Chapter 9

Chapter 9 : Formation of Traditional and E- Contracts

Contract Law must provides rules to determine which contract terms will be enforce and which

promises must be kept.

Promise: is an assertion that something either will or will not happen in the future.

Contract Law reflects our social values, interests, and expectations at a given point in

time. It shows what kinds of promises our society thinks should be legally binding.

It distinguishes between promises that create only moral obligations (such as promise to

take a friend to lunch) and promises that are legally binding (such as a promise to pay for

merchandise purchased.)

Contract Law demonstrates what excuses our society as a whole; therefore, legally

invalid.

I. An Overview of Contract Law

1. Sources of Contract Law

Common Law governs all contracts except when it has been or replace by statutory such as the

Uniform Commercial Code (UCC), or by Administrative Agency Regulations.

Contracts relating to services, real estate, employment, and insurance, generally are

governed by the common law of contracts.

Contracts for the sale and lease of goods are governed by the UCC to the extent that the

UCC has modified contract law.

2. The Function of a Contract

No aspect of modern life is entirely free of contractual relationships.

Promisor: A person who makes a promise.

Promisee: A person to whom a promise is made.

Contract Law is designed to provide stability and predictability for both buyers and sellers in

the marketplace.

o Contract Law assures the parties to private agreements that the promises they make will

be enforceable. Many promises are kept because the parties involved feel a moral

obligation to keeping a promise is in their mutual self-interest.

o The rules of contract law are often followed in business an essential condition for the

existence of a market economy.

o Duty and good faith are usually sufficient, but when dramatic price changes or adverse

economic conditions make it costly to comply with a promise, these elements may not be

enough.

o Contract Law is necessary to ensure compliance with a promise or to entitle the innocent

party to some form of relief.

o A contract is legally binding agreement between two or more parties who agree to

perform or to refrain from performing some act now or in the future.

o Contract disputes arise when there is subject to the sanctions of a court and may be

required to pay monetary damages or in limited instances to perform the promised act.

3. The Objective Theory of Contracts

The element of intent is of prime importance.

In contract law, intent is determined by the Objective Theory of Contracts; theory is that a

party's intention to enter into a contract is judged by outward, objective facts as interpreted by a

reasonable person, rather than by the party's secret, subjective intentions.

Objective Facts includes:

1) What the party said when entering into the contract?

2) How the party acted or appeared?

3) The circumstances surrounding the transaction.

4. Freedom of Contract and Freedom from Contract.

Freedom of Contract: Everyone has the ability to enter freely into contractual arrangements. A

freedom protected by the U.S Constitution in Article I, Section 10.

Because Freedom of Contract is a fundamental public policy of the U.S, courts rarely interfere

with contracts that have been voluntarily made.

Illegal bargains, agreement that unreasonably restrain trade, and certain unfair contracts made

between one party with a great amount of bargaining power and another with little power

generally are not enforced.

Certain contracts and clauses may not be enforced if they are contrary to public policy, fairness,

and justice.

These exceptions provide Freedom from Contract for persons who may have been enforced into

making contracts unfavorable to themselves.

5. Requirements of a Valid Contract

i. Agreement: An agreement to form a contract includes an OFFER and an

ACCEPTANCE. One party must offer to enter into a legal agreement, and

another party must accept the terms of the offer.

ii. Consideration. Any promises made by the parties must be supported by

legal sufficient and bargained for consideration.

iii. Contractual Capacity: both parties entering into the contract must have

the Contractual Capacity to do so. The law must recognize them as

possessing characteristics that qualify them as competent parties.

iv. Legality: the contract's purpose must be accomplish some goal that is

legal and not against public policy.

6. Defense to the Enforceability of a Contract.

A contract may be unenforceable of the following requirement are not met:

i. Voluntary Consent: the apparent consent of both parties must be voluntary. For

example: if a contract was formed as a result of fraud, a mistake, or duress the contract

may not be enforceable.

ii. Form: the contract must be in whatever form the law requires; for example, some

contracts must be in writing to be enforceable.

II. Types of Contracts

1. Contract Formation

a) Bilateral versus Unilateral Contracts

Offeror: Person who makes an offer. The offeror always promises to do or not to do something

and thus is also promisor.

Offeree: person to whom an offer is made.

Bilateral Contracts

Bilateral Contract: A type contract that arises is given in exchange for a return promise.

A bilateral Contract is a "promise for a promise."

For example: a contact in which one person agrees to buy another person's automobile for a

specified price.

No performance, such as the payment of funds of goods, need take place for a bilateral to

be formed.

The contract comes into existence at the moment then promises are exchanged.

Unilateral Contracts

Unilateral Contracts: If the offer is phrased so that the offeree can accept only but completing

the contract performance.

