CONTRACTS!What makes a contract?

CONTRACTSWHAT YOU WILL LEARN

How to identify a contract’s elements

How to identify valid, void, voidable & unenforceable contracts

How to distinguish between express & implied contracts

How to identify unilateral & bilateral contracts

How to distinguish between oral & written contracts

CONTRACTSPRE-LEARNING QUESTION

What contracts have you had to sign?

What contracts will you probably sign in the future?

ELEMENTS OF A CONTRACTThere are six elements of a contract.

1. Offer2. Acceptance3. Genuine assent/agreement4. Consideration5. Capacity6. Legality

ELEMENTS OF A CONTRACTThere are TWO sides to a contract

1. Offeror – the person (party) proposing the contract

2. Offeree – the person (party) the offer is made to

3. Offer – a proposal by offeror to do something provided the offeree does or refrains from doing something in return

ELEMENTS OF A CONTRACT1. Offer 2. Acceptance

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

ELEMENTS OF A CONTRACT3. Genuine Assent (Agreement)

4. Legality If a valid offer is met by a valid acceptance, a genuine agreement exists.Legality means that people can only enter into contracts for legal purposes. People cannot enter into contracts to commit illegal acts.

ELEMENTS OF A CONTRACT5. Consideration 6. Capacity

Consideration is the exchange of things of value. What the promisor demands and must receive.

Capacity is the legal ability to enter a contract.

Types of ContractsExecuted & Executory contracts

Executed contract is one that has been fully performed (completed).

Executory contract is one that has not been fully performed yet.

Types of ContractsExpress Contract is one that has all terms stated in writing or orally spoken.

Implied-in-Fact Contract does not have its terms expressly stated but can be inferred from the action of both parties.

Implied-at-Law Contract is not really a contract but is created by the law to enforce a contract into existence.

Types of ContractsAn oral contract is created by word of mouth and comes into existence when two or more people form a contract by speaking to each other. They are valid contracts! BUT…

It is desirable to put contracts in writing!!!

Oral or Written

Types of ContractsUnilateral contract has the offeror promising something in return for the offeree’s performance

Bilateral contract both parties exchange promises to do something

ContractsThe 3 Requirements of an Offer1. Made Seriously the offer must have

been made with intent (no joking! Can’t be made in anger)

2. Communicated the contract must be communicated to the offeree (someone not being offered the contract can not jump in and take it)

3. Terms are definite the terms must be complete and not vague

ContractsThe 3 Requirements of an OfferInvitation to Negotiate

This happens when a store, for example, initiates a bargain but not a definite contract – ads on TV

Social Agreements Agreements between friends are not usually seen as legal obligations – go to the movies tonight

ContractsThe 3 Requirements of an OfferComplete Contracts

1. Proper legal description of the item2. Price3. Quantity4. Date for delivery of possession

All of these things must be present and clearly identified (at minimum) to create a valid offer.

ContractsEnding An Offer

RevocationWithdrawing an offer before it is accepted

RejectionRefusal to accept an offer by the offeree

Expiration of TimeOffers end when a reasonable length of time passes

Death or InsanityEnds an offer due to loss of control (voluntary involvement)

ContractsAccepting An Offer!!The acceptance must match the offer. This

means:• Comes from the person to whom the

offer was made• Matches the terms of the offer exactly

(also called the mirror image rule)• Be communicated to the offeror

If the acceptance doesn’t match the offer, it may be a counteroffer

ContractsCOUNTEROFFERSCounteroffers are made by the offeree back

to the offeror• Rejects the original offer• Creates a new offer• Makes the offeree the new offeror

Roles have now reversed!

ContractsWhen is Acceptance effective?Offers are effective the moment it is

received.Acceptance is effective the moment it is

SENTThe way to control this is for the offeror to

require a certain method of responding acceptance (mail, fax, email, etc.)

Courts generally say acceptance is effective when sent by the same means or faster used for the offer.

ContractsWhen is Acceptance effective?Offers are effective the moment it is

received.Acceptance is effective the moment it is

SENTThe way to control this is for the offeror to

require a certain method of responding acceptance (mail, fax, email, etc.)

Courts generally say acceptance is effective when sent by the same means or faster used for the offer.

ContractsMistakesUnilateral Mistake – when only 1 party holds

an incorrect belief about the facts or law related to a contract

Example: I have $40k to buy a car. I buy a $40k car. Dealer then says I owe 8% tax. My mistake!

