Fundamentals of Contract Formation

1. Module 2Contract Formation BUS 105 PowerPoints by Rick Manzano is licensed under CC-BY 4.0

2. Definition of a Contract • A contract is a: • Promise or set of promises, • For which breach of which, • The law provides a remedy, or • The performance of which the law in some way recognizes as a duty.

3. Elements of a Contract • Agreement (Offer and Acceptance). • Consideration. • Contractual Capacity.

4. I. Agreement • Agreement = offer and acceptance. • Parties must show mutual assent to terms of contract. • Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.

5. Requirements of the Offer • Offeror’s serious intention. • Definiteness of terms. • Communication to Offeree.

6. Offer: Intention • Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer. • Offers made in anger, jest, or undue excitement are usually not offers. • Expressions of opinion are not offers. • Statements of Intention or preliminary negotiations are are not offers. • Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers.

7. Offer: Definiteness of Terms • Terms (Expressed or Implied). • Identification of the parties. • Object or subject matter of the contract. • Consideration to be paid. • Time of payment, Delivery, or Performance.

8. Offer: Communication • Offeree’s knowledge of the offer: • Directly by the Offeror. • Use of Agents.

9. Termination of the Offer • An offer may be terminated prior to acceptance by either: • Action of the Parties; or by • Operation of Law.

10. Termination by Action of the Parties • Revocation of the offer by the Offeror: • Offer can be withdrawn anytime before Offeree accepts the offer. • Effective when the Offeree or Offeree’s agent receive it. • Exceptions: • Irrevocable Offers (Detrimental Reliance). • Option Contract: Promise to hold an offer open for a specified period of time in return of consideration.

11. Termination by Action of the Parties • Exceptions (Cont’d): • Detrimental Reliance or Promissory Estoppel where Offeree relies on offer to his or her detriment, thus Offeror is barred from revoking the offer. • Rejection of the offer by the Offeree: • Rejection by the Offeree (expressed or implied) terminates the offer. • Effective only when it is received by the Offeror or Offeror’s agent.

12. Termination by Action of the Parties • Rejection by Offeree (Cont’d). • A counteroffer by the Offeree is a rejection of the original offer and making of a new offer. • Mirror Image Rule. • Offeree’s acceptance to match the the Offeror’s offer exactly.

13. Termination by Operation of Law • Lapse of Time. • Offer terminates by law when the period of time specified in the offer has passed. • If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. • Destruction of the Subject Matter. Death or Incompetence of the Offeror or Offeree. • Supervening Illegality of the Proposed Contract.

14. Acceptance • Acceptance is the • Voluntary act (expressed or implied), • by the Offeree that, • shows assent (agreement), • to the terms of an offer. • “Mirror Image” Rule.

15. Silence as Acceptance • Acceptance of Services by Silence. • Sometimes Offeree has a duty to speak. • Prior Dealings and Acceptance. • Silence can be acceptance if there are prior dealings. • Solicited Offers. • Offeree has a duty to reject.

16. Timeliness of Acceptance • Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance. • Offeror specifies (expressly or impliedly) how acceptance should be made. • Effective when dispatched (mailed, shipped).

17. Authorized Means of Acceptance • Exceptions: • If acceptance is not properly dispatched by the Offeree. • If Offeror specifies that acceptance will not be effective until it is received. • If acceptance is sent after rejection, whichever is received first is given effect. • Unauthorized Means of Acceptance. • Not effective until it is received by the Offeror. If timely sent and dispatched it is considered to have been effective on its dispatch.

18. II. Consideration • Consideration for a promise must be either: • Legally detrimental to the promisee, or Legally beneficial to the promisor. • “Legal Value”: • Promise, • Performance, or • Forbearance.

19. Adequacy of Consideration • A Court will not question the fairness of the bargain if legally sufficient. • Law does not protect a person for entering into an unwise contract. • In extreme cases, a court may find that a party lacks legal capacity or that contract was unconscionable.

20. Agreements That Lack Consideration • Preexisting Duty. • Promise to to what one already has a legal duty to do does not constitute legally sufficient consideration. • Exceptions: • Unforeseen Difficulties. • Recession and New Contract. • Past Consideration is no consideration because the bargained-for exchange element is missing.

21. Promissory Estoppel • Promissory Estoppel and Detrimental Reliance: • Must be definite promise. • Promisee must justifiably rely on the promise. • Reliance is substantial. • Justice will be served by enforcing promise.

22. III. Capacity • Contractual Capacity. • The legal ability to enter into a contractual relationship. • Full competence. • No competence. • Limited competence. • Legality. • The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

23. Minors • In most states, a person is no longer a minor for contractual purposes at the age 18. • A minor can enter into any contract that an adult can. • A contract entered into by a minor is voidable at the option of that minor.

24. Minor’s Right to Disaffirm • A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. • Minor must disaffirm the entire contract. • Disaffirmance can be expressed or implied.

25. Minor’s Obligation on Disaffirmance • Minor must restore the goods received in substantially the same condition as received.

26. Exceptions to Minor’s Right to Disaffirm • Misrepresentation of Age. • Minor can disaffirm the contract. • Contracts for Necessaries. • Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services.

