Contracts

ELEMENTS OF A CONTRACT

1. A contract is an agreement, a meeting of the minds.

2. A contract contains the following essential elements:

a. offer
b. acceptance
c. Legal Subject mater
d. Legal Capacity of Parties
e. consideration
f. Statute of Frauds (may require a writing)

CALLOS

OFFERS AND ACCEPTANCES

1. An agreement requires both an Offer and an Acceptance
2. An Offer has 3 elements
a. it must be seriously intended (the test is whether a reasonable person
would consider it to be a serious offer)
b. it must be communicated by either words or actions
c. it must be definite in its terms (must include a price)

3. Advertisements and price quotes are not usually offers; they are invitations
to deal

4. An Acceptance has 3 elements

a. an acceptance must be unconditional - the offeree must comply with all
of the offeror's terms or a counteroffer is created
b. an acceptance must be communicated by words or actions (e.g. silence
is rarely an acceptance unless there is a long course of dealing between
the parties)
c. an acceptance may only be accepted by the party to whom it's made
(e.g. offeree cannot assign his/her right to accept to accept an offer to a
3rd party)

WHEN OFFERS END

1. Counteroffers end offers but they are only effective when they are received.
Requests and inquiries are not counteroffers

2. Rejections end offers but they are only effective when received
 3. Revocations end offers but they are only effective when received. Offeror
may usually revoke any time before acceptance even if promises the offer
will be held open
a. exception: Option Contracts can't be revoked
i. the offeree pays consideration to keep offer open (note: there is no
option contract until the consideration is actually paid by the offeree)
ii. counteroffers will not end an option contract

b. exception: In UCC Sales Firm Offers are irrevocable without

consideration if: made by a merchant, in writing, and a guarantee the
offer will be held open

4. Offers end at the time stated (if no termination time is stated, it ends at
reasonable time)

5. Death or insanity ends offers immediately, but does not end most contracts

6. Destruction or sale of the subject matter will end an offer

a. destruction of the subject matter ends the offer immediately
b. sale of the subject only revokes the offer when the offeree learns of it,
not when the subject is sold

WHEN ACCEPTANCE ARE EFFECTIVE

1. MAILBOX RULE
a. Offer, Rejection and Revocation are effective upon receipt
b. Acceptance is effective upon dispatch.
i. An acceptance is valid when sent if the offeree uses either an
the express means (the form of communication the offeror said
to use) or any reasonable means if none is specified (the same
means offeror used or faster)
c. If a slower means of communication is used, it is valid when received
d. The mailbox rule does not apply if an offer states an acceptance must
be received by a specified date, then the acceptance must be received
by that date to be valid and cannot be effective when sent (reason: the
offeree must comply with all of the offeror's terms)

TYPES OF CONTRACTS
1. Bilateral contracts - a bilateral contract is a promise for a promise (most
contracts are bilateral)

2. Unilateral contract is a promise for an act (e.g. a reward)

3. Requirement and Output contracts –

4. Executed and Executory contracts

5. Valid, Void and Voidable contracts

CONSIDERATION
1. An essential element of a contract is that it be supported by adequate
consideration
a. consideration is giving up of a legal right (e.g. something you're legally free
not to do)
b. consideration must be mutually bargained for (e.g. one promise was given
in exchange for the other party's promise or act) and legally sufficient
2. Courts aren't usually concerned with the adequacy of consideration, only that it be
present for both parties
a. thus, there is no requirement that the consideration be of equal value
b. exception: courts will consider the adequacy of consideration if the
contract is unconscionable (so grossly one sided that it shocks the conscience
of a court)
3. Two cases where consideration is not present
a. past consideration is no good
b. there is no consideration when a party is already contractually or legally
obligated to perform
4. Additional consideration is needed from both parties to modify a contract.

STATUTE OF FRAUD

Contracts that require some type of writing to be enforceable in a court of law.

Sale of goods of $500 or more
Real estate contracts
Contracts impossible to perform in 1 year
Promise to pay for the debts of another
Contracts where marriage is the consideration

1. Any type of writing that states the major contract terms can satisfy the Statute of
Frauds
2. The writing need only be signed by one party but it is only enforceable against the
one who signed
3. The terms may be stated in more than one document
4. No writing is required if the contract is fully performed by both parties (executed)

LEGAL CAPACITY OF PARTIES (COMPETENT PARTIES)

A contract must be made by two or more competent parties

MINORS. Minors may disaffirm contracts anytime while a minor or a reasonable time
thereafter
a. minors cannot disaffirm real estate contracts while they are still a minor
b. minors cannot disaffirm necessary contracts (things like food, clothing or
shelter)
c. To disaffirm a minor need only return what (s)he possesses or controls at
that time
d. Minor may ratify a contract by words or actions (i.e. use of the object)
e. minors can only ratify after becoming an adult; they can’t ratify while still a
 minor
f. minors must ratify the entire contract - they can't ratify part and disaffirm
part
g. Minors may disaffirm contracts, but they are liable in damages for torts
(civil wrongs)

