You graduated from law school and recently passed the Tennessee bar exam. You have returned to your hometown of Selmer, TN and opened your own law office. You hope to slide into practice slowly at your own pace. However, Bill, your parents’ next-door neighbor and your dads best friend, shows up at your office within 10 minutes of your first day.
Bill is a dentist and has an office just a few blocks down from your office. You hope he has come to welcome you to the neighborhood. But you quickly learn that the visit is business, as Bill begins telling you he is in a pickle and needs some help. Bill tells you of the following three problems.
1. Bill first tells you that he is having trouble getting paid from a former patient named Justin. Justin came to Bills office for dental work earlier this year. Upon arriving at the office, Justin first spoke with Bills receptionist, Peggy. Justin told Peggy that he fell down the stairs at his home and landed face first (Bill has since learned that Justin really got in a fight and that is how he suffered his injury). Peggy asked Justin for his dental insurance card, but Justin told her that he did not have any dental insurance. As such, as is standard protocol, Peggy had Justin sign a one-page agreement in which Justin agreed to pay Bills office for any charges within 60 days. Bill treated Justin. The cost of Justins dental work was $1,328. Peggy sent Justin the invoice within a week of his visit, which was about 4 months ago. Justin received the invoice, but has ignored it. Bill called Justin a few weeks ago. Justin told Bill that he cannot pay the invoice. Bill told Justin that he will sue him if he does not pay, but Justin’s response was that he is only 16 and in high school.
Bill also tells you that he spoke to Peggy after learning Justins age. As Bill put it, he gave Peggy “a stern talking to” because she should not have accepted a 16-year-old as a patient; Bills practice is limited to adultsnot children. Peggy told Bill that she told Justin that he looked young, and Justin replied that he always gets that comment from people. Peggy thus assumed that Justin was older than he really was. Bill wants you to sue Justin for breaching the contract based on his nonpayment within 60 days.
2. In his spare time, Bill builds duck calls. He enjoys the work and finds it relaxing. Several weeks ago, John called Bill and asked Bill to help him. John owns a company in Kentucky that produces and sells high-end duck calls. Business is great for John, so great, in fact, that John needs extra help to keep up with demand. John asks Bill if he will agree to help him build duck calls so that he can catch up on his orders. John specifically wants Bill to assemble the duck calls. John says that he will provide Bill with all the materials. Bill agreed to help John, but told John that he could only help him on a small scale as it is only a hobby for him. John tells Bill that any help would be greatly appreciated and a significant help to him.
As such, after their phone call, John sends Bill an email, stating that he will pay Bill $20 for every 10 duck calls he assembles and asks that Bill assemble 500 duck calls. Bill ponders the email for a few days and then replies to John confirming the work. In his email, however, Bill made a typo. Instead of writing 500 units, Bill typed 5000 units. John responded back and said “Wow! That will be a ton of help! I’m glad that you can do so many. I will get the first batch shipped to you tomorrow and will send the remainder when I have the materials gathered.”
A few days later Bill received the materials for the duck calls. It was enough to assemble 500 duck calls. In order to assemble the duck calls in a timely fashion, Bill closed his dental office for the week as vacation and worked hard to assemble all 500 duck calls. The day after he shipped the assembled duck calls back to John, several large packages arrived at Bill’s home. Bill opens the first package and finds a note from John. John states that these packages include enough material to assemble another 1,500 duck calls. John also tells Bill that he will send the materials to make the next 3,000 units within a month. Bill was confused, as he was only supposed to assemble 500 duck calls. He then looked back at the emails and realized his typographical error. Bill called John and told John that he cannot assemble another 1,500 units or the forthcoming 3,000 units because he does not have time to make them.
John, however, demanded that Bill assemble the remaining 1,500 units because that is what he agreed to do and John cannot afford for Bill not to assemble the duck calls. His business will suffer if Bill does not assemble them, as he will have to cancel purchase orders. As such, John has hired a lawyer in Tennessee. The lawyer sent Bill a letter this week telling Bill that if he does not assemble and return the duck calls within two weeks, then John will sue him for damages of lost profits and specific performance to compel Bill to assemble the duck calls.
