CHAPTER 9 CONTRACT FORMATION I AN OVERVIEW OF CONTRACT LAW Contract law is designed to provide stability predictability and certainty to buyers and sellers formation and enforcement of agreements between parties Pacta sunt servanda agreements shall be kept In business law contracts are followed to avoid potential disputes A The Definition of a Contract Promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty legally binding agreement between parties to perform or refrain for performing some act B The Objective Theory of Contracts A party s intention to enter a contract is judged by outward objective facts as interpreted by a reasonable person rather than by secret subjective intentions Objective factors what party said how party acted or appeared oral or written conduct circumstances surrounding the transaction C Elements of A Contract 1 Requirements of a Valid Contract Agreement offer acceptance Consideration something of value received or promised to convince a person to make a Contractual capacity law must recognize parties are possessing the characteristics that deal that must be made in a contract qualify them as competent parties Legality purpose of contract must be legal and not violate public policy 2 Defenses to the Enforceability of a Contract Voluntary consent if contract was formed as a result of fraud undue influence mistake duress then contract is not enforceable Form must be in whatever form the law requires i e some require to be written TYPES OF CONTRACTS II A Contract Formation Classified according to how and when they were formed 1 Bilateral v Unilateral Contracts Depends on what the offeree must do to accept the offer and bind the offeror to a contract Bilateral a promise for a promise offeree can accept by simply promising to perform i e Javier promised Ann 200 for a camera when he gets paid on Friday and she promised to deliver the camera on Friday when he pays her Unilateral offeree can accept the offer only by completing the contract performance promise for an act i e I will give you 2 000 for watching my dog Only when you agree to take care of the dog and actually do it are you accepting the offer You can chose not to dogsit Revocation of Offers for Unilateral Contracts promisor attempts to revoke the offer after promise has begun performance but before act has been completed Present view an offer to form a unilateral contract becomes irrevocable once performance has begun 2 Formal versus Informal Formal require a special form or method of creation formation to be enforceable letters of credit agreements to pay contingent on the purchaser s receipt of invoices and bills of lading document evidencing receipt and title of goods Informal simple contracts usually based on substance rather than form Businesses often put them in writing to have evidence in case dispute arises 3 Express versus Implied Express terms of agreement are fully explicitly stated in words oral or written Implied contract implied in fact contract conduct of the parties rather than their words creates and defines the terms of the contract A contract may contain both express and implied elements Example A homeowner hires a contractor to do some renovations and they sign a contract based on the specifications and cost of the project The homeowner asks the contractor several times to use materials different as those stated in the contract and the contractor uses those materials Because of the conduct of the contractor used the different materials the contractor may not have standing to sue the homeowner for breach of contract Implied contract requirements 1 plaintiff furnished some service or property 2 Plaintiff expected to be paid for that service or property and defendant knew or should have known that payment was expected 3 Defendant had chance to reject service property B Contract Performance Executed contract has been fully performed on both sides Executory contract not fully performed by either party C Contract Enforceability 1 Voidable Contracts Can be avoided by one or both parties party hiving the option can elect to either avoid the duty to perform or ratify make valid the contract Contracts make by minors voidable at option of the minor mentally ill and intoxicated persons undue influence duress or fraud may be voidable 2 Unenforceable Contracts There are legal defenses against the contract rendered unenforceable by a statute or law 3 Void Contracts Produces no legal obligations it is not really a contract does not fulfill contract requirements AGREEMENT III A Requirements of the Offer Offer promise or commitment to do or refrain from doing something specified action in the future Three elements are necessary for an offer to be effective 1 Intention Offers made in obvious anger jest or undue excitement do not meet the serious and objective test because a reasonable person would realize a serious offer was not made acceptance does not create agreement Concept of intention can be clarified by examination of expressions that are NOT offers Expressions of opinion a doctor expressing you might heal in a couple of days is NOT an offer or a contract Statements of future intent I plan to sell my stock in Novation Inc for 150 Preliminary Negotiations request or invitation to negotiate Advertisements treated as invitations to negotiate price lists are NOT an offer Agreements to agree if it is clear that the parties intended to be bound by the agreements then it might be an enforceable contract emphasis on intent rather than form 2 Definiteness of Terms Identification of parties Identification of object or subject matter of contract including work to be performed A contract generally must include the following terms either explicit or easily inferred Consideration to be paid Time of payment delivery or performance When the parties have clearly manifested an intent to form a contract courts sometimes are willing to supply a missing term especially in sales contracts 3 Communication One cannot agree to bargain without knowing it exists For example someone offers and advertised 200 for their lost cat You have not seen the ad and not know about the reward and yet you found and returned the cat Under contract law you are not bound to receive the reward B Termination of the Offer Power of acceptance can be terminated by 1 Termination by Action of the Parties before he she accepts Revocation of offer by
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