Contracts

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CONTRACTS

Chapter 10

Meiners, Ringleb & EdwardsThe Legal Environment of Business, 12th Edition


CONTRACT LAW

Provides a mechanism to deal with others Law of contracts has evolved in commerce over the

centuries The concept of freedom of contract means there are

responsibilities to those who create legally binding relationships


Common Law Judge-made law Each state differs There is uniformity about

general contract principles that run throughout most states’ laws

Years ago, English courts began to use lex mercatoria (“the law merchant”)

Roman law of contracts was surprisingly sophisticated covering the Roman Empire

UCCUniform Commercial

CodeAll States have

adopted in its entirety except Louisiana

Covers contracts for sale of goods

Many countries rely on Code Law only for their basic legal framework

CONTRACT LAW


DEFINITION OF A CONTRACTo Sir Wm. Blackstone: “An agreement, upon sufficient

consideration, to do or not to do a particular thing.”o Modern definition--centers on a promise: “A promise or

set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.”

o The promise itself creates a manifestation of intento Contracts form legal relationships and duties between

partieso Not all promises are enforceable contracts – must

meet the requirements of a contract to create an enforceable promise


EXPRESS AND IMPLIED CONTRACTS

Express Contractso Direct statement by the

parties of the promises made

o May be oral or writteno All important terms are

expressly stated between the parties

Implied Contractso Actions and circumstances

infer and define the terms of the contract

o May be words, conduct, gestures

o These contracts are implied at law

o Ex: At a check out counter at a grocery store, actions of the parties create offers/ acceptances


ELEMENTS OF A CONTRACT1. An Agreement, through

OfferAcceptance

2. Consideration

3. Contractual Capacity

4. Legality

5. Genuine Consent

6. Writing If necessary under the

Statute of Frauds

RULE:

If all elements are present, the contract is generally termed valid

See Exhibit 10.1


OFFER AND ACCEPTANCE The Offer

Creates the Offeror and Offeree 1. Manifestation of Intent

Preliminary Negotiations vs. Intent to Offer 2. Definite Terms & Conditions 3. Communication

Person returns a dog but does not know of an award Sometimes terms will be presumed

i.e. mailed computer is packed properly Restatement (2nd) of Contracts: “the manifestation of

willingness to enter into a bargain, so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it.”


TERMINATING AN OFFER Revocation

Withdrawing of offer by the Offeror Rejection

By Offeree Through lapse of time (Option Contracts are different) Counteroffers are created by rejecting the original offer but

keeping negotiations open by presenting new conditions – result is a counteroffer

Operation of Law Intervening Illegality Destruction of subject matter Death or insanity of offeror or offeree


THE ACCEPTANCE The Acceptance – Expression of Assent

1. Unconditional Must be a mirror image of the offer If conditions are added, they create a counteroffer

2. Unequivocal3. Legally Communicated

Bilateral contracts versus unilateral contracts See Certified Fire Protection v. Precision Construction See also Exhibit 10.4


CASECERTIFIED FIRE PROTECTION V. PRECISION CONSTRUCTION

Precision Construction is general contractor that bid on job. Solicited bids from subcontractors for things such as design & installation of a

sprinkler system for fire prevention. Based on specifications, Certified Fire submitted a bid of $480,000. Won the bid. Precision began construction.

December 5: Certified got a copy of the contract from Precision, along with set of construction plans and sprinkler requirements. Contract required Certified to have preliminary design draws for system within 2

weeks and provide an insurance certificate. January 19: No signed contract or insurance certificate, but Certified billed Precision

for $33,575, although plans were not yet ready for Certified. January 26: Precision told Certified that it was holding up the project and it would

move ahead without Certified. February 1: Certified submitted drawings but objected to terms in contract. February 8: Precision was informed of mistakes in sprinkler system drawings. February 16: Precision told Certified that it was ending relationship: Because

contract wasn’t signed; There was no insurance certificate; Drawings were incorrect. Certified sued for breach of contract. Contended it was due payment for the sprinkler system drawings. Trial court held for Precision -- no contract existed. Certified appealed.

(Continued)


A contract requires offer & acceptance, meeting of minds and consideration. Meeting of the minds: When parties have agreed upon contract’s essential terms. Essential “depends on the agreement and its context and also on the subsequent conduct of the parties, including the dispute which arises and the remedy sought.

Certified argued progress bill it sent to Precision established the price term. Said Precision’s urging that Certified get started on designs established scope of work for express design-work-only contract.

