1 Unit 6 – Contracts I. Definition A contract is a voluntary agreement between two or more parties that a court will enforce. The rights and obligations created by a contract apply only to the parties to the contract (i.e., those who agreed to them) and not to anyone else. II. Elements In order for a contract to be valid, certain elements must exist: (A) Competent parties. In order for a contract to be enforceable, the parties must have legal capacity. Even though most people can enter into binding agreements, there are some who must be protected from deception. The parties must be over the age of majority (18 under most state laws) and have sufficient mental capacity to understand the significance of the contract. Regarding the age requirement, if a minor enters a contract, that agreement can be voided by the minor but is binding on the other party, with some exceptions. (Contracts that a minor makes for necessaries such as food, clothing, shelter or transportation are generally enforceable.) This is called a voidable contract, which means that it will be valid (if all other elements are present) unless the minor wants to terminate it. The consequences of a minor avoiding a contract may be harsh to the other party. The minor need only return the subject matter of the contract to avoid the contract. if the subject matter of the contract is damaged the loss belongs to the nonavoiding party, not the minor. Regarding the mental capacity requirement, if the mental capacity of a party is so diminished that he cannot understand the nature and the consequences of the transaction, then that contract is also voidable (he can void it but the other party can not). Furthermore, if the party with diminished mental capacity cannot act in a reasonable manner regarding the contract and if the other party knew of the defect, then that contract is void. Mental disease alone does not necessarily mean that a party is mentally incompetent for contractual purposes. The distinction between a voidable and a void contract is that a voidable contract is enforceable unless avoided by the protected party. A void contract cannot be enforced by anyone. (B) Proper subject matter. The purpose of the contract must be a legal one in order for the contract to be valid. Subject matter is not proper if it is contrary to public policy (such as an agreement to commit a tort or a crime or an agreement in restraint of trade), immoral (the only use of the subject matter is to violate the law), or if it violates a statute (such as a gambling contract or a usurious contract.)2 (C) Offer. An offer is a statement that creates a power of acceptance in the offeree. It does not have to be in a certain form. However, to be valid, an offer must be communicated to the offeree, it must express an intent of willingness to enter into a contract (with serious intent and not as a joke or as merely preliminary negotiations), and it must be sufficiently definite and certain (especially with regard to the identity of the parties, the subject matter, the price and the time and place of performance). It is generally effective when the communication is received by the offeree. (D) Acceptance. The power of acceptance lies only with the offeree, and the acceptance must relate to the terms of the offer (with no changes to the terms of the offer or counteroffer, if applicable). The acceptance is effective when it is dispatched (put out of the offeree’s possession). This is called the “mailbox rule” (if use of the mails is a reasonable method of accepting, then the acceptance is effective when posted). This rule is interpreted broadly and not limited just to use of the mails. The acceptance must be made within any time limit and in any manner as specified by the offer. A counteroffer terminates the offer. A counteroffer is treated as if it were a new offer. Any change to the offer by the offeree results in the termination of the offer and the creation of a counteroffer. A grudging acceptance by the offeree includes complaints about the oppressiveness of the agreement but no alteration of the terms of the original offer. Grudging acceptances are problematic because they create confusion about whether there has been an acceptance or a counteroffer. This may lead to litigation. (E) Consideration. To be enforceable, a contract must have sufficient “consideration.” Consideration is something of value (money, labor, goods or a promise to act or not act) given in exchange for a return promise or a performance and only if the parties intend to make such an exchange. Consideration is something that is bargained for and given in exchange for a promise or a performance. III. Types of Contracts An express contract is one whose terms are specifically stated, either orally or in writing. A contract is bilateral if both the offeror and the offeree make promises. Each party must perform and can expect the other party also to perform. A contract is called unilateral if only one party makes a promise. The offeror (the one who makes the promise) expects the offeree to accept the offer by actually performing an act, not by making a promise to perform the act. Newspaper advertisements are not generally offers. Ads are considered to be solicitations of offers and do not bind the advertiser. The exception is an advertisement of a reward which is treated as an offer to form a unilateral contract. Note that other law such as consumer protection statutes or unfair trade practices statutes may impose restrictions on advertisers.3 An implied contact is one where the terms are inferred, in whole or in part, from conduct and circumstances rather than from written or spoken works. The only legal difference between an implied contract and an express contract is the way that mutual assent is given. An “implied-in-fact” contract is one where the conduct of the parties and the circumstances of the transaction make it reasonable to assume that the parties had an understanding between them, and thus a contract enforceable by the court, in spite of the absence of spoken or written words of agreement. Also, in a case where the circumstances are such that one person should have a right and the other a responsibility, in spite of a lack of an intention or agreement for such, the court will find a contract “implied by law.” If there is something that someone ought to do, the court will find
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