Chapter 7

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Contracts: Nature, Classification, Agreement and Consideration

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Chapter 7

  1. 1. CHAPTER 7 Contracts: Nature, Classification, Agreement and Consideration
  2. 2. <ul><li>What is a contract? What are the four basic elements necessary to the formation of a valid, contract? </li></ul><ul><li>What are the various types of contracts? </li></ul><ul><li>What are the requirements of an offer? </li></ul><ul><li>How can an offer be accepted? </li></ul><ul><li>What are the elements of consideration? </li></ul>Learning Objectives
  3. 3. Contracts <ul><li>Function of Contracts </li></ul><ul><ul><li>Fundamental to business. </li></ul></ul><ul><ul><li>Creates rights and duties between parties. </li></ul></ul><ul><ul><li>Provides stability and predictability. </li></ul></ul><ul><li>Parties: Promisor (makes the promise) and Promisee (accepts the promise). </li></ul><ul><ul><li>Good faith in commercial agreements. </li></ul></ul>
  4. 4. Contracts <ul><li>Definition of a Contract </li></ul><ul><ul><li>Agreement that can be enforced in court. </li></ul></ul><ul><ul><li>Formed by two or more parties. </li></ul></ul><ul><ul><li>Failure to perform results in breach and damages. </li></ul></ul><ul><li>Objective Theory. </li></ul><ul><ul><li>Reasonable person standard. </li></ul></ul><ul><ul><li>Circumstances surrounding contract formation. </li></ul></ul>
  5. 5. Requirements of a Contract <ul><li>A valid, enforceable contract includes: </li></ul><ul><ul><li>Agreement. </li></ul></ul><ul><ul><li>Consideration. </li></ul></ul><ul><ul><li>Capacity. </li></ul></ul><ul><ul><li>Legality. </li></ul></ul><ul><li>Defenses to formation include: </li></ul><ul><ul><li>Genuineness of Assent. </li></ul></ul><ul><ul><li>Form. </li></ul></ul>
  6. 6. Types of Contracts <ul><li>Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee). </li></ul><ul><li>Bilateral Contracts. </li></ul><ul><ul><li>Offeror and Offeree exchange promises to each other. </li></ul></ul><ul><ul><li>A contract is formed when Offeree promises to perform. </li></ul></ul>
  7. 7. Types of Contracts <ul><li>Unilateral Contracts. </li></ul><ul><ul><li>Offeror wants performance in exchange for his promise. </li></ul></ul><ul><ul><li>Contract is formed when Offeree performs . </li></ul></ul><ul><ul><li>Contests and lotteries are examples. </li></ul></ul><ul><ul><li>Revocation of Offer: modern view is that offer is irrevocable once the Offeree substantially performs. </li></ul></ul><ul><ul><li>Ardito v. City of Providence (2003). </li></ul></ul>
  8. 8. Types of Contracts <ul><li>Express vs. Implied Contracts </li></ul><ul><ul><li>Express: terms of contract are set forth either in writing or orally. </li></ul></ul><ul><ul><li>Implied-in-Fact : based on conduct . </li></ul></ul><ul><ul><ul><li>Plaintiff furnished service or product. </li></ul></ul></ul><ul><ul><ul><li>Plaintiff expects to be compensated. </li></ul></ul></ul><ul><ul><ul><li>Defendant had a chance to reject and did not. </li></ul></ul></ul><ul><ul><li>Implied-in-Law (Quasi Contract). </li></ul></ul><ul><ul><ul><li>Fictional, created by court to avoid unjust enrichment. </li></ul></ul></ul>
  9. 9. Types of Contracts <ul><li>Formal vs. Informal Contracts </li></ul><ul><ul><li>Formal: require special form or method to be enforceable, e.g., under seal. </li></ul></ul><ul><ul><li>Informal: all other contracts. </li></ul></ul><ul><li>Executed vs. Executory Contracts </li></ul><ul><ul><li>Executed: fully performed by both sides. </li></ul></ul><ul><ul><li>Executory: at least one of the parties has not performed. </li></ul></ul>
  10. 10. Contract Enforceability <ul><li>Valid Contract. </li></ul><ul><ul><li>Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity. </li></ul></ul><ul><li>Voidable Contract. </li></ul><ul><ul><li>Valid contract that is legally defective and can be avoided (rescinded) by one of the parties. </li></ul></ul><ul><li>Void Contract. </li></ul><ul><ul><li>No contract at all. </li></ul></ul>
  11. 11. Quasi Contracts <ul><li>Implied-in-Law Contracts (Quasi Contract). </li></ul><ul><ul><li>Fictional, created by court to avoid unjust enrichment. </li></ul></ul><ul><ul><li>Limitations on Quasi-Contractual Recovery. </li></ul></ul>
