Chapter 9: Formation of Traditional and E

Chapter 9: Formation of

Traditional and E-Contracts

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Overview of Contract Law

 Sources of Contract Law.

• Common Law for all contracts except sales and leases.

• Sale and lease contracts - Uniform

Commercial Code (UCC).

 Function of a Contract.

• Provides stability and predictability for commerce.


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 Definition of a Contract.

• Promise or set of promises,

• For breach of which,

• The law provides a remedy, or

• The performance of which the law in some way recognizes as a duty.


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 Objective Theory of Contacts.

• Circumstances to determine intent of parties.

• Objective Facts include:

• What a party said when entering into the contract,

• How the party acted or appeared (intent may be inferred), and

• Circumstances surrounding the transaction.

 Freedom of Contract.


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 Requirements of a Valid Contract:

• Agreement (Offer & Acceptance).

• Consideration: bargained-forexchange.

• Contractual Capacity.

• Legality: purpose of contract must be legal at the time of execution.


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 Defenses to the Enforceability of a

Valid Contract:

• Voluntary Consent.

• Form: some types of contracts must be in writing.


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Types of Contracts


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Types of Contracts

 Contract Formation.

• Bilateral: Offeror accepts Offeree’s promise to perform (“a promise for a promise”).

• Unilateral: Offeror is bargaining for performance. Offeree accepts by completing contract performance (“a promise for an act”).

• CASE 9.1 S CHWARZROCK V . R EMOTE

T ECHNOLOGIES , I NC . (2011). Did the employer owe the bonus?


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Types of Contracts


• Unilateral Contracts.

• Revocation of Offers for Unilateral Contracts:

Offeror cannot revoke promise once performance has begun, for a reasonable time period.

 Formal versus Informal Contracts.

• Formal: must be in writing to be enforceable.

• Informal: all other contracts.


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Types of Contracts


• Express versus Implied Contracts.

• Express: oral or written.

• Implied: conduct creates and defines the terms of the contract. Requirements:

• PL furnished good or service

• PL expected to be paid

• DEF had chance to reject and did not.


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Types of Contracts

 Contract Performance.

• Executed - A contract that has been fully performed on both sides.

• Executory - A contract that has not been fully performed on either side.


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Types of Contracts

 Contract Enforceability.

• Valid: agreement, consideration, contractual capacity, and legality.

• Voidable (unenforceable): Valid contract can be avoided or rescinded based on certain legal defenses.

• Void: no contract.


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Agreement

 An essential element for contract formation is agreement.

 The parties must mutually assent to the same bargain.

 An agreement has two components: an offer and an acceptance.


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Agreement

 Requirements of the Offer.

• An offer is a promise to do or not do something in the future.

• The common law requires three elements for an effective offer:

• Offeror’s serious intention. 

• Reasonably certain terms. 

• Communication to offeree. 


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Agreement


• Offeror’s serious, objective intention.

• A contract is judged by what a reasonable person in the offeree’s position would conclude about the offer.

• CASE 9.2 L UCY V . Z EHMER (1954). Do you think the Zehmers had a serious intention?


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Agreement



• Expressions of Opinion: not offers.

• Statements of Future Intent: not offers.

• Preliminary Negotiations, or Invitations to

Negotiate: not offers. 


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Agreement



• Advertisements: not offers (invitations to negotiate).

• Agreements to Agree: can be enforceable if parties intended to be bound.


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Agreement


• Definiteness of Terms.

• Identification of the parties.

• Object or subject matter of the contract.

• Consideration to be paid.

• Payment, delivery, or performance.

• An offer can require specific terms to make the contract definite. Courts can supply missing terms.


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Agreement


• Communication to Offeree.

• Directly by the Offeror, or

• Use of Agents.


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Agreement

 Termination of the Offer.

• An offer may be terminated prior to acceptance by either:

• Action of the Parties  or by

• Operation of Law. 


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Agreement

 Termination by Action of the Offeror.

• Revocation of the Offer by the Offeror:

• Offer can be withdrawn anytime before

Offeree accepts the offer.

• Effective when the offeree or offeree’s agent receives it. 


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Agreement

 Termination by Action of the Offeree.

• When rejected, by words or conduct, by the offeree.

• Counteroffer is a termination of the original offer.

• “Mirror-Image rule” applies.


