Chapter 11CompetentParties Copyright © 2016 McGraw-Hi.docx

Chapter 11
Competent
Parties
Copyright © 2016 McGraw-Hill Education. All rights reserved.
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Capacity to ContractA competent party is a person who must
meet all the following conditions:Must be of legal age. Must
have normal mental capacity.Is considered by law to be capable
of understanding the meaning of a contract.A competent party
must have contractual capacity—the ability to make a valid
contract.
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Learning Outcome 11-1: Explain what is meant by contractual
capacity and define competent parties.
Page: 170
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Capacity to Contract (cont.)Minor: A person who has not yet

reached the age of majority. Minors and persons who are
mentally ill or mentally challenged cannot make legally binding
contracts, although they are not denied the opportunity to
benefit from their legal rights. The responsibility of
determining whether a person is competent to contract rests on
everyone who enters into a contract with such a person.
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Learning Outcome 11-1: Explain what is meant by contractual
capacity and define competent parties.
Page: 170
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Minors’ ContractsUntil individuals reach legal age, or the age
of majority, they are not legally required to carry out most of
their contracts The legal age of majority varies from state to
state. The legal age is 18 in most states, and 19 or 21 in
others.According to the coming of age rule in common law, a
person’s legal birthday is 12:01 a.m. of the day before his or her
actual birthday. However, under the modern birthday rule, a
person attains a given age on the anniversary date of his or her
birth.
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Learning Outcome 11-2: Discuss minors’ contracts and how the
age of majority impacts the legality of contracts.
Page: 170
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Avoidance of Minors’ ContractsIn contracts between a minor
and a competent person, only the minor has the privilege of
disaffirmance, or avoidance of the contract; the competent party
is bound.In contracts for necessities (food, shelter, clothing,
employment, and medical care), in many states the minor is
bound as well.Also, generally, a minor may not disaffirm a
contract involving the sale or purchase of real estate.
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Page: 170
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Example: Avoidance of Minors’ ContractsFacts:Fifteen-year-old
Dillon made a $100 clothing purchase from a store using a
credit card. One month later, when he received the credit card
bill, he refused to pay, claiming that he was not responsible for
the payment as a minor.However, a contract made for
necessities by a minor, even while he is intoxicated, must be
paid for their reasonable value.
Since food, clothing, employment, and medical care are
considered necessities, Dillon can be held liable to pay the
reasonable value of the clothing.
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Page: 170
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Ratification of Minors’ ContractsWhether a contract has not yet
been performed (an executory contract) or fully performed (an
executed contract), the minor may disaffirm the contract if he or
she wishes. Once the minor reaches the legal age of majority,
the contract must be either ratified (that is, agreed to) or
disaffirmed within a reasonable time.
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Page: 171
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Ratification of
Minors’ Contracts (cont.)A contract involving a minor can be
ratified by an act that shows that the minor party intends to live
up to the terms of the contract. If a reasonable period of time
passes after a minor reaches legal age and he or she has said
nothing about disaffirming the contract, it is considered ratified
in the eyes of the law.When a contract is ratified, the entire
contract must be ratified, not merely a part of it.
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Page: 171

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Disaffirmance of Minors’ ContractsAn individual may disaffirm
a contract, that is, state his or her intention either orally or in
writing not to honor a contract that had been made before
reaching legal age. Disaffirmance may be done before reaching
the legal age or within a reasonable time after reaching
adulthood. Disaffirmance, like ratification, may be implied by
the acts of the person who has reached legal age and wishes to
disaffirm.For example, disaffirmance might be implies by
failing to make an installment payment.
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Page: 173
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Minors’ Enforceable ContractsThe law that protects minors
from their contractual commitments is not intended to deny
them the opportunity to enter into contracts for necessaries that
are not provided by their parents or a guardian.As a result of a
minor’s emancipation, he or she assumes many of the rights and
obligations of a person of legal age. Emancipation could result
from marriage or from voluntary separation of a minor from his
or her parents or guardians.A minor is liable only for the
reasonable value of necessaries purchased by him or her.The
law regards actions on the part of a minor resulting in
emancipation as abandonment-a surrender of the special

protection given to minors by law.
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Page: 172
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Liability for Minors’ Torts and CrimesThe law does not protect
minors who have committed a tort or a crime. A minor may be
liable for such injuries or damages and may be prosecuted by
the state in a criminal action. A minor may be held liable for
money damages in a tort action when he or she: Destroys
property and/or appropriates it.Causes another person to suffer a
money loss through his or her negligence.Persuades another
person to break a contractMakes damaging statements in writing
or orally.
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Learning Outcome 11-3: Describe the operation of the law as it
relates to liability for a minor’s torts and crimes.
Page: 174
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Liability for Minors’ Torts and Crimes (cont.)State laws that
determine liability for minors’ torts and crimes vary from state
to state.In most states, parents are not held liable for torts
committed by their children. However, if a child causes damage

