Law 6

Assent

A conscious approval or confirmation of facts. In contract law, assent is the knowing, voluntary, and mutual approval of the terms of a contract by each party.

DEFINITION OF A CONTRACT A contract is an enforceable agreement that obligates the parties to perform, as compared to a mere agreement with no enforceability.

A contract is more than an agreement between two or more parties. -Contracts are enforceable agreements between parties. -One generally accepted definition of a contract is a promise or a set of promises enforceable by law. -a contract is simply an agreement that a court of law will recognize and enforce. Contract law also defines certain circumstances that excuse one or both parties from performing their obligation or enforcing the agreement's promise. To take a simple example, -suppose that Baker hires Downing to paint her apartment. -two agree on price, timing, and paint color. -Downing begins to paint the apartment, and while on his lunch break, a pipe breaks and floods the apartment and he is unable to complete the work. -Several contract issues are at work in this scenario. 1st. a court must determine whether Baker and Downing have met all of the elements of a contract (formation). 2. is either party entitled to recover any money from the other (breach and damages)? Contracts are prevalent in business transactions that range from the sale of a cup of coffee at a diner to the acquisition of the stock of a multinational corporation. Contracts / are used to carry out day-to-day business operations in manufacturing, buying, and selling products and services.

CONTRACT FORMATION

A valid contract is formed when four elements are met: 1.mutual assent (offer and acceptance), 2.consideration, 3.capacity, and 4.legality. The broad underlying requirement of an enforceable contract is the notion of mutual assent -(also referred to simply as assent or agreement). =Typically, the parties reach mutual assent using a combination of offer and acceptance. -In most cases, the offeror makes a valid offer to the offeree, who in turn must accept the offer in order for the parties to be bound by the agreement's terms. -This is known as a meeting of the minds because the parties have agreed to certain promises and obligations.

Contract formation Acceptance

A valid offer creates the power of acceptance for the offeree. -An acceptance is the offeree's expression of agreement to the terms of the offer. -An offeree typically communicates the acceptance in writing or orally but, in some cases, may accept via some action or conduct (as in a unilateral contract). -So long as the offer is still in force (has not yet been terminated), the offeree may accept the terms of the offer, thereby forming an agreement. -Only the party or parties to whom the offer is intended has the power of acceptance and may accept. In order for agreement to exist though, the offer has to be properly accepted by the offeree. -Note that the offeror is considered the "master" of the offer and, therefore, has the power to terminate, modify its terms, or prescribe the method of acceptance of the offer up and until the offer has been accepted by the offeree. -Once the offer has been terminated, the offeree has lost the power to accept and form an agreement.

Categories of Contracts Express versus Implied versus Quasi-Contracts

An express contract -is created when the parties have knowingly and intentionally agreed on the promises and performances. An implied contract -is one in which the agreement is reached by the parties' actions rather than their words. For example, -when you order food at a restaurant, the server, after taking your order, does not ask if you promise to pay for the food at the end of the meal. -Your act of ordering food and consuming it will create an obligation to pay. -The contract is formed as an implied contract in fact. In some cases where no express or implied contract exists, -a party may still be able to recover losses based on a quasi-contract. -The law permits quasi-contracts to be enforceable when one party suffers losses as a result of another party's unjust enrichment. -This theory of contract is based on an implied-in-law recovery, =whereby one party does not actually request a certain service but still benefits from the services rendered. -Suppose that an unconscious patient is brought into a hospital, the hospital administers aid, and the patient survives. -The hospital will be able to recover the reasonable costs of its services even though the patient never agreed or never performed an act agreeing to the hospital's assistance. -If the patient were able to avoid payment, then he would be receiving a benefit without payment and thereby be unjustly enriched.

