2014
Mr. Sherpinsky’s Business Law Class
Entering Into Contracts
Mr. Sherpinsky’s Business Law Class
Entering Into Contracts
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contract (p. 106)
offer/acceptance (p. 109)
genuine agreement (p. 109)
capacity (p. 109)
consideration (p. 109)
legality (p. 109)
void/voidable contract (p. 110)
unenforceable (p. 111)
express/implied contract (p. 111)
bilateral/unilateral contract (pp. 111, 112)
How would you define contract?
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A contract is any agreement
enforceable by law.
Not all agreements are
contracts, however.
 Whether or not it’s a contract,
depends on the circumstances of
the agreement.
Evolution of contract law:
Equity Theory: Parties to a contract exchanged
things of equal value. This approach was called
the equity theory of contract law.
 Free Will Theory: The advent of industrial
capitalism forced the courts to shift their focus.
They began to ask if the parties had agreed to the
terms in the agreement of their own free will.
 Formalist Theory: Then the courts began to
study the parties’ actions and words to determine
if there was a “meeting of the minds.”
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Offer
Acceptance
Genuine Agreement
Consideration
Capacity
Legality
***All six elements must be
present in order to
constitute a contract***
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An offer is a proposal by one party
to another intended to create a
legally binding agreement
 Must be directed to a specific person
 Example:
 Menu listing prices isn’t an offer because it’s
not directed toward anyone in particular
 When you place your order, you make an
offer
 When they start cooking your food, the
restaurant has accepted your offer, and a
contract has been formed
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An acceptance is the second
party’s unqualified willingness to
go along with the first party’s
proposal
 The law infers acceptance from
certain actions, such as signing a
contract or beginning to carry out the
terms of a bargain
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Genuine Agreement:
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If a valid offer is met by a valid acceptance, a
genuine agreement exists.
Capacity is the legal ability to enter
a contract.
 Minors can make contracts, but many
times they are asked to have a cosigner
(Person responsible for the contract
should the minor fail to pay
 Conditions affecting capacity:
 Intoxication, mental illness, legal
competency or something against the
public good is usually NOT enforceable
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Consideration is the exchange of things
of value. (Must be legally sufficient and
bargained-for) What about a promise?
 You buy a shirt, the consideration you pay is
the money, and the merchant’s is the item
you’re buying
 DO NOT have to be the same value
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Legality means that people can only
enter into contracts for legal purposes.
People cannot enter into contracts to
commit illegal acts.
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Contracts can have any of the
following characteristics:
 valid, void, voidable, or
unenforceable
 express or implied
 bilateral or unilateral
 oral or written
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Contracts can have any of the
following characteristics:
 Formal and Informal
 Formal: Requires a special form or
method of creation for contract formation
 Examples: contracts under seal,
negotiable instruments, letters of credit
 Informal or (Simple Contracts):
 Requires no special form for contract
information, but usually details or conditions are
put into writing to hold proof of existence.
Valid, Void, Voidable, or Unenforceable
 A valid contract is legally binding.
 MUST have the necessary contractual elements of offer,
acceptance, agreement, consideration, legal capacity, and legal
purpose
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A contract that is void has no legal effect.
 No contract exists, or there is a contract without legal obligations
Valid, Void, Voidable, or Unenforceable
 A contract that is void has no legal effect.
 When a party to a contract is able to
avoid, or enforce, or cancel the contract
for any legal reason, it is a voidable
contract.
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An unenforceable contract is one the
court will not uphold.
Express or Implied
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Express contract is stated in
words.
 Can be oral, written or a combination.
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An implied in fact contract
comes about from the actions
of the parties. (Conduct)
Bilateral or Unilateral
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A bilateral contract contains
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A unilateral contract contains
two promises.
 Promise for a promise
a promise by only one person to do
something, if and when the other
party performs some act.
 A promise for an act
 Acceptance is the completed or
substantial performance of the
contract
Oral or Written
 An oral contract is created by word
of mouth and comes into existence
when two or more people form a
contract by speaking to each other.
 Sometimes, however, it is desirable
to put contracts in writing.
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Pennsylvania Law requires
written contracts!
CONTRACT
FORMATION
Bilateral
A promise for a promise
Unilateral
A promise for an act
Formal
Requires a special form for creation
Informal
Requires no special form for creation
Express
Formed by words
Implied by fact
Formed at least in part by the parties conduct
Offer and Acceptance
1.
2.
3.
Must be made seriously
Has to be definite and certain
Must be communicated to offeree
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No contract without
both primary
elements
Mutually agreed
terms
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Offeror
 Gives proposal
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Offeree
 Person to whom offer is made
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Proposal by offeror to do something
 Must appear to intend to create legal
obligation
 Terms must be definite & complete
 Must be communicated to the offeree
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Objective legal test used by
jurors or judges
 Concerned with the
appearance of the action
▪ Problem: Think you are
joking but interpreted as
serious intention then you
have made an offer
▪ Problem: If you are serious
but interpreted as joking
you have not made an offer
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The intention of entering into a legal
obligation.
