Uniform Commercial Code

Attached is the instructions and reading material (chapters 4,5,6, and 7). Please read the instructions and answer the questions directly and substantively using the reading material to support claims.
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Read the Ace Heating and Cooling scenario in your text and answer the following questions:
•
•
•
Under UCC 2-302, who has the best chance of getting out of the contract due to
unconsionability?
The symbol for justice features a woman wearing a blindfold illustrating that the law
should be applied the same way regardless of who the parties are. Does the UCC rule
seem to contradict this? Which approach do you think is more ethical?
Note that both Glamour and Shady Rest are businesses, and courts rarely find that
contracts between two businesses are unconscionable. The rationale is that a business is a
sophisticated entity, familiar with transactions and able to protect itself. Do you think
Glamour and Shady Rest are in a comparable position in regard to this contract? Why or
why not?
Here is a Link: Legal Information Institute. (n.d.). Uniform Commercial Code. Retrieved from
http://www.law.cornell.edu/ucc/ucc.table.html
Your initial post should be at least 250 words in length. Support your claims with examples from
the required reading material, and properly cite the reference.
Unit II
Contracts
CHAPTER 4:
Offer, Acceptance, and Consideration
CHAPTER 5:
Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality
CHAPTER 6:
Third Parties, Performance and Discharge of Contracts, and Remedies
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C
ontract law is of great importance in business and in everyday life. Common transactions such as buying a pack of gum at the corner grocery store, purchasing a ticket
at a movie theater, or ordering a meal at a restaurant involve making contracts, but
so does a complex patent licensing agreement between two multinational corporations. In
this unit, we will explore the nature of contracts, the requirements for their valid formation,
and the consequences for their breach.
A contract is a legally enforceable agreement between two or more people. Although all
contracts contain enforceable promises, not all promises result in contracts. Consider the
following situation:
Henry invites Ericka to dinner, and Ericka accepts. Henry looks forward to the date and can
think of little else all day long. A half hour before they were to meet, Ericka calls Henry and
tells him that she will not be able to keep their date because Ron has invited her to go dancing and she has accepted. Henry is upset, hurt, and angry and would like to sue Ericka for
breach of contract, since she has clearly broken a promise made to him earlier that day and
caused him distress. Will he succeed?
Ericka may not be a very nice person, and she may have had a moral obligation to attend
the dinner date. Nevertheless, she had no legal obligation to do so. The agreement that she
breached was not a contract, but merely a social obligation that the courts will not enforce.
In order for there to be a valid contract, certain essential elements must exist. These include
an offer to enter into a contract, acceptance of the offer by the other party, an exchange of
consideration between the parties, and a legal purpose for the contract. In addition, both
parties must have the capacity to enter into a contract. We will explore these elements in
depth in this unit. We will also discuss certain types of contracts that must be in writing to
be enforceable and situations in which a contract is unenforceable due to a lack of genuine
assent, such as in cases of fraud or mutual mistake of fact.
We enter into contracts every day. On the way to work, you pick up a newspaper at a newsstand. You also stop for a cup of coffee at a cafe. While there, you use your phone to browse
the Web and purchase tickets to a concert online. Finally, you arrive at the bus stop and
pay your fare as you enter the bus that will take you to work or to class. In each of these
examples, a contract was made. In each case, there was a valid offer and acceptance (your
ordering the drink and the cafe’s providing it), consideration (the cup of coffee and the
money you pay for it), capacity and legality (you are (hopefully) of sound mind when purchasing the coffee, and coffee is a legal good that can be purchased and sold in the United
States). There were no issues concerning mutual assent. No documents were signed, and no
negotiations took place; nevertheless, valid contracts were formed giving each party certain
rights and imposing on each party some responsibilities as well.
