978-0077733735 Chapter 7 Lecture Notes

Type

Quiz

Book Title

Business Law with UCC Applications 14th Edition

ISBN 13

978-0077733735

April 10, 2019

Chapter 07 - The Essentials of Contract Law

Chapter 7

The Essentials of Contract Law

I. Key Terms

Admiralty court(p. 173) Informal contract (p. 187)

Bilateral contact (p. 185) Law merchant (p. 169)

Breach of contract (p. 185) Objective concept rule (p. 169)

Canon law (p. 171) Pie powder court (p. 186)

Capitalism (p. 170) Privity (p. 173)

Contract (p. 169) Punitive damages (p.182)

Contract of record (p. 188) Quasi-contract (p. 181)

Executed contract (p. 188) Rehabilitate (p. 187)

Executory contract (p. 188) Staple court (p. 180)

Express contract (p. 186) Unenforceable contract (p. 185)

Fair court (p. 173) Unilateral contract (p. 185)

Formal contract (p. 187) Valid contract (p. 185)

Implied contract (p. 186) Void contract (p. 185)

Implied-in-fact contract (p. 186) Voidable contract (p. 185)

Implied-in-law contract (p. 187)

II. Learning Objectives

1. Explain the three theories of contract law.

2. Identify the six elements of a contract.

3. Explain the place of the UCC in contract law.

4. Distinguish contracts from other agreements between different parties.

5. Explain the concept of privity and contract law.

6. Explain the nature of valid, void, voidable, and unenforceable contracts.

7. Contrast unilateral and bilateral contractual arrangements.

8. Outline the difference between express and implied contracts.

9. Discuss the difference between quasi-contracts and implied-in-fact contracts.

10. Differentiate between formal and informal contracts.

11. Explain how executory contracts differ from executed contracts.

III. Major Concepts

7-1 The History of Contract Law

With the Roman law providing a model, with the Roman Catholic Church supplying

political and social support, with canon law supplying a moral framework, and with

practicality guiding their activities over a 300- year period, the merchants of the late

Middle Ages developed a body of active law that was characterized by neutrality,

universality, mutuality, involvement, integration, and evolution. The law merchant was

developed by the merchants themselves. The law merchant also successfully integrated

itself into other legal tradition such as English common law. Many of its provisions still

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Chapter 07 - The Essentials of Contract Law

exist in today’s court decisions and statutes.

7-2 The Multidimensional Nature of Contract Law

Contract law is a multidimensional area of the law, laying out not only what our rights

and duties are, but also whether we have actually under-taken those duties and been

given those rights. To explore this in more detail, we looked at the elements of a contract

and at several additional multidimensional aspects of contract law including the

objectives of contract law, remedies in contract law, contracts and the UCC, contracts and

other agreements, contracts and agency law, and contracts that must be written.

7-3 Contractual Characteristics

Contractual characteristics fall into five categories. These categories are valid, void,

voidable, or unenforceable; unilateral or bilateral; express or implied; informal or formal;

and executory or executed.

IV. Outline

I. The History of Contract Law (7-1)

A. Mercantile Law, Ancient Rome, Capitalism, and the Church

1. The history of contract law is intertwined with the parallel development of Western

mercantile law.

2. Mercantile law is often referred to as the law merchant and as lex mercatoria.

3. The law merchant saw rapid development between the 11th and 13th centuries in

Western Europe.

4. Between the fall of Rome and the rise of the mercantile city states, commercial

transactions were limited to traveling merchants and such with the governing law

emerging from rules within the traditions of the Justinian Code of the Roman Empire.

5. Ancient Roman law was adequate at the time because commerce itself was limited

and the population was low.

6. Changes occurred in that the technological complex adaptive system led to

developments in agriculture resulting in crop surpluses that could be sold; changes in

manor law freed many peasants who began selling in commerce; and Europe had a

population explosion.

7. The changes led to a new group of professional sellers who developed their own

system of laws.

8. The complex adaptive system that resulted came to be called mercantile law or the

law merchant.

9. Mercantile law is closely associated with the development of capitalism.

10. European capitalism began in the 11th and 12th centuries.

11. One of the driving forces behind the growth of capitalism was the Roman Catholic

Church.

12. The church encouraged the new class of sellers to establish guilds that followed the

law of the church, a legal tradition that is generally referred to as canon law.

