CHAPTER 7 CHAPTER 7

Contracts

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INTRODUCTION INTRODUCTION

This chapter yields basic and detailed analysis of the area of contracts, including requirements and negotiating concerns. The student should gain a firm grasp on these concepts and achieve at least a rudimentary ability to legally enter into such enforceable agreements.

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BASIC REQUIREMENTS OF A CONTRACT

BASIC REQUIREMENTS OF A CONTRACT

Contract is a legally enforceable promise or set of promises.

Agreement. Valid contract requires and offer and acceptance.

Offer has a serious intention, with definite terms that is communicated to the offeree.

Termination of Offer by Operation of Law or by Action of the Parties.

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Irrevocable Offers.– Option Contracts.– Detrimental Reliance.

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

BASIC REQUIREMENTS OF A CONTRACT

BASIC REQUIREMENTS OF A CONTRACT

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Consideration - each party must transfer something of legal value to the other. Adequacy of Consideration.

Bilateral and Unilateral Contracts. Bilateral Contract: Promise for a Promise. Unilateral Contract: Promise for an Act (or Performance).

Mutuality of Obligation in Bilateral Contracts. Illusory Promises.

BASIC REQUIREMENTS OF A CONTRACT

BASIC REQUIREMENTS OF A CONTRACT

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Case 7.1 Synopsis. Dahl v. HEM Pharmaceuticals Corp. (9th Cir. 1993).

HEM Pharmaceuticals Corporation designed a new drug, Ampligen, to fight chronic fatigue syndrome. Dahl and the other patients signed consent forms warning of the experimental nature of Ampligen and its possible side effects. Patients were free to withdraw from the clinical trial at any time, but if they completed the study they would be entitled to receive Ampligen for a full year at no charge. At the end of the year-long study, HEM refused to provide the year’s supply of the drug to the patients free of charge. The patients sued HEM for breach of contract. ISSUE: Is voluntary participation in clinical trials sufficient consideration to form a contract when the participants could have dropped out of the trials at any time? HELD: A unilateral contract was created when the patients finished the trials, and the court ordered HEM to provide Ampligen to the participants who wanted it.

BASIC REQUIREMENTS OF A CONTRACT

BASIC REQUIREMENTS OF A CONTRACT

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Conditional Promises Conditions Precedent - occurs prior to performance. Conditions Concurrent - simultaneous performance. Conditions Subsequent - terminates an existing duty to

perform. Requirements and Output Contracts

Requirement contracts - buyer agrees to buy all its needs from the seller (exclusive contract).

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

BASIC REQUIREMENTS OF A CONTRACT

BASIC REQUIREMENTS OF A CONTRACT

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PROMISSORY ESTOPPEL

PROMISSORY ESTOPPEL

Promise – there must be a promise. Justifiable Reliance – the promise must cause the

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

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

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

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PROMISSORY ESTOPPELPROMISSORY ESTOPPELCase 7.2 Synopsis. Hoffman v. Red Owl Stores, Inc. (Wis. 1965).

Hoffman negotiated for over two years with Red Owl Stores to open one of its grocery stores. Prior to the negotiations breaking down, Hoffman, relying on Red Owl statements, sold properties and changed his business position. ISSUE: Can a party to failed negotiations successfully assert a claim for promissory estoppel based on the pre-contract negotiations and the acts he performed based on his reliance on those negotiations? HELD: Yes. The court looked at three criteria for promissory estoppel: 1) Was the promise one which the promisor could reasonably expect the promisee to act upon in a definite and substantial way? 2) Did the promise induce such action? 3) Can injustice be avoided only by enforcement of the promise? The court found the promissory estoppel was required here to prevent injustice.

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CAPACITY CAPACITY

A person’s ability to understand the nature and effect of an agreement.

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LEGALITY LEGALITY Licensing Statutes Other Contracts Contrary to Statute

Usury statutes Illegal contracts

Unconscionability (Oppression or Surprise) Procedural Element Substantive Element

Releases

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LEGALITY LEGALITY Case 7.3 Synopsis. Kurashige v. Indian Dunes, Inc. (Cal. 1988).

Indian Dunes Park was a general public park for dirt-bike motorcycle riding. Kurashige was injured while riding on a trail in the park. Before entering, Kurashige signed a general release which said, inter alia, (in red ink and in large letters) that motorcycle riding is dangerous and the riders assume all the risks. ISSUE: Is the exculpatory language in a general release agreement enforceable? HELD: Yes. The court upheld this release as exculpatory.

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GENUINENESS OF ASSENT

GENUINENESS OF ASSENT

Fraud Fraud in the Factum Fraud in the Inducement

Duress Ambiguity Mistakes of Fact

Substantiality of the Mistake Allocation of the Risks Timing

Mistake of Judgment (or Value)

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STATUTE OF FRAUDS STATUTE OF FRAUDS

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

one year. Prenuptial agreements.

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Electronic Contracts: The Uniform Electronic Transactions

Act And The E-Sign Act.

Electronic Contracts: The Uniform Electronic Transactions

Act And The E-Sign Act.

UETA adopted by the National Conference of Commissioners on Uniform State Laws.

E-Sign Act enacted by Congress in 2000.

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THE PAROLE EVIDENCE RULE

THE PAROLE EVIDENCE RULE

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

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CHANGED CIRCUMSTANCES

CHANGED CIRCUMSTANCES

Impossibility – an event causes obligations to be discharged.

