5Chapter SECTION OPENER / CLOSER: INSERT BOOK COVER ART Contracts Chapter 4: Contracts & Fraud.

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SECTION OPENER / CLOSER:INSERT BOOK COVER ART

ContractsContractsChapter 4: Contracts & FraudChapter 4: Contracts & Fraud

Understanding Business and Personal Law

ContractsContractsSection 5.1Section 5.1

How Contracts Arise

What You’ll Learn

How to identify a contract’s elements How to identify a contract’s elements (p. 108)(p. 108)

How to identify valid, void, voidable, How to identify valid, void, voidable, and unenforceable contracts (p. 110) and unenforceable contracts (p. 110)



How Contracts Arise

What You’ll Learn

How to distinguish between express and How to distinguish between express and implied contracts (p. 111)implied contracts (p. 111)

How to identify unilateral and bilateral How to identify unilateral and bilateral contracts (p. 111)contracts (p. 111)



How Contracts Arise

What You’ll Learn

How to distinguish between oral and How to distinguish between oral and written contracts (p. 112)written contracts (p. 112)



How Contracts Arise

Why It’s Important

Identifying a contract’s elements will help Identifying a contract’s elements will help you manage your affairs in an intelligent you manage your affairs in an intelligent and effective manner.and effective manner.



How Contracts Arise

The Nature of a ContractThe Three Theories of Contract LawThe Elements of a Contract

Section OutlineSection Outline

Understanding Contract Law



How Contracts Arise

Characteristics of a Contract Valid, Void, Voidable, or UnenforceableExpress or ImpliedBilateral or UnilateralOral or Written




How Contracts Arise

Pre-Learning Question Pre-Learning Question

How would you define contract?



How Contracts Arise

A A contractcontract is any agreement is any agreement enforceable by law.enforceable by law.Not all agreements are contracts, Not all agreements are contracts, however.however.Whether or not it’s a contract, Whether or not it’s a contract, depends on the circumstances of depends on the circumstances of the agreement.the agreement.

The Nature of a Contract The Nature of a Contract



How Contracts Arise

The evolution of contract law shows The evolution of contract law shows how its focus has changed.how its focus has changed.

The Three Theories of The Three Theories of Contract Law Contract Law



How Contracts Arise

In the past, courts asked whether the In the past, courts asked whether the parties to a contract exchanged things parties to a contract exchanged things of equal value. This approach was of equal value. This approach was called the equity theory of contract called the equity theory of contract law.law.

The Equity Theory The Equity Theory



How Contracts Arise

The advent of industrial capitalism The advent of industrial capitalism forced the courts to shift their forced the courts to shift their focus.They began to ask if the parties focus.They began to ask if the parties had agreed to the terms in the had agreed to the terms in the agreement of their own free will.agreement of their own free will.

The Will Theory The Will Theory



How Contracts Arise

Then the courts began to study the Then the courts began to study the parties’ actions and words to parties’ actions and words to determine if there was a “meeting of determine if there was a “meeting of the minds.”the minds.”

The Formalist Theory The Formalist Theory



How Contracts Arise

This led to certain fixed elements in a This led to certain fixed elements in a contract. It is called the formalist contract. It is called the formalist theory because it relies on the form of theory because it relies on the form of the agreement.the agreement.

The Formalist Theory The Formalist Theory



How Contracts Arise

There are six elements of a contract.There are six elements of a contract.

Elements of a Contract Elements of a Contract

1.1. OfferOffer2.2. AcceptanceAcceptance3.3. Genuine agreementGenuine agreement4.4. ConsiderationConsideration5.5. CapacityCapacity6.6. LegalityLegality



How Contracts Arise

An An offeroffer is a proposal by one party is a proposal by one party to another intended to create a to another intended to create a legally binding agreement.legally binding agreement.An An acceptanceacceptance is the second is the second party’s unqualified willingness to go party’s unqualified willingness to go along with the first party’s proposal.along with the first party’s proposal.




How Contracts Arise

If a valid offer is met by a valid If a valid offer is met by a valid acceptance, a acceptance, a genuine agreementgenuine agreement exists.exists.CapacityCapacity is the legal ability to enter is the legal ability to enter a contract.a contract.




How Contracts Arise

ConsiderationConsideration is the exchange of is the exchange of things of value.things of value.LegalityLegality means that people can means that people can only enter into contracts for legal only enter into contracts for legal purposes. People cannot enter into purposes. People cannot enter into contracts to commit illegal acts.contracts to commit illegal acts.




