ENTERING INTO ENTERING INTO CONTRACTSCONTRACTS

Sunny Hills High Sunny Hills High SchoolSchool

Business LawBusiness LawMrs. LarsenMrs. Larsen

Chapter 7Chapter 7

HOW CONTRACTS HOW CONTRACTS ARISEARISE

PAGE 91PAGE 91

Learning ObjectivesLearning Objectives

Six Elements of a ContractSix Elements of a Contract Major Classes of Contracts with Major Classes of Contracts with

ExplanationExplanation Three Basic Elements of an OfferThree Basic Elements of an Offer Requirements of an AcceptanceRequirements of an Acceptance How an Offer can come to an ENDHow an Offer can come to an END

Contract LawContract Law

Enforces promisesEnforces promises Gives reasonable assurances Gives reasonable assurances

to all partiesto all parties Provides remedies for failure Provides remedies for failure

to keep promisesto keep promises

Contracts Contracts

written or oralwritten or oraloral contracts are more oral contracts are more

difficult to prove difficult to prove in most jurisdictions the time to in most jurisdictions the time to sue on the contract is shorter sue on the contract is shorter such as two years for oral such as two years for oral compared to four years for compared to four years for written written

Contract isContract is

an agreement with specific terms an agreement with specific terms between two or more persons or entitiesbetween two or more persons or entities with a promisewith a promise considerationconsideration

heart of most business dealingsheart of most business dealings legal concerns are legal concerns are

variations on circumstances and variations on circumstances and complexitiescomplexities

enter into an agreemententer into an agreement

Elements of a ContractElements of a Contract

There are six elementsThere are six elements Have all elements to be Have all elements to be

enforceableenforceable Writing is not oneWriting is not one

1.1. OfferOffer

• Proposal by one party Proposal by one party (Offeree)(Offeree)

• To another Party (Offeror)To another Party (Offeror)• Showing a willingnessShowing a willingness• To create a legally binding To create a legally binding

contractcontract

2 Acceptance2 Acceptance

Unqualified willingness to go Unqualified willingness to go along with the offeralong with the offer

Agreement to be bound by Agreement to be bound by the terms of the offerthe terms of the offer

3.Genuine Agreement3.Genuine Agreement

Valid offer is met by a valid Valid offer is met by a valid acceptanceacceptance

a meeting of the mindsa meeting of the minds Genuine—no fraud or Genuine—no fraud or

misrepresentationmisrepresentation

4. Capacity4. Capacity

Legal ability to enter a Legal ability to enter a contractcontract

Issues: minor, mental Issues: minor, mental competence, mental statecompetence, mental state

5. Consideration5. Consideration

Exchange of things of value Exchange of things of value Mutual Exchange creates the Mutual Exchange creates the

bondbond Between the contractual Between the contractual

partiesparties

6. Legality6. Legality

To be enforceable must be To be enforceable must be for a legal act or purposefor a legal act or purpose

Characteristics of a Characteristics of a ContractContract

one or more of these four groupsone or more of these four groups For Example: Valid, Express, For Example: Valid, Express,

Bilateral and WrittenBilateral and Written1.1. Valid, Void, Voidable, UnenforceableValid, Void, Voidable, Unenforceable

2.2. Express or ImpliedExpress or Implied

3.3. Bilateral or unilateralBilateral or unilateral

4.4. Oral or WrittenOral or Written

Valid, Void, Voidable, Valid, Void, Voidable, UnenforceableUnenforceable

Valid is legally good or bindingValid is legally good or binding Void is No legal forceVoid is No legal force

Not a contractNot a contract Can be cancelledCan be cancelled Example: Minor as a partyExample: Minor as a party

Voidable: One party can cancelVoidable: One party can cancel Unenforceable is not supported by lawUnenforceable is not supported by law

not words of partiesnot words of parties Example: Statue of Limitations has run Example: Statue of Limitations has run

outout

Express or ImpliedExpress or Implied

ExpressExpress: : stated in words, oral or writtenstated in words, oral or written

ImpliedImplied: : comes from the actionscomes from the actions

Bilateral, UnilateralBilateral, Unilateral

A A bilateral contractbilateral contract is a is a promise exchanged for a promise exchanged for a promise. 2 promisespromise. 2 promises (I promise to fix your car by (I promise to fix your car by

Thursday and you promise to Thursday and you promise to pay $500 on Thursday.) pay $500 on Thursday.)

UnilateralUnilateral

A A unilateral contractunilateral contract is a is a promise to give consideration promise to give consideration in return for actual in return for actual performance. One promise.performance. One promise. (I will pay you $500 to fix my (I will pay you $500 to fix my

car by Thursday; the car by Thursday; the performance is fixing the car by performance is fixing the car by that date.)that date.)

