Business Law Contract Law Unit Chapters 6-12

Chapter 6 Offer & Acceptance

What Must Be In A Contract? Contract agreement between two parties that creates an obligation. 6 major requirements: (next slides) Consideration Capacity Writing Offer & Acceptance Genuine Assent Legality

#1 Offer & Acceptance Offer –Must intend to create legal obligation –Terms are definite & complete –Communicated to Offeree (considers offer) Acceptance –Made by Offeree (and only that person) –Communicated to Offeror (makes offer) –Unconditional - match the terms Mirror Image Rule: acceptance must exactly match the terms contained in the offer.

An agreement must not be based on deception, improper pressure, misrepresentations. # 2 - Genuine Assent # 3 - Legality What the parties are agreeing to must be legal. An agreement to commit a crime cannot be legally enforced.

#4 - Consideration Both sides receive something of value #5 - Capacity #6 - Writing Parties must have legal ability to contact themselves. Minimum Age Ability to understand. Some contracts are so important that the courts must have it in writing to enforce it.

Ending an Offer… (Detailed Slides Next) 1.Revocation 2.Stated Time 3.Reasonable Length of Time 4.Rejection by the Offeree 5.Counteroffer 6.Death or Insanity of Either Party 7.Destruction of Specific Subject Matter

#1 - Revocation The Offeror has right to withdraw the offer before it is accepted by the Offeree. #2 - Time Stated in the Offer Offeror can state how and when the offer must be accepted. When a time is not stated in offer. RLOT depends on surrounding circumstances. Perishable vs. Durable Objects #3 - Reasonable Length of Time

#4 - Rejection Offeree clearly rejects the offer. Rejection terminates offer immediately. #5 - Counteroffer Offer must be accepted exactly as made. Counter - Offeree changed the terms in an important way & sent back to the offeror. “I refuse your offer, here’s my proposal” Terminate original – Creates NEW Offer

#6 – Death or Insanity Law acts on behalf of dead or insane person and terminates the offer for them. #7 - Destruction If the offer refers to a unique subject matter such as a physical object and it is subsequently destroyed before the offer is accepted, the offer is terminated.

Requirements of Acceptance 1.Come from the person to whom the offer was made Offer made to public (i.e. entire BLaw class) *** anyone who knows of offer may accept.

Requirements of Acceptance 2.Match the terms in the offer Mirror image rule: requires that the acceptance must exactly match the terms contained in the offer. If it is not identical = counteroffer

Requirements of Acceptance 3.Be communicated to the offeror Silence – silence is NOT acceptance i.e. If I don’t hear from you by 1/10/14 I’ll assume you accepted. Bilateral – giving promise instead of performance promise to deliver product; if you promise to pay $ Unilateral – indicate acceptance by performing i.e. reward for lost item, return (performance) = acceptance

Chapter 7 Genuineness of Assent

#2 Genuine Assent (in depth) True and complete agreement. Without G.A. – contract is Voidable Voidable Contract: contract in which the injured party can withdraw if they desire, thus canceling the contract

Rescission – Voiding a voidable contract (To Rescind) - Avoidance must be prompt after you discover the lack of Genuine Assent. Ratification – Conduct that confirms you intend to be bound by the contract.

Genuine Assent Lacking if: 1.Duress 2.Undue Influence 3.Mistake (usually mutual) 4.Fraud (misrepresentation/concealment) 5.No Capacity (18, Sane, Sober)

#1 - Duress Duress occurs when one party uses an improper threat or act to obtain an expression of agreement (threatening) Threat of Illegal or Tortious Conduct –Threats against a person’s immediate family, near relatives, or home –Stabbing, threat to stab, unlawful detention, etc. Threat to prosecute (report) a crime –See a crime and threaten to report or else (extortion)

#1 - Duress Threat to Sue –Law encourages parties to settle conflicts w/o suit. –Threaten you will sue if the other side doesn’t settle –i.e. threat to sue ex for custody of child if they don’t sign over something you want in divorce suit Economic Threats –Threats of substantial economic harm