How Contracts Arise


What is one characteristic that you think a contract must have?



How Contracts Arise

Contracts can have any of the Contracts can have any of the following characteristics:following characteristics:

Characteristics of a Contract Characteristics of a Contract

Valid, void, voidable, or Valid, void, voidable, or unenforceableunenforceableExpress or implied Express or implied Bilateral or unilateralBilateral or unilateralOral or writtenOral or written



How Contracts Arise

Valid, Void, Voidable, Valid, Void, Voidable, or Unenforceable or Unenforceable

A valid contract is legally binding.A valid contract is legally binding.A contract that is A contract that is void void has no legal has no legal effect.effect.



How Contracts Arise

Valid, Void, Voidable, Valid, Void, Voidable, or Unenforceable or Unenforceable

When a party to a contract is able to When a party to a contract is able to void or cancel the contract for some void or cancel the contract for some legal reason, it is a legal reason, it is a voidable voidable contract.contract.An An unenforceable unenforceable contract is one contract is one the court will not upholdthe court will not uphold. .



How Contracts Arise

An An express contractexpress contract is stated in is stated in words and may be either oral or words and may be either oral or written.written.An An implied contractimplied contract comes about comes about from the actions of the parties.from the actions of the parties.

Express or Implied Express or Implied



How Contracts Arise

Sarah paid Isabel $50 to hack into Mrs. Wojcik’s computer files for a copy of the upcoming final exam, but Isabel gave Sarah the pre-test instead. Is this contract valid, void, voidable, or unenforceable?



How Contracts Arise

ANSWERANSWER

Void. It has no legal affect.



How Contracts Arise

A A bilateral contractbilateral contract contains two contains two promises.promises.A A unilateral contractunilateral contract contains a contains a promise by only one person to do promise by only one person to do something, if and when the other something, if and when the other party performs some act.party performs some act.

Bilateral or Unilateral Bilateral or Unilateral



How Contracts Arise

5.15.1

How Parties Reach Agreement How Parties Reach Agreement



How Contracts Arise

An oral contract is created by word An oral contract is created by word of mouth and comes into existence of mouth and comes into existence when two or more people form a when two or more people form a contract by speaking to each other.contract by speaking to each other.Sometimes, however, it is desirable Sometimes, however, it is desirable to put contracts in writing.to put contracts in writing.

Oral or Written Oral or Written



How Contracts Arise

Reviewing What You Learned

1. What are the elements of a contract?

Section 5.1 Assessment



How Contracts Arise


Offer, acceptance, genuine agreement, capacity, consideration, and legality.


Answer



How Contracts Arise


2. What are the differences among valid, void, voidable, and unenforceable contracts?




How Contracts Arise


A valid contract is legally binding.An unenforceable contract will not be upheld generally by the court because of some rule of law.


Answer



How Contracts Arise


A contract that is void has no legal effect and a voidable contract is not void in itself, but may be voided by one or more of the parties if the party so chooses.


Answer



How Contracts Arise


3. What are the differences between express and implied contracts?




How Contracts Arise


An express contract involves words, while an implied contract does not.


Answer



How Contracts Arise


4. What are the differences between unilateral and bilateral contracts?




How Contracts Arise


A unilateral is a one-sided contract, in which one party makes a promise in exchange for an act. In a bilateral contract, a contract legally comes into existence when promises are exchanged.


Answer



How Contracts Arise


5. What are the differences between oral and written contracts?




How Contracts Arise


Oral contracts are spoken. Written contracts are in writing.


Answer

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ContractsContractsEnd of Section 5.1End of Section 5.1

55ChapterChapter





How Contracts Arise

What You’ll Learn

How to recognize the requirements of How to recognize the requirements of an offer (p. 114)an offer (p. 114)

How to distinguish between an offer How to distinguish between an offer and an invitation to negotiate (p. 114)and an invitation to negotiate (p. 114)



How Contracts Arise

What You’ll Learn

How to recognize the requirements of an How to recognize the requirements of an acceptance (p. 116)acceptance (p. 116)

How to distinguish between an How to distinguish between an acceptance and a counteroffer (p. 117)acceptance and a counteroffer (p. 117)



How Contracts Arise

What You’ll Learn

How to recognize when an offer has How to recognize when an offer has terminated (p. 119)terminated (p. 119)



How Contracts Arise


You need to know when an offer has been You need to know when an offer has been made and when an acceptance goes into made and when an acceptance goes into effect to make sound contracts.effect to make sound contracts.



