1. © 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 9 Contract Formation

2. © 2004 West Legal Studies in Business A Division of Thomson Learning 2 IntroductionIntroduction Promise is a declaration that something will or will not happen in the future. Promise is a declaration that something will or will not happen in the future. What is a Contract? What is a Contract?  Contract is an agreement (based on a promise) that can be enforced in court. What law governs? What law governs?  Service contracts - common law of contracts.  Sale and lease contracts - Uniform Commercial Code (UCC). Promise is a declaration that something will or will not happen in the future. Promise is a declaration that something will or will not happen in the future. What is a Contract? What is a Contract?  Contract is an agreement (based on a promise) that can be enforced in court. What law governs? What law governs?  Service contracts - common law of contracts.  Sale and lease contracts - Uniform Commercial Code (UCC).

3. © 2004 West Legal Studies in Business A Division of Thomson Learning 3 §1: Function of Contract Law Designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace. 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. Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief. Designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace. 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. Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning 4 §2: Definition of a Contract A contract is a: A contract is a:  Promise or set of promises,  For which breach of which,  The law provides a remedy, or  The performance of which the law in some way recognizes as a duty. Objective Theory of Contacts. Circumstances to determine intent of parties. Objective Theory of Contacts. Circumstances to determine intent of parties. A contract is a: A contract is a:  Promise or set of promises,  For which breach of which,  The law provides a remedy, or  The performance of which the law in some way recognizes as a duty. Objective Theory of Contacts. Circumstances to determine intent of parties. Objective Theory of Contacts. Circumstances to determine intent of parties.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning 5 §3: Elements of a Contract Agreement (Offer and Acceptance). Agreement (Offer and Acceptance). Consideration. Consideration. Contractual Capacity. Contractual Capacity. Defense: Defense:  Legality.  Genuineness of assent.  Form. Agreement (Offer and Acceptance). Agreement (Offer and Acceptance). Consideration. Consideration. Contractual Capacity. Contractual Capacity. Defense: Defense:  Legality.  Genuineness of assent.  Form.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning 6 §4: Types of Contracts Bilateral v. Unilateral. Bilateral v. Unilateral.  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”). »Irrevocable: Offer cannot be revoked once performance has begun. Bilateral v. Unilateral. Bilateral v. Unilateral.  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”). »Irrevocable: Offer cannot be revoked once performance has begun.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning 7 Types of Contracts Express v. Implied In Fact. Express v. Implied In Fact.  Express: Words (oral or written).  Implied In Fact: Conduct creates and defines the terms of the contract. Requirements: »PL furnished good or service »PL expected to be paid »DEF had chance to reject and did not. Express v. Implied In Fact. Express v. Implied In Fact.  Express: Words (oral or written).  Implied In Fact: Conduct creates and defines the terms of the contract. Requirements: »PL furnished good or service »PL expected to be paid »DEF had chance to reject and did not.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning 8 Types of Contracts Quasi Contracts - Implied in law. Quasi Contracts - Implied in law.  Fictional contracts created by courts.  Imposed on parties for the interest of fairness and justice.  Equitable remedies.  