Chapter 11&12: Contract Law PDF
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This document covers fundamental concepts of contract law, including types of contracts (bilateral, unilateral, express, implied), and key elements of a valid contract. It's written in a concise format, providing a good overview of legal agreements.
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**Chapter\# 11&12** - A contract is a legally enforceable agreement that outlines the expectations and obligations between parties. Breach of contract can lead to legal consequences. - Contracts serve as a source of law that governs the relations between two or more parties, ensuri...
**Chapter\# 11&12** - A contract is a legally enforceable agreement that outlines the expectations and obligations between parties. Breach of contract can lead to legal consequences. - Contracts serve as a source of law that governs the relations between two or more parties, ensuring that each party upholds their agreed-upon commitments. - In the United States, there are three primary sources of contract law: 1. Common Law: Based on precedent and court decisions that have become binding principles in contract law. 2. UCC (Uniform Commercial Code): Governs commercial transactions and the sale of goods across states. 3. E-commerce regulations: Govern electronic contracts and transactions conducted over the internet. - **Types of Contracts** 1. **Bilateral vs Unilateral:** [Bilateral contracts] involve mutual promises between both parties. **[-Example:]** The student promises to fulfill the obligations of a standard student while the university promises to provide education in the form of classes, access to resources, and the opportunity to earn a degree [Unilateral contracts] involve one party making a promise, and the other party fulfilling the obligation without making a promise. -**[Example:]** A company promises a reward for finding a lost item. Anyone who finds the item can claim the reward by returning it, without explicitly promising anything to the company beforehand. 2. **Express vs Implied:** In [express contracts], the parties express their promises. **[Example:]** Contract of sales of a real estate [a- Implied-in-fact contracts]: the parties do not declare their promises and don't discuss the contract; they simply perform. Their promises can be simply deduced from their behavior. **[Example:]** Taking a doctor's appointment [b-Implied-in-law contracts (quasi contract):] it is an after-the-fact contract mandated by a judge seeking to address a situation where one party benefited at the expense of the other party. The court treats two parties who don't have a contract as if they did because of the enrichment of one party at the unjust expense of the other. **[Example:]** If a painter paints your house without you asking and you don\'t stop them, you have to pay and a quasi-contract is formed between both of you. 3. **Formal vs Informal:** A [formal contract] is a contract in which a legal procedure should be present (legal formality) **[Example:]** When buying a real estate, it should be registered An [informal contract] is the ones which does not require legal procedure **[Example:]** A verbal agreement between friends to pet sit for each other\'s animals while one is away, 4. **Valid vs Void:** A [valid contract] all the essential elements required for it to be legally binding and enforceable. **[Example:]** Student's contract with AUB A [void contract] is an illegal contract. It is an unenforceable contract including an illegal promise. It lacks legal effect right from the beginning, often due to the presence of illegal elements or a lack of capacity to form a contract. **[Example:]** If a party promises other party to kill someone and it did not perform its promise, the other party cannot sue the first one if they do not kill him. A [voidable contract] is a contract that can be unenforceable at the election of one of the parties. It is initially valid and enforceable, but one of the parties has the option to void it due to certain circumstances, such as the lack of capacity, fraud, or misrepresentation. **[Example:]** If a person under the age of 18 makes a contract, they can choose to either continue with the contract once they turn 18, making it valid, or cancel it, making it void. 5. **Oral vs Written:** An [oral contract] is a contract concluded orally. n legal disputes, evidence such as receipts or witnesses may be required to prove the existence of an oral agreement. **[Example:]** Contract of buying food. A [written contract] is the one that is proven through written documentation **[Example:]** Contract with AUB 6. **Executed vs Executory:** An [executed contract] is a contract where all parties have fulfilled their obligations or promises, and there are no more outstanding duties to be performed. **[Example:]** After a student graduates from AUB, the contract becomes executed An [executory contract] is the contract in which parties are still in the process of executing their promises **[Example:]** The contract of a current student - **Consumer Credit Contract:** **[Equal Credit Opportunity Act (ECOA):]** -It is unlawful to discriminate against an applicant for credit for any reason (race,gender..) and if a credit application is rejected, an explanation should be provided to the lender (such as high credit card balances) -Debtors can recover actual damages for embarrassment and emotional distress and for punitive damages of up to \$10,000. -If a group of debtors brings a class action against a creditor, they can collect punitive damages of up to \$500,000 or 1% of the creditor's net worth. - **Legal Doctrines Governing Contracts:** **1) Formation of Contracts Under the Common Law:** **Common Law governs services, real estate and employment contracts** 1. **[Offer:]** - A clear proposal from one party to another, outlining the terms of the agreement. - It should be clear, precise, and definite to be considered a valid offer. 