A Unilateral Contract us a "promises for an act." The contact is formed not at the

moments when promises are exchanged but rather when the contact is performed.

Contests, lotteries, and other competitions involving prizes are examples of offers to form

unilateral contracts.

Of a person complies with the rules of the contest such as submitting the right lottery

number at the right place at time.

A unilateral contact is formed, binding the organization offering the prize to a contract to

perform as promises in the offer.

If the person fails to comply with the contest rules, however no binding contract is

formed.

Revocation of Offers for Unilateral Contracts.

A problem arises in unilateral contracts when the promisor attempts to revoke (cancel) the offer

the promise has begun but before the act has been completed.

In Contract law, offer normally are revocable (capable of being taken back, or canceled) until

accepted.

The revocation of an offer to form a unilateral contract can have a harsh effect on the offeree, the

modern day view is that once performance has been substantially undertaken, the offeror cannot

revoke the offer.

b) Formal versus Informal Contracts.

Formal Contracts: require a special form or method of formation to be enforceable. For

example: letter of credit, which frequently are used in international sales contracts are a type of

formal contract because a special form and language are required to create them.

Informal Contracts: Also, called simple contract includes all other contracts. No special

required (except for certain types of contracts that must be writing). As the contracts usually are

based on their substance rather than their form.

Businesspersons put their contracts in writing to ensure that there is some proof of

a contract's existence should problem arise.

c) Express Versus Implied Contracts

Express Contracts: the terms of the agreement are fully and explicitly stated in words, oral or

written. A signed lease for an apartment or a house is an express written contract.

Implied Contract: a contract that we 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 at least some of the terms of

the contract.

If the following requirements are met, a court will hold that an implied contract

was formed.

i. The plaintiff furnished some service or property.

ii. The plaintiff expected to be paid for that service or property, and the

defendant knew or should have know that payment was excepted ( by

using theory-of-contracts test)

iii. The defendant had a chance to reject the services or property and did not.

2. Contract Performance

Contracts are also classified according to their state of performance.

Executed Contract: a contract that has been fully performed on both sides.

Executory Contract: a contract that has not been fully performed on either side.

If one arty has fully performed but the other has not, the contract is said to be executed on the

one side and executory on the other, but the contract is still classified as executory.

3. Contract Enforceability

A Valid Contract has four elements for contract formation:

i. An agreement (offer and acceptance)

ii. Supported by legally sufficient consideration

iii. For a legal purpose

iv. Made by parties who have the legal capacity to enter into the contract.

a. Voidable Contracts

Voidable Contract is a valid contract but one that can be avoided at the option of one or both

parties.

The party having the option can elect either to avoid any duty to perform or to ratify

(make valid) the contract.

If the contract is avoided, both parties are released from it. If it is ratified, both parties

must fully perform their respective legal obligations.

Contracts made by minors are voidable at the option of the minor. Contracts entered into

under fraudulent conditions are voidable at the option of the defrauded party.

Contracts entered into under legally defined duress or undue influence is also voidable.

b. Unenforceable Contracts

Unenforceable Contract is one that cannot be enforced because of certain legal defenses against

it.

A contract is valid in that it satisfied the legal requirements of a contract, but it has been rendered

unenforceable by some state statute law.

c. Void Contracts

Void Contract is no contract at all. The term Void and Contract are contradictory. None of the

parties has any legal obligations if a contract is void.

A contract can be void because, one of the parties was previously determined by a court legally

insane (and thus lacked the legal capacity to enter into a contract) or because the purpose of the

contract was illegal.

III. Agreement

Agreement: the parties must agree on the terms of the contract. Agreement is evidence by two

events: an offer and an acceptance.

1. Requirements of the Offer

An offer is a promise or commitment to perform or refrain from performing some

specified act in the future. Three elements are necessary for an offer to e effective:

i. There must be a serious, objective intention by the offeror.

ii. The terms of the offer must be reasonably certain, or definite, so that the

parties and the court can ascertain the terms of the contract.

iii. The offer must be communicated to the offeree.

Once effective offer has been made, the offeree's acceptance of that offer creates a legally

binding contact (providing the other essential elements for a valid and enforceable

contracts are present.)

a. Intention

The first requirement for an effective is a serious, objective intention on the part of the

offeror.

Intent is not determined by subjective intentions, beliefs, or assumptions of the offeror.

It is determined by what a reasonable person in the offeree's position would conclude the

offeror's words and actions meant.

Offer made in obvious anger, jets, or undue excitements do not meet the serious and

objective intent test. These offers are not effective; an offeree's acceptance does not

create an agreement.

The concept of intention can be further clarified through an examination of the types of

statements that are not offers.

The court considered whether an offer made "after a few drink" met the serious intent

requirement.

