Home Solutions What are the main sources of American contract law?
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As an entrepreneur, you want to start a business. You know that the first step is to consider drafting a business plan proposal to organize all of your ideas. For this assignment, you will be submitting a business plan proposal outline for your imaginary business. For research purposes, you can choose any state for the location of your business(I CHOSE THE STATE OF GEORGIA)!!!!!!!!!
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CHAPTER 6: CONTRACTS
On a hot summer afternoon, 8-year-old Tiffany sets up a table and chair on the sidewalk outside her family’s home. She places an ice-cold pitcher on the table and hangs a hand-painted sign that reads “Lemonade for Sale: 25¢ a Cup.” Soon thereafter, Aaron, 10, approaches and sees the sign.
“I have only 20 cents. Is that enough?” he asks.
“No,” replies Tiffany.
“How about 20 cents, and I let you listen to my MP3 player?”
“Okay,” says Tiffany.
Aaron gives Tiffany two dimes and hands over the MP3 player. Moments later, with the transaction complete, Tiffany bops to the music while Aaron sips his lemonade.
Tiffany’s successful lemonade sales negotiation with Aaron raises some questions that come up in every sales contract. For a contract to exist, several elements must be in place. Contract law includes basic concepts such as offer and acceptance. Did Tiffany’s hand-painted sign constitute an offer or was it mere advertising of goods to be sold? By proposing 20 cents for lemonade, was Aaron making a counteroffer to Tiffany? At what point in the negotiations was there a valid offer and acceptance to form a contract? Were the terms of the contract clear? As minors, did the parties have the capacity to enter into a valid contract? Would the contract be enforceable?
None of these questions were of any concern to Tiffany and Aaron as they enjoyed lemonade and music on a hot summer’s day. However, these are questions that parties need to consider before entering into a valid enforceable contract. These are also some of the questions that courts routinely address when determining winners and losers in a contract dispute after a deal goes sour.
After completing this chapter, students should be able to do the following:
1. Define and explain a contract
2. Differentiate, with examples, between sources of contemporary contract law
3. Outline the elements of a contract
4. Explain remedies available for a breach of contract
INTRODUCTION TO CONTRACTS
Sources of Contract Law
American contract law draws upon centuries of commercial transactions and traces its roots back to various sources of law—primarily to English and American common law, or judge-made law, and the United States Constitution.
COMMON LAW Judge-made law; a series of court precedents over time. Common law set the foundation of U.S. law.
OBJECTIVE THEORY The theory that courts should analyze the acts of the parties rather than their thoughts to determine intent.
Early contract law evolved in England over many generations. Principles used in resolving contract disputes concerning sheep, horses, and commercial transactions in early industrial England were the precedents relied upon by early American judges. Much of early American property law grew from those common law experiences and precedents. Over the past two centuries, American courts have continued to rely on basic contract principles first expressed under English common law. The common law continues to grow with precedents in new areas of law. Legal scholars and legislators have looked to these court precedents when enacting new codes covering contract law.
Over time, U.S. contract law has also grown to become more consistent, primarily because of the American courts’ reliance on an objective theory in reviewing contracts. Some early scholars had argued that under English common law, a court must look at what persons are actually thinking—their subjective intent—in analyzing the terms of a contract. American courts have instead relied on an objective theory, by which the court analyzes the circumstances of the contract. In other words, rather than relying on the thoughts of the parties to determine intent, American courts rely on the acts of the parties under the circumstances. They consider subjective intent too vague of a standard to apply consistently.
COMMERCE CLAUSE Article I, Section 8 of the U.S. Constitution; the legal basis for much of what Congress has done over the past two centuries in regulating commerce within the United States.
The U.S. Constitution
The U.S. Constitution is another source of contract law. It gives Congress broad authority to regulate commerce. Article I, section 8 authorizes Congress “to regulate Commerce with foreign Nations, and among the several States, and with Indian Tribes.” From the earliest days of U.S. history, Congress has relied on this provision in order to maintain almost unlimited power in setting up international trade agreements. The Commerce Clause has been the foundation for much of what Congress has done over the past two centuries in regulating commerce within the United States. The courts have deferred to Congress in setting up antitrust laws, employer and employee labor laws, minimum wages, and regulating railroads and airlines. In fact, civil rights laws of the 1960s were enacted in part on the basis of the Commerce Clause. Congress has continued to rely on the Commerce Clause for extending its regulatory authority over hotels, restaurants, and other public accommodations. The Commerce Clause has also been a source of authority for Congress to regulate the environment and ensure clean air and water.
In recent years, there have been new court challenges testing the limits of the Commerce Clause. The scope of the Commerce Clause is at
issue in litigation between a number of states and the federal government over the Affordable Care Act, passed by Congress and signed into law by President Obama in March 2010. Courts have split on the authority of Congress to enact the national healthcare law. Those challenges may eventually end up before the U.S. Supreme Court—but regardless of the outcome of those cases, it is settled law that the Commerce Clause gives Congress immense authority to regulate U.S. commerce.
