Any time we have someone perform a service for us (unless it is a gift or favor) or we buy things, a contract is formed. In this lesson we will learn what it takes to enter into legally enforceable agreements, how to create them, how to avoid problems with them, and what to do when contracts must be enforced because they have been breached.
As we discussed briefly in lesson 1 regarding areas of law, a contract is a voluntary promise between two or more parties for which the law will provide a remedy for nonperformance. You can see how important contracts are to business. Business owners must purchase goods and services and provide goods or services to others and be paid for them as a source of business revenue. They need to have a means of ensuring that when they make agreements to receive or to render goods or services, then there will be a way to obtain redress if the promise is not kept.
As you can imagine, ethical issues arise a good deal in contracts. Whether it amounts to actual fraud or not, many of the ethical issues involve parties to the contract alleging they did not agree to something that they may have agreed to, particularly if the contract is not in writing. Whether these provisions could be enforced is another matter, but there is definitely room in the making of contracts for more attention to ethics. Of course, personal responsibility is a significant factor also and it is not up to the business providing the contract to also make individuals carefully read it.
The purpose of contracts is to secure some good or performance we would not otherwise be entitled to. If one of the parties does not perform as promised, then that party has breached the contract. The law will allow recovery for the breach by generally requiring the breaching party to put the non-breaching party in the position the non-breaching party would have been in had there been no breach. In order to be able to recover for breach of contract, the parties to the contract must meet the requirements of a valid contract or none will exist to serve as a basis for breach.
The contract must have 1) legal subject matter, 2) capacity of the parties to enter into contracts, 3) the exchange of consideration or something of agreed value between them, and 4) mutual assent between the parties, i.e., true agreement between the parties as to the contract’s terms.
Legality refers to the subject matter of the contract being legal. Generally, if it is illegal to do an act, then it is illegal to contract to have the act done. Capacity ensures that those who enter into agreements understand the nature and effect of their agreements. Consideration ensures that parties to the contract actually bind themselves to the agreement by exchanging an agreed upon legal detriment. Mutual assent is agreement between the parties as to the contract’s terms and their intent to actually enter into a contract rather than just inquiring or joking with each other.
Sources of Contract Law
There are two sets of laws that govern contracts: the common law or Restatement of Contracts, and the Uniform Commercial Code (UCC). Each state has its own common law of contracts that governs how contracts are made and enforced in its state. Rather than know the law is in each state, states’ contract laws have been distilled into a compilation called the Restatement of Contracts. The Restatement is a compilation of the most common approaches to states’ common law of contracts, but is not, in and of itself, law.
The other source of contract law is the Uniform Commercial Code, or UCC.
Article 2 of the UCC addresses contracts for the sale of goods, defined as tangible, movable, personal property.
The Restatement and the UCC, which have been adopted in some form by all states together cover all contract actions,, with contracts for the sale of goods addressed by the UCC, while contracts involving land, services or intangibles addressed by the Restatement or common law.
Consideration is the thing of value exchanged between the parties to a contract. If there is no consideration between the parties, there is no valid and binding contract. Consideration is often defined as “bargained for legal detriment exchanged between the parties.” The law does not deal with the value of consideration unless fraud is involved. The parties can agree to consideration of as little or as much as they want.
Capacity addresses whether parties entering into a contract have the minimal age or mental ability to comprehend what they have done by agreeing to be bound. In addressing capacity, the law has “three I’s”. That is, it protects three groups in particular regarding capacity: Infants, Intoxicants and Incompetents.
In order for a contract to be legal, what it proposes to do must be legal. If it is not, the contract is void. Generally, anything that is illegal to do is illegal to contract to do or have done. Courts also will not enforce agreements that may not actually be illegal, but are considered to violate public policy.
Enforce-ability of Contracts
Statute of Frauds – There is no requirement that a contract be written to be valid, however, under the Statute of Frauds, certain types of contracts thought to lend themselves to “faulty memories” must be in writing in order to be enforced in court. Oral contracts about these matters are legal, and may be valid, but they simply cannot be enforced in a court of law because they are not in writing. If the contract is not in writing as required by the Statute of Frauds, check to see if there are facts supporting an exception to the Statute that applies to make the contract enforceable even though no writing is present.
The Writing Requirement – There must simply be something in writing, signed by the party who is being sued, evidencing the material terms of the agreement. If it is in more than one writing that must be read together to understand the contract, the parts must be able to relate the pieces together without explanation.
