Title: What is a contract
1What is a contract?
- An agreement between two or more parties
consisting of promises which the law will enforce
2Everyday Contracts
- Checking account or savings account or CD
- Who are the contracting parties?
- Is it an verbal or written contract?
- What is the duration of the contract?
- What if one of the parties defaults?
- Apartment lease
- Who are the contracting parties?
- Is it a verbal or written contract?
- What is the duration of the contract?
- What if one of the parties defaults?
3What are the requirements to have an
enforceable contract?
- Proper Legal Subject Matter
- Legally Competent Parties
- Offer
- Acceptance
- Consideration
4Examples of Improper or Illegal Subject Matter
for a Valid Contract
- Gambling and contracts to pay such debts
- Crimes such as "hit contracts"
- Anti-Trust Violations
5When is a person competent to enter into a
contract?
- 18 years or older (Missouri)
- Exception 1 Minors (court cases) can legally
contract for necessities, as long as - The minor is emancipated ("out from under the
parental roof," I.e., financially independent) - Contract subject matter is a "necessity," defined
by the courts to include food, clothing, and
shelter. - Exception 2 Missouri statute authorizes minors
to contract (borrow) for educational loans at any
age, as long as it is for attending an accredited
university, college, or conservatory (but not a
"trade school")
6- Under the Missouri statute (431.067) authorizing
minors to legally contract to borrow money to
defray the necessary expenses of attending any
accredited university, college, or
conservatory, how much can a minor borrow to
attend MIZZOU? - All university fees
- All university fees and book costs
- All university fees, book costs, and room/board
costs - All university fees, book costs, room/board
costs, and other necessary living expenses
7Contracts with Minors who later ratify their
contract
- AFTER the "minor who contracted" turns 18
- Ratification Makes legally enforceable a
contract which was not valid before the ratifying
act - Four Statutory Options (in Missouri)
- Written acknowledgement of or promise to pay
- Partial payment upon such debt
- Disposal or part or all of the property for which
such debt was contracted - Refusal to deliver property for which such debt
was contracted upon written demand to the
creditor
8When is someone 18 or older NOT competent to
contract?
- When they are not able to comprehend the nature
and consequences of entering into the contract at
the time of its execution - Mental Illness
- Intoxication
9Missouri Statute
- Persons competent to contract when eighteen years
of age (Chapter 431.055) - The legal age at which a person becomes competent
to contract in Missouri is eighteen years and any
rule or provision of the common law to the
contrary is hereby abrogated. - (L. 1974 2d Ex. Sess. S.B. 3 2)
10Offer
- Offeror makes the offer to the Offeree
- Three Requirements of an Offer
- Intent to make a contract
- Certain definite terms (item description,
price, quantity) - Offer must be communicated to the offeree
- Counteroffer Cancels the prior offer
- Only one offer at a time can exist
- Advertisements NOT usually considered to be
"offers" but rather "inducements" to buyers to
make offers to potential sellers - Grocery store ads like Bananas 10-cents/lb
- Exception Ads which are very specific
11Who can accept an offer?
- Stated persons identified in the offer
- Sometimes the offer indicates a "class" of
possible offerees (then it becomes important to
identify clearly which offeree was first to
accept the offer)
12How long is an offer effective?
- General Rule Offers are effective for a
"reasonable time" determined by the trade customs
and the type of goods or services being bargained
for - For the stated time period IF it is between
"merchants" as defined by the U.C.C. - Otherwise, non-merchant offerors are not bound to
keep open their offer for the stated time (UNLESS
the offeree pays money to keep the offer open,
known as an "option contract")
13Revocation of Offers
- By the expiration of a stated duration
- By the expiration of a "reasonable time"
- By a COUNTEROFFER from the offeree
- By the Offeror telling the offeree(s) that the
offer is revoked
14Acceptance
- Offeree must accept ALL of the offer terms
- Manner for acceptance
- Exactly as the offer requires (if specified)
- If no manner specified, then acceptance is proper
in the manner the offer was delivered
15Mailbox Rule for Acceptance
- Mailbox Rule Acceptance effective as soon as it
is placed in the mailbox (outside the offerees
control) - Not when postmarked, received, nor read by the
offeror
16- March 16 Amanda sends a written offer by mail
to Jesse, offering to buy his piano for 2,000 - March 19 Jesse received Amandas offer
- March 23 Jesse mailed his acceptance to Amanda
- March 24 Amanda phoned Jesse and told him her
offer was cancelled - On March 27 Amanda received Jesses acceptance
- So Jesse sold his piano to another person for
1,800 - ??? Is there a contract or not? (yes)
- ??? If there is a contract, how much in damages
does Amanda owe Jesse for her default (breach) on
the contract? (200)
17Consideration
- Mutuality Benefit Detriment
- Each party must benefit, AND each party must give
up something (detriment) - Each party must give something of value
- A promise to do something
- A promise to refrain from doing something
- Money or other property
- NOT required that the exchange be of equal value
18Gifts
- Why isnt a promise to make a gift legally
enforceable as a contract? - Because only one party gave up something of
value, there is NO consideration - Church pledges Is there "consideration?"