Contract formation Offer

An offer is a promise or commitment to do (or refrain from doing) a specified activity such as selling a good at a certain price or offering to provide services at a given rate. -An offer also is the expression of a willingness to enter into a contract by the offeror's promising an offeree that she will perform certain obligations in exchange for the offeree's counter promise to perform. To take a simple example, suppose that Lewis offers to sell Williams a rare book for $1,000. -In this case, Lewis is the offeror and is promising to perform through a transfer of ownership rights to the book so long as Williams, as the offeree, counter promises to perform by paying $1,000. Offers must meet three criteria to be valid: They must be (1) clear, (2) serious, and (3) communicated. -Clear means that the language of the offer must be such that the offeree knows what is being offered. -Seriousness of an offer requires that the offeror have an objective intent to contract when making the offer. =Generally, the offeror must have a serious intention to become bound by the offer, and the terms of the offer must be reasonably certain. -Finally, courts look at how an offer is communicated. =they examine the language of the offer and the actions of the parties to determine how a reasonable person would interpret that language. ==Does the language indicate a serious intent to form a contract? Or perhaps the language indicates intent to negotiate rather than agree. Or is the language so innocuous that a reasonable person would conclude that there was no intent at all (for example, an offer made in jest)? Note that it does not matter what the offeror actually intended. -Rather, the objective test is what a reasonable person would ordinarily believe the language and conduct (collectively referred to as manifestations of intent) mean in those circumstances. -Otherwise, the offer is considered simply an offer to discuss or negotiate the terms of an agreement. Under modern case law, the importance of the parties' intention, or lack of intention to form a contract depends largely upon the context of the agreement. -When an agreement is in the context of a business transaction, there is a strong presumption that the parties intended the agreement to be legally enforceable.

Contract formation Acceptance Termination of an Offer Rejection and Counteroffer

An offer is also terminated once the offeree either rejects the offer outright or makes a counteroffer by rejecting the original offer and making a new offer. -Under the common law, the offeree's response operates as an acceptance only if it is the precise mirror image of the offer. -If the response conflicts with the original offer even slightly, the original offer is terminated and the new offer is substituted. -This principle is called the mirror image rule. -Once the offeree has rejected the offer or made a counteroffer, her power of acceptance is terminated. Franz: I will pay you $1,000 to paint the interior of our office building. Josef: I've seen your office; it is going to cost you more than that. Franz: How much more? Josef: I'll do it for $2.000. Franz: Ah, yes. Well, let's split it down the middle. I'll pay you $1,500. Josef: OK. I agree to do it for $1,500, but you must also supply the paint, brushes, ladder, tarps, cleaner, and other equipment I need. -Does a contract exist between Josef and Franz? Carefully examine the language of the parties. -Josef made an outright rejection of Franz's first offer to paint the office for $1.000. -Then Josef made an offer to paint the office for $2,000. -Franz then rejected the offer via counteroffer and now has made a new offer for Josef to accept or reject his offer to pay $1,500 for the services. -Although Josef starts out his response with "OK." he adds additional terms (Franz must supply the paint, etc.). -Therefore, Josef has rejected the offer because his acceptance was not the mirror image of Fran's offer. -Despite the "OK" language, the law treats Josef's response as a counteroffer (and therefore a rejection). -Franz's offer is now terminated, and no contract exists at this point. -Of course, Franz is now free to accept or reject Josef's counteroffer.

Contract formation Acceptance Termination by Operation of Law

An offer may also be terminated by certain happenings or events covered by operation of law. Generally, these include (1) lapse of time, (2) death or incapacity of the offeror or offeree, (3) destruction of the subject matter of the contract before acceptance, and (4) supervening illegality.

Contract formation Consideration Past Consideration

Another type of consideration that is not considered to meet the bargained-for exchange requirement is a promise made in return for a detriment previously made by the promisee. -This is known as past consideration, and it is not sufficient to meet the consideration requirement. Suppose that O'Connor has been working at her job for 40 years and is retiring. -Her boss approaches her a week before her last scheduled day and tells her that because she has been such a faithful and effective employee for the last 40 years, on Friday, her last day, there will be a party and she will be presented with a gold watch. -She gratefully thanks him and accepts the offer of a party and watch. -On Thursday she is disappointed when informed that there will be no party and she will not receive a gold watch. -Although the party and watch contract includes both an offer and an acceptance, it is unenforceable because it lacks consideration. -O'Connor's contention that her 40 years of dedicated service are sufficient consideration is false because it is past consideration, performed prior to the current agreement. -Thus, the offer of a party and watch is an offer of a gift and is not enforceable as a contract. Now suppose the company's employment manual, in force since she started work, states that employees receive a gold watch after 25 years of employment. -In this case, O'Connor is entitled to the watch because she acted based on a promise made before she began performing.

CATEGORIES OF CONTRACTS

Because the subject of contracts is so vast, - it is useful to categorize the different types of contracts in order to understand various forms of promises and agreements. This is not to say that these categories are mutually exclusive. -In fact, all contracts may be classified in several ways.