How Contracts Arise

Requirements of an Offer Serious IntentDefiniteness and CertaintyCommunication to the Offeree


Requirements of an Acceptance Unconditional AcceptanceMethods of Acceptance



How Contracts Arise

Termination of an Offer RevocationRejectionCounterofferExpiration of TimeDeath or Insanity




How Contracts Arise


What do you think the requirements of an offer are?



How Contracts Arise

The person who makes an offer is The person who makes an offer is the offeror.the offeror.The person who receives the offer The person who receives the offer is the offeree.is the offeree.

Requirements of an Offer Requirements of an Offer



How Contracts Arise

An offer has three basic requirements. An offer has three basic requirements. It must be:It must be:

Requirements of an Offer Requirements of an Offer

1.1. Made seriouslyMade seriously2.2. Definite and certainDefinite and certain3.3. Communicated to the offeree Communicated to the offeree



How Contracts Arise

An offer must be made with the An offer must be made with the intention of entering into a legal intention of entering into a legal obligation. obligation. An offer made in the heat of anger An offer made in the heat of anger or as a joke would not meet this or as a joke would not meet this requirement.requirement.

Serious Intent Serious Intent



How Contracts Arise

Sometimes an invitation to negotiate Sometimes an invitation to negotiate can be confused with an offer. can be confused with an offer.




How Contracts Arise

Advertisements in newspapers, Advertisements in newspapers, magazines, and catalogs are magazines, and catalogs are examples of examples of invitations to negotiateinvitations to negotiate, , which are invitations to make an offer.which are invitations to make an offer.




How Contracts Arise

An offer must be definite and certain An offer must be definite and certain to be enforceable.to be enforceable.Offers that use vague words or Offers that use vague words or terms that cannot be quantified lack terms that cannot be quantified lack definiteness and certainty.definiteness and certainty.

Definiteness and Certainty Definiteness and Certainty



How Contracts Arise

Offers may be made by any method Offers may be made by any method that communicates the offer to the that communicates the offer to the offeree, including:offeree, including:

Communication to the Offeree Communication to the Offeree

TelephoneTelephoneLetterLetterTelegramTelegram

Fax machineFax machineE-mailE-mail



How Contracts Arise

ANSWERANSWER

The offeree is the person making the offer.The offeror is the person receiving the offer.



How Contracts Arise


Is a counteroffer the same thing as an acceptance? Why or why not?



How Contracts Arise

To be legally binding, the acceptance To be legally binding, the acceptance must meet certain basic requirements.must meet certain basic requirements.

Requirements of an Acceptance Requirements of an Acceptance

The acceptance must be The acceptance must be unconditional.unconditional.The acceptance must follow the The acceptance must follow the rules regarding the method of rules regarding the method of acceptance.acceptance.



How Contracts Arise

The acceptance must not change The acceptance must not change the terms of the original offer in any the terms of the original offer in any way. way. This principle is called theThis principle is called the mirror mirror image ruleimage rule..

Unconditional Acceptance Unconditional Acceptance



How Contracts Arise

Any change in the terms of the offer Any change in the terms of the offer means the offeree has not really means the offeree has not really accepted the offer.accepted the offer.The offeree has made a The offeree has made a counteroffer.counteroffer.




How Contracts Arise

If a counteroffer is made, the If a counteroffer is made, the original offeror is not obligated to go original offeror is not obligated to go along and no contract exists.along and no contract exists.The offeror becomes an offeree and The offeror becomes an offeree and may accept or reject the may accept or reject the counteroffer.counteroffer.




How Contracts Arise

Contracts for the sale of goods are Contracts for the sale of goods are exceptions to the mirror image rule.exceptions to the mirror image rule.These exceptions include contracts These exceptions include contracts for personal property such as for personal property such as clothing, furniture, food, motor clothing, furniture, food, motor vehicles, and appliances. vehicles, and appliances.




How Contracts Arise

The time at which an acceptance The time at which an acceptance takes place is important because that takes place is important because that is when the contract comes into is when the contract comes into existence.existence.

Methods of Acceptance Methods of Acceptance



How Contracts Arise

Special rules govern acceptances that Special rules govern acceptances that take place when the parties are take place when the parties are separated by a distance and must be separated by a distance and must be communicated by letters, telegrams, communicated by letters, telegrams, or fax.or fax.




