Business Law

4/27/2009

ContractsChapter 7 - 13

Definition of a Contract• A contract is an agreement that can be

enforced in court. A contract may be formed when two or more parties each promise to perform or to refrain from performing some act now or in the future. A party who does not fulfill his or her promise may be subject to sanctions, including damages or, under some circumstances, being required to perform the promise.

Intent• The intent to enter into a contract is

important in the formation of a contract. Intent is determined by the objective theory of contracts. The theory is that a party’s intention to enter into a contract is judged by outward, objective facts as they would be interpreted by a reasonable person, rather than by the party’s own secret, subjective intentions. Objective facts include: (1) what the party said; (2) how the party acted or appeared; and (3) the circumstances surrounding the transaction.

Offer--Requirements

• Serious Intention:– Opinions are not offers.– Good Intentions are not offers.– Preliminary Negotiations are not offers.– Agreements to Agree are not offers.– Auctions are not offers.– Definiteness: Offer must have reasonably definite

terms so a court can determine whether breach occurred.

– Communication: Offer must be communicated to offered.

Legal

• The use of contract principles to govern the relationships of those who make promises dates back thousands of years.

• Modern capitalist society could not exist without the law of contracts. The foundation for almost all commercial activity is the contract.

The Function of Contracts• Contract law is needed to ensure

compliance with a promise or to entitle a nonbreaching party to relief when a contract is breached. All contractual relationships involve promises, but all promises do not establish contractual relationships. Most contractual promises are kept; keeping a promise is generally in the mutual self-interest of the promissory and the promisee.

A Contract - • Agreement that can be enforced in

court.• Formed by two or more parties.• Failure to perform results in breach

and damages• A valid, enforceable contract

includes:– Agreement.– Consideration.– Capacity.– Legality.

Nature & Classification –

• Function of Contracts:– Fundamental to business.– Creates rights and duties between

parties.– Provides stability and predictability.

• Parties: Promisor (makes the promise) and Promisee (accepts the promise).– Good faith in commercial agreements

Intention

• Serious intent is determined by what a reasonable person in the offeree’s position would conclude the offeror’s words and actions meant. Offers made in obvious anger, jest, or undue excitement do not meet the test.

Definiteness• A contract must have reasonably definite

terms so that a court can determine if a breach has occurred and can give an appropriate remedy. An offer may invite an acceptance to be worded in specific terms so that the contract is made definite. Courts may supply a missing term when the parties have clearly manifested an intent to form a contract, but they will not do so if the parties’ expression of intent is too vague or uncertain.

Communication

• An offer must be communicated to the offeree, so that the offeree knows it. Ordinarily, one cannot agree to a bargain without knowing that it exists.

• Offer and Acceptance

Requirements of a Contract

• The four essential elements of a contract are

• (1) agreement• (2) consideration - Consideration is the

value given in return for a promise.• (3) contractual capacity• (4) legality• Agreement and Consideration

Legal Aspect

• Contract law shows what promises or commitments our society believes should be legally binding. It shows what excuses our society will accept for the breaking of promises. And it shows what kinds of promises will be considered to be against public policy and therefore legally void.

Types of Contracts--Formation

• 1) Bilateral Contracts:– Offeror and Offeree exchange promises to each

other. – A contract is formed when Offeree promises to

perform.• 2) Unilateral Contracts:

– Offeror wants performance in exchange for his promise.

– Contract is formed when Offeree performs.– Contests and lotteries are examples.– Revocation of Offer: modern view is that offer is

irrevocable once the Offeree substantially performs. – Unilateral Contract

Bilateral v. Unilateral Contracts

• Every contract involves at least two parties: an offeror and an offeree. The offeror promises to do or not to do something. Whether a contract is unilateral or bilateral depends on what the offeree must do to accept. A bilateral contract is a promise for a promise; if the offeree need only promise to perform, the contract is bilateral. A unilateral contract is a promise for an act; if the offeree can accept only by complete performance, the contract is unilateral. A unilateral contract’s offer becomes irrevocable once substantial performance has been completed.

