LGS 200 (Lisenby) CONTRACTS – CHAPTER EIGHT 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 C. Quasi Contract – fictional contracts imposed on parties by a court in the interests of fairness and justice. Example: a doctor renders aid in an emergency to a person. D. Executed vs. Executory Contracts 1. Executed: a contract which has been fully performed by both parties. 2. Executory: a contract which has not been fully performed by both parties. 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. F. Unenforceable Contract – a contract which cannot be enforced because of a statute or other law. Example: contract for the sale of land must be in writing. 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