Quantum Meruit. Quasi Contracts - Implied in law. Quasi Contracts - Implied in law.  Fictional contracts created by courts.  Imposed on parties for the interest of fairness and justice.  Equitable remedies.  Quantum Meruit.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning 9 Types of Contracts Formal v. Informal. Formal v. Informal. Executed v. Executory. Executed v. Executory.  Executed - A contract that has been fully performed on both sides.  Executory - A contract that has not been fully performed on either side. Formal v. Informal. Formal v. Informal. Executed v. Executory. Executed v. Executory.  Executed - A contract that has been fully performed on both sides.  Executory - A contract that has not been fully performed on either side.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning 10 EnforceabilityEnforceability Valid. Valid.  Elements: Agreement, consideration, contractual capacity, and legality. Void. Void.  No contract. Voidable (unenforceable). Voidable (unenforceable).  Valid contract can be avoided or rescinded. Valid. Valid.  Elements: Agreement, consideration, contractual capacity, and legality. Void. Void.  No contract. Voidable (unenforceable). Voidable (unenforceable).  Valid contract can be avoided or rescinded.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning 11 § 5: Agreement Agreement = offer and acceptance. Agreement = offer and acceptance. Parties must show mutual assent to terms of contract. Parties must show mutual assent to terms of contract. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed. Agreement = offer and acceptance. Agreement = offer and acceptance. Parties must show mutual assent to terms of contract. Parties must show mutual assent to terms of contract. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning 12 Requirements of the Offer Offeror’s serious intention. Offeror’s serious intention. Definiteness of terms. Definiteness of terms. Communication to Offeree. Communication to Offeree. Offeror’s serious intention. Offeror’s serious intention. Definiteness of terms. Definiteness of terms. Communication to Offeree. Communication to Offeree.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning 13 Offer: Intention Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer. Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer.  Case 9.1: Lucy v. Zehmer (1954). Offers made in anger, jest, or undue excitement are usually not offers. Offers made in anger, jest, or undue excitement are usually not offers. Expressions of opinion are not offers. Expressions of opinion are not offers. Statements of Intention or preliminary negotiations are are not offers. Statements of Intention or preliminary negotiations are are not offers. Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers. Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers. Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer. Contract is judged by what a reasonable person in the Offeree’s position would conclude about the offer.  Case 9.1: Lucy v. Zehmer (1954). Offers made in anger, jest, or undue excitement are usually not offers. Offers made in anger, jest, or undue excitement are usually not offers. Expressions of opinion are not offers. Expressions of opinion are not offers. Statements of Intention or preliminary negotiations are are not offers. Statements of Intention or preliminary negotiations are are not offers. Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers. Advertisements, Catalogues, Price Lists, and Circular are treated as Invitations to negotiate and not as offers.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning 14 Offer: Definiteness of Terms Terms (Expressed or Implied). 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 9.2: Satellite Entertainment Center v. Keaton (2002). Case 9.2: Satellite Entertainment Center v. Keaton (2002). Terms (Expressed or Implied). 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 9.2: Satellite Entertainment Center v. Keaton (2002). Case 9.2: Satellite Entertainment Center v. Keaton (2002).

