Chapter 10 Agreement and Consideration.

Introduction Contracts are voluntary agreements between the parties; that is, one party makes an offer that is accepted by the other party. Without mutual assent, there is no contract. Assent may be expressly evidenced by the oral or written words of the parties or implied from the conduct of the parties. To be enforceable, a contract must be supported by consideration, which is broadly defined as something of legal value. It can consist of money, property, the provision of services, the forbearance of a right, or anything else of value. Most contracts that are not supported by consideration are not enforceable. The parties may voluntarily perform a contract that is lacking in consideration. We will discuss consideration, promises that lack consideration, and promises that are enforceable without consideration.

Agreement Agreement is the manifestation by two or more persons of the substance of a contract. It requires an offer and an acceptance. An offer sets forth the terms under which the offeree is willing to enter into the contract. The offeree has the power to create an agreement by accepting the offer. Offer The following three elements are required for an offer to be effective: 1.The offeror must objectively intend to be bound by the offer. 2.The terms of the offer must be definite or reasonably certain. 3.The offer must be communicated to the offeree.

Offer Objective Intent The intent to enter into a contract is determined using the objective theory of contracts – that is, whether a reasonable person viewing the circumstances would conclude that the parties intended to be legally bound. Definiteness of Terms The terms of an offer must be clear enough for the offeree to be able to decide whether to accept or reject the terms of the offer. If the terms are indefinite, the courts cannot enforce the contract or determine an appropriate remedy for its breach. To be considered definite, an offer (and contract) generally must contain the following terms: (1) identification of the parties, (2) identification of the subject matter and quantity, (3) consideration to

Offer cont. be paid, and (4) time of performance. Complex contracts usually state additional terms. Implied Terms The common law of contracts required an exact specification of contract terms. If one essential term was omitted, the courts would hold that no contract had been made. This rule was inflexible. The modern law of contracts is more lenient. Contemporary legal doctrine supports the notion that terms of the offer be “reasonably certain.” Accordingly, the court can supply a missing term if a reasonable term can be implied. The definition of reasonable depends on the circumstances. Terms that are supplied in this way are called implied terms.

Offer cont. Generally, time of performance can be implied. Price can be implied if there is a market or source from which to determine the price of the item or service. Communication An offer cannot be accepted if it is not communicated to the offeree by the offeror or a representative or an agent of the offeror. Advertisements Advertisements for the sale of goods, even at specific prices, generally are treated as invitations to make an offer.

Offer cont. Rewards An offer to pay a reward is an offer to form a unilateral contract. To be entitled to collect the reward, the offeree must (1) have knowledge of the reward prior to completing the requested act and (2) perform the requested act. Auctions At an auction, the seller offers goods for sale through an auctioneer. Unless otherwise expressly stated, an auction is considered an auction with reserve—that is, it is an invitation to make an offer. The seller retains the right to refuse the highest bid and withdraw the goods from sale. A contract is formed only when the auctioneer strikes the gavel down or indicates acceptance by some other means. The bidder may withdraw his or her bid prior to that time.

Offer cont. If an auction is expressly announced to be an auction without reserve, the participants reverse the roles: The seller is the offeror, and the bidders are the offerees. The seller must accept the highest bid and and cannot withdraw the goods from sale. A seller who sets a minumum bid has to sell the item only if the highest bid is equal to or greater than the minimum bid. Termination of Offers An offer may be terminated by the actions of the parties or by operation of laws. Revocation of an Offer by the Offeror Under common law, an offeror may revoke (i.e. withdraw) an offer any time prior to its acceptance by the offeree. Generally, an offer can be

Offer cont. so revoked even if the offeror promised to keep the offer open for a longer time. The revocation may be communicated to the offeree by the offeror or by a third party and made by (1) the offeror’s express statement or (2) an act of the offeror that is inconsistent with the offer. Generally, a revocation must be received by the offeree to be effective. Offers made to the public may be revoked by communicating the revocation by the same means used to make the offer. Rejection of the offer by the Offeree An offer is terminated if the offeree rejects it. A rejection may be evidenced by the offeree’s express words (oral or written) or conduct. Generally, a rejection is not effective until it is actually received by the offeror. Counteroffer by the Offeree A counteroffer by the offeree simultaneaously terminates the offeror’s offer and creates a new offer.

Offer cont. Destruction of the Subject Matter An offer terminates if the subject matter of the offer is destroyed through no fault of either party prior to the offer’s acceptance. Death or Incompetency of the Offeror or the Offeree The death or incompetency of either the offeror or the offeree terminates an offer. Notice of the other party’s death or incompetence is not a requirement. Supervening Illegality If the object of an offer is made illegal prior to the acceptance of the offer, the offer terminates. Lapse of Time An offer expires at the lapse of time of an offer. An offer may state that it is effective only until a certain date. If no time is stated in an offer, the offer terminates after a “reasonable time” dictated by the circumstances.

Acceptance Acceptance is “a manifestation of assent by the oferee to the terms of the offer in a manner invited or required by the offer as measured by the objective theory of contracts”. Generally, unilateral contracts can be accepted only by the offeree’s performance of the required act, and a bilateral contract can be accepted by an offeree who promises to perform the requested act. Only the offeree has the legal power to accept an offer and create a contract. The offeree’s acceptance must be unequivocal: The offeree must accept the terms as stated in the offer. This is called the mirror image rule. (A “grumbling acceptance” is a legal acceptance).

