Chapter 6
Contracts: Nature,
Classification, Agreement
and Consideration
Learning Objectives
What is a contract? What is the objective
theory of contracts?
What are the four basic elements of a valid,
enforceable contract?
What are the various classifications of
contracts?
What are the requirements of an offer?
How can an offer be accepted?
What are the elements of consideration?
Contracts
Function of Contracts
Fundamental to business.
Creates rights and duties between parties.
Provides stability and predictability.
Parties: Promisor (makes the promise) and
Promisee (accepts the promise).
Good faith in commercial agreements
Contracts
Definition of a Contract
Agreement that can be enforced in court.
Formed by two or more parties
Failure to perform results in breach and
damages.
Objective Theory
Reasonable person standard
Circumstances surrounding contract formation
Requirements of a Contract
A valid, enforceable contract includes:
Agreement
Consideration
Capacity
Legality
Defenses to formation include:
Genuineness of Assent
Form
Types of Contracts
Every contract has at least 2 parties: the
Offeror (Promisor) and the Offeree
(Promisee).
Bilateral Contracts
Offeror and Offeree exchange promises to each
other.
A contract is formed when Offeree promises to
perform.
Types of Contracts
Unilateral Contracts
Offeror wants performance in exchange for his
promise.
Contract is formed when Offeree performs.
Contests and lotteries are examples.
Revocation of Offer: modern view is that offer
is irrevocable once the Offeree substantially
performs.
Types of Contracts
Express vs. Implied Contracts
Express: terms of contract are set forth either in
writing or orally.
Implied-in-Fact: based on conduct.
• Plaintiff furnished service or product
• Plaintiff expects to be compensated
• Defendant had a chance to reject and did not.
Implied-in-Law (Quasi Contract)
• Fictional, created by court to avoid unjust enrichment.
Types of Contracts
Formal vs. Informal Contracts
Formal: require special form or method to be
enforceable, e.g., under seal.
Informal: all other contracts.
Executed vs. Executory Contracts
Executed: fully performed by both sides.
Executory: at least one of the parties has not
performed.
Types of Contracts
Valid Contract
Four Elements: Agreement, Consideration,
Legal Purposes, Parties have legal capacity.
Voidable Contract
Valid contract that is legally defective and can
be avoided (rescinded) by one of the parties.
Void Contract
No contract at all.
Agreement: Offer
Agreement = Offer and Acceptance.
An offer is the Offeror’s promise to
perform. An offer requires:
Serious, objection intention
• Opinions are not offers
• Good Intentions are not offers
• Preliminary Negotiations are not offers
• Agreements to Agree are not offers
Offer
An offer requires (continued):
Reasonably definite terms
Communication to Offeree
Termination of Offer
By Act of the Parties
Revocation by Offeror (unless irrevocable)
Rejection by Offeree (or counteroffer)
Operation of Law (destruction, death)
Agreement: Acceptance
Voluntary act by Offeree that shows
assent to terms of original offer.
Unequivocal Acceptance: “Mirror
Image” Rule
Offeree must unequivocally accept offer.
Additional terms may be considered a
counteroffer.
Acceptance by Silence
Acceptance
Communication of Acceptance
Authorized Means of Communication is either
express or implied by form of offer (e.g., U.S.
mail, fax, email)
“Mailbox Rule”: Offeree accepts offer when the
acceptance is dispatched to Offeror in the form
it was received, unless offer requires a different
method (e.g., Fed-Ex, or receipt by Offeror).
Consideration
Consideration is value given in
return for a promise.
Elements:
Something of legally sufficient value
given in exchange for a promise and
A bargained-for-exchange between the
parties.
Adequacy of Consideration
Contracts that Lack Consideration
Pre-Existing Duty
Unforeseen Difficulties
Past Consideration
Illusory Promises
Settlement of Claims
Accord and Satisfaction
Release
Covenant Not to Sue
Promises Enforceable
Without Consideration
Promissory Estoppel
Promissory Estoppel (“detrimental reliance”)
doctrine applies when a person relies on the
promise of another to her legal detriment.
Promisor is “estopped” (precluded) from
revoking the promise. There must be:
• Clear and definite promise with substantial reliance
• Justice is served by enforcement of the promise.