© 2005 West Legal Studies in Business A Division of Thomson Learning CHAPTER 7 Contracts: Nature, Classification, Agreement and Consideration

© 2005 West Legal Studies in Business A Division of Thomson Learning 2 What is a contract? What are the four basic elements necessary to the formation of a valid, contract?What is a contract? What are the four basic elements necessary to the formation of a valid, contract? What are the various types of contracts?What are the various types of contracts? What are the requirements of an offer?What are the requirements of an offer? How can an offer be accepted?How can an offer be accepted? What are the elements of consideration?What are the elements of consideration? Learning Objectives

© 2005 West Legal Studies in Business A Division of Thomson Learning 3 Contracts Function of ContractsFunction 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).Parties: Promisor (makes the promise) and Promisee (accepts the promise). –Good faith in commercial agreements.

© 2005 West Legal Studies in Business A Division of Thomson Learning 4 Contracts Definition of a ContractDefinition 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.Objective Theory. –Reasonable person standard. –Circumstances surrounding contract formation.

© 2005 West Legal Studies in Business A Division of Thomson Learning 5 Requirements of a Contract A valid, enforceable contract includes:A valid, enforceable contract includes: –Agreement. –Consideration. –Capacity. –Legality. Defenses to formation include:Defenses to formation include: –Genuineness of Assent. –Form.

© 2005 West Legal Studies in Business A Division of Thomson Learning 6 Types of Contracts Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee).Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee). Bilateral Contracts.Bilateral Contracts. –Offeror and Offeree exchange promises to each other. –A contract is formed when Offeree promises to perform.

© 2005 West Legal Studies in Business A Division of Thomson Learning 7 Types of Contracts Unilateral 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. –Ardito v. City of Providence (2003).

© 2005 West Legal Studies in Business A Division of Thomson Learning 8 Types of Contracts Express vs. Implied ContractsExpress 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 furnished service or product. Plaintiff expects to be compensated.Plaintiff expects to be compensated. Defendant had a chance to reject and did not.Defendant had a chance to reject and did not. –Implied-in-Law (Quasi Contract). Fictional, created by court to avoid unjust enrichment.Fictional, created by court to avoid unjust enrichment.

© 2005 West Legal Studies in Business A Division of Thomson Learning 9 Types of Contracts Formal vs. Informal ContractsFormal vs. Informal Contracts –Formal: require special form or method to be enforceable, e.g., under seal. –Informal: all other contracts. Executed vs. Executory ContractsExecuted vs. Executory Contracts –Executed: fully performed by both sides. –Executory: at least one of the parties has not performed.

© 2005 West Legal Studies in Business A Division of Thomson Learning 10 Contract Enforceability Valid Contract.Valid Contract. –Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity. Voidable Contract.Voidable Contract. –Valid contract that is legally defective and can be avoided (rescinded) by one of the parties. Void Contract.Void Contract. –No contract at all.

© 2005 West Legal Studies in Business A Division of Thomson Learning 11 Quasi Contracts Implied-in-Law Contracts (Quasi Contract).Implied-in-Law Contracts (Quasi Contract). –Fictional, created by court to avoid unjust enrichment. –Limitations on Quasi-Contractual Recovery.

© 2005 West Legal Studies in Business A Division of Thomson Learning 12 Agreement: Offer Agreement = Offer and Acceptance.Agreement = Offer and Acceptance. An offer is the Offeror’s promise to perform. An offer requires:An offer is the Offeror’s promise to perform. An offer requires: –Serious, objection intention. Opinions are not offers.Opinions are not offers. Good Intentions are not offers.Good Intentions are not offers. Preliminary Negotiations are not offers.Preliminary Negotiations are not offers. Agreements to Agree are not offers.Agreements to Agree are not offers. Lucy v. Zehmer (1954).Lucy v. Zehmer (1954).

© 2005 West Legal Studies in Business A Division of Thomson Learning 13 Offer An offer requires (continued):An offer requires (continued): –Reasonably definite terms. –Communication to Offeree. Termination of Offer.Termination of Offer. –By Act of the Parties. –Revocation by Offeror (unless irrevocable). –Rejection by Offeree (or counteroffer). –Operation of Law (destruction, death).

© 2005 West Legal Studies in Business A Division of Thomson Learning 14 Agreement: Acceptance Voluntary act by Offeree that shows assent to terms of original offer.Voluntary act by Offeree that shows assent to terms of original offer. Unequivocal Acceptance: “Mirror Image” Rule.Unequivocal Acceptance: “Mirror Image” Rule. –Offeree must unequivocally accept offer. –Additional terms may be considered a counteroffer. Acceptance by Silence.Acceptance by Silence.

© 2005 West Legal Studies in Business A Division of Thomson Learning 15 Acceptance Communication of 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).

© 2005 West Legal Studies in Business A Division of Thomson Learning 16 Termination of Offer Termination of Offer.Termination of Offer. –By Act of the Parties. –Revocation by Offeror (unless irrevocable). –Rejection by Offeree (or counteroffer). –Operation of Law: lapse of time, destruction, death or incompetence, supervening illegality.

© 2005 West Legal Studies in Business A Division of Thomson Learning 17 Acceptance Voluntary act by Offeree that shows assent to terms of original offer.Voluntary act by Offeree that shows assent to terms of original offer. Mirror Image Rule.Mirror Image Rule. –Offeree must unequivocally accept offer. –Additional terms may be considered a counteroffer. Acceptance by Silence.Acceptance by Silence.

© 2005 West Legal Studies in Business A Division of Thomson Learning 18 Acceptance Communication of 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).

© 2005 West Legal Studies in Business A Division of Thomson Learning 19 Consideration Consideration is value given in return for a promise.Consideration is value given in return for a promise. Elements:Elements: –Something of legally sufficient value given in exchange for a promise and –That is bargained for between the parties. Seaview Orthopedics v. National Healthcare Resources, Inc. (2004).Seaview Orthopedics v. National Healthcare Resources, Inc. (2004).

© 2005 West Legal Studies in Business A Division of Thomson Learning 20 Consideration Contracts that Lack Consideration:Contracts that Lack Consideration: –Pre-Existing Duty. –Unforeseen Difficulties. –Past Consideration. –Illusory Promises. Settlement of Claims:Settlement of Claims: –Accord and Satisfaction. –Release. –Covenant Not to Sue.

© 2005 West Legal Studies in Business A Division of Thomson Learning 21 Promissory Estoppel Promissory Estoppel (“detrimental reliance”) doctrine applies when a person relies on the promise of another to her legal detriment.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: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.