Uniform Commercial Code

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Attached is the instructions and reading material (chapters 4,5,6, and 7). Please read the instructions and answer the questions directly and substantively using the reading material to support claims.

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Read the Ace Heating and Cooling scenario in your text and answer the following questions: • • • Under UCC 2-302, who has the best chance of getting out of the contract due to unconsionability? The symbol for justice features a woman wearing a blindfold illustrating that the law should be applied the same way regardless of who the parties are. Does the UCC rule seem to contradict this? Which approach do you think is more ethical? Note that both Glamour and Shady Rest are businesses, and courts rarely find that contracts between two businesses are unconscionable. The rationale is that a business is a sophisticated entity, familiar with transactions and able to protect itself. Do you think Glamour and Shady Rest are in a comparable position in regard to this contract? Why or why not? Here is a Link: Legal Information Institute. (n.d.). Uniform Commercial Code. Retrieved from http://www.law.cornell.edu/ucc/ucc.table.html Your initial post should be at least 250 words in length. Support your claims with examples from the required reading material, and properly cite the reference. Unit II Contracts CHAPTER 4: Offer, Acceptance, and Consideration CHAPTER 5: Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality CHAPTER 6: Third Parties, Performance and Discharge of Contracts, and Remedies 62 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 62 9/20/16 11:14 AM C ontract law is of great importance in business and in everyday life. Common transactions such as buying a pack of gum at the corner grocery store, purchasing a ticket at a movie theater, or ordering a meal at a restaurant involve making contracts, but so does a complex patent licensing agreement between two multinational corporations. In this unit, we will explore the nature of contracts, the requirements for their valid formation, and the consequences for their breach. A contract is a legally enforceable agreement between two or more people. Although all contracts contain enforceable promises, not all promises result in contracts. Consider the following situation: Henry invites Ericka to dinner, and Ericka accepts. Henry looks forward to the date and can think of little else all day long. A half hour before they were to meet, Ericka calls Henry and tells him that she will not be able to keep their date because Ron has invited her to go dancing and she has accepted. Henry is upset, hurt, and angry and would like to sue Ericka for breach of contract, since she has clearly broken a promise made to him earlier that day and caused him distress. Will he succeed? Ericka may not be a very nice person, and she may have had a moral obligation to attend the dinner date. Nevertheless, she had no legal obligation to do so. The agreement that she breached was not a contract, but merely a social obligation that the courts will not enforce. In order for there to be a valid contract, certain essential elements must exist. These include an offer to enter into a contract, acceptance of the offer by the other party, an exchange of consideration between the parties, and a legal purpose for the contract. In addition, both parties must have the capacity to enter into a contract. We will explore these elements in depth in this unit. We will also discuss certain types of contracts that must be in writing to be enforceable and situations in which a contract is unenforceable due to a lack of genuine assent, such as in cases of fraud or mutual mistake of fact. We enter into contracts every day. On the way to work, you pick up a newspaper at a newsstand. You also stop for a cup of coffee at a cafe. While there, you use your phone to browse the Web and purchase tickets to a concert online. Finally, you arrive at the bus stop and pay your fare as you enter the bus that will take you to work or to class. In each of these examples, a contract was made. In each case, there was a valid offer and acceptance (your ordering the drink and the cafe’s providing it), consideration (the cup of coffee and the money you pay for it), capacity and legality (you are (hopefully) of sound mind when purchasing the coffee, and coffee is a legal good that can be purchased and sold in the United States). There were no issues concerning mutual assent. No documents were signed, and no negotiations took place; nevertheless, valid contracts were formed giving each party certain rights and imposing on each party some responsibilities as well. 63 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 63 9/20/16 11:14 AM The vast majority of contracts are routinely completed without a problem, and without the interested parties giving the matter much thought. Problems arise when parties to a contract fail to live up to their agreements, or misunderstand what it is that they agreed to do. In such cases, the courts may be called upon to settle the dispute in accordance with established rules of law that determine each party’s rights and obligations under a valid contract. Many misunderstandings and disagreements between contracting parties, as well as costly, time-consuming litigation, can easily be avoided if each party has a basic understanding of the law of contracts. The following chapters will explore the requirements for the formation of valid contracts and the remedies available when they are breached. Under the Uniform Commercial Code, the rules for sales of goods contracts are sometimes different. Where the UCC rules are an exception to a basic common law rule, they will be briefly discussed in this section, and other issues concerning the UCC and sales of goods will be explored in later chapters. But the common law of contracts is very much in effect today and is crucial to the running of every business, regardless of its size. 64 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 64 9/20/16 11:14 AM Contracts: Offer, Acceptance, and Consideration 4 Learning Objectives After studying this chapter, you will be able to: 1. Describe the difference between express, implied, bilateral, unilateral, simple, formal, and quasi contracts. 2. Explain the requirements for a valid offer and acceptance. 3. Explain the ways an offer may terminate. 4. Define consideration. 5. Recognize situations where consideration is not present. psphotograph/iStock/Thinkstock Chapter Overview 4.1 Types of Contracts • • • • 4.4 Consideration Express Contracts v. Implied Contracts Bilateral Contracts v. Unilateral Contracts Simple Contracts v. Formal Contracts Quasi Contracts (Contract Implied in Law) • • • • • What Isn’t Consideration? Past Consideration Preexisting Duty Illusory Promises Distinguishing Illusory Promises and Requirement Contracts • Exceptions to the Consideration Requirement 4.2 The Offer • Clear Intent: An Unequivocal Promise • Reasonably Certain Terms • Offers and Termination 4.5 Chapter Summary • Focus on Ethics • Case Study: Hamer v. Sidway • Case Study: South Shore Amusements, Inc v. Supersport Auto Racing Association • Critical Thinking Questions • Hypothetical Case Problems • Key Terms 4.3 Acceptance • Communicating the Acceptance 65 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 65 9/20/16 11:14 AM CHAPTER 4 Section 4.1 Types of Contracts A contract is a legally enforceable agreement. As this definition implies, a contract comes into existence from the voluntary assent of two or more individuals to enter into a legally binding agreement. Mutual accord is crucial to the formation of a contract. In order for there to be a valid contract, five basic elements must be present. Before we get into the detailed requirements for a valid contract in this unit, it may be useful to have at least a working definition for each of the required elements: 1. Offer: An invitation for another to enter into a contract. 2. Acceptance: Acquiescence to enter into a contract under the terms of the offer. 3. Consideration: Anything of legal value that is asked for and received as the price for entering into a contract. 4. Legality: The extent to which the contract is legal and not against public policy. 5. Capacity: The mental competency to enter into a contract. Additionally, there are special rules for people who are under legal age. One party, referred to as the offeror, makes an offer—a business proposition—to another; the other, known as the offeree, accepts. Provided that the other three requirements are present (consideration, capacity, and legality), a valid contract is formed. If Manuela offers to sell Linda her laptop for $450 and Linda accepts the offer, a valid contract is formed since there is a valid offer and acceptance, consideration (something of value is given and received by each party—the laptop and the $450), capacity (both parties are of sound mind and are freely entering into the agreement), and the contract is for a legal purpose. In some cases, there is a further requirement that the contract be in a particular form, for example in writing, in order for it to be enforceable. In other situations, a contract may prove not to be binding because the parties did not truly assent, such as in the case of fraud or mistake. So that seems relatively straightforward. But beware: contracts are not always so simple. In fact, there are many subtle and difficult issues that can arise when attempting to determine if there is an offer and acceptance. 4.1 Types of Contracts C ontracts can be classified as express or implied in fact, bilateral or unilateral, and simple or formal. In addition, sometimes when a contract does not exist, there may be something known as a quasi contract (contract implied in law). Each type of contract will be briefly examined below. Express Contracts v. Implied Contracts Express contracts are formed by the express language of the parties—the actual words they use in their agreement—and can be either written or oral. Example 4.1. Sam says to Ben, “I’ll sell you my Business Law book for $50.” Ben replies, “I’ll take it.” It is a popular misconception that contracts are not binding unless they are in writing. It’s always a good idea to reduce business agreements to writing to avoid future 66 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 66 9/20/16 11:14 AM CHAPTER 4 Section 4.1 Types of Contracts misunderstandings—and to keep the parties honest as to what it is that they have obligated themselves to do—but most contracts are legally valid whether they are oral or written. Some contracts, such as those creating an interest in real property, are required to be in writing, witnessed, notarized, and sealed in most jurisdictions. But the vast majority of contracts do not need to follow any of those formalities in order to be binding. Implied contracts are formed not by the express words of the parties, but rather by their actions. Think about the last Every time you buy something, you make a contract. time you bought groceries. Did you tell diego_cervo/iStock/Thinkstock the checkout clerk, “I offer to buy this gallon of milk at its advertised price?” Probably not, but the clerk understood that you wanted to enter into a contract, and accepted (by ringing up your order) on behalf of the store. As long as the parties’ actions plainly indicate an intention to enter into a contract, and as long as the terms of that contract can clearly be implied from those actions, a binding contract can be created even without a single word being spoken. Consider the following examples: Example 4.2. Dana walks into a newsstand and places three quarters on the counter and takes a copy of her hometown newspaper. Example 4.3. Steve enters Nilda’s hardware store. He picks up a screwdriver from a rack and, looking over at Nilda, who is taking care of a line of customers at the moment, waves the screwdriver in the air. She recognizes Steve, a long-time customer, and understands that he would like to take the screwdriver now and pay for the purchase later. She signals her consent by nodding in his direction. He leaves, taking the screwdriver with him. In each of the above situations, an implied contract has been entered into. Dana has paid seventy-five cents for a copy of a newspaper and Steve has agreed to pay the selling price of the screwdriver to Nilda at a later time. Bilateral Contracts v. Unilateral Contracts If the offeror (the person who makes an offer to enter into a contract) and offeree (the person to whom a contract offer is made) exchange promises to perform some act in the future, a bilateral contract is formed. For example: Example 4.4. Bruce offers to sell his old car to Irving if Irving will pay him $2,000. Irving accepts the offer. Example 4.5. Lina offers to babysit for Inga every Saturday for the next three months if Inga will pay her $8.00 per hour. Inga accepts. 