1. How Contracts Arise
Chapter 5

2. What are the legal issues?
Does the promise to do a favor create a binding contract?
What characteristics do contracts share?
When does a contract legally come into existence?
What constitutes a legal offer?
What constitutes a legal acceptance?

3. Answers The promise to do a favor does not create a binding contract.
Valid, void, voidable, unenforceable; bilateral and unilateral, express and implied; oral and written.
In a bilateral contract, a contract legally comes into existence when promises are exchanged. In a unilateral contract, a contract legally comes into existence when the required act is performed.
A legal offer must include serious intent, clear and definite terms, and communication to the offeree.
An acceptance must meet two requirements. It must be unconditional and it must follow the rules regarding the method of acceptance.

4. What is a contract?
A contract is any agreement enforceable by law. You should never enter into a contract without understanding the legal responsibilities involved.
Not all agreements are contracts, however. A promise to take out the trash is not a contract, but a promise to make payments to a bank for an auto loan is most definitely a contract. One is legally enforceable and the other is not.

5. The Three Theories of Contract Law
In the past, courts considered whether the parties to a contract exchanged things of equal value. The was called the equity theory of contract law.
With the advent of industrial capitalism, this needed to be changed to support the idea of profit-making. Courts then considered whether both parties had agreed to the terms of the contract. This theory was called the will theory of contract law. It focused on each party’s “free will” to enter into the agreement. It was often difficult to know the minds of those entering into these agreements, however.
Courts then searched for “fixed elements” of contracts. If these elements existed, it was determined that there was a contract. This became known as the formalist theory because it relied on the form of the agreement.

6. Six Elements of a Contract
Offer - A proposal made by one party (the offeror) to another party (the offeree) indicating a willingness to enter a contract
Acceptance - the agreement of the offeree to be bound by the terms of the offer
Genuine Agreement - Offer and acceptance go together to create genuine agreement, or a meeting of the minds. Agreement can be destroyed by fraud, misrepresentation, mistake, duress, or undue influence
Consideration - Consideration is the thing of value promised to one party in a contract in exchange for something else of value promised by the other party. The mutual exchange binds the parties together.

7. Cont.
Capacity - The law presumes that anyone entering a contract has the legal capacity to do so. Minors are generally excused from contractual responsibility, as are mentally incompetent and drugged or drunk individuals.
Legality - Parties are not allowed to enforce contracts that involve illegal acts. Some illegal contracts involve agreements to commit a crime or a tort. Others involve activities made illegal by statutory law.

8. Social Agreement vs. Contract
I promise to take the entire class out to eat this weekend. I also promise to let you order anything you want and I will pay for it.
Is this a contract? Why or why not? :)

9. Characteristics of a Contract
Contracts can be created in different ways and can assume diverse forms. A contract can be described by any of the following characteristics:
Valid, void, voidable, or unenforceable
Express or implied
Bilateral or unilateral
Oral or written

10. Valid, Void, Voidable, or Unenforceable
Valid means legally good, or legally binding. A contract that is void has no legal effect.
When a party to a contract is able to void or cancel a contract for some legal reason, it is a voidable contract. It is not void in itself, but may be voided by one or more of the parties. A contract between two minors, for example, could be voidable by either of them. Why?
An unenforceable contract is one the court will not uphold, generally because of some rule of law, such as the statute of limitations. If you wait too long to bring a lawsuit for breach of contract, the statute of limitations may have run its course, making the contract unenforceable.

11. Express or Implied
An express contract is stated in words and may be either oral or written.
An implied contract comes about from the actions of the parties.
Example:
Herb went to a self-service gas station that requires payment before the attendant will turn on the pumps. He handed the attendant $10, returned to his car, pumped $10 worth of gas into his tank, and drove off. Neither party spoke a single word, yet an implied contract arose from their actions.