Uniform Commercial Code
Institute and the National Conference of Commissioners on Uniform State Laws, analyzed common law precedents before drafting the UCC. The first draft of the UCC was adopted by most states in the 1950s and 1960s. The UCC is periodically updated to reflect current changes in law and to include new areas of law. The UCC has specific articles covering sales and leases of goods, negotiable instruments, bank deposits, funds transfers, letters of credit, bulk sales, warehouse receipts, investment securities, and secured transactions. The UCC is particularly important for business in outlining the rights and responsibilities of buyers and sellers in commercial sales. Another important article sets forth responsibilities between banks and their customers in honoring deposits and checks. The UCC helps clarify and provide consistency in U.S. law governing commercial transactions. Prior to the law’s enactment, the rules of commerce could vary widely among the states. Business organizations support the UCC because it has made the rules for doing business more predictable. The UCC is now in effect in every state, although there are still some differences in the codes of each state and not every state has enacted the entire code.
Elements of a Contract
In business law, there are a number of necessary elements courts look at to determine whether a contract is, in fact, a binding legal agreement. These four conditions can be examined in the context of our earlier example of the lemonade stand.
A valid offer and acceptance form the basis of an agreement.
■Valid offer: One of the conditions is whether there was in fact a valid offer under contract law. You can assume Tiffany offered Aaron lemonade at 25 cents a cup (and not merely advertised). That would constitute an offer.
■Acceptance: There also has to be acceptance. If Aaron had said yes, that would constitute acceptance of Tiffany’s offer.
There also has to be mutual consideration in order to form a contract. Each party has to give something of value for consideration to exist. Again, if Aaron had said yes, Tiffany provides the lemonade, and Aaron provides the 25 cents. Both parties are providing valuable consideration.
There must also be performance under the contract. In the example, performance is Aaron handing over 25 cents and Tiffany giving Aaron a cup of lemonade.
The persons entering into the contract must have legal capacity to enter into a contract and do so in good faith. Also, the purpose of the contract must be legal. In this instance, neither Aaron nor Tiffany has the legal capacity to enter into a contract because of their young age.
The elements necessary for a valid legal contract are agreement involving a valid offer and acceptance, mutual consideration, performance, and legality and legal capacity.
The various elements of a contract have to be met before a contract can be enforced as legally binding on the parties. In another example, Joe offers to sell his television to his friend Eric for $100. Joe later changes his mind and tells Eric before Eric accepts. It does not matter that Eric has $100 in his pocket and is willing to buy the television on the spot. The offer was revoked before there was acceptance under the contract. If there is not a meeting of the minds between the parties, a contract has not been formed. If parties have talked in general terms or entered preliminary discussions without meeting all of the necessary elements of a contract, there is not a legally binding agreement. Similarly, if only one person offers valuable consideration, there is not an enforceable contract; in this case, a contract would fail because of a lack of mutual consideration. Both persons have to give something of value. If a contract is for an illegal purpose, such as selling narcotics, there is not an enforceable contract because it is not a legal contract. A contract may be unenforceable because one or both parties lack legal capacity or because of a lack of mutual assent. Without the requisite elements in place, there is not a valid contract to be enforced.
ENFORCEABILITY The means by which a contract is considered valid and legally binding on the parties.
The issue of privity can come up if you buy a refrigerator from a retail store and decide you want to sue the manufacturer of that item. Under common law, privity of contract would suggest that you could sue the retail store, but you would not have a contractual right to sue the manufacturer because your contract is only with the retailer. The UCC provides warranties in some instances, and in other instances parties may have a remedy under tort law if injured by the product, or may be considered to be a third-party beneficiary under the contract.
Contracts can be drafted to allow a third-party beneficiary to have the same rights as a party to a contract. A third-party beneficiary may be someone who did not participate in entering into the contract but can stand in the place of a party to the contract. An example of a third-party beneficiary would be a beneficiary under
a life insurance policy. The person is not paying the premiums but has rights under the policy. Another example is a creditor who could have the right to enforce the provisions of a contract. Another exception to privity is an agent acting on behalf of the principal. In probate law, a beneficiary of a trust may sue the trustee to enforce the provisions of the trust.
Types of Contracts
Under contract law, there are a number of terms that are used to define the types of contracts.
An express contract is one that is clearly stated. All of the terms of the contract are clear. Each party has provided valuable consideration. The parties have agreed upon all the terms of the contract. An express contract can be either oral or in writing. An example of an express contract would be a lease of an apartment. The contract sets forth the rights of the
An implied contract is one in which there may not be a clearly stated agreement either orally or in writing. The court will look at the behavior of the parties and will determine whether a contract existed based on their actions. For example, Jim rakes leaves in Tom’s yard and Tom sends Jim a check for $30. The court may determine that a contract existed based on Tom and Jim’s behavior. This implied-in-fact contractmay be harder to prove than an express contract because the terms are not clearly stated, and the parties’ behavior could be interpreted in many different ways.
An implied-in-law contract is not really a contract, but a quasi contract. It is one in which there may be no real contract, but a court will create one to avoid one party being unjustly enriched by the actions of another party. For example, Sam sees a man from a local lawn care company come to his property and spray fertilizer on his lawn knowing that the company made a mistake and the man is spraying the wrong lawn. The lawn care man comes back two weeks later and sprays Sam’s lawn. Sam again watches the man and says nothing. Sam continues to watch as the lawn care company comes back three more times over the summer. The lawn care company has provided Sam with the benefit of spraying fertilizer on his lawn. Sam accepted the benefit of the fertilizer by watching the man spray his lawn and not objecting. Under these circumstances, a court might consider there to be a quasi contract between Sam and the lawn care company.
The terms valid, void, voidable, and unenforceable are also used to describe types of contracts. In a valid contract, the elements of the contracthave been met, and the contract is enforceable. In other words, there is an offer and acceptance, there is mutual consideration, the agreement is legal, and the parties have capacity to carry out the terms of the contract.