due to a lack of parental supervision, the parent may be held for
any damages caused by the unsupervised child .In many states,
when a minor disaffirms a contract and returns the goods, he or
she can be held liable for damages to the goods.
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Learning Outcome 11-3: Describe the operation of the law as it
relates to liability for a minor’s torts and crimes.
Page: 174
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Contracts of the Mentally IncompetentMentally incompetent
people cannot make binding contracts to safeguard their own
affairs.Consequently, most of their contracts are considered
voidable and cannot be enforced against them if they do not
carry them out.If the person entered into a contract during a
lucid interval and the other party can prove it, such a mentally
ill person will be held to the contract. A person with mental
incompetence is liable for the reasonable value of necessaries
that he or she buys, unless he or she can return them. For all
other contracts, the person who is mentally incompetent can
recover his or her money or property, but the other party’s
consideration must be returned if possible.
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Learning Outcome 11-4: Assess the legal status of contacts
made by persons who are incompetent.
Page: 175
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Contracts of the Mentally Incompetent (cont.)A contract with a
person who has been declared insane by the courts is void:Even
if the other party who contracted with the incompetent
individual did not know that he or she had been declared insane
by the courts. Even if the contract was made during a lucid
period.When a court classifies a person as insane, it appoints a
legal guardian to handle his or her affairs. Any contracts the
insane person makes thereafter are considered void, not simply
voidable. However the legal guardian is usually liable for
purchases on necessaries.
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Page: 175
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Example: Contracts of the Mentally Incompetent Facts:Trudy
suffered from a mental condition that was medically declared
insanity. Trudy hired Julio to build a sundeck for her house.
However, a week before the construction was complete, she
died in a car accident. When Julio approached her son to collect
the amount due to him for the construction, the son refused to
pay the bill, claiming that Trudy was mentally incompetent
when she hired Julio.
Since a contract with a person who has been declared insane by
the courts is void, even if the party who contracted with the
incompetent individual was unaware, Julio cannot avail any
remedy because the contract itself is void.
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Page: 175
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Contract of Persons affected by Drugs or AlcoholWhen a person
makes a contract while intoxicated by alcohol or drug use and is
unable to understand the nature and effect of the contract, the
contract is voidable at his or her option. The law considers the
impaired person to have been mentally incompetent at the time
the contract was made. If a contract does not involve
necessaries, the person who wishes to disaffirm it on the
grounds that he or she was intoxicated or affected by drugs
when the contract was made must either return the other party’s
consideration or prove that he or she lost possession of it while
still impaired.If the party, when no longer impaired and within a
reasonable time. Chooses to carry out the contract, it has been
ratified.
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Page: 175
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Chapter 10
Consideration

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The Nature of ConsiderationConsideration was defined as
promises exchanged by the parties to a contract. Forbearance is
then the promise to refrain from doing something that a party
has a legal right to do, or the promise of inaction.Consideration
in a contract may be more than just the promises exchanged by
the parties, but the actual benefit gained and the detriment
suffered by them. A party who makes a promise, the promisor,
may make a promise to pay a sum of money to another party,
the promisee, for the performance of a certain act.
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Learning Outcome 10-1: Explain consideration and define
forbearance.
Page: 154
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Characteristics of
Valid ConsiderationLegalityA valid contract does not exist if
the consideration is a promise to perform an illegal act (or to
avoid performing a legal act).AdequacyJudging whether or not
the exchange of promises in a contract was fair. In an attempt to

level the playing field, many consumer protection statutes have
been passed. The notions of unconscionable contracts and
contracts of adhesion are now widely applied.Possibility of
PerformanceA legally enforceable contract cannot be based on a
promise that is impossible to fulfill.
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Learning Outcome 10-2: Identify and explain the three essential
characteristics of valid consideration.
Page: 155
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Kinds of Valid ConsiderationConsideration required in an
enforceable contract can be: An exchange of
promisesForbearancePledges or subscriptions
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Learning Outcome 10-3: Describe the kinds of valid
consideration, including a promise for a promise, a promise of
forbearance, and a pledge or subscription.
Page: 156
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A Promise for a PromisePromise: A promise of an act by one
party in exchange for the promise of an act by another is a valid
consideration. The exchange of money is not a
requirement.Example: Joanne promised to paint Elaine’s office
room if Elaine helps with her landscape project. The law

