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
Legality
Offer
Acceptance
Genuine
Agreement
Elements of a Contract
1) 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.
Minors
Not Legal Capable to
enter into a contract
Mentally Impaired People
Person under influence of drugs or
alcohol
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.
CHARACTERISTICS of a Contract
• Contract can have any of the following characteristics:
1)
2)
3)
4)
Valid, Void, Voidable, or Unenforceable
Express or Implied
Bilateral or Unilateral
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
• The ad below is NOT an invitation to negotiate
• Offer begins when the customer offers to
make a purchase
• Due to the fact that it is very definite (has an exact
date and time) it is treated as an offer.
• Store owner can accept or reject the 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) Revocation
2) Rejection
3) Counteroffer
4) Expiration of Time
5) 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 accepted
2) 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.