Impracticality – performance is possible but commercially impractical.

Frustration of Purpose – performance is possible, but changed circumstances have made the contract useless to one or both of the parties.

Sovereign Acts Doctrine – the government cannot be held liable for breach of contract due to legislative or executive acts.

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DISCHARGE OF CONTRACT

DISCHARGE OF CONTRACT

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

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

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

Mutual Recission –agreement by both parties not to enforce their mutual legal obligations.

Accord and Satisfaction – any agreement to accept performance that is different from what is called for in the contract.

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DUTY OF GOOD FAITH AND FAIR DEALING

DUTY OF GOOD FAITH AND FAIR DEALING

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

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THIRD PARTY BENEFICIARIES

THIRD PARTY BENEFICIARIES

Creditor Beneficiary – If the promisee entered into the contract in order to discharge a duty he or she owed the third party, then the third party has the right to enforce the contract between the promisor and the promisee.

Donee Beneficiary – when the promisee does not owe an obligation to the third party but rather wishes to confer a gift.

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DAMAGES DAMAGES Types of Damages

Expectation Damages Consequential Damages Uncertainty of Damages Reliance Damages Restitution and Quantum Meriut

Mitigation of Damages Liquidated Damages vs. Penalties

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Case 7.5 Synopsis. Glendale Federal Bank, FSB v. United States (Fed. 1999).Glendale entered into a merger with First Federal Savings and Loan Association of Broward County in Florida (First Federal). At the time of the merger, the market value of the liabilities of First Federal exceeded the market value of the assets by $734 million. Pursuant to its contract with the government, Glendale was permitted to treat First Federal’s negative net worth as goodwill for regulatory capital purposes and to amortize it over a forty year period. Eight years into the contract, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). FIRREA eliminated the ability of Glendale to count goodwill as regulatory capital by requiring an accelerated amortization schedule. FIRREA also established new capital requirements. Glendale initially failed to meet these new requirements, and was forced to engineer a massive recapitalization to satisfy them. Glendale filed suit. ISSUE: Under what contract measure of relief, expectancy, reliance or restitution, is Glendale entitled to recover damages? HELD: Glendale was entitled to recover restitution damages and “nonoverlapping reliance damages” for a total of $908,498,000 in damages.

DAMAGES DAMAGES

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Case 7.6 Synopsis. MCA Television v. Public Interest Corp. (11th Cir. 1999).

PIC owns and operates television station WTMV-TV in Lakeland, Florida. MCA owns and licenses syndicated television programs. In 1990, MCA and PIC entered into licensing agreements in which MCA agreed to license several television shows on a “barter basis” for advertising time on WMTV. The agreements established a payment schedule and provided that late payment constituted a default giving MCA the right to terminate the license as well as a damages provision stating that, in the event of a default by PIC, MCA could (1) recover damages equivalent to the full value of the contract, and (2) revoke PIC’s broadcast licenses, recovering other available damages. From the outset, PIC’s payments were consistently behind schedule, but MCA did not object. Later PIC expressed its belief that it was not obligated under that portion of the contract. MCA demanded payment but PIC denied any obligation to pay. MCA suspended PIC’s broadcast rights and stated that any telecast of MCA programming by WTMV-TV amount to copyright infringement. PIC continued to broadcast MCA’s programs. Continued…

DAMAGES DAMAGES

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Case 7.6 Synopsis. MCA TV v. Public Interest. (11th Cir. 1999).

Trial court awarded MCA $804,538.65 for breach of contract, and $1,060,000 for copyright infringement. PIC appealed. ISSUE: Did the award of damages for breach of contract as well as for copyright infringement, as permitted under the damages provision, constitute an improper double recovery? HELD: MCA was not permitted to recover both damages for the full price of the contract as if it were ratified, as well as damages for copyright infringement, as if the contract had been rescinded.

DAMAGES DAMAGES

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SPECIFIC PERFORMANCE

SPECIFIC PERFORMANCE

Allowed when the goods are unique, the subject matter is real property, or the amount of loss cannot be calculated fairly

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PRECONTRACTUAL LIABILITY

PRECONTRACTUAL LIABILITY

Good Faith and Fair Dealing– Refrain from imposing improper conditions on the negotiation.– Disclose enough about parallel negotiations to allow the other

party to make a counterproposal.– Continue to negotiate until a impasse or an agreement has

been reached.

Pre-Contractual Liability based on:– Misrepresentation.– Promissory Estoppel– Restitution.

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MERGERS AND ACQUISITIONS MERGERS AND ACQUISITIONS

A corporation can acquire control of another corporation (the target) by merger, sale of stock or sale of substantially all of the target’s assets.

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Merger Agreements – an agreement between two companies to combine into a single entity.

Conflicting Duties Best Efforts Clause. Tortious Interference with Contract.

Fiduciary Outs – allows the target company’s directors to remain faithful to their fiduciary duties to the corporation and its shareholders even after signing an agreement with a suitor.

MERGERS AND ACQUISITIONS MERGERS AND ACQUISITIONS

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REVIEWREVIEW1. How do agreements and contracts

differ?2. Why do courts generally not inquire

about the adequacy of value in a contract?

3. Why doesn’t the parole evidence rule prohibit the showing of fraud or duress?