3. Bill tells you that he is building a weekend home and is having problems. Bill is building a 5-acre retreat near the Tennessee river. Bill found the land a few years ago and it was his dream spot. Tom owned the land and was reluctant to sell. After what Bill believed was a very generous offer and some begging, Tom agreed to sell the land. However, Tom wanted to sell the land in two parts. Based on a handshake, Bill agreed to purchase the land from Tom in two parts. Tom initially sold Bill 2 acres and was to sell Bill the last 3 acres in two years. The two years passed last month, and Tom has refused to sell the 3 acres. He said that he has had a change of heart. These 3 acres are critical to Bills property because it is the land that has access to the river. Without these 3 acres, Bill has no access to the river other than public access 3 miles from his home. Bill wants the propertynot money.
Bill now asks you for advice on what he should do. Please analyze Bills three problems and tell Bill what you believe will happen in his scenarios.
Chapter 7 covers contracts. Contracts are an important function in life, as we all execute contracts in our daily lives. For example, when we buy our home, we execute a contract to memorialize the terms of the home purchase. Similarly, insurance agreements are contracts. Contracts are just as important in business. Contracts are an integral part of business, as contracts are essential to conduct business, whether it be agreements to purchase inventory, to sale product, or provide services. As such, it is important to understand the basic legal principles controlling contracts.
Contracts Lecture Part 1:
-an enforceable agreement to do something
-if the agreement is broken, then a person would have legal rights against the breaching party
-contracts are essential to business: agreements to sell products/services, to rent space or equipment, to hire workers, and to protect against loss through insurance.
-there must be a valid, enforceable contract before any legal rights and obligations arise.
-valid, enforceable contracts have 4 requirements:
-there must be a meeting of the minds as evidence by an offer and acceptance
-there must be consideration
-the parties must have the ability to contract; and
-the contract must have a legal purpose
-a manifestation of willingness to enter into a bargain that justifies another person in understanding that his or her assent will conclude the bargain.
-offeror is the person who is making the offer; offer is the person receiving the offer.
-offer may be in writing, oral, or implied by conduct.
-offer is binding if:
-offeror intends to be bound;
-terms of offer are reasonably definite; and
-offer is communicated to the offeree.
-evaluate based on outward acts rather than unexpressed acts
-offers judged by an object standard offers as a joke. (Ex: Ill sell my car for $30) are not offers
-advertisements are treated as negotiations rather than an offer.
-reasonable definiteness of offer:
-essential terms of the agreement must be present
-essential terms include subject matter, price, form of payment, and duration of contract
-if essential terms are missing, then there is no contract
-is an offer permanent?
-no, offeror may terminate the offer or the offer may expire by law
-termination by law includes when the time to accept has expired and if the offeror dies or becomes incapacitated.
-offeror has authority to revoke an offer so long as the offeree has not accepted the offer.
-an offer is also terminated if the offeree makes a counter offer.
-an offer may not be revoked if:
-it is an options contract;
-the offeree relied on the offer to his/her detriment.
-option contract is a contract in which the offeror agrees to extend the offer for a set period of time in exchange for consideration.
-with option contracts, an offeror can only revoke once the time period ends.
-when the offeree has acted to his/her detriment because of his/her reliance on the offer.
-in these scenarios, the doctrine of promissory estoppel may apply to prevent the offeror from revoking the offer.
-a response by the offeree that indicates his/her agreement to the offerors offer.
-acceptance may be in writing, oral, or implied by the conduct
-offeror may specify the method and manner in which the offeree accepts
-if offeree fails to follow offerors method, then there is no valid acceptance
-an acceptance is effective once the acceptance notice is placed in the mailbox
-this, there is a contract formed at the time of mailing.
-and the offeror can no longer revoke the offer.
Mirror Image rule:
-the offeree must accept the exact offer made by the offeror
-if the terms are not identical, then under the mirror image rule, there is not contract
-intent to be bound
-this is another way of saying the meeting of the minds
-when the parties have an intent to be bound by essential terms, a contract is likely formed and minor details may still be negotiated at a later date.
-consideration is second required element for a binding contract
-requires that the offeror and offeree provide something of value.
