Marianne M. Jennings
BUSINESS
Its Legal, Ethical, and
Global Environment
10th Ed.
Chapter 12
Contracts and Sales:
Introduction and Formation
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What Is a Contract?
• “A contract is a promise (or set of
promises) for breach of which the law
gives a remedy.”
– Defined in Restatement (Second) of
Contracts—American Law Institute
(ALI)
12-1
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Sources of Contract Law
• Common Law
– Based on English common law
– Summarized in Restatement (Second)
of Contracts
– Applies to contracts with subject
matters of land or services
• Examples: Mortgage, lease or medical
services
12-2
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Sources of Contract Law
• Uniform Commercial Code (UCC)
– Drafted by ALI and National Conference of
Commissioners on Uniform State Laws
• Common law is not uniform from state to state
• First appeared in 1940s
• Adopted in part or whole in all states
– Article 2 governs contracts for the sale of
goods; more liberal than common law
12-3
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Does the UCC apply?
• Case 12.1 Paramount Contracting
Co. v DPS Industries, Inc. (2011)
– Is bringing dirt to a construction site a
good or a service?
– What facts in the case would be
important in answering this question?
12-4
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UCC v. Common Law
UCC
Car
Horse
Easement
Lease
Mortgage
Real Estate Listing Agreement
Fabric
Loan
Roof Repair
Air Conditioner
12-5
Common Law
X
X
X
X
X
X
X
X
X
X
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Sources of Contract Law
• Uniform Commercial Code (UCC)
– Article 2A leases
• New addendum to UCC
• Covers leases of goods—long-term leases
such as car leases
• Adopted in most states
12-6
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E-Commerce and Contracts
• Uniform Electronic Transactions Act (UETA)
– Contracts formed on the internet
– Law in 48 states and D.C.
• Electronic Signatures in Global and National
Commerce Act of 2000 (E-sign)
– Federal law
– Requires parity for electronic signatures
• Uniform Computer Information Transaction Act
(UCITA)
12-7
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Bilateral vs. Unilateral
• Bilateral: First party (offeror) makes a promise
in exchange for the second party’s (offeree’s)
promise
– Example: You promise to pay back money with
interest and the bank promises to loan you the money
• Unilateral: First party (offeror) makes a promise
in exchange for offeree’s performance
– Example: “Drive my car across the country and I’ll
pay you $500 plus expenses”
12-8
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Express vs. Implied
• Express Contracts are Written or Oral
Agreements
• Implied-in-fact Contracts are Non-spoken,
Non-written Understandings
– Example: When you go into a doctor’s office,
you have an implied contract to pay her for her
services even though you may not sit down
and organize the details
• Implied-in-Law Contracts 
12-9
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Quasi Contracts
• Implied-in-Law
– Fictional Contract created by a court
– Elements
• One party confers a benefit on another
• Both are aware of the benefit
• Retention of the benefit without
compensation would be unfair and unjust
12-10
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Void or Voidable Contracts
• Void Contracts are Ones to Do Something
Illegal or Against Public Policy—Neither
Side Can Enforce
– Example: Contract to buy drugs
– Void Contracts are illegal and do not exist at
law!
• Voidable Contracts are Contracts in Which
One Party has the Right to End the Contract
– Example: Contracts of minors are voidable
12-11
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Executed vs. Executory
• Executed Contract is One in Which the
Promises Under the Contract Have Been
Performed
• Executory Contract is One That Has Been
Entered Into But Not Yet Performed
• Contracts Can Be Partially
Executory/Executed if One Side Has
Performed
12-12
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Equal Credit Opportunity Act
• Equal Credit Opportunity Act
– Passed to be certain credit was awarded
on applicant’s merits and not on
extraneous factors such as age, sex, race,
color, religion, or national origin
12-13
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Equal Credit Opportunity Act
• Equal Credit Opportunity Act
– Cannot consider
• Marital status
• Receipt of public assistance income
• Receipt of alimony or child support
• Plans for children
– Spouses have rights to individual credit
applications
12-14
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Equal Credit Opportunity Act
• Equal Credit Opportunity Act
– Penalties
• Actual damage plus punitive damages of up
to $10,000
• Class action—punitive damages of up to
$500,000 or 1 percent of creditor’s net
worth (whichever is less)
12-15
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ECOA Violation?
