Essay on Legals aspects, insurance, real estates and contracts

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This essay consists of 3 questions, each to be answered thoroughly to at least 1000 words (more is preferred)

QUESTION 1:

You are the property acquisition manager for Caruana Industries.Your job is to find properties so that the corporation can build buildings or other structures and develop land.

You have found a parcel of land of approximately 50 acres in the City of Oceanside.

First of all, if you were going to advise the corporation about how they should acquire the land, what would you advise?In other words, would you recommend that they rent the land on a month-to-month basis or perhaps get a lease or would you recommend purchase?

You are concerned about which of the above is the best but assuming that you have come to the conclusion that you would like to purchase the land, how can you be sure that the land is really owned by what appears to be the prior owner, Park Industries?What would you do to verify ownership?

Subsequent to deciding to purchase, assume that you are going to go into escrow.Please explain the escrow process and the significance of it. Please detail all of the stages and the issues.

In looking at the land that you will subdivide, certain pieces of land, once subdivided, if approved by the City of Oceanside, will need access to major streets and highways.What do we call the right of way that a person may have in going over another piece of property?Please explain what that is and the significance of it. Explain how it is accomplished.

Finally, if there are problems with the purchase of the land, the parties may have remedies.When it comes to remedies for real estate deals, please explain what the remedies might be if somebody wants to get out of a deal. Please check your text books for the types of damages and the other remedies. Make sure that you consider rescission as a remedy.

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QUESTION 2:

Reliance Steel Products sent a purchase order for certain steel products to Kentucky Electric Steel referred to as KES.Reliance’s purchase order contained a clause stating that Reliance would not be bound by any terms other than those in its purchase order unless it agreed in writing to a change of the terms.KES responded with its standard order acknowledgment form and the form contained a limitation of liability clause that limited KES’s liability for defective goods to replacing the goods or allowing the buyer a credit for them.Reliance later filed a breach of contract suit against KES arguing that some of the goods received did not conform to the contract specifications.Reliance asked for a damage award based upon damage to its fabricating machinery and lost profits that they claimed resulted from KES’s breach.KES obviously argues that such damages are not allowable for several reasons.

Please discuss the various positions.First of all, please analyze whether or not there is a valid offer and acceptance.Second, please discuss the various contents of the offer, if any, and the contents of the acceptance, if any.Third, please look into the damages issue as is requested.Please discuss what would have been allowable and not allowable.

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QUESTION 3:

Matthew Green, age 16, signed a contract to buy a Camaro from Caruana Chevrolet.Matthew Green is the son of Mark Green, a local businessman, well known by Caruana Chevrolet.The Green family lived about six miles from the dealership.The Green family was friends with the Caruana family.Matthew Green lived about six miles from his school and about one mile from his job and used the Camaro to go back and forth to school and to work. Matthew misrepresented his age by using a false ID card which was an obvious fraud. The photo looked nothing like Matthew.

When Matthew did not have the car, he used a car pool to get to school and to work.Matthew’s father drove in the car pool as did several other parents.Several months later, the used car became inoperable due to a blown head gasket and Green gave notice of his rejection of the car and of the contact to Caruana Chevrolet. Caruana Chevrolet refused to refund the purchase price.

Caruana Chevrolet had purchased this vehicle at auction for $2,500.00.The sale price to Matthew was $7,000.00.

Please discuss the issues contained within this case.Before you get to any subsequent issues, please take a look at the primary issues.

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Requirements:

- analysis of the cases are to be done thoroughly by realizing what term applies to the case and to elaborate as detailed as possible.

- I will be providing notes as to be used as a reference in determining what needs to be used

- upon completion, I will need a work cited page at the end of the essay please (MLA)

