How Contracts Arise

1. How Contracts Arise

2. Chapter 5.1 What is a contract? • A contract is any agreement enforceable by law. • Never enter into a contract without understanding the legal responsibilities involved.

3. Three Theories of Contract Law • Equity Theory: did the parties exchange things of equal value? • Will Theory: focus on each party’s free will • Formalist Theory: based on six elements of a contract that must be present

4. What are the elements of a contract? • Offer • Acceptance • Genuine Agreement • Consideration • Capacity • Legality • ALL ELEMENTS MUST BE PRESENT FOR THE CONTRACT TO BE VALID

5. What are the characteristics of a contract? • Valid: Legally good; include all elements; legally binding • Void: No legal effect; missing one of the elements • Voidable: One party has the ability to cancel the contract for some legal reason (i.e. a contract between 2 minors) • Unenforceable: the court will not uphold; usually because of some rule of law (i.e. statute of limitations)

6. What are the characteristics of a contract? • Express contract: stated in words, either written or oral • Implied contract: comes about from actions of the parties • Bilateral: contains two promises; one party promises to do something in exchange for the other’s promise to do something • Unilateral: promise by only one person to do something

7. Oral or Written? • Oral contract: created by word of mouth • No proof the agreement exists • Written contract: typed or handwritten agreement • not always necessary to create a binding contract • assures both parties know the exact terms of the agreement • provides proof of the agreement

8. Chapter 5.2 What is an offer? • An offer is a proposal by one party to another intended to create a legally binding agreement

9. Requirements of an Offer • Serious intent (made seriously) • Not in heat of anger or as a joke • Not an invitation to negotiate • Advertisements are invitations to negotiate, since sellers have limited merchandise to sell • If the advertisement contains specific promises (i.e. “first come, first served”), then it is an offer, not an invitation to negotiate

10. Requirements of an Offer • An offer must be definite and certain to be enforceable • Quantifiable • Cannot be ambiguous as to what the offer is about • Offering to “share in the cost” of an item is not definite

11. Requirements of an Offer • An offer must be communicated to the offeree • May be made by telephone, letter, telegram, fax, email, or any other method that makes communication possible

12. Termination of an Offer • Revocation: taking back of an offer by the offeror before it has been accepted • Rejection: refusal of the offer by the offeree • Counteroffer: making changes to the original offer during the “acceptance” • Expiration of time: if there is a time limit for acceptance in the original offer that has passed or if it is not accepted in a reasonable amount of time • Death or insanity: if offeror dies or becomes insane before the offer is accepted

13. Chapter 5.2 Requirements of Acceptance • The acceptance of an offer must be unconditional • Mirror Image Rule: must not change the original offer in any way • Any “acceptance” that changes the original offer is instead considered a counteroffer • The original offeror does not have to go along with the new counteroffer and no contract results

14. Requirements of Acceptance • Exceptions to the mirror image rule: • UCC exceptions involve the sale of goods among non-merchants • UCC exceptions involve the sale of goods between merchants as long as: • New terms aren’t material change to nature of contract • Offeror doesn’t object to changes within a reasonable amount of time • Original offer didn’t expressly limit acceptance to the original terms of the offer

15. Methods of Acceptance • The time at which an acceptance takes place is important to when the contract comes into existence • Especially important to long-distance contracts • An acceptance over long-distance is effective when it is sent (i.e. mailed, faxed, emailed) • Acceptance can be made by any reasonable means: past practices between parties, usual method of trade, or customary means in comparable transactions

16. Chapter 6.1 What is genuine agreement? • Genuine agreement occurs when a valid offer is met by a valid agreement • Defective agreements invalidate contracts because no genuine agreement truly exists

17. How do defective agreements arise? • Fraud is the deliberate deception intended to secure an unfair or unlawful gain • Misrepresentation is the untrue statement of facts • Mistake is an error on part of one or both of the parties

18. How do defective agreements arise? • Duress is inducing a party to enter into an agreement by overcoming a person’s will by use of force or threats • Undue influence occurs when a person uses unfair or improper persuasive pressure to force another into a contract

19. To succeed in lawsuit for fraud: • The following 5 elements must be present • There must be a false representation of fact • The party making the false representation must know it was false • The false representation was made with the intent that it be relied upon • The innocent party actually relied upon the false representation • The innocent party must have actually suffered some monetary loss

20. Terms of Fraud • Material Fact: a fact that is important; matters to one of the parties • Does not include “sales puffery,” which is legal and essentially the sales person’s opinion • Concealment: false representation by choosing not to reveal important information; passive fraud or nondisclosure

21. What happens to the contract if fraud occurs? • If induced to enter a contract through fraud you may rescind (cancel) the agreement or sue for monetary damages (to punish the wrongdoer)

22. What is happens if misrepresentation occurs? • If misrepresentation occurs, the innocent party may cancel the contract and possibly sue for damages • If the misrepresentation is innocent, meaning the person honestly believed the statement was true when it was made, no damages may be awarded.

23. Mistake, Duress, & Undue Influence • Mistake: entering into a contract while believing that certain information is true when it actually is not, or that information is not true when it actually is • When truth is learned, one or both parties may wish to avoid contract

24. What types of mistakes are there? • Unilateral mistake: error on the part of one of the parties • Mistake as to nature of the agreement • Cannot avoid the contract • Mistake as to the identity of a party • May avoid the contract

25. What types of mistakes are there? • Bilateral mistake: both parties to the agreement are mistaken about an important fact • Mistake as to the possibility of performance • Contract may be avoided • Mistake as to the subject matter • May avoid the contract

26. What types of duress exist? • Duress: overcoming a person’s will by use of force or by threat of force or bodily harm will enable the innocent party to avoid the contract • Economic duress: threats to a person’s business or income that cause him to enter into an agreement without true consent • Note…the threat to exercise legal rights is not a form of duress!

