Contracts: Overview, Assent, and Consideration

Introduction

Setting

• A contract is a legally enforceable promise
• Contracts are vital for protecting expectations, facilitating planning, and enabling transactions
• Contracts form the basis for modern society

Objective

Today we look at the nature of a contract and the requirement for agreement and consideration

Importance of contracts

The Constitution protects the right to contract

• Article I, Section 10 limits the ability of the government to interfere with contracts
• Much of American history has been based on the legal doctrine of "freedom of contract"

Sources of contract law

• Common law
  • services
  • real estate
• Uniform Commercial Code (UCC)
  • sale of goods
• Convention on the International Sale of Goods (CISG)
  • international sale of goods

Elements of a valid contract

A valid contract has four basic required elements

• Mutual Assent: Offer and acceptance
• Consideration: Mutual exchange of benefits and detriments
• Legality of Purpose: The contract must not violate the law
• Capacity: The parties must be legally capable of entering a contract

Contracts can be described as

• Valid – a contract with all the required elements
• Void – an agreement which lacks a required element of a valid contract or was not formed in accordance with the law
• Voidable – one or more parties have the right to cancel an otherwise valid contract
• Unenforceable - a valid contract that cannot be enforced by the court because of a legal defense

There are different types of contracts

• By Contractual Commitment: Bilateral vs. Unilateral
• By Source of Law: Common Law vs. UCC
• By Level of Explicitness: Explicit vs. Implied
• By Business Relationship: Transactional vs. Relational

Mutual assent

Mutual assent is made up of offer and acceptance

• Offer is a promise or commitment to do (or refrain from doing) a specified activity
• Requirements of a Valid Offer:
  • Objective intent
  • Clear and definite terms
  • Communication to the offeree

Case Study: Lucy v. Zehmer (objective intent)

Advertisements as Offers

• Generally not offers, but invitations to make an offer
• There are a few exceptions

Termination of an offer

An offer can terminate because of the actions of the parties

• Revocation
• Rejection
• Counteroffer

An offer can generally be revoked at any time before acceptance

• Express communication by offeror to revoke (withdraw) the offer
  • or an inconsistent act that would give reasonable notice to the offeree that the offer no longer exists
• An offer is irrevocable if it is an option to enter into a contract
  • This holds open the offer for a set time

Rejection of an offer terminates the offer

• An offer is terminated when the offeree rejects it
• The mirror image rule requires that the offeree’s acceptance may not even slightly alter the terms of the original offer

Counteroffer

• A counteroffer is a rejection plus new offer
• A counteroffer terminates the original offer and makes a new offer even if there is only a slightly change in terms from the original offer

An offer can terminate by operation of law

Even without acts of the parties, the following may terminate the offer

• Lapse of time
• Death or incapacity of the offeror or offeree
• Destruction of the contract’s subject matter before acceptance
• Supervening illegality

Acceptance

Acceptance is a voluntary act that shows agreement to the terms of an offer

• Acceptance is an offeree's agreement to the terms of the offer
• Offeror has the power to terminate the offer, modify its terms, or prescribe the method of acceptance until the offer is accepted by the offeree

Mailbox rule

• The mailbox rule states that an acceptance is valid once it is sent
• An acceptance is effective upon dispatch, while a revocation becomes effective upon receipt

Consideration

Consideration is something of legally sufficient value given in return for a promise

• Definition: The bargained-for exchange of benefits and detriments
• There must be a bargained-for exchange
• Forbearance (giving up a legal right) can be consideration

Consideration consists of a legal detriment

• Doing or promising something not one is not legally obligated to do
• Courts generally don't assess the fairness of the exchange

Preexisting Duty Rule

• If a party does or promises to do what they are already legally obligated to do,
  • the law generally does not recognize this as a legal detriment
• Thus, the contract is unenforceable

Illusory promises lack consideration

• Deathbed promises made to comfort the dying.
• Promises of a gift.
• Promises of love and friendship.
• Promises that by their terms are not binding.

Past Consideration

• A promise made in return for a detriment previously made by the promise
• Not sufficient to create a valid contract

Promissory Estoppel

Under the theory of promissory estoppel, a relying party may recover damages if

• The promisor makes a promise that is reasonable
• The promise actually relied on the promise and suffered an injury
• The promise’s reliance was reasonably foreseeable to the promisor

Conclusion

What did we learn today?

• Contracts are important to businesses
• A valid contract requires offer, acceptance, and consideration
• Justifiable reliance on a promise may provide a path for reliance damages