Chapter 10: The Formation of Traditional and E-Contracts

BLAW 220 Exam 3

Why Do Traditional Contracts and E-Contracts Matter to Me?

Contracts involve promises, or declarations by a party to do or not do a certain act. It is an agreement that a court can enforce. As a society, contract law reflects our values, interests, and expectations. E-contracts have the same elements as a traditional paper contract (that is, agreement, consideration, contractual capacity, and legality). In the online environment we live in, we need to be aware of the elements and provisions of online offers and acceptances.

Sources of Contract Law

• The Common Law

• The Uniform Commercial Code (UCC)

Definition of a Contract

Agreement that can be enforced in court

Requirements of a Valid Contract (Can sue for breach of contract if these requirements are not met)

1. Agreement - Offer/Acceptance

2. Consideration

3. Contractual capacity - Must be in the right mental capacity

4. Legality - can change when laws change

Defenses to the Enforceability of a Contract

1. Voluntary consent

2. Form

Types of Contract

• Bilateral contracts (A promise for a promise)

– Example 10.1 Javier

• Unilateral contracts (A promise for an act - Somebody has to do something before a contract becomes a contract. Ex. I'll buy your boat if you deliver it to my dock. - The contract begins once the boat is delivered)

– Example 10.2 Reese

• Formal contracts (Requires a special form for creation - Actual printed forms)

• Informal contracts (Requires no special form for creation)

• Express contracts (Formed by words - Back and Forth words or written. Offer $$ for backpack)

• Implied contracts (Formed by the conduct of the parties - Did lawn work, should not unduly benefit at profs expense) - One party may think there’s an agreement, but the other doesn’t. Court would imply a contract because you did the work. 

Contract Performance

• Executed Contract – Performed (You build the house)

• Executory Contract – Not performed (You’re going to build a house)

Contract Enforceability

• Valid Contract

1. Agreement

2. Legally sufficient consideration

3. Parties have legal capacity to enter into contract

4. Legal purpose

• Voidable Contracts (One you can tear up, not really enforceable)

• Unenforceable Contracts

• Void Contracts

Agreement

In today’s world, numerous contracts are formed via the internet. When someone enters an online agreement with a cell phone company to purchase a smartphone and data plan, for instance, that person has entered into an electronic contract, or e-contract.

Offer

Three required elements for an offer:

• Serious, objective intention by the offeror

• Reasonably certain or definite terms

• Must be communicated to the offeree

− Intent sometimes lacks clarity (may include expressions of opinion, future intent, preliminary negotiations, invitations to bid, etc.)

Agreements to Agree

• May be enforceable if it is clear that the parties intended to be bound by the agreements.

Preliminary Agreements

• Increasingly, the courts are holding that a preliminary agreement constitutes a binding contract if the parties have agreed on all essential terms, and no disputed issues remain to be resolved.

Definiteness

• Generally, the contract must include:

1. The identification of the parties.

2. The identification of the object of the contract items like goods, services, and land.

3. The consideration to be paid.

4. The time of payment, delivery.

Termination of the Offer: By actions of the parties

• An offer can be terminated by action of the parties by revocation, by rejection, or by counteroffer.

Revocation – The withdrawal of a contract offer by the offeror. Revocation may be accomplished by either of the following:

1. Express repudiation of the offer

2. Performance of acts that are inconsistent with the existence of the offer and are made known to the offeree

− Irrevocable offers: some offers can be made irrevocable

Option contract: a contract under which the offeror cannot revoke the offer for a stipulated time period (because the offeree has given consideration for the offer to remain open)

Termination of the Offer: by Action of the Offeree

− If the offeree rejects the offer, the offer is terminated.

− Rejection: a rejection is effective only when it is actually received by the offeror, or the offeror’s agent

− Counteroffers: a rejection of the original offer, and the simultaneous making of a new offer

− At common law, the mirror image rule requires that the offeree’s acceptance match the offeror’s offer exactly.

Termination of the Offer: by Operation of Law

− Lapse of time: an offer terminates automatically by law when the period of time specified in the offer has passed

− Destruction of specific subject matter: an offer is automatically terminated if the specific subject matter of the offer is destroyed before the offer is accepted

Unequivocal acceptance

• The offeree must accept unequivocally to exercise the power of acceptance effectively. An acceptance may be unequivocal even though the offeree expresses dissatisfaction with the contract.

• An acceptance cannot impose new conditions or change the terms of the original offer.

Communication of Acceptance

• Unilateral contracts: full performance of some act is called for, acceptance is usually evident, and notification is unnecessary (unless required by law or offeror asks for it)

• Bilateral contracts: communication of acceptance is necessary, because acceptance is in the form of a promise

Adequacy of Consideration

General Rule Fairness of the Bargain

• The general rule: a court will normally not question the adequacy of consideration based solely on the comparative value of the things exchanged

When Voluntary Consent May Be Lacking

• A large disparity in the amount or value of the consideration exchanged may raise a red flag for a court to look more closely at the bargain.

Agreements That Lack Consideration

• Preexisting duty: under most circumstances, a promise to do what one already has a legal duty to do, does not constitute a legally sufficient consideration

− Unforeseen difficulties

− Rescission and new contract: two parties can mutually agree to rescind, or cancel, their contract, to the extent that it is executory (still to be carried out)

Past Consideration

• an act that takes place before a contract is made and that ordinarily, by itself, cannot later be consideration with respect to that contract

Illusory Promises

• A promise is illusory (without consideration and is unenforceable) if its terms express such uncertainty of performance, that the promisor has not definitely promised to do anything.

