Law of Contracts

Business Law

Chapters 6 - 11

6 Elements of Legally Enforceable Contracts

1. Offer and Acceptance

2. Genuine Assent

3. Legal Purpose

4. Consideration (Exchange of value)

5. Capacity to Contract

6. In writing (when required)

Offer

Contractual Intent must be presentTest of Reasonable Person

Not just an invitation to negotiate (i.e. advertisement)

Offer must be Communicated to the Offeree

Terms must be complete and definiteSubject Matter

Quantity

Price

Full terms of payment

Date of Delivery and Possession

Determining Contractual Intent

Jests

Invitations to Negotiate

Statements Made in

Anger or Terror

Social

Agreements

You Make the CallYou Make the Call

Termination of Offer before Acceptance

Revocation by offeror

(Must be communicated to offeree)

Expiration of a set period or reasonable time

Rejection by Offeree

Counteroffers

Death or Insanity

Destruction of Subject Matter

Keeping an Offer Open

OptionsOfferee gives offeror something of value tokeep offer open

Creates a binding contract of its own

Firm OffersMerchant offer in writing

Good through stated time

Not more than 3 months

Acceptance

Only offeree can accept

Must match the offer

Must be communicated to offeror

Communication of Acceptance

Silence as Acceptance (not legal)

Bilateral AcceptanceBoth sides promise an action

Unilateral AcceptancePerformance is acceptance

Communication may be in any reasonablemanner

Acceptance is effective when sent, unlessspecified otherwise.

6 Elements of Legally Enforceable Contracts

1. Offer and Acceptance

2. Genuine Assent

3. Consideration (Exchange of value)

4. Capacity to Contract

5. Legal Purpose

6. In writing (when required)

Lack of Genuine Assent Lack of Genuine Assent

Intentional or Reckl

ess

Proof of Injury

Reaso

nable

Relian

ceMate

rial F

act

Untru

e St

atem

ent

of F

act

Active Concealment

Silence

Unilateral

Mutual (Bilateral)

The Re

latio

nship

Unfair

Persua

sion

Econ

omic T

hrea

ts

Thre

ats to

Sue

Thre

ats to

Rep

ort C

rimes

Illeg

al C

ondu

ct

Remedies for Voidable Contracts

Cancel contract and get back what you put in

Act toward contract as if you intend to be bound to it

If Fraud• Rescission

• Damages

• Punitive Damages

6 Elements of Legally Enforceable Contracts

1. Offer and Acceptance

2. Genuine Assent

3. Consideration (Exchange of value)

4. Capacity to Contract

5. Legal Purpose

6. In writing (when required)

Consideration

Each party must give value to the otherparty

Each party must trade what theycontribute for the other party’sconsideration

Consideration must have legal value

Examples of Consideration

Act Forbearance Promise

Is a gift consideration?

Read “Hot Debate” on page 138

Consideration must be a mutual trade.

Legal ValueConsideration must have “legal value”

Benefit exchanged for a BenefitExample: I’ll pay you $100 to take care

of my dog while I’m on vacation.

Benefit for a DetrimentExample: I’ll buy you a new car if

you don’t date until you are 21.

Detriment for a DetrimentExample: I won’t build a fence if

you don’t buy a dog.

6 Elements of Legally Enforceable Contracts

1. Offer and Acceptance

2. Genuine Assent

3. Consideration (Exchange of value)

4. Capacity to Contract

5. Legal Purpose

6. In writing (when required)

Review:

3 Requirements of Consideration

Act, forbearance or promise

Mutual Trade

Legal Value

Adequacy of Consideration

Unimportant if there is genuine assent

Unconscionable: grossly unfair or oppressive

Nominal Consideration: stated token amount

Questionable Consideration

Illusory PromisesExample: I’ll paint your house, if I have time.

Termination ClausesIllusory: Will buy only Coke, unless we change our mind.

Legal: Will buy only Coke, unless given 31 days notice.

Output ContractExample: We’ll buy all the coal you produce.

Requirements ContractExample: We’ll provide all the engines you need forproduction.

Read “What’s Your Verdict?” on page 143

Existing DutyExisting public duty

Existing private duty

Settlement of Liquidated DebtPartial Payment

Accord and Satisfaction

Release

Composition of Creditors

More Questionable Consideration False Consideration

“What’s Your Verdict?” page 145

Mutual Gifts

Past Performance

Exceptions to Consideration

Promises to Charitable Organizations

“What’s Your Verdict” page 147

Specific Use of gift

Acts in Reliance on the pledge

Promises Covered by the UCC

Firm Offers: signed writing to buy or sell, promisesto leave open, bound up to 3 months

Modifications: Modification to sale of goods does notneed additional consideration

More Exceptions to Consideration

Promises barred from Collection byStatute

Statute of Limitation• Most states, 3 years for a lawsuit

Debts Discharged in Bankruptcy• May promise to repay without additional

consideration

Promissory EstoppelPrevents gross injustice, when one party hasacted in reliance of promise of other party

Preventing Legal Difficulties

Generally, both parties must give and receiveconsideration

Adequacy of consideration is usually immaterial

Accepting money in exchange for giving up a legal rightconstitutes consideration

A pledge to a charitable institution is usually bindingwithout mutual consideration

Promises to make gifts are generally not enforceable

Courts generally will not rescue you from unfavorabledeals voluntarily made.

6 Elements of Legally Enforceable Contracts

1. Offer and Acceptance

2. Genuine Assent

3. Consideration (Exchange of value)

4. Capacity to Contract

5. Legal Purpose

6. In writing (when required)

Contractual Capacity

Ability to understand the consequencesof a contract, excludes

Minor

18 in most states, some states it is 19 or 21

Minority ends the day before your birthday

Early Emancipation (states differ)By Court Order

Parent and minor agree to end support

Minor marries

Minor moves out of family home

Minor becomes member of armed forces

Minor gives birth

Minor undertakes full-time employment

Mentally Incapacitated

Severe mental illness

Severe mental retardation

Severe senility

Insanity could be ruled temporary

Intoxication

Alcohol or drugs

Stricter standards because intoxicationis voluntary

Person must be so intoxicated that theydo not know they are contracting, or

Person determined to be in apermanent state of alcoholism

Lack of Contractual Capacity Options

Contract considered voidable

Disaffirmance

Contract is voided

Protected party gets back what they put intocontract, other party may not get everything back

Necessaries, only must pay what is reasonable

Ratification

Acting toward contract as if you intend to bebound by it, after obtaining contractual capacity

Timeline to Disaffirm a Contract

Period of Minority Period of Majority

Right to disaffirm Right to disaffirm

lasts for a reasonable

length of time after

majority is attained.

Contract is Ratified

Age of Majority or

Capacity Attained

Contracts that Cannot be Disaffirmed

All States

Court-ApprovedContracts

Major Commitments

Enlistment

Educational loans

Marriage contracts

Most States

Banking Contracts

Insurance Contracts

Work-RelatedContracts

Some States

Sale of Realty

Apartment Rental

Effects of Misrepresenting Age

May still disaffirm contracts

May be held liable for falserepresentation or fraud

Damages may be awarded to otherparty

Contractual Capacity in Organizations

Scope of Authority

Employer authorizes employee

Titles such as purchasing agent

If no scope of authority

Contract is voidable

Person could be held personally liable