Express of Opinion

o An express of opinion is not an offer. It does not demonstrate an intention to enter into a

binding agreement.

Statements of Future Intent

o A statement of an intention to do something in the future is not an offer

Preliminary Negotiations

o A request or invitation to negotiate is not an offer but only an expression of a willing to

discuss the possibility of entering into a contract.

The invitation to submit bids is not an offer, and a contractor does not bind the government or

private firm by submitting a bid. (The bids that the contractor submits are offers; however, the

government or private firm can bind the contractor by accepting the bid.)

Advertisements, Catalogues, and Circulars

o Advertisements, mail-order catalogues, price lists, and circular letters (meant for the

public) are treated as invitations to negotiate, not as offers to form a contract.

o Price List is another form of invitation to negotiate or trade. A seller's price list is not an

offer to sell at that price but merely an invitation to the buyer to offer to buy at that price.

o The seller puts "price subject to change" on the price list.

o Although most advertisement can never be offer. Some occasions courts have construed

advertisement to be offers because the ads contained definite terms that invited

acceptance (such as an ad offering a reward for the return of a lost dog)

Agreement to agree

Agreement to agree: that is agreements to agree to the material terms of a contract at

some future date, were not considered to be binding contracts.

The modern view is that agreements to agree may be enforceable agreements (contracts)

if it is clear the parties intend to be bound by the agreements.

Under the modern view the emphasis is one the parties' intent rather than on form.

b. Definiteness

The second requirement for an effective involves the definiteness of it terms.

o An offer must have reasonably definite terms so that a court can determine if a breach has

occurred and give an appropriate remedy.

o The specific terms required depend on the type of contract.

o A contract must include the following terms, either expressed in the contract or capable

of being reasonable inferred from it:

i. The identification of the parties.

ii. The identification of the object or subject matter of the contract (also the quantity

when appropriate), including the work to be performed, with specific

identification of such items as goods, services, and land.

iii. The consideration to be paid.

iv. The time of payment delivery or performance.

o An offer invite an acceptance to be worded in such specific terms that the contract is

made definite.

c. Communication

The third requirement - the offer must be communicated to the offeree.

2. Termination of the Offer

The communication of an effective to an offeree gives the offeree the power to transform

the offer into a binding, legal obligation (a contract) by an acceptance.

This power does not continue forever. It can be terminated by either the action of the

parties or operation of law.

Termination by the action of the parties can involve a revocation by the offeror or a

rejection or counteroffer by the offeree.

a. Termination by Action of the Offeror

Revocation : The offerer's act of withdrawing an offer, unless the offer is irrevocable, it can be

revoke at any time prior to acceptance without liability.

Revocation may be accomplished by an express reputation of the offer or by the

performance of acts that are inconsistent with the existence of the offer and that are made

known to the offeree

Example: with a statement such as "I withdraw my previous offer of October 17."

The general rule followed by most states is that a revocation becomes effective when the offeree

or the offeree's agent actually receives it

b. Termination by Action of the Offeree

o If the offeree rejects the offer by words or by conduct the offer is terminated . Any

subsequent attempt by the offeree to accept will be construed as a new offer, giving the

original offeror (now the offeree) the power of acceptance.

o A reject of an offer is effective only when it is actually received by the offeror or the

offeror's agent.

Counteroffer: a rejection of the original offer and the simultaneous making of a new offer.

Mirror Image Rule: requires that the offeree's acceptance match the offeror's offer exactly.

The terms of the acceptance must "mirror" those of the offer.

If the acceptance materially changes or adds to the terms of the original offer, it will be

considered not an acceptance but a counteroffer which need not to be acceoted.

The original offeror can accept the terms of the counteroffer and create a valid contract.

c. Termination by Operation of Law

o The power of the offeree to transform the offer into a binding, legal obligation can be

terminated by operation of law through the occurrence of any following events:

i. Lapse of time

ii. Destruction of the specific subject matter of the offer.

iii. Death or incompetence of the offeror the offeree

iv. Supervening illegality of the proposed contract. ( A state or court decision that

makes an offer illegal automatically terminates the offer.)

o An offer terminates automatically by law when the period of time specified in the offer

has passed.

o If the offer does not specify a time for acceptance, the offer terminated at the end of a

reasonable period of time, which is determined by the subject matter of the contract,

business and market conditions, and other relevant circumstances.

d. Irrevocable Offers

Although most offers are revocable, some can be made irrevocable.

Courts refuse to allow an offer to revoke an offer when the offeree has changed position because

of justifiable reliance on the offer (under the doctrine of promissory estoppels.)

