SS 2019

U.S. Business Organizations Friday: 14:00 - 16:00Location: Hörsaal XVIII [Mel]

Current Class Portfolio❖ Apple (10 shares = 204.18 USD per share = 2,418.00 USD)

❖ IBM (10 shares = 139.60 USD per share = 1,396.00 USD)

❖ Disney (10 shares = 140.98 USD per share = 1409.80 USD)

❖ Coca-Cola (10 shares = 48.26 USD per share = 482.60 USD)

❖ PepsiCo. Inc (10 shares = $126.40 USD per share = 1264.00 USD)

❖ Imaginary Value of our portfolio = 6,970.40 USD

❖ UBER (To Be Decided)

Review

Question:

Sources of Contract Law?

• Case Law (Common Law Contracts)

• Restatement of Contracts• Uniform Commercial Code

(UCC)

Define:

Restatement of ContractsThe Restatement of Contracts is one of the most widely recognized and most frequently cited legal treatises that is part of jurisprudence in the United States of America. It is taught to most American law students during the first year of law school. It is the most-cited non-binding authority in common law in the United States.

Define:

Contract

2nd Restatement: A contract is a promise or a 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.

Question:

Uniform Commercial CodeDrafted by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, the UCC is not itself the law, but only a recommendation of the laws that should be adopted in the states. It has been adopted in various form by most but not all US states.

Question:

Uniform Commercial CodeAccording to the text the UCC: “must be liberally construed and applied to promote its underlying purposes and policies, which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions.” (1-103 UCC)

Formal Requirements for Contracts

Elements of a Contract

• Contractual Capacity: The parties must have the capacity to contract • Lawful Object: The object of the contract must be lawful. • Agreement: There must be an agreement between the parties • Consideration: The promise must be supported by a bargained-for-consideration

Capacity: Does each party have the authority to contract?

Lawful Object

Lawful Object

❖ The object of a contract must be lawful

❖ A contract to perform an illegal act is an illegal contract

❖ Illegal contracts are void

Agreement

What is an agreement?

❖ The manifestation by two or more persons of the substance of a contract

❖ Essential ingredients of a legal agreement:

❖ Offer

❖ Acceptance

SPECIAL RULES: Common Law Contract

❖ Offeree can only accept an offeror by communicating his acceptance of all the terms of the offer prior to the time the offer expires, is terminated, or is revoked

❖ Unless the offeror requires a different method of acceptance in his offer, an offer is accepted at the time the letter of acceptance is mailed

❖ Words of the offeree which the offeror can reasonably believe constitute an acceptance will cause a contract to be formed, even if those words do not include the term “accept.”

SPECIAL RULES: UCC 2 Contract

Applies to the sale of goods

SPECIAL RULES: Common Law Contract

❖ Offeree can only accept an offer by communicating his acceptance of all the terms of the offer prior to the time the offer expires, is terminated, or is revoked

SPECIAL RULES: UCC 2-207(1)❖ A definite and reasonable expression of acceptance or a written confirmation which is sent within a

reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to different from those offered or agreed upon , unless acceptance is expressly made conditional on assent to the additional or different terms.

❖ Additional terms are to be construed as proposals for an addition to the contract

❖ Between merchants the terms become a part of the contract UNLESS:

❖ Offer expressly limits acceptance of the terms of the offer

❖ The additional terms materially alter the offer, or

❖ Notification of objection to the terms is given within a reasonable time after notice of them is received

❖ If the proposed additional term materially changes the original offer there is still a contract but the additional term is not a part of it.

SPECIAL RULES: UCC 2-207(2)❖ Additional terms are to be construed as proposals for an addition to the contract

❖ Between merchants the terms become a part of the contract UNLESS:

❖ Offer expressly limits acceptance of the terms of the offer

❖ The additional terms materially alter the offer, or

❖ Notification of objection to the terms is given within a reasonable time after notice of them is received

❖ If the proposed additional term materially changes the original offer there is still a contract but the additional term is not a part of it.

SPECIAL RULES: UCC 2-207(3)

❖ Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract.

❖ In those cases, the terms of a particular contract consist of these terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act.x

Was there offer and acceptance?

Depends on the kind of contract

Types of Contracts

Express and Implied Contracts

❖ Express contracts are in oral or written words.

