Chapter 9CONTRACT FORMATION (Chapter 9)I. OVERVIEW1. What is a contract? A legally binding agreement between two or more parties whoagree to perform or to refrain from performing some act now or in the future2. 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. Olins3. Elements of a Contract: all must be present for the contract to be valida. Agreement= Offer + Acceptanceb. Considerationc. Contractual Capacityd. Legality: you cannot contract for anything illegal or contrary to public policy4. Defenses to Enforceability, includes:a. Voluntary consent: the consent of both parties must be voluntaryb. Form: the contract must be in whatever form the law requiresII. TYPES OF CONTRACTS1. Bilateral vs. Unilaterali. Bilateral: acceptance occurs through a promise to performii. Unilateral: acceptance occurs at the time of performance; BUT- Offeror cannot revoke offer if offeree has substantially undertaken performance2. Formal vs. Informali. Formal: Certain contracts require a special form or method of creation to be enforceableii. Informal: No special form is required3. Express vs. Impliedi. Express: Terms are fully stated in words, oral or writtenii. Implied: Contract has arisen through the conduct of the parties4. Classification by degree of performance: i. Executed: a contract that has been performedii. Executory: a contract that has NOT been performediii. 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 executory5. Enforceabilityi. Valid: A contract having all necessary elements so that at least one party can enforce the contract in courtii. Voidable: A valid contract that gives one or both parties the option to avoid his/her obligationiii. Unenforceable: A valid contract rendered unenforcelable by lawiv. Void: No contract at allIII. THE OFFER1. Offer: A promise or commitment to do or not do something; it requiresi. Serious and Objective intent of offeror to become bound by offer1. Lucy v. Zehmer2. Opinions, plans, advertisements, preliminary negotiations, invitations to submit bids are NOT offersii. Definiteness of Terms: an offer must have reasonably definite terms (who, what, when, where, how?)iii. Communication to the offeree2. Terminating the Offer: happens in one of 4 waysi. Revocation1. Must be communicated to the offeree BEFORE acceptance2. Effective when the offeree (or his agent) ACTUALLY receives it3. Offer becomes irrevocable if offeree has changed position due to justified reliance on the offer4. May be express (a definite statement of intent to revoke theoffer) 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 periodii. Rejection: no contract is formed if the offer is rejected1. Effective when actually received by offeror or agent2. Subsequent efforts to accept are considered a new offer3. May be express or implied4. Mere inquiries about terms of an offer are NOT rejectionsiii. 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 Law1. Lapse of time2. Destruction of subject matter3. Death of parties4. Supervening IllegalityIV. ACCEPTANCE1. Acceptance must be voluntary2. Must be unequivocal (Mirror Image Rule; the acceptance cannot materially change the offer)3. Must be communicated to the offeror4. Must be timely and conveyed in an appropriate manneri. Mailbox Rule: acceptance is effective when it is SENT by whatever means the offeror authorizedii. Acceptance can be made by any reasonable means unless the offeror expressly authorizes a particular mode of acceptanceV. CONSIDERATION1. Consideration: the value given in return for a promise or performance2. Consideration requires:i. Legally sufficient value1. A promise to do something there is no prior legal duty to do2. Performance of an action you are not otherwise obligated todo3. Forebearance: not doing something you have a legal right to doii. Bargained-for Exchange: Distinguishes a contract from a gift3. Agreement lacks consideration if:i. There is a preexisting dutyii. Past considerationVI. CONTRACTUAL CAPACITY1. 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 boundii. Disaffirmance: the legal avoidance of a contractual obligation2. 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 agreement3. Mental Incompetence: i. A person adjudged mentally incompetent by the courts (and appointed a guardian) cannot enter into a contractii. If not declared incompetent by a court, can enter into contractiii. 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 consequencesiv. 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 formedVII. LEGALITY1. Contracts Contrary to Statute: any contract to commit a crime is a contractin violation of a statute and is not enforceablei. Usury: statutes place a ceiling on rates of interest, loaning at a higher rate is illegalii. Gambling: contracts regarding gambling are illegaliii. Licensing statutes: contracts with unlicensed professionals may or may not be legal depending on the purpose of the licensing requirement2. Contracts Contrary to Public Policyi. Contracts in Restraint of Trade (price-fixing agreements): illegal because they inhibit competition and adversely affect the public1. Covenants not to compete: any contractual restrictions mustbe reasonable in order to be legal2. Enforcement Problems: laws governing enforceability of covenants not to compete vary from state