Business project 2

The Turnip Plaza Hotel

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Mark Piper was employed for several years as a tour guide at the Turnip Plaza Hotel in Port Austin, Michigan. Turnip Plaza is one of Colossal Corporation’s luxury hotel holdings, strategically located near Lake Huron’s famous Turnip Rock. Over the years, Mark developed a reputation as one of the most skillful tour guides in Michigan. He would guide tourists through extreme kayaking, hiking, and camping adventures in and around the Great Lakes. He was often requested by name by tourists visiting the hotel and was featured on extreme sports television. His high adventure kayaking tours brought in significant revenue for the hotel.

One month ago, Mark was approached by Stacey Nguyen, the manager of the Huron Overnight Inn—a rival company of Turnip Plaza. Stacey offered Mark a substantial salary increase to leave Turnip Plaza and come to work for her. Mark agreed to think about this offer and get back to Stacey in 48 hours. When he returned to Turnip Plaza, he asked several of his colleagues what they thought about the offer. One of them immediately went to Turnip Plaza’s manager, Edward Griffin, and told him the details of Stacey’s offer to Mark.

Upon hearing of the offer, Edward called Mark into his office and said: “If you stay with Turnip Plaza, I promise that next month you will receive a promotion with a 50 percent raise and a guaranteed contract for a two-year term.” This sounded good to Mark, and he turned down the offer from Stacey to stay with Turnip Plaza. However, last week, shortly before Mark was to receive his new contract, he was dismissed from Turnip Plaza because of corporate restructuring due to concerns about the increased liability risks of managing high adventure tours through Colossal’s hotels. Although Mark has not taken any formal action at this point, the vice president is concerned that Mark might try to hold Turnip Plaza to Edward’s promise.

Your task is to research the legal and ethical issues associated with this situation and write a report to the vice president answering the following questions:

1. What legal theories might Mark use to try to legally enforce Edward’s promise? Explain the elements of these theories and how they apply to the facts of this scenario.

2. If Mark were to file a lawsuit and win, what sort of damages or other remedies might he be entitled to? Include your reasoning and any evidence that led you to your conclusions.

3. Finally, regardless of the legal implications, the vice president would like your view on the ethical issues. Does Turnip Plaza have an ethical obligation to fulfill the promise made by Edward to Mark? Is it right to lay off Mark under these circumstances? What should Turnip Plaza do from an ethical perspective? Use ethical theory and principles to analyze these questions.

**Use the resources and learning topics provided and list any other resources used**

You’ve finished your research and reflected on how the facts and the law come together in this situation. You’ve also analyzed the possible arguments and determined which seem most reasonable (all things considered). Now it is time to formulate them, making sure to address all the concerns that VP Dodger expressed to you when you met. Outline the report that you will draft for your VP and review your document to make certain it covers all relevant points and progresses in a logical order.

After you finish the outline, if you have time, give yourself one night of sleep before you begin the next step, in which you will write the report. Fresh eyes might help you see points that need revision.

Use your outline and research notes to prepare your report for the VP. Be sure to meet the following requirements he has requested:

·

Format your report by including APA-formatted in-text citations and an APA-formatted reference list (do not format the body of the report using APA style, just the reference list). See

references and citations

for details.

· Include a specific recommendation of what action, if any, the VP should take based on your analysis and conclusions.

· Support your conclusion with references to legal principles and laws.

· The report should be no more than 10 pages (double spaced, 12-point font; the reference list does not count towards page limit).

· Title your file using this protocol: yourlastname_TurnipPlazaReport_date.

·

Learning Topic

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Ethical Business Decision Making

It is reasonable that everyone who asks justice should do justice.

Thomas Jefferson

What Is Ethics?

Ethics has been a topic of discussion and debate starting with the Greek philosophers about 2,500 years ago. We can define ethics simply, but resolving ethical issues is rarely simple. Ethics is the study of good and of how people apply good principles in their behavior. Behavior includes how we treat people we know and, perhaps more importantly, how we treat people we do not know. Our biases and fears can complicate ethical decision making. Our own interests in achieving specific ends can also interfere with our choice of an ethical course of action; the ethical choice may not be the most profitable or socially acceptable.

It might be helpful to discuss what ethics is not. Ethics is not religion, although religion can guide ethical thinking. Ethics is not defined by what is possible (e.g., through scientific discovery or technology), although, as new machines are created, what is possible changes, giving rise to new ethical quandaries. Nor is ethics simply what is commonly practiced. Any one of us could cite a historically common practice that is unethical. In addition, what is common practice today in one place will conflict with what is common practice today in other places.

Ethics is not just how we feel: our instincts may tell us to act one way or another, but this feeling may not lead us to the best behavior. If making a public speech against a new piece of legislature were the only way to behave ethically following the passage of that legislature, would we take this action? Many people, for example, have a gut reaction against public speaking. The law is not an adequate guide either. Looking back at history, we can certainly name unethical laws.

An important outcome of ethical decision making is a standard for behavior. Standards can be informal, as in our behavior on the street, in a store, or with our neighbors. If you see someone drop a $20 bill, what should you do? Standards can also be formal, usually at the institutional level (e.g., at a university, trade organization, or business) or the societal level (city, county, state, national, international). At the societal level, for example, methods and forms of taxation must be determined. What means of taxation are ethical? Are there some that are unethical?

What Is Business Ethics?

Business ethics is ethics concerning behaviors occurring within a business context. The breadth of ethical considerations should be considered when one is formulating a standard of behavior in a business setting. We cannot look only to the law, only to common or prior practice, to religion, or to instinct. We must carefully consider multiple competing factors and, using logic and rational thought, create business standards of behavior that are ethical.

How Does a Business Provide Ethical Standards?

Businesses attempt to provide ethical standards in several ways:

· relying on each individual to make ethical decisions

· stopping at compliance with the law

· simply telling employees and officers to act ethically

And some businesses achieve results by taking a managing values approach—a systematic approach to maintaining the organization’s values that doesn’t depend on individual interpretation of those values or how to safeguard them.

The first three options are not helpful even when an employee wishes to act ethically; the employee may not understand how to judge what is ethical behavior. Thus, determining if your company is using a managing values approach is the first step. Places to look to make this determination include your organization’s mission statement, core values, and ethics code.

Operational Ethics in a Business Setting

But what if these don’t help, or worse, they raise ethical issues themselves? Fortunately, there is a set of standard ethics tests that you can apply yourself.

Ethics Tests You Can Apply

The first ethics test you can apply is called the front page test, or viral news test. This is a fairly new test, and it is simple: How would your business feel if the issue were on the front page of a newspaper? Or went viral on the internet?

More traditionally, there are five theoretical tests with which you can judge a business action (Markkula Center for Applied Ethics, n.d.):

· rights—What duty do the actors have to respect the human rights of those affected?

· justice or fairness—Are all parties treated equally or proportionally? If differently, is the basis for treating them differently rational?

· virtues—The good human being is fair, is honest, shows integrity, and shows compassion. Does the action uphold these virtues?

· common good—This test has become more common recently. How does the action benefit everyone in society? Whom does it not benefit? Whom might it harm?

· utilitarianism—Utilitarianism is also called the greatest good principle. Does the overall good outweigh any bad? Sometimes, this conflicts with other tests.

In order to answer the questions above, we must have a clear sense of what is a good? What is a harm? What are legitimate rights? What is the standard of fairness? What is the canon of virtues? What is the common good? These questions have been much debated.

A Method of Determining Ethical Responsibility

There are five questions you can ask to determine whether or not you should act on a given decision:

· What is the severity of the harm?

· What is the certainty of the harm?

· What is the degree of involvement?

· What is the cost of acting?

· What is the certainty of the solution?

Process of Ethical Analysis

Think of ethical analysis as a process that builds on itself. Follow the steps below, knowing that you might circle back and reevaluate your interpretation of the situation as you complete each step.

1. Identify the stakeholders and determine whether some are more important than others.

2. Determine whether all stakeholders have been consulted on the business decision at hand.

3. Describe the possible actions of the stakeholders following the business decision

4. Evaluate each of the possible business decisions in light of the ethical tests.

5. Identify the best possible decision and justify your choice, with reference to the ethical approach on which you have based it.

References

Markkula Center for Applied Ethics. (n.d.). Ethical decision making. Santa Clara University. Retrieved from https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/

Learning Resource

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Business Ethics in a Nutshell: What is Ethics?

Ethics is the branch of philosophy concerned with the meaning of all aspects of human behavior. Theoretical ethics, sometimes called normative ethics, is about discovering and delineating right from wrong; it is the consideration of how we develop the rules and principles (norms) by which to judge and guide meaningful decision making. Theoretical ethics is supremely intellectual in character, and being a branch of philosophy, is also rational in nature. Theoretical ethics is the rational reflection on what is right, what is wrong, what is just, what is unjust, what is good and what is bad in terms of human behavior.

Business ethics is not chiefly theoretical in character. Though reflective and rational in part, this is only a prelude to the essential task behind business ethics. It is best understood as a branch of ethics called applied ethics: the discipline of applying value to human behavior, relationships and constructs, and the resulting meaning. Business ethics is simply the practice of this discipline within the context of the enterprise of creating wealth (the fundamental role of business).

There are three parts to the discipline of business ethics: personal, professional, and corporate. All three are intricately related, and it is helpful to distinguish between them because each rests on slightly different assumptions and requires a slightly different focus in order to be understood. We are looking at business ethics through a trifocal lens: close up and personal, intermediate and professional, and on the grand scale (using both farsighted and peripheral vision) of the corporation.

In spite of some recent bad press, business executives are first and foremost human beings. Like all persons, they seek meaning for their lives through relationships and enterprise, and they want their lives to amount to something. Since ethics is chiefly the discipline of meaning, the business executive, like all other human beings, is engaged in this discipline all the time, whether cognizant of it or not. Therefore, we should begin by looking at how humans have historically approached the process of making meaningful decisions. Here are four ethical approaches that have stood the test of time.

Personal Ethics: Four Ethical Approaches

From the earliest moments of recorded human consciousness, the ethical discipline has entailed four fundamental approaches, often called ethical decision-making frameworks: utilitarian ethics (outcome based), deontological ethics (duty based), virtue ethics (virtue based), and communitarian ethics (community based). Each has a distinctive point of departure as well as distinctive ways of doing the fundamental ethical task of raising and answering questions of value. It is also important to understand that all four approaches have overlaps as well as common elements, such as the following:

· impartiality—weighting interests equally

· rationality—backed by reasons a rational person would accept

· consistency—standards applied similarly to similar cases

· reversibility—standards that apply no matter who makes the rules

These are in a sense the rules of the ethics game, no matter which school or approach to ethics one identifies with most.

Utilitarian Ethics

The utilitarian approach is perhaps the most familiar and easiest to understand of all approaches to ethics. Most of us are using utilitarian ethics much of the time, especially those of us in business. The utilitarian asks a very important question: “How will my actions affect others?” They then attempt to quantify the impact of their actions based on some least common denominator, such as happiness, pleasure, or wealth. Therefore, utilitarians are also called consequentialists, because they look to the consequences of their actions to determine whether any particular act is justified.

“The greatest good for the greatest number” is the motto of the utilitarian approach. Of course, defining “good” has been no easy task because what some people think of as good, others think of as worthless. When a businessperson does a cost benefit analysis, he or she is practicing utilitarian ethics. In this case, the least common denominator is usually money. Everything from the cost of steel to the worth of a human life must be given a dollar value, and then one just does the math. The Ford Pinto automobile was a product of just such reasoning. Thirty years ago, executives at the Ford Motor Company reasoned the cost of fixing the gas tank problem with their Pinto would cost more than the benefit of saving a few human lives. Several tanks did explode, people died, and the company lost lawsuits when judges and juries refused to accept these executives’ moral reasoning.

One of the most familiar uses of outcome-based reasoning is in legislative committees in representative democracies. How many constituents will benefit from a tax credit and how many will be diminished is the question before the revenue committee at tax rectification time. Representative democracies make most decisions based on the utilitarian principle of the greatest good for the greatest number.

Democratic governments are naturally majoritarian, though in constitutional democracies there are some things that cannot be decided by doing the math (adding up the votes). Some questions should never be voted on. The founders of our nation expressed this fundamental concept with three words: certain unalienable rights.

Deontological Ethics

Enter the deontological ethicists. Immanuel Kant is the quintessential deontological (duty-based) ethical theorist. Kant, who lived in eighteenth-century Prussia, was one of the most amazing intellects of all time, writing books on astronomy, philosophy, politics, and ethics. He once said, “Two things fill the mind with ever new and increasing admiration and awe …the starry heavens above and the moral law within” (Kant, 1788). For Kant there were some ethical verities as eternal as the stars.

Deontological simply means the study (or science) of duty. Kant did not believe that humans could predict future consequences with any substantial degree of certainty. Ethical theory based on a guess about future consequences appalled him. What he did believe was that if we use our facility of reason, we can determine with certainty our ethical duty. As to whether or not doing our duty would make things better or worse (and for whom), Kant was agnostic.

Duty-based ethics is enormously important for (though consistently ignored by) at least two kinds of folks: politicians and business people. It is also the key to a better understanding of our responsibilities as members of teams. Teams (like work groups or political campaign committees) are narrowly focused on achieving very clearly defined goals: winning the election, successfully introducing a new product, or winning a sailboat race. Sometimes a coach or a boss will say, “Look, just do whatever it takes.” Ethically, “whatever it takes” implies the ends justify the means. This was Kant’s fundamental criticism of the utilitarians.

For Kant, there were some values (duties) that could never be sacrificed to the greater good. He wrote: “So act as to treat humanity, whether in thy own person or in that of any other, in every case as an end withal, never as a means only” (Kant, 1998). Fellow team members, employees, campaign staffs, customers, and partners are always to some extent means to our various goals (ends), but they are also people. And people, Kant believed, cannot be just used, they must also be respected in their own right, whether or not the goal is achieved. He called this absolute respect for persons a categorical imperative.

In any team situation the goal is critical, but treating team members with respect is imperative. Teams fall apart when a team member feels used or abused (treated as less important than the overall goal itself). Great leaders carry the double burden of achieving a worthwhile end without causing those who sacrifice to achieve the goal being treated as merely expendable means. People are never merely a means to an end. We owe that understanding to Immanuel Kant.

It is one thing to understand that there are duties that do not depend on consequences; it is quite another to develop the character to act on those duties. This is where Aristotle (384-322 B.C.) comes in. Aristotle wrote the first systematic treatment of ethics in Western civilization: Nicomachean Ethics.

Virtue Ethics

Today we call his approach to ethics 
virtue ethics
. For Aristotle and other Greek thinkers, virtue meant the excellence of a thing. The virtue of a knife is to cut; the virtue of a physician is to heal; the virtue of a lawyer is to seek justice. In this sense, ethics becomes the discipline of discovering and practicing virtue. Aristotle begins his thinking about ethics by asking, “What do people desire?” He discovers the usual—wealth, honor, physical and psychological security—but he realizes that these are not ends in themselves; they are means to ends.

The ultimate end for a person, Aristotle taught, must be an end that is self-sufficient, “that which is always desirable in itself and never for the sake of something else” (Arisotle, 1999). This end of ends Aristotle designates with the Greek word eudemonia, usually translated by the English word “happiness.” But happiness does not do Aristotle or his ethics justice. Yes, eudemonia means “happiness,” but really it means so much more. The problem is not with Aristotle’s Greek word eudemonia, the problem is in our English word “happiness.”

Happiness in English comes from the ancient word hap, meaning chance, as in happenstance. For Aristotle happiness was not something one acquired by chance. Happiness was the grand work of living; the very practice of being all that you can be. Fulfillment and flourishing are far better words to translate the concept contained in the Greek word eudemonia. For Aristotle, this state of virtue is achieved not by accident but through intent, reason, and practice.

Aristotle thought that one discovers virtue by using the unique gift of human reasoning, that is, through rational contemplation. “The unexamined life is not worth living,” said Socrates almost 100 years before Aristotle. Like Aristotle and Aristotle’s teacher Plato, Socrates knew that we humans need to engage our brains before we open our mouths or spring into some decisive action. For Aristotle, the focus of that brain work was chiefly about how to balance between the fears and excesses in which the human condition always abounds. Between our fears (deficits) and exuberances (excesses), lies a sweet spot, the golden mean, called virtue.

At times of physical peril—say in a big storm on a small sailboat—a crew member may be immobilized by fear and unable to function, thus putting the lives of everyone on the sailboat in danger. Or the opposite could happen. A devil-may-care attitude in the face of real danger can as easily lead to disaster. Courage is the virtue located at the mean between cowardliness and rashness. Yet, identifying such a virtue and making that virtue part of one’s character are two quite different things. Aristotle thus distinguishes between intellectual virtue and practical virtue. Practical virtues are those developed by practice and are a part of a person’s character, while intellectual virtue is simply the identification and understanding of a virtue.

Practice is how one learns to deal with fear; practice is how one learns to tell the truth; practice is how one learns to face both personal and professional conflicts. Practice is the genius of Aristotle’s contribution to the development of ethics. He showed that virtues do not become a part of our moral muscle fiber because we believe in them, or advocate them. Instead, virtues become characteristics of ourselves by our exercising them. How does one learn to be brave in a storm at sea? “Just do it.”

The ultimate goal behind developing characteristics of virtue is eudemonia, a full flourishing of our self, true happiness. Practitioners of the Judeo-Christian tradition tend to think of ethics (or morality) as the business of figuring out how to be good rather than bad. That is not the true end of ethics so far as Aristotle was concerned. The end is a state of fulfillment; the ultimate goal is becoming who you truly are and realizing the potential you were born with—being at your best in every sense.

Just as the virtue of the knife is to cut and the virtue of the boat is to sail, the virtue of the self is to become the best of who it can be. This is eudemonia. Just as the well-trained athlete seeks to be in the zone (the state of perfect performance achieved by practice), Aristotle wrote about the truly virtuous life and the pursuit of eudemonia. Just as a perfectly trimmed sailboat glides through the water, effortlessly in sync with the waves and the wind, the man or woman in a state of eudemonia has achieved the state of earthly fulfillment.

Communitarian Ethics

All three approaches to ethics described above are principally focused on the individual: the singular conscience, rationally reflecting on the meaning of duty or responsibility, and in the case of virtue ethics, the ethical athlete practicing and inculcating the capacity to achieve the state of eudemonia. Communitarian ethics has quite a different point of departure: the community (or team, or group, or company, or culture) within which the individual engages himself or herself is the critical context for ethical decision making.

The communitarian asks the important question, “What are the demands (duties) that the community or communities of which I am a part make on me?” The Scottish ethicists W. D. Ross (himself a student of Aristotle) focused his own ethical reflections on the question of, “Where do ethical duties come from?” His answer was that they come from relationships. We know our duties toward fellow human beings by the nature and quality of our relationships with them. The duties we owe a colleague in the workplace is different from the duties we owe a spouse; those duties are different from the duties we owe our country. The communitarian asks us to look outward and to face up to the duties of being social creatures. We define ourselves and our responsibilities by the company we keep.

