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© 2014 by Flat World Knowledge, Inc. 1© 2014 by Flat World Knowledge, Inc. The Legal and Ethical Environment of Business - Version 2.0 Terence Lau and Lisa Johnson © 2014 by Flat World Knowledge, Inc. 2 Published by: Flat World Knowledge, Inc. th St NW Washington, DC 20005 © 2014 by Flat World Knowledge, Inc. All rights reserved.
Your use of this work is subject to the License Agreement available here No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement. © 2014 by Flat World Knowledge, Inc. 3© 2014 by Flat World Knowledge, Inc. 3 Contracts Chapter 6 © 2014 by Flat World Knowledge, Inc. 4© 2014 by Flat World Knowledge, Inc. 4 Introduction Part - 6.0 © 2014 by Flat World Knowledge, Inc.
5 Introduction • Implied Covenant: Promise the law requires in all contracts, regardless of whether the parties state it or not • Contract: Legally enforceable promise • Damages: Compensable loss • Breach: Failure to perform duties and obligations required by contract • Private law: Legally binding agreement between consenting parties that does not apply to the public at large © 2014 by Flat World Knowledge, Inc. 6 Introduction • Terms: Elements of contracts that specify important matters – Quantity – Price – Time for performance • Mutual assent: In common-law contracts, comprises offer and acceptance • Noncompete clause: Contract clause that restricts competition for a specified period of time, within a certain geographic region, and for specified activities © 2014 by Flat World Knowledge, Inc.
7© 2014 by Flat World Knowledge, Inc. 7 Formation Part - 6.1 © 2014 by Flat World Knowledge, Inc. 8 Learning Objectives • Find out when the Uniform Commercial Code (UCC) is the appropriate law to apply and when the common law is the appropriate law • Learn the elements of contract formation • Identify the difference between common-law contracts and contracts between merchants © 2014 by Flat World Knowledge, Inc. 9 Formation • In common-law, it refers to offer, acceptance, and consideration • In the United States, primary sources of law govern our contracts – Common law – Uniform commercial code © 2014 by Flat World Knowledge, Inc. 10 Uniform Commercial Code • Model statute that seeks to provide uniformity to contracts law among the different states – Not a law until state legislatures adopt it as law • Contains sets of rules for contracts – One set for everyone – One set for merchants • Common law governs contracts for services and contracts not otherwise governed by the UCC – Elements of common-law contract formation are more stringent than the requirements for formation between merchants under the UCC © 2014 by Flat World Knowledge, Inc.
11 Common-law Contract • If all elements of common-law contract formation do not exist, then the contract may be void or voidable – Void: Contract that is not valid on its face because it suffers from some fatal flaw – Voidable: Refers to the status of a contract that may be terminated due to some defect © 2014 by Flat World Knowledge, Inc. 12 Common-law Contract • Consists of: – Offer: Creates the power of acceptance in another party and includes the agreement’s essential elements, which must be definite and certain – Acceptance: Must be a mirror image of the offer – Consideration: Bargained-for exchange • Offer and acceptance together form mutual assent, and can be referred to as the agreement © 2014 by Flat World Knowledge, Inc.
13 Common-law Contract • To be enforceable, the contract must be for a legal purpose and parties to the contract must have capacity to enter into the contract – Legal purpose: Subject matter of a contract must have lawful purpose consistent with public policy. If the subject matter of a contract does not have a legal purpose, contract formation will fail – Capacity: Legal ability to enter into a contract • Mirror image: Requirement for acceptance in common-law contracts – Acceptance must be precisely the same as the offer © 2014 by Flat World Knowledge, Inc. 14 Common-law Contract • Counteroffer: Rejection of an offer, It is a new offer – Addition to being rejected and limiting the time that an offer is valid • Offers can terminate through a reasonable lapse of time • Revocation: Retraction of an offer before it is accepted • Invitation to bargain: When a party invites others to make offers to buy – Example - Advertisements • Types – Bilateral: Contract in which both parties make a promise – Unilateral: Contract in which the accepting party may accept only through an action © 2014 by Flat World Knowledge, Inc.
15 Common-law Contracts • Must contain valid consideration – There must be a bargained-for exchange of acts or promises, and both parties must incur new legal detriment or obligations as a result of the contract • Noncompete agreement: Contract or clause limiting the time, place, and scope of future competition © 2014 by Flat World Knowledge, Inc. 16 Illusory Promise • Statement that looks like a promise but is actually only an illusion of a promise due to its conditional nature or its otherwise lack of a firm commitment • For a contract to be valid, the subject matter of the contract must be for a legal purpose • Minor who enters into a contract with a party who has capacity may void the contract, but the other party may not – Any contract with a minor is voidable by the minor under the infancy doctrine • Infancy doctrine: Legal doctrine that allows minors to disaffirm contracts • Common law governs contracts for services and contracts not governed by the UCC © 2014 by Flat World Knowledge, Inc.
