Answers to Issue Spotters, Using Business Law, Real-World Case Problems & Ethical

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Questions

Chapter 9 Introduction To Contracts

Answers To Issue Spotters

1A. Molly tells Nick that she will pay him $10,000 to set fire to her store, so that she can collect the money from her fire insurance policy. Nick sets fire to the store, but Molly refuses to pay him. Can Nick recover the $10,000 from Molly? Why or why not? No. This contract,

A-1 although not fully executed, is for an illegal purpose and therefore is void. A void contract gives rise to no legal obligation on the part of any party. A contract that is void is no contract. There is nothing to enforce.

2A. Alison receives a notice of property taxes due from the local tax collector. The notice is for tax on Jerry’s property, but Alison believes that the tax is hers and pays it. Can Alison recover from Jerry the amount that she paid? Why or why not? Yes. A person who is unjustly enriched at the expense of another can be required to account for the benefit under the theory of quasi contract. The parties here did not have a contract, but the law will impose one to avoid the unjust enrichment.

Answers To Using Business Law

9–

1A. Express v. implied contracts

The facts presented here indicate the presence of all the elements necessary for a valid contract. There are a serious offer and acceptance, consideration is exchanged (a candy bar for $1), both parties have capacity, the selling of the candy is legal, and there is no particular form required for this type of contract. Thus, a contract exists and for the reasons given here is classified as valid, enforceable, and informal. In addition, this is a classic case of an implied-in-fact contract. There is no explicit agreement between the parties. Rather, an agreement is implied by McDougal’s action of waving the candy bar and by his past conduct. By his conduct McDougal is telling Krunch that because the store is crowded, he will pay for the candy bar later. The contract is also bilateral (as opposed to unilateral), because Krunch impliedly promises to sell the candy bar to McDougal in exchange for McDougal’s implied promise to pay. The contract is partially executory, as McDougal has engaged to pay for the candy bar in the future. Because the contract is for a legal purpose, both parties have capacity, and reality of consent is not an issue, the contract is neither voidable nor void.

9–2A. Contract classification

In the modern view, most courts would hold that there was a contract between McElfresh and Big Burger, and that Big Burger could not revoke once McElfresh started to perform. This case is an example of a unilateral contract. Big Burger promised to pay $5,000 as a unilateral promise under which it would not be bound unless somebody completely performed the act that Big Burger requested. McElfresh could not accept Big Burger’s offer merely by promising to swim across Long Island Sound; Big Burger’s offer could be accepted only by full performance. The contract between McElfresh and Big Burger was an express contract, since the terms of the agreement were fully and explicitly stated in the banner that High-Flying Advertising flew over the beach. The contract was also executory, since it called for future performance; it would be considered executed only when

McElfresh had fully performed. The contract could also be classified as valid, enforceable, and informal.

ANSWERS TO REAL-WORLD CASE PROBLEMS

9–3A. Implied contracts

Yes Allstate was liable under the homeowner’s policy A contract that is implied from the conduct of the parties. This type of contract differs from an express contract in that the conduct of the parties, rather than their words, creates and defines the terms of the contract. For an implied contract to exist, a party must furnish a service or property (which includes money), the party must expect to receive something in return for that property or service, and the other party must know or should know of that expectation and had a chance to reject the property or service but did not. Of course, a contract may be a mix of express and implied terms.

In this problem, the homeowner’s policy was a mix of express and implied terms. As for the elements showing the existence of the implied terms, the payments for the premiums on the policy continued after Ralph’s death, but the amounts were paid from Douglas’s account. Undoubtedly, Douglas expected to receive coverage under the policy in return for his payments. The insurer Allstate must have known that Douglas expected the coverage insurance has long been Allstate’s business, and the company obviously understands the relationship between the payments of premiums and the expectation of insurance coverage. And Allstate had the opportunity to cancel the homeowner’s policy as it had with Ralph’s auto insurance, which was canceled but did not terminate it.

In the actual case on which this problem is based, the court issued a judgment in Allstate’s favor on the implied contract issue. The U.S. Court of Appeals for the Sixth Circuit reversed this judgment “A reasonable fact-finder could determine that [Allstate’s] continuation of the premium payments constituted a contract implied with Douglas.”

9–4A. Quasi contract

The court in this case could impose a quasi contract to avoid the unjust enrichment of Kim at Kris’s expense. To recover on this basis, one party must confer a benefit on another party, the other party must appreciate or know of the benefit, and the other party must retain the benefit under circumstances that would make it inequitable to do this without paying for it. Here, Kris asserted that she “loaned” Kim the money that her sister asked for. The loan conferred a benefit on Kim, who clearly knew of it. Kris’s use of the word “loan” implied that she gave her sister the money with the expectation of being repaid. These circumstances met the test for an award to Kris of recovery in quasi contract.

In the actual case on which this problem is based, the court granted a judgment in Kris’s favor for the repayment of the loans. The court stated, “All equities lie with the plaintiff and whether or not there is a written contract to support the amount is not necessarily required. It’s whether or not someone gives something over, pays something for somebody and it’s inequitable for that person to retain the benefit of that without returning the money.”

9–5A. Interpretation of contracts

A court is bound to give effect to a contract according to the intent of the parties at the time that they entered into it. This intent is determined by the parties’ expressions the words of the contract and their plain, ordinary meaning. A contract is ambiguous if the intent of the parties cannot be determined from its language, if it lacks a provision on a disputed issue, if a term is susceptible to more than one interpretation, or if there is uncertainty about a provision. If a contract is ambiguous, outside evidence may be considered, or an ambiguity will be interpreted against the party who drafted it or who asserts it.

A divorce settlement is a contract. In this problem, the type of college expenses that the Millers anticipated are not specified in the JCP, nor is the length of the obligation. And there is ambiguity in the phrasing. When was Darrell to “begin setting funds aside?” How much was he to set aside? Where was he to deposit or invest the funds? Was he to be responsible for the entire cost of Landon’s post-secondary education? In other words, what exactly did the parties intend? The provision is ambiguous. Lisa, however, did not offer any evidence to support her asserted interpretation of the provision. Without such evidence, the ambiguity should be interpreted in favor of Darrell.

In the actual case on which this problem is based, the court did not order Darrell to pay.

Answers To Ethical Questions

9–6A. Quasi contract

No. Enrichment does not qualify as unjust if, before the enrichment occurs, the party who is about to be “enriched” informs the party who is about to do the “enriching” that the “enrichee” will not accept liability for the cost. This might happen if, for example, a tenant defaults on a contract for certain work on leased premises with a party whom the landlord told that the landlord would not, under any circumstances, pay for the work.

9–7A. Unilateral contract

Every contract includes at least two parties. The offeror is the party making the offer. The offeree is the party to whom the offer is made. If an offer is phrased so that the offeree can accept only by completing the contract performance, the contract is a unilateral contract “a promise for an act.” In this problem, it would not be fair to rule in Jensen’s favor. There was no contract between the parties on the commission arrangement or its amount. An employer can make a unilateral offer to its employee, and the offer becomes a contract when its conditions are fulfilled. But IBM did not