offeror accepts the counter-offer. When the reply is not expressly conditional on the offeror’s assent to the different or additional terms, it operates as an acceptance and a contract is formed. Whether the additional or different terms are included in the contract depends on whether the parties are both merchants. If only one of the parties is a merchant, the different or additional terms are considered merely proposals, which the offeror may accept or reject. If both parties are merchants, however, the terms become part of the contract unless: the offer expressly limited acceptance to the terms of the offer, or the terms materially alter the offer, or the offeror objects to the terms within a reasonable time. Even if the exchange of written forms by the parties does not lead to the formation of a contract, it is still possible that the conduct of the parties may allow a court to conclude that a contract between them does in fact exist. For instance, the parties may perform as they had agreed, ignoring or without noticing the offeree’s different or additional terms. In such a case, the terms of the contract will “consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under” the gap-filling provisions of the UCC. This is sometimes referred to as the “knock-out” rule because the conflicting terms are excluded from the contract and replaced with UCC gapfilling terms. An alternative approach is known as the last shot doctrine, which holds that if the parties perform despite the offeree’s rejection of the offer by counter-offer, then the terms of the contract are those of the counter-offer. *Adapted with permission from Valerie Flugge & Kurt M. Saunders, A Contract Depending on How You Slice It: Serving up the Common Law, The Uniform Commercial Code, and Business Ethics. All rights reserved. Consideration* Contracts are distinguished from gratuitous promises by the element of consideration. Only those agreements supported by consideration are enforceable. Consideration is legal value, bargained for and given in exchange for an act or a promise. In bilateral contracts, the parties must have mutuality of obligation. The promisee must have agreed to do, or to refrain from doing, something in exchange for the promisor’s promise. When the promisee has not done so, the contract lacks consideration and is considered to be “illusory” because the promisee is not required give the promisor anything of legal value in exchange. A contract in which one party agrees to buy all of the other party’s production of a particular product is known as an output contract, and a contract in which one party agrees to supply all of the other’s needs for a product is known as a requirements contract. At common law, these contracts are considered to be unenforceable illusory promises because they fail to specify the quantity of goods to be produced or purchased. The UCC, however, allows for the enforcement of output and requirements contracts, subject to the limitation of good faith. In other words, the quantity demanded or supplied must be made in good faith such that it is not unreasonably disproportionate to any stated estimate in the contract or to “normal or comparable” prior output or requirements if no estimate is stated in the agreement. *Adapted with permission from Valerie Flugge & Kurt M. Saunders, A Contract Depending on How You Slice It: Serving up the Common Law, The Uniform Commercial Code, and Business Ethics. All rights reserved. Contract Modification* Under the common law, a modification of an existing contract must be supported by the exchange of additional consideration. This is because the parties have a preexisting duty to perform the contract – each party is obligated to perform and is entitled to performance by the other party as agreed. As such, an agreement between the parties to modify the terms of their contract requires some new consideration to be binding. The Restatement (Second) of Contracts has loosened this traditional rule when “the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made.” Thus, a mutually agreed modification resulting from an unforeseen circumstance that could not have reasonably been expected to occur would be enforceable without additional consideration. Unlike the traditional common law rule, the UCC does not require additional consideration in order for a modification to be effective. This assumes that the modification was mutually agreed on by the parties and made in good faith. The Writing Requirement* As a general rule, oral contracts governed by the common law are enforceable. However, the statute of frauds is an exception to this rule in that it specifies that certain contracts must be in writing in order to be enforceable. These contracts are: collateral or suretyship contracts in which a person promises to perform the obligation of another person, such as payment of an amount owed; contracts for the sale of an interest in real estate; bilateral contracts that, by their terms, cannot be performed within a year from the date of their formation; contracts in which an executor or administrator of an estate agrees to be personally liable for the debt of an estate; and contracts in which marriage serves as the consideration. The UCC also includes a statute of frauds. According to section 2-201, all contracts for the sale of goods of $500 or more must be in writing. Likewise, an existing oral contract can fall within the statute of frauds if the contract is later modified for a price of $500 or more. The writing requirement of section 2-201 is satisfied if the entire contract is in writing, or if the parties’ agreement is confirmed by a written memorandum sufficient to indicate that a contract for sale has been made between the parties. The memorandum must indicate the quantity of goods to be sold and be signed by the party to be charged or his or her