Types of Contracts--Formation

• 3) Express vs. Implied Contracts.– Express: terms of contract are set forth

either in writing or orally.

• 4) Implied-in-Fact: based on conduct. – Plaintiff furnished service or product.– Plaintiff expects to be compensated.– Defendant had a chance to reject and did

not.

Express v. Implied Contracts

• An express contract is one in which the terms are expressed in words, oral or written. A contract that is implied from the conduct of the parties is an implied-in-fact contract, or simply an implied contract. The parties’ conduct reveals that they intended to form a contract and creates and defines its terms. To establish an implied-in-fact contract: (1) the plaintiff must have furnished some service or property; (2) the plaintiff must have expected to be paid and the defendant knew or should have known that payment was expected; and (3) the defendant had a chance to reject the service or property and did not.

Types of Contracts--Formation

• 5) Formal vs. Informal Contracts.– Formal: require special form or method

to be enforceable, e.g., under seal.– Informal: all other contracts.

• 6) Contract Performance: Executed vs. Executory.– Executed: fully performed by both sides.– Executory: at least one of the parties

has not performed.

Formal v. Informal Contracts

• Formal contracts require a special form or method of formation to be enforceable. Formal contracts include contracts under seal, which are writings with a special seal attached. All other contracts are informal contracts, or simple contracts. For these, no special form is required (except for certain types of contracts that must be in writing).

Contract Enforceability

• Valid Contract.– Four Elements: – Agreement– Consideration– Legal Purposes– Parties have legal capacity.

• Voidable Contract.– Valid contract that is legally defective and

can be avoided (rescinded) by one of the parties.

BILATERALA promise for a promise

UNILATERALA promise for an actVALID

A contract that has all the nec. Elements

VOIDNo contract w/out legal

obligation

VOIDABLEA contract where a party has

the option of voiding

UNENFORCEABLEA contract which can not be enforced because of legal

defenses

EXPRESSFormed by words

IMPLIED IN FACTFormed at least in part by the parties

conduct

QUASI CONTRACTImposed by law to

prevent unjust enrichment

EXECUTEDA fully performed contract

EXECUTORYA contract not yet fully

performed

FORMALRequires a special form for

creationINFORMAL

Requires no special form

Interpretation of Contracts

• Plain Language Laws.– If language is clear from face of

contract, court will enforce a contract according to plain terms.

– If language is not clear, courts cannot consider extrinsic evidence

• Other Rules of Interpretation.– Plain Meaning Rule, Trade usage,

Custom, Prior Dealings.

PLAIN MEANING RULE

• When a contract is in writing that is not subject to conflicting meanings, a court will enforce the writing according to its plain meaning. Under this plain meaning rule, the meaning of the words must be determined from the face of the instrument—a court cannot consider evi dence extrinsic to the document.

Agreement and Consideration - Ch. 8

• Agreement:• An essential element of contract

formation is AGREEMENT: – OFFER, and– ACCEPTANCE

• Elements: - Offer– Serious Intention,– Reasonably Definite Terms, and– Communication to Offeree.

Offer--Requirements

• Serious Intention:– Opinions are not offers.– Good Intentions are not offers.– Preliminary Negotiations are not offers.– Agreements to Agree are not offers.– Auctions are not offers.– Definiteness: Offer must have reasonably definite

terms so a court can determine whether breach occurred.

– Communication: Offer must be communicated to offeree.

Expressions of Opinion• An expression of opinion is not an offer. For example,

a doctor’s opinion that a hand will heal within a few days of an operation is not an offer. No offer is made when a party says that he or she plans to do something. A request or invitation to negotiate is not an offer. (This includes statements such as “Will you sell your estate?” and “I wouldn’t sell my car for less than $1,000.”)

• An invitation to submit bids is not an offer. Thus, when contractors are invited to bid on a job, the party to whom the bid is submitted is not bound. (The bid is an offer, however, and the contractor is bound by its acceptance.)

