Contracts

Contract

A contract is an agreement between two or more parties that is legally enforceable. It creates obligations that the parties must follow.

Freedom of Contract

This principle means that people have the right to enter into agreements on their own terms, as long as those terms are legal. Courts generally don't interfere with contracts unless there’s an issue with validity.

Categories of Contracts

  • Bilateral Contract: Both parties make promises to each other (e.g., "I promise to sell you my car, and you promise to pay me $5,000").

  • Unilateral Contract: One party makes a promise in exchange for an act (e.g., "I will pay $100 if you find and return my lost dog").

  • Void Contract: A contract that is not legally valid from the beginning (e.g., illegal contracts).

  • Voidable Contract: A contract that is valid unless one party chooses to cancel it (e.g., contracts with minors may be voidable by the minor).

  • Express Contract: The terms of the contract are stated clearly, either orally or in writing.

  • Implied-in-Fact Contract: The terms are not spoken or written, but are inferred from the actions or conduct of the parties.

Formation – 5 Elements

A contract must include these five essential elements:

  1. Offer: A clear proposal made by one party to another.

  2. Acceptance: The other party agrees to the offer.

  3. Consideration: Something of value must be exchanged.

  4. Capacity: Both parties must have the legal ability to enter into the contract.

  5. Legality: The subject matter of the contract must be legal.

Offer

An offer is the proposal to form a contract. For an offer to be valid:

  • Present Intent to Contract: The offeror must show a clear intention to make a deal (using the objective “reasonable person” test).

  • Specificity/Definiteness: The terms of the offer must be clear and specific.

  • Communicated to the Offeree: The offer must be communicated to the person it's intended for.

Ads and Rewards

  • Ads: Generally not offers, but invitations to negotiate (e.g., "Car for sale" is not an offer).

  • Rewards: A reward offer is an exception to the rule and can be legally binding if someone performs the required act (e.g., "Find my lost dog and get $100").

Termination of Offer – 4 Ways

An offer can be terminated by:

  1. Revocation: The offeror withdraws the offer.

  2. Rejection: The offeree rejects the offer.

  3. Counteroffer: The offeree makes a new offer, which terminates the original offer.

  4. Lapse of Time: The offer expires after a reasonable amount of time.

Acceptance

Acceptance is when the offeree agrees to the offer. For acceptance to be valid:

  • Present Intent to Contract: The offeree must clearly intend to agree to the offer (again, using the “reasonable person” test).

  • On the Terms Proposed: The acceptance must mirror the terms of the offer exactly (no changes).

  • Communicated to Offeror: The acceptance must be communicated back to the offeror.

Silence as Acceptance

Generally, silence does not count as acceptance unless there’s an agreement or pattern where silence means agreement (e.g., continuing to receive goods).

When Acceptance Occurs

  • If the offeror specifies how and when acceptance must happen, that must be followed.

  • If not specified, acceptance occurs when the offeree sends the acceptance (mailbox rule).

Consideration

Consideration is what each party gives in exchange for something from the other party. It can be:

  • An act or promise to do something you weren’t already obligated to do.

  • A promise not to do something you had the right to do.

Rule: The court will not judge whether the consideration is fair or adequate; it only needs to be something of value.
Other Considerations:

  • Past Consideration: Something done before the contract was made, which is not valid consideration.

  • Preexisting Obligation: You can’t offer to do something you're already legally required to do (e.g., a police officer offering to stop a crime).

  • Illusory Promises: Promises that don’t actually commit the promisor to anything (e.g., "I promise to pay if I feel like it").

  • Promises to Make a Gift: Not valid since there is no consideration.

  • Promissory Estoppel: If one party relies on a promise to their detriment, the court may enforce the promise even without consideration.

Capacity

The parties must have the legal ability to enter into a contract. If they lack capacity, the contract may be voidable.

Infancy: Minors can’t usually contract, but can ratify the contract once they reach adulthood.
Insanity: People who are mentally incompetent can’t contract, but they can disaffirm the contract.
Intoxication: Contracts made by intoxicated people may be voidable, and they may need to return consideration (what they received under the contract).

Legality

A contract must have a legal purpose.

  • Agreement to Restrain Trade: Contracts that unlawfully limit competition may be illegal.

  • Non-Compete Agreement: These are enforceable only if reasonable in scope and time, and if necessary to protect legitimate business interests.

  • Unconscionability: Contracts that are shockingly unfair or one-sided may be unenforceable.

Reality of Consent (Defenses to Contract Suits Based on Lack of Meeting of the Minds)

If someone didn’t truly agree to a contract, they may use these defenses to get out of it:

  • Misrepresentation: One party lied about a material fact.

  • Fraud: A lie with intent to deceive and cause harm.

  • Mistake: Both parties misunderstood the terms of the contract.

  • Duress: One party was forced into the contract under threat or pressure.

  • Undue Influence: One party unfairly persuaded the other to enter into the contract.

  • Unconscionability: The contract is so one-sided that it shocks the conscience.

Performance and Remedies

  • Performance: Fulfilling the terms of the contract.

  • Interpretation of Ambiguous Terms:

    • Use the usual meaning within the industry.

    • If unclear, construe the terms against the party who drafted the contract.

    • Handwritten terms take priority over typed or pre-printed terms.

Breach

A breach happens when one party fails to perform as agreed. The breach can be:

  • Material Breach: A serious violation that undermines the contract.

  • Substantial Performance: The contract is mostly performed, but with minor defects.

  • Preponderance of the Evidence: The standard of proof in civil cases (more likely than not).

Remedies

  • Compensatory Damages: These are awarded to make the injured party "whole" again, typically equal to the value of what was lost.

  • Specific Performance: A court order requiring the breaching party to fulfill their obligations (often used for unique goods like real estate).

Excuses for Non-Performance

  • Impossibility: When it’s impossible to perform due to unforeseen circumstances.

  • Waiver/Release: A party can choose to give up their right to enforce the contract.