Agreements that Lack Consideration Examples

• Preexisting Duty: When a person already has a legal duty to perform an action, there is no legally sufficient consideration.

  • Example: A firefighter cannot receive a cash award from a business owner for putting out a fire in a downtown commercial district. As a city employee, the firefighter had a duty to extinguish the fire.

• Past Consideration: When a person makes a promise in return for actions or events that have already taken place, there is no consideration.

  • Example: A real estate agent sells a friend’s house without charging a commission, and in return, the friend promises to give the agent $1,000. The friend’s promise is simply an intention to give a gift.

• Illusory Promise: When a person expresses contract terms with such uncertainty of performance, the promise is illusory.

  • Example: A man promises to stop by soon to look at his neighbor’s riding lawn mower. If he likes it, he will pay $900. The promise to purchase is simply a statement of something he might do in the future.

Contractual Capacity: Minors

• The age of majority (when a person is no longer a minor) for contractual purposes is eighteen years in almost all states.

• Minority status may also be terminated by a minor’s emancipation (the act of being freed from parental control).

• A minor can generally enter into any contract that an adult can, provided that the contract is not one prohibited by law for minors.

• Disaffirmance: the legal avoidance, or setting aside, or a contractual obligation

Contractual Capacity: Intoxication

• A contract entered into by an intoxicated person can be either voidable or valid (and, thus, enforceable).

− If the person was sufficiently intoxicated to lack mental capacity, the transaction may be voidable.

− If the intoxicated person understood the legal consequences of the agreement, the contract is enforceable.

• Lacking mental capacity, but other party knows it

• Transaction may be voidable

• Option for disaffirmance for a reasonable time upon sobriety

• Consequences understood while intoxicated, then enforceable contract

• Difficult to prove impaired judgment causing misunderstanding

• Courts rarely permit avoiding contracts due to intoxication

Contractual Capacity: Mental Incompetence

• Contracts can be void, voidable, or valid

• Court determines mental incompetence, contract void

• Without court, minor incompetence when contract formed, then voidable

• Case Example 10.19 Larry

• Contract valid if capacity present when contract formed

• Validity of the contract depends on mental capacity of the person at the time the contract was formed

Legality 

• For a contract to be valid and enforceable, it must be formed for a legal purpose.

• A contract to do something that is prohibited by federal or state statutory law is illegal, void from the outset, and unenforceable.

Contracts Contrary to Statute

• Contracts to commit a crime violate statute

  • Any contract to commit a crime is in violation of a statute.

• Usury

  • Charging an illegal interest rate on loans.

• Gambling

• Licensing statutes for certain professions

  • All states require members of certain professions (such as physicians) to have licenses. 

Contracts Contrary to Public Policy

• Contracts in Restraint of Trade

− Covenants Not to Compete and the Sale of an Ongoing Business

• A contractual promise of one party to refrain from conducting similar business for a certain time and within a specified geographical area.

− Covenants Not to Compete in Employment Contracts

• Sometimes, noncompete agreements are included in employment contracts.

• Noncompete agreements are generally legal in most states, so long as the specified period of time is not excessive in duration and the geographic restriction is reasonable.

• Unconscionable Contracts or Clauses

− Procedural Unconscionability

• Often involves inconspicuous print, unintelligible language (“legalese”), the lack of an opportunity to read the contract or ask questions about its meaning, or an adhesion contract.

− Substantive Unconscionability

• Occurs when contracts (or portions of contracts) are oppressive or overly harsh.

E-Contracts and Online Offers

• Electronic contracts, or e-contracts, must meet the same basic requirements (agreement, consideration, contractual capacity, and legality) as paper contracts.

• Online contracts may be formed not only for the sale of goods and services but also for licensing.

• Displaying the Offer

− The contract generally must be displayed online in a readable format, and all provisions should be reasonably clear.

Online Offers

• Dispute-Settlement Provisions

− Online offers frequently include provisions relating to dispute settlement.

− Forum-Selection Clause: a provision in a contract designating the court, jurisdiction, or tribunal that will decide any disputes arising under the contract.

− Choice-of law clause: a clause that specifies that any dispute arising out of the contract, will be settled in accordance with the law of a particular jurisdiction

Online Acceptances

Click-on Agreements

• An agreement that arises when an online buyer clicks on “I agree.”

Shrink-Wrap Agreements

− Agreement terms are located inside a packaged box of goods.

− Shrink-Wrap Agreements and Enforceable Contract Terms – A buyer’s failure to object to terms contained within a shrink-wrapped package may constitute an acceptance of the terms by conduct.

Federal Law on E-Signatures

• E-Signature: an electronic sound, symbol, or process attached to or logically associated with a record and adopted by a person with the intent to sign the record

• The E-SIGN Act provides that no contract, record, or signature may be “denied legal effect” solely because it is in electronic form.

• The act does not apply to court papers, divorce decrees, evictions, foreclosures, health-insurance terminations, prenuptial agreements, and wills.

The Uniform Electronic Transactions Act

The Scope and Applicability of the UETA

• The act removes barriers to e-commerce by giving the same legal effect to electronic records and signatures as is given to paper versions.

The Federal E-SIGN Act and the UETA

• If a state has enacted the UETA without modification, state law will govern.

• The E-SIGN Act allows states to enact alternative requirements for the use of electronic records or electronic signatures.

The UETA is enacted without modifications

• State law governs

The UETA is enacted with modifications

State law governs if…

• The state’s procedures or requirements are consistent with the E-Sign Act.

• The state does not give priority to one type of technology.

• The state law was enacted after the E-SIGN Act and refers to it.

The E-SIGN Act governs if…

• The modifications are inconsistent with the E-SIGN Act