15. © 2004 West Legal Studies in Business A Division of Thomson Learning 15 Offer: Communication Offeree’s knowledge of the offer: Offeree’s knowledge of the offer:  Directly by the Offeror.  Use of Agents. Offeree’s knowledge of the offer: Offeree’s knowledge of the offer:  Directly by the Offeror.  Use of Agents.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning 16 Termination of the Offer An offer may be terminated prior to acceptance by either: An offer may be terminated prior to acceptance by either:  Action of the Parties; or by  Operation of Law. An offer may be terminated prior to acceptance by either: An offer may be terminated prior to acceptance by either:  Action of the Parties; or by  Operation of Law.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning 17 Termination by Action of the Parties Revocation of the offer by the Offeror: 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 (Detrimental Reliance). »Option Contract: Promise to hold an offer open for a specified period of time in return of consideration. Revocation of the offer by the Offeror: 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 (Detrimental Reliance). »Option Contract: Promise to hold an offer open for a specified period of time in return of consideration.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning 18  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 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.  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 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

19. © 2004 West Legal Studies in Business A Division of Thomson Learning 19 Termination by Action of the Parties Rejection by Offeree (Cont’d). 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. Mirror Image Rule.  Offeree’s acceptance to match the the Offeror’s offer exactly. Rejection by Offeree (Cont’d). 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. Mirror Image Rule.  Offeree’s acceptance to match the the Offeror’s offer exactly.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning 20 Termination by Operation of Law Lapse of Time. 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. Destruction of the Subject Matter. Lapse of Time. 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. Destruction of the Subject Matter.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning 21 Termination by Operation of Law Death or Incompetence of the Offeror or Offeree. Death or Incompetence of the Offeror or Offeree. Supervening Illegality of the Proposed Contract. Supervening Illegality of the Proposed Contract. Death or Incompetence of the Offeror or Offeree. Death or Incompetence of the Offeror or Offeree. Supervening Illegality of the Proposed Contract. Supervening Illegality of the Proposed Contract.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning 22 AcceptanceAcceptance Acceptance is the Acceptance is the  Voluntary act (expressed or implied),  by the Offeree that,  shows assent (agreement),  to the terms of an offer. “Mirror Image” Rule. “Mirror Image” Rule. Acceptance is the Acceptance is the  Voluntary act (expressed or implied),  by the Offeree that,  shows assent (agreement),  to the terms of an offer. “Mirror Image” Rule. “Mirror Image” Rule.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning 23 Silence as Acceptance Acceptance of Services by Silence. Acceptance of Services by Silence.  Sometimes Offeree has a duty to speak. Prior Dealings and Acceptance. Prior Dealings and Acceptance.  Silence can be acceptance if there are prior dealings. Solicited Offers. Solicited Offers.  Offeree has a duty to reject. Acceptance of Services by Silence. Acceptance of Services by Silence.  Sometimes Offeree has a duty to speak. Prior Dealings and Acceptance. Prior Dealings and Acceptance.  Silence can be acceptance if there are prior dealings. Solicited Offers. Solicited Offers.  Offeree has a duty to reject.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning 24 Timeliness of Acceptance Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance. Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance.  Offeror specifies (expressly or impliedly) how acceptance should be made.  Effective when dispatched (mailed, shipped). Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance. Mail Box Rule - Acceptance becomes effective on dispatch, providing that authorized means of communication is used. Offeree accepts by using the stipulated means of acceptance.  Offeror specifies (expressly or impliedly) how acceptance should be made.  Effective when dispatched (mailed, shipped).

25. © 2004 West Legal Studies in Business A Division of Thomson Learning 25 Authorized Means of Acceptance Exceptions: 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. Unauthorized Means 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. Exceptions: 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. Unauthorized Means 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.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning 26 Technology and Acceptance Traditional rules provide framework for digital age. Traditional rules provide framework for digital age. But traditional rules may not apply to acceptances via Fed Ex, email, or fax. But traditional rules may not apply to acceptances via Fed Ex, email, or fax. Generally, ‘mailbox rule’ does not apply to online offers. Generally, ‘mailbox rule’ does not apply to online offers. Traditional rules provide framework for digital age. Traditional rules provide framework for digital age. But traditional rules may not apply to acceptances via Fed Ex, email, or fax. But traditional rules may not apply to acceptances via Fed Ex, email, or fax. Generally, ‘mailbox rule’ does not apply to online offers. Generally, ‘mailbox rule’ does not apply to online offers.

27. © 2004 West Legal Studies in Business A Division of Thomson Learning 27 §6: Consideration Consideration for a promise must be either: Consideration for a promise must be either:  Legally detrimental to the promisee, or Legally beneficial to the promisor. “Legal Value”: “Legal Value”:  Promise,  Performance, or  Forbearance. Case 9.3: Hamer v. Sidway (1891). Case 9.3: Hamer v. Sidway (1891). Consideration for a promise must be either: Consideration for a promise must be either:  Legally detrimental to the promisee, or Legally beneficial to the promisor. “Legal Value”: “Legal Value”:  Promise,  Performance, or  Forbearance. Case 9.3: Hamer v. Sidway (1891). Case 9.3: Hamer v. Sidway (1891).

28. © 2004 West Legal Studies in Business A Division of Thomson Learning 28 Adequacy of Consideration A Court will not question the fairness of the bargain if legally sufficient. A Court will not question the fairness of the bargain if legally sufficient.  Law does not protect a person for entering into an unwise contract.  In extreme cases, a court may find that a party lacks legal capacity or that contract was unconscionable. A Court will not question the fairness of the bargain if legally sufficient. A Court will not question the fairness of the bargain if legally sufficient.  Law does not protect a person for entering into an unwise contract.  In extreme cases, a court may find that a party lacks legal capacity or that contract was unconscionable.

