CONTRACTS. CHAPTER 4: What is a Contract? Contract is any agreement enforceable by law. Not all agreements are contracts Agreeing to take out the trash.

CONTRACTS

CHAPTER 4: What is a Contract?

• Contract is any agreement enforceable by law.• Not all agreements are contracts• Agreeing to take out the trash (not a contract)• Offering a reward in the newspaper for returning a lost

item (IS a contract)

•Each contract MUST have six (6) elements to be legal

Capacity Consideration

Elements of a Contract1) Offer- A proposal made by one party (the offeror) to another party (the

offeree) to create a legally binding agreement

2) Acceptance- The agreement of the offeree to go along with the first party’s proposal.

3) Genuine Agreement- Offer and acceptance go together to form a genuine agreement. A valid offer is met by a valid acceptance.• Circumstances that can destroy a genuine agreement:

• Fraud• Misrepresentation• Mistake• Undue Influence• Economic Distress

Elements of a Contract (Continued)

4) Capacity- The law assumes anyone entering into a contract has the legal capacity.

5) Consideration- The thing of value promised to one person in exchange for something else. (Ex. I offer you $10 for your phone case the consideration is the $10 and the phone case)

6) Legality- Can not enter into contracts involving illegal goods or acts. - Ex. Bob signs a contract to produce X amount of drugs to Mike for X amount of dollars each week. Contract is NOT valid/legal.

Not Legal Capable to enter into a contract

Minors

Mentally Impaired People

Person under influence of drugs or alcohol

CHARACTERISTICS of a Contract• Contract can have any of the following characteristics:

1) Valid, Void, Voidable, or Unenforceable2) Express or Implied3) Bilateral or Unilateral4) Oral or Written

• Contracts can have characteristics from one or more of these categories

• EX. A contract can be Valid, Express, Bilateral and Written

Valid, Void, Voidable and Unenforceable • Contracts may be Valid, Void, Voidable or Unenforceable

• Valid- a contract that is legally good (legally binding)

• Void- a contract lacks one or more of the elements of a contract.• Has no legal effect• Ex. Contract that involves something illegal

• Voidable- Either party can cancel the contract for a legal reason.• Ex. A contract between two minors is a voidable contract because minors have the right to get out of

contracts. (Reason why most companies require someone over 18 to sign a contract).

• Unenforceable- a contract that will not hold up in court, usually because of some rule of law. • Ex. Wait to long to sue someone for breach of contract, statute of limitations may have run out and

now it is unenforceable.

EXPRESS or IMPLIED• A contract may be Express or Implied

• Express- a contract statement that may be oral or written• Most contracts are express

• Implied- contract that comes about from the actions of the parties (no words are required).• Ex. You go to a gas station, hand the tenant a $20 bill. You go back to your car and pump $20 worth of

gas and leave. Neither of you needed to speak to each other but it was implied that both parties entered into a contract involving exchange of gas for money.

BILATERAL or UNILATERAL

• Contracts may be Unilateral or Bilateral

• Bilateral- both parties promise to do something• One party promises to do something in exchange for the other’s promise to do something else.• Most contracts are bilateral

• Unilateral- one party promises to do something only if the other party does something• A person says they will sell you their car for $2,000 if you pay in cash by Friday afternoon. If you do

not have the cash by then, the person is not required to keep their promise. • A reward in a newspaper is another example. The reward is only required to be given if you return

whatever they are offering a reward for.

ORAL or WRITTEN• Contracts can be Oral or Written

• Oral- created by word of mouth• Both parties agree to do something, but nothing is written down• Can be hard to prove if there is ever a dispute

• Written- contract is put into writing• Safer due to hard evidence of an agreement or contract• Both parties know the exact terms due to it being in writing• Statue of Frauds (a law)- requires certain contracts must be in writing to be enforceable.

4.2

HOW A CONTRACT BEGINS

Requirements of an Offer

• An offer has 3 basic requirements:

Made Seriously

Definite and Certain

Communicated to the offeree

Serious Intent

• An offer must be made with Serious Intent to enter into a legal obligation

• An offer made as a joke, or in anger, would not meet this requirement.

• Ex. If you are at the park and your friend says he will hit a full court shot. You jokingly tell him, “I’ll give you $1,000 if you hit that shot”. He shoots it and makes it. You never made that offer with serious intent so you are not obligated to pay.