provides certain remedies where there is partial or
nonperformance.
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Page: 156
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Example: Valid ConsiderationFacts:Jamaal promised to repair
Jane’s bike if Jane agreed to paint Jamaal’s room. Although the
most common form of valid consideration is the promise of
money by one party for an act or service, the exchange of
money is not a requirement.
Therefore, the exchange of promises would be deemed a valid
consideration even though there was no money exchange
involved between Jamaal and Jane.
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Page: 156
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Promise of ForbearanceOne party to a contract may wish to

exchange his or her promise to pay money for a promise of
inaction from the other party. Example: Jonah agreed to
purchase a printing business from Mark for a certain price, only
if Mark promised to refrain from opening another printing
business within 10 miles for three years.
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Page: 156
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Example: ForbearanceFacts:Amy agreed to purchase a grocery
store from Ben for $500,000 if Ben promised to refrain from
opening another grocery store within a 50-mile radius for the
next two years. Many contracts in which part of the
consideration is forbearance involve agreements not to compete.
This situation falls under a promise of forbearance because
Amy’s consideration was her promise to pay the agreed selling
price for Ben’s business, and the promise of inaction, or
forbearance.
Ben’s consideration was his promise to transfer the business to
Amy, and to avoid opening a similar business within the set
radius for two years.
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Page: 156

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Pledge or Subscription A pledge is a promise to donate money
to such organizations as churches, temples, mosques, hospitals,
colleges, cultural institutions, charitable organizations, and
other groups. Because pledges are for a worthy cause, courts
have deemed them to be enforceable.Some courts have held that
consideration given by the charitable institution is the promise t
use the money for the purpose it was donated.Example: John
Peterson makes a pledge of $20.00 to the local firefighters
association.
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Page: 156
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Consideration and the UCCIn some cases that involve contracts
to sell goods, the Uniform Commercial Code (UCC) dispenses
with the requirement of consideration in certain contracts that
involve any of the following:A merchant’s written firm offer
that provides that the contract is irrevocable.A written discharge
of a claim for an alleged breach of contract.Modifications of
existing contracts.
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Learning Outcome 10-4: Discuss the situations in which the
UCC dispenses with the requirement of consideration in
contracts to sell goods.
Page: 157
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General ReleaseGeneral Release: Statutes that permit a person
who has a claim against another to give up, or release, his or her
claim without an exchange of consideration by making a written
statement to that effect. A general release may be regarded as
valid consideration if the parties so intend. In such cases, the
general release would be viewed as forbearance.In some states,
a general release is supported by consideration only where the
original claim that is being released is not regarded by the
courts as frivolous. If it is deemed frivolous, there is no
forbearance beacuse, in effect, the releasting party is not giving
up anything.
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Learning Outcome 10-5: Define the term “general release.”
Page: 158
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Agreements That
Lack ConsiderationCertain agreements are not enforceable
because they lack consideration.Barren promisesGratuitous
promisesIllusory promisesAgreements supported by:Moral
considerationPast consideration

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Learning Outcome 10-6: Identify five kinds of agreements that
lack consideration.
Page: 158
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Barren PromisesA promise to do something that is already
required to do either by law or by contract represents no
additional sacrifice and is not valid consideration. A promise to
pay an existing debt or to obey the law, or a similar promise, is
called a barren promise.The obligation to perform acts already
required is known as a preexisting duty.
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lack consideration.
Page: 158
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Gratuitous PromisesA person who makes a promise without
requiring some benefit in return has made a gratuitous promise.
Agreements based on such one-sided promises are generally not
enforceable.Example: A golf pro promises to give her golf clubs
to her friend after a tournament is over. She realizes that they
are worth more than she orignally thought and changes her
mind. The pro is not obliged to give her friend the clubs as it
was a gratuitous promise.

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lack consideration.
Page: 159
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Illusory PromisesAn illusory promise consists of an indefinite,
open-ended statement purporting to be an agreement. A person
who makes an illusory promise never commits to a specific or
absolute act. Example: The manager of a fleet of delivery trucks
tells the owner of an auto repair shop “If your tires are high
quality, I will purchase all the tires I need from you.”
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lack consideration.
Page: 159
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Agreements Supported by Moral ConsiderationA person is not
legally bound to do what he or she may feel obligated to do
because of love, friendship, honor, sympathy, conscience, or
some other moral consideration. Some courts, however, will
justify the enforcement of some contracts, even though there is
no consideration, by stating that there was “moral
consideration.”
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lack consideration.
Page: 161
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Agreements Supported by Past ConsiderationPast consideration
is a promise to repay someone for a benefit after it has been
received. This type of promise is generally not a valid
consideration and is considered a gratuitous promise.Example:
Mike promised his brother Joe that he would give him two
Superbowl tickets when Joe graduated from college. As
planned, Joe graduated and Mike gave him the tickets. When
Joe realized how expensive the tickets were, he promised to pay
Mike one-half of the ticket price. Joe later changed his mind
and decided not to keep his promise. Joe will not be legally held
to his promise since it was based on past consideration.
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lack consideration.
Page: 161
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Chapter 9