A void contract cannot be enforced, because it did not meet the requirements to become a valid contract under law. No contract exists. There are a number of circumstances under which a court
would not enforce a contract because it is void. An agreement in which the terms are uncertain could be considered void; an agreement in which the parties have not clarified their intent could be void; if only one party provided consideration in the contract, the contract would be void (both parties had not provided the required consideration, so the contract did not come into existence); and a contract for an illegal purpose, such as to do physical harm to another person, would be void.
A voidable contract is one in which there is a defect, so the contract may be avoided by one of the parties. For example, if an adult enters into a contract with a minor, the contract may be voidable by the child. However, if both parties proceed with the contract despite the defect, a voidable contract remains a valid contract.
An unenforceable contract is one that is not legally binding on the parties. A contract could be unenforceable for a number of reasons. Essentially, the parties would not have met all of the elements of the contract for it to become a valid contract. Some contracts, such as the sale of real estate, must be in writing. If the parties reached an agreement on the sale of a property orally but did not put the agreement in writing, it would be considered unenforceable by the court.
A unilateral contract involves an offer that entices the offeree to act. The offeror makes a promise for performance, and the offeree accepts the offer by performing. For example, Art loses his pet water terrier Poochie and places an ad in the local newspaper offering a $50 reward. Lori sees the ad, finds Poochie, and returns him to Art. Under this unilateral contract, Art is now required to pay Lori $50. This type of contract is distinguished from a bilateral contract, which involves a promise for a promise. An example of a mutual exchange of promises would be if Art hired Lori to find and return his dog. Art promises to pay Lori $50 to find his dog, and Lori promised to find and return the dog within a certain period of time. At that point, a contract is created and both Lori and Art are obligated to perform. Conversely, in a unilateral contract, Lori’s act (her performance) occurs before the contract is formed. It is her performance that creates a contract.
A bilateral contract places obligations on both parties to the contract. Both parties make promises when the contract is entered into, and both parties are compelled to act. A sales agreement is considered to be a bilateral contract. The vendor agrees to provide the product, and the customer agrees to pay for the product.
Contracts can also be described as executory or executed. An executory contract is one in which all of the obligations under the contract have not yet been met. An installment contract is an example of an executory contract. For example, making monthly payments under the terms of a lease is considered an executory contract. Entering into a contract with a builder to construct a new home would be considered an executory contract. The house will not be built for a number of months, so there are future responsibilities that need to be fulfilled before the contract is completed.
An executed contract is a contract that is completed—there is nothing left to be done. A sales contract in which the vendor has provided the product and the customer has already paid for the product is an executed contract. In the case of a real estate closing, an executed contractwould exist when the buyer has paid the seller and the seller has transferred the deed and ownership to the buyer.
Contract law also includes the term promissory estoppel. This theory applies to someone who makes a promise that reasonably induces action or forbearance on the part of another person causing that person harm. Under these circumstances, a court may require the person who made the promise to fulfill the promise if that is the only way to avoid an injustice from occurring. The court may require the person making the promise to act even when there is not a valid contract. For example, Bill, who lives in Texas, tells his cousin Alan, who lives in Chicago, that he is starting a new construction business and wants him to join him in the new venture. Alan sells his home in Chicago for a loss and moves to Texas and then learns Bill has changed his mind. Even if there is not a valid contract between Alan and Bill, Alan may be able to bring a suit against Bill on a theory of promissory estoppel. The doctrine has arisen in situations where someone promises money to a charity, and the charity later invokes promissory estoppel seeking to require the person to make the donation.
For any type of contract, there are a number of steps that must be taken in order to form a valid contract.
The first step in forming a contract is making an offer. The person who makes the offer is referred to as the offeror. An offer is a proposal to act, to refrain from acting, or to pay money for something in return from another party. The proposal is conditional upon the response from the other party. The proposal binds the offeror upon the other party accepting the offer. The person accepting the offer is referred to as the offeree.
Three Essential Elements of an Offer
In order for an offer to be considered valid, it must meet three criteria. The first requirement is that the offeror must have a serious intent to make the offer. For purposes of contract law, the intent is a willingness to be bound by the action. For example, a statement like “I will hire you today and pay you $100 to clean out my attic” would manifest a willingness to be bound to the action of paying $100 if your attic is cleaned. Contrast that statement with “I would someday like to hire you to help me at work.” Such a statement is not sufficient to demonstrate a serious intent. A person hearing that statement would recognize that it was merely a wish to do something in the future and not a specific commitment. Under contract law, it would be considered an illusory promise.
The second requirement of a valid offer is that there are clear and reasonably definite terms to the contract. The terms have to be descriptive enough to accurately convey the scope of the agreement. If the offer is too vague, a court will conclude that there was no meeting of the minds. The offer must clearly identify the parties and their responsibilities under the contract: Who are the people making the deal? Who is responsible for taking action or making payment? The contract must identify the goods or services under the contract: Does the contract describe 1 item or 100 items? Is the scope of services to paint one room or paint the entire house? The contract must also identify the price agreed upon under the
contract: Am I paying you $100 as a deposit or does that amount cover the whole contract? The contract should also identify the time required to fulfill the contract: Is the contract to be completed today or six months from now?
Under the common law, identifying the parties, price, goods or services, and timing of the contract are critical parts of the offer. The terms have to be clear and reasonably definite so that the offeree may accept the offer as it is presented. If the parties have clearly shown their intent, a court may supply a missing term. However, if the offer leaves out a key term, a court will conclude that the parties’ intent was so uncertain that no contract exists.