Parol Evidence Rule – The Parol Evidence Rule provides that if there is a valid, written, integrated contract between the parties, then evidence of prior or contemporaneous agreements will not be permitted to vary or alter its terms. Contracts are to be enforced as written.
Contracts Involving Third Parties
The issue is whether the third party has any rights in the contract, either to sue for breach or to demand performance. The answer to these questions depends on the type of relationship the third party has to the contract.
Assignment – Once a contract is formed, there are rights and benefits on both sides. If either side decides to allow someone else to receive their benefit in the contract, it is accomplished by an assignment. If the duties are given to a third party to perform, it is called a delegation.
Parties to Assignments – The party who assigns their right is an assignor. The one to whom such rights are assigned is an assignee. The one who owes a duty to perform is the obligor.
The one to whom performance is owed is the obligee. The one who delegates his or her duties is the delegator. The one to whom such duties are delegated is the delegatee. Virtually any contract may be assigned as long as the contract is not too personal or does not substantially change the obligation of the obligor.
Third Party Beneficiary Contracts – Unlike assignments, which have third parties enter the contract only after the contract is created third party beneficiary contracts include third parties in the contract from the outset.
By design, the contract is between the offeror and offeree, but it is for the benefit of the third party beneficiary. Third party beneficiaries have rights in the contract from the time it was made and their rights cannot be abridged without their consent.
Unintended beneficiaries have no right to enforce a contract as a third party beneficiary.
A contract can be set up so that there are conditions that must occur. If the duty to perform has a condition precedent to performance, then the duty to perform does not rise until the condition has been met. The condition being met precedes the party’s performance.
If the condition is a condition subsequent, then performance is due until and unless the condition is met. Most conditions are concurrent conditions. That is, the performance by both parties takes place at the same time.
If a party does not perform the contract as agreed, the non-breaching party is generally entitled to remedies for breach. These remedies can take the form of legal remedies or equitable remedies. The goal in breach of contract actions is to put the non-breaching party in the position he or she would have been in had there been no breach. Money damages may be the most likely way to make the non-breaching party whole, but if not, then equitable remedies may be used, as appropriate. Punitive damages are generally not awarded in breach of contract actions.
As we discussed briefly in the introductory chapter, torts are civil wrongs; violations of law that are civil rather than criminal in nature. In this lesson, we will learn what torts are available to individuals and to business owners for torts against the person, property or business. We will also discuss business owner liability for torts that are committed by those who work for the business owner.
Ethical considerations are numerous in the tort area, and often quite gray. There are three large categories of torts, based on the intent of the tortfeasor. If the tortfeasor intended to do the act that resulted in the harm to the victim, it is an intentional tort. If the tortfeasor did not intend to do the act, and instead the act was the result of the tortfeasor’s failure to meet a required standard of care to prevent an unreasonable risk of harm to others, it is negligence. If the tortfeasor engaged in activity that a statute classifies as one that is so dangerous that the tortfeasor must be responsible for virtually all the harm that arise as a result of engaging in the activity, the offense is one of strict liability.
Generally speaking, everyone is responsible for the torts he or she commits. However, an important part of torts committed in the business setting is the concept of respondeat superior. Respondeat superior involves vicarious liability which is liability imposed upon someone who did not actually commit the tort.
What are the Defenses to International Torts?
Even if a tortfeasor engages in tortious activity, he or she may be able to defend his or her actions and thus avoid liability. With intentional torts there is no liability if the tortfeasor can show that there was no intent to do the act which resulted in the harm (i.e., it was an accident).
The victim gave consent to the activity.
The tort was committed in defense of self or others.
What is a Negligence Action?
Recovery for foreseeable unintentional or accidental injuries is addressed through negligence (often called personal injury) actions. When a tortfeasor fails to meet a standard of reasonable care appropriate for the circumstances and another forseeably subjected to an unreasonable risk of harm and is injured as a result, the tortfeasor can be sued by the injured party for negligence.
Rather than a one-size-fits-all approach, it is a standard that takes the specifics of the situation into consideration in determining what is reasonable.
In order for negligence liability to attach to the tortfeasor, plaintiffs must prove four requirements: duty, breach of duty, actual cause, proximate cause and damages. If these requirements are proved, then the passerby can recover for the injuries sustained.
Under the law, in general each person has a duty to conduct him or herself in a way that does not present a forseeable unreasonable risk of harm to others. The duty can be imposed by statute or reason. If the duty is imposed by statute and the statute is violated, it is negligence per se. The duty owed can also be imposed by law based on a relationship or activity. However, the law does not impose a general duty on each of us toward others.