In some circumstances "firm offers" made by merchants may also be considered irrevocable.

o Another form of irrevocable offer is option contract. Option Contract is created when

an offeror promises to hold an offer open for a specific period of time in return for a

payment (consideration) given by the offeree.

An option Contract takes away the offeror's power to revoke an offer for the

period of time specified in the option.

If no time is specified, then a reasonable period of time is implied.

Option Contract frequently are used in conjunction with the sale of real estate.

3. Acceptance

Acceptance is a voluntary act by the offeree that shows assent, or agreement, to the terms of an

offer.

The offeree's act may consists of words or conduct. The acceptance must be unequivocal and

must be communicated to the offeror.

Only the person to whom the offer is made or that person's agent can accept the offer and create

a binding contract.

a. Unequivocal Acceptance.

The offeree must accept unequivocally. This is the mirror image rule.

If the acceptance is subject to new conditions or of its terms materially change the

original offer, the acceptance may be deemed a counteroffer that implicitly reject the

original offer.

The acceptance is effective without the written contract.

b. Silence as Acceptance

Silence cannot constitute acceptance, even of the offeror state," by your silence ad

inaction, you will be deemed to have accepted this offer."

This rule applies because an offeree should not be put under burden of liability to act

affirmatively in order to reject an offer.

No consideration that is nothing of value has passed to the offeree to impose such as a

liability.

The offeree does have a duty to speak

If his/her silence or inaction will operate as an acceptance. Silence may be an acceptance

when an offeree takes the benefit of offered services even though he/she had an

opportunity to reject them and knew that they were offered with the expectation of

compensation.

Silence can operate as an acceptance when the offeree has had prior dealings with the

offeror.

If a buyer solicits an offer specifying that certain terms and conditions are acceptance,

and the seller makes the offer in response to the solicitation, the buyer has a duty to

reject. That is a duty to tell the seller that the offer is not acceptable. Failure to reject

(silence) will operate as an acceptance.

c. Communication of Acceptance

o In a bilateral contract, communication of acceptance is necessary because acceptance is

in th form of a promise (not performance), and the contract is formed when the promise is

made (rather than when the act is performed.)

o Communication of Acceptance is not necessary if the offer dispenses with the

requirement, or if the offer can be acceptance is usually evident, and notification is

unnecessary.

o Exceptions do exist, such as when the offeror requests notice of acceptance or has now

way of determining whether the requested act has been performed.

o The court had to decide whether a party's failure to respond to a settlement offer

constituted acceptance.

d. More and Timeline of Acceptance

Acceptance in bilateral contract is timely if it is made before the offer is terminated.

Problems arise when the parties involved are not dealing face to face. The offeree should use an

authorized mode of communication.

The Mailbox Rule

The Mailbox Rule also called the Deposited Acceptance Rule which the majority of

courts follow. If the authorized mode of communications is the mail, then an acceptance

becomes valid when it is dispatched ( placed in the control of the U.S Postal Service) not

when it is received by the offeror.

The mailbox rule does not apply to instantaneous forms of communication, such as face

to face, telephone, or fax.

If the parties have agree to conduct transactions electronically and if the Uniform

Electronic Transactions Act ( UETA) applies, the email is considered sent when it either

leaves the sender's control or received by the recipient.

This rule takes the place of the mailbox rule when the UETA applies, essentially allows

an email acceptance to become effective when sent ( as it would if sent by the U.S mail.)

Authorized Means of Communication

A means of communicating acceptance can be expressly authorized by the offeror or

impliedly authorized by the facts and circumstances surrounding the situation.

An acceptance sent by means not expressly or impliedly authorized normaly is not

effective until it is received by the offer.

If the offeror does not expressly authorize a certain mode of acceptance, then acceptance

can be made by any reasonable means.

Courts look at the prevailing business usages and the surrounding circumstances to

determine whether the mode of acceptance used was reasonable .

The offeror's choice of a particular means in making the offer implies that the offeree can

use the same or faster means for acceptance.

If the offer is made via priority mail, it would be reasonable to accept the offer via

priority mail by a faster method, such as by fax or overnight delivery.

Substitute Method of Acceptance

If the offeror authorizes a particular method of acceptance, but the offeree accepts by a different

means, the acceptance may still be effective if the substitute method serves the same purpose as

the authorized means.

The use of a substitute method of acceptance is not effective on dispatch, , though, and no

contract will be formed until acceptance is received by the offeror.

IV. E- Contracts

Electronic contracts, or e-contracts, must meet the same basic requirement ( agreement,

consideration, capacity, and legality) as paper contracts. Disputes concerning e-contracts tend to

center on contract terms and whether the parties voluntarily agreed those terms.

E-Contracts: A contract is formed electronically.

Online contracts may be formed not only for the sale of goods and services but also for licensing.

