Creating Contracts

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Creating an Enforceable

Contract

OBE 118, Section 10

Fall 2004

Six “Elements” of a Contract

Agreement

Consideration

Capacity

Legality

Genuineness of assent

Writing and Form

Acceptance Complications I

Revocation versus Acceptance

Acceptance rule

: acceptance by authorized manner effective when ……………. (also called the mailbox rule)

Authorized manner: (General rule) same means that offeror used or one that is

commercially reasonable and quicker

.

Revocation rule:

Revocation is effective when ….

Acceptance Complications II

Accepting a Unilateral Contract

Rule

: A unilateral contract is accepted by performing and once performance has commenced the offeree has a reasonable period of time to complete performance

Consideration

Consideration is our second element of a valid enforceable contract and requires that something of legal value be given in exchange for a promise as a result of a bargained-for exchange.

Reciprocal Consideration

We call the requirement “reciprocal consideration” because for each promise there must be corresponding consideration that makes that promise enforceable

Party A

Party B

Consideration: Legal Value

• A legal detriment

Dollar cost

Doing or promising to do something that there was no prior legal duty to perform

Forbearance

• No requirement that each side give up something of equal value

Consideration Complications

Pre-existing duty

Unforeseen difficulties situations

Past consideration

Illusory promises

Settlement of Debts

Fact pattern: A party agrees to accept less than is owed.

Issue: When is such a promise enforceable?

Is the debt liquidated or unliquidated?

If the debt is unliquidated, then surrendering the right to claim a lower or higher amount than agreed upon can constitute consideration and make the promise enforceable

Is a written release involved?

Reciprocal Consideration

We call the requirement “reciprocal consideration” because for each promise there must be corresponding consideration that makes that promise enforceable

Promise

Party A

Consideration

Party B

Promise

Consideration

Consideration: Legal Value

• A legal detriment

Dollar cost

Doing or promising to do something that there was no prior legal duty to perform

Forbearance

• No requirement that each side give up something of equal value

Consideration Complications

Pre-existing duty

Unforeseen difficulties situations

Past consideration

Illusory promises

Promissory Estoppel

Fact pattern:

A party relies on a promise to their detriment but no consideration was given.

Issue:

Is there another means to enforce the promise?

Elements of Promissory Estoppel

1) A promise

2) Justifiable reliance on the promise

3) Substantial and definite reliance

4) Enforcing the promise serves the interests of justice

Capacity

Issues:

1) Minority

2) Mental Incompetence

3) Intoxication

Legality

Legality is our fourth element of a contract and failure to meet this element often renders a contract void

1. Contracts calling for an illegal or tortious act

2. Contracts against public policy

3. Licensing Statutes

Legality

If an agreement were to be enforced, would it violate:

Written Law

Common Law?

Public Policy?

Illegal Acts

Contracts calling for violation of federal or state statutes are void

1. Usury -

2. Gambling -

3. Licensing statutes –

Restraint of Trade

Contracts that interfere with or inhibit free trade are usually against the public interest

Violation of Antitrust Laws -

Covenants Not to Compete

A covenant not to compete can be valid and enforceable if it is reasonably limited in time, scope, and distance.

1.

2.

Genuineness of Assent

Genuine Assent is our fifth element of a contract and requires that their be a true objective meeting of the minds.

The Defenses of Genuine

Assent

Genuine Assent is our fifth element of a contract and requires that their be a true objective meeting of the minds.

Many defenses make up this “element”

Bilateral Mistakes

Must be a bilateral mistake of a material fact!

Bilateral: Both parties

Material: Important and central to contract

Fact: Not value, opinion, etc.

EFFECT:

Example:

Fraud

Fraudulent in the factum

Tricked into signing wrong document –

Fraudulent Misrepresentation

False statement to induce signing correct document

Basic Elements to be Voidable

1) Misrepresentation of a material fact

2) Intent to deceive

3) Justifiable reliance

4) Injury from the reliance

Writing and Form

Some contracts must be evidenced in writing to be enforceable. This is the last

“element” of a contract.

“Statute of Frauds”

1) Interests in land (sale, lease, mortgage, easement)

2) > 1 Year performance

3) Paying debt or performing duty of another

4) Sale of Goods >$

5) Promises for marriage

6) Executor of estate assuming debt personally

“Written Evidence”

1) “Signed” by party against whom enforcement sought

2) Contain essential terms of contract

Parol Evidence Rule

When a contract is expressed in writing, oral negotiations, promises, or terms prior to the writing are not usable to prove the contract’s terms

“Exceptions”

1) Later changes*

2) Evidence to show contract is voidable or void*

3) Unclear terms- to show meaning

4) Incomplete contract- to fill gaps

5) Show obvious or gross clerical error

A Valid Enforceable Contract

1) Mutual Agreement

2) Consideration

3) Capacity

4) Legality

5) Genuineness of Assent

6) Writing

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