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Agreement

 Termination by Operation of Law.

• Lapse of Time.

• Offer terminates by law when the period of time specified in the offer has passed.

• If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. 


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Agreement

 Termination by Operation of Law.

• Destruction of the Subject Matter: before acceptance of offer, terminates the offer.

• Death or Incompetence of the Offeror or

Offeree: automatically terminates unless irrevocable offer.

• Supervening Illegality of the Proposed

Contract: by court or legislation.


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Agreement

 Termination of the Offer.

• Irrevocable Offer: offeree has changed position based on justifiable reliance on the offer.


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Agreement

 Acceptance.

• A voluntary act (expressed or implied) by the Offeree that shows assent

(agreement), to the terms of an offer.

• Unequivocal Acceptance: the “Mirror

Image” Rule..


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Agreement

 Acceptance.

• Silence as Acceptance.

• General Rule: offeree should not be legally obligated to affirmatively reject an offer.

• When Offeree Has Duty to Speak:

• He takes benefit of services with opportunity to reject.

• Prior dealings with Offeror.


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Agreement

 Communication of Acceptance.

• Bilateral Contract: communication of acceptance is necessary because there is a mutual exchange of promises.

• Unilateral Contract: acceptance is evident, notification not necessary.

• CASE 9.3 P OWERHOUSE C USTOM H OMES ,

I NC . V . 84 L UMBER C O . (2011).


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Agreement


• Mode and Timeliness of Acceptance.

• General Rule: in bilateral contracts, acceptance is timely if done before offer is terminated.

• The Mailbox Rule.




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Agreement


• The Mail Box Rule: acceptance is effective when offeree uses authorized means of acceptance.

• If U.S. Mail, acceptance is effective upon dispatch.

• If no means specified, acceptance can be by any reasonable means.


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Agreement


• Exceptions to the Mail Box Rule.

• If Offeror specifies that acceptance will not be effective until it is received.

• If acceptance is sent after rejection, whichever is received first is given effect.


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Agreement


• Substitute Method of Acceptance.

• Effective if the substitute serves the same purpose (Fed-Ex vs. UPS).

• Not effective on dispatch.

• Effective when received by the Offeror.


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E-Contracts

 Online Offers.

• Displaying the Offer. Seller’s website should include hyperlink to page with full contract.

• Provisions to Include. 


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E-Contracts

 Online Offers.

• Provisions to Include:

• Acceptance of Terms: what constitutes an acceptance.

• Payment: how payment is made.

• Return Policy.

• Disclaimer: of liability for certain uses of the goods.

• Limitations on Remedies: if goods defective or contract is breached. 


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E-Contracts

 Online Offers.

• Provisions to Include:

• Privacy Policy.

• Dispute Resolution: usually arbitration or forum-selection clauses.

• Choice-of-law clause.


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E-Contracts

 Online Acceptances.

• Click-On Agreements.

• Courts have concluded a binding contract can be formed by clicking on a box indicating “I Accept” or “I Agree.” Contract can be formed via website or software.

• Law does not require parties read all the terms.


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E-Contracts


• Shrink-Wrap Agreements.

• Contract terms are inside the box.

• Party opening box agrees to terms by keeping merchandise.

• Enforceable vs. Unenforceable Terms.


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E-Contracts


• Browse-Wrap Terms.

• Like click-on agreements, browse-wrap terms can occur in transactions over internet.

• Unlike click-on agreements, browse-wrap terms do not require assent and are usually unenforceable.


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E-Contracts

 E-Signature Technologies.

• E-Signature: electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.

• Digitized Signature: graphical image of a handwritten signature.


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E-Contracts

 Federal Law on E-Signatures and E-

Documents.

• E-SIGN (2000) gives e-signatures and edocuments legal force.

• For an e-signature to be enforceable, the contracting parties must have agreed to use electronic signatures.

 Partnering Agreements.


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The Uniform Electronic

Transactions Act

 Purpose is to remove barriers to forming electronic commerce.

 E-Signature is “electronic sound, symbol or process…associated with a record and… adopted by a person with intent to sign the record.” 


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Transactions Act

 A record is information that is inscribed on a tangible medium or stored in electronic or other medium that is retrievable in visual form.


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Transactions Act

 UETA does not create new rules, but rather enforces ‘real world’ rules on electronic contracts.