- Yes, because the churchs detriment is the
expense of providing a meeting place (utilities,
capital costs, ministers salary, etc). The
church members benefit is the opportunity to
hear the ministers sermon in the comforts of the
church.
19Statute of Frauds When Must A Contract Be
Written?
- If a verbal contract violates the S/F, then it is
unenforceable - Rationale for the Statute of Frauds
- To help parties settle their own disputes since
they will have a written document to refer to - To impress upon the parties the seriousness of
their dealings
20Situations Governed by the Statute of Frauds
- Any contract for the sale/purchase of land
- Any contract which cannot be performed within one
year (as judge from the date of execution) - Any contract for goods for 500 or more (if a
merchant is the buyer or seller) - For non-merchants, Missouri uses 5,000 as the
threshold for whether the contract must be in
writing (see next slide) - Any promise to pay for the debts of another
21Special Missouri Statute for the Sale of
Personal Property" Between Non-Merchants
- a contract for the sale of personal property is
not enforceable by way of action or defense
beyond five thousand dollars in amount or value
of remedy unless there is some writing which
indicates that a contract for sale has been made
between the parties at a defined or stated price,
reasonably identifies the subject matter, and is
signed by the party against whom enforcement is
sought or by his authorized agent. - Missouri Statutes, Chapter 400.001.206
22- Which of the following ORAL agreements is
UNENFORCEABLE because it violates the Missouri
statute of frauds? - Sale of a new TV from a store (merchant) for
1,200 - Purchase of a time share in a vacation condo
(real estate) for 400/month, indexed for
inflation - Sale of a 2006 Prius by Alex to his brother for
10,500 (not merchants) - Purchase of Joe, the camel for 2,500 at the
Mexico auction (not a merchant, as the seller is
the camel owner, not the auction) - All the above violate the Missouri statute of
frauds - (A), (B), and (C) violate the Missouri statute of
frauds - (A) and (B) violate the Missouri statute of frauds
23Exception to the Statute of Frauds Doctrine of
Part Performance (DPP)
- DPP allows a verbal contract for land to be
enforced at court (specific performance) - Requirements
- Verbal contract
- Possession by the buyer (at least co-possession)
- Partial payment by the buyer
- Major improvements to the land by the buyer
24- Which of the following is NOT A REQUIREMENT under
Missouri common law in order to argue the
Doctrine of Part Performance to allow a buyer to
enforce a verbal contract to buy land? - The buyer must have started paying on the verbal
contract - The buyer must have the right to come on the land
- The buyer must have made major improvements to
the land - The buyer must have made ordinary repairs to the
land and its buildings - The buyer must have made significant payments
- The buyer must be living or operating a business
on the land - (D), (E), and (F) are not required
- (C) and (F) are not required
25Excusal from Contract Performance Impossibility
of Performance (IP)
- Unforeseeable and intervening force majeure (act
of God) - Unforeseeable means outside the control of
either party - Exception Crops
- Exception to the exception Crops to be grown on
specified land - Example Soybeans to be grown on Ryans farm (or
SW1/4 of Section 31 of T31N, R22W)
26Excusal from Contract Performance Frustration
of Purpose (FP)
- Unforeseeable and intervening force majeure
destroys the desired benefit for one party even
though both parties are able to perform their
promises - Unforeseeable means outside the control of
either party - Example A landowner contracts with an
oil-drilling company to drill an oil well for a
specified price. But then oil prices drop by
200, making it unprofitable to pump up oil from
such a well.