CONTRACT TRANSACTIONS

Before learning the individual components required to form a contract and the rules that govern the parties, -it is helpful to consider a typical contract transaction from a macro perspective. First, a contract is formed when two or more parties agree to a particular set of terms. -One party typically agrees to provide services, real estate, or goods in exchange for something of value (usually money). -An agreement is recognized as legally binding so long as it meets certain formation requirements. Second, after the formation requirements are met, the contract is governed by laws that set out requirements for enforceability of the agreement. Finally, assuming that the contract was properly formed and is legally enforceable, the law sets out rules and consequences related to how the parties will fulfill their obligations to one another. -This is known as performance (or nonperformance) of the agreement.

Contract formation Consideration Amount and Type of Consideration

Consideration exchanged does not need to be of equal value. -Ordinarily, in deciding the validity of consideration, courts will not look to the amount or type of consideration or the relative bargaining power of the parties (except in the rare case of a contract so burdensome on one party as to indicate unconscionability,/ discussed later). -So long as some bargained-for exchange is contemplated, the contract will be deemed enforceable. Contracts may be based on nominal consideration (i.e., consideration that is stated in. a written contract even though it is not actually exchanged). -Most courts have held that the consideration requirement is still met even if the nominal amount is never actually paid so long as the amount is truly nominal (such as $1).

Categories of Contracts Other Categories

Contracts may also be classified in other ways. -Keep these definitions in mind as you continue your study of contract law. • Valid: When a contract has the required elements, it is called a valid contract. • Void: When an agreement lacks one of the required elements or has not been formed in conformance with the law from the outset, the contract is considered to be void (sometimes called void per se). • Voidable: A contract is voidable when the law gives one or more parties the right to cancel an otherwise valid contract under the circumstances. • Unenforceable: Although a contract may have met the required elements and be considered valid, it still may be unenforceable because one party asserts a legal defense to performing the contract.

Contract formation Consideration Bargained-for Exchange

Even if a legal detriment is suffered by one party, that alone does not satisfy the consideration requirement. -The bargained-for exchange aspect of consideration primarily distinguishes contracts from illusory promises. -Some promises do not support a bargained-for exchange and will not support contractual consideration. Such promises are called illusory promises. -Examples of illusory promises are (1) deathbed promises, in which you make a promise to a friend or loved one just prior to her death to comfort her; (2) promises of a gift, in which a promise is made but no reciprocal promise is exchanged; (3) promises of love and friendship; and (4) promises that by their terms are not binding. For example, a manager announces to his employees that each may have three personal days in December if he can get it approved by senior management. -This is an illusory promise because neither the manager nor the company is bound by his statement. -Because gift promises are not enforceable and contract promises are, it is important to understand the precise difference. -A performance or return promise is "bargained for' only if it was exchanged for another promise.

Contract formation Acceptance Termination by Operation of Law Lapse of Time

Following the "offeror is the master of his offer" rule, the offeror will frequently attach some time limit on the offeree's power of acceptance. -Once the time limit has expired, the offer is considered to have terminated via lapse of time. -If, however, the offeror has not set a time limit, the offer will still expire after a reasonable time. -Courts determine the "reasonable time period" for an acceptance by analyzing the circumstances that existed when the offer and attempted acceptance were made. -When the offer involves a speculative transaction in which the subject matter is subject to sharp fluctuations in value, a reasonable time period will be considerably shorter. For example, Milton sends Dryden an e-mail: "I offer to sell you my private stock in Local Oil Company for $500 per share." -Dryden waits one week, and the price of oil skyrockets in the week, making stock in Local Oil rise to $700 per share. He responds to Milton's e-mail: -"I accept your offer of last week." In this case, Dryden would likely not be obligated to perform because the subject matter of the offer was so speculative that it dictated a short time period for expiration. -On the other hand, if Milton wishes to sell Dryden a used lawn mower for $100, waiting one week would still be well within a reasonable time period for acceptance of the offer.

Contract formation Consideration

For a binding contract to exist, -not only must there be agreement (i.e., offer and acceptance), -but the agreement must be supported by consideration. Consideration is defined as the mutual exchange of benefits and detriments. -In plain terms, this means that each party receives something of value from the other and each party gives up something of value, called legal detriment, to the other. -This results in a bargained-for exchange. The benefits and detriments may take the form of (1) money, (2) goods, (3) services, or ( 4) the giving up of a legal right. When someone goes to a store to purchase a sweater, the exchange of goods (the sweater) and cash paid is the contract consideration. -When a homeowner hires someone to mow her lawn, the exchange of the cash paid and the service rendered (mowing the lawn) is the contract consideration. Suppose that a neighbor's teen throws a ball through your front window. -You and your neighbor agree that if he pays for the cost of replacement, you'll promise not to sue him. -Your promise is called forbearance and is valuable consideration. -However, giving something up does not always create legal forbearance. -What is forfeited must be a legal right.