12. Bilateral Contract
Bilateral means two sided, so a bilateral contract contains two promises. One party promises to do something in exchange for the other’s promise to do something else.
Example: You tell a friend you’ll sell them your DVD player for $25 and they say they’ll buy it. You’ve both made a promise to do something--one to sell and one to buy.

13. Unilateral Contract
Unilateral means one-sided. A unilateral contract contains a promise by only one person to do something, if and when the other party performs some act.
Example: Your friend says “I’ll sell you my DVD player for $25 if you give me the cash before noon tomorrow.” Your friend would not be required to keep the promise unless you hand over the $25 before noon the next day.
One of the most common types of unilateral contracts would be a reward offer. The acceptance of a reward offer would only come into existence if someone provided the information or property that was tied to the reward.

14. Oral Contracts
An oral contract is created by word of mouth and comes into existence when two or more people form a contract by speaking to each other.
One person usually offers to do something and the other party agrees to do something else in return.

15. Answer the following with your neighbor:
What are the elements of a contract?
What are the differences among valid, void, voidable, and unenforceable contracts?
What are the differences between unilateral and bilateral contracts?
What are the differences between oral and written contracts?
How did the Industrial Revolution change the court’s attitude toward interpreting contract law?

16. Requirements of an Offer
An offer has three basic requirements:
Made seriously
Definite and certain
Communicated to the offeree

17. Serious Intent
An offer must be made with the intention of entering into a legal obligation. An offer made in the heat of anger or as a joke would not meet this requirement.
For example: A friend who has an unreliable car may say “Give my $5 and it’s yours!” It might sound like an offer, but your friend couldn’t be required to sell their car for $5.
An invitation to negotiate is not an offer. Sellers usually have limited merchandise to sell and cannot possibly sell an advertised product to everyone who sees the ad. For this reason, most advertisements are treated as an invitation to negotiate.

18. Serious Intent, cont. Invitation to negotiate:
An advertisement in the newspaper reads “Lava Lamps, $49.98.” Carol goes to the store the next day and states that she wants to purchase a lava lamp. A clerk apologizes and tells her that the lamps sold out within an hour of opening.
The advertisement is merely an invitation to the public to come in, see the lamps, and make an offer. Carol made the offer to buy the lamp, but the store owner is free to accept or reject her offer.
The exception to this rule: The store states a specific promise, such as “first come, first served”, or limited number of items that will be sold. In these cases, only a limited number of people, which makes it an offer instead of an invitation to negotiate.

19. Definiteness and Certainty
An offer must be definite and certain to be enforceable. A landlord of an apartment with faulty plumbing might agree to pay “a share” of the cost if the tenant fixes the plumbing, but the court would not enforce the contract because it was not possible to determine what the parties meant by a “share.”
Example: Joe was offered a position as an account executive with the International Corporation at a salary of $2,400 a month plus a “reasonable” commission on total sales. This is not a definite and certain offer because it would be difficult to determine what is “reasonable” commission is.

20. Communication to the Offeree
Offers may be made by telephone, letter, telegram, fax, , or any other method that communicates the offer to the offeree.
Example: Jean found a wallet. A driver’s license identified the owner, and Jean returned the wallet. The owner thanked her but did nothing more. Later that evening, Jean discovered that the owner had offered a reward for return of the wallet. However, she cannot claim the reward because the offer was not communicated to her. She did not know about the reward when she returned the wallet.

21. Requirements of Acceptance
The second element of a legally binding contract is acceptance of the offer by the offeree. Certain basic requirements must be met: the acceptance must be unconditional and must follow the rules regarding the method of acceptance.

22. Unconditional Acceptance
The acceptance must not change the terms of the original offer in any way. The principle is called the mirror image rule. Any change in the terms of the offer means the offeree hasn’t accepted the offer, but has made a counteroffer. If this happens, the offeror is not obligated to go along and no contract results.
Example: John sent Mr. and Mrs. Smith an offer to purchase their home for $150,000. The Smith’s had advertised their home for $155,000. They replied to John that they accepted is offer, but would like the price to be $153,000. No acceptance occurred. Instead, a counter offer was made. John is free to accept the offer, make a counter offer of his own, or reject the offer. This process could go back and forth until the offer and acceptance “mirror” each other.