B. The Characteristics of the Law Merchant

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Chapter 07 - The Essentials of Contract Law

1. Involvement and Law Merchant

a. Involvement requires that those affected by law participate in its making and

execution.

b. Merchants were involved in the establishment and the operation of courts that

adjudicated disputes involving contracts and other commercial disagreements.

2. Neutrality of the Law Merchant

a. The law merchant was made up of a fairly neutral system of laws and procedures.

b. Neutrality characterizes any system of laws that is consistently applied in the

same evenhanded way, no matter who the antagonists might be.

c. The law merchant was made up of fairly neutral system of laws and procedures.

d. The actual process of writing these things down was facilitated by the ruling

classes and by professional notaries.

3. Universality and the Law Merchant

a. Universal laws are those that apply to everyone.

b. The universal applicability of the law merchant was made necessary by global

nature of trade in the late middle ages.

c. Some rulers agreed to incorporate the law merchant into their national documents,

such as the Manga Carta in 1215 which contains a clause that specifically grants

safe conduct to foreign merchants in England.

4. Integration of the Law Merchant with Common Law

b. The integration of mercantile law into the diverse legal traditions in Europe was

especially difficult in England where a strong common law tradition had

developed during the late Middle Ages.

c. The first merchant courts in England were established in the 11th century as part

of every royal charter that legalized a local fair and were known as “fair courts”

or “pie powder courts.”

d. The fair courts lost their power with the creation of staple courts under the Staples

Act of 1353.

e. Staples courts heard cases that involved certain set commodities.

f. Staple courts were run by mayors who applied mercantile law, and this worked

well for about two centuries.

g. In the 16th century staple courts were taken over by the judges of the King’s

Court, and common law dominated that court.

5. Evolution of the Law Merchant and Common Law

a. The evolution of law merchant and common law required that the two work in

tandem to deal with their chief competitor, the admiralty courts, by using

arbitration and eventually the statutory law system.

b. Admiralty courts were tribunals set up in seaport towns to handle disputes

involving maritime law, shipping contracts, contests of over docking rights,

collisions at sea, and the like.

c. When the common law judges took over the staples courts, the merchants took

their cases to the admiralty courts to ensure that the law merchant would be used

to settle their disputes.

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Chapter 07 - The Essentials of Contract Law

6. When common law courts obtained jurisdiction over commercial cases handled by

admiralty courts, the merchants fought back by establishing their own arbitration

groups to avoid common law altogether.

7. The common law courts finally began to see the wisdom of integrating common law

with the law merchant and this integration practice became more accepted by the

beginning of the 18th century.

8. In the 19th century, Parliament passed the Bills of Exchange Act and the Sale of

Goods Act both of which codified common law principles which by that time had

been successfully integrated with most law merchant principles.

9. When the National Conference of Commissioners was established in 1895 in the

United States, it developed two model laws, the Uniform Negotiable Instruments Act

which followed the Bills of Exchange Act and the Uniform Sales Act which was

patterned after the Sale of Goods Act.

10. The traditions of the common law and the law merchant were merged, with the

principles of the law merchant dominating the law governing commercial

transactions.

C. The Restatement of the Law of Contracts

1. Restatements are restatements of the common law written clearly and organized in a

straightforward fashion.

2. Restatements of the Law are written by the American Law Institute, an organization

founded in 1923 consisting of lawyers, judges, and law professors.

3. Restatements are persuasive, not binding.

4. Restatements are adaptive and sometimes do more than restate the law in that they

may create the law as lawyers, judges, and law professors struggle to compromise on

the meaning, intent, and objectives of common law.

5. Early drafting of the Restatement of the Law of Contracts narrowly defined the

interpretation of consideration leaving no room for a situation in which before a

contract exists, a promise is made, relied on, and then broken.

6. Illustrating the role of the drafters in regard to struggles with the law, to remedy the

situation involving a promise being broken outside the confines of a contract, the

concept of promissory estoppel was added to the Restatement.

II. The Multi-Dimensional Nature of Contract Law (7-2)

A. The Elements of a Contract

1. Mutual Assent

a. Once the offer has been properly made by the offeror and accepted properly by

the offeree, then mutual assent exists between them.

b. Situations that might destroy assent include: fraud (both active and passive),

misrepresentation, mistake, duress, and undue influence.

2. Consideration

a. Consideration is the thing of value promised to the other party in exchange for

something else of value promised by the other party.

b. Courts are generally not concerned with the adequacy of consideration unless the

consideration is unconscionable.

c. Parties can settle disputes through an accord and satisfaction.