Contract formation Legality

For a contract to be enforceable, it must meet the requirement of legality; that is, -both the subject matter and performance of the contract must be legal. Depending on the state, some contracts are -specifically barred by statute (e.g., a contract related to illegal gambling such as betting on sports events or a contract for the sale of goods that is banned by a trade embargo), -while other contracts are illegal because the terms violate some public policy objective (such as an overly broad restriction on employment possibilities, known as a restrictive covenant). As a general rule, an illegal contract is void automatically, and neither party may enforce it against the other. -This is true even when only one party's performance is illegal. For example, if Holmes promises to paint Cardozo's home in exchange for Cardozo's promise to smuggle 500 Cuban cigars into the United States in violation of federal law, then neither Holmes nor Cardozo may enforce the contract.

Contract formation Insufficient Agreement Indefinite Terms

For an offer to be valid, the parties must reach mutual assent on all of the essential terms of the agreement. -Even though two parties who are negotiating with each other may have an objective intent to contract, there is no valid contract if the terms are too vague to be performed. -Typically, these terms must either be expressly agreed upon or capable of being reasonably inferred. These essential terms are (1) parties to the con-tract, (2) subject matter of the contract, (3) time for performance or delivery, and (4) price or other consideration to be exchanged. Note, however, that courts have become increasingly tolerant of uncertainty in terms before allowing a contract to be voided for indefiniteness. -The Restatement test requires all courts to examine the terms of the agreement to determine whether "they provide a basis/ for determining the existence of a breach and for giving an appropriate remedy." -Thus, even though an agreement does not contain all of the required terms, courts have held that missing terms may be supplied by the court when the term may be implied as "reasonable" or by the course of past dealing. -So long as the agreement is definite enough to allow the court to determine whether one party failed to fulfill the obligations of the agreement and to award some kind of reasonable damages to the wronged party, the contract is not void for indefiniteness.

Contract formation Consideration Preexisting Duty Rule

If a party does or promises to do what she is already legally obligated to do, -the law generally does not recognize this as a legal detriment and, thus. the contract is unenforceable. The classic example is that a police officer cannot collect the reward for arresting a fugitive because the officer has a preexisting duty to find and arrest fugitives. -More often, however, the preexisting duty rule applies in circumstances where one party claims he wishes to modify an existing contract because of unforeseen difficulties in performing his obligations.

Contract formation Consideration Promissory Estoppel

If one party justifiably relies on the promise of another to her detriment, -under certain circumstances the relying party may recover costs of the reliance from the promisor even though the original promise agreement lacked consideration. Under the theory of promissory estoppel, a relying party may recover damages if (1) the promisor makes a promise that is reasonable; (2) the promisee actually relied on the promise (the promise must have induced the act) and suffered an injury; (3) the promisee's reliance was reasonably foreseeable to the promisor (what an objectively reasonable person would have foreseen under the same circumstances); and (4) principles of equity and justice (did each party act in good faith and fair dealing?) are served by providing compensation to the reliant party. One particularly important domain of promissory estoppel for managers is the promise of employment. -Most commonly, this arises in a situation where an employer makes a promise of employment to an at-will employee candidate and then revokes the promise / before the employee's start date (or soon thereafter). -Typically, the employee would have left her previous position and potentially incurred moving expenses. - In those cases, courts have held that the revocation of the employment-at-will promise before any consideration was exchanged triggers the doctrine of promissory estoppel, whereby the innocent party is entitled to damages. -In promissory estoppel cases, courts frequently award damages equal to the out-of-pocket costs plus what the employee lost in quitting her job and declining employment elsewhere

Contract formation Capacity

In addition to having to meet the requirements for agreement and consideration, -contracts will be enforced by the courts only if each party has the legal capacity to enter into a contract. Certain classes of persons have only limited power to contract: -minors and those with mental incapacity, These parties may seek to avoid (cancel) the contract immediately, -or they may enforce the contract with the option of avoiding it at any time up until the time they regain capacity. -Once the party has regained capacity, the contract becomes binding on both parties.

