Chapter 9 CONTRACT FORMATION Chapter 9 I OVERVIEW 1 What is a contract A legally binding agreement between two or more parties who agree to perform or to refrain from performing some act now or in the future 2 The Importance of Intent a party s intention to enter into a contract is judged based on OUTWARD OBJECTIVE facts as interpreted by a REASONABLE PERSON the reasonable person standard a What did the party say b How did the party act c What were the circumstances surrounding the transaction d See Pan Handle Realty v Olins 3 Elements of a Contract all must be present for the contract to be valid a Agreement Offer Acceptance b Consideration c Contractual Capacity d Legality you cannot contract for anything illegal or contrary to public policy 4 Defenses to Enforceability includes a Voluntary consent the consent of both parties must be voluntary b Form the contract must be in whatever form the law requires II TYPES OF CONTRACTS 1 Bilateral vs Unilateral i Bilateral acceptance occurs through a promise to perform ii Unilateral acceptance occurs at the time of performance BUTOfferor cannot revoke offer if offeree has substantially undertaken performance 2 Formal vs Informal i Formal Certain contracts require a special form or method of creation to be enforceable ii Informal No special form is required 3 Express vs Implied i Express Terms are fully stated in words oral or written ii Implied Contract has arisen through the conduct of the parties 4 Classification by degree of performance i Executed a contract that has been performed ii Executory a contract that has NOT been performed iii Executory if one party has performed but the other has not the contract is executed on one side and executory on the other but classified as executory 5 Enforceability i Valid A contract having all necessary elements so that at least one party can enforce the contract in court ii Voidable A valid contract that gives one or both parties the option to avoid his her obligation iii Unenforceable A valid contract rendered unenforcelable by law iv Void No contract at all III THE OFFER 1 Offer A promise or commitment to do or not do something it requires i Serious and Objective intent of offeror to become bound by offer 1 Lucy v Zehmer 2 Opinions plans advertisements preliminary negotiations invitations to submit bids are NOT offers ii Definiteness of Terms an offer must have reasonably definite terms who what when where how iii Communication to the offeree 2 Terminating the Offer happens in one of 4 ways i Revocation 1 Must be communicated to the offeree BEFORE acceptance 2 Effective when the offeree or his agent ACTUALLY receives it 3 Offer becomes irrevocable if offeree has changed position due to justified reliance on the offer 4 May be express a definite statement of intent to revoke the offer or implied behavior inconsistent with the existence of the offer and made known to the offeree 5 Option Contract promise to hold an offer open for a specified period of time in return for a payment from the offeree offeror may not revoke during that time period ii Rejection no contract is formed if the offer is rejected 1 Effective when actually received by offeror or agent 2 Subsequent efforts to accept are considered a new offer 3 May be express or implied 4 Mere inquiries about terms of an offer are NOT rejections iii Counteroffer rejection of original offer and simultaneous making of a new offer the offeree s acceptance must match the offeror s offer Mirror Image Rule iv Operation of Law 1 Lapse of time 2 Destruction of subject matter 3 Death of parties 4 Supervening Illegality IV ACCEPTANCE 1 Acceptance must be voluntary 2 Must be unequivocal Mirror Image Rule the acceptance cannot materially change the offer 3 Must be communicated to the offeror 4 Must be timely and conveyed in an appropriate manner i Mailbox Rule acceptance is effective when it is SENT by whatever means the offeror authorized ii Acceptance can be made by any reasonable means unless the offeror expressly authorizes a particular mode of acceptance V CONSIDERATION 1 Consideration the value given in return for a promise or performance 2 Consideration requires i Legally sufficient value 1 A promise to do something there is no prior legal duty to do 2 Performance of an action you are not otherwise obligated to do 3 Forebearance not doing something you have a legal right to do ii Bargained for Exchange Distinguishes a contract from a gift 3 Agreement lacks consideration if i There is a preexisting duty ii Past consideration VI CONTRACTUAL CAPACITY 1 Minors can enter into any contract unless otherwise prohibited by law generally contracts entered into by minors are i Voidable minor need only to manifest an intent not to be bound ii Disaffirmance the legal avoidance of a contractual obligation 2 Intoxication if a person is intoxicated enough to lack mental capacity a contract entered into at the time MIGHT be voidable but also might be valid question is whether despite intoxication the person objectively understood the legal consequences of the agreement 3 Mental Incompetence i A person adjudged mentally incompetent by the courts and appointed a guardian cannot enter into a contract ii If not declared incompetent by a court can enter into contract iii Contract is voidable if person did not know she was entering into the contract or lacked the mental capacity to comprehend its nature purpose and consequences iv Question is whether the person objectively has the capacity to understand the nature purpose and consequences of the contract at the time the contract is formed VII LEGALITY 1 Contracts Contrary to Statute any contract to commit a crime is a contract in violation of a statute and is not enforceable i Usury statutes place a ceiling on rates of interest loaning at a higher rate is illegal ii Gambling contracts regarding gambling are illegal iii Licensing statutes contracts with unlicensed professionals may or may not be legal depending on the purpose of the licensing requirement 2 Contracts Contrary to Public Policy i Contracts in Restraint of Trade price fixing agreements illegal because they inhibit competition and adversely affect the public 1 Covenants not to compete any contractual restrictions must be reasonable in order to be legal 2 Enforcement Problems laws governing enforceability of covenants not to compete vary from state to state ii Unconscionable Contracts Clauses if the bargain is unduly oppressive a court will relieve a party of