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Chapter 07 - The Essentials of Contract Law

d. Past consideration, pre-existing duties, illusory promises, and future gifts are not

consideration.

e. Situations involving promissory estoppels will not eliminate a party’s

responsibility to compensate an innocent party, even without consideration.

3. Capacity

a. Capacity is the legal ability to make a contract.

b. Questions involving capacity arise with minors and parties with mental

impairment.

4. Legality

a. Any contract to commit a crime or a tort would be illegal and, therefore, void.

b. Some contracts are made illegal by statutory law.

c. Some contracts are made illegal by courts based on public policy.

B. The Objectives of Contract Law

1. Rehabilitation in Contract Law

a. If the court finds that one of the parties breached the contract, that party will have

to rehabilitate the innocent party by compensating that party for any loss that

results from the breach.

b. The courts say that the objective of this rehabilitation is to place the innocent

party in as good a position as he or she would have been had the contract been

performed.

2. The Payment of Damages

a. Actual or compensatory damages are meant to make up for a financial loss

suffered by an innocent victim.

b. Incidental damages are those that are paid by the breaching party to make up for

any expenses paid by the victim to prevent any additional loss.

c. Consequential damages are indirect damages that result because of special

circumstances that exist with a particular contract.

d. Punitive damages are designed to punish the wrongdoer for his or her outrageous

conduct; and, while they are not generally awarded in breach of contract cases,

there are exceptions.

3. Recovery Limits and Equitable Relief

a. The innocent party cannot take advantage of the breach by deliberately raising the

amount of damages that the other party must pay which is referred to as the duty

to mitigate the damages or just the duty to mitigate.

b. An equitable remedy called specific performance is an exception to the rule that

says that the courts cannot force a party to go through with a contract.

c. Equitable remedies are those that are imposed by the courts when the payment of

money would not compensate for the loss suffered by the innocent party.

d. An injunction, a court order issued by a court directing a party to refrain from

some activity that represents a breach of contract, is a type of equitable remedy.

C. Multi-Dimensional Principles of Contract Law

1. Contracts and the Uniform Commercial Code

a. The Uniform Commercial Code (UCC) is a model set of laws designed to govern

almost all commercial transactions.

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Chapter 07 - The Essentials of Contract Law

b. The UCC replaced the Uniform Sales Act which followed the British Sale of

Goods Act, and which preserved the law merchant as integrated within English

common law.

c. The UCC is a compendium of the laws that affect most of the areas of contract

law covered in the law merchant.

d. Other types of contracts, such as employment contracts and real property

contracts are covered by common law and by special statutes.

2. Contracts and Other Agreements

a. All contracts are agreements, but not all agreements are contracts.

b. At the very least that to be a legally recognized contract, an agreement must

possess the four elements of a contract: mutual assent, consideration, capacity,

and legality.

3. Contracts and Privity

a. The general rule of contract law is that the parties must stand in privity to one

another.

b. Privity means that all parties must have a legally recognized interest in the subject

of the contract if they are to be bound by it.

c. It is possible for two or more parties to provide benefits to a third party under the

terms of a contract although there is a distinction between intended beneficiaries

and incidental beneficiaries.

d. An exception to the general rule of privity exists in cases involving warranties and

product liability.

4. Contracts and Agency Law

a. An agent is a party who has been hired or appointed by a principal to perform

some sort of work, usually of a business nature, for the principal.

b. Agents can bind the principal to a contract, even if the principal is not present.

5. Contracts and the Statute of Frauds

a. The Statute of Frauds is a law that outlines those contracts that must be in writing

to be enforceable in court.

b. The six types of contracts must be in writing to be enforceable are (1) contracts

that cannot be completed within one year; (2) contracts involving land; (3)

contracts inconsideration of marriage; (4) contracts made by executors to pay a

debt of the estate out of his or her own finances; (5) a promise to pay the debt of

another; and (6) contracts for the sale of goods valued at $500 or more.

6. Exceptions to the Statutory Rule

a. The statute says that a contract for the sale of goods valued at $500 or more must

be in writing unless the contract is for specially manufactured goods.

b. The writing becomes unnecessary with a sale of goods contract if the goods have

already been shipped and accepted or a payment has been received and accepted.

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Chapter 07 - The Essentials of Contract Law

c. If one of the parties reduces the contract to writing and sends that writing to the

other party, that unsigned paper will be sufficient as a writing under the statute

unless the receiving party objects in writing within 10 days.

d. In a court action if the party that has invoked the Statute of Frauds to escape

enforcement has also admitted under oath that the contract exists, no writing is

needed.

