chapter 7 contracts 2 a contract is a legally enforceable

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning

CHAPTER 7CHAPTER 7ContractsContracts


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A contract is a legally enforceable A contract is a legally enforceable promise or set of promises.promise or set of promises.

AgreementAgreement. Valid contract requires and . Valid contract requires and offer and acceptance.offer and acceptance.– Offer Offer has a serious intention, with definite has a serious intention, with definite

terms that is communicated to the offeree.terms that is communicated to the offeree.– Termination of OfferTermination of Offer by Operation of Law by Operation of Law

or by Action of the Parties.or by Action of the Parties.

Basic Requirements Basic Requirements of a Contractof a Contract


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Irrevocable Offers.Irrevocable Offers.– Option Contracts.Option Contracts.– Detrimental Reliance.Detrimental Reliance.

Acceptance.Acceptance.– Mirror Image Rule.Mirror Image Rule.– Intent to Be Bound.Intent to Be Bound.– Acceptance in a Timely Manner.Acceptance in a Timely Manner.



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Consideration:Consideration: each party must each party must transfer something of legal value to the transfer something of legal value to the other.other.– Adequacy of Consideration?Adequacy of Consideration?

Bilateral and Unilateral Contracts.Bilateral and Unilateral Contracts.– Bilateral: Promise for a Promise.Bilateral: Promise for a Promise.– Unilateral: Promise for an Unilateral: Promise for an

Act/Performance.Act/Performance.



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Mutuality of Obligation in Bilateral Mutuality of Obligation in Bilateral Contracts.Contracts.

Illusory Promises.Illusory Promises.– Case 7.1 Case 7.1 Heye v. American (2003).Heye v. American (2003).



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Conditional Promises.Conditional Promises.– Conditions Precedent - occurs prior to Conditions Precedent - occurs prior to

performance.performance.– Conditions Concurrent - simultaneous Conditions Concurrent - simultaneous

performance.performance.– Conditions Subsequent - terminates an Conditions Subsequent - terminates an

existing duty to perform.existing duty to perform.



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Requirements and Output Requirements and Output Contracts.Contracts.– Requirement contracts - buyer agrees Requirement contracts - buyer agrees

to buy all its needs from the seller to buy all its needs from the seller (exclusive contract). (exclusive contract).

– Output contracts - buyer agrees to buy Output contracts - buyer agrees to buy all the seller produces (exclusive all the seller produces (exclusive contract).contract).



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CapacityCapacity A person’s ability to understand the A person’s ability to understand the

nature and effect of an agreement.nature and effect of an agreement.Contracts with legally incompetent Contracts with legally incompetent

persons are void or voidable (at persons are void or voidable (at incompetent party’s option.incompetent party’s option.


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Other Contracts Contrary to Other Contracts Contrary to StatuteStatute– Usury statutes.Usury statutes.– Illegal contracts.Illegal contracts.

LegalityLegality


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Promise:Promise: there must be a promise. there must be a promise.Justifiable RelianceJustifiable Reliance: the promise must : the promise must

cause the promisee to take an action cause the promisee to take an action that he or she would not otherwise have that he or she would not otherwise have taken.taken.

Foreseeability: Foreseeability: the action taken in the action taken in reliance on the promise must be reliance on the promise must be reasonably foreseeable by the promisor.reasonably foreseeable by the promisor.

Promissory Estoppel Promissory Estoppel (Ethical Safety Net)(Ethical Safety Net)


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Promissory Promissory EstoppelEstoppel

Injustice:Injustice: a promise that has been a promise that has been reasonably relied on will give rise to reasonably relied on will give rise to relief only if the failure to do so would relief only if the failure to do so would cause injustice.cause injustice.

Case 7.2Case 7.2 Pop’s Cones, Inc. v. Pop’s Cones, Inc. v. Resorts International Hotel, Inc.Resorts International Hotel, Inc. (1998).(1998).


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Precontractual Precontractual LiabilityLiability

Pre-Contractual Liability based on:Pre-Contractual Liability based on:– Misrepresentation.Misrepresentation.– Promissory EstoppelPromissory Estoppel– Restitution.Restitution.– Case 7.3Case 7.3 Copeland v. Baskin RobbinsCopeland v. Baskin Robbins (2002). (2002).


