1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Contracts: Nature, Classification, Agreement, and Consideration Chapter 8 BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objectives  What is a contract? What is the objective theory of contracts?  What are the four basic elements necessary to a valid contract?  What elements are necessary for an effective offer? What are some examples of nonoffers?  How do shrink-wrap and click-on agreements differ from other contracts? How have traditional laws been applied to these agreements?  What is consideration? What is required for consideration to be legally sufficient?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 An Overview of Contract Law  Sources of Contract Law. Common law governs all contracts except when modified by statutory law such as the UCC. Common law governs all contracts except when modified by statutory law such as the UCC.  Function of Contracts: Fundamental to business. Fundamental to business. Creates rights and duties between parties. Creates rights and duties between parties. Provides stability and predictability. Provides stability and predictability.  Parties: Promisor (makes the promise) and Promisee (accepts the promise). Good faith in commercial agreements Good faith in commercial agreements

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4  Agreement that can be enforced in court.  Formed by two or more parties (promisor and promisee).  Failure to perform results in breach and damages.  Objective Theory of Contracts. Intent is interpreted by a reasonable person. Intent is interpreted by a reasonable person. Definition of a Contract

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Requirements of a Valid Contract  A valid, enforceable contract includes: Agreement. Agreement. Consideration. Consideration. Capacity. Capacity. Legality. Legality.  Defenses to the Enforceability of a Contract: Genuineness of Assent. Genuineness of Assent. Form. Form.

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Classifications Based on Contract Formation

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Bilateral vs. Unilateral 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. Offeror and Offeree exchange promises to each other. A contract is formed when Offeree promises to perform. A contract is formed when Offeree promises to perform.

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8  Unilateral Contracts: Offeror wants performance in exchange for his promise. Offeror wants performance in exchange for his promise. Contract is formed when Offeree performs. Contract is formed when Offeree performs. Contests and lotteries are examples. Contests and lotteries are examples.  Revocation of Offers for Unilateral Contracts: modern view is that offer is irrevocable once the Offeree substantially performs. Bilateral vs. Unilateral Contracts

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Formal vs. Informal Contracts  Formal: require special form or method to be enforceable, e.g., under seal.  Informal: all other contracts.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 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 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.  CASE 8.1 Uhrhahn Construction & Design, Inc. v. Hopkins (2008). Parties created an enforceable implied-in-fact contract when both parties waived the written requirement for changes.

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Contract Performance  Contract Performance: Executed vs. Executory. Executed: fully performed by both sides. Executed: fully performed by both sides. Executory: at least one of the parties has not performed. Executory: at least one of the parties has not performed.

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Contract Enforceability

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Contract Enforceability  Valid Contract. Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity. 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. Valid contract that is legally defective and can be avoided (rescinded) by one of the parties.  Void Contract. No contract at all. No contract at all.

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Quasi Contracts  Fictional, created by court to avoid unjust enrichment.  Limitations on Quasi-Contractual Recovery.  When an actual contract already exists, quasi contract cannot be used.

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Agreement: Requirements of the Offer  An agreement consists of a valid offer and acceptance.  An offer is the Offeror’s promise to perform.  An offer requires: (1) Serious, objective intention. (1) Serious, objective intention. CASE 8.2 Lucy v. Zehmer (1954). Although the parties had been drinking, the court found the circumstanced indicated a serious offer, acceptance and consideration, and a writing. CASE 8.2 Lucy v. Zehmer (1954). Although the parties had been drinking, the court found the circumstanced indicated a serious offer, acceptance and consideration, and a writing.

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Requirements of an Offer  An offer requires (cont’d): (1) Serious Intention: (1) Serious Intention: Expressions of Opinions are not offers.Expressions of Opinions are not offers. Statements of Future Intent are not offers.Statements of Future Intent are not offers. Preliminary Negotiations are not offers.Preliminary Negotiations are not offers. Advertisements, Catalog, and Circulars are not offers.Advertisements, Catalog, and Circulars are not offers. Auctions are not offers.Auctions are not offers. Agreements to Agree are not offers.Agreements to Agree are not offers.

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Requirements of an Offer  An offer requires (cont’d): (2) Definiteness: Reasonably definite terms so that a court can determine whether a breach has occurred and give an appropriate remedy. (2) Definiteness: Reasonably definite terms so that a court can determine whether a breach has occurred and give an appropriate remedy. (3) Communication of Offer to Offeree. (3) Communication of Offer to Offeree.

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18  Revocation of the Offer (by Offeree) is possible if communicated to Offeree before the offer is accepted. Exception: Irrevocable Offers, based on detrimental reliance or promissory estoppel, cannot be revoked. Exception: Irrevocable Offers, based on detrimental reliance or promissory estoppel, cannot be revoked. Option Contracts: requires consideration. Option Contracts: requires consideration.  CASE 8.3 T.W. Nickerson, Inc. v. Fleet National Bank (2009). Optionee, with right of first refusal, must be notified of “any bona fide offer” to sell the property for consideration. Termination of the Offer By Act of the Parties

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19  Rejection of the Offer by the Offeree. Effective only when actually received by the Offeror or its agent. Effective only when actually received by the Offeror or its agent.  Counter Offer by the Offeree. Rejection of original offer and simultaneous making new offer with different, material terms. Original Offeror can accept. Rejection of original offer and simultaneous making new offer with different, material terms. Original Offeror can accept. “Mirror Image” Rule: at common law, material terms must be identical or rejection. “Mirror Image” Rule: at common law, material terms must be identical or rejection. Termination of the Offer By Act of the Parties