Mutual Agreement
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Defective Agreements
Recall that a meeting of the minds (i.e. genuine assent) is the
second of the six requirements discussed in chapter 7 for an
enforceable contract. Genuineness of an agreement is said to be
present in a contract when there is a true meeting of the minds
of the parties.
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Learning Outcome 9-1: List seven ways in which a lack of a
meeting of the minds may cause defective agreements.
Page: 142
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Defective Agreements (cont.)If there is any misunderstanding
,or if force or deception was used to obtain the agreement of the
other party, the contract is voidable and may be disaffirmed at
the option of the injured party. A voidable contract results if
agreement (of either party) is obtained by fraud,
misrepresentation, mistake, undue influence, or duress.
Additionally, a voidable contract may result if the contract is
one of adhesion, or is unconscionable.
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Learning Outcome 9-1: List seven ways in which a lack of a
meeting of the minds may cause defective agreements.
Page: 142
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FraudThe intentional misstatement or nondisclosure of a
material fact made by one party in an attempt to influence the
actions of another party is fraud. Fraud may arise from spoken
or written words or by acts or conduct. Regardless of how the
fraud is committed, the party who relies on the misstatement or
nondisclosure must suffer a loss as a result of the
act.Intentional concealment or intentional nondisclosure of
material facts is just as fraudulent as making a false statement.
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Learning Outcome 9-2: Identify the elements of fraud.
Page: 142
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Fraud (cont.)In order to prove a fraud case, a plaintiff must
demonstrate five elements:
A misstatement or nondisclosure of a material fact;
Knowledge of its falsity or with reckless disregard of its truth;
Intention of causing the other party to enter into the agreement;
Reliance by the injured party; and
Harm to injured party (financial, physical, or both)
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Page: 142
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PuffingThere is a distinct difference between a fraudulent
statement and a salesperson’s “puffing.” Puffing is considered a
mere expression of opinion.Most of us have experienced puffing
when we speak to a salesperson.Some examples of puffing
are:“This washing machine is the best buy in town.”“This
computer is as good as other well-known brands.”“The engine
in this car has the latest hybrid technology.”
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Page: 143
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MisrepresentationMisrepresentation is the unintentional
misstatement or nondisclosure of a material fact that results in
inducing another to enter into an agreement to his or her loss.
When misstatement made knowingly or recklessly it is
fraud.Remedy is different for fraud and misrepresentation. An
injured party proving fraud can have contract canceled and sue
for additional damages. An injured party proving
misrepresentation can have contract canceled but cannot sue for
additional damages.
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Learning Outcome 9-3: Explain misrepresentation and how it
differs from fraud.
Page: 143
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MistakeA mistake is a belief that is not in accord with the
facts.Mistakes relating to contracts may be concerned with the
nature of the subject matter or the quality of the subject matter.
Court decisions involving mistakes are often complex, and the
courts attempt to determine whether the mistake was
“unilateral,” or “mutual”.A unitlateral mistake is a mistake
made by only one party.A mutual mistake is a mistake made by
both parties.
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Learning Outcome 9-4: Explain the concept of mistake in the
eyes of the law.
Page: 144
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Mistake (cont.)For a contract to be dissolved because of a
mistake, the law usually requires that both parties be a part of
the misunderstanding—that is, the mistake must be
mutual.Example: Chin, a painting delear offered to sell a
particular Picasso painting (catalog number 1401) to Kovacs for
$14,000. When it came time to exchange the painting for the
money, it was obvious that Kovacs expected a different Picasso
paining (catalog number 1410) .Chin believed Kovacs wanted to

buy catalog number 1401. The contract can be canceled by
either party because this was a mutual mistake.
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Learning Outcome 9-4: Explain the concept of mistake in the
eyes of the law.
Page: 144
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Undue InfluenceSometimes a person has the power to control
the actions of another because of a special or confidential
relationship.Examples: Relationships between employer and
employee, physician or nurse and patient, teacher and student.
When someone uses this power improperly to his or her
personal advantage, it is undue influence. A contract resulting
from the use of undue influence is voidable at the option of the
wrongfully influenced party.
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Learning Outcome 9-5: Define undue influence and explain its
impact upon the validity of a contract.
Page: 144
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DuressDuress is the act of applying unlawful or improper
pressure or influence to a person in order to gain his or her
agreement to a contract. Some types of pressure are: Threat of
bodily harm to an individual or to his or her family.Threat of

