Chapter 11 Contract Formation

Law Governing Contracts Common law of contracts. Restatement of the Law of Contracts. Contracts for the Sale of Goods. UCC Article 2 governs sales contracts. Relationship between common law and Article 2.

Law Governing Contracts

The Function of Contracts Designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace. Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief. What is a Contract? Contract is an agreement (based on a promise) that can be enforced in court.

Types of Contracts Bilateral - Offeree must only promise to perform (“promise for a promise”). Unilateral - Offeree can accept the offer only by completing the contract performance (“promise for an act”). Case 11.1 Ardito v. City of Providence (2003). Offers for Unilateral Contracts are generally revocable unless substantial work.

Types of Contracts Express-words (oral or written). Implied In Fact - Conduct creates and defines the terms of the contract. Quasi Contracts (implied in law). Fictional contracts created by courts. Equitable remedy imposed on parties in the interest of fairness and justice. Limitations On Recovery. Cannot claim if misconduct or negligence. Quantum Meruit.

Types of Contracts Formal vs. Informal Contracts. Executed v. Executory. Executed - A contract hat has been fully performed on both sides. Executory - A contract that has not been fully performed on either side.

Enforceability Valid. Voidable (unenforceable). Void. Elements: Agreement, consideration, contractual capacity, and legality. Voidable (unenforceable). Valid contract can be avoided or rescinded. Void. No contract.

Requirements of A Contract Agreement (Offer and Acceptance). Consideration. Contractual Capacity. Legality. Genuineness of assent. Form.

Agreement Agreement = Offer and Acceptance. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.

Requirements of the Offer Offeror’s serious intention.  Definiteness of terms.  Communication. 

Offeror’s Serious Intention Offers made in anger, jest, or undue excitement are usually not offers. Case 11.2 Lucy v. Zehmer (1954). Expressions of opinion are not offers. Statements of intention or preliminary negotiations are are not offers. Advertisements, Catalogues, Price Lists, and Auctions are treated as Invitations to negotiate and not as offers.

Definiteness of Terms Terms (Expressed or Implied). Identification of the parties. Object or subject matter of the contract. Consideration to be paid. Time of payment, Delivery, or Performance. Case 11.3 Satellite Entertainment Center, Inc. v. Keaton (2002).

Offer-Communication Offeree’s knowledge of the offer: Directly by the Offeror. Use of Agents.

Termination of the Offer An offer may be terminated prior to acceptance by either: Action of the Parties; or by  Operation of Law.

Termination by Action of the Parties Revocation of the Offer by the Offeror: Offer can be withdrawn anytime before Offeree accepts the offer. Effective when the Offeree or Offeree’s agent receive it. Exceptions: Irrevocable Offers. Option Contract: Promise to hold an offer open for a specified period of time in return of consideration.

Termination by Action of the Parties Exceptions (Cont’d): Detrimental Reliance or Promissory Estoppel where Offeree relies on offer to his or her detriment, thus Offeror is barred from revoking the offer. Rejection of the offer by the Offeree: Rejection by the Offeree (expressed or implied) terminates the offer. Effective only when it is received by the Offeror or Offeror’s agent.

Termination by Action of the Parties Rejection by Offeree (Cont’d). A counteroffer by the Offeree is a rejection of the original offer and making of a new offer. Mirror Image Rule. Offeree’s acceptance to match the Offeror’s offer exactly.

Termination by Operation of Law Lapse of Time. Offer terminates by law when the period of time specified in the offer has passed. If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. Destruction of the Subject Matter.

Termination by Operation of Law Death or Incompetence of the Offeror or Offeree. Supervening Illegality of the Proposed Contract.

Acceptance Acceptance: Additional terms may constitute rejection. Voluntary act (expressed or implied), by the Offeree that, shows unequivocal assent (agreement), to the terms of an offer. Additional terms may constitute rejection. Generally, silence is not acceptance.

Mode and Timeliness of Acceptance Mail Box Rule - Acceptance is effective on dispatch, providing that authorized means of communication is used. Offeror specifies (expressly or impliedly) how acceptance should be made. Effective is properly dispatched (mailed, shipped). Exceptions: 

Mode and Timeliness of Acceptance Exceptions: If acceptance is not properly dispatched by the Offeree. If Offeror specifies that acceptance will not be effective until it is received. If acceptance is sent after rejection, whichever is received first is given effect.

Mode and Timeliness of Acceptance Unauthorized Means of Acceptance. Not effective until it is received by the Offeror. If timely sent and dispatched it is considered to have been effective on its dispatch. Technology has all but eliminated the mailbox rule.

Consideration Consideration is legal value given in return for a promise or performance. Must have something of legal value or sufficiency. Must be a bargained-for exchange.