-can be in form of money, a service, a promise, or forbearance of a right.
-example: buyer provides money and seller provides a car. Money and car are the consideration.
-illegal promise is insufficient to constitute consideration.
-a promise to perform a pre-existing legal obligation is not consideration because you were already obligated.
-no bring line rule on how much consideration is needed.
-must be adequate, which will be determined on a case by case basis.
-if consideration is considered to be a sham (not genius such that is has no value), it is indequate.
-can be a promise to act or the performance of the act itself.
-bilateral contract is a mutual exchange of promises. Both parties promise to perform an act.
-ex: susie promises to pay Tim $5 to rake her yard and Tim promises to rake Suzies yard.
-unilateral contract is a promise is exchange for performance of an act.
-ex: susie promises to pay Tim $5 if he rakes her yard.
-a promise that provides no benefit to the person who would receive the promise or subjects the person making the promise to any detriment.
-example: Tod agrees to buy firewood from Bill when he needs it. There is no binding agreement because Tod may not need to buy any firewood.
-requirements and output contracts are exceptions to illusory promise doctrine.
-requirement contract: an agreement to buy required commodities from seller, but the exact quantity is unknown. The buyer is bound to buy whatever amount it needs from the seller, so there is a binding agreement.
-output contract: a buyer agrees to purchase all of the output that the seller produces. The exact amount is unknown, but the buyer and seller are bound to sell/buy.
-an agreement is conditioned upon a certain event (either happening or not) is binding provided that the condition is beyond the persons control.
-condition precedent: event that must occur before a party must perform under the contract.
-Example: ABC Corp, a book publisher, is interested in purchasing Book Co, a book publishing and distributing company. ABC does not want the distribution of Book Co. ABC Corp therefore executes an agreement with Book Pro, a book distributing company, in which Book Pro agrees to purchase Book Cos distribution business if ABC Corp buys Book Co.
-condition concurrent: the parties are required to perform simultaneously. An example would be: ABC corp must pay for the car it buys from Teds Motor Co and Teds Motor Co must provide a vehicle at the same time.
-Condition subsequent: if a condition occurs, a contractual obligation is terminated. Take condition precedent example, but assume the Book Pro agrees to purchase Book Cos distribution unless Book Cos valuation is valued at less than 5,000,000 during the audit.
-generally, all contracts must be supported by consideration.
-Promissory Estoppel is an exception to the consideration requirement.
-requires that the injured party establish:
-there was a promise on which he justifiably relied;
-the reliance was foreseeable; and
-injustice would result if the court provided no relief to the injured party.
-ABC Corp wants to hire Tim as their new VP of Communications. ABC Corp tells Tim what it will pay him for a year and that it will draft an employment contract for 5 years. Time says he will accept the job and asks ABC to send him the employment contract. ABC says it will once their legal department finishes it.
-Tim gives his current company his 2 week notice.
-ABC Corp gets a call from Jill, a former ABC VP. Jill tells ABC she is looking for a job. ABC decides to hire Jill instead of Tim since they have not yet executed a contract.
-capacity is the third essential elements of a valid contract
-capacity means both parties have the mental ability to understand the terms and conditions of the agreement.
-generally minors and those deemed mentally incompetent lack the mental ability to execute valid contracts.
-contracts executed by minors/mentally incompetents may be voidable at that personss election.
-person may cancel the contract or enforce the contract.
-However, minors may not be able to cancel the contract if they lied about their age
-if mental incompetence is declared by the court and a guardian is appointed, the contract is void and has no legal effect. It cannot be enforced.
-if no court declaration, then the contract is voidable if the person did not understand the terms and conditions of the agreement.
-if no court declaration, then the contract is enforceable if the person understood the terms and conditions of the agreement, even if the person is mentally incompetent in other activities.
-a minor or mentally incompetent person can ratify the voidable contract once they have capacity.
-if they ratify, then the contract is valid and enforceable.
-the required element of a valid contract is that it be for a legal purpose.
-contracts that are illegal are unenforceable.
-contracts are illegal based on being contrary to a statue, case law, or public policy.
