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Contracts, Cont’d.. Elements of an Offer – Objective Intention to Contract Auctions In an auction, a seller “offers” items for sale via an auctioneer.

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Presentation on theme: "Contracts, Cont’d.. Elements of an Offer – Objective Intention to Contract Auctions In an auction, a seller “offers” items for sale via an auctioneer."— Presentation transcript:

1 Contracts, Cont’d.

2 Elements of an Offer – Objective Intention to Contract Auctions In an auction, a seller “offers” items for sale via an auctioneer. However, this is not an “offer” for purposes of contract formation. For contract formation purposes, an auction is considered an invitation to submit offers to buy. The bidder is the offeror; the offer is accepted only when the bid is struck off. At any time before that, the bid can be revoked or the auctioneer can reject any bid received.

3 Auction Example Mr. Martinez puts up his Ferrari for sale at auction. Mr. Belcik is the auctioneer. The price has quickly risen from an initial bid of $500 up to well over $500,000. Expecting that her bid will easily be surpassed, but wanting to give Mr. Martinez a hand, Ms. Moody bids $600,000. Shortly after, Mr. Moya bids $625,000, which Mr. Belcik takes. The momentum quickly subsides, however, and while Mr. Rodriguez is looking around the now silent room for other bids, Mr. Moya realizes that his wife will kill him if he came home in that thing, and he withdraws his bid. Mr. Rodriguez looks at Ms. Moody and says “SOLD, for $500,000. Does Ms. Moody have a new car?

4 Elements of an Offer – Objective Intention to Contract Agreements to Agree Because the auction was such a disaster, Mr. Martinez and Ozzy Ozbourne enter into a valid written agreement for Ozzy to lease the car for one year. The lease provides that Ozzy has the option to renew the lease at the end of it’s term, for a lease payment to be mutually agreed to by he and Mr. Martinez at that time. Is Ozzy’s option worth the paper it’s written on? NOPE – an agreement to agree won’t be enforced as a contract. The lease may be valid, but the option to renew is not enforceable.

5 Elements of an Offer – Definiteness An offer must have reasonably definite terms; if not, a court cannot determine if a breach has occurred nor can it give an appropriate remedy. The UCC relaxes the requirements for definiteness in some areas, calling for the court to supply certain missing or indefinite terms with “reasonable” terms. The UCC is intended to govern commercial relationships involving the sale of goods, often among merchants, and has as a primary purpose the facilitation of commerce

6 Elements of an Offer – Communication of Offer If we don’t tell the offeree how are we going to have a contract? One type of advertisement that is often held to be an offer is one offering a reward for, say the return of a lost pet. Suppose Mr. Black places an ad offering a $100 reward for his lost cat. Mr. White, not seeing the ad, but recognizing the cat as Mr. Black’s, finds it wandering around and returns it to Mr. Black. The offer has not been communicated to Mr. White. Is there a valid unilateral contract? Does he get the reward? No, there’s no contract…but Mr. White may still get the reward in some jurisdictions based on equity, but not on contract theory.

7 Termination of Offers A valid offer is made but not yet accepted; what can happen to the offer before acceptance, and prevent a contract from coming into existence? Termination by Act of the Parties  Revoked by Offeror (unless irrevocable)  Rejected by Offeree  Counteroffer by Offeree Terminated by operation of law  Lapse of time  Destruction of subject matter  Death or incompetence of a party  Supervening illegality of the object of the contract

8 Termination of Offers Revocation by Offeror Generally, offers are revocable as long as the revocation is communicated to the offeree before he or she accepts. If before accepting, offeree learns from another source information indicating the offer has been revoked, what happens? Generally revocation can be communicated in the same way the offer was communicated. Now that Mr. White had reunited Mr. Black with his cat, how might he communicate that the reward is no longer being offered?

9 Termination of Offers Irrevocable Offers – some offers can be made irrevocable If offeree has substantially changed position in reliance on an offer (for example, the guy who began sailing his boat from San Francisco) it may be held to be irrevocable. Option Contracts are irrevocable; offeror has received payment or consideration in exchange for giving up his right to revoke for a specified time.