#2 – Undue Influence Undue influence occurs when one party to a contract is in a position of trust and wrongfully dominates the other party –The Relationship ~ of trust, confidence or authority must exist between the parties (husband/wife, parent/child, doctor/patient) –Unfair Persuasion ~ used to influence party

#3 - Mistakes Unilateral mistake occurs when one party holds an incorrect belief about the facts related to a contract Mutual mistake both parties to a contract have an incorrect belief about an important fact

#3 - Mistakes Innocent – did not know statement was untrue vs. Fraudulent – knew statement was untrue Innocent ~ Accident vs. Fraudulent ~ Sneaky, On Purpose

#3 - Mistakes Statements are treated as Misrepresentations by law only if: 1.The untrue statement is one of fact or there is active concealment 2.The statement is Material ( Important ) to the transaction or is a Fraudulent statement 3.The victim reasonably relied on the statement

#4 – Fraud Fraud: intentional misrepresentation of an existing, important fact Intentional – deliberately lie or conceal material facts, makes false statements Reckless – makes a false statement without knowing whether it is true or false. Must Injure – proof of injury Pay $10,000 when its really worth $15,000

#4 – Fraud Remedies Rescission –Backing out of the transaction by asking for the return of what you gave and offering to give back what you received. Compensatory Damages –Amount of money awarded to place an injured party in the position they were in prior to loss. (compensate) Punitive Damages – money a court requires a defendant to pay in order to punish a person who inflicted an injury ( in addition to C.D.)

Genuine Assent Lacking if: 1.Duress 2.Undue Influence 3.Mistake (usually mutual) 4.Fraud (misrepresentation/concealment) 5.No Capacity (18, Sane, Sober)

Chapter 8 Consideration

#3 Consideration (in depth) Consideration what a person demands and generally must receive in order to make his or her promise legally binding 1.Each party must: Promise, Act or Forbearance 2.Must be in exchange for a return PrAcFo 3.Exchanges must have legal value (worth something in the eyes of the law)

Each party must: Promise, Act or Forbearance What’s Your Verdict: Promise: Pay $100 Acts: House Sitting, Dog Walking Forbearance: refrain / not to do something

Must be in exchange for a return Promise, Act or Forbearance Promisor: Person who offers promise Promisee: Person to whom the promise is made Consideration must be mutual. If either party does not receive the required consideration, that party has no duty to perform.

Exchanges must have Legal Value Legal Value: there has been a change in a party’s legal position as a result of contract. Exchange of twp benefits

Forms of Consideration 1.Money $ 2.Goods 3.Acts 4.Forbearance 5.Promise 6.Marriage Consideration – “This for That” in contracts

Not Consideration Gift transfer of ownership w/o receiving anything in return. Lacks an exchange of value from both. Generally not legally enforceable.

Illusory Promises To be consideration, a promise must be binding –Must create a duty or impose an obligation Illusory Promise – contract contains a clause that allows you to escape the legal obligation Termination Clauses Output & Requirement Clauses

Illusory Promises Termination Clauses –Business often want the power to withdrawal if circumstances change. –Not illusory if: termination is allowed only after a defined circumstance (such as defined time) –That is a clear CHANGE in legal obligations

Illusory Promises Output Clauses –Buyers sometimes agree to purchase all of a particular producers production. Requirement Clauses –Seller may agree to supply all of the needs of a particular buyer. –Courts recognize these contracts as supported by consideration because they imply a duty of fair dealing.

Illusory Promises Termination Clauses the power to withdraw from a contract if business circumstances change Output and Requirements Contracts Output contract - steel company may buy all of the output of a nearby coal mining company. Requirements contract - carburetor manufacturer may agree to supply all the carburetors needed for the production of a certain make of vehicle.