serious loss or damage to property.If someone enters into a
contract under duress, the injured party can dissolve the
agreement.
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Learning Outcome 9-6: Describe duress and the forms that such
may take:
Page: 145
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Contracts of AdhesionA contract that involves parties who have
unequal bargaining power is known as a contract of adhesion.
Sometimes referred to as “take-it-or-leave-it” contracts, they
are quite common and are normally enforceable. But when
enforcement of an otherwise legal contract will result in a
significant hardship to one of the parties, courts have
considered such agreements to be so unfair as to be
unenforceable.
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Learning Outcome 9-7: Define contracts of adhesion and
describe the conditions under which these contracts are
voidable.
Page: 145
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Contracts of Adhesion (cont.)The inequality of bargaining
power exists in contracts that are prepared by one party and

presented to the other without the opportunity for meaningful
negotiation.Example – Lorenz brought shirts to a laundry
service for cleaning. A note on the receipt he was given
indicated that the establishment was not responsible for goods
left over 30 days.Lorenz attempted to pick up his shirts 35 days
later and was told that, under contract terms he was not entitled
to them. The “30 day” clause would be a contract of adhesion.
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Learning Outcome 9-7: Define contracts of adhesion and
describe the conditions under which these contracts are
voidable.
Page: 145
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Unconscionable ContractsAn unconscionable contract is
regarded as shockingly unjust or unfair. While courts have long
been reluctant to uphold these, more recently, however, the
UCC has made such contracts even less likely to be enforced.
Under the UCC if there is a judicial finding of
unconscionability the court may – Refuse to enforce the
contract, or Strike any unconscionable clause and enforce the
remainder of the contract, or limit application of any
unconscionable clause to avoid an unconscionable result.
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Learning Outcome 9-8: Define unconscionable contracts.
Page: 146
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Chapter 8
Offer and Acceptance
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Reaching AgreementRecall that there are six elements of an
enforceable contract. The first of these essential elements is
offer and acceptance. For a contract to be valid, there must be a
proposal that is both offered by the offeror and accepted by the
offeree.
Learning Outcome 8-1: Identify the first step in reaching
agreement and forming a valid contract.
Page: 126
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Requirements for a Valid OfferFor an offer to be valid, it must
be:
Definite and certain
Communicated to the offeree

Made with a serious intention that the offeror will be bound by
it.
Learning Outcome 8-2: Explain and provide examples of the
three requirements for a valid offer.
Page: 126
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An Offer Must Be
Definite and CertainTo be definite and certain, an offer should
specify all the terms and conditions of the contract. A later
disagreement can be avoided if the offer is made as specific as
possible.
Page: 126
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An Offer Must Be
Definite and Certain (cont.)Under the Uniform Commercial
Code (UCC) an omission of one or more essential terms does
not necessarily make an offer invalid as long as the contract
contains sufficient information to suggest that the parties

intended to enter into a contract.Therefore, according to the
UCC, uncertainty with respect to specific terms does not
necessarily invalidate a contract.
Page: 126
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Offer Must Be CommunicatedAn offeror can make the offer
known to the offeree in various ways. The usual means of
communication are:Oral communication (in person or by
telephone, television, or radio)Written communication (letter,
fax, e-mail, text message, or other written forms)
Page: 126
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Offer Must Be Communicated Cont.)Businesses frequently use
printed or electronic purchase orders containing the terms of an
offer. Purchase orders are therefore considered offers to buy. In
these cases, the buyer of the goods is the offeror and the seller
is the offeree. Communication also may be implied by the
actions of the parties.

Page: 126
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An Offer Must Intend an Enforceable ObligationOffers made in
anger or jest, or those made under severe emotional strain, are
obviously not made with the intent of entering into a valid,
enforceable agreement. The lack of serious intent must,
however, be apparent to a reasonable person.
Page: 127
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Bids, Advertising, and Public OffersThe requirement of offer
and acceptance is usually fairly straightforward in contracts
involving few parties. Complications can arise when there is
little or no direct contact between the partiesE.g., bidding,
advertising, and public offers
Learning Outcome 8-3: Distinguish between bids,
advertisements, and public offers, and describe how each relates

to offer and acceptance.
Page: 127
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Bids and EstimatesA call for a bid or materials/work estimate is
a request for an offer, not an offer.May be an invitation to
negotiate.Can be accepted or rejected by the person calling for
the bid.Such an announcement or solicitation is often called a
request for proposal.
Page: 127
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AdvertisingAdvertisements are generally regarded as an
invitation to trade, or an invitation to make an offer, rather than
a valid offer because they usually do not contain sufficient
words of commitment to sell.If, however, an advertisement
contains a positive promise and a positive statement of what
the advertiser expects in return, the courts will usually hold that
the advertisement is an offer. This is especially true if the word
offer is used in the advertisement.

