Student Guide LAW/421 Version 1

Week Three Student Guide This weeks material covers contract law as has developed under the common law. U.S. contract law has evolved over a long period of time, going back to ancient origins. Although it can vary somewhat from state to state, it has generally accepted concepts. This week concentrates on basic contract principles. Components covered include the manner of creation of contracts, elements required for validity and enforcement, remedies for breach of contract, and unique nuances necessary for understanding all ramifications of creation and enforcement. The law of agency is also discussed because it involves the ability to have an employee to act on behalf of a principal in contractual matters. An understanding of contract law is essential for business law students. It is fundamental to business law and transactions. Contractual relations with customers, vendors, employees, partners, and other stakeholders are essential to business success. All of these relationships have some form of contractual thread inherent in the relationship. Contract principles are part of each business law topic in this course. The law of agency is equally applicable throughout the course. Contracts OBJECTIVE: Analyze the elements necessary to form valid contracts Resources: Ch. 6 of The Legal Environment of Business Content Ch. 6: Overview and Formation of Contracts of The Legal Environment of Business

o Definition and Categories of Contracts 1. Written vs Oral 2. Bilateral vs unilateral: bilateral contract involves 2 promises and 2 performances. Most contracts are bilateral. A unilateral contract involves one promise followed by one performance, which triggers a second performance from the offeror. Ex: a reward 3. Express vs implied vs. Quasi contracts: Express contracts are created when the parties have expressly agreed on the promises and performances. An implied contract is one in which the agreement is reached by the parties actions rather than their words. 4. Valid vs void contracts: When contracts have necessary elements they are valid. Void contracts are those agreements that have not been

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formed in conformance with the law from the outset of the agreement and either party cannot enforce this. 5. Voidable vs unenforceable contracts: Even when two parties have formed a Valid contract, sometimes the agreement may still not be fully enforceable. A voidable contract is one in which one party may at its option either disaffirm the contract or enforce it. An enforceable contract is one that meets the elements required by law or an otherwide binding agreement, but is subject to a legal defense such as statutory agreement that certain contracts be in writing in order to be enforceable. o Sources of Law A. State common law: contracts for services like legal, accounting, and engineering or real estate. B. State statutory law: contracts for goods or products based on the UCC. The UCC also covers transactions related to leasing of equipment. C. Hybrid contracts: are contracts that involve terms of both goods and services. The source of the law is established by determining the predominant thrust of the contract subject matter. o Overview of a Contract Transaction: A contract is formed when two or more parties agree to a particular set of terms. An agreement is recognized as legally binding so long as it meets certain formation requirements. After formation, the contract is governed by laws that set our requirements for enforeceability of the agreement. After the contract is properly formed and is legally enforced, the law sets out rules and consequences related to how the parties fulfill their obligations to one another. This is performance agreement. o Contract Formation: Mutual Assent: is the broad underlying requirement to form an enforceable contract. This means for the contracts to be valid, the parties must reach an agreement using a combination of offer and acceptance. The elements of a contract are (1) agreement (offer and acceptance) that indicates mutual assent, (2) consideration, (3) capacity, and (4) legality/public policy. To enforce a contract, it must be a product of genuine assent and in writing (in certain cases). o Enforceability: Ch. 10: Agency and Employment Relationships of The Legal Environment of Business Definitions and Sources of Agency Law: Agency is a legal relationship in which the parties agree, in some form, that one party will act as an agent for another party, called the principal, subject to the control of the

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principal. Agency relationships are common and essential in the business environment and exist in a variety of forms. A common form of agency is in an employeremployee relationship, but there are other important forms of agency as well. o Classification of Agents: 1. employee agents: individual employees who are authorized to transact business on behalf of the employer/principal. Principals are liable for actions or omissions of employee agents. Not every employee is an agent. An independent contractor agent is not considered an employee and has no legal protections of employees such as minimum wage and overtime laws. Gratultous agents are agents who act on behalf of a principal without receiving any compensation. 2. Although the parties themselves may agree to a certain classification, the status of an agent is based not on what the parties agreed to, but is instead determined by the actual working relationship between principal and agent. Courts apply the substance over form 2 analysis to determine the classification of an agent. The agent is classified based on the amount of direction and control that the principal has over the agent in terms of setting a work schedule, pay rate, and day-to-day supervision requirements. Overview of an Agency Transaction: Fundamentally, an agency transaction involves one party hiring another party to transact business on behalf of (or perform a task for) the hiring party. In a business context, this relationship is crucial because business owners and managers depend on agents to carry out the daily operations of the business. Liability of the Principal for Acts of the Agent: One of the most important aspects of agency law involves understanding the ways in which actions of an agent result in liability for the principal. For agency purposes, liability can arise either through a contract obligation or through vicarious liability (liability for another) in tort. Therefore, when a third party claims that the principal is liable for an agents act, he is asserting that the principal is responsible for any legal consequences of that act (such as damages or losses suffered by the third party). -- The primary sources of an agents power are (1) actual authority, (2) apparent authority, and (3) ratification. o Duties, Obligations, and Remedies of the Principal and Agent: When an agent acts on behalf of its principal, the agent may incur expenses, make payments,suffer an injury, or cause damages to third parties. In such cases, the principal has a duty to reimburse and indemnify its agents. This duty applies in the following cases: Payments made or expenses incurred within the agents actual authority. Payments made by the agent for the principals benefit, but done without authority, so long as the agent acted under a