Contract formation Insufficient Agreement Indefinite Terms Agreements to Agree

In certain circumstances in the business environment, the parties enter into an agreement with an essential term unfilled, intending to agree upon the term in the future. -Although historically courts were reluctant to enforce such agreements, the modern trend is to allow such agreements to be enforced with the court supplying the missing term according to industry standards and market values. -So long as the court determines that the parties themselves intended to make a binding contract, the agreement is enforceable and a court may supply the missing term. For example, suppose that Ernest offers to purchase an office building from Whitehead for $100,000 in 30 days. -At the time of the agreement, Ernest is unsure of the method that he will use to pay the purchase price, so the parties leave that term unfilled. -On the day of the purchase, Ernest pays Whitehead $10 in cash and signs a promissory note for $99,990. -Whitehead refuses to complete the transaction and demands a check or cash for the full $100,000. -In this case, a court would likely hold that (1) the agreement to agree on the payment terms was enforceable because it is clear the parties intended to enter into a contractual relationship and (2) the court can supply the missing term with a degree of reasonableness based on the pattern of past practices and/or industry standards (e.g., requiring that Ernest obtain a mortgage or pay in cash for the property).

SOURCES OF CONTRACT LAW

In general, contracts for services (e.g., legal, accounting, or engineering) or real estate (such as an agreement of sale for an office building or a lease for a commercial retail space) are governed by state common law. Contracts for goods or products (defined as items that are movable at the time of identification in the contract) are governed by state statutory law based on the Uniform Commercial Code (UCC). -The UCC also covers transactions related to leasing of equipment. Some contracts involve terms for both goods and services. -These are known as hybrid contracts. -In a hybrid contract, the source of law is established by determining the predominant thrust of the contract subject matter. -If the contract is predominantly for services, and the goods are incidental, then the contract is governed by the common law. -If, on the other hand, goods are the main feature of the contract and the services come incidentally, then the contract is governed by statutory law. For example, -Huxley is a manager charged with the task of hiring an artist to paint a portrait of the company's founder, which will be displayed in the lobby. -Huxley hires Pablo, and Pablo paints the portrait. -This is a hybrid contract because it involves services (of the artist) and goods (Huxley gets the canvas, paint, etc., at the conclusion of the services). -However, in this case the goods are incidental to the services; thus, it is primarily a contract for services and therefore governed by the common law. In determining the source of law governing a hybrid contract, courts will examine (1) allocation of price in the contract (value of goods versus value of services) and (2) uniqueness of the services (do they require special talent, as in the case of the portrait artist). -The more unique the service, the more likely it is that the contract is covered by the common law. Contracts for services or real estate are governed by state common law. -Contracts for goods or products are governed by state statutes. - Contracts for goods and services are called hybrid contracts and the source of law is established by determining the predominant thrust of the contract subject matter.

Contract formation Insufficient Agreement

In some cases the parties may actually have satisfied the elements of offer and acceptance, -but the agreement still lacks mutual assent and the agreement is insufficient to constitute a properly formed contract. -Some common circumstances where parties lack mutual assent are in cases when the agreement's terms are too indefinite or when one or both parties are mistaken about an important term.

Contract formation Acceptance Termination by Operation of Law Death, Incapacity, Destruction, or Supervening Illegality

In the event that the offeror or the offeree either dies or becomes incapacitated before acceptance, -the offer automatically terminates. Similarly, if the subject matter of the contract is destroyed before acceptance, -the offer is considered terminated by operation of law. -A supervening illegality occurs when changes in the law make a previously legal offer illegal. For exa-ple, suppose NewCo offers to sell 100 UltraWidgets to a vendor in the fictional country of Freedonia. -Before the vendor accepts, Congress passes a law prohibiting the sale of U.S. goods to Freedonia. -NewCo's offer is terminated via supervening illegality. -Death, inca-pacity, destruction, and supervening illegality are all examples of what many courts refer to as impossibility.