• Case 12.2 A.B. & S. Auto Service,
Inc. v. South Shore Bank of Chicago
(1997)
– What, according to Bonner’s expert is
the impact of considering criminal
records of applicants?
– Do you think a criminal record is an
indication of character?
12-16
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Truth-in-Lending
• Truth-in-Lending Act (TILA)
– Part of Consumer Credit Protection Act
• Purpose was full disclosure
• Elaboration and forms are found in Regulation Z
– Application
• Consumer credit transactions
• Open-end transactions (credit cards and lines of
credit)
• Closed-end transactions (loans; financing)
12-17
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Truth-in-Lending
• Regulation Z was Originally Part of
the Federal Reserve Regulations
• Bureau of Consumer Financial
Protection (BCFP) is New Agency
Created Under Dodd-Frank
– Will be housed in Federal Reserve
– Will be funded by the Federal Reserve
12-18
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CARD
• Credit Card Accountability,
Responsibility, and Disclosure Act
– Credit terms must last for one year
– Restrictions on soliciting those under 21
and restrictions on colleges and
universities
12-19
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Additional Credit Protections
• Liability Limitations
– $50 maximum liability if you comply
with notification requirements
• Credit Balance Transfer Protections
– Additional disclosures and regulations
on transferring balances
12-20
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Formation of Contracts
12-21
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Formation: Offer
• Offer is the First Part of the Contract
– Parties
• Offeror = person who makes offer
• Offeree = person who receives offer
– Must have language that indicates intent to
contract
• Not just inquiry
• More than negotiation
• Courts use an objective, not a subjective, standard
12-22
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Formation of Contracts
• Case 12.3
(2000)
Leonard v. PepsiCo
– Was the commercial an offer for a
Harrier Jet?
– What was the acceptance?
– Does the commercial satisfy the statute
of frauds?
12-23
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Formation: Essential Terms
• Under Common Law
Offer Must Contain
Essential Terms Of
The Contract:
• Under UCC Article 2
Offer Need Only
Contain:
– Parties
– Parties
– Subject matter
– Subject matter of the
contract
– Quantity
– Price and Payment
Terms
– Delivery Terms
– Performance Times
12-24
– Courts can consider
industry custom and
course of dealing in
determining whether
terms are sufficient
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Formation: Offer
• Communication to Offeree
– Offeree cannot accept offer that never
arrives
– Ads are generally considered invitations
for offers—not offers
12-25
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Offer: Termination
• Revocation: Offer Can be Revoked
any Time Prior to Acceptance
– Exception is option
– Offeror is paid to hold offer open
– It is a separate contract for time
– UCC merchant’s firm offer UCC 2-205
• Offer by merchant signed in writing states it
will be kept open (irrevocable) for period
stated (maximum of three months)
12-26
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Offer: Termination
• Termination of an Offer by Rejection
– Offeree indicates “no”
– Rejection by changes in terms—
counteroffer
12-27
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Offer: Termination (UCC)
• Termination by Counteroffer –
UCC 2-207
– Non-merchants-addition of terms in
acceptance does not equal a counteroffer
– Acceptance results but additional terms
are not part of contract
12-28
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Offer: Termination (UCC)
• Termination by Counteroffer – UCC 2-207
– Merchants – “Battle of the forms”
– Acceptance with additional terms = contract
– Additional terms are part of contract unless:
• Material—price, warranties (immaterial =
shipment or payment terms)
• Offer limited—“This offer is limited to these
terms”
• Objection to new terms
12-29
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UCC Contract Formation
12-30
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Additional Terms Under New UCC
Section 2-207
Contract Formed
In Meeting of Minds on
Subject Matter
Terms
Are Those in
Both Records
Parties Act
As if
Contract Exists
Parties Create
Record of
Contract
Terms
They Agree
On
Terms
In Record
Control
UCC Terms
Court
Decides
Terms
12-31
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Contract Formation
• Case 12.4 C9 Ventures v. SVCWest, L.P. (2012)
– Explain how tense physical
circumstances affect contract signatures
and validity
– Discuss why whether this is a contract
governed by UCC or common law is
important to the decision
12-32
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Checklist for Drafting Contracts
1. Identify both parties clearly. Be certain corporate names
are correct. Make sure the parties have the proper
authority to enter into the transaction. (Are copies of
board resolutions approving the contract available?)
