ES 2.00 UNDERSTAND
CONTRACT LAW
Obj. 2.01 Understand the elements and
characteristics of a contract
Elements of a Contract


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Offer
Acceptance
Genuine Agreement/Assent
Consideration
Capacity
Legality
All elements MUST be present to be an enforceable
contract.
Offer


An offer is a proposal by one party to another
intended to create a legally binding agreement.
The offer must be made seriously, definite and
certain and communicated to the offeree
Offer



Often a invitation to negotiate is confused with an
offer.
Invitations to negotiate are invitations to deal,
trade, or make an offer.
Sellers usually have limited merchandise to sell and
cannot possible sell an advertised product to
everyone who sees an ad. For this reason most
advertisements are not treated as offers
OFFER
Proposal by one party to another with intent to create a
legal binding agreement
 Offeror
 Makes
the offer
 Offeree
 Offer
made to this person
Requirements of an Offer

Serious Intent
Must intend to make the offer
 Advertisements?




Definite and Certain


No serious intent
Known as an invitation to negotiate
Must use definite words
Communicated to the Offeree

Phone, fax, Internet, letter, etc
Termination of Offer

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Revocation – Taking back of an offer by offeror
Rejection – Refusal by the offeree
Counteroffer – Any change in the terms of the offer
Death – Offeror dies
Insanity – Offeror is declared insane
Expiration of Time – If the offeror puts a time limit on
the offer and it has passed
Destruction of the subject matter
Options & Firm Offers


Option – the offeree gives the offeror something of
value in return for a promise to keep the offer open
for a set period of time
Firm Offer – a written offer for goods that states
the period of time during which the offer will stay
open
 No
additional consideration is required
 Maximum period of time set by the UCC – 3 months
 Offeror must be a merchant who deals in related
goods on a daily basis STOP HERE……WORK SHEET
Acceptance

An acceptance is the second party’s unqualified
willingness to go along with the first party’s
proposal.
ACCEPTANCE
•
Mirror Image Rule
•
•
Terms of the acceptance must match exactly (mirror)
the terms of the offer
Any change means there is no acceptance
(counteroffer)
Bilateral and unilateral contract


A bilateral contract is a contract that contains two
promises. Most are this way
Unilateral contract is a contract that contains a
promise by only one person to do something, if and
when the other party performs some act
Methods of Acceptance

Bilateral Acceptance
Offer is accepted by offeree through communication of the
promise to the offeror
 Only requires giving a promise to perform, not performance
itself
 Most offers are bilateral


Unilateral Acceptance


Offeror promises something in return for offeree’s
performance and indicates that performance represents
acceptance
Silence as Acceptance
Does not represent acceptance
 Offeror cannot word offer in a way that silence would be
considered acceptance STOP HERE WROKSHEET

Genuine Agreement

Genuine Agreement means that an agreement is
true and genuine: a valid offer is met by a valid
acceptance.
GENUINE AGREEMENT (ASSENT)

•
A valid offer has been made by the offeror, and a
valid acceptance has been exercised by the offeree
Several causes for genuine agreement to be
lacking in a contract
•
•
•
•
•
Duress
Undue Influence
Unilateral or Mutual Mistake
Innocent Misrepresentation
Fraudulent Misrepresentation
Duress
Overcoming a person’s free will by use of force or by
threat of force or bodily harm
 Threats of Illegal Conduct
 Threats to Report Crimes
 Threats to Sue


Threats to sue made for purpose unrelated to the suit
Economic Duress

Threats to a person’s business or income
Undue Influence


Unfair and improper persuasive pressure within a
relationship of trust
Must be able to prove:
 Relationship
of trust, confidence or authority
 Unfair persuasion
Unilateral Mistake
An error on the part of one of the parties
Usually a person cannot get out of a contract
just because of a mistake.
 Does
not affect validity of the contract
 Cannot get out of contract
 Nature of the Agreement
 Signing
a contract you don’t understand or have not read
 Signing a contract in a language you don’t understand
Mutual Mistake (Bilateral Mistake)
Both parties are mistaken about an important
fact. Often when the mistake is bilateral, etiher
one of the parties can get out of the contract.
Impossibility of Performance
 Contract is impossible to perform
 Contract is void
 Subject Matter
 Either party can void contract
 Existing Law

Contract is valid
 Parties are expected to know the law

Innocent Misrepresentation
Innocent statement of supposed fact that turns out to
be false
 Statement
must be one of fact
 Statement must be material
 Statement must be relied upon


