LAW BUSINESS for 17e John D. Ashcroft, J.D. Distinguished Professor of Law and Government Regent University Member of the Missouri and District of Columbia Bar Janet E. Ashcroft, J.D. Member of the Missouri and District of Columbia Bar Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Law for Business, Seventeenth Edition John D. Ashcroft and Janet E. Ashcroft Vice President of Editorial, Business: Jack W. Calhoun Publisher: Rob Dewey Acquisitions Editor: Vicky True Developmental Editor: Daniel Noguera Marketing Manager: Jenny Garamy Marketing Coordinator: Heather McAuliffe Content Project Manager: Darrell E. Frye Media Editor: Kristin Meere Frontlist Buyer, Manufacturing: Kevin Kluck Production Service: Integra © 2011, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to [email protected] Sr. Art Director: Michelle Kunkler Cover and Internal Designer: Beckmeyer Design Cover Image: © Todd Davidson/Stock Illustration Source/Getty Images, Inc. ExamView® is a registered trademark of eInstruction Corp. Windows is a registered trademark of the Microsoft Corporation used herein under license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license. © 2008 Cengage Learning. All Rights Reserved. Library of Congress Control Number: 2009939663 ISBN-13: 978-0-324-78653-8 ISBN-10: 0-324-78653-0 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 13 12 11 10 09 Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. CHAPTER 5 Nature and Classes of Contracts LEARNING OBJECTIVES 1 State the five requirements for a valid contract. 2 Describe the types of contracts and how they differ from agreements. 3 Explain the difference between a contract and a quasi contract. PREVIEW CASE Brooklyn Union Gas Co. (BUG) discovered that gas was being consumed at 369 Euclid Avenue although there was no record of an account or meter at that address. The last account at that address had been closed fourteen years earlier. John Diggs was in possession of the premises at 369 Euclid. BUG sued him for the gas consumed at that location on the basis of a quasi contract for his unjust enrichment. Had BUG suffered any detriment? Had Diggs received any benefit for which he had not paid? Do you think it was ethical for Diggs to use the gas when there was no account for his address? Contract Legally enforceable agreement 48 Part 2 A contra can be defined as a legally enforceable agreement between two or contract more ccompetent people. At first glance, this seems like a very simple definition. N Notice that this definition does not even require a written document. Chapters 5 th through 13 are devoted exclusively to explaining and clarifying this definition. Making co contracts is such an everyday occurrence that we often overlook their iimportance, except when the contracts are of a substantial nature. When one buys a cup of coffee during a coffee break, a contract has been made. When the purchaser agrees to pay 50¢ for the coffee, the seller agrees not only to supply one cup of coffee but also agrees by implication of law that it is safe to drink. If the coffee Contracts Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Chapter 5 Nature and Classes of Contracts contains a harmful substance that makes the purchaser ill, a breach of contract has occurred that may call for the payment of damages. A breach of contract is the failure of one of the parties to perform the obligations assumed under the contract. Business transactions result from agreements. Every time a person makes a purchase, buys a theater ticket, or boards a bus, an agreement is made. Each party to the agreement obtains certain rights and assumes certain duties and obligations. When such an agreement meets all the legal requirements of a contract, the law recognizes it as binding on all parties. If one of the parties to the contract fails or refuses to perform, the law allows the other party an appropriate action for obtaining damages or enforcing performance by the party breaking the contract. Contracts are extremely important in business because they form the very foundation upon which all modern business rests. Business consists almost entirely of the making and performing of contracts. A contract that is a sale of goods is governed by the Uniform Commercial Code (see Chapter 16). 49 Breach of Contract Failure to perform contractual obligations Requirements for a Contract A valid contract is an agreement that courts will enforce against all parties. Such a contract must fulfill the following definite requirements: 1. It must be based on a mutual agreement by the parties to do or not to do a specific thing. 2. It must be made by parties who are competent to enter into a contract that will be enforceable against both parties. 3. The promise or obligation of each party must be supported by consideration (such as the payment of money, the delivery of goods, or the promise to do or refrain from doing some lawful future act) given by each party to the contract. 4. It must be for a lawful purpose; that is, the purpose of the contract must not be illegal, such as the unauthorized buying and selling of narcotics. 