The "sale" of software generally involves a license, or a right to use the software, rather than the

passage of title (ownership rights) from the seller to the buyer.

We refer to the offeror and offeree as a seller and buyer in many online transactions these parties

would be more accurately described as a licensor and licensee.

1) Online Offers

a. Displaying the Offer

The seller's Website should include a hypertext link to a page containing the full contract so that

potential buyers are made aware of the terms to which they are assenting.

All provisions should be reasonably clear.

b. Provision to Include

An important rule to keep in mind is that the offeror controls the offer and thus resulting

contract.

The seller should therefore determine the terms she or he wants to include in a contract and

provide for them in the offer. In some instances, a standardized contract form may suffice.

An online offer contract should include:

1. A clause that clearly indicates what constitutes the buyer's agreement to the terms of the

offer, such as a box containing the words "I accept" that the buyer can click on to indicate

acceptance.

2. A provision specifying how payment for the goods ( including any applicable taxes) must

be made.

3. A statement of the seller's return and return policies.

4. Disclaimers of liability for certain uses of the goods. For example, an online seller of

business forms may add a disclaimer that the seller does not accept responsibility for the

buyer's reliance on the forms rather than on an attorney's advice.

5. A provision specifying the remedies available to the buyer if the goods are found to be

defective or if the contract is otherwise breached. Any limitation of remedies should be

clearly spelled out.

6. A statement indicating how the seller will use the information gathered about the buyer.

7. Provision relating to dispute settlement, such as an arbitration clause or a forum selection

clause.

c. Dispute-Settlement Provisions

Forum Selection Clause: indicating the forum, or location(such as a court or jurisdiction) for the

resolution of any dispute arising under the contract. Significant jurisdictional issues may occur

when parties are at a great distance, as they often are when they form contracts via the Internet.

A forum selection clause will help to avert future jurisdictional problems and also help to ensure

that the seller will not be required to appear in court in a distant state.

Online Contracts may also include a choice of law clause specifying that any dispute arising out

of the contract will be settled in accordance with the law of a particular jurisdiction, such as a

state or country.

Choice-of-law clause are particularly common in international contracts, but they may also

appears in e-contract to specify which state's law will govern in the U.S

2) Online Acceptances

The Restatement ( second) of Contracts states that parties may agree to contract " by written or

spoken words or by other actions or by failure to act."

a. Click - On Agreement

o The courts have used these provision conclude that a binding contract can be created by

conduct, including the act of clicking on a box indicating " I accept" or " I agree" to

accept an online offer.

o The agreement resulting from such as acceptance is often called a click on agreement.

o The law does not require that the parties have read all the terms in a contract for it be

effective.

o The terms may be contained on a website.

b. Shrink-Wrap Agreements.

Shrink Wrap Agreement ( shrink wrap license) is an agreement whose term are expressed

inside a box in which the goods are packaged. (the term shrink wrap refers to the plastic that

cover the box).

The party who opens the box is told that he/she agrees to the terms by keeping whatever is in the

box.

Similar when purchaser open a software package, he/she agrees to abide by the terms of the

limited license agreement.

A shrink-wrap agreement is not between a retailer and a buyer, but between the manufacturer of

the hardware or software and the ultimate buyer user of the product.

The terms concern warranties, remedies, and other issues associated with the use if the product.

Shrink-Wrap Agreements and Enforceable Contract Terms

Court have enforced the terms of shrink-wrap agreements in the same way as the terms of

other contracts.

These courts have reasoned that by including the terms with the product, the seller

proposed a contract that the buyer could accept by using the product after having an

opportunity to read the terms.

Shrink-Wrap Terms That May Not be Enforced

Sometime courts have refused to enforce certain terms in shrink-wrap agreements

because the buyer did not expressly consent to them. An important factor is when the

parties form their contract.

If the clause are included in the shrink-wrap agreement a court may conclude that they

are proposals for additional terms, and not part of the original contract , because the

buyer did not discover them until after contract was formed.

c. Browse-Wrap Terms

Browse-Wrap Terms can occur in a transaction conducted over the Internet.

o Browse-Wrap Terms DO NOT require an Internet user to assent to the terms before say,

downloading or using certain software.

o A person can install the software without clicking " I agree" to the terms of a license.

o Browse-Wrap terms are often enforceable because they do not satisfy the agreement

requirement of contract formation.

3) E- Signature Technologies

E-Signature define as " an electronic sound , symbol, or process attached to or logically

associated with a record and executed or adopted by a person with the intent to sign the record.

E-Signatures include encrypted digital signatures, names (intended as signature) at the ends of

email messages, and "clicks" on a web page of the click includes the identification of the person.