Actual and Proximate Cause
Actual cause is the tortfeasor’s actions resulting in harm to the injured party. But for the act by the tortfeasor, the plaintiff would not have been harmed. In addition, there must be proximate cause in order to impose liability upon the tortfeasor. Proximate cause is a legal mechanism used to allow legal responsibility only for consequences of our actions if the consequences were foreseeable. However, the consequences from our actions are not always foreseeable. Proximate cause is the means the law uses to cut off responsibility for the consequences of our actions so that we are not responsible for every single act that flowed from our breach of duty but only those that are foreseeable and that we should have contemplated and thus prevented. It is not enough that a plaintiff was harmed.
What are the Defenses to Negligence?
It is possible for a tortfeasor to defend against a negligence suit by showing that the plaintiff either voluntarily assumed the risk (assumption of the risk) by knowing of the risk of presented by the tortfeasor’s negligence and continuing to act anyway, or the plaintiff contributed to the injury by doing a negligent act him or herself (contributory negligence), including comparative negligence. In both these defenses the tortfeasor does not deny the act took place or that plaintiff was harmed, but instead alleges he is not responsible because other legally cognizable factors were at play that relieve him of liability.
Voluntary Assumption of the Risk
When the injured party had reason to know that there was the possibility of harm from defendant’s negligence and decided to do an act anyway, the defendant can avoid liability by using the defense of voluntary assumption of the risk.
What is Product Liability?
Product liability is the name given to a group of several different legal bases including negligence, breach of warranty, and strict liability, for imposing liability on product makers and distributors for harm caused to people and property by defective, unreasonably dangerous products.
When manufacturers and distributors place goods in the stream of commerce and those goods are defective and malfunction causing harm because of some act on the part of those who produce the goods, the possibility of harm is enormous because the goods are offered to the public at large and a great many people can be adversely affected. As a result, there are laws from each protecting the public, of which the prudent business owner must be aware.
Lesson Learning Objectives
By the conclusion of this Lesson you should be able:
- Give the two sources of contract law.
- Define a contract, what it is designed to do, and provide the requirements for a valid contract.
- Compare and contrast the various classifications of contracts.
- Demonstrate an understanding of the remedies available for breach of contract.
- Explain several bases for contracts lacking legality and the impact of such.
- Explain what torts are, the different categories of torts, their ethical considerations, and who commits them.
- Recognize negligence actions and explain the requirements and defenses.
- Study Chapters 5 and 6 of the text.
The following Assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response.
Be sure to properly site your sources, both in-text and with a reference list at the conclusion. If you use an online source to support your answers, you must provide a properly formatted link to the source. You should use APA citation format and make sure your sources are credible. In most cases, your responses should be no more than 100 words.
Short Answer Questions
- What is a contract? What are the requirements of a valid contract?
- What is a void contract?
- What are the different requirements of an offer in order to be sufficient to create a contract?
- Discuss briefly, capacity to contract.
- What are the three large categories of torts?
- With reference to false imprisonment discuss the shopkeeper’s rule.
- What is the difference between slander and libel?
- Discuss briefly the four torts included under invasion of privacy.
- What is disparagement?
- What is product liability?
Professional Development Questions
- On March 4, Gloria calls Sheffield, Inc. and inquires about cleaning services for her office building. Kim Sung gives Gloria an offer over the phone and says he will send the contract over for her to sign. When Gloria receives the contract on March 6, she immediately signs it and puts it in the mail. A few hours later Gloria finds out she can have the work done elsewhere for cheaper, and faxes a rejection to Sheffield. Sheffield received the signed contract on March 12. As per the contract, Sheffield employees show up on March 15 to clean Gloria’s office building. Gloria refuses to let them enter the premises, and says there is no contract between Gloria and Sheffield because she rejected it. If Sheffield sues Gloria for breach of contract, who wins, and why?
- Roscoe erects a home-size golf driving range in his backyard, complete with a 10 X10 foot mesh screen to prevent the balls from going too far. One day while practicing his swing, one of the balls goes over the screen and crashes through the window of his next door neighbor’s office, injuring his neighbor E.J, and a client in E.J.’s office at the time. When Roscoe is sued by E.J. and the client, what will it likely be for, and what will Roscoe’s response likely be?
Lesson 3 Quiz
Use the quiz to test your knowledge of the concepts covered in this lesson. You may take the quiz as many times as you wish. The results are not calculated into your grade.