Communitarians are quite critical today of the attitude of so many in our society who, while adamant about their individual rights, are negligent of their social duties. The “me generation” has created a need for a new breed of ethicists who insist that, from family and neighborhood to nation and global ecosystem, the communities in which we live require us to accept substantial responsibilities. Environmentalists, neighborhood activists, feminists, and globalists are some of the groups loosely identified today with the communitarian movement.

Amitai Etzioni, in Spirit of Community: Rights, Responsibilities and the Communitarian Agenda described the principles of this somewhat disorganized movement. Etizioni’s thesis is that we must pay more attention to common duties as opposed to individual rights. Our neighborhoods, he believes, can again be safe from crime without turning our country into a police state. Our families can once again flourish without forcing women to stay home and not enter the workforce. Our schools can provide, “essential moral education” without indoctrinating young people or violating the First Amendment’s prohibition of establishing religion.

The key to this social transformation is the communitarian belief in balancing rights and responsibilities: “Strong rights presume strong responsibilities.” Etzioni (1993) states the communitarian agenda: “Correcting the current imbalance between rights and responsibilities requires a four-point agenda: a moratorium on the minting of most, if not all, new rights; reestablishing the link between rights and responsibilities; recognizing that some responsibilities do not entail rights; and, most carefully, adjusting some rights to the changed circumstances.”

Here, if nothing else, is a frontal attack on the libertarian mindset of our age.

Communitarianism is not new, at least if one defines it as an approach to ethics and value referencing significant communities of meaning. Most of the world’s great religions are in this sense communitarian. It is from a community of faith that the faithful develop a sense of self and responsibility (or in Confucian thought, the extended family which nurtures this development). Ethics cannot be separated from the ethos of the religious or familial community. The modern communitarian movement may or may not be religiously inclined, yet it is clearly a part of a tradition of ethical approach as old as human association.

In the context of teams, the communitarian approach to ethics has much to commend itself. How much of one’s personal agenda is one willing to sacrifice for the overall goal of winning a sailboat race? Under what conditions is one willing to let the values or culture of the team alter one’s own ethical inclinations? To what extent do the relationships one has with team members give rise to duties that one is willing to honor? How willing is one to share the credit when the team succeeds? How willing is one to accept blame when the team loses? Under what conditions would one break with the team? If Ross is correct that duties come from relationships, paying attention to such questions about the company we keep may be more than a social obligation; perhaps, our ethical duty.

Other Ethical Approaches

There are two pervasive ethical approaches not treated here: ethical egoism and the divine imperative. Each has a broad and dedicated following and each is deeply problematic to the ethical maturing of any society. Briefly, and with pejorative intent, here is what these extreme, yet interestingly similar approaches assert.

The ethical egoists say that ethics is a matter of doing what feels right to the individual conscience. If one asks, “Why did you do that?” The answer is, “Because I felt like it.” The approach is often dressed up with statements about being true to yourself: “let your conscience be your guide”, or “do the right thing.” But how does one know what is true for the self? How does one develop a conscience? How is one to know that doing what is right (what feels right to you) is the right thing to do?

If nothing else, ethical egoism is a conversation stopper! How does one communicate to colleagues, friends, children or any other human being when the reference point of behavior or ethical judgment is just about how one feels inside? How does a civil society emerge if we civilians cannot deliberate in common, understandable language about our motives, intents, values, or duties? In essence, ethical egoism is the ethics of teenagers rebelling against being answerable to outside authority. To teenagers, to enter the ethical dialogue is to take the radical risk of having one’s values and actions challenged.

Apparently, there are many of us who are just not grown up enough to risk that! Better to repeat the mantra: “I did what my conscience dictated.”

Just as there is no possible meaningful ethical dialogue with the ethical egoist, nor is there much hope of creative engagement with divine imperialists. For this growing community, ethics is the simple business of doing what God tells one to do. There is therefore no reason or need for discussion. The issue is conversion, not conversation. In a constitutional democracy like ours with a fundamental commitment to “the non-establishment of religion”, the divine imperialist is stuck with a difficult dilemma: either to 

make all ethical inquiry personal (that is, no social or political value deliberation), or bring no state into conformity with the revealed will of God. Divine Imperialists do not deliberate. They dictate, simply because there is nothing to deliberate about. God has spoken. It is in the book.

The flaw in the divine imperialists’ approach that if God is good, then He must reveal only good laws and rules. This creates two alternatives. The first is that there is a reference for “good” apart from the divine itself. The only other, that God is undependable; that God is arbitrary; surely this is unacceptable. God is not only good, but God wills the good. God’s will, then, becomes a reality discoverable even apart from belief in a particular represented manifestation of God. Religion, at its best, should understand that faith confers no special status of ethical insight. Believers, agnostics, and nonbelievers can, and do, contribute to the culture’s continuing struggle to understand what is good, what is just, what is true. That is why democracies (as opposed to states founded upon some divine right of kings) survive.

Narrative Ethics

Among the professions, particularly medicine, law, and counseling, narrative has become a powerful tool in developing ethical insights and perspective. To tell a story is to invite participation from the hearer, and it is to also a means of communicating the richness and complexity of human dilemmas. Narrative ethics is simply diagnosis through story. Its benefit over the four traditional ethical approaches is that story invites both ethical engagement and ethical creativity. In business, as in law, a great deal of teaching is done through the use of cases. This is nothing more or less than using the pedagogy of narrative ethics. The narrative invites the hearer into the complexity of issues involved in personal, professional and organizational dilemmas, and provides a road through the complexity to the simplicity on the other side.

Oliver Wendell Holmes, an American jurist who wrote stunningly comprehensible decisions, even in some of the most complex cases imaginable, has a famous quote: “I would not give a fig for simplicity this side of complexity, but I would give my life for the simplicity that lies on the other side of complexity.” It is the role of narrative to lead us through the thickets of overwhelming complexity, to the clarity of enriched simplicity.

At all stages of the ethical decision-making process, narrative is a useful tool of analysis for exposing the facts, conflicts, feelings, and values that are the stuff of the human predicament.

References

Aristotle. (1999). Nicomachean ethics. (T. Irwin, trans.). Indianapolis, IN: Hackett Publishing Company.

Etzioni, A. (1993). The spirit of community: Rights, responsibilities, and the communitarian agenda. New York: Crown Publishers.

Kant, I. (1998). Groundwork of the metaphysics of morals (M. Gregor and J. Timmermann, eds.). Cambridge, UK: Cambridge University Press.

Kant, I. (2002). Critique of practical reason (W. S. Pluhar, trans.). Indianapolis, IN: Hackett Publishing Company.

Learning Topic

Contract

Remedies

The US legal system is a common-law system, a type of system that originated in England after the Norman conquest of 1066 CE. The rulers of England, including William the Conqueror and his progeny, took measures to unify the country. One of the measures they took was to establish king’s courts, which sparked the beginning of a body of common law, or generally applicable rules of law, throughout England and, eventually, its colonies. Over time, the common law was brought to America through English colonization, and the system of common law was adopted by the Founding Fathers of the United States.

In medieval English times, one could seek different remedies in different courts. Remedies, broadly construed, are the legal method by which rights are enforced or wrongs redressed. In medieval English times, king’s courts resolved disputes by issuing an award of compensation to injured parties, often in the form of land, valuable property, or money. The king’s courts eventually became known as courts of law, and the awards of compensation, remedies at law. Remedies at law, today, are mostly issued in the form of monetary amounts called damages, and are awarded through court orders.

It became apparent during the medieval period that there was sometimes no adequate remedy at law available to resolve a dispute, and so, over time, chancery courts, also known as courts of equity, were established. The remedies available in the courts of equity (called remedies in equity or equitable remedies) were non-monetary remedies, including specific performance, rescission, reformation, and injunction.

During the medieval period and still today, equitable remedies are typically available to the injured party only when remedies at law (e.g., monetary damages) are inadequate for resolving a dispute. Over time, and particularly during the nineteenth century, most states in United States adopted rules to combine the traditional courts of law and courts of equity, streamlining the process by making injured parties capable of seeking both monetary and equitable remedies in the same court.

Remedies are available for victims of breach of contract. When one party to a contract does not fulfill his or her legal obligations under the contract (“breaching the contract”), the other party may seek a remedy, or some combination of remedies, to make the injured party whole. Today, in the United States, the remedies available for breach of contract include both remedies at law (damages), and equitable remedies, and in most states, these remedies may be sought simultaneously in the same court. When there is a valid and enforceable contract, monetary and equitable remedies may be available.

Even when there is not a valid and enforceable contract, in some cases, remedies may be sought under other common-law theories, such as promissory estoppel, or pursuant to theories of quasi-contract. The following decision tree explains how contract remedies work in tandem with noncontract remedies.

Contract Remedy Decision Tree

As the decision tree shows, when there is a valid and enforceable contract, then monetary and equitable remedies may be sought. If there is not a valid and enforceable contract, then one should ask if a promise has been made in order to determine the appropriate theory to use. If a promise has been made, then one may seek a remedy under the theory of promissory estoppel. If a promise has not been made, then one may seek a remedy under the theory of quasi-contract. If there might be a contract, but this is not certain, then one may seek relief in the alternative (by requesting the court to determine if there is a contract and, if so, to issue contract remedies; or, if not, to issue noncontract remedies).

Thus, even if no valid and enforceable contract exists, there is still the potential, depending on the circumstances, for the injured party to seek remedies.

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Breach of Contract

A party who is not relieved from her duty of performance and fails to perform her obligations under a contract is said to breach the contract. Breach entails a failure to perform material duties in accordance with the agreement. This can include a complete lack of performance, partial performance of the material duties, or performance that fails to meet the demanded standard. A breach by one party relieves the other party’s duty of performance.

Ask Yourself

· Should different types of breach be treated differently? Why or why not?

· Joseph enters into a contract with Eric to build a deck on Eric’s house. Joseph builds a deck that is weak, flimsy, and drastically varies from the design plans. Under what grounds might Joseph allege breach of contract against Eric?

Remedies

A breach of contract action may result in any number of damages.

Compensatory Damages

Compensatory damages are court-awarded damages to put the plaintiff in the same position as if the contract had been performed. It includes lost profits on the contract and the cost of substitute performance. A party’s lost profits from the other party’s breach of contract are the expected gains from performance of the contract. This would generally mean the value received minus the costs incurred in performing. This calculation is known as the “expectation damages.”

For example, you sign a contract to sell me supplies for my business. You back out of the contract and I have to purchase my supplier from another vendor. The cost to me to purchase the supplies from a new vendor is 15 percent higher than pursuant to our agreement. I have suffered damages of 15 percent of the contract value. Alternatively, if I backed out of the contract and my duties to purchase your supplies, you would have suffered expectation damages equal to the price of the goods minus your cost of supplying them to me.

Consequential Damages

Consequential damages are court-awarded damages arising from unusual losses which the parties knew would result from breach of the contract.

For example, I order cement from you to complete a large contract. I express to you that I intend to use the cement for the large construction contract and that time of deliver and quality of the goods is of utmost importance. You fail to deliver the cement and I am forced to purchase from another vendor. The cement arrives late and causes delays. I incur substantial penalties under the larger contract. Your breach of contract may have cost me compensatory damages equal to the price difference between our contract and the replacement vendor. The consequential damages, however, are the penalties incurred and any lost business as a result of your breach.

Liquidated Damages

Liquidated damages are damages specified in the contract in the event of non-performance by either party. Liquidated damages are appropriate where real damages for breach of contract are likely to be uncertain. In such a case, the parties decide to specify in the contract the damages in the event of breach. Courts will enforce these liquidated damage clauses unless they seem to penalize the defendant instead of merely compensating the plaintiff for uncertain losses.

For example, I sign an agreement to provide you with consulting services. It is difficult to estimate the damage to your business if I fail to adequately perform. In the agreement we indicate that my failure to perform will result in damages of $1,000 to you. This liquidated damages clause is likely enforceable.

Nominal Damages

Nominal damages include a small amount awarded by the court to the plaintiff for a breach of contract, which causes no financial injury to the plaintiff. In a tort action, a court may only award punitive damages if there is some finding of liability of the defendant. The court may not be able to find liability based upon tort theory in the absence of identifiable harm suffered by the plaintiff. If, however, the tort action is accompanied by a contract cause of action for the same conduct, the award of nominal damages for breach of contract may support a finding of punitive damages in the related tort action.

For example, I enter into a contract to provide you with consulting services. I fail to perform and you hire someone else. In this situation, it is difficult to determine if your business incurred any damages. If you sue me, a court may award nominal damages against me indicating that I was legally wrong in failing to perform my contractual duties. A common nominal damages amount is between $1 and $100.

Specific Performance

Specific performance is a court-ordered, equitable remedy available when the subject matter of the contract is unique. A court order for specific performance directs a party to perform her duties under the contract. The court will only apply this remedy when the subject matter of the agreement is truly unique and irreplaceable. Specific performance is not available for service obligations.

For example, you agree to sell me a Picasso painting that you inherited. At the last minute, you back out of the contract. I sue you to force you to sell me the painting. A court may order specific performance of the contract by ordering you to sell me the painting.

Recission

Rescission means to undo a contract and return the parties to the position they were in prior to entering the contract. This generally means returning property sold in the condition it was transferred and a return of the purchase price. This remedy is not available for executed services contracts.

Ask Yourself

· How do you feel about the concept of consequential damages? Is it fair to impose that extent of liability on a party if it is not part of the subject matter of the contract? Why or why not?

· Taylor enters into a contract with Winnie to supply her with reinforced steel. Winnie is going to use the steel in the construction of a new manufacturing facility for her business. Winnie backs out of the contract when she realizes that she can get the steel 10 percent cheaper from a competitor. If Taylor sues Winnie, what are his options for damages?

Transcript

Efficient Breach

Efficient breach occurs when a party makes a conscious decision to breach a contract after balancing the costs of complying against fulfilling the contractual obligation. This normally arises in situations where a party will incur fewer losses or make more money by breaching the contract than the party would suffer in compensatory or consequential damages if sued.

Ask Yourself

· How do you feel about the concept of efficient breach? Should the decision of whether to breach a contract simply be an economic consideration or is there a moral consideration involved? Should morality or ethics play a role in business transactions? If so, to what extent and why?

· Wendy enters into a contract to sell a piece of equipment to Laura. Before the sale is finalized, Erwin offers to purchase the equipment from Wendy at a much higher price. Wendy evaluates whether to breach the contract with Laura and sell the equipment to Erwin at the higher price. What might Wendy consider in making her decision?

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Damages in a Breach of Contract Action

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Learning Topic

Contract Formation and Execution

Contract law is a component of civil law that concerns the legal principles governing the exchange of goods or services between individuals or businesses. At its heart, contract law involves how legally enforceable promises are formed and executed.

A promise is a declaration by a legal person (called the promisor) to perform or forbear from performing specified act(s). The recipient of the promise (called the promisee), upon a promise being made, has rights to expect (and often to demand) that the promise be performed. Whether these rights to expect and demand performance are moral or legal rights depends on whether the promise was made in the context of a valid and enforceable contract. Only if the legal requirements of a contract are satisfied, or if other legal remedies are available, will a promise be enforceable in a court of law.

The law of contracts provides a means of distinguishing between types of promises that create moral obligation (e.g., a promise to meet a friend for coffee) and those that also create legal obligation (e.g., a promise to your bank to pay the mortgage acquired on your home).

Within the United States, there are two major sources of domestic contract law: the Uniform Commercial Code (UCC) and the common law. Depending on the subject matter of the contract, such as if the contract involves the purchase of tangible personal property (“goods”) or the hiring of an individual for employment (“services”), one will look to specific sources of law to determine whether the legal promise is enforceable.

Contracts for the sale of goods are governed by Article 2 of the UCC. Most contracts that are not for the sale of goods—such as contracts for employment, real property, insurance, and so forth—are governed by the common law, which is generally summarized in the Restatement of Contracts (Restatement).

Once one identifies the applicable source of the contract law—that is, whether the contract is governed by the common law or by the UCC—then, one can determine if the particular promise is valid and enforceable under the applicable rules contained in that source of law. Although the UCC and the common law do overlap, there are many key differences between the two sources of law as regards many areas of contract law, including the formation and performance of a contract, the requirements for breach of a contract, the enforceability of a contract, and the remedies available for the victim of a breach.

The legal enforceability of a particular promise thus hinges on the rules contained in the relevant source of law that are applicable to the subject matter of that particular promise. The promise is, in many ways, the cornerstone of societal order. As stated by distinguished jurist Roscoe Pound, the “social order rests upon the stability and predictability of conduct, of which keeping promises is a large item” (Pound, 1959). Contract law provides the mechanism for determining when a promise is valid and enforceable in a court of law.

Transcript

References

Pound, R. (1959). Jurisprudence (Vol. 3). Saint Paul, MN: West Publishing Co.

Learning Resource

Contract Modification

In order to modify a contract, first determine whether the contract is governed by Uniform Commercial Code (UCC) or common law. The UCC requires no new consideration for modification of a sales contract made in good faith (UCC Section 2-209(1)). However, under common law, new consideration is required to modify a contract. The following case considers whether a contract was properly modified under common law.

Gross v. Diehl Specialties International, Inc., 776 S.W.2d 879 (Missouri Ct. App. 1989)

The plaintiff appeals from a jury verdict and resultant judgment for defendant in a breach of employment contract case. Plaintiff was employed under a 15-year employment contract originally executed in 1977 between plaintiff and defendant. Defendant, at that time called Dairy Specialties, Inc., was a company in the business of formulating ingredients to produce nondairy products for use by customers allergic to cow’s milk. Plaintiff successfully formulated [Vitamite]…for that usage. Thereafter, on August 24, 1977, plaintiff and defendant corporation entered into an employment contract employing plaintiff as general manager of defendant for 15 years. Compensation was established at $14,400 annually plus cost of living increases. In addition, when 10 percent of defendant’s gross profits exceeded the annual salary, plaintiff would receive an additional amount of compensation equal to the difference between his compensation and 10 percent of the gross profits for such year. On top of that, plaintiff was to receive a royalty for the use of each of his inventions and formulae of 1 percent of the selling price of all of the products produced by defendant using one or more of plaintiff’s inventions or formulae during the term of the agreement. That amount was increased to 2 percent of the selling price following the term of the agreement. The contract further provided that during the term of the agreement the inventions and formulae would be owned equally by plaintiff and defendant and that following the term of the agreement the ownership would revert to plaintiff. During the term of the agreement, defendant had exclusive rights to use of the inventions and formulae and a nonexclusive right of use after the term of agreement.

At the time of the execution of the contract, sales had risen from virtually nothing in 1976 to $750,000 annually from sales of Vitamite and a chocolate-flavored product formulated by plaintiff called Chocolite. [Dairy’s owner] was in declining health and, in 1982, desired to sell his company. At that time, yearly sales were $7.5 million. [Owner] sold the company to the Diehl family enterprises for $3 million. Prior to the sale, Diehl insisted that a new contract between plaintiff and defendant be executed, or Diehl would substantially reduce the amount to be paid for [the company]. A new contract was executed August 24, 1982. It reduced the expressed term of the contract to 10 years, which provided the same expiration date as the prior contract. It maintained the same base salary of $14,400, effective September 1982, thereby eliminating any cost of living increases incurred since the original contract. The 10 percent of gross profit provision remained the same. The new contract provided that plaintiff’s inventions and formulae were exclusively owned by defendant during the term of the contract and after its termination. The 1 percent royalty during the term of the agreement remained the same, but no royalties were provided for after the term of the agreement. No other changes were made in the agreement. Plaintiff received no compensation for executing the new contract. He was not a party to the sale of the company by [Owner] and received nothing tangible from that sale.