5. In some cases, the contract must meet certain formal requirements, such as being in writing or under seal. LO1 Requirements for valid contract Valid Contract Contract enforceable by law You may test the validity of any contract using these five requirements. Contracts Contrasted with Agreements A contract must be an agreement, but an agreement need not be a contract. An agreement results whenever two or more people’s minds meet on any subject, no matter how trivial. Only when the parties intend to be legally obligated by the terms of the agreement will a contract come into existence. Chapter 6 explains how such agreements are formed. Ordinarily, the subject matter of the contract must involve a business transaction as distinguished from a purely social transaction. If Mary and John promise to meet at a certain place at 6 p.m. and have dinner together, this is an agreement, not a contract, as neither intends to be legally bound to carry out the terms of the agreement. If Alice says to David, “I will pay you $25 to be my escort for the Spring Ball,” and David replies, “I accept your offer,” the agreement results in a contract. LO2 Types of contracts and differences from agreements Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. 50 Part 2 Contracts David is legally obligated to provide escort service, and Alice is legally bound to pay him $25. Classification of Contracts Contracts are classified by many names or terms. Unless you understand these terms, you cannot understand the law of contracts. For example, the law may state that executory contracts made on Sunday are void. You cannot understand this law unless you understand the words executory and void. Every contract may be placed in one of the following classifications: 1. 2. 3. 4. 5. Valid contracts, void agreements, and voidable contracts Express and implied contracts Formal and simple contracts Executory and executed contracts Unilateral and bilateral contracts Valid Contracts, Void Agreements, and Voidable Contracts Void Of no legal effect Unenforceable Contract Agreement that is not currently binding Voidable Contract Enforceable agreement that may be set aside by one party Agreements classified according to their enforceability include valid contracts (defined earlier), void agreements, and voidable contracts. An agreement with no legal effect is void. An agreement not enforceable in a court of law does not come within the definition of a contract. A void agreement (sometimes referred to as a void contract) must be distinguished from an unenforceable contract. If the law requires a certain contract to be in a particular form, such as a deed to be in writing, and it is not in that form, it is merely unenforceable, not void. It can be made enforceable by changing the form to meet the requirements of the law. An agreement between two parties to perform an illegal act is void. Nothing the parties can do will make this agreement an enforceable contract. A voidable contract would be an enforceable agreement but, because of circumstances or the capacity of a party, one or both of the parties may set it aside. The distinguishing factor of a voidable contract is the existence of a choice by one party to abide by or to reject the contract. A contract made by an adult with a person not of lawful age (legally known as a minor or infant) is often voidable by the minor. Such a contract is enforceable against the adult but not against the minor. If both parties to an agreement are minors, either one may avoid the agreement. Until the party having the choice to avoid the contract exercises the right to set the contract aside, the contract remains in full force and effect. An agreement that does not meet all five of the requirements for a valid contract might be void or it might be a voidable contract. Express and Implied Contracts Express Contract Contract with the terms of the agreement specified in words Contracts classified according to the manner of their formation fall into two groups: express and implied contracts. In an express contract, the parties express their intentions by words, whether in writing or orally, at the time they make the agreement. Both their intention to contract and the terms of the agreement are expressly stated or written. Customary business terms, however, do not need to be stated in an express contract in order to be binding. Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Chapter 5 COURT Nature and Classes of Contracts 51 C A S E Facts: Sean Smith and others were indicted for Smith asked the court to enforce the immunity the capital murder of Hilton Merriman. Smith and District Attorney Randall Sherrod entered into an oral immunity agreement by which Smith agreed to give a videotaped statement and testify against a codefendant. Smith gave the statement and although not called to testify was available to do so. When the other defendants’ cases were disposed of, the indictment as to Smith was dismissed. Two years later, James Farren was elected district attorney. Farren got a second indictment against Smith. agreement saying that he had complied with it. Sherrod testified that when he dismissed the first indictment against Smith he had considered the immunity agreement a “done deal.” Outcome: Although the immunity agreement was oral, Smith had complied with it. An oral agreement is enforceable, so Smith was acquitted. —Smith v. State, 96 S.W.3d 377 (Tex.) An implied contract (also called a contract implied in fact) is one in which the duties and the obligations that the parties assume are not expressed but are implied by their acts or conduct. The adage “actions speak louder than words” very appropriately describes this class of contracts. The facts of a situation imply that a contract exists. The parties indicate that they have a mutual agreement so clearly by their conduct and what they intend to do that there is no need to express the agreement in words to make it binding. COURT Implied Contract (Implied in Fact Contract) Contract with major