Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
10
Principles of Contract Law
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Contract Law
Basic Issues
Terminology
Formation
Formality
of Contracts
of Contracts
Performance
Contracts
8-1
of Contracts
and Third Parties
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Contractual Terminology
Types of Contracts
 Based on Enforceability
 Valid, enforceable
 Voidable
 Invalid, unenforceable, void
 Based on Form
 Bilateral v. Unilateral
 Based on Expression
 Express contracts
 Implied-in-fact contracts
 Implied-in-law contracts
 Based on Performance
 Executory v. Executed
8-2
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Types of Contracts
Based on Form
 Bilateral
Contract
Promises are exchanged
 Bill promised to pay $75 for Betty’s collection of
CDs; Betty promises to deliver the CDs upon payment
of $75

 Unilateral
Contract
Promise made in anticipation of performance
 Betty promises to pay $200 when Bill has set up the
computer system in Betty’s office

8-3
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Types of Contracts
Based on Expression
 Express
Contract
Typical situation regardless of contract being in writing
or orally stated
 Mutually stated agreement

 Implied-in-Fact
Contract
Based on parties’ conduct
 Example:


8-4
Self-serve gas station
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Types of Contracts
Based on Expression
 Implied-in-Law
Contract
Quasi-contract
 Legal remedy to prevent unjust enrichment
 Example


8-5
You notice that your neighbor’s child is
mowing your grass (as he/she has done in
the past) and you say nothing - you will be expected to
pay a fair value for this service
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Types of Contracts
Based on Performance
 Executed

Contract
The expected performance of all parties
is completed
 Executory

Contract
The expected performance of the parties
has not yet occurred
 Example

8-6
Bill has paid the $75 he promised, but
Betty has not delivered the CDs
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Remedies for Breach
 Legal
Remedies (Money)
 Compensatory
Damages
 Consequential Damages
 Liquidated Damages
 Punitive Damages
 Equitable
Remedies
 Specific
Performance
 Rescission
 Restitution
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Formation of Contracts
Elements of Valid Contracts
Offer
 Expression of willingness to be committed
 Acceptance
 Expression of mutual assent
 Consideration
 Inducement to become contractually obligated
 Competent Parties
 Mentally able adults
 Beware of




8-7
Minors
Incapacitated parties
Lawful Purpose
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Offer and Acceptance
Meeting of the Minds -- Mutual Asset
 Olivia
says, “Art, are you interested in buying my used
laptop computer for $450?”
 Is there an offer?
 If Art
says, “Yes, I will buy your laptop for $450.”
 Is there an agreement?
 What exists now?
 If
Olivia responds, “Great, I will deliver it to you
tomorrow in class at 10:00.”
 What do we have now?
8-8
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consideration
Motivating Influence

What does offeror expect?

What does offeree expect?

Benefit & Detriment Analysis
 Promisor either wants




Example:

8-9
To gain a benefit
Or have promisee suffer a detriment
Or both
Bill and Betty
 Bilateral
 Unilateral
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consideration
Benefit-Detriment Analysis
 Bill
promises to pay $75 for Betty’s collection of CDs;
Betty promises to deliver the CDs upon payment of $75

What is the consideration?
Benefits and Detriments exchanged
 What did Bill gain and Betty suffer and
vice versa

8-10
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consideration
Benefit-Detriment Analysis
 Betty
promises to pay $200 when Bill has set up the
computer system in
Betty’s office

Where is consideration now?

 Issue
When does the contract become valid
and enforceable?
of Adequacy/Mutual Exchange
Not generally a matter of concern
 Why?

8-11
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Voidable Contracts
Competent Parties & Other Issues

Minors
Power to avoid obligation
 Return existing consideration
 Necessaries

Incapacitated Adults
 Mistake

Bilateral -- voidable agreement
 Unilateral -- enforceable agreement

Fraud/Misrepresentation
 Duress & Undue Influence

8-12
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Formality of Contracts

Orally Stated v. Written Document
 General Rules

Statute of Frauds
 Types of Cases





Exceptions



Part Performance
Judicial Admissions
Parol Evidence Rule

8-13
Interest in Land
Secondary Promise
Performance Beyond One Year
Goods over $500
Negotiations v. Amendments
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Performance of Contracts
Analysis of Conditions
 Types

of Conditions
Example

Bill promises to pay $75 for Betty’s collection of CDs;
Betty promises to deliver the CDs
upon payment of $75
Concurrent
 Precedent
 Subsequent


8-14
Insurance notification example
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Performance of Contracts
Analysis of Conditions
 Satisfying

Conditions
Substantial Performance

Betty promises to pay $200 when Bill has
set up the computer system in Betty’s office
 Excuses
for Nonperformance
Impossibility
 Impracticability

8-15
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Third Parties’ Interest
Beneficiaries
 Donee
 Creditor
 Assignments
 Betty


Of Rights



Computer Services
Of Duties



8-16
Obligee (Assignor), Assignee
Tenant assigns the right to live in apartment
Bill

Bank
Obligor (Assignor), Assignee
Tenant delegates obligation to pay rent to landlord
Impact on nonassigning original parties
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.