Chapter 6 Contracts: Nature, Classification, Agreement and Consideration

 What is a contract? What is the objective theory of contracts?  What are the four basic elements of a valid, enforceable contract?  What are the various classifications of contracts?  What are the requirements of an offer?  How can an offer be accepted?  What are the elements of consideration?  What is a contract? What is the objective theory of contracts?  What are the four basic elements of a valid, enforceable contract?  What are the various classifications of contracts?  What are the requirements of an offer?  How can an offer be accepted?  What are the elements of consideration? Learning Objectives

Contracts  Function of Contracts Fundamental to business. Creates rights and duties between parties. Provides stability and predictability.  Parties: Promisor (makes the promise) and Promisee (accepts the promise). Good faith in commercial agreements  Function of Contracts Fundamental to business. Creates rights and duties between parties. Provides stability and predictability.  Parties: Promisor (makes the promise) and Promisee (accepts the promise). Good faith in commercial agreements

Contracts  Definition of a Contract Agreement that can be enforced in court. Formed by two or more parties Failure to perform results in breach and damages.  Objective Theory Reasonable person standard Circumstances surrounding contract formation  Definition of a Contract Agreement that can be enforced in court. Formed by two or more parties Failure to perform results in breach and damages.  Objective Theory Reasonable person standard Circumstances surrounding contract formation

Requirements of a Contract  A valid, enforceable contract includes: Agreement Consideration Capacity Legality  Defenses to formation include: Genuineness of Assent Form  A valid, enforceable contract includes: Agreement Consideration Capacity Legality  Defenses to formation include: Genuineness of Assent Form

Types of Contracts  Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee).  Bilateral Contracts Offeror and Offeree exchange promises to each other. A contract is formed when Offeree promises to perform.  Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee).  Bilateral Contracts Offeror and Offeree exchange promises to each other. A contract is formed when Offeree promises to perform.

Types of Contracts  Unilateral Contracts Offeror wants performance in exchange for his promise. Contract is formed when Offeree performs. Contests and lotteries are examples. Revocation of Offer: modern view is that offer is irrevocable once the Offeree substantially performs.  Unilateral Contracts Offeror wants performance in exchange for his promise. Contract is formed when Offeree performs. Contests and lotteries are examples. Revocation of Offer: modern view is that offer is irrevocable once the Offeree substantially performs.

Types of Contracts  Express vs. Implied Contracts Express: terms of contract are set forth either in writing or orally. Implied-in-Fact: based on conduct. Plaintiff furnished service or product Plaintiff expects to be compensated Defendant had a chance to reject and did not. Implied-in-Law (Quasi Contract) Fictional, created by court to avoid unjust enrichment.  Express vs. Implied Contracts Express: terms of contract are set forth either in writing or orally. Implied-in-Fact: based on conduct. Plaintiff furnished service or product Plaintiff expects to be compensated Defendant had a chance to reject and did not. Implied-in-Law (Quasi Contract) Fictional, created by court to avoid unjust enrichment.

Types of Contracts  Formal vs. Informal Contracts Formal: require special form or method to be enforceable, e.g., under seal. Informal: all other contracts.  Executed vs. Executory Contracts Executed: fully performed by both sides. Executory: at least one of the parties has not performed.  Formal vs. Informal Contracts Formal: require special form or method to be enforceable, e.g., under seal. Informal: all other contracts.  Executed vs. Executory Contracts Executed: fully performed by both sides. Executory: at least one of the parties has not performed.

Types of Contracts  Valid Contract Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity.  Voidable Contract Valid contract that is legally defective and can be avoided (rescinded) by one of the parties.  Void Contract No contract at all.  Valid Contract Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity.  Voidable Contract Valid contract that is legally defective and can be avoided (rescinded) by one of the parties.  Void Contract No contract at all.

Agreement: Offer  Agreement = Offer and Acceptance.  An offer is the Offeror’s promise to perform. An offer requires: Serious, objection intention Opinions are not offers Good Intentions are not offers Preliminary Negotiations are not offers Agreements to Agree are not offers  Agreement = Offer and Acceptance.  An offer is the Offeror’s promise to perform. An offer requires: Serious, objection intention Opinions are not offers Good Intentions are not offers Preliminary Negotiations are not offers Agreements to Agree are not offers

Offer  An offer requires (continued): Reasonably definite terms Communication to Offeree  Termination of Offer By Act of the Parties Revocation by Offeror (unless irrevocable) Rejection by Offeree (or counteroffer) Operation of Law (destruction, death)  An offer requires (continued): Reasonably definite terms Communication to Offeree  Termination of Offer By Act of the Parties Revocation by Offeror (unless irrevocable) Rejection by Offeree (or counteroffer) Operation of Law (destruction, death)

Agreement: Acceptance  Voluntary act by Offeree that shows assent to terms of original offer.  Unequivocal Acceptance: “Mirror Image” Rule Offeree must unequivocally accept offer. Additional terms may be considered a counteroffer.  Acceptance by Silence  Voluntary act by Offeree that shows assent to terms of original offer.  Unequivocal Acceptance: “Mirror Image” Rule Offeree must unequivocally accept offer. Additional terms may be considered a counteroffer.  Acceptance by Silence

Acceptance  Communication of Acceptance Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, ) “Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror).  Communication of Acceptance Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, ) “Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror).

Consideration  Consideration is value given in return for a promise.  Elements: Something of legally sufficient value given in exchange for a promise and A bargained-for-exchange between the parties.  Consideration is value given in return for a promise.  Elements: Something of legally sufficient value given in exchange for a promise and A bargained-for-exchange between the parties.

Adequacy of Consideration  Contracts that Lack Consideration Pre-Existing Duty Unforeseen Difficulties Past Consideration Illusory Promises  Settlement of Claims Accord and Satisfaction Release Covenant Not to Sue  Contracts that Lack Consideration Pre-Existing Duty Unforeseen Difficulties Past Consideration Illusory Promises  Settlement of Claims Accord and Satisfaction Release Covenant Not to Sue

Promises Enforceable Without Consideration  Promissory Estoppel Promissory Estoppel (“detrimental reliance”) doctrine applies when a person relies on the promise of another to her legal detriment. Promisor is “estopped” (precluded) from revoking the promise. There must be: Clear and definite promise with substantial reliance Justice is served by enforcement of the promise.  Promissory Estoppel Promissory Estoppel (“detrimental reliance”) doctrine applies when a person relies on the promise of another to her legal detriment. Promisor is “estopped” (precluded) from revoking the promise. There must be: Clear and definite promise with substantial reliance Justice is served by enforcement of the promise.