What is a contract?
A contract is an agreement between two or more persons (e.g. individuals, corporations, partnerships, limited liability companies or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value.
What are the key elements of a binding contract?
The elements of a contract are: (i) an agreement; (ii) between competent parties; (iii) based upon the genuine assent of the parties; (iv) supported by consideration; (v) made for a lawful objective; and (vi) in the form required by law.
Isn’t an agreement the same thing as a contract?
No, an agreement is only one element of a contract. If all six elements are not present, there is no contract.
What is an agreement then?
An agreement arises when at least one person, the offer or, makes an offer and the person or persons to whom the offer is made, the offeree, accepts. There must be both an offer and an acceptance. If either is not present, there is no agreement and therefore no contract.
What constitutes an offer?
To constitute an offer, the offeror must intend to create a legal obligation, or he must appear to intend to create a legal obligation. This intent can be shown by conduct. For example, when one party signs a written contract and sends it to the other party, this action is obviously an offer to enter into a contract on the terms of the writing. Again, the offeror must intend to create a legal obligation. No contract comes into being when an offer is made jokingly, or under any other circumstances that would cause a reasonable person to believe there was no intent to enter into a binding agreement.
Do newspaper advertisements, price quotations, or catalog prices constitute an offer?
No, ordinarily these are just invitations to negotiate and cannot be accepted in a contractually-binding manner. No seller has an unlimited supply of any commodity and therefore cannot possibly be deemed to have intended to make a contract with everyone who sees the advertisement or seeks to accept the price offered.
An invitation to negotiate is not an offer. An invitation to negotiate is merely a preliminary discussion or an invitation by one party to the other to negotiate or make an offer. For example, a school asking a teacher whether or not the teacher wishes to continue teaching at the school the following year is a preliminary discussion and not an offer that could be accepted. If the teacher indicated that she would like to continue teaching, then a formal offer could be made.
Does an offer have to be in writing?
Not necessarily; but, it does have to be communicated in order to be a valid offer. The offer may be communicated by the offeror or at his direction. If the offeree hears about the offer indirectly, through the grapevine so to speak, he cannot accept the offer until it is communicated to him by the offeror or at the offeror’s direction.
Can an offer be withdrawn without incurring liability to the other party?
Yes, an offer can be withdrawn before acceptance and therefore prevent a contract from arising. If an offer is terminated, an attempted acceptance after the termination has no legal effect. Ordinarily, an offer may be revoked at any time by the offeror. All that is required is the showing by the offeror of his intent to revoke the offer and communication of this intent to the offeree.
How else can an offer be terminated?
Offers may be terminated in any one of the following ways: Revocation of the offer by the offeror; counteroffer by offeree; rejection of offer by offeree; lapse of time; death or disability of either party; or performance of the contract becomes illegal after the offer is made. The general rule is that the revocation is effective only when it is made known to the offeree. Until it is communicated to the offeree, directly or indirectly, the offeree has reason to believe that there still is an offer that may be accepted. The offeree may rely on this belief. If the offeror seeks to revoke the offer, but the offeree accepts the offer before notice of the revocation, a valid contract is created.
What is the difference between a void and a voidable contract?
A valid contract is a legally-binding contract that is made in accordance with all legal requirements. A voidable contract is an agreement that would be binding and enforceable except the circumstances surrounding its execution, or the fact that one of the parties lacks capacity, makes the contract voidable at the option of one of the parties. For example, a person who has been forced to sign an agreement against his will may avoid being bound by the agreement. A void agreement is an agreement which is without legal effect. For example, an agreement which deals with the performance of an illegal act is void
What is the “Mailbox Rule.”?
If the offeror does not otherwise specify, a mailed accep¬tance takes effect when the acceptance is properly mailed. This is known as the Mailbox Rule. If the offeror specifies that an acceptance shall not be effective until received, there is no acceptance until acceptance is received. The Mailbox Rule also would not apply in a situation where the offeror requires receipt of a payment to accompany an acceptance.
What is a counteroffer?
A counteroffer is a new set of terms and conditions given in response to the original offer. A counteroffer causes the original offer to be null and void.
What is an executory contract?
An executed contract is a contract that has been completely performed. Nothing remains to be done by either party. For example, if you go into a furniture store and agree with the sales-man to pay $200.00 for a chair and then pay the salesman cash and take delivery of the furniture, the contract has been completely executed. In an executory contract, something remains to be done by one or both of the parties. For example, suppose you and a seller signed a contract regarding the purchase of land, and you both agree that the sale will be consummated after the buyer obtains his loan and the seller gives a certificate of title (showing no defects). This is an enforceable contract, but it is said to be executory.
What is an option contract?
