Chapter 7 Contract Formation Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

7-2 Contract Formation The elements of a contract are: (1) mutual assent (offer and acceptance), (2) consideration, (3) capacity, and (4) legality/public policy. To be enforceable, a contract must be a product of genuine assent, not be voidable, and be in writing (in certain cases).

7-3 Mutual Assent Part 1: Offer An offer is a promise or commitment to do (or refrain from doing) a specified activity. Requires: Serious intention to become bound by the offer Reasonably certain terms Communication to the offeree Advertisements are not considered offers.

7-4 Mutual Assent Part 2: Acceptance Acceptance is the offeree’s expression of agreement to the terms of the offer. –Bilateral contract: Promise for a promise –Unilateral contract: Promise for an act

7-5 Terminating the Power of Acceptance Revocation –Offeror withdraws prior to acceptance Rejection –Offeree rejects prior to acceptance Counteroffer –Offeree rejects and proposes a new offer Operation of law –(1) Lapse of time (2) death or incapacity of the offeror or offeree, (3) destruction of the subject matter of the contract before acceptance, and (4) supervening illegality.

7-6 Irrevocable Offers Option contract –Offer open for a specified period of time –In exchange for something of value (consideration) Detrimental reliance –Offeree makes preparations prior to acceptance based on a reasonable reliance on the offer. Firm offer –Discussed in Chapter 9 “Contracts for the Sale of Goods”

7-7 Insufficient Agreement Mistake –A mutual mistake in which both parties hold an erroneous belief, may be the basis for canceling a contract (also called avoiding the contract). –In a unilateral mistake, only one party has an erroneous belief about a basic assumption in the terms of the agreement.

7-8 Consideration For a binding contract to exist, not only must there be agreement (i.e., offer and acceptance) but the agreement must be supported by consideration. Consideration requires that each party give up something of value, called legal detriment. Legal detriment can also include forbearance. Consideration also requires a bargained-for exchange, that is a promise made in return for a detriment previously made by the promisee.

7-9 Insufficient Consideration Preexisting Duty –If a party does or promises to do what she is already legally obligated to do, the law generally does not recognize this as a legal detriment. Past Consideration –A promise made in return for a detriment previously made by the promisee.

7-10 Insufficient Consideration (cont’d) Illusory Promises –Examples of illusory promises are (1) deathbed promises, in which you make a promise to a friend or loved one just prior to her death to comfort her; (2) promises of a gift, in which a promise is made but no reciprocal promise is exchanged; (3) promises of love and friendship; and (4) promises that by their terms are not binding.

7-11 Genuineness of Assent Misrepresentation - For one party to avoid the contract on the basis of misrepresentation, she must prove: (1)the misrepresented fact was material in the agreement, or the false representation somehow changed the value of the contract, (2) she justifiably relied on the misstatement when forming an agreement, and (3) the misrepresentation was one of fact and not just someone’s opinion or mere puffing.

7-12 Genuineness of Assent (cont’d) Fraudulent Misrepresentation - When one party has engaged in conduct that meets the standards for misrepresentation but that party has actual knowledge that the representation is not true, this is known as fraudulent misrepresentation.

7-13 Genuineness of Assent (cont’d) Duress - If one party to a contract uses any form of unfair coercion to induce another party to enter into or modify a contract, the coerced party may avoid the contract on the basis of duress.

7-14 Genuineness of Assent (cont’d) Undue Influence - Allows the influenced party to avoid a contract when the court determines that the terms of the contract are unfair and the parties had some type of relationship that involved a fiduciary duty or some duty to care for the influenced party.

7-15 Genuineness of Assent (cont’d) Unconscionability - A contract may potentially be avoided on the grounds that one party suffered a grossly unfair burden that shocks the objective conscience.

7-16 Statute of Frauds The statute of frauds is the law governing which contracts must be in writing in order to be enforceable. The statute of frauds primarily applies to five types of contracts: –Contracts that involve the sale of interest in land. –Contracts that cannot be (i.e., are not able to be, by their terms) performed in under one year. –Contracts to pay the debt of another. –Contracts made in consideration of marriage. –Contracts for the sale of goods for $500 or more and lease transactions for goods amounting to $1,000 or more (UCC contracts).