A recent Texas case highlights the problems that can arise when terms are not reasonably clear or definite. Ton’s Remodeling and Fung’s Kitchen agreed that remodeling construction services would be offered, and the restaurant would be invoiced for the charges “as usual, customary, and reasonable fees.” The restaurant later disputed $15,239 in charges along with other services provided by Ton’s. The court refused to enforce the agreement, finding there were no specific statements of types of construction under the agreement, the services to be provided were not clear, the fees were in dispute, and the duration of the construction project was never agreed upon. Blanket invoice statements were insufficient to discern the intent of the parties.
The third essential element of a valid offer is that an offer must be communicated to the offeree in order for it to be effective. If the offeror makes a promise but does not communicate it to the offeree, there is no agreement between the parties. There can be no meeting of the minds if the promise has not been communicated to the other party. For example, Jon cuts his neighbor Joe’s lawn, noticing it is long and realizing that Joe is out of town. Joe’s sister tells Jon that Joe was planning to pay him $25 to cut his lawn. There is no contract. Jon cut the lawn because he wanted to help his neighbor, and there was no meeting of the minds to form a contract.
An offer can be communicated in numerous ways. It can be communicated orally, in writing, electronically, or by the acts of the parties. The law requires that certain types of contracts be in writing. Otherwise, the method of communicating the offer is up to the offeror.
The issue of whether the communication is an offer or merely an invitation to bargain commonly arises in commercial settings. Courts have generally viewed advertising as an invitation to bargain rather than constituting an offer. It is usually only when a customer comes into the store, and there is an agreement on the product and price, that a contract is formed.
Rewards are another means of communicating an offer. For example, if Alison places an ad in the local newspaper agreeing to pay $50 for the person who finds her lost diamond broach, her ad can be considered a contract offer. The contract would not be completed until the broach is recovered and returned to her.
Invitations to an auction normally are not considered offers under contract law but are considered more in the nature of invitations to bargain. The auction gives the bidder a seat at the table. At an auction, the individual bidder is the offeror and the auctioneer is the offeree or acts on behalf of the offeree.
CASE STUDY: EXAMPLES OF AN OFFER
In most instances, an advertisement does not constitute an offer but rather an invitation to bargain. However, there is a classic 1957 case involving the Great Minneapolis Surplus Store in which the Minnesota Supreme Court found that advertising did in fact constitute an offer. The Minneapolis store ran newspaper ads two weeks in a row. The first ad stated “Saturday 9 a.m. Sharp/3 Brand New Fur Coats Worth to $100/First Come First Served/$1 Each.” The second ad stated “Saturday 9 a.m./2 Brand New Pastel Mink 3-Skin Scarves Selling for $89.50/Out They Go Saturday. Each . . . $1.00/ 1 Black Lapin Stole Beautiful, worth $139.50 . . . $1.00 First Come First Served.”
Morris Lefkowitz was first in line on both Saturdays to buy the furs and was refused on the basis that a “house rule” policy meant the furs were intended for women only. The Minnesota trial and supreme courts rejected the house rule argument. The courts found that the terms of the first ad were not clear enough to constitute an offer. The supreme court found that the trial court properly disallowed Lefkowitz’s claim for the value of the fur coats since the value of these articles was speculative and uncertain: “The only evidence of value was the advertisement itself to the effect that the coats were ‘Worth to $100.00,’ how much less being speculative especially in view of the price for which they were offered for sale.”
However, Lefkowitz was entitled to the stole advertised for $1 in the second ad. The Minnesota Supreme Court concluded: “We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff, having successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by the advertisement, and having offered the stated purchase price of the article … was entitled to performance on the part of the defendant.”
In business settings, parties use a letter of intent, sometimes referred to as a memorandum of understanding, or similar type of communication to focus negotiations during contract discussions. A memorandum of understanding may either be nonbinding or binding on the parties. In complex negotiations, this type of letter may be used at the beginning of negotiation to discuss the scope of the negotiation as part of a preliminary discussion. The letters are sometimes used as a basis to demonstrate good faith in the transaction. A memorandum of understanding may also contain terms limiting the parties to negotiate with each other
for a specified period of time or require confidentiality as the negotiations proceed. Courts reviewing these letters may consider them to be unenforceable in that the parties were merely agreeing to agree, or in other instances consider them to be binding contracts. Care must be taken in drafting a letter of intent so that it accurately conveys whether the parties wish to be bound by its terms.
COUNTEROFFER A proposal to change an offer.
Once an offer has been made, the offeree has the power to accept the offer and create a contract. The offeree must accept the offer as presented to bind the offeror. If the offeree proposes a change to the offer, it is considered to be a counteroffer. Under common law, the legal effect of a counteroffer is to reject the offer. The offeree no longer has the power to accept the original offer. When making a counteroffer, the offeree is in effect making a new offer. A counteroffer then must be accepted in order to form a contract.
For example, Jan offers to sell her concert tickets to Alex for $250, and Alex proposes to pay $200 for the tickets. Alex is making a counteroffer that Jan may reject. If Alex then says he will pay Jan the entire $250, she is not bound to accept Alex’s offer and may sell the tickets to someone else. By making a counteroffer, Alex rejected Jan’s offer and there is no further obligation on Jan’s part to make a new offer to Alex.