How Contracts Arise

According to common law, an According to common law, an acceptance that must be sent over acceptance that must be sent over long distances is effective when it is long distances is effective when it is sent.sent.




How Contracts Arise

An acceptance is implied when the An acceptance is implied when the offeree accepts by the same or a offeree accepts by the same or a faster means than that used by the faster means than that used by the offeror.offeror.




How Contracts Arise

The authorization of an acceptance The authorization of an acceptance can also be implied by any reasonable can also be implied by any reasonable means, including:means, including:


Past practices between the partiesPast practices between the partiesThe usual method in the tradeThe usual method in the tradeCustomary means in comparable Customary means in comparable transactions transactions



How Contracts Arise


What is one way an offer is terminated?



How Contracts Arise

Termination of an offer may occur in Termination of an offer may occur in any of the following five ways:any of the following five ways:

Termination of an Offer Termination of an Offer

1.1. RevocationRevocation2.2. RejectionRejection3.3. CounterofferCounteroffer4.4. Expiration of timeExpiration of time5.5. Death or insanity Death or insanity



How Contracts Arise

RevocationRevocation is the taking back of an is the taking back of an offer by the offeror.offer by the offeror.

Revocation Revocation



How Contracts Arise

RejectionRejection, or refusal, of an offer by , or refusal, of an offer by the offeree brings the offer to an end.the offeree brings the offer to an end.

Rejection Rejection



How Contracts Arise

A counteroffer ends the first offer. A counteroffer ends the first offer. The offeree creates a new offer, The offeree creates a new offer, which the original offeror may which the original offeror may accept or reject. accept or reject.

Counteroffer Counteroffer



How Contracts Arise

If the offeror sets a time limit for the If the offeror sets a time limit for the acceptance of the offer, it must be acceptance of the offer, it must be honored.honored.

Expiration of Time Expiration of Time



How Contracts Arise

If the offeror dies or becomes insane If the offeror dies or becomes insane before the offer is accepted, the offer before the offer is accepted, the offer comes to an end.comes to an end.

Death or Insanity Death or Insanity



How Contracts Arise


1. What are the requirements of an offer?




How Contracts Arise


Serious intent, clear and definite terms, and communication to the offeree.


Answer



How Contracts Arise


2. What is the difference between an offer and an invitation to negotiate?




How Contracts Arise


An offer empowers the offeree to accept its terms and create a contract. An invitation to negotiate is an invitation to the other party to make an offer.


Answer



How Contracts Arise


3. What are the requirements of an acceptance?




How Contracts Arise


Must be unconditional and must follow the rules regarding the method of acceptance.


Answer



How Contracts Arise


4. What is the difference between an acceptance and a counteroffer?




How Contracts Arise


An acceptance creates a contract. A counteroffer means that the original offer has not been accepted. The offeree has made a new offer, which the original offeror may accept or reject.


Answer



How Contracts Arise


5. When is an offer terminated?




How Contracts Arise


Upon revocation by the offeror, on rejection by the offeree, when a counteroffer is made, after the expiration of a set period of time, and/or the death or insanity of the offeror.


Answer

55ChapterChapter





How Contracts Arise

What You’ll Learn

How to distinguish between fraud and How to distinguish between fraud and innocent misrepresentation innocent misrepresentation (pp. 128 and 132)(pp. 128 and 132)



How Contracts Arise

What You’ll Learn

How to distinguish between the remedy How to distinguish between the remedy available for fraud and the remedy available for fraud and the remedy available for misrepresentation available for misrepresentation (pp. 128 and 132)(pp. 128 and 132)



How Contracts Arise


Learning the elements of fraud may prevent Learning the elements of fraud may prevent you from being victimized or help you claim you from being victimized or help you claim your rights if you are defrauded.your rights if you are defrauded.



How Contracts Arise

Fraud

False Representation of FactRepresentation Known to Be FalseFalse Representation Intended to Be

Relied Upon


Defective Agreements



How Contracts Arise

Innocent Misrepresentation

Fraud, continued

False Representation Actually Relied Upon

Resulting Loss



How Contracts Arise

If the offeror makes a valid offer, If the offeror makes a valid offer, and the offeree has made a valid and the offeree has made a valid acceptance, then a genuine acceptance, then a genuine agreement has been reached.agreement has been reached.The courts describe this type of The courts describe this type of agreement as “a meeting of the agreement as “a meeting of the minds.”minds.”