terms implied by the parties’ conduct C A S E Facts: William Shoemake of Texas insured his Live Oak and asked Live Oak to send that notice to home with Hochheim Prairie Farm Mutual Insurance Co. through Live Oak Insurance Agency. After he died, his son, Billy Dan of Louisiana, told Live Oak’s customer representative of the death and to switch the insurance to his name. For two years, Hochheim sent renewal notices to Texas. When they were returned undelivered, Live Oak sent them to Billy Dan, who paid them. Live Oak included a note with the second renewal notice asking if he still wanted the policy and where to send it. Billy Dan’s wife called Live Oak and said to send the policy to Louisiana. Hochheim asked Live Oak to forward the next renewal notice to Shoemake and requested his address. The renewal was not paid, so Hochheim sent a notice of policy lapse to Shoemake. Live Oak did not. A few months later, fire destroyed the home. When Hochheim denied the claim because the policy had lapsed, Billy Dan sued Live Oak for failing to perform an implied contract. The jury found for Billy Dan, and Live Oak appealed. Outcome: The appellate court found that although there was no express contract with Live Oak, its actions were adequate to find that it had agreed to provide an insurance policy on the house. —Live Oak Insurance Agency v. Shoemake, 115 S.W.3d 215 (Tex.App.) Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. 52 Part 2 Contracts Formal and Simple Contracts Formal Contract A formal contract must be in a special form or be created in a certain way. Formal contracts include contracts under seal, recognizances, and negotiable instruments. When very few people could write, contracts were signed by means of an impression in wax attached to the paper. As time passed, a small wafer pasted on the contract replaced the use of wax. The wafer seal was in addition to the written signature. This practice is still used occasionally, but the more common practice is to sign formal contracts using the word “Seal” or the letters “L.S.” after the signatures: Jane Doe (Seal); Jane Doe [L.S.] Today, it is immaterial whether these substitutes for a seal are printed on the document, typewritten before signing, or the people signing write them after their respective names. However, in some states, the document itself also must recite that it is under seal. In jurisdictions where the use of the seal has not been abolished, the seal implies consideration. In some states, the presence of a seal on a contract allows a party a longer time in which to bring suit if the contract is broken. Other states make no distinction between contracts under seal and other written contracts. The Uniform Commercial Code abolishes the distinction with respect to contracts for the sale of goods. Contract with special form or manner of creation COURT C A S E Facts: Charles Stuckey signed an agreement to alleged the contract was under seal so a suit could purchase an interest in a condominium. The agreement recited that it was executed under seal. The word “seal” appeared after Stuckey’s signature and the signatures of the sellers, but not after the signature of the escrow agent, Phillip Johns. Eleven years after the sale of the property, Stuckey sued the escrow agent. The agent asked the court to dismiss the suit because a suit on a written contract had to be brought within six years. Stuckey Recognizance Obligation entered into before a court to do an act required by law Negotiable Instrument Document of payment, such as a check Simple Contract Contract that is not formal be brought up to twenty years after its execution. Outcome: Because there was no indication that the escrow agent’s signature was under seal, the agreement was not a sealed contract as to him. The six-year requirement applied, and the case was dismissed. —McCalla v. Stuckey, 504 S.E.2d 269 (Ga.) Recognizances, a second type of formal contract, are obligations entered into before a court whereby people acknowledge that they will do a specified act that is required by law. By these obligations people agree to be indebted for a specific amount if they do not perform as they agreed, such as the obligation a criminal defendant undertakes to appear in court on a particular day. Negotiable instruments, discussed in later chapters, are a third type of formal contract. They include checks, notes, drafts, and certificates of deposit. All contracts other than formal contracts are informal and are called simple contracts. A few of these, such as an agreement to sell land or to be responsible for the debt of another, must be in writing in order to be enforceable; otherwise, they need not be prepared in any particular form. Generally speaking, informal Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Chapter 5 Nature and Classes of Contracts or simple contracts may be in writing, may be oral, or may be implied from the conduct of the parties. A written contract is one in which the terms are set forth in writing rather than expressed orally. An oral contract is one in which the terms are stated in spoken, not written, words. Such a contract is usually enforceable; however, when a contract is oral, disputes may arise between the parties as to the terms of the agreement. No such disputes need arise about the terms of a written contract if the wording is clear, explicit, and complete. For this reason, most businesspeople avoid making oral contracts involving matters of great importance. Some types of contracts are required to be in writing and are discussed in Chapter 11. 