-example is the usury statutes
-usury statues set a maximum amount of interest that may be charged.
-any contracts with an interest rate in excess of the statutory cap is illegal and would be unenforceable.
Contracts Part 2
-once a contract is formed, the contract may later be modified by the parties
-modification can be oral or written
-to be valid, modification must typically be based on a meeting of the minds.
-consideration may be required if it is a one sided modification
True meeting of the minds
-we have discussed the 4 requirements for a valid contract
-there are circumstances in which a court may find that despite the appearance of all 4 requirements, there was no true meeting of the minds.
-in other words, under certain circumstances, a party will not have truly agreed to the terms and thus there is no contract.
-A true meeting of the minds does not occur under the following circumstances:
-mistake of fact
-contract procured under circumstances of fraud is voidable
-fraud in the fact: a contract is made based on an untrue statement about a material fact (misrepresentation) such that the person does not understand an essential term of the contract.
-example: person signs deem of trust to transfer property when he is told that it is an employment agreement
-fraud in the inducement: a party makes a false statement to entire the person to enter into the agreement.
-example: a jeweler tell person that ring is a diamond when it is really zirconium. Person can cancel the contract.
-for the contract to be voidable under either theory of fraud, the misrepresentation must be material and relied upon by the person in deciding to make the contract.
-fraudulent misrepresentations are difference from puffing
-promissory fraud is where the party promises to perform some act, but has not mention of completing the act.
-promissory fraud does not invalidate the contract, but rather there would be a claim for breach of contract after the person fails to perform as required under the contract.
-duress is when a party is forced to execute the contract because of fear (usually due to threats)
-examples: physical threat, blackmail, or extortion.
-contract is voidable
-threat must be wrongful or illegal
Mistake of fact
-if a mistake of fact happens, a contract may be voidable.
-generally, a unilateral mistake by one party does not make the contract voidable.
-exception is when the mistaken party made an unintentional mistake in preparing the offer such that the offer is really too good.
-to determine whether there is a mistake of fact, courts consider 3 factors:
1- the substantiality of the mistake: contract is more likely to be voidable when the mistake has a material effect on the party.
2-whether the risks were allocated: if a party agrees to a risk, he is bound by the consequences if the risk occurs. If there is no agreement, the court will determine which party should be allocated the risk.
3-timing: prompt notice of alleged mistake must be given.
-does not invalidate the contract.
-it just means. Court must interpret the contractual terms to determine what the parties obligations are.
-an ambiguity exists when a term is subject to two or more reasonable interpretations.
-ambiguity does not exists just because two parties interpret the term differently.
-generally in contract interpretation, the court is confined to the four corners of the contract
-rule of construction is that the ambiguous language will be constructed against the party who drafted it.
-parol evidence refers to prior or contemporaneous statements about the contract
0if the contract is ambiguous, then parol evidence is inadmissible because the interpretation is confined to the four corners of the contract.
-if contract is ambiguous, parol evidence can be used to interpret the ambiguous terms of the contract.
-refers to a contract term that is so strict or so unfair that it shocks the courts conscience
-no honest may in his sense and not under delusion would make on one hand, and as no honest and fair man would accept on the other.
-unconscionability is rare in business settings because usually you have sophisticated persons negotiating the contract and courts are this unlikely to find a term unconscionable.
-most often arises in contracts that are not at arms- length.
-these are standard boiler plate contracts between a business and an individual
-there are often transactions in which the individual has no control over the terms, he must accept the businesses terms or there is no agreement.
-when a contract term is deemed unconscionable, the court will refuse to enforce that term.
-the entire contract is usually not deemed unenforceable unless the unconscionable term is an essential term.
-if it is an essential term, then the court will either rewrite the term or void the contract.
Implied covenant of good faith and fair dealing
-every contract contains an implied covenant of good faith and fair dealing
-this means that every party is obligated to act in a manner in such that they do not deprive the other party of the benefits of the agreement.
-example: when a person misleads a person with false statements.
-good measure to know if violating your obligation is:
-would this action embarrass you or the company if it was made public?
-would you act this way if you were dealing with a close friend or family member?