After the sale, plaintiff was given the title and responsibilities of president of defendant with additional duties but no additional compensation. In 1983 and 1984, sales declined precipitously, and, in October 1984, plaintiff’s employment with defendant was terminated by defendant. This suit followed…We turn now to the court’s holding that the 1982 agreement was the operative contract. Plaintiff contends this holding is erroneous because consideration for the 1982 agreement does not exist to support it. We agree.

A modification of a contract constitutes the making of a new contract, and such new contract must be supported by consideration. If a contract has not been fully performed at the time of the new agreement, the substitution of a new provision, resulting in a modification of the obligations on both sides, for a provision in the old contract still unperformed is sufficient consideration for the new contract. Although consideration may consist of either a detriment to the promisee or a benefit to the promisor, a promise to carry out an already-existing contractual duty does not constitute consideration. Under the 1982 contract, defendant assumed no detriment it did not already have. The term of the contract expired on the same date under both contracts. Defendant undertook no greater obligations than it already had. Plaintiff, on the other hand, received less than he had under the original contract. His base pay was reduced back to its amount in 1977, despite the provision in the 1977 contract for cost of living adjustments. He lost his equal ownership in his formulae during the term of the agreement and his exclusive ownership after the termination of the agreement. He lost all royalties after termination of the agreement and the right to use and license the formulae subject to defendant’s right to nonexclusive use upon payment of royalties. In exchange for nothing, defendant acquired exclusive ownership of the formulae during and after the agreement, eliminated royalties after the agreement terminated, turned its nonexclusive use after termination into exclusive use and control, and achieved a reduction in plaintiff’s base salary. Defendant did no more than promise to carry out an already-existing contractual duty, without consideration for the 1982 agreement. Defendant asserts that consideration flowed to plaintiff because the purchase of defendant by the Diehls might not have occurred without the agreement, and the purchase provided plaintiff with continued employment and a financially viable employer. However, evidence to support this contention does not exist. Plaintiff had continued employment with the same employer under the 1977 agreement. Nothing in the 1982 agreement provided for any additional financial protection to plaintiff. The essence of defendant’s position is that [the owner] received more from his sale of the company because of the new agreement than he would have without it. We have difficulty converting [the owner’s] windfall into a benefit to plaintiff.

[Remanded to determine how much plaintiff should receive.]

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Contract Law

A contract is a legally enforceable promise or an exchange of promises. To be enforceable, the contract must meet certain elements. There must be an offer, acceptance of that offer, and then an intended exchange of value between the parties. These elements demonstrate a meeting of the minds between the parties. That is, the parties have a common understanding of the material terms of the agreement. A contract does not have to be a formal, written document. It can be a verbal agreement or it can arise through the conduct of the parties. Those who make a contract do not have to use the word contract or even recognize that they have made a legally enforceable promise. Each state develops its own contract law. Contract law provides confidence and promotes productivity by making private agreements between individuals legally enforceable. Plainly stated, it helps make buyer and seller willing to do business together.

For example, one individual offers to purchase a widget from another person for $1. The other person agrees. This is an contract, as there is an offer and acceptance of that offer, a planned exchange of value, and a meeting of the minds as to these primary terms of the agreement.

As you can see, a contract does not necessarily have to be formal or in writing. A simple conversation or even actions of two or more individuals can be a contact.

Ask Yourself

· Does it surprise you how easy it is to form a contact? Why or why not? Why do you think it is so easy to form an enforceable contract? Are there any negatives to this? How do you judge whether there is a meeting of the minds between the parties? How do you account for the subjective nature of one person’s understanding?

· Mark goes to an antiques auction. A nice painting comes up for auction and Mark love it. The auction provides extensive background on all of the items being offered. The auctioneer begins taking bids and Mark the winning bidder. Has a contract been formed in this situation?

Sources of Contract Law

States create their own contract law. They pass statutes and allow courts to develop common law. In doing so, state legislators and judges rely upon model laws in developing the statutory and common law. These model laws are known as the Restatement of Contracts and the Uniform Commercial Code (UCC). These model laws influence judges who interpret contract law and legislators who draft statutes that resemble (or copy exactly) these model laws. As such, you can study model laws to acquire a broad understanding of how contract law works. You can then look to the specific laws of your state to determine the exact law that applies to a given situation.

· Restatement of Contract—The Restatement of Contracts (Restatement) is a model law that deals primarily with contracts that do not involve the sale of goods or when goods are not the primary subject of the contract. Most state common law generally tracks closely the provisions of the Restatement.

· Article 2 of the Uniform Commercial Code—Article 2 of the UCC governs contracts for the sale of goods. It has been uniformly accepted by nearly every state in the United States. A sale of goods includes any manufactured product, crops, timber, livestock, attachments to land, exchanged currencies, mined minerals, etc. It does not include intellectual property, securities, noncommodity currencies, and un-mined minerals.

To be subject to the provision of the UCC, goods must be the primary purpose of the contract. If services are the primary purpose of the agreement, the incidental inclusion of goods is not covered by the UCC or corresponding state statutes.

Ask Yourself

· What are some of the advantages and disadvantages of model codes of laws? Why do you think states more readily adopt a uniform code of contracts covering the sale of goods, but are less apt to adopt a uniform code covering services?

· Jill approaches an interior designer about designing and purchasing furniture for her home. Jill owns a large mansion. The designer quotes Jill a price of $10,000 for her services and $1 million for all of the furniture. If Jill’s state adopts the Restatement of Contracts and UCC, which model law will primarily govern the contract?

Unilateral and Bilateral Contracts

Contracts are divided into unilateral and bilateral agreements based upon the duty of performance and how an offer to contract is accepted.

· bilateral contract—A bilateral contract consists of two promises between individuals that form a contract. Specifically, one party makes a promise to another party that she will do something (or forgo doing something) in exchange for the other party’s promise to do something (or promise to forgo doing something). For example, Eric promises to wash Julia’s car if she promises to pay him $20. The both activities will occur at some point in the future, so you have two promises of future performance.

· unilateral contract—A unilateral contract is an agreement with only one promise. That is, one party promises a future action if the other party performs whatever is requested of her. The promising party does not want a return promise. As such, a contract is formed or comes into exists once the other party begins to perform the requested services. Suppose Eric tells Julia that he will pay her $20 if she washes his car. Eric does not want a promise to wash the car. Julia can accept Eric’s offer by beginning to wash his car. Julia is not obligated to wash the car unless or until she begins doing so. Further Eric is not obligated to pay Julia until she begins washing the car.

The common characteristic between unilateral and bilateral contracts is that it entails a promise of performance and a demand from the offeree. This is critical to the requirement that a contract contain an offer, acceptance, and exchange of value.

Ask Yourself

· Why do you think it is important to distinguish and recognize these two types of contracts? Do you think each type of contract is more applicable in either sales of goods or services? Why or why not?

· Jennifer is looking for someone to paint her house. She sends out an email to several painters in the neighborhood that she has purchased the paint and will pay $3,000 to anyone who paints her house. She also includes some detailed requirements for the painting process and states that project must be completed by the coming weekend. Rob shows up the next morning with all of his equipment and ready to paint. Is there a contract in this situation? Why or why not?

Express, Implied-in-Fact, and Implied-in-Law Contracts

An express contract arises from interactions in which parties actually discuss the agreement and the promised terms. The contract does not have to be formal or in writing, but it requires that the parties express their intentions in an agreement.

For example, one person expressly offers to sell a widget to another person. The other person accepts the offer by saying the she will buy it. The parties have an expressed contract because they have stated an offer, stated an acceptance, and identified consideration. These expressions can be verbal, as in this situation, or written.

An implied-in-fact contract arises from the conduct of the parties, rather than from words. That is, the parties interact in a manner that constitutes a legally enforceable contract. This means that all of the elements of an enforceable contract can be inferred from the actions of the parties.

For example, Ellen asks Albert, an attorney, for professional advice. Ellen knows that Albert is an attorney and charges for his advice. Asking Albert for his professional advice implies a promise from Ellen to pay the going rate for that advice. This is true even though Ellen and Albert did not make an express promise to pay for it.

An implied-in-law contract, or quasicontract, is a contractual relationship ordered by the court. It lacks the mutual asset element of a contract, but the court deems the interactions between parties to be a contract under the law. This court action is generally taken to avoid an unjust result, such as when one party is unjustly enriched at the expense of another. The court will hold that the law implies a duty on the first party to pay the second, even though the elements to find a legally enforceable contract between the two parties are absent.

For example, Bell routinely rakes leave in the neighborhood for extra money. She rakes leaves for lots of houses and sometimes forgets which houses have requested her services. She begins raking James’s yard, having forgotten that she never worked out an agreement to do so. James often pays individuals to rake his yard and has plenty of money to do so. At the end of the job, Bell asks James for $20 for her effort. If James refuses to pay the court may hold that it would be unfair for James to receive this value and not pay something for it. As such, the court could hold that an implied-in-law contract to pay for Bell’s services.

Ask Yourself

· How do you feel about implied contracts? Should all contracts be required to be expressed? What are some arguments for and against this approach? What do you think is the justification for recognizing implied contracts?

· Kyle agrees to purchase building material from Anna, a new employee of a construction materials company. Anna executes a contract but makes an error when pricing the material. Per the terms of the agreement, Kyle will pay far less than the cost of the material. Kyle realizes this, but he stays quiet. Kyle uses the material before Anna catches the error. She sends Kyle an additional bill to cover the cost of the material, but not profit. Kyle refuses to pay the additional amount. What might a court do in this situation?

Valid, Enforceable, Void, and Voidable Contracts

There are several common characteristics of contracts that dictate whether a contract actually exists and whether it is enforceable in a court of law. The following vocabulary is important for characterizing these aspects of a contract.

· valid and invalid—A contract is valid when all of the elements essential to forming a legal contract are present. Conversely, a contract is invalid (or rather, there is no contract) if any of the essential elements of a contract are missing. The elements to forming a valid contract (offer, acceptance, consideration, and a meeting of the minds) are discussed further below. For example, One person announces that she will sell her cell phone for a reasonable price. Another person quickly says, “I will buy it.” In this case there is not a valid contract because there is not enough specificity in the consideration. As such, a critical piece of the contract is missing. While the parties might think they have a contract, if a challenge to the contract arises, a court is likely to hold it to be invalid.

· enforceable and unenforceable contract—An enforceable contract is one that can be enforced in court of law. That is, the law allows for enforcement of the contract. An enforceable contract must always be valid. A valid contract may, however, be unenforceable. That is, even though all of the essential elements of a contract are present, a court will not enforce the contract. An oral contract may be valid, but the court will not enforce it because that specific type of contract is required to be in writing under the state’s law. Contracts that are required to be in writing are discussed further below.

· void and voidable contracts—An otherwise valid contract may be void pursuant to the law. That is, state law identifies certain types of contracts that are deemed void from the outset. These include contracts that violate public policy or have an illegal purpose. A voidable contract is an agreement where either one or both parties has the right to make the contract void. That is, the contract is valid and enforceable until one party elects to void it. A contract to purchase illegal drugs, for example, is void. A party to a contract who is below the legal age of mental capacity may void the contract at any point before she reaches the age of mental capacity. Various situations where contracts are deemed valid, enforceable, void, or voidable are discussed further below.

Ask Yourself

· Why do you think there is a distinction between a invalid contract and contract that is unenforceable against a party? Are there any reasons or justifications for treating them as one in the same?

· Gayle arrives at work one morning and says to all of her colleague, “I am tire of my piece of junk car. I would sell it right now for $500.” Bert thinks about Gayle’s statement and determines that it would be a good buy. After lunch, Bert approaches Gayle and says, “I will buy your car” and extends $500 in cash. Gayle, surprised by Bert’s actions, replies that she is not willing to sell her car. If Bert sues Gayle for breach of contract, what will be the likely result?

· What do you think are the justifications for deeming a contract voidable? Can you think of scenarios where you think one party should be allowed to get out of the contract, but not the other party? Can you think of scenarios where both parties should be allowed out of the contract?

· Amy is extremely angry at David. She hires Laura to pour sugar into the gas tank of David’s car. Laura loses her nerve and backs out of their agreement? Can Amy enforce her agreement with Laura?

Requirements of a Valid Contract

As previously discussed, a contract is a specific promise to another and also a specific demand of that person. The demand could be a promise of future action (bilateral contract) or immediate performance of an act (unilateral contract). The promise and demand is an offer. Meeting with the offerer’s demand is known as acceptance. Both parties must give or exchange something of value with the other. The thing of value is known as consideration. Consideration is the promise to give, or actual giving, of a requested benefit or the incurring of a legal detriment (i.e., doing something one does not have to do.). Both parties must be of a legal age and sound mind, and the purpose of the agreement cannot be illegal or against public policy.

For example, one person offers to sell a product, service, or offers something of value (money, goods, etc.) in exchange for someone else’s product, service, or other thing of value. This constitutes a valid offer. The things of value constitute consideration. A second person accepts the offer by either agreeing to the offerer’s request to trade things or actually trading those valuables.

Remember that each party must provide something of value to the other. It does not matter how much value or even whether anyone else in the world would consider it valuable.

Ask Yourself

· Why do you think that the law requires an agreement to have all of the elements to be enforceable? Can you think of situations where any of these elements are not present, but you believe the agreement should be enforceable anyway?

Offer to Contract

The following elements must be present to establish a valid offer to contract:

· offerer and offeree—An offer to contract must contains a specific promise from the the person making the promise (offerer) and a specific demand of the individual receiving the offer (offeree). For example, I tell you that I will sell you a product for $5. I am the offerer and you are the offeree. My offer is to transfer ownership of a product and my demand is that you transfer ownership $5.

· intent to make an offer—The offerer must intend to make the offer. Whether there is intent to make an offer is judged from the position of the offeree. If a reasonable person in the position of the offeree would believe the offerer’s words or actions constitute an offer, it is an offer. This is an objective, rather than subjective, standard for determining whether the intent to make an offer exists. For example, I shout out loud in frustration that I would sell my piece-of-junk car for a $100. The words look like an offer to sell my car. In reality, I am simply espousing my frustration. I do not have the intent necessary for my statement to constitute an offer and no reasonable person would interpret my statement as truly demonstrating that intent.

· definite terms—An offer to contract must be sufficiently definite. That is, the terms of the offer must be sufficiently specific to allow the offeree to understand and accept the offer. The offeree must understand that she is the intended recipient of the offer and may accept it. Also, the terms of consideration must be stated. There is an exception to this rule for the sale of goods pursuant to the terms of the UCC. Some contracts for the sale of goods can leave open nonquantity terms to be decided at a future time. For example, simply stating that I will sell you an item “for a reasonable price” is not sufficient to constitute a definite offer. Most advertisements, catalogs, and web page price quotes are considered too indefinite to form the basis for a contract. To be sufficiently definite, the advertisement must be specific about the quantity of goods being offered and who is the intended offeree.

Remember, the above elements do not have to be in writing or formal. Further, the parties do not have to realize that their words or actions constitute a valid contract; rather, each element is judged by an objective standard. That is, how would a reasonable person perceive the actions potentially constituting an offer?

Ask Yourself

· How do you feel about the requirement that a contract meet this level of formality? Should it be more or less formal, and why? How do you feel about the fact that individuals can form a contract without fully realizing that their agreement is legally enforceable?

· Ashton is reading looking at the merchandise for sale on Smart Clothes Corp’s website. He places an order for a new shirt and goes through the process of setting up an account and attempting to pay. At the end of the process, he gets notification that his purchase is discontinued and cannot be purchased. Ashton is furious and wants to sue Smart Clothes for breach of contract. If he does, what is the likely legal result in this situation?

When Does an Offer to Contract Terminate?

An offer to contract terminates at the following times or under the following conditions:

· specific provision—An offer may include a specific provision detailing how long an offer will stay open and the conditions under which it terminates.

· lapse of time—Unless the offer states otherwise, an offer terminates after a reasonable period of time. A reasonable period of time will vary depending upon the type of contract. An offer to sell bananas will terminate more quickly than an offer to sell cement.

· offeree’s rejection—An offer terminates if the offeree receives the offer and rejects it. Once the offeree rejects the offer, she cannot come back later and accept the offer. Any attempt to do so may constitute a new offer to the original offerer.

· counter offer—If an offeree makes a counter offer or counter proposal in response to an offer, the original offer terminates. This is the case with negotiations. If a party attempts to negotiate new or additional material terms to the offer, the original offer terminates. Attempting to offer ancillary or nonmaterial terms may not terminate the offer.

· revocation by the offerer—Generally, the offerer may revoke an offer at any time before the offeree accepts it. If the offeree has already accepted the offer, a valid contract exists and an attempt to revoke the offer may constitute breach of the contract. There are certain offers, known as “firm offers,” that state that the offer cannot be revoked for a certain period. This type of offer is a form of contract in itself.

· destroy subject matter of contract—An offer terminates if, before the offer is accepted, the property that is the subject of the offer is destroyed. If the offer has already been accepted, this could serve to void the contract.

· death or mental incapacity—If the offerer dies or loses mental capacity at any time before an offer is accepted, the offer is revoked. The offer does not become effective again if the offerer regains mental capacity.

· illegality—An offer terminates if the subject of the offer (the activity or product) becomes illegal. If the offer has been accepted, the subject matter becoming illegal will void the contract.

Some of the methods of contract termination are voluntary, while others others are a result of circumstances beyond the control of the parties.

Ask Yourself

· Do any of the common methods by which an offer terminates surprise you? What factors should a court consider when determining whether a “reasonable time” has passed? What factors should the court consider in determining whether an offeree has been rejected? Does the rule regarding counter-offers discourage negotiation? Why or why not?

· Dudley is interested in purchasing an ownership interest in Sarah’s business. Sarah sends over a term sheet that places a specific value on her business and offers a specific number of shares. Dudley reviews the sheet and sends back a sign subscription agreement that lists a lower valuation, but agrees to buy a larger number of shares. The total purchase price for all shares would equal the amount indicated in Sarah’s term sheet. Sarah writes back and says that she will work with other investors. Dudley is angry and wants to sue for a breach of contract? What is the likely outcome?

Acceptance of an Offer

Acceptance of a contract is the assent of the offeree to the demands contained in the offerer’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offerer. An offeree accepts a unilateral contact by undertaking the performance demanded by the offerer. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are described in the sections below.

Mirror-Image Rule (Reinstatement)

Contracts that are not primarily for the sale of goods may be governed by rules derived from the Restatement of Contracts. The Restatement proposes the “mirror-image rule” for acceptance of an offer. This rule states that the acceptance of an offer must be exactly as demanded by the offerer. That is, the acceptance must “mirror” the offer. If the offeree adds new terms to the acceptance, it is not really an acceptance. Acceptance with different or additional terms constitutes a counteroffer.