Mutual Mistake – (bilateral mistake) when both parties have an incorrect belief about an important fact or applicable law

Example: We both think land being sold is 40 acres. It is then measured and found to be 30 acres. We both were wrong.

ContractsMistakesVOID – a contract without any legal effect

MATERIAL FACTS – facts that influence the parties’ decisions about a contract

ContractsMisrepresentationCan be innocently done (didn’t know it was untrue)

or fraudulently done (knew it was untrue but said it anyway) – a contract without any legal effect

NOTE: Mistakes void a contract (it has no legal effect).

Misrepresentation allows the injured party to make a contract voidable which means they can cancel the contract and receive damages.

ContractsMisrepresentationTo prove in court you must show:

1. false representation of fact2. the statement is key to the transaction3. Victim reasonably relied on the statement

ContractsFRAUDFraud is misrepresentation that was:

1. done intentionally or recklessly2. caused an injury (physical or

emotional)To prove in court you must show both things above

PLUS the 3 things for misrepresentation:3. false representation of fact4. the statement is key to the transaction5. Victim reasonably relied on the statement

PLUS the two statements in green above.

ContractsFRAUDRemedies for FraudIf a seller innocently misrepresents a material fact,

the buyer may avoid (cancel) the contract.If fraud is established in court, the buyer can also

recover damages!

ContractsDURESSWhen one party is forced to enter into a contract

through threats or actions. This includes:1. Threats of illegal conduct or crime2. Tort-like conduct3. Threats to sue if the other party won’t settle a

suit4. Threats to use economic power to negotiate a

favorable settlement

ContractsUNDUE INFLUENCEWhen a person uses their influence or power to

pressure someone into a contract1. Parent – child2. Child – elderly parent3. Attorney – client4. Physician – patientThis action results in the loss of free will of the person

entering the contract.Note: persuasion or nagging does not count!

ContractsCAPACITYRECAP: 5 elements of a contract are:1. OFFER2. ACCEPTANCE3. GENUINE ASSENT/AGREEMENT4. LEGALITY5. CONSIDERATION6. CAPACITY

ContractsCAPACITYContractual capacity = the ability to understand the

consequences of a contractNote: This doesn’t mean understand the TERMS of the

contract, just the CONSEQUENCES

Special parties with contractual rights include:1. Minors2. Intoxicated individuals3. Mentally impaired

Incapacitated – the parties above who lack capacity

ContractsCAPACITYMinors are said to be under the age of majority

Majority – in most states it is 18 years old (some states it is 19 or 21)

Minor – a person who has not yet reached their majority

Minority – the state of being below the age of majority (ends the day BEFORE your 18th birthday in IL)

ContractsCAPACITYScope of AuthorityIN business, the person with the greatest authority

should be the one to sign a contract. They have the greatest capacity.

However an employer can give someone capacity to enter a contract. Certain people may have capacity in certain areas.

Example: Barnes & Noble – café manager has capacity to purchase café goods, trade book manager has capacity to purchase books to sell, etc.

ContractsCAPACITY & MINORSI’m under majority! I don’t want to be held to this

contract!!!!

Lucky for you!

Disaffirmance – a refusal to be bound by a previous legal commitment

1. Can happen anytime while still under incapacity2. Can happen within a reasonable time after attaining

capacity (reaching majority, for example)

If you disaffirm a contract, you must return anything of value!

ContractsCAPACITY & MINORSI’m under majority! I don’t want to be held to this

contract!!!!

The law shields minors when they make contracts to protect them from unscrupulous adults. Minors may be vulnerable because of

ImmaturityInexperience

Lack of educationNaïveté

ContractsCAPACITY & MINORSYES! I am now 18!!!!!

After reaching the age of majority, a person can ratify, or approve, contracts made during minority.

ContractsCAPACITY & MINORSI’m a minor…I still have to pay for that??

A minor is held responsible for the fair value of necessaries.Necessaries, or necessities, include food, clothing, shelter, and medical care.

ContractsCAPACITY & EXCEPTIONSYou are a what?

Other classes of persons lack the capacity to enter into certain types of contracts. 1. Convicts—people convicted of a crime. 2. Aliens—people who are living in this country but owe

their allegiance to another country.3. Enemy aliens—some foreign-born persons

designated as such during time of war.