2. **[Acceptance of an Offer:]** - The offeree\'s agreement to the terms of the offer, which should match the terms of the original offer according to the **[Mirror Image Rule]**. - According to the **[mailbox rule]**, if the acceptance is sent before the revocation is received, a valid contract is formed. - If the offer includes stipulated (specific) method of acceptance, the acceptance should be according to the stated method. - If the offer does not include stipulated method: any method is considered acceptance. The offeree can even start executing the obligation without declaring his acceptance to the offeror. - Counteroffer: A rejection of original offer and a new offer is sent by the offeree to the offeror. 3. **[Consideration: (4 sub-elements-2 gain & 2 loss)]** It is what each party, offeror and offeree, gives up under the contract. There is no contract if there is no consideration. **[Example:]** If your grandmother promises to give you a car for no cost, there is no contract, and the promise is not enforceable. **[Exceptions:]** Donation contract, 2 components but it is a valid contract. 4. **[Legal Capacity:]** - Legal ability to conduct a contract. - The person concluding the contract should be older than 18 years. If younger, the contract is voidable. However, under the doctrine of necessities, contracts concluded by a minor for necessities, such as educational and health services are considered valid rather than voidable. - The person should enjoy full mental awareness (no mental disorders), so he/she is aware of the consequences of his/her actions 5. **[Legality:]** The contract is a source of law which binds the parties to the contract. It should not conflict with any source of law or breach any law. If a contract slightly breaches any source of law, it is considered void. **[Example:]** Any contract in breach of criminal laws is void and results in a punishment (imprisonment and payment of a fine) It is a written law, unlike common law which is accumulation of precedents. UCC governs transactions related to sales or lease of goods: moveable, tangible property -UCC was issued by the congress to facilitate transactions, to render contracts more valid than void. -UCC is an exception to the common law because under the UCC, if a contract is lacking an item, it is still valid in contrary to common law. 1. **[Offer:]** - Any expression of intention of the offeror to bind himself to a contract is an offer. The offer does not have to be precise, definite, and clear. - The merchants firm offer is an irrevocable offer, which means the merchant who offered a written offer and signed his offer, it will be irrevocable. The merchant cannot revoke his signed written offer. If the firm offer included a time limit, this irrevocable offer will be irrevocable within the time limit, but if the firm offer did not include a time limit, the offer will be irrevocable until expiration date of the goods which depends on the type of goods, unless the subject matter is destroyed or stolen. 2. **[Acceptance of the offer:]** - Acceptance does not need to match the offer. Any acceptance or any modification to the offer made by the offeree will be part of the contract. (no stipulated acceptance) - However, if the modified part is essential to the contract, such as price, the modification will not be part of the contract. Any changes to the material part of an offer with acceptance will not be part of the contract. - According to **[mailbox rule]**, if the offeree sends his acceptance before he receives the revocation, acceptance is valid, and we end-up with a contract. However, if the offeree receives revocation before he sends the acceptance, there is no contract; it is void. 3. **Consideration:** - UCC requires consideration but it is more flexible than common law. - Consideration is a requirement for the formation of a contract, but no additional consideration would be required in case of modifications to an existing contract. 4. **Legality:** - The contract should not conflict with any source of law or breach any law. If a contract slightly breaches any source of law, it is considered void. 5. **Legal Capacity:** - Under UCC, contracts concluded by minors for necessities are valid, rather than voidable. Necessities include food, clothing. Other contracts are voidable. - The parties entering into a contract should have full mental capacity and awareness to fully understand the consequences of a contract. If a party lacks mental capacity, it cannot enter into a contract. **[Termination of An Offer:]** 1)Termination of an Offer by Revocation: Revocation occurs when the offeree informs the offeror that the offer is no more available Note: Acceptance of the offer cuts the right of offeror to revoke -Under common law, options cannot be revoked. An option is a contract in which the offeree pays the offeror for the time needed to consider the offer. (Paying money to hold the offer for a certain period of time) -Merchant's firm offer under UCC, if an offer is made by a merchant in a form of record, with the signature of the offeror, it cannot be revoked for a definite time of period (but no more than 3 months). 