For example, I offer to perform a service for you at a given fee. You reply that my prices are too high and that you want a 15 percent discount. You changed the terms of the consideration (the price), which is a material aspect of the offer. As such, you have effectively rejected my offer, as your attempted acceptance was not the mirror image of my offer.

Ask Yourself

· Why do you think about the mirror-image rule? Does it concern you that a minor deviation in an acceptance can effectively reject a contract? Why or why not? What if this was not the intent of the parties at the time of entering into the agreement?

· Kate offers to paint Roger’s house for $2,500. Roger attempts to accept the offer by saying, “Great. But, you have to paint the storage shed in the backyard as well.” Kate does not respond and decides to take a different painting job. Roger is angry, particularly when he learns that the next closest offer is twice as expensive. He wants to sue Kate for her failure to perform. What is the likely result?

Rule for Sale of Goods (UCC)

The mirror-image rule does not apply to sales of goods under the UCC. The UCC recognizes that a contract is formed if the acceptance of the offer is unequivocal. That is, if it is obvious the parties agree on the primary or material terms of the agreement, an acceptance that changes or adds additional terms is a valid acceptance. The effect of different or additional terms depends on whether the parties are merchants. If either party is not a merchant, any additional or different terms are deemed suggestions for addition and do not become part of the contract. If both parties are merchants, the additional terms become a part of the contract, unless:

· they materially alter the contract,

· acceptance is conditioned on the specific terms of the offer, or

· the offerer specifically rejects the additional or different terms.

For example, I am a merchant and I offer to sell you goods. You respond that you are willing to purchase the goods, but I must provide you with a warranty. I send the goods and you accept them. If you are not a merchant, there is no warranty. That was simply a recommendation to be part of the contract. If you are a merchant, the warranty is a part of the contract. In this example, if we are both merchants, I could have excluded the warranty from the contract be expressly rejecting the warranty. If I sent the goods and you accepted them, you have agreed to the terms of my original offer.

Ask Yourself

· Why do you think the sale of goods employs a different rule than contracts to provide services? Can you think of any reasons for differentiating between the rules that apply to merchants of goods and nonmerchants?

· Darla is purchasing consumer goods from Isaac’s business. Darla sends in a purchase order and the payment for the goods. Isaac sends the goods and a receipt that includes a clause stating that any disputes about the goods must be submitted to arbitration. Darla is not happy with the quality of the goods and she asks Isaac to return her money. When Isaac refuses she seeks to sue Isaac. What is the result in this situation?

Silence with Regard to Offer

Failing to reply to an offer is not acceptance in most cases. This is true even if the offer says silence will be considered acceptance. There are, however, exceptions to this rule. If the relationship between the parties is such that it is not expected that the offeree reply, silence by the offeree may constitute acceptance. Another exception would be where the offeree readily understands that silence or a failure to respond means acceptance of the offer. This generally only arises in situations where the offerer and offeree have a history of prior dealings. Lastly, in the case of contracts between merchants under the UCC, silence may constitute acceptance of an offer. In some instances, a merchant is required to expressly reject goods that are delivered; otherwise, her silence constitutes acceptance of the contract.

For example, I offer to paint your house for $100. If you do not respond to my offer, there is no acceptance. If, however, I specifically state that, “If I do not hear anything from you by Friday, I will assume you agree to my offer.” You reply, “That sounds good.” You now realize that silence become acceptance on Friday. Changing the scenario a bit, you are a contractor and I routinely provide you quotes on houses. You expect me to paint all of your houses. If our routine practice is that I provide a quote and am expected to paint the house if you do not object, silence may be acceptance.

If we are both merchants dealing in expensive bicycles. You make a monthly order with me for the same inventory. One month, I send a shipment of inventory without receiving an order from you. If the goods arrive and you do not reject them for two weeks, your silence constitutes acceptance.

Ask Yourself

· How do you feel about the idea that, in some instances, an individual can accept and offer simply by failing to respond? Are you convinced that the applicable exceptions are justified? Why or why not?

· Eric enters his email address to receive offers from a CD of the month club. The next week, Eric receives a CD in the mail with instructions state that he must return them within 10 days or he incurs an obligation to purchase the CD. What is the likely result?

Mailbox Rule

The mailbox rule is a default rule that applies when the offerer does not place specific requirements on the manner of acceptance. Under this rule, the offeree accepts the offer when it is sent to the offerer. This could include dropping it in the mail or sending it with a courier. This may also include providing notice of acceptance via email or other electronic communication (regardless of whether the offerer actually checks or reads the email). As such, if an offer is made to multiple offerees, the first offeree to accept in any manner (including by dropping the acceptance in the mail) has a binding contract.

For example, You offer to sell me your car for $500. I immediately send you a letter accepting your offer and a $500 check. We have a contract as soon as I drop the letter in the mail.

Ask Yourself

· What do you think about the mailbox rule? Should it be the default rule in contracts? Why or why not?

· Pamela is a musician and writer. She offers to sell her copyright to a popular song to Devon and Mark. Devon drops his acceptance of the offer in the mail on Friday evening. On Saturday morning, Pamela meets with Mark and signs an agreement transferring the copyright to him. What is the likely result in this situation?

Consideration in Contract Formation

Consideration is anything of value. Recall that a valid contract must include an exchange of value between the offerer and offeree. The value should be the inducement or incentive for the other party entering into the agreement. That is, it must be the subject of the bargain between the parties. A promise to make a gift is not binding because the party receiving the gift gives no value in return for the promise. When the existence of consideration is not clear, the court will examine the transaction as a whole to determine if consideration exits and the contract is enforceable.

Types of Consideration

The amount or value of the consideration present does not matter. It need not be money or goods. Acceptable types of consideration include the following:

· agreement to refrain—An agreement to refrain from doing something that you have the right and ability to do may constitute consideration. For example,  I really want to stand up and sing in the middle of a crowded restaurant. You would be very embarrassed if I do so. You offer me $5 to not stand up and start singing. My refraining from doing this may constitute consideration.

· agreement not to sue—An agreement not to sue the other party may be sufficient consideration when reasonable grounds exist to make a lawsuit possible. For example, you claim that I owe you additional funds under a contract. I disagree and argue that all accounts are settled. You threaten to sue me. I offer to pay you a small sum of money in exchange for your agreement not to bring a legal action against me. Forgoing your right to sue me in exchange for money is a valid exchange of consideration.

· prior consideration—Generally, consideration in a prior agreement is not valid consideration in a new agreement, except in very limited circumstances. The reason is because the individual is already obligated under the old agreement. Trying to promise to do the same thing does not provide a new form of value. Under the UCC, however, a preexisting obligation can constitute valid consideration if the offerer is a purchaser of $500 or more in goods, and she offers to pay more than an additional $500 for the same goods. This exception exists to protect certain business arrangement from failing. For example, we are both merchants. You enter into a contract to purchase goods from me for $5,000. In the pendency of the contract, you realize that I am likely breach the contract. You really do not want to find another seller, so you offer to pay an additional $1,000 for me to perform the contract. May agreement to perform my existing contractual obligation (sell you the goods) is valid consideration – even though it is the consideration for a prior agreement.

Ask Yourself

· How do you feel about the requirement for consideration? Should there be a value requirement for the consideration? Why or why not? What do you think is the purpose or objective behind requiring any form of consideration, regardless of the nature or value?

· Donna is merchant and enters into a contract with Ashley to purchase bricks from me for $10,000. In the pendency of the contract, the cost of bricks rises dramatically. Ashley will lose money by selling the bricks to Donna for $10,000. Donna realizes that Ashley is going to lose money and will likely breach the contract. Donna really needs the bricks and it is most convenient to purchase from Ashley. She offers to pay an additional $1,000 for the bricks. If, after Ashley ships the bricks, Donna decides not to pay the additional $1,000, what is the probable result?

Promissory Estoppel Exception to Consideration Requirement

A doctrine known as promissory estoppel may serve as a substitute for consideration to make an agreement into a valid contract. Promissory estoppel is an equitable doctrine. If the offeree reasonably relies on the offerer’s promise to her detriment, the doctrine of promissory estoppel may make the contract valid despite the absence of consideration. The two key elements are (1) that the reliance must be reasonable in light of the situation, and (2) the relying party must suffer a tangible detriment. The court may also consider whether performance causes a hardship on the promising party.

For example, you are having erosion problems in your hard. You cannot afford to pay to have it fixed, so I offer to give you the materials necessary to build a retaining wall. You spend your available money grading out the ground and digging the dirt where the wall will go. After all of this, I back out of my promise. You have now spent your available money and, without installing the wall, made the situation far worse than it was before. A court may deem my promise to be an enforceable contract because you relied to your detriment on my promise.

Ask Yourself

· How do you feel about the idea that a person’s reliance on another person’s promise can substitute for consideration? How much of a detriment must the relying party suffer before you think a court should enforce the agreement? Should the promise be enforced if it would result in a significant hardship for the promising party?

· Tina says that she will give Sam her car to drive across the country from Georgia to California. Sam relies on Tina’s promise by not purchasing a plane ticket. Tina fails to follow through with her promised gift. Sam has to purchase a plane ticket that is dramatically more expensive that it would have been if he had purchased the ticket at the time that Tina made her promise. If Sam wants to sue Tina for breach of contract, what is the likely result?

Other Exceptions to Consideration Requirement

There are two very broad, common exceptions to the requirement that a contract be supported by consideration:

· option contracts—An option contract is an agreement between parties that allows one party a specific period of time to purchase a particular asset at a given price. For example, Mark believes that the price of Apple, Inc., stock is going to rise. He purchases an option contract from Tom that allows him to purchase the Apple stock at the current price at any time within the next 30 days. Tom believes that the price is going to go down, so he is happy to sell the option to Mark.

· firm offers—The UCC recognizes the enforceability of a promise to keep open (not retract or cancel) the offer to purchase or sell a good for a specific period of time. For example, Agnes offers to sell a piece of equipment to Maria. She states that the offer is good for 30 days. Agnes and Maria now have an enforceable agreement for the next 30 days, despite the absence of consideration in the agreement to keep the offer open.

Mental Capacity to Contract

To enter into a contract, a person must have mental capacity sufficient to understand the nature and consequences of her actions. If mental capacity is absent, the contract is voidable by the person lacking capacity. There are three classes of persons commonly understood to lack capacity to be bound by contractual promises:

· minors—A minor is someone below the statutory age of mental capacity within a jurisdiction. Generally, a person must be 18 years old or older to have the requisite mental capacity to contract. As such, a minor who enters into a contract can void the contract at any time prior to reaching the age of majority. The exception to this rule is when the contract involves goods or services necessary for the child’s survival. This could include food, water, shelter, etc. In the case of necessities, the child will be obligated to pay the reasonable value of the goods or services received. If the child fails to disaffirm the contract by this time, she thereby ratifies the contract and is bound going forward. For example, Jane is 17 years old. She goes to a local gym and signs up for a year-long membership. This is not a contract for a necessity. Jane will be able to void the contract at any time before she turns 18 years old. She will, however, have to pay the reasonable cost of any value she receives from the gym.

· intoxicated person—An intoxicated person may lack the mental capacity necessary to contract. Generally, this will require extreme intoxication. If the intoxicated person enters into a contract, she must disaffirm the contract within a reasonable time of regaining capacity and learning of the contract. If she fails to do so within a reasonable time, she has ratified the contract and will be bound. For example, Don gets drunk in a bar. He does not know where he is and asks a stranger for a ride home. He offers to give the stranger, Gary, his Rolex watch in exchange for a ride home. Gary takes him home and takes the Rolex. When Don sobers up, he can immediately demand return of the Rolex. He was too intoxicated to appreciate the nature of his actions. As such, he can void the contract. He must act within a reasonable period to void the contract upon becoming sober.

· mentally incompetent person—A mentally incompetent person generally lacks the ability to enter into a contract. If the mental incompetency is temporary, the individual must disaffirm any contract entered into during incapacity within a reasonable time of regaining capacity. If the person is permanently incapacitated, the contract is either void or voidable at the insistence of a legally appointed guardian. For example, Ernie is having psychotic delusions. He goes to a security firm and hires a private security guard. Ernie’s legally appointed caretaker will be able to void the contract based upon Ernie’s lack of mental competence to enter into the agreement.

Each state may pass additional situations in which it deems an individual mentally incompetent to enter into contractual relations.

Ask Yourself

· How do you feel about the requirement for mental capacity to contract? Do you agree with arbitrarily setting an age at which a person is deemed to have mental capacity? Why or why not? How should a person’s level of intoxication be measured to determine whether she has mental capacity to contract?

· Phyllis is in a bar and drinking heavily. She realizes that she cannot drive in her state, so she solicits a ride from Harriet. She does not have any money, so she offers Harriet her new Rolex watch in exchange for a ride. Harriet accepts and drives Phyllis three miles to her home. The next morning Phyllis realizes that she traded a very expensive watch for a three-mile ride. What are Phyllis’ options?

Lawful Purpose of a Contract

A contract must have a lawful purpose to be enforceable. That is, the contract cannot violate or cause others to violate the law or public policy. The following scenarios may result in an unenforceable contract:

· crimes and torts—Contracts that require commission of a crime or tort or violate accepted standards are void. If a contract has both legal and illegal provisions, a court will often enforce the legal provisions and refuse to enforce the illegal ones.

· unconscionable contracts—An unconscionable contract is one that is so unfair that it is said to “shock the conscience.” Unconscionability is broken down into “substantive unconscionability” and “procedural unconscionability.”

· Substantive unconscionability means that the terms of the agreement are so extremely unfair or one-sided in favor of a party that it is unlikely that the other party to the agreement understood its terms.

· Procedural unconscionability refers to the conditions under which the contract was formed. The terms of the contract may indicate that one party was taken advantage of by another party with greater bargaining power. Such a contract may be void as against public policy if the circumstances indicate that a reasonable person would not have entered into the agreement without the existence of an undue hardship. In some situations, the undue hardship must have been brought on by the party unduly benefited by the contract.

· contracts to restrain trade—Contracts that restrain trade may be illegal and thus void. This is true for contracts that create a monopoly, fix prices, and divide up markets. This is generally the area of antitrust law. A court may also find a contract void if it serves to frustrate economic activity in a manner not covered by antitrust law or it intentionally interferes with contractual relations or unfairly competes. An example of a contract that directly prohibits competitive business activity is a “covenants not to compete.” This type of contract restricts an individual from carrying on a trade or practice. These contracts are held to be void when they are unduly burdensome in their restrictions regarding the time and geographic locations for doing business. A covenant not to compete that has a limited time frame (3 to 6 months) and a limited jurisdiction (up to 50 miles) is generally enforceable if there is good reason for the restriction.

 States are free to pass statutes or develop common law that protects the public interest. A contract that runs afoul of what is deemed necessary for the public good may also be void.

Ask Yourself

· How do you feel about the requirement that a contract have a lawful purpose? Can you think of any situations where this requirement may cause an unfair result for parties? Should there be a sliding scale for determining enforceability of contracts that violate public policy or are illegal? Why or why not?

· Carter lives in New Orleans, Louisiana. The state is in a state of emergency based upon an approaching hurricane. Carter, along with thousands of other people, attempts to flee the city. The traffic is horrible and folks are running out of gas on the roadway. Carter is low on gas and pulls into a gas station. The gas station is charging $250 per gallon of gas. Carter is outraged, but purchases the gas and continues to flee the city. What are his legal options?

Voidable Contracts: Common Situations

Contracts are commonly voided in the following situations:

· fraud—Fraud involves an intentional misstatement of the material (important) fact that induces one to rely justifiably to his or her injury. If a person is defrauded into entering a contract, the defrauded party may void the contract upon learning of the fraud. Voiding the contract is at the option of the defrauded party, as she may wish to remain in the contract. The party committing fraud may not void the contract. If the defrauded party fails to void the contract upon learning if the fraud, she is deemed to have ratified it and is bound.

· misrepresentation—Misrepresentation is a material misstatement of fact that induces one to rely on the statement. The difference with misrepresentation and fraud is that misrepresentation does not involve the intent to mislead. As in the case a fraud, a party who enters a contract as a result of a material misrepresentation may void the contract upon learning of the false representation. The misrepresenting party may not void the contract. If a party fails to void the contract upon learning of the misrepresentation, she is deemed to ratify the agreement.

· duress—Duress means the use or threat of force to convince a person to act according to one’s wishes. If a party enters into a contract due to the physical or economic duress imposed by the other party, the contract is voidable at any time by the party subject to duress.

· undue influence—Undue influence arises when one party unfairly takes advantage of another party by using a position of trust, influence, or confidence. For example, a psychiatrist who enters into a contract with her patient that is not related to medical services may be deemed to have exercised undue influence. The influenced party may have been pressured to enter into the agreement or felt unduly obligated to enter into the agreement for fear of destroying the doctor-client relationship.

· mutual mistake—A mistake by both parties regarding “material” facts or circumstances relevant to the contract may make a contract voidable. In such a situation, either party may void the contract upon learning of the mutual mistake. The standard for whether the mistake of fact is material is whether a reasonable person would have entered into the agreement if the true facts were known. A mutual mistake of law may make a contract voidable if it caused the parties to not have a “meeting of the minds” with regard to the core aspects of the contract. If no meeting of the minds exists, there is never a valid agreement between the parties.

· unilateral mistake—Generally, unilateral mistake by one party to the contract does not make the contract voidable. A unilateral mistake about the basic assumptions of the contract will only make the contract voidable when the nonmistaken party knew or had reason to know of the other party’s mistake. In such a case, the effect of enforcing the contract against the mistaken party must be unconscionable and the nonmistaken party would not suffer a substantial hardship by voiding the contract. If the nonmistaken party did not know about the other party’s mistake, the standard for voiding the contract is even higher. In such a case, the contract must not yet have been performed or the parties must be easily restored to their pre-performance positions. The mistake must be substantial, and the mistake must directly relate to some computational or clerical error in the construction of the terms of the agreement. No defense exists if the mistaken party knowingly assumed the risk of the mistake; is grossly negligent in making the mistake; violates a legal duty; fails to act within her duty of good faith and fair dealing; or intentionally fails to read the contract.

Ask Yourself

· How do you feel about the idea that both parties may hold the right to void a contract? Is there any justification for holding that the contract is void rather than voidable? Do you agree with the scenario under which a unilateral mistake if voidable? Why or why not?

· Constance enters into an agreement to purchase Gerald’s business. The contract contains a calculation for the business’s cash on hand at the time of sale to be added to the purchase price. Constance and Gerald did not pick up on the calculation error at the time of signing the agreement. The week prior to closing, Constance’s attorney caught the error, which causes a huge increase in the calculated value of the business. Gerald wants to hold Constance to the dramatically increased price, as she signed the contract containing the calculation error. What are Constance’s options?

When is a Contract Required to Be in Writing?

Some valid contracts are required to be in writing to be enforceable by a court of law. The requirement that a contract be in writing is generally dependent upon the subject matter of the agreement. A statute requiring that a contract be in writing is known as a “statute of frauds.” These statutes are designed to prevent fraud in the formation of contracts. Most statutes do not require that the entire contract be in a formal writing; rather, there must be sufficient writing (in any form) to demonstrate the core aspects of the agreement.