• Only applies to e-records and esignatures relating to a “transaction”

(interactions between two people relating to business, commercial, or governmental activities).


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Transactions Act

 UETA does not apply to wills or testamentary trusts.

 Does not apply unless each party has previously agreed to conduct electronic transactions. Can be implied by conduct and prior dealings.


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Transactions Act

 E-SIGN explicitly refers to UETA and provides that E-SIGN is pre-empted by state passing of UETA.

 But state law must conform to minimum E-SIGN procedures.


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Transactions Act


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Transactions Act

 Attributing Electronic Signatures.

• If electronic record or signature is act of a particular person, the record or signature is attributed to that person.

• However, state law governs issues of agency, authority, forgery, contract formation.


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Consideration

 Generally, consideration must have:

• “Legally Sufficient Value”  and

• a “Bargained-for-Exchange.” 


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Consideration

 Legally Sufficient Value can mean:

• Promise,

• Performance, or

• Forbearance. 


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Consideration

 Bargained-for-Exchange: must provide basis for the bargain.

• Something of legal value (a promise, or a performance) must be exchanged between the parties.

• The promise must be either l egally detrimental to the promisee, or legally beneficial to the promisor.


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Consideration

 Adequacy of Consideration:

• Courts typically will not consider.

• Law does not protect a person from entering into an unwise contract.

• Cases of “shockingly inadequate consideration” may raise a red flags, and be ruled unconscionable .


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Consideration

 Agreements That Lack

Consideration.

• Preexisting Duty.

• Promise to do what one already has a legal duty to do does not constitute legally sufficient consideration.

• Unforeseen Difficulties.

• Recession and New Contract.


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Consideration


Consideration.

• Past Consideration is no consideration because the bargained-for exchange element is missing.


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Consideration


Consideration.

• Promissory Estoppel. Elements:

• Must be definite promise.

• Promisee must justifiably rely on the promise.

• Reliance is substantial.

• Justice will be served by enforcing promise.


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Contractual Capacity

 Minors: at 18 years, a person is emancipated, and has the legal capacity to enter into any contract that an adult can.

• However, a contract entered into by a minor is voidable at the option of that minor, and can be disaffirmed. 


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 Minors (continued).

• A contract can be disaffirmed at any time during minority, or for a reasonable period after minor is emancipated.

• Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.


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 Intoxication.

• Lack of capacity at the time the contract is being made. Contract is either voidable or valid, depending on circumstances.

• Disaffirmance (voidable).

• Ratification: after ‘sobering up.’


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 Mental Incompetence.

• Void: person is adjudged mentally incompetent by a court of law and a guardian has been appointed. 


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 Mental Incompetence (cont’d).

• Voidable: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences.




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 Mental Incompetence (cont’d).

• Valid: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities

(known as “lucid” intervals).


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Legality

 A contract must be formed for a legal purpose.

 A specific clause in contract can be illegal, but rest of contract can be enforceable.

 Contract to commit a tortious act is illegal.


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Legality

 Contracts Contrary to Statute.

• A contract must be formed for a legal purpose.

• A specific clause in contract can be illegal, but rest of contract can be enforceable.

• A contract to commit a tortious act is illegal.


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Legality


• Any contract prohibited by federal or state statutory law is illegal and therefore void (never existed).

• Contracts to Commit a Crime.

• Contracts for Usury.


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Legality


• Gambling: distribution of property based on chance among persons who have paid valuable consideration.

• Licensing Statutes: contract’s enforceability depends on purpose.


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Legality

 Contracts Contrary to Public Policy.

• Contracts contrary to public policy are void.

• Contracts in Restraint of Trade are generally void.

• Exception: Covenant not to Compete and Sale of an Ongoing Business.

• Exception: Covenant Not to Compete in

Employment.


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Legality

 Unconscionable Contracts.

• Procedural Unconscionability: inconspicuous print or legalese.

• Depends on a party’s lack of knowledge or expertise.

• Substantive Unconscionability.

• Contracts are oppressive or overly harsh; that deny a remedy for nonperformance.


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Legality

 Exculpatory Clauses.

• Release a party from liability in the event of monetary or physical injury – no matter who is at fault.

• Enforceable when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct.


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Chapter 9: Formation of Traditional and E

Chapter 9: Formation of

Traditional and E-Contracts

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