authorized agent. Regardless whether the contract is governed by the common law or the UCC, the statute of frauds applies only to executory contracts (contracts that have not yet been performed). If an oral contract has been completely performed by both parties, the statute of frauds will not be the basis for rescission of the contract. The UCC provides four alternative ways to satisfy the statute of frauds even if there is not a confirming written memorandum. First, if the transaction is between merchants and one of the parties sends a confirming memorandum within a reasonable time after the contract is made which is not objected to by the other party within 10 days, the memorandum can satisfy the statute even if it is not signed by the party against whom the contract is being enforced. Second, part payment or part delivery will satisfy the statute, but only for the quantity of goods that have been delivered or paid for. Third, admissions in testimony or pleadings in court that an oral contract was made will satisfy the statute of frauds as to the quantity of goods admitted. The last alternative involves specially manufactured goods. Specially manufactured goods are goods that are not suitable for sale in the ordinary course of the seller’s business. For example, goods imprinted with the name or logo of the buyer would be specially manufactured goods because they could not be sold to another buyer. If the seller has made a substantial beginning in the manufacture of the goods or made commitments for their procurement, the statute of frauds may be satisfied. Finally, the UCC incorporates the parol evidence rule, which prohibits the introduction of evidence of statements of promises or representations made prior to or during the creation of a written contract for the purpose of supplementing, changing, or contradicting the applicable terms of the contract. However, the terms of the contract may be explained or supplemented by course of dealing, usage of trade, by course of performance, or by evidence of consistent additional terms. Likewise, the parol evidence rule is applied to contracts governed by the common law. Performance and Breach* A party’s failure to perform when performance is due is a breach of contract. The elements of a breach of contract claim are the same under the common law and the UCC: the plaintiff must prove: (1) the existence of a valid and enforceable contract containing both definite and certain terms, (2) performance by the plaintiff, (3) breach by the defendant, and (4) resultant injury to the plaintiff. Under the common law, a buyer is entitled to substantial performance unless a condition in the contract requires strict performance. By contrast, the UCC adopts the “perfect tender” rule, which recognizes a breach “if the goods or the tender of delivery fail in any respect to conform to the contract.” However, the right of either party to pursue their remedies against the other is conditioned upon there having been a repudiation of the contract, a failure of performance, a rejection of the goods, or a revocation of the acceptance of the goods. The seller’s primary duty under the UCC is to deliver conforming goods and title to the buyer according to the terms of the contract. The place for delivery, unless otherwise agreed, is the first carrier’s place of business if the goods are to be transported, or the place where the parties knew the goods were located or were to be manufactured or produced. The buyer must pay the price for the goods at the time and place as specified in the contract or, if no time is specified, the buyer must pay for the goods at the time and place where the buyer is to receive the goods rather than at the point of delivery. The buyer need not pay until he or she has had the opportunity to inspect the goods. The seller has the right to avoid the contract when the buyer fails to perform any of its obligations or when the buyer fails to take delivery of the goods or pay the purchase price. If the seller chooses to avoid the contract, it is released from performance and may resell the goods and recover damages representing the difference between the contract price and the resale price. If the goods are not resold, the seller may recover the difference between the contract price and the market price. The seller may also bring an action for consequential damages, including lost profits. The seller may attempt to recover liquidated damages if the parties have agreed to include such a provision in their contract and the damages are “reasonable in light of the anticipated or actual harm caused by the breach.” Anticipatory breach or repudiation of the contract occurs when one party indicates that he or she is unable to perform or unwilling to perform before time for performance specified in the contract. A party’s repudiation must be clear and unequivocal. When this occurs, the non-breaching party may withhold performance and sue for damages, or wait until the time for performance and then sue for breach at that time. Excuses for Nonperformance* In some cases, the failure to perform a contractual obligation leading to breach can be excused. The common law recognizes several excuses for nonperformance. For instance, if a law enacted or amended after the formation of a contract makes performance of a party’s obligation illegal, then the party is excused from performing. Likewise, the death of a party or destruction of the essential subject matter of the contract through no fault of the party obligated to perform will excuse their failure to perform. A related excuse for nonperformance is that of impossibility. When a party’s performance of a contractual duty becomes impossible after the formation of the contract, the party will be discharged from liability for failing to perform that duty. Impossibility is more than difficulty, unprofitability, or