Acceptance cont. Silence as Acceptance Silence usually is not considered acceptance, even if the offeror states that it is. This rule is intended to protect offerees from being legally bound to offers because they failed to respond. Nevertheless, silence does constitute acceptance in the following situations: 1.The offeree has indicated that silence means assent. 2.The offeree has signed an agreement indicating continuing acceptance of delivery until further notification. 3.Prior dealings between the parties indicate that silence means acceptance. 4.The offeree takes the benefit of goods or services provided by the offeror even though he or she (a) has an opportunity to reject the goods or services but fails to do so and (b) knows that the offeror expects to be compensated.

Acceptance cont. Time of Acceptance Under the common law of contracts, acceptance of a bilateral contract occurs when the offeree dispatches the acceptance by an authorized means of communication. Thus, the acceptance is effective when it is dispatched, even if it is lost in transmission. If an offeree first dispatches a rejection and then sends an acceptance, the mailbox rule does not apply to the acceptance. The problem of lost acceptances can be minimized by expressly altering this rule. The offeror can do this by stating in the offer that acceptance is effective only upon actual receipt of the acceptance. Mode of Acceptance The acceptance must be properly dispatched. The acceptance must be properly addressed, packaged in an appropriate envelope or container,

Acceptance cont. and have prepaid postage or delivery charges. Under common law, if an acceptance is not properly dispatched, it is not effective until it is actually received by the offeror. Generally, an offeree must accept an offer by an authorized means of communication. The offer can stipulate that acceptance must be by a specified means of communication (e.g. registered mail). Such stipulation is called express authorization. If the offeree uses an unauthorized means of communication to transmit the acceptance, the acceptance is not effective, even if it is received by the offeror within the allowed time period, because the means of communication was a condition of acceptance. Most offers do not expressly specify the means of communication required for acceptance. The common law recognozes certain implied means of communication. Implied authorization may be inferred from what is customary in similar transactions, usage of trade, or prior dealings between the parties.

Consideration Consideration must be given before a contract can exist. Consideration is defined as something of legal value given in exchange for a promise. Consideration can come in many forms. The most common types consist of either a tangible payment (e.g. money, property) or the performance of an act (e.g. providing some service). Less usual forms of consideration include the forbearance of a legal right (e.g. accepting an out-of-court settlement in exchange for dropping a law suit) and non-economic forms of consideration (e.g. refraining from drinking, smoking). Written contracts are presumed to be supported by consideration. This rebuttable presumption, however, may be overcome by sufficient evidence.

Requirements for Consideration Consideration consists of two elements: (1) Something of legal value must be given (either a legal benefit must be received or legal detriment must be suffered) and (2) there must be a bargained-for exchange. Gift Promises Gift promises, also called gratuitous promises, are unenforceable because they lack consideration. To change a gift promise into an enforceable promise, the promisee must offer to do something in exchange—that is, consideration—for the promise. A completed gift promise, however, cannot be rescinded for lack of consideration.

Contracts Lacking Consideration Some contracts seem as though they are supported by consideration even though they are not. The following types of contracts fall into this category. Illegal Consideration A contract cannot be supported by a promise to refrain from doing an illegal act because that is illegal consideration. Contracts based on illegal consideration are void. Illusory Promises If parties enter into a contract, but one or both of the parties can choose not to perform their contractual obligations, the contract lacks consideration. Such promises, which are known as illusory promises (or illusory contracts), are unenforceable.

Contracts Lacking Consideration Cont. Moral Obligation Promises made out of a sense of moral obligation or honor are generally unenforceable on the ground that they lack consideration. In other words, moral consideration is not treated as legal consideration. Contracts based on love and affection and deathbed promises are examples of such promises. Preexisting Duty A promise lacks consideration if a person promises to perform an act or to do something he or she is already under an obligation to do. This is called a preexisting duty. The promise is unenforceable because no new consideration has been given. Past Consideration In a business setting, problems of past consideration often arise when a party to a contract promises to pay additional compensation for work done in the past.

Settlement of Claims The law promotes the voluntary settlement of disputed claims. Settlement saves judicial resources and serves the interests of the parties entering into the settlement. In some situations, one of the parties to a contract believes that he or she did not receive what he or she was due. This party may attempt to reach a compromise with the other party (e.g. by paying less consideration than was provided for in the contract). The compromise agreement is called an accord. If the accord is performed, it is called a satisfaction. This type of settlement is called an accord and satisfaction. If the accord is not satisfied, the other party can sue to enforce either the accord or the original contract.

Promissory Estoppel The doctrine of promissory estoppel (or detrimental reliance) is an equitable doctrine developed to avoid injustice. It is used to provide a remedy for a person who has relied on another person’s promise, but that person has withdrawn her promise and is not subject to a breach of contract action because one of the two elements discussed in this chapter—agreement or consideration—is lacking. The doctrine of promissory estoppel estops (i.e. prevents) the promisor from revoking her promise. Therefore, the person who has detrimentally relied on the promise may sue the promisor for performance or other remedy the court deems fair to award in the circumstances.

Promissory Estoppel Cont. For the doctrine of promissory estoppel to be applied, the following elements must be shown: 1.The promisor made a promise. 2.The promisor should have reasonably expected to induce the promisee to rely on the promise. 3.The promisee actually relied on the promise and engaged in an action or forbearance of a right of a definite and substantial nature. 4.Injustice would result if the promise were not enforced.