Rachel Horsch, Emily Ratchford, Thomas McIntyre, Andrew Hansen
Not all promises are legally enforceable; however, when combined with certain elements, they do create a legally binding contract. A contract is a set of agreements or promises that are legally enforceable. Since contracts are legally binding, this is a way to ensure that both parties involved will follow through with the promise they have made. Contracts are useful because they allow people to construct their own private law. They also allow people to make promises and terms that permit them to make reliable future plans.
There are four requirements necessary to create a contract:
1. The first of these is offer and acceptance . An offer is a proposal that includes a set of terms or promises created by an offeror. An offer can be written or made orally as long as both parties are aware of the circumstances that are involved in it. The offer is sent by the offeror to the offeree and the offeree then has the option to either accept or reject it. An offer is considered binding as soon as the offeree accepts or acceptance is implied by the offeree’s actions. An example of implied acceptance is when you go to the doctor. It is implied that you will pay for the doctor’s services after your appointment.
2.
The second requirement, consideration , is the idea that both sides get something of value.
This does not have to be of monetary value, but rather anything that one party wants and the other party promises to give or do in exchange. Consideration is not given with gifts.
3. Third, all parties involved must have the capacity, or legal
Example: A homeowner wants to sell their house for $100,000 and another party agrees to buy it for that amount. There is consideration because the homeowner is getting the asking price and the other party is getting the home they want.
ability, to enter into a contract. The main grounds for incompetence are infancy and insanity. Since they are incompetent, minors and the insane have the ability to void contracts they enter because they may not fully understand what they are doing. An exception to this rule is that minors do have capacity when buying necessities such as food or education. the law and judicial proceedings.
4. Lastly, the actual contract must be legal in accordance with
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There are four distinct types of contracts:
A contract of record is an agreement between an individual and the court. In this case, courts often will let you go after you’ve been accused of a crime with the intent that you will show up later when summoned. However, if you later fail to return to court, you are required to pay a certain amount of money.
The idea behind a sealed contract is that the seal makes the contract official. In the past, all contracts were required to have a stamped seal. Today the seal is used less frequently, if at all.
In Missouri, a seal is only required when a corporation sells real estate. The corporation must put a seal or imprint on the contract before it is deemed official.
A negotiable instrument is a type of contract for payment of money that is unconditional and can be transferred. Items that fall under the contract of negotiable instruments are checks, stocks, and bonds. They are negotiable because the amount may vary from day to day.
Simple contracts are used mainly for goods and services and are most frequent.
Contracts can be created formally or informally. Express contracts are created formally when the parties involved directly state the terms of the contract orally or in writing. While oral contracts are legal, they can be problematic due to the fact that they are easy to lie about. In contrast, implied contracts are created informally by the conduct of the parties.
In certain circumstances, contracts
Example: When someone fills up their gas tank at the gas station, they are entering into an implied contract where they will have to pay for the gas they are putting in their car. can be created without formal agreement between parties and without exchange of value. These situations are referred to as
“noncontract” obligations
because they impose a responsibility to pay yet do not meet the requirements for creation of a contract.
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One such contract , a quasi contract
, also known as an “as if” contract, represents an obligation imposed by law to avoid injustice. Quasi contracts are usually imposed when one party bestows a benefit on another party who knowingly accepts it and keeps it under a situation
Example: Someone gets in a wreck and is unconscious. An ambulance takes them to the hospital where they have surgery in order to live.
The person who was in the accident now has a quasi contract with the hospital to pay their medical bills. that makes it unjust to do so without paying for it. In this case, unjust enrichment occurred and so the benefited party must pay reasonable value for the benefits received.
For example, a painter accidently paints the wrong house. The owner of that house knows that the painter is painting his house on accident but does not say anything. The owner of the house is unjustly enriched and is liable for payment of the paint job.
A second type of “noncontract” obligation is promissory estoppel in which one party relies on the promise of another party even if a formal contract was not created. In this situation there is an injustice on the person who relied on the promise. There are three requirements for promissory estoppel to exist. First, there must be a promise that the promisor should foresee as likely to induce reliance. In addition, there must be reliance on the promise by the promisee and injustice as a result of that reliance. For example, Smith says she will donate one million dollars to her alma mater to build a new student union building. The university begins building based on the promise, and then Smith retracts her offer. Because the university relied on Smith’s promise, promissory estoppel exists and Smith is liable.
