Transcript Chapter 16

P A R T
3
Contracts
Introduction to Contracts
The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
P A R T
3
Contracts
Capacity to Contract
Illegality
Writing
Rights of Third Parties
Performance & Remedies
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
16
Writing
“A verbal contract
isn’t worth the
paper it’s written
on.”
Samuel Goldwyn, quoted in
The Great Goldwyn (Alva
Johnson, 1937)
Learning Objectives
 Significance
of a writing in contract law
 The Statute of Frauds
 Contracts covered by the Statute of
Frauds and the requirements
 The UCC & the Statute of Frauds
 The Parole Evidence Rule
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Basics
In general, a writing is not required to create
a legally enforceable contract
 However, a writing is preferable to an oral
contract for a number of reasons: more
definite, signature provides authentication,
and use as evidence
 Sometimes, a writing is required…

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The Statute of Frauds
In 17th Century England,
the Statute of Frauds was
enacted to prevent fraud by
requiring written evidence
before enforcing certain
types of contracts
 American states adopted
similar statutes

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House of Lords, England
Covered Contracts
 Collateral
contracts
 Contracts for real estate
 Contracts for more than one year
 Contracts for sale of goods over $500
 Executor’s promise
 Marriage as consideration
 See
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the list on page 400 of the text
Covered Contracts
 Collateral
contracts in which a person
(guarantor) promises to perform an
obligation of another person (principal
debtor) to a third person (obligee)
 Example: Bob is a personal guarantor
on a loan from City Bank to Bob’s
brother, John
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The Collateral Contract
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Exception to Collateral
Contract Rule
 Under
the main purpose or leading
object rule, no writing is required
where the guarantor makes a collateral
promise for the main purpose of
obtaining personal economic
advantage

See Wintersport Ltd. v. Millionaire.com, Inc.
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Wintersport Ltd. v. Millionaire.com Inc.

Facts & Procedural History:
Wintersport Ltd. printed one issue of
Millionaire.com’s magazine
 They negotiated to print another issue, but order
and price cut due to magazine’s financial trouble
 Concerned over creditworthiness, Leiter
(Wintersport) told Strong (Millionaire.com) that
Wintersport would only extend credit to
Millionaire.com if the firm paid a $10,000 down
payment and a stockholder (White) gave a
personal guaranty on the balance due

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Wintersport Ltd. v. Millionaire.com Inc.

Facts & Procedural History:
White (Millionaire.com) gave Leiter personal
guaranty via the phone and sent a $10,000 check
 Millionaire.com failed to pay balance and
Wintersport sued Millionaire.com
 Trial court entered judgment for Wintersport
against Millionaire.com and White, but White
appealed, arguing that the action should have
been dismissed because the statute of frauds
prevented the enforcement of his oral guaranty

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Wintersport Ltd. v. Millionaire.com Inc.

Issue and Legal Reasoning:
Does the statute of frauds prevent enforcement of
White’s oral guaranty?
 An original promise – outside statute of frauds –
occurs when the promisor receives a direct benefit
from the promise
 Wintersport did not show that White’s benefit
was anything more than an indirect incident of
share ownership
 Reversed and dismissed in favor of White

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Covered Contracts
 Contracts
for the transfer or sale of an
interest in real estate
Some states require a writing for leases
and certain easements on real property
 Exception: if vendor fully performed on
the contract or vendee reasonably relied
on the contract to his/her detriment


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Then statute of frauds does not apply
Covered Contracts
 Bilateral
contracts that cannot be
performed within a year from the date
of their formation (one year rule)
 Is performance possible within year?
 Probability

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of performance irrelevant
Example: Jack signs contract to
consult with Company X for 13
months – this must be in writing
Covered Contracts
UCC 2-201: contracts for the sale of goods for a
price of $500 or more
 Includes agreements to modify existing sales
contracts if contract as modified is for a price
of $500 or more [UCC section 2–209(3)]
 Example: Pam buys a refrigerator for $501,
thus a writing is required to be enforceable
 No writing required for <$500 refrigerator

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Covered Contracts
 Though
uncommon, the statute of
frauds requires a writing to evidence
(a) contracts in which an executor or
administrator promises to be
personally liable for debt of an estate,
or (b) contracts in which marriage is
the consideration
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Satisfying the Statute of Frauds
 Most
states require only a signed
memorandum of the parties’ agreement
stating the essential terms:
(a) identity of parties, (b) subject matter
identified with reasonable certainty, and
(c) signed by the party to be charged
 Memorandum need not be made at the
same time the contract comes into being