Testimony establish that Precision would not execute a contract for only design drawings. Such drawings are specifically tailored for company – not useful to another installer.

Price and scope of work terms missing. Parties never agreed to performance time. Certified also argued it should recover under implied contract. Such a contract must be “manifested by conduct” – showing intent by parties to

contract, i.e. promises were exchanged and obligations were clear. Not true here. HELD: Affirmed. No contract was ever made. Too many gaps to fill. Precision never agreed to a contract for only design-related work. This was a

design and install contract for sprinkler system. No agreed upon price; disputes included time of performance. The designs are installer-specific.

CASECERTIFIED FIRE PROTECTION V. PRECISION CONSTRUCTION


CONSIDERATION Definition: Something of value or something bargained

for in exchange for a promise This element keeps contract from being a gift. If consideration is absent, neither party may enforce the

promise or agreement Traditional Rule: Must create –

Legal detriment to the promisee OR Legal benefit to the promisor Actually the legal detriment and benefit usually occur at the same

time.


ADEQUACY OF CONSIDERATION

Courts do not examine much. If a party bargains poorly, courts usually won’t

interfere. Those who bargain take on the risk of their own errors. There are exceptions such as fraud, duress, etc. The main concern is an exchange of mutual promises

and obligations by the parties. See Caley v. Gulfstream Aerospace Corp.


CASECALEY V. GULFSTREAM AEROSPACE CORP.

Gulfstream adopted a dispute resolution policy (DRP) as only procedure to resolve disputes between Gulfstream and the employees. Mailed policy to employees.

Policy said that DRP would begin in 2 weeks and would be “a condition of continued employment.” If an employee continued work, then she accepted the DRP.

Group of employees sued, saying there was no contract and DRP could not be enforced.

District Court held for Gulfstream. Employees appealed. HELD: Affirmed. DRP is an offer and states it is a contract. Terms of acceptance are continued employment by employees. Acceptance can be through a promise or an act. Here the action of continuing employment = acceptance of the offer and a contract. Employees had a choice to (1) continue employment, accepting DRP or (2)

terminate employment. There is “bargained for consideration” by mutual promises and obligations.


ENFORCEABLE PROMISES WITHOUT CONSIDERATION

Promissory Estoppel or Detrimental Reliance Use of this doctrine avoids injustice due to the promisee's

reasonable reliance on the promisor’s promise. Promisor is estopped (prevented) from denying a promise. Equitable doctrine. “A promise which the promisor should reasonably expect to induce

action or forbearance on the part of the promissee . . . and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” Restatement (2nd) of Contracts

Courts don’t impose the rule lightly. Sometimes used in promises to charities, especially if organizations

rely on the donation to act in some way. e.g. Beginning construction based on promises of charitable contribution.

See Hinson v. N&W Construction Company, Inc.


CASEHINSON V. N&W CONSTRUCTION COMPANY,

INC. N&W Construction prepared bid to submit to MJCC to build kitchen facility at training

center. N&W received oral bids from plumbing subcontractors in preparing its bid to MJCC.

Hinson quoted $92,000 as bid as plumbing sub; next lowest bid was $139,000. N&W used Hinson’s bid to prepare its bid to MJCC. N&W was low bidder and awarded contract by MJCC. Then contacted Hinson that it needed plumbing work to begin. Hinson failed to sign and return plumbing subcontract and refused to due the job.

N&W then hired next lowest bidder; paid additional $47,000 to get work done. N&W sued Hinson based on promissory estoppel.

Trial court granted summary judgment to N&W, awarding $47,000. Hinson appealed. Ct. of Appeals held: Affirmed. Hinson admits he provided a verbal quote. Also testified that he reviewed plans &

specs for the building, & was satisfied with his quote of $92,000. Hinson refused to do the plumbing because, “I just had a lot of other jobs going.” Promissory estoppel arises when “making of a promise, even though without

consideration . . . “ that plaintiff (here N&W) relied upon. “Refusal to enforce it would be virtually to sanction the perpetuation of fraud or would

result in other injustice.”


CAPACITY TO CONTRACT Refers to the legal ability to create a contract Some have limited capacity to contract

Minors Intoxicated persons Insane persons

If there is no capacity, the contract is void If there is partial capacity, the contract is voidable –

may disaffirm NOTE: Until the mid 19th century, married women did

not have capacity to make contracts independent of their husbands.