A valid contract meets all of the requirements for a binding contract and is therefore enforceable in court. If one party breaks the contract, the other party can sue.
A contract is unenforceable when all the basic legal requirements for a contract are met, however it may not be enforced because of some other legal rule. An example of an unenforceable contract is one that is done orally but must be done in writing.
A contract is voidable when one or more parties have the ability to cancel the contract.
An example is if a contract is induced under duress. In this situation, the person that was forced into the contract, or the injured party, can void the contract if they choose or keep the contract in place.
Example: A person buys a car that has had its mileage rolled back. The party that the car was sold to has the option to sue and return the car and get their money back or they can keep the car and possibly only get a little money back.
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Void contracts are agreements that create no legal obligation. They cannot be taken to court and neither party can sue over it. Examples of void contracts include murder for hire and contracts to steal.
A contract can be classified as either bilateral or unilateral. These terms deal with the number of parties that make a promise.
Example: If someone loses a dog and places a reward ad in the paper promising to pay
$200 if it is returned, this would be a unilateral contract. The only party with the obligation is the one offering the payment.
The second type, a bilateral contract , involves both parties making promises. This type of contract is sometimes called a two-sided contract.
In a unilateral contract, only one side makes a promise. The offeror makes a proposal to do something if the offeree performs a certain act in the future. The performance of that act signifies acceptance of the offer.
The offeree can reject the offer by simply not performing but cannot be sued for failure to perform because they never promised to do anything
Example: One party is selling a car for
$15,000 and the other party is agreeing to buy the car. The seller has an obligation to give the car to the buyer and the buyer also has an obligation to deliver the money to the seller.
When a contract has been completed and there is nothing left to be done by either party, it has been executed. Contracts that still have yet to be completed are known as executory contracts.
C.
There are two bodies of law that govern contracts: common law and Article 2 of the
Uniform Commercial Code.
Common law , or court-made law, governs contracts for the sale of real estate, services, and intangibles. Because common law is based off of court decisions, it is constantly changing and is where most laws come from. Common law tends to be less flexible than the UCC.
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The Uniform Commercial Code , also known as the UCC, governs contracts for the sale of goods. Goods are defined as tangible, moveable, personal property. The UCC was created to organize and maintain commercial sales under a consistent set of rules throughout the country, as well as to resolve problems that arise during the sale of goods in a fair manner. The UCC also wanted to establish superior standards in general for goods and transactions. The code has been adopted by all of the states except Louisiana, which only adopted a portion of it.
Before a contract is created, there first must be an offer. There are three main components that must be present for an offer to be valid. They include contractual intent, definiteness of terms, and communication to the offeree.
When one party makes an offer to another, they first have to have present intent to contract , which means there is intent to enter a contract once there has been an acceptance.
Agreements that don’t count as intent to contract include social invitations and statements that are made in anger or jest. These types of declarations aren’t taken seriously because they are often spontaneous statements that might not be what one party truly means. If they were taken seriously, one party might unwilling be bound into a contract. Advertisements, catalogs, and brochures are also not considered contracts because of lack of intent. Advertisements are
Example: When placing an ad, a company cannot know how many people will respond and come buy the product. As a result, if there is an overwhelming response, the company isn’t liable to provide the product to everyone. considered invitations for a party to make an offer and contract. They cannot be considered contracts because companies are unsure of the response they will get from an advertisement. An exception to advertisements however would include reward advertisements. In contrast to a commercial advertisement, only one person can accept the reward offered in a reward advertisement.
Due to this difference, the party offering the reward is liable to follow through on their part and distribute the reward.
An important aspect of the intent component of an offer is the Objective Standard. Early courts used more of a subjective standard when determining the intent of contracts. It became a difficult task to try and enforce contracts based on what the parties were thinking as opposed to the words that the agreement consisted of. This is why the objective standard was developed. It states that contracts will be enforced based on objective characteristics such as words, actions, and the circumstances as a reasonable person would interpret them.