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The vast majority of contracts are routinely completed without a problem, and without the interested parties giving the matter much thought. Problems arise when parties to a contract fail to live up to their agreements, or misunderstand what it is that
they agreed to do. In such cases, the courts may be called upon to settle the dispute
in accordance with established rules of law that determine each party’s rights and
obligations under a valid contract. Many misunderstandings and disagreements
between contracting parties, as well as costly, time-consuming litigation, can easily
be avoided if each party has a basic understanding of the law of contracts. The following chapters will explore the requirements for the formation of valid contracts
and the remedies available when they are breached.
Under the Uniform Commercial Code, the rules for sales of goods contracts are
sometimes different. Where the UCC rules are an exception to a basic common law
rule, they will be briefly discussed in this section, and other issues concerning the
UCC and sales of goods will be explored in later chapters. But the common law of
contracts is very much in effect today and is crucial to the running of every business, regardless of its size.
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Contracts: Offer, Acceptance,
and Consideration
4
Learning Objectives
After studying this chapter, you will
be able to:
1. Describe the difference between express,
implied, bilateral, unilateral, simple,
formal, and quasi contracts.
2. Explain the requirements for a valid offer
and acceptance.
3. Explain the ways an offer may terminate.
4. Define consideration.
5. Recognize situations where consideration
is not present.
psphotograph/iStock/Thinkstock
Chapter Overview
4.1 Types of Contracts
•
•
•
•
4.4 Consideration
Express Contracts v. Implied Contracts
Bilateral Contracts v. Unilateral Contracts
Simple Contracts v. Formal Contracts
Quasi Contracts (Contract Implied in Law)
•
•
•
•
•
What Isn’t Consideration?
Past Consideration
Preexisting Duty
Illusory Promises
Distinguishing Illusory Promises and Requirement
Contracts
• Exceptions to the Consideration Requirement
4.2 The Offer
• Clear Intent: An Unequivocal Promise
• Reasonably Certain Terms
• Offers and Termination
4.5 Chapter Summary
• Focus on Ethics
• Case Study: Hamer v. Sidway
• Case Study: South Shore Amusements, Inc v.
Supersport Auto Racing Association
• Critical Thinking Questions
• Hypothetical Case Problems
• Key Terms
4.3 Acceptance
• Communicating the Acceptance
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CHAPTER 4
Section 4.1 Types of Contracts
A
contract is a legally enforceable agreement. As this definition implies, a contract
comes into existence from the voluntary assent of two or more individuals to enter
into a legally binding agreement. Mutual accord is crucial to the formation of a
contract. In order for there to be a valid contract, five basic elements must be
present. Before we get into the detailed requirements for a valid contract in this unit, it
may be useful to have at least a working definition for each of the required elements:
1. Offer: An invitation for another to enter into a contract.
2. Acceptance: Acquiescence to enter into a contract under the terms of the offer.
3. Consideration: Anything of legal value that is asked for and received as the price
for entering into a contract.
4. Legality: The extent to which the contract is legal and not against public policy.
5. Capacity: The mental competency to enter into a contract. Additionally, there are
special rules for people who are under legal age.
One party, referred to as the offeror, makes an offer—a business proposition—to another;
the other, known as the offeree, accepts. Provided that the other three requirements are
present (consideration, capacity, and legality), a valid contract is formed. If Manuela offers
to sell Linda her laptop for $450 and Linda accepts the offer, a valid contract is formed
since there is a valid offer and acceptance, consideration (something of value is given and
received by each party—the laptop and the $450), capacity (both parties are of sound mind
and are freely entering into the agreement), and the contract is for a legal purpose. In some
cases, there is a further requirement that the contract be in a particular form, for example
in writing, in order for it to be enforceable. In other situations, a contract may prove not to
be binding because the parties did not truly assent, such as in the case of fraud or mistake.
So that seems relatively straightforward. But beware: contracts are not always so simple.
In fact, there are many subtle and difficult issues that can arise when attempting to determine if there is an offer and acceptance.
4.1 Types of Contracts
C
ontracts can be classified as express or implied in fact, bilateral or unilateral, and
simple or formal. In addition, sometimes when a contract does not exist, there may
be something known as a quasi contract (contract implied in law). Each type of
contract will be briefly examined below.
