Unit 3 CONTRACT LAW 1

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1 Unit 3 CONTRACT LAW 1

2 WHAT IS A CONTRACT? A legally binding agreement THAT requires a bargain Offer + Consideration = Acceptance 2

3 WHAT IS IN A CONTRACT? Offer-- proposal by one party to another to create legally binding agreement. Acceptance nd parties willingness to go along with lst parties proposal (offer) Consideration -- whatever is exchanged for something else THE BIG QUESTION IN A CONTRACT: Did everyone give up something? 3

4 Developer promised to pay Graphic Designer $5000 for creating certain promotional materials for Developer's multimedia work. Graphic Designer created the materials and delivered them to Developer, as required in the contract. Developer admits that the materials meet the contract specifications. IS THERE AN OFFER? IS THERE ACCEPTANCE? IS THERE CONSIDERATION? IS THERE A BINDING CONTRACT? 4

5 WHAT ARE THE TWO PARTS TO AN AGREEMENT? 5

6 THE EXCHANGE OF SOMETHING FROM BOTH PARTIES IS CALLED? 6

7 CAPACITY Legal ability to enter a contract CAPACITY HAS TO DO WITH BEING CAPABLE Did both parties know what they were doing when they entered into the contract? 7

8 INFANCY If under age of 18, can disaffirm an agreement if NOT for the necessity of life WHY 18: BELIEF THAT YOU CAN BE TAKEN ADVANTAGE OF What are necessities of life: Capacity continued food, clothing, shelter, medical care Disaffirm: deny, terminate 8

9 CAN SEAN VOID THE CONTRACT? Sean, 17, a snowboarder, signs a longterm endorsement agreement for sportswear. He endorses the products and deposits his compensation for the endorsements for several years. At age 19, he decides he wants to void the agreement to take a better endorsement deal. He claims he lacked capacity when he signed the deal at 17. 9

10 Two tests: Capacity continued MENTAL INCAPACITY 1. COGNITIVE TEST Did you understand the nature and consequences of the transaction at the time it was entered into? 2. MOTIVATIONAL OR AFFECTIVE TEST Because of a mental illness or defect, a person was unable to act in a reasonable manner with respect to the transaction. Did the other party know or should have known of the condition? 10

11 CAN SMALLEY CONTRACT? Mr. Smalley contracted to sell an invention, and then later claimed that the contract was void because he lacked capacity. Smalley had been diagnosed as manic-depressive and had been in and out of mental hospitals. His doctor stated that Mr. Smalley was not capable of evaluating business deals when he was in a "manic" state. The manic phase of the illness under discussion is not, however, a weakness of mind rendering a person incompetent to contract. 11

12 UNDER WHAT AGE CAN YOU DISAFFIRM A CONTRACT? WHAT DOES DISAFFIRM MEAN? 12

13 TYPES OF CONTRACTS: EXPRESS CONTRACTS CLEAR STATED. KNOW PARTY S INTENT TWO TYPES OF EXPRESS CONTRACTS: 1. ORAL ONLY SPOKEN WORDS 2. WRITTEN CONTRACTS: WRITTEN TERMS IF YOU DON T TRUST A PERSON S WORD, OR MONEY INVOLVED AND THINK A PROBLEM WILL ARISE: GET IT IN WRITING Statute of Limitations on contracts: ENFORCEMENT: ORAL 6 YRS. WRITTEN 15 YRS. 13

14 IMPLIED CONTRACT RESULTS FROM ACTIONS OF PARTIES 1. LOOK AT THE FACTS 2. CAN RESULT WITHOUT SINGLE WORD SPOKEN WHAT ARE THE FACTS YOU LOOK AT? THE ACTIONS INVOLVED 14

15 QUASI CONTRACT CONTRACT WOULD HAVE BEEN CREATED EXCEPT FOR UNFORESEEN CIRCUMSTANCES (TROLLEY EXAMPLE) Quasi contracts determined by two things: 1. Facts 2. Law 15

16 WHAT TYPE OF CONTRACT IS CREATED THROUGH ACTIONS OF PARTIES? WHAT TYPE OF CONTRACT IS CREATED THROUGH CLEARLY STATED TERMS EACH PARTY UNDERSTANDS? WHAT TYPE OF CONTRACT IS CREATED THROUGH UNFORESEEN CIRCUMSTANCES -- CONTRACT WOULD HAVE BEEN CREATED UNDER NORMAL CIRCUMSTANCES? 16

17 OTHER TYPES OF CONTRACTS VALID CONTRACT good contract Six elements to a good contract: 1. offer 2. acceptance 3. agreement 4. consideration 5. capacity 6. legality 17

VOIDABLE CONTRACT --defect in contract (legal reason?