Advertisements, Catalogues, and Circulars

• In general, ads, catalogues, price lists, and circular letters are treated as invitations to negotiate. If an ad to sell a single item was interpreted as an offer, and fifty people accepted, the offeror would breach forty-nine contracts. A price list is not an offer to sell at that price; it invites the buyer to offer to buy at that price.

• If an ad makes a promise so definite that it is apparent that the offeror is binding him self or herself to the conditions stated, the ad is treated as an offer. Thus, an ad may be an offer if it solicits performance—for example, by offering a reward for something.

Auctions• An auction is not an offer—the owner is only

expressing a willingness to sell. In an auction with reserve, the owner may withdraw the goods any time before the auctioneer closes the sale. An auction is assumed to be with reserve, unless it is stated to be with out reserve, in which case the goods cannot be withdrawn and must be sold to the highest bidder. In an auction with reserve, the bidder is the offeror. A bidder may revoke his or her bid, or the auctioneer may reject it, before the auctioneer strikes the hammer, which constitutes acceptance of the bid. When a bid is accepted, all previous bids are rejected.

Offer—Termination

• By Act of the Parties.• Revocation by Offeror (unless

irrevocable).• Rejection by Offeree (or

counteroffer).• Operation of Law: lapse of time,

destruction, death or incompetence, supervening illegality

Revocation of the Offer

• Generally, an offer may be revoked any time before acceptance, even if the offeror agreed to hold it open, but revocation is effective only on receipt. Revocation can be express or implied by conduct inconsistent with the offer. Revocation of an offer made to the general public must be communicated in the same manner in which the offer was communicated. One form of irrevocable offer is an option contract, which is created when an offeror promises to hold an offer open for a specified period of time in exchange for a payment by the offeree.

Rejection of the Offer by the Offeree

• An offer may be rejected by the offeree. A subsequent attempt to accept will be construed as a new offer. Rejection can be express or implied by conduct evidencing an intent not to accept. It is effective only on receipt. Asking about an offer is not rejection, but an ambiguous response may be construed as a rejection.

Counteroffer by the Offeree

• A counteroffer is a rejection and a simultaneous making of a new offer. The mirror image rule requires that the offeree’s acceptance match the offeror’s offer—any material change in the terms automatically terminates the offer and substitutes a counteroffer.

Unequivocal Acceptance

• Unequivocal acceptance is required by the mirror image rule. An acceptance subject to new conditions or with terms that materially change the offer (“I accept the offer, but only if I can pay on ninety days’ credit”) may be considered a counteroffer. An acceptance may be unequivocal even though the offeree expresses dissat isfaction (“I accept the offer, but I wish I could have gotten a better price” is effective). Conditions that add no new terms do not turn an acceptance into a rejection (“I accept; please send written contract”) unless the acceptance is made conditional (“I accept if you send a written contract”).

Acceptance

• Voluntary act by Offeree that shows assent to terms of original offer.

• Mirror Image Rule.– Offeree must unequivocally accept offer.– Additional terms may be considered a

counteroffer.• Acceptance by Silence.

– Ordinarily silence is not acceptance, unless offeree has duty to speak (benefit of services).

Silence as Acceptance

• Ordinarily, silence cannot be acceptance. Silence can operate as acceptance if an offeree takes the benefit of offered goods or services even though he or she had an opportunity to reject and knew that they were offered with the expectation of compensation. Silence can operate as acceptance when the parties have had prior dealings in which the offeree has led the offeror reasonably to understand that the offeree will accept all offers unless the offeree sends notice to the contrary.

Acceptance

• Communication of Acceptance.– Authorized Means of Communication

is either express or implied by form of offer (e.g., U.S. mail, fax, email).

– “Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror).

Acceptance

• An acceptance is timely if it is made before the offer is terminated. Acceptance is effective when it is sent by whatever means is authorized by the offeror. This is the mailbox rule. Specific means can be stated in the offer or authorized by facts or by law. If an offeror specifies an exclusive means, the contract is not formed unless the offeree uses that means.

Consideration and Its Requirements

• Consideration is value given in return for a promise.– Something of legally sufficient value,– Given in a bargained-for-exchange

between the parties.