❖ Implied-in-fact contracts are implied from the conduct of the parties

Define:

Implied-in-Law Contracts

Arises even though a party has not acted in word or deed to incur contractual liability

The law will imply contractual liability to pay for necessary services rendered to an

individual when he lacks the mental capacity to request such services or agree to them

Define:

Implied-in-Fact Contracts

Arises out of the conscious action of a partE.g. accepting services of someone in the business of providing those services (eating out)

Contracts that are void ab initial

Define:

Void Contract

A void contract is a formal agreement that is effectively illegitimate and unenforceable

from the moment it is created. A void contract differs from a voidable contract, although both may indeed be nullified for

similar reasons. (Investopedia)

Statute of Frauds (SoF)—Writing Requi❖ The requirement that certain kinds of contracts be memorialized in writing, signed by the party to be charged,

with sufficient content to evidence the contract

❖ SoF requires signed writing for contracts:

• For marriage and prenuptial agreements

• That cannot be performed within one year. (not contracts of indefinite duration regardless of how long the performance takes)

• For the transfer of an interest in land (Not only to a contract to sell land but also to any other contract in which land or an interest in it is disposed, such as the grant of a mortgage or an easement.)

• By the executor of a will to pay a debt of the estate with his own money.

• Contracts for the sale of goods totaling $500.00 or more.

• Contracts in which one party becomes a surety (acts as guarantor) for another party's debt or other obligation.

Fraud

❖ Material misrepresentation of fact =

❖ Intent to deceive +

❖ Reliance on the misrepresentation

Termination

Define:

Revocation

The official cancellation of a decree

decision, or promise

Common Law: REVOCATION❖ An offer is revocable by the offeror at any time, even if it the offeror promises to keep the

offer open for a period of time.

❖ OPTION K: An offer to keep it open for a period of time is supported by consideration

❖ Offeror may not revoke an offer for a unilateral contract if the offeror knows that the offer has commenced a substantial performance.

❖ To be effective: MUST BE COMMUNICATED BEFORE ACCEPTANCE

❖ No need for express language—std: fair indication: “I sold it already” is okay

❖ Need not be directly expressed—eg 3rd party information can revoke

❖ Death terminates an offer, does not terminate a contract unless performance impossible.

UCC: MERCHANTS

❖ A “merchant” means a person who deals in goods of the kind, or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction, or to who such knowledge or skill may be attributed by his employment of an agent, broker, or other intermediary who by his occupation holds himself out as having knowledge or skills.”

❖ Between merchants — any transaction where both parties are merchants

UCC: REVOCATION: Merchants

❖ An offer by a merchant to buy or sell goods in a signed writing, which by its terms gives assurances that it will be held open, is not revocable, for lack of consideration, during the time stated, or if no time is stated, for a reasonable time. In no event may such a period of irrevocability exceed three months.

❖ Any such term of assurance on a from supplied by the offer must be separately signed by the offeror

Define:

Rejection

The dismissing or refusing of a

proposal idea, etc.

REJECTION

❖ An offer is terminated by rejection or counter-offer.

❖ Thereafter the offer cannot accept the original offer—even if the time when it is to remain open has not expired.

Common Law: REJECTION

❖ If, at common law, the offeree purports to accept an offer but changes the terms of the offer in any way, the communication is a counter-offer and no contract is formed.

❖ With respect to the sale of goods, this rule is qualified by UCC 2-207

If there is Capacity, Agreement (offer + acceptance), and lawful object and no termination, you still DO NOT have a

contract until there is ADEQUATE…

Consideration

Define:

Consideration

• A promise by one party to perform an act or refrain from acting, in exchange for a counter-promise by the other party to perform an act or refrain from acting, constitutes valid consideration, making the promises enforceable.

Bargain and Exchange❖ Bargain is the essence of consideration

❖ For there to be valid consideration, the party making the bargain need not be the person benefitting from it.

❖ An agreement is supported by consideration if the person benefitted is a third party for whom the benefit was requested.

❖ As long as the party promises something that he is not legally obligated to do, he has given consideration, because the promisor possesses a unilateral right to avoid any obligation made in the promise.

❖ ILLUSORY: I PROMISE TO PAY YOU IF I FEEL LIKE IT

Illusory Promises NOT Bargain

❖ As long as the party promises something that he is not legally obligated to do, he has given consideration, because the promisor possesses a unilateral right to avoid any obligation made in the promise.

