Chapter 11 Formation of Traditional And Online Contracts PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 5E, by Henry R. Cheeseman Chapter 11 Formation of Traditional And Online Contracts Prentice Hall © 2007

What Is a Contract? A contract is an agreement that is enforceable by a court of law or equity. Prentice Hall © 2007

Parties to a Contract Offeror Offeree Offer Acceptance Offeror makes an offer to the offeree Offeree has the power to accept the offer and create a contract Prentice Hall © 2007

Sources of Contract Law Common law of contracts Uniform Commercial Code (UCC) Restatement of the Law of Contracts Prentice Hall © 2007

Classifications of Contracts Bilateral and unilateral contracts Express and implied-in-fact contracts Quasi-contract (implied-in-law) Formal and informal contracts Valid, void, voidable, and unenforceable contracts Executed and executory contracts Prentice Hall © 2007

Bilateral and Unilateral Contracts Offer is accepted by a promise Unilateral Offer can only be accepted by performance of an act by the offeree Prentice Hall © 2007

Express or Implied-in-Fact Express contract Terms are stated, either written or oral Implied-in-fact Plaintiff provided goods or services Plaintiff expected to be paid Defendant had the opportunity to reject the goods or services and did not Prentice Hall © 2007

Quasi-Contract (Implied-in-Law) Equitable doctrine to prevent unjust enrichment Elements of quasi-contract Plaintiff conferred a benefit on the defendant. It would be unjust not to require the defendant to pay for the benefit received. Prentice Hall © 2007

Formal and Informal Contracts Formal contracts require a special form or method of creation. Negotiable instruments Letters of credit Recognizances Contracts under seal Informal contracts include all other contracts that do not qualify as formal contracts. Prentice Hall © 2007

Valid, Void, Voidable Valid – meets all the required elements of an enforceable contract Void – has no legal effect Voidable – at least one party has the option to avoid enforcement Unenforceable – there is a legal defense to enforcement of the contract Prentice Hall © 2007

Executed and Executory Contracts Executed – contract has been fully performed Executory – contract has not been fully performed by at least one party Prentice Hall © 2007

Elements of an Enforceable Contract Agreement Consideration Contractual capacity Lawful object Prentice Hall © 2007

Agreement Agreement The manifestation by two or more persons of the substance of a contract Requires an offer and an acceptance Prentice Hall © 2007

Parties to an Agreement Offeror Person who makes an offer Offeree Person to whom an offer has been made Prentice Hall © 2007

Requirements of an Offer The offeror must objectively intend to be bound by the offer. The terms of the offer must be definite or reasonably certain. The offer must be communicated to the offeree. Prentice Hall © 2007

Objective Intent The intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties. Prentice Hall © 2007

Auctions Auction with reserve Auction without reserve Is considered an invitation to make an offer The seller has the right to withdraw the goods from sale. Auction without reserve The seller is considered an offeror. The seller must accept the highest bid. Prentice Hall © 2007

Termination of an Offer By action of the parties: Revocation of the offer by the offeror Rejection of the offer by the offeree Counteroffer by the offeree Prentice Hall © 2007

Termination of the Offer By operation of law: Destruction of the subject matter Death or incompetence of the offeror or the offeree Supervening illegality Lapse of time Prentice Hall © 2007

Acceptance The offeree’s acceptance must be unequivocal. The terms of the acceptance must match the terms of the offer. Mirror image rule Acceptance is effective when sent. Mailbox rule Prentice Hall © 2007

Elements of Consideration Something of legal value must be given. There must be a bargained-for exchange. Gift promises (gratuitous promises) are unenforceable because they lack consideration. Prentice Hall © 2007

Other Promises Lacking Consideration Illegal consideration Illusory promises Moral obligation Preexisting duty Past consideration Prentice Hall © 2007

Persons Who May Lack the Capacity to Contract Minors Persons who have not reached the age of majority Mentally incompetent persons Intoxicated persons Prentice Hall © 2007

Minors Infancy doctrine Parties’ duties at disaffirmance Allows minors to disaffirm (cancel) most contracts they have entered into with adults Parties’ duties at disaffirmance Minor has the duty to return the property he or she received in the condition it is in at the time of disaffirmance. Competent party has the duty to return all the consideration received from the minor. Prentice Hall © 2007

Contract Issues With Minors Ratification If a contract is not disaffirmed within a reasonable time after reaching majority, it is considered ratified. Necessaries of life A minor may not disaffirm contracts for necessaries of life. Prentice Hall © 2007

Mentally Incompetent Persons If a person is adjudged insane, the contract is void; neither party can enforce the contract. If the person is insane, but not adjudged insane, the contract is voidable by the insane person; the competent party cannot void the contract. Prentice Hall © 2007

Intoxicated Persons Most contracts entered into by intoxicated persons are voidable by that person. A person who disaffirms a contract based on intoxication generally must return the other party to status quo. Prentice Hall © 2007

Illegality Contracts having an illegal object are illegal contracts. Illegal contracts are void; neither party may enforce. Prentice Hall © 2007

Illegality Contracts contrary to statutes Gambling statutes Usury laws Sabbath laws or blue laws Licensing statutes Prentice Hall © 2007

Illegality Contracts Contrary to Public Policy Immoral contracts Contracts in restraint of trade Certain covenants not to compete Some exculpatory clauses Prentice Hall © 2007

Covenant Not to Compete A noncompete agreement related to an employment contract or sale of a business is legal if it is reasonable in 3 areas: The line of business protected The geographical area protected The duration of the restriction Prentice Hall © 2007

Exculpatory Clauses A contract provision that relieves a party of tort liability. An exculpatory clause is not effective if: It is against the public interest. It is the result of superior bargaining power. Prentice Hall © 2007