Chapter 9: Formation of Traditional and E-Contracts

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Chapter 9: Formation of Traditional and E-Contracts

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2013

Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Overview of Contract Law

Sources of Contract Law.

Common Law for all contracts except sales and leases.

Sale and lease contracts - Uniform Commercial Code (UCC).Function of a Contract.Provides stability and predictability for commerce.

2

Overview of Contract Law

Definition of a Contract.

Promise or set of promises,

For breach of which,The law provides a remedy, orThe performance of which the law in some way recognizes as a duty.

3

Overview of Contract Law

Objective Theory of Contacts.

Circumstances to determine intent of parties.

Objective Facts include:What a party said when entering into the contract,How the party acted or appeared (intent may be inferred), and

Circumstances surrounding the transaction.

Freedom of Contract.

4

Overview of Contract Law

Requirements of a Valid Contract:

Agreement (Offer & Acceptance).

Consideration: bargained-for-exchange.Contractual Capacity.Legality: purpose of contract must be legal at the time of execution.

5

Overview of Contract Law

Defenses to the Enforceability of a Valid Contract:

Voluntary Consent.

Form: some types of contracts must be in writing.6

Types of Contracts

7

Types of Contracts

Contract Formation.

Bilateral:

Offeror accepts Offeree’s promise to perform (“a promise for a promise”).Unilateral: Offeror is bargaining for performance. Offeree accepts by

completing

contract

performance (“a promise for an act

”).

CASE 9.1 Schwarzrock v. Remote Technologies, Inc. (2011).

Did the employer owe the bonus?

8

Types of Contracts

Contract Formation.

Unilateral

Contracts.Revocation of Offers for Unilateral Contracts: Offeror cannot revoke promise once performance has begun, for a reasonable time period.Formal versus Informal Contracts.Formal: must be in writing to be enforceable. Informal: all other contracts.

9

Types of Contracts

Contract Formation.

Express versus Implied Contracts.

Express: oral or written.Implied: conduct creates and defines the terms of the contract. Requirements:PL furnished good or servicePL expected to be paid

DEF had chance to reject and did not.

10

Types of Contracts

Contract Performance.

Executed

- A contract that has been fully performed on both sides.Executory - A contract that has not been fully performed on either side.

11

Types of Contracts

Contract Enforceability.

Valid

: agreement, consideration, contractual capacity, and legality.Voidable (unenforceable): Valid contract can be avoided or rescinded based on certain legal defenses.Void: no contract.

12

Agreement

An essential element for contract formation is agreement.

The parties must mutually assent to the same bargain.

An agreement has two components: an offer and an acceptance.

13

Agreement

Requirements of the Offer.

An offer is a promise to do or not do something in the future.

The common law requires three elements for an effective offer:Offeror’s serious intention. Reasonably certain terms. 

Communication to offeree.



14

Agreement

Requirements of the Offer.

Offeror’s serious, objective intention.

A contract is judged by what a reasonable person in the offeree’s position would conclude about the offer.CASE

9.2

Lucy v. Zehmer (1954).

Do you think the Zehmers had a serious intention?

15

Agreement

Requirements of the Offer.

Offeror’s serious, objective intention.

Expressions of Opinion: not offers.Statements of Future Intent: not offers.Preliminary Negotiations, or Invitations to Negotiate: not offers. 

16

Agreement

Requirements of the Offer.

Offeror’s serious, objective intention.

Advertisements: not offers (invitations to negotiate). Agreements to Agree: can be enforceable if parties intended to be bound.17

Agreement

Requirements of the Offer.

Definiteness of Terms.

Identification of the parties.Object or subject matter of the contract.Consideration to be paid.Payment, delivery, or performance.An offer can require specific terms to make the contract definite. Courts can supply missing terms.

18

Agreement

Requirements of the Offer.

Communication to Offeree.

Directly by the Offeror, orUse of Agents. 19

Agreement

Termination of the Offer.

An offer may be terminated prior to acceptance by either:

Action of the Parties or by Operation of Law. 

20

Agreement

Termination by Action of the Offeror.

Revocation

of the Offer by the Offeror:Offer can be withdrawn anytime before Offeree accepts the offer.Effective when the offeree or offeree’s agent receives it.



21

Agreement

Termination by Action of the Offeree.

When rejected, by words or conduct, by the offeree.

Counteroffer is a termination of the original offer.“Mirror-Image rule” applies.22

Agreement

Termination by Operation of Law.