DRUNKS A drunk may disaffirm only if (s)he was incapable of understanding what
(s)he did

INSANE. Insane may usually disaffirm, but once adjudicated insane all future
contracts are void

LEGAL SUBJECT MATTER

1. Illegal contracts are void.
2. Failure to have a required license makes all your contracts void exception:
the contract is enforceable if the license was a mere revenue raising
measure
3. Covenants not to compete in a sale of business or employment contract
are valid if reasonable.
a. must be reasonably needed to protect a legitimate business interests
b. must be reasonable as to time
C. must be reasonable as to distance

FRAUD Fraud has 5 elements

1. Material misrepresentation of a fact
2. Scienter
3. Reasonable reliance
4. Intent
5. Damages

Constructive Fraud - has the same 5 elements as actual fraud but the intent to
deceive element is fulfilled by a reckless disregard for the truth (making a statement
without knowing if the statement is true or false).

Fraud in the execution is void (defrauded party didn't know a contract was made)

Fraud in the inducement (party knows they made a contract but one or more terms
are misrepresented) makes a contract voidable. This means the injured party has 2
choices: rescission: (1.) cancel the contract and restore parties to their former
positions or (2.) the injured party may accept the contract and sue in tort for money
damages

Innocent Misrepresentation has 4 of the elements of fraud but no scienter or

reckless disregard for the truth. The injured party may only rescind and cannot sue
for damages.
MISTAKES
1. Most mistakes have no effect on a contract. There are 2 exceptions:
a. mutual mistakes of material facts make a contract voidable
b. with material unilateral mistakes, one may disaffirm only if the other
party knew or should have known a mistake was being made

Duress is forcing someone into a contract by threats of violence, economic

devastation or criminal action
a. forcing someone into a contract by actual physical force makes the contract
void
b. forcing someone into a contract by improper threats makes a contract
voidable

Undue Influence is an unfair use of a position of trust, confidence or affection to

overcome another's free will in contract. It makes a contract voidable

PAROL EVIDENCE RULE Evidence (oral or written) that contradicts a written

contract is inadmissible in court.

THIRD PARTY BENEFICIARY CONTRACTS

A & B make a contract with the intent of benefiting a third party
donee beneficiary - someone you make a gift to.
Creditor beneficiary - may sue either A or B or both if there is a breach
Incidental beneficial)/ obtain no rights under the contract

Assuming a Mortgage: buyer purchases land already encumbered by a mortgage

a. buyer agrees to take over mortgage and the buyer is liable for the mortgage
b. seller (original mortgagor) is still liable for mortgage
c. creditor (mortgagee) may sue either buyer or seller if there is a breach

Buying Subject to a Mortgage: buyer purchases land encumbered by a mortgage

a. buyer doesn't agree to take over the mortgage and is not liable
b. seller (original mortgagor) is the only one liable for mortgage
c. buyer runs the risk of foreclosure if the seller doesn't pay

ASSIGNMENT AND DELEGATION

Most contract rights can be assigned and duties delegated

CONTRACTS THAT CANNOT BE ASSIGNED

1. Personal service contracts
2. Increase risk or duty
3. Prohibited by the contract
4. Insurance contracts

If there is a breach, both the assignee and the assignor are liable
PERFORMANCE AND DISCHARGE OF CONTRACT DUTIES

Discharge by performance or prevention of performance

a. performance or tender of performance of contractual duties discharges that
party
b. prevention of performance by one party is a material breach and discharges
the other party

Discharge by breach .a material breach by one side of a contract releases the

other side from performing

substantially performance, no discharge occurs

1). the breach must be minor
2). the breach must usually be unintentional
3). breaching party may still collect under the contract, but damages are
subtracted for the minor breach

anticipatory breach or anticipatory repudiation occurs when one party, before the
time of performance, indicates they won't perform
1). injured party may sue immediately OR
2). wait until the time of performance and then sue if there is a breach

Discharge by agreement
a. mutual rescission: both parties agree to cancel the contract
b. in a novation, the parties agree to replace one party in a contract with a
new party

in an Accord & Satisfaction the parties agree to change a contract by substituting a

new performance for an existing one.

Discharge by operation of law If a contract becomes absolutely impossible to

perform, both parties are discharged (e.g. Death of a party to perform services
discharges the personal service contract and destruction of the subject matter
through no fault of either party discharges both parties)

Statute of limitations limits the time which a law suit may be brought
the time period is measured from the date of the breach, not the contract date
and is usually six years in most states

CONTRACT REMEDIES

Compensatory damages are monetary damages to compensate for all harm done.

Punitive damages

Mitigation of damages: injured party is required to use reasonable efforts to keep

damages low
Liquidated damages occur when the contract states what damages will be for a
breach

Specific performance is an equitable remedy where the breaching party is required

by court order to perform the contractual duties as promised
a. it is available only when money damages are an inadequate remedy
b. thus, it may only be used with rare and unique property and never in
personal service contracts.

Rescission cancels the contract and restores the parties to their former position

Reformation: a court rewrites a contract to make it conform to the agreement of the

parties