Chapter 4.1
Agreements and Contracts
Key Points
Nature and importance of contracts
Elements of contracts
Different classifications of contracts
Express or Implied
Unilateral or Bilateral
Oral or Written
Contracts
Most people view contracts as long,
printed, formal documents that
are signed when buying a vehicle,
selling a house, or purchasing
insurance.
Those only represent a small
fraction of contracts that you will
make in your lifetime.
Contracts
You create a contract anytime you
agree to exchange things of value.
Buying fast food
Filling your car with gas
Signing up for an email account
Renting a video
Contract
Any agreement enforceable by
law.
You should never enter into a
contract without understanding the
legal responsibilities involved.
Contract
Not ALL agreements are contracts
Promising to take out the trash is NOT
a contract
Posting an ad in the newspaper and
offering a reward for a lost dog IS a
contract. If someone answers the ad
and returns the dog, that person is
owed what was promised in the ad.
6 Elements of a Contract
Offer
Acceptance
Genuine Agreement
Consideration
Capacity
Legality
Offer
A proposal made by one party
(offeror) to another party (the
offeree) indicating a willingness to
contract.
Intent: create a legally binding
agreement
Acceptance
The agreement of the offeree to
be bound by the terms of the
offer.
The second party’s unqualified
willingness to go along with the first
party’s proposal.
Genuine Agreement
Means that an agreement is true
and genuine.
Offer and acceptance need to occur
in order for a contract to lead to a
genuine agreement.
It is a meeting of the minds.
An agreement can be destroyed by
fraud, misrepresentation,
mistake, duress (pressure or
force), or undue influence.
Capacity
Legal ability to enter a contract.
Minors, mentally impaired, and
individuals under the influence are
people who are generally excused
from contractual responsibility.
Consideration
The thing of value promised to one
party in a contract in exchange for
something else of value promised
by another party.
The mutual exchange binds the
parties together.
Consideration Example
Suppose Adam agree to sell his iPod
for $50 to Amy. Amy agrees to buy
it at that price. Adam has made a
promise to sell. Amy has made a
promise to buy. Each promise is
consideration for the other.
Legality
Means the contract does not entail
violating the law.
Example: Agreeing to commit a crime
or a tort.
Even if all 5 other elements are
present, a contract can be void if it
violates the law.
Legality Example
Luis, a candidate for mayor, agreed
to pay Sandra, a newspaper
reporter, $1000 to write an article
containing false statements that
would damage the reputation of
Edward, Luis’ opponent. Since this
agreement required Sandra to
commit libel, it is illegal.
Characteristics of a Contract
Valid, void, voidable, and
unenforceable
Express or implied
Bilateral or unilateral
Oral or written
Executory or Executed
Characteristics Of A Contract
Valid
Means legally good. Legally binding
Void
Has no legal affect
A contract that is missing one of the 6
elements would be void
Ex. One of the parties is a minor
When a party to a contract is able to
void or cancel a contract, it is called a
voidable contract.
Characteristics Of A Contract
A contract between two minors can
be voided by either one of them
because minors have the right to
get out of contracts.
Unenforceable
A contract that the court will not
uphold, generally because of some
rule of law, such as the statute of
limitation.
If you wait too long to bring a lawsuit
for breach of contract, the statute of
limitation may have run its course,
making the contract unenforceable.
Express or Implied
Contracts
Express
Contract statement that may be oral
or written.
Implied
Contract that comes about from the
actions of the parties involved.
People often enter implied contracts
without saying a word to each other at
all.
Implied contract example
If you go to a self-service gas station
that requires payment before the
attendant will turn on the pump,
you can simply hand the attendant
your money without saying a word,
pump your gas, and drive away.
An implied contracts arises based
on actions.
Bilateral
A contract that contains 2
promises.
One party promises to do something in
exchange for the other’s promise to do
something else.
Most contracts are created this way.