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Contracts - - Consideration o Bargained for change in your legal standing o If there has been a detriment to both sides; there is legal consideration ▪ Even if a profit is made on an item there is still a “loss” because the item is still given up for money Form of the contract o A contract is not always required to be in writing ▪ Sometimes things are taken on credibility • Secondary problem in this is that certain contracts must be in writing o If you want full recovery • Remedy of law o Only foreseeable damages will be awarded o Compensatory damages ▪ In a contract action the only damages you’ll receive are compensatory economic damages • You’ll only get what’s in the contract (the benefit of the bargain) o What was expected at the time of the formation of the contract ▪ Unless there is a tort • Fraud o At the time of the fraud you knew the action to be false o Rolling back the odometer as an example • Misrepresentation o An honest mistake o No knowledge of the mistake • Fraud will get punitive damages, misrepresentations will get damages ▪ There are times when the judge will give an equitable decision with his/her power of equitable discretion o Full recovery items (statutes of fraud) ▪ In place because it is too easy to be dishonest • Contracts for the sale of land • Any interest in land that is greater than month to month • Contracts to answer for the debt of another o Don’t cosign on loans unless you LOVE them o All partners in business are cosigners in the business • ▪ ▪ ▪ Contracts for the sale of goods over $500.00 o Not services • Contracts not capable of being performed in one year o Lifetime contracts can be oral • Contracts in contemplation of a marriage o Pre-nuptial agreements • Divorce proceedings o Marriage settlement agreement (MSA) ▪ Binding agreement between the ex-spouses ▪ MSA do not relieve responsibility to a third-party creditor Rules of writings • Any documentations listing the essential terms signed by the person denying the existence of the agreement was. o Can be a cocktail napkin Parole Evidence Rule (PER) • Where the parties to a contract express their agreement in a writing, with the intent that this is final manifestation of the deal, any other writings made prior to or at the same time of those writings are inadmissible to change the terms of the deal. o Only loophole, if a prior document can explain an ambiguity it will be examined Communication in writing should be worded like it is going to be read in court Contracts (cont.) - Capacity o Minors ▪ Contracts with a minor are voidable at the option of the minor • Don’t deal with minors when it comes to business ▪ If dealing with a minor for the necessities of life • Food, shelter and clothing • The court will deem that you have a quasi-contract o A judge has discretion to look at the deal and accept it or modify it as he/she sees fit. • There are some potential remedies o Not automatic • Exception o If the kid uses a fake ID (Fraud) you can sue ▪ Can be awarded wear/tear and depreciation o Intoxicated/Drugged parties ▪ Contract can be voided because there still has not been a thoughtful agreement • Mentally incompetent due to the effects of the substance abuse o Insanity (sometimes retarded) ▪ Must be declared insane (decreed) ▪ Voidable at the discretion of the individual • Represented by an officer of the court • It will never make it that far after the decree is handed over Third Party (non-parties) - - Rights and obligations of non-parties Assignments (of benefit) o Example: Insurance payment goes directly to the MD vs. the insured ▪ It is assigned to the MD ▪ The rights do not change amongst the parties as long as there is a release (which will not happen) Delegations (Duties) o Can only delegate a very general duty ▪ Cannot delegate artistic work without permission of the other party Insurance - Liability o Workers Compensation o Medical bills paid ▪ The company controls the medical care o Loss of earnings ▪ By percentage o o o o - - Disability rating ▪ Lump sum after determining the percentage Only for unexpected risks of the job Required by law ▪ Labor code Covers people within the course and scope ▪ Doubt will almost always go to the employee ▪ Going to or from work is not course and scope • Unless you perform ANY assistance for the job o Group Health o Covered by ERISA (Employee Retirement Income Security Act) of 1974 ▪ If you sue under ERISA you will only get benefit of the bargain o Required for companies with 50 full time employees ▪ Per the ACA o HMO ▪ Health Maintenance Org ▪ Will pay 70%-80% • 60% if you go outside the HMO ▪ Tells the employee that he/she must go to a specific MD • Cheaper • Limited in coverage o PPO ▪ Preferred Provider Org ▪ Will pay 70%-80% ▪ More expensive • Can lower costs with a higher deductible • Can lower costs with a co-pay Four portions of an insurance company o Sales ▪ Captive Agents • Works for one company an agent can represent a principal • When an agent makes a statement on behalf of a principal it is binding to the principal • Known and principal and agency law ▪ General Agents • Represents multiple carriers • Aka broker o Need to be authorized to work on behalf of those companies ▪ Authorization = before the fact o Ratification (captive and general) ▪ When an agent does something without previous authority and the principal accepts payment • After the fact o o When you make a representation, it is making an offer ▪ Telling the company what you are insuring If you misrepresent your offer, the insurer will attempt to not pay ▪ Void ab intitio: Void from the beginning o - Underwriting ▪ Assess the risk o Operations ▪ Envelope stuffers ▪ Send correspondence o Claims ▪ Function is to not pay the claim • Not your friend ▪ They look at: • Coverage o If you were not truthful on what was insured • Liability o If I am at fault, they will not pay • Damages Must have an insurable interest o Insured has a stake in the outcome An insurance company must have communication with the named insured o Additional insured do not have to be named. Make sure that our subcontractors have POI before you bring them onto the project o Make sure that the sub’s insurance has me named under the policy Insurance Law - If the insurance doesn’t pay o The most you can sue for is the benefit of the bargain o When there is a breach of contract ▪ Sue for the breach and a tort of bad faith Contracts (day three) Undo Pressure - - Physical duress o Can’t muscle people into a contract Emotional duress o Threats cannot be used to influence a decision o Economic duress o If you get a cartel together and force a price down it is illegal Unclear Contracts - Fast maneuvering o Adhesion contract ▪ Unfair portions can be removed by the judge • Known as a “Blue pencil” Breach of Contract - - - - Entitled to damages o Ensure that you have mitigated your issues prior to going into a lawsuit ▪ Must make an effort to cover the losses o Will get compensatory ▪ Economic damages only • Unless the cause of action is an insurance bad faith o That would be a tort Violating a covenant o At the heart of the matter (benefit of the bargain) ▪ “you didn’t paint the house” Violating a condition o Supports a covenant ▪ “You didn’t get it done in three days.” Rescission o Unwinding the deal Specific performance o Forcing the judge to do something ▪ “Judge, I want him to pay me.” Real Estate - If it’s not in writing, it doesn’t exist Recording Statutes o County recorder ▪ Deed shows title to the property • Encumbrances (burdens) are listed on title o Limitations on the property - - - - - Title can be held in many ways o Start with a title search ▪ Done at the recorder’s office o Title insurance ▪ Says that if the title is not correct, the title company will buy out or make it right o Asset check ▪ To ensure that the loan doesn’t default • Make sure that the funds are available o Easements ▪ A right of use of a property • Can be owned by the government ▪ A right of way • Roadway to the street o Best way is “fee simple absolute” Covenants o If they run with the land, it must be recorded on title ▪ Enforceable by the law ▪ Some historical covenants are no longer enforceable ▪ If the covenant is not bound by the land, it is an agreement between people • Known as a condition Zoning o Public limitation on private use of land o Public regulation of land ▪ R1 • Residential Normal ▪ R2 • Residential high density ▪ C1 • Commercial Normal ▪ C2 • Commercial high density o Easier to change than covenants o Infrastructure ▪ Those services needed to support the community’s use of land Master plan o Growth is projected and tends to be smarter ▪ Without the plan there are variances • Variance means the land is being used contrary to the zoning o Conditional Use Permit (CUP) helps existing businesses stay in place even if the zoning changes over time Multiple Listing Service (MLS) o Let’s the realtors know that property is for sale Escrow o Collects the paperwork and cash between seller and buyer - PITI o o o o - - - - - Principal Interest Taxes Insurance ▪ Payed into an impound account Mello – Roos o Temporary fee (tax) for the amount of strain placed on the infrastructure. ▪ New construction ▪ Payed via impound to city, state, county HOA o Make sure that you know the limitations of the HOA and myself o Payments are ON TOP of Mello – Roos Condemnation proceeding o Government wants your land ▪ Gets around the Constitution o Emanant Domain Inverse condemnation o When a project causes damage to the property ▪ Having the govt pay for it Nuisance o When you do something on your property that has an unreasonable interference on another’s property o It’s a tort ▪ The tort can defended like any other tort Contract Law For Dummies® Visit www.dummies.com/cheatsheet/contractlaw to view this book's cheat sheet. Table of Contents Introduction About This Book Conventions Used in This Book What You’re Not to Read Foolish Assumptions How This Book Is Organized Part I: Introducing Contract Law and Contract Formation Part II: Determining Whether a Contract Is Void, Voidable, or Unenforceable Part III: Analyzing Contract Terms and Their Meaning Part IV: Performing the Contract or Breaching It Part V: Exploring Remedies for Breach of Contract Part VI: Bringing Third Parties into the Picture Part VII: The Part of Tens Icons Used in This Book Where to Go From Here Part I: Introducing Contract Law and Contract Formation Chapter 1: Getting the Lowdown on Contract Law Grasping the Concept of Contract Law Defining contract Comparing different schools of thought on contract rules Tracing contract law’s roots Meeting the Key Players: Common Law, the Restatement, and the UCC Exploring the common law: Tradition and precedent Capturing general rules in the Restatement Statutes: Supplanting common law with codes Brushing up on the Uniform Commercial Code (UCC) Applying state law in federal court Applying different sources of contract law Forming, Defending, and Interpreting Contracts: The Basics Understanding contract formation Checking out attack and defense maneuvers Finding the terms of the contract and building contract-interpretation skills Examining Contract Performance, Breach, and Remedies Recognizing breach of contract Formulating remedies and establishing losses Exploring the role of third parties in contract law Practicing in the Real World of Contracts Chapter 2: Let’s Make a Deal: Offer and Acceptance Contract Formation: Getting a Handle on the Essentials Forming a Contract: Promises, Offers, and Mutual Assent Making a commitment by making a promise Turning a promise into an offer by asking for something in return Giving acceptance by giving or agreeing to give what was requested in return Assenting in action or thought: Objective manifestation versus subjective intent Forming contracts without words: The implied-in-fact contract Determining Whether Language Constitutes an Offer Distinguishing a preliminary inquiry from an offer Ads, catalogs, and circulars: Distinguishing advertisements from offers Deciding How Long an Offer Remains Open Determining Whether the Offeror Can Back Out: Revoking the Offer Making an option contract Recognizing statutes that create an option Relying on the offer Deciding Whether the Offer Has Been Accepted Acceptance must match the offer: The mirror-image rule Acceptance is effective on dispatch: The mailbox rule Looking at various forms of acceptance Making Sense of the “Battle of the Forms” and UCC § 2-207 Deciding whether acceptance is conditional Dealing with additional or different terms Chapter 3: Sealing the Deal: The Doctrine of Consideration Checking an Agreement for Consideration Using a simple Q and A Making a diagram Making Distinctions about Consideration Deciding whether it’s a bargain or a gift promise Distinguishing between sufficient and adequate consideration Detecting an Absence of Consideration Spotting a phony: Nominal consideration Applying the pre-existing duty rule Finding past consideration Tracking Down Illusory Promises Dealing with satisfaction clauses Analyzing output and requirements contracts Spotting illusory promises in settlements Too Many Blanks: Distinguishing Contracts from Agreements to Agree Looking for Consideration Substitutes: Enforcing without Consideration Evaluating the Recital of Consideration in a Contract Term Chapter 4: Noting Exceptions: Promises Enforceable without a Contract Examining Exceptions: When Contracts Aren’t Necessary The Doctrine of Reliance: Looking for a Promise That Induced Action Determining whether reliance applies Limiting the remedy for breach of the promise Deciding Cases That Test the Limits of Reliance: Promissory Estoppel Deciding whether a charitable pledge is enforceable Deciding whether a sophisticated party can claim reliance Remembering that reliance doesn’t usually qualify as acceptance The Doctrine of Restitution: Creating an Obligation to Prevent Unjust Enrichment Battling unjust enrichment with the implied-in-law contract Determining when a court is likely to find unjust enrichment