The following types of contract are generally required to be in writing in all jurisdictions:

· sale of an interest in land—Contracts concerning the transfer of an interest in land must be in writing to be enforceable. An “interest in land” includes contracts for mortgages, mining rights, easements, etc. For example, I agree to sell you an easement to cross my land. Our contract must be in writing to be enforceable. Note that a construction agreement is not a transfer of an interest in land.

· collateral promise to pay another’s debt—Debt surety or guarantee agreements are required to be in writing to be enforcement. These instruments document when one person promises to repay the debt of another. This includes situations where business owners guarantee the debts of their business. For example, you approach your rich uncle and ask that he loan you money to buy a car. I am your friend and I promise to repay the loan if you are unable to do so. If you default, your uncle may not be able to recover against me because our agreement is not in writing. That is, your uncle and I do not have an enforceable contract.

· duties that cannot be performed within one year—A contract must be in writing to be enforceable if the duties under the contract cannot possibly be performed within one year after its making. The ability to carry out the contract must be impossible to a certainty. For example, you and I enter into an oral contract for services that lasts for twenty months. This is not enforceable, as any service contract or a lease of longer than one year are generally not enforceable.

· sale of goods of $500 or more—Sales of goods fall under the provisions of the UCC. The UCC requires that any contract for the sale of goods for $500 or more must be in writing to be enforceable. Modifications to any such agreement must also be in writing. For example, I verbally agree to sell you a piece of equipment for $750. If I back out of our agreement, you may not be able to enforce our agreement through the courts because the agreement is not in writing.

States may establish other contracts that are required to be in writing to be enforced in that jurisdiction. For example, most states require insurance policies to be written.

Ask Yourself

· Why do you think that certain contracts are required to be in writing to be enforceable while others are not? Can you think of any other types of contract that you believe should be in writing to be enforceable? What is your reasoning?

· Todd enters into a verbal agreement with Ashley to provide lawn serves at her rental property for the next two years. After performing his obligations for one month, he realizes that it is a very difficult property to service and he drastically underbid the job. What are his options?

Statute of Frauds Requirements

To meet the requirements of the statute of frauds, there must be a sufficient writing to demonstrate that a contract exists. The writing can be typed, handwritten, or electronic. The agreement must generally be signed by the party against whom it is being enforced. A signature may be a mark, seal, stamp, electronic signature, or a handwritten agreement. Between merchants, a confirmation regarding the contract by one merchant that is not objected to by the other merchant will be sufficient, even though it is not signed by the other merchant.

Ask Yourself

· Why do you think that the definition of a writing is construed so broadly? Is this broad interpretation justified or does it unduly detriment a party? Why?

· Frank agrees to sell Amy his collector-edition, signed baseball card. Frank writes on the back of the a napkin, “I agree to sell Amy my Mickey Mantle rookie card for $2,000.” Will this be a sufficient writing to satisfy the statute of frauds?

Exceptions to Requirement of a Written Contract

Jurisdictions recognize a number of exceptions to the requirement that certain contracts be in writing to be enforceable. Common exceptions to the writing requirement are as follows:

· admission under oath—If a party admits under oath (such as in a deposition or in a court proceeding), the contract may then be deemed enforceable.

· part performance—A court may deem an oral contract enforceable if the parties (or one party) has partly performed the contract. This principle generally applies to oral agreements to sell or transfer real property (land). If the buyer has paid part of the purchase price and taken possession of the land, the court may hold the oral agreement enforceable. This would generally entail a court order to complete the contract performance by signing a deed legally transferring the property.

· promissory estoppel—The equitable doctrine of promissory estoppel applies in situations where one party relies to her detriment on another party’s promise. It arises in a situation where a party believes that her exchange of promises with the other party is a legally enforceable contract. That party puts herself in a position where she would suffer a loss if the other party does not perform. For example, Tom promises Jane that he will sell her land to build a house. Jane, relying on the promise, hires individuals to begin grading the land and laying a foundation for the house. Later, Tom refuses to transfer a deed to Jane and claims that the contract is not enforceable because it was not in writing. Jane has spent significant money and time under the belief that the contract was enforceable. As such, a court will probably hold the contract to be enforceable under the doctrine of promissory estoppel.

· rules involving goods—The UCC provides several exceptions to the rule that contracts for the sale of goods for $500 or more be in writing:

· specialty goods—If a manufacturer agrees to manufacture specialty goods for a client, once the manufacturer begins production of the goods, the contract may be enforceable without a written agreement.

· partial or complete performance—If goods have been accepted and payment for the goods has been made, the parties cannot later claim that the contract was unenforceable and demand return of the money or property. This may also be true for partial payment or delivery of a portion or installment of the goods.

· contract between merchants—An oral contract between merchants is enforceable when one party delivers goods and the other party either delivers goods or sends written notice confirming the terms of the agreement and the other party does not object to that notice within 10 days.

The justification for the above exceptions to the statute of frauds is that each situation provides an additional level of proof regarding the existence of a contract. It reduces the need for a writing to prove that the contract exists and its terms.

Ask Yourself

· Why do you think each of these exemptions from the statute of frauds exists? What standard do you think should apply to determining what is “part performance”? How far should anindividual go in relying on a promisor before it exempts the agreement from the statute of frauds? Why do you think these special provisions exist for sales of goods between merchants?

· Chris is a professional musician and celebrity. He walks into Grey’s jewelry store and request that Grey make him a custom necklace. Grey agrees, but they do not execute a contract. The necklace is very ornate and will cost about $150,000. It will contain the musician’s initials and symbol. When Grey finishes the necklace, Chris decides that he does not want it. What are Grey’s options?

Relief from Contractual Obligation

Parties to a contract have duties or obligations thereunder. There are generally three options to relieve these obligations:

· perform—An individual is relieved from her duties under a contract once she has fully or substantially performed those duties. The individual is “discharged” from the contract.

· release from contract—Either party may be released from a contract by the other party. Alternatively, the person may be released if the contract becomes void.

· breach—Once a party to a contract breaches that contract, she and the other party no longer have duties to perform. If the contract is enforceable, the other party then has the ability to enforce the contract against the other party by seeking damages.

Performance of the contract and release eliminate a person’s liability under the contract. Breach exposes the breaching party to damages or losses suffered for the breach. None of these options relieve a party form tort liability if her actions with regard to the contract constitute a tort.

Ask Yourself

· Should a party pursue the method of relieve her obligation under a contract that is of greatest advantage to her? Why or why not?

· Katie and Smith enter into a contract. Each has a duty to perform services for the other. Neither party ever takes action to act on the contract. What is the result?

Performance of a Contract

Performance of a contract relieves a person from further duties under the contract. There are three levels of performance:

· complete performance—Complete performance by a party means that the contracting party has fulfilled every duty required by the contract. A completely performing party is entitled to a complete performance by the other party. For example, I enter into a contract to build a house for Ellen. I build the house and complete all of the material and nonmaterial requirements of the contract.

· substantial performance—Substantial performance of a contract means less than complete performance; but, the level of performance is sufficient to avoid a claim of breach of contract. More specifically, it means that a party has performed all material elements of the contract, but there are nonmaterial aspects left uncompleted. The other party may be entitled to seek offset or recovery from the substantially performing the party for the aspects of the contract not completed. For example, I enter into a contract to build a house for Ellen. I build the house, but fail to paint the interior the color described in the contract. This contract is substantially performed and does not give rise to an action for breach. Ellen may, however, recover or offset the cost of painting the walls when paying me.

· breach of contract—Any performance that is not complete or substantial performance is a material breach. This entails performance at a level below what is reasonably acceptable. The materially breaching party cannot sue the other party for performance and is liable for damages to the other party for the breach. For example, I enter into a contract to build a house for Ellen. I distracted by another contract and make material errors in laying the foundation. It causes the house not to meet standards and pass inspection by the building inspector. In this case, I have breached the contract by failing to perform a material duty under the agreement.

Ask Yourself

· How do you feel about the concept of substantial performance? Do you believe that failure to perform certain duties under a contract should not constitute a breach? Why or why not?

· Missy enters into a contract to perform auditing functions for ABC Corp. She does reconciliation of many of the accounts, which takes substantial time. She is satisfied that the books are accurate, so she skips performing many of the key tasks required of external auditors. What is the status of Missy’s duties under the contract?

Relief from Performing Duties under a Contract

An individual is relieved from her duty to perform a contract in the following scenarios:

· void contract—If a contract becomes void, both parties are relieved from their duty of performance.

· breach by other party—If the other party materially breaches the contract, the nonbreaching party is relieved from the obligation to further perform the agreement.

· failure of a condition—contract may contain any number of conditions that may materialize (or fail to materialize), which relieve the parties’ obligation to perform under the contract.

· impossibility, impracticability, or frustration of purpose—Parties to a contract may be relieved from their obligation to perform if performance becomes impossible, commercially impracticable, or the underlying purpose of the contract is frustrated.

· waiver or release—A party may, per her own volition, sign a waiver or release relieving the other party’s obligation to perform.

Any of the above situations may release one or both parties from their duties of performance.

Ask Yourself

· Do you agree that the above situations should relieve an individual from her obligations under a contract? Why or why not?

Conditions Regarding Payment, Delivery, and Tender of Performance

Tendering performance means to offer or attempt to perform the agreement. Often a party’s offer or attempt to perform is sufficient to satisfy the condition of performance and obligate the other party’s performance. That is, a party cannot avoid her obligation under the contract by failing to accept the other party’s tender of performance. One party offering or attempting to perform is a condition to the other party’s obligation to perform. Unless a contract states otherwise, the default rules under the UCC and Restatement place conditions on the delivery of services and the delivery of a product by a party to a contract.

The UCC states the buyer tendering payment to the seller of a good is a condition that must be satisfied before the seller has the duty to deliver the good. For example, I offer to purchase an expensive jacket from you. You accept. I must offer to give you the money before you are obligated under the contract to give me the jacket.

The Restatement, in contrast to the UCC, requires that a service provider must tender performance before the other party has a duty to pay for those services. I offer to paint your house for $500. You accept. I must complete my obligation to paint your house before you are obligated to pay me $500. In this case, tendering performance is completing my duty to paint.

In either case, rejecting a party’s tender of performance can constitute a breach of contract if the tender of performance conforms to the requirements of the contract.

Ask Yourself

· Why do you think tending performance as a condition is treated differently under the UCC versus the Restatement?

· Herman offers to purchase machinery for his business from Jamie. The party is silent on who must perform first. Herman asks that Jamie ship the goods to his business location so that he can inspect it. If it meets inspection, he will pay for the machinery. Jamie refuses and asks Herman to pay first. If both parties refuse to perform first, who is likely legally liable for breach of contract?

Impossibility, Impracticability, and Supervening Frustration of Purpose

Impossibility of performance, commercial impracticability, and a supervening frustration may excuse a party’s duty to perform a contract. Further, it will relieve the party from liability for the nonperformance.

Impossibility of Performance

A party may be excused from her duty to perform under a contract if performance becomes impossible. Events that make a contract impossible include the following:

· Illegality of the subject matter. I enter into a contract with you to sell you cleaning chemicals. The sale of such chemicals becomes illegal. My duty to perform is excused.

· The subject of the contract (property) is destroyed. I enter into a contract to sell you a car. Before I can sell it to you, a branch falls from a large tree and destroys the car. I am excused from my duty to sell an undamaged car.

· One of the parties to the contract dies or becomes physically or mentally disabled.

· Natural forces interrupt the contract. For example, a tornado, earthquake, severe storms, flooding, etc., permanently interrupts a party’s ability to perform her contractual obligations.

· Performance would cause substantial risk of physical harm to one party. I enter into an agreement to replace the shingles on our house. Upon inspection, the roof of the house appears to be structurally unsound. Replacing the shingles would put me in an unreasonably dangerous situation. I did not anticipate this danger when entering the contract. As such, my duty to perform is relieved.

Impossibility of performance will only excuse a party’s performance if the impossibility is not the fault of the nonperforming party. Further, impossibility will not excuse liability for nonperformance if the contract expressly contemplated the risk of conditions making performance impossible and specifically placed those risks upon the nonperforming party. For example, I enter into a contract to sell you a piece of machinery. In the contract, we expressly state that I must repair any malfunction of the machine that occurs prior to sale. The machinery breaks before the sale date. In this situation, the contract anticipates a risk and places it on me. I must repair the machine prior to sale.

Ask Yourself

· What do you think is the justification for allowing the above situations to excuse a person’s duty under a contract? Can you think of any other situations that you believe should excuse a person’s duty?

· Derek agrees to sell Artem sheet rock for a construction job. Derek leaves the sheetrock outside and it rains. The sheet rock is ruined. Artem has to purchase sheetrock from another source at a much higher price. If Artem decides to sue Derek, what will be the likely outcome?

Commercial Impracticability

Commercial impracticability arises when performance of a contract by a party has become unfeasibly difficult or costly to perform. The difference between impracticability and impossibility is that impracticability is still physically possible; however, performance will result in a substantial hardship to the performing party. Impracticability will excuse performance where the excused party did not have control over (or was not at fault for) the condition that made performance impracticable. Further, the excused party must not have expressly or impliedly assumed the risk of the duties becoming impracticable. Generally, impracticability is only found in extreme circumstances.

For example, I enter into an agreement with you to sell goods or perform services. The cost of performing the contract spikes because of a government tax, regulatory hurdles, raw material rates, etc. When entering the contract, we did not contemplate the price of goods or the cost of performing services to go up. If performing the contract would result in a serious financial burden to me, I may be able to get out of the contract by claiming that commercial impracticability excuses my performance.

Ask Yourself

· How do you feel about the doctrine of commercial impracticability? How unforeseeable must the intervening event be to make the contract impracticable? How severe must the damage suffered by the performing party be?

· Tom agrees to sell lobsters to Suzie for resale in her restaurant. Tom sets the price at a specific dollar value per pound. Later, the government imposes a large tax on sales of lobsters. If Tom continues to sell at the contract price, he will go out of business. What are Tom’s options?

Supervening Frustration of Purpose

Supervening frustration of purpose is when circumstances arise that fundamentally frustrate a party’s reason or purpose for entering a contract. The doctrine is similar to impracticability, but it does not relate to a party’s hardship; rather it focuses on her expectation and purpose in entering the agreement. For a frustrating circumstance to relieve or excuse an obligation under a contract, the party cannot have assumed the risk of the circumstance (in the contract) or be at fault for the occurrence or the nonoccurrence of the event or circumstance. Further, the occurrence or nonoccurrence must have been a basic assumption on which the contract was made.

For example, John signs up for piano playing lessons from Tara. John suffers a horrible accident that causes him to lose dexterity in his hands. This is a frustration of purpose that was unforeseeable and substantially frustrates the purpose of learning to play the piano. As such, John will be excused from performance of the contract. Suffering an economic loss is not a frustration of purpose.

Ask Yourself

· How do you feel about allowing an unforeseen event relieving a person’s duty for performing a contract? How fundamental must the assumption be to the purpose of the contract? To what extent must each party understand this to be the fundamental purpose of the agreement?

· Donald bids for and wins a government contract to construct a dam. The contract is subject to legislative approval. He begins preparing by entering into contracts with Lizzie for the purchase of cement. The cement supplier knows that the cement purchase is in preparation for the dam-building project. The legislator ultimately disapproves the dam project, which causes Donald to lose the contract. What is the possible result?

Waiver and Release

A waiver and a release serve to excuse one or both parties’ duty of performance.

When a party intentionally relinquishes a right to enforce the contract. A waiver is generally employed after a party fails to perform. For instance, per our contract, I am supposed to paint your house, but I fail to do so in the allotted time. You grant a waiver excusing my liability for failure to perform.

A release is when one party is relieved from her promise of performance. A release generally occurs before a contracting party has to perform. For example, we sign a contract where you agree to pay me to paint your house by the end of the month. Before my performance is due, I explain that I do not have time to paint your house. You sign a release that frees me of my duty to paint your house.

Waivers and releases are often used synonymously to refer to a single document that simultaneously relieves a party from her duty to perform and excuses a nonperformance or breach.

Ask Yourself

· What do you think is the justification for categorizing a release and waiver differently? Should the content of a release agreement be treated differently than the content of a waiver?

· Pam enters into a contract with Lia to perform consulting services for her business. Pam has a great deal of work and is too busy to perform the contract. She asks Lia to let her out of the contract. What is Pam asking of Lia?

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Business Law: An Introduction

 by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC.

© 2019 University of Maryland University College

Learning Topic

Contract Formation and Execution

Contract law is a component of civil law that concerns the legal principles governing the exchange of goods or services between individuals or businesses. At its heart, contract law involves how legally enforceable promises are formed and executed.

A promise is a declaration by a legal person (called the promisor) to perform or forbear from performing specified act(s). The recipient of the promise (called the promisee), upon a promise being made, has rights to expect (and often to demand) that the promise be performed. Whether these rights to expect and demand performance are moral or legal rights depends on whether the promise was made in the context of a valid and enforceable contract. Only if the legal requirements of a contract are satisfied, or if other legal remedies are available, will a promise be enforceable in a court of law.

The law of contracts provides a means of distinguishing between types of promises that create moral obligation (e.g., a promise to meet a friend for coffee) and those that also create legal obligation (e.g., a promise to your bank to pay the mortgage acquired on your home).

Within the United States, there are two major sources of domestic contract law: the Uniform Commercial Code (UCC) and the common law. Depending on the subject matter of the contract, such as if the contract involves the purchase of tangible personal property (“goods”) or the hiring of an individual for employment (“services”), one will look to specific sources of law to determine whether the legal promise is enforceable.

Contracts for the sale of goods are governed by Article 2 of the UCC. Most contracts that are not for the sale of goods—such as contracts for employment, real property, insurance, and so forth—are governed by the common law, which is generally summarized in the Restatement of Contracts (Restatement).
Once one identifies the applicable source of the contract law—that is, whether the contract is governed by the common law or by the UCC—then, one can determine if the particular promise is valid and enforceable under the applicable rules contained in that source of law. Although the UCC and the common law do overlap, there are many key differences between the two sources of law as regards many areas of contract law, including the formation and performance of a contract, the requirements for breach of a contract, the enforceability of a contract, and the remedies available for the victim of a breach.

The legal enforceability of a particular promise thus hinges on the rules contained in the relevant source of law that are applicable to the subject matter of that particular promise. The promise is, in many ways, the cornerstone of societal order. As stated by distinguished jurist Roscoe Pound, the “social order rests upon the stability and predictability of conduct, of which keeping promises is a large item” (Pound, 1959). Contract law provides the mechanism for determining when a promise is valid and enforceable in a court of law.

Transcript

References

Pound, R. (1959). Jurisprudence (Vol. 3). Saint Paul, MN: West Publishing Co.

Learning Resource

Contract Modification

In order to modify a contract, first determine whether the contract is governed by Uniform Commercial Code (UCC) or common law. The UCC requires no new consideration for modification of a sales contract made in good faith (UCC Section 2-209(1)). However, under common law, new consideration is required to modify a contract. The following case considers whether a contract was properly modified under common law.