2)Termination of an Offer by Rejection: once the offeree rejects the offer, the offer is ended and cannot be later accepted unless the offeror renews it. Types of rejection: a-By counteroffer under common law: if the offeree modifies a certain portion of the offer, the original offer will be no more valid b-By Counteroffer under UCC: addition of terms does not result in rejection as long as the added terms are not material. c-Rejection with no counteroffer 3)Termination by Expiration: if the offer remains open until certain date, or the death of the offeror **[Statute of Fraud: ]** Contracts that must be evidenced by a record to be enforceable Common law: 1. Sale of real property contracts 2. Contracts not performed within one year 3. Consigner's agreement to pay if debtor defaults or guarantees UCC: 1. Contracts valued more than \$5000 Under both UCC and common law, if the parties perform the oral contract, even if it is required to be written by statute of fraud, courts will enforce the contract for what already has been done. **[Defense in Contract Formation:]** 1. Capacity 2. Misrepresentation: When one party is not given full information or accurate information about the contract subject matter If misrepresentation is proved, the law allows a rescission of the contract, meaning that the contract is set aside. 3. Fraud: the intentional disclosure of inaccurate information or the intentional failure to disclose material information. The difference between fraud and misrepresentation is that in fraud the person knows that he is disclosing inaccurate information. 4. Duress: a party is physically forced into a contract (forcing employees to sell their shares of the company to keep their jobs). When duress is proved, the party that experienced duress will have the choice of enforcement or rescission of the contract 5. Undue Influence: when party uses a close personal relationship with another party to gain contractual benefits (existence of confidential relationship) 6. Illegality and Public Policy: a contract that violates a statute is void and cannot be enforced by either party. - Contracts that are agreements to commit criminal wrongs are void. - Contracts where one party's duty is to perform a legal act without authorization are void. - Contracts in violation of usury laws (charging excess interest more than the limit) are void. - Contracts in violation of public policy are void. Many firms include exculpatory clauses in their contracts in attempt to hold itself completely blameless for any accident occurring on its premises. Covenants not to compete can be included in contracts as long as they are reasonable. - Unconscionable Contract: a contract which gives all the benefits to one side and puts all the burdens on another. Unconscionable contracts are not defined by laws; the standards are set on case-by-case basis. **[Performance is Excused:]** 1. Impossibility: an excuse for the nonperformance of duties under a contract, based on a change in circumstances (or the discovery of preexisting circumstances), the nonoccurrence of which was an underlying assumption of the contract, that makes performance of the contract literally impossible (the contract cannot be performed by the parties or anyone else -- land that has been washed away-. 2. Commercial Impracticability: highly unusual situations far from what the parties could have reasonably expected would happen. (When the basic assumptions that parties made when they entered into the contract have changed) 3. Force Majeure: excuses parties from performance in the events of wars, economic crisis (Events such as wars, economic depression). Parties can add a clause to the contract which excuses the parties from performance in these cases. **[Remedies for Non-Performance: ]** 1. **Compensatory Damages:** to put the nonbreaching party in the same position he or she would have been in had no breach occurred (actual results as a result of the contract breach) 2. **Incidental Damages:** for example, party if a seller must run an ad to sell his car which a buyer refused to buy after entering into a contract, the buyer should pay the ad fees. 3. **Consequential damages**: often comprises profits that a company lost as a result of the breach; they flow as a natural result of the breach 4. **Liquidated damages**: are a specific amount the parties agree to in the contract as compensation for a breach **[Third-Party Rights in Contracts:]** 1. **Third-Party Beneficiary**: a person or business that benefits from the terms of a contract made between two other parties. This third party can be an intended third party (life insurance), or incidental third-party beneficiary (Professor and students). 