67 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 67 9/20/16 11:14 AM CHAPTER 4 Section 4.1 Types of Contracts Example 4.6. Tina offers to sing at Charles’s club next Friday, Saturday, and Sunday if he will pay her $5,000 per night. He agrees. In each of the above examples, both parties are obligating themselves to take some action in the future. As soon as the offer is accepted, a valid contract comes into existence. When a bilateral contract is involved, the contracting parties exchange mutual promises to perform some future act. As soon as a bilateral contract offer is accepted, a contract comes into existence and both parties are bound. If either party fails to live up to the agreement, a suit for breach of contract can result. In a unilateral contract, one party makes a promise to the other that can only be accepted by the other’s performance. For example, if Lana offers to pay $100 to anyone who finds and safely returns Fluffy, her lost cat, Fred can accept and form a contract only by actually returning Fluffy safely to Lana. If Fred tells Lana, “I’ll find Fluffy later, I promise,” there is no acceptance, and no contract. Simple Contracts v. Formal Contracts A simple contract is any oral or written contract that is not required to follow a specific form, or be signed, witnessed, or sealed. The vast majority of contracts entered into by businesses and private individuals are simple contracts, even though some may seem rather complex and go on for many pages. A formal contract at common law was one that needed to be in writing, signed, witnessed, and sealed by the parties. A person’s seal on a contract (usually a unique mark made by a signet ring pressed into hot sealing wax, though a seal could be any symbol adopted by an individual or a company) gave that contract special significance. The distinction between simple and formal contracts is much less important today, and in many states is only used for contracts involving transfer of real estate. Quasi Contracts (Contract Implied in Law) The first thing to know about a quasi contract is that it is not a real contract at all, but rather a situation where one person has given a benefit to the other and it seems as though it would be unfair for him to be not be paid. So a quasi contract is a situation where to prevent unjust enrichment, a court may award a remedy because a benefit was accepted, even though there is no contract. This is also called a contract implied in law. There are three distinct requirements to have a quasi contract: 1. One party has conferred a benefit on the other; 2. The party receiving the benefit chose to accept it; and 3. The benefit is the sort of thing a reasonable person would believe had to be paid for, under the circumstances. If the plaintiff proves the requirements for a quasi contract, the plaintiff is entitled to recover the fair market value of the benefit that was conferred on the receiving party. Example 4.7. Peter had spoken with you about possibly painting your house, but no agreement was made. However, one day you look out your 68 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 68 9/20/16 11:14 AM CHAPTER 4 Section 4.2 The Offer window and see Peter pull up in his work van, and begin to set up his ladder. You don’t say a word to Peter, but simply let him paint the house. Even if there is no contract here, you have accepted the benefit (you could have told Peter to stop, but chose not to), and a reasonable person knows that they have to pay for painting services. Peter is entitled to the fair market value of the paint job. But what if Peter comes over when you’re not home and paints your house? Because you did not accept (you had no chance to decline), there is no quasi contract and Peter is out of luck. (Peter should have taken a business law course!) The law does slightly modify the rule in the case of emergency circumstances. If an ambulance takes your unconscious, injured body to the hospital and doctors treat you there, you are probably liable to pay for their services. Even though you could not accept or decline, for obvious public policy reasons the law wants to encourage providers to give care in these situations. If they could not get paid, doctors might stop giving emergency care! 4.2 The Offer A n offer must contain an unequivocal (clear, unambiguous) promise to enter into a contract, must have reasonably certain terms, and must be communicated by the promisor (the person making the promise) to the promisee (the person to whom the promise is made). For example, Sam tells Ben, “I’ll sell you my car for $5,000.” But suppose Sam instead says, “Would you give me $5,000 for my car?” That is not an offer, but merely an inquiry, which might open up negotiations or lead to an offer at some point. If Sam says, “I’d sure like to sell my car for $5,000,” there is no offer, because Sam is not committing to selling it to Ben at the present time. What if Sam owns five cars? Then the subject matter is not certain enough to be an offer, unless Ben knows which one Sam intended to sell. The couple holding this yard sale aren’t making any offers, merely inviting others to make offers on their household items. But if Sam only owns one car, and if Sam says, “If you give me $5,000, I’ll sell you my car,” Sam’s statement is unequivocal and constitutes an offer. They will have a contract if Ben accepts. David Sacks/DigitalVision/Thinkstock 69 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 69 9/20/16 11:15 AM CHAPTER 4 Section 4.2 The Offer Clear Intent: An Unequivocal Promise An offer does not need to contain specific language such as “I promise to sell you” or “I offer to sell you” in order to be effective. What matters is that a reasonable person under the same circumstances would clearly understand that an offer was intended by the offeror. The language used is always important in helping to determine the intent of the parties, but a valid offer can be made even when no words are spoken, simply by the actions of the parties. If, for example, Muhammad holds out a twenty-dollar bill and tells Carol, “I’ll give you this for that fountain pen on your desk,” and Carol takes the money and puts it in her pocket without saying a word, she will have clearly accepted his offer by her actions. What is important in determining whether a valid offer or acceptance existed is the objective intent of the parties as communicated through their words or actions. In other words, would a reasonable person viewing the situation believe the parties intended to contract? For example, on Tyrone’s drive to work one day, his car dies. Tyrone is very upset because this is the fourth time in two weeks that he’s had car trouble, and now he’s going to be late to work again. Tyrone gets out of the car, kicks the door, and yells, “I’d pay someone $10 to drive this piece of junk off a cliff!” Sofia happens to be walking by, and she could use $10 and she knows where there is a convenient cliff. Can she accept? No, because a reasonable person would realize that Tyrone is simply expressing his anger, and does not seriously intend to pay for his car to go over a cliff. The subjective intent of the offeror and offeree are irrelevant and will not be examined by a court in determining intent to contract. What is important is not whether an offeror subjectively made an offer in jest, but rather whether the person to whom the offer was made, the offeree, should have realized that the offeror was only joking when he made the offer. It must be clear to an average person that the offer was not seriously intended; otherwise, the offeree can accept it and form a valid contract. Examine the following examples: Example 4.8. Laverne tells Ernest: “I’d give you a million dollars for a kiss.” Ernest, knowing a good deal when he hears it, runs to her and gives her a quick smooch before she can change her mind. Example 4.9. Deborah, exasperated at Gabe’s incessant chatter, tells him: “If you can keep your mouth shut for five minutes, I’ll give you an allexpense-paid cruise around the world.” He smiles and remains silent for the required time period. In each of the above examples, if the offerees seek to enforce the offerors’ promises they will have a difficult time. Laverne and Deborah will almost certainly prevail if they claim that the offers were not seriously intended. Under the circumstances, a reasonable person should have realized that the offers were intended in jest and were not serious proposals. But consider the following example: Example 4.10. Glen, a radio talk show host, is discussing a recent incident where the governor of the state was rumored to have had a sexual relationship with an intern. The governor’s opponents are demanding that he be prosecuted for perjury, since the governor said under oath at a hearing that he had never had sex with “that woman,” and there now is plenty 70 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 70 9/20/16 11:15 AM CHAPTER 4 Section 4.2 The Offer of evidence that he did. Glen declares that a perjury case in these circumstances would be ridiculous, and states, “No one gets prosecuted for lying about their sex life. I’ll pay $10,000 to anyone who can show me a case where that’s happened.” Joanna, a law student who has just read a case where a woman who falsely accused a man of raping her was prosecuted for perjury, promptly sends Glen a copy of the court decision. Did Glen make an offer? In all likelihood, a court would say yes, because objectively it sounds as though he is serious, and he has been reasonably specific with the terms. He may have been joking, but what Glen was really thinking doesn’t matter! Since there is an offer, Joanna has accepted by doing the requested act, and they have a contract. Glen must pay the $10,000. Reasonably Certain Terms Because the offer establishes the subject matter of what may become a binding agreement, the offer must be reasonably specific and certain. For example, if Brianna says to Matias, “I’ll sell you ten grade-A blue widgets at the price of a dollar per widget,” that is an offer. But if Brianna instead says, “I’ll sell you some grade-A blue widgets at a price of a dollar per widget,” that is not specific enough, because there is no way of narrowing down what she meant by “some” widgets. Five? Fifty? Five hundred? Since not even a reasonable person can determine this, there is no offer. If Matias answers, “Great! I’ll take ten widgets,” he is actually the one making the offer. Offers and Termination Assume we have established that an offer has been made. Emily offers to sell Terrell her only bicycle for $100. We have intent and reasonably certain terms. But before we turn our focus to the offeree, Terrell, to see if he has accepted, we must first establish that the offer is still open to him. There are a number of ways in which offers can terminate, including revocation by the offeror, rejection or counteroffer by the offeree, lapse of time, death of either party, or destruction or illegality of the subject matter. If any of these occurs, it is too late for Terrell to accept and form a contract with Emily. Revocation As a general rule, an offeror has the right to make a revocation of (cancel) the offer at any time prior to acceptance. Example 4.11. Emily makes the following offer to Terrell: “I will sell you my Raleigh bike for $100. You can have until Friday noon to let me know.” Terrell is thinking it over. On Thursday, Emily calls Terrell and says, “Sorry, I changed my mind. I’m keeping the bike.” Can Emily revoke, even when she said Terrell had until Friday? Yes, because Terrell had not yet accepted. It may not be very nice of Emily, but it is legal, and the offer has terminated. 