27. What is involved in undue influence? • Undue influence occurs when a stronger/more powerful person substitutes his will for that of a weaker person • Elements involved: • Dependency relationship • Unfair or improper pressure • Beneficial contract

28. Section 8.1 The Element of Consideration • Law has refused to enforce most gratuitous (free) agreements • There must be a bargained for exchange

29. Section 8.1 The Element of Consideration • Consideration is the exchange of benefits and detriments by parties to an agreement; exchange of things of value • Benefit: something the a party was not previously entitled to receive • Detriment: any loss suffered • Forbearance: not doing something you have legal right to do

30. Characteristics of Consideration • Three key characteristics: • Promises must involve the concept of a bargained-for-exchange • Something of value must be involved • Benefits and detriments must be legal • Examples: money, property, promises not to sue, charitable pledges

31. Problems with Consideration • Disputed Amounts: parties cannot agree as to actual amount owed; can be settled by accord & satisfaction • Accord- acceptance by the creditor of less than what has been billed • Satisfaction- the agreed to settlement contained in the accord

32. Problems with Consideration • Undisputed Amounts: amount cannot be disputed if the parties have mutually agreed to a set amount of money

33. Everyday Examples of Consideration • Consideration is the contractual element that distinguishes a legally binding agreement from all other types of agreements • For something to amount to consideration, the act performed or promised must be legal

34. Everyday Examples of Consideration • To constitute consideration, an act or promise must be bargained for • If a person pays a debt in advance, it is something that he or she is not legally bound to do • Paying in advance would be consideration for settling a debt for a lesser amount

35. Everyday Examples of Consideration • The courts enforce charitable pledges as if they were contracts • A promise by one party not to sue another party is generally proven by evidence of a release • Usually, a party will offer money in exchange for another party’s promise or performance

36. Everyday Examples of Consideration • Some people prefer barter agreements that involve goods and services rather than money • Generally, the courts do not get involved in determining how much consideration is enough • Forbearance is a type of consideration that involves promising not to do something that you are legally entitled to do

37. Section 8.2 Enforceable Agreements Without Consideration • Most of the time, contracts are invalid if no consideration is given • States differ on rules but there are a few types of contracts in which consideration is not necessary

38. Section 8.2 Enforceable Agreements Without Consideration • Promises under seal • Promises after discharge in bankruptcy • Debts barred by statute of limitations • Promises enforced by promissory estoppel • Promissory estoppel- restraint on a person to prevent him from contradicting a previous act

39. Section 8.2 Unenforceable Agreements Without Consideration • Courts will not enforce certain promises because they lack basic qualities of valid consideration • Illusory promises: contract may appear to be valid, but doesn’t truly include real promises • Future gifts: promising future gifts is not an enforceable promise if no consideration is given for this promise

40. Section 8.2 Unenforceable Agreements Without Consideration • Past consideration: act of giving/exchanging benefits and detriments must occur when the contract is made, not at some point in the past • Preexisting duties: if already under legal obligation to do something, then the promise to do that same thing is not consideration

41. Section 8.2 Unenforceable Agreements Without Consideration • Promise to attend a social engagement: social engagements do not include exchanging things of value

42. 9.1 What is capacity? • Capacity is the legal ability to enter into a contract • Those who do not have capacity to make a contract: • Minors • Mentally impaired • Intoxicated persons

43. Definition of Minority • Minor- person who has not yet reached age of majority • Legal Age- 18 years old (actually 18 years and one day) • Emancipation- minors no longer under control of their parents • Responsible for own contracts • Typically these minors have chosen to abandon the protection afforded to minors

44. Misrepresentation of Age • Claiming to be over the age of majority is fraud • Minor may be sued for misrepresenting age • Use of fake ID is illegal

45. Contracts of Minors • The law shields minors in making contracts • Immaturity, inexperience, lack of education, naiveté could cause adults to take advantage of minors

46. Contracts of Minors • Voidable contracts- minors may disaffirm, or avoid, their contracts if they choose • Return merchandise • Disaffirm whole contract • Disaffirm contracts made with other minors • Ratify- after reaching the age of majority, a person can approve contracts made while a minor • Using an item from a contract = ratifying

47. Contracts of Minors • Contracts for necessities- minor is held responsible for the fair values of necessities • Food, clothing, shelter, medical care • Paying more than fair value means the minor is entitled to the difference being repaid • Special Statutory Rules- some states have laws in place for special circumstances • Purchasing car insurance; owning own business

48. Other Capacity Rules • Mentally impaired persons- unable to make sound judgment and contracts made without a guardian are voidable • Intoxicated persons- intoxicated persons are sometimes able to disaffirm their contracts due to impaired judgment • Other- convicts, aliens, etc. have limited contractual capacity

49. Legality • Contracts must be made for a legal purpose • Any contract for an illegal purpose may be void/unenforceable • Example: Individuals who agree to commit crimes for a promised consideration are involved in the crime of conspiracy and the contract is unenforceable

50. Illegality in Part or Whole • If it is impossible to separate the illegal parts of the agreement from the legal parts, the contract will be illegal and unenforceable • If certain promises and actions can be separated from the illegal aspects of the contract, then the contract is divisible and the legal parts will be upheld • In pari delicto: parties to an illegal contract are at equal fault if they knew the contract was for an illegal purpose