Chapter 7 - Contract Law

1. Chapter Seven
Contract Law

2. Definition of A Contract
* A contract is an agreement, between two or more persons, to do or not to do a certain thing which the law will in some way recognize as a duty
* Not all agreements are contracts
- When a person is entitled to a remedy in court if the promise is not performed, the contract is enforceable
- Courts may not enforce some agreements

3. Agreements that are Void, Voidable, or Unenforceable
* Void: neither party has a legal obligation to perform and neither party can enforce agreement in court
- Example: agreement with bookie
* Voidable: one of the parties to the contract has the power to disaffirm (cancel, reject) the agreement
- Example: agreement obtained by fraud
* Unenforceable: a valid contract can no longer be enforced in court due to a legal defense
- Example: oral agreement to pay broker’s commission

4. Methods of Classifying Contracts
Contracts can be classified by:
* how the contract was formed
* who made an enforceable promise, and
* status of performance by parties

5. Classifications of Contracts:
Who makes a promise?
* Unilateral Contract
A promise exchanged for an act
- One person makes a promise
- The other person does not make a promise
- Reward: I promise to give $100 to anyone who finds and returns my dog

6. Classification of Contracts, Who makes promise? continued
* Bilateral Contract
- A promise exchanged for a promise
-- Both persons make a promise
- Example:
-- House painting: I promise to pay you $1,000 if you paint my house. You promise to paint my house for the $1,000.
- Most contracts, including most real estate contracts, are Bilateral Contracts

7. Other Ways to Classify Contracts
* By Manner of Creation
- Express Contract
-- Parties put agreement in words
-- Oral or Written
- Implied Contract
-- Contract implied by conduct of parties
-- Example: Ordering a meal in a restaurant

8. Other Ways to Classify Contracts
* By Status of Contract
* Civil Code § 1661. “An executed contract is one, the object of which is fully performed. All others are executory.”
- Executory
-- At least one promise by one of the parties remains to be performed
- Executed
-- Both parties have performed all promises

9. Requirements for a Valid Contract

* Parties Capable of Contracting
* Mutual Consent (offer and acceptance)
* Lawful Object
* Sufficient Consideration

10. 1. Parties Capable of Contracting
* All persons have the legal capacity to contract, except:
- Minors
-- But, Emancipated Minors have capacity to contract, and
-- Some other agreements by minors will be enforced
- Incompetent persons
- Imprisoned convicts (for business purposes)

11. Contracts by Minors
* Agreements made by minors are usually void or voidable
* Agreements relating to real property or any interest in real property are void
* most other agreements by a minor are voidable by the minor
- minor may disaffirm agreement before majority or within a reasonable time after reaching majority

12. Exceptions Where Minors can Enter into Enforceable Contracts
An agreement made by a minor is valid if:
* the minor is emancipated
* the contract is for necessities and medical services, or
* a court approves a contract

13. Emancipated Minors
An emancipated minor may enter into binding contracts
Minor becomes emancipated by:
* Becoming married (current or dissolved)
* Enlisting in the armed forces (at least 16)
* Obtaining a court approved declaration of emancipation

14. Court Order of Emancipation
A minor may obtain a court approved declaration of emancipation if:
* the minor is14 years of age or older
* the minor is willingly living apart from parents or guardians with the consent of the parents or guardians
* the minor is managing his or her own financial affairs
- requires declaration of income and expenses
* The minor's source of income is not illegal

15. Emancipation Identification
* After receiving a declaration of emancipation, the minor may obtain a driver's license or identification card from the DMV that states that the minor is emancipated
* People dealing with the minor can rely on the a minor's identification card to establish that the minor is emancipated

16. Contracts for Necessities
An agreement made by a minor is valid if:
* the contract is for something necessary for the support of the minor or the minor's family
* the things was actually furnished to the minor or to the minor's family, and
* the minor was under the care of a parent or guardian

17. Contracts for Medical Services
An agreement made by a minor is valid if the contract is for:
* prevention or treatment of pregnancy
* diagnosis or treatment of a sexually transmitted disease
* diagnosis or treatment an alleged rape or sexual assault
* diagnosis and treatment of a drug- or alcohol-related problem