Page: 128
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Advertising (cont.)Sometimes goods are advertised at an
incorrect price. If the error is the merchant’s fault, he or she is
required to honor the lower price. If the error is not the
merchant’s fault, he or she might decide to honor the lower
price, even if not profitable in order to retain public goodwill.
Page: 128
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Public OffersWhen an advertisement offers a reward for
information that might lead to the arrest of a criminal or for the
return of a lost article, it is regarded as a general offer to the
public at large. Acceptance of a public offer by anyone, as
indicated by the performance of the act, results in an
enforceable contract.Example: An advertisement in a local
newspaper, offering a $200 reward for a dog’s return, is valid
even though it is directed to thousands of readers and only one
of whom could accept it.

Page: 128
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Requirements for a
Valid AcceptanceIn order for an acceptance of an offer to be
valid:It must be communicated to the offeror, and It must be
unconditional.It is important to determine how an acceptance is
communicated and when such acceptance becomes effective.
two requirements for a valid acceptance.
Page: 129
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Acceptance CommunicationMethod of CommunicationThe usual
forms of communication (telephone, letter, fax, e-mail, text
message) may be used in accepting an offer. Exception - The
offer specifies a certain form of communication, such as “Reply
by registered mail,” “Reply by return mail,” or “Reply by e-
mail.”

Page: 129
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Acceptance Communication(cont.)When Acceptance Becomes
Effective - General rule is that an acceptance becomes effective
when the parties so intend. The offer may explicitly state
whether acceptance effective when it is sent by offeree or when
it is received by offeror. Mailbox Rule: If the offer is silent as
to time acceptance is effective, the mailbox rule states that an
acceptance sent by mail or courier is effective when sent.
Page: 129
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Acceptance Communication(cont.)When Acceptance Becomes
Effective - An acceptance communicated by telephone, fax, or
telex is effective when received. Courts have been divided on
whether an acceptance sent via e-mail or text message is
effective when sent or received.

Page: 129
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Acceptance Communication (cont.)Silence as Acceptance - A
person cannot be compelled to speak or to write to avoid a
binding agreement.A persona is under no obligation to reply to
an offer. However, silence may indicate assent to an offer when
both parties have agreed in advance that this is to be the means
of acceptance.
Page: 129
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Example: Silence as AcceptanceFacts:Jimmy has to board the
local train to get to his destination.He approaches the teller at
the train station and hands her the correct amount required for
his travel. The teller, without making conversation, hands him a
pass in exchange for the money. The UCC 2-204 provides that a
“contract for the sale of goods may be made in any manner
sufficient to show agreement, including conduct by both parties
which recognizes the existence of such a contract.” Thus, in the
above scenario, the conduct of the parties binds this into a
contract.

Page: 130
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Acceptance Must Be UnconditionalA counteroffer that is
conditional, or a qualified acceptance of an offer, is generally
interpreted as a rejection and is not binding on the parties.The
general rule of contract: The acceptance of an offer must be the
same as the offerIf there are any material (important)
differences between the offer and the acceptance, the
acceptance is regarded as a rejection of the offer.
Page: 130
*
8-*
Acceptance Must Be Unconditional (Cont.)
The UCC provides an exception to the unconditional acceptance
rule:Between merchants, “a definite and reasonable expression
of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states
terms additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on assent
to the additional or different terms.”

Page: 130
*
8-*
Termination of an OfferOffers are terminated by:Lapse of
timeRevocationRejectionDeath or incapacityDestruction or
illegality
Learning Outcome: 8-5: Identify the five ways in which an offer
may be terminated.
Page: 131
*
8-*
Termination of an Offer (cont.)Termination by Lapse of Time -
When offeree fails to accept an offer within the time specified,
the opportunity to form a contract ends because of a termination
by lapse of time. When no definite time for acceptance is stated
in an offer, it terminates after a reasonable time.What is
considered a reasonable time can vary according to the
circumstances.
may be terminated.
Page: 131

*
8-*
Termination of an Offer (cont.)Termination by RevocationAn
offer that has been neither accepted nor rejected by the offeree
can be revoked, or withdrawn, by the offeror. The offeror may
communicate the revocation to the offeree in either spoken or
written words. However, according to the UCC, an offer that
includes specific time limits expires automatically when the
time is up, unless the offeror chooses to extend the offer.
may be terminated.
Page: 131
*
Termination of an Offer (cont.)Termination by RejectionA
direct, unqualified rejection, or a refusal to accept, terminates
an offer. The offer, once rejected by the offeree, cannot be
revived or made into a counteroffer once the communication of
the rejection has been received by the offeror. However, If the
offeror acknowledges the rejection but restates the offer, the
offeree still has the opportunity to accept, or reject, or make a
counteroffer.
8-*
may be terminated.