Existing Duty A person sometimes promises to do something that he or she is obligated to do by law or by prior contract. Such a promise, or act, cannot serve as consideration to bind the other party to a later contract. –Examples on Slides to Follow….

Existing Duty Existing Public Duty –On your 16 th Birthday, Aunt Ellen promised to pay you $10,000 if you promise not to buy alcohol for 4 years. You agree. –NOT a contract: Illegal for you to buy alcohol until you are 21.

Existing Duty Existing Private Duty –If a contract creates a duty, this duty cannot be the basis of consideration in a different contract. –Same rule holds true for someone demanding further compensation for carrying out a contractual promise already made.

Existing Duty Existing Public Duty If you make an agreement not to drink alcohol when you are not of age to drink, there is no binding agreement  Existing Private Duty When a duty already exists, a person cannot come back demanding more

Settlement of Liquidated Debts Individuals must pay the amount agreed upon.

Existing Duty Settlement of Liquidated Debts –Liquidated Debt: one where parties agree that the debt exists and on the amount of the debt. –Creditor agrees to accept less than total amount due from debtor

Existing Duty Settlement of UNLiquidated Debts –Unliquidated Debts: Genuine dispute between parties on how much is owed. –A payment offered in full settlement by the debtor and accepted by the creditor settles the claim. (Accord & Satisfaction)

Release When a tort occurs - the liability is un- liquidated because the extent of damages is uncertain Due to financial pressure - injured party in the tort will agree to discharge another person from liability for the tort in return for a monetary payment or other consideration (release) Discharge agreement = release

Existing Duty Composition with Creditors –Group of creditors agree to accept less than what they are entitled to, in full satisfaction of their claims against a debtor. –Debtor agrees not to file bankruptcy. –Best case scenario for all creditors involved. –If bankruptcy filed, they could receive much less.

Why is consideration not binding in illusory contracts? The promise is not binding because, as stated, it is in essence a sham best paraphrased by, “I will if I want to.”

False Consideration Mutual Gifts - when something of value is given by one party to another without demanding anything in return, the something of value is not consideration for anything later promised or provided. Past Performance - an act that has already been performed cannot serve as consideration

What distinguishes a gift from a valid contract? Gift transfer of ownership w/o receiving anything in return. Lacks an exchange of value from both. Valid Contract: consideration supports the contractual promises made.

4 Exceptions to Requirement of Consideration 1.Promises to Charitable Organizations –Business Pledges/Contributes one way = usually means gift = not a contract –Courts will enforce promises provided the charity states a specific use for the money and actually acts in reliance on the pledge. –NonProfits: churches, schools, hospitals, etc. may rely on such donations.

4 Exceptions to Requirement of Consideration 2.Promises covered by the UCC UCC – Uniform Commercial Code Firm Offers: leave the offer open is bound for a period of time stipulated or up to 3 months.

4 Exceptions to Requirement of Consideration 2.Promises covered by the UCC (continued) –Under UCC: a good-faith agreement that modifies an existing contract for the sale of goods needs no new consideration. –Ex: sale is made, seller then agrees to give buyer a valid warranty without further charge. *** Modification Enforceable ***

4 Exceptions to Requirement of Consideration 3.Promises barred from Collection by Statute –Statute of Limitations: specifies a time limit for bringing a lawsuit. (Lose the right to litigate) –Breach of Contract = 3 years in most states

4 Exceptions to Requirement of Consideration 4.Promissory Estoppel –Enforcement of a promise to avoid injustice by denying to the promisor the defense of lack of consideration. –Courts counteract injustice by taking action in the name of fairness or equity. –Brought into use = “Invoked”

Promissory Estoppel For the courts to invoke Promissory Estoppel the following conditions must be met: –The promisor should reasonably foresee that the promise will rely on the promise. –The promisee does, in fact, act in reliance on the promise –The promisee would suffer a substantial economic loss if the promise is not enforced. –Injustice can be avoided only by enforcement of promise.