When an offer is made, the circumstances or terms in it must be definite or reasonably definite. The conditions in the offer should be clear to each party and also should state
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everything that the contract is to include. There are two primary reasons that concise parameters are necessary. The first is the definiteness demonstrates that there is contractual intent. If there is not definiteness, the contract is viewed as an invitation and has not yet been completed. At this point the parties are still considered to be negotiating. The second reason that terms need to be definite is that, if taken to trial, it is necessary for the court to understand all of the conditions that were stated in the contract in order to determine if violation of a contract occurred.
Problems with definiteness of terms arise especially with real estate. If you offer to buy a house, you have to specify all of the terms and conditions that need to be met with the purchase of real estate. If you don’t have all of the specifications in writing, the offer is not valid. With services and goods however, it is much easier to determine the conditions that are needed in an offer. One issue that can be potentially challenging with services is that the final price may be unknown until completion of the service.
When dealing with goods, a contract can be created without having as concise parameters as needed in other contracts. The fair market value is usually used for the price of goods which makes determining a price not important. Also on contracts dealing with goods, there can be two types of contracts that are commonly used for bulk payment and contract for goods. An output contract is when you agree to buy all of something from the other party no matter how much of the item is produced. This occurs when a product is in high demand. A requirements contract is when one party agrees to buy all of a particular item from the other party and the other party agrees to supply as much of the product as the first party needs.
The third major component of an offer is communication. When an offeror communicates the terms of an offer to another party, he is expressing intent to enter into a contract. Any lack of communication on the offeror’s part expresses no intent to enter a contract. The offeror is obligated to write down the terms of the contract and give them to the offeree. The terms can be sent through the mail or email as long as they are somehow put into writing. The offeree has to know about the terms of the offer or they cannot accept. This can be a problem when dealing with rewards such as returning of lost property or criminal capture rewards because of the vague conditions of the contract.
There are many factors that determine how long an offer is valid. These factors include the original terms in the offer, how long the offeree has had to accept the offer, revocation, rejection, death or insanity, destruction of subject matter, intervening illegality, and counteroffers.
Example: If someone finds a lost dog and returns it to the owner, and this person was not previously aware of the reward being offered, they are not legally entitled to the reward.
Revocation is when the offeror takes the offer back. When this happens, the offer is immediately considered dead. A revocation can be done at any time prior to acceptance of the
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offer even if the offeror promises not to revoke an offer. It doesn’t matter how the offeree hears about the revocation. As long as the offeror revokes it before an acceptance has been made, the offer is null. While the general rule is that an offer can be revoked at any time, there are four major exceptions to this rule. They are as follows:
An option is when the offeree has paid to keep the offer open. This payment is not refundable and the offeree loses it permanently. When the offeree makes an option, the parties agree on how long an offer should stay open. An option is not an agreement to accept the offer, but it simply ensures that the offeror will not revoke the offer for a certain amount of time due to the fact that the offeree has given them something of value. A down payment on a house is a common example of a deposit made to create an option. Options can be terminated on two conditions, lapse of time and illegality. If the option doesn’t specify how long it is good for, it can be ignored after a reasonable amount of time. The option can also be ended if it is illegal, but options normally cannot be revoked or end with a rejection or a counteroffer.
Example: if Sue hires a babysitter to take care of her son for 4 hours, and offers to pay the babysitter $30, she cannot revoke the offer and pay the babysitter less than stated if Sue returns home earlier than planned.
When entering into a unilateral contract, once one party has made substantial performance on their part, the other party is not allowed to revoke the offer. This can apply to reward contracts.
The doctrine of promissory estoppel is used when one party relies on the offeror to keep the offer open. The second party often relies on the first party in order to enter into a contract with a third party as mentioned earlier. This is the case when a company hires a general contractor and the general contractor enters into a contract with multiple subcontractors. These subcontractors aren’t allowed to back out of the offer because the general contractor relies on the subcontractors to keep the offer with the company open.