71 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 71 9/20/16 11:15 AM CHAPTER 4 Section 4.2 The Offer But there are some exceptions to this general rule—in other words, some situations where the offeror cannot terminate, even though the offer has not yet been accepted. Two common exceptions are the option and the UCC’s firm offer. Options exist when the offeree has given the offeror consideration to keep that offer open for a period. Suppose in the example above, Terrell wants to make sure he has until Friday noon to accept. He can pay Emily $10 for an option. This means in exchange for the money, Emily is giving up her right to revoke. If she now changes her mind on Thursday, Terrell can just ignore the phone call. If he accepts by calling Emily on Friday morning and saying “I’ll take that bike!” they will have a contract. Note that Emily is not getting a down payment with that $10. Terrell still has to pay the full $100 for the bike if he accepts, and if he declines he will not get the $10 back. In a down payment situation, a contract has already been made. The UCC has a special rule when merchants are offering to sell goods. Under Section 2-205, if a merchant makes an offer in a signed writing, giving assurance that the offer will stay open, it is a firm offer that she cannot revoke. However, the time period cannot exceed three months (if the offer states it is open for six months, the UCC automatically shrinks it down to three months). Some examples: Example 4.12. ABC Inc. sends the following letter to Courtney: “We will sell you the Futura laptop with premium software loaded for $450. This offer is good until January 15.” The letter is signed by Andy Andrews, VicePresident. This is a firm offer. Example 4.13. ABC Inc. calls Courtney with the same offer. This is not a firm offer, because it was oral. Example 4.14. ABC Inc. offers in a signed letter to service Courtney’s company’s computers on a monthly basis for a set fee, giving her until January 15 to accept. This is not a firm offer, because it is not a contract for sales of goods. So only in the first situation will Courtney have a contract if she calls Andy at ABC on January 6 and tells him that she accepts. Lapse of Time If nothing is stated as to how long the offer will remain open, the law says that the offer will remain open for a reasonable amount of time. For example: Example 4.15. Tawana makes the following offer to Jerome: “I will sell you my Dell laptop for $400.” Jerome tells Tawana that he’ll think about her offer. Two days later, he calls her and agrees to buy the computer under her terms. They have a contract. But if Jerome called her after a year, his acceptance is too late. A reasonable time will vary with the subject matter. An offer to sell fresh raspberries will terminate before the offer for the laptop. If Tawana’s offer involved pork belly futures, 72 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 72 9/20/16 11:15 AM CHAPTER 4 Section 4.2 The Offer Jerome’s acceptance would likely be too late, since that type of commodities market fluctuates widely in very short time periods. Confusion may be avoided if Tawana simply states a time period in her offer. If she says “You have until 5 p.m. this Friday to call me and accept,” the offer will automatically expire if Jerome does not respond by then. Rejection or Counteroffer by the Offeree If an offeree responds to the offer with either a rejection or a counteroffer, the offer terminates. For example, assume Emily offers to sell Ben her bike for $100. Consider the following possible responses by Ben. “No, that’s too much.” “I’ll give you $75.” In the first example, Ben is rejecting Emily’s offer. In the second, he is making a counteroffer. In both of these situations, Emily’s offer promptly terminates. If Ben changes his mind later and calls up Emily, saying, “I accept! I’ll give you $100 for that bike,” Ben is actually making an offer to Emily. There is no contract unless Emily chooses to accept. But what if the conversation goes like this: Emily: “I’ll sell you my bike for $100.” Ben: “Hmm. That seems a little high. Would you take $75?” Emily: “No.” Ben: “Okay, I accept. I’ll buy the bike for $100.” This time, they have a contract. Ben’s remark was not an outright rejection, and he is not making a counteroffer since he does not say he will buy the bike for $75. He is merely engaging in a little negotiation, which has not affected Emily’s offer. The offer was still open when Ben accepted. Death, Incompetence, Destruction, and Illegality If either offeror or offeree dies or loses his mental competency before the offer has been accepted, the offer terminates. Emily offers to sell her bike to Ben for $100. If either Emily or Ben now dies, Negotiating a contract must be undertaken with care. An inquiry or question will not affect the offer, but a counteroffer or rejection takes the original offer off the table. Digital Vision/Thinkstock 73 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 73 9/20/16 11:15 AM CHAPTER 4 Section 4.3 Acceptance the offer dies with them. But if Emily makes her offer, and then Ben accepts, and now Emily dies, note that they already had made a contract and it does not terminate. The exception to this rule is if the offer was part of an option. So if Emily offers to sell her house to Ben for $100,000, and Ben paid her $75 for a thirty-day option, the offer will stay open for the thirty days even if either Emily or Ben dies. In that case, the estate of the dead person could perform instead. If Emily offers to sell Ben her bike, but before he can accept, Emily’s neighbor backs her SUV over the bike, rendering it into a twisted metal and rubber abstract sculpture, the offer terminates due to destruction of the subject matter. If Sandra offers to sell Damian a carved ivory statue, and now the government outlaws the sale of ivory (to protect endangered elephants), the offer terminates due to illegality. 4.3 Acceptance A cceptance of an offer is the clear manifestation of assent to the terms of the offer. For an acceptance to be valid, it must be (1) made by a person to whom the offer was made, (2) unequivocal, and (3) communicated to the offeror. The first requirement is simple: only a person to whom an offer was made may accept it. The following example will illustrate: Example 4.16. Professor Smith, an attorney, offers to draft a will for anyone in his Business Law class for $25. Bill Jones, who is not a student in the class, overhears the offer while passing by the lecture hall and promptly walks to accept the offer. Bill’s acceptance is not valid since the professor’s offer was made only to students in his class and could be accepted only by them. It also must be clear from the offeree’s words or actions that he intends to accept the offeror’s offer under the offeror’s terms. Under the common law’s mirror image rule, which is still used for situations involving subject matter other than sales of goods, an acceptance was deemed valid only if it mirrored the offer exactly. A deviation constituted a counteroffer, which revoked the original offer. For example, Peter offers to paint Harry’s house for $3,000, and Harry responds: “I accept. Use Benjamin Moore brand paint.” Since Peter’s offer said nothing about what type of paint he was willing to use, this is a counteroffer and they do not yet have a contract. The mirror image rule has been modified by Article 2 of the Uniform Commercial Code in transactions involving the sale of goods. Under UCC Section 2-207, acceptance is valid even if it contains terms different from the original offer unless it is conditioned on the offeree accepting the additional terms. The additional terms in the acceptance are simply ignored and the contract is formed under the terms of the offeror’s offer. 74 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 74 9/20/16 11:15 AM CHAPTER 4 Section 4.3 Acceptance Example 4.17. Peter offers to sell a painting of an Irish landscape that he did on vacation last year for $350. Harry responds: “I accept. Put it in one of those pretty gilt frames.” Harry and Peter have a contract, and Harry is committed to buying the painting. But Peter does not have to put it in the gilt frame. But if Harry had instead responded to Peter’s offer by saying, “I accept as long as you put it in a gilt frame,” there would be a counteroffer by Harry and thus no contract at this point. This is because Harry has explicitly tied his acceptance to Peter’s agreeing to the additional term. When conditional language such as “I accept as long as/but only if/contingent upon” is used in this way, the result is a counteroffer. However, if both parties are merchants (individuals engaged in the business of buying and selling goods of the type involved in the contract), the additional terms in the acceptance become part of the contract unless: 1. they are objected to within a reasonable time of receipt of the acceptance; 2. the additional terms materially alter the contract; or 3. the offer specifically limits acceptance to the stated terms. Note that whether the statement is an acceptance or a counteroffer has not changed for the merchants; we are only dealing here with the terms of the contract. Consider these examples: Example 4.18. Peter, of Peter’s Famous Art Gallery, offers to sell a certain painting for $350. Harry, of Harry’s Other Famous Art Gallery, responds: “I accept, as long as you deliver by Friday.” There is no contract because Harry made a counteroffer. Example 4.19. Peter makes the same offer. This time Harry says, “I accept. Deliver to my place Friday.” They have a contract. Because they are both merchants, Peter must deliver to Harry as noted. Example 4.20. Same as number 2 above, except Peter, who doesn’t want to deliver, promptly calls Harry and says, “Thanks for buying the painting, but you have to pick it up.” Because as the offeror he has objected within a reasonable time, the additional term about delivery is not part of the deal. In transactions other than contracts for the sale of goods, the mirror image rule is still very much in force for both merchants and nonmerchants alike. 