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20  Lapse of Time. Offer automatically terminates by law based on terms specified in the offer itself. Offer automatically terminates by law based on terms specified in the offer itself.  Destruction of Subject Matter. Offer automatically terminates if subject matter destroyed before offer accepted. Offer automatically terminates if subject matter destroyed before offer accepted.  Death or Incompetence of either party. Unless offer is irrevocable. Unless offer is irrevocable.  Supervening Illegality of Proposed Contract. Statute or court decision making the offer illegal automatically terminates it. Statute or court decision making the offer illegal automatically terminates it. Termination of the Offer By Operation of Law

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Acceptance  Voluntary act by Offeree that shows assent to terms of original offer.  Mirror Image Rule. Offeree must unequivocally accept offer. Offeree must unequivocally accept offer. Additional terms may be considered a counteroffer. Additional terms may be considered a counteroffer.  Silence as Acceptance.

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Communication of Acceptance  Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, email).  “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).

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Communication of Acceptance  Exceptions: Acceptance is not properly dispatched. Acceptance is not properly dispatched. Offer stipulates not accepted until received. Offer stipulates not accepted until received. Offeree rejects then accepts. First communication received determines whether contract is formed. Offeree rejects then accepts. First communication received determines whether contract is formed.

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Agreement in E-Contracts  Online Offers should include: Remedies for Buyer. Remedies for Buyer. Statute of Limitations. Statute of Limitations. What constitutes Buyer’s acceptance. What constitutes Buyer’s acceptance. Method of Payment. Method of Payment. Seller’s Refund and Return Policies. Seller’s Refund and Return Policies. Disclaimers of Liability. Disclaimers of Liability. How Seller will Use Buyer’s Information (Privacy). How Seller will Use Buyer’s Information (Privacy).

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Provisions to Include  Dispute Settlement Provisions. Choice of Law. Choice of Law. Choice of Forum. Choice of Forum. E-Bay uses online dispute resolution. E-Bay uses online dispute resolution.  Displaying the Offer (via hyperlink).  How Offer Will Be Accepted. Amazon.com--Checkout. Amazon.com--Checkout. “I Accept” Button to Click. “I Accept” Button to Click.  Dispute-Settlement Provisions.

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Online Acceptances  Click-On Agreements. Buyer “checks out” or clicks on “I Accept” button on Seller’s website or when software is installed. Buyer “checks out” or clicks on “I Accept” button on Seller’s website or when software is installed.  Shrink-Wrap Agreements. Contract terms are inside the box. Contract terms are inside the box. Party opening box agrees to terms by keeping merchandise. Party opening box agrees to terms by keeping merchandise. Limits: when was contract formed? Before or after terms communicated to buyer? Limits: when was contract formed? Before or after terms communicated to buyer?

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 E-Signatures  E-Signature Technologies. Asymmetric Cryptosystem. Asymmetric Cryptosystem. Cyber Notary. Cyber Notary.  State Law Governing E-Signatures. Uniform Electronic Transactions Act (1999). Uniform Electronic Transactions Act (1999).  Federal Law. E-SIGN (2000) gives e-signatures and e- documents legal force. E-SIGN (2000) gives e-signatures and e- documents legal force.

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Uniform Electronic Transactions Act  Purpose is to remove barriers to forming electronic commerce.  E-Signature is “electronic sound, symbol or process…associated with a record and… adopted by a person with intent to sign the record.”  UETA applies only to e-records and e- signatures relating to a transaction.

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 UETA and E-SIGN  E-SIGN explicitly refers to UETA.  Provides that E-SIGN is pre-empted by state passing of UETA.  But state law must conform to minimum E-SIGN procedures.

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Consideration  Consideration is value given in return for a promise.  Elements: Something of legally sufficient value given in exchange for a promise and Something of legally sufficient value given in exchange for a promise and That is bargained-for-exchange between the parties. That is bargained-for-exchange between the parties.  Adequacy of Consideration. Courts generally do not look for “how much” consideration” is given. Courts generally do not look for “how much” consideration” is given.

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 Contracts That Lack Consideration  Pre-Existing Duty. A promise to do what one is already legally obligated to do is not consideration. A promise to do what one is already legally obligated to do is not consideration. Unforeseen Difficulties. Unforeseen Difficulties. Rescission and New Contract. Rescission and New Contract.

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 Contracts That Lack Consideration  Past Consideration. A promise made in return for actions or events that have already taken place are unenforceable. A promise made in return for actions or events that have already taken place are unenforceable.  Illusory Promises. If the terms of performance are so uncertain that the promisor has not legally promised anything, the promise is illusory. If the terms of performance are so uncertain that the promisor has not legally promised anything, the promise is illusory. Option to Cancel clauses. Option to Cancel clauses.

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Settlement of Claims  Accord and Satisfaction. Debtor and Creditor agree on lesser amount. Debtor and Creditor agree on lesser amount.  Release. One of the parties forfeits the right to purse legal claim against the other. One of the parties forfeits the right to purse legal claim against the other.  Covenant Not to Sue. Parties substitute a contractual obligation for some other type of legal action. Parties substitute a contractual obligation for some other type of legal action.

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 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.  Elements: Clear and definite promise Clear and definite promise Promisor expected promisee would rely. Promisor expected promisee would rely. Promisee reasonably relies by acting. Promisee reasonably relies by acting. Reliance with definite and substantial detriment. Reliance with definite and substantial detriment. Enforcement of promise is necessary to avoid injustice. Enforcement of promise is necessary to avoid injustice.