  12. 12. Agreement: Offer <ul><li>Agreement = Offer and Acceptance. </li></ul><ul><li>An offer is the Offeror’s promise to perform. An offer requires: </li></ul><ul><ul><li>Serious, objection intention. </li></ul></ul><ul><ul><ul><li>Opinions are not offers. </li></ul></ul></ul><ul><ul><ul><li>Good Intentions are not offers. </li></ul></ul></ul><ul><ul><ul><li>Preliminary Negotiations are not offers. </li></ul></ul></ul><ul><ul><ul><li>Agreements to Agree are not offers. </li></ul></ul></ul><ul><ul><ul><li>Lucy v. Zehmer (1954). </li></ul></ul></ul>
  13. 13. Offer <ul><li>An offer requires (continued): </li></ul><ul><ul><li>Reasonably definite terms. </li></ul></ul><ul><ul><li>Communication to Offeree. </li></ul></ul><ul><li>Termination of Offer. </li></ul><ul><ul><li>By Act of the Parties. </li></ul></ul><ul><ul><li>Revocation by Offeror (unless irrevocable). </li></ul></ul><ul><ul><li>Rejection by Offeree (or counteroffer). </li></ul></ul><ul><ul><li>Operation of Law (destruction, death). </li></ul></ul>
  14. 14. Agreement: Acceptance <ul><li>Voluntary act by Offeree that shows assent to terms of original offer. </li></ul><ul><li>Unequivocal Acceptance: “Mirror Image” Rule. </li></ul><ul><ul><li>Offeree must unequivocally accept offer. </li></ul></ul><ul><ul><li>Additional terms may be considered a counteroffer. </li></ul></ul><ul><li>Acceptance by Silence. </li></ul>
  15. 15. Acceptance <ul><li>Communication of Acceptance. </li></ul><ul><ul><li>Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, email). </li></ul></ul><ul><ul><li>“Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror). </li></ul></ul>
  16. 16. Termination of Offer <ul><li>Termination of Offer. </li></ul><ul><ul><li>By Act of the Parties. </li></ul></ul><ul><ul><li>Revocation by Offeror (unless irrevocable). </li></ul></ul><ul><ul><li>Rejection by Offeree (or counteroffer). </li></ul></ul><ul><ul><li>Operation of Law: lapse of time, destruction, death or incompetence, supervening illegality. </li></ul></ul>
  17. 17. Acceptance <ul><li>Voluntary act by Offeree that shows assent to terms of original offer. </li></ul><ul><li>Mirror Image Rule. </li></ul><ul><ul><li>Offeree must unequivocally accept offer. </li></ul></ul><ul><ul><li>Additional terms may be considered a counteroffer. </li></ul></ul><ul><li>Acceptance by Silence. </li></ul>
  18. 18. Acceptance <ul><li>Communication of Acceptance. </li></ul><ul><ul><li>Authorized Means of Communication is either express or implied by form of offer (e.g., U.S. mail, fax, email). </li></ul></ul><ul><ul><li>“Mailbox Rule”: Offeree accepts offer when the acceptance is dispatched to Offeror in the form it was received, unless offer requires a different method (e.g., Fed-Ex, or receipt by Offeror). </li></ul></ul>
  19. 19. Consideration <ul><li>Consideration is value given in return for a promise. </li></ul><ul><li>Elements: </li></ul><ul><ul><li>Something of legally sufficient value given in exchange for a promise and </li></ul></ul><ul><ul><li>That is bargained for between the parties. </li></ul></ul><ul><li>Seaview Orthopedics v. National Healthcare Resources, Inc. (2004). </li></ul>
  20. 20. Consideration <ul><li>Contracts that Lack Consideration: </li></ul><ul><ul><li>Pre-Existing Duty. </li></ul></ul><ul><ul><li>Unforeseen Difficulties. </li></ul></ul><ul><ul><li>Past Consideration. </li></ul></ul><ul><ul><li>Illusory Promises. </li></ul></ul><ul><li>Settlement of Claims: </li></ul><ul><ul><li>Accord and Satisfaction. </li></ul></ul><ul><ul><li>Release. </li></ul></ul><ul><ul><li>Covenant Not to Sue. </li></ul></ul>
  21. 21. Promissory Estoppel <ul><li>Promissory Estoppel (“detrimental reliance”) doctrine applies when a person relies on the promise of another to her legal detriment. </li></ul><ul><li>Promisor is “estopped” (precluded) from revoking the promise. There must be: </li></ul><ul><ul><li>Clear and definite promise with substantial reliance. </li></ul></ul><ul><ul><li>Justice is served by enforcement of the promise. </li></ul></ul>

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