Express Contracts v. Implied Contracts
Express contracts are formed by the express language of the parties—the actual words
they use in their agreement—and can be either written or oral.
Example 4.1. Sam says to Ben, “I’ll sell you my Business Law book for $50.”
Ben replies, “I’ll take it.”
It is a popular misconception that contracts are not binding unless they are in writing. It’s always a good idea to reduce business agreements to writing to avoid future
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CHAPTER 4
Section 4.1 Types of Contracts
misunderstandings—and to keep the
parties honest as to what it is that they
have obligated themselves to do—but
most contracts are legally valid whether
they are oral or written. Some contracts,
such as those creating an interest in real
property, are required to be in writing,
witnessed, notarized, and sealed in
most jurisdictions. But the vast majority
of contracts do not need to follow any of
those formalities in order to be binding.
Implied contracts are formed not by the
express words of the parties, but rather
by their actions. Think about the last
Every time you buy something, you make a contract.
time you bought groceries. Did you tell
diego_cervo/iStock/Thinkstock
the checkout clerk, “I offer to buy this
gallon of milk at its advertised price?”
Probably not, but the clerk understood that you wanted to enter into a contract, and
accepted (by ringing up your order) on behalf of the store. As long as the parties’ actions
plainly indicate an intention to enter into a contract, and as long as the terms of that contract can clearly be implied from those actions, a binding contract can be created even
without a single word being spoken. Consider the following examples:
Example 4.2. Dana walks into a newsstand and places three quarters on the
counter and takes a copy of her hometown newspaper.
Example 4.3. Steve enters Nilda’s hardware store. He picks up a screwdriver from a rack and, looking over at Nilda, who is taking care of a line of
customers at the moment, waves the screwdriver in the air. She recognizes
Steve, a long-time customer, and understands that he would like to take
the screwdriver now and pay for the purchase later. She signals her consent
by nodding in his direction. He leaves, taking the screwdriver with him.
In each of the above situations, an implied contract has been entered into. Dana has paid
seventy-five cents for a copy of a newspaper and Steve has agreed to pay the selling price
of the screwdriver to Nilda at a later time.
Bilateral Contracts v. Unilateral Contracts
If the offeror (the person who makes an offer to enter into a contract) and offeree (the person
to whom a contract offer is made) exchange promises to perform some act in the future, a
bilateral contract is formed. For example:
Example 4.4. Bruce offers to sell his old car to Irving if Irving will pay him
$2,000. Irving accepts the offer.
Example 4.5. Lina offers to babysit for Inga every Saturday for the next
three months if Inga will pay her $8.00 per hour. Inga accepts.
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CHAPTER 4
Section 4.1 Types of Contracts
Example 4.6. Tina offers to sing at Charles’s club next Friday, Saturday, and
Sunday if he will pay her $5,000 per night. He agrees.
In each of the above examples, both parties are obligating themselves to take some action
in the future. As soon as the offer is accepted, a valid contract comes into existence. When
a bilateral contract is involved, the contracting parties exchange mutual promises to perform some future act. As soon as a bilateral contract offer is accepted, a contract comes
into existence and both parties are bound. If either party fails to live up to the agreement,
a suit for breach of contract can result.
In a unilateral contract, one party makes a promise to the other that can only be accepted
by the other’s performance. For example, if Lana offers to pay $100 to anyone who finds
and safely returns Fluffy, her lost cat, Fred can accept and form a contract only by actually
returning Fluffy safely to Lana. If Fred tells Lana, “I’ll find Fluffy later, I promise,” there is
no acceptance, and no contract.
Simple Contracts v. Formal Contracts
A simple contract is any oral or written contract that is not required to follow a specific
form, or be signed, witnessed, or sealed. The vast majority of contracts entered into by
businesses and private individuals are simple contracts, even though some may seem
rather complex and go on for many pages.
