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Dynamic business law 4e kubasek 4e CH13

Chapter 13
Introduction to Contracts

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.


• LO13-1: What is a contract?
• LO13-2: What are the sources of contract law?
• LO13-3: How can we classify contracts?
• LO13-4: What are the rules that guide the interpretation of contracts?


Chapter 13 Hypothetical Case 1

While having a beer and a hamburger at Rapid City, South Dakota's favorite watering hole, All the Presidents' Heads, Jake Johnson and Alan
Harrison's conversation eventually leads to the topic of Johnson's cabin at nearby Canyon Lake. Johnson has owned the cabin for years, having

inherited it from his father, and Harrison has always admired his friend's hideaway from the madness of the "civilized" world. Emboldened by the
beer, Harrison scrawls out the following with a pen and napkin provided by the waiter: "Contract for purchase and sale of 106 Canyon Lake Drive
property, purchase price—$100,000—Signed, Jake Johnson and Alan Harrison." Harrison signs the napkin and presents it to his friend with a smile.
Johnson says, "Cheers," finishes his drink, and signs the napkin as well.

Later that day, Harrison calls Johnson and inquires when the two should close on the property. Johnson is taken aback, and says to his soon-to-be exfriend, "Alan, I was only kidding; surely you knew it was just a joke. For crying out loud, a napkin isn't a contract, and you know how much I cherish
my cabin!"

Is Jake Johnson obligated to sell his property at 106 Canyon Lake Drive to Alan Harrison? What if the fair market value of the property is $400,000?


Chapter 13 Hypothetical Case 2

Zsa Zsa Tilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the world was her pet poodle Caboodles, and Caboodles had
been missing for three days. Having searched her estate exhaustively, Tilton decided that her next best option was to post a reward for her beloved

Tilton carefully prepared a poster advertising a reward for the return of her pet. The heading of the poster exclaimed "Please find Caboodles—
Reward—$25,000!!!" Below the heading was a color glamour shot of the animal and Tilton's contact information, including her address and cell
phone number. After soliciting the assistance of her butler, her maid, and her best friend Eva Ritchie, Hilton displayed and distributed hundreds of
posters throughout the greater Beverly Hills area.

Later in the week, Dane "Bulldog" Sheppard showed up at Tilton's front door. When she answered the door, Sheppard said, "I am pleased to meet
you, Ms. Tilton. I saw your ad for the return of your lost poodle, and I am your man. I will find him, Ms. Tilton, and let me say in advance that I really
appreciate the $25,000 bounty, um, reward money!"

Is there a contract between Dane "Bulldog" Sheppard and Zsa Zsa Tilton?


What Is a Contract?

• Definition:

A legally enforceable promise

• Elements required for contract formation:

Agreement (offer and acceptance)
Consideration (value given by both parties)
Contractual capacity (legal ability to enter into binding agreement)
Legal object (contract cannot be illegal or against public policy)


Defenses to Contract Enforcement

• Lack of genuine assent (fraud, duress, undue influence,

Lack of proper form requirements (some contracts that lack writing


Objective Theory of Contracts

• Existence and interpretation of contract based on outward manifestations

of intent by parties (objective, reasonable person standard of contract
formation and interpretation)
Subjective (individual) intent generally irrelevant


Sources of Contract Law

• Two most important sources:
• Common law

• Restatement of the Law Second, Contracts

• Uniform Commercial Code (UCC)

Governs contracts for the sale of goods


Classification of Contracts:
Bilateral or Unilateral

• Bilateral contract

• Exchange of promises

• Unilateral contract

• Promise in return for performance of act


Classification of Contracts:
Express or Implied

• Express contract

• Based on written or spoken words

• Implied contract

• Based on conduct or actions

• Quasi-contract (implied-in-law contract)

• Not actually contracts, but imposed in certain cases to avoid unjust


Classification of Contracts:
Valid, Void, Voidable, Unenforceable

• Valid contract
• All elements of contract formation satisfied
• Void contract
• Illegal object or serious defect
• Voidable
• Parties can withdraw from or enforce contract
• Unenforceable
• Valid, but courts cannot legally enforce contract

Classification of Contracts:
Executed or Executory

• Executed contract

• All terms of contract fully performed

• Executory contract

• Some duties under contract not performed by one/both parties


Classification of Contracts:
Formal or Informal

• Formal contract

• Have special form or created in specific manner
• Examples: Contracts under seal, recognizances, letters of credit, and
negotiable instruments

• Informal contract

• No formalities required in making; a simple contract


Interpretation of Contracts

Contract interpreted to give effect to parties' intentions at time they entered into contract

If contract contains ambiguity, judge should interpret it against interests of drafter

If multiple interpretations possible, adopt interpretation that would make contract lawful, operative,
definite, reasonable, and capable of being effected
Handwritten provisions prevail over preprinted terms
Numbers written in words prevail over numerals
Specific terms prevail over general terms
Technical words are generally interpreted in accordance with industry standard


Chapter 13 Hypothetical Case 3

Carter Morley and Erena Erickson live side by side in townhomes with a shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls a
painter, Jerome Sizemore, having selected his name from the phone book. Morley provides his address, the physical dimensions and structure of his home, and he agrees
with Sizemore that the work will be performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of the home, the work will
only take one day to complete. Morley advises that although he will have to work a 14-hour day on Friday, he would like to have the work completed in his absence. In
passing conversation with Erickson, Morley advises her of his plans.

Early Friday morning, Sizemore and his team arrive, but by mistake, they begin work on Erickson's side of building. Although Erickson is home, she does not object to the
work, nor does she inform Sizemore and his crew of the mistake. Midway through the day, she offers them fresh-squeezed lemonade and ham sandwiches, and they
heartily accept.

Upon completion of the work on Friday evening, Sizemore knocks on Erickson's door and asks if "the man of the home" is present, for he would like Morley to review the
work and pay him. Erickson chuckles and breaks the news that the painting crew has made a mistake. She proclaims, "I do not owe you a dime, because you don't have a
contract with me. You have 10 minutes to remove yourself and your materials from my property, or I will call the police."

Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery available to Sizemore?


Chapter 13 Hypothetical Case 4

Rock star Byron Haddon's manager wanted to create some buzz about Haddon's new album, Wingmaster. He decided to hire a videographer to follow Haddon around for
a couple of days while two videos were being shot for the album, thinking they'd release the behind-the-scenes video on YouTube just before the videos came out.

The videographer, Lori Breck, shows up, and Haddon's manager tells her that the video she shoots will be the property of Haddon's production company, and that he'll
send a nondisclosure agreement via email after the shoot is complete. Breck agrees.

Three hours into the shoot, with Breck's camera trained on him, Haddon receives a text from Samantha Virdo, a young and very popular actress he has been dating. In
the text, Virdo tells Haddon she never wants to see him again. He flies into a rage, and in a ten-minute rant, he divulges intimate details of their relationship, Virdo's
ongoing relationships with other celebrities (some of whom are married), and Virdo's drug use. As Haddon's manager tries to calm him down, Breck slips away.

Breck sells the video to a website that specializes in embarrassing celebrity videos. A gig that would have earned her $800 for the two-day shoot is suddenly a $50,000
windfall. Haddon's production company files suit against Breck, stating that it is the true owner of the video, and that a verbal contract existed between Breck and the
production company. Will the production company prevail?


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