18 VOID CONTRACT Other types of contracts cont. --contract that is not good --one element missing would void contract VOIDABLE CONTRACT --defect in contract (legal reason?) --can continue or void EXAMPLE: CONTRACT BETWEEN MINOR AND ADULT WILL VOID CONTRACT FOR BUT NOT. Why voidable for minor? 18

19 Other types of contracts cont. BILATERAL CONTRACT --two sides two promises --promise for a promise UNILATERAL CONTRACT --uni means one -- promise for an act One person promises to do something if and when the other person performs some act. 19

20 Other types of contracts cont. EXECUTED CONTRACT --completed contract when both parties FULFILL their part of the bargain. EXECUTORY CONTRACT --incomplete contracts --one party fulfills obligation to contract --other party has not completed their part of the bargain. 20

enforceable Modern Trends Promissory Estoppel --If agreement

21 COMMON LAW CONTRACTS VS MODERN TRENDS OF CONTRACTS Common Law --all contracts must be agreements --not all agreements enforceable Modern Trends Promissory Estoppel --If agreement made and you accept in good faith and injured, can sue for monetary damages. 21

22 WHAT IS THE DIFFERENCE BETWEEN A VOID CONTRACT AND A VOIDABLE CONTRACT? 22

23 I OFFER TO PAY YOU $5 IF YOU WASH MY CAR UNILATERAL OR BILATERAL CONTRACT? I WILL SELL YOU MY CANDYBAR FOR $.50, I WILL BUY YOUR CANDYBAR FOR $.50 UNILATERAL OR BILATERAL CONTRACT? THIRD PARTY OFFERS TO BUY MY CANDYBAR FOR $ UNILATERAL OR BILATERAL CONTRACT?

24 OFFER A proposal by one party to another party to enter a contract OFFEROR Person making offer Person who receives the offer OFFEREE 24

25 THREE BASIC REQUIREMENTS OF A BASIC OFFER: Offer made to you must be definite and certain. (ex: newspaper ad, catalog, price lists invitations to negotiate NOT OFFERS HOWEVER, IF AD SAYS this price good for given period can hold to that price 2.Offer must be communicated to offeree. 3.Offer must be made seriously and intent to be enforceable obligation. (I will sell you my stapler for $5; I will buy your stapler for $5 OFFERS DONE IN JEST OR UNDER EMOTIONAL 25 DISTRESS NOT REAL OFFERS.

26 MAILBOX RULE: APPLIES ONLY TO ACCEPTANCE When an offer is sent, acceptance takes place when it is mailed, faxed, phoned. acceptance takes place when it is received in readable form in the designated inbox. It does not have to be opened. If you want to withdraw an offer, withdrawal does not take effect until offer is received. 26

27 ed When arrives in readable form at system designated received 27

28 EXCEPTION TO MAILBOX RULE: IF YOU DO NOT RESPOND AS TOLD TO AN OFFER EX: Please mail your response to our offer and you fax it. THE OFFER IS NOT ACCEPTED UNTIL RECEIVED GENERAL RULE: UNLESS SPECIFICALLY INDICATED, ANY REASONABLE MANNER OF ACCEPTANCE IS ACCEPTABLE UNLESS TOLD OTHERWISE. EX: If mailed offer, I respond by fax Acceptance when faxed unless told to mail. 28

29 REVIEW OF MAILBOX EXAMPLE Receive offer on April 10. Letter dated April 1, offer says good for 10 days. Good until If letter dated April 1 and offer good for 10 days from date of letter. You receive the letter on April 10. Is offer still good? 29

30 A makes an offer to B on January 1; A then decides to revoke the offer on January 2 and puts a letter in the mail to B revoking the offer; however, B puts a letter accepting the offer in the mail on January 3, and does not receive A's revocation letter until January 4. WHEN WAS A CONTRACT FORMED? CAN THE OFFER BE REVOKED? #1 30

31 #2 A makes an offer to B on January 1, and initially B intends to reject the offer on January 2 by putting a letter in the mail to A rejecting the offer. However, the next day B changes his mind and sends a fax to A accepting the offer. IS THE OFFER REJECTED OR ACCEPTED BY A? 31

32 REQUIREMENTS FOR ACCEPTANCE 1)Acceptance cannot change terms of original offer in any way 2)Mirror Image Rule acceptance mirrors offer. 32