Sorting out restitution in a material breach Part II: Determining Whether a Contract Is Void, Voidable, or Unenforceable Chapter 5: Introducing Contract Defenses Leveraging the Power of Policies Freedom of contract Efficiency Fairness Predictability Making the Most of Statutes Protecting consumers with state and federal statutes Tapping the power of statutes to bring a contract claim Examining the Courts’ Role in Policing Contracts Checking into Affirmative Defenses Distinguishing valid, void, and voidable contracts Separating matters of law and matters of fact Chapter 6: Considering Whether an Agreement Is Unenforceable Due to Illegality or Unfairness Determining Enforceability When the Legislature Has Spoken Recognizing illegal agreements that are unenforceable Noting exceptions: Illegal but enforceable agreements Making a Public Policy Argument Examining enforceability in agreements that restrain trade Examining enforceability in agreements that interfere with family relationships Examining enforceability in agreements that encourage torts Testing an Agreement against the Doctrine of Unconscionability Applying the doctrine of unconscionability in the UCC Distinguishing procedural and substantive unconscionability Challenging Enforceability with the Doctrine of Reasonable Expectations Chapter 7: Evaluating the Parties’ Ability to Make the Contract Recognizing Who Can Legally Make a Contract Passing the mental capacity check Child’s play? Making contracts with minors Basing a Contract Defense on One Party’s Bad Actions Saying things that aren’t true: The fraud defense Making an offer they can’t refuse: The duress defense Taking unfair advantage: The undue influence defense Whoops! The Mistake Defense Evaluating a mutual mistake defense Using the mutual mistake defense to escape a release Finding relief when the mistake is unilateral Chapter 8: Assessing the Enforceability of Oral Agreements Asking Whether the Parties Intended to Orally Form a Contract Challenging Oral Agreements with the Statute of Frauds Determining whether a transaction is within the statute of frauds Distinguishing between voidable and unenforceable agreements Finding a Writing That Satisfies the Statute Does it describe the contract? Is it signed by the party against whom enforcement is sought? Finding Exceptions to the Statute Revisiting reliance Finding an exception in the main purpose rule Examining part performance and restitution Finding exceptions in UCC § 2-201 Finding a big exception in international contracts Part III: Analyzing Contract Terms and Their Meaning Chapter 9: Evaluating Unwritten Terms with the Parol Evidence Rule Introducing the Parol Evidence Rule Identifying Parol Evidence: The Stuff outside the Writing Asking Why the Evidence Is Being Offered To prove a modification To prove a defense to formation To prove an unfulfilled condition To prove the meaning of a term To add a term to the agreement Deciding Whether the Agreement Is Final and Complete Recognizing the difference between subjective and objective intent Figuring out whether the agreement is final Checking whether the agreement is complete Dealing with a merger clause that says the contract is final and complete Considering Evidence That Supplements or Contradicts the Agreement Contrasting the Common Law with the UCC Parol Evidence Rule Getting Terms in Writing to Avoid the Parol Evidence Rule Quagmire Chapter 10: Finding Unwritten Terms That Complete the Contract Finding the Terms of an Incomplete Contract Using contract rules to fill the gaps Understanding types of gap-filling rules Reading In the Duty of Good Faith Being honest: The subjective duty of good faith Being reasonable: The objective duty of good faith Using freedom of contract to refine the definition of good faith Working with and around the Default Rules Recognizing default rules when you see them Using freedom of contract to change the rules and shift the risk Protecting Buyers through Warranties Making express warranties Looking for an implied warranty of title or warranty against infringement Checking for an implied warranty of merchantability Seeking out an implied warranty of fitness for a particular purpose Shifting the Risk by Disclaiming or Limiting Warranties Making warranty disclaimers specific and conspicuous Limiting the remedy for breach Drafting a disclaimer of warranty Recognizing the statutory regulation of disclaimers Chapter 11: Interpreting Contracts Grasping the Basics of Ambiguity Doing the Interpretation Two-Step Understanding How Courts Decide What’s Ambiguous Applying the rules of interpretation Examining the baggage the parties bring to the contract Bringing in objective meaning from outside the contract Considering subjective evidence: Context and testimony Deciding What Something Means Dealing with Misunderstanding Part IV: Performing the Contract or Breaching It Chapter 12: Evaluating Whether Contract Modifications Are Enforceable Considering Modifications Made during Performance Determining whether consideration is required Written requirements: Seeing whether the modification is within the statute of frauds Dealing with “no oral modification” clauses Agreeing to future, unilateral modifications Making Changes after One Party Fully Performed: Accord and Satisfaction Determining whether the parties formed an accord: Offer and acceptance Finding consideration: Doing something additional or different Finding consideration in unliquidated debts and debt-dispute settlements Figuring out what happens when the accord has been satisfied . . . or not Distinguishing accord and satisfaction from substituted contract Applying the rule of UCC § 3-311 to settlements by check Doing away with consideration by statute or case law Chapter 13: Deciding Whether Unforeseen Events Excuse Performance Deciding Whether a Nonperforming Party Is in Breach Did the event occur after contract formation? Did performance become impracticable? Was nonoccurrence of the event a basic assumption? Did the party seeking to be discharged carry the risk? Determining Whether a Buyer’s Purpose Was Frustrated Figuring Out What Happens When a Party’s Performance Is Excused Using our old friends reliance and restitution Allocating the loss when a performance is partially excused Using Freedom of Contract to Allocate Risk Drafting a “force majeure” clause to identify events excusing nonperformance No excuses: Drafting a “hell or high water” clause Chapter 14: Checking for Conditional Language Defining Condition in Legal Terms Telling the difference between a promise and a condition Determining whether a condition is express or implied Tapping the Power of Express Conditions Determining Whether Courts Will Find an Implied Condition Sorting Out Conditions Precedent, Concurrent, and Subsequent Deciding Who Must Go First Checking out the default order of performance Making agreements about the order of performance Determining Whether a Party Has Substantially Performed Considering how the type of breach affects the outcome Running tests to find substantial performance Deciding whether a breach with respect to time is material Solving the problem by drafting express conditions Looking at Conditions in the UCC Rule § 2-601: Making a “perfect tender” Rule § 2-612: Dealing with installment contracts Excusing Conditions Finding promise: Interpreting your way out of a condition Using restitution when a condition bars recovery Finding a divisible contract Claiming waiver to excuse a condition Throwing yourself on the mercy of the court to excuse a condition Chapter 15: Breaching the Contract by Anticipatory Repudiation Recognizing the Two Types of Anticipatory Repudiation Determining Whether a Party Has Repudiated Insecurity and assurances: Using UCC § 2-609 to identify repudiation Applying the rule to the common law Figuring Out What Happens after Repudiation Deciding whether the breaching party can retract the repudiation Seeking remedies for the breach when the injured party accepts the repudiation Ignoring the repudiation: Not the best option Part V: Exploring Remedies for Breach of Contract Chapter 16: Examining How Courts Handle Breach of Contract Mastering the Rule of the Expectancy Seeing the expectancy in context Accounting for expenses Justifying breach: The economist’s notion of the efficient breach Recognizing How Contract Law Limits the Damages for Breach Concluding whether the breach caused the loss Determining whether the loss is established with certainty Limiting damages with the rule of foreseeability Asking whether the non-breaching party mitigated the loss Using Reliance and Restitution as Remedies Chapter 17: Exploring Remedies in Article 2 of the UCC Comparing Common-Law and UCC Remedies Recognizing the key difference Understanding just how similar they really are Giving the Buyer a Remedy When the Seller Is in Breach Seeking specific performance: Getting the promised goods Buying substitute goods and calculating cover damages Making the buyer whole by calculating market damages Adding consequential damages for losses caused by the breach Including incidental damages and subtracting savings Keeping the goods and claiming damages Providing the Seller a Remedy When the Buyer’s in Breach Seeking the contract price as damages Selling to someone else and calculating resale damages Deciding whether to complete the manufacture of the goods Making the seller whole by calculating market damages Solving the mystery of lost profits Chapter 18: Checking for Additional Remedies Deciding Whether Equitable Remedies Should Be Granted Awarding specific performance . . . or not Stopping a party with an injunction Undoing or Revising the Contract Unwinding the contract through rescission Rewriting the contract through reformation Letting the Parties Determine the Remedies for Breach Calculating liquidated damages Providing for limited remedies Awarding Transaction Costs on Top of Damages Getting attorney’s fees Recovering transaction costs Punitive damages? Fuhgeddaboudit! Finding the Law that Governs the Contract Selecting the governing law through a choice-of-law clause Selecting the place of trial through a choice-of-forum clause Resolving a Dispute through Alternative Dispute Resolution Resolving disputes through arbitration Trying mediation Part VI: Bringing Third Parties into the Picture Chapter 19: Deciding Whether a Third Party Can Enforce or Interfere with a Contract Determining Whether a Party Is a Third-Party Beneficiary Creating a creditor beneficiary by telling someone to pay your debt Creating a donor beneficiary by making a gift Creating an incidental beneficiary: Another name for loser Asking three key questions to identify third-party beneficiaries Changing a third-party beneficiary’s rights Interfering with Someone Else’s Contract: A Big No-No Finding the tort of tortious interference with contract Considering claims that the interference is improper Chapter 20: Acknowledging the Rights and Duties of Third Parties Breaking Down a Contract into Rights and Duties Determining Whether Rights May Be Assigned Applying the general rule: Freely assigning rights Spotting exceptions to the assignment of rights Determining Whether Duties May Be Delegated Applying the general rule: Freely delegating duties Back to the source: Spotting exceptions to the delegation of duties Using UCC § 2-609 to get assurances Prohibiting Assignment and Delegation Drafting an effective prohibition Recognizing key limitations on prohibition Substitutions: Making a New Contract through Novation Part VII: The Part of Tens Chapter 21: Ten Questions to Ask When Analyzing a Contracts Problem Was a Contract Formed? Is a Promise Enforceable without a Contract? Does a Party Have a Defense to the Contract That Was Formed? Where Do You Find the Terms of the Contract? Do the Parties’ Interpretations of the Contract’s Language Differ? Is a Party in Breach? Did a Condition Have to Occur Before a Performance Was Due? Did a Breach Occur Before Performance Was Due? What Are the Remedies for Breach? How Does the Contract Affect Third Parties? Chapter 22: Ten Notable People (And Philosophies) in Contract Law Lord Mansfield Christopher Columbus Langdell Samuel Williston Arthur Corbin Benjamin N. Cardozo Karl N. Llewellyn E. Allan Farnsworth Ian Macneil Richard Posner Stewart Macaulay Appendix: Glossary Cheat Sheet Contract Law For Dummies ® by Scott J. Burnham with Joe Kraynak Contract Law For Dummies® Published by John Wiley & Sons, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2012 by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. 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For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-5723993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Control Number: 2011941728 ISBN 978-1-118-09273-6 (pbk); ISBN 978-1-118-19555-0 (ebk); ISBN 978-1-118-19544-4 (ebk); ISBN 978-1-118-19547-5 (ebk) Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 About the Author Scott J. Burnham, a graduate of New York University School of Law, is the Curley Professor of Commercial Law at Gonzaga University School of Law in Spokane, Washington. For 30 years, he has taught Contracts at law schools throughout the U.S. and internationally. As a practicing lawyer and consultant on contract matters, he has a good sense of the practical application of contracts principles, and as a prolific writer on legal topics, he has the ability to convey those principles with clarity. Dedication To everyone who studies contract law — may you grow to love her as much as I do! Author’s Acknowledgments Thanks to acquisitions editors Michael Lewis and David Lutton, who chose me to author this book and ironed out all the preliminary details to make it possible, and to Larry Garvin, who recommended me for the gig. Elizabeth Rea, my project editor, deserves a loud cheer for serving as a gifted and patient collaborator and editor — shuffling chapters back and forth, shepherding the text and graphics through production, making sure any technical issues were properly resolved, and serving as the unofficial quality control manager. Copy editor Danielle Voirol earns the editor of the year award for ferreting out my typos, misspellings, grammatical errors, and other language foe paws (or is it faux pas?), in addition to assisting Elizabeth as reader advocate. I also tip my hat to the Composition crew for doing such an outstanding job of transforming my text and graphics into such an attractive book. My deepest thanks go to wordsmith Joe Kraynak, who was able to successfully blend my knowledge of Contracts with his knowledge of writing. Publisher’s Acknowledgments We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-5724002. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Vertical Websites Project Editor: Elizabeth Rea Acquisitions Editor: Michael Lewis Senior Copy Editor: Danielle Voirol Development Editor: Joe Kraynak Assistant Editor: David Lutton Editorial Program Coordinator: Joe Niesen Technical Editors: James P. Nehf, Jeremy Telman Editorial Manager: Michelle Hacker Editorial Assistant: Alexa Koschier Cover Photo: © iStockphoto.com/Pali Rao Cartoons: Rich Tennant (www.the5thwave.com) Composition Services Project Coordinator: Nikki Gee Layout and Graphics: Joyce Haughey, Christin Swinford, Laura Westhuis Proofreaders: Melissa Cossell, Bonnie Mikkelson Indexer: Valerie Haynes Perry Publishing and Editorial for Consumer Dummies Kathleen Nebenhaus, Vice President and Executive Publisher Kristin Ferguson-Wagstaffe, Product Development Director Ensley Eikenburg, Associate Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher Composition Services Debbie Stailey, Director of Composition Services Introduction In The Paper Chase, a TV series based on a 1973 movie about the adventures of first-year law students at Harvard, Professor Kingsfield, the Contracts professor, tells his students the following: The study of law is something new and unfamiliar to most of you, unlike any other schooling you have ever known before. You teach yourselves the law, but I train your minds. You come in here with a skull full of mush, and, if you survive, you leave thinking like a lawyer. Getting you to think like a lawyer is the goal of law school, but reaching that goal can seem more arduous than it has to be. When you take the course called Contracts, for example, you’ll probably find that you’re mostly reading cases, and you never see a contract. One reason for this disconnect is that the course in Contracts is traditionally designed to teach you “legal method” — skills such as reading cases, analysis, and synthesis — and not the substance of contract law, which is often sort of incidental. The only problem is that you have to know the rules and principles of contract law in order to have some grist for the analytical mill. Because your casebook may not present the material in an easily accessible and understandable format, Contract Law For Dummies is designed to plug that gap. It can help you wrap your brain around the most fundamental concepts and help you see the forest, not just the trees. Consider this book your stepstool up to the higher-complexity coverage you’ll encounter in your classes. About This Book Contract law isn’t exactly a science or an art; it’s a little of each. As a science, contract law is governed by certain principles and rules. As an art, contract law often requires creativity as courts apply the rules and interpret the language of contracts. Because of this, Contract Law For Dummies contains a little of both. It presents the rules that govern contracts and provides numerous examples to help you apply those rules to different fact situations. This presentation enables you, as a budding contract lawyer, to do the following: More accurately predict a court’s ruling on any given contract dispute. Know when you have to follow a rule and when you can change it. Draft contracts that more effectively protect your clients’ interests. Pass your law school and bar exams. This book is organized so you can read it from cover to cover or skip around to only those parts, chapters, or sections that capture your current fancy or serve your present needs. I’ve been teaching contract law for 30 years and practiced it for 7 years before that, and I’ve developed a unique approach that has been very successful for my students. This book follows that approach, presenting what you need to know in the order that tends to be most effective. As you’ll soon discover, however, developing the skills required for understanding and practicing contract law — and doing it well — isn’t always a linear path. While discovering new concepts and ways to interpret the language of contracts, you often must skip back to review what you thought you already knew and understood. This book is optimized for skipping around to find exactly what you need whenever you happen to need it. Conventions Used in This Book I use several conventions in this book to call your attention to certain items. For example: Italic highlights new, somewhat technical terms (such as objective manifestation and parol evidence), which I follow up with straight- forward, easy-to-understand definitions. Boldface text indicates keywords and phrases in bulleted and numbered lists. Monofont highlights web addresses. A widget is a hypothetical good bought and sold in Contracts classes. Contracts with a capital C refers to the study of the subject, and contracts with a small c refers to agreements. I generally cite the North Carolina version of the Uniform Commercial Code (UCC), because the Uniform version is under copyright, whereas an enacted statute is in the public domain. When I refer to “the Code,” I mean the UCC. And when you see “the Restatement,” I’m referring to the Second Restatement of Contracts. What You’re Not to Read You can safely skip anything you see in a gray shaded box. We stuck this material in a box (called a sidebar) for the same reason that most people stick stuff in boxes: to get it out of the way so you don’t trip over it. However, you may find the brief asides in the sidebars engaging, entertaining, and perhaps even mildly informative. Foolish Assumptions In writing this book, I made a few foolish assumptions, mostly about your motivation and how you’re going to use this book: You’re planning to master U.S. contract law. This book mentions English law, international law, and the contract law of other countries only in passing. You’re eager to tackle contract law. You’re probably going to supplement this text with more formal study, including coursework, additional reading, assignments, and briefing the cases. You understand that my approach to teaching contract law is only one of many effective ways. In class, you won’t say, “But Burnham says. . . .” I make no assumptions concerning how much you already know about contract law — you needn’t know anything to get started. How This Book Is Organized To assist you in navigating this book’s contents, I divvied up the chapters that comprise this book into seven distinct parts. This section provides a quick overview of what I cover in each part. Part I: Introducing Contract Law and Contract Formation In a contract law case, one of the first things the court has to determine is whether the parties even have a contract. The chapters in this part introduce and explain the essential elements of contract formation (offer, acceptance, and consideration) along with notable exceptions — promises that are enforceable without a contract. As a bonus, Chapter 1 provides an overview of contract law and introduces you to the two sources of governing rules: the Restatement of Contracts and the Uniform Commercial Code (UCC). Part II: Determining Whether a Contract Is Void, Voidable, or Unenforceable To challenge the formation of a contract in the court of law, a party may present a contract defense — proof claiming that certain additional facts undermine the contract’s formation and destroy its enforceability. This part explains different contract defenses, including whether a party did anything illegal or unfair and whether the parties had the ability to make a contract, as well as the factors that determine whether an oral agreement is enforceable. Part III: Analyzing Contract Terms and Their Meaning Contract disputes arise when the parties don’t concur on which terms they agreed to or what the terms mean. One party may claim that the parties agreed to a term that doesn’t appear in the written contract. A contract may have gaps that fail to address unforeseen circumstances. Or the language in a contract may be ambiguous. The chapters in this part discuss several strategies that the courts use to plug the gaps in a contract and interpret what the language really means . . . or at least what it would mean to reasonable people standing in the parties’ shoes. Part IV: Performing the Contract or Breaching It Whether the parties formed a contract is only half the story. The other half deals with the performance of that contract. The chapters in this part tackle nonperformance issues. Here you find out whether changes made to a contract after formation are enforceable, whether the occurrence of unforeseen events or the nonoccurrence of certain conditions excuses performance, and how one party may breach a contract even before performance is due. Part V: Exploring Remedies for Breach of Contract If a party breaches the contract, the courts must decide how to remedy the breach in a way that’s fair for both parties. This isn’t tort law, where the courts try to punish the wrongdoer. In contract law, the goal is to give the non-breaching party what she expected from the performance of the contract but no more than that. The non-breaching party shouldn’t get a windfall at the expense of the breaching party. The chapters in this part introduce and explain the various methods available to the courts to remedy a breach. Part VI: Bringing Third Parties into the Picture A contract often affects more than the parties who made it. A contract is like a piece of property that can be carved up and bought and sold. When parts are transferred, third parties can get involved in performance and enforcement of the contract. The chapters in this part help you recognize the rights and duties of those third parties and decide under which circumstances third parties are allowed to enforce contracts and may have duties to perform under a contract. Part VII: The Part of Tens Every For Dummies book includes a Part of Tens — chapters containing ten bite-sized, easily digestible tips, tricks, or insights. Here I offer ten key questions to ask when analyzing a contract problem and ten famous people and philosophies in contract law. Icons Used in This Book Throughout this book, icons appear in the margins to call your attention to different types of information. Here are the icons and a brief description of each. Everything in this book is important (except for the stuff in the shaded boxes), but some information is even more important. When you see this icon, read the text next to it not once but two or three times to tattoo it on your gray matter. Tips provide insider insight from behind the scenes. When you’re looking for a better, faster way to do something, check out these tips. This icon appears when you need to be extra vigilant or seek additional guidance before moving forward. Don’t skip this important information — I’m warning you! Certain cases have strongly influenced contract law and how the courts interpret the law and language of contracts. To spot these key cases, look for the Key Case icon. Contract law makes a lot more sense when you see how it applies to fact situations, so I use hypothetical situations liberally throughout the book to illustrate and simplify the explanation of certain concepts. The Example icon flags these hypotheticals so you can easily spot them. Where to Go From Here Contract Law For Dummies is designed to take you from ground zero to a fundamental understanding of contract law. If you’re interested in the big-picture view of contract law in theory and practice, check out Chapter 1. Otherwise, read the book from cover to cover, skip around by using the table of contents as your guide, or head to the index if you need guidance on a more specific topic. Part I Introducing Contract Law and Contract Formation In this part . . . Chapter 1 begins by exploring the fundamentals of contract law — what it is, how it came into being, and which sources provide the rules and principles that govern contracts. Here, you discover the basics of contract formation, contract defenses, and contract interpretation, and you find out what generally happens when parties don’t fulfill their contractual obligations. The remaining chapters in this part focus on contract formation. You encounter the three essential elements of contract formation — offer, acceptance, and consideration — and find out when promises are enforceable even if parties haven’t met the requirements to form a contract. Chapter 1 Getting the Lowdown on Contract Law In This Chapter Wrapping your brain around the concept of contract law Grasping the fundamental rules and principles that govern contracts Understanding contract formation, defenses, and interpretation Getting up to speed on performance, breach, and remedies Contract law may feel overwhelming, especially when you’re in a class that reads and analyzes case after case after case. Adding to that load are the many sources of contract law, including the common law, the Restatement of Contracts (Restatement), the Uniform Commercial Code (UCC), federal and state statutes, and rules that govern when parties are allowed or prohibited from coming up with their own contract terms. Although all the details swirling around the topic of contract law are important, placing those details in context makes them more manageable and enables you to see the big picture. That’s what this chapter is all about. Here, you get the eye-in-the-sky view of contract law and a framework on which to hang the rich tapestry of policies, principles, and rules collectively referred to as contract