Gross v. Diehl Specialties International, Inc., 776 S.W.2d 879 (Missouri Ct. App. 1989)

The plaintiff appeals from a jury verdict and resultant judgment for defendant in a breach of employment contract case. Plaintiff was employed under a 15-year employment contract originally executed in 1977 between plaintiff and defendant. Defendant, at that time called Dairy Specialties, Inc., was a company in the business of formulating ingredients to produce nondairy products for use by customers allergic to cow’s milk. Plaintiff successfully formulated [Vitamite]…for that usage. Thereafter, on August 24, 1977, plaintiff and defendant corporation entered into an employment contract employing plaintiff as general manager of defendant for 15 years. Compensation was established at $14,400 annually plus cost of living increases. In addition, when 10 percent of defendant’s gross profits exceeded the annual salary, plaintiff would receive an additional amount of compensation equal to the difference between his compensation and 10 percent of the gross profits for such year. On top of that, plaintiff was to receive a royalty for the use of each of his inventions and formulae of 1 percent of the selling price of all of the products produced by defendant using one or more of plaintiff’s inventions or formulae during the term of the agreement. That amount was increased to 2 percent of the selling price following the term of the agreement. The contract further provided that during the term of the agreement the inventions and formulae would be owned equally by plaintiff and defendant and that following the term of the agreement the ownership would revert to plaintiff. During the term of the agreement, defendant had exclusive rights to use of the inventions and formulae and a nonexclusive right of use after the term of agreement.

At the time of the execution of the contract, sales had risen from virtually nothing in 1976 to $750,000 annually from sales of Vitamite and a chocolate-flavored product formulated by plaintiff called Chocolite. [Dairy’s owner] was in declining health and, in 1982, desired to sell his company. At that time, yearly sales were $7.5 million. [Owner] sold the company to the Diehl family enterprises for $3 million. Prior to the sale, Diehl insisted that a new contract between plaintiff and defendant be executed, or Diehl would substantially reduce the amount to be paid for [the company]. A new contract was executed August 24, 1982. It reduced the expressed term of the contract to 10 years, which provided the same expiration date as the prior contract. It maintained the same base salary of $14,400, effective September 1982, thereby eliminating any cost of living increases incurred since the original contract. The 10 percent of gross profit provision remained the same. The new contract provided that plaintiff’s inventions and formulae were exclusively owned by defendant during the term of the contract and after its termination. The 1 percent royalty during the term of the agreement remained the same, but no royalties were provided for after the term of the agreement. No other changes were made in the agreement. Plaintiff received no compensation for executing the new contract. He was not a party to the sale of the company by [Owner] and received nothing tangible from that sale.

After the sale, plaintiff was given the title and responsibilities of president of defendant with additional duties but no additional compensation. In 1983 and 1984, sales declined precipitously, and, in October 1984, plaintiff’s employment with defendant was terminated by defendant. This suit followed…We turn now to the court’s holding that the 1982 agreement was the operative contract. Plaintiff contends this holding is erroneous because consideration for the 1982 agreement does not exist to support it. We agree.

A modification of a contract constitutes the making of a new contract, and such new contract must be supported by consideration. If a contract has not been fully performed at the time of the new agreement, the substitution of a new provision, resulting in a modification of the obligations on both sides, for a provision in the old contract still unperformed is sufficient consideration for the new contract. Although consideration may consist of either a detriment to the promisee or a benefit to the promisor, a promise to carry out an already-existing contractual duty does not constitute consideration. Under the 1982 contract, defendant assumed no detriment it did not already have. The term of the contract expired on the same date under both contracts. Defendant undertook no greater obligations than it already had. Plaintiff, on the other hand, received less than he had under the original contract. His base pay was reduced back to its amount in 1977, despite the provision in the 1977 contract for cost of living adjustments. He lost his equal ownership in his formulae during the term of the agreement and his exclusive ownership after the termination of the agreement. He lost all royalties after termination of the agreement and the right to use and license the formulae subject to defendant’s right to nonexclusive use upon payment of royalties. In exchange for nothing, defendant acquired exclusive ownership of the formulae during and after the agreement, eliminated royalties after the agreement terminated, turned its nonexclusive use after termination into exclusive use and control, and achieved a reduction in plaintiff’s base salary. Defendant did no more than promise to carry out an already-existing contractual duty, without consideration for the 1982 agreement. Defendant asserts that consideration flowed to plaintiff because the purchase of defendant by the Diehls might not have occurred without the agreement, and the purchase provided plaintiff with continued employment and a financially viable employer. However, evidence to support this contention does not exist. Plaintiff had continued employment with the same employer under the 1977 agreement. Nothing in the 1982 agreement provided for any additional financial protection to plaintiff. The essence of defendant’s position is that [the owner] received more from his sale of the company because of the new agreement than he would have without it. We have difficulty converting [the owner’s] windfall into a benefit to plaintiff.

[Remanded to determine how much plaintiff should receive.]

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Business Law and the Legal Environment

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Learning Resource

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Contract Law

A contract is a legally enforceable promise or an exchange of promises. To be enforceable, the contract must meet certain elements. There must be an offer, acceptance of that offer, and then an intended exchange of value between the parties. These elements demonstrate a meeting of the minds between the parties. That is, the parties have a common understanding of the material terms of the agreement. A contract does not have to be a formal, written document. It can be a verbal agreement or it can arise through the conduct of the parties. Those who make a contract do not have to use the word contract or even recognize that they have made a legally enforceable promise. Each state develops its own contract law. Contract law provides confidence and promotes productivity by making private agreements between individuals legally enforceable. Plainly stated, it helps make buyer and seller willing to do business together.

For example, one individual offers to purchase a widget from another person for $1. The other person agrees. This is an contract, as there is an offer and acceptance of that offer, a planned exchange of value, and a meeting of the minds as to these primary terms of the agreement.

As you can see, a contract does not necessarily have to be formal or in writing. A simple conversation or even actions of two or more individuals can be a contact.

Ask Yourself

· Does it surprise you how easy it is to form a contact? Why or why not? Why do you think it is so easy to form an enforceable contract? Are there any negatives to this? How do you judge whether there is a meeting of the minds between the parties? How do you account for the subjective nature of one person’s understanding?

· Mark goes to an antiques auction. A nice painting comes up for auction and Mark love it. The auction provides extensive background on all of the items being offered. The auctioneer begins taking bids and Mark the winning bidder. Has a contract been formed in this situation?

Sources of Contract Law

States create their own contract law. They pass statutes and allow courts to develop common law. In doing so, state legislators and judges rely upon model laws in developing the statutory and common law. These model laws are known as the Restatement of Contracts and the Uniform Commercial Code (UCC). These model laws influence judges who interpret contract law and legislators who draft statutes that resemble (or copy exactly) these model laws. As such, you can study model laws to acquire a broad understanding of how contract law works. You can then look to the specific laws of your state to determine the exact law that applies to a given situation.

· Restatement of Contract—The Restatement of Contracts (Restatement) is a model law that deals primarily with contracts that do not involve the sale of goods or when goods are not the primary subject of the contract. Most state common law generally tracks closely the provisions of the Restatement.

· Article 2 of the Uniform Commercial Code—Article 2 of the UCC governs contracts for the sale of goods. It has been uniformly accepted by nearly every state in the United States. A sale of goods includes any manufactured product, crops, timber, livestock, attachments to land, exchanged currencies, mined minerals, etc. It does not include intellectual property, securities, noncommodity currencies, and un-mined minerals.

To be subject to the provision of the UCC, goods must be the primary purpose of the contract. If services are the primary purpose of the agreement, the incidental inclusion of goods is not covered by the UCC or corresponding state statutes.

Ask Yourself

· What are some of the advantages and disadvantages of model codes of laws? Why do you think states more readily adopt a uniform code of contracts covering the sale of goods, but are less apt to adopt a uniform code covering services?

· Jill approaches an interior designer about designing and purchasing furniture for her home. Jill owns a large mansion. The designer quotes Jill a price of $10,000 for her services and $1 million for all of the furniture. If Jill’s state adopts the Restatement of Contracts and UCC, which model law will primarily govern the contract?

Unilateral and Bilateral Contracts

Contracts are divided into unilateral and bilateral agreements based upon the duty of performance and how an offer to contract is accepted.

· bilateral contract—A bilateral contract consists of two promises between individuals that form a contract. Specifically, one party makes a promise to another party that she will do something (or forgo doing something) in exchange for the other party’s promise to do something (or promise to forgo doing something). For example, Eric promises to wash Julia’s car if she promises to pay him $20. The both activities will occur at some point in the future, so you have two promises of future performance.

· unilateral contract—A unilateral contract is an agreement with only one promise. That is, one party promises a future action if the other party performs whatever is requested of her. The promising party does not want a return promise. As such, a contract is formed or comes into exists once the other party begins to perform the requested services. Suppose Eric tells Julia that he will pay her $20 if she washes his car. Eric does not want a promise to wash the car. Julia can accept Eric’s offer by beginning to wash his car. Julia is not obligated to wash the car unless or until she begins doing so. Further Eric is not obligated to pay Julia until she begins washing the car.

The common characteristic between unilateral and bilateral contracts is that it entails a promise of performance and a demand from the offeree. This is critical to the requirement that a contract contain an offer, acceptance, and exchange of value.

Ask Yourself

· Why do you think it is important to distinguish and recognize these two types of contracts? Do you think each type of contract is more applicable in either sales of goods or services? Why or why not?

· Jennifer is looking for someone to paint her house. She sends out an email to several painters in the neighborhood that she has purchased the paint and will pay $3,000 to anyone who paints her house. She also includes some detailed requirements for the painting process and states that project must be completed by the coming weekend. Rob shows up the next morning with all of his equipment and ready to paint. Is there a contract in this situation? Why or why not?

Express, Implied-in-Fact, and Implied-in-Law Contracts

An express contract arises from interactions in which parties actually discuss the agreement and the promised terms. The contract does not have to be formal or in writing, but it requires that the parties express their intentions in an agreement.

For example, one person expressly offers to sell a widget to another person. The other person accepts the offer by saying the she will buy it. The parties have an expressed contract because they have stated an offer, stated an acceptance, and identified consideration. These expressions can be verbal, as in this situation, or written.

An implied-in-fact contract arises from the conduct of the parties, rather than from words. That is, the parties interact in a manner that constitutes a legally enforceable contract. This means that all of the elements of an enforceable contract can be inferred from the actions of the parties.

For example, Ellen asks Albert, an attorney, for professional advice. Ellen knows that Albert is an attorney and charges for his advice. Asking Albert for his professional advice implies a promise from Ellen to pay the going rate for that advice. This is true even though Ellen and Albert did not make an express promise to pay for it.

An implied-in-law contract, or quasicontract, is a contractual relationship ordered by the court. It lacks the mutual asset element of a contract, but the court deems the interactions between parties to be a contract under the law. This court action is generally taken to avoid an unjust result, such as when one party is unjustly enriched at the expense of another. The court will hold that the law implies a duty on the first party to pay the second, even though the elements to find a legally enforceable contract between the two parties are absent.

For example, Bell routinely rakes leave in the neighborhood for extra money. She rakes leaves for lots of houses and sometimes forgets which houses have requested her services. She begins raking James’s yard, having forgotten that she never worked out an agreement to do so. James often pays individuals to rake his yard and has plenty of money to do so. At the end of the job, Bell asks James for $20 for her effort. If James refuses to pay the court may hold that it would be unfair for James to receive this value and not pay something for it. As such, the court could hold that an implied-in-law contract to pay for Bell’s services.

Ask Yourself

· How do you feel about implied contracts? Should all contracts be required to be expressed? What are some arguments for and against this approach? What do you think is the justification for recognizing implied contracts?

· Kyle agrees to purchase building material from Anna, a new employee of a construction materials company. Anna executes a contract but makes an error when pricing the material. Per the terms of the agreement, Kyle will pay far less than the cost of the material. Kyle realizes this, but he stays quiet. Kyle uses the material before Anna catches the error. She sends Kyle an additional bill to cover the cost of the material, but not profit. Kyle refuses to pay the additional amount. What might a court do in this situation?

Valid, Enforceable, Void, and Voidable Contracts

There are several common characteristics of contracts that dictate whether a contract actually exists and whether it is enforceable in a court of law. The following vocabulary is important for characterizing these aspects of a contract.

· valid and invalid—A contract is valid when all of the elements essential to forming a legal contract are present. Conversely, a contract is invalid (or rather, there is no contract) if any of the essential elements of a contract are missing. The elements to forming a valid contract (offer, acceptance, consideration, and a meeting of the minds) are discussed further below. For example, One person announces that she will sell her cell phone for a reasonable price. Another person quickly says, “I will buy it.” In this case there is not a valid contract because there is not enough specificity in the consideration. As such, a critical piece of the contract is missing. While the parties might think they have a contract, if a challenge to the contract arises, a court is likely to hold it to be invalid.

· enforceable and unenforceable contract—An enforceable contract is one that can be enforced in court of law. That is, the law allows for enforcement of the contract. An enforceable contract must always be valid. A valid contract may, however, be unenforceable. That is, even though all of the essential elements of a contract are present, a court will not enforce the contract. An oral contract may be valid, but the court will not enforce it because that specific type of contract is required to be in writing under the state’s law. Contracts that are required to be in writing are discussed further below.

· void and voidable contracts—An otherwise valid contract may be void pursuant to the law. That is, state law identifies certain types of contracts that are deemed void from the outset. These include contracts that violate public policy or have an illegal purpose. A voidable contract is an agreement where either one or both parties has the right to make the contract void. That is, the contract is valid and enforceable until one party elects to void it. A contract to purchase illegal drugs, for example, is void. A party to a contract who is below the legal age of mental capacity may void the contract at any point before she reaches the age of mental capacity. Various situations where contracts are deemed valid, enforceable, void, or voidable are discussed further below.

Ask Yourself

· Why do you think there is a distinction between a invalid contract and contract that is unenforceable against a party? Are there any reasons or justifications for treating them as one in the same?

· Gayle arrives at work one morning and says to all of her colleague, “I am tire of my piece of junk car. I would sell it right now for $500.” Bert thinks about Gayle’s statement and determines that it would be a good buy. After lunch, Bert approaches Gayle and says, “I will buy your car” and extends $500 in cash. Gayle, surprised by Bert’s actions, replies that she is not willing to sell her car. If Bert sues Gayle for breach of contract, what will be the likely result?

· What do you think are the justifications for deeming a contract voidable? Can you think of scenarios where you think one party should be allowed to get out of the contract, but not the other party? Can you think of scenarios where both parties should be allowed out of the contract?

· Amy is extremely angry at David. She hires Laura to pour sugar into the gas tank of David’s car. Laura loses her nerve and backs out of their agreement? Can Amy enforce her agreement with Laura?

Requirements of a Valid Contract

As previously discussed, a contract is a specific promise to another and also a specific demand of that person. The demand could be a promise of future action (bilateral contract) or immediate performance of an act (unilateral contract). The promise and demand is an offer. Meeting with the offerer’s demand is known as acceptance. Both parties must give or exchange something of value with the other. The thing of value is known as consideration. Consideration is the promise to give, or actual giving, of a requested benefit or the incurring of a legal detriment (i.e., doing something one does not have to do.). Both parties must be of a legal age and sound mind, and the purpose of the agreement cannot be illegal or against public policy.

For example, one person offers to sell a product, service, or offers something of value (money, goods, etc.) in exchange for someone else’s product, service, or other thing of value. This constitutes a valid offer. The things of value constitute consideration. A second person accepts the offer by either agreeing to the offerer’s request to trade things or actually trading those valuables.

Remember that each party must provide something of value to the other. It does not matter how much value or even whether anyone else in the world would consider it valuable.

Ask Yourself

· Why do you think that the law requires an agreement to have all of the elements to be enforceable? Can you think of situations where any of these elements are not present, but you believe the agreement should be enforceable anyway?

Offer to Contract

The following elements must be present to establish a valid offer to contract:

· offerer and offeree—An offer to contract must contains a specific promise from the the person making the promise (offerer) and a specific demand of the individual receiving the offer (offeree). For example, I tell you that I will sell you a product for $5. I am the offerer and you are the offeree. My offer is to transfer ownership of a product and my demand is that you transfer ownership $5.

· intent to make an offer—The offerer must intend to make the offer. Whether there is intent to make an offer is judged from the position of the offeree. If a reasonable person in the position of the offeree would believe the offerer’s words or actions constitute an offer, it is an offer. This is an objective, rather than subjective, standard for determining whether the intent to make an offer exists. For example, I shout out loud in frustration that I would sell my piece-of-junk car for a $100. The words look like an offer to sell my car. In reality, I am simply espousing my frustration. I do not have the intent necessary for my statement to constitute an offer and no reasonable person would interpret my statement as truly demonstrating that intent.

· definite terms—An offer to contract must be sufficiently definite. That is, the terms of the offer must be sufficiently specific to allow the offeree to understand and accept the offer. The offeree must understand that she is the intended recipient of the offer and may accept it. Also, the terms of consideration must be stated. There is an exception to this rule for the sale of goods pursuant to the terms of the UCC. Some contracts for the sale of goods can leave open nonquantity terms to be decided at a future time. For example, simply stating that I will sell you an item “for a reasonable price” is not sufficient to constitute a definite offer. Most advertisements, catalogs, and web page price quotes are considered too indefinite to form the basis for a contract. To be sufficiently definite, the advertisement must be specific about the quantity of goods being offered and who is the intended offeree.

Remember, the above elements do not have to be in writing or formal. Further, the parties do not have to realize that their words or actions constitute a valid contract; rather, each element is judged by an objective standard. That is, how would a reasonable person perceive the actions potentially constituting an offer?

Ask Yourself

· How do you feel about the requirement that a contract meet this level of formality? Should it be more or less formal, and why? How do you feel about the fact that individuals can form a contract without fully realizing that their agreement is legally enforceable?

· Ashton is reading looking at the merchandise for sale on Smart Clothes Corp’s website. He places an order for a new shirt and goes through the process of setting up an account and attempting to pay. At the end of the process, he gets notification that his purchase is discontinued and cannot be purchased. Ashton is furious and wants to sue Smart Clothes for breach of contract. If he does, what is the likely legal result in this situation?

When Does an Offer to Contract Terminate?

An offer to contract terminates at the following times or under the following conditions:

· specific provision—An offer may include a specific provision detailing how long an offer will stay open and the conditions under which it terminates.

· lapse of time—Unless the offer states otherwise, an offer terminates after a reasonable period of time. A reasonable period of time will vary depending upon the type of contract. An offer to sell bananas will terminate more quickly than an offer to sell cement.

· offeree’s rejection—An offer terminates if the offeree receives the offer and rejects it. Once the offeree rejects the offer, she cannot come back later and accept the offer. Any attempt to do so may constitute a new offer to the original offerer.

· counter offer—If an offeree makes a counter offer or counter proposal in response to an offer, the original offer terminates. This is the case with negotiations. If a party attempts to negotiate new or additional material terms to the offer, the original offer terminates. Attempting to offer ancillary or nonmaterial terms may not terminate the offer.