Oral, WrittenOral, Written

Oral ContractOral ContractCreated by word of mouthCreated by word of mouth2 or more people speak to each 2 or more people speak to each

otherother Written ContractWritten Contract

Words and terms are put into Words and terms are put into writing writing

for clarity and prooffor clarity and proof

REQUIREMENTS OF AN REQUIREMENTS OF AN OFFEROFFER

Offer is a proposal by one party Offer is a proposal by one party to another to enter into a to another to enter into a contractcontract

Three requirementsThree requirementsSeriously intendedSeriously intendedDefinite and certainDefinite and certainCommunicated to the offeree by Communicated to the offeree by

the offerorthe offeror

Serious IntentSerious Intent

Offers must have serious intentOffers must have serious intent Must be made with legal Must be made with legal

obligation in mindobligation in mind Invitation to NegotiateInvitation to Negotiate

Advertisements are treated as Advertisements are treated as invitations, not offersinvitations, not offers

Price devices are invitations to Price devices are invitations to tradetrade

Definiteness and Definiteness and CertaintyCertainty

Offer must be definite and Offer must be definite and certaincertain

Amounts must be specifiedAmounts must be specified

Communication to the Communication to the OffereeOfferee

Many waysMany waysTelephone, letter, telegram, Telephone, letter, telegram,

fax, email, otherfax, email, other Given directly to the OffereeGiven directly to the Offeree

REQUIREMENTS OF AN REQUIREMENTS OF AN ACEPTANCEACEPTANCE

Acceptance isAcceptance isUnqualified willingness to go Unqualified willingness to go

along with the offeralong with the offer Requirements areRequirements are

Unconditional acceptanceUnconditional acceptanceMethod of acceptance follows Method of acceptance follows

the rulesthe rules

Unconditional Unconditional AcceptanceAcceptance

Mirror Image RuleMirror Image Rule Acceptance does not change the Acceptance does not change the

original offeroriginal offer Counter Offer: Any change to originalCounter Offer: Any change to original

Exceptions:Exceptions: UCC:UCC: Uniform Commercial Code Uniform Commercial Code

Not a merchant, thus not an expertNot a merchant, thus not an expert Sale of goodsSale of goods: small changes to : small changes to

original offeroriginal offer

METHODS OF METHODS OF ACCEPTANCEACCEPTANCE

At the TIME the At the TIME the acceptance is sentacceptance is sent,,

the contract is createdthe contract is created Face-to-Face, TelephoneFace-to-Face, Telephone Same method of communicationSame method of communication

At the TIME the At the TIME the acceptance is receivedacceptance is received,,

the contract is createdthe contract is created Letters, telegrams, fax machinesLetters, telegrams, fax machines Great distancesGreat distances

MORE METHODS OF MORE METHODS OF ACCEPTANCEACCEPTANCE

Offer or CounterofferOffer or Counteroffercan specify a time and place can specify a time and place for contract to take effectfor contract to take effect

ACTIONACTIONContract is in effect when Contract is in effect when action occursaction occurs

Condition of SilenceCondition of SilenceNot an acceptanceNot an acceptance

Termination of an OfferTermination of an Offer

RevocationRevocation RejectionRejection CounterofferCounteroffer Expiration of timeExpiration of time Death or SanityDeath or Sanity

Revocation (to revoke)Revocation (to revoke)

Change of mind or Change of mind or circumstancescircumstances

2 Rules2 RulesRevoked before acceptedRevoked before acceptedWhen offer is acceptedWhen offer is accepted

Rejection (to refuse)Rejection (to refuse)

Ends the offerEnds the offerOffer is not acceptedOffer is not accepted

CounterofferCounteroffer

Ends the first offerEnds the first offerCreates a new offer to the Creates a new offer to the

original offereroriginal offerer

Expiration of timeExpiration of time

Time limit must be complied withTime limit must be complied with No time stated, must be No time stated, must be

reasonable timereasonable time Deposit of Money creates an Deposit of Money creates an

option contractoption contractOption is a binding promise for Option is a binding promise for specified period of timespecified period of time

Provides exclusive rights to offerProvides exclusive rights to offer

Death or SanityDeath or Sanity

Death or insanity of offeror Death or insanity of offeror before acceptancebefore acceptance

Offer ends.Offer ends. Death ends an OFFER not a Death ends an OFFER not a

CONRACTCONRACT

In some cases In some cases

a contract can consist of a contract can consist of several documentsseveral documents a series of letters, orders, a series of letters, orders,

offers and counteroffers. offers and counteroffers.

There are a variety of types There are a variety of types of contracts: of contracts:

"conditional" "conditional" on an event occurring; on an event occurring;

"joint and several,“"joint and several,“ in which several parties make a joint in which several parties make a joint

promise to perform, but each is promise to perform, but each is responsible; responsible;

"implied,“"implied,“ in which the courts will determine in which the courts will determine

there is a contract based on the there is a contract based on the circumstances.circumstances.