law. Grasping the Concept of Contract Law Contrary to popular belief, contract law isn’t just a bunch of rules and regulations that govern agreements between people. It’s not developed and imposed from above by some rule-making authority. It developed naturally over the course of thousands of years through the interactions and transactions between people like you and me — the parties who form contracts. In this section, I explain what a contract is, present a few different perspectives on the principles that should drive the formation of contract rules, and briefly explore how contract law developed into what it is today. From coconuts to contracts: Grasping the purpose of contracts To begin to grasp what contract law is all about, imagine a group of people on a desert island trying to figure out ways to govern their relationships. They want to be a community, but they also want each person to have autonomy. Collectively, they decide that each person may own property and make agreements about what to do with that property. They discover that the free exchange of property increases the wealth and well-being of both parties; for example, if one person has a surplus of coconuts and a shortage of fish and another person has a surplus of fish but no coconuts, the two may exchange goods for their mutual benefit. If the parties take the next step and decide that they can promise in advance to perform such exchanges, their agreement indicates the beginnings of contract law. As certain issues arise, the islanders form rules that address those issues, such as how quickly the parties must perform, the acceptable quality of the coconuts and fish, and the consequences for nonperformance. Their system of contract law grows organically from the ground up, not from the top down. Defining contract A contract is simply a promise or set of promises enforceable by law. Which agreements are enforceable by law varies from culture to culture — what’s acceptable in one culture may not be acceptable in another. If I agree to sell you my house, for example, the houseselling culture says that I can’t make any untruthful statements about the house. But if I agree to play a hand in the World Series of Poker, then the poker culture says that I can’t make any truthful statements about my hand. The United States doesn’t have a monolithic contract law with uniform rules. Contract law is nuanced and fact intensive. A “rule” may differ, for example, depending on whether the parties are two giant corporations having their lawyers negotiate an agreement or family members making an agreement over the dinner table. Comparing different schools of thought on contract rules The overriding principles that guide the formation of contract rules vary according to different schools of thought. Depending on your perspective, you may think that the rules should be based on what is Customary and reasonable: In most systems of contract law, the rule that develops is usually based on what’s customary and reasonable. With nearly every issue that arises in contract law, just think about what’s reasonable, and you’ll usually discover the “rule.” Economically efficient: My economist friends think that rules should be based on what’s most economically efficient. According to the economists, people enter contracts for their mutual financial benefit; for example, you agree to sell and I agree to buy your car for $7,000, because right now, the $7,000 is worth more to you than the car, and the car is worth more to me than the $7,000 I have in my piggy bank. Throughout this book, I sometimes share the economist’s perspective, but if you haven’t studied Econ (or read Economics For Dummies [Wiley]), stick with asking what’s reasonable and you’ll come up with the rule most of the time. Fair for the little guy: According to my friends in the Critical Studies movement, the people in power, who happened to be rich white men, made the rules. The rich guys came up with rules that are favorable to them, so contract law needs to watch out for the little guy, who gets the worst of it in contracts. Regardless of view, everyone would probably agree that one of the most difficult problems facing contract law today is the ease with which consumers can bind themselves to contracts by clicking I AGREE to the “terms and conditions” that nobody reads. This is quite different from the contract created by a carefully negotiated exchange of drafts. Or is it? Throughout your career in contract law, you’ll struggle to determine whether the same rules apply to both situations. Tracing contract law’s roots Most contract law in the United States comes from England, where it was largely based on the tradition commonly referred to as the common law, meaning the law made by judges. Many of the rules of commercial law that govern buying, selling, and financing come from medieval times. Anytime parties traded, they had to have an understanding of the deal they were making. They made their own rules, called the law merchant, to govern their situation. As the law became more specialized, various areas of contract law were spun off and now stand on their own. Insurance law, banking law, and government procurement law are all areas of contract law that you don’t study in a standard Contracts course. One authority has called contract law “the law of leftovers” — general principles that remain irrespective of the substance of the transaction. Meeting the Key Players: Common Law, the Restatement, and the UCC Although you’ll find no definitive collection of the rules and regulations that govern contracts, you can find guidance from three primary resources: the common law, the Restatement of Contracts, and the Uniform Commercial Code (UCC, or the Code). I refer to these resources throughout the book, so you need to have a general understanding of how each resource contributes to contract law. Exploring the common law: Tradition and precedent In the Anglo-American (meaning English and American) tradition, contract law was common law — judges decided each dispute on the basis of tradition and recorded precedent. Imagine yourself the lord of the manor in Merrie Olde England, and the parties to a dispute look to you for wisdom. You’d likely ask, “What have we done in the past? Does it make sense today?” — the same questions today’s judges ask! In a common-law system, if you want to find out what the outcome is likely to be under a particular fact pattern, you have to read all the applicable cases (the reported court decisions) and synthesize them. That’s what you do in your legal research and writing class and you sometimes do in your Contracts class when you have a string of cases to read. You don’t read them in isolation; you try to see the connections and be prepared to say why one case came out one way and one came out another way. Because of the common-law rule of stare decisis (“let the decision stand”), courts generally follow precedent. Therefore, you can fairly accurately predict what a court will do in the future based on what courts have done in the past. Because that predictive power is important to businesses entering transactions, contract law is slow to change. Capturing general rules in the Restatement Although the common-law approach is effective, sometimes you just want to know what the general rule is, devoid of any particular fact situation. Having to read all the cases on point to find a rule would be a pain. Fortunately, someone has always been willing to read all those cases and try to synthesize them into black-letter rules — attempts to capture the essence of each rule. In the 18th century, that someone was Sir William Blackstone, who wrote Commentaries on the Laws of England (1765–1769). In those days, lawyers, including many of our Founding Fathers, relied on Blackstone for this purpose. Now contract law has the Restatement. The Restatements of Law are an effort by the American Law Institute (a group of law professors, lawyers, judges, and other interested parties) to reduce the law to workable sets of black-letter rules. The First Restatement of Contracts came out in 1932. The principal reporter was Samuel Williston, who wrote one of the great multivolume treatises on contract law. The rules in this Restatement are somewhat rigid and don’t always reflect modern legal thinking, which often takes into consideration a number of mushy factors instead of drawing bright lines. A Second Restatement of Contracts was promulgated in 1981, with Allan Farnsworth as reporter. When I refer to “the Restatement,” I mean the Second Restatement. Although the Restatement is a great resource, recognize its limitations: It’s not enacted law, so it has only persuasive authority. If you’re citing law to a judge, the judge wants to know what the higher courts in that jurisdiction have held, not what the Restatement says. It represents a limited number of views. People hold conflicting views of what should be the rule, with some jurisdictions following one line of reasoning and others following another. The Restatement generally chooses the majority view in this situation, so you may get the misimpression from its statement of a rule that the law is more settled than it is. And on a few occasions, the Restatement states the minority view because the drafters thought it represented the better view. Many publications of the Restatement for students contain only the rules. The complete edition includes commentaries and illustrations to help you more fully understand each rule. Statutes: Supplanting common law with codes Although contract law is traditionally common law, statutes enacted by legislatures are increasingly taking over the role of common law. The courts have to follow the laws enacted by the legislature, so if the law has a statute on point, that should be the starting point for a court. As you’re probably aware, many European countries have civil law systems based largely on systematic arrangements of statutes called codes. Such systems have an authoritative source to go to in order to find the governing contract law. Louisiana, because of its French origins, has a civil code of Contracts, and so do many other states. In the mid-19th century, a “codification” movement in England and the U.S. sought to codify the law in order to make it more accessible, and the codifiers won out in a number of states, including California, which has codified the law of Contracts in its Civil Code. But these codes often just state common-law rules and principles, leaving the courts plenty of room to interpret the statute and apply it to a particular situation. Contract law is mostly state law rather than federal law. Although no federal common law of contracts exists, a number of federal statutes govern contracts. Most of these are in the consumer and credit areas, so when you have a transaction in these areas, check for any relevant federal statutes. Brushing up on the Uniform Commercial Code (UCC) If each state had the same statutes governing contracts, then the law would be easier to find and more predictable, which is especially important in commercial law that applies to many interstate transactions. Congress could probably enact an American Commercial Code based on its authority to regulate interstate commerce, but Congress has left this project to the states. The states have turned to the assistance of the Uniform Law Commission (ULC) — a private group with representatives from every state that aspires to write model statutes that get the law right and that are enactable. When the ULC agrees on a model statute, the process is only just beginning, because the model statute isn’t yet law. State legislatures must enact the statutes for them to become law. The ULC, with the assistance of the American Law Institute (the folks responsible for the Restatements) has had great success getting states to enact the Uniform Commercial Code (UCC), which contains a number of Articles addressing various aspects of commercial law. Karl Llewellyn first drafted this model statute in the 1940s, and states began to enact it in the 1960s. Article 2, which deals with the sale of goods, is the Article most relevant to contract law. Varying the model statutes in state laws The ULC is frequently unable to achieve its goal of uniformity, because states can and often do alter the Uniform version. So although every state has enacted the UCC (Louisiana has not enacted Article 2), they’ve all enacted slightly different versions. In this book, I generally cite the North Carolina version, not out of some love for the Firstin-Flight state but because the Uniform version is under copyright, whereas an enacted statute is in the public domain. In your law studies, you’ll probably be working with the Restatement and the Uniform version of the UCC as promulgated by the ULC. But remember, when you have a research question in a certain jurisdiction, you need to look up the law in that state to make sure that it’s the same. Note: Attempts to revise UCC Article 2 have come to an end, but Article 1 underwent a revision process in 2001. Most states have enacted Revised Article 1, which is also used on the Multistate Bar Exam, so that’s the version of Article 1 that I refer to. Again, when doing research in a jurisdiction, you must find out which is the applicable law in your jurisdiction. Looking at some important UCC principles Although UCC Article 2 gets the most press in this book, you also encounter references to UCC Article 1, which deals with basic principles and definitions that apply throughout the Code, including Article 2. Some of the basic principles found in Article 1 are so important that I cite them repeatedly. I discuss two of the most significant provisions next. Freedom of contract: Letting parties agree to a different rule One important principle of UCC Article 1 is what I call the freedom of contract provision. Section 1-302(a), as enacted in North Carolina at 25-1-302(a), provides the following: § 25-1-302. Variation by agreement. (a) Except as otherwise provided in subsection (b) of this section