53 Written Contract Contract with terms in writing Oral Contract Contract with terms spoken Executory and Executed Contracts Contracts are classified by the stage of performance as executory contracts and executed contracts. An executory contract is one in which the terms have not been fully carried out by all parties. If a person agrees to work for another for one year in return for a salary of $3,500 a month, the contract is executory from the time it is made until the twelve months expire. Even if the employer should prepay the salary, it would still be an executory contract because the other party has not yet worked the entire year, that is, executed that part of the contract. COURT Executory Contract Contract not fully carried out C A S E Facts: Six months after they married, Josephine the waiver of inheritance right was executory so he Archibald and Toney Edwards separated. While separated, they signed an agreement by which they gave up the right to inherit from each other’s estates. They reconciled shortly thereafter and lived together until Josephine died. Josephine left a will written before her marriage that left nothing to Toney. State law provided that a surviving spouse could choose to get a share of a deceased spouse’s estate. Toney opted for that share saying was not bound by it. Outcome: The court held that because the waiver bound Toney to do something in the future, it was executory and not executed. Toney could choose a share of Josephine’s estate. —In re Estate of Archibald, 644 S.E. 2d 264 (N.C. App.) An executed contract is one that has been fully performed by all parties to the contract. The Collegiate Shop sells and delivers a dress to Benson for $105, and Benson pays the purchase price at the time of the sale. This is an executed contract because nothing remains to be done on either side; that is, each party has completed performance of each part of the contract. Executed Contract Fully performed contract Unilateral and Bilateral Contracts When an act is done in consideration for a promise, the contract is a unilateral contract. If Smith offers to pay $100 to anyone who returns her missing dog and Fink returns the dog, this would be a unilateral contract. It is unilateral (one-sided) in that only one promise is made. A promise is given in exchange for an act. Smith made the only promise, which was to pay anyone for the act of returning the dog. Fink was not obligated to find and return the dog, so only one duty existed. Unilateral Contract Contract calling for an act in consideration for a promise Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. 54 Part 2 Contracts Bilateral Contract Contract consisting of mutual exchange of promises A bilateral contract consists of a mutual exchange of promises to perform some future acts. One promise is the consideration for the other promise. If Brown promises to sell a truck to Adams for $5,000, and Adams agrees to pay $5,000, then the parties have exchanged a promise for a promise—a bilateral contract. Most contracts are bilateral because the law states a bilateral contract can be formed when performance is started. This is true unless it is clear from the first promise or the situation that performance must be completed. The test is whether there is only one right and duty or two. Quasi Contract LO3 Difference between contract and quasi contract Quasi Contract (Implied in Law Contract) Imposition of rights and obligations by law without a contract Unjust Enrichment One benefiting unfairly at another’s expense One may have rights and obligations imposed by law when no real contract exists. This imposition of rights and obligations is called a quasi contract or implied in law contract. It is not a true contract because the parties have not made an agreement. Rights and obligations will be imposed only when a failure to do so would result in one person unfairly keeping money or otherwise benefiting at the expense of another. This is known as unjust enrichment. For example, suppose a tenant is obligated to pay rent of $300 a month but by mistake hands the landlord $400. The law requires the landlord to return the overpayment of $100. The law creates an agreement for repayment even though no actual agreement exists between the parties. For the landlord to keep the money would mean an unjust enrichment at the expense of the tenant. Courts will also invoke the principles of unjust enrichment when there is a contract, but there is no remedy provided under the contract. An unjust enrichment offends our ethical principles, so the law imposes a contractual obligation to right the situation. PREVIEW CASE REVISITED Facts: Brooklyn Union Gas Co. (BUG) discovered that gas was being consumed at 369 Euclid Avenue although there was no record of an account or meter at that address. The last account at that address had been closed fourteen years earlier. John Diggs was in possession of the premises at 369 Euclid. BUG sued him for the gas consumed at that location on the basis of quasi contract for his unjust enrichment. Outcome: The fact that Diggs knew he was receiving gas and BUG was not paid for it established his quasi-contractual liability. —Brooklyn Union Gas Co. v. Diggs, 2003 WL 42106 (N.Y. City Civ.Ct) QUESTIONS ETHICAL POINT Notice that quasi contracts arise because of strictly ethical considerations. It is unfair for one person to benefit at the expense of another. 1. What provision does the law allow if a party to a contract fails or refuses to perform it? 2. How does a contract differ from an agreement? 