A formal contract at common law was one that needed to be in writing, signed, witnessed,
and sealed by the parties. A person’s seal on a contract (usually a unique mark made by a
signet ring pressed into hot sealing wax, though a seal could be any symbol adopted by an
individual or a company) gave that contract special significance. The distinction between
simple and formal contracts is much less important today, and in many states is only used
for contracts involving transfer of real estate.
Quasi Contracts (Contract Implied in Law)
The first thing to know about a quasi contract is that it is not a real contract at all, but
rather a situation where one person has given a benefit to the other and it seems as though
it would be unfair for him to be not be paid. So a quasi contract is a situation where to
prevent unjust enrichment, a court may award a remedy because a benefit was accepted,
even though there is no contract. This is also called a contract implied in law. There are
three distinct requirements to have a quasi contract:
1. One party has conferred a benefit on the other;
2. The party receiving the benefit chose to accept it; and
3. The benefit is the sort of thing a reasonable person would believe had to be paid
for, under the circumstances.
If the plaintiff proves the requirements for a quasi contract, the plaintiff is entitled to
recover the fair market value of the benefit that was conferred on the receiving party.
Example 4.7. Peter had spoken with you about possibly painting your
house, but no agreement was made. However, one day you look out your
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CHAPTER 4
Section 4.2 The Offer
window and see Peter pull up in his work van, and begin to set up his ladder. You don’t say a word to Peter, but simply let him paint the house. Even
if there is no contract here, you have accepted the benefit (you could have
told Peter to stop, but chose not to), and a reasonable person knows that
they have to pay for painting services. Peter is entitled to the fair market
value of the paint job.
But what if Peter comes over when you’re not home and paints your house? Because you
did not accept (you had no chance to decline), there is no quasi contract and Peter is out
of luck. (Peter should have taken a business law course!)
The law does slightly modify the rule in the case of emergency circumstances. If an
ambulance takes your unconscious, injured body to the hospital and doctors treat you
there, you are probably liable to pay for their services. Even though you could not
accept or decline, for obvious public policy reasons the law wants to encourage providers to give care in these situations. If they could not get paid, doctors might stop giving
emergency care!
4.2 The Offer
A
n offer must contain an unequivocal (clear, unambiguous) promise to enter into a
contract, must have reasonably certain terms, and must be communicated by the
promisor (the person making the promise) to the promisee (the person to whom the
promise is made). For example, Sam tells Ben, “I’ll sell you my car for $5,000.”
But suppose Sam instead says, “Would
you give me $5,000 for my car?” That is
not an offer, but merely an inquiry, which
might open up negotiations or lead to an
offer at some point. If Sam says, “I’d sure
like to sell my car for $5,000,” there is no
offer, because Sam is not committing to
selling it to Ben at the present time.
What if Sam owns five cars? Then the
subject matter is not certain enough to
be an offer, unless Ben knows which one
Sam intended to sell.
The couple holding this yard sale aren’t making any offers,
merely inviting others to make offers on their household items.
But if Sam only owns one car, and if Sam
says, “If you give me $5,000, I’ll sell you
my car,” Sam’s statement is unequivocal
and constitutes an offer. They will have
a contract if Ben accepts.
David Sacks/DigitalVision/Thinkstock
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CHAPTER 4
Section 4.2 The Offer
Clear Intent: An Unequivocal Promise
An offer does not need to contain specific language such as “I promise to sell you” or “I offer
to sell you” in order to be effective. What matters is that a reasonable person under the same
circumstances would clearly understand that an offer was intended by the offeror. The language used is always important in helping to determine the intent of the parties, but a valid
offer can be made even when no words are spoken, simply by the actions of the parties. If,
for example, Muhammad holds out a twenty-dollar bill and tells Carol, “I’ll give you this for
that fountain pen on your desk,” and Carol takes the money and puts it in her pocket without saying a word, she will have clearly accepted his offer by her actions. What is important
in determining whether a valid offer or acceptance existed is the objective intent of the parties as communicated through their words or actions. In other words, would a reasonable …
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