Lapse of Time

.Offer terminates by law when the period of time specified in the offer has passed.If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. 

23

Agreement

Termination by Operation of Law.

Destruction

of the Subject Matter: before acceptance of offer, terminates the offer.Death or Incompetence of the Offeror or Offeree: automatically terminates unless irrevocable offer.

Supervening

Illegality

of the Proposed Contract: by court or legislation.

24

Agreement

Termination of the Offer.

Irrevocable Offer

: offeree has changed position based on justifiable reliance on the offer. 25

Agreement

Acceptance.

A voluntary act (expressed or implied) by the Offeree that shows assent (agreement), to the terms of an offer.

Unequivocal Acceptance: the “Mirror Image” Rule..26

Agreement

Acceptance.

Silence as Acceptance.General Rule: offeree should not be legally obligated to affirmatively reject an offer. When Offeree Has Duty to Speak:He takes benefit of services with opportunity to reject. Prior dealings with Offeror.

27

Agreement

Communication of Acceptance.

Bilateral

Contract: communication of acceptance is necessary because there is a mutual exchange of promises.Unilateral Contract: acceptance is evident, notification not necessary.

CASE 9.3 Powerhouse Custom Homes, Inc. v. 84 Lumber Co. (2011).

28

Agreement

Communication of Acceptance.

Mode and Timeliness of Acceptance.

General Rule: in bilateral contracts, acceptance is timely if done before offer is terminated. The Mailbox Rule.

29

Agreement

Communication of Acceptance.

The Mail Box Rule

: acceptance is effective when offeree uses authorized means of acceptance. If U.S. Mail, acceptance is effective upon dispatch. If no means specified, acceptance can be by any reasonable means.

30

Agreement

Communication of Acceptance.

Exceptions

to the Mail Box Rule.If Offeror specifies that acceptance will not be effective until it is received.If acceptance is sent after rejection, whichever is received first is given effect.

31

Agreement

Communication of Acceptance.

Substitute

Method of Acceptance.Effective if the substitute serves the same purpose (Fed-Ex vs. UPS).Not effective on dispatch.Effective when received by the Offeror.

32

E-Contracts

Online Offers.

Displaying the Offer. Seller’s website should include hyperlink to page with full contract

.Provisions to Include. 33

E-Contracts

Online Offers.

Provisions to Include:

Acceptance of Terms: what constitutes an acceptance.Payment: how payment is made.Return Policy.Disclaimer: of liability for certain uses of the goods.Limitations on Remedies: if goods defective or contract is breached. 

34

E-Contracts

Online Offers.

Provisions to Include:

Privacy Policy. Dispute Resolution: usually arbitration or forum-selection clauses.Choice-of-law clause.35

E-Contracts

Online Acceptances.

Click-On Agreements

. Courts have concluded a binding contract can be formed by clicking on a box indicating “I Accept” or “I Agree.” Contract can be formed via website or software. Law does not require parties read all the terms. 36

E-Contracts

Online Acceptances.

Shrink-Wrap Agreements

. Contract terms are inside the box.Party opening box agrees to terms by keeping merchandise.Enforceable vs. Unenforceable Terms. 37

E-Contracts

Online Acceptances.

Browse-Wrap Terms.

Like click-on agreements, browse-wrap terms can occur in transactions over internet.Unlike click-on agreements, browse-wrap terms do not require assent and are usually unenforceable.38

E-Contracts

E-Signature Technologies.

E-Signature: electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.

Digitized Signature: graphical image of a handwritten signature. 39

E-Contracts

Federal Law on E-Signatures and E-Documents.

E-SIGN (2000) gives e-signatures and e-documents legal force.

For an e-signature to be enforceable, the contracting parties must have agreed to use electronic signatures. Partnering Agreements.40

The Uniform Electronic

Transactions

Act

Purpose is to remove barriers to forming electronic commerce.E-Signature is “electronic sound, symbol or process…associated with a record and… adopted by a person with intent to sign the

record

.”



41

The Uniform Electronic

Transactions

Act

A record is information that is inscribed on a tangible medium or stored in electronic or other medium that is retrievable in visual form.

42

The Uniform Electronic

Transactions

Act

UETA does not create new rules, but rather enforces ‘real world’ rules on electronic contracts.Only applies

to e-records and e-signatures relating to a “transaction” (interactions between two people relating to business, commercial, or governmental activities).