75 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 75 9/20/16 11:15 AM CHAPTER 4 Section 4.3 Acceptance Communicating the Acceptance Suppose an offer has been made to you and you want to accept. You already know what to say (because you just read the section above). But how should you communicate this acceptance to the offeror? If the offeror stated already how you are to accept, you must follow exactly the offeror’s instructions. For example: Example 4.21. Carlos offers to sell you his acoustic guitar for $300, and adds that you should reply by e-mail. Email or phone calls can be valid methods for accepting, but only if the offer didn’t specify other means! Emily offers to sell you her bike for $100 and says she must receive your acceptance in writing by 3 p.m. Thursday. Digital Vision/Thinkstock Edmund offers to employ you as his butler for $10,000 per month, and states that to accept you must climb the Matterhorn and plant a red flag on the summit that says “I accept.” In all of these situations, the offeror has directed the means of acceptance. To contract for the guitar, you must e-mail Carlos. If you call him up, you will actually be making a counteroffer. If you attempt to accept Emily’s offer by mailing an acceptance on Tuesday that she receives on Friday, that will be another counteroffer. And as for Edmund . . . well, get out your ice pick and make a reservation for Switzerland if you really want that job! Note that this is all up to the offeror; there is no requirement that he be reasonable. The offeror can make acceptance just as difficult, or silly, as he wishes. Of course, in many situations, the offeror doesn’t give any directions on how to accept. Jake offers to sell Calvin his business law book for $20, and that’s all he says. The rule then is that the offeree can use any reasonable means of acceptance. In face-to-face transactions, acceptance is usually communicated verbally. As soon as assent is given, a contract is formed that obligates both parties to render whatever performance was promised. Since a contract comes into existence as soon as the offeror’s offer is accepted by the offeree, problems can arise when parties are not dealing face to face when a contract is made. In such instances, the general rule is that an acceptance is binding at the time that it is sent. Therefore, leaving a voice message on an answering machine constitutes acceptance at the time that the message is recorded, not at the time that it is actually heard by the offeror. Likewise, sending an e-mail message or a telegram containing a valid acceptance results in a valid contract as soon as the messages are sent. Consider the following situation: 76 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 76 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration Example 4.22. Joan offers to sell Matilda a used television set for $100. Matilda writes Joan a letter in which she accepts the offer. She mails the letter at 5 p.m. The next morning, before the mail is delivered, Joan calls Matilda and tells her that she wishes to revoke the offer. May she do so? This illustrates the mailbox rule, which states that as long as mail is a proper way to accept an offer, the acceptance takes effect and forms a binding contract as soon as a properly addressed and stamped envelope is mailed. Matilda’s acceptance was effective, and they have a contract, as soon as Matilda mailed her letter to Joan, and Joan’s attempted revocation is too late. This is true even though Joan has not yet received the acceptance. Even if the postal service loses the letter, there is still a contract as long as the letter was properly addressed and had the right postage. This may seem unfair, but keep in mind that the offeror can easily protect himself by requiring as part of the offer that acceptance be made in a particular way or simply by stating that the acceptance is not effective until it is received. Note that because other communications, such as revocations and rejections, are not effective until they are received by the other party, it is easy for matters to get confused. For example, Jin offers to sell Blackacre to Maurice for $100,000. Now assume the following take place in the order listed: Jin changes his mind and mails a revocation. Maurice decides he wants Blackacre and mails an acceptance. Jin receives the acceptance. Maurice receives the rejection. Do they have a contract? Yes, because Jin’s mailing the revocation had no effect. The offer was still open when Maurice mailed his acceptance, which formed the contract. Perhaps the lesson for offerors is to make revocations by the fastest means possible! 4.4 Consideration O nce an offer and acceptance are established, the third element of a contract must be examined. A contract is a bargained-for exchange between the parties, and consideration is whatever is being exchanged. To put it yet another way, consideration is simply the price of the contract. Since consideration involves an exchange between parties, making a visual reference of a situation can be helpful. See figure 4.1 for an example. 77 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 77 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration Figure 4.1: Diagramming consideration Diagramming contracts is a good way to keep track of consideration issues. Harry has contracted here to pay $3,000; Peter has contracted to paint Harry’s house. Harry Peter $3,000 Paint house Example 4.23. Norma offers to sell Leopold her stamp collection for $1,000. Leopold accepts. A valid contract is formed, the consideration for which is as follows: the $1,000 that Leopold must pay to Norma, and the stamp collection that Norma must turn over to Leopold. Consideration can be either of the benefit form, as in the above case where Leopold gets the benefit of the stamp collection and Norma is entitled to the benefit of the money, or the detriment (also called forbearance) form, as when someone gives up something he has a legal right to do. Example 4.24. Jenny accidentally hits Theo with her car. Jenny’s insurance company offers Theo $15,000 in compensation for his injuries, but in exchange he must sign a full release. Here, the consideration to Theo is the promise to give him $15,000. If Theo accepts, his consideration to the insurance company is his giving up his right to sue based on the accident. Since Theo has a right to bring a lawsuit, his release is consideration to the insurance company, and they have a binding contract. But if Jared, a business law student, threatens to sue Aaron on grounds that Aaron’s personality constitutes Intentional Infliction of Obnoxiousness, and only agrees to drop the case if Aaron will promise to pay him $500, Jared’s forbearance from suing is not consideration. Jared did not in good faith believe he had a right to sue. So Aaron is not bound to pay the money. 78 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 78 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration It is important to focus on the idea that a contract involves an exchange to understand the concept of consideration. Suppose Maya, who is cleaning out her garage, says to Josh, “I offer you this bike.” Josh replies, “Great! I accept.” Maya then changes her mind and decides to sell the bike on Craigslist. Can Josh sue for breach successfully? Josh thinks there is an offer and acceptance, after all. But alas for his case, there is no consideration. While Maya did promise him the bike, he gave nothing in return. Thus Maya’s promise is merely an unenforceable gift promise. Courts generally are not concerned with whether consideration is of equal value, or whether the parties have made a good bargain. If you truly wish to sell your Mercedes for $10, you may do so! Sometimes nominal consideration such as this is used to turn what might otherwise be a gift into a contract, but as long as there is no fraud, duress, or undue influence, the contract is valid. What Isn’t Consideration? To have a contract, we see that there generally must be consideration flowing in both directions. However, sometimes there are things that at first look seem to be consideration, but legally don’t qualify. This category includes past consideration, preexisting legal duties, and illusory promises. Also, note that some promises are simply too vague to qualify. If Darrel promises Jane a diamond ring in three months’ time, in exchange for her love and affection, there is no consideration. If your mother promises you $1,000 at the end of the semester if you will be a good boy/girl this term, it might sound like a unilateral offer to you, but in fact you will not be giving consideration. What Mom thinks is good may not be the same as what you consider being good! Past Consideration If a benefit has already been given, there is no present bargained-for exchange, and thus no consideration and no binding agreement. Consider the following: Example 4.25. Helen, the owner of ABC Company, wishes to reward the loyal service of Matthew, an employee. She drafts an agreement that reads as follows: “In consideration of Matthew’s faithful service to ABC Company throughout the past thirty years, ABC Company hereby promises to pay to Matthew a yearly pension of $20,000 per year.” Matthew accepts. Example 4.26. Yin, grateful for Mark having saved his life, tells him: “In consideration of your bravery in rescuing me from the path of an oncoming truck, I promise to give you $50,000.” Mark accepts. In both of the above examples, past consideration is given and there is no contract. In reality, Helen and Yin want to make a gift to reward past service and gift promises are not enforceable. Matthew’s 30 years of faithful service are certainly valuable, as is Mark’s good deed. But there is no exchange involved in these situations, since the benefits from Matthew and Mark have already been given without any bargaining. 79 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 79 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration In the Media: Allen Iverson: “The Answer” to the Question About When a Contract Is Made Allen Iverson is one of the NBA’s all-time greats. Playing most of his career with the Philadelphia 76ers, at barely six feet tall Iverson was an 11-time all-star, and a league MVP. Although Iverson is currently in bankruptcy, he earned $154 million playing basketball—not counting commercial endorsements. The money from those endorsements, however, was the source of a lawsuit filed against Iverson by his long-time mentor and father figure, Jamil Blackmon. According to the complaint, in July 1994 (while Iverson was still playing at Georgetown University, but in an NBAstyled summer basketball league), Blackmon suggested to Iverson that he use the nickname, “The Answer,” meaning that Iverson would be the answer to all of the NBA’s woes. Iverson liked this idea and later that day he promised to give Blackmon 25 percent of all the money Iverson might eventually make from the nickname. Upon being drafted by the 76ers, Iverson renewed his promise to Blackmon, even before signing an endorsement deal with the shoe company Reebok. Iverson repeated the A friend suggested the nickname The Answer to promise about “The Answer” for years afterwards. Iverson, and later wanted While “The Answer” may have been Iverson’s nickname, the question to be compensated for Blackmon found himself repeatedly asking was “Where’s my money?” In its use. 2001, Blackmon sued Iverson for breach of contract and unjust enrichMatt Slocum/Associated Press ment. He lost, even on appeal. When looking at the nature of the alleged contract, however, we can see why. Iverson’s promise to Blackmon came after the nickname was offered, which means there was no consideration for Iverson’s promise to pay Blackmon 25 percent. And of course, past performance cannot constitute consideration for the creation of a contract. Blackmon even lost the unjust enrichment claim, which is grounded in doctrines of equity rather than pure contract law. Here, the appellate court ruled that since Blackmon offered the nickname without expectation of compensation, Iverson wasn’t unjustly enriched by profiting from the marketing of “The Answer.” A promise to provide something in return for what another person has already done for you is not consideration for a contractual obligation. Contract promises are exchanges about future performance by both sides, not thank-you promises for benefits already received. Source: Blackmon v. Iverson, 324 F. Supp. 2d 602 (E.D. Pa. 2003) http://scholar.google.com/scholar_case?case=16577460154069 688056&hl=en&as_sdt=2&as_vis=1&oi=scholarr Preexisting Duty It is not consideration to do what one is already obligated to do. For example: Example 4.27. Mara, a police officer, gives information that leads to the arrest of a bank robber. Mara attempts to claim the $10,000 reward the bank has offered. 