Contracts

Broadly defined, a contract is an exchange of promises enforceable

by law. Many business and personal transactions – including marriage,

estate planning (wills), and credit purchases – involve contracts. Con-

tracts may be either express or implied. An express contract is derived

from the words (either oral or written) of the parties; an implied con-

tract is derived from the actions or conduct of the parties. The law of

contracts deals largely with identifying the exchanges that can be clas-

sified as contracts. Intent is the essence of a contract. In addition, the

following factors must usually be present for a contract to be valid and

enforceable:

An offer must be made. One party must propose that an agreement

be entered into. The offer may be oral or written – for example, a sales-

person may telephone or write a prospective client, offering to sell the

client materials at a certain price. Or the offer may take the form of an

act – for example, the telephone company offers to provide service by

placing a pay phone on a street corner. In any case, the offer must be

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firm, definite, and specific enough to make it clear that someone intends

to be legally bound by the offer. Finally, the offer must be communicated

to the intended party or parties.

An offer must be accepted. For an offer to be accepted, there must

be clear intent (either spoken, written, or by action) to enter into the

contract. The acceptance must also be communicated to the other party

or parties. Further, the acceptance must satisfy the terms of the offer –

that is, if John offers to sell Mary his stereo for $200 and Mary says she

would take it for $180, Mary has not accepted the offer. Rather, Mary’s

response is a counteroffer, which may or may not be accepted by John.

In commercial law, the Uniform Commercial Code allows additional

or different terms to become part of the contract unless (1) the offer

expressly limits acceptance to the terms of the offer, (2) the new terms

materially alter the offer, or (3) the party making the offer objects to the

new terms within a reasonable amount of time.

Both parties must give consideration. A contract is legally binding

only when the parties have bargained with one another and exchanged

something. This bargained-for exchange, or consideration, does not

have to be money, goods, or services. But it must impose a legal detri-

ment, the assumption of a duty or the forfeit of a right, to one or both

parties. For example, when a house is sold, the purchaser incurs a legal

detriment by agreeing to pay a certain amount to the seller. Likewise, the

seller incurs a legal detriment by agreeing to give up his or her interest

in the home. The relative value of each party’s consideration does not

generally matter to the courts. Thus, if people make what seems later to

be a bad bargain, it is not the court’s concern. Consideration is legally

sufficient when there is a bargained-for exchange and legal detriment.

Both parties must give genuine assent. A valid contract must be free

of fraud, duress, undue influence, and even mistake. Each party must

enter into a legal contract voluntarily, and each must understand the

terms in the same way.

Both parties must be competent. The law gives to certain classes of

people only a limited capacity to enter into contracts. Minors, people

who are senile or insane, and in some cases those who are intoxicated

cannot usually be bound by a contract for anything but the bare necessi-

ties: food, clothing, shelter, and medical care.

The contract must not involve an illegal act. The law will not enforce

a promise that involves an illegal act. For example, a gangster cannot

get help from the courts to enforce a contract to deliver illegal drugs at

a prearranged price. Nor can a contract be enforced if it is inconsistent

with general public policy or is unconscionable.

The contract must be in proper form. Most contracts can be made

orally, by an act, or by a casually written document; however, certain

contracts are required by law to be in writing. For example, the transfer

of goods worth $500 or more must be accompanied by a written docu-

ment signed by both parties. The written form is also required for all

real-estate contracts. When the law requires a written document, any

change in the agreement must also be written.

Most valid contracts are obeyed by both parties. Each party does what

was promised, and the contract is terminated by being carried out or by

performance, which discharges both parties. But sometimes a contract

will not be fulfilled (or discharged) because both parties agree to end it.

A contract may also be discharged because of impossibility of perfor-

mance— for example, (1) the death or serious illness of a person who has

promised personal performance and for whom there is no substitute, (2)

the change of a law making performance of the contract illegal, or (3)

the destruction of the subject matter of the contract. However, when one

party has no legal excuse for failure to live up to the terms of a contract,

the other party may claim breach of contract.

Look through the text once again and speak on a) different types of con-

tracts; b) the main factors to be present for the contract to be valid

Text 6

Read the text. Be ready to answer the questions after the text. Give your own examples

of different types of contract.