One person says “I’ll sell you my DVD
player for $50” the other person says
“I’ll buy it.”
Unilateral
A contract that contains a promise
by only one person to do
something, if and when the other
party performs some act.
Unilateral Vs. Bilateral Contract
Unilateral Example
Your friend says “I’ll sell you my
DVD player for $150 if you give me
cash by noon tomorrow.”
He or she will not be required to
keep the promise unless you hand
over the cash before noon on the
following day.
Reward Offer
One of the most common
instances of a unilateral.
The acceptance of the reward must
precisely comply with the offer.
If there is an ad in the newspaper
for a reward for a lost computer, the
ad alone did not create the contract.
The contract comes into play only
when the laptop is returned.
Oral Contract
Created by word of mouth and
comes into existence when two or
more people form a contract by
speaking to each other.
One person usually offers to do
something, and another person
usually offers to do something in
return.
Written Contract
Assures both parties know the
exact terms of the contract and also
provides proof that the agreement
was made.
Executory
A contract that has not yet fully
been performed.
Both sides still have something to
do in order for the contract to be
complete.
If you say “I will give you $5 for that
t-shirt” I say “okay” Until the
exchange has taken place, the
contract is not fully complete.
Executed
A contract that has been
completed and or fully performed.
If you say “I will give you $5 for that
shirt.” I say “Okay.” You hand me
the $5 and I hand you the shirt.
Then the contract can be
considered executed (complete).
Review
Valid
Legally Good. All
elements are there.
Void
No legal effect.
Missing an element.
When one party is
asked to do something
illegal, or something
that cannot be done
Voidable:
When a party is able
to cancel or void a
contract for a legal
reason if they want
to.
Valid contract that can
be enforced, but is
canceled by one of the
parties.
Forced into a
contract
When one party
was
A contract between
incapacitated
two minors
Unenforceable
Court will not
uphold.
Example: Statute of
limitation
One party is usually
bound to contract
where the other party
can get out.
Review
Express
Contract
Oral or Written
Oral- spoken
Written- Assures both
parties know the terms
Implied
Contract
Comes about from the
actions of the parties
Getting hair done- you
pay for service
Going to restaurant
and paying the bill
Getting gas at a gas
station
Review
Unilateral
Contains only one
promise to do
something ONLY if the
other party does
something else
Ill sell you my DVD
player if you give me
cash by noon tomorrow.
After noon, the deal can
be off.
Reward for a lost
animal/item. You only
pay IF the item is
returned to you.
Bilateral
Contains two promises One parts does
something in exchange
for something else.
Buying a car
Buying a house
*Most contracts are
created this way
Chapter 4.2
How A Contract Begins
Key Points
Requirements of a value offer
Requirements of an acceptance
Difference between an offer, an
invitation, to negotiate, an
acceptance, and a counteroffer
How offers are terminated
Review: Page 88
Elements of a contract:
Offer
Acceptance
Genuine Agreement
Capacity
Consideration
Legality
Review
Offeror: Person making the offer
Offeree: Person receiving the offer
Offer
Has 3 basic requirements:
Serious Intent
Needs to be Definite and
Certain
Communicated to the offeree
Serious Intent
An offer must be with the intention
of entering into a legal obligation
An offer made in the heat of anger or
as a joke would not meet this
requirement.
For example, a friend complaining
about her unreliable car might say
“Give me $5 and its yours.”
Your friend cant be forced to sell it for
$5
Invitations to Negotiate
Invitations to deal, trade, or
make an offer.
This is often confused with an
offer.
Invitation To Negotiate
An ITN is simply allowing discussions
to occur that could lead to an offer
and acceptance
In contracting an agreement is not valid
unless there is an official offer and
acceptance of it, and then an exchange of
something of value.
The ITN is none of these; it simply opens
to door as a notice to start talking
about potential offers and related
details.