Contract formation Capacity Mental Incompetents

Like minors, mental incompetents are treated as having limited capacity to contract. -This category covers not just obvious cases (such as mental disorders or dementia) but also temporary incompetence such as people who are highly intoxicated, people severely depressed, or people under severe or traumatic pressure. -The question is whether the person was lucid at the time he entered into the contract. -Although there is no universally accepted definition, courts have held that a party who is lucid is one who is not suffering from delusion or confusion. In general, a person lacks capacity because of mental illness or defect if he or she is either (1) unable to understand the nature and consequences of the contract or (2) unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of that person's condition. In a majority of states, contracts made by an incompetent are voidable, not void. -If the incompetent party regains her mental capacity, or has a guardian appointed, she may ratify the contract. -Note that the other party does not have the power to avoid the contract. -However, many states classify a contract as void per se (not valid from the outset) if one party has been legally declared to be incompetent prior to entering into the contract

Contract formation Advertisements as an Offer

Most advertisements appearing in the mass media, in store windows, or in display cases are not offers. -Rather, the law recognizes mass advertisements as an invitation for the consumer to make an offer to the seller to purchase the goods at a specified price. -Frequently, these advertisements do not constitute an offer because they do not contain a specific commitment to sell. The primary exception to this rule occurs when the advertisement is specific enough to constitute a unilateral contract. -Advertisements that offer to sell a particular number of certain products at a certain price may constitute an offer

Contract formation Acceptance Termination of an Offer Option Contracts

One way to make an offer irrevocable is for the offeror to grant the offeree an option to enter a contract. -Typically, the offeror agrees to hold an offer open (not enter into a contract with another party) for a certain period of time in exchange for something of value (known as consideration, discussed later in this chapter).

Contract formation Insufficient Agreement Indefinite Terms Mistake

Over the course of a business life cycle, it is inevitable that a manager involved in a contract will make a mistake (or contract with a mistaken party). -The law recognizes certain mistakes and provides a remedy intended to make the parties whole again. -Generally, a mistake is defined in contract law as a belief that is not in accord with the facts. -It is important to note that not all erroneous beliefs are classified as a mistake. -A mistake is an erroneous belief about an existing fact, not an erroneous belief as to what will happen in the future. -Erroneous beliefs about the future are covered by doctrines of impossibility and impracticability, which are discussed in the next chapter. -Mistakes are classified as either mutual (both parties) or unilateral (one party). A mutual mistake. in which both parties hold an erroneous belief, may be the basis for canceling a contract (also called avoiding the contract). -For the adversely affected party to cancel the contract, the mistake must concern a basic assumption on which the contract was made. Other examples of mutual mistakes include mistakes as to the -existence of the subject matter (e.g., parties agree to the sale of goods, but the goods were already destroyed by fire at the time of the contract) and the -quality of the subject matter (e.g., parties agree to the sale of a rare first-edition book that turns out to be a second edition and not nearly as valuable). Courts will not generally consider market conditions (such as the fair market value of a piece of real estate) -or financial ability (such as relying on one party's representation that she can receive adequate credit to purchase the real estate) -as a mistake that allows a contract to be avoided. In a unilateral mistake, only one party has an erroneous belief about a basic assumption in the terms of the agreement. -Courts are much less willing to allow a mistaken party to cancel a contract for a unilateral mistake than they are in the case of a mutual mistake. -In fact, the general rule is that a unilateral mistake is not a valid reason to avoid a contract, -However, if the unmistaken party had reason to know of the mistake or his actions caused the mistake, a court will allow the mistaken party to avoid the contract. Note that courts are much less willing to allow a party to cancel a contract if the unilateral mistake is essentially an error in business judgment rather than a clerical error.

Contract formation Consideration Legal Detriment

Proper consideration requires that the parties suffer some type of detriment that the law recognizes as adequate. -This is satisfied if the party promises to perform something that the party is not legally obligated to do (such as promising to sell your car for $5,000) -or to refrain from doing something that the party had a right to do (such as waiving your rights to pursue a lawsuit when you have been injured). In one famous decision from 1891, an appellate court in New York held that one party's promise to abstain from the then-legal practices of drinking, smoking, and gambling until age 21, in exchange for a promise by his uncle to pay him $5,000," was sufficient legal detriment for both parties and thus was an enforceable contract. -The nephew had given up a legal right that was sufficient to satisfy the legal detriment required (forbearance).

Forbearance

The giving up of a right that you legally possess This can be used as consideration in a contract.

Contract formation Acceptance When Acceptance Is Effective: The Mailbox Rule

The mailbox rule / governs common law contracts and is a rule that determines when a contract is considered to be deemed accepted by the offeree, thus depriving the offeror of the right to, revoke the offer, -In essence, the mailbox rule provides that the acceptance of an offer is generally effective upon dispatch of the acceptance when sent in a commercially reasonable manner (e.g., when the offeree places the acceptance in the mailbox, sends it by overnight mail, or faxes it) -and not when the acceptance is received by the offeror. -The time of acceptance depends on whether the offeror has specified a method of acceptance or not.