18. Sports and Entertainment Contracts
* An agreement made by a minor to render services in the arts, entertainment, or professional sports is valid if approved by a court
- 15 percent of the minor's gross earnings pursuant to the contract must be set aside by the minor's employer in trust until the minor reaches 18 years of age

19. Mentally Incompetent Persons
* A person who is "of unsound mind " cannot enter into a valid contract
* Unsound mind means that the person was "entirely without understanding" or incapable of understanding the nature or consequences of a transaction
- Medical testimony may be required to establish the person's mental condition at the time the agreement was made

20. Capacity of Entities
* Corporations, limited partnerships, and other "artificial persons" have capacity to contract
* Capacity vs. Authority
- Person who signs on behalf of the artificial person must have authority to sign
- Example: corporate officer authority evidenced by board of directors resolution certified by corporate secretary

21. 2. Consent
Consent must be:
* mutual
* freely given, and
* communicated to the other party

22. Mutual Consent
* Mutual consent must result in a "meeting of the minds”
- the parties must all agree upon the same thing
* Mutual consent is usually evidenced by
- a proposal (offer) by one party, and
- the acceptance of that offer by the other party

23. Offer
Offer = a promise to do or refrain from doing some specified thing in the future
* Offer must be definite
- subject matter, price, terms, quantity, quality, and time for performance
* Offer gives the offeree a “power of acceptance”

24. Termination of Offers
* Lapse of time
- Time stated in offer or “reasonable” time
* Death or incapacity of either party
* Revocation
- offer may be revoked at any time before acceptance
-- even before stated time or if “irrevocable”
- revocation must be communicated to offeree
* Rejection
- making a counter offer = rejecting offer
* Destruction of subject matter

25. Counteroffers
* Making a counteroffer terminates the offer
* The counteroffer is simply a new offer, giving power of acceptance to original offeror
- same “mirror image” rules apply
- counteroffer can be terminated in same manner as offers

26. Acceptance
* Who may accept offer?
- Only the offeree named in offer
* When can offer be accepted?
- Anytime before it is terminated
* Unilateral contract can only be accepted by the performance of the acts or deeds specified in the offer

27. Method of Acceptance
* To accept an offer, the offeree must
- communicate acceptance to the offeror
-- If a method of communication is specified in the offer, the communication must be made in the manner specified
-- If no method is specified, in any reasonable and usual method of communication is acceptable

28. Mail Box Rule
* Acceptance of an offer is generally effective and deemed communicated when deposited in the regular mail, postage paid
* Exception: if the person making the offer provides in the offer that the offer can only be accepted in particular manner, the offer terms will control
- Example: Offer states “you must accept by delivering a written acceptance in person”

29. Mirror Image Rule
* To accept an offer, the offeree must not change, add to, or qualify any of the terms of the offer
- Changing, adding to, or qualifying any term is a rejection of the offer and a new proposal (a “counteroffer”)

30. Free Consent
If consent is not freely given, contract is voidable
* Consent not free when obtained through:
- Undue influence
-- use of a special confidence or authority to gain an unfair advantage
- Duress
-- Unlawful confinement
- Menace
-- Threat of injury or confinement
- Fraud
- Mistake of Law
- Mutual Mistake of Fact

31. 3. Legal Object
* The object of a contract is the thing that a party agreed to do (or not to do)
* The object must be lawful when the contract is made
* Examples of “unlawful” objects:
- Gambling (in most states)
- Execution “contract”

32. 4. Sufficient Consideration
* Consideration = something that is a legal detriment to the promisor
- doing or promising to do something that promisor is not legally obligated to do
- refraining or promising to refrain from something that the promisor is legally entitled to do

33. Adequate Consideration
* Consideration does not need to be equal
- One person may receive a better bargain than the other
- But grossly unequal consideration may affect remedies upon breach

34. Inadequate Consideration
* Consideration cannot be:
- something already done
-- Case example: X gave Y occasional business advice. Several years later Y gave X a $5,000 note in payment for these past services. There was no evidence that when these services were rendered Y expected to pay for them, or that X expected to be paid.
- a preexisting duty
-- Case example: H promises to leave property to W in his will in return for W’s promise to care for H at home after H suffered a stroke. Court: preexisting marital duty to care for a spouse who is ill