Two categorizes Digitized Handwritten Signatures and digital signature based on public-key

infrastructure.

o Digitized Signature is graphical image of a handwritten signature that is often

created using a digital pen and pad, such as an ePad, and special software. The

stroke of a person's signature (this is referred to as signature dynamics.)

In a public key infrastructure ( such as an asymmetric cryptosystem) two mathematically

linked but different keys are generated a private signing key and a public validation key.

o Digital Signature is created when the signer uses the private key to create a

unique mark on an electronic document.

o Cybernotary or legally recognized certification authority, issues the key pair,

identified the owner of the keys, and certified the validity of the public key.

The Cybernotary also serves as a repository for public keys.

4) Federal Law on E-Signature and E-Documents

Congress enacted the Electronic Signature in Global and National Commerce Acts ( E-

SIGN Act) which provides that no contract, record, or signature may be "denied legal

effect" solely because it is in electronic form.

An electronic signature is as valid as a signature in paper, and an e-document can be as

enforceable as a paper one.

For an e-signature to be enforceable, the contracting parties must have agree to use

electronic signatures.

For an electronic document to be valid, it must be in a form that can be retained and

accurately reproduced.

The E-SIGN does not apply to all types of documents. Courts papers divorce decrees,

evictions, foreclosure, health - insurance terminations, prenuptial agreement, and wills

are exempt.

Despites these limitations, the E-SIGN Act significantly expanded the possibilities for

contracting online.

One provision of the FACT act involves how credit card receipts should be handle to

avoid fraud.

5) Partnering Agreement

To prevent disputes over signatures in the E- Contracts is to form partnering agreement.

o Partnering Agreement : a seller and buyer who frequently do business with each other

agree in advance on the terms and conditions that will apply to all transactions

subsequently conducted electronically.

The partnering agreement can also establish special access and identification

codes to be used by the parties when transacting business electronically.

A partnering agreement reduces the likelihood that disputes will arise under the

contract because the buyers and the sellers have agree in advance to the terms and

conditions that will accompany each sale.

If the dispute does arise, a court or arbitration forum will be able to refer to the

partnering agreement when determining the parties' intent.

V. The Uniform Electronic Transactions Act

o In 1999 the National Conference of Commissioners on Uniform State Laws and the

American Institute promulgated the Uniform Electronic Transaction Act (UETA). To

date, the UETA has been adopted, at least in apart by 48 states.

o The primary purpose of the UETA is to remove barriers to ecommerce by giving the

same legal effect to electronic records and signatures as is given to paper documents and

signatures.

o The UETA broadly defines an e- signature as “an electronic sound, symbol or process

attached to or logically associated with a record and executed or adopted by a person with

the intent to sign the record.

Record: is :information that is inscribed on a tangible medium or that is stored in an

electronic or other medium and is retrievable n perceivable (visual) form.

o The UETA does not create new rules for electronic contracts but rather establishes that

records, signatures, and contracts may not be denied enforceability solely due to their

electronic form.

o It also does not apply to all writing and signatures. It covers only electronic records and

electronic signatures relating to a transaction.

Transaction is defined as an interaction between 2 or more people

relating to business, commercial, or governmental activities.

o In addition, the provision of the UETA allow the states to exclude its application to others

areas of law.

1) The Federal E-SIGN Act and the UETA

The E-SIGN Acts refers explicitly to the UETA and provides that if a state has enacted

the uniform version of the UETA, it is not preempted by the E-SIGN Act.

If the state has enacted the UETA without modification, state law will govern.

The E-SIGN Act specifies that those exclusions will be preempted to the extent that they

are inconsistent with the E-SIGN Act's provisions.

The E-SIGN Act explicitly allows the states to enact alternative requirements for the use

of the electronic records or electronic signatures.

The requirements must be consistent with the provision of the E-SIGN Act, and the state

must not give greater legal status or effect to one specific type of technology.

If a state enacts alternative requirements after the E-SIGN Act was adopted, the state law

must specifically refer to the E-SIGN Act.

2) Highlights of the UETA

The UETA will not apply to a transaction unless each of the parties has previously agreed

to conduct by electronic means.

The agreement need not be explicit, and it may be implied by the conduct of the parties

the surrounding circumstances.

It may be reasonable to infer that a person who gives out a business card with an email

address on it has consented to transact business electronically.

The party's agreement may be inferred from a letter or other writing, as well as from

some verbal communication.

A person who has previously agreed to an electronic transaction can also withdraw

his/her consent and refuse to conduct further business electronically.

If an electronic record or signature is the act of a particular person, the record of signature

may be attributed to that person.

If a person types her/his name at the bottom of an email purchase order, that name will

qualify as a "signature" and be attributed to the person whose name appears.

Note: the UETA states that the effect of a record is to be determined from the context and

surrounding circumstances. A record may have legal effect even of no one has signed it.