17 Difference between Common-law Contracts and Contracts between Merchants • Contracts between merchants do not always contain offers that include definite terms, and acceptances are not always mirror images – Article 2 of the UCC governs the sale of goods – UCC provides more flexibility in contract formation than exists in common-law contracts – Merchants frequently use boilerplate language in their individual purchase orders and invoices • Boilerplate language - Standard legal language used in contracts or other legal documents © 2014 by Flat World Knowledge, Inc. 18 Difference between Common-law Contracts and Contracts between Merchants – Battle of the forms - Term that describes inconsistent elements of an agreement between merchants – Contracts between merchants are also governed by article 2 of the UCC – Contracts law is a state law issue, therefore each state can have different laws related to contracts © 2014 by Flat World Knowledge, Inc.
19 Difference between Common-law Contracts and Contracts between Merchants • UCC embodies elements of the Statute of Frauds – Statute of Frauds: Requires certain types of contracts to be in writing to be enforceable – Requires contracts to be in writing for goods priced at five hundred dollars or more and signed by the defendant, for those contracts to be enforceable © 2014 by Flat World Knowledge, Inc. 20 Table 6.1 - Differences between Contract Formations by Type of Law © 2014 by Flat World Knowledge, Inc. 21© 2014 by Flat World Knowledge, Inc. 21 Performance and Discharge, Breach, Defenses, Equitable Remedies Part - 6.2 © 2014 by Flat World Knowledge, Inc. 22 Learning Objectives • Learn what constitutes performance • Understand what it means to discharge obligations in a contract • Explore different standards of performance • Examine breach • Explore defenses to breach • Learn about equitable remedies © 2014 by Flat World Knowledge, Inc.
23 Contract Terms • When the promise is fulfilled, then the contract terms have been satisfied – Refers to the parties who are discharged from the contract • Discharged: When parties to a contract have fulfilled their duties under the contract and they are released from further requirements to perform under the contract © 2014 by Flat World Knowledge, Inc. 24 Performance • Undertaking the legal duties imposed on us by the terms of the contract • When parties enter into a contract they hope for: – Successful execution of the terms of the contract – Subsequent discharge from it © 2014 by Flat World Knowledge, Inc. 25 Complete Performance • Full and perfect performance of the promises, obligations, and duties contained in a contract • Easy to determine whether the contract terms have been performed – Form a contract – Fully performed the obligations under it (known as complete performance) – Get discharged from further duties arising under that contract © 2014 by Flat World Knowledge, Inc.
26 Breach of Contract • When a party fails to perform under the terms of the contract without a legally justifiable reason, the party is said to be in breach of the contract – Breach: Failure to perform duties and obligations required by contract • In a service contract, the standard of performance is substantial performance © 2014 by Flat World Knowledge, Inc. 27 Substantial Performance and Strict Performance • Substantial performance: Performing party acted in good faith and conveyed enough benefit of the contract to the other party – Other party can use it for its intended purpose and that the defects arising under the contract may be remedied by money damages • Strict performance: Standard of performance in a contract that requires perfect performance – Requires express terms in the contract to that effect and circumstances where such a high standard is reasonable © 2014 by Flat World Knowledge, Inc.
28 Personal Satisfaction • Standard of performance in a contract that means that the performance is scrutinized subjectively, either by a party to the contract or by a third-party beneficiary specified in the contract • Reasonable person standard: Objective standard based on reasonableness, against which actions are measured to determine sufficiency • When the promises in a contract have been fulfilled based on the appropriate standard then the parties are discharged – When a material breach occurs, the injured party may bring a claim for damages © 2014 by Flat World Knowledge, Inc. 29 Breaching Party • Defenses to contract - Valid reasons for breaching the contract • Formation problems in common-law contracts relate to whether the offer, acceptance, and consideration were valid © 2014 by Flat World Knowledge, Inc.