Contract formation Acceptance Termination of an Offer

The power of acceptance is terminated when the offer is terminated either through actions of the parties or by operation of law. -In both cases, the opportunity for the offeree to accept ends at the same time that the offer is terminated. An offer may be terminated by action of the parties in one of three ways: (1) revocation, where the offeror revokes (withdraws) the offer prior to acceptance; (2) rejection, where the offeree rejects the offer; and (3) counteroffer, where the offeree rejects the original offer and proposes a new offer with different terms. Offers may also be terminated by operation of law

Contract formation Acceptance Termination of an Offer Partial Performance and Detrimental Reliance

There are certain offers whereby the offeree may, prior to actual formation of the contract, take some action that relies on the offer; -for example, the offeree begins to perform based on a unilateral offer. =Recall that a unilateral offer is one in which the offer makes clear that acceptance can occur only through performance and not through a promise. ==This is known as partial performance and can render an offer temporarily irrevocable. For example, Burns offers Realtor a commission of 10 percent of the sales price if Realtor can find a buyer for the Burns Building for $500,000. -Realtor spends funds to research and obtain potential buyer contact information and locates Walters, who is willing to accept the $500,000 offer to sell from Burns. -Before any transaction takes place, Burns revokes his offer to Realtor and refuses to sell the property to Walters. -Burns's revocation is not effective. -Burns's promise to pay for a particular performance (a unilateral contract) was rendered irrevocable once Realtor performed by finding a buyer for the building. Also, an offer may be rendered irrevocable if the offeree makes preparations prior to acceptance based on a reasonable reliance on the offer. -This is known as detrimental reliance. For example, SubCo is a subcontractor for GeneralCo. -GeneralCo relies on SubCo's bid in preparing to make an offer to renovate a commercial office complex. -After GeneralCo is awarded the renovation contract, SubCo notifies GeneralCo that its bid was too low due to the poor business forecasting of one of SubCo's partners. -Because it is no longer interested in the job, SubCo attempts to revoke its offer/bid. -In this case, SubCo is still required to perform even at a loss. -GeneralCo reasonably relied on SubCo's bid and would suffer a significant detriment based on this reliance. -SubCo's offer became irrevocable once GeneralCo exercised reasonable reliance on the offer.

Contract formation Acceptance Silence as an Acceptance

Under most circumstances, acceptance cannot be imposed or inferred from an offeree's silence after receiving an offer. -Therefore, courts will not enforce a contract in which the offer states that failure to respond will be considered an acceptance of the offer. -An exception occurs if the parties had previously agreed that silence acts as an acceptance. For example, restaurants often have delivery agreements with food suppliers to accept deliveries daily. -Suppose Mackey's, a restaurant, enters into an agreement with a bakery to supply 10 dozen hamburger and hot dog buns each morning at 7 a.m. -The agreement may contain a provision stating that if the bakery does not receive a cancellation of the delivery by 4 p.m., the next morning's delivery will be made and accepted. -Mackey's failure to cancel by 4 p.m. on Tuesday, therefore, represents an acceptance of delivery on Wednesday, and so on.

Contract formation Capacity Minors

Until a person reaches her majority age, any contract that she may enter into is voidable at the minor's option. -Minors (referred to as infants in legal terminology) are defined by most states as those who are younger than 18. A minor may avoid a contract even before she reaches the age of majority. -It is important to remember that a contract made by a minor is not automatically void. -Rather, the minor either avoids the contract or may enforce the contract. -While a minor may avoid a contract up until the age of majority, the minor may also ratify the contract upon reaching the age of 18. -Note that a minor is assumed to have ratified the contract upon reaching the age of 18 if she fails to disaffirm (avoid) the contract in a reasonable time period. In the case where the minor has disaffirmed and avoided the contract, the other party may be entitled to an economic adjustment if the minor received some economic benefit from the contract. -Generally, this means that the minor will have to return any goods or make restitution for any damages that affected the value of the good or service. Virtually all jurisdictions recognize an exception to the minor-capacity rule for necessities such as food, clothing, and shelter. -Thus, a 16-year-old customer at a restaurant may not disaffirm a contract to purchase french fries when presented with the bill.