29. © 2004 West Legal Studies in Business A Division of Thomson Learning 29 Agreements That Lack Consideration Preexisting Duty. Preexisting Duty.  Promise to to what one already has a legal duty to do does not constitute legally sufficient consideration.  Exceptions: »Unforeseen Difficulties. »Recession and New Contract. Past Consideration is no consideration because the bargained-for exchange element is missing. Past Consideration is no consideration because the bargained-for exchange element is missing. Preexisting Duty. Preexisting Duty.  Promise to to what one already has a legal duty to do does not constitute legally sufficient consideration.  Exceptions: »Unforeseen Difficulties. »Recession and New Contract. Past Consideration is no consideration because the bargained-for exchange element is missing. Past Consideration is no consideration because the bargained-for exchange element is missing.

30. © 2004 West Legal Studies in Business A Division of Thomson Learning 30 Promissory Estoppel Promissory Estoppel and Detrimental Reliance: Promissory Estoppel and Detrimental Reliance:  Must be definite promise.  Promisee must justifiably rely on the promise.  Reliance is substantial.  Justice will be served by enforcing promise. Promissory Estoppel and Detrimental Reliance: Promissory Estoppel and Detrimental Reliance:  Must be definite promise.  Promisee must justifiably rely on the promise.  Reliance is substantial.  Justice will be served by enforcing promise.

31. © 2004 West Legal Studies in Business A Division of Thomson Learning 31 §7: Capacity Contractual Capacity. Contractual Capacity.  The legal ability to enter into a contractual relationship. »Full competence. »No competence. »Limited competence. Legality. Legality.  The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy. Contractual Capacity. Contractual Capacity.  The legal ability to enter into a contractual relationship. »Full competence. »No competence. »Limited competence. Legality. Legality.  The agreement must not call for the performance of any act that is criminal, tortious, or otherwise opposed to public policy.

32. © 2004 West Legal Studies in Business A Division of Thomson Learning 32 MinorsMinors In most states, a person is no longer a minor for contractual purposes at the age 18. 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 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. A contract entered into by a minor is voidable at the option of that minor. In most states, a person is no longer a minor for contractual purposes at the age 18. 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 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. A contract entered into by a minor is voidable at the option of that minor.

33. © 2004 West Legal Studies in Business A Division of Thomson Learning 33 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. 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. Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied. Disaffirmance can be expressed or implied. A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. 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. Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied. Disaffirmance can be expressed or implied.

34. © 2004 West Legal Studies in Business A Division of Thomson Learning 34 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 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. In increasing number of states, the minor must restore the adult to the position held before the contract was made. 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 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. In increasing number of states, the minor must restore the adult to the position held before the contract was made.

35. © 2004 West Legal Studies in Business A Division of Thomson Learning 35 Exceptions to Minor’s Right to Disaffirm Misrepresentation of Age. Misrepresentation of Age.  Generally, minor can disaffirm the contract.  But some states prohibit disaffirmance and hold the minor liable. Contracts for Necessaries. Contracts for Necessaries.  Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services. Misrepresentation of Age. Misrepresentation of Age.  Generally, minor can disaffirm the contract.  But some states prohibit disaffirmance and hold the minor liable. Contracts for Necessaries. Contracts for Necessaries.  Contracts for food, clothing, shelter may be disaffirmed by minor is liable for reasonable value of goods or services.

36. © 2004 West Legal Studies in Business A Division of Thomson Learning 36 Exceptions to Minor’s Right to Disaffirm Insurance. Insurance.  Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans. Loans.  Seldom considered to be necessaries.  Exception: »Loan to a minor for the express purpose of enabling the minor to purchase necessaries. Insurance. Insurance.  Not viewed as necessaries, so minor can disaffirm contract and recover all premiums paid. Loans. Loans.  Seldom considered to be necessaries.  Exception: »Loan to a minor for the express purpose of enabling the minor to purchase necessaries.

37. © 2004 West Legal Studies in Business A Division of Thomson Learning 37 RatificationRatification Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Executed v. Executory contracts. Executed v. Executory contracts. Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Minor, or after reaching majority, indicates (expressly or impliedly) an intention to become bound by a contract made as a minor. Executed v. Executory contracts. Executed v. Executory contracts.

