ES 2.00 UNDERSTAND CONTRACT LAW

Obj. 2.01 Understand the elements and characteristics of a

contract

Elements of a Contract

• Offer• Acceptance• Genuine Agreement/Assent• Consideration• Capacity• Legality

All elements MUST be present to be an enforceable contract.

OFFERProposal by one party to another with intent to create a legal binding agreement – Offeror

• Makes the offer– Offeree

• Offer made to this person

Requirements of an Offer

• Serious Intent– Must intend to make the offer– Advertisements?

• No serious intent• Known as an invitation to negotiate

• Definite and Certain– Must use definite words

• Communicated to the Offeree– Phone, fax, Internet, letter, etc

Termination of Offer

• Revocation – Taking back of an offer by offeror • Rejection – Refusal by the offeree • Counteroffer – Any change in the terms of the

offer• Death – Offeror dies • Insanity – Offeror is declared insane • Expiration of Time – If the offeror puts a time

limit on the offer and it has passed • Destruction of the subject matter

Options & Firm Offers

• Option – the offeree gives the offeror something of value in return for a promise to keep the offer open for a set period of time

• Firm Offer – a written offer for goods that states the period of time during which the offer will stay open – No additional consideration is required– Maximum period of time set by the UCC – 3 months– Offeror must be a merchant who deals in related

goods on a daily basis

ACCEPTANCEUnqualified willingness by the offeree to go along with the offer

• Mirror Image Rule• Terms of the acceptance must match

exactly (mirror) the terms of the offer• Any change means there is no

acceptance (counteroffer)

Methods of Acceptance• Bilateral Acceptance

– Offer is accepted by offeree through communication of the promise to the offeror

– Only requires giving a promise to perform, not performance itself

– Most offers are bilateral• Unilateral Acceptance

– Offeror promises something in return for offeree’s performance and indicates that performance represents acceptance

• Silence as Acceptance– Does not represent acceptance– Offeror cannot word offer in a way that silence would be

considered acceptance

GENUINE AGREEMENT (ASSENT)

A valid offer has been made by the offeror, and a valid acceptance has been exercised by the offeree • Several causes for genuine agreement to

be lacking in a contract• Duress • Undue Influence • Unilateral or Mutual Mistake• Innocent Misrepresentation• Fraudulent Misrepresentation

DuressOvercoming a person’s free will by use of force or by threat of force or bodily harm • Threats of Illegal Conduct• Threats to Report Crimes• Threats to Sue

– Threats to sue made for purpose unrelated to the suit• Economic Duress

– Threats to a person’s business or income

Undue Influence

• Unfair and improper persuasive pressure within a relationship of trust

• Must be able to prove:– Relationship of trust, confidence or authority– Unfair persuasion

Unilateral MistakeAn error on the part of one of the parties – Does not affect validity of the contract– Cannot get out of contract– Nature of the Agreement

• Signing a contract you don’t understand or have not read

• Signing a contract in a language you don’t understand

Mutual Mistake (Bilateral Mistake)

Both parties are mistaken about an important fact– Impossibility of Performance

• Contract is impossible to perform • Contract is void

– Subject Matter• Either party can void contract

– Existing Law• Contract is valid• Parties are expected to know the law

Innocent Misrepresentation

Innocent statement of supposed fact that turns out to be false

– Statement must be one of fact– Statement must be material– Statement must be relied upon

• Injured party has the right to rescind (take back) the offer

• No rights to damages

Fraudulent Misrepresentation

Party to a contract deliberately makes an untrue statement of fact• Deliberate: Done with or marked by full

consciousness of the nature and effects; intentional

• Deception: The fact or state of being deceived• Gain: To secure as profit or reward

• In order to prove fraud, you must prove the above 3 definitions

Proving Fraudulent Misrepresentation– Untrue statement of fact

• Must be one of fact, not opinion• Active concealment • Silence – may stay silent about defects except when:

– statement is about material facts– True statement is made false by subsequent events– One party knows the other party has made a basic mistaken

assumption

– Materiality• Statement would cause reasonable person to contract• If one party knows the other party would rely on the

statement • If one party knows the statement is false

Proving Fraudulent Misrepresentation– Reasonable Reliance

• One party must reasonable rely on statement– Intentional or reckless

• One party deliberately lies or conceals a material fact

• One party recklessly makes a false statement of fact, without knowing whether it is true or false

• Statement must be intended to induce party to enter into contract

– Resulting Loss• Must cause an injury

CAPACITY

Legal ability to enter into a contract

• Minors• Mentally Incapacitated• Intoxicated

A person serving a prison sentence lacks capacity.

Minors• Minor – not yet reached legal age (age of majority)• NC Age of Majority – 18 years old

• Emancipation - severing of the parent-child relationship– Formal – court decree– Informal – arises from the conduct of the minor and the parent

• Parent and minor agree that parent will end support• Minor gets married• Minor moves out of family home• Minor joins armed forces• Minor gives birth• Minor takes on full-time employment

• Ratification – agreeing to be bound by a contract that could be avoided– Contracts made by minors are voidable; minors may disaffirm (or

avoid being bound by) contracts

Mentally Incapacitated

• Lacking the ability to understand the consequences of his or her contractual acts

• Severe mental illness• Severe mental disability• Severe senility• Contracts made by mentally incapacitated

are usually void unless involving necessaries.

