Chapter 7 Contracts: Concepts, Terms, and the Agreement
Promises • Contract Law deals with a very ancient concept, the keeping of promises • 2 Types of Promises: • Moral (Social) Promises • Legal Contracts • DAMAGES – may require the payment of money or a specific performance as promised in the contract
II. Defining a Contract Civil Code Expectations Essential Elements of a Contract
A. Civil Code • California Civil Code section 1549 defines a contract as “…an agreement to do or not do a certain thing.” • Civil Codes 1428 and 1427 add further meaning by stating “An obligation arises …from…the contract of the parties…” “An obligation is a legal duty, by which a person is bound to do or not do a certain thing.” • A simple definition of a contract would be: an agreement to do or not do a certain thing, enforceable by the courts.
B. Expectations • If two parties form a contract, the expectation is that both parties will perform their obligations • Without some procedure for enforcing these obligations, parties would be free to change their mind at any time, break the promise and have no further obligation • Our society has developed a legal system that enforces contracts since they are an essential part of the market economy
Essential Elements of a Contract • Parties Capable of Contracting • Parties Must Each Consent to the Formation of the Contract • Object of the Contract Must be Lawful • A Sufficient Cause or Consideration
III. Types of Contracts Express / Implied Quasi Executed / Executory Bilateral / Unilateral Recap
A. Express and Implied Contracts • An EXPRESS CONTRACT is characterized by stating the terms in words [CC§1620]. Terms can either be in spoken word, written word, or both. • An IMPLIED CONTRACT is one, the existence and terms of which are manifested by conduct [CC§1621]. An implied contract is created by conduct, NOT spoken words.
B. Quasi Contracts • A QUASI CONTRACT is one imposed by the courts to prevent unjust enrichment • Rescission • Quantum Meruit • Court will need to find: • that the defendant received a benefit from the plaintiff • that the benefit was not gratuitously conferred • that it would be unjust for the defendant to retain the conferred benefit without compensating the plaintiff for its value
C. Executed and Executory Contracts • An EXECUTED CONTRACT is one, the object of which is fully performed. All others are EXECUTORY [CC§1661].
D. Bilateral and Unilateral Contracts • An BILATERAL CONTRACT is one in which a promise is exchanged for another promise • A UNILATERAL CONTRACT is one in which a promise is given in exchange for the future performance of an act
E. Recap • EXPRESS CONTRACT : terms expressed orally or in writing • IMPLIED CONTRACT : terms implied from conduct • QUASI CONTRACT : obligation implied by law in absence of agreement in order to prevent unjust enrichment • EXECUTED CONTRACT : contract that is fully performed • EXECUTORY CONTRACT : contract that is not yet performed • BILATERAL CONTRACT : promise exchanged for a promise • UNILATERAL CONTRACT : promised exchanged for an act
IV. How a Contract is Formed – Mutual Assent Making the Offer Intention to Contract Definiteness and Certainty of the Offer
Mutual Assent - is formed when one party, the offeror, makes an offer to another party, the offeree, and the offeree accepts the terms of the offer.
A. Making the Offer • An offer must: • Show a present serious intention to enter into a contract; • Be definite and certain in its terms, and • Be communicated to the offeree
1. Intention to Contract • Words and Circumstances • Words or conduct must show serious intent to contract • Reasonable person standard • Statements of Intention • Not an offer in the present • Invitations to Negotiate • Not offers by themselves • Writing Contemplated • Spoken words or writings to arrive at a contract
Definiteness and Certainty of the Offer • To be definite and certain, there are minimal terms that must be contained in the offer • Implied Terms • If the parties intend to contract, a reasonable term will be implied to fill in the term left open • Open Price • If the parties intended to contract, but failed to establish a sales price, a reasonable price can be enforced • Time for Performance, Delivery, and Payment • If the parties have not agreed otherwise, delivery of the goods must be made within a reasonable time [UCC§ 2309(1)].