10 Termination of Offers Rejection by Offeree If an offeree rejects an offer, it is terminated; the offeree cannot thereafter change his mind. Rejection is effective when received by the offeror. Merely inquiring about an offer doesn’t constitute a rejection Now that the lease on Mr. Martinez’s Ferrari is up, Kobe Bryant makes an offer of $600,000. Mr. Martinez asks, “is that the best you can do?” Is the offer rejected? What if he says “I was really looking for $650,000”? How about “I’ll take $650,000”?

11 Termination of Offers Counteroffer Now, Mr. Martinez has made a counteroffer. A counteroffer is a rejection of the first offer and a new offer by the former offerree. If Kobe Bryant says no, Mr. Martinez cannot then take him up on his first offer…that offer was terminated by the counteroffer. Common law employs “mirror image” rule: if the acceptance doesn’t match the offer exactly, it’s a counteroffer, and the original offer is terminated.

12 Termination by Operation of Law Termination by Lapse of Time An offer may specify that it expires after a given period of time. If a number of days is specified, but the specific starting date is not, it will normally be held to start on the day the offer is received, and terminate at midnight on the expiration date. If not specified, then an offer will expire after a “reasonable” time.

13 Termination by Operation of Law Other ways offers can be terminated: Destruction of Subject Matter – A offers to sell B a cow; before B accepts, cow struck by lightning Death or Incompetence of Party. Unless irrevocable, an offer terminates if the offeror or offeree dies or becomes incompetent. Supervening Illegality. A bank offers to loan A money at 17% interest. Before A accepts, the legislature passes a law limiting interest rates to 10%. The law terminates the offer.

14 Acceptance A voluntary act by the offeree that shows assent to the terms of the offer. Must be unequivocal Must be communicated to the Offeror

15 Acceptance  Mr. Martinez offers to sell his Ferrari to Kobe Bryant for $600,000. If Kobe Bryant doesn’t respond right away, can Lindsay Lohan accept the offer?  No…Only an offeree – the person or one of the persons to whom the offer was intended to be made – may accept (their agents may also accept)

16 Acceptance  Kobe Bryant is considering Mr. Martinez’s offer to sell the Ferrari. He decides to accept, but wants Mr. Martinez to put a trailer hitch on it so he can pull his cutting horse trailer behind it. Has he accepted?  No…this is the other half of the “mirror-image” rule we talked about earlier. By adding terms, Kobe Bryant has made a counteroffer. If Mr. Martinez refuses to add the trailer hitch, can Kobe Bryant back-up and say, “well, OK I’ll take it without the trailer hitch”?

17 Acceptance  Let’s say that Mr. Martinez transmits his offer to sell the Ferrari to Kobe Bryant and the offer says “unless I hear from you within 10 days, I’ll assume that you have accepted my offer.” Kobe Bryant remains silent. We got a deal?  No – generally, silence cannot be an acceptance. However, in what circumstances might silence operate as an acceptance?  (1) where the parties have an established course of dealing between them, there can be a duty to speak, and (2) where the circumstances are such that silence can create an implied-in-fact contract

18 Acceptance Communication of Acceptance  In a unilateral contract, acceptance is communicated by performance  In a bilateral contract, it has to be communicated separately from performance (unless the offer itself dispenses with the requirement of communication of the acceptance).  If the offer specifies how acceptance is to be made, then that’s how it has to be accepted

19 Acceptance Communication of Acceptance  George Bush sends a letter to Mr. Martinez offering $700,000 for his Ferrari, but stating that his offer expires on October 15. Mr. Martinez writes a letter back, saying “I accept your offer.” He puts it in the mail on October 12 (properly addressed and with proper postage). It doesn’t arrive until the 17 th. Meanwhile, George Bush has heard about the starting problem, and has found a nice cherry Yugo that he’d rather spend his money on. Has George Bush bought the Ferrari?  Yup…’fraid so. This is the “mailbox rule.” What if Mr. Martinez used the wrong address or didn’t use enough postage on his letter? Different result?

