Mr. Sherpinskys Business Law Class Entering Into Contracts 2014.

REVIEW FOR EXAMChapter 5 – How Contracts Arise

Mr. Sherpinsky’s Business Law ClassEntering Into Contracts

2014

Chapter 5 – Section 1Mr. Sherpinsky’s Business Law ClassEntering Into Contracts

Key Terms

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)

Nature of a Contract

How would you define contract?

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.

The Three Theories of Contract Law

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.”

6 Elements of a ContractOfferAcceptanceGenuine AgreementConsiderationCapacityLegality***All six elements must be

present in order to constitute a contract***

Elements of Contract Defined

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


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


Genuine Agreement: 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


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


Legality means that people can only enter into contracts for legal purposes. People cannot enter into contracts to commit illegal acts.

Characteristics of a Contract

Contracts can have any of the following characteristics: valid, void, voidable, or

unenforceable express or implied bilateral or unilateral oral or written


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

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.

An unenforceable contract is one the court will not uphold.


Express or Implied Express contract is stated

in words. Can be oral, written or a combination.

An implied in fact contract comes about from the actions of the parties. (Conduct)


Bilateral or Unilateral A bilateral contract contains

two promises. Promise for a promise

A unilateral contract contains 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.

Pennsylvania Law requires written contracts!

Visual Mapping: Contracts

CON

TRAC

T FO

RMAT

ION

BilateralA promise for a promise

UnilateralA promise for an act

FormalRequires a special form for creation

InformalRequires no special form for creation

ExpressFormed by words

Implied by factFormed at least in part by the parties conduct

Chapter 5, Section 2Offer and Acceptance

3 Basic Requirements of Offer

1. Must be made seriously2. Has to be definite and certain3. Must be communicated to

offeree

Offer & Acceptance

No contract without both primary elements

Mutually agreed terms

OfferOfferor

Gives proposalOfferee

Person to whom offer is madeProposal by offeror to do

something Must appear to intend to create legal

obligation Terms must be definite & complete Must be communicated to the

offeree

Test of Reasonable Person

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

Serious IntentThe intention of entering into a

legal obligation. Example: Venting

Serious Intent

Offer must be made with seriousness Not in heat of anger As a joke

Advertisement for Lava Lamps, $49.98Buyer comes to store to buy a lampClerk apologized and said lamps had

sold out in 1 hour after the store opened.

Preliminary Negotiations

Information communicated without indicating intent

Social Agreements▪ Don’t create legal obligations

Advertisements▪ Not considered an offer – but

an invitation to make offer

Invitation to Negotiate

Advertisements (price tags, signs in windows or on counters, prices marked on merchandise)…unless it contains a specific promise, Example: “first come, first served”

Example 3, pg. 114

Complete & Definite Allows court to determine what

was intended & identify legal rights

Complete Price (if not communicated = current

market 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

Definiteness and CertaintyCannot be a certain offer if

something is too unclear or vague Example 4, pg. 115-116

Must Be Communicated

Only intended offeree can accept

Can’t accept if didn’t know offer was made

Communication to the OffereeTelephone, letter,

telegram, fax, e-mail, or any other method that communicates the offer to the offeree. Example 5, pg. 116

Review: 3 Basic Requirements of an Offer

1. Must be made seriously2. Has to be definite and certain3. Must be communicated to

offeree

Requirements of an Acceptance

Must be1. Unconditional2. Unqualified3. Must follow all

rules regarding the method of acceptance

Acceptance Must Match Offer

Offeree must accept all terms Changes = CounterofferMirror Image Rule▪ Terms in acceptance exactly match the terms

contained in the offer

Acceptance Must be CommunicatedSilence as Acceptance

Continuing relationship – agree in advance▪ Not Valid if offer is worded in a way in which

silence means acceptanceUnilateral Acceptance

Promises something in return for the offeree’s performance & indicates performance is acceptance▪ Only be revoke after reasonable amount of

time

Acceptance Must be CommunicatedBilateral 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

Modes of Contractual Communication

Telephone?Text Messaging?Mail?Delivery Service?E-mail?Fax?Other?

When Acceptances are EffectiveOfferor may require offeree to

use a certain communication method to accept.

Once it is accepted, it’s binding Oral/Spoken Mail Telegram Fax Email

Termination of an OfferMay occur in any of 5 ways

1. Revocation 2. Rejection 3. Counteroffer – ends the first

offer4. Expiration of time5. Death or Insanity

RevocationTaking back of an offer by the offerorExample 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

Rejection

Refusal of an offer by the offeree brings the offer to an end. 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

Counteroffer

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…” Mirror Image Rule (Must be exactly same)

Expiration of Time

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.

Expiration of Time

Example: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

Death/Insanity/Destruction

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

Destruction of specific subject matter

Can An Offer Be Kept Open?Options

Offeree gives the offeror something of value in return for a promise to keep the offer open▪ Binding the Offerer within the specific

limitsFirm 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!

Mr. Sherpinskys Business Law Class Entering Into Contracts 2014.

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