33 COUNTEROFFER Any change in the terms of the offer that means the offeree has not really accepted the offer. Ex: House on market for $30,000. $30,00 is too much. I will offer $25,000 for your house. If counteroffer made by offeree, original offeree becomes offeror. 1)If counteroffer made by offeree, offeror becomes offeree to accept/reject offer. 33

34 EXCEPTIONS for MERCHANTS Merchants can make minor changes as long as it does not change the basic terms of the contract. Merchants can revoke an offer before acceptance Firm Offer can be good for max. of 90 days. Terms are: it must be in writing, it must be clearly stated. Ex: An event planner extended a firm offer to accept the company's proposal for a private catered dinner party. 34

35 OFFER AND ACCEPTANCE OFFER TERMINATION 1. DURATION STATED IN OFFER most common way to end offer 2. NO DURATION STATED IN OFFER reasonable time frame one month reasonable 3. DESTRUCTION OF SUBJECT MATTER unknown to both, subject matter destroyed 4. DEATH OR INSANTIY OF PARTY -- BEFORE offer accepted, offeror dies or insane at time of offer. If offeror dies AFTER offer made, must deal with guardians or person(s) handling estate 5. SUPERVENING ILLEGALITY an offer is made and then it becomes illegal to perform it. 35

36 How do most offers end? BY ACTION OF THE PARTIES Revocation of Offer withdraw offer Irrevocable Offer paying someone money to keep an offer open Firm Offer - offer good for 3 months if nothing stated. MUST BE IN WRITING. Rejection NO. That ends offer immediately Counteroffer ends first offer Inquiry - As long as one does not say NO, original 36 offer is still on the table

37 LET S REVIEW WHAT WE ALREADY KNOW ABOUT CONTRACTS Contracts are legal agreements & enforceable The age of majority or legal adult age is 18 The age of minority or minor age is under 18 Disaffirm means your intention to get out of a contract You cannot disaffirm a contract for necessities of life: food, clothing, shelter, medical need Six elements of a valid contract are: offer, agreement, acceptance, consideration, capacity, legality 37

38 DEFECTIVE AGREEMENT Genuine agreement disrupted by fraud, misrepresentation, mistake, duress, undue influence. 38

39 FRAUD Intentional misrepresentation, deliberate deception 39

true Ryan puts his summer cottage up for sale.

40 MISREPRESENTATION (1-2) 1. CAN BE INNOCENT Both parties believed information provided was true but it was not true Ryan puts his summer cottage up for sale. Mary, interested in buying it, asks if it had termites. Ryan, unaware of the termite problem, answers NO. Mary buys the cottage and discovers termites. Can Mary get her money back? 40

41 MISREPRESENTATION continued (1) 2. INTENTIONAL --CHEAT SOMEONE KNOWINGLY Andrew s basement floods every time it rains. When Stephanie, a potential buyer, asks about water in the basement, Andrew says the basement is dry. After the first heavy rain, Stephanie s new home basement is flooded. Is Andrew guilty of a crime? Can Stephanie sue for damages? 41

42 MISTAKE 1. UNILATERAL MISTAKE One of the parties makes a mistake on a material fact OR in judgment, value, or quality out of carelessness. OR 2. BILATERAL(MUTUAL) MISTAKE Deals with existence of subject matter. Contract can be voided by either party because both parties mistaken. Nature of mistake determines whether courts 42 will help you.

43 UNILATERAL OR BILATERAL MISTAKE (1-2-3) Michael agreed to sell his car to Jon for $1,000. Unknown to both of them, the car had been totaled the night before by a tree that fell on the car as it sat on the side of the street. Unilateral or Bilateral Mistake? Kierra sent a letter to Melissa offering her a babysitting job at $15/hr. The letter was delivered to another Melissa instead. The other Melissa accepted the offer. Unilateral or bilateral mistake? 43

44 44

45 VS+WRZESINSKI&src=IE- SearchBox&Form=IE8SRC 45

46 DURESS Overcoming a person s will by: Force; Threat of force; Threat of bodily harm You shoot him or I will shoot you. You shoot the person to save yourself. Your defense: Duress. Will it hold up in a court of law? NO cannot use duress as an excuse for killing someone. 46

47 47

48 UNDUE INFLUENCE One party in a dominating relationship takes unfair advantage, causing a contract to be voidable. Ex: doctor-patient relationship; lawyer-client relationship; teacher-student relationship 48