UETA does not contain any express provision about what constitutes fraud or whether an

agent is authorized to enter a contract.

Under the UETA, other state laws control if any issues requires a document to be

notarized, the UETA provides that this requirement is satisfied by the electronic signature

of a notary public or other person authorized to verify signatures.

VI. Consideration

Consideration : the value (such as cash) given in return for a promise (in a bilateral contract) or

in return for a performance ( in a unilateral contract.)

1) Elements of Consideration

a. Legally Sufficient Value

The something of legally sufficient value" may consist of

i. A promise to do something that one has no prior legal duty to do

ii. The performance of an action that one is otherwise not obligated to undertake

iii. The refraining from an action that one has a legal right to undertake (called a

forbearance)

In contracts, unilateral involve a promise in return for a performance.

In most situations, such forbearance constitutes legally sufficient consideration for a promise.

b. Bargained for Exchange

It must provide the basic for the bargain struck between the contracting parties. The

iterms of value must be given promised by the promisor (offeror) in return for the

promisee's promise, performance, or promise of performance.

This element of bargained for exchange distinguishes contracts from gifts.

2) Adequacy of Consideration

o Adequacy of Consideration involves how much consideration is given. It concerns the

fairness of the bargain .

o When the items exchanged are of unequal value, fairness would appear to be an issue.

o A court generally will not question the adequacy of consideration based solely on a

comparison of values of the things exchanged. Something need not be direct economic or

financial value to be regarded as legally sufficient consideration.

o Under the doctrine of freedom contract, courts leave it up to the parties to decide what

something is worth, and parties usually are free bargain as they wish.

o If people could sue merely because they had entered into an unwise contract, the courts

would be overloaded with frivolous suits.

o A large disparity in the amount or value of the consideration exchanged may raise a red

flag, causing a court to look closely at the bargain.

o This is because shockingly inadequate consideration can indicate that fraud, duress or

undue influence was involved of that the element of bargained for exchange was lacking.

3) Agreement that Lack Consideration.

a. Preexisting Duty

A promise to do what one already has a legal duty to do does not constitute legally sufficient

consideration. Preexisting legal duty may be imposed by law or may arise out of a previous

contract.

If a party is already bound by contract to perform a certain duty that duty cannot serve as

consideration for a second contract.

The agreement s unenforceable because it is not supported by legal sufficient consideration.

Unforeseen Difficulties.

The preexisting duty rule is intended to prevent extortion and the "holdup game." During

performance of a contract, extraordinary difficulties arise that were totally unforeseen at the time

the contract was formed, a court may allow an exception to the rule.

Rescission and New Contract

The law recognizes that two parties can mutually agree to rescind, or cancel their contract, at

least to the extent that it is executory (still t be carried out.)

Rescission: a remedy whereby a contract s canceled and the parties are returned to the

positions they occupied before the contract was made, may be effected through the mutual

consent of the parties, by their conduct, or by court decree.

Parties rescind a contract and made a new contract at the same time. This occurs, it is often

difficult to determine whether there was consideration for the new contract, or whether the

parties had a preexisting duty under the previous contract.

If a court finds there was a preexisting duty, then the new contract will be invalid because there

was no consideration.

b. Past Consideration

Promise made in return actions or event that have already taken place are unenforceable.

A person can bargain for something to take place now or in the future but not for something that

has already taken place. Past consideration is no consideration.

4) Promissory Estoppel

o Promissory Estoppels ( detrimental reliance) A doctrine that applies when a promisor

makes a clear and definite promise on which the promisee justifiably relies, such as a

promise is binding if justice will be better served by the enforcement of the promise.

i. There must be a clear and definite promise

ii. The promisor should have expected that the promisee would rely on the promise.

iii. The promisee reasonably relied on the promise by acting or refraining from some

act.

iv. The promisee's reliance was definite and resulting detriment.

v. Enforcement of the promise is necessary to avoid injustice.

If the requirement are met, a promise may be enforced even though it is not supported by

consideration.

The promisor will be estopped (prevented) from asserting the lack of consideration as a

defense.

VII. Contractual Capacity

Contractual Capacity: the threshold mental capacity requirement by the law for a party who

enters into a contract to be bound by that contract.

1) Minors

Contractual purposes is eighteen years.

Minority status may also terminated by a minor's emancipation., which occurs when a

child's parent o legal guardian relinquishes the legal right to exercise control over the

child. Minors who leave home to support themselves are considered emancipated.

The general rule is that a minor can enter into any contract that an adult can, provided

that the contract is not one prohibited by ;aw for minors (exp: the sale of tobacco). A

contract entered into by a minor is avoidable a the option of that minor, subject to certain

exceptions.

