P A R T 3 Contracts Introduction to

P A R T 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent Mc. Graw-Hill/Irwin Business Law, 13/e © 2007 The Mc. Graw-Hill Companies, Inc. All rights

P A R T 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies Mc. Graw-Hill/Irwin Business Law, 13/e © 2007 The Mc. Graw-Hill Companies, Inc. All rights

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 v Significance of a writing in contract law v The Statute of Frauds v Contracts covered by the Statute of Frauds and the requirements v The UCC & the Statute of Frauds v The Parole Evidence Rule 16 - 5

Basics v In general, a writing is not required to create a legally enforceable contract v However, a writing is preferable to an oral contract for a number of reasons: more definite, signature provides authentication, and use as evidence v Sometimes, a writing is required … 16 - 6

The Statute of Frauds v In 17 th Century England, the Statute of Frauds was enacted to prevent fraud by requiring written evidence before enforcing certain types of contracts v American states adopted similar statutes 16 - 7 House of Lords, England

Covered Contracts v Collateral contracts v Contracts for real estate v Contracts for more than one year v Contracts for sale of goods over $500 v Executor’s promise v Marriage as consideration v See 16 - 8 the list on page 400 of the text

Covered Contracts contracts in which a person (guarantor ) promises to perform an obligation of another person (principal debtor ) to a third person (obligee ) w Example: Bob is a personal guarantor on a loan from City Bank to Bob’s brother, John v Collateral 16 - 9

The Collateral Contract 16 - 10

Exception to Collateral Contract Rule v 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 v See 16 - 11 Wintersport Ltd. v. Millionaire. com , Inc.

Wintersport Ltd. v. Millionaire. com Inc. v Facts & Procedural History : Wintersport Ltd. printed one issue of Millionaire. com’s magazine w They negotiated to print another issue, but order and price cut due to magazine’s financial trouble w 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 w 16 - 12

Wintersport Ltd. v. Millionaire. com Inc. v Facts & Procedural History : White (Millionaire. com) gave Leiter personal guaranty via the phone and sent a $10, 000 check w Millionaire. com failed to pay balance and Wintersport sued Millionaire. com w 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 w 16 - 13

Wintersport Ltd. v. Millionaire. com Inc. v Issue and Legal Reasoning: Does the statute of frauds prevent enforcement of White’s oral guaranty? w An original promise – outside statute of frauds – occurs when the promisor receives a direct benefit from the promise w Wintersport did not show that White’s benefit was anything more than an indirect incident of share ownership w Reversed and dismissed in favor of White w 16 - 14

Covered Contracts v 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 w Exception: if vendor fully performed on the contract or vendee reasonably relied on the contract to his/her detriment w w 16 - 15 Then statute of frauds does not apply

Covered Contracts v Bilateral contracts that cannot be performed within a year from the date of their formation (one year rule ) w Is performance possible within year? w Probability w 16 - 16 of performance irrelevant Example: Jack signs contract to consult with Company X for 13 months – this must be in writing

Covered Contracts v UCC 2 -201: contracts for the sale of goods for a price of $500 or more v Includes agreements to modify existing sales contracts if contract as modified is for a price of $500 or more [UCC section 2– 209(3)] v Example: Pam buys a refrigerator for $501, thus a writing is required to be enforceable w No writing required for <$500 refrigerator 16 - 17

Covered Contracts v 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 16 - 18

Satisfying the Statute of Frauds v 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 w Memorandum need not be made at the same time the contract comes into being w 16 - 19

Satisfying the Statute of Frauds v 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 w A sales receipt may satisfy the requirement v 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 16 - 20

Consequences v If a covered contract does not satisfy the requirements of the statute of frauds, the contract is unenforceable v A person injured by the unenforceable contract may pursue an action based on quasi-contract or promissory estoppel 16 - 21

The CISG & a Writing v The Convention on the International Sale of Goods does not require that a contract be in writing to be enforceable w 16 - 22 A contract need not take any particular form, and can be proven by any means

Cyberlaw v. Electronic Signatures in Global and National Commerce Act (E-Sign) of 2000 v. 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 16 - 23

The Parol Evidence Rule v 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 16 - 24

Watkins & Sons Pet Supplies v. the lams Company & Procedural History : w Iams, a pet food manufacturer, required distributors, including Watkins, to sign yearly written distributorship agreements w Iams offered a 2% discount to distributors who sold Iams products exclusively w 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 v Facts 16 - 25

Watkins & Sons Pet Supplies v. the lams Company v Facts & Procedural History : w Contract of 1/31/93 stated that Iams “may appoint any other distributor to sell Products within the Territory” and contained an “entireties” clause w The contract expired by its terms and Iams gave an exclusive distribution contract to a competitor of Watkins w Watkins sued and district court granted summary judgment to Iams; Watkins appealed 16 - 26

Watkins & Sons Pet Supplies v. the lams Company Issue : w Was Watkins’ reliance on alleged representations of Iams reasonable? v Law Applied to Facts : w The four corners of the document determine the terms of the agreement w 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 v 16 - 27

Watkins & Sons Pet Supplies v. the lams Company : w The integration clause in the contract makes Watkins’s reliance on Iams’s representations unreasonable as a matter of law w Affirmed in favor of Iams v Holding 16 - 28

More on Parol Evidence v UCC 2 -202 includes parol evidence rule v Admissible parol evidence: w w w 16 - 29 Additional terms in partially integrated contracts Explaining ambiguities Circumstances invalidating contract Existence of condition Subsequent agreements

Parol Evidence Chart 16 - 30

Test Your Knowledge v True=A, False = B w All contracts must be in writing to be enforceable. w A contract for the sale of a carpet for $499 must be in writing to be enforceable. w 16 - 31 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 v True=A, False = B Joey owes Chandler money, so Joey contracts with Loan. Co for a short-term loan. Chandler orally gave his personal guaranty to Loan. Co that Joey would repay the loan. Joey defaulted and Chandler must repay the loan for Joey. w If a state law conflicts with the federal ESign, the provisions of E-Sign prevail. w 16 - 32

Test Your Knowledge v Multiple w Choice Parol evidence refers to: (a) The evidence required to prove a case w (b) Written or spoken statements not contained in the written contract w (c) The lack of evidence w w E-Sign states that: (a) An electronic signature has the same legal effect as a handwritten signature. w (b) A contract in electronic form is not enforceable unless proven with a hard copy w 16 - 33

Test Your Knowledge v Multiple Choice w 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: (a) May refuse to hand over the painting since the contract was on a napkin and is unenforceable w (b) Must give Susan the painting since the contract satisfies the statute of frauds w 16 - 34

Thought Question v Does the Statute of Frauds – a legal principle from the 1600 s – still make sense in today’s commercial world? 16 - 35