or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement. This important rule offers guidance on how to think of “the law.” Contract law is not a bunch of regulations that parties to a contract must follow. Often, contract law facilitates a transaction by providing a rule that kicks in if the parties neglect to provide their own rule. These rules are often called default rules because, like the default settings on your computer, they apply unless you change them. But very often, as UCC § 1-302(a) states, contract law gives the parties the freedom of contract to come up with their own rule. Some of the rules are regulatory, and unfortunately the Code isn’t always helpful in identifying whether a particular rule is regulatory (can’t be changed) or facilitatory (can be changed by the parties’ mutual agreement). Note, for example, that § 1-302(b) states some obligations that the parties can’t get out of by agreement. But that same provision goes on to say that you can “determine standards by which the performance of those obligations is to be measured.” You can’t, for example, agree not to be reasonable, but you can agree, “It is to be considered reasonable if we do A, B, and C.” Figuring out the interplay between what is permissible in some circumstances and not permissible in others is one of the greatest challenges in studying contract law. As you study Contracts, try to identify which are the regulatory rules that have to be followed and which are the facilitatory rules that the parties are free to change. Take a nuanced view. If the court doesn’t let the parties change the rule, ask why — was it because the parties were in a particular state? Entered into a particular kind of transaction? Had an imbalance of power? Supplementing the UCC with common law Another important provision in Article 1 is § 1-103(b), which points out that the Code is not the exclusive law applicable to a transaction. As enacted in North Carolina at § 25-1103(b), it provides the following: (b) Unless displaced by the particular provisions of this Chapter [the Uniform Commercial Code], the principles of law and equity [. . .] supplement its provisions. This rule makes clear that the Code doesn’t address every topic, and where it’s incomplete, courts will fill in gaps in the Code with rules derived from the common law. For example, the Code says very little about the defenses to contract formation that I explain in Chapters 5 through 7 of this book. Section 1-103(b) says that in a case involving the sale of goods, those defenses apply, but you have to look to the common law to see what they are. Applying state law in federal court Many contracts cases are heard in federal court. Most of those cases got there on the jurisdictional basis of diversity — under federal law, parties who are citizens of different states are allowed to use the federal courts if the amount of money at issue is over a certain dollar amount set by Congress. In such cases, the federal court uses the principles of Choice of Law (as I explain in Chapter 18) to decide which state’s law governs the transaction. The federal court is in effect sitting as the state’s highest court and asking, “What would the judges on that court do in this situation?” Whenever you see that a contracts case is in federal court, ask how that court got jurisdiction. If the answer is diversity, then identify the state whose law the court is applying. If the court got jurisdiction in some other way — for example, because it’s a matter of admiralty law (law on the high seas) or because the United States is a party — then the court follows general principles of contract law rather than the law of any particular state. Be careful when you research contract law questions, particularly online. Your search results for the decisions of a particular state often include federal court decisions from the circuit in which the state is located. But you have to read the federal court decision carefully to find out which state’s law it’s applying. If it’s not applying the law of your state, the federal court isn’t a very good authority. And even if the court applies your state’s laws, remember that the federal court decision is only persuasive authority in your state. Inferring a state rule that makes little sense When federal courts take a contract case on the basis of diversity, the federal courts defer to state law, regardless of whether they agree with it. A good example of how this plays out in the real world is in the case of Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir. 1994). In this case, Judge Richard Posner of the 7th circuit Federal Court of Appeals was given the task of ruling on a case where Illinois law applied. The rule in issue had three possible interpretations, but the Illinois courts had not yet expressed their opinion on the matter. Although Judge Posner preferred the view adopted only in California, his job was to try to figure out how the courts in Illinois would decide the case. Judge Posner concluded that Illinois would probably not agree with his preferred view and said in effect, We are hearing this case because of diversity, and Illinois law applies. Illinois would likely follow a rule that makes less sense, but I am going to have to hold my nose and go along with the state rule because that is what a federal judge has to do in a diversity case. You might think it would make more sense for the federal court judges to ask the state court judges what they would do, and many states have a procedure for doing that. Sometimes when the state has insufficient precedent, the state court takes a “certified question” from the federal court in order to assist the federal court in resolving a dispute. Applying different sources of contract law When you look at a contract case, you often need to consider several different sources of contract laws, including common law, the Restatement, the UCC, and federal and state statutes. Suppose a client in Montana purchased a wheelchair for personal use and the seller refuses to fix it, even though it came with a warranty. Is she entitled to relief? At first glance, the case seems pretty simple, but it gets complicated in a hurry when you start to consider all sources of law that may come into play, which include the following: Federal consumer protection law, because the case involves a consumer The federal Magnuson-Moss Warranty Act, because it involves a warranty Montana UCC Article 2, because it involves the sale of goods The Montana Wheelchair Warranty Act, a statute that specifically addresses this transaction State consumer protection statutes and other relevant statutes General principles of contract law in Montana, found both in statutes and in cases A word about international law and the CISG Uniformity is helpful in governing both interstate and international transactions. More than 70 countries, including the United States, have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG). By default, the CISG applies to transactions for the sale of goods between businesses located in countries that have adopted it. You can find the text of the CISG at www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html. Many U.S. lawyers contract around application of the CISG by putting in their international contracts a choice of law provision (see Chapter 18) specifying that the UCC of a particular state governs the agreement. Other lawyers, particularly in contracts that contain an arbitration clause (see Chapter 18), specify that the UNIDROIT Principles of International Commercial Contracts will apply. For the text of the UNIDROIT Principles, promulgated by the International Chamber of Commerce, visit www.unidroit.org/english/principles/contracts/main.htm. The parties’ contract, because it’s part of their own private contract law (You’d have to examine the contract terms carefully; the parties’ agreement to a term doesn’t necessarily make it enforceable. To the extent the federal and state law is regulatory, the contract would have to follow that law, but to the extent it’s facilitatory, the parties would be free to provide their own rules.) If you like solving puzzles like this, welcome to the world of contracts! Forming, Defending, and Interpreting Contracts: The Basics Knowing the rules that govern contracts is only half the battle. You have to be able to apply those rules to different situations. Because contract law is so fact dependent, it’s always coming up with exceptions to the rules to deal with particular circumstances. No book covers all the possible variables and exceptions, but knowing the rules and the principles behind them gives you a firm foundation to build on. This section provides a framework for understanding Contracts. Look at the big picture. Doing so may be difficult because no one agrees on a single best way to organize the study of Contracts. The topics are like a deck of cards that you can shuffle up and deal in various ways. Whether you start with remedies or with consideration, what’s important is seeing how the pieces all fit together. Understanding contract formation Every contract starts at the point of formation. As I explain in Chapters 2 and 3, a contract is a bargained-for exchange that requires the following three ingredients: Offer: Party A’s promise to Party B in exchange for something Acceptance: Party B’s assent to Party A’s offer Consideration: What each party offers in exchange for the other party’s promise If the parties didn’t form a contract (because one of the essential ingredients was missing), that may not be the end of the story. Based on the theories of reliance and restitution (see Chapter 4), even in the absence of a contract, parties may be required by law to compensate another party because they made a promise or received a benefit: Reliance: If one person relies on another person’s promise, the promise may be enforceable even in the absence of a bargain. For example, I promise to give you my car when you graduate, and you pass up another free-car offer as a result. I may be required to compensate you for your loss. Contract law uses reliance to restore the injured party to the position she was in before she relied on the promise. Restitution: If Party A confers a benefit on Party B without forcing it on her and without intending it as a gift, then even though Party B never offered consideration in exchange for that benefit, Party A may have a right to receive restitution. Contract law uses restitution to make the benefitted party give up the benefit, restoring her to the position she was in before the benefit was conferred. Checking out attack and defense maneuvers When a deal fulfills the requirements of offer, acceptance, and consideration, the agreement is presumptively an enforceable contract, but either party may challenge the contract via a contract defense, otherwise known as a defense to formation. A party may base its contract defense on different grounds, such as the characteristics of one of the parties (under the age of 18 or having impaired judgment), something one party did to the other (fraud, duress, or undue influence), or something wrong with the contract itself (mutual mistake, illegality, unconscionability, or an oral contract when the law requires the contract to be evidenced by a writing). Chapter 5 introduces contract defenses, and Chapters 6 through 8 discuss the specifics. Finding the terms of the contract and building contractinterpretation skills A contract rarely contains a comprehensive list of terms the parties agreed to, nor does it provide for everything that might happen in the future. If the contract is indefinite or incomplete, contract law provides ways to clarify the terms and fill the gaps. If the agreement is part written and part oral, contract law uses the parol evidence rule to determine which unwritten terms to include. Some terms not included in the contract may need to be added due to course of performance (a history of how the parties acted under the present agreement), course of dealing (how the parties performed under other, similar contracts), or trade usage (how other parties in the industry perform). Finally, even after finding all the terms, the parties may have a disagreement regarding interpretation of unclear language in the contract. Chapters 9 through 11 address these issues. Examining Contract Performance, Breach, and Remedies After parties form a contract, the parties must perform (do what they promised to do). If a party doesn’t perform and she’s in breach, then contract law must determine a just remedy for the breach — usually an amount of money sufficient to compensate the nonbreaching party for what he lost as a result of the breach. This section explores breach, remedies for breach, and the role of third parties. Recognizing breach of contract Breach of contract is a deceptively easy concept to grasp — it means that the party didn’t keep his promise. Sometimes, however, a party who didn’t keep his promise may actually not be in breach, as in the following situations: The parties didn’t actually have a contract. One of the best and most common responses to an allegation of breach of contract is to launch a contract defense to try to prove that contract formation never happened. A party accused of breach may say, “Ha-ha! I can’t be in breach because we never had a contract!” The parties modified the contract, omitting the promise. See Chapter 12 for details on making changes to a contract. Performance was excused. Performance may be excused because of an unanticipated event that prevented it or because performance was conditional and the condition never occurred. The most common condition is the other party’s performance: The claim is that if you didn’t perform, then I don’t have to perform. See Chapters 13 and 14 for details on circumstances that excuse performance. The other party repudiated prior to the performance deadline. One of the other parties may have made an anticipatory repudiation — telling the other party in advance of the time for performance that he doesn’t plan to perform the