Page: 132
*
Termination of an Offer (cont.)Termination by Death or
IncapacityMutual agreement cannot occur if either the offeror
or the offeree die or become incompetent. An offer is
immediately terminated as a result of the death or legal
incapacity of either the offeror or the offeree.
8-*
may be terminated.
Page: 132
*
Termination of an Offer (cont.)Termination by Death or
Incapacity (cont.) - Although an offer is terminated as a result
of the death of either the offeror or the offeree, if either the
offeror or the offeree are bound by an option contract the
surviving party may still be obligated to the contract. An
option contract has a provision to keep an offer open for a
certain period of time. In the event of death, the estate of the
deceased is responsible to carry out the provisions of a the
options contract.
8-*
may be terminated.

Page: 132
*
Termination of an offer (cont.)Termination by Destruction or
Illegality If the subject matter of the contract is destroyed or
declared illegal after the offer has been made but before it has
been accepted, the contract is terminated. Example – Gipson
offered to sell Ramirez her boat for $8,000. While the boat was
docked, a storm damaged the boat, causing it to sink. Because
the boat was destroyed.Gipson’s offer to sell Ramirez the boat
would thereafter be terminated.
8-*
may be terminated.
Page: 132
*
Chapter 7
Contracts
*

Nature of a ContractA contract is a legally enforceable
agreement that is created when two or more competent parties
agree to perform, or to avoid performing, certain acts that they
have a legal right to do and that meet certain legal
requirements.The Uniform Commercial Code (UCC) defines a
contract as “the total legal obligation which results from the
parties’ agreement as affected by the Uniform Commercial Code
or any other applicable rules of law.”
7-*
Learning Outcome 7-1: Describe the nature of a contract.
Page: 108
*
Sources of Contract LawArticle 2 of the UCC is relevant to
contract law but only applies to transactions in goods or other
tangible personal property. Tangible personal property can be
defined as personal property that can be moved, such as a
vehicle, kitchen table, or computer. Common law, on the other
hand, is the source of contract law regarding the sale of fixed
assets, services, or intangibles.
7-*
Learning Outcome 7-2: Identify the sources of contact law.
Page: 108
*

Agreements that Result in a ContractAll contracts are
agreements, but not all agreements are contracts. If an
agreement imposes a legal obligation, an enforceable contract
results; if it imposes only a social or moral obligation, however,
it is not a contract and cannot be legally enforced.Example:
Allen promises Kobayashi, a coworker, a ride to a training
seminar. Allen failed to keep the promise and Kobayashi missed
the seminar. Kobayashi has no legal remedy against Allen
because the agreement was based on a social or moral
obligation, not a legal obligation.
7-*
Learning Outcome 7-3: Distinguish between agreements and
contracts.
Page: 108
*
Purposes of a ContractContracts may be created to establish
legal obligations regarding many matters including:The sale of
merchandise or servicesEmploymentThe transfer of ownership
of land (real property) or personal property such as a car A
contract may be extended and/or terms revised to reflect the
parties future wishes.
7-*
Learning Outcome 7-4: Explain the purpose of a contract.
Page: 108

*
Elements of an
Enforceable ContractTo be legally enforceable, a contract must
contain six elements:
1. Offer and AcceptanceAn offer is made by the offeror and
accepted by the offeree . This indicates both parties desire to
enter into the agreement.
2. Mutual AgreementThe parties must have a clear
understanding of what they are undertaking and the contract
must show mutual agreement (i.e. meeting of the minds).
3. ConsiderationEach party to a contract must promise to give
up something. The exchange of promises (where each party
gives the other something of value) is called consideration.
7-*
Learning Outcome 7-5: Identify the six elements of an
enforceable contract.
Page: 109
*
Elements of an
Enforceable Contract (cont.)Elements of an Enforceable
Contract
4. Competent PartiesThe parties to a contract must be competent

and capable of understanding what they are doing. (Example:
legal age, mentally stable)
5. Legality of PurposeThe intent of the contract must not violate
the law. The courts will not enforce a contract that violates the
law.
6. Proper FormRequirements for contracts are known as proper
form. Contracts must not only be in writing but also follow a
prescribed form, such as containing the signatures of the
parties.
7-*
Learning Outcome 7-5: Identify the six elements of an
enforceable contract.
Page: 109
*
Kinds of ContractsContracts may be classified in several ways,
depending on the manner in which they are created, expressed,
or performed. A contract may be:Oral or writtenExpress or
impliedFormal or simpleEntire or divisible
7-*
Learning Outcome 7-6: Distinguish between the different
classifications of contracts, including oral and written, express
and implied, formal and simple, and entire and divisible.
Page: 110
*