49 INFANCY IS A SHIELD NOT A SWORD WHAT DOES THAT MEAN? 49

50 MINOR S RIGHT TO DISAFFIRM CONTRACT CAUSES CONTROVERSY If you take out a contract at 17 and continue making payments after you turn 18, are you liable for the contract? YES - ratified the contract by continuing to make payments after turning 18. If you lie about your age are you held to a contract? YES, If a minor misrepresents their age, they could be held liable for the contract fraud. 50

majority (18), person can ratify contract made during minority

51 RATIFICATION OF MINORS CONTRACTS What does ratification mean? confirming or making something valid Upon reaching age of majority (18), person can ratify contract made during minority (under 18). 1. Ratification can be done orally, in writing, or by actions. 51

52 DOES IT MATTER WHETHER YOU ARE WITH FRIENDS OR YOUR PARENTS WHEN YOU BUY ITEMS? If you bought an item with your parent around, your parents will be held to the contract. If you bought an item WITHOUT your parents around, you have the right to return an item and ask for your money back. 52

53 ARE THERE LIMITATIONS OF MINORS RIGHTS TO DISAFFIRM CONTRACT 1. Minors have right to disaffirm contracts even if items damaged or destroyed. 2. After disaffirmed, minor must return purchased items. 3. Minor cannot disaffirm unfavorable parts of contract and affirm favorable parts of contract. 53

54 (1) Gina, one week before her 18th birthday purchased an ipod from the Apple store and paid $180 cash for the item. A week after her birthday, she purchased a handheld police scanner for $95 from Radio Shack and paid cash. A week after she purchased the police scanner, Gina wished to disaffirm both contracts and recover $180 from the Apple store and $95 from Radio Shack. Will Gina be allowed to disaffirm one, both, or neither of these contracts assuming that both purchases were within the guidelines of selling to minors? 54

55 MINORS REPONSIBLE FOR ALL TORTS 1) PARENTS RESPONSIBLE FOR ACTIONS OF MINORS 2) PARENTS CAN BE SUED UP TO $10,000 FOR PROPERTY DAMAGES OR PERSONAL DAMAGES SUCH THEFT, ASSAULT. $15,000 FOR DESECRATION, VANDALISM IF WANTON (RECKLESS) ACTION 3) MINOR CAN BE SUED AS WELL AS PARENT 4) NON-RESIDENT PARENT CAN BE HELD EQUALLY LIABLE FOR ACTIONS OF KIDS 55

56 EMANCIPATION AND ABANDONMENT EMANCIPATION ABANDONING the protection afforded to them as minors. 56

57 OHIO does not have an emancipation law. As a general rule, a child is emancipated, or freed from parental control, care and custody, upon reaching the age of 18 or upon graduation from high school if a child turns 18 in his or her senior year. In Ohio, emancipation also can occur before that time if the child gets married or joins the military service. While many people think that someone under 18 can go to court and get emancipated, Ohio law does not provide for such a court order. Rather, circumstances determine whether or not a person is emancipated in the eyes of the law. In the event of divorce or annulment, or discharge from the Armed Forces before the age of 18, custody of the minor will automatically revert to the parent who previously had custody over the minor. 57

58 RIGHTS OF MENTALLY IMPAIRED TO DISAFFIRM 1. No guardian, contract voidable 2. Guardian, contract valid ROLE OF GUARDIAN: LOOK AFTER MENTALLY IMPAIRED PERSON S AFFAIRS 58

59 INTOXICATED PERSON S RIGHT TO DISAFFIRM Must prove state of mind was impaired 1. unable to understand purpose 2. unable to understand nature or effect of transaction 3. must have been intoxicated at time of contracting 4. responsible for fair value of necessities (food, clothing, shelter, medical care) 59

60 Mr. Thackrah, a Utah resident and owner of $80,000 worth of mining stock, went on a threemonth bender. Mr. T's fondness for alcohol was well known, and a local bank hired Mr. Haas to contract with the inebriated Thackrah. Haas did the deal, getting Thackrah to agree to accept $1,200 for his mining stock. When he sobered up (a month later), Thackrah learned that Haas had turned over the mining shares to a local bank (apparently the real culprits in the scheme). Thackrah sued Haas. The case went all the way to the U.S. Supreme Court. 60

61 ALIENS PEOPLE LIVING IN THIS COUNTRY BUT OWE THEIR ALLEGIENCE TO ANOTHER COUNTRY. If they don t speak English, are they bound to contracts they enter? 61

requires a + = WHAT IS IN A CONTRACT? by to another to create.

requires a + = WHAT IS IN A CONTRACT? by to another to create. UNIT 3 CONTRACTS NBEA STANDARD II: Analyze the relationships between contract law, law of sales, and consumer law. OBJECTIVE: Develop an understanding of contracts: distinguish between express and implied