80 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 80 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration Example 4.28. Al, a company’s accountant, agrees to recheck the company’s tax returns in exchange for a percentage of the tax savings he can realize for the company. Neither Mara nor Al has given consideration to make a contract. They are already obligated to perform the duties for which they seek additional compensation: the police officer has a duty to the public to catch criminals, and the accountant has a preexisting duty to find the largest legal refund he can for his employer. Mara and Al are not giving anything new or different than they are already required to give. Suppose Cathy contracts to build a house for Rita for $100,000. Halfway through the project, Cathy decides she isn’t going to make enough profit and she refuses to finish unless Rita promises to pay her an additional $15,000. Rita, facing a half-done house, reluctantly agrees. Cathy finishes the house. Must Rita pay her? Generally the answer is no, because Cathy gave no new consideration. But if in exchange for Rita’s promise, Cathy in turn promises to install a beautiful door knocker (worth an entire $25) that was not in the contract, that is consideration and Rita is bound to make the extra payment. It doesn’t matter that this is nominal consideration; the law doesn’t generally concern itself with whether the parties have made a good deal or whether consideration is of equal value. However, if the contract involves goods, we get a different result under UCC Section 2-209. Keisha promises to sell ten office computers preloaded with certain software to Max for $4,500. Keisha now discovers that installing the software is taking more time than she thought, and she demands that Max promise in writing to pay her an extra $1,000. If Max acquiesces, he is bound. The UCC says that a good faith modification of an existing sales of goods contract needs no new consideration to be binding. Of course, Max could always refuse and threaten to sue Keisha on their original, binding contract if she fails to go through with the deal. A firefighter’s job requires trying to put out fires, so if a homeowner offered “I’ll give you a thousand dollars if you save my house,” the promise would not be binding. The firefighter has a preexisting duty to fight fires, and so gave no consideration. A common example where the preexisting duty rule comes into play is in the maXx images/SuperStock area of agreements modifying a preexisting debt. In general, a person who owes a debt to another cannot enter into an agreement to pay a lesser amount, since there is no consideration for the new agreement. Example 4.29. Daniel owed Carla $50,000 that was due last June. Now, in November, he still hasn’t paid anything and Carla is starting to think he never will. Daniel now proposes that in exchange for his paying $40,000 next week, Carla promise to take that sum as payment in full. Carla, feeling she may never see the money otherwise, agrees. 81 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 81 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration Can Carla collect the $40,000, then turn around and sue Daniel for the remaining $10,000 on the original debt? In most states, the answer is yes. She is not bound to her promise to accept the lesser sum as full payment, because she received no new consideration. Daniel’s payment of the $40,000 was just part of what he already owed: he had a preexisting legal duty to pay that money. The result could be different if there was a good faith dispute as to the amount actually owed, which is known as an unliquidated debt. If Daniel owed the money because he had bought 50,000 widgets from Carla and he claims that 20,000 of them were defective, and they agree to settle for $40,000, both parties are bound. Also, if the money is paid before it is due, or if it is accompanied by some new item of consideration, or if the settlement occurs in a bankruptcy proceeding, the creditor’s promise to accept a lesser amount as payment in full is generally binding. Illusory Promises In order for consideration to be valid, each party to an agreement must be obligated under the contract. There are situations in which both parties to a contract appear to be giving consideration, but, in fact someone is making an illusory promise and really not committing to do anything. For example: Example 4.30. Wendy offers to sell Oscar “1,000 widgets at $1 per widget, delivery to be on or before June 1. Seller reserves the right to cancel at any time without penalty.” Oscar accepts. At first look, this appears to be a binding agreement because we seem to have an offer and acceptance and Oscar has promised to pay $1,000, which is consideration on his part. However, because Wendy included the right to cancel that is completely unrestricted, she has not committed to selling a single widget to Oscar. Basically Wendy has said she will sell Oscar the widgets if she feels like it. As a result, if Oscar doesn’t receive the widgets by June 1, he will be unable to sue Wendy for breach of contract. Wendy’s promise was illusory, or an illusion of a promise. Thus there was no consideration from Wendy to Oscar to support a contract. Suppose XYZ Company promises to buy from ABC Oil Inc. “All the heating oil we want for the next year at a price of $2.75 per gallon.” XYZ is making an illusory promise; only ABC is obligating itself to do anything—to provide XYZ with all the oil it wants at a set price of $2.75 per gallon. If prices drop and XYZ prefers to buy its oil from someone else, it is free to do so. If, on the other hand, oil prices increase, XYZ will be able to take advantage of its agreement with ABC and buy as much oil as it wants for the $2.75-per-gallon price. But if the agreement were to read “In consideration of a $1,000 cash payment by XYZ to ABC, ABC promises to sell to XYZ all the oil it may want in the coming year to heat its business premises for $2.75 per gallon,” there could be a valid contract. XYZ is now paying ABC a cash amount (valid consideration) for what amounts to an option contract where XYZ can buy any oil it needs during the coming year for a set price. The consideration given to ABC now is the $1,000 payment, and the consideration received by XYZ is the security of knowing that it will have a secure source of oil at a set price during the coming year despite fluctuations in the oil market. 82 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 82 9/20/16 11:15 AM CHAPTER 4 Section 4.4 Consideration Distinguishing Illusory Promises and Requirement Contracts While promises to buy anything one wishes, chooses, desires, or wants are illusory, a promise to buy as much of a given item as one will need or require is valid consideration. Consider the following examples: Example 4.31. ABC Company promises to buy from the XYZ Company “all the heating oil it needs next winter for $3.00 per gallon.” Example 4.32. Carl, a carpenter, promises to buy from Jan’s Hardware “all the hardware supplies he needs for his business during the next year at a discount of 25% off regular retail prices.” Each of the above examples represents a valid requirement contract with valid consideration, even though they may look suspiciously similar to illusory promises. In enforcing these contracts, the courts impose an implied duty of good faith on the parties. As long as the goods, materials, or services contracted for are likely to be needed by the promisor during the period of time in question, the courts hold that there is valid consideration for the promise and will enforce it. In the above examples, ABC is likely to need some heating oil next winter, and Carl will need hardware supplies to practice his trade. The promises are specific enough to be the basis of a contract because needs can be objectively determined at the time of breach. If ABC buys its oil from another supplier, XYZ can sue for breach. XYZ’s damages will be determined from the sales they lost when ABC used another supplier. If Jan’s Hardware refuses to sell Carl his supplies at the 25 percent discount, Carl’s damages will be the amount he had to pay to buy the goods (either from Jan or from another supplier). Note that if the goods or services contracted for are not likely to be needed by the promisor, the promise would be illusory and unenforceable. If, for example, the ABC Company in the above example uses gas heat and obligates itself to purchase all the heating oil it needs, the promise is illusory and the agreement unenforceable, since ABC will not need any oil. Exceptions to the Consideration Requirement Promises to give money to charities are binding without return consideration in most states, since charities serve an important role in society. If you pledge $100 to the Cancer Fund Drive, you will probably be held to it! Another exception is promissory estoppel. ABC Inc. promises Karen the job of vice president of the California office for the next five years at a salary of $100,000 per year. The company requires a formal acceptance by appearing at the next Board of Directors meeting. Karen says she will be there, quits her present job and moves to Los Angeles. Can ABC renege on their job offer? Because they made a promise, and Karen has reasonably relied on it to her detriment, ABC may be bound. 83 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 83 9/20/16 11:15 AM CHAPTER 4 Section 4.5 Chapter Summary 4.5 Chapter Summary C ontracts are the basic building blocks of business relationships. A business makes contracts with its suppliers, its customers, and its employees. Understanding when a contract comes into being is invaluable for business persons. A contract is made up of specific component parts: the offer, the acceptance, and the consideration. Each one has particular requirements and issues. In analyzing a situation, it’s always wise to take it from the top, and begin with identifying an offer. If one can be found, proceed to the next step: was that offer accepted by the offeree? Remember, sometimes the original offeror and offeree can change places, such as when a counteroffer is made. If an acceptance is present, be sure that both parties are giving consideration, or that an exception to the consideration requirement is present. A contract is defined as a bargained-for exchange, and by breaking down an agreement into its component parts, it should become more apparent whether or not there is a contract. Focus on Ethics In the first part of the 21st century, a real estate “bubble” formed in the U.S. economy. In other words, prices rose and rose to unrealistic levels. Many people took out mortgages that in all likelihood they were not going to be able to pay off by retirement age, if ever. In some cases the mortgage terms were difficult to understand and buyers may not have realized what they were getting into. In others they were just overpaying in relation to their income. A mortgage is basically a loan contract, which is secured by the lending institution. The bank retains title to the real estate until the loan is paid in full, and if payments are delinquent, the property can be repossessed by the bank in a foreclosure proceeding. Furthermore, the owner would forfeit all payments previously made. When the recession of 2008 hit, many home buyers discovered they could not afford their homes. Many had what is termed negative equity, meaning that they owed more on their mortgages than their homes were worth. In some cases banks foreclosed on them; in others the buyers simply walked away, breaching their contracts. Whole neighborhoods were negatively impacted as empty properties grew derelict, and values fell even more. Questions for Discussion 1. T he banks may have been acting legally in granting mortgages to people who could not afford them, but do you think they were acting ethically? Were the borrowers acting ethically in buying houses out of their realistic price range? Who should have the responsibility of determining whether the loans should be made in such a situation? 2. The mortgage crisis had a draining effect on the entire U.S. economy. As a result, some people called for more regulation of the industry. Some said the government should let the market correct itself. Which side do you agree with? 3. Suppose you have been appointed a special judge in County X, with the power to resolve delinquent mortgage situations. Is there anyone whose interest you need to take into account, other than the bank and the home buyer? Should you be concerned with the interest of the community as a whole? The banking industry? The American economy? 4. Assume you are still a judge. How would you choose among different options for a specific situation? For example, you could order foreclosure or that the bank adjust the payment rate. What factors will you consider in making your decision? 