Chapter 10 Formation of Traditional And Online Contracts PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 4E, by Henry R. Cheeseman Chapter 10 Formation of Traditional And Online Contracts Prentice Hall © 2005

What Is a Contract? A contract is an agreement that is enforceable by a court of law or equity Prentice Hall © 2005

Parties to a Contract Offeror Offeree Offer Acceptance Offeror makes an offer to the offeree Offeree has the power to accept the offer and create a contract Prentice Hall © 2005

Elements of an Enforceable Contract Agreement Consideration Contractual capacity Lawful object Contract Prentice Hall © 2005

Sources of Contract Law Common law of contracts Uniform Commercial Code Restatement of the Law of Contracts Prentice Hall © 2005

Classifications of Contracts Bilateral and unilateral contracts Express and implied contracts Formal and informal contracts Executed and executory contracts Valid, void, voidable, and unenforceable contracts Prentice Hall © 2005

Equity and Contracts Equity Quasi- or implied-in-law contract A doctrine that permits judges to made decisions based on fairness, equality, moral rights, and natural law Quasi- or implied-in-law contract An equitable doctrine whereby a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed. The doctrine is intended to prevent unjust enrichment or unjust detriment Prentice Hall © 2005

Agreement Agreement Parties The manifestation by two or more persons of the substance of a contract Parties Offeror Person who makes an offer Offeree Person to whom an offer has been made Prentice Hall © 2005

Requirements of an Offer For an offer to be effective: The offeror must objectively intend to be bound by the offer The terms of the offer must be definite or reasonably certain The offer must be communicated to the offeree Prentice Hall © 2005

Objective Theory of Contracts A theory that says the intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties Prentice Hall © 2005

Termination of an Offer by Action of the Parties Revocation of the offer by the offeror Rejection of the offer by the offeree Counteroffer by the offeree Promissory estoppel Prentice Hall © 2005

Termination of the Offer by Operation of Law Destruction of the subject matter Death or incompetence of the offeror or the offeree Supervening illegality Lapse of time Prentice Hall © 2005

Acceptance Only the offeree can legally accept an offer and create a contract The offeree’s acceptance must be unequivocal Mirror image rule Silence is not considered acceptance even if the offeror states that it is Prentice Hall © 2005

Mode of Acceptance An offeree must accept an offer by an authorized means of communication Express authorization Acceptance must be by a specified means of communication Implied authorization Mode of acceptance is implied from what is customary in similar transactions, usage of trade, or prior dealings between the parties Prentice Hall © 2005

Elements of Consideration Something of legal value must be given, e.g., either a legal benefit must be received or a legal detriment suffered There must be a bargained-for exchange Gift promises (gratuitous promises) are unenforceable because they lack consideration Nominal consideration Nominal consideration is not considered legally sufficient in many states Prentice Hall © 2005

Persons Who May Lack the Capacity to Contract Minors Persons who have not reached the age of majority Mentally incompetent persons Intoxicated persons Prentice Hall © 2005

Minors Infancy doctrine Duties Allows minors to disaffirm (cancel) most contracts they have entered into with adults Duties Restitution Minor’s Competent party’s Restoration Ratification Prentice Hall © 2005

Special Types of Contracts for which Minors May be Liable Medical, surgical, and pregnancy care Psychological counseling Health and life insurance Performance of duties relating to stock and bond transfers, bank accounts, etc. Educational loan expenses Contracts to support children Contracts to enlist in the military Artistic, sports, and entertainment contracts Prentice Hall © 2005

Disaffirmance of Contracts Based on Legal Insanity If a person is adjudged insane, the contract is void; neither party can enforce the contract If the person is insane, but not adjudged insane, the contract is voidable by the insane person; the competent party cannot void the contract Prentice Hall © 2005

Disaffirmance of Contracts Based on Intoxication Most states provide that contracts entered into by intoxicated persons are voidable by that person A person who disaffirms a contract based on intoxication generally must be returned to the status quo Prentice Hall © 2005

Illegality—Contracts Contrary to Statutes Usury laws Gambling statutes Sabbath laws or blue laws Contracts to commit a crime Licensing statutes Prentice Hall © 2005

Illegality—Contracts Contrary to Public Policy Immoral contracts Contracts in restraint of trade Covenants not to compete Exculpatory clauses Prentice Hall © 2005

Effect of Illegality Illegal contracts are void; therefore, the parties cannot sue for nonperformance Exceptions Innocent persons who were justifiably ignorant of the law or fact that made the contract illegal Persons who were induced to enter into the contract by fraud, duress, or undue influence Persons who entered into an illegal contract withdraw before the illegal act is performed Persons who were less at fault than the other party for entering into an illegal contract In pari delicto When both parties are equally at fault in an illegal contract Prentice Hall © 2005

Unconscionable Contracts Elements of an unconscionable contract: The parties possessed severely unequal bargaining power The dominant party unreasonably used its unequal bargaining power to obtain oppressive or manifestly unfair contract terms The adhering party had no reasonable alternative Remedies for an unconscionable contract: Court can refuse to enforce the contract Court can refuse to enforce the unconscionable clause but enforce the remainder of the contract Court can limit the applicability of any unconscionable clause to avoid any unconscionable result Prentice Hall © 2005

Third Party Rights Assignment—the transfer of contractual rights by the obligee to another party Assignor—the obligee who transfers the right Assignee—the party to whom the right has been transferred Prentice Hall © 2005

Beneficiaries Intended beneficiary Incidental beneficiary A third party who is not in privity of contract but who has rights under the contract and can enforce the contract against the obligor Incidental beneficiary A party who is unintentionally benefited by other people’s contracts Prentice Hall © 2005