38. © 2004 West Legal Studies in Business A Division of Thomson Learning 38 Parent’s Liability Contracts. Contracts.  Parents not liable (This is why parents are usually required to sign any contract made with a minor). Torts (Statutes Vary): Torts (Statutes Vary):  Minors are personally liable for their own torts.  Liability imposed on parents only for willful acts of their minor children.  Liability imposed on parents for their children negligent acts that result from their parents’ negligence. Contracts. Contracts.  Parents not liable (This is why parents are usually required to sign any contract made with a minor). Torts (Statutes Vary): Torts (Statutes Vary):  Minors are personally liable for their own torts.  Liability imposed on parents only for willful acts of their minor children.  Liability imposed on parents for their children negligent acts that result from their parents’ negligence.

39. © 2004 West Legal Studies in Business A Division of Thomson Learning 39 IntoxicationIntoxication Lack of contractual capacity at the time the contract is being made. Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid. Contract can be either voidable or valid.  Courts look at objective indications to determine if contract is voidable. If voidable: If voidable:  Person has the option to disaffirm, or  Person may ratify the contract expressly or impliedly. Lack of contractual capacity at the time the contract is being made. Lack of contractual capacity at the time the contract is being made. Contract can be either voidable or valid. Contract can be either voidable or valid.  Courts look at objective indications to determine if contract is voidable. If voidable: If voidable:  Person has the option to disaffirm, or  Person may ratify the contract expressly or impliedly.

40. © 2004 West Legal Studies in Business A Division of Thomson Learning 40 Mentally Incompetent Persons Void. Void.  If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Voidable. 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. Valid. Valid.  If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.  Lucid Interval. Void. Void.  If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Voidable. 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. Valid. Valid.  If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.  Lucid Interval.

41. © 2004 West Legal Studies in Business A Division of Thomson Learning 41 §8: Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). 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. Case 9.4: Moore v. Midwest Distribution, Inc. (2002). Case 9.4: Moore v. Midwest Distribution, Inc. (2002). A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). 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. Case 9.4: Moore v. Midwest Distribution, Inc. (2002). Case 9.4: Moore v. Midwest Distribution, Inc. (2002).

42. © 2004 West Legal Studies in Business A Division of Thomson Learning 42 §9: Genuineness of Assent Contract may be unenforceable if the parties have not genuinely assented to its terms by: Contract may be unenforceable if the parties have not genuinely assented to its terms by:  Mistakes.  Misrepresentation.  Undue Influence.  Duress. Contract may be unenforceable if the parties have not genuinely assented to its terms by: Contract may be unenforceable if the parties have not genuinely assented to its terms by:  Mistakes.  Misrepresentation.  Undue Influence.  Duress.

43. © 2004 West Legal Studies in Business A Division of Thomson Learning 43 MistakesMistakes Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. Bilateral (Mutual) Mistakes can be rescinded by either party. Bilateral (Mutual) Mistakes can be rescinded by either party. Unilateral Mistakes cannot be canceled unless: Unilateral Mistakes cannot be canceled unless:  If other party to the contract knows or should have known that a mistake of fact was made.  If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence. Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. Only a Mistake of Fact allows a contract to be canceled. Mistake of Value is enforceable. Bilateral (Mutual) Mistakes can be rescinded by either party. Bilateral (Mutual) Mistakes can be rescinded by either party. Unilateral Mistakes cannot be canceled unless: Unilateral Mistakes cannot be canceled unless:  If other party to the contract knows or should have known that a mistake of fact was made.  If mistake was due to mathematical mistake in addition, summation, subtraction, division, or multiplication and was made inadvertently and without gross negligence.

