Chapter 9 Introduction to Contracts 1 Exhibit 9.1 (page 225) 2 In Chronological Order 3 1
Second 4 Third 5 Fourth 6 2
Exhibit 9.1 (page 225) 7 The Four Essential Elements of a (Valid) Contract 1. Agreement (Ch. 10, 13) 2. Consideration (Ch. 11) 3. Legality (Ch. 12) 4. Capacity (Ch. 13) 8 The Purposes of Contract Enforcement So that people can rely on each other and accomplish difficult things together So that people can allocate the risks and rewards of endeavors in advance To incent people to try very, very hard to keep their business promises 3
Most Contracts are Enforced as Written For example, if a real estate developer contracts with a builder to erect 10 expensive homes, but the housing market collapses before construction begins, the developer is still obligated to pay the builder for the houses, even though the expense will cause him devastating losses. Why is this not unjust? Why is This Not Unjust? Because businesspeople find it useful to be able to decide for themselves who will bear the risk of a given business project. If the real estate developer can persuade the builder to agree to a contract in which the developer need pay only for completed work, and may cancel his order for the homes at any time, courts will most likely enforce it as written. The Two Most Likely Outcomes Either: 1. Both parties keep their promises, or 2. The parties mutually agree to rescind their contract, and the developer pays the builder a fixed fee for the privilege of escaping his promise. 4
Judicial Restraint vs. Judicial Activism Chapter 5 Judicial restraint: A court s willingness to leave lawmaking to legislatures; to limit its role to enforcing the laws passed by legislatures. Judicial activism: A court s willingness, or even eagerness, to be involved in major issues; to use the power of judicial review to shape the substantive law. Judicial Restraint vs. Judicial Activism Chapter 9 Judicial restraint: A court s reluctance to interfere with the terms of a contract. Judicial activism: A court s willingness to change or ignore a contract that it perceives as unjust. Development of Contract Law Century Degree of restraint Specifics 12 th /13 th Extremely high Contracts aren t even binding unless they have a seal affixed. 15 th Very high Promises aren t binding unless the plaintiff made a down payment. 17 th High (1602) Mutual promises are binding if both parties made some effort to fulfill them. 5
Davis v. Mason (1792) Mason was a surgeon/apothecary and Davis wanted to be his apprentice. As a condition of taking him on, Mason made Davis agree Not to set up a competing establishment within 10 miles of Thetford for 14 years To pay 200 if he broke this agreement 16 Davis s Four Arguments 1. 14 years is unreasonably long 2. 10 miles is too great a distance 3. It is harmful to the public health to restrict a doctor from practicing his profession 4. 200 is too much 17 Development of Contract Law Century Degree of restraint Specifics 18 th /19 th High The era of laissez-faire and the zenith of the freedom of contract doctrine. 20 th Medium 1. Non-competition agreements are no longer automatically enforced. Courts may alter them or ignore them entirely because they interfere with an individual s need to work and because the public may be harmed if all employers use them and all courts enforce them. 6
Development of Contract Law Century Degree of restraint Specifics 20 th Medium 2. A seller of polluted land can no longer escape responsibility for cleaning up the pollution, even if he can get the buyer to agree to accept sole responsibility. 3. Manufacturers of defective products that cause harm cannot escape liability for the harm, even if they can get the buyer to agree to accept all risk of injury while using the product. Development of Contract Law During the 500 years from 1292 to 1792, courts went from ignoring most promises to enforcing almost all mutual promises. Since 1892, there has been some erosion of the freedom to contract doctrine, as courts intervened more often to prevent injustice. Basic Contract Concepts and Types Bilateral and Unilateral Contracts Express and Implied Contracts Executed and Executory Contracts Valid and Voidable Contracts, and Unenforceable and Void Agreements 7
Bilateral and Unilateral Contracts In a bilateral contract, both parties make a promise. In a unilateral contract, one party makes a promise that the other party can only accept by doing something. 22 Express and Implied Contracts Express contract terms of the contract are directly stated orally or in writing at the time the contract is formed. Implied contract surrounding facts and circumstances indicate an agreement has in fact been reached. 23 DeMasse v. ITT Corporation You Be the Judge Five employees-at-will ITT issued the first edition of the employee handbook in 1979. That edition, and the following 3 editions, stated that layoffs would be done in reverse order of seniority. 24 8
The Fifth Edition of the Handbook Came out in about 1995. Said: 1. Nothing contained herein shall be construed as a guarantee of future employment, and 2. ITT reserves the right to amend, modify, or cancel any or all of the policies outlined in [this handbook.] 25 DeMasse v. ITT Corporation You Be the Judge Four years later, ITT informed its employees that layoffs would be based on ability and performance, not seniority. Ten days later, the six employees, each of whom had more than 20 years at the company, were laid off. 26 DeMasse v. ITT Corporation Company and employees worked together for many years with a common understanding*, and that is a textbook definition of an implied contract. *The understanding that the longer an employee works at ITT, the safer their job becomes. 27 9
Executed and Executory Contracts Executed all the parties have performed their contractual duties. Executory some duties under the contract still need to be performed. 28 Valid and Voidable Contracts, and Unenforceable Agreements Valid contract meets all of the legal requirements for a binding contract. Voidable contract one or more parties has a legal right to cancel the contract. Unenforceable agreement meets the legal requirements for a contract but may not be enforceable because of some other legal rule. Void Agreements Void agreements agreements that create no legal obligations and for which no remedy is available. 30 10
