1. FUNDAMENTALS OF CONTRACT LAW 4
1.1.What is a contract? 4
1.2. Contract language 4
1.2.1. Capacity 5
1.3. Capacity 6
1.4. Written and oral contracts 6
1.5. Offer and acceptance 8
1.6. Give and take 9
1.6.1. Acceptance 10
1.6.2. The Reasonable Person 11
1.7. Non-acceptance 11
1.7.1. Conditions 12
1.7.2. Consideration 12
1.8. In consideration 12
1.8.1. Reliance 14
1.8.2. Agents 15
1.9. Agents who exceed their authority 16
1.9.1. Delegations and Assignments 16
2. BARS TO A CONTRACT 17
2.1. When is a contract not a contract? 17
2.1.1. Illegality 17
2.2. Is it or isn’t it a contract? 18
2.2.1. Duress 19
2.2.2. Undue Influence 20
2.2.3. Fraud 20
2.3. When someone forces you to sign 21 2.3.1. Mistake 21
2.3.2. Statutes of Limitations 22
2.3.3.Changing Situations 23
2.4. Should the buyer still dew are? 24
2.4.1. Unconscionability 24
2.5. Fill in the blanks 24
2.6. Practical contracts 25
2.7. Getting out of a contract 26
2.8. Read the fine print 27
2.9.Get it in writing 28
THE LIST OF LITERATURE 32
The major theme of this article is that the interpretation of contracts – their possible amplification, correction, and modification by adjudicators — is in the interests of contracting parties. The reasons are no doubt well-appreciated in at least a general sense: interpretation may improve on otherwise imperfect contracts; and the prospect of interpretation allows parties to write simpler contracts and thus to conserve oncontracting effort.
As background, we know from common experience that parties may fail to provide for certain events in their contracts (suppose that they overlook the possibility of a leap year) and that they often employ broad terms that do not reflect their wishes in particular circumstances (suppose that they specify that material A should be used in construction but that they would really prefer substitution of material B if an unusual problem arises with A). To explain why parties write such incomplete contracts, it is frequently suggested that some eventualities are hard to anticipate or describe in advance, that leaving contracts incomplete saves time and effort, and that fashioning highly refined contracts would be impractical1y costly.
The object of this theme is – to find out the fundamentals of the contract, bars to a contract. To find out these things, we have to do some tasks.
Our tasks :
1. To explain what is contracts, how to know, when You have a deal, and when not.
2. How can the illeaglity of the contracts be interpreted.
3. How to make a good contract, that after Your sign it, that You could be sure, You won‘t have any problems.
To find all these things out, we will need a lot of literature, we will take some opinions of famous lawyers. The finding is, that this work will explain all the main things about contracts, how to make them, how to prepare, how and when to sign and lastly who and how can interpret it.
1. FUNDAMENTALS OF CONTRACT LAW
1.1.What is a contract?
Having an appreciation for the fundamental principles of contract law will enable you to answer many of your own questions about everyday consumer transactions.
A contract consists of voluntary promises, which the law will enforce, between competent parties to do, or not to do, something. These binding promises may be oral or written. Depending on the situation, a contract could obligate someone even ifhe or she wants to call the deal offbefore receiving anything rrom the other side. The details of the contract — who, how, what, how much, how many, when, etc. — are called its provisions or tenus.
You donot need a lawyer to form a contract. If you satisfy the maturity and mental capacity requirements, discussed below, you don’t need anyone else (besides the other party). But it probably is a good idea to see a lawyer before you sign complex contracts, such as business deals or contracts involving large amounts of money.
In order for a promise to qualify as a contract, it has to be supported by the exchange of something of value between the participants or parties. This something is called consideration. Consideration is most often money, in exchange for property or services, but can be some other bargained-for benefit or detriment (as explained more fully below). The final qualification for a contract is that the subject of the promise (including the consideration) may not be illegal.
