ES 2.00 UNDERSTAND CONTRACT LAW Obj. 2.01 Understand the elements and characteristics of a contract
Elements of a Contract • Offer • Acceptance • Genuine Agreement/Assent • Consideration • Capacity • Legality All elements MUST be present to be an enforceable contract.
OFFER Proposal by one party to another with intent to create a legal binding agreement • Offeror • Makes the offer • Offeree • Offer made to this person
Requirements of an Offer • Serious Intent • Must intend to make the offer • Advertisements? • No serious intent • Known as an invitation to negotiate • Definite and Certain • Must use definite words • Communicated to the Offeree • Phone, fax, Internet, letter, etc
Termination of Offer • Revocation – Taking back of an offer by offeror • Rejection – Refusal by the offeree • Counteroffer – Any change in the terms of the offer • Death – Offeror dies • Insanity – Offeror is declared insane • Expiration of Time – If the offeror puts a time limit on the offer and it has passed • Destruction of the subject matter
Options & Firm Offers • Option – the offeree gives the offeror something of value in return for a promise to keep the offer open for a set period of time • Firm Offer – a written offer for goods that states the period of time during which the offer will stay open • No additional consideration is required • Maximum period of time set by the UCC – 3 months • Offeror must be a merchant who deals in related goods on a daily basis
ACCEPTANCE Unqualified willingness by the offeree to go along with the offer Mirror Image Rule Terms of the acceptance must match exactly (mirror) the terms of the offer Any change means there is no acceptance (counteroffer)
Methods of Acceptance • Bilateral Acceptance • Offer is accepted by offeree through communication of the promise to the offeror • Only requires giving a promise to perform, not performance itself • Most offers are bilateral • Unilateral Acceptance • Offeror promises something in return for offeree’s performance and indicates that performance represents acceptance • Silence as Acceptance • Does not represent acceptance • Offeror cannot word offer in a way that silence would be considered acceptance
Time of Acceptance • Face to Face – No special circumstances • Parties separated by distance • Contract accepted when sent, if same method of communication used • Contract accepted when received, if different method of communication is used • If method is stated in offer, it MUST be used
GENUINE AGREEMENT (ASSENT) A valid offer has been made by the offeror, and a valid acceptance has been exercised by the offeree Several causes for genuine agreement to be lacking in a contract Duress Undue Influence Unilateral or Mutual Mistake Innocent Misrepresentation Fraudulent Misrepresentation
Duress Overcoming a person’s free will by use of force or by threat of force or bodily harm • Threats of Illegal Conduct • Threats to Report Crimes • Threats to Sue • Threats to sue made for purpose unrelated to the suit • Economic Duress • Threats to a person’s business or income
Undue Influence • Unfair and improper persuasive pressure within a relationship of trust • Must be able to prove: • Relationship of trust, confidence or authority • Unfair persuasion
Unilateral Mistake An error on the part of one of the parties • Does not affect validity of the contract • Cannot get out of contract • Nature of the Agreement • Signing a contract you don’t understand or have not read • Signing a contract in a language you don’t understand
Mutual Mistake (Bilateral Mistake) Both parties are mistaken about an important fact • Impossibility of Performance • Contract is impossible to perform • Contract is void • Subject Matter • Either party can void contract • Existing Law • Contract is valid • Parties are expected to know the law
Innocent Misrepresentation Innocent statement of supposed fact that turns out to be false • Statement must be one of fact • Statement must be material • Statement must be relied upon • Injured party has the right to rescind (take back) the offer • No rights to damages
Fraudulent Misrepresentation Party to a contract deliberately makes an untrue statement of fact • Deliberate: Done with or marked by full consciousness of the nature and effects; intentional • Deception: The fact or state of being deceived • Gain: To secure as profit or reward • In order to prove fraud, you must prove the above 3 definitions
Proving Fraudulent Misrepresentation • Untrue statement of fact • Must be one of fact, not opinion • Active concealment • Silence – may stay silent about defects except when: • statement is about material facts • True statement is made false by subsequent events • One party knows the other party has made a basic mistaken assumption • Materiality • Statement would cause reasonable person to contract • If one party knows the other party would rely on the statement • If one party knows the statement is false
Proving Fraudulent Misrepresentation • Reasonable Reliance • One party must reasonable rely on statement • Intentional or reckless • One party deliberately lies or conceals a material fact • One party recklessly makes a false statement of fact, without knowing whether it is true or false • Statement must be intended to induce party to enter into contract • Resulting Loss • Must cause an injury
CAPACITY Legal ability to enter into a contract Minors Mentally Incapacitated Intoxicated A person serving a prison sentence lacks capacity.
Minors • Minor – not yet reached legal age (age of majority) • NC Age of Majority – 18 years old • Emancipation - severing of the parent-child relationship • Formal – court decree • Informal – arises from the conduct of the minor and the parent • Parent and minor agree that parent will end support • Minor gets married • Minor moves out of family home • Minor joins armed forces • Minor gives birth • Minor takes on full-time employment • Ratification – agreeing to be bound by a contract that could be avoided • Contracts made by minors are voidable; minors may disaffirm (or avoid being bound by) contracts
Mentally Incapacitated • Lacking the ability to understand the consequences of his or her contractual acts • Severe mental illness • Severe mental retardation • Severe senility • Contracts made by mentally incapacitated are usually void unless involving necessaries.