Injured party has the right to rescind (take back) the
offer
No rights to damages
Fraudulent Misrepresentation
Party to a contract deliberately makes an untrue
statement of fact

Deliberate: Done with or marked by full
consciousness of the nature and effects; intentional

Deception: The fact or state of being deceived

Gain: To secure as profit or reward

In order to prove fraud, you must prove the
above 3 definitions
Proving Fraudulent Misrepresentation
 Untrue
statement of fact (failing to disclose that a car
had been damaged in a flood)
 Must
be one of fact, not opinion
 Active concealment
 Silence – may stay silent about defects except when:



statement is about material facts
True statement is made false by subsequent events
One party knows the other party has made a basic mistaken
assumption
 Materiality
 Statement
would cause reasonable person to contract
 If one party knows the other party would rely on the
statement
 If one party knows the statement is false
Proving Fraudulent Misrepresentation
 Reasonable
 One
Reliance
party must reasonable rely on statement
 Intentional
or reckless
 One
party deliberately lies or conceals a material fact
 One party recklessly makes a false statement of fact,
without knowing whether it is true or false
 Statement must be intended to induce party to enter into
contract
 Resulting
 Must
Loss
cause an injury STOP HERE WORK SHEET AGREEMENT
CAPACITY
Legal ability to enter into a contract
 The following have the right to get out of a
contract…..

•
•
•

Minors
Mentally Incapacitated
Intoxicated
A person serving a prison sentence lacks
capacity.
Minors



Minor – not yet reached legal age (age of majority)
NC Age of Majority – 18 years old
The law allows minors to get out of contracts. It
considers them too inexperienced, immature
unknowledgeable or naïve.
Minors


Emancipated minors are responsible for their own
contracts.
Emancipation - severing of the parent-child relationship
Emancipated minors are responsible for their own contract.
Minors are automatically emancipated when they get
married or set up their own household.


Formal – court decree
Informal – arises from the conduct of the minor and the parent

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Parent and minor agree that parent will end support
Minor gets married
Minor moves out of family home
Minor joins armed forces
Minor gives birth
Minor takes on full-time employment
Minors


Ratification – the act of agreeing to be bound by a
contract that could be avoided
If a minor makes a payment on a contract that is
due after becoming an adult, that minor has ratified
the contract
 Contracts
made by minors are voidable; minors may
disaffirm (or avoid being bound by) contracts
Mentally Incapacitated

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Lacking the ability to understand the consequences
of his or her contractual acts
Severe mental illness
Severe mental retardation
Severe senility
Contracts made by mentally incapacitated are
usually void unless involving necessaries.
Intoxicated

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People under the influence of drugs or alcohol
Intoxication is a voluntary act.
Most courts are reluctant to consider contracts
entered into by intoxicated individuals as voidable.
Must be so intoxicated that the person did not know
they were contracting. This decision is made by a
judge. Stop WORK SHEET CAPACITY
CONSIDERATION
Exchange of benefits and detriments by the parties to an agreements
 Requirements of consideration:
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Benefits

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Something that a party was not previously entitled to receive
Detriments

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Must involve a bargained-for exchange (promise made in return for
another promise)
Must involve something of value
Benefits and detriments must be legal
Any loss suffered; anything given up
Forbearance

Not doing something that you have the right to do
Adequacy of Consideration


Courts don’t look at adequacy or value of an
agreement unless it is “unconscionable”
Unconscionable
 So
grossly unfair or oppressive that it would shock the
conscience of the court
 So lop-sided that the average person would not agree
to terms
Nominal Consideration

Token amount in a written contract where either the
parties cannot or do not wish to state the amount
Agreements without Consideration

Promise to make a gift
 Gifts
have no consideration
 Cannot be enforced

Gift that has been given
 Doesn’t
have to be returned
 Donor – Gives the gift
 Donee – Accepts the gift
What happens when the engagement
is off?