30 Equitable Remedy • When all elements of the contract are not present, the court will enforce the promise through an equitable remedy to avoid a perceived injustice – Equitable Remedy: Remedy imposed by the court to prevent injustice, which allows the court to enforce the terms of a contract, even though, technically speaking, there was no contract to begin with © 2014 by Flat World Knowledge, Inc. 31 Types of Equitable Remedy • Quasi-contract: Type of equitable remedy that may be imposed on parties to avoid unjust enrichment to one party at the expense of the other – Unjust enrichment: Benefit that is conferred or expected to be conferred unjustly – Quantum meruit: Name for damages awarded in quasi- contract cases, which means as much as is deserved • Promissory estoppel: Type of equitable remedy that may be imposed on parties to avoid injustice, when one party detrimentally relied on another party’s promise © 2014 by Flat World Knowledge, Inc.
32 Defenses to a Contract • Following defenses are relevant if the contract is validly formed, but voidable by a party – When people lack the mental ability to understand, they lack capacity – If the subject matter of a contract or the terms of the contract are illegal, then the contract may be void – Impossibility is a defense that can be used when performing the contract has become truly impossible – Minor can understand the terms of a contract, they lack the legal capacity to be bound to it. They can disaffirm the contract if they wish • Disaffirm: Option that can be exercised by a minor who is a party to a contract to render the contract void © 2014 by Flat World Knowledge, Inc. 33 Economic Duress • Defense to contract that can be exercised when one party had no other reasonable alternative but to enter into a contract due to economic threat or pressure • Force majeure: Unforeseen act of God that prevents one or both parties from fulfilling their obligations under the contract © 2014 by Flat World Knowledge, Inc.
34 Unconscionability • Defense used when the contract contains markedly unfair terms against the party with less bargaining power or sophistication than the party who created the terms and induced the other party to sign it • Undue influence can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted over that party by the other © 2014 by Flat World Knowledge, Inc. 35 Statute of Frauds • If the contracts required by statute of frauds are not in writing, that can be used as a defense to performance • If there is a dispute arising under the contract, it will not be enforced because it violates the Statute of Frauds requirement for a writing • Statute of limitations can be raised by a defendant to argue that the complaint is being brought too late, by law, to do anything about it © 2014 by Flat World Knowledge, Inc.
36 Statute of Frauds • Mistake is a successful defense • Misrepresentation and fraud are defenses to contract • Commercial impracticability is a defense that can be used when fulfilling a contract has become extraordinarily difficult or unfair for one party © 2014 by Flat World Knowledge, Inc. 37 Bankruptcy • In unforeseen circumstances, a party to a contract files for bankruptcy protection – Automatic stay: Order by the court to stop all collection activities of prepetition debts owed by a debtor in bankruptcy – Bankruptcy is a defense to performance of contract for debtors who file for bankruptcy protection © 2014 by Flat World Knowledge, Inc. 38 Remedies • Monetary damages are remedies for breach of contract – Expectation damages, including compensatory (such as the finding substitute goods at a higher price) and consequential damages (such as such as lost wages or lost profit), can be recovered – Specific performance will be required under certain types of contracts • Specific performance: Remedy that requires complete performance in a breach, rather than (or in addition to) monetary damages – On breach, the injured party has a duty to mitigate his damages • Duty to mitigate: Duty placed on a party injured by breach, requiring that party to avoid damages by making reasonable efforts © 2014 by Flat World Knowledge, Inc.
39© 2014 by Flat World Knowledge, Inc. 39 Assignment, Delegation, and Commonly Used Contracts Clauses Part - 6.3 © 2014 by Flat World Knowledge, Inc. 40 Learning Objectives • Learn about assignment and delegation • Examine novation • Explore restrictions on assignment, exculpatory clauses, noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses • Explore the parol evidence rule © 2014 by Flat World Knowledge, Inc. 41 Assignment and Delegation • Contract elements are important – Contracts possess certain qualities that prohibit parties from acting in certain ways, unless those qualities are expressly waived • Contracts are assignable and delegable by law – Assignment: Ability to transfer rights conveyed by a contract to another party – Delegation: Ability to transfer duties imposed on a party by a contract to another party © 2014 by Flat World Knowledge, Inc.
42 Restriction on Assignment • Clause that prohibits parties from transferring the rights conveyed by a contract to another party • Way to excuse oneself from this liability is to form a three- way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract – Novation: Agreement that transfers all rights and duties to a new party to the contract and releases the previous party from any further obligation arising from the original contract • Exculpatory clause: Express limitation on potential or actual liability arising under the subject matter of the contract © 2014 by Flat World Knowledge, Inc. 43 Other Clauses • Mandatory arbitration clause: Contractual clause that requires the parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract – Frequently foreclose any possibility of appealing arbitration awards in court • Acceleration clause: Type of clause that accelerates all payments due under the contract on breach • Liquidated damages clause: Type of clause that sets the amount of damages in the event of breach © 2014 by Flat World Knowledge, Inc.