❖ ILLUSORY: I PROMISE TO PAY YOU IF I FEEL LIKE IT

❖ An illusory promise becomes a valid contract once the condition has been satisfied (I felt like paying and I paid)

Donative Transaction NOT Bargain

❖ I will buy you a pizza if yo ago and pick it up from the store = no consideration

❖ This is just a minor burden imposed upon the a person receiving property.

Adequacy of Consideration❖ Is the consideration enough?

❖ Courts do not measure the value of what a party promises in comparison to what is received

❖ An agreement to settle a totally meritless claim is not valid consideration

❖ As long as an agreement is supported by consideration so that a valid contract exists, a party who performs his side of the bargain is entitled to enforce the contract according to its terms, even if he is getting for more than he is given.

Moral Obligation is NOT Consideration

❖ A service which has already been gratuitously rendered is not valid consideration for a later promise to pay for that service because the bargain element, which is the essence of consideration, is not present.

Modification

Define:

Modification• A modification of contract

is any change, in part or whole, occurring to a legally binding agreement between two or more parties.

Modification

❖ An agreement to totally rescind an existing executory contract is supported by consideration, since each side is bargaining to give up the rights they previously had under the contract

Common Law Modification

❖ No modification without fresh consideration—a different obligation than that already agreed to) is required to support a modification of a contract

❖ Agreement to modify is unenforceable if the promises of one party are more burdensome and the promises of the other party are unmodified.

Common Law Modification Exceptions

❖ An agreement to modify without fresh consideration is enforceable when the modification is made in good faith.

❖ Eg, the circumstances under which the contract is to be performed have changed through no fault of the parties from the time when the contract was executed.

❖ Consideration not an issue if one party modifies existing K inn exchange for a promise of the other party to modify its promises

UCC Modification

❖ No new consideration needed to modify contract

Enforcing a Contract

Lawyers engage with contracts at all stages of their existence — a judge usually only engages with contracts to solve disputes

Quasi-Contracts

What if it isn’t really a Contract?

Detrimental Reliance

❖ TO establish the existence of a contract, a court needs to establish proper exchange of consideration. This is a strict requirement that can lead to dissatisfying results.

❖ In such situations the court can recognize that a person’s detrimental reliance on the promise of another can substitute for the requirement of consideration.

Promissory Estoppel

❖ What is a doctrine?

❖ Why and how does this apply?

❖ TO establish the existence of a contract, a court needs to establish proper exchange of consideration. This is a strict requirement that can lead to unfair results.

❖ In such situations the court can recognize that a person’s detrimental reliance on the promise of another can substitute for the requirement of consideration.

❖ This substitution of detrimental reliance for consideration is called promissory estoppel.

Promissory Estoppel❖ Plaintiff must show:

1. A promise reasonably expected by the promise to induce action or forebearance

❖ forebearance = voluntarily refraining from doing something such as asserting a legal right)

2. Action of forbearance by the promisee inn justifiable reliance on the promise (i.e. detrimental reliance) and

3. Injustice can be avoided only through enforcement of the promise

Promissory Estoppel

❖ NOTE: YOU ARE NOT ENTITLED TO THE FULL RANGE OF CONTRACT REMEDIES

❖ Damages are usually limited to those necessary to make a victim whole.

❖ If an agreement is supported by bargained-for consideration, the issue of whether the elements of promissory estoppel is irrelevant: YOU HAVE A CONTRACT

Example: ❖ Owner of a property puts out a construction contract out to bid to general

contractors

❖ A subcontractor submits an offer to perform a subcontract to the general contractor, with knowledge that the general contractor is relying on the bid when making his bid for the general contract

❖ The subcontractor’s bid is treated like an option contract

❖ Detrimental reliance by general contractor is enough to substitute for bargained-for-consideration so that the subcontractor cannot revoke his bid.

❖ NO CONTRACT UNLESS AND UNTIL the general contractor accepts the bid.

Once a contract is subject to legal action lawyers can argue for or against its existence by offering proof of formation OR defenses

against formation (reasons why no contract was formed)

Burden of proof to establish a contract is usually on the person bringing the claim to court (the Claimant)

Defenses to Formation: (Arguing that no contract was formed)

Define:

Mistake, Fraud, Deception

Unilateral Mistake: Mistake of One Party

❖ Unliateral Mistake is grounds for avoiding a contract if the first party is mistaken about a material fact, and the second party should have known of the mistake at the time the offer was accepted.