An option contract is a contract that gives the right to one party to enter into a second contract with the other party at a later date. One of the most common forms of option contracts deals with the sale of real estate. In this type of contract, the prospective buyer will be granted an option to purchase the property within a specified period of time. The prospective buyer will pay the seller a nonrefundable sum of money since the seller is, in effect, taking the property off the market during the option period. If the prospective buyer exercises his option during that time, a second contract is entered into regarding the sale of the property. If the option period expires, then neither party has any obligation to the other, but the money paid for the option is not returned.
What about mistakes? How does a mistake affect the enforceability of an agreement?
The agreement of parties may be affected by the fact that one or both of them made a mistake. A unilateral mistake is a mistake made by one party to the agreement. A mistake that is unknown to the other party usually does not affect the enforceability of the agreement. A unilateral mistake regarding a fact does not affect the contract. For example, if a customer orders a water-resistant coat thinking that this means waterproof, the customer cannot legally get out of the contract unless the sale was made with some sort of misrepresenta¬tion as to the meaning of those words. An exception to this would be if the seller knew that the buyer misunderstood those terms but went ahead and sold the coat anyway.
What if I sign an agreement without reading it? Does that affect the enforceability of the agreement?
A person who has the ability and the opportunity to read a document before signing it is contractually bound by the terms of the document even if the person signed it without reading it. The signer cannot avoid liability based on the argument that no explana¬tion was given to him of the terms of the contract.
Even if a person is unable to read or understand the terms of the agreement, he is still bound by the terms of the agreement since he should have tried to obtain an explanation of the agree¬ment. The exception to this rule is that if the other party knows, or has reason to know, that the signer cannot read or has a limited education, some Courts would hold that the other contracting party should have read the document to the other party or explained the terms.
What if I could not read and the explanation of the other party regarding the terms of the agreement were wrong?
If a party relies on the explanation of another party as to the contents of the agreement, the contract may be avoided under two circumstances:
1. The party was justified in relying on the explanation of the other party; and
2. The explanation was fraudulent.
The party making the explanatory statements does not have to be a lawyer but can be any person who handles these types of agreements on a regular basis and therefore has a greater knowledge of the contents than the other person. This rule would not apply if the agree¬ment were negotiated between the two parties and therefore both parties had an understanding of the terms as evidenced by the negotia¬tion. This rule is more applicable to a situation where the agreement is on a preprinted form, and the person who explains the agreement deals with these types of forms on a regular basis.
What if there is a mistake as to the legal effect of an agreement?
When parties to an agreement make a mistake as to the legal effect of the contract, the contract is still binding. For example, suppose Yusuf sold Emre a vacant lot and Emre planned to build an office on the lot. Both Yusuf and Emre assume that this would be a lawful use of the property. However, if after pur¬chasing the property and applying for a building permit, Emre is told that the property is zoned for residential use, the contract is still binding.
What does it mean to rescind a contract?
Rescission of a contract means to put the parties back in the same circumstances they were in before making the agreement. If the agreement involved the sale of goods, the goods would be returned to the seller and the money for the goods would be returned to the buyer.
What if one party to a contract knows of a fact that has a critical bearing on the transaction, but fails to disclose this fact to the other party?
Generally, the law does not attach any significance to nondisclosure. Thus, generally, an agreement of the parties is not affected by the fact that one party did not disclose information to the other party. This is the general rule. The theory is that it is preferable that the party lacking the knowledge ask questions of the party with the knowledge rather than imposing some sort of duty on the party with the knowledge to volunteer the information.
Are there exceptions to this nondisclosure rule?
Yes, in some instances, the failure to disclose information that was not requested can be regarded as fraudulent, and give the party harmed by the nondisclosure the same remedies as if a false statement were intentionally made. These exceptions fall generally into one of four categories:
• Unknown defect or condition;
• Confidential relationship;
• Fine print; and
• Active concealment.
Many courts would hold that there is a duty for one party, who knows of a defect or a harmful condition, to disclose this information to the other party if the defect or harmful condition is obviously unknown to the other party and is of a nature that the other party would be unlikely to discover or inquire about the defect or condition.
What is active concealment?
Active concealment can cause a contract to be invalid or result in liability to the concealing party. This is more than a failure to volunteer information. Active concealment consists of hiding information from the other party by concealment. For example, using the Yusuf and Emre house transaction as an example, if Yusuf had painted over the cracks in the wall and the ceiling in order to hide the foundation problem, he would be guilty of active concealment and the contract could possibly be rescinded, or Emre could possibly recover damages from Yusuf in the amount of the foundation repair costs.
What constitutes fraud and how to you prove it?
Fraud consists of five elements:
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The making of a false statement;
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With knowledge that the statement is false or with reckless disregard as to whether or not the statement is false or true;
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With the intent that the listener rely on the statement;
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With the result that the listener relies on the statement; and
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With the consequence that the listener is harmed.