3. Communication of the Offer • Without communication of the offer to the offeree, there can be no contract
V. Termination of Offers Revocation Irrevocable Offers Promissory Estoppel Rejection Termination by Operation of Law
A. Revocation • The offeror may REVOKE an offer at any time prior to acceptance by the offeree • In California, revocations are effective to terminate offers when they are sent or e-mailed [CC§ 1587]
B. Irrevocable Offers • THE OPTION CONTRACT • is a contract in which a potential buyer purchases the right to have an irrevocable offer • FIRM OFFERS (Sale of Goods) • a firm offer is irrevocable even though the offeror did not receive anything of value from the offeree in order to hold the option open
C. Promissory Estoppel • Detrimental Reliance • The offeror will be prevented from revoking an offer, even though no consideration was given by the offeree • Promissory Estoppel will allow the contract to be formed ONLY if: • The offeror made the promise knowing that the offeree was likely to rely on it; • The offeree did rely on the offer, and • The only way to avoid an injustice is to allow the formation of the contract and to enforce it
D. Rejection • When the offeree rejects the offer, the rejection terminates the offer • Rejections are effective to terminate offers when they are received by the offeror
Termination By Operation of Law • LAPSE OF TIME –an offer will terminate after the stated time period in the offer has expired • INCOMPETENCE or DEATH OF EITHER THE OFFEROR or OFFEREE • DEATH or DESTRUCTION OF THE SUBJECT MATTER OF THE OFFER • SUPERVENING ILLEGALITY OF THE SUBJECT MATTER OF THE OFFER – after an offer is made, a court decision or statute makes the subject matter of the offer illegal, the offer is immediately terminated
F. Recap • Offer – communicates power to accept by offeree • Acceptance – agree to all terms of offer, effective when sent • Termination of the offer: • Rejection • Counter Offer • Revocation • Operation of law • Lapse of time • Death or incompetence • Destructions of subject matter • Supervening illegality- by statute or court
VI. Acceptance of Contract Offers Who May Accept the Offer Acceptance of Unilateral Contracts The “Mirror Image Rule” The Grumbling Acceptance UCC Sales Under Section 2207 Communication of the Acceptance
Who May Accept the Offer • The offeror is the master of the offer and can designate whomever the offeror desires to be the intended offeree • Individual • Group of people • General public
Acceptance of Unilateral Contracts • Since a unilateral contract offer is a promise for performance of an act, FULL COMPLETION of the act constitutes the acceptance and forms the unilateral contract
C. The “Mirror Image Rule” • The acceptance must be unqualified, unequivocal and in absolute agreement with each and every term of the offer [CC§ 1585]
D. The Grumbling Acceptance • An acceptance still mirrors the exact terms of the offer EVEN though the offeree grumbles about the acceptance
UCC Sales Under Section 2207 • Section 2207 of the UCC has completely altered the common law rule that an acceptance must be the mirror image of the offer. • Under this section, if the contract is for sale of goods, additional or different terms may automatically become a part of the contract if both parties are merchants. • If the offer and the acceptance contain different or conflicting terms, a contract is formed. However, the conflicting terms do not become part of the contract. • The conflicting terms cancel each other out and the blank is filled in as provided under the U.C.C.
F. Communication of the Acceptance • BILATERAL CONTRACTS – an acceptance must be communicated to the offeror in order to show a present intention to contract with the offeror • WHEN IS ACCEPTANCE EFFECTIVE? –an acceptance of an offer is normally effective once it has been dispatched • Mailbox Rule • WILL THE OFFEREE’S SILENCE CONSTITUTE ACCEPTANCE? – silence is rarely an effective acceptance of an offer, because an acceptance must be communicated
F. Communication of the Acceptance (cont.) • UNSOLICITED MERCHANDISE – Civil Code Section 1584.5 provides, that silence does not constitute acceptance for unsolicited merchandise sent by the offeror to the offeree, and that merchandise can be kept without any obligation to pay for it • UNILATERAL CONTRACTS – if the offeror proposes acceptance by performance, then only performance can operate as an acceptance
Promises Defining A Contract Civil Code Expectations Essential Elements of a Contract Types of Contracts Express and Implied Quasi Executed and Executory Bilateral and Unilateral How a Contract is Formed Making the Offer Intention to Contract Definiteness and Certainty of the Offer Communication of the Offer Termination of Offers Revocation Irrevocable Offers Promissory Estoppel Rejection Termination by Operation of law Chapter Summary
Acceptance of Contract Offers Who May Accept the Offer Acceptance of Unilateral Contracts Mirror Image Rule Grumbling Acceptance UCC Sales under Section 2207 Communication of the Acceptance Chapter Summary