44. © 2004 West Legal Studies in Business A Division of Thomson Learning 44 Fraudulent Misrepresentation Contract Voidable by Innocent Party. Contract Voidable by Innocent Party. Elements: Elements:  Misrepresentation of Material Fact.  Intent to Deceive.  Reliance on Misrepresentation.  Injury to the Innocent Party. Case 9.5: Foley v. Parlier (2002). Case 9.5: Foley v. Parlier (2002). Contract Voidable by Innocent Party. Contract Voidable by Innocent Party. Elements: Elements:  Misrepresentation of Material Fact.  Intent to Deceive.  Reliance on Misrepresentation.  Injury to the Innocent Party. Case 9.5: Foley v. Parlier (2002). Case 9.5: Foley v. Parlier (2002).

45. © 2004 West Legal Studies in Business A Division of Thomson Learning 45 Nonfraudulent Misrepresentation Innocent Misrepresentation. Innocent Misrepresentation. Negligent Misrepresentation. Negligent Misrepresentation.  Equal to Scienter.  Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful. Innocent Misrepresentation. Innocent Misrepresentation. Negligent Misrepresentation. Negligent Misrepresentation.  Equal to Scienter.  Is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful.

46. © 2004 West Legal Studies in Business A Division of Thomson Learning 46 Undue Influence Contract is Voidable. Contract is Voidable.  Confidential or Fiduciary Relationship.  Relationship of dependence.  Influence or Persuasion.  Weak party talked into doing something not beneficial to him or herself. Presumption of Undue Influence. Presumption of Undue Influence. Contract is Voidable. Contract is Voidable.  Confidential or Fiduciary Relationship.  Relationship of dependence.  Influence or Persuasion.  Weak party talked into doing something not beneficial to him or herself. Presumption of Undue Influence. Presumption of Undue Influence.

47. © 2004 West Legal Studies in Business A Division of Thomson Learning 47 DuressDuress Forcing a party to enter into a contract under fear or threat makes the contract voidable. Forcing a party to enter into a contract under fear or threat makes the contract voidable. Threatened act must be wrongful or illegal. Threatened act must be wrongful or illegal. Exceptions: Exceptions:  Threat to exercise legal rights (criminal or civil suit).  Economic. Forcing a party to enter into a contract under fear or threat makes the contract voidable. Forcing a party to enter into a contract under fear or threat makes the contract voidable. Threatened act must be wrongful or illegal. Threatened act must be wrongful or illegal. Exceptions: Exceptions:  Threat to exercise legal rights (criminal or civil suit).  Economic.

48. © 2004 West Legal Studies in Business A Division of Thomson Learning 48 Adhesion Contracts and Unconscionability Adhesion Contracts. Adhesion Contracts.  Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract. Unconscionability. Unconscionability.  One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract. »“Standard-form.” »“Take-it-or-leave-it” adhesion contracts. Adhesion Contracts. Adhesion Contracts.  Preprinted contract in which the adhering party has no opportunity to negotiate the terms of the contract. Unconscionability. Unconscionability.  One sided bargains in which one party has substantially superior bargaining power and can dictate the terms of the contract. »“Standard-form.” »“Take-it-or-leave-it” adhesion contracts.

49. © 2004 West Legal Studies in Business A Division of Thomson Learning 49 §10: The Statute of Frauds 1677 England passed the law “An Act for the Prevention of Frauds and Abuses.” 1677 England passed the law “An Act for the Prevention of Frauds and Abuses.” Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable. Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable. Today, almost every state has a Statute of Frauds. Today, almost every state has a Statute of Frauds. 1677 England passed the law “An Act for the Prevention of Frauds and Abuses.” 1677 England passed the law “An Act for the Prevention of Frauds and Abuses.” Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable. Certain types of contracts must be in writing and signed by the party against whom enforcement is sought to be enforceable. Today, almost every state has a Statute of Frauds. Today, almost every state has a Statute of Frauds.

50. © 2004 West Legal Studies in Business A Division of Thomson Learning 50 Modern Statutes of Frauds To be enforceable, the following types of contracts must be in writing and signed: To be enforceable, the following types of contracts must be in writing and signed:  Contracts involving interest in land.  Contracts involving “One Year Rule.”  Collateral or Secondary Contracts.  Promise made in consideration of marriage.  Contracts for the sale of goods priced at $500 or more. To be enforceable, the following types of contracts must be in writing and signed: To be enforceable, the following types of contracts must be in writing and signed:  Contracts involving interest in land.  Contracts involving “One Year Rule.”  Collateral or Secondary Contracts.  Promise made in consideration of marriage.  Contracts for the sale of goods priced at $500 or more.

