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  1. ES 2.00 UNDERSTAND CONTRACT LAW Obj. 2.01 Understand the elements and characteristics of a contract

  2. Elements of a Contract • Offer • Acceptance • Genuine Agreement/Assent • Consideration • Capacity • Legality All elements MUST be present to be an enforceable contract.

  3. OFFER Proposal by one party to another with intent to create a legal binding agreement • Offeror • Makes the offer • Offeree • Offer made to this person

  4. Requirements of an Offer • Serious Intent • Must intend to make the offer • Advertisements? • No serious intent • Known as an invitation to negotiate • Definite and Certain • Must use definite words • Communicated to the Offeree • Phone, fax, Internet, letter, etc

  5. Termination of Offer • Revocation – Taking back of an offer by offeror • Rejection – Refusal by the offeree • Counteroffer – Any change in the terms of the offer • Death – Offeror dies • Insanity – Offeror is declared insane • Expiration of Time – If the offeror puts a time limit on the offer and it has passed • Destruction of the subject matter

  6. Options & Firm Offers • Option – the offeree gives the offeror something of value in return for a promise to keep the offer open for a set period of time • Firm Offer – a written offer for goods that states the period of time during which the offer will stay open • No additional consideration is required • Maximum period of time set by the UCC – 3 months • Offeror must be a merchant who deals in related goods on a daily basis

  7. ACCEPTANCE • Unqualified willingness by the offeree to go along with the offer • Mirror Image Rule • Terms of the acceptance must match exactly (mirror) the terms of the offer • Any change means there is no acceptance (counteroffer)

  8. Methods of Acceptance • Bilateral Acceptance • Offer is accepted by offeree through communication of the promise to the offeror • Only requires giving a promise to perform, not performance itself • Most offers are bilateral • Unilateral Acceptance • Offeror promises something in return for offeree’s performance and indicates that performance represents acceptance • Silence as Acceptance • Does not represent acceptance • Offeror cannot word offer in a way that silence would be considered acceptance

  9. GENUINE AGREEMENT (ASSENT) • A valid offer has been made by the offeror, and a valid acceptance has been exercised by the offeree • Several causes for genuine agreement to be lacking in a contract • Duress • Undue Influence • Unilateral or Mutual Mistake • Innocent Misrepresentation • Fraudulent Misrepresentation

  10. Duress Overcoming a person’s free will by use of force or by threat of force or bodily harm • Threats of Illegal Conduct • Threats to Report Crimes • Threats to Sue • Threats to sue made for purpose unrelated to the suit • Economic Duress • Threats to a person’s business or income

  11. Undue Influence • Unfair and improper persuasive pressure within a relationship of trust • Must be able to prove: • Relationship of trust, confidence or authority • Unfair persuasion

  12. Unilateral Mistake An error on the part of one of the parties • Does not affect validity of the contract • Cannot get out of contract • Nature of the Agreement • Signing a contract you don’t understand or have not read • Signing a contract in a language you don’t understand

  13. Mutual Mistake (Bilateral Mistake) Both parties are mistaken about an important fact • Impossibility of Performance • Contract is impossible to perform • Contract is void • Subject Matter • Either party can void contract • Existing Law • Contract is valid • Parties are expected to know the law

  14. Innocent Misrepresentation Innocent statement of supposed fact that turns out to be false • Statement must be one of fact • Statement must be material • Statement must be relied upon • Injured party has the right to rescind (take back) the offer • No rights to damages

  15. Fraudulent Misrepresentation Party to a contract deliberately makes an untrue statement of fact • Deliberate: Done with or marked by full consciousness of the nature and effects; intentional • Deception: The fact or state of being deceived • Gain: To secure as profit or reward • In order to prove fraud, you must prove the above 3 definitions

  16. Proving Fraudulent Misrepresentation • Untrue statement of fact • Must be one of fact, not opinion • Active concealment • Silence – may stay silent about defects except when: • statement is about material facts • True statement is made false by subsequent events • One party knows the other party has made a basic mistaken assumption • Materiality • Statement would cause reasonable person to contract • If one party knows the other party would rely on the statement • If one party knows the statement is false

  17. Proving Fraudulent Misrepresentation • Reasonable Reliance • One party must reasonable rely on statement • Intentional or reckless • One party deliberately lies or conceals a material fact • One party recklessly makes a false statement of fact, without knowing whether it is true or false • Statement must be intended to induce party to enter into contract • Resulting Loss • Must cause an injury

  18. CAPACITY • Legal ability to enter into a contract • Minors • Mentally Incapacitated • Intoxicated • A person serving a prison sentence lacks capacity.

  19. Minors • Minor – not yet reached legal age (age of majority) • NC Age of Majority – 18 years old • Emancipation - severing of the parent-child relationship • Formal – court decree • Informal – arises from the conduct of the minor and the parent • Parent and minor agree that parent will end support • Minor gets married • Minor moves out of family home • Minor joins armed forces • Minor gives birth • Minor takes on full-time employment • Ratification – agreeing to be bound by a contract that could be avoided • Contracts made by minors are voidable; minors may disaffirm (or avoid being bound by) contracts

  20. Mentally Incapacitated • Lacking the ability to understand the consequences of his or her contractual acts • Severe mental illness • Severe mental retardation • Severe senility • Contracts made by mentally incapacitated are usually void unless involving necessaries.