Intoxicated

• People under the influence of drugs or alcohol

• Intoxication is a voluntary act.• Most courts are reluctant to consider

contracts entered into by intoxicated individuals as voidable.

• Must be so intoxicated that the person did not know they were contracting.

CONSIDERATIONExchange of benefits and detriments by the parties to an agreements• Requirements of consideration:

– Must involve a bargained-for exchange (promise made in return for another promise)

– Must involve something of value– Benefits and detriments must be legal

• Benefits– Something that a party was not previously entitled to receive

• Detriments– Any loss suffered; anything given up

• Forbearance– Not doing something that you have the right to do

Adequacy of Consideration

• Courts don’t look at adequacy or value of an agreement unless it is “unconscionable”

• Unconscionable– So grossly unfair or oppressive that it would

shock the conscience of the court– So lop-sided that the average person would

not agree to terms

Nominal Consideration

• Token amount in a written contract where either the parties cannot or do not wish to state the amount

Agreements without Consideration

• Promise to make a gift– Gifts have no consideration– Cannot be enforced

• Gift that has been given– Doesn’t have to be returned– Donor – Gives the gift– Donee – Accepts the gift

Illusory PromisesClause or wording that allows party to escape from legal obligation• Termination clause

– Illusory – clause to allow termination of contract for any reason– Not illusory – termination only allowed after a change in

defined circumstances• Output Contracts

– Agreement to purchase all of a specific producer’s product• Requirements Contracts

– Agreement to supply all of the needs of a specific buyer• Output & Requirements contracts are recognized by the

courts as having consideration by implying fair dealing.

Existing Duty

• Existing Public Duty– No detriment– Obligation to obey the law

• Existing Private Duty– If a person is already under legal duty to do

something, another promise to do that same thing does not furnish consideration for a new contract.

Past Performance

• An act that has already been performed cannot be consideration in a contract.

Exceptions to Consideration

• Promises to charitable organizations– Gift or Pledge for future contribution

• Enforceable as consideration if organization identifies the pledge for a specific use and acts in reliance on the pledge

• Promises covered by the UCC– Firm offers – Good faith modification of contract

• Promises discharged in bankruptcy

Exceptions to Consideration

• Promises barred from collection• Promissory Estoppel

– Rely on what a person said – Elements:

• Promise must bring action or forbearance• One who gave no consideration must have relied

on the promise• Injustice can be avoided only enforcing the

promise

LEGALITY

Illegal Contracts• Civil & Criminal

– Agreements to commit a crime/tort are illegal • Usury

– State sets a max interest rate– Interest – fee the borrower pays to the lender for using the money – Usury - charging too high of an interest rate

• Gambling– Legal gambling varies from state to state

• Licensing– States require that persons in certain occupations obtain a

license to practice that occupation• Doctors, plumbers, barbers, lawyers, funeral directors

Illegal Contracts• Public policy

– Agreements that unreasonably restrain trade• Takes away the ability to do business with others

– Agreements not to compete• Restrictive covenant - agreement not to compete in a region for

a period of time • Only legal for a short period of time and small geographic region

– Agreements for price fixing• Price Fixing - competitors agree on certain price ranges within

which they will sell their products

Illegal Contracts• Public policy (continued)

– Agreements to eliminate competitive bidding (or bid rigging)• Bid - offer to buy or sell goods or services at a stated price • Bid rigging – competitors agree that one bidder will have low bid

for a certain job….low bidder sets bid higher than would if real competition

– Agreements to obstruct justice• Anything that delays or prevents justice

– Agreements to induce breach of duty or fraud• Influencing persons who hold positions of high trust for private

gain– Agreements to interfere with marriage

• Damage, destroy, or discourage good family relationships

Statute of Frauds

• Requires that certain contracts be in writing to be enforceable– Contracts to buy and sell goods for a price of $500

or more– Contracts to buy and sell real property– Contracts that require more than one year to

complete– Promises to pay the debt of another– Promises to give something of value in return for

marriage

CHARACTERISTICS OF A CONTRACT

• Valid, void, voidable, unenforceable• Express or implied• Bilateral or unilateral• Oral or written

Valid, Void, Voidable, Unenforceable• Valid contract

– Includes all elements recognized by the courts– Legally binding

• Void contract– Without legal effect– Contracts missing one or more elements

• Voidable contract– One or more parties can get out of contract for some legal reason

• Contract lacks genuine assent, contracts with minors

• Unenforceable contract– Contract that court will not uphold, usually because of some rule

of law– Statute of limitations has expired

Express or implied

• Express – Contract statement that may be written or oral

• Implied– Contract that comes about from the actions of

the parties

Bilateral or Unilateral

• Bilateral – Contains two promises– Most contracts are bilateral

• Unilateral – Contains a promise by only one person to do

something if, and when, the other party performs a certain act

– Reward offer is most common unilateral contract

Oral or written• Oral

– Created by two or more people speaking to each other

• Written– contract terms are written so that both parties

know the exact terms – Provides proof of existence for the contract– Certain contract are required by the Statute of

Frauds to be in writing