Chapter 8 Presentation (Week 4)

Chapter 8 Contracts: Overview, Mutual Assent, and Consideration

Learning Objectives

• Basic Definition and Purpose of a Contract

• Basic Elements of a Valid Contract

• Classification of Contracts

• Requirements for a Valid Offer

• Termination of Offers

• Effective Acceptance Rules

• Element of Consideration

• Agreements with vs. without Consideration

Nature and Application of Contracts

• Definition: A contract is a legally enforceable promise or set of promises.

• Freedom of Contract: Emphasizes the ability of parties to structure their agreements as they deem fit.

• Legal Framework:

  • The Restatement (Second) of Contracts governs contracts related to services and real estate.

  • The Uniform Commercial Code (UCC) applies to goods sales across states.

• Good Faith Dealing: An ethical norm that insists on honesty and fair dealing in contracts.

Noncompete Contracts

• Definition: Agreements where one party agrees not to compete with another.

• State Enforcement Variance:

  • Most states require these to maintain legitimate business interests and reasonable parameters.

  • California does not enforce noncompete agreements due to public policy.

  • Florida tends to uphold them favorably for employers.

Contracts and Value Chain Activities in Business

• Research and Development: Invention assignment

• Supply Chain & Logistics: Manufacturing and packaging agreements

• Human Resources: Employment agreements for executives

• Marketing: License agreements for use of logos

• Distribution: Sales and distribution agreements with dealerships

• Sales: Contracts between representatives and clients

• Finance: Loan agreements from banks to companies.

Elements of a Contract

• Mutual Assent: Agreement by parties indicating willingness to enter a contract (valid offer and acceptance).

• Consideration: Requirement that both parties exchange something of value.

• Legality of Purpose: A contract must be formed for a legal purpose to be enforceable.

• Capacity to Contract: Parties must have legal standing; minors or incapacitated individuals may void contracts.

Contract Status

• Valid: Has all necessary elements.

• Void: Lacks essential elements from the start.

• Voidable: Can be canceled by one party under certain circumstances.

• Unenforceable: Valid but cannot be enforced due to legal defenses.

Types of Contracts

• Bilateral: Mutual promises by both parties.

• Unilateral: One party's obligation arises from an action instead of a promise.

• Common Law Contracts: Governed by state law for services.

• UCC Sales Contracts: Governed by UCC statutes for sales of goods.

• Explicit Contracts: Defined terms by the parties.

• Implied Contracts: Defined by actions or customs, lacking explicit terms.

Basic Contract Structure and Terminology

1. Preamble: Identifies agreement specifics.

2. Recitals: States the purpose of the contract.

3. Definitions: Clarifies key terms used.

4. Clauses: Contains mutual promises and obligations.

5. Termination: Details on how the contract ends.

6. Appendices: Additional documents or agreements relevant to the contract.

Drafting Contracts

• Key Steps:

  • Understand transaction details.

  • Assess risks and major negotiation points.

  • Translate legal jargon into plain business language.

Mutual Assent: Offer

• Definition: An offer is a commitment to engage in a specified action.

• Objective Intent: Reasonable conclusion that an offeror intends to contract.

• Advertisements: Typically invitations to make an offer.

Termination of an Offer

Actions of the Parties:

• Revocation: Offeror communicates withdrawal.

• Rejection: Offeree refuses offer.

• Counteroffer: Alters original terms, terminating the initial offer.

Operation of Law:

• Lapse of Time: Offer expires after a set period.

• Death/Incapacity: Affected by death or incapacity of parties.

• Destruction: Subject matter destruction before acceptance.

• Supervening Illegality: Changes in legality affecting the offer.

Acceptance

• Definition: Offeree's agreement to the offer terms.

• Mailbox Rule: Acceptance is effective upon dispatch in a commercially reasonable manner.

When is Acceptance Effective?

• Specified Method Used: Acceptance occurs based on the indicated method by the offeror.

• Comparison of Methods: Faster acceptance means valid; slower may lead to rejection or counteroffer.

Consideration

• Principle: Legal exchange of benefits and detriments; the basis for the enforceability of a contract.

• Legal Benefit: Getting something of value.

• Legal Detriment: Giving up something of value.

• Forbearance: Not doing something one is entitled to.

Agreements that Lack Consideration

• Preexisting Duty Rule: A promise to do what's already legally obligated is unenforceable.

• Illusory Promises: Vague or non-binding agreements.

• Past Consideration: Detriments incurred before the promise are unenforceable.

Promissory Estoppel

• Definition: Allows recovery based on reliance on a promise.

• Requirements:

  • Reasonable promise made.

  • Actual reliance leading to injury.

  • Foreseeable reliance by promisor.

  • Equitable principles warrant compensation.

Conclusion

• Preparation for next week: Chapter 9