An example: Suppose a rriend agrees to buy your car, an Edsel in less-than-mint condition, for $1,000. That is the promise. The money is the consideration for the sale. You benefit by getting the cash. Your rriend benefits by getting the Edsel. Since it is your car, the sale is legal, and you and your friend have a contract.
1.2. Contract language
A valid contract does not have to be printed, legalistic-looking document. Nor does it have to be called a contract. A typed or even handwritten „agreement,“ “ letter of agreement“ or „letter of understanding“ signed by the parties or even e-mailed between them will be valid if it meets the legal requirements of a contract. Don’t sign something assuming it’s not a contract and therefore not important.
It is also common for the word „contract“ to be used as a verb meaning „to
enter into a
contract.“ And we speak of contractual relationships to refer to the whole of sometimes complex relationships or transactions, which may comprise one or many contracts.
Not just anyone can enter into a contract. In order to make an enforceable contact, people have to be able to understand what they’re doing. That requires both maturity and mental capacity. Without both of these, one party could be at a disadvantage in the bargaining process, which could invalidate the contract.
In this sense, maturity is defined as a certain age a person reaches — regardless of whether he or she is in fact „mature.“ State laws permit persons to make contracts if they have reached the age of majority (the end of being a minor), which is usually age eighteen. That does not mean minors canot make contracts, by the way. But courts may choose not to enforce some of them. The law presumes that minors need to be protected trom their lack of maturity, and won’t allow, for example, a Porsche salesman to exploit a minores naivete by enforcing a signed sales contract whose real implications a young person is unlikely to have comprehended. Sometimes this results in minors receiving benefits (such as goods or services) and not having to pay for them, though they would have to return any goods still in their possession. This would apply even to minors who are emancipated — living entirely on their own — who get involved in contractual relationships, as weU as to a minor who lives at home but is unsupervised long enough to get into a contractual fix.
A court may require a minor or the minor’s parents to pay the fair market value (not necessarily the contract price) for what courts call necessaries (what you and I would likely call „necessities“). The definition of a „necessary“ depends entirely on the person and the situation. It probably will always include food and probably will never include CD’s, Nintendo cartridges or Porsches. Minors who reach full age and do not disavow their contracts may then have to comply with all their terms, and in some states, courts may require a minor to pay the fair value of goods or services purchased and received under a contract that minor has disavowed.
Parents who give their children access to home computers hooked up to the Internet should consider the situation that may arise if a child uses their credit card information online. This includes information that may be stored in the computer or at a website that recognizes your home computer and, of course, doesn’t know that a minor is the actual „shopper.“ From the point of view of the website owner, the parent is the customer, and you may have a hard time avoiding liability for a contract (such as for the purchase of merchandise) that your children have entered into using your Internet identity.
There are other people, besides minors, who may not be able to fonn enforceable contracts.
While the age test for legal maturity is easy to detennine, the standards for detennining mental capacity are remarkably complex and differ widely :trom one state to another. One common test is whether someone has the capacity to understand what he or she was doing and to appreciate its effects when the deal was made. Another approach is evaluating whether someone has self-control, regardless of his or her understanding.
That brings up the question of whether an intoxicated person can be held to a contract. Very often someone who is „under the influence“ can get out of a contract. The courts don’t like to let a voluntarily intoxicated person revoke a contract with innocent parties this way __ but if the evidence shows that someone acted like a drunk when making a contract, a court may well assume that the other party probably was trying to take advantage. On the other hand, if someone doesn’t appear to be intoxicated, he or she probably will have to follow the tenns ofthe contract. (The key in this area may be a person’s medical history. Someone who can show a history of alcohol abuse, blackouts, and the like, may be able to void the contract, regardless of his or her appearance when the contract is made. This is true especially ifthe other party involved knew about the prior medical history.)
