Chp. 5 - How Contracts Arise
What is a contract?
A contract is any agreement enforceable by law (following through with a promise could be a contract, but not all agreements are contracts). Being able to identify the elements of a contract will help you manage your dealings effectively.
Six elements of a contract
ACCEPTANCE, or the agreement by the other party to the offer presented
GENUINE AGREEMENT (intent of both parties to carry out their promise)
CONSIDERATION, or the money or something of value being exchanged between the parties
CAPACITY of the parties in terms of age and mental ability
LEGALITY (The object of the contract is legal and not against public policy or in violation of law)
Characteristics of a Contract
- Valid (an agreement between 2 parties to provide a product or service)
- Example: A homeowner (who is over 18 and of sound mind) signed a contract with the Home Depot to buy a refrigerator. The homeowner pays for the refrigerator and Home Depot delivers it to the homeowner.
- Void (has no legal effect ~ missing any of the 6 elements ~ neither party needs to take action to terminate the contract because it was never a contract to begin with)
- Voidable (one of the parties is legally bound to honor the contract. So, a voidable contract can be executed, even though there is an element missing, if the party not legally bound agrees to move forward.)
- Unenforceable (cannot be enforced in a court of law; could happen because the terms of the contract are unclear (ambiguous) or if there has been a needless delay)
- Example: Mary buys a house from Steve. After moving in she finds a small leak in a pipe in the bathroom but does not take any legal action against Steve for 4 years. The court decided that the contract was unenforceable because of Mary's delay.
- Bilateral (Both parties to the contract make promises to one another)
- Example: I promise to pay the car wash $15 in exchange for the car wash's promise to clean my car.
- Unilateral (Only one party to the contract makes a promise.)
- Example: Joe promises Matt that he will pay him $100 if Matt finds his dog. Joe's performance of the contract depends on what Matt does. If he finds the dog, Joe must pay him.
- Oral Contract (created by word of mouth ~ these are generally valid and legally binding as long as they are reasonable and made in good faith ~ when oral contracts are taken to court, there is always a risk of one of the parties lying about the terms of the agreement.)
- Example: "I will pay you $50 if you will mow my grass this weekend."
- Written Contract (assures that both parties know the exact terms of the contract and also provide proof that the agreement was made)
- Express (written or oral contract where the terms are clear and concise and leaves no room for interpretation)
- Implied (requires no oral or written statements; comes from actions of one or both of the parties involved
- Example: Your neighbor hires you to mow his grass every Friday for the entire summer. You mow for the first 3 weeks of summer and he pays you each Saturday morning. The 4th Friday you mow , he refuses to pay you. The law will require the neighbor to pay you because you performed your part of the bargain.
Offer and Acceptance
- Made seriously - An offer does not meet the serious intent requirement if the offer is made in the heat of anger or as a joke. (Example: "I hate this car! I'll sell it to you right now for $5!" ~ you can't be forced to really sell it because you were mad when you said it)
- Definite and certain - The court must be able to determine the terms of the contract to settle a dispute. (Example of an offer that is not definite and certain: "I'll hire you as a car salesperson and pay you a percentage of each car you sell." This does not give exact terms (it doesn't say what % or how much they'll pay)
- Communicated to the offeree - Offers may be made by phone, letter, fax, email, or by any other method that communicates the offer to the offeree. (Example: My dog went missing so I posted reward signs everywhere offering $500 to anyone that brought her home. Someone did find her, mentioned the reward, so I had to pay the $500.)
Invitations to negotiate ~ most advertisements in newspapers, magazines, and catalogs should not be considered an offer because there is limited merchandise to sell.
Requirements of an Acceptance
1.) The mirror image rule (absolute acceptance) occurs when acceptance does not change the terms of the original offer.
2.) A counteroffer occurs when there is any change in the terms of the offer. This means the offeree has not yet accepted the offer. The offeror does not have to agree to the counteroffer. (Example: You offer to sell your PS3 for $150 to your neighbor. Your neighbor says I'd like to buy it but only for $100.)
Methods of Acceptance
*The time an acceptance takes place is important because that’s when the contract comes into existence.
When parties to a contract are separated by distance there are special rules that apply:
1 - when the acceptance to an offer is sent it has come into existence (Example: I send an offer to buy my car to Joe, who lives in Florida. Joe receives my offer on Monday. He decides to accept my offer, signs the agreement, and puts it in the mail. **This is when acceptance has taken place**)
2 - Acceptance can also be based on past practices between the parties, the usual method in trade, or customary means in comparable transactions. (Ex: Sara orders flowers for a party and offers to pay $100. When the florist delivers the flowers she will have accepted my offer...this is the florist's normal way of completing transactions.)
**If the acceptance is sent to the wrong address then it is not complete - it could be delivered to the wrong place and the other party has no idea about the acceptance.
Termination of an Offer
1. Revocation - the taking back of an offer by the offeror because they’ve changed their minds or circumstances and decides to withdraw BEFORE THE OFFER HAS BEEN ACCEPTED.
(Example: I offer to sell my car to a neighbor. She said she would need to think about it and let me know tomorrow. I thought about it as well and decided I no longer wanted to part with it so I called and let her know that I changed my mind.)
2. Rejection - refusal of an offer by the offeree brings the offer to an end.
(Example: Joe says "I'll sell you my camera for $150" and I say "I don't want it!"
3. Counteroffer - ends the first offer
4. Expiration of Time - If the offeror sets a time limit for the acceptance of the offer, it must be honored…if no time limit is set, the contract must be accepted within a reasonable amount of time…if offeree pays money or other consideration to an offeror to hold an offer open for an agreed period of time, an option contract exists.**an option is a binding promise to hold an offer open for a specified period of time
(Example: “I’ll sell you my car for $10,000 if you accept the offer my Saturday at 1pm.”)
5. Death of Insanity - if offeror dies or becomes insane before offer is accepted, the offer comes to an end