VOID AND VOIDABLE CONTRACTS

Void Contracts Contract does not exist at

lawOne of elements is

missing – lacks a requirement of a contract

i.e. Contract with a legally insane person

i.e. Contract for an illegal subject matter

Courts won’t accept disputes

Voidable Contracts One party to the contract

has right to avoid legal obligation

Is valid but capable of being voided by a circumstance i.e. Minors contracts i.e. Contracts with person

under influence of drugs or alcohol

i.e. Fraud by one of the parties


MINORS

Defined as a person under the legal age of majority

Traditionally, the age of majority was 21

Now it is 18 years old in all states for most contracts

Minors have partial capacity Contract is voidable Legal policy to protect the

young from the “results of their own folly”

General Rules #1: Minors may disaffirm

contracts at their option #2: If a minor disaffirms a

contract after receiving benefits, restitution must be paid for the benefit

Some contracts may not be disaffirmed, i.e.

Enlistment contracts Marriage contracts Educational loans Insurance loans Medical care

After reaching majority, the minor may ratify the contract


INTERNATIONAL PERSPECTIVE“PROBLEMS ENFORCING CONTRACTS”

Study by World Bank looked at problem of enforcing a contract in various countries

Problem: Lack of effective contract law Problem: Lack of honest and efficient judicial

enforcement Effect: Discouragement of foreign firms from investing

in poor countries Effect: Discouragement of foreign firms even to do

business in poor countries See examples of comparisons of number of legal

procedures, duration and costs in China, India, Mexico, Germany, Canada, U.K. and U.S.


LEGALITY

If a contract is lacking legality, courts will not enforce it Subject Matter Must Be Lawful

Criminal activities; sale of prohibited drugs; gambling activities in some states

Interest rates on loans that violate usury lawsCourt may strike entire bargain as unenforceable or

only a part that concerns illegal subject matter


UNENFORCEABLE CONTRACTS

Contract is actually valid when made, but courts won’t enforce it i.e. Unconscionable contracts i.e. Exculpatory agreementsEx: Company agrees to ship wheat to Iran. After

shipment is at sea, U.S. government declares no U.S. firms may trade with Iran.

Result: Unenforceable under U.S. law even if seen as legal in Iran


CONTRACT CONTRARY TO PUBLIC POLICY

Exculpatory Agreements (types of those contracts written to completely escape liability)

Unconscionable Agreements (unequal bargaining power) Outcome is grossly unfair to an innocent party. See Walker v. Walker-Thomas Furniture

Contracts in Restraint of Trade Contracts that restrain trade or unreasonably restrict

competition Covenant not to compete may be restraint of trade unless

Limited by time, territory and ancillary to the contract Different states differ on this subject

Covenants not to compete often used in sale of business or employment contracts

o See Arthur J. Gallagher & Co. v. Babcock


CASEARTHUR J. GALLAGHER & CO. V. BABCOCK

Arthur J. Gallagher & Co. is in the insurance business. Subsidiary, GBSI, handles employee-benefit insurance programs. GBSI purchased a Louisiana insurance broker, Babcock.• Paid almost $3 million for his business• Part of the deal: Babcock & several employers went to work for GBSI

Agreed to a restrictive covenant. If they left, they would not compete with GBSI in Louisiana for 2 years

Few years later: Babcock and others quit GBSI and went to work for a competitor. Drew away 13 clients to their new employer.

Gallagher sued Babcock for violating agreement that contained a non-solicitation agreement and non-competition agreement.

Gallagher contended that Babcock & the employees solicited GBSI clients in competition with their former employer.

Trial court upheld agreements, but limited the geographic restriction to 9 parishes in which Babcock could not compete with GBSI.• This was rather than restricting Babcock to the whole state.

Jury awarded Gallagher $1.2 million in damages + attorneys fees. Babcock and other GBSI employees appealed.

(Continued)


Defendants said non-competition provisions were not valid because (1) Their language (2) Their geographic scope

Agreements unambiguously prohibited defendants from competing against Gallagher or soliciting its clients for 2 years after employment was terminated.

Employees agreed they would not “serve,” “sell to,” “market,” “accept,” “aid,” “consult,” “place,” “counsel,” or “consult” re: insurance services with customers or prospective customers of Gallaher

Provisions in this agreement is less restrictive than allowed under state law. Gallagher allowed former employees to work in similar business, just not on

accounts they worked on while employed with Gallagher. In Louisiana non-compete clauses are limited to geographic areas under “a like

business” and agreement must specify “parishes, municipalities or parts thereof” in which employer operates.

Court may rely on contractual severability clause to excise the geographic areas in which an employer does not conduct such business.