84 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 84 9/20/16 11:15 AM CHAPTER 4 Section 4.5 Chapter Summary Case Study: Hamer v. Sidway 124 N.Y. 538, 27 N.E. 256, LEXIS 1396 (N.Y. Court of Appeals 1891) Facts: Mr. Story was concerned about his 15-year-old nephew’s lifestyle. The uncle promises the nephew that if he will refrain from drinking liquor, using tobacco, swearing, and playing cards or billiards for money until his twenty-first birthday, the uncle will pay him $5,000. (At that time, all these activities were actually legal for boys of this age. New York must have been a wild and crazy place!) The nephew agrees, and adopts the wholesome lifestyle he has promised his uncle. There is no dispute that the nephew fulfilled his promise. When he turns twenty-one, the uncle agrees that the nephew has performed, but says he is going to wait a few years before paying him. Uncle wants the nephew to be a little more mature before handing such a big wad of cash. (Note: This was a lot of money in those days! The modern equivalent would be over $30,000.) Unfortunately, the uncle dies before paying the nephew. (Note: If you’re wondering why the case is called Hamer v. Sidway and not Story v. Story, it is because the nephew had assigned his claim to Mr. Hamer, and the legal representative of the uncle’s estate is named Sidway.) The uncle’s executor refuses to pay the money, saying there was no contract. Issue: Was there a contract? Did the nephew give consideration? Discussion: The estate contended that because the nephew was only doing what was good for him, he did not give consideration. The nephew was not harmed and the uncle received no benefit. But because the nephew had a legal right to drink, smoke, swear, and play cards and billiards for money, and he gave up those rights in exchange for his uncle’s promise to pay $5,000, the nephew had undertaken a detriment at the uncle’s behest. As the judge noted in his opinion, “Courts will not ask whether the thing which forms the consideration does in fact benefit the promise . . . or is of any substantial value to anyone. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him.” Holding: The court ruled that there was consideration, and thus a binding contract. Questions for Discussion 1. Analyze whether the uncle made an offer. A. Was there intent to contract? Do you think the uncle was serious? B. Were the terms reasonably definite? C. Would this be express or implied? Unilateral or bilateral? D. If the uncle had instead promised, “If you mend your ways and behave yourself until you are twenty-one, I’ll pay you $5,000,” would that be an offer? E. Suppose the uncle promised, “If you refrain from drinking liquor and smoking tobacco, I’ll pay you $5,000 when I’m convinced you’re going to stick with it.”Would that be a valid offer? 2. Did the nephew accept the offer? Could he have accepted by promising to adopt a healthy lifestyle? 3. What was the uncle’s consideration? 4. What was the nephew’s consideration? 85 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 85 9/20/16 11:15 AM CHAPTER 4 Section 4.5 Chapter Summary Case Study: South Shore Amusements, Inc. v. Supersport Auto Racing Association 483 N.E.2d 337 (Ill. App. Ct. 1st Dist. 1985) Facts: Under a written contract between South Shore Amusements and Supersport Auto Racing, South Shore would lease the Raceway Park Motordrome (Raceway) from Supersport on September 24, 1974, to show a closed circuit telecast of a boxing match between Muhammad Ali and George Foreman. The match was postponed because of the injury of one of the contestants. When Brotman, the president of South Shore, learned about the delay of the match, he telephoned Jenin, the president of Supersport. According to Brotman, during this telephone conversation, Jenin orally agreed to make Raceway available to South Shore to show the telecast of the match on the rescheduled date. Supersport denied that such an agreement was made. In fact, on the rescheduled date the boxing match occurred, Raceway was closed for the season. In reliance on the alleged oral agreement, South Shore spent money in preparation to show the match and also lost approximately $60,000 in anticipated earnings from ticket sales. Additionally, Supersport failed to return South Shore’s $1,500 deposit and money received from ticket sales. South Shore sued Supersport for breach of contract, and the trial court ruled in favor of South Shore in the amount of $8,695, based solely on the uncorroborated testimony of Brotman, who was not only South Shore’s president but also its attorney. Supersport appealed the judgment. Issue: Was there a valid oral modification of the written contract? Discussion: The appellate court acknowledged that a written contract can be modified by a later oral agreement, but ruled that the trial court’s conclusion was completely against the weight of the evidence presented at trial. The only evidence of the oral agreement was the testimony of Brotman. There was no other evidence, such as written correspondence confirming the alleged oral modification, or evidence of rescheduling equipment that would be needed to show the boxing match. Moreover, there was no evidence of the rescheduled date of the match. The court ruled that the written agreement was controlling, and that South Shore failed to establish that the contract was breached by a later oral modification. Holding: The judgment of the trial court was reversed. Questions for Discussion 1. What were the terms of the original contract between South Shore and Supersport? 2. Did Supersport perform according to the terms of the contract? 3. Since the match was delayed, why didn’t the appellate court order Supersport to return South Shore’s deposit of $1,500 and money received from ticket sales? 4. Supposing that the original contract was modified by an oral agreement, did South Shore give Supersport any consideration? 5. What kind of evidence should Brotman present to support his claim that the original contract was modified by an oral agreement? 86 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 86 9/20/16 11:15 AM CHAPTER 4 Section 4.5 Chapter Summary Critical Thinking Questions 1. The law sometimes defines a contract as a bargained-for exchange. Explain what this means. 2. What does it mean when we say that the law judges intent to contract by an objective standard? Hypothetical Case Problems Case 1. A  BC Company writes in a letter to Sam, “How much would you take for the forty-acre tract of land known as the old Hanscom site?” Sam writes back, “I couldn’t take less than $150,000.” ABC responds by FedEx special delivery, “Accept your offer for $150,000.” Do they have a contract? Case 2. B  ertha calls Anita by telephone and offers to sell Anita her oriental rug for $400. Anita says she’ll think about it. Later on that day, she writes Bertha telling her that she accepts the offer. On her way back from mailing the letter, Anita receives a phone call from Bertha in which she tries to revoke the offer, since she’s found someone who is willing to pay $800 for the rug. A. Was mail a proper way for Anita to accept? B. Did Bertha revoke her offer in a timely manner? C. Do they have a contract? D. Suppose Anita forgot to put a stamp on the letter. Has Bertha successfully revoked with her phone call later that same day? E. Assume Anita properly stamped and addressed her letter. What if she had written, “I accept and will buy the rug for $350.” Now do they have a contract? Case 3. R  ebecca is planning to retire from her job at BCA Corp. Todd, the president of BCA Corp., tells Rebecca: “In consideration of your thirty years of faithful service to this company, BCA Corp. promises to pay you $1,500 per month for the rest of your life when you retire next week.” Rebecca gratefully accepts. A. If BCA doesn’t pay Rebecca the pension, can she successfully sue for breach of contract? B. What if Rebecca had not yet decided if she could afford to retire, and then Todd makes the promise? C. Suppose Rebecca had definitely already decided to retire, but Todd is concerned about replacing her. Now Todd offers, “In consideration of Rebecca’s thirty years of faithful service, BCA Corp. promises to pay her $1,500 per month for the rest of her life, provided that she continues to work for BCA for at least three more months.” Does this change the situation? Case 4. C  arla contracts to drive Martin’s race car in an upcoming race in exchange for $1,000. Now Martin learns that the prize money has been increased, and he tells Carla, “If you win, I’ll pay you $1,500.” Carla wins the race. A. Does Martin owe her $1,000 or $1,500? B. Suppose instead Carla had contracted to sell Martin three race cars for $75,000 each. Now she tells Martin that because some components have gone up in price, she will only sell him the three cars if he pays an extra $10,000 per car. Martin isn’t happy, but he really wants the cars so he agrees. Is Martin bound to pay the extra money? 87 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 87 9/20/16 11:15 AM CHAPTER 4 Section 4.5 Chapter Summary Key Terms acceptance The offeree’s manifestation of assent to the terms of the offer. offer A promise to do business; the first element of a contract. bilateral contract One in which a promise is exchanged for another promise. offeree The person to whom an offer is made, who has the power to accept and form a contract. contract An agreement that may be enforced. A bargained-for exchange. offeror The person who makes an offer. express contract One in which the offer and acceptance are clearly stated in express language. option An offer for which consideration has been paid expressly to keep the offer open for a set period of time. firm offer An offer that states it will be held open. Under the UCC, it must be made by a merchant, in a signed writing, in order to be enforceable without consideration. promissory estoppel A legal doctrine that allows reasonable reliance on a promise to substitute for another legal requirement, such as consideration. formal contract One required to have a certain format, such as being in writing and signed with a seal. quasi contract A situation where to prevent unjust enrichment, a court may award a remedy because a benefit was accepted, even though there is no contract. Also called a contract implied in law. illusory promise A statement that sounds like a promise but is worded so as to not commit the promisor; an illusion of a promise. rejection An offeree’s declining the offer, which results in termination of the offer. implied contract One in which either offer, acceptance, or both are implied by the conduct of the parties rather than explicit language. requirement contract One in which a buyer has agreed to buy all the specified goods that the buyer needs or requires for a certain period of time. (A similar contract which involves a seller agreeing to sell all the goods the seller produces is known as an output contract.) mailbox rule A rule that states that as long as mail is a proper way to accept an offer and the offer has not stated limits on acceptance, an acceptance is effective as soon as it is mailed. revocation An offeror’s cancellation of the offer. merchant A person who customarily deals in goods of the type involved in the transaction; one for whom the contract is in the course of business. simple contract A contract which is not required to be in a specific form. unilateral contract A promise (offer) exchanged for actual performance (the acceptance). mirror image rule A common law rule that states the acceptance must be on the same terms as the offer, or it will be deemed a counteroffer instead. unliquidated debt A legal obligation to pay money, but the amount owed is in genuine good faith dispute between the parties. 88 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_04_c04_062-088.indd 88 9/20/16 11:15 AM Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality 5 Learning Objectives After studying this chapter, you will be able to: 1. Distinguish between voidable, unenforceable, and void agreements. 2. Explain the requirement of capacity and describe why a person might lack it. 3. Describe mutual mistake, duress, undue influence, and fraud. 