20 Acceptance Communication of Acceptance Mailbox Rule: Revocation of an Offer is effective when actually received; but acceptance of an offer is effective when placed in the mail (assuming it’s properly addressed and posted). WHY? It’s to prevent confusion that can occur when revocations and acceptances cross each other in the mail – If the revocation were effective when mailed, then the offeree could accept it without knowing it had been revoked. It’s a rule that is designed to facilitate the formation of contracts.

21 Acceptance Communication of Acceptance  Authorized means of communication of acceptance – Can be expressly stated or implied by the facts or implied by law  If the offeror chooses one means (say mail) to transmit the offer, then the offeree may accept in the same way or by a faster means.  When the parties are at a distance, mailing is impliedly authorized.  Exceptions: (1) If not properly addressed or posted or (2) if the offer explicitly says it won’t be effective until received.

22 Acceptance Communication of Acceptance So what happens if an offeree screws up the mailbox rule – for instance, he sends a rejection first, but then transmits an acceptance? Here, the law cancels the rule that says the acceptance is valid on deposit in the mail, and whichever is first received by the offeror is effective.

23 Consideration, Capacity, Legality, Assent and Form

24 Consideration Definition: “the value given in return for a promise” Two Elements: ۩ Legal Value. ۩ Bargained-for Exchange.

25 Consideration Hamer v. Sidway Mr. Story told his nephew that, if he would not smoke, drink or play cards or pool until he was 21, that he’d give him $5,000. Nephew did not smoke, drink or play cards or pool for six years, when he became 21. Nephew reported to Uncle that he had fulfilled his end of the deal, and Uncle responded, saying that Nephew would have his reward, and could consider the money to be invested with interest. Nephew left the money with Uncle for 12 years. At some point, he assigned the money to another person. After Uncle died, Nephew’s assignee asked the Uncle’s executor to pay. The executor refused, saying there was no consideration for Uncle’s promise. What result?

26 Consideration Court held that the executor had to pay the nephew’s assignee because the promise was an enforceable promise. The court said: “The promisee used tobacco, occasionally drank liquor, and he had a legal right to do so…that right he abandoned for a period of years upon the strength of the testator that for such forbearance, he would give him $5,000.” The court said the issue was not how difficult this was for the nephew, the issue was that he had a legal right to indulge, which he gave up because of the Uncle’s promise. The consideration was legally sufficient.

27 Consideration Legal Value  Must be something of “legally sufficient” value  A promise to do something that one is not otherwise legally bound to do  Performance of an action one is not otherwise legally required to perform  Refraining from action one is otherwise legally authorized to take

28 Consideration Key Concept: ☺ To give “legally sufficient” value, the party has to do something he or she is not otherwise legally required to do ☺ This assures that the consideration is indeed intended to support or be exchanged for the promise by the other party

29 Consideration “Legally sufficient” is not a mathematical concept. The inquiry as to “sufficiency” is not into how much consideration is offered. The court’s don’t evaluate what the consideration is worth. Why is this? If it were, then people wouldn’t have the freedom to contract as they wish.

30 Consideration Bargained-for Exchange Mr. Arruda has become fabulously wealthy, and now he has ungrateful children that won’t come see him. In a conversation with his son, he says, “My boy, Lattimore, in consideration of the fact that you don’t have enough money to come see me very often, I am going to give you $500 a month for the next year.” Has Mr. Arruda made an enforceable contract with little Lattimore?

31 Consideration No…Despite the fact that Lattimore really doesn’t come see his dad very often, he’s not been asked to do anything, forbear from doing something, or to incur any “legal detriment.” What if Mr. Arruda had instead said, “Little Lattimore, my son, if you will come see me three times a year, I’ll give you $500 a month.” Contract here? Yes. Why? Because now, Lattimore has been asked to do something for the promised money…he has to come and see his dad

32 Consideration Change it up: Little Lattimore is a minor; he’s 16, and a royal pain. Some of Lattimore’s wealthy friends parents are afraid that because of Lattimore’s bad attitude that Mr. Arruda is about to boot him out of the house; if that happens, they’re afraid that he’ll want to live with them. They offer to pay Mr. Arruda $500 per month if he’ll agree to continue to support Little Lattimore. Can Mr. Arruda enforce the promise? No…why not?