general hardship. Rather, it involves an event or occurrence which was not reasonably foreseeable and which makes performance impossible for anyone, not just the party seeking to be excused. The UCC expands on the excuse of impossibility to include events or circumstances that make performance highly impracticable. Under section 2-615 of the UCC, a party to a contract may be excused from performance and from liability for breach of contract when it would be commercially impracticable to perform. The seller must establish (1) the occurrence of a contingency that was not their fault, (2) the nonoccurrence of the contingency was a presumed or a basic assumption underlying the contract, and (3) the occurrence of the contingency made performance commercially impracticable. Commercial impracticability is an arguably less stringent standard than impossibility. Although a breach stemming from major market price fluctuations or severe supply shortages is not usually excusable because they are a foreseeable risk of doing business, those contingencies resulting from war or a natural disaster would likely meet the standard for excuse due to commercial impracticability. Problems 1. Bob MacDonald gave a presentation to promote his new book, Cheat to Win. At the beginning of the presentation, he announced that one of the attendees would leave that day with a million dollars. MacDonald stated that all that was required to win was to stay to the end of the presentation and submit a business card. MacDonald would then draw the winning card at the end of the presentation. Frank Meram was one of the attendees. He submitted his business card, stayed until the end of the presentation, and MacDonald drew his card. MacDonald then told Meram that his million dollars would be paid one dollar a year for the next million years. MacDonald gave Meram one hundred dollars to cover the first hundred years. Meram thereafter brought a lawsuit against MacDonald to recover the balance of the million dollars, alleging that MacDonald had made an offer which Meram had accepted. MacDonald moved to dismiss the lawsuit, asserting that his “too good to be true” offer could not have evidenced an intent to enter into a binding contract. SHOULD MERAM’S LAWSUIT BE DISMISSED? IF THE PARTIES ENTERED INTO A BINDING CONTRACT, WAS THIS A UNILATERAL OR BILATERAL CONTRACT? WHAT CONSIDERATION DID MERAM PROVIDE? 2. Richard Davis conceived of and developed a pilot episode of a television show documenting the house flipping process. He shopped the show to several networks, including A&E. Davis discussed turning the show into a series with A&E’s director of lifestyle programming, Charles Nordlander. Davis proposed that he would assume all financial risk related to the purchase, renovation, and sale of the real estate and that Davis and A&E would evenly split the show’s revenues. Nordlander replied, “Okay, okay, I get it.” Once filming had begun, Davis was notified that A&E’s board of directors “had approved the money for our series.” However, the terms of any agreement were never reduced to writing. They filmed 13 episodes of the series Flip this House, and the show was a tremendous commercial success, earning $8 million in profits in the first season. A&E thereafter claimed that it had never entered into an agreement regarding Davis’ compensation because it never made an unambiguous acceptance of Davis’ offer. A&E offered to pay Davis an appearance fee and a 5% share of the show’s revenues. Davis sued. WAS A BINDING CONTRACT ENTERED INTO BETWEEN DAVIS AND A&E? WHY OR WHY NOT? 3. Rena Gottlieb was a member of the Tropicana Hotel’s Diamond Club. To become a Diamond Club member, an individual must visit a promotional booth, fill out an application form, and show identification. There is no charge. The member then swipes their membership card in a machine every time they play a game at the casino. The casino thereby gains information about the member’s gambling habits, which the casino then uses to tailor its promotions. While at the casino, Ms. Gottlieb played the Fun House Million Dollar Wheel promotion, where members were allowed one spin of the wheel each day. According to Ms. Gottlieb, she spun the wheel and landed on the million dollar grand prize. The wheel attendant then immediately swiped another card and spun the wheel again. This time it landed on two free show tickets. When Tropicana refused to pay the one million dollar prize, Ms. Gottlieb sued for breach of contract. Tropicana moved for summary judgment, alleging that no contract was made because it was not supported by consideration. WAS A BINDING CONTRACT ENTERED INTO BETWEEN TROPICANA AND MS. GOTTLIEB? WHY OR WHY NOT? 4. In August 2003, R.F. Cunningham & Co., a farm products dealer, and Driscoll, a farmer, entered into an oral contract for Cunningham to purchase 4,000 bushels of soybeans from Driscoll at a price of $5.50 per bushel. Immediately afterward, Cunningham sent Driscoll a purchase confirmation. Driscoll did not object to its contents. Driscoll thereafter refused to sell the soybeans to Cunningham. Cunningham was forced to buy the soybeans elsewhere at the then market price of $7.74 per bushel. Cunningham sued Driscoll for breach of contract, and Driscoll defended on the ground that the contract was unenforceable because it did not satisfy the statute of frauds. IS DRISCOLL CORRECT? WHY OR WHY NOT?

Collepals.com Plagiarism Free Papers

Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.

Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS

Why Hire Collepals.com writers to do your paper?

Quality- We are experienced and have access to ample research materials.

We write plagiarism Free Content

Confidential- We never share or sell your personal information to third parties.

Support-Chat with us today! We are always waiting to answer all your questions.