contract and thus letting the non-repudiating party off the hook. Chapter 15 covers anticipatory repudiation. Formulating remedies and establishing losses If parties have a contract and one party breaches, then the injured, non-breaching party is entitled to a remedy. The goal here is to give the injured party the expectancy — the position the party would’ve been in had the contract been performed. In addition to the expectancy, reliance and restitution come back as two additional remedies for breach. Chapters 16 to 18 cover the various remedies in greater detail. In contract law, the principal remedy, the expectancy, puts the non-breaching party where she would’ve been had the contract been performed, not back where she was before the contract was formed. Exploring the role of third parties in contract law Third parties are people who aren’t parties to the contract but who are affected by it in some way. They may be third-party beneficiaries of the contract (they stand to receive something), or they may have rights assigned or duties delegated to them by parties to the contract. Contracts classes rarely cover the role of third parties in contract law, but this is an important topic in the real world. Chapters 19 and 20 explain what you need to know. Practicing in the Real World of Contracts Getting lost in the study of Contracts or any legal subject is easy. The rules keep piling up, you can’t keep them all straight, and pretty soon you’re drowning under them. Take a deep breath and try to see the big picture as I present it in this chapter. Most contract issues are solved through negotiation, not litigation, so contract lawyers, especially the most skillful of them, rarely see the inside of a courtroom. As you’re studying case after case — the way Contracts is typically taught — fight the urge to become overly litigation-oriented and bogged down in minutiae. Use your skills to see how you can use contract law in planning and drafting agreements. Contracts then becomes a matter of preventive law: Having read how people screwed up in past cases, you’re going to get it right so you and your clients don’t end up in court. When you think of Contracts as planning and drafting, you appreciate more the principle of freedom of contract. If you know the rules, then you’re better able to draft around them. Chapter 2 Let’s Make a Deal: Offer and Acceptance In This Chapter Recognizing the three requirements of contract formation Making a contract through offer and acceptance Gauging the time an offer stays open and whether and when the offeror can back out Knowing how to proceed when the parties exchange different forms A contract is a promise or set of promises enforceable by law. The waters get a little murky, however, when you begin to explore how the law determines whether parties have formed a contract. Questions arise, such as What constitutes an offer? Did the offeree signal acceptance? Was the offer still open when the acceptance occurred? Questions also arise regarding the manner and method of acceptance. Was the agreement formed by promise (a commitment to do something) or performance (actually doing something)? Does clicking the Agree button on a website or entering an electronic signature count as acceptance? What if the party on the receiving end of a form offer signals acceptance with a form of her own, complete with additional or different terms? This chapter answers these questions and more. Contract Formation: Getting a Handle on the Essentials In the Anglo-American legal system, a contract is binding if it fulfills the following three contract formation requirements: Offer: One party (the offeror) promises the other party (the offeree) something in return for something else. To legally qualify as an offer, it must specify what the offeror wants in return. What’s binding? It’s a cultural thing Each culture may draw the line between nonbinding talk and binding commitments in a different place. In theory, a society could treat all promises as legally enforceable. Five-year-olds seem to live in such a culture — they scream, “But, Mommy, you promised,” as though that alone were sufficient to require enforcement. Other societies may make entering into an enforceable agreement very difficult. A few hundred years ago, English society required that you put a seal on a document to make it binding. Fortunately for the practice of international law, most societies accept written agreements signed by both parties as a sufficient indication of intent to make a binding commitment, but exceptions do exist. The counsel for a multinational company recently told me about a deal he made in which the other country’s law required that both parties sign every page and have the signing witnessed by a team of notaries. Currently in the U.S. and elsewhere, electronic contracting challenges the tradition of signing contracts by hand. Society must now determine how parties can form binding contracts in the culture of cyberspace. Don’t let the -or and -ee suffixes confuse you. Just remember that the or is on the giving end, as in promisor (the party making the promise), and the -ee is on the receiving end, as in promisee (the party to whom the promise is made). Acceptance: The offeree gives the offeror whatever was requested in the offer. Consideration: The consideration is whatever each party brings to the table. For example, if I contract with you to be your attorney, you bring money, and I bring my services. Mix all three ingredients, and you have a contract. The rest of this chapter explains how to determine whether the requirements of offer and acceptance have been satisfied. Chapter 3 tackles the third requirement: consideration. A contract signals the end of “just talk” and the beginning of serious business. After a contract is made, if a dispute arises, one party can take the other to court to seek enforcement. Contract formation is all about distinguishing between “just talk” and the binding commitment that has legal ramifications. Forming a Contract: Promises, Offers, and Mutual Assent It takes two parties to make a contract. A party is a person or entity who agrees to be bound by the contract. (See how much fun contract law can be? One person is a party!) Part VI explains how a third party, one who’s not bound by the contract, may become involved. To make a contract, both parties must give their mutual assent; that is, they must willingly agree to the terms of the contract. To determine whether the parties have formed a contract, you must carefully examine the facts to find assent by both parties. This section describes how parties give their assent and reveals that not all promises are legally binding commitments. Making a commitment by making a promise A promise is a commitment to do or not to do something, regardless of whether the word promise is actually used. So to determine whether a party has made a promise, look for the commitment behind the words. For example, if Joe says to Mary, “I promise to give you $200 tomorrow,” that’s a commitment; Joe has pledged to do something. If Mary says to Joe, “I’ll give you my bicycle tomorrow,” that’s also a commitment, even though Mary didn’t utter the word promise. When one person promises something to another as in this example, it’s a gift promise. It may be morally binding, but it’s not legally binding. To become legally binding, the promise must be accompanied by a request for something in return, as I explain in the next section. Turning a promise into an offer by asking for something in return To turn a gift promise into an offer, add the condition that the offeree must do or give something in return. That something can be either a promise (a commitment to do something) or a performance (actually doing something). When Joe says to Mary, “I promise to give you $200 tomorrow,” that’s just a gift promise. But if Joe says to Mary, “I promise to give you $200 tomorrow if you promise to give me your bicycle tomorrow,” now he’s made an offer. He’s promised to do something but only if she promises to do something in return. Note: To my economist friends, contracts are exchanges that maximize utility — the usefulness of whatever the parties agree to exchange. Joe makes his offer because Mary’s bicycle is more useful for him than is his $200. If Mary can make better use of the $200 than she can her bicycle, she’s likely to agree to the exchange. With both parties better off than they were, the exchange has increased the sum total of human happiness. It’s a win-win situation. Way to go, Contracts! Giving acceptance by giving or agreeing to give what was requested in return Acceptance occurs when the offeree gives or agrees to give the offeror whatever he asked for in return for his promise (see the section “Acceptance must match the offer: The mirror-image rule,” later in this chapter). As with the offer, the acceptance requires no formal language. If Joe offers to buy Mary’s bicycle for $200 and she says, “It’s a deal!” that’s all it takes. At that very moment, Boom! — a contract falls from the sky. Don’t make the mistake of confusing contract formation with contract performance. As soon as Joe presents his offer and Mary accepts it, they’ve formed a contract. If Joe comes to get the bicycle the next day and Mary says, “Ha-ha! I changed my mind. I’m not selling you my bicycle,” then she has breached the contract. See Part IV for info on breach of contract. Assenting in action or thought: Objective manifestation versus subjective intent One of the great debates in contract law revolves around whether assent is found in the parties’ subjective intent to form a contract or in their objective manifestations: Subjective intent: What the parties were thinking when they formed the contract Objective manifestation: What the parties did, such as their words or their outward expressions Meeting of the minds? Nonsense! Courts sometimes speak of the need for a “meeting of the minds” in order to establish the intent to be legally bound. But courts don’t really mean that. Because they don’t know whether the minds actually met, judges look for words or conduct that a disinterested (impartial) observer would regard as indicating agreement to the contract. Such words or conduct constitute the “objective manifestation of assent” that can bind the parties. Don’t describe assent by using that offensive expression (which I refuse to repeat here, because I don’t want to encourage you to say it). Instead, say that a contract requires an “objective manifestation of assent.” This doesn’t exactly roll off your tongue as easily as that other expression, but that’s how you should say it and how judges should, too. Verifying what’s going on in someone’s mind is impossible, so courts look for assent in the objective manifestations of the parties, not in their intent. This section explains how the objective theory of assent plays out in practice and highlights its importance. Seeing objective manifestation in practice The reason I use so many examples in explaining Contracts is that the rules mean something only in context, and seeing a rule applied in different contexts is how you come to understand the law in action. This section contains two examples of how objective manifestation of assent plays out in practice: In one example, someone claims the agreement was a joke, and in the other, someone makes an inadvertent arm movement at an auction. Suppose that the day after Mary agreed to sell her bicycle to Joe, she has a change of heart and says, “I didn’t really mean it when I said, ‘It’s a deal.’ I was just joking.” Mary is claiming that no contract was formed because in her mind, she didn’t intend her words to be taken seriously. Unfortunately for Mary, contract law isn’t concerned with what was or wasn’t in her head but with her objective manifestations. The question is not whether she thought she was serious — that would involve looking at subjective thoughts. The question is whether a reasonable person standing in Joe’s shoes would’ve thought she was serious by looking at her objective manifestations — whether she appeared to be serious when she spoke the words. If the answer is yes, then based on the objective theory of assent, Mary is bound to the contract even if in her heart of hearts she was joking. A TV commercial for a dandruff shampoo contained a wonderful example of the objective theory of assent. The setting is an auction, which is a great place to explore contract-formation essentials and the nuances of assent. The auctioneer opens the bidding by saying, “Who will give $2,000 for a date with supermodel Cindy?” A guy in the audience lifts his paddle with #18 on it in order to use it to scratch his head. The auctioneer immediately slams down his gavel and says, “Sold to number 18 for $2,000!” As soon as the auctioneer opens the bidding, he’s inviting bids or offers from the attendees. As soon as the guy in the audience lifts his paddle, which everyone knows is how you enter a bid, he has made his offer. When the auctioneer brings his hammer down and says, “Sold!” that’s acceptance. The commercial ends there, but imagine the winning bidder’s response: “Hey, wait a minute. I didn’t intend to make an offer — my intention was to scratch my head.” But contract law would say, “Sorry. We don’t care what your subjective intention was. You objectively manifested your assent when you raised the paddle. A reasonable person in the shoes of the auctioneer would think you had made an offer, and he accepted it, so a contract was formed!” Leonard v. Pepsico: Collecting for a jet In the case of Leonard v. Pepsico, Pepsi issued a catalog of items a person could buy with Pepsi Points. Consumers could buy Pepsi products to earn points, and although people had to submit a minimum of 15 Pepsi Points with their order, they could purchase additional points for 10 cents each. To advertise the promotion, Pepsi ran a commercial in which a teenager is buying all sorts of stuff with Pepsi points — a T-shirt for 75 points, a leather jacket for 1,450 points, sunglasses for 175 points — and