· revocation by the offerer—Generally, the offerer may revoke an offer at any time before the offeree accepts it. If the offeree has already accepted the offer, a valid contract exists and an attempt to revoke the offer may constitute breach of the contract. There are certain offers, known as “firm offers,” that state that the offer cannot be revoked for a certain period. This type of offer is a form of contract in itself.

· destroy subject matter of contract—An offer terminates if, before the offer is accepted, the property that is the subject of the offer is destroyed. If the offer has already been accepted, this could serve to void the contract.

· death or mental incapacity—If the offerer dies or loses mental capacity at any time before an offer is accepted, the offer is revoked. The offer does not become effective again if the offerer regains mental capacity.

· illegality—An offer terminates if the subject of the offer (the activity or product) becomes illegal. If the offer has been accepted, the subject matter becoming illegal will void the contract.

Some of the methods of contract termination are voluntary, while others others are a result of circumstances beyond the control of the parties.

Ask Yourself

· Do any of the common methods by which an offer terminates surprise you? What factors should a court consider when determining whether a “reasonable time” has passed? What factors should the court consider in determining whether an offeree has been rejected? Does the rule regarding counter-offers discourage negotiation? Why or why not?

· Dudley is interested in purchasing an ownership interest in Sarah’s business. Sarah sends over a term sheet that places a specific value on her business and offers a specific number of shares. Dudley reviews the sheet and sends back a sign subscription agreement that lists a lower valuation, but agrees to buy a larger number of shares. The total purchase price for all shares would equal the amount indicated in Sarah’s term sheet. Sarah writes back and says that she will work with other investors. Dudley is angry and wants to sue for a breach of contract? What is the likely outcome?

Acceptance of an Offer

Acceptance of a contract is the assent of the offeree to the demands contained in the offerer’s offer. Acceptance of the contract varies depending upon whether the contract is unilateral or bilateral. An offeree accepts a bilateral contract by making the return promise demanded by the offerer. An offeree accepts a unilateral contact by undertaking the performance demanded by the offerer. The acceptance of an offer must meet a specific standard based upon the type of contract and the governing law. The standards that a specific type of contract must meet are described in the sections below.

Mirror-Image Rule (Reinstatement)

Contracts that are not primarily for the sale of goods may be governed by rules derived from the Restatement of Contracts. The Restatement proposes the “mirror-image rule” for acceptance of an offer. This rule states that the acceptance of an offer must be exactly as demanded by the offerer. That is, the acceptance must “mirror” the offer. If the offeree adds new terms to the acceptance, it is not really an acceptance. Acceptance with different or additional terms constitutes a counteroffer.

For example, I offer to perform a service for you at a given fee. You reply that my prices are too high and that you want a 15 percent discount. You changed the terms of the consideration (the price), which is a material aspect of the offer. As such, you have effectively rejected my offer, as your attempted acceptance was not the mirror image of my offer.

Ask Yourself

· Why do you think about the mirror-image rule? Does it concern you that a minor deviation in an acceptance can effectively reject a contract? Why or why not? What if this was not the intent of the parties at the time of entering into the agreement?

· Kate offers to paint Roger’s house for $2,500. Roger attempts to accept the offer by saying, “Great. But, you have to paint the storage shed in the backyard as well.” Kate does not respond and decides to take a different painting job. Roger is angry, particularly when he learns that the next closest offer is twice as expensive. He wants to sue Kate for her failure to perform. What is the likely result?

Rule for Sale of Goods (UCC)

The mirror-image rule does not apply to sales of goods under the UCC. The UCC recognizes that a contract is formed if the acceptance of the offer is unequivocal. That is, if it is obvious the parties agree on the primary or material terms of the agreement, an acceptance that changes or adds additional terms is a valid acceptance. The effect of different or additional terms depends on whether the parties are merchants. If either party is not a merchant, any additional or different terms are deemed suggestions for addition and do not become part of the contract. If both parties are merchants, the additional terms become a part of the contract, unless:

· they materially alter the contract,

· acceptance is conditioned on the specific terms of the offer, or

· the offerer specifically rejects the additional or different terms.

For example, I am a merchant and I offer to sell you goods. You respond that you are willing to purchase the goods, but I must provide you with a warranty. I send the goods and you accept them. If you are not a merchant, there is no warranty. That was simply a recommendation to be part of the contract. If you are a merchant, the warranty is a part of the contract. In this example, if we are both merchants, I could have excluded the warranty from the contract be expressly rejecting the warranty. If I sent the goods and you accepted them, you have agreed to the terms of my original offer.

Ask Yourself

· Why do you think the sale of goods employs a different rule than contracts to provide services? Can you think of any reasons for differentiating between the rules that apply to merchants of goods and nonmerchants?

· Darla is purchasing consumer goods from Isaac’s business. Darla sends in a purchase order and the payment for the goods. Isaac sends the goods and a receipt that includes a clause stating that any disputes about the goods must be submitted to arbitration. Darla is not happy with the quality of the goods and she asks Isaac to return her money. When Isaac refuses she seeks to sue Isaac. What is the result in this situation?

Silence with Regard to Offer

Failing to reply to an offer is not acceptance in most cases. This is true even if the offer says silence will be considered acceptance. There are, however, exceptions to this rule. If the relationship between the parties is such that it is not expected that the offeree reply, silence by the offeree may constitute acceptance. Another exception would be where the offeree readily understands that silence or a failure to respond means acceptance of the offer. This generally only arises in situations where the offerer and offeree have a history of prior dealings. Lastly, in the case of contracts between merchants under the UCC, silence may constitute acceptance of an offer. In some instances, a merchant is required to expressly reject goods that are delivered; otherwise, her silence constitutes acceptance of the contract.

For example, I offer to paint your house for $100. If you do not respond to my offer, there is no acceptance. If, however, I specifically state that, “If I do not hear anything from you by Friday, I will assume you agree to my offer.” You reply, “That sounds good.” You now realize that silence become acceptance on Friday. Changing the scenario a bit, you are a contractor and I routinely provide you quotes on houses. You expect me to paint all of your houses. If our routine practice is that I provide a quote and am expected to paint the house if you do not object, silence may be acceptance.

If we are both merchants dealing in expensive bicycles. You make a monthly order with me for the same inventory. One month, I send a shipment of inventory without receiving an order from you. If the goods arrive and you do not reject them for two weeks, your silence constitutes acceptance.

Ask Yourself

· How do you feel about the idea that, in some instances, an individual can accept and offer simply by failing to respond? Are you convinced that the applicable exceptions are justified? Why or why not?

· Eric enters his email address to receive offers from a CD of the month club. The next week, Eric receives a CD in the mail with instructions state that he must return them within 10 days or he incurs an obligation to purchase the CD. What is the likely result?

Mailbox Rule

The mailbox rule is a default rule that applies when the offerer does not place specific requirements on the manner of acceptance. Under this rule, the offeree accepts the offer when it is sent to the offerer. This could include dropping it in the mail or sending it with a courier. This may also include providing notice of acceptance via email or other electronic communication (regardless of whether the offerer actually checks or reads the email). As such, if an offer is made to multiple offerees, the first offeree to accept in any manner (including by dropping the acceptance in the mail) has a binding contract.

For example, You offer to sell me your car for $500. I immediately send you a letter accepting your offer and a $500 check. We have a contract as soon as I drop the letter in the mail.

Ask Yourself

· What do you think about the mailbox rule? Should it be the default rule in contracts? Why or why not?

· Pamela is a musician and writer. She offers to sell her copyright to a popular song to Devon and Mark. Devon drops his acceptance of the offer in the mail on Friday evening. On Saturday morning, Pamela meets with Mark and signs an agreement transferring the copyright to him. What is the likely result in this situation?

Consideration in Contract Formation

Consideration is anything of value. Recall that a valid contract must include an exchange of value between the offerer and offeree. The value should be the inducement or incentive for the other party entering into the agreement. That is, it must be the subject of the bargain between the parties. A promise to make a gift is not binding because the party receiving the gift gives no value in return for the promise. When the existence of consideration is not clear, the court will examine the transaction as a whole to determine if consideration exits and the contract is enforceable.

Types of Consideration

The amount or value of the consideration present does not matter. It need not be money or goods. Acceptable types of consideration include the following:

· agreement to refrain—An agreement to refrain from doing something that you have the right and ability to do may constitute consideration. For example,  I really want to stand up and sing in the middle of a crowded restaurant. You would be very embarrassed if I do so. You offer me $5 to not stand up and start singing. My refraining from doing this may constitute consideration.

· agreement not to sue—An agreement not to sue the other party may be sufficient consideration when reasonable grounds exist to make a lawsuit possible. For example, you claim that I owe you additional funds under a contract. I disagree and argue that all accounts are settled. You threaten to sue me. I offer to pay you a small sum of money in exchange for your agreement not to bring a legal action against me. Forgoing your right to sue me in exchange for money is a valid exchange of consideration.

· prior consideration—Generally, consideration in a prior agreement is not valid consideration in a new agreement, except in very limited circumstances. The reason is because the individual is already obligated under the old agreement. Trying to promise to do the same thing does not provide a new form of value. Under the UCC, however, a preexisting obligation can constitute valid consideration if the offerer is a purchaser of $500 or more in goods, and she offers to pay more than an additional $500 for the same goods. This exception exists to protect certain business arrangement from failing. For example, we are both merchants. You enter into a contract to purchase goods from me for $5,000. In the pendency of the contract, you realize that I am likely breach the contract. You really do not want to find another seller, so you offer to pay an additional $1,000 for me to perform the contract. May agreement to perform my existing contractual obligation (sell you the goods) is valid consideration – even though it is the consideration for a prior agreement.

Ask Yourself

· How do you feel about the requirement for consideration? Should there be a value requirement for the consideration? Why or why not? What do you think is the purpose or objective behind requiring any form of consideration, regardless of the nature or value?

· Donna is merchant and enters into a contract with Ashley to purchase bricks from me for $10,000. In the pendency of the contract, the cost of bricks rises dramatically. Ashley will lose money by selling the bricks to Donna for $10,000. Donna realizes that Ashley is going to lose money and will likely breach the contract. Donna really needs the bricks and it is most convenient to purchase from Ashley. She offers to pay an additional $1,000 for the bricks. If, after Ashley ships the bricks, Donna decides not to pay the additional $1,000, what is the probable result?

Promissory Estoppel Exception to Consideration Requirement

A doctrine known as promissory estoppel may serve as a substitute for consideration to make an agreement into a valid contract. Promissory estoppel is an equitable doctrine. If the offeree reasonably relies on the offerer’s promise to her detriment, the doctrine of promissory estoppel may make the contract valid despite the absence of consideration. The two key elements are (1) that the reliance must be reasonable in light of the situation, and (2) the relying party must suffer a tangible detriment. The court may also consider whether performance causes a hardship on the promising party.

For example, you are having erosion problems in your hard. You cannot afford to pay to have it fixed, so I offer to give you the materials necessary to build a retaining wall. You spend your available money grading out the ground and digging the dirt where the wall will go. After all of this, I back out of my promise. You have now spent your available money and, without installing the wall, made the situation far worse than it was before. A court may deem my promise to be an enforceable contract because you relied to your detriment on my promise.

Ask Yourself

· How do you feel about the idea that a person’s reliance on another person’s promise can substitute for consideration? How much of a detriment must the relying party suffer before you think a court should enforce the agreement? Should the promise be enforced if it would result in a significant hardship for the promising party?

· Tina says that she will give Sam her car to drive across the country from Georgia to California. Sam relies on Tina’s promise by not purchasing a plane ticket. Tina fails to follow through with her promised gift. Sam has to purchase a plane ticket that is dramatically more expensive that it would have been if he had purchased the ticket at the time that Tina made her promise. If Sam wants to sue Tina for breach of contract, what is the likely result?

Other Exceptions to Consideration Requirement

There are two very broad, common exceptions to the requirement that a contract be supported by consideration:

· option contracts—An option contract is an agreement between parties that allows one party a specific period of time to purchase a particular asset at a given price. For example, Mark believes that the price of Apple, Inc., stock is going to rise. He purchases an option contract from Tom that allows him to purchase the Apple stock at the current price at any time within the next 30 days. Tom believes that the price is going to go down, so he is happy to sell the option to Mark.

· firm offers—The UCC recognizes the enforceability of a promise to keep open (not retract or cancel) the offer to purchase or sell a good for a specific period of time. For example, Agnes offers to sell a piece of equipment to Maria. She states that the offer is good for 30 days. Agnes and Maria now have an enforceable agreement for the next 30 days, despite the absence of consideration in the agreement to keep the offer open.

Mental Capacity to Contract

To enter into a contract, a person must have mental capacity sufficient to understand the nature and consequences of her actions. If mental capacity is absent, the contract is voidable by the person lacking capacity. There are three classes of persons commonly understood to lack capacity to be bound by contractual promises:

· minors—A minor is someone below the statutory age of mental capacity within a jurisdiction. Generally, a person must be 18 years old or older to have the requisite mental capacity to contract. As such, a minor who enters into a contract can void the contract at any time prior to reaching the age of majority. The exception to this rule is when the contract involves goods or services necessary for the child’s survival. This could include food, water, shelter, etc. In the case of necessities, the child will be obligated to pay the reasonable value of the goods or services received. If the child fails to disaffirm the contract by this time, she thereby ratifies the contract and is bound going forward. For example, Jane is 17 years old. She goes to a local gym and signs up for a year-long membership. This is not a contract for a necessity. Jane will be able to void the contract at any time before she turns 18 years old. She will, however, have to pay the reasonable cost of any value she receives from the gym.

· intoxicated person—An intoxicated person may lack the mental capacity necessary to contract. Generally, this will require extreme intoxication. If the intoxicated person enters into a contract, she must disaffirm the contract within a reasonable time of regaining capacity and learning of the contract. If she fails to do so within a reasonable time, she has ratified the contract and will be bound. For example, Don gets drunk in a bar. He does not know where he is and asks a stranger for a ride home. He offers to give the stranger, Gary, his Rolex watch in exchange for a ride home. Gary takes him home and takes the Rolex. When Don sobers up, he can immediately demand return of the Rolex. He was too intoxicated to appreciate the nature of his actions. As such, he can void the contract. He must act within a reasonable period to void the contract upon becoming sober.

· mentally incompetent person—A mentally incompetent person generally lacks the ability to enter into a contract. If the mental incompetency is temporary, the individual must disaffirm any contract entered into during incapacity within a reasonable time of regaining capacity. If the person is permanently incapacitated, the contract is either void or voidable at the insistence of a legally appointed guardian. For example, Ernie is having psychotic delusions. He goes to a security firm and hires a private security guard. Ernie’s legally appointed caretaker will be able to void the contract based upon Ernie’s lack of mental competence to enter into the agreement.

Each state may pass additional situations in which it deems an individual mentally incompetent to enter into contractual relations.

Ask Yourself

· How do you feel about the requirement for mental capacity to contract? Do you agree with arbitrarily setting an age at which a person is deemed to have mental capacity? Why or why not? How should a person’s level of intoxication be measured to determine whether she has mental capacity to contract?

· Phyllis is in a bar and drinking heavily. She realizes that she cannot drive in her state, so she solicits a ride from Harriet. She does not have any money, so she offers Harriet her new Rolex watch in exchange for a ride. Harriet accepts and drives Phyllis three miles to her home. The next morning Phyllis realizes that she traded a very expensive watch for a three-mile ride. What are Phyllis’ options?

Lawful Purpose of a Contract

A contract must have a lawful purpose to be enforceable. That is, the contract cannot violate or cause others to violate the law or public policy. The following scenarios may result in an unenforceable contract:

· crimes and torts—Contracts that require commission of a crime or tort or violate accepted standards are void. If a contract has both legal and illegal provisions, a court will often enforce the legal provisions and refuse to enforce the illegal ones.

· unconscionable contracts—An unconscionable contract is one that is so unfair that it is said to “shock the conscience.” Unconscionability is broken down into “substantive unconscionability” and “procedural unconscionability.”

· Substantive unconscionability means that the terms of the agreement are so extremely unfair or one-sided in favor of a party that it is unlikely that the other party to the agreement understood its terms.

· Procedural unconscionability refers to the conditions under which the contract was formed. The terms of the contract may indicate that one party was taken advantage of by another party with greater bargaining power. Such a contract may be void as against public policy if the circumstances indicate that a reasonable person would not have entered into the agreement without the existence of an undue hardship. In some situations, the undue hardship must have been brought on by the party unduly benefited by the contract.

· contracts to restrain trade—Contracts that restrain trade may be illegal and thus void. This is true for contracts that create a monopoly, fix prices, and divide up markets. This is generally the area of antitrust law. A court may also find a contract void if it serves to frustrate economic activity in a manner not covered by antitrust law or it intentionally interferes with contractual relations or unfairly competes. An example of a contract that directly prohibits competitive business activity is a “covenants not to compete.” This type of contract restricts an individual from carrying on a trade or practice. These contracts are held to be void when they are unduly burdensome in their restrictions regarding the time and geographic locations for doing business. A covenant not to compete that has a limited time frame (3 to 6 months) and a limited jurisdiction (up to 50 miles) is generally enforceable if there is good reason for the restriction.

 States are free to pass statutes or develop common law that protects the public interest. A contract that runs afoul of what is deemed necessary for the public good may also be void.

Ask Yourself

· How do you feel about the requirement that a contract have a lawful purpose? Can you think of any situations where this requirement may cause an unfair result for parties? Should there be a sliding scale for determining enforceability of contracts that violate public policy or are illegal? Why or why not?

· Carter lives in New Orleans, Louisiana. The state is in a state of emergency based upon an approaching hurricane. Carter, along with thousands of other people, attempts to flee the city. The traffic is horrible and folks are running out of gas on the roadway. Carter is low on gas and pulls into a gas station. The gas station is charging $250 per gallon of gas. Carter is outraged, but purchases the gas and continues to flee the city. What are his legal options?

Voidable Contracts: Common Situations

Contracts are commonly voided in the following situations:

· fraud—Fraud involves an intentional misstatement of the material (important) fact that induces one to rely justifiably to his or her injury. If a person is defrauded into entering a contract, the defrauded party may void the contract upon learning of the fraud. Voiding the contract is at the option of the defrauded party, as she may wish to remain in the contract. The party committing fraud may not void the contract. If the defrauded party fails to void the contract upon learning if the fraud, she is deemed to have ratified it and is bound.

· misrepresentation—Misrepresentation is a material misstatement of fact that induces one to rely on the statement. The difference with misrepresentation and fraud is that misrepresentation does not involve the intent to mislead. As in the case a fraud, a party who enters a contract as a result of a material misrepresentation may void the contract upon learning of the false representation. The misrepresenting party may not void the contract. If a party fails to void the contract upon learning of the misrepresentation, she is deemed to ratify the agreement.

· duress—Duress means the use or threat of force to convince a person to act according to one’s wishes. If a party enters into a contract due to the physical or economic duress imposed by the other party, the contract is voidable at any time by the party subject to duress.

