250 WORDS

An auto retailer started a marketing promotion on a new hybrid model sedan. It advertised that anyone who purchased the car in 2013 and did not get at least 50 miles per gallon average gas mileage during the first 60 days would receive a payment of $10,000 cash from the company. Record-keeping and inspection procedures were required to assure accurate reporting by the vehicle owner. The promotion was widely publicized. A female customer purchased a hybrid model during the promotion period, followed all the rules, and recorded only 42 mpg in the first 60 days. She demanded the rebate but the company stalled for months and then stopped responding to her inquiries. Does she have a contractual right to collect the $10,000?   Consider the following two lines of thought and provide your opinion.

• Yes, this was a unilateral contract in which the offeree acted upon the offer by performing the terms of the offer, thus creating a binding contract.
• No, this was merely puffing, was not an offer to contract with any particular person and was without consideration.

Provide good examples of the principles and terms discussed in chapter 6.

© 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

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Contracts

Chapter 6

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Introduction

Part – 6.0

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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

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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

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Formation

Part – 6.1

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Table 6.1 – Differences between Contract Formations by Type
of Law

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Performance

and Discharge,
Breach, Defenses, Equitable

Remedies

Part – 6.2

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Assignment, Delegation,
and Commonly Used
Contracts Clauses

Part – 6.3

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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

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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

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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

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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

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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