Contract formation Acceptance Termination of an Offer Revocation

When the offeror decides to revoke (withdraw) the offer by expressly communicating the revocation to the offeree prior to acceptance, the offer is terminated by revocation. -Revocation is consummated through an express repudiation of the offer (e.g. "I revoke my offer of May 1 to paint your office building for $1,000*) or by some inconsistent act that would give reasonable notice from the offeror to the offeree that the offer no longer exists. One important issue with revocation is the timing of the revocation. -Most states follow the rule that revocation is effective only upon receipt by the offeree or the offeree's agent. Note that some offers are irrevocable: (1) offers in the form of an option contract, (2) offers that the offeree partly performed or detrimentally relied on, and (3) so-called firm offers by a merchant under the UCC

Categories of Contracts Written versus Oral Contracts

While the word contract is often used to describe a written document, -many contracts are not in writing and yet are enforceable. Any agreement, oral or written, may result in a binding contract so long as it meets certain requirements. -Some contracts, however, are required to be in writing in order to be enforceable. -These contracts are defined by the statute of fraud

Categories of Contracts Bilateral versus Unilateral Contracts

bilateral contract (most) -involves two promises and two performances. example -suppose Holmes says to Andrews: "I offer to pay you $5,000 for your delivery van." -Andrews responds, "I accept." -On the following day, Holmes shows up with a check for $5,000. -Andrews signs over the title to the delivery van to Holmes. -The first promise is Holmes's promise to pay $5,000 for the delivery van. -The second promise is Andrews's promise to sell the delivery van for $5,000. -The first performance takes place when Holmes pays $5.000. -The second performance takes place when Andrews signs over the title of the delivery van to Holmes. unilateral contract - involves one promise, followed by one performance -which then triggers a second performance from the offeror (the party making the offer). -A second promise is not made, and the contract only becomes enforceable if the action specified in the original promise is performed. -Perhaps the best example of a unilateral contract occurs when the offer is in the form of a reward. For example, -if Jonah places several reward posters in his neighborhood and offers to pay $500 to anyone who finds his missing dog, this is an example of a unilateral offer. -Jonah has made one promise, but there has been no second promise made by any of the neighbors. -Therefore, the only way that a neighbor may accept the offer made by Jonah is to perform by finding the dog and delivering him to Jonah as specified in the promise (via the reward posters). -Once a neighbor has performed, Jonah will be obligated to perform his promise (to pay a $500 reward). -Of course, if no one performs, Jonah may not sue his neighbors for recovery because no return promise was ever made.

CONCEPT SUMMARY Categories and Types of Contracts

• Contracts may be written or oral. Oral contracts, while harder to prove, are valid and legal unless required to be in writing by statute. • Contracts may be bilateral (formed by an exchange of promises) or unilateral (when a promise requires acceptance by a required performance). •Contracts are expressed when the parties knowingly and intentionally come to an agreement. Implied contracts arise from the party's conduct, and quasi-contracts are imposed by the law in the absence of an express or implied agreement in order to remedy a party's losses due to one party's unjust enrichment at the other's expense. •A contract may be valid- -a fully enforceable contract; void--a contract missing a required element; voidable--a seemingly valid contract that one party has the right to cancel; or unenforceable valid contract that is subject to a defense.

CONCEPT SUMMARY Mutual Assent

• The formation of a contract requires mutual assent, whereby the parties reach an agreement and a meeting of the minds. • An agreement results from the offeror's making a valid offer and the offeree's accepting the terms of the offer and agreeing to be bound by its terms. This meeting of the minds may come from a true understanding or may be inferred through words and actions of the parties (objective intent). • Advertisements are generally not considered an offer. Rather, they are an invitation for the consumer to make an offer to a seller of goods or services. If an advertisement is highly specific in its terms, it may constitute a unilateral offer. • For an offer to be valid, the parties must reach agreement on all of the essential terms of the agreement. An offer that is too vague or indefinite cannot be the basis for an agreement. • Most offers may be terminated either by the actions of the parties or by operation of law. However, certain offers are considered irrevocable. • The time acceptance becomes effective is governed by the mailbox rule.

CONCEPT SUMMARY Sources of Law

•Contracts for services or real estate are governed by state common law, while contracts for goods are governed by state statutory law based on the Uniform Commercial Code. • For contracts involving a combination of goods and services (hybrid contracts), the source of law is established by determining the predominant thrust of the contract subject matter.