3. When is a contract actually an unenforceable agreement? Can it be made enforceable? 4. What two items must be expressed in order to have an express contract? 5. How must a sealed contract be executed? 6. What is a recognizance? Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Chapter 5 Nature and Classes of Contracts 7. Why are most business contracts written rather than oral? 8. Explain the difference between an executor and an executed contract. 9. Are all contracts the result of mutual promises by both parties? 10. When will the law impose a contract when no real contract exists? CASE PROBLEMS When the concluding question in a case problem can be answered simply yes or no, state the legal principle or rule of law that supports your answer. 1. Uhrhahn Construction prepared proposals for work on construction projects for Lamar and Joan Hopkins. The Hopkinses signed the proposals for each project under sections titled “Acceptance of Proposal.” The proposals stated that any changes to the written estimates and specifications had to be in writing. During the construction, the Hopkinses made several oral requests for additional work not included in the proposals. They paid for some of them after receiving invoices labeled change orders for such work. When they did not pay for the rest, Uhrhahn sued, alleging there was an implied contract to make oral changes. Was there such an implied contract? LO 2 2. Rental Management, Inc., demonstrated its computer software to Rent-A-PC, a computer rental business. Rent-A-PC discovered that the software needed to be modified for its business. Rent-A-PC agreed to Rental’s charges and paid a deposit of $42,110. Rent-A-PC discovered that the software did not include the modifications it had requested. It informed Rental it was going to stop implementation of the software and requested the deposit back. When Rental did not return the $42,110, Rent-A-PC sued, alleging unjust enrichment. Rental claimed that because it had incurred costs in obtaining the software for Rent-A-PC, it was not unjustly enriched. Was it? LO 3 3. By letters, the Twin Buttes School District had hired Cheryle Good Bird to be the elementary school head cook for two different school years. Each letter specifically set the term of employment as one school year. Before the first contract had expired, Good Bird had received a letter telling her she had been chosen to be the head cook specifically for the next school year. During the second contract period, the principal by letter told Good Bird the head cook position for the next school year was going to be advertised, but she could apply for it. Good Bird reapplied, but was not hired. Good Bird sued the school district, claiming it had breached an implied contract. Did Good Bird have an implied contract to continue to be the head cook? LO 2 4. Nina Parkhurst owned a ranch and asked her son, Doug Boykin, to move to it and manage it for her. Boykin and his wife moved to the ranch and managed it for several years. They talked with Parkhurst many times, urging her to transfer 49 percent of the ranch to them. Parkhurst said she had thought and talked about possibly transferring the ranch but had made no decision. The Boykins claimed they were on the ranch under an oral contract with Parkhurst and the oral contract also entitled them to a 49 percent interest in the ranch. She sued them and asked the court to declare that there was no contract. Was there a contract? LO 1 5. David and Kimberly Birt met with Richard Gibbs, a loan officer with Wells Fargo Home Mortgage, Inc. After reviewing the Birts’ financial documents, Gibbs said they were eligible for a home construction loan. He told them to get a builder and LO 2 Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. 55 56 Part 2 Contracts design plans. The Birts had plans drawn and gave them to their proposed builder. Gibbs knew from a second credit report that the Birts would not be able to borrow as much as expected, but told them to sign a contract with the builder, which they did. They got a letter welcoming them to Wells Fargo Mortgage Resources and containing lending disclosures, but they knew the figures in the disclosures were just an example. Several weeks later, when they still had not received a loan commitment letter, the Birts contacted Gibbs’s supervisor. He told them the loan was denied. They sued Wells Fargo. Was there an implied in fact contract with Wells Fargo? LO 3 6. Alan Kortmeyer and Carolyn Allen owned a lot in Glenhaven, a mobile home park. They lived there for thirteen years and got water, sewer, garbage, and snow removal services. For six years, they paid $60 a month for these services, but then concluded that they were only required to pay a proportionate share of the costs of the services. Glenhaven continued to supply the services and bill them $60 a month; they received the services but paid nothing for them. Glenhaven finally sued. Must Kortmeyer and Allen pay for the services and, if so, on what basis? LO 1, 2 7. After an argument with his wife, Russell Pelo bought a shotgun and made threats of self-harm. In accordance with state law, he was detained in a hospital psychiatric unit for examination after a judge found him seriously mentally impaired. After Pelo was released, he refused to pay the hospital bill or allow his health insurer to pay it. When sued for the hospital bill, Pelo said he should not have to pay because he did not want to be hospitalized. Must he pay for services he did not want? Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
© Copyright 2026 Paperzz