Statute of Frauds
-contracts may be oral
-statute of frauds, however, requires that some contracts be (at least in part) in writing.
-statute of frauds is an affirmative defense.
-if a contract required to be in writing is oral, the contract will still be enforced if no party raises the statute of frauds as a defense.
-the following agreements must generally be in writing:
-sale or lease of land;
-an agreement which cannot be performed within 1 year;
-a prenuptial agreement
-an agreement to pay the debts of a third party
-contract does not have to be formal contract
-writing requirement may be satisfied based on correspondence about agreement.
-writing only has to include essential terms, subject matter, price, duration of contract.
Contracts part 3
Breach of Contract
-if a party does not meet his or her obligations under the contract, then the non breaching party may sue the breaching party.
-a breach of contract claim has 3 elements
1-the parties entered into a valid contract
2-one party has materially breached the contract;
3-the non breaching party suffered damages
-must be material, meaning that the party did not perform or abide by an essential term.
-if the breach is material, then the non breaching party is relieved of his obligations.
-if the breach is of a nonmaterial term, the non breaching party must still perform under the contract. However, the non breaching party may either suspend performance until the breach is cured or sue for damages.
-contracts often involve future events
-some events are foreseeable, while some events are not foreseeable
-3 responses to unforeseeable events
-frustration of purpose
-performance of an act may become impossible
-in such a case, the court will not award money damages for a breach (ex: nonperformance)
-example: Scott and Fred executed a contract for Scott to paint Freds house for $1000. Scott is in a bad car wreck and is in an induced coma at the hospital for an unknown duration.
-similar to impossibility but not as extreme
-performance is possible but is commercially impractical
-difficult case to prove
-example: ships difficult to deliver goods when Suez Canal was closed.
Frustration of Purpose
-frustration of purpose is where the parties can perform the contract, but the circumstances have changes such that the contract has no value to one or both parties
-to rely upon this defense, you must show:
1-the stated purpose for making the contract is frustrated;
2-at no fault of the breaching party;
3-by the occurrence of an event, the nonoccurrence of which was a basic assumption upon which the contract was made.
-defense does not apply if either breaching party contributed to the frustration or the frustrating even was foreseeable
-example: rental of room for purpose of viewing Kings coronation, but the coronation was canceled due to Kings sickness
Termination of an agreement:
a contract may be terminated in the following ways:
-mutual performance: the contract ends because the obligations under the contract have been performed in full.
-material breach: if party materially breaches the contract, the non breaching party is relieved of their obligations under the contract.
-anticipatory repudiation: one party knows in advance that the other party will breach the contract, repudiation is considered a material breach, relieving non breaching party from waiting until future time when breach would occur.
-conditions are not met- conditions occurrence or failure thereof may terminate agreement.
A contract may be terminated in the following ways:
-mutual rescission: when both parties agree to terminate the contract.
-operation of law: contract may be terminated by law, such as impossibility, frustration of purpose, or impracticability.
-sometimes persons are asked to execute a liability waiver or release
-these are agreements in which the person essentially agrees not to hold the other party responsible for any injuries or other liability that could result
-these releases are most often used in dangerous activities, such as sky diving, whitewater rafting, etc.
-often held to be enforceable
-waivers are infective for claims of intentional, willful, or gross negligence.
-waivers executed on behalf of minors are often deemed unenforceable.
-if a party proves a breach of contract claim, the non breaching party would be entitled to monetary damages
-courts may also away equitable remedies under certain circumstances.
-purpose is to place the non breaching party in the same position he would have been in had the contract been performed.
-damages should also have a deterrent effect to discourage similar conduct in the future.
-punitive damages are usually not available.
Duty to mitigate
-non breaching party has a duty to mitigate their damages
-non breaching party must steps reasonable steps to limit damages to as small as possible.
-non breaching partys award will be reduced if they do not attempt to mitigate damages
-as an alternative to monetary damages, a court may award specific performance.
-a rare remedy
-specific performance is awarded when:
1-goods sold are unique
2-sale is for land
3-the amount of loss is too speculative that monetary damages cannot be fairly calculated.
-is there the court orders some conduct
-court may award a party to perform an act
-relief is also rare.