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mistaken good faith belief that he had the authority to act. Claims made by third parties on contracts entered into by an authorized agent and on the principals behalf. Claims made by third parties for torts allegedly committed by the agent if the agents conduct was within the agents actual authority, or the agent was unaware that the conduct was tortious. Termination of the Agency Relationship: Failing to properly notify appropriate parties may result in continued liability of the principal for acts of the agent despite the termination. In general, an agency relationship is terminated either through express acts or through operation of law. Express acts: termination or expration. through either simply communicating the desire to terminate the relationship, the expiration of a fixed term, or satisfaction of purpose. Operation of law: destruction of subject matter, death, bankruptcy and mental capacity. o Employment Relationships: Most common is between employer and employee. ---The employment-at-will doctrine is a deep-seated common law rule that exists in some form in every U.S. jurisdiction. 13 Fundamentally, the doctrine permits employers to terminate an employee with or without advance notice and with or without just cause, subject to certain exceptions.

Resources: Ch. 7 of The Legal Environment of Business Content Ch. 7: Contract Performance: Conditions, Breach, and Remedies of The Legal Environment of Business

o Nature and Effect of Conditions: A condition is caregorized as either a condition precedent (event that must occur before the performance under a contract is due or a condition subsequent (even that occurs after the performance under the contract and discharges the parties obligations). Modern contract law does not recognize any substantive difference between these categories of conditions. 2 In fact, today most courts do not make any distinction between them. Rather, the law defines a condition as an event, not certain to occur, which must

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occur, [ . . . ] before the performance under a contract becomes due. 3 Generally, courts do enforce a strict compliance standard for conditions. In Luttinger v. Rosen, 4 an appellate court ruled that a condition, namely that a real estate buyer being able to obtain financing at a certain rate before going through with the purchase, must be strictly applied. o Good Faith Performance and Discharge: In the promises to perform in an agreement are not conditional, the duty to perfrom is absolute. The parties agree on terms and the parties perform the contractual obligations in good faith in order to complete the contract. The completion is known as discharge because both parties have now discharged their obligation to the other by performing the agreed upon duties. o Other Events of Discharge: A. mutual consent- if both parties have performed they can cancel the contract which is called rescission, which gives up the rights under the contract in exchange for the release by the other party from performing. Accord and satisfaction is when one party agrees to render a substitute performance in the future and the party promises to accept that substitute performance in discharge of the exiting performance obligations. The parties to a contract may also discharge their obligations by replacing the original contract with a substitute agreement, also known as modification. The substitute agreement is generally used to compromise when two parties have a dispute as to performance of the contract and wish to amend its terms. The substituted agreement, unlike the accord agreement discussed previously, immediately discharges any obligations under the original contract. B. operation of law- After contracts are formed, unexpected events occur that affect the probability of one parties ability to perform. Courts separate these there doctrines into impossibility, impracticalillity, and frustration of purpose. 166 A party may be discharged from the original terms of the contract by the operation of law if the contract has become impossible (no one can do it), impracticable (I cant do it), or its purpose has been frustrated (why would I want to do it now). Breach of Contract: is when a party to an agreement owes a duty to perform and fials to fulfill her obligation. After the parties have entered into an agreement but before performance has occurred, it sometimes becomes apparent that one party does not intend to perform as agreed. This may be apparent through the partys words or conduct. Under certain circumstances, the law provides an avenue of recovery for the nonbreaching party even before the nonperforming party actually breaches the contract or even before the performance is due. Repudiation occurs by the statement that reasonably interpreted, communicates nonperformance; an action making performance impossible, or knowledge by the parties that one part will be unable to perform. The doctrine of anticipatory repudiation allows a nonbreaching

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party to suspend performance and recover damages before performance is due if the other party has made an unequivocal statement or action suggesting that performance will not occur. o Remedies: are when the law provides certain relief for aggrieved parties that suffer loses as a result of another parties breach of contract. Remedy at law will be money damages awarded by the court to the nonbreaching party. 171 1.compensatory damages: 2. consequential damages 3. restitution 4. liquidated damages Equitable Remedies occurs when money damages are insufficient. a. specific performance: remedy whereby a court orders the breaching party to render the promised performance by ordering the party to take specific action. Ex: real estate contract b. injuctive relief: a court order to refrain from performing a particular act c. Reformation: When the parties inperfectly express their agreement and this imperfection results in a dispute, a court may change the contract by rewriting it to conform to the parties actual intentions. o Avoidance and Mitigation of Damages: The duty to migate is the nonbreaching parts obligation to avoid excessive or innecessary damages through reasonable efforts or else be abrred from recovery for those avoidable costs of nonperformance. o Contracts Involving Rights of a Third Party: One party may wish to do this by transferring to a third party her own rights in the contract, known as an assignment, or by appointing another to perform her duties, known as a delegation. Another form of a contract that involves rights of a third party occurs when a person who is not a party to the contract at the time of formation becomes a third-party beneficiary because the parties to the contractintended to confer a benefit on that person. Note. The information above is intended to help you complete your assignments. Read chapters in their entirety, as indicated in the syllabus. Additional information from sections not outlined above may be needed for classroom discussions.