❖ Defense of unilateral mistake is available when the mistake by one party was so obvious that the other party should have known of the mistake at the time the offer was accepted

Mutual Mistake: Mistake of Both Party

❖ Mutual Mistake is grounds for avoiding a contract if at the time of the contract both parties relied on an untrue material fact.

Meeting of the Minds

❖ There is no meeting of the minds, an essential requirement for the existence of a contract, if each party to the contract without fault has a different understanding of the meaning of the words which they agreed to.

❖ If the contract involves a ship “Peerless” but each party innocently and honestly is thinking of a different ship named “Peerless” there is no meeting of the minds and no contract.

Unconscionability

❖ A contract is unconscionable and a court can refuse to enforce such a contract if at the time of the execution of the contract, one of its provisions was oppressive.

❖ UNFAIR TERMS + UNFAIR BARGAINING PROCESS

❖ Part of the UCC, and also applied, increasingly to common law contracts

Impossibility

❖ Events subsequent to formation make the performance by one party illegal or impossible — doctrine of impossibility discharges parties

❖ Contractor can recuperate the value of the services already performed in quantum merit but cannot sue for damages because the contract has been discharged

❖ Assumption of Risk bars this defense

UCC: Doctrine of Impracticability

❖ Performance is excused when

1.Goods identified to the contract are destroyed

2.Performance becomes illegal or

3.Performance is prevented by non-foreseeable event, the nonoccurence of which was basic assumption of the contract

Contract still exists even if there are

Scrivener’s Error

❖ If the parties orally agree on terms of a contract which is then to be reduced to writing and the scrivener makes an error in setting out the terms of the contract, either party can reform the written contract to conform to the actual oral understanding

Indefiniteness and Absence of Terms (UCC)

❖ UCC Rule: A contract is not void for indefiniteness if there is no price agreed to. There is a valid contract for a reasonable price.

❖ There are legal conventions, often industry-based, for setting the price

❖ NOT SO FOR COMMON LAW CONTRACTS

Suppose there is a Contract, what next?

Performance

❖ Performance, in law, act of doing that which is required by a contract. The effect of successful performance is to discharge the person bound to do the act from any future contractual liability. Each party to the contract is bound to perform promises according to the stipulated terms.

If there is a contract and proof of the necessary performance, then all rights and obligations under the contract are

extinguished

If there is a contract and no performance or incomplete performance, then there is

BREACH

How do courts define breach?

Immaterial Breach and Substantial Performance

❖ Under Common Law, a Plaintiff can sue for breach of contract and collect damages if he has substantially performed the contract, even if there is an immaterial (non-willful) breach.

❖ If the Plaintiff has not fully performed the contract, the Defendant can successfully assert a counterclaim for damages caused by his failure to perform

UCC = PERFECT TENDER

❖ USS does not recognize substantial performance

❖ Instead, it follows the rule of perfect tender

❖ Except for an installment contract, the seller must tender the correct amount of conforming goods at the time specified in the contract or the buyer can reject the good without liability and sue the seller for damages

UCC Installment Contract❖ An installment contract is one where the seller does not have the obligation

to deliver all of the goods to be sold under the contract at one time.

❖ If a contract is determined to be an installment contract, the rule of perfect tender, which permits the buyer to reject non-conforming goods if all of the goods are to be delivered at one time, is inapplicable

❖ A failure by the seller to deliver the appropriate quantity of conforming goods on time, with with respect to one installment of an installation contract is breach of the total contract only if the nonconformity SUBSTANTIALLY IMPAIRS the value of the ENTIRE CONTRACT

Breach of Contract

Define

Breach

Failure to live up to the terms of a contract. The failure may provoke a lawsuit, in which an aggrieved party asks a court to award financial compensation for the loss brought about by the breach.

Remedies

Types of Remedies❖ Types

❖ Recission: Cancel the contract and get a refund for attempted service or product

❖ Reformation: Rewrite the contract so it is more versatile, forgiving, helpful, realistic …

❖ Specific Performance: D must perform (not for contracts in services)

❖ Damages

❖ When a party cannot sue on the contract

❖ Restitution Damages (quantum meruit) = fair value of the benefit conferred on the other party

Compromise and Settlement

❖ Forbearance (a promise not to assert a right) is not valid consideration if it involves forbearance of a totally frivolous claim.

❖ Forbearance is valid if the person seeking to enforce the contract reasonably believes he has a valid claim.