Chapter 9 Contract Formation

1. Chapter 9Contract Formation

2. Introduction • Promise is a declaration that something will or will not happen in the future. • What is a Contract? • Contract is an agreement (based on a promise) that can be enforced in court. • What law governs? • Service contracts - common law of contracts. • Sale and lease contracts - Uniform Commercial Code (UCC).

3. §1: Function of Contract Law • Designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace. • Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

4. §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. • Objective Theory of Contacts. Circumstances to determine intent of parties.

5. §3: Elements of a Contract • Agreement (Offer and Acceptance). • Consideration. • Contractual Capacity. • Defense: • Legality. • Genuineness of assent. • Form.

6. §4: Types of Contracts • Bilateral v. Unilateral. • Bilateral - Offeree must only promise to perform (“promise for a promise”). • Unilateral - Offeree can accept the offer only by completing the contract performance (“promise for an act”). • Irrevocable: Offer cannot be revoked once performance has begun.

7. Types of Contracts • Express v. Implied In Fact. • Express: Words (oral or written). • Implied In Fact: Conduct creates and defines the terms of the contract. Requirements: • PL furnished good or service • PL expected to be paid • DEF had chance to reject and did not.

8. Types of Contracts • Quasi Contracts - Implied in law. • Fictional contracts created by courts. • Imposed on parties for the interest of fairness and justice. • Equitable remedies. • Quantum Meruit.

9. Types of Contracts • Formal v. Informal. • Executed v. Executory. • Executed - A contract that has been fully performed on both sides. • Executory - A contract that has not been fully performed on either side.

10. Enforceability • Valid. • Elements: Agreement, consideration, contractual capacity, and legality. • Void. • No contract. • Voidable (unenforceable). • Valid contract can be avoided or rescinded.

11. § 5: 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.

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

13. Offer: Intention • Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer. • Case 9.1: Lucy v. Zehmer (1954). • 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.

14. 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. • Case 9.2:Satellite Entertainment Center v. Keaton (2002).

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

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

17. 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.

18. 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.

19. 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.

20. 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.

21. Termination by Operation of Law • Death or Incompetence of the Offeror or Offeree. • Supervening Illegality of the Proposed Contract.

22. 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.

23. 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.

24. 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).

25. 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.

26. Technology and Acceptance • Traditional rules provide framework for digital age. • But traditional rules may not apply to acceptances via Fed Ex, email, or fax. • Generally, ‘mailbox rule’ does not apply to online offers.

27. §6: 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. • Case 9.3:Hamer v. Sidway (1891).

28. 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.

29. 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.

30. 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.

31. §7: 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.

32. 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.

33. 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.

34. Minor’s Obligation on Disaffirmance • In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control. • In increasing number of states, the minor must restore the adult to the position held before the contract was made.

35. Exceptions to Minor’s Right to Disaffirm • Misrepresentation of Age. • Generally, minor can disaffirm the contract. • But some states prohibit disaffirmance and hold the minor liable. • Contracts for Necessaries. • Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services.

36. 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.

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

38. Parent’s Liability • Contracts. • Parents not liable (This is why parents are usually required to sign any contract made with a minor). • Torts (Statutes Vary): • 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.

39. Intoxication • Lack of contractual capacity at the time the contract is being made. • Contract can be either voidable or valid. • Courts look at objective indications to determine if contract is voidable. • If voidable: • Person has the option to disaffirm, or • Person may ratify the contract expressly or impliedly.

40. Mentally Incompetent Persons • Void. • If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. • Voidable. • If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. • Valid. • If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities. • Lucid Interval.

41. §8: Legality • A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). • Contract that calls for for a tortious act. • Contract that calls for an act contrary to public policy. • Case 9.4:Moore v. Midwest Distribution, Inc. (2002).

42. §9: Genuineness of Assent • Contract may be unenforceable if the parties have not genuinely assented to its terms by: • Mistakes. • Misrepresentation. • Undue Influence. • Duress.

43. Mistakes • Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. • Bilateral (Mutual) Mistakes can be rescinded by either party. • Unilateral Mistakes cannot be canceled unless: • If other party to the contract knows or should have known that a mistake of fact was made. • If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.

44. Fraudulent Misrepresentation • Contract Voidable by Innocent Party. • Elements: • Misrepresentation of Material Fact. • Intent to Deceive. • Reliance on Misrepresentation. • Injury to the Innocent Party. • Case 9.5:Foley v. Parlier (2002).

45. Nonfraudulent Misrepresentation • Innocent Misrepresentation. • Negligent Misrepresentation. • Equal to Scienter. • Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

46. Undue Influence • Contract is Voidable. • Confidential or Fiduciary Relationship. • Relationship of dependence. • Influence or Persuasion. • Weak party talked into doing something not beneficial to him or herself. • Presumption of Undue Influence.

47. Duress • Forcing a party to enter into a contract under fear or threat makes the contract voidable. • Threatened act must be wrongful or illegal. • Exceptions: • Threat to exercise legal rights (criminal or civil suit). • Economic.

48. Adhesion Contracts and Unconscionability • Adhesion Contracts. • Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract. • Unconscionability. • One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract. • “Standard-form.” • “Take-it-or-leave-it” adhesion contracts.

49. §10: The Statute of Frauds • 1677 England passed the law “An Act for the Prevention of Frauds and Abuses.” • Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable. • Today, almost every state has a Statute of Frauds.

50. Modern Statutes of Frauds • To be enforceable, the following types of contracts must be in writing and signed: • Contracts involving interest in land. • Contracts involving “One Year Rule.” • Collateral or Secondary Contracts. • Promise made in consideration of marriage. • Contracts for the sale of goods priced at $500 or more.