District court agreed with Defendants. Eliminated 55 parishes where Gallagher did not provide insurance service. This was not an error by the District Court

HELD: District Court decision was AFFIRMED.

CASEARTHUR J. GALLAGHER & CO. V. BABCOCK


REALITY AND GENUINENESS OF CONSENT This concept deals with an individual’s choice of entering into

agreements. If reality is missing, there is no meeting of the minds.

If there is unilateral mistake over a simple error, then contract usually can be avoided. (typographical error - $20,000 instead of $200,000).

Without this element, the contract is void or voidable (depending on the circumstances).

Examples: Fraud Misrepresentation Duress Undue influence Statutory Exceptions: Pressure by salesperson, i.e. Federal Trade

Commission’s Cooling-Off Rule re: door-to-door sales


CONTRACTS IN WRITING AND THE STATUTE OF FRAUDS

Contracts do not always have to be in writing to be enforceable, however

Written contracts are always good as evidence of the agreement, and

Some contracts require a writing Sale of land or interests therein Contracts that cannot be performed within 1 year Promise to pay the debt of another, including debts of an estate Promises made in consideration of marriage


SUFFICIENCY OF THE WRITING

o Writing must set out the material terms of contracto Names of partieso Considerationo Subject matter, etc.o Invoices, E-mails, sales orders, checks, confirmations

may satisfy this requirement See “Digital Signatures”

• Electronic Signatures in Global & National Commerce Act (E-Sign) 2000 federal law.

• Technology & contracts


THE PAROLE EVIDENCE RULE

o Restricts use of oral evidence when that evidence is contrary to terms of written contract.

o Oral evidence cannot contradict, change or add terms to written contracts.

o IF a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, THEN

o Oral evidence may explain the problems. See Issue Spotter “Liars’ Contest?”


CASEDESCHAMPS V. TREASURE STATE TRAILER

COURT In 2003, Rasmussen agreed to sell Deschamps a mobile home trailer park in

Great Falls, Montana. 96 residential spaces for $1,445,000. Contract explained how Rasmussen would be paid over time. After sale was completed, Rasmussen died. His estate inherited the asset. Deschamps found significant problems with park’s water system. Required

$400,000 in repairs. In 2006, Deschamps stopped making payments to the estate.

Claimed the cost of the water system repairs made payments impossible. Estate sued; Deschamps countersued: contract breach/fraud. Deschamps contended

Rasmussen said that water system was in good condition and that occupancy rate was higher than in fact it was.

Trial Court held for estate, finding Deschamps’ claims were precluded by parol evidence rule. He appealed.

(Continued)


HELD: Affirmed. When language of contract is clear and unambiguous, look at the substance of the contract itself.

Here contract clearly, expressly stated that Deschamps did not rely on any oral assurances or presentations by Rasmussen.

Deschamps cannot now claim otherwise. Deschamps signed a contract prepared by his real estate agent, containing

statement that Deschamps had not relied upon assurances by Rasmussen. Agreement provided

(1) Rasmussen had not conducted an inspection nor warranted property’s condition.

(2) Deschamps had right/duty to inspect property prior to purchase. (3) Special disclaimer of reliance on Rasmussen’s assurances. (4) Inspection was waived or satisfied. (5) Clause in agreement said this was entire agreement and superseded

any oral agreements. (6) Agreement could only be amended by a writing.

CASEDESCHAMPS V. TREASURE STATE TRAILER

COURT


Substantial Performance (Usually in good faith) Usual remedy is the contract price minus damages resulting

from lack of complete performance Material Breach

Performance substantially less than required Damages now due to non-breaching party

Executed Contract Fully performed; nothing left undone If you have fully performed, damages for the price of

performance may be sought as a remedy Executory Contract

Not fully performed If partial delivery of products, buyer need not pay total contract

price See Issue Spotter “Do You Have to Eat the Loss?” See Exhibit 10.5

PERFORMANCE


ASSIGNMENT AND DELEGATION

Assignment (transfer of rights to another) and Delegation (transfer of duties to another) Many contracts can be assigned or delegated; although

exceptions do occur in contracts for services.