Legal Sufficiency and Adequacy

• Sufficient consideration must be something of value in the eyes of the law.

• Adequate consideration is “fair” although courts do not generally consider this.

• If consideration is inadequate (e.g., fraud) courts may strike down the contract as unconscionable.

Contracts That Lack Consideration

• Pre-Existing Duty.• Unforeseen Difficulties.• Past Consideration.• Illusory Promises

Settlement of Claims p. 168/9

• Accord and Satisfaction. – A method of discharging a claim whereby the parties

agree to give and accept something in settlement of the claim and perform the agreement, the accord being the agreement and the satisfaction its execution or performance, and it is a new contract substituted for an old contract which is thereby discharged, or for an obligation or Cause of Action which is settled, and must have all of the elements of a valid contract.

• Release.• Covenant Not to Sue

Promissory Estoppel p. 169

• Promissory Estoppel (“detrimental reliance”) doctrine applies when a person relies on the promise of another to her legal detriment.

• Promisor is “estopped” (precluded) from revoking the promise. There must be:– Clear and definite promise with substantial

reliance– Justice is served by enforcement of the

promise.

Capacity and Legality – Ch. 9• Contractual Capacity.

– The legal ability to enter into a contractual relationship.• Full competence.• No competence.• Limited competence.• Capacity & Illegality: Exculpatory Clauses

• Legality.– The agreement must not call for the

performance of any act that is criminal, tortious, or otherwise opposed to public policy.

Minors

• In most states, a person is no longer a minor for contractual purposes at the age 18.

• A minor can enter into any contract that an adult can.

• A contract entered into by a minor is voidable at the option of that minor.

Disaffirmance

• A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age.

• Minor must disaffirm the entire contract.

• Disaffirmance can be expressed or implied.

A Minor’s Obligations on Disaffirmance

• In most states, minor need only return the goods (or other consideration) subject to the contract, provided the goods are in the minor’s possession or control.

• In increasing number of states, the minor must restore the adult to the position held before the contract was made.

Exceptions to Minor’s Right to Disaffirm

• Misrepresentation of Age.– Generally, a minor can disaffirm the

contract.– But some states prohibit Disaffirmance

and hold the minor liable.• Contracts for Necessaries.

– Contracts for food, clothing, shelter may be disaffirmed by minor, who remains liable for the reasonable value of goods or services.

Exceptions to Minor’s Right to Disaffirm

• Insurance.– Not viewed as necessaries, so minor

can disaffirm contract and recover all premiums paid.

• Loans.– Seldom considered to be necessaries.– Exception:

• Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

Ratification by Minor

• Occurs when a minor, on or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.

• Emancipation.– Removes lack of contractual capacity.

Parents’ Liability

• Contracts.– Parents not liable (This is why parents

are usually required to sign any contract made with a minor).

• Torts (Statutes Vary):– Minors are personally liable for their

own torts.– Liability imposed on parents only for

willful acts of their minor children.– Liability imposed on parents for their

children negligent acts that result from their parents’ negligence.

Intoxicated Persons

• Lack of contractual capacity at the time the contract is being made.

• Contract can be either voidable or valid.– Courts look at objective indications to

determine if contract is voidable.• If voidable:

– Person has the option to disaffirm, or– Person may ratify the contract expressly or

impliedly.

Mentally Incompetent Persons

• Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed.

• Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.

• Valid: If person is able to understand the nature and effect of entering into a contract yet lacks capacity to engage in other activities. Lucid Interval.

Legality

• A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed).– Contract that calls for a tortious act.– Contract that calls for an act contrary to

public policy.

Contracts Contrary to Statute

• Usury.• Gambling.• Sabbath Laws. (Sunday)• Licensing Statutes.• Contracts to Commit a Crime.• Contracts with Unlicensed

Practitioners.

Contracts Contrary to Public Policy• Contracts contrary to public policy-void.• Unconscionable Contracts or Clauses.• Procedural or Substantive

Unconscionability.• Exculpatory Clauses.• Discriminatory Contracts.• Contracts for the Commission of a Tort.