Your fiance recently ended the engagement and
you spent $3000 on an engagement ring. She
refuses to give the ring back. Are you entitled to the
ring according to the law?
What happened if you are the one who bought the
ring and also broke the engagement, do you still
get the ring back?
Illusory Promises
Clause or wording that allows party to escape from legal obligation.
A promise that is unenforceable due to indefiniteness or lack of
mutuality, where only one side is bound to perform. Ex. The seller
agrees to sell all of the icecream he wants to , to the buyer.
 Termination clause
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
Output Contracts


Agreement to purchase all of a specific producer’s product
Requirements Contracts


Illusory – clause to allow termination of contract for any reason
Not illusory – termination only allowed after a change in defined
circumstances
Agreement to supply all of the needs of a specific buyer
Output & Requirements contracts are recognized by the courts as
having consideration by implying fair dealing.
Existing Duty


Existing Public Duty
You cut my hair, I give you $25.00.
 No
detriment
 Obligation to obey the law

Existing Private Duty
 If
a person is already under legal duty to do
something, another promise to do that same thing does
not furnish consideration for a new contract.
Past Performance

An act that has already been performed cannot be
consideration in a contract.
Exceptions to Consideration

Promises to charitable organizations
 Gift
or Pledge for future contribution
 Enforceable
as consideration if organization identifies the
pledge for a specific use and acts in reliance on the pledge

Promises covered by the UCC
 Firm
offers
 Good faith modification of contract

Promises discharged in bankruptcy
Exceptions to Consideration



Promises barred from collection
Promissory Estoppel
Is the principle that a promise made without
consideration may nonetheless be enforced to prevent
injustice
Rely on what a person said
 Elements:

Promise must bring action or forbearance
 One who gave no consideration must have relied on the promise
 Injustice can be avoided onlyby enforcing the promise

Example of Promissory Estoppel

You are the principal of a small high school. A musician
approaches you to discuss implementing a music
program on campus. Excited you begin planning for
the program. You order construction of anew building
complete with soundproofing and a stage. Next new
furniture and fixtures, drums etc. You hire a new staff,
then in one fell swoop the promise is retracted. The
musician simply changes his mind. The doctrice of
Promissory Estoppel can help you recover your losses. It
states that you can recover losses if they were the result
of a promise made by a promisor and the promise was
significant enough to move the promisee to act on it.
LEGALITY
Illegal Contracts

Civil & Criminal

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Usury

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State sets a max interest rate
Interest – fee the borrower pays to the lender for using the
money
Usury - charging too high of an interest rate
Gambling


Agreements to commit a crime/tort are illegal
Legal gambling varies from state to state
Licensing

States require that persons in certain occupations obtain a
license to practice that occupation

Doctors, plumbers, barbers, lawyers, funeral directors
Illegal Contracts

Public policy no one should be allowed to something that
harms the public.

Agreements that unreasonably restrain trade, the law protects the
right to make a living ex.


Agreements not to compete



Takes away the ability to do business with others
Restrictive covenant - agreement not to compete in a region for a
period of time with the seller of the business you just bought.
Only legal for a short period of time and small geographic region
Agreements for price fixing

Price Fixing - competitors agree on certain price ranges within which
they will sell their products
Illegal Contracts

Public policy (continued)

Agreements to eliminate competitive bidding (or bid rigging)
Bid - offer to buy or sell goods or services at a stated price
 Bid rigging – competitors agree that one bidder will have low bid
for a certain job….low bidder sets bid higher than would if real
competition


Agreements to obstruct justice

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Agreements to induce breach of duty or fraud


Anything that delays or prevents justice
Influencing persons who hold positions of high trust for private gain
Agreements to interfere with marriage

Damage, destroy, or discourage good family relationships
Statute of Frauds

Requires that certain contracts be in writing to be
enforceable
 Contracts
to buy and sell goods for a price of $500 or
more
 Contracts to buy and sell real property
 Contracts that require more than one year to complete
 Promises to pay the debt of another
 Promises to give something of value in return for
marriage Stop here Worksheet Legality
CHARACTERISTICS OF A CONTRACT




Valid, void, voidable, unenforceable
Express or implied
Bilateral or unilateral
Oral or written
Valid, Void, Voidable, Unenforceable

Valid contract



Void contract



Includes all elements recognized by the courts
Legally binding
Without legal effect
Contracts missing one or more elements
Voidable contract

One or more parties can get out of contract for some legal reason


Contract lacks genuine assent, contracts with minors
Unenforceable contract


Contract that court will not uphold, usually because of some rule
of law
Statute of limitations has expired
Express or implied

Express
 Contract

statement that may be written or oral
Implied
 Contract
parties
that comes about from the actions of the
Bilateral or Unilateral

Bilateral
 Contains
two promises
 Most contracts are bilateral

Unilateral
 Contains
a promise by only one person to do something
if, and when, the other party performs a certain act
 Reward offer is most common unilateral contract
Oral or written

Oral
 Created

by two or more people speaking to each other
Written
 contract
terms are written so that both parties know the
exact terms
 Provides proof of existence for the contract
 Certain contract are required by the Statute of Frauds
to be in writing