51. © 2004 West Legal Studies in Business A Division of Thomson Learning 51 Contracts Involving Interests in Land Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself. Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself. All contracts for the transfer of other interest in land: mortgages and leases. All contracts for the transfer of other interest in land: mortgages and leases. Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself. Land includes all physical objects that are permanently attached to the soil: buildings, fences, trees, and the soil itself. All contracts for the transfer of other interest in land: mortgages and leases. All contracts for the transfer of other interest in land: mortgages and leases.

52. © 2004 West Legal Studies in Business A Division of Thomson Learning 52 The One-Year Rule A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable. A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable. One-year period begins to run the day after the contract is made. One-year period begins to run the day after the contract is made.  Test: Whether performance is possible (although unlikely) within one year. A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable. A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing to be enforceable. One-year period begins to run the day after the contract is made. One-year period begins to run the day after the contract is made.  Test: Whether performance is possible (although unlikely) within one year.

53. © 2004 West Legal Studies in Business A Division of Thomson Learning 53 Collateral Promises Primary v. Secondary Obligations. Primary v. Secondary Obligations. “Main Purpose Rule” Exception. “Main Purpose Rule” Exception. Estate Debts. Estate Debts. Primary v. Secondary Obligations. Primary v. Secondary Obligations. “Main Purpose Rule” Exception. “Main Purpose Rule” Exception. Estate Debts. Estate Debts.

54. © 2004 West Legal Studies in Business A Division of Thomson Learning 54 Promises Made in Consideration of Marriage Prenuptial agreements must be in writing and signed to be enforceable. Prenuptial agreements must be in writing and signed to be enforceable. Contracts must be supported by some consideration to be enforceable. Contracts must be supported by some consideration to be enforceable. Prenuptial agreements may not be enforceable if the agreement is not voluntary. Prenuptial agreements may not be enforceable if the agreement is not voluntary. Prenuptial agreements must be in writing and signed to be enforceable. Prenuptial agreements must be in writing and signed to be enforceable. Contracts must be supported by some consideration to be enforceable. Contracts must be supported by some consideration to be enforceable. Prenuptial agreements may not be enforceable if the agreement is not voluntary. Prenuptial agreements may not be enforceable if the agreement is not voluntary.

55. © 2004 West Legal Studies in Business A Division of Thomson Learning 55 Contracts for the Sale of Goods UCC requires a writing or memorandum for the sale of goods priced at $500 or more. Exceptions: UCC requires a writing or memorandum for the sale of goods priced at $500 or more. Exceptions:  Partial Performance.  Admissions.  Promissory Estoppel.  Special Exceptions under the UCC. UCC requires a writing or memorandum for the sale of goods priced at $500 or more. Exceptions: UCC requires a writing or memorandum for the sale of goods priced at $500 or more. Exceptions:  Partial Performance.  Admissions.  Promissory Estoppel.  Special Exceptions under the UCC.

56. © 2004 West Legal Studies in Business A Division of Thomson Learning 56 § 11: Third Party Rights Only the Parties to a contract have rights and liabilities under the contract. Only the Parties to a contract have rights and liabilities under the contract. Exceptions: Exceptions:  Assignment or Delegation.  Third party beneficiary contract. Only the Parties to a contract have rights and liabilities under the contract. Only the Parties to a contract have rights and liabilities under the contract. Exceptions: Exceptions:  Assignment or Delegation.  Third party beneficiary contract.

