LGS 200 (Lisenby)
CONTRACTS – CHAPTER NINE
CONTRACT FORMATION
I. Contract – an agreement which can be enforced in court; formed by 2 or
more parties who agree to perform or to refrain from performing some act
now or in the future.
II. Uniform Commercial Code – Article II – series of uniform state laws
which deal with the sale of goods by a merchant.
III. Terminology
A. Promisor – person who makes a promise
B. Promisee – person to whom a promise is made
C. Offeror – person who makes an offer
D. Offeree – person to whom an offer is made
IV. Types of Contracts
A. Bilateral vs. Unilateral
1. Bilateral = “a promise for a promise” – the contract exists at
the moment the promises are exchanged.
2. Unilateral = “a promise for an act” – offeree can only accept
the contract by completing the contract performance.
B. Express vs. Implied
1. Express – the terms are fully stated, whether oral or in
writing. Example: written lease agreement
2. Implied – the conduct of the parties creates or defines some
of the terms of the contract. Example: dropping your laundry
off at the drycleaner
E. Valid, Void and Voidable Contracts
1. Valid: has all 4 elements for contract formation.
2. Void: no contract at all – produces no legal obligation by
either party. Example: one party is insane.
3. Voidable: valid contract which can be avoided at the option
of one or both of the parties. Example: contract with a minor,
fraudulent conditions.
V. Requirements of a Contract
A. Agreement – Offer and Acceptance
1. Offer -- a promise or commitment to perform or refrain
from performing some specified act in the future
a. serious, objective intention by the offeror to enter into
a binding agreement as determined by outward, objective
facts as interpreted by a reasonable person.
b. the terms must be reasonably certain or definite
c. the offer must be communicated to the offeree
2. Termination of the Offer
a. revocation – withdrawal of the offer by the offeror
b. rejection – offeree declines to accept the offer
c. counteroffer – this is a rejection of the offeror’s offer
and an offer by the offeree (counterofferor). MIRROR
IMAGE RULE: common law rule that requires offeree’s
acceptance to match the offeror’s offer exactly.
d. by operation of law
(1) expiration of time set forth in the offer
(2) destruction of the subject matter before
acceptance of the offer
(3) death or incapacity of offeror or offeree
(4) a law or legal ruling that makes the offer illegal
3. Acceptance – voluntary act by offeree that shows assent to
the terms of an offer
a. acceptance may be by words or conduct
b. unequivocal acceptance – same terms as offer
c. communication – depend on whether it is a bilateral or
unilateral contract
d. mode and timeliness – acceptance effective at the time
the offeree sends the acceptance via the mode expressly
or impliedly authorized by offeror. MAILBOX RULE:
acceptance valid when sent.
B. Consideration – value given in exchange for a promise
1. Legal value
a. a promise to do something that one has no prior legal
due to do
b. the performance of an action that one is otherwise not
obligated to undertake
c. forbearance – refraining from an action that one has a
legal right to undertake
2. Adequacy of consideration – generally adequacy not
questioned if the consideration is legally sufficient
3. Preexisting duty -- not legally sufficient consideration
4. Past consideration – promises for actions already occurred is
not a bargained for exchange and not enforceable
5. Detrimental reliance (promissory estoppel) -- legal doctrine
that when a promisor makes a clear and definite promise on
which the promise relies, such promise bay be binding if justice
would be better served. Ex: “if you buy a car, I will pay you
$10,000.00”.
C. Capacity – the legal ability to enter into a contractual relationship.
1. Minors – generally contracts entered into by minors are voidable at
the option of the minor – disaffirmance. Exception: necessaries – a
minor may be responsible for the reasonable value of the goods used.
2. Intoxication – if an intoxicated person is so impaired as to
lack mental capacity to enter into a contract, the contract is voidable at
the option of the intoxicated person.
3. Mental incapacity –
a. if a person has been adjudicated mentally incompetent
and has a guardian, then the contract is void.
b. if there has been no adjudication of mental incapacity,
the contract may be voidable or valid depending upon the
circumstances.
D. Legality – the contract must be for a legal purpose. Examples of
contracts which are contrary to statutes or other laws:
1. Usury – exceeding the maximum rate of interest that can be
charged on a loan
2. Gambling
3. Blue laws – contracts made on a Sunday
4. Licensing statutes – Example: lawyer, real estate broker,
plumber
5. Contracts contrary to public policy – Example: contract not
to marry
6. Contracts in restraint of trade – anticompetitive agreements.
Exception: covenants not to compete. Example: seller of an
ongoing business agrees not to compete with purchaser – must
be reasonable in time and geographical restriction.
7. Unconscionable contracts or clauses – Example: due to
greater relative bargaining power, one party may force terms on
the other party that are unfairly burdensome. Example:
Adhesion contract – “take it or leave it”
8. Exculpatory clauses – release from liability no matter who
was at fault. Enforceability often depends on the nature of the
business. Example: common carrier vs. amusement park.
IV. Third party rights
A. Assignment – the act of transferring to another all or part of one’s
rights arising under a contract
1. General Rule – all rights can be assigned.
2. Exception – personal service contracts, where the provisions
of the contract prohibit assignment