finally he descends from the sky and lands in front of his school in his own Harrier Jump Jet (one of those jet planes that can descend straight down). As he lands, the commercial displays “HARRIER FIGHTER 7,000,000 PEPSI POINTS.” After watching the ad, Mr. Leonard sent in an order form with 15 Pepsi Points plus $700,000 and change (to cover postage and handling) and demanded the Harrier Jump Jet. Pepsi claimed no contract had been formed. One of Pepsi’s defenses was that because the ad and the catalog didn’t constitute an offer but were invitations to make an offer, they could decline to accept Leonard’s offer. They also defended on the grounds that even if they had made an offer, it wasn’t a serious offer. They argued that Leonard’s thinking it was serious didn’t matter. The court decided in favor of Pepsico. It held that Pepsi’s objective manifestations in the ad would lead a reasonable person to conclude that Pepsi was joking. Leonard was tossed out of court. To decide for yourself whether a reasonable person would think Pepsi was joking, watch the Pepsi Harrier Jet Commercial video on YouTube. Appreciating the importance of objective manifestation of assent The theory of objective manifestation of assent has significant consequences. Because a contract is formed objectively, whether a party reads or understands it is irrelevant. For example, if I sign a ten-page contract and then claim no contract was formed because I never read it or didn’t understand it, I’d have no case. The court would look for objective manifestation of assent and find it in my signature. Similarly, when I travel to Uruguay and rent a car, I have to sign a rental agreement that’s written in Spanish. Claiming that no contract was formed, I might say, “No hablo español!” But contract law would point to my signature on the contract and respond, “¡Manifestación objetiva de consentimiento mutuo!” which translates to “Objective manifestation of assent!” Objective manifestation of assent also comes into play with online contracts. The offeree usually has an opportunity to read the Terms and Conditions but skips that part and clicks the Agree button or its equivalent. That qualifies as an objective manifestation of assent. Although objective manifestation seals the deal, it doesn’t necessarily mean that the contract is enforceable. In some cases, the offeror, knowing that the offeree won’t read or understand the contract, slips one-sided terms into it to take unfair advantage. Contract law has ways of dealing with this, as I explain in Chapter 6. However, although the courts may scrutinize such a contract more carefully and may not enforce all the terms, they usually conclude that a contract was formed. Forming contracts without words: The implied-in-fact contract As long as other objective manifestations are present, you don’t even need words to form a contract. Parties may, through their actions, form an implied-in-fact contract — a real contract (that is, a bargained-for contract) found in the conduct of the parties rather than in their words. For example, suppose you go into your favorite fast-food restaurant and see that the manager is busy with customers. You grab a bottle of water out of the cooler, and, catching her eye, you point to the bottle and she nods. You then take a seat and start drinking the water. Even though the two of you have not exchanged words, little doubt exists that you entered into a contract to pay for that water. This is an implied-infact contract. Determining Whether Language Constitutes an Offer An offer requires a promise, and a promise requires a commitment, but sometimes what a person says doesn’t rise to the level of commitment and is therefore not an offer. The test is whether the language is so complete that it requires nothing more than acceptance to form a contract. If the language requires something more than acceptance, then it’s probably not an offer. Using this test typically disqualifies the following as offers: Preliminary inquiries Advertisements Circulars (offers that were sent to multiple persons) if the offerees know they were sent to multiple persons Catalogs Of these four, preliminary inquiries and advertisements are the most common. The following sections explain how to distinguish inquiries and advertisements from genuine offers and how circulars and catalog listings fit in with advertisements. Distinguishing a preliminary inquiry from an offer A preliminary inquiry is like a fishing expedition: The parties merely discuss what they’d hypothetically be willing to offer or accept. To test whether a party has presented an offer, ask whether a reasonable person would think that no more than an acceptance is required to form a contract. Carefully scrutinize the language and the context. Suppose Mary says to Tom, “How much would you sell your house for?” Tom responds, “I’d like to get $100,000 for it.” Mary says, “I accept!” Have the two parties formed a contract? Mary clearly uttered a manifestation of acceptance, but does what Tom said constitute an offer? The test is whether a reasonable person observing this conversation would think that when Tom said, “I’d like to get $100,000 for it,” he was committing to sell his house for $100,000. I think a reasonable person would conclude that this isn’t the language of an offer. He was expecting Mary to make him an offer. It’s not the same as saying something like, “Give me $100,000 for it, and it’s yours.” Tom’s statement is more along the lines of a preliminary inquiry than an offer. Similarly, if Tom puts a sign outside his house that says, “For Sale. $100,000,” that’s not an offer. Mary can’t simply accept the offer by handing Tom a suitcase with $100,000 in it, because that’s not the customary practice for this type of transaction. Customary practice is to put a for-sale sign outside a house to solicit offers to buy the house, not to get people to give an acceptance. Based on the language and the context, more than acceptance is required to form a contract. Ads, catalogs, and circulars: Distinguishing advertisements from offers An advertisement is generally not an offer. It’s an invitation to make an offer. Assume a store advertised in the newspaper, “Golden 50" HDTVs $500.” If this were an offer, the store would legally be obligated to sell a TV to everyone who accepted the offer, even if the store ran out of those TVs. If the store couldn’t deliver on its commitment, it would be found in breach. Contract law comes to the aid of the store by saying that the ad is merely an invitation to make an offer. Technically, when a customer goes to the store and says, “I’d like to buy one of those TVs you advertised,” the customer is making an offer. The store can then either accept or reject it. Similarly, a catalog is not an offer but an invitation to make an offer. For example, if I order something from a store catalog and they’re unable to supply it, the store isn’t in breach. I make my offer when I submit my order. If they can’t fill my order, they decline my offer. What’s a widget? In Contracts classes, professors are always coming up with hypotheticals that involve buying and selling widgets. This may lead you to wonder, What’s a widget? The answer: A widget is a hypothetical good bought and sold in Contracts and Economics classes. Think of it as a gadget, a whatchamacallit, or a thingamajig. Of course, stores could take advantage of this arrangement by employing the bait and switch — advertise an incredible deal (the bait) and then offer a deal that’s not so great (the switch). Contract law has no solution for this problem, but most jurisdictions have enacted consumer protection laws that make the bait and switch a legal violation. This is why stores often add language to their advertisements, such as “while supplies last” or “quantities limited.” Another way to resolve the issue of multiple acceptances and limited supplies is to make an item available only to the first person who accepts. If I have six friends over to my house, for example, and say to them, “I’ll sell this widget for $10,” five of them may accept. I’d be in trouble if the remaining four filed a breach of contract claim against me. A reasonable person in this situation would probably say that because the six offerees knew I had only one widget for sale, a reasonable way to resolve which of them got it would be the first to accept. An advertisement may be an offer if it’s so clear and definite that only acceptance is required to form the contract. Circulars are especially vulnerable because each recipient might not reasonably know that others have received the same circular. If I send a letter to six friends offering to sell a widget for $10, this may constitute an offer. If each recipient didn’t know I’d sent the offer to others, then I could be bound by multiple acceptances, because each offeree might reasonably think I had one widget and was offering it to him or her exclusively. Deciding How Long an Offer Remains Open An offer remains open for whatever time period is reasonable. What’s reasonable varies according to facts and circumstances. If late in the day on Friday I offer to sell you 1,000 shares of Megalomart stock for $20 a share, you may reasonably expect the offer to remain open until the opening bell on Monday, because the share value won’t change over the weekend. If we’re standing on the floor of the New York Stock Exchange during the trading day, however, and I say the same thing to you, the offer may be open for only a few seconds, because values may be very volatile. (Some old cases state that an offer made during a face-to-face meeting lapses when that meeting ends.) The offeror may override the “reasonable period” rule by setting a specific time period. On Friday, for example, I can say to you, “I’ll sell you 1,000 shares of Megalomart stock for $20 a share, and this offer is open until Tuesday noon.” Unless another offer-terminating rule applies, the offer remains open until that time. One of those rules is that the death of the offeror or offeree terminates the offer. Determining Whether the Offeror Can Back Out: Revoking the Offer Keeping an offer open indefinitely would result in keeping the offeror on the hook until the offeree got around to accepting it, which is obviously unfair to the offeror. Because of this, contract law allows the offeror to back out under certain ...
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Lease agreements are contracts between the tenant which in this case is the real estate
company and the landlord, property owner which covers the renting of the land over long
durations, often more than one year. Leases are very particular in nature when in comes to the
detailing of the responsibilities of each party to the contract and has all the important
information to guarantee that all the parties are protected (Senn 2121). Rent agreements are
different from leases in that, it is not a long-term agreement and often takes place on a
monthly base. After every month, the agreement is renewed when an agreement among
parties is reached. Buying refers to the making of a one-of payment to obtain full ownership
of the property and its rights. Therefore, in this case, the corporation should buy the land.
This is because, the purchase option will allow the corporation to develop the land in
whatever way and in a permanent nature unlike in a lease or a rent condition where there are
restrictions on what can be done and what cannot be done on the land. Since the company is a
real estate firm, its nature of business involves buying, developing and selling property and a
purchase agreement is very favourable.
Before buying the piece of land, the corporation needs to verify that indeed the seller,
Park Industries, is the real owner of the land. Ownership can be verified when the seller
provides the original title deed of the land, an encumbrance certificate and property tax bills
and receipts. A title deed should show that the name is indeed the sellers meaning that the
seller is legally allowed to dispose the parcel of land. The encumbrance certificate shows that
the land does not have any unpaid dues and is free of any legal issues. The document is

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obtainable from the sub-registrar’s office. Finally, the seller should show property tax bills
and receipts to guarantee that all payments relating to the property have been settled to avoid
any future additional expenses on the land. Additionally, the company should also check that
any loans on the property have been repaid and the is a release certificate from the bank so as
to get the land valued at the same land measure.
Escrow refers to the process where parties to the financing or transferring of property
deposit funds and documents or other things which are of value to a neutral third party up to
the time when a particular condition or event happens in accordance to particular, written
conditions from the parties (Grau Sr 153). The third disinterested party in the process is
known as the escrow agent and an escrow is basically a clearing house that facilitates the
exchange, receipt as well as the distribution of the needed items for the transfer of property.
The escrow process is essential as it protects the parties and reduces the potential risks that
are involved in the real estate transaction. Further, the process facilitates the interaction of the
parties and ensures that legal documents and transfer of funds only happens when the
conditions of the agreement are met.
Simply put, the right of way refers to the rite of passage to another individual’s
property or land and is often related to the land usage rights. In other words, the right of way
refers to the easement that allows an entity or a person to pass through a property for a
number of reasons. An example can be a driveway right of way which allows a neighbour
who has no access to the public walk way, to access streets across one’s land. After the
subdivision of the land, there will be...


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