57. © 2004 West Legal Studies in Business A Division of Thomson Learning 57 AssignmentsAssignments Transfer of rights in a bilateral contract to 3rd party. Obligee/ Assignor Obligor Assignee Original Contract Formed Assignment Duties Owed After Assignment

58. © 2004 West Legal Studies in Business A Division of Thomson Learning 58 AssignmentsAssignments Rights cannot be assigned: Rights cannot be assigned:  If the assignment is contrary to statute.  When a contract is personal in nature.  Assignment materially changes rights or duties of obligor.  If the contract stipulates the right cannot be assigned.  Case 9.6: Forest Commodity Corp. v. Lone Star Industries Inc. (2002). Valid notice must be given to all parties. Valid notice must be given to all parties. Rights cannot be assigned: Rights cannot be assigned:  If the assignment is contrary to statute.  When a contract is personal in nature.  Assignment materially changes rights or duties of obligor.  If the contract stipulates the right cannot be assigned.  Case 9.6: Forest Commodity Corp. v. Lone Star Industries Inc. (2002). Valid notice must be given to all parties. Valid notice must be given to all parties.

59. © 2004 West Legal Studies in Business A Division of Thomson Learning 59 DelegationDelegation Contractual duties in a bilateral contract that are delegated to a 3 rd party. Contractual duties in a bilateral contract that are delegated to a 3 rd party. ObligeeObligor Delagatee Original Contract Formed Duties Owed After Delegation

60. © 2004 West Legal Studies in Business A Division of Thomson Learning 60 Duties That Cannot be Delegated When special trust has been placed on the obligor. When special trust has been placed on the obligor. When performance requires personal skill or talents. When performance requires personal skill or talents. When performance will vary materially from obligee expectations. When performance will vary materially from obligee expectations. When the contract expressly prohibits delegation. When the contract expressly prohibits delegation. When special trust has been placed on the obligor. When special trust has been placed on the obligor. When performance requires personal skill or talents. When performance requires personal skill or talents. When performance will vary materially from obligee expectations. When performance will vary materially from obligee expectations. When the contract expressly prohibits delegation. When the contract expressly prohibits delegation.

61. © 2004 West Legal Studies in Business A Division of Thomson Learning 61 Third Party Beneficiaries Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person. Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person. Intended vs. Incidental beneficiaries. Intended vs. Incidental beneficiaries. Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person. Original parties to the contract intend at the time of contracting that the contract performance directly benefits a third person. Intended vs. Incidental beneficiaries. Intended vs. Incidental beneficiaries.

62. © 2004 West Legal Studies in Business A Division of Thomson Learning 62 Intended v. Incidental Beneficiaries Intended: Intended:  Promisee intended to confer on the beneficiary the right to bring suit to enforce the contract.  Factors: »Performance is rendered directly to 3rd party. »3rd party’s right to control contract details. »3rd party expressly designated as beneficiary. Intended: Intended:  Promisee intended to confer on the beneficiary the right to bring suit to enforce the contract.  Factors: »Performance is rendered directly to 3rd party. »3rd party’s right to control contract details. »3rd party expressly designated as beneficiary.

63. © 2004 West Legal Studies in Business A Division of Thomson Learning 63 Intended v. Incidental Beneficiaries Incidental. Incidental.  Contract between two parties is unintentional.  Incidental beneficiary cannot sue to enforce the contract. Incidental. Incidental.  Contract between two parties is unintentional.  Incidental beneficiary cannot sue to enforce the contract.

64. © 2004 West Legal Studies in Business A Division of Thomson Learning 64 Law on the Web ‘Lectric Law Library. ‘Lectric Law Library.Lectric Law Library.Lectric Law Library. Contract Forms. Contract Forms. Contract Forms. Contract Forms. History of Statute of Frauds. History of Statute of Frauds. History of Statute of Frauds. History of Statute of Frauds. ‘Smart Agreements’. ‘Smart Agreements’. ‘Smart Agreements’. ‘Smart Agreements’. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. ‘Lectric Law Library. ‘Lectric Law Library.Lectric Law Library.Lectric Law Library. Contract Forms. Contract Forms. Contract Forms. Contract Forms. History of Statute of Frauds. History of Statute of Frauds. History of Statute of Frauds. History of Statute of Frauds. ‘Smart Agreements’. ‘Smart Agreements’. ‘Smart Agreements’. ‘Smart Agreements’. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web.