 Example: Venting
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Offer must be made with seriousness
 Not in heat of anger
 As a joke
Advertisement for Lava Lamps, $49.98
Buyer comes to store to buy a lamp
Clerk apologized and said lamps had sold
out in 1 hour after the store opened.
Information communicated
without indicating intent
 Social Agreements
▪ Don’t create legal obligations
 Advertisements
▪ Not considered an offer – but an
invitation to make offer
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Advertisements (price tags, signs in
windows or on counters, prices marked on
merchandise)…unless it contains a
specific promise, Example: “first
come, first served”
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Example 3, pg. 114
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Allows court to determine what was
intended & identify legal rights
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Complete
 Price (if not communicated = current market
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price)
Full terms for payment
Legal description of goods/services
Date for delivery of possession
Date for delivery of the transfer of
ownership/title/deed
Definite
 Essential term identified clearly
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Cannot be a certain offer if
something is too unclear or vague
 Example 4, pg. 115-116
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Only intended
offeree can
accept
Can’t accept if
didn’t know
offer was made
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Telephone, letter, telegram,
fax, e-mail, or any other
method that communicates
the offer to the offeree.
 Example 5, pg. 116
1.
2.
3.
Must be made seriously
Has to be definite and certain
Must be communicated to offeree
Must be
1. Unconditional
2. Unqualified
3. Must follow all
rules regarding
the method of
acceptance
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Offeree must accept all terms
 Changes = Counteroffer
 Mirror Image Rule
▪ Terms in acceptance exactly match the terms
contained in the offer
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Silence as Acceptance
 Continuing relationship – agree in advance
▪ Not Valid if offer is worded in a way in which silence
means acceptance
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Unilateral Acceptance
 Promises something in return for the offeree’s
performance & indicates performance is
acceptance
▪ Only be revoke after reasonable amount of time
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Bilateral Acceptance
 Most offers use this type of acceptance
 Most common method of acceptance
▪ Requires that offeree accept by communicating the
requested promise back to offeror
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Telephone?
Text Messaging?
Mail?
Delivery Service?
E-mail?
Fax?
Other?
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Offeror may require offeree to use a
certain communication method to
accept.
Once it is accepted, it’s binding
 Oral/Spoken
 Mail
 Telegram
 Fax
 Email
May occur in any of 5 ways
1. Revocation
2. Rejection
3. Counteroffer – ends the first offer
4. Expiration of time
5. Death or Insanity
Taking back of an offer by the offeror
Example
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Rob offered to sell his CD burner to Jodi Costa for
$250.00
Jodi examined the CD burner and found that it
was in good condition
However, Jodi couldn’t decide if she wanted to
spend so much money.
She told Rob she would consider his offer.
Rob called Jodi later the same day and withdrew
his offer.
Can he do so? Why?
Jodi had not yet accepted his offer….
– example 8, pg. 120
Refusal of an offer by the offeree
brings the offer to an end.
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Example
Diane decided that she wanted to make
some extra money by selling dried flower.
She offered the flowers to a friend for
$40.00
Friend looked at the flowers and decided
not to purchase them.
Has the offer come to an end?
– example 9, pg. 120
A counteroffer ends the first offer.
Example:
“I’ll sell you my camera for $50.00, and you say
“I’ll give you $45.00 for it.”
 No contract comes into existence unless the
original offeror accepts your new offer.
 If you say later, “Ok, I’ll give you $50.00 you are
now making a new offer…”
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Mirror Image Rule (Must be exactly same)
If the offeror sets a time limit for the
acceptance of the offer, it must be honored.
Example:
If Frank says to John, “I’ll sell you my
motorcycle for $1,000 and you have till noon
tomorrow to accept, then you must honor the
timeline given.
 If no timeline is given then the offer must be
accepted within a reasonable time.
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Example:
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Options
 If an offeree pays money or other consideration to an
offeror to hold an offer open for an agreed period of
time, an option contract comes into existence.
 An option contract is a binding promise to hold an
offer open for a specific period of time.
▪ Exclusive right to accept the offer
▪ Within the agreed time
▪ Subject to the terms of the original offer
If the offeror dies or becomes insane
before the offer is accepted, the offer
comes to an end.
 Death ends an offer, but not a contract
 Estate heirs will have to comply with the terms of
any contract
 Unless the contract is for personal services
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Destruction of specific subject matter
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Options
 Offeree gives the offeror something of value in
return for a promise to keep the offer open
▪ Binding the Offerer within the specific limits
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Firm Offers (Standing Offers)
 Applies to merchants who make offers in
writing…MUST STAY OPEN UNTIL DEADLINE!
▪ MUST contain a term stating how long it is to stay
open and how it MAY be revoked!