A fourth exception is what is known as a firm offer which is used with goods. Also more commonly known as a
Merchant’s Firm Offer
, this is used when the offeror is a merchant who sells products on a day to day basis. In this case, the offer must be made in writing and the offeror must agree to keep the offer open for 90 days. This is irrevocable at any time before the
90 days are up. There are three guidelines that must be met for a Merchant’s Firm Offer to be valid:
1. Must be made by an offeror who is a merchant.
2. Must be contained in a signed writing.
3. Must give assurance that the offer will be kept open.
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Rejection is much like a revocation; however, it is done by the offeree. Rejection is a formal way for the offeree to decline the offer. Once an offer has been rejected, it can’t be accepted again but the person who rejected the offer is able to make an offer back. One exception to a Rejection terminating an offer is when an offer contains an option. Some courts have determined that when a party rejects an offer that has a option, that same party can later accept the offer.
After an offer has been created and extended to the offeree, if the offeree adds or removes a part of the requirements in an offer, this is also considered a termination of the offer. The only way that it will not be viewed as ending the offer is if the offeree makes it clear in their counteroffer that they don’t want to reject the offer, but simply want to change the conditions.
Another factor that can lead to the end of an offer is the amount of time it has been available for. Offers that do not state how long they are good for are good for a reasonable amount of time. This amount of time depends on the value of the offer and is determined by how long it would take a normal person to accept the offer.
When there is an offer, if one of the parties either dies or is incapacitated, the offer is automatically terminated. Though this is true when the offer is still on the table, once the offer has been accepted and someone dies, the offer is valid. In this case, the person’s estate is responsible for following through with the offer.
If any part of the offer becomes illegal, no matter if it has been accepted already or not, the offer is immediately terminated.
Example: If Russia creates an offer, gives it to the United States and a war begins between the countries, the offer is no longer valid. This is due to the fact that
Russia is now considered an enemy and it would be illegal to accept the offer.
The original conditions of the offer are a limiting factor created by the offeror. These can include statements such as the offer should be accepted within a week, by a certain date, or by mail. To ensure that the time period and terms in the offer are understood clearly, the offeror should be very specific in the date and conditions they want the offer to include.
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If any of the material in the offer is damaged before the offer has been accepted, the offer is no longer good. Since the subject matter is destroyed, there is nothing left for the offeree to receive and can no longer be considered for a possible contract.
Options cannot be revoked. If an option is made, then a rejection or counteroffer does not terminate the offer. Lapse of time and illegality do terminate the offer. Death normally does not unless personal services are involved.
Chapter 15 Problems
1.
Caroline recently decided to travel to Africa. Her grandfather promises to refund her for the trip upon returning to the States. However, once Caroline returns, her grandfather revokes his offer. The only reason Caroline was able to go on the trip was because her grandfather was going to pay for it. Would the grandfather be liable in this situation?
2.
Thomas accidentally installs a home theater in the wrong house. The home owner is aware that this is happening but does not say anything to Thomas and then refuses to pay when the job is complete. Is the home owner liable in this situation?
3.
A salesman sells a used car to Will, who is 16 at the time. Two weeks later Will decides he wants to cancel and get his money back. Does he have the ability to do this?
4.
Jones made an offer to Bryce to sell his car for $25,000. Bryce and Jones agreed to create an option of the offer for the duration of 10 days, starting on April 5 and ending on April
15. If Jones wishes to revoke the offer on April 11, can he do so?
5.
Assume the same facts as question #4. Can Jones Revoke if he wishes on April 16 th
?
6.
Emily offers to sell Thomas her goat for $25, and Thomas replies, “I will accept if you throw in a llama.” In this situation, is Emily’s initial offer still valid?
Answers:
1.
He probably would be liable under promissory estoppel even though there is no contract because it is a gift.
2.
The home owner may be liable for unjust enrichment under quasi contract rules.
3.
Will is a minor and the contract is voidable. He can back out. See the chapter on contractual capacity.
4.
No, the option stops the revocation during the period of the option.
5.
Yes, the option period is up.
6.
No, Thomas’ reply is a counteroffer and counts as a rejection. The offer is dead.
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