7. Rules of Interpretation

a. Courts have developed rules of construction to guide judges as they interpret the

written word.

b. The standard construction rule which tells judges that their primary objective in

the interpretation of a written contract is to uncover the goals that the parties had

when they entered the contract in the first place.

c. Courts must also interpret any ambiguous clause against the party who actually

wrote the contract.

d. Under the UCC, it is not always necessary to have all of the terms just as long as

the judge has enough information to determine a “reasonably certain basis for

giving an appropriate remedy.”

III. Contractual Characteristics (7-3)

A. Valid, Void, Voidable, and Unenforceable Contracts

1. A valid contract is one that is legally binding and fully enforceable by the court.

2. A void contract is one that has no legal effect whatsoever.

3. A voidable contract is one that may be avoided or canceled by one of the parties.

4. An unenforceable contract is one that, because of some rule of law, cannot be upheld

by a court of law.

B. Unilateral and Bilateral Contracts

1. A unilateral contract is an agreement in which one party makes a promise to do

something in return for an act of some sort.

2. A bilateral contract is one in which both parties make promises.

C. Express and Implied Contracts

1. Express Contracts

a. When contracting parties accept mutual obligations, either through oral discussion

or written communication, they have created an express contract.

b. Oral negotiations in many cases will be reduced to writing, but this is not always

necessary.

2. Implied Contracts

a. A contract implied by the direct or indirect acts of the parties is known as an

implied-in-fact contract.

b. An implied-in-law contract, also called a quasi-contract, is imposed by a court

when someone is unjustly enriched.

c. A quasi-contract is not a contract in the true sense of the word, because it is

created by the court.

D. Informal and Formal Contracts

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Chapter 07 - The Essentials of Contract Law

1. Informal Contracts

a. Any oral or written contract that is not under seal or is not a contract of record is

considered an informal contract.

b. An informal contract is also known as a simple contract.

2. Formal Contracts

a. Under common law principles, a formal contract differs from other types of

contracts in that it has to be (1) written; (2) signed, witnessed, and placed under

the seal of the parties; and (3) delivered.

b. The UCC removed the requirement for a seal in sale-of-goods contracts.

3. Contracts of Record

a. A special type of formal contract is known as a contract of record.

b. In support of the contract, an accompanying judgment may be issued in favor of

one of the parties by the court.

c. A contract of record is not a contract

d. in the true sense of the word, because it is court created.

E. Executory and Executed Contracts

1. A contract that has not yet been fully performed by the parties is called an executory

contract.

2. When a contract’s terms have been completely and satisfactorily carried out by both

parties, it is an executed contract.

V. Background Information

A. Cross-Cultural Notes

1. In China, judges may act as mediators in contractual disputes, often applying powers

that exceed those of American judges.

2. Traditionally, the Japanese seek harmony in all things. Japanese businesses, therefore,

generally avoid litigation. Referring a dispute to a third party, such as a court, is

considered an embarrassment. Evidence of this fact is the smaller number of lawyers

per capita in Japan as compared to the U.S. The number of lawyers in Japan,

however, has been on the rise.

3. Early Roman law, like Anglo-Saxon law and other early legal systems, recognized

only executed contracts that involved face-to-face dealings and an exchange of

property at the moment the deal was made. With the expansion of the Roman Empire

and increased foreign trade, rules to address unfulfilled promises developed, allowing

a new flexibility in commerce.

4. An article available from the website of the American Bar Association, at

http://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_

e_newsletter_home/estate_qadri_2.html, by Shahzad Q. Qadri discusses the marriage

contract under Muslim law and the mahr. As explained in the article, the mahr is not

a bride price, but can be loosely translated as a marriage gift.

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Chapter 07 - The Essentials of Contract Law

B. Historical Fact

1. Many contracts are informally sealed with a handshake, a gesture commonly used to

signify agreement. The handshake is a Western custom that is thought to have

originated when hands were extended to show they held no weapons. The parties to

the agreements then shook hands as a symbolic gesture of mutual trust.

2. The nineteenth century was considered the golden age of contract law. At that time,

contract law was a general branch of law that was suited for a free and expanding

market. Much economic and social legislation proposed in the United States during

this period and in the early twentieth century was denounced by the Supreme Court as

unconstitutional because it interfered with “freedom of contract.” In basing its

decisions on the “freedom of contract” principle, the Supreme Court was

demonstrating that it had accepted the will theory of contract law.