33 Consideration Since Little Lattimore is a minor, Mr. Arruda has a legal duty to support him, whether he gets the money from the neighbors or not. There’s no legally sufficient consideration. He has a “pre- existing duty.” This matters why? If you pay someone to do something they are obliged to do anyway, then there’s no consideration.

34 Consideration Mr. Geistman contracts with Ms. Canales to build a building for him. The contract requires her to build the building for a fixed sum of $1 million. In the middle of doing the work, she encounters problems that double her cost of doing the work. She tells Mr. Geistman that she needs more money or she’ll stop work. Mr. Geistman, needing to have the building ready because his lease is expiring, agrees. Can Ms. Canales enforce the amendment to the contract?

35 Consideration Generally No. Why? Because Ms. Canales had a preexisting duty to build the building for the agreed price. If this weren’t the rule, what injustice would result? This would facilitate extortion, wouldn’t it? That being said, are there still a kind of unforeseen difficulties that may justify an amendment like Ms. Canales made with Mr. Geistman? Extraordinary and completely unforeseen; also NOT the kind of risks ordinarily assumed by builders.

36 Consideration Mr. Cano is a real estate agent. He sells Ms. Williams’s house for her, but because they are friends, does not charge a commission. Ms. Williams later on tells Mr. Cano that, because he did such a good job selling the house, that she will give him $3,000 out of her next paycheck. If Ms. Williams doesn’t pay, can Mr. Cano sue her for breach of contract? No. Why not? Past consideration is no consideration. Ms. Williams’s offer is merely a statement that she intends to make a gift.

37 Consideration Ms. Garcia is president of Ceilingmart (get it?) She tells her employees that if they gain an additional 10% in market share against their close competitor, Wallmart, she’ll give them all a 10% bonus, if management approves it. Can the employees hold her to this? No, there’s really no promise here, is there? This is called an “illusory promise.”

38 Consideration Ms. Garcia offers to hire Lindsay Lohan as Vice President of Ceilingmart for one year. She offers Lindsay $10,000 a month, but reserves the right to terminate her at will (at any time and for any reason or no reason – employment at will). What’s the effect? Again, it’s an illusory promise. Does this mean there’s no contract? What is the contract that results?

39 Consideration Same situation, except that this time, Ms. Garcia offers to hire Lindsay Lohan for a year, but she provides that the company can terminate the employment on 30 days notice. Any difference in your answer? Yes – this is not illusory; Ceilingmart is giving up the right to hire somebody else as VP for at least the 30 day period during which Lohan is entitled to notice.

40 Its’s just not fair…

41 Consideration Mr. Gray’s aging uncle, Mr. Blue, is very wealthy and enjoys spending time with his nephew. Mr. Gray likewise enjoys spending time with Mr. Blue. One day, Mr. Blue promises to pay Mr. Gray $35,000 a year so that Mr. Gray won’t have to work anymore. In reliance on the promise, Mr. Gray quits his job (which paid him $30,000/yr). Mr. Blue doesn’t pay. Is there a Contract? No, no consideration. Is there anything that Mr. Gray can do?

42 Consideration Promissory Estoppel Sometimes when there has been justifiable and reasonable reliance by a person upon a promise made without consideration, courts will hold that the promisor should be prevented, or estopped, from failing to make good on the promise. This is the doctrine of Promissory Estoppel. In our example with Mr. Gray, Uncle Blue may be estopped to deny his promise of payment. What does it take for the doctrine of promissory estoppel to apply?

43 Consideration Elements of Promissory Estoppel  Clear and definite promise  Promisee must justifiably rely on the promise  The reliance must be of a substantial and definite character  Justice will be served by enforcing the promise

44 Capacity Persons who sometimes lack capacity to enter into Contracts: Minors (aka “infants”) Intoxicated persons Mentally incompetent persons There are exceptions to all of the above

45 Capacity Minors Little Lattimore is 16 but looks like he’s 22. He buys a computer at Walmart. The next day, he returns the computer to Walmart and says that he doesn’t want it anymore. Can he do this? Yes. Lattimore has “disaffirmed” his contract.