Intoxicated • People under the influence of drugs or alcohol • Intoxication is a voluntary act. • Most courts are reluctant to consider contracts entered into by intoxicated individuals as voidable. • Must be so intoxicated that the person did not know they were contracting.
CONSIDERATION Exchange of benefits and detriments by the parties to an agreements • Requirements of consideration: • Must involve a bargained-for exchange (promise made in return for another promise) • Must involve something of value • Benefits and detriments must be legal • Benefits • Something that a party was not previously entitled to receive • Detriments • Any loss suffered; anything given up • Forbearance • Not doing something that you have the right to do
Adequacy of Consideration • Courts don’t look at adequacy or value of an agreement unless it is “unconscionable” • Unconscionable • So grossly unfair or oppressive that it would shock the conscience of the court • So lop-sided that the average person would not agree to terms
Nominal Consideration • Token amount in a written contract where either the parties cannot or do not wish to state the amount
Agreements without Consideration • Promise to make a gift • Gifts have no consideration • Cannot be enforced • Gift that has been given • Doesn’t have to be returned • Donor – Gives the gift • Donee – Accepts the gift
Illusory Promises Clause or wording that allows party to escape from legal obligation • Termination clause • Illusory – clause to allow termination of contract for any reason • Not illusory – termination only allowed after a change in defined circumstances • Output Contracts • Agreement to purchase all of a specific producer’s product • Requirements Contracts • Agreement to supply all of the needs of a specific buyer • Output & Requirements contracts are recognized by the courts as having consideration by implying fair dealing.
Existing Duty • Existing Public Duty • No detriment • Obligation to obey the law • Existing Private Duty • If a person is already under legal duty to do something, another promise to do that same thing does not furnish consideration for a new contract.
Past Performance • An act that has already been performed cannot be consideration in a contract.
Exceptions to Consideration • Promises to charitable organizations • Gift or Pledge for future contribution • Enforceable as consideration if organization identifies the pledge for a specific use and acts in reliance on the pledge • Promises covered by the UCC • Firm offers • Good faith modification of contract • Promises discharged in bankruptcy
Exceptions to Consideration • Promises barred from collection • Promissory Estoppel • Rely on what a person said • Elements: • Promise must bring action or forbearance • One who gave no consideration must have relied on the promise • Injustice can be avoided only enforcing the promise
Illegal Contracts • Civil & Criminal • Agreements to commit a crime/tort are illegal • Usury • State sets a max interest rate • Interest – fee the borrower pays to the lender for using the money • Usury - charging too high of an interest rate • Gambling • Legal gambling varies from state to state • Licensing • States require that persons in certain occupations obtain a license to practice that occupation • Doctors, plumbers, barbers, lawyers, funeral directors
Illegal Contracts • Public policy • Agreements that unreasonably restrain trade • Takes away the ability to do business with others • Agreements not to compete • Restrictive covenant - agreement not to compete in a region for a period of time • Only legal for a short period of time and small geographic region • Agreements for price fixing • Price Fixing - competitors agree on certain price ranges within which they will sell their products
Illegal Contracts • Public policy (continued) • Agreements to eliminate competitive bidding (or bid rigging) • Bid - offer to buy or sell goods or services at a stated price • Bid rigging – competitors agree that one bidder will have low bid for a certain job….low bidder sets bid higher than would if real competition • Agreements to obstruct justice • Anything that delays or prevents justice • Agreements to induce breach of duty or fraud • Influencing persons who hold positions of high trust for private gain • Agreements to interfere with marriage • Damage, destroy, or discourage good family relationships
Statute of Frauds • Requires that certain contracts be in writing to be enforceable • Contracts to buy and sell goods for a price of $500 or more • Contracts to buy and sell real property • Contracts that require more than one year to complete • Promises to pay the debt of another • Promises to give something of value in return for marriage
CHARACTERISTICS OF A CONTRACT • Valid, void, voidable, unenforceable • Express or implied • Bilateral or unilateral • Oral or written
Valid, Void, Voidable, Unenforceable • Valid contract • Includes all elements recognized by the courts • Legally binding • Void contract • Without legal effect • Contracts missing one or more elements • Voidable contract • One or more parties can get out of contract for some legal reason • Contract lacks genuine assent, contracts with minors • Unenforceable contract • Contract that court will not uphold, usually because of some rule of law • Statute of limitations has expired
Express or implied • Express • Contract statement that may be written or oral • Implied • Contract that comes about from the actions of the parties
Bilateral or Unilateral • Bilateral • Contains two promises • Most contracts are bilateral • Unilateral • Contains a promise by only one person to do something if, and when, the other party performs a certain act • Reward offer is most common unilateral contract
Oral or written • Oral • Created by two or more people speaking to each other • Written • contract terms are written so that both parties know the exact terms • Provides proof of existence for the contract • Certain contract are required by the Statute of Frauds to be in writing