2. **Assignment:** occurs when one party to an existing contract (the \"assignor\") hands off the benefits to a third-party 3. **Delegation:** transfer of contractual duties to a third-party **[Credit Disclosure:]** -Federal laws require disclosure of all interest charges, points, and fees for all types of loans and credit contracts. - The Truth in Lending Act (TILA): provides the requirements for disclosures in credit contracts and consumer rights when full disclosure is not made. **[Credit Cards for Those Under 21:]** -CARD Act restricts the solicitation of credit card accounts from those under 21. Credit Card companies must have written application in hand from those under 21 and those applications must carry the signature of a parent or guardian. **[United Nations Convention on contracts for the international sale of Goods (CISG): ]** Applies to contracts in which buyer and seller have their businesses in different countries. It is very similar to UCC: both require offer and acceptance Under CIGS, acceptance is effective upon receipt The acceptance should be the same as the offer unless the non-matching part is immaterial. It requires an agreement over price Merchant's firm offer exist under CIGS, but without the 3 months limitation **[International Protection in Contract Performance:]** For protection of businesses that involve in international trade, most international contracts have built-in performance guarantees. 1. **Bill of lading:** receipt of shipment issued by the carrier to the seller. The buyer will not be able to pick-up the goods without getting a copy of the bill of lading in addition to other necessary documents. It offers the seller assurance of payment and the buyer arrival of goods. 2. **Letter of Credit:** issued by the buyer's bank and is sent to corresponding bank where the seller is located. It is the buyer's bank commitment to pay to the seller (through his bank) the amount due upon receiving the goods **[Definitions:]** 1. **Implied-in-law contract (quasi contract):** it is an after-the-fact contract mandated by a judge seeking to address a situation where one party benefited at the expense of the other party. The court treats two parties who don't have a contract as if they did because of the enrichment of one party at the unjust expense of the other. 2. **Parol evidence rule:** any agreement that is not contained within the written contract is inadmissible in court (prevents the introduction of evidence prior to a contract -- for example during negotiation stage -- that contradicts with the contractual terms of a written contract 3. **Electronic Signatures in Global and National Commerce Act (ESIGN)**: online clicks on a tab "I accept" can all be used to form a valid contract (with exceptions such as checks, trusts and will) 4. **Merchant's confirmation memoranda:** used by merchants under UCC to satisfy the statute of fraud. They summarize the oral agreement and are signed by one party and are sent to the nonsigning party for review and as long as no objection is raised upon receipt, the statute of fraud is satisfied. 5. **Force Majeure clauses:** provisions in international contracts that allow the parties to agree on what will happen in the event of changes in the global political climate. 6. **Conditions precedent:** events that give rise to performance of a contract (buying after getting a loan) 7. **Conditions Concurrent:** benefits are exchanged at the same time 8. **Doctrine of Substantial Performance:** applies in construction contracts and it means that the constructed building is good as the one contracted for. 9. **Novation:** the replacement of one of the parties in a two-party agreement with a third party, with the agreement of all three parties, resulting in a new contract 10. **Accord and Satisfaction:** This agreement involves a new agreement between the offeror and the offeree to fulfil the contract to in different terms from the original contract. (For example pay less) 11\) **Subprime Lending Market:** credit market that makes loans to consumers who have bankruptcies, no credit history, low to moderate incomes, or poor credit history. These loans are usually characterized with higher risk which leads to lower loan amounts and higher fees. 12\) **Promissory Estoppel:** used as a substitute of consideration in case someone acts in reliance on a promise that is not supported by consideration. Example: if an employer told you move to another state and I will hire you and you sold your house to move, it would be unfair to claim that the contract did not exist because of no consideration. 13\) **Uniform Electronics Transactions Act (UETA):** state recognition of a federal law (ESIGN) that mandates the recognition of electronic signature for the formation of contracts. 14\) **Puffing:** opinion about the subject matter of the contract (the house is located in the best area in town) on which misrepresentation cannot be based. 15\) **Fair Credit Billing Act:** affords debtors the opportunity to challenge the figures on credit card monthly statements. 16\) **The Bankruptcy Abuse Prevention and Consumer Protection Act:** those who wish to declare bankruptcy must qualify under a prescribed statutory formula that they don't have the means for repaying debts. 17\) **Fair Credit Reporting Act (FCRA):** designed to provide debtors some rights and protections regarding the credit information held by third parties about them. (applies to consumer reporting agencies)