Genuine Agreement Genuine Agreement



How Contracts Arise

6.16.1

Genuine Agreement Genuine Agreement Several circumstances might create a Several circumstances might create a defective agreement: defective agreement:

FraudMisrepresentationMistakeDuress Undue Influence



How Contracts Arise


How would you define fraud?



How Contracts Arise

Fraud Fraud

FraudFraud is a deliberate deception is a deliberate deception intended to secure an unfair or intended to secure an unfair or unlawful gain. unlawful gain.



How Contracts Arise

You may You may rescindrescind, or cancel, the , or cancel, the contract.contract.You may sue for money damages.You may sue for money damages.

Remedies for Fraud Remedies for Fraud



How Contracts Arise

To succeed in a lawsuit for fraud, the To succeed in a lawsuit for fraud, the following five elements must be following five elements must be demonstrated:demonstrated:

The Elements of Fraud The Elements of Fraud

1.1. A false representation of fact.A false representation of fact.2.2. Knowledge of the falsity by the Knowledge of the falsity by the

party making the false party making the false representation.representation.



How Contracts Arise

3.3. Intent to deceive by the party Intent to deceive by the party making the false representation.making the false representation.

4.4. Reasonable reliance by the Reasonable reliance by the innocent party.innocent party.

5.5. An actual loss must be suffered by An actual loss must be suffered by the innocent party.the innocent party.

The Elements of Fraud The Elements of Fraud



How Contracts Arise

False Representation of Fact False Representation of Fact

Fraud requires a false Fraud requires a false representation of a material, representation of a material, existing fact.existing fact.A A material factmaterial fact is one that is is one that is important; it matters to one of the important; it matters to one of the parties.parties.



How Contracts Arise

False Representation of Fact False Representation of Fact

Under some circumstances, Under some circumstances, individuals can make false individuals can make false representation by choosing not to representation by choosing not to reveal important information. reveal important information.

This is known as This is known as concealmentconcealment, or , or passive fraud.passive fraud.



How Contracts Arise

Representation Known to Be False Representation Known to Be False

To be held accountable for fraud, the To be held accountable for fraud, the party making the false representation party making the false representation must be aware that it is false. This must be aware that it is false. This may be shown by:may be shown by:

Proving actual knowledgeProving actual knowledgeShowing the statement was made Showing the statement was made recklessly recklessly



How Contracts Arise

False Representation False Representation Intended to Be Relied Upon Intended to Be Relied Upon

To prove fraud, the person making the To prove fraud, the person making the misrepresentation must intend that the misrepresentation must intend that the other party will rely upon the other party will rely upon the information as part of the contract information as part of the contract negotiations.negotiations.



How Contracts Arise

False Representation False Representation Actually Relied Upon Actually Relied Upon

To prove fraud, the false To prove fraud, the false representation must be reasonably representation must be reasonably relied upon by the other party when relied upon by the other party when the agreement is made.the agreement is made.



How Contracts Arise

Resulting Loss Resulting Loss

In proving fraud, the innocent party In proving fraud, the innocent party must show some monetary loss.must show some monetary loss.



How Contracts Arise


How is misrepresentation different from fraud?



How Contracts Arise

Innocent Misrepresentation Innocent Misrepresentation

MisrepresentationMisrepresentation is the act of is the act of making an innocent statement that making an innocent statement that turns out to be false, when the person turns out to be false, when the person honestly believed the statement was honestly believed the statement was true at the time it was made.true at the time it was made.



How Contracts Arise

Remedy for Misrepresentation Remedy for Misrepresentation

The right to rescind the contract.The right to rescind the contract.You may not win damages.You may not win damages.



How Contracts Arise

After Mrs. Grayson died, her neighbor, Joel, asked her son, Tom, if he would sell her TV. Before giving Tom $100, Joel asked, “It works, doesn’t it?” and Tom answered, “As far as I know.” However, when Joel plugged it in, it did not work.



How Contracts Arise

Can Joel claim there was false representation? Why or why not?



How Contracts Arise

ANSWERANSWER

Probably not. “As far as I know,” would probably be considered innocent misrepresentation.



How Contracts Arise


1. What are the elements of fraud?




How Contracts Arise


There must be a false representation of There must be a false representation of a material fact. a material fact. The party making the representation The party making the representation must know that it is false.must know that it is false.


Answer

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5Chapter SECTION OPENER / CLOSER: INSERT BOOK COVER ART Contracts Chapter 4: Contracts & Fraud.

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