A counteroffer is not restricted to differences over price. For example, Ann agrees to pay $1,200 per month under the terms of a lease offered to her for a house she wishes to rent. In reviewing the lease, she changes the occupancy date and adds that the kitchen must be painted before occupancy. Her changes in the lease are a counteroffer.
Counteroffers can also arise in employment settings. James lives in California and is offered a job in Chicago. James responds to the offer stating he accepts the salary offer and is looking forward to his new position. In his acceptance letter, James states he will need to start eight weeks later than requested so that he can finish up his current work assignments. James’s response may be considered a counteroffer rather than an acceptance of employment because his response introduces a new condition to the contract.
Courts have distinguished between a counteroffer and a mere inquiry that questions the terms of the contract. A mere inquiry does not terminate the offer because it simply proposes a change to the contract. An inquiry seeks to clarify the meaning of the offer. For example, a seller offers to ship books to a buyer, and the buyer asks the seller whether the books will be sent via U.S. mail or by FedEx. The buyer is asking to clarify the means of shipment. The buyer is not proposing a change in the terms of the offer. However, if the buyer says he will accept shipment only on the condition that the books arrive by the next day, it may be a counteroffer introducing a new term that was not contemplated as part of the offer.
The UCC modifies some common law contract concepts for commercial sales. UCC 2-207 addresses issues relating to additional terms in acceptance or confirmation of a contract.
This section of the UCC is commonly referred to as dealing with a “battle of forms” between parties. Two companies may have different sets of forms they routinely use in sales transactions. The forms may have certain sections that disagree, but the overall intent of the parties is to form a contract. Under common law, there would be no agreement, because a change from the offer would be a counteroffer rejecting the offer. Under the UCC, additional terms may be accepted under certain circumstances based on the behavior of the parties and the records of the transaction.
Every contract involves at least two parties, as illustrated in Figure 6.1:
■Offeror—the party who makes an offer to enter into a contract
■Offeree—the party to whom an offer to enter into a contract is made
FIGURE 6.1 Parties of a Valid Contract Agreement
ACCEPTANCE An expression by the offeree agreeing to the terms of the offer.
The next step in contract formation is acceptance. Acceptance is an expression by the offeree agreeing to the terms of the offer. Acceptance can be expressed by words or actions. By accepting the offer, the offeree is creating a contract. A contract requires at least two parties, and there is no contract formed until the offeree accepts (see Figure 6.1). A unilateral contract may require an act before there is acceptance. A bilateral contractmay be formed by mutual promises. There has to be some sort of demonstration of a commitment by the offeree to show an acceptance of the contract. The act of acceptance locks the parties into the terms the contract.
For example, Luis offers to sell Melissa a video game for $20. Melissa pulls a $20 bill from her purse and hands it to Luis. Her action of handing Luis the $20 bill would show acceptance of the contract. By handing Luis the money, she is binding Luis to the contract. Luis must provide Melissa the game. At this point, Luis is bound to honor the agreement. In this example, acceptance would also occur if Melissa promised to pay Luis $20 rather than handing him the money. Her promise would constitute acceptance. When acceptance occurs, the parties are bound by the agreement, whether it is through words or actions.
The offeree also has the power to reject the offer outright and end negotiations. If the offer is rejected, the offeror is free to bargain with a new party. A rejection of the offer terminates the offer. Upon rejection, the offeree no longer has the power to bind the offeror to the agreement. Normally, there is no continuing obligation to keep an offer open once it is rejected. If Melissa tells Luis that she does not want to buy the video game, that statement terminates Luis’s offer. He is free to negotiate with someone else. If Melissa later offers Luis $20 for the game, he is not bound to accept the money.
As previously discussed, under common law acceptance has to be the mirror image of the offer. Any change to the offer is considered a rejection of the offer. The act of making a counteroffer constitutes a new offer that has to be accepted
by the other party before acceptance occurs. If Melissa expresses to Luis a willingness to pay $15 for the video game rather than $20, her statement is a counteroffer. The effect of the counteroffer is to terminate Luis’s offer. Luis is free to accept or reject Melissa’s counteroffer. If he rejects Melissa’s counteroffer, he is free to offer the game to someone else. If Luis says nothing but accepts Melissa’s money, his actions indicate acceptance of Melissa’s counteroffer. At that point, he is legally bound to provide Melissa the game. The new terms of the contract are those presented under Melissa’s counteroffer and accepted by Luis.
The duration of an offer can vary. The mere passage of time can void an offer. An offer can be quite specific in setting the duration of the offer; for example, “This offer expires at the close of business today.” If the offeree responds the following day, the offeror is no longer bound by the offer because it has lapsed. The duration of the offer was a condition of acceptance. No contract can be formed because the offeree cannot meet a condition of acceptance. When the duration is not clearly stated or is silent, courts will consider what would be a reasonable period of time for the offer to remain open. A reasonable period of time will be determined based on the facts or circumstances of the offer. Determining what is a reasonable time can vary significantly based on the nature of the offer. For example, a reasonable duration of an offer to buy basketball tickets for a game two days from now may be different than for a game scheduled two months from now. An offer to sell a commodity such as gasoline, whose price may fluctuate widely, would likely have a shorter reasonable time than an offer to sell a car. In either case, if the offeree does not act on the offer, the offer will expire after a reasonable period of time.