3. In seventeenth century England, because people made many unsealed and, therefore,

informal and unenforceable contracts, the power of local courts in contract disputes

declined. Unsealed contracts were accepted as valid, provided there was

consideration.

4. The use of a seal or a signet ring has been associated with legal transactions for

centuries. Roman lawyers displayed their rings at legal proceedings. Also, the use of a

seal for the purchase of property was mentioned in the Old Testament: “And I bought

the field of Hanameel my uncle’s son, that was in Anathoth, and weighed him the

money, even seventeen shekels of silver. And I subscribed the evidence, and sealed it,

and took witnesses, and weighed him the money in the balances” (Jeremiah 32:9–10).

5. The Statute of Frauds as it exists in most U.S. jurisdictions is based on a 1677 act

passed by the English parliament known as “An Act for the Prevention of Frauds and

Perjuries.”

C. State Variations

1. In Nebraska, a surrogate parent contract (a contract by which a woman is to be

compensated for bearing a child of a man who is not her husband) is void and

unenforceable.

2. Tennessee’s statute of frauds at T.C.A. § 29-2-101 has a provision in its statute of

frauds protecting lenders through providing requirements for writings in connection

with promises to lend money or extend credit.

D. Quotations

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Chapter 07 - The Essentials of Contract Law

1. Corruptissima republicans, plurimae leges. (When the state is the most corrupt, then

you have the most laws.)

— Tactitus, first century A.D., Roman historian.

VI. Terms

1. When an offer is accepted and there is consideration, the process is called “objective

manifestation of mutual assent.” This process is commonly referred to as “making a

deal.” The word deal comes through the Old English “dael” or “dal,” meaning

“division” or “portion.”

VII. Related Cases

1. In Bagley v. Mt. Bachelor, Inc., 356 Or. 543, 340 P.3d 27 (2014), the Oregon held that

enforcement of an anticipatory release of a ski operator’s liability for its own negligence

would be unconscionable. The court noted that the release was a take-it-or-leave-it type

arrangement and that the plaintiff had no opportunity to bargain as to its terms. The court also

noted that the defendant had the ability to guard against hazards.

2. In Hernandez v Banks, 65 A.3d 59 (D.C. App. 2013), a property owner brought an action

against tenants who had entered into lease with property's former owner, seeking possession

of the property on grounds that former owner lacked mental capacity to enter into lease.

Rather than rule that the lease was void as a matter of law, the court adopted a voidable

standard.

VIII. Teaching Tips and Additional Resources

1. The U.S. Small Business Administration has information for small businesses

including information regarding starting a business at

https://www.sba.gov/category/navigation-structure/starting-managing-business.

2. Findlaw.com has a site devoted to contract law issues at

http://smallbusiness.findlaw.com/business-forms-contracts/business-forms-contra

cts-overview/business-forms-contracts-overview-basics.html.

3. An article titled the “Top 10 Reasons to Avoid Breaching a Contract” can be

found at

http://smallbusiness.findlaw.com/business-forms-contracts/business-forms-contra

cts-overview/business-forms-contracts-overview-avoid-breaching.html.

4. An article discussing the importance of clear contract language titled “Lessons

Learned the Hard Way: Business Contracts” can be found at

http://smallbusiness.findlaw.com/business-forms-contracts/business-forms-contra

cts-overview/business-forms-contracts-overview-lessons.html.

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Chapter 07 - The Essentials of Contract Law

5. Information regarding the American Law Institute, a body involved with

developing proposed uniform laws such as the Uniform Commercial Code, can be

found at http://www.ali.org/index.cfm?fuseaction=about.overview.

6. Discuss with the students what constitutes a contract and why contracts are

necessary. Ask students to surmise how and when contracts originate. Suggest that

they write down at least three questions they have about the nature of contracts

and encourage them to refer to these questions periodically throughout the

chapters on contracts to see if they have found any answers.

7. Divide the class into small groups and have each group create one situation in

which there is an implied-in-fact contract and one in which there is an

implied-in-law contract, or quasi-contract. Have each group share their examples

and identify each type of contract.

8. Insurance policies are a form of contract that are heavily regulated. The National

Association of Insurance Commissioners website at http://www.naic.org/ contains

information regarding many current insurance topics. An interactive map is

available at http://www.naic.org/state_web_map.htm allowing users to obtain

information regarding individual state departments of insurance. Consumer

information is available at http://www.naic.org/index_consumer.htm.

without the prior written consent of McGraw-Hill Education.