27- Which of the following is the LEAST LIKELY to be
excused under either the doctrine of
impossibility of performance or the doctrine of
frustration of purpose? - Storm blows a big tree down on Kevins truck
being sold to George. The exchange was to have
taken place tomorrow, but now the truck is
totaled. George wants to be excused from the
written contract. (IP) - Shannon has a written one-year health club
contract with Wilsons. But Shannons job is
eliminated and he cant keep up the payments.
Shannon wants to be excused from his contract.
(FP) - Derek has a written agreement to stay at the K.C.
Marriott Hotel to attend a three-day professional
conference. But the conference is canceled.
Derek wants to be excused from his contract.
(FP) - Ryan has a written contract to provide music as a
DJ at Jordans wedding reception. But the
wedding is cancelled because Jordan decides not
to get married. Jordan wants to be excused from
her contract.
28Remedies for Breach of Contract
- Money Damages Preferred remedy
- Money damages are used to make the injured party
"whole," I.e., putting the innocent party in the
position s/he would have been in had the contact
been performed as agreed - Specific Performance (SP) Not available unless
money damages are inadequate compensation - Requires each party to perform as per the
contract - For LAND the buyer can always get SP
- For personal property, the buyer cannot get SP
unless the specific property is very unique and
almost impossible to find in the marketplace - Rescission Cancels the contract, and puts the
parties back into their original positions. - Usually involves "fraud"
29Liquidated Damages Clause (LDC)
- Rationale To avoid litigation
- Defined The amount agreed upon by parties to a
contract for the amount of damages to be paid in
the event either party breaches the contract - The jury decides whether a liquidated damages
clause was reasonable or a penalty - For class purposes, let's presume a jury would
find "unreasonable and a penalty" any LDC
exceeding 50 of the contract price
30How Do You Calculate Damages?
- Look at the contract and identify what the
non-defaulting (innocent) party was to pay in
exchange - If the non-defaulting party is the seller, ask
what the seller was going to get paid under the
contract. - If the non-defaulting party is the buyer, ask
what the buyer was going to pay under the
contract. - Next find out what the non-defaulting party had
to pay (if the buyer) or to sell for (if the
seller) elsewhere, meaning to another person. - This is called the cover price (to do the
contract deal but with a third party) - The difference between the contract price and
cover price is what the law calls damages - This is the amount of money it takes to give the
non-defaulting party the deal they would have had
had the contract been fully performed.
31How Does A Liquidated Damages Clause Change the
Damages Remedy?
- If the liquidated damages clause (LDC) is not
challenged in court or is found by a jury to be
reasonable (not a penalty), then it is
specifically enforced. - What does that mean? That the only (exclusive)
remedy for the non-defaulting party is the amount
of the LDC. - It makes no difference whether the real damages
were more or less - It makes no difference whether the non-defaulting
party covered by buying (or selling) from (to)
a third party - Why do the courts allow LDCs?
- To avoid litigation (to free up the courts for
other litigants) - To encourage advance settlements between the
parties (should there be a default) - To promote and to respect the Right To Contract
- That persons are free to voluntarily (consent)
enter into binding legal agreements (and agree to
whatever clauses they want to, as long as it is
not for an illegal purpose)
32If the LDC is a Penalty, What Happens?
- If a LDC is taken to court and the jury finds it
to be unreasonable as an early estimate of
damages (before the real damages occurred), then
it is called a penalty - This means the LDC itself is NOT enforceable
- BUT the rest of the contract provisions (clauses)
are still enforceable - The contract as a whole is not invalidated only
the LDC - What are the damages if the LDC is thrown out for
being a penalty? - Follow the default damages formula What amount
is required to make the non-defaulting party
whole under the contract - What puts the innocent party in the same position
they would have been in had the contract been
fully performed
33Application 1
- Nathan tells Stacie she can have his used car for
1,200 cash. - Stacie says its a deal.
- Is there a contract?
- Yes
- Will the courts enforce this contract against
the non-defaulting party? - Yes
34Application 2
- Drew has a written contract to sell his horse to
Alex for 2,500. - But Alex decided not to go through with the deal.
- Will the courts grant a remedy for breach of
contract? - Drew sold the horse for 2,000
- Alex bought another horse for 3,000
- Yes. Drew will be awarded damages of 500 (what
he would have gotten under the contract, when
combined with the money he got from selling the
horse to a third party)