Third-Party Beneficiary is party not part of original contract who acquires rights under the contract. Usually occurs in credit contracts


BREACH Breach (non-breaching party is discharged) Material breach: Performance is substantially less than the

contract provides Anticipatory breach or repudiation: A party indicates inability

or lack of desire to perform Discharge by Agreement of the Parties: rescission,

novation, accord & satisfaction Discharge by Impossibility

An unforeseeable, unanticipated event occurs that makes performance impossible

The impossibility doctrine has been extended to commercial impracticability or frustration


Monetary Damages ($$)

Compensatory Damages

Actual Damages

Expectancy Damages

Liquidated Damages

Nominal Damages

Punitive Damages (if there is tort related to breach of contract)

Special Damages

Equitable Remedies Specific Performance

Injunction

Restitution

Mitigation of Damages Injured party is required to

make efforts to mitigate or lessen losses

REMEDIES


ECONOMIC LOSS RULE In breach of contract case, if there is no tort involved, damages are

only those related to economic losses suffered by the breach. Rule based on three policies

1. Maintain fundamental distinction between tort and contract law 2. Protect commercial parties’ freedom to allocate risks by

contract 3. Encourage the party best situated to assess the risk of

economic loss Damages are only those related to lost profits and costs due to the

breach. Accounting evidence and specific calculations are necessary

evidence to be presented. No punitive damages or mental distress awards. (Parties often try to

assert a tort along with breach of contract in order to get these damages.)


CASEDEROSIER V. UTILITY SYSTEMS OF AMERICA,

INC. DeRosier owned land on a hillside. Before house could be built, lot needed to be

filled with dirt. Asked Utility Systems of America (USA), working on nearby construction, if it would dump excess fill dirt on his lot. USA saved money doing this instead of hauling the dirt away.

DeRosier obtained permit from city to allow 1,500 cubic yards of fill to be dumped on his property. Gave permit to USA.

Later Rosier found USA dumped 6,500 cu. yd., so 5,000 cu. yd. had to be removed since permit was violated.

USA denied responsibility; offered to remove the excess for $9,500. DeRosier sued. Trial Court granted him $22,829 damages paid to another company to remove

the dirt. Also awarded him $8,000 in consequential damages for delay of time lost in constructing new house.

USA appealed, saying DeRosier failed to mitigate damages by not having USA move the dirt for only $9,500 rather than $22,829 paid to another contractor.

(Continued)


Consequential damages usually refers to items of damages which can be distinguished from general damages.

Special or consequential damages flow naturally from the breach, but are not recoverable unless they are reasonably foreseeable by parties at time of breach.

USA contended no claim for delay damages was in pleading and no evidence of monetary loss caused by delay was introduced at trial.

HELD: District Court erred in awarding DeRosier $8,000 in consequential damages.

HELD: District court had sufficient basis for calculating and granting $22,829 in general damages.

HELD: Regarding DeRosier’s duty to mitigate: Non-breaching DeRosier could decline the offer of USA to remove dirt for $9,500.

Did not unreasonably reject USA’s offer and did not fail to mitigate his general damages.

HELD: Reversed in part; affirmed in part.

CASEDEROSIER V. UTILITY SYSTEMS OF AMERICA,

INC.


INTERNATIONAL PERSPECTIVE“CONTRACTING WITH THE JAPANESE”

U.S. contracts tend to try to cover all contingencies. Japanese view contracts as secondary to the ongoing relationships

of the parties. Contracts with the Japanese should be brief and flexible, not

detailed. Long, detailed contracts may be viewed with suspicion. Strong statement (“That just won’t work”) likely to be viewed as an

insult. The Japanese often want “good faith clauses” in contracts with

Westerners. Consensus among the negotiating teams is very important.


QUASI CONTRACTS

Quasi (means “almost”) – not a true contract Closely related to quantum meruit recovery Legal concept used by courts to prevent injustice Courts apply this classification in equity (out of a sense

of fairness) to give relief to innocent parties Example: You watch as a crew (in good faith) come to

your house and pave your driveway. Do you have to pay the bill when it is sent to you? Yes,

under quasi contract.


CASESCHEERER V. FISHER

Scheerer, a real estate agent. Helped arrange to buy commercial real estate for $20 million.

Seller & Fisher each promised to pay Scheerer 2% commission. Deal fell apart.

Fisher formed a new company, & had 3rd party, Antonio, buy the property & then sell it to Fisher’s new company.

Scheerer learned of deal (had gotten no commission from it) & sued for breach of contract on quantum meruit compensation.

Trial Court held no contract or basis of payment. Scheerer appealed.

HELD: Reversed. Defendants took action to deny Scheerer compensation for

services rendered. Although original contract failed, law implies a promise to pay

some reasonable compensation for services rendered. Allegations state a valid quantum meruit claim.

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