How the offer is communicated may also affect what is considered to be a reasonable time to keep the offer open. If an offer is sent by e-mail stating “I look for a prompt response,” the nature of the communication may signal urgency in responding to the offer. Similarly, if an offer is communicated by messenger it may require a more immediate response than if it is communicated by regular mail. The court looks objectively at the facts of the case to determine what a reasonable time would be under the circumstances.
An offeror can normally revoke an offer any time before it is accepted. The reason is that there is no binding commitment between the parties at the time of the offer. There is no contract in place until acceptance occurs, so there is no legally binding reason why the offer must remain open. The offeror normally can retain control of the power to revoke an offer even if he or she promises to keep it open for a specified period of time. For example, if Luis tells Melissa he has changed his mind before she accepts his offer to buy the video game, the offer is revoked. Even if Luis tells Melissa he will keep the offer open for two days, he can revoke it sooner. There is no contract until acceptance.
An offeror must be clear with his or her words or actions in revoking an offer for it to be effective. In a sales negotiation, telling a buyer that the item is no longer for sale or that it has already been sold would be a clear revocation of the offer. A statement by the seller that he has also been talking to a third party about the sale of the item may or may not be sufficient to revoke the offer. Depending upon the circumstances, a court may conclude that the offer remained open because it was not expressly revoked.
Although an offer usually can be revoked at any time before acceptance, statutes require certain types of contracts to remain open. For example, a stock option contract may require an offer to be open for a certain period of time. Also, if a party has given something of value or consideration to keep the offer open, there may be a continuing obligation to keep the offer open for a specified period of time. For example in the sale of a piece of machinery worth $1,000, a potential buyer gives the seller $50 to keep the offer open for three days and tells the seller to keep the money if the potential buyer does not purchase the machinery within that period of time. The $50 may be considered something of value to keep the offer open separate from an agreement to buy the machinery.
An offer may be revoked due to death or incapacity prior to acceptance. Under common law, formation of contracts requires mutual assent of the parties and a manifestation of that assent. Following this reasoning, an offeree’s ability to accept a contract was terminated upon the death or legal incapacity of the offeror or offeree prior to acceptance. If a party dies or does not have legal capacity, the offer can no longer be accepted. Courts have generally held that death or permanent incapacity terminates the offer without any notice required. Under some circumstances, courts have found that persons who are partially mentally disabled or temporarily insane do have the ability to enter into contracts that are voidable.
MAILBOX RULE A rule stating that acceptance of a contract is generally effective when it is mailed.
Acceptance can be communicated by a variety of means—a face-to-face meeting, the U.S. mail, or various forms of electronic communications. In a unilateral contract, acceptance may be communicated by performing the act requested under the contract. Under common law, an offeror also has the right to place restrictions on how acceptance is communicated. An offeror may control the timing, location, and means of acceptance as conditions of the contract. If the offeree ignores these restrictions, it may limit the party’s ability to accept the contract. Courts also generally require an offeree to accept using a reasonable means of communication.
A whole series of cases has developed because of timing of acceptance when using the U.S. mail. A problem arises if an offeror revokes an offer, but the offeree has already mailed an acceptance. Under the mailbox rule, acceptance of a contract is generally effective when it is mailed. For example, on day one Jon drops a letter in the mail to Joe accepting his offer. On day two Joe revokes the offer. On day three Joe receives Jon’s acceptance letter. Jon’s acceptance was effective when it was sent, so there is a contract.
Mobile phone text messages pose even more significant problems than e-mail. Given the brevity of text messages, there can be problems in whether they constitute accurate expressions of a party’s wishes. An MMS message exchange may be only a few words long. Is there enough information in the message to clearly articulate an offer? Is the message too vague to indicate an offer? Another question text messages raise is whether or not they convey the serious intent of the parties. Does a text message with a smile emoticon constitute acceptance of a contract offer? Depending upon the circumstances, there could be issues surrounding whether a text message would be admissible in court. How is the record of the message preserved? Does it convey the entire communication regarding an offer and acceptance?
Does E-mail Satisfy the Mailbox Rule?
Phone calls, e-mails, and text messages have alleviated some of the contractproblems involving communication delays via the U.S. mail, but they have also created a host of new problems. The speed of electronic communications allows parties to communicate an offer and acceptance quickly. However, along with this convenience come new drawbacks. If parties are negotiating a complex business deal, the question may arise as to whether relying on a string of e-mail messages is the best way to demonstrate the terms of an offer and acceptance. In addition, an e-mail or a text message may not involve as much thought as drafting a formal document. As a result, the correspondence may convey terms that are less clear than if presented in a detailed, formal document.
There are also issues regarding the security of e-mail. E-mail can easily be circulated widely beyond the intended recipients. If the document is intended to be private, e-mail may not be the best way to communicate. The text of an e-mail message can be easily manipulated, too. If the text is forwarded to other people, portions of the original message may be lost or edited. E-mail attachments may be unintentionally left off of messages so that important conditions of the offer may not be communicated along with the text message. This could create contractterms quite different from those intended in attachments.
Various statutes address electronic communications. The Electronic Signature in Global and National Commerce Act (E-Sign) and the Uniform Electronic Transactions Act (UETA) are two examples. E-Sign and UETA provide rules for electronic signatures and electronic transactions. The UCC also has a number of provisions regarding acceptance of contracts. The growing dependence on various forms of electronic communications raises new issues—many of which are governed by statutes.
Many issues can arise in contract disputes over what constitutes an suitable form of communication of an offer and acceptance. An offer can limit the form of acceptance. Courts will generally look to the terms of the offer as to whether acceptance was appropriate under the circumstance. When the means of acceptance does not match the offer, a court will look at the objective intent of the parties to determine whether the contract was accepted.