Unconscionable Contracts• Ordinarily, a court does not look at the

fairness or equity of a contract; for example, a court normally will not inquire into the adequacy of consideration. Persons are assumed to be reasonably intelligent, and the court does not come to their aid just because they made unwise or foolish bargains….however, bargains are so oppressive that the courts sometimes relieve innocent parties.

Unconscionable Contract or Clause

A contract/clause that is void for reasons of public policy

Sustentative UnconscionabilityThis exist when a contract, or

one of its terms, is oppressive or overly harsh

Procedural UnconscionabilityThis occurs if a contract is entered into, or a terms becomes part of a

contract, because of a party’s lack of knowledge or understanding of the

contract or its term.

Factors that Courts Consider•Is the print inconspicuous?•Is the language unintelligible?•Did one party lack an opportunity to ask questions about contract?•Was there a disparity of bargaining power between the parties

Factors that Courts ConsiderDoes the provision deprive one party of the benefits of the agreement?Does a provision leave one party w/out a remedy for nonperformance by the other?

Contract Enforceability Ch. 10• In what types of situations might

genuineness of assent to a contract’s terms be lacking?

• What is the difference between a mistake of value or quality and a mistake of fact?

• What elements must exist for fraudulent misrepresentation to occur?

• What contracts must be in writing to be enforceable?

• What is parol evidence? When is it admissible to clarify the terms of a written contract?

Mistakes

• Mistake of Value (or Quality).– Contract is enforceable.

• Mistake of Fact.– Unilateral Mistake of Material Fact—

mistaken party does not have the right to cancel contract unless:• (1) the non-mistaken party knew or should

have known about the mistake, or • (2) there is a clerical error.

• Bilateral (Mutual) Mistakes—if both are mistaken either one can cancel the contract.

Mistakes of Fact

Material Mistake of Fact

Bilateral Mistake

Contract can be

rescinded either party

Unilateral MistakeEnforceable unless

Other party knew or

should have about mistake

Mistake was due to

substantial math. Error, or

made inadvertently

Fraudulent Misrepresentation

• Innocent party can cancel the contract.

• Plaintiff must show:– Misrepresentation of a material fact

(not opinion) by conduct, silence or words.

– Intent to deceive.– Innocent party must have justifiably

relied on the misrepresentation.– Plaintiff must have suffered a legal

injury.

Undue Influence and Duress

• Undue Influence.– Arises from a special relationship of

trust.– A stronger party overcomes a weaker

party’s free will by exerting psychological influence.

• Duress.– Threat of physical force or extortion.– Can serve as basis for rescission of

contract.– Economic need, by itself, is not duress.

Statute of Frauds: The Requirement of a Writing

• Statute of Frauds requires certain contracts to be in writing and signed to be enforceable.– A contract involving an interest in land.– A contract that by its terms cannot be

performed within 1 year of execution.– Collateral contracts to answer for the

debt of another.– Prenuptial agreement. – Contracts for sale of goods over $500.

The One-Year Rule

Date of ContractFormation

One Yr.

One Year from the day after the date of Contract Formation

If the contract can possibly be performed within a year, the

contract does not have to be in writing to be enforceable

If performance cannot possibly be completed within a year, the

contract must be in writing to be enforceable

Exceptions to Statute of Frauds

• Partial performance. – Purchaser has paid part of purchase

price, taken possession and made valuable improvements to property.

• Admissions.– Party admits in court records contract

exists.• Promissory Estoppel/Detrimental

Reliance.– Promisee justifiably relies.

Sufficiency of the Writing

• “Writing” includes memorandum, invoice, fax, check, email.

• Essential terms sufficient.• Signed by party against whom

enforcement is sought (Defendant).• Initials of Defendant adequate.

Parol Evidence Rule

• Prohibits the introduction at trial of evidence of the parties prior communications that contradicts the written contract.

• Exceptions (allow parol evidence):– To show Contract is void or voidable– Subsequent contract modifications– Ambiguous Terms– Prior Dealings– Obvious or gross clerical errors

Third Party Rights and Discharge

• What is the difference between an assignment and a delegation?