35. Substitute for Consideration
* Promissory Estoppel/Detrimental Reliance can validate an agreement that lacked consideration
* Elements:
- a promise likely to induce reliance
- actual reliance
- substantial detriment (economic loss) to promisee
- injustice only avoided by enforcement

36. Statute of Frauds: Special Rule for Some Real Estate Contracts
* Statute of Frauds provides that certain contracts are enforceable only if in writing
* Real estate contracts subject to the Statute of Frauds:
- listing agreements
- contracts for sale of real estate
- leases with a term of more than 1 year

37. Statute of Frauds vs. Statute of Limitations
* Statute of Frauds requires that certain contracts must be in writing
* Statute of Limitations requires that a lawsuit be filed within a certain time period or you lose the right to sue
- Example: 4 years to sue on written contract, 2 years on oral contract
- Example: 3 years to sue for fraud

38. Interpretation of Contracts
* When parties dispute what the words in a contract mean, courts use several rules to interpret the contract
* Plain Meaning Rule
- intention of the parties expressed in writing control if contract is unambiguous
* Parol Evidence Rule
- When parties intend contract to be the final expression of their agreement, the written terms cannot be contradicted by evidence of any prior agreement
- Excludes evidence of:
-- prior written or oral agreements
-- contemporaneous oral agreements

39. Covenants versus conditions
* Promises in a contract may be unconditional or be based upon the occurrence of some event
* An unconditional promise is a covenant
- promisor must perform when time for performance arises
* A conditional promise is a condition or contingency
- Promisor has a legal excuse for not performing if the condition does not occur
- Conditions are common in real estate purchase agreements (discussed in Chapter 8)

40. Time for Performance
* If time for performance is stated in contract:
- General rule: performance is due at stated time
- Exception: late performance permitted if delay is short and for valid reason
-- Exception to exception: Contract states “Time is of the essence”
* If no time is stated in the contract:
- performance due in reasonable time

41. Breach of Contract
* Breach is the unexcused failure to perform a material promise
* Effect of breach is to give the non-breaching party a remedy
* Breach does not occur until time for performance passes without performance
- Exception: Anticipatory Breach

42. Remedies for Breach: Damages
* The most common remedy for breach of contract is to award money damages
* The goal of damages is to give the non-breaching party the benefit of the bargain
- Typically, the difference between contract price and market price
* Damages must be foreseeable and certain
- not speculative (for example, future profits)
* Non-breaching party has a duty to mitigate damages
- take reasonable steps to reduce amount of losses

43. Liquidated Damages
* Parties to a contract can agree at time of contracting on the amount of damages that will be assessed if a party breaches
* Liquidated damage clauses are generally enforced if the amount of liquidated damages was reasonable at the time the contract was made
* Liquidated damage clauses are common in real estate purchase agreements and construction contracts
- Special rules apply to residential transactions where the buyer will occupy the property (Chapter 8)

44. Equitable Remedies for Breach
* Specific Performance is a remedy in which the court orders a breaching party to perform
- Only available for unique subject matter
-- real property is almost always considered unique
- Not available if consideration was inadequate
* Rescission
- Puts parties back to their original positions
- Each party returns consideration received
- Available for voidable contracts due to fraud, lack of capacity, etc.

45. Modification of Contracts
A contract modification must:
* be supported by new consideration
- Exceptions:
-- when original contract was oral and modification is in writing
-- when the modification is fully performed
- be in writing if:
-- the original contract required written modifications, or
-- Statute of Frauds applies

46. Assignment of Contract
General rules:
* Assigning duties requires consent
* Assigning rights does not require consent
- Exception: if contract prohibits assignment
* Assignment does not relieve assignor from liability
- Exceptions: a novation (agreement to allow substitute one person for another) or a release

47. Termination of Contracts
Contracts are terminated by:
* Full performance
* Substantial performance
- non-performing party liable for damages
* Mutual consent
* Impossibility
- Destruction of property
- Death of party (unless the promise can be performed by others)
* Operation of law