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UnconscionabilityUnconscionabilityOppressive or fundamentally Oppressive or fundamentally

unfair.unfair. – Procedural Element.Procedural Element.– Substantive Element.Substantive Element.

ReleasesReleases..Case 7.4 Case 7.4 Atkins v. Swimwest Family Atkins v. Swimwest Family

Fitness Fitness (2005). (2005).


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Fraud.Fraud.– Fraud in the Factum.Fraud in the Factum.– Fraud in the Inducement.Fraud in the Inducement.

Duress.Duress. Ambiguity.Ambiguity.

Genuineness of Genuineness of AssentAssent


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Genuineness of Genuineness of AssentAssent

Mistakes of Fact.Mistakes of Fact.– Substantiality of the Mistake.Substantiality of the Mistake.– Allocation of the Risks.Allocation of the Risks.– Timing.Timing.– Case 7.5 Case 7.5 Honda v. Board of Trustees Honda v. Board of Trustees

(2005).(2005). Mistake of Judgment (or Value).Mistake of Judgment (or Value).

– Usually not a defense.Usually not a defense.


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Certain oral agreements must be in Certain oral agreements must be in writingwriting to be enforceable: to be enforceable: – Transfer of any interest in real property.Transfer of any interest in real property.– Promise to pay the debt of another.Promise to pay the debt of another.– An agreement which cannot be An agreement which cannot be

performed within one year.performed within one year.– Prenuptial agreements.Prenuptial agreements.

Statute of FraudsStatute of Frauds


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When the parties have a written When the parties have a written agreement which the parties intended agreement which the parties intended be the complete agreement, parol (be the complete agreement, parol (oraloral) ) evidence of prior or contemporaneous evidence of prior or contemporaneous communications communications will not be permittedwill not be permitted to alter the terms of the contract, unless to alter the terms of the contract, unless the language is ambiguous. the language is ambiguous.

The Parol Evidence The Parol Evidence RuleRule


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ImpossibilityImpossibility: an event causes : an event causes obligations to be discharged.obligations to be discharged.

ImpracticalityImpracticality: performance is : performance is possible but commercially possible but commercially impractical. impractical.

Changed Changed CircumstancesCircumstances


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Discharge:Discharge: when both parties have fully when both parties have fully performed their obligations toward one performed their obligations toward one another.another.

Material Breach:Material Breach: one party fails to perform one party fails to perform a contract according to its essential terms.a contract according to its essential terms.

Anticipatory Repudiation:Anticipatory Repudiation: one party one party knows before performance is due that the knows before performance is due that the other party will breach the contract.other party will breach the contract.

Discharge of Discharge of ContractContract


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Every contract contains an implied Every contract contains an implied covenant of good faith and fair dealing covenant of good faith and fair dealing in its performance. This implied in its performance. This implied covenant imposes on each party a covenant imposes on each party a duty not to do anything that will deprive duty not to do anything that will deprive the other party of the benefits of the the other party of the benefits of the agreement.agreement.

Good Faith and Fair Good Faith and Fair DealingDealing


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Types of Damages:Types of Damages:– Expectation Damages.Expectation Damages.– Consequential Damages.Consequential Damages.– Restitution and Restitution and Quantum Meriut.Quantum Meriut.

• Case 7.6Case 7.6 Glendale Federal Glendale Federal Bank FSB v. United StatesBank FSB v. United States (2001).(2001).

RemediesRemedies


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RemediesRemediesMitigation of Damages.Mitigation of Damages.Liquidated Damages vs. Penalties.Liquidated Damages vs. Penalties.Specific Performance and Injunctive Specific Performance and Injunctive

Relief.Relief.– Allowed when the goods are unique, the Allowed when the goods are unique, the

subject matter is real property, or the subject matter is real property, or the amount of loss cannot be calculated fairly.amount of loss cannot be calculated fairly.


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Good Faith and Fair Dealing.Good Faith and Fair Dealing.– Traditional U.S. Rule: Traditional U.S. Rule: NoNo liability liability

(This is changing).(This is changing).– European Rule: Actions may lead European Rule: Actions may lead

to liability.to liability.

Precontractual Precontractual LiabilityLiability

chapter 7 contracts 2 a contract is a legally enforceable

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