• What rights can be assigned despite a contract clause expressly prohibiting assignment?

• What factors indicate that a third party is an intended beneficiary?

• How are most contracts discharged?• What is a contractual condition, and

how might a condition affect contractual obligations?

Assignments

• Transfer of contractual rights to a 3rd party (assignee).

• The assignee has the right to demand performance from the other original party (Obligor) to the contract.

• Cannot Assign rights for personal services or when obligor’s performance changes.

Third Party Beneficiaries

• 3rd Party Intended Beneficiaries (Creditor and Donee) Original parties to K intend at the time of contracting that the contract performance directly benefit a 3rd party. After rights vest, 3P can sue for breach.

• 3re Party Incidental Beneficiaries. Benefit is unintentional. 3P has no rights.

Discharge: Conditions of Performance

• Conditions to Performance:– Condition is a possible future event that

may or may not happen.– Triggers or terminates performance.– Condition Precedent: prior to

performance.– Condition Subsequent: follows initial

performance.– Concurrent: occur simultaneously.

Discharge by Performance

• Complete vs. Substantial Performance.– Complete Performance: perfect

performance under the contract.– Substantial Performance: technically a

minor breach but as long as in good faith, the non-breaching party remains liable to pay.

– Satisfaction Contract: performance is conditioned on reasonable satisfaction.

Discharge by Performance

• Material Breach – When performance is not substantial.– Innocent party is excused from performance

and has the right to sue for damages.– A minor breach may be cured.– CASE 11.3 Kim v. Park (2004).

• Anticipatory Repudiation– One party gives notice of refusal to perform.– Innocent party treats AR as material breach.

Discharge by Agreement

• Discharge By Mutual Rescission: parties must make another agreement.

• Discharge by Novation: new contract with substitution of a third party for one of the original parties.

• Accord and Satisfaction: settlement to discharge original contract.

Discharge by Operation of Law

• Contract Alteration.–Statutes of Limitations.–Bankruptcy.– Impossibility of Performance

(Objective).• Party’s incapacitation.• Subject matter is destroyed.• Performance becomes illegal.• Commercially impracticable.

Contract Discharge

Agreement

Performance

BreachOper. of

Law

ConditionPending

ContractDischarge

Breach and Remedies Ch. 12

• What is the difference between compensatory and consequential damages? What are nominal damages, and when do courts award nominal damages?

• What is the standard measure of compensatory damages when a contract is breached? How are damages computed differently in construction contracts?

• Under what circumstances is the remedy of rescission and restitution available?

• When do courts grant specific performance as a remedy?

• What is the rationale underlying the doctrine of election of remedies?

Types of Damages

• Compensatory Damages:– Compensates injured party (Plaintiff).– Plaintiff must prove actual damages

caused by breach. Amount:• Generally: difference between

Defendant’s promised performance and actual.

• Sale of Goods: difference between the contract price and market.

• Sale of Land/Construction Contracts.

Types of Damages

• Consequential (Special) Damages– Foreseeable damages that result from

breach of contract.– Caused by other than breach of contract.

• Punitive (Exemplary) Damages.– Deter wrongdoer; set example.

• Nominal Damages.• Mitigation of Damages.

– Injured party has a legal duty to mitigate damages.

Damages - ChartRemedy Availability Result

Compensatory Damages A party sustains & proves an injury from loss of the bargain

The insured party is compensated for the loss of a bargain

Consequential Damages Special circumstances of which the breaching party is aware or should be aware, cause the injured party additional loss

The injured party is given the entire benefit of the bargain, such as forgone profits.