43

The Uniform Electronic

Transactions

Act

UETA does not apply to wills or testamentary trusts.Does not apply unless each party has previously agreed to conduct electronic transactions. Can be implied by conduct and prior dealings.

44

The Uniform Electronic

Transactions

Act

E-SIGN explicitly refers to UETA and provides that E-SIGN is pre-empted by state passing of UETA.But state law must conform to minimum E-SIGN procedures.

45

The Uniform Electronic

Transactions

Act

46

The Uniform Electronic

Transactions

Act

Attributing Electronic Signatures. If electronic record or signature is act of a particular person, the record or signature is

attributed

to that person.

However, state law governs issues of agency, authority, forgery, contract formation.

47

Generally, consideration must have:

“Legally Sufficient Value

”

and a “Bargained-for-Exchange.” 

Consideration

48

Legally Sufficient Value can mean:Promise,

Performance, or

Forbearance

. Consideration49

Bargained-for-Exchange: must provide basis for the bargain.

Something of legal value (a promise, or a performance) must be exchanged between the parties.

The promise must be either l

egally detrimental to the promisee, or legally beneficial to the promisor.Consideration

50

Adequacy of Consideration:Courts typically will not consider.

Law does not protect a person from entering into an unwise contract.

Cases of “shockingly inadequate consideration” may raise a red flags, and be ruled unconscionable .

Consideration51

Agreements That Lack Consideration.Preexisting Duty.

Promise to do what one

already

has a legal duty to do does not constitute legally sufficient consideration.Unforeseen Difficulties. Recession and New Contract.Consideration

52

Agreements That Lack Consideration.

Past Consideration is

no consideration because the bargained-for exchange element is missing.

Consideration53

Agreements That Lack Consideration.

Promissory Estoppel.

Elements:

Must be definite promise.Promisee must justifiably rely on the promise.Reliance is substantial.Justice will be served by enforcing promise.

Consideration

54

Contractual Capacity

Minors:

at 18 years, a person is emancipated, and has the legal capacity to enter into any contract that an adult can.

However, a contract entered into by a minor is voidable at the option of that minor, and can be disaffirmed. 

55

Contractual Capacity

Minors (continued).

A contract can be disaffirmed at any time during minority, or for a reasonable period after minor is emancipated.

Minor must disaffirm the entire contract. Disaffirmance can be expressed or implied.56

Contractual Capacity

Intoxication.

Lack of capacity

at the time the contract is being made. Contract is either voidable or valid, depending on circumstances. Disaffirmance (voidable).Ratification: after ‘sobering up.’

57

Contractual Capacity

Mental Incompetence.

Void

: person is adjudged mentally incompetent by a court of law and a guardian has been appointed.  58

Contractual Capacity

Mental Incompetence (cont’d).

Voidable

: person does not know she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. 

59

Contractual Capacity

Mental Incompetence (cont’d).

Valid

: when person is able to understand the nature and effect of entering into a contract but may lack capacity to engage in other activities (known as “lucid” intervals).60

Legality

A contract must be formed for a legal purpose.

A specific clause in contract can be illegal, but rest of contract can be enforceable.

Contract to commit a tortious act is illegal.61

Legality

Contracts Contrary to Statute.

A contract must be formed for a legal purpose.

A specific clause in contract can be illegal, but rest of contract can be enforceable.A contract to commit a tortious act is illegal.62

Legality

Contracts Contrary to Statute.

Any contract prohibited by federal or state statutory law is illegal and therefore

void (never existed).Contracts to Commit a Crime.Contracts for Usury.63

Legality

Contracts Contrary to Statute.

Gambling:

distribution of property based on chance among persons who have paid valuable consideration.Licensing Statutes: contract’s enforceability depends on purpose.64

Legality

Contracts Contrary to Public Policy.

Contracts contrary to public policy are void.

Contracts in Restraint of Trade are generally void.Exception: Covenant not to Compete and Sale of an Ongoing Business.

Exception

: Covenant Not to Compete in Employment.

65

Legality

Unconscionable Contracts.

Procedural Unconscionability

: inconspicuous print or legalese.Depends on a party’s lack of knowledge or expertise. Substantive Unconscionability.Contracts are oppressive or overly harsh; that deny a remedy for nonperformance.

66

Legality

Exculpatory Clauses.

Release a party from liability in the event of monetary or physical injury – no matter who is at fault.

Enforceable when they are not against public policy, are not ambiguous, and do not shield parties from intentional conduct.67