Kinds of Contracts (cont.)Oral Contracts: Not in writing or
signed by the parties, but it is a real contract created entirely by
the conversation of the parties. Written Contracts: Reduced to
writing on a permanent surface. A written contract can be
simply a handwritten note or any other memorandum containing
the terms of the agreement, as long as it is signed by the party
or parties who wish to be bound by the agreement. The law does
not specify any particular form or language to be used. It is
sufficient that the parties clearly express themselves in
understandable language.
7-*
Page: 110
*
Kinds of Contracts (cont.)
Express Contracts: One that specifically states the terms of the
agreement between the parties (either written or oral).Implied
Contract: A contract where rather than from oral or written
words its terms are derived from –the intentions of the parties
which is inferred by their actions, or from the customs of the
trade, or from conditions or circumstances.
7-*

Page: 110
*
Kinds of Contracts (cont.)Formal Contract: Also referred to as
specialty contract, it is a written contract under seal. The seal
may consist of simply the word Seal or L.S. (locus sigilli), a
scroll, a wafer, or an impression on the paper. Today only a few
contracts, such as bonds, mortgages, and deeds conveying title
to real estate, are required to have a seal. Many states have
stopped using the seal entirely.Simple Contract: It is an
informal contract made without seal (even though the subject
matter of the contract may be extremely complex and may
involve huge amounts of money).
7-*
Page: 111
*
Kinds of Contracts (cont.)Entire Contract: Also known as an
indivisible contract, it has two or more parts. Each part is
dependent on the others for satisfactory performance. Such a
contract must be completely performed. Divisible Contract: It is

made up of two or more parts, and each part is independent of
the others.
7-*
Page: 112
*
Status of ContractsContracts may call for performance over an
extended period. At any particular time, a contract may be –
Awaiting the first to commence obligation In the process of
completionFully completed.
7-*
Learning Outcome 7-7: Explain the status of contracts and
differentiate between executory and executed contracts.
Page: 113
*
Executory or Executed ContractsExecutory Contract: A
contract where a future act or obligation remains to be
performed under its terms. A contract is completely executory if
no part of it has been performed.It is partly executory if some
parts have been performed and some have yet to be performed.

Executed Contract:If all the terms of the agreement have been
fully performed by both parties, it is an executed contract. It is
more a record of an agreement that has been completed by all
the parties.
7-*
Page: 113
*
Example: Executory ContractsFacts:Lee, a secretary, signed a
contract with an employment agency that agreed to find him a
job. Lee agreed to pay the agency 50% of his first month’s
salary. The agency found him a new job.A month later Lee sent
the agency a check for 50 % of his first month’s salary as
agreed.The contract is now fully executed as there are no
further legal obligations left to either party.
7-*
Page: 114
*
Enforceability of ContractsIt is important to determine whether
a contract is valid, void, or voidable, because not all contracts

can be enforced.Valid contracts are agreements resulting in
obligations that are legally enforceable. Void contracts are
agreements that lack one or more of the essential elements of a
contract. Voidable contracts are agreements that may be
rejected by one of the parties for a legally acceptable reason.
7-*
Learning Outcome 7-8: Describe the enforeability of contracts
in terms of valid, void, and voidable contracts.
Page: 114
*
Enforceability of Contracts (cont.)Valid Contracts:A majority of
the contracts entered into business transactions are of this
type.Meets all the requirements of a contract because all six
essential elements present.Recall the six elements are offer and
acceptance, mutual agreement, consideration, competent parties,
legality of purpose and proper form.
7-*
Page: 114
*
Enforceability of Contracts (cont.)Void Contract

An agreement that lacks one or more of the essential elements
of a contract is a void contract.
It cannot be enforced and is not a true contract.
7-*
Page: 115
*
Enforceability of Contracts (cont.)Voidable ContractAn
contract that may be rejected by one party (for a legally
acceptable reason) is a voidable. Such a contract is valid and
enforceable unless and until rejected by party who has the right
to reject. For instance, in a contract between a minor and an
adult, the adult must perform his or her part of the agreement,
unless and until the minor decides to withdraw from the
contract.
7-*
Page: 115
*
Example: Enforceability

of ContractsFacts:Braun, a minor, agreed with dealer to buy
car. Dealer must perform as agreed, but Braun, who is not
legally a competent party, can withdraw.The fact that Braun is a
minor and thus not legally competent renders the contract
voidable.
7-*
Page: 115
*

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