We’ve discussed the fundamental requirements for competence to make a contract — maturity and mental capacity. Of course, it should go without saying that there’s an even more fundamental requirement: that both parties be people. In the case of a corporation or other legal entity, which the law considers a „person,“ this could be an issue. A problem in the formation or status of the entity could cause it to cease existing legally, thus making it impossible to enter into a contract. In that case, however, the individuals who signed the contract on behalf of the legally nonexistent entity could be personally liable for fulfilling the contract.
Historically, the law has had other criteria for capacity. Slaves, married women and convicts were at one time not considered capable of entering into contracts in most states. Even today, certain American Indians are regarded as wards of the U.S. government for many purposes, and their contract-law status is similar to that of minors.
1.4. Written and oral contracts
Some people mistakenly believe that an oral contract oisnot worth the paper itos printed on.O But many types of contracts don’t have to be written to be enforceable. An example is
purchasing an item in a retail store. You pay money in exchange for an item that the store warrants (by implication, as discussed later) will perform a certain function. Your receipt is proof of the contract.
As with a written contract, the existence of an oral contract must be proved before the courts will enforce it. But as you can imagine, an oral contract can be very hard to prove — you seldom have it on video. An oral contract is usually proved by showing that outside circumstances would lead a reasonable observer to conclude that a contract most likely existed. Even then, there is always the problem of what the terms of the oral contract were.
Although most states recognize and enforce oral contracts, the safest practice is to put any substantial agreement in writing. Get any promise from a salesperson or an agent in writing, especially ifthere already is a written document that might arguably be a contract covering any part ofthe same deal. If the court concludes that the parties intended the written document–a handwritten „letter of agreement“ or „understanding,“ an e-mail, or even an order form–to contain all its tenns and be a complete statement of all understandings between the parties, then the court will be very hesitant to add words or terms to the document. This is the important parol evidence rule, under which courts typically look only to unrefuted (uncontested) testimony to help them „fill in the b]anks“ of a contract. Anything not in that written contract would be deemed not to be part of the deal.
Writing down the terms of a good-faith agreement is the best way to ensure that all parties are aware of their rights and duties — even if no party intends to lie about the provisions of the agreement.
Having said that, know that there are some contracts which are completely unenforceable if theyore not in writing. This requirement, which exists in varying forms in nearly all the states, had its origins in the famous statute of frauds, an English law dating from 1677. It refers to „frauds“ because it attempts to prevent fraudulent testimony in support of nonexistent agreements. In most states, the courts will enforce certain contracts only if they are in writing and are signed by the parties who are going to be obligated to full fill them. These contracts often include:
• any promise to be responsible for someone else’s debts — often called a surety contract or a guaranty; one example would be an agreement by parents to guarantee payment of a loan made by a bank to their child;
• any promise, made with consideration, to marry (though this rule has been eliminated in many states);
• any promise that the parties cannot possibly fulfill within one year from when they made the promise;
• any promise for the sale of goods worth more than $500 or lease of goods worth more than
$1,000 (the amounts may vary from state to state);
• any promise to bequeath property (give it after death);
• any promise to sell stocks and bonds (this provision is eliminated in some states).
Some states have additional requirements for written contracts. These statutes are designed to prevent fraudulent claims in areas where it is uniquely difficult to prove that oral contracts have been made, or where important policies are at stake, such as the dependability of real estate ownership rights. Promises to extend credit are often in this category. One typical area of state regulation is automobile repairs; many states require that estimates for repair work be given in writing. If they arenot, and the repair is done anyway, the contract may not be enforceable, and the repair shop may not be able to get its money if the customer disputes authorizing the repairs.
Where a written contract is required, a signature by the party to be charged — that is, the person whom the other party wants to hold to the contract — is also necessary. A signature can be handwritten, but a stamped, photocopied, or engraved signature is often valid as well, as are signatures written by electronic pens. Even a simple mark or other indication of a name may be enough. What matters is whether the signature is authorized and intended to authenticate a writing, that is, indicate the signer’s execution (completion and acceptance) of it. That means that you can authorize someone else to sign for you as well. But the least risky and most persuasive evidence of assent is your own handwritten signature.