2. Define the terms used in the contract, including industry
terms.
3. List all terms: price, subject matter, quantity, delivery,
payment terms.
4. Answer “what if” questions. (What if payment is not
made? What if deliveries are late?)
12-33
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Checklist for Contract
Preliminaries
1. Do your contract homework
a. Do background checks – check references, complaints
at state and private agencies, court dockets
b. Learn the nature of the business and industry custom –
learn to use the language
2. Negotiate details
a. Agree on terms that held you accomplish your purpose
(“apple powder for bakery equipment,” not just “apple
powder”)
b. Make sure your written agreement is complete
12-34
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Formation: Acceptance
• Acceptance: Offeree’s Response
– Offeree’s positive response
– Must be communicated to offeror
– Using proper means of acceptance
– Only offeree has power to accept
12-35
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Formation: Acceptance
• Acceptance: Offeree’s Response
– The Mailbox Rule
• Timing rule in contract acceptances that
provides that acceptance is effective upon
mailing if properly done
– Acceptance by stipulated means
• Mailbox rule applies
• If offeree does not use means stipulated,
then counteroffer and/or rejection
12-36
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Formation: Acceptance
• Acceptance With No Stipulated
Means
– Mailbox rule if same means or stipulated
means used
– Arrival if different (slower) method used
– If non-stipulated means used, it is a
counteroffer and a rejection
12-37
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Timing Rules for Acceptance
TYPE OF OFFER
METHOD OF
ACCEPTANCE
ACCEPTANCE
EFFECTIVE?
No means given
Same or reasonable
method of
communication
When properly mailed,
dispatched (mailbox
rule)
No means given
Slower or unreasonable
method of
communication
When received, is offer
still open
Means specified
(specified or stipulated
means)
Stipulated means used
Mailbox rule
Means stipulated
(specified or stipulated
means)
Stipulated means not
used
Counteroffer and
rejection
12-38
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Formation: Timing
• Case 12.5
Kass v. Grais (2009)
– Discuss the FedEx issue in the case
– What could the parties have done
differently to avoid this confusion?
12-39
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Formation: E-Contracts
• E-Commerce and Contract Formation
– Formation by ‘Clickon’, ‘Clickthrough’
or ‘Clickwrap’ agreements
– Offeree agrees to terms contained in an
online agreement
– Offeree accepts by clicking the “I
Agree” button
12-40
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Formation: E-Contracts
• Case 12.6 Home Basket Co., LLC
v. Pampered Chef, Ltd. (2005)
– How were the orders placed?
– How were the terms communicated?
– What do you learn about on-going terms
in transaction?