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Satisfying the Statute of Frauds
UCC 2–201: writing must be sufficient to
indicate a contract for sale has been made
between the parties, but must indicate the
quantity of goods to be sold
 A sales receipt may satisfy the requirement
 Sufficient writing includes (a) confirmatory
memorandum between merchants, (b) part
payment or part delivery, (c) admission in
pleadings or court, and (d) specially
manufactured goods

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Consequences
 If
a covered contract does not satisfy
the requirements of the statute of
frauds, the contract is unenforceable
 A person injured by the unenforceable
contract may pursue an action based
on quasi-contract or promissory
estoppel
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The CISG & a Writing
 The
Convention on
the International Sale
of Goods does not
require that a contract
be in writing to be
enforceable

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A contract need not take
any particular form, and
can be proven by any
means
Cyberlaw
Electronic
Signatures in Global and
National Commerce Act (E-Sign) of 2000
The federal E-Sign provides that in interstate
commerce transactions, an electronic signature
has the same legal effect as a handwritten
signature, and an electronic contract has the
same legal effect as a traditionally-printed
contract
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The Parol Evidence Rule

The parol evidence rule provides that,
when parties enter a written contract that
they intend as a complete integration
(final statement of agreement), a court
will not permit the use of evidence of
prior or contemporaneous statements to
add to, alter, or contradict the terms of
the written contract
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Watkins & Sons Pet Supplies v.
the lams Company

Facts & Procedural History:
 Iams, a pet food manufacturer, required
distributors, including Watkins, to sign
yearly written distributorship agreements
 Iams offered a 2% discount to distributors
who sold Iams products exclusively
 Watkins alleged it became an exclusive
Iams distributor because it relied on a
promise by Iams to grant Watkins the
exlusive sales territory of Michigan
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Watkins & Sons Pet Supplies v.
the lams Company

Facts & Procedural History:
 Contract of 1/31/93 stated that Iams “may
appoint any other distributor to sell
Products within the Territory” and
contained an “entireties” clause
 The contract expired by its terms and Iams
gave an exclusive distribution contract to a
competitor of Watkins
 Watkins sued and district court granted
summary judgment to Iams; Watkins
appealed
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Watkins & Sons Pet Supplies v.
the lams Company
Issue:
 Was Watkins’ reliance on alleged
representations of Iams reasonable?
 Law Applied to Facts :
 The four corners of the document determine the
terms of the agreement
 When a written contract is the final statement of
the parties’ agreement (a complete integration),
the parol evidence rule prohibits the parties
from introducing extrinsic evidence of the
agreement

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Watkins & Sons Pet Supplies v.
the lams Company

Holding:
 The integration clause
in the contract makes
Watkins’s reliance on
Iams’s representations
unreasonable as a
matter of law
 Affirmed in favor of
Iams
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More on Parol Evidence
 UCC
2-202 includes parol evidence rule
 Admissible parol evidence:





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Additional terms in partially integrated
contracts
Explaining ambiguities
Circumstances invalidating contract
Existence of condition
Subsequent agreements
Parol Evidence Chart
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Test Your Knowledge

True=A, False = B
 All contracts must be in writing to be
enforceable.
 A contract for the sale of a carpet for $499
must be in writing to be enforceable.

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Jill orally promised the President of First
Bank to pay Jack’s debt to First Bank if Jack
defaulted on the note. Jack defaulted and Jill
must pay Jack’s debt.
Test Your Knowledge
 True=A,
False = B
Joey owes Chandler money, so Joey
contracts with LoanCo for a short-term
loan. Chandler orally gave his personal
guaranty to LoanCo that Joey would repay
the loan. Joey defaulted and Chandler
must repay the loan for Joey.
 If a state law conflicts with the federal ESign, the provisions of E-Sign prevail.

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Test Your Knowledge
 Multiple

Choice
Parol evidence refers to:
(a) The evidence required to prove a case
 (b) Written or spoken statements not
contained in the written contract
 (c) The lack of evidence


E-Sign states that:
(a) An electronic signature has the same legal
effect as a handwritten signature.
 (b) A contract in electronic form is not
enforceable unless proven with a hard copy

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Test Your Knowledge

Multiple Choice
 Mamie agreed to sell Susan her Picasso
painting. She wrote the name of the
painting and $600 on a napkin. Both
Mamie & Susan signed the napkin. Susan
paid Mamie the money and Mamie:


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(a) May refuse to hand over the painting since the
contract was on a napkin and is unenforceable
(b) Must give Susan the painting since the contract
satisfies the statute of frauds
Thought Question
 Does
the Statute of
Frauds – a legal
principle from the
1600s – still make
sense in today’s
commercial world?
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