27. Exceptions to Minor’s Right to Disaffirm • Insurance. • Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. • Loans. • Seldom considered to be necessaries. • Exception: • Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

28. Special Types of Contracts for which Minors May be Liable • Medical, surgical, and pregnancy care • Psychological counseling • Health and life insurance • Performance of duties relating to stock and bond transfers, bank accounts, etc. • Educational loan expenses • Contracts to support children • Contracts to enlist in the military • Artistic, sports, and entertainment contracts

29. Ratification • Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor.

30. Parent’s Liability • Contracts. • Parents not liable (This is why parents are usually required to sign any contract made with a minor). • Torts: • Minors are personally liable for their own torts. • Liability imposed on parents only for willful acts of their minor children. • Liability imposed on parents for their children negligent acts that result from their parents’ negligence.

31. Illegality—Contracts Contrary to Statutes • Usury laws • Gambling statutes • Sabbath laws or blue laws • Contracts to commit a crime • Licensing statutes

32. Module 2Contract Performance, Breach, and Remedies

33. A party may be discharged from a valid contract by: • A condition occurring or not occurring. • Types of Conditions: • Conditions Precedent. • Conditions Subsequent. • Full performance or material breach by the other party. • Agreement of the parties. • Operation of law.

34. Discharge by Performance • Types of Performance: • Complete Performance. • Substantial Performance (minor breach). • Performance to the Satisfaction of One of the Parties or a Third Party. • Jacobs & Young v. Kent (1921). Substantial performance by builder was entitled to contract amount less amount of cost to cure.

35. Breach of Contract • Breach of Contract - the nonperformance of a contractual duty. • Material breach. • Discharges the non breaching party from the contract. • Non-material breach • Does not discharge non-breaching party. • Damages • Time for Performance. • If none specified, reasonable time is implied

36. Discharge by Agreement • Discharge by Rescission. • Discharge by Novation: • Previous obligation. • All parties agree to new contract. • Extinguishment of old obligations. • New Contract Formed. • Discharge by Substituted Agreement. • Accord and Satisfaction.

37. Discharge by Operation of Law • Alteration of The Contract. • Statutes of Limitations. • Bankruptcy. • Impossibility or Impracticability. 

38. Impossibility or Impracticability of Performance • Objective Impossibility of Performance. • Death or incapacitation prior to performance; • Destruction of the Subject Matter; or • Illegality in performance. • Commercial Impracticability. • Key: Circumstances not foreseeable. Frustration of Purpose. • Temporary Impossibility.

39. Breach of Contract and Remedies • Most Common Remedies: • Damages. • Rescission and Restitution. • Specific Performance. • Reformation. • Recovery Based on Quasi Contract.

40. Damages • Compensatory Damages—direct losses. • Sale of Goods: difference between contract and market price. • Sale of Land: specific performance. • Construction Contracts: varies. • Consequential (Special) Damages—foreseeable losses. • Breaching party is aware or should be aware, cause the injury party additional loss. • Hadley v. Baxendale (1854). • Mill

41. Damages • Punitive Damages—punish or deter future conduct. • Generally not available for mere breach of contract. • Usually tort (e.g., fraud) is also involved. • Nominal Damages—no financial loss. • Defendant is liable but only a technical injury.

42. Mitigation of Damages • When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered. • Duty owed depends on the nature of the contract.

43. Liquidated Damages • Liquidated Damages. • A contract provides a specific amount to be paid as damages in the event of future default or breach of contract. • Penalties. • Specify a certain amount to be paid in the event of a default or breach of contract and are designed to penalize the breaching party.

44. Rescission and Restitution • Rescission. • A remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions. • Restitution. • Both parties must return goods, property, or money previously conveyed. • Note: Rescission does not always call for restitution. Restitution is called for in some cases not involving rescission.

45. Specific Performance • Equitable remedy calling for the performance of the act promised in the contract. • Remedy in cases where the consideration is: • Unique (land); • Scarce; or • Not available remedy in contracts for personal services.

46. Reformation • Equitable remedy allowing a contract to be reformed, or rewritten to reflect the parties true intentions. • Available when an agreement is imperfectly expressed in writing.

47. Recovery Based on Quasi Contract • Equitable theory imposed by courts to obtain justice and prevent unjust enrichment. • Party seeking quantum meruit must show the following: • A benefit was conferred to the other party. • Party conferring did so with the reasonable expectation of being paid. • The benefit was not volunteered. • Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit.

48. Election of Remedies • Doctrine created to prevent double recovery. • Non-breaching party must choose which remedy to pursue. • UCC rejects election of remedies. • Cumulative in nature and include all the available remedies for breach of contract. • California Law • Pleadings contain all remedies. Only one recovery

49. Waiver of Breach • A pattern of conduct that waives a number of successive breaches will operate as a continued waiver. • Nonbreaching party can still recover damages, but contract is not terminated. • Nonbreaching party should give notice to the breaching party that full performance will be required in the future.

50. Contract Provisions Limiting Remedies • Exculpatory clauses. • Provisions stating that no damages can be recovered. • Limitation of liability clauses. • Provisions that affect the availability of certain remedies.