Are text messages valid for contractnegotiation? Are they admissible in court? Can erased text messages be subpoenaed? Is a text message the same as an e-mail or a physical mailing with regard to the mailbox rule?
For example, Ann’s offer requests that Amanda respond “by letter via U.S. mail received by this Friday.” A court may look at the offer as one of duration and requiring written acceptance. If Amanda chooses an alternate means of communicating acceptance, it may be appropriate as long as it meets the conditions of the offer. Amanda drafts a letter accepting Ann’s offer, and it is delivered by messenger on Friday. This would likely be considered to be valid acceptance because it is timely and in writing. The fact that acceptance was sent by messenger or by a private commercial service such as FedEx would not terminate the offer. The result may be different if Amanda made a telephone call on Friday afternoon and told a receptionist that Ann’s offer was accepted. Under common law, a court may conclude that
this was not a valid acceptance of Ann’s offer. An oral acceptance would not be considered to be effective because Ann required acceptance in writing.
However, if the parties exchange an oral commitment of an offer and acceptance during face-to-face negotiations, they usually would be bound unless they stated the agreement had to be in writing. A court would enforce an oral agreement concluding that the parties intended to be bound by their oral expressions. Similarly, if the parties had face-to-face negotiations and later concluded the deal over the phone, their statements would still be considered oral expressions of intent. It would likely not matter that these oral expressions occurred over the phone rather than face to face.
Consideration is something of value that induces parties to form a contract. It is the reason the parties are entering into a contract. Without consideration, there is no contract. It may involve a benefit or right gained under the contract. It may involve forbearance by a party preventing them from doing something to which they may otherwise be entitled. Consideration can take many forms.
CONSIDERATION Something of value that induces parties to form a contract; the reason the parties are entering into a contract.
Types of Consideration
Money is the most common form of consideration. It is the consideration used in sales contracts. For example, Brandi pays the grocery store $3 for a loaf of bread. The money that Brandi pays the store is her consideration under the contract. It is the inducement that the grocery store relies upon in providing her the bread. In most instances, courts will not be concerned about whether the price the parties agreed upon is a fair price for purposes of determining consideration. As long as there is something of value exchanged, there normally will be adequate consideration under a contract.
The most common forms of consideration are money, property, goods, commodities, services, and the promise not to sue.
Property or goods are another common form of consideration. An exchange of personal property such as a car, television, or clothing may form the basis of consideration. Real property such as land or a house may be a form of consideration. Commodities or agriculture products may be forms of consideration. The test for consideration is whether there is value to the item. A barter agreement with no cash being exchanged is sufficient to form consideration. For example, Corey offers to provide Joe his business law textbook in exchange for Joe’s English literature textbook. There is no money being exchanged, but each party is giving something of value to the other party. Corey’s consideration would be his business law textbook. Joe’s consideration would be his English literature textbook. There are mutual obligations, so valid consideration exists.
Services can be a form of consideration. Many contracts involve some sort of service by one party to the other party. The act of providing that service constitutes sufficient consideration under a contract. This may range from professional services, consulting work, day care, or practically any other type of service in which the party is paid for the service. For example, Ann pays her accountant Jack to prepare
her tax return, and Abe hires Green Trees tree service to cut down a tree in his backyard. A mutual exchange of services is also valuable consideration. Jack the accountant hires Green Trees tree service in exchange for doing the company’s taxes. There is no cash exchanged, but mutual services constitute valuable consideration.
A promise not to sue may be consideration as well. There is forbearance on a right or detriment that has occurred because of the action of the other party. For example, Tom throws a baseball through his neighbor Tim’s window. Tim returns home after a thunderstorm to find his prized Persian rug ruined and threatens to sue Tom. In exchange for Tim’s promise not to sue, Tom pays for the window and the rug. In business situations, this happens when one party pays the other a fee to avoid a lawsuit. For example, a manufacturer fails to deliver a shipment of metal on time to the supplier, and the parties agree on a payment to settle the dispute and avoid a lawsuit.
As discussed previously, in some instances courts will view charitable pledges as binding commitments. If there is some action or inaction by the charity in exchange for the pledge, there may be consideration. In other instances, the pledge may be enforced as a gift or enforced under a promissory estoppel theory. The enforceability of a pledge may also be a question of statutory law.
Accord and Satisfaction
ACCORD AND SATISFACTION An accord constitutes a new agreement; satisfaction is performance or settlement of the dispute under that agreement.
Accord and satisfaction is another term that can arise in contract law consideration. Parties may enter a new agreement to settle a dispute over a contract. An accord is an agreement to pay a certain amount to discharge an obligation under an old contract, or to settle a disagreement as to the amount of the obligation. Satisfaction is the performance under the new agreement. In other words, the new contract replaces the old contract. One of the questions in reaching the new agreement is whether there is consideration for the new agreement. There must be consideration for the accord to be valid. The question of when the new agreement becomes effective may also arise. Is the new agreement effective when it is entered into, or does there have to be specific action completed before satisfaction occurs? If there is no satisfaction, a party may seek to enforce the original contract.
Consider the example of an owner of a new home who hires a landscaper to plant numerous trees and bushes throughout the property over the summer. The contract calls for $2,000 down and three additional payments of $1,000 each. After some of the trees and bushes die, the homeowner refuses to make the final two payments to the landscaper. Instead, the homeowner writes a check for $800 and includes the notation “Payment in Full.” The landscaper cashes the check but then demands more money from the homeowner. Here, the check represents the homeowner’s offer of an accord contract. The landscaper’s act of cashing the check is acceptance of the offer and is the satisfaction—performance under the accord contract.