The legal avoidance, or setting aside, of a contractual obligation is referred to as

disaffirmance. To disaffirm, a minor must express his/her intent, through words or

conduct, not to be bound to the contract. The minor must disaffirm the entire contract, not

merely a portion

2) Intoxication

o Intoxication is a condition in which as person's normal capacity to act or think is inhibited

by alcohol or some other drug.

o If a person was sufficient intoxicated to lack mental capacity, the agreement may be

voidable even if the intoxication was purely voluntary.

o If, despite intoxication, the person understood the legal consequences of the agreement,

the contract will be enforceable.

3) Mental Incompetence

If a court has previous determined that a person is mentally incompetence and has

appointed a guardian to represent the individual, any contract made by the mentally

incompetence person is void, no contract exists. Only the guardian can enter into binding

legal obligations on behalf of the mentally incompetent person.

If a court has not previous judged a person to be mentally incompetent, the contract may

be voidable if the person did not know he/she was entering into the contract or lacked the

mental capacity to comprehend its nature, purpose, and consequences.

A contract entered into by a mentally incompetent person may also be valid person had

capacity at the time the contract was formed.

VIII. Legality

A contract to do something that is prohibited by federal or state statutory law is illegal and, as

such, void from the outset and thus unenforceable.

A contract or a clause in a contract can also be illegal even in the absence of a specific statute

prohibiting the action promised by the contract.

A contract to commit a tortious act such as an agreement to engage in fraudulent

misrepresentation - is contrary to public policy and therefore illegal and unenforceable.

1. Contracts Contrary to Statute

A contract to sell illegal drugs in violation of the Sarbanes - Oxley Act. A contract to smuggle

undocumented workers from another country into the United States for an employer is illegal.

A contract to dump hazardous waste in violation. Of environmental laws.

Of the object or performance of the contract is rendered illegal by statute after the contract has

been entered into the contract is contract is considered to be discharged by law.

a) Usury

A letter who makes a loan at an interest rate above the lawful maximum commits usury.

Usurious contracts are illegal, most state simply limit the interest that the lender may collect on

the contract to the lawful maximum interest rate in that state.

b) Gambling

Gambling is the creation of risk for the purpose of assuming it. The states have deemed gambling

contracts illegal and thus void.

c) Licensing Statutes

Certain professions including physicians, lawyers, real estate brokers, accountants, architects,

electricians, and stock brokers to have license.

Some licenses are obtained only after extensive schooling and examination which indicate to the

public that a special skill has been acquired.

2. Contracts Contrary to Public Policy

a. Contracts in Restraint of Trade

Contracts in restraint of trade (anticompetitive agreements) usually adversely affect

public policy that favors competition in the economy.

An exception recognized when the restraint is reasonable and is contained in an ancillary

(secondary or subordinate) clause in a contract. Such restraints often are included in

contracts for the sale of an ongoing business and employment contracts.

Covenants not to compete and the sale of an ongoing business

Covenants Not to Compete and the Sale of an Ongoing Business

A covenant not to compete may be created when a seller agrees not to open a new store in

a certain geographic area surrounding the old store.

Covenants Not to Compete in Employment Contracts

Agreements not to compete (also referred to as non-compete agreements) are included in

employment contracts.

Depending on the jurisdiction, courts will reform covenants not to compete to make the

terms more reasonable and then enforce the reformed covenant. Court usually resort to

contract reformation only when necessary to prevent undue burdens or hardships.

b. Unconscionable Contracts

Persons are assumed to be reasonable intelligent, and the courts will not come to their aid just

because they have made an unwise bargain.

Unconscionable: A contract that is void on the basic of public policy because one party, as a

result of his/her disproportionate bargaining power, is forced to accept terms that are unfairly

burdensome and that unfairly benefit the dominating party.

Procedural Unconscionability

Procedural unconscionability often involves inconspicuous print, unintelligible language

(legalese), or the lack of an opportunity to read the contract or ask questions about its meaning.

It can also occur when there is such disparity in bargaining power between the two parties that

the weaker party’s consent is not voluntary.

Adhesion Contract is written exclusively by one party (usually, the seller or creditor) and

presented to the other (usually, the buyer or borrower) on a take it or leave it basic.

Substantive unconscionability characterizes contracts that are oppressive or overly harsh. Court

generally focuses on provisions that deprive one party of the benefits of the agreement or leave

that party without a remedy for nonperformance by the other.

c. Exculpatory Clauses

Often closely related to the concept of unconscionability are exculpatory clauses, which release a

party from liability in the event of monetary or physical injury no matter who is at fault.

Exculpatory clauses found in rental agreements for commercial property frequently are held to

be contrary to public policy, and such clauses are almost always uncomforceable in residential.