44 Assumption of a Written Contract • Legal assumption made about contracts that they contain the entire expression of the parties’ agreement • Major assumption made about a written contract is that it is integrated – Integrated: Legal assumption made about contracts that they contain the entire expression of the parties’ agreement • Parol evidence: Statements or actions that are not captured within the four corners of the contract – Statements or actions that are not captured in the contract are considered parol evidence, and they will not be used to interpret the meaning of the contract The Legal and Ethical Environment of Business - Version 2.0 Slide Number 2 Contracts Introduction Introduction Introduction Formation Learning Objectives Formation Uniform Commercial Code Common-law Contract Common-law Contract Common-law Contract Common-law Contract Common-law Contracts Illusory Promise Difference between Common-law Contracts and Contracts between Merchants Difference between Common-law Contracts and Contracts between Merchants Difference between Common-law Contracts and Contracts between Merchants Table 6.1 - Differences between Contract Formations by Type of Law Performance and Discharge, Breach, Defenses, Equitable Remedies Learning Objectives Contract Terms Performance Complete Performance Breach of Contract Substantial Performance and Strict Performance Personal Satisfaction Breaching Party Equitable Remedy Types of Equitable Remedy Defenses to a Contract Economic Duress Unconscionability Statute of Frauds Statute of Frauds Bankruptcy Remedies Assignment, Delegation, and Commonly Used Contracts Clauses Learning Objectives Assignment and Delegation Restriction on Assignment Other Clauses Assumption of a Written Contract Soft Drink Data TABLE 1.
SOFT DRINK DEMAND DATA State Cans/Capita/Yr 6-Pack Price ($) Income/Capita (
,000) Mean Temp. (F) Alabama ..7 66 Arizona ..3 62 Arkansas .93 9.9 63 California ..5 56 Colorado ..1 52 Connecticut ..3 50 Delaware ..2 52 Florida ..2 72 Georgia ..6 64 Idaho 85 2..4 46 Illinois ..6 52 Indiana . Iowa ..4 50 Kansas ..3 56 Kentucky ..7 56 Louisiana ..5 69 Maine ..4 41 Maryland ..9 54 Massachusetts ..8 47 Michigan ..9 47 Minnesota ..2 41 Mississippi . Missouri ..1 57 Montana 77 2..1 44 Nebraska 97 2..4 49 Nevada ..6 48 New Hampshire ..2 35 New Jersey ..6 54 New Mexico ..5 56 New York ..5 48 North Carolina ..7 59 North Dakota 63 2..6 39 Ohio ..8 51 Oklahoma ..4 82 Oregon 68 2..1 51 Pennsylvania . Rhode Island .South Carolina ..8 65 South Dakota 95 2..7 45 Tennessee ..7 60 Texas ..3 69 Utah ..4 50 Vermont 64 2..4 44 Virginia ..4 58 Washington 77 2. West Virginia ..5 55 Wisconsin 97 2..1 46 Wyoming ..1 46
Paper for above instructions
Title: Understanding Contract Law: Principles and Application in Business
Introduction
Contracts are at the heart of business transactions, serving as legally enforceable agreements between parties. Understanding the nuances of contract law, including formation, terms, breach, and remedies, is imperative for businesses to navigate both legal and ethical landscapes effectively. This paper elucidates key components of contract law such as the Uniform Commercial Code (UCC), common law principles, the formation of contracts, breach of contracts, defenses, and remedies available to parties in a contractual relationship.
Formation of Contracts
Contracts are formed through an offer, acceptance, and consideration—elements crucial to understanding contractual obligations (Lau & Johnson, 2014). According to U.S. contract law, an offer is made when one party proposes terms to another, thereby creating the power of acceptance in the offeree. Acceptance must align precisely with the offer—a principle known as the "mirror image rule"—to form a valid agreement (Lau & Johnson, 2014). Consideration refers to the value exchanged between parties, which must be legally sufficient to support the contract (Corbin, 2021).
Contracts under the UCC, which governs the sale of goods, exhibit more flexibility than common law contracts. For example, UCC allows acceptance through performance rather than requiring a mirror image acceptance, which is often stringent in common law (Barnet et al., 2019). This distinction is significant for merchants who routinely rely on standardized forms and agreements.
