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Law, Business, and Society Assignment No. 2, Contracts What Are the Elements of a Contract?

Spring is approaching, and as owner of a Frisbee manufacturing company, you are offering your local retailer fifty Frisbees for $2.00 each. He says to you, I will buy it. The moment he agrees to buy, a legally enforceable contract has been established between you and the retailer. In other words, if you or the retailer does not fulfill the contractual promise, the nonbreaching party can sue the breaching party for breach of contract. Contracts serve an important purpose in our society because they provide certainty, predictability, and stability.1 In the example above, both you and the retailer benefit from the contract because if either party breaches the contract, there will be a remedy at law. The first step to any contract question is to make sure that a contract actually exists. There are several elements that go into a contract, and they must be present for a contract to be legally binding. The first element to any contract is an offer. The offer must contain objective intent to make an offer, definite material terms and communication to the offeree.2 If a reasonable person interprets the offerors words as anything other than an offer, such as a joke or an invitation to make an offer, then an offer has not been made. The second element to a contract is an acceptance. The acceptance is only valid if it demonstrates objective intent to accept, mirrors the material terms of the offer and is communicated to the offeror.3 In our example, if the retailer offers to buy your Frisbees for $1.75 each after you have made your offer for $2.00 each, there has been no acceptance. Rather, a counteroffer has been made. This counteroffer ends the original offer and directs the power to accept back to the original offeror. The third element

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Kowal, R. Contracts Outline. Kowal, R. Agreement & Consideration Outline. 3 Kowal, R. Agreement & Consideration Outline.

to a contract is consideration, or something of legal value. Each party to the contract must receive something of value for a contract to form. In addition to the previous elements, given that the purpose of the agreement does not violate the law, and there is a mutual assent between the contracting parties, a legally binding contract has been formed. However, courts may not always enforce contracts as written, even if they have satisfied all of the required elements. As we will see in the examples below, there are circumstances when courts do not enforce contracts according to their terms. In What Circumstances Do Courts Not Enforce Contracts as Written? Substantial Performance One scenario in which the court may not enforce contracts as written is when there is substantial performance. This is best demonstrated in Jacobs & Youngs v. Kent, 129 N.E. 889 (NY 1921). Plaintiff Jacob & Youngs built a house for defendant Kent for a price of $77,000, and sued for an unpaid balance of $3483.46. The defendant has specified in their contract that all the pipes in the house must be of the brand Reading. However, the plaintiff had unintentionally installed a different brand, but explained to the defendant that the pipes were of equal quality, appearance, and cost. The defendant demanded that the pipes be redone, which would have required the demolition at great expense of substantial parts of the completed structure.4 The plaintiff refused and demanded the remaining balance to be paid. The issue in this case is whether the defendant is entitled to the cost of replacement of the pipes for plaintiffs breach of contract. The court held that the defendant has performed substantially and is only required to compensate the difference in value of a home with the Reading pipes and the value of a home with the installed pipes. The court allowed for this remedy as an instrument of justice in cases involving defects of trivial or inappreciable
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Jacobs & Youngs v. Kent, 129 N.E. 889 (NY 1921)

importance. Forcing the plaintiff to compensate the cost of replacement would be considered unreasonable and unfair, because the significance of the default is grievously out of proportion to the oppression of the forfeiture.5 Unconscionability Another scenario when courts may not enforce contracts according to their terms is when there is presence of unconscionability. This permits contracts that are grossly unfair, oppressive and one-sided to be declared illegal and unenforceable.6 In Jones v. Star Credit Corp., 59 Misc.2d 189 (N.Y., Nassau Co. 1969), the presence of unconscionability has led the court to not enforce the terms of the contract at hand. The plaintiffs, who were welfare recipients, agreed to purchase a home freezer for $900 in installments. They have paid $619.88 towards the purchase, but the defendant, Star Credit Corp, claimed that additional charges relating to the extension of time for payment resulted in remaining balance of $819.81. However, the maximum retail value of the freezer is $300 at the time they made the agreement. The court examined Section 2-302 of the Uniform Commercial Code (UCC) to decide whether the transaction was unconscionable. This code enacts the moral sense of the community into the law of commercial transactions and authorizes the court to not enforce a contract if it finds that a contract was unconscionable at the time it was made.7 Indeed, the court found the contract to be unconscionable. The court reasoned that there was a gross inequality of bargaining power8 between the parties and there was a need to protect uneducated consumers from greedy merchants. There is