Legal Sufficiency of Consideration Consideration for a promise must be either: Legally detrimental to the promisee, or legally beneficial to the promisor.

Contracts That Lack Consideration Preexisting Duty: Generally, a promise to to what one already has a legal duty to do is not consideration. Exceptions: Unforeseen Difficulties. Recession and New Contract.

Contracts That Lack Consideration Past Consideration is no consideration because the bargained-for exchange element is missing. Illusory Promise: promissor has not definitely promised to do anything (no promise at all).

Promises Enforceable Without Consideration Promissory Estoppel / Detrimental Reliance: Must be clear and definite promise. Promisee must justifiably and substantially rely. Justice will be served.

Capacity Contractual Capacity. Legality. The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence. Legality. The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

Minors In most states, a person is no longer a minor for contractual purposes at the age 18. A minor can enter into any contract that an adult can. A contract entered into by a minor is voidable at the option of that minor.

Minor’s Right to Disaffirm A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.

Minor’s Obligation on Disaffirmance In most states, minor need only return the the goods (or other consideration) subject to the contract, provide the goods are in the minor’s possession or control. In increasing number of states, the minor must restore the adult to the position held before the contract was made.

Misrepresentation of Age Right to Disaffirm. Minor can disaffirm the contract even though minors age is misrepresented. Obligation to Restore. Some courts refuse to allow minors to disaffirm executed contracts unless they can return the consideration received. Some courts allow the defrauded party to sue the minor for misrepresentation or fraud.

Contracts for Necessaries Minor may disaffirm the contract but remains liable for the reasonable value of the goods. Criteria: Item contracted for must be necessary for the minor’s subsistence. Value of the necessary must be up to the level required to maintain a minor standard of living. Minor must not be under the care of parent or guardian.

Ratification Occurs when a minor indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Executed v. Executory contracts. Emancipation terminates minority status.

Intoxicated Persons Key is whether there was contractual capacity at the time the contract was formed. Contract can be either voidable or valid. Courts look at objective indications to determine if contract is voidable. If voidable. Person has the option to disaffirm. Person may ratify the contract expressly or impliedly.

Mentally Incompetent Persons Contract Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Contract Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. Contract Valid: If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Contract that calls for for a tortious act. Contract that calls for an act contrary to public policy.

Contracts Contrary to Statute Usury. Gambling. Sabbath Laws. Licensing Statutes. Contracts to Commit a Crime.

Contracts Contrary to Public Policy Contracts in Restraint of Trade. Case 11.4 Moore v. Midwest Distribution, Inc. (2002). Unconscionable Contracts or Clauses. Procedural or Substantive Unconscionability.

Contracts Contrary to Public Policy Exculpatory Clauses. No liability, regardless of fault. Generally viewed as unconscionable. Discriminatory Contracts. Contracts for the Commission of a Tort.

Effect of Illegality Justifiable Ignorance of the Facts. Members of Protected Classes. Withdrawal from an Illegal Agreement. Fraud, Duress, or Undue Influence.

Third Party Rights There are two important exceptions to the rule of privity of contract: A party to a contract may transfer the rights arising from the contract to another or to free himself or herself from the duties by having another person perform them. The first of these actions is referred to as an assignment of rights and the second, delegation of duties. Where a contract involves a third party beneficiary contract.

Assignments An assignment is the transfer of rights under a contract to a third party. The party assigning the rights is the assignor, and the party to whom the rights are assigned is the assignee. The assignee has a right to demand performance from the other original party to the contract.

Assignments Generally, all rights can be assigned, except in the following circumstances: When assignment is expressly prohibited by statute (for example, worker’s compensation benefits). When a contract is personal in nature (unless all that remains is a money payment). Where the assignment will materially increase or alter the risk or duties of the obligor. If a contract stipulates the right cannot be assigned, then ordinarily it cannot be assigned.

Delegation A delegation is the transfer of duties under a contract to a third party (the delegatee), who then assumes the obligation of performing the contractual duties previously held by the one making the delegation (the delegator). A valid delegation of duties does not relieve the delegator of obligations under the contract. If the delegatee fails to perform, the delegator is still liable to the obligee.

Third Party Beneficiaries A third party beneficiary contract is one made for the purpose of benefiting a third party. Third party beneficiaries can be categorized into: Intended beneficiaries, or Incidental beneficiaries.

Third Party Beneficiaries Intended beneficiary One for whose benefit a contract is created. When the promissor fails to perform as promised, the third party can sue the promissor directly. (Examples of third party beneficiaries are creditor beneficiaries and donee beneficiaries.) Incidental beneficiary A third party who indirectly benefits from a contract but for whose benefit the contract was not specifically intended. Incidental beneficiaries have no rights to the benefits received and cannot sue to have the contract enforced.