  21. Intoxicated • People under the influence of drugs or alcohol • Intoxication is a voluntary act. • Most courts are reluctant to consider contracts entered into by intoxicated individuals as voidable. • Must be so intoxicated that the person did not know they were contracting.

  22. CONSIDERATION Exchange of benefits and detriments by the parties to an agreements • Requirements of consideration: • Must involve a bargained-for exchange (promise made in return for another promise) • Must involve something of value • Benefits and detriments must be legal • Benefits • Something that a party was not previously entitled to receive • Detriments • Any loss suffered; anything given up • Forbearance • Not doing something that you have the right to do

  23. Adequacy of Consideration • Courts don’t look at adequacy or value of an agreement unless it is “unconscionable” • Unconscionable • So grossly unfair or oppressive that it would shock the conscience of the court • So lop-sided that the average person would not agree to terms

  24. Nominal Consideration • Token amount in a written contract where either the parties cannot or do not wish to state the amount

  25. Agreements without Consideration • Promise to make a gift • Gifts have no consideration • Cannot be enforced • Gift that has been given • Doesn’t have to be returned • Donor – Gives the gift • Donee – Accepts the gift

  26. Illusory Promises Clause or wording that allows party to escape from legal obligation • Termination clause • Illusory – clause to allow termination of contract for any reason • Not illusory – termination only allowed after a change in defined circumstances • Output Contracts • Agreement to purchase all of a specific producer’s product • Requirements Contracts • Agreement to supply all of the needs of a specific buyer • Output & Requirements contracts are recognized by the courts as having consideration by implying fair dealing.

  27. Existing Duty • Existing Public Duty • No detriment • Obligation to obey the law • Existing Private Duty • If a person is already under legal duty to do something, another promise to do that same thing does not furnish consideration for a new contract.

  28. Past Performance • An act that has already been performed cannot be consideration in a contract.

  29. Exceptions to Consideration • Promises to charitable organizations • Gift or Pledge for future contribution • Enforceable as consideration if organization identifies the pledge for a specific use and acts in reliance on the pledge • Promises covered by the UCC • Firm offers • Good faith modification of contract • Promises discharged in bankruptcy

  30. Exceptions to Consideration • Promises barred from collection • Promissory Estoppel • Rely on what a person said • Elements: • Promise must bring action or forbearance • One who gave no consideration must have relied on the promise • Injustice can be avoided only enforcing the promise


  32. Illegal Contracts • Civil & Criminal • Agreements to commit a crime/tort are illegal • Usury • State sets a max interest rate • Interest – fee the borrower pays to the lender for using the money • Usury - charging too high of an interest rate • Gambling • Legal gambling varies from state to state • Licensing • States require that persons in certain occupations obtain a license to practice that occupation • Doctors, plumbers, barbers, lawyers, funeral directors

  33. Illegal Contracts • Public policy • Agreements that unreasonably restrain trade • Takes away the ability to do business with others • Agreements not to compete • Restrictive covenant - agreement not to compete in a region for a period of time • Only legal for a short period of time and small geographic region • Agreements for price fixing • Price Fixing - competitors agree on certain price ranges within which they will sell their products

  34. Illegal Contracts • Public policy (continued) • Agreements to eliminate competitive bidding (or bid rigging) • Bid - offer to buy or sell goods or services at a stated price • Bid rigging – competitors agree that one bidder will have low bid for a certain job….low bidder sets bid higher than would if real competition • Agreements to obstruct justice • Anything that delays or prevents justice • Agreements to induce breach of duty or fraud • Influencing persons who hold positions of high trust for private gain • Agreements to interfere with marriage • Damage, destroy, or discourage good family relationships

  35. Statute of Frauds • Requires that certain contracts be in writing to be enforceable • Contracts to buy and sell goods for a price of $500 or more • Contracts to buy and sell real property • Contracts that require more than one year to complete • Promises to pay the debt of another • Promises to give something of value in return for marriage

  36. CHARACTERISTICS OF A CONTRACT • Valid, void, voidable, unenforceable • Express or implied • Bilateral or unilateral • Oral or written

  37. Valid, Void, Voidable, Unenforceable • Valid contract • Includes all elements recognized by the courts • Legally binding • Void contract • Without legal effect • Contracts missing one or more elements • Voidable contract • One or more parties can get out of contract for some legal reason • Contract lacks genuine assent, contracts with minors • Unenforceable contract • Contract that court will not uphold, usually because of some rule of law • Statute of limitations has expired

  38. Express or implied • Express • Contract statement that may be written or oral • Implied • Contract that comes about from the actions of the parties

  39. Bilateral or Unilateral • Bilateral • Contains two promises • Most contracts are bilateral • Unilateral • Contains a promise by only one person to do something if, and when, the other party performs a certain act • Reward offer is most common unilateral contract

  40. Oral or written • Oral • Created by two or more people speaking to each other • Written • contract terms are written so that both parties know the exact terms • Provides proof of existence for the contract • Certain contract are required by the Statute of Frauds to be in writing