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Jacobs & Youngs v. Kent, 129 N.E. 889 (NY 1921) Kowal, R. Illegal Contracts Outline. 7 Jones v. Star Credit Corp., 59 Misc.2d 189 (N.Y., Nassau Co. 1969) 8 Jones v. Star Credit Corp., 59 Misc.2d 189 (N.Y., Nassau Co. 1969)

considerable public necessity for installments sales contracts, and often times, unequal bargaining power is inherent in these contracts. The UCC in effect protects these individuals. One of the main purposes of the court is to provide societal stability. In this case, the court has done so by protecting uneducated welfare recipients from inherently unfair contracts. On the other hand, the defendant should also deserve protection for the risk of selling to those who may default on payment. However, the court found the price terms set in the contract to have charged an excessive amount for the risk of default. Therefore, the court has amended the contract by changing the payments equal to the $619.88 the plaintiffs have already paid. Functional Equivalent Whenever an offer is made, the offeror has the authority to demand that the acceptance be communicated in a specific method (e.g. deliver in person, express mail). If the acceptance is communicated in any method other than the one specified, no contract has been formed.9 Sometimes, however, the method of communication demanded by the offeror is ambiguous, as we will see in Osprey LLC v. Kelly-Moore Paint Co. Inc., 984 P.2d 194 (Okla. 1999). We will see how the concept of functional equivalent is used by the court to resolve such ambiguity. Plaintiff Osprey L.L.C, who owns commercial property in Oklahoma, has agreed to lease its store to defendant Kelly-Moore Paint Company for fifteen years. The lease also contained two five-year renewal options which required defendant to give notice six months prior to its expiration date. The lease mentioned all notices shall be given in writing and may be delivered either personally or by depositing the same in United States mail10 After fifteen years, defendant has timely informed Osprey of its intent to renew by certified letter, but did not send the letter of renewal notice until the last day of the six-month notification deadline. Defendant

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Kowal, R. Agreement & Consideration Outline. Osprey LLC v. Kelly-Moore Paint Co. Inc., 984 P.2d 194 (Okla. 1999)

had both faxed and sent through Federal Express a copy of the renewal notice on that last day. However, plaintiff denied ever receiving the fax, and said the physical copy arrived late. Plaintiff requested defendant to vacate the premises, but defendant refused. The Court of Civil Appeals ruled in favor of the plaintiff because the defendant had neither delivered the notice personally or by mail. However, the Supreme Court of Oklahoma determined the timely faxed delivery of the notice was valid because the use of an alternative method of notificationdoes not render the notice defective if the substituted notice performed the same function or served the same purpose as the authorized method.11 Furthermore, defendant argued that the use of the word shall required that the notice be written, and the use of the word may permitted the suggested methods of delivery, but did not excluded other modes of delivery such as delivery by fax. Therefore, under the judgment of the court, delivery by fax was deemed to be a functional equivalent and the exercise of the renewal was valid. As we have examined in the examples above, there are many instances when courts may not enforce contracts according to their terms. Some of these circumstances are the presence of substantial performance, unconscionability, or functional equivalent. These special circumstances grant the court the power to not enforce contracts. Contracts are meant to provide certainty and stability to our society. Only with this power can the court make decisions in the best interests of our society.

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Osprey LLC v. Kelly-Moore Paint Co. Inc., 984 P.2d 194 (Okla. 1999).

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