Remedies Created by Judicial Activism The law sometimes recognizes and enforces a legal obligation even though there is no contract. We will learn about two types: Promissory Estoppel Quasi-contract 31 Promissory Estoppel and Quasi- Contract In promissory estoppel cases, the defendant made a promise that the plaintiff relied on. In quasi-contract cases, the defendant did not make any promise, but did receive a benefit from the plaintiff. 32 Promissory Estoppel Requires: 1. The defendant made a promise knowing that the plaintiff would likely rely on it. 2. The plaintiff did rely on the promise (and that reliance was reasonable); and 3. The only way to avoid injustice is to enforce the promise. 11
Norton v. Hoyt Gail Norton was single and Russell Hoyt was married. Initially, he lied to her and said he was single. When she learned the truth, he assured her he would soon get a divorce. But he never did. 34 Norton v. Hoyt Twenty-three years later, he broke up with her. She became ill. He attended some of her psychotherapy sessions. In one, he promised to continue to pay her $80,000 per year indefinitely. But he did not do so. 35 The Hoffmans owned and operated a successful small bakery and grocery store. They spoke with Lukowitz, an agent of Red Owl Stores, who told them that for $18,000 Red Owl would build a store and fully stock it for them. The Hoffmans sold their bakery and grocery store and purchased a lot on which Red Owl was to build the store. Lukowitz then told Hoffman that the price had gone up to $26,000. T he Hoffmans borrowed the extra money from relatives, but then Lukowitz informed them that the cost would be $34,000. Negotiations broke off and the Hoffmans sued. The court determined that there was no contract because too many details had not been worked out the size of the store, its design, and the cost of constructing it. Can the Hoffmans recover any money? 12
Quasi-Contract Sometimes called a contract implied in law. But be careful, because it s not really a contract at all! Quasi means somewhat like a Occurs when A confers a benefit on B which, if not enforced as a quasicontract, would lead to inequity and unjust enrichment. Requirements for the Application of Quasi-Contract 1. The plaintiff gave some benefit to the defendant. 2. The plaintiff reasonably expected to be paid for the benefit and the defendant knew (or should have known) this; and 3. The defendant would be unjustly enriched if he did not pay. Don Easterwood leased over 5,000 acres of farmland in Jackson County, Texas, from PIC Realty for one year. The next year, he obtained a second one-year lease. During each year, Easterwood farmed the land, harvested the crops, and prepared the land for the following year s planting. Toward the end of the second lease, after Easterwood had harvested his crop, he and PIC began discussing the terms of another lease. While they negotiated, Easterwood prepared the land for the following year, cutting, plowing, and disking the soil. But the negotiations for the new lease failed, and Easterwood moved off the land. He sued PIC Realty for the value of his work preparing the soil. Will he win? 13
John Stevens owned a dilapidated apartment that he rented to James and Cora Chesney for a low rent. The Chesneys began to remodel and rehabilitate the unit. Over a four-year period, they installed two new bathrooms, carpeted the floors, installed new septic and heating systems, and rewired, replumbed, and painted. Stevens periodically stopped by and saw the work in progress. The Chesneys transformed the unit into a respectable apartment. Three years after their work was done, Stevens served the Chesneys with an eviction notice. The Chesneys counterclaimed, seeking the value of the work they had done. Are they entitled to it? Novak v. Credit Bureau Collection Service David Novak suffered a brain aneurysm and was unconscious. An ambulance took him to Saint Regional Medical Center, where doctors successfully operated. Novak remained in the hospital for two months and then was discharged. Novak did not pay the Medical Center s bill, and the claim was assigned to a collection agency which sued Novak for the debt. The trial court found that Novak owed the debt under quasi-contract because Novak was unconscious and could not consent to the treatment, and the medical services were necessary to avoid serious bodily injury or death. Was the credit bureau entitled to damages based on quasicontract? Sources of Contract Law Common Law The Uniform Commercial Code The Restatement of Contracts 42 14
Common Law Contract law was virtually 100% common law until 1952! Even now, most contracts and types of contracts are governed by common law! 43 The Common Law of Contracts (Governs) Employment contracts Service contracts Insurance contracts Contracts involving real property (land and buildings) Sales of intangibles E.g. patents and copyrights The Uniform Commercial Code Developed in 1952 by the American Law Institute, plus representatives from each state. Consists of 11 Articles or chapters. We will learn a lot about Article 2, and a little about Articles 3 and 9. 45 15
UCC Article 2: Sale of Goods Governs contracts for the sales of goods A good is a thing which exists, and is movable. Electricity qualifies as goods, money and securities do not. 46 Mixed Contracts Contracts for a mixture of goods and services Examples: Car repair, house painting, home improvement In a mixed contract, UCC article 2 governs if and only if the primary purpose of the contract was the sale of goods. 47 Fallsview Glatt Kosher Caterers, Inc. v. Rosenfeld Fallsview sued Willie Rosenfeld, alleging he had requested accommodations for 15 members of his family, agreeing to pay $24,050, and then failed to appear or pay. Rosenfeld moved to dismiss, claiming that even if there had been an agreement, it was never put in writing. Under UCC section 2-201, any contract for the sale of goods worth $500 or more can only be enforced if it is in writing and signed. Fallsview argued that the agreement was not for the sale of goods, but for services. The company claimed that because the contract was not governed by the UCC, it should be enforced even with no writing. 48 16
The Restatement of Contracts The common law in each state evolved separately. The common law in each state became different. So the American Law Institute wrote the Restatement of Contracts. 17