4. List the types of contracts required to be in writing. Pixtal/SuperStock 5. Give examples of illegal agreements. Chapter Overview 5.1 V  alid, Voidable, Unenforceable, and Void Agreements 5.5 Illegality 5.2 Capacity 5.6 Chapter Summary • Contract Interpretation and the Parol Evidence Rule • Capacity and Age: Minors • Capacity and Mental Incompetence • • • • • • 5.3 Genuine Assent • • • • Mutual Mistake of Material Fact Fraud Duress Undue Influence Focus on Ethics Case Study: Lamle v. Mattel, Inc. Case Study: Sherman v. Burton Critical Thinking Questions Hypothetical Case Problems Key Terms 5.4 U  nenforceable Contracts and the Statute of Frauds • A Promise to Pay the Debt of Another • A Promise That by Its Terms Cannot Be Performed Within One Year of the Date the Contract Is Made • A Promise in Consideration of Marriage • Contracts for the Sale of Goods With a Price of $500 or More • Contracts Creating an Interest in Real Estate • Requirements of the Writing Under the Statute of Frauds 89 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 89 9/20/16 11:13 AM Section 5.1 Valid, Voidable, Unenforceable, and Void Agreements CHAPTER 5 A fter determining that an offer and acceptance are valid, and that there is valid consideration, each party to the contract must have the capacity to enter into a binding contract and must give his or her genuine assent to enter into a binding agreement. To put it another way, the parties must fully understand that they are entering into a contract, and they must willingly enter into a contractual relationship with each other. To use a simple example, if Felipe holds a gun on Heather to persuade her to sell him her car, there may be offer, acceptance, and consideration, but the contract is defective due to lack of mutual assent. Heather was not truly agreeing to sell her car; she just wanted to avoid getting shot. In this chapter we will examine a number of impediments that might invalidate what otherwise appear to be valid contracts. These include lack of capacity, defective assent issues (mutual mistake of material fact, duress, undue influence, fraud), illegality, and having an oral agreement in one of the few situations in which the law requires a writing. But first, it’s time for some more terminology! 5.1 Valid, Voidable, Unenforceable, and Void Agreements A valid contract is one that meets all legal requirements. It’s what people generally aim for when they seek to make a contract. Sometimes, though, it’s not what they end up with. A voidable contract results from lack of either capacity or genuine assent. Voidable means that at least one of the parties, and sometimes both, can get out of the contract without being liable for breach, generally because of some circumstance present when the contract was made. Contracts made by minors (people under a statutory age) are voidable at the option of the minor. Contracts made under duress or undue influence, or contracts that involve fraud by one party, are voidable at the option of the victim. However if the victim wishes to go through with the contract, he or she can hold the “bad guy” to the deal. Suppose that Heather, in the above example, discovers that Felipe actually contracted to pay more than market value for her old car. If she decides to forgive him for the whole gun thing and hold him to the contract rather than voiding it, she can. Lastly, a contract made when there was a mutual mistake of material fact is voidable at the option of either party. A contract that is unenforceable is one that was legally required to be in writing and is not. A law called the statute of frauds (which is not the same as the fraud mentioned above) requires that five types of contracts be evidenced by writing. Lastly, an agreement that is illegal is void, which generally means it will be given no legal effect. Now that we understand the terminology, let’s begin with a closer look at the voidable contracts, followed by an examination of unenforceable and void agreements. 90 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 90 9/20/16 11:13 AM CHAPTER 5 Section 5.2 Capacity 5.2 Capacity T here are two separate issues that may arise with regard to contractual capacity: age and mental competency. First, let’s look at age. Capacity and Age: Minors Minors are people who have not reached the age of majority, which is set by statute in any given state. The most common age for majority is 18. By law, minors’ contracts are voidable at the option of the minor, because minors have the right of disaffirmance. This means that a person can get out of the contract he or she made while a minor without being liable for breach. Why have such a rule? The theory is that minors, young and inexperienced, might be lured into making unfair and unnecessary contracts by older, sneaky types. Picture, if you will, a fast-talking, slick salesman persuading a teenager to buy a car on a complicated installment contract she is unlikely to understand! Of course, the law could have chosen to just let minors void their unfair and unnecessary contracts. The problem with this type of rule is that it would be unpredictable and almost every case would go to trial on the question of fact of whether the contract was unfair. The general rule that minors can disaffirm at least has the advantage of being easy to apply and it gets rid of many conflicts before they go to trial. Example 5.1. Mary, age 16, buys a used car from Dan for $3,000. She drives the car for six months, crashes it, has the wreck towed back to Dan’s house, and shows up on his doorstep, demanding her money back. Can Mary actually get away with this? Yes, she can. She is a minor and she has disaffirmed. When a minor disaffirms, she has the duty to return the consideration in whatever shape it’s in. In exchange, in a majority of jurisdictions, the other party must return the minor’s full consideration. So Dan must give Mary back her $3,000. The law even allows a person to disaffirm within a contract made while a minor within a reasonable time after attaining majority age. If the boy decides he doesn’t like this flavor, can he get his money back? Once an offer is accepted, a contract has been formed, but the contracts of a minor are voidable. Glow Images, Inc./Getty Images Example 5.2. Michael, age 17, buys a car from Cathy for $2,000. A week later, he turns 18, the age of majority in that state. A few days later, he begins to have transmission trouble, goes to a garage, and is told it will cost $800 to repair the car. Michael decides to disaffirm instead. 91 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 91 9/20/16 11:13 AM CHAPTER 5 Section 5.2 Capacity How long is a reasonable time? This is a question of fact that depends on the individual case, but clearly in the example above Michael can disaffirm. It’s been less than two weeks since he made the contract, and a few days since he came of age. How does a minor disaffirm? By saying anything, or doing anything, that would indicate to a reasonable person that the minor does not intend to go through with the contract. Example 5.3. Renaldo, a minor, buys a car from the local dealership, on an installment payment plan. He makes the down payment of $1,000 and has made three monthly payments when the car is stolen. Renaldo stops making payments to the dealer. Renaldo’s cessation of payments would indicate he does not intend to be bound to the contract, so this is an implied disaffirmance. He does not have a legal duty to return the car, because he does not have it. What if Renaldo lied to the dealer about his age in order to get the car? The states have a variety of rules dealing with a minor’s misrepresentation. Some still allow disaffirmance, some allow it under some circumstances, and some don’t allow it at all. Also, states differ on whether the minor can be held liable for fraud in such situations. If a person makes a contract while a minor, comes of age, and ratifies the contract, he or she is now bound. Once you ratify, you lose forever the right to disaffirm. Ratification can be either express or implied. Example 5.4. Mary the minor buys that car from Dan. Then she turns 18. Now of majority age, Mary tells Dan she considers the contract to be binding. A week later, she changes her mind and wants to disaffirm. Mary cannot disaffirm, because she came of age and expressly ratified the contract. Example 5.5. Renaldo the minor buys the car from Dealer. He turns 18. He makes a payment on the car. Now the car is stolen, and Renaldo wants to disaffirm. He cannot, because he has already ratified. He must continue to pay for the car. The right of minors to disaffirm contracts can place a heavy burden on merchants who sell goods to minors on a regular basis. Yet most merchants are quite happy to deal with minors. The reason? It makes good business sense to bear the risk that a minor may disaffirm a contract, since only a very small percentage of minors ever do so. One way around this potential risk is to have an adult cosign any contract with a minor. If this is done, the adult contracting with a minor has a greater measure of protection, since she may recover the full price of the contract from the cosigner in the event that the minor decides to disaffirm the contract. It should also be noted here that only the minor has the right to void a contract entered into during minority—the adult who contracts with a minor is fully bound by his contract. (If both parties to the contract are minors, then either may void the contract at her option, but neither has any special rights of enforcement.) Likewise, a cosigner or guarantor of a contract entered into by a minor may not exercise the minor’s right to disaffirm the contract—only the minor may do so. 92 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 92 9/20/16 11:13 AM CHAPTER 5 Section 5.2 Capacity Emancipated Minors Sometimes a person who is still a minor may be treated legally as an adult. In some states, the minor may petition the court to have the power of disaffirmance legally removed. Example 5.6. Mary Lou wins the Olympic gold medal for all-around gymnastics. She is a hot commodity for endorsement contracts, but no one wants to do business with her because she’s a minor. Mary Lou petitions for and is granted emancipation. Now she can make binding contracts, so she signs to promote a soft drink for a fee of $1 million. In some states, if a minor is independent and selfsupporting, the minor is considered to be emancipated and contracts are no longer voidable. Example 5.7. John, a minor, works full time, is married, and has a baby. John has not spoken with his own parents for more than five years; neither has he received any support from them. In states that view independence as emancipation even without a court procedure, John’s contracts are binding. Olympic gymnast Mary Lou Retton sought emancipation in order to take advantage of endorsement contracts. Because she was under the age of majority, companies did not want the risk of a voidable contract. Emancipation meant that Retton could no longer disaffirm her contracts. Associated Press By statute in every state, there are some types of contracts that minors cannot disaffirm for public policy reasons. The typical examples are insurance contracts, contracts with financial institutions (which also issue most credit cards), and contracts made to fulfill a legal duty. For example, regardless of your age, if you are yourself a parent, you have a duty to supply necessities for a minor child. If you own real estate, you have a legal duty to pay the taxes on it. If you make a contract to carry out such a legal duty, it is binding even if you are a minor. Example 5.8. Mary, age 15, has a baby. One night the baby gets very sick and Mary takes her to the emergency room of the hospital for treatment. Mary then refuses to pay the bill. Mary will be liable, because as a parent she had a duty to provide medical care for her child. Contracts for Necessities Another exception to the general rules for minors involves necessities purchased by the minor. A necessity can be defined as anything that a minor reasonably needs to live and covers such essential items as food, clothing, shelter, medical care, and credit in most states. Educational expenses are also treated as necessities in some states. While minors can disaffirm these contracts, they can still be held liable for the fair market value of the necessity. 