Chapter 6 - Formation of Contracts
Contract - a voluntary exchange of promises, creating obligations that, if defaulted on, can be
enforced and remedied by the courts
people are creating and defining their own rules and obligations
freedom of contract - people can enter into almost any contractual agreement, as long as
the contract meets the common law requirements
Elements of a Contract:
1. Consensus - parties must have reached mutual agreement to commit themselves to a certain
transaction; assumed to have negotiated the agreement from equal bargaining positions
2. Consideration - must be commitment by each party to do something or abstain from doing
something; it's the price each is willing to pay to participate in the contract
3. Capacity - parties must be legally capable of understanding and entering into agreement
(limitations placed on infants, insane/intoxicated persons, aliens, native people, corporations)
4. Legality - the object and consideration involved must be legal and not against public policy
5. Intention - both parties must be serious when making the agreement and must intend that
legally enforceable obligations will result from it
Important Terms and Definitions:
Formal contract - one that is sealed by the party to be bound
Simple contracts (parol contracts) - may be verbal or written but are not under seal
Express contract - parties have expressly stated their agreement, either verbally or in writing
Implied contract - inferred from the conduct of the parties (when people deposit coins into
vending machine, it can be inferred that they intend to create contractual relationship, thus
implied contract is in force)
Valid contract - one that's legally binding on both parties
Void contract - does not qualify as a legally binding contract because an essential element is
Voidable contract - is valid but one party has the option to end the contract
*Distinction: If original contract is void, goods must be returned to seller. If contract is
voidable, the outsider has acquired good title to goods and can keep them
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Unenforceable contract - required to be in writing under Statute of Frauds and is not. Court
won't enforce unenforceable contract
Illegal contract - involves the performance of an unlawful act. It is void and courts normally
won't assist parties by returning them to their original positions. However courts will help a
person who is innocent of any wrongdoing even when contract is illegal
Bilateral contract - both parties make commitments and assume obligations.
Unilateral contract - there is no exchange of promises; it involves a promise followed by an act.
Consensus - two parties must have a common will in relation to the subject matter of their
negotiations, and they must have reached an agreement
A valid offer contains all the terms to be included in the contract; its a tentative promise
An interim agreement (agreement of purchase and sale) is binding even though a more formal
document will follow
"Subject-to" clauses - an offer may include a term making the contract conditional on some
future event
Quasi-contracts involve requests for goods and services
Most newspaper, radio, TV, internet ads are invitations to treat. They're simply invitations to
potential customers to engage in the process of negotiation, not offers. They have no legal effect
Figure 6.1 - Typical Process to Create a Contract
A. Invitation Negotiations Offer Counteroffer Acceptance
No obligation No obligation No obligation No obligation Contract
*Sometimes difficult to distinguish between an offer and an invitation to treat
Offer by Conduct:
e.g. person hails a cab by the gesture of raising a hand and calling "taxi!". However an
auctioneer's comment "Do I hear $50?" is merely an invitation to people to make an offer
Communication of an Offer:
Before you can accept an offer, it must be communicated to you. You can't accept an
offer made to someone else, no matter how you learn about it and you cannot accept an
offer you did not know about.
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