Invitation to Negotiate

• Invitation to negotiate- invitations to deal, trade, or make an offer• Often an invitation to negotiate is confused with an offer.• Invitations to negotiate are associated with businesses and ads they put out

• Most ads are treated as invitations to negotiate because:• Sellers usually have limited merchandise• Can not possibly sell one to everyone who sees the ad

• The law treats the ad as an invitation to negotiate and not as an offer

• The actual offer comes when the customer attempts to buy the item.

Invitation to Negotiate (continued)

• The ad below is an invitation to negotiate

• Offer begins when the customer offers to make a purchase

• Store owner can accept or reject the offer

• The ad below is NOT an invitation to negotiate

• Due to the fact that it is very definite (has an exact date and time) it is treated as an offer.

• Once the customer comes in to make a purchase, they are accepting the offer and a contract is formed.

Invitation to Negotiate

• Courts consider some ads as offers when:• Contain specific promises• Use phrases like “first come, first served”• Limit the number of items that will be sold

• Ad becomes an offer because the number of people who can buy the product becomes limited

• Examples of invitations to negotiate are: • Price tags• Signs in store windows and counters

Definiteness and Certainty

• An offer must be Definite and Certain to be enforceable

• Example of an offer that is definite and certain:• I will buy your iPhone for $200 in two weeks.

• This offer is legally valid because it is definite. If you accept you know you will receive $200 in two weeks in exchange for your iPhone.

• Example of an offer that is NOT definite and certain:• I will buy your iPhone for a reasonable amount at some time in the future.

• This is not legally valid because “reasonable amount” and “some time in the future” are not definite and certain.

Communication to the Offeree

• An offer can not be made if it is not communicated to the other party

• Offers may be made by:• Telephone• Letter• Telegram• Fax• Email• Social Media• Any other method that communicates the offer to the offeree

Termination of an Offer

Even if an offer has been communicated properly, it can still be terminated.

Ways an offer may be terminated:1) Revocation2) Rejection3) Counteroffer4) Expiration of Time5) Death or Insanity

REVOCATION

Revocation- taking back of an offer by the offeror• The offeror can decide to withdraw the offer before it has been accepted

Two important rules regarding revocation:1) An offer can be revoked any time before it has is accepted2) A revocation becomes effective when it is received by or communicated to

the offeree.

REJECTION

Rejection- a refusal of an offer by the offeree. This refusal brings the offer to an end.

Ex. Your friend- “I’ll sell you my iPhone 6 for $500.” You- “No, I don’t want your iPhone.”

That is a rejection and the offer is over.

COUNTEROFFER

Counteroffer ends the first offer, but starts a separate offer.• Also causes the original offeror and offeree to switch roles.

Ex. Your friend (offeror)- “I’ll sell you my iPhone 6 for $500.” You (offerree)- “I’ll give you $300 for it.”

You have just made a counteroffer. The first offer is over and a new offer is on the table. Since you now made the offer, you become the offeror and your friend changes from the offeror to the offeree.

EXPIRATION OF TIME

The offeror may set a time limit for the acceptance of the offer. • This time limit MUST be honored.

Ex. You offer to sell your iPhone to your friend for $400. Your friend says he will buy it but won’t have the money until Saturday. You agree to wait until Saturday.• If your friend does not have the money by Saturday the offer has expired. • However, if on Friday someone tells you they will give you $600 for the phone and you

sell it, you have broken the deal and the contract.

EXPIRATION OF TIME (cont’d)

If no time limit is given, the offer must be accepted in a reasonable amount of time.• Reasonable amount of time depends on what is being offered.• Ex. A reasonable amount of time to accept an offer to buy a shipment of milk is

different than to buy a house. • The milk will only last so long before going bad, the house does not have that issue.

Death or Insanity

If the offeror dies or becomes insane before the offer is accepted, the offer is no longer valid.

Although death will end an offer, it DOES NOT end a contract.• Unless the contract is for personal services.

Ex. A music label may have a contract with you to take 15% of all your album sales. If you die, but you have 3 albums worth of songs recorded but not released yet, the company can sell the albums and still take their 15%.

If you had a contract to mow someone’s lawn for a year, if you die the contract is obviously over.