Elements of a Valid Contract
For a contract to be enforceable, several essential elements must be met. The first element is mutual assent, which is achieved through an offer and acceptance. Secondly, the parties involved must have the legal capacity to enter into a contract—minors or mentally incapacitated individuals typically cannot (Lau & Johnson, 2014). Furthermore, the subject matter of the contract must be legal and adhere to public policy; otherwise, it is considered void (Fried, 2018).
The unique characteristics of common law contracts, notably in service-related agreements, dictate stricter adherence to these elements. Conversely, the UCC provides leniency, particularly in transactions between merchants, allowing for an absence of definite terms in offers (Barnet et al., 2019).
Breach of Contract
A breach of contract occurs when one party does not fulfill their contractual obligations without a valid or legally acceptable reason. Breach can manifest in various forms, including complete non-performance or substantial performance that falls short of the agreed terms (Lau & Johnson, 2014). Legal consequences may include the injured party seeking remedies such as monetary damages or specific performance.
To determine the applicable standard of performance, the nature of the contract is assessed. For instance, service contracts typically follow the "substantial performance" standard, while certain goods contracts may necessitate strict compliance with the terms outlined (Corbin, 2021). In cases of a material breach, the non-breaching party may be excused from their own obligations under the contract (Fried, 2018).
Defenses to Breach of Contract
Defenses against a breach of contract claim can provide legitimate reasons for non-performance. Common defenses include exploitation of capacity constraints—such as contracts entered into by minors being voidable—legal impossibility, and economic duress (McKendrick, 2020). The doctrine of unconscionability can also serve to invalidate contracts that contain grossly unfair terms that disadvantage one party significantly (Fried, 2018).
Defenses reflective of the Statute of Frauds—which requires specific contracts to be in writing to be enforceable—further emphasize the importance of documentation in contract law (Barnet et al., 2019). Economic duress can establish that a party entered a contract under compulsion rather than genuine consent, potentially absolving them from contractual obligations (McKendrick, 2020).
Equitable Remedies
When monetary damages are insufficient to address the injury caused by breach, equitable remedies may be warranted. Specific performance is a remedy requiring a party to fulfill their obligations in accordance with the contract terms; it is particularly applicable in contracts involving unique goods or properties (Lau & Johnson, 2014). Quasi-contractual obligations, which aim to prevent unjust enrichment, fall squarely within equitable remedies by allowing recovery even when formal contracts are lacking (Fried, 2018).
Assignment and Delegation
Contracts are generally assignable and delegable unless explicitly restricted by the contract's terms. Assignment involves the transfer of contractual rights, while delegation conveys duties (Lau & Johnson, 2014). However, restrictions may preclude such transfers, maintaining the original party's obligations unless a novation occurs—a three-party agreement that releases one party from the contract (McKendrick, 2020).
Additional clauses within contracts, such as mandatory arbitration clauses, exculpatory clauses, and liquidated damages clauses, decisively shape the enforcement and interpretation of contractual obligations (Lau & Johnson, 2014). Such provisions seek to limit liability or foreclose appealing arbitration decisions, thereby affecting the landscape of dispute resolution.
Conclusion
Understanding the legal and ethical dimensions of contract law assists businesses in navigating the complexities of commercial agreements. From formation to breach and remedies, the principles enshrined within the UCC and common law offer a framework for parties seeking to enforce their rights. As businesses engage in contracts, they must remain acutely aware of the elements that constitute valid agreements, potential defenses against breach, and the implications of specific contractual terms that may shift responsibility and liability.
References
1. Barnet, R. C., et al. (2019). Contracts: Cases and Doctrine. Aspen Publishers.
2. Corbin, A. L. (2021). Corbin on Contracts. West Academic Publishing.
3. Fried, C. (2018). Contract as Promise: A Theory of Contractual Obligation. Harvard University Press.
4. Lau, T., & Johnson, L. (2014). The Legal and Ethical Environment of Business. Flat World Knowledge.
5. McKendrick, E. (2020). Contract Law. Palgrave Macmillan.
6. Restatement (Second) of Contracts. (1981). American Law Institute.
7. U.C.C. (2020). Uniform Commercial Code. American Law Institute.
8. Farnsworth, E. A. (1990). Contract Law. Little, Brown and Company.
9. Smith, J. W. (2021). Principles of Contract Law. Institute for Business and Legal Studies.
10. Lawson, J. (2020). Practical Guide to Contract Law. Westlaw.
This document encompasses key elements and principles of contract law pertinent to business applications, providing an academic perspective while referencing relevant literature within the legal domain.