23. Unconditional Acceptance, cont.
Contracts for the sale of goods are exceptions to the mirror image rule. These exceptions include contracts for personal property such as clothing, furniture, food, motor vehicles, appliances, and other items. These primary exceptions were created by the Uniform Commercial Code, which is a set of statutes that cover commercial law. It was drafted to make trade among the states easier.

24. Methods of Acceptance
The time at which an acceptance takes place is important because that is when the contract comes into existence.
When parties form a contract face to face or on the phone, no special problems exists. One party speaks and the other listens and communicates the offer or acceptance.
Special rules have to come into play when offers and acceptance is communicated via letters or fax. According to common law, an acceptance that must be sent over a distance is effective when it is sent. It also states that an acceptance is implied when the offeree accepts by the same or a faster means than that used by the offeror.

25. Termination of an Offer
An offer may be terminated in one of the following ways:
Revocation--the taking back of an offer by the offeror.
Rob offered to sell his CD burner to Jodi for $250. Jodi examined the burner and determined it was in good condition, however she couldn’t decide if she wanted to spend that much money on something used. She told Rob she would consider it. Meanwhile, Rob decided he didn’t want to sell it after all. He called Jodi and informed her of his decision. He could revoke his offer because Jodi had not yet accepted it.

26. Rejection - the refusal of an offer by the offeree, which brings the offer to an end.
Diane decided that she wanted to make some extra money by selling some floral arrangements that she made using flowers she had grown. She spoke with a neighbor about selling them for $40 and the neighbor decided to take a look at them. When Diane showed the arrangements to her, the neighbor realized they weren’t what she expected and decided to reject Diane’s offer.

27. Counteroffer - this ends the original offer and introduces a new offer from the offeree. No contract comes into existence until the original offeror accepts the new offer.
Jim offers to sell Sam his guitar for $200. Sam says he’ll give him $150. Sam’s offer then becomes the new offer. No agreement will be in effect unless Jim agrees to Sam’s counteroffer.

28. Expiration of time - If the offeror sets a time limit for the acceptance of the offer, it must be honored.
Brad offers to sell Frank his motorcycle for $ Brad tells Frank the offer will remain open until noon the following day. To create a contract, Frank must accept within that time.
If no time for acceptance is stated in the offer, it must be accepted within a reasonable time, otherwise no contract exists. Reasonable time depends on the circumstances. For example, reasonable time to purchase a truckload of ripe tomatoes would be different from a reasonable time to purchase a house.
When an offeree pays money or other consideration to an offeror to hold an offer open for an agreed period of time, an option into existence. An option is a binding promise to hold an offer open for a specified period of time.

29. Death or Insanity - If the offeror dies or becomes insane before the offer is accepted, the offer comes to an end. Although death ends an offer, it does not end a contract, except for contracts related to personal services.

30. Questions What are the requirements of an offer?
What is the difference between an offer and an invitation to negotiate?
What are the requirements of an acceptance?
What is the difference between and acceptance and a counteroffer?
When is an offer terminated?

31. Answers
What are the requirements of an offer? Serious intent, clear and definite terms, and communication to the offeree
What is the difference between an offer and an invitation to negotiate? An offer empowers the offeree to accept its terms and create a contract. An invitation to negotiate is an invitation to the other party to make an offer.
What are the requirements of an acceptance? Must be unconditional and must follow the rules regarding the method of acceptance.
What is the difference between and acceptance and a counteroffer?An acceptance creates a contract. A counteroffer means that the original offer has not been accepted. The offeree has made a new offer.
When is an offer terminated?Upon revocation by the offeror, on rejection by the offeree, when a counteroffer is made, after the expiration of a set time period, and/or upon death or insanity of the offeror.