Punitive Damages Damages are normally available only when a tort is also involved

The wrongdoer is punished, and others are deterred from committing similar acts

Nominal Damages There is no financial loss Wrongdoing is established w/out actual damages being suffered. Plaintiff is awarded a nominal amount ($1)

Liquidated Damages A contract provides a specific amount if contract is breached

Nonbreaching party is paid the amount stipulated in the contract for the breach

Measurement of DamagesParty in Breach

Time of Breach Measurement ofDamages

Owner Before construction has begun

Profits less cost of materials and labor

Owner During Construction Profits plus cost incurred up to the time of breach

Owner After Construction is completed

Contract plus Interest

Contractor Before Construction has begun

Cost above contract price to complete work

Contractor Before Construction is completed

Generally, all cost incurred by owner to complete work

Equitable Remedies

• Rescission: cancel or undo a contract.– Available for fraud, mistake, duress and

failure of consideration.• Restitution: recapture the benefit

conferred on the defendant that has unjustly enriched her. – Parties must return goods, property or

money.• Specific Performance.• Reformation: court re-writes the contract to

reflect parties’ true intentions

Recovery Based on Quasi Contract

• Plaintiff must show:–Benefit was conferred on the other

party.–Party conferring benefit expected to

be paid.–Party seeking recovery did not

volunteer.–Retaining benefit without payment

would be unjust enrichment.

Remedies available

DamagesCompensatoryConsequential

PunitiveNominal

Liquidated

Recession &

Restitution

SpecificPerformance

Reformation

Contract Provisions Limiting Remedies

• Exculpatory Clauses or Limitations of liability clauses.

E-Contracts – Ch. 13

• What are some important clauses to include when making offers to form e-contracts?

• How do shrink-wrap and click-on agreements differ from other contracts? How have traditional laws been applied to these agreements?

• What is an electronic signature? Are electronic signatures valid?

• E-Contracts: Agreeing Online

Forming Contracts Online

• Online Offers should include:– Remedies for Buyer.– Statute of Limitations.– What constitutes Buyer’s acceptance.– Method of Payment.– Seller’s Refund and Return Policies.– Disclaimers of Liability.– How Seller will Use Buyer’s Information

(Privacy).

Forming Contracts Online

• Dispute Settlement Provisions.– Choice of Law.– Choice of Forum.– E-Bay uses online dispute resolution.

• Displaying the Offer (via hyperlink).• How Offer Will Be Accepted.

– Amazon.com--Checkout.– “I Accept” Button to Click

Online Offers• ONLINE OFFERS• Terms should be conspicuous and clearly

spelled out. On a Web site, this can be done with a link to a separate page that contains the details. The text lists subjects that might be covered, including remedies, forum selection, payment, taxes, refund and return policies, disclaimers, and privacy policies. An online offer should also include a mechanism by which an offered can affirmatively indicate assent (such as an “I agree” box to click on).

•  

Online Acceptances

• Click-on Agreements.• Shrink-Wrap Agreements.

– Contract terms are inside the box.– Party opening box agrees to terms by

keeping merchandise.• Enforceable Contract Terms. (UCC 2-

204). page. 241• Additional Terms.

ONLINE ACCEPTANCES

• A shrink-wrap agreement is an agreement whose terms are expressed inside a box in which computer hardware or software is packaged. In most cases, the agreement is not between a seller and a buyer, but between a manufacturer and the user of the product. The terms generally concern warranties, remedies, and other issues associated with the use of the product.

Online Acceptances

• Click-On Agreements occur when Buyer “checks out” or clicks on “I Accept” button on Seller’s website or when software is installed.– CASE 13.1 i.LAN Systems, Inc. v.

NetScout Service Level Corp. (2002). Page 242

Click-On Agreements

• A click-on agreement occurs when a buyer, completing a transaction on a computer, is required to indicate his or her assent to be bound by the terms of an offer by clicking on a button that says, for example, “I agree.” The terms may appear on a Web site through which a buyer is obtaining goods or services, or they may appear on a computer screen when software is loaded.

Click-On Agreements• Suppose that you click on “I accept” in order to

download software from the Internet. You do not read the terms of the agreement before accepting it, even though you know that such agreements often contain forum-selection and arbitration clauses. The software later causes irreparable harm to your computer system, and you want to sue. When you go to the Web site and view the agreement, however, you discover that a choice-of-law clause in the contract specified that the law of Nigeria controls. Is this term enforceable? Is it a term that should be reasonably expected in an online contract?

