Chapter 12 Contract Formation. Chapter Objectives. 1. Define the term contract , and discuss the function of contracts in our society. 2. Identify the types of contracts that are subject to Article 2 of the Uniform Commercial Code.
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Chapter 12 Contract Formation
1. Define the term contract, and discuss the function of contracts in our society.
2. Identify the types of contracts that are subject to Article 2 of the Uniform Commercial Code.
3.Summarize each of the four basic requirements for a valid contract.
4. Explain the contractual rights and obligations of minors.
5. Give some examples of how third parties may acquire rights in contracts.
The four requirements that constitute what are known as the elements of a contract are:
A contract that is otherwise valid may be unenforceable if:
Requirements of the Offer
Termination of the Offer
Three elements are necessary for an offer to be effective:
There must be a serious, objective intention by the offeror to become bound by the offer. Nonoffer situations include:
(a) expressions of opinion; (b) statements of intention; (c) preliminary negotiations; and
(d) advertisements, catalogues, and circulars.
The terms of the offer must be sufficiently definite to be ascertainable by the parties or by a court.
The offer must be communicated to the offeree.
An offer can be terminated by:
Action of the Parties
An offer can be revoked or rejected at any time before acceptance without liability. A counteroffer is a rejection of the original offer and the making of a new offer.
Operation of Law
An offer can terminate by (a) lapse of time, (b) destruction of the specific subject matter of the offer, (c) death or incompetence of the parties, or (d) supervening illegality.
Consideration is broken down into two parts:
When a promisor reasonably expects a promise to induce definite and substantial action or forbearance by the promisee, and the promisee does act in reliance on the promise, the promise is binding if injustice can be avoided only by enforcement of the promise.
Mentally Incompetent Persons
Occurs when a lender makes a loan at an interest rate above the lawful maximum. The maximum rate of interest varies from state to state.
Gambling contracts that contravene (go against) state statutes are deemed illegal and thus void.
Contracts entered into by persons who do not have a license, when one is required by statute, will not be enforceable unless the underlying purpose of the statute is to raise government revenues.
Laws prohibiting the formation or the performance of certain contracts on Sunday. Such laws vary widely from state to state, and many states do not enforce them.
There are two important exceptions to the rule of privity of contract:
Generally, all rights can be assigned, except in the following circumstances:
One for whose benefit a contract is created. When the promisor fails to perform as promised, the third party can sue the promisor directly. Examples of third party beneficiaries are creditor beneficiaries and donee beneficiaries.
A third party who indirectly benefits from a contract but for whose benefit the contract was not specifically intended. Incidental beneficiaries have no rights to the benefits received and cannot sue to have the contract enforced.
1. What is the difference between a void contract and a voidable contract?
2. What are the four basic elements necessary to the formation of a valid contract?
3. What elements are necessary for an effective offer? What are some examples of nonoffers?
4. What is consideration? What is required for consideration to be legally sufficient?
5. Generally, a minor can disaffirm any contract. What are some exceptions to this rule?