BU315 - Ch. 6 Overview and Formation of Contracts

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Contract

An enforceable agreement that can be punished by law if either party does not hold up their end of the promise. Can be simple or complex.

Bilateral Contract

Involves two promises and two performances (ex. “I will pay you for this equipment.” “I accept.” the first performance is the payment, the second is the signing off of the equipment.)

Unilateral Contract

One promise and one performance followed by a second promise, only enforceable when the performance is done. (ex. saying “I’ll pay you if you mow my lawn” and then they do without saying it, so you must pay them)

Express Contracts

When both parties have knowingly and intentionally agreed on the promises and performances.

Implied Contracts

An agreement is reached by parties’ actions, rather than words (ex. ordering food at a restaurant; the server will not tell you to pay but consuming the food will create the obligation to pay.)

Quasi-Contract

When an agreement isn’t explicitly stated but is still enforceable when one party suffers from another’s unjust enrichment. (ex. an unconscious patient receiving treatment at the hospital that is unwilling to pay upon regaining consciousness.)

Valid Contracts

When a contract has the required elements and is therefore enforceable

Void Contracts

When an agreement is missing one of the required elements or isn’t made in accordance with the law and is therefore unenforceable

Voidable Contracts

When the law gives one or more parties the ability to conceal an otherwise valid contract (ex. a minor purchasing a vehicle could stop paying and would not be held accountable by law as they could not have legally consented to the purchase)

Unenforceable Contract

A contract that meets all requirements to be binding but the law cannot enforce it or award damages upon it’s breach (ex. fraud, coercion, lack of capacity, etc.)

State Common Law

governs contracts for services or real estate

State Statutory Law

Governs contracts for goods or products based on the Uniform Commercial Code (UCC); this includes the leasing of equipment.

Hybrid Contracts

Contracts that involve both goods and services, determined which law to look to based on what the primary subject matter is. To determine this, courts will look into:

1. Allocation of price - price of goods vs. services

2. Uniqueness - requiring of a special talent; the more unique the more likely it is to be covered by common law

Digital Contract

An agreement expressed in an electronic data exchange. It is signed, concluded, and transferred via an electronic or code-based system. The Uniform Electronic Transactions Act (UETA) and the E-Sign Act cover e-commerce and electronic communication.

Mutual Assent

Offer and acceptance, the first step of a contract

Objective Intent

An offer made must have serious intention and the terms should be reasonably certain

Revocation

The offeror no longer wishes to form a contract, must occur before the offeree’s performance

Rejection

Where the offeree rejects the offer

Counterclaim

Where the offeree rejects the original offer and proposes a new offer with different terms

Operation of Law

Events that may happen to terminate a contract, i.e. death, lapse of time, destruction of subject matter, or illegality

Irrevocable Offer

Offers that cannot be withdrawn by the offeror, includes:

1. Option Contracts

2. Partial Performance

3. Detrimental Reliance

Partial Performance

When a party completes some service, but not all of the duties required of a contract. This makes a contract irrevocable, though it can be partially paid if the contract is split into sections.

Detrimental Reliance

When the offeree preforms based on a reasonable promise by the offeror, and would be injured if the offeror’s promise is not carried out or enforced. This is an irrevocable contract for the offeror.

Mirror Image Rule

When an offeree’s response constitutes as acceptance only if the new offer is a precise mirror image of the original. (ex. “I’ll give you $1000 for this.” “I’ll do $2000.“ yes! “How about $1500 but you provide the tools” now it’s Rejection and Counteroffer!)

Termination by Operation of Law and the four reasonings

An offer’s termination may occur due to happenings or events such as the following, rendering offers impossible.

1. Death - when one party passes away or becomes incapacitated before acceptance

2. Lapse of Time - a time limit set by offeror, otherwise is terminated via reasonable time

3. Destruction of subject matter - The subject discussed in the offer is no longer functional

4. Supervening Legality - a law put in place that makes a previously legal contract illegal, and therefore void

Mailbox Rule

Governs common law contracts, applies when a contract is accepted by an offeree upon deposit, rather than when the offeror receives it

Silence as Acceptance

Instances where not saying no to an offer but acting/implying as though you have deems an offer as accepted (ex. a bakery not cancelling for a day on an offer to deliver pastries daily)

Insufficient Agreement

When an offer is lacking mutual assent, making it insufficiently constitute a contract. This applies when an agreement’s terms are too indefinite or the parties have a misunderstanding of an essential term.

Indefinite Terms

When an agreement is made and both parties have objective intent to form the contract, but the terms are too vague to be preformed. Courts may conduct a Restatement test to clarify an agreement and determine if a contract has been breached.

The 4 Essential Terms

1. Parties to the contract

2. Subject Matter of the contract

3. Time for performance or delivery

4. Price or other consideration of exchange

Agreements to Agree

No contract is formed; when parties attempt to enter an agreement with an essential term unfilled, intending to agree in the future. Court may supply the missing term to enforce the contract.

Mistake

A belief that is not in accord with the facts, can be either a

• Unilateral mistake - Only on party holds an erroneous belief, likely an invalid reason to cancel a contract

• Mutual mistake - mutual misunderstanding where both parties hold an erroneous belief, may lead to cancellation of a contract

Consideration

Legal Detriment, where both parties receive something of value and both give up something of value to the other. Comes in the form of Good, Money, Services, or Forbearance (giving up of a legal right, such as ability to sue)

Nominal Consideration

Consideration stated in legal contract even though not actually exchanged. Symbolic exchange (such as $1) with little monetary value compared to the actual item or deal

Preexisting Duty

A duty that one is legally obligated to perform and is not recognized as legal detriment (ex. a police officer cannot receive a reward for catching a fugitive)

Bargained-for Exchange

Each party gives up something of value to induce another party to make a return promise or performance (Benefits and Burdens)

Illusory Promises

When a party is not bound by their promise due to lack of bargained-for exchange. Examples include:

1. Deathbed promises

2. Promises of a gift

3. Promises of love and friendship

4. Promises with unbinding terms

Past Consideration

An act or performance done before a promise is made, does not meet the bargained-for exchange requirement.

Promissory Estoppel

Doctrine that enforces when one party suffers harm by reasonably relying on the other party’s promise. (When promisee’s reliance was reasonably foreseeable to the promisor.)

Capacity

The ability to enter a contract, limited with minors and those with mentally incapacity.

Legality

The subject matter and performances of an agreement must follow the law. May be restricted due to statutes or public policy. Illegal contracts are automatically voided as they cannot be enforced.