• YES

E-Signatures

• E-Signature Technologies.– Asymmetric Cryptosystem. (smart card)– Cyber Notary.

• State Law Governing E-Signatures.– Uniform Electronic Transactions Act (1999).

• Federal Law.– E-SIGN (2000) gives e-signatures and e-

documents legal force.

– CASE 13.3 In re Cafeteria Operators, L.P. (2003).

Online Acceptances

Shrink- Wrap Agreement

• Contract terms expressed inside a product package

Click-OnAgreement

• Contract terms that appear on a comp. screen, accomp. By an on-screen button on which the buyer is asked to click

Browse-WrapTerms

• Contract terms on a Web site that need not be actively agreed to before using a product available from the site

ARE THESE TERMS OF THE CONTRACT BETWEEN THE PARTIES?

Yes, if before entering into the contract, the buyer—Is made aware of the terms And expressly agrees to the terms by opening the package, clicking on the button, or using the product

The Uniform Electronic Transactions Act

• The UETA, which is a draft of legislation suggested to the states by the National Conference of Commissioners of Uniform State Laws (NCCUSL) and the American Law Institute (ALI), removes barriers to e-commerce by giving the same legal effect to electronic records and signatures as to paper documents and signatures. (40 States to date) (1999)

• The Uniform Electronic Transactions Act (UETA) provides a definition of “electronic signature” (or e-signature) that can be used by the states that enact the UETA. The following comments accompanying the draft of UETA 102(8) presented for the states’ adoption explain the definition.

UETA

• Purpose is to remove barriers to forming electronic commerce.

• E-Signature is “electronic sound, symbol or process…associated with a record and… adopted by a person with intent to sign the record.”

• UETA applies only to e-records and e-signatures relating to a transaction.

HIGHLIGHTS OF THE UETA

• The Parties Must Agree to Conduct Transaction Electronically

• Parties Can “Opt Out”• Attribution• Notarization• The Effect of Errors• Timing

THE SCOPE AND APPLICABILITY OF UETA

• The UETA applies only to e-records and e-signatures relating to a transaction (an interaction between two or more people relating to business, commercial or governmental activities). The UETA does not apply to laws governing wills or testamentary trusts, the UCC (except Articles 2 and 2A), the UCITA, and other laws excluded by the states.

UETA and Federal E-SIGN

• E-SIGN explicitly refers to UETA.• Provides that E-SIGN is pre-empted

by state passing of UETA.• But State law must conform to

minimum E-SIGN procedures.• In other words – if the State has

enacted UETA w/out modification, State law will govern……

THE FEDERAL E-SIGN ACT AND THE UETA

• If a state enacts the UETA without modification, the E-SIGN Act does not preempt it. The E-SIGN Act does preempt modified versions of the UETA to the extent that they are inconsistent with the E-SIGN Act. Under the E-SIGN Act, states may enact alternative procedures or requirements for the use or acceptance of e-records or e-signatures if (1) those procedures or requirements are consistent with the E-SIGN Act, (2) the state’s procedures do not give greater legal effect to any specific type of technology, and (3) if the state adopts the alternative after the enactment of the E-SIGN Act, the state law must refer to the E-SIGN Act.

Highlights of UETA

• Parties must agree to Conduct Transactions Electronically.– A party can “opt out” of UETA terms.

• Attribution—process to ensure person sending an electronic record is in fact the real person.

• Electronic Errors.• “E-Mailbox” Rules.

– Dispatched when leaves control of sender.– Received when enters recipient’s

processing system.

Uniform Electronic Transaction Act

The UEFA is enactedW/out Modification

The EUFA is enactedWith Modification

State Law GovernsState Law Governs ifThe State’s procedures or requirements are consis. with the E-SIGN ACT:

The State does not give priority to one type of technology

The State Law was enacted after the E-SIGN ACT refers to it

The E-SIGN Act Governs if:

The Modifications are inconsistent with the E-SIGN

ACT