Introduction to Contracts

“The whole duty of government is to prevent crime and to preserve contracts.” Lord Melbourne, British Prime Minister

OfferAll contracts begin when a person or a company proposes a deal AgreementOnce a party receives an offer, he must respond to it in a certain way ConsiderationThere has to be bargaining that leads to an exchange between the parties LegalityThe contract must be for a lawful purpose CapacityThe parties must be adults of sound mind ConsentCertain kinds of trickery and force can prevent the formation of a contract WritingWhile verbal agreements often amount to contracts, some types of contracts must be in writing to be enforceable

 Performance and discharge ◦ If a party fully accomplishes what the contract requires, his duties are discharged  Remedies ◦ A court will award money or other relief to a party injured by a breach of contract

 Bilateral contract: A promise made in exchange for another promise  Unilateral contract: A binding agreement in which one party has made an offer that the other party can accept only by action, not words  Executory contract: An agreement in which one or more parties have not yet fulfilled their obligations

 Executed contract: An agreement in which all parties have fulfilled their obligations  Valid contract: One that satisfies all of the law’s requirements  Unenforceable agreement: Occurs when the parties intend to form a valid bargain ◦ But a court declares that some rule of law prevents enforcing it  Voidable contract: An agreement that may be terminated by one of the parties

 Void agreement: A contract that neither party can enforce, because the bargain is illegal or one of the parties had no legal authority to make it  Express contract: An agreement with all the important terms explicitly stated  Implied contract: The words and conduct of the parties indicate they intended an agreement

 A plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that: ◦ The defendant made a promise knowing that the plaintiff would likely rely on it ◦ The plaintiff did rely on the promise ◦ The only way to avoid injustice is to enforce the promise

 Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show that: ◦ The plaintiff gave some benefit to the defendant ◦ The plaintiff reasonably expected to be paid for the benefit and the defendant knew this ◦ The defendant would be unjustly enriched if he did not pay  Quantum meruit: “As much as he deserves”— the damages awarded in a quasi-contract case

 Common law - Many contract lawsuits continue to be decided using common-law principles developed by courts  Uniform Commercial Code ◦ UCC Article 2 governs the sale of goods ◦ Goods: Anything moveable, except for money, securities, and certain legal rights ◦ In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods

 Meeting of the minds - For this to happen, one side must make an offer and the other must make an acceptance ◦ Offer: An act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms  Offeror: The person who makes an offer  Offeree: The person to whom an offer is made

 Statements that usually do not amount to offers ◦ Invitations to bargain ◦ Letters of intent: A letter that summarizes negotiating progress ◦ Advertisements  Problems with definiteness – The terms of the offer must also be definite

 Termination by revocation - An offer is revoked when the offeror “takes it back” before the offeree accepts  Termination by rejection - If an offeree clearly indicates that he does not want to take the offer, then he has rejected it ◦ Counteroffer: A party makes a counteroffer when it responds to an offer with a new and different proposal  A counteroffer is a rejection

 Termination by expiration - When an offer specifies a time limit for acceptance, that period is binding ◦ If the offer specifies no time limit, the offeree has a reasonable period in which to accept  Termination by operation of law - If an offeror dies or becomes mentally incapacitated, the offer terminates automatically and immediately ◦ Destruction of the subject matter terminates the offer

 When there is a valid offer outstanding, it remains effective until it is terminated or accepted ◦ The offeree must say or do something to accept  Mirror image rule: Requires that acceptance be on precisely the same terms as the offer

 For the sale of goods, the most important factor is whether the parties believe they have a binding agreement  If the offeree adds new terms to the offer, acceptance by the offeror generally creates a binding agreement

 If the offeree changes the terms of the offer, a court will probably rely on general principles of the UCC to create a fair contract  If a party wants a contract on its terms only, with no changes, it must clearly indicate that

 Three rules of consideration: ◦ Both parties must get something of measurable value from the contract ◦ A promise to give something of value counts as consideration ◦ The two parties must have bargained for whatever was exchanged and struck a deal: “If you do this, I’ll do that”

 An essential part of consideration is that both parties must get something of value  Item of value can be either ◦ An act - A party commits an act when she does something she was not legally required to do in the first place ◦ Forbearance: Refraining from doing something that one has a legal right to do

“Vagueness or ambiguity in an offer or acceptance guarantees problems and may lead to litigation. The executive or consumer who articulates to herself precisely what she wants and then bargains clearly for it, is likely to spend more time doing business and less time in court.”