Contract versus Gift
GIFT Something that is freely given and does not require action for it to be received. A promise made without asking for anything in exchange lacks consideration and, therefore, is not an offer but a promise of a gift.
In terms of consideration, it is important to distinguish between a contract and a gift. A gift lacks consideration under contract law. A gift cannot be enforced as a contract because there are not mutual obligations on the parties. A gift is freely given and does not require action in order for it to be received. For example, a promise by a father to
buy his son a new mobile phone for his birthday cannot be enforced under contract law because there is no consideration for the promise made by the father.
CASE STUDY: ACCORD ANDSATISFACTION EXAMPLE
Parties may enter a new agreement to settle a dispute over a contract. If done properly, an accord constitutes a new agreement and satisfaction would be performance or settlement of the dispute under that agreement. The new contract replaces the old contract.
In some cases, the parties disagree whether accord and satisfaction are met. In one example, E. S. Herrick Co. supplied blueberries to Maine Wild Blueberries for a number of years without incident or problems over the contract price. In 1990, under a new president, Maine Wild agreed to pay “10 cents per pound over field price.”
That year, Maine Wild announced the field price was going to be $0.30 a pound, and various dissatisfied growers met with the company and let them know that other buyers were paying a field price as high as $0.40 a pound. Maine Wild agreed to raise the price from $0.30 pound to $0.33 a pound.
Maine Wild sent payment to Herrick with a cover letter stating, “Enclosed is a check for $12,407.55 representing final settlement for blueberries that Maine Wild purchased from you in 1990.” The lower court found there was no accord and satisfaction because Maine Wild was simply paying Herrick what it was owed. The court stated the price was unilaterally set by Maine Wild and concluded that if the price had been negotiated it would have been $0.35 a pound. The lower court awarded Herrick damages of $24,815.10.
The appellate court reversed the lower court decision, stating that it has consistently concluded that a check bearing the language “full and final payment” or “in satisfaction of all claims” creates an accord and satisfaction when cashed or deposited by the payee. The court noted that in this instance, although the language was in a letter and not on a check, the intent was the same and provided Herrick sufficient notice. The court concluded that by cashing instead of returning the check, Herrick bound the new terms of the accord and satisfaction.
PROMISSORY ESTOPPEL A doctrine that states that courts may create a contract under a quasi contract theory in order to avoid an injustice from occurring.
As previously discussed, sometimes courts will enforce a promise under a theory of promissory estoppel. This can occur when consideration is not clear, but the court will look at the situation from a fairness standpoint. A court may create a contract under a quasi contract theory in order to avoid an injustice from occurring. It does not happen often, but courts can create these contracts even when all the elements of a contract are not present. For promissory estoppel to occur, there first must be a promise. The person making the promise should reasonably expect that another party will act or refrain from acting based on that promise. There also has to be a substantial change in circumstances by the person relying on the promise. The person must have acted based on the promise and not for some other reason. A court can enforce the promise only if it is the only way injustice can be avoided.
One of the important cases invoking this theory involved a dispute in 1965 between Joseph Hoffman and Red Owl Stores in Wisconsin. Red Owl promised that for the sum of $18,000 it would provide Mr. Hoffman with a franchise. Hoffman sold his grocery store and inventory on the promise he would be established in a new store. He also sold a bakery and made a series of other commitments based on various promises by Red Owl. At the request of Red Owl, he moved so that he would have experience working in a Red Owl store. Red Owl did not honor its promises and later argued Hoffman could not be compensated for his losses because there was no valid contract between the parties. The Wisconsin Supreme Court recognized Mr. Hoffman’s claims under a theory of promissory estoppel, noting it “supplies a needed tool which courts may employ in a proper case to prevent injustice.” The court found that Mr. Hoffman had complied with all the terms of the negotiations with Red Owl. Even if there was not a valid contract, the court concluded Hoffman had a right to damages based on the promises made to him by Red Owl.
Charitable pledges are technically gifts but can be enforced under a promissory estoppel theory.
Bankruptcy law can also intersect with contract law in the area of consideration. A debtor who has no assets can receive a discharge under a Chapter 7 bankruptcy. The bankruptcy discharge will wipe the slate clean so the debtor no longer has to repay the debt. After the discharge, the creditor cannot seek enforcement of the debt. However, there is a possibility that a debtor may revive the debt even after a discharge by making a new promise to pay the debt. For example, Art receives a Chapter 7 discharge including $800 owed to his mechanic. He later goes back to his mechanic for an oil change. While there, he tells the mechanic he is sorry about not paying him the $800 and promises to pay him for the previous debt. Art later changes his mind and refuses to pay the mechanic $800. Art’s original debt may now become enforceable because of his new promise to pay.
ENFORCEABILITY OF CONTRACTS
For a contract to be enforced, it must meet a number of conditions. The parties to the contract must have legal capacity to enter into a contract; the subject of the contract has to be legal; and there must be mutual assent between the parties. In addition, a contract will not be enforced if it is induced by fraud or if one party misrepresents the terms of the contract. A court also will not enforce a contract that is entered into under duress or if it finds there to be undue influence upon a party entering into the agreement.
LEGAL CAPACITY The power or fitness of a party to enter into a c
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