46 Capacity What if on the way back home from Walmart, somebody runs a stop sign and hits his car at an intersection. The computer is smashed. Can he still return it? Yes, in most states, he can even if it’s damaged.

47 Capacity Change facts a bit. What if Lattimore bought a car for $2,500 from a used car dealer. He drives it for a year, at which time it begins to smoke and run poorly. Lattimore ignores this, and keeps driving it until the engine blows up. He goes back to the dealer and says, “I am returning this car; I disaffirm my contract to buy it on the basis that I am a minor.” What happens here? Depends on the state. A Tennessee court under similar circumstances said that he could disaffirm and return the car, but he had to compensate the dealer for the depreciated value (not the purchase price) of the car. In Texas…maybe not.

48 Capacity-Minors In general, minors can enter into contracts just as adults can and those contracts are valid and enforceable up to the point that the minor chooses to disaffirm. Thus, they are voidable at the option of the minor...but not at the option of the adult. Generally, the minor disaffirming the contract has to return the consideration or property received by them, if it is still in their possession. Courts differ from state to state about the effect of damage to the property or what causes the damage. Disaffirmance can normally occur at any time up to the time of reaching majority, and for a reasonable time thereafter. Once majority is reached, the person can ratify the contract, making it no longer voidable.

49 Capacity-Minors Misrepresentation of Age: Generally has no effect. Some states have statutes or have adopted common law rules that limit or prevent disaffirmance where minor misrepresents his or her age (for instance, allowing disaffirmance only if the minor can return the consideration or property) Others will hold the minor liable in tort for fraud. But this is a minority view; most won’t hold a minor liable in tort as a way to “bootstrap” into contract liability. Contracts for Necessaries: Almost all states recognize an exception where the minor contracts for things that are necessary to sustain the minor’s existence. Are chinchillas “necessaries?”

50 Capacity Texas Law – the Case of the Fragile Chinchillas

51 Capacity-Minors Chinchillas aren’t but consider this case: Young boy named Fountain was accidentally shot in the head by a playmate. He required extensive emergency lifesaving medical treatment. One provider, Yale Diagnostics, billed Fountain’s mother for the services. She did not pay, and filed for bankruptcy, which discharged all her debts, including the one to Yale. However, Fountain’s mother did sue the playmate’s family on behalf of her injured son, and received a settlement, which was paid to the son’s estate. Yale Diagnostics, being unable to continue to try to collect from the mother, made a claim for payment from the son’s estate, which now had some money. Could Yale recover payment from the minor son?

52 Capacity-Minors The Connecticut Supreme Court said yes. Why?  There is a longstanding rule that a minor can’t avoid contract liability for goods or services necessary to the minor’s health  Rule is based on Quasi Contract (implied-in-law contract; not a real contract)  When a necessary medical service is provided to a minor, two contracts arise. One is a real one between the provider and the parents who are responsible for the minor’s care; the other is a contract implied in law between the provider and the minor to prevent unjust enrichment. Do you agree with this? Why or why not?

53 Capacity-Minors Necessaries Basic needs: food, clothing, shelter, medical services. Not chinchillas. Some element of appropriateness of the need to the particular minor’s station in life; value may be up to the level required to maintain current living standards Is minor in the care of someone else who is obliged to provide? If so, then it may not be “necessary” for minor to acquire from the seller Unless all elements are met, the contract can be disaffirmed, usually without the minor being responsible for the value of the goods

54 Capacity-Minors Recall that Lattimore, our minor, bought a computer at Walmart. Say that Lattimore keeps the computer and uses it until he turns 18, then sends an to Walmart telling it that he likes the computer and believes that he’ll keep it. What effect? Lattimore has expressly ratified the contract; it’s binding on him now. Now assume that he doesn’t Walmart, but he just continues to use the computer well beyond his 18 th birthday. What effect? Same thing. He’s ratified the contract, but he’s done so by implication…this is implied ratification.


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