12-41
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Formation: Consideration
• Distinguishes Gifts From Contracts
• The Bargained-For Exchange
– What each party is willing to give up for
the other parties promise
– Courts are not concerned with the
adequacy of consideration, only the legal
sufficiency of consideration
12-42
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Formation: Consideration
• Unique Consideration Issues
– Charitable subscriptions are enforceable
even though detriment is one-sided
– Reliance (promissory estoppel) provides
element of detriment for contracts not
yet begun
12-43
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Statute of Frauds
• When Record Is Required
– Statute of Frauds (1677) controls what
must be recorded
– Types for contracts
• Real property
• Contracts that can not be performed in one
year
• Contracts to pay the debt of another
• UCC-contracts for sale of goods for $5,000
or more
12-44
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Statute of Frauds
• Exception: Performance
• What Form of Record is Required?
– Need not be one formal document—can
be pieced together
– Merchant’s confirmation memorandum2-201
12-45
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Common Law vs.
UCC Rules on Formation
Area
UCC
Common Law
Application
Sales of goods
Services, real estate, employment
contracts
Offers
Need subject matter (quantity), Code
gives details
Need subject matter, price, terms, full
details agreed upon
Options
Merchant’s firm offer – no consideration
needed
Need consideration
Acceptance
Can have additional terms; Mailbox rule
works for reasonable means of
acceptance
Mirror image rule followed; must use
same/faster method for mailbox rules to
get mailbox rule (old rule: same method)
Consideration
Required for contracts but not for
modification or firm offers
Always required
Writing
Requirement
Sale of goods $500 or more
Real estate contracts not to be performed
in one year; paying the debt of another
Defenses
Must be free of all defenses for valid
contract
Must be free of all defenses for valid
contract
12-46
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Statute of Frauds
• Case 12.7 Sununu v. Philippine
Airlines, Inc. (2011)
– What mistakes did the parties make in
their communications?
– Why is the court not sympathetic to Mr.
Sununu?
12-47
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Statute of Frauds
• The Recording Requirement in the
Electronic Contract
– Allows for the identification of
electronically transferred documents
using encryption technology
– Digital signatures help authenticate users
– E-SIGN and UETA
12-48
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Statute of Frauds
• Case 12.8
(1996)
Rosenfeld v. Basquiat
– Did the contract comply with the statute
of frauds?
– What is the effect of not complying with
the statute of frauds?
– Was the writing void?
12-49
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Parol Evidence
• The Effect of the Recorded Contract
– Contract reduced to its final and
unambiguous form cannot be
contradicted with extrinsic evidence
– Exceptions include evidence on fraud,
misrepresentations, and ambiguities
12-50
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International Contracts
• UN’s Convention on Contracts for the
International Sale of Goods (CISG)
– Adopted in 1980
– United States has adopted
• Party Autonomy Still Controlling in
International Contracts
– Must Provide for Additional Risks
12-51
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Avoiding Legal Pitfalls in
International Transactions
1.
Use short, simple contracts. The tendency to place all possibilities
in a contract is a U.S. tradition. In Germany, for example, the
parties have a one-page agreement that references and incorporates
terms and conditions of one of the parties.
2.
Watch unconscionability protections. While the U.S. focuses its
unfairness protections on consumers, other countries afford these
same protections to commercial transactions.
3.
Some disclaimers are void in other countries. For example, the
clause, “We are only liable for loss of data which is due to a
deliberate act on our part. We are not responsible for lost profits in
any event,” would be valid in the U.S. but void in Germany. In
Germany, sellers of software must assume liability for at least gross
negligence.
12-52
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Avoiding Legal Pitfalls in
International Transactions
4. One party’s attempt to limit liability would be void in
Germany. Any liability limitation must be specifically
addressed and negotiated for such a clause to be valid.
5. Unusually long periods for performance are typical in
the U.S. but void in Germany.
6. Price increase limitations are typical in non-U.S.
contracts.
7. In other countries, parties can refuse to pay on a current
contract if performance on an earlier contract was less
than satisfying and damages are owed.
12-53
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International Contracts
• Case 12.9 Intershoe, Inc. v.
Bankers Trust (1991)
– Is the memo a final writing?
– What dangers would the court introduce
if orders such as this were contradicted
by oral testimony?
12-54
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