93 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 93 9/20/16 11:13 AM CHAPTER 5 Section 5.3 Genuine Assent Example 5.9. Michael, a minor, comes home from boarding school to find his family home locked up and deserted. None of his friends are around, so he goes to a hotel for a few nights. Michael will be held liable for the reasonable value of staying in the hotel, since shelter was a necessity for him and he had to provide it for himself. What constitutes a necessity depends in part on the facts of each case. If a minor’s parents are willing to provide him with housing, an apartment is not a necessity for the minor, even if he would prefer to have his own place. On the other hand, if the minor is an orphan and must provide his own housing, the apartment would be deemed a reasonable necessity. If a minor needs a job to help support herself and her family, and she cannot reach work without a car, the car is a necessity. But if she could have just as easily walked or ridden her bike to work, the car is not a necessity, and she would not be liable in quasi contract if she disaffirms the contract for the car. Capacity and Mental Incompetence To have a valid contract, both parties, at the time the contract is made, must have sufficient mental competency to understand the nature and circumstances of the transaction. This does not necessarily mean they would understand every clause of legalese in a long, complicated written contract, but does require that they know basically what they are doing. Example 5.10. Cassandra’s landlord comes to her door to ask if she intends to renew her lease for another year. Cassandra, a paranoid schizophrenic who is not taking her meds, is suffering from complex hallucinations and thinks he is an alien asking her to sign a peace treaty on behalf of Planet Earth. Not wanting to be responsible for a war with aliens, Cassandra signs the new lease. Cassandra lacks capacity and can void the contract when she realizes what she has done. If Cassandra had already been declared mentally incompetent by a court, her contract would be void rather than voidable. The relevant time period for capacity is when the contract is made. The law generally presumes both parties to have capacity unless there is something in evidence that puts it in question. Then the burden is on the party who wants the contract to stand to show that the other really did understand what he was doing. People can lack capacity for a variety of reasons: mental illness, senility, even intoxication! (This is one of the few times in your life when being drunk is actually a legal excuse.) But the issue is not whether you are mentally ill, or too drunk to drive; the issue is whether because of your condition, you were unable to understand the contract. 5.3 Genuine Assent S ometimes it appears that there is an agreement, but when we examine the circumstances more closely, we can see that one or both parties did not truly have a “meeting of the minds.” Such defective assent makes a contract voidable. Let’s take a closer look at the specific grounds for voiding a contract on this basis. 94 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 94 9/20/16 11:13 AM CHAPTER 5 Section 5.3 Genuine Assent Mutual Mistake of Material Fact If both parties to a contract make a mistake about a material fact (something a reasonable person would consider in choosing to make the contract), either one can void the contract. Example 5.11. If Jeremy contracts to sell his yacht to Keisha for $1 million, and unknown to either at the time the yacht has already sunk to the bottom of the slip where it was moored, the contract is voidable. A classic case involving mutual mistake had a seller contracting to sell bales of cotton to a buyer. The contract seemed very specific, calling for the 125 bales of cotton to be shipped from Bombay, India, to Liverpool, England, on a ship called Peerless. How could there be a misunderstanding? It turns out there were two ships called Peerless, both carrying Surat cotton, both sailing from Bombay to Liverpool. One was scheduled to arrive in October, and the other in December. The buyer was thinking of the October ship, and when his cargo isn’t on the Peerless, he sues for breach. But all along the seller had the December ship in mind. The parties never truly agreed on the terms, because of their factual mistake. Thus the contract is voided by the seller, and the buyer is out of luck. Note that a mistake in value is not a mistake of fact. If you are simply ignorant of the subject matter, you are not making a mistake. If you buy a painting on eBay that is correctly identified as being by Juan Picasso, paying $5,000 for it because you did not know that the famous Picasso’s name is Pablo, you will not be able to void the contract when you discover you can only resell the painting for about $500 instead of the millions you planned on getting. Enjoy your painting! A unilateral mistake by one party to the contract generally will not void the agreement. If Bret offers to sell milk wholesale to Organic Grocery for $1.44 per gallon when he meant to type in $1.55 and Organic accepts his offer, Bret cannot get out of the contract. There is a possible exception if the other party knew or should have known about the mistake. For example, if Sam offers to sell his deluxe mansion in Beverly Hills for $50,000, it is quite obvious that some zeros were left out, and a court might let Sam avoid the contract. Fraud In addition to being a tort, fraud is also a way to avoid a contract. Review the elements in Chapter 2! We will add a few details here. For simplicity, since either party could be plaintiff or defendant in a contract fraud case, we will refer to the person committing the fraud as “Bad Guy” and the person seeking to void the contract as “Victim.” There are two basic types of contract fraud. The first is fraud in the execution, where Victim is deceived in such a way he does not even realize he’s made a contract. For example, suppose Vic is asked by Bad Guy to sign a guest book, but there is a carbon sheet underneath that transfers Vic’s signature to a contract to buy BG’s car. The contract will be voidable at Vic’s option: he could still buy the car if he wanted to. The second type of fraud is fraud in the inducement, where Vic knows he is making a contract but is deceived as to some aspect of the subject matter. The remainder of our examples deal with this type, which is far more common. 95 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 95 9/20/16 11:13 AM CHAPTER 5 Section 5.3 Genuine Assent Note that while generally silence is not making a false statement and thus not fraud, if Bad Guy owed victim a fiduciary duty (discussed previously), silence might be fraud. Another situation where silence can be fraudulent is when Bad Guy’s original statement, though true at the time, ends up giving Victim a mistaken impression. Example 5.12. Bad Guy tells Victim, who is considering buying BG’s house, “According to the last inspection, there is no sign of termites.” This is true, but before Vic makes an offer, BG discovers termites in the house. Because it was BG’s statement that has given Vic the idea the house is termite free, BG is committing fraud by not giving Vic an update. Silence can also be fraud if there is active concealment of information; in other words, if Bad Buy is doing something to cover up a material fact. Example 5.13. Bad Guy’s house has a bad fire. Rather than make real repairs, BG takes the insurance money and makes cosmetic repairs, painting over the smoke damage, installing some new sheetrock, but not replacing burnt out support beams. Vic buys the house, and two weeks later falls through the living room ceiling when a beam collapses. Vic can void the contract and get his money back, or sue for damages to repair the house properly. In February 2012, Proview Electronics Co. filed a lawsuit against Apple for intentional misrepresentation, fraud by concealment, fraudulent inducement, and unfair compensation. Apple purchased the “iPad” trademark from the Taiwanese company using a United Kingdom–based proxy called “IP Application Development,” which later turned the trademark over to Apple. The lawsuit was thrown out in May of that same year. Dong Jinlin – Imaginechina/Associated Press The final situation where silence can be fraud is where the information is unusual, something Victim would not normally check out, and Bad Guy is aware it could be a deal-breaker. Example 5.14. Bad Guy’s house has no usable water source. The well is contaminated with industrial pollutants, and the house is too far from the center of town to connect with a water main. BG “forgets” to tell Vic this fun fact about the house. When Vic discovers the problem, he will have a good case against BG for fraud. Keep in mind that predictions and opinions are generally not statements of fact, and therefore not fraudulent. If another student tells you to sign up for Business Law because it’s dead easy and you later decide it’s actually a really hard class, you cannot sue, because that is an opinion. If your advisor tells you “Business Law is the greatest class in the whole world! A life-changing experience! Fantastic!” this is called puffery, and is not a basis for 96 © 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. rog80328_05_c05_089-110.indd 96 9/20/16 11:13 AM Section 5.4 Unenforceable Contracts and the Statute of Frauds CHAPTER 5 fraud. If your stockbroker tells you, “This one will be a winner,” and the stock you buy tanks, your broker was merely making a prediction, and this is not fraud. In addition to an intentional misrepresentation of a material fact, made with intent to deceive, remember that Vic must also show he reasonably relied on BG’s statement. In a contract case, to prove the final element of damage, Vic does not have to have an economic loss to avoid the contract. His damage is that the deal he thought he was getting is not the one he wound up with! Remember, fraud is intentional. Sometimes negligent or innocent misrepresentation may affect the legal status of a contract, but the rules differ from state to state. Duress Duress occurs when one party (shall we keep calling him Bad Guy?) uses wrongful coercion to get the other (yes, Victim) to make a contract. For example, BG shows Vic a gun/threatens to beat him up/burn his house down/beat up his girlfriend/file criminal charges against Vic, in order to get Vic to pay $10,000 for BG’s car. All of these threats are unlawful coercion and would be duress, allowing Vic to void the contract (once he feels safe!). If BG threatens Vic with a civil lawsuit, that is perfectly lawful and Vic cannot void the bargain. That is an example of what lawyers call “tactics”; in other words, do what I want or I’ll sue you. Undue Influence The concept of undue influence is difficult to define but easy to recognize, since it almost always is going to involve one of two fact patterns: (1) the parties have a fiduciary relationship, or (2) one party is highly dependent on another due to illness, age, infirmity, etc...
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Explanation & Answer

As with the previous question, the answers are specific based on the case and it was difficult to find an external source. let me know what you think about the response.

Discussion 2


Under UCC 2-302, who has the best chance of getting out of the contract due to
unconsionability?
In this instance, Breanna has the best chance of getting out of the contract due to
unconscionability. During the time when the contract to purchase the Freezy was made,
Breanna had no option but to accept the terms due to the urgency of the situation which
left her with no ...


Anonymous
Excellent! Definitely coming back for more study materials.

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