Invitation to Negotiate:
Scenario
A store puts an ad in the
newspaper/a magazine/a catalog
Stores don’t have enough
merchandise to sell it to the amount
of people who may see the ad.
The ad is seen as an invitation to
negotiate, It is NOT an offer.
This is also the case is there is a
misprint in an ad. It is not a contract.
Invitation to Negotiate
Some advertisement can be
seen as offers when they
contain a specific promise
“First come first serve”
Number of people who can buy
it becomes limited, making the
advertisement an offer.
Invitation to Negotiate
Examples
Price Tags
Signs in a store window or
on the counters
Prices marked on
merchandise
Definiteness and Certainty
An offer must be definite and certain to
be enforceable
Having distinct limits with no uncertainty
A landlord of an apartment with faulty
plumbing might agree to pay a share of
the cost if the tenant fixes the plumbing.
Court would not enforce this contract
because its not possible to determine
what is meant by the word “share”
Communication to the
Offeree
Offers can be made by:
Telephone
Letter
Telegram
Fax
Email
Or any method that communicates the
offer to the offeree.
Requirement of an
Acceptance
Acceptance must be unconditional
It must follow the rules regarding
the method of acceptance.
Willing to go along with party’s
proposal.
Unconditional Acceptance
Acceptance must not change the
terms of the original offer in any way
according to the mirror image rule
Mirror image rule
The terms stated in the acceptance must
exactly mirror or match the terms of the
offer
The Acceptance must mirror the offer
Unconditional Acceptance
Any change in the terms of the offer
means the offeree has not really
accepted the offer, but has made a
counteroffer.
Counteroffer
A response to an offer in which the
terms of the original offer are changed.
Unconditional Acceptance
When a Counteroffer occurs…
The two parties change roles.
The original offeror becomes
the offeree; and the offeree
becomes the offeror.
Mirror Image Exceptions
Contracts for personal property
such as:
Clothing
Furniture
Food
Motor Vehicles
Appliances
Etc.
Methods of Acceptance
This is when a contract comes
into existence.
When parties are dealing face-toface or on the phone, no problems
exist.
Each party listens and talks about
contract. A conversation occurs.
Methods of Acceptance
When communicating by letter,
telegram, or fax, special rules
apply.
An acceptance that must be sent
over long distances is effective
when sent.
Termination Of An Offer
Even though an offer has been
properly communicated to the
offeree; it may be terminated.
Termination can occur in the
following ways: Revocation,
Rejection, Counteroffer,
Expiration of time, and death or
insanity.
Revocation
Is the taking back of an offer by
the offeror due to:
Change of mind
Circumstances result in deciding to
withdraw the offer before it has been
accepted.
Revocation
2 important rules govern revocation
1. An offer can be revoked any time
before it is accepted
2. A revocation becomes effective when
it is received by or communicated to
the offeree.
Rejection
A refusal of an offer by the offeree
that brings the offer to an end.
Example: If someone says “I’ll sell
you my camera for $150.” and you
say, “I don’t want it!” The offer has
come to an end.
Counteroffer
Ends the first offer
No contract comes into existence
unless the original offeror accepts
your new offer.
Roles often change...
The original offeror becomes the
offeree; and the offeree becomes the
offeror
Expiration of Time
If the offeror sets a time limit for the
acceptance of the offer, it must be
honored.
Brad says to Joe, “I will sell you my
motorcycle for $2,000 if you give me
the money by noon tomorrow.” Joe
must accept the time frame.
After Noon, if Joes doesn’t come up
with the $2000 the offer is no longer
existent.
Expiration Of Time
Option Contract
When an offeree pays money or other
consideration to an offeror to hold
an offer open for an agreed period of
time.
It is a binding promise to hold an
offer open for a specified period of
time.
Death or Insanity
If the offeror dies or becomes insane
before the offer is accepted, the offer
comes to an end.
Death ends an offer, but does not
end a contract, except contracts
related to personal services.