· undue influence—Undue influence arises when one party unfairly takes advantage of another party by using a position of trust, influence, or confidence. For example, a psychiatrist who enters into a contract with her patient that is not related to medical services may be deemed to have exercised undue influence. The influenced party may have been pressured to enter into the agreement or felt unduly obligated to enter into the agreement for fear of destroying the doctor-client relationship.

· mutual mistake—A mistake by both parties regarding “material” facts or circumstances relevant to the contract may make a contract voidable. In such a situation, either party may void the contract upon learning of the mutual mistake. The standard for whether the mistake of fact is material is whether a reasonable person would have entered into the agreement if the true facts were known. A mutual mistake of law may make a contract voidable if it caused the parties to not have a “meeting of the minds” with regard to the core aspects of the contract. If no meeting of the minds exists, there is never a valid agreement between the parties.

· unilateral mistake—Generally, unilateral mistake by one party to the contract does not make the contract voidable. A unilateral mistake about the basic assumptions of the contract will only make the contract voidable when the nonmistaken party knew or had reason to know of the other party’s mistake. In such a case, the effect of enforcing the contract against the mistaken party must be unconscionable and the nonmistaken party would not suffer a substantial hardship by voiding the contract. If the nonmistaken party did not know about the other party’s mistake, the standard for voiding the contract is even higher. In such a case, the contract must not yet have been performed or the parties must be easily restored to their pre-performance positions. The mistake must be substantial, and the mistake must directly relate to some computational or clerical error in the construction of the terms of the agreement. No defense exists if the mistaken party knowingly assumed the risk of the mistake; is grossly negligent in making the mistake; violates a legal duty; fails to act within her duty of good faith and fair dealing; or intentionally fails to read the contract.

Ask Yourself

· How do you feel about the idea that both parties may hold the right to void a contract? Is there any justification for holding that the contract is void rather than voidable? Do you agree with the scenario under which a unilateral mistake if voidable? Why or why not?

· Constance enters into an agreement to purchase Gerald’s business. The contract contains a calculation for the business’s cash on hand at the time of sale to be added to the purchase price. Constance and Gerald did not pick up on the calculation error at the time of signing the agreement. The week prior to closing, Constance’s attorney caught the error, which causes a huge increase in the calculated value of the business. Gerald wants to hold Constance to the dramatically increased price, as she signed the contract containing the calculation error. What are Constance’s options?

When is a Contract Required to Be in Writing?

Some valid contracts are required to be in writing to be enforceable by a court of law. The requirement that a contract be in writing is generally dependent upon the subject matter of the agreement. A statute requiring that a contract be in writing is known as a “statute of frauds.” These statutes are designed to prevent fraud in the formation of contracts. Most statutes do not require that the entire contract be in a formal writing; rather, there must be sufficient writing (in any form) to demonstrate the core aspects of the agreement.

The following types of contract are generally required to be in writing in all jurisdictions:

· sale of an interest in land—Contracts concerning the transfer of an interest in land must be in writing to be enforceable. An “interest in land” includes contracts for mortgages, mining rights, easements, etc. For example, I agree to sell you an easement to cross my land. Our contract must be in writing to be enforceable. Note that a construction agreement is not a transfer of an interest in land.

· collateral promise to pay another’s debt—Debt surety or guarantee agreements are required to be in writing to be enforcement. These instruments document when one person promises to repay the debt of another. This includes situations where business owners guarantee the debts of their business. For example, you approach your rich uncle and ask that he loan you money to buy a car. I am your friend and I promise to repay the loan if you are unable to do so. If you default, your uncle may not be able to recover against me because our agreement is not in writing. That is, your uncle and I do not have an enforceable contract.

· duties that cannot be performed within one year—A contract must be in writing to be enforceable if the duties under the contract cannot possibly be performed within one year after its making. The ability to carry out the contract must be impossible to a certainty. For example, you and I enter into an oral contract for services that lasts for twenty months. This is not enforceable, as any service contract or a lease of longer than one year are generally not enforceable.

· sale of goods of $500 or more—Sales of goods fall under the provisions of the UCC. The UCC requires that any contract for the sale of goods for $500 or more must be in writing to be enforceable. Modifications to any such agreement must also be in writing. For example, I verbally agree to sell you a piece of equipment for $750. If I back out of our agreement, you may not be able to enforce our agreement through the courts because the agreement is not in writing.

States may establish other contracts that are required to be in writing to be enforced in that jurisdiction. For example, most states require insurance policies to be written.

Ask Yourself

· Why do you think that certain contracts are required to be in writing to be enforceable while others are not? Can you think of any other types of contract that you believe should be in writing to be enforceable? What is your reasoning?

· Todd enters into a verbal agreement with Ashley to provide lawn serves at her rental property for the next two years. After performing his obligations for one month, he realizes that it is a very difficult property to service and he drastically underbid the job. What are his options?

Statute of Frauds Requirements

To meet the requirements of the statute of frauds, there must be a sufficient writing to demonstrate that a contract exists. The writing can be typed, handwritten, or electronic. The agreement must generally be signed by the party against whom it is being enforced. A signature may be a mark, seal, stamp, electronic signature, or a handwritten agreement. Between merchants, a confirmation regarding the contract by one merchant that is not objected to by the other merchant will be sufficient, even though it is not signed by the other merchant.

Ask Yourself

· Why do you think that the definition of a writing is construed so broadly? Is this broad interpretation justified or does it unduly detriment a party? Why?

· Frank agrees to sell Amy his collector-edition, signed baseball card. Frank writes on the back of the a napkin, “I agree to sell Amy my Mickey Mantle rookie card for $2,000.” Will this be a sufficient writing to satisfy the statute of frauds?

Exceptions to Requirement of a Written Contract

Jurisdictions recognize a number of exceptions to the requirement that certain contracts be in writing to be enforceable. Common exceptions to the writing requirement are as follows:

· admission under oath—If a party admits under oath (such as in a deposition or in a court proceeding), the contract may then be deemed enforceable.

· part performance—A court may deem an oral contract enforceable if the parties (or one party) has partly performed the contract. This principle generally applies to oral agreements to sell or transfer real property (land). If the buyer has paid part of the purchase price and taken possession of the land, the court may hold the oral agreement enforceable. This would generally entail a court order to complete the contract performance by signing a deed legally transferring the property.

· promissory estoppel—The equitable doctrine of promissory estoppel applies in situations where one party relies to her detriment on another party’s promise. It arises in a situation where a party believes that her exchange of promises with the other party is a legally enforceable contract. That party puts herself in a position where she would suffer a loss if the other party does not perform. For example, Tom promises Jane that he will sell her land to build a house. Jane, relying on the promise, hires individuals to begin grading the land and laying a foundation for the house. Later, Tom refuses to transfer a deed to Jane and claims that the contract is not enforceable because it was not in writing. Jane has spent significant money and time under the belief that the contract was enforceable. As such, a court will probably hold the contract to be enforceable under the doctrine of promissory estoppel.

· rules involving goods—The UCC provides several exceptions to the rule that contracts for the sale of goods for $500 or more be in writing:

· specialty goods—If a manufacturer agrees to manufacture specialty goods for a client, once the manufacturer begins production of the goods, the contract may be enforceable without a written agreement.

· partial or complete performance—If goods have been accepted and payment for the goods has been made, the parties cannot later claim that the contract was unenforceable and demand return of the money or property. This may also be true for partial payment or delivery of a portion or installment of the goods.

· contract between merchants—An oral contract between merchants is enforceable when one party delivers goods and the other party either delivers goods or sends written notice confirming the terms of the agreement and the other party does not object to that notice within 10 days.

The justification for the above exceptions to the statute of frauds is that each situation provides an additional level of proof regarding the existence of a contract. It reduces the need for a writing to prove that the contract exists and its terms.

Ask Yourself

· Why do you think each of these exemptions from the statute of frauds exists? What standard do you think should apply to determining what is “part performance”? How far should anindividual go in relying on a promisor before it exempts the agreement from the statute of frauds? Why do you think these special provisions exist for sales of goods between merchants?

· Chris is a professional musician and celebrity. He walks into Grey’s jewelry store and request that Grey make him a custom necklace. Grey agrees, but they do not execute a contract. The necklace is very ornate and will cost about $150,000. It will contain the musician’s initials and symbol. When Grey finishes the necklace, Chris decides that he does not want it. What are Grey’s options?

Relief from Contractual Obligation

Parties to a contract have duties or obligations thereunder. There are generally three options to relieve these obligations:

· perform—An individual is relieved from her duties under a contract once she has fully or substantially performed those duties. The individual is “discharged” from the contract.

· release from contract—Either party may be released from a contract by the other party. Alternatively, the person may be released if the contract becomes void.

· breach—Once a party to a contract breaches that contract, she and the other party no longer have duties to perform. If the contract is enforceable, the other party then has the ability to enforce the contract against the other party by seeking damages.

Performance of the contract and release eliminate a person’s liability under the contract. Breach exposes the breaching party to damages or losses suffered for the breach. None of these options relieve a party form tort liability if her actions with regard to the contract constitute a tort.

Ask Yourself

· Should a party pursue the method of relieve her obligation under a contract that is of greatest advantage to her? Why or why not?

· Katie and Smith enter into a contract. Each has a duty to perform services for the other. Neither party ever takes action to act on the contract. What is the result?

Performance of a Contract

Performance of a contract relieves a person from further duties under the contract. There are three levels of performance:

· complete performance—Complete performance by a party means that the contracting party has fulfilled every duty required by the contract. A completely performing party is entitled to a complete performance by the other party. For example, I enter into a contract to build a house for Ellen. I build the house and complete all of the material and nonmaterial requirements of the contract.

· substantial performance—Substantial performance of a contract means less than complete performance; but, the level of performance is sufficient to avoid a claim of breach of contract. More specifically, it means that a party has performed all material elements of the contract, but there are nonmaterial aspects left uncompleted. The other party may be entitled to seek offset or recovery from the substantially performing the party for the aspects of the contract not completed. For example, I enter into a contract to build a house for Ellen. I build the house, but fail to paint the interior the color described in the contract. This contract is substantially performed and does not give rise to an action for breach. Ellen may, however, recover or offset the cost of painting the walls when paying me.

· breach of contract—Any performance that is not complete or substantial performance is a material breach. This entails performance at a level below what is reasonably acceptable. The materially breaching party cannot sue the other party for performance and is liable for damages to the other party for the breach. For example, I enter into a contract to build a house for Ellen. I distracted by another contract and make material errors in laying the foundation. It causes the house not to meet standards and pass inspection by the building inspector. In this case, I have breached the contract by failing to perform a material duty under the agreement.

Ask Yourself

· How do you feel about the concept of substantial performance? Do you believe that failure to perform certain duties under a contract should not constitute a breach? Why or why not?

· Missy enters into a contract to perform auditing functions for ABC Corp. She does reconciliation of many of the accounts, which takes substantial time. She is satisfied that the books are accurate, so she skips performing many of the key tasks required of external auditors. What is the status of Missy’s duties under the contract?

Relief from Performing Duties under a Contract

An individual is relieved from her duty to perform a contract in the following scenarios:

· void contract—If a contract becomes void, both parties are relieved from their duty of performance.

· breach by other party—If the other party materially breaches the contract, the nonbreaching party is relieved from the obligation to further perform the agreement.

· failure of a condition—contract may contain any number of conditions that may materialize (or fail to materialize), which relieve the parties’ obligation to perform under the contract.

· impossibility, impracticability, or frustration of purpose—Parties to a contract may be relieved from their obligation to perform if performance becomes impossible, commercially impracticable, or the underlying purpose of the contract is frustrated.

· waiver or release—A party may, per her own volition, sign a waiver or release relieving the other party’s obligation to perform.

Any of the above situations may release one or both parties from their duties of performance.

Ask Yourself

· Do you agree that the above situations should relieve an individual from her obligations under a contract? Why or why not?

Conditions Regarding Payment, Delivery, and Tender of Performance

Tendering performance means to offer or attempt to perform the agreement. Often a party’s offer or attempt to perform is sufficient to satisfy the condition of performance and obligate the other party’s performance. That is, a party cannot avoid her obligation under the contract by failing to accept the other party’s tender of performance. One party offering or attempting to perform is a condition to the other party’s obligation to perform. Unless a contract states otherwise, the default rules under the UCC and Restatement place conditions on the delivery of services and the delivery of a product by a party to a contract.

The UCC states the buyer tendering payment to the seller of a good is a condition that must be satisfied before the seller has the duty to deliver the good. For example, I offer to purchase an expensive jacket from you. You accept. I must offer to give you the money before you are obligated under the contract to give me the jacket.

The Restatement, in contrast to the UCC, requires that a service provider must tender performance before the other party has a duty to pay for those services. I offer to paint your house for $500. You accept. I must complete my obligation to paint your house before you are obligated to pay me $500. In this case, tendering performance is completing my duty to paint.

In either case, rejecting a party’s tender of performance can constitute a breach of contract if the tender of performance conforms to the requirements of the contract.

Ask Yourself

· Why do you think tending performance as a condition is treated differently under the UCC versus the Restatement?

· Herman offers to purchase machinery for his business from Jamie. The party is silent on who must perform first. Herman asks that Jamie ship the goods to his business location so that he can inspect it. If it meets inspection, he will pay for the machinery. Jamie refuses and asks Herman to pay first. If both parties refuse to perform first, who is likely legally liable for breach of contract?

Impossibility, Impracticability, and Supervening Frustration of Purpose

Impossibility of performance, commercial impracticability, and a supervening frustration may excuse a party’s duty to perform a contract. Further, it will relieve the party from liability for the nonperformance.

Impossibility of Performance

A party may be excused from her duty to perform under a contract if performance becomes impossible. Events that make a contract impossible include the following:

· Illegality of the subject matter. I enter into a contract with you to sell you cleaning chemicals. The sale of such chemicals becomes illegal. My duty to perform is excused.

· The subject of the contract (property) is destroyed. I enter into a contract to sell you a car. Before I can sell it to you, a branch falls from a large tree and destroys the car. I am excused from my duty to sell an undamaged car.

· One of the parties to the contract dies or becomes physically or mentally disabled.

· Natural forces interrupt the contract. For example, a tornado, earthquake, severe storms, flooding, etc., permanently interrupts a party’s ability to perform her contractual obligations.

· Performance would cause substantial risk of physical harm to one party. I enter into an agreement to replace the shingles on our house. Upon inspection, the roof of the house appears to be structurally unsound. Replacing the shingles would put me in an unreasonably dangerous situation. I did not anticipate this danger when entering the contract. As such, my duty to perform is relieved.

Impossibility of performance will only excuse a party’s performance if the impossibility is not the fault of the nonperforming party. Further, impossibility will not excuse liability for nonperformance if the contract expressly contemplated the risk of conditions making performance impossible and specifically placed those risks upon the nonperforming party. For example, I enter into a contract to sell you a piece of machinery. In the contract, we expressly state that I must repair any malfunction of the machine that occurs prior to sale. The machinery breaks before the sale date. In this situation, the contract anticipates a risk and places it on me. I must repair the machine prior to sale.

Ask Yourself

· What do you think is the justification for allowing the above situations to excuse a person’s duty under a contract? Can you think of any other situations that you believe should excuse a person’s duty?

· Derek agrees to sell Artem sheet rock for a construction job. Derek leaves the sheetrock outside and it rains. The sheet rock is ruined. Artem has to purchase sheetrock from another source at a much higher price. If Artem decides to sue Derek, what will be the likely outcome?

Commercial Impracticability

Commercial impracticability arises when performance of a contract by a party has become unfeasibly difficult or costly to perform. The difference between impracticability and impossibility is that impracticability is still physically possible; however, performance will result in a substantial hardship to the performing party. Impracticability will excuse performance where the excused party did not have control over (or was not at fault for) the condition that made performance impracticable. Further, the excused party must not have expressly or impliedly assumed the risk of the duties becoming impracticable. Generally, impracticability is only found in extreme circumstances.

For example, I enter into an agreement with you to sell goods or perform services. The cost of performing the contract spikes because of a government tax, regulatory hurdles, raw material rates, etc. When entering the contract, we did not contemplate the price of goods or the cost of performing services to go up. If performing the contract would result in a serious financial burden to me, I may be able to get out of the contract by claiming that commercial impracticability excuses my performance.

Ask Yourself

· How do you feel about the doctrine of commercial impracticability? How unforeseeable must the intervening event be to make the contract impracticable? How severe must the damage suffered by the performing party be?

· Tom agrees to sell lobsters to Suzie for resale in her restaurant. Tom sets the price at a specific dollar value per pound. Later, the government imposes a large tax on sales of lobsters. If Tom continues to sell at the contract price, he will go out of business. What are Tom’s options?

Supervening Frustration of Purpose

Supervening frustration of purpose is when circumstances arise that fundamentally frustrate a party’s reason or purpose for entering a contract. The doctrine is similar to impracticability, but it does not relate to a party’s hardship; rather it focuses on her expectation and purpose in entering the agreement. For a frustrating circumstance to relieve or excuse an obligation under a contract, the party cannot have assumed the risk of the circumstance (in the contract) or be at fault for the occurrence or the nonoccurrence of the event or circumstance. Further, the occurrence or nonoccurrence must have been a basic assumption on which the contract was made.

For example, John signs up for piano playing lessons from Tara. John suffers a horrible accident that causes him to lose dexterity in his hands. This is a frustration of purpose that was unforeseeable and substantially frustrates the purpose of learning to play the piano. As such, John will be excused from performance of the contract. Suffering an economic loss is not a frustration of purpose.

Ask Yourself

· How do you feel about allowing an unforeseen event relieving a person’s duty for performing a contract? How fundamental must the assumption be to the purpose of the contract? To what extent must each party understand this to be the fundamental purpose of the agreement?

· Donald bids for and wins a government contract to construct a dam. The contract is subject to legislative approval. He begins preparing by entering into contracts with Lizzie for the purchase of cement. The cement supplier knows that the cement purchase is in preparation for the dam-building project. The legislator ultimately disapproves the dam project, which causes Donald to lose the contract. What is the possible result?

Waiver and Release

A waiver and a release serve to excuse one or both parties’ duty of performance.

When a party intentionally relinquishes a right to enforce the contract. A waiver is generally employed after a party fails to perform. For instance, per our contract, I am supposed to paint your house, but I fail to do so in the allotted time. You grant a waiver excusing my liability for failure to perform.

A release is when one party is relieved from her promise of performance. A release generally occurs before a contracting party has to perform. For example, we sign a contract where you agree to pay me to paint your house by the end of the month. Before my performance is due, I explain that I do not have time to paint your house. You sign a release that frees me of my duty to paint your house.

Waivers and releases are often used synonymously to refer to a single document that simultaneously relieves a party from her duty to perform and excuses a nonperformance or breach.

Ask Yourself

· What do you think is the justification for categorizing a release and waiver differently? Should the content of a release agreement be treated differently than the content of a waiver?

· Pam enters into a contract with Lia to perform consulting services for her business. Pam has a great deal of work and is too busy to perform the contract. She asks Lia to let her out of the contract. What is Pam asking of Lia?

Licenses and Attributions

Business Law: An Introduction

 by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC.

© 2019 University of Maryland University College

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