Business Law - Contract Formation PDF

The Legal & Regulatory Environment of Business 19e Chapter 8 Contract Formation Pagnattaro Cahoy Magid...

The Legal & Regulatory Environment of Business 19e Chapter 8 Contract Formation Pagnattaro Cahoy Magid Shedd Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-1  Learning Objectives To describe the rationale and legal basis for contracts To classify contracts and understand the terminology used to describe contracts To describe the requirements needed to create an enforceable contract To identify instances in which mutual agreement cannot exist To know when a contract must be in writing Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-2  Contracts Promises that are enforceable with predictable consequences for performance failures Enable buyers and sellers to account for future risks or have confidence in exchanging valuables Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-3  Examples Service Contract: Landscaper promises weekly garden maintenance for $500/month. Sales Contract: Car dealership promises to deliver a car for $30,000. Lease Agreement: Landlord promises to rent an apartment in exchange for monthly rent. Employment Contract: Employer promises $50,000/year for employee’s services. Loan Agreement: Bank promises $100,000 loan, borrower promises repayment with interest. Non-Compete Agreement: Employee promises not to work for a competitor after leaving. Settlement Agreement: Party promises to pay $10,000, other party drops legal claims. Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-4  Think Tank think think think TANK TANK TANK All promises are legal contracts a. True b. False Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-5 Contract Law in Private Enterprise Contract need not be a formal, written document Contract law enables private agreements to be legally enforceable Provides flexibility and precision in business dealings Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-6  Sources of Contract Law Contract law comes from either Legislation Common Law Uniform Judges’ decisions Commercial Code Contracts for other than goods Contracts for goods Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-7  Classification of Contracts Bilateral and unilateral contracts Express and implied-in-fact contracts Implied-in-law or quasi-contracts Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-8  Figure 8.1 - Bilateral Contract Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-9  Figure 8.2 - Unilateral Contract Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-10 Express and Implied-in-fact Contracts Express contracts – Arise from interactions in which parties discuss the promised terms of agreement E.g., Sale of Goods: A buyer and seller agree on the sale of a car for $10,000, with clear terms on the condition of the vehicle and payment. Implied-in-fact contracts – Arise from the conduct of the parties rather than from words E.g., Haircut Appointment: When a customer goes to a hair salon and sits in the chair for a haircut, there is an implied agreement that the customer will pay for the service rendered. Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-11 Implied-in-law or Quasi-Contracts Judicial remedy to prevent one party from receiving unjust enrichment Remedy applies when no actual contract exists to cover the dispute E.g., Emergency Medical Services: If a person receives emergency medical treatment while unconscious, the hospital may seek payment for services rendered, even if no explicit agreement was made, based on the principle that the patient should not be unjustly enriched. Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-12  Contractual Enforcement Terminology Enforceable Unenforceable Valid Void Voidable Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-13  Contractual Performance Terminology Executed contract Parties have performed their promises Executory contract Parties have not yet performed their agreement Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-14  Figure 8.3 - Requirements for an Enforceable Contract Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-15  Figure 8.3 - Defenses to Contract Enforcement Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-16  Offer to Contract Contains a specific promise and a specific demand Offeror must intend to make the offer by making a commitment to the offeree Contractual terms must be definite and specific Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-17  Offer Termination Offeror Offeree Offer Acceptance  Revocation  Rejection  Counteroffer  Lapse of time  Subject matter destruction  Offeror death or insanity  Subject matter illegality Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-18  Acceptance of Offer Necessary to create a valid and enforceable contract – Bilateral contract is accepted when offeree has made the required promise – Unilateral contract is accepted by performing a requested act Mirror image rule: Acceptance must match the offer exactly to create a binding contract Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-19  Acceptance of Offer, II Section 2-207 of the UCC (law governs sales of goods) – An expression of acceptance or a written confirmation is treated as an acceptance Silence – Being silent on the offeree’s part does not imply acceptance Mailbox rule: Acceptance becomes legally binding when the offeree dispatches it Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-20  Consideration Receipt of a legal benefit or the suffering of a legal detriment Agreement not to sue – Consideration to support a promise when reasonable grounds for a lawsuit exist Accord and satisfaction: Resolving a dispute over an amount owed by reaching a compromise Preexisting obligation – Party to an agreement does not give consideration by promising to do something that he or she is already obligated to do Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-21  Consideration, II Prior consideration – Performance made before the discussion of the agreement does not count Promise to make a gift – Option: Agreement to not revoke an offer for a certain period, supported by the offeree’s consideration – Promissory estoppel: Doctrine arises when promisee relies on a promisor’s promise to his or her economic injury Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-22  Case 8.3 - Agreement Not to Sue Case – Vassilkovska v. Woodfield Nissan, Inc. – 830 N.E.2d 619 (Ill. App. 2005) Issue – Nadejda Vassilkovska purchased used car from Woodfield Nissan. In a separate agreement both parties promised to arbitrate any claim against the other instead of suing in court Vassilkovska sued Woodfield for misrepresenting the price of the car in a financing agreement Was the arbitration agreement valid requiring the plaintiff to arbitrate the claim rather than go to court? Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-23  Capacity of Parties Minors – Cannot be legally bound to contractual promises with exceptions for necessaries of life – Contract is voidable at the election of the minor Intoxicated or mentally incompetent persons – Contracts are voidable depending on the person’s capability to understand the contract’s nature and purpose Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-24  Lawful Purpose Contracts that require commission of a crime or tort or violate accepted standards of behavior are void – No action will be taken – Contracts that restrain trade are illegal and void Covenants not to compete: Protects employers from having the employees they train leave them and compete against them Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-25  Contracts Lacking Mutual Understanding Fraud: Intentional misstatement of fact that induces another to enter into a contract Mistake – Mutual mistake – Unilateral mistake Duress: Threat of force – Force can be physical or economic Undue influence: When a person is taken advantage of unfairly through a contract Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-26  Oral Contracts Generally as enforceable as written agreements Informal Everyday examples:  Buying fast food  Vending machines Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-27  Statute of Frauds Legal requirement that certain contracts be in writing Business contracts required in writing – Sale of an interest in land – Collateral promise to pay another’s debt – Contracts that cannot be performed in a year – Sale of goods of $500 or more – Other contracts based on state statutes Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-28  Exceptions to the Writing Requirement Part Judicial admission performance Rules involving goods Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8-29