Incidentally, hardly any contracts require notarization today. Notary publics or notaries, once important officials who were specially authorized to draw up contracts and transcribe official proceedings, act now mostly to administer oaths and to authenticate documents by attesting or certifYing that a signature is genuine. Many commercial contracts, such as promissory notes or loan contracts, are routinely notarized with the notary’s signature and seal to ensure that they are authentic, even where this is not strictly required. Many technical documents required by law, such as certificates of incorporation and real property deeds, must be notarized if they are going to be recorded in a local or state filing office.
1.5. Offer and acceptance
Offer and acceptance are the fundamental parts of a contract, once capacity is established. An offer is a communication by an offeror of a present intention to enter a contract. (The offeror is the person making the offer.) It is not simply an invitation to
negotiate. For the communication to be effective, the offeree (the one who is receiving the offer) must receive it. In a contract to buy and sell, for an offer to be valid, all of the following must be clear:
• Who is making the offer?
• What is the subject matter of the offer?
• How many ofthe subject matter does the offer involve (quantity)?
• How much is offered (price)?
Let’s say you told your friend, „I’ll sell you my mauve-colored Edsel for one thousand dollars.“
You’re making the offer, your friend is receiving it, and the car is the subject matter. Describing the car as a mauve Edsel makes your friend reasonably sure that both of you are talking about the same car (and only one of them). Finally, the price is $1,000. It’s a perfectly good offer.
Advertisements are not offers, as much as they seem like it. Instead, courts usually consider advertisements an „expression of intent to sell“ or an invitation to bargain.
1.6. Give and take
A contract can only come about through the bargaining process, which may take many forms. This chapter discusses the definitions of consideration, offer, and acceptance. All the principles discussed here will have to be present, in some form, in any contract.
An offer doesn’t stay open indefinitely, unless the offeree has an option, which is an irrevocable offer (discussed below). Otherwise, an offer ends when:
• the time to accept is up — either a „reasonable“ amount oftime or the deadline stated in the offer;
• the offeror cancels (revokes) the offer;
• the offeree rejects the offer;
• the offeree dies or is incapacitated.
An offer is also closed, even if the offeree has an option, if:
• a change in the law makes the contract illegal;
• something destroys the subject matter ofthe contract (see below);
Note that there are special kinds of contracts called options. An option is an agreement, made for consideration, to keep an offer open for a certain period. For example, in return for a fifty-dollar payment today, you might agree to give your friend until next Friday to accept your offer to sell her your Edsel for $1,000. Now you have an option contract. The fifty dollars is not a down payment or
a deposit, but the price of the option. Selling an option puts a limit on your ability to revoke an offer, a limit that the optionee (the option-holder) bargains for with you in return for the fifty dollars.
A contract is not complete unless an offer is accepted. But what, exactly constitutes the acceptance of an offer? Acceptance is the offeree’s voluntary, communicated agreement or assent to the terms and conditions of the offer. Assent is some act or promise of agreement. An easy example of an assent might be your rriend saying, „I agree to buy your mauve Edsel for one thousand dollars.“
Generally, a valid acceptance requires that every material term agreed to be the same as in the offer. In addition, if the offer requires acceptance by mail, you must accept by mail for the offer to be effective. Be aware that under the mailbox rule, an offer accepted by mail is usually effective when you put the letter in the mailbox, not when it is received — unless the terms for acceptance state otherwise. If there’s no such requirement, you just have to communicate your acceptance by some reasonable means (not by carrier pigeon, smoke signals or •channeling. but by telephone, mail, e¬mail or facsimile). On the other hand, an assent that is not quite so specific but is crystal-clear in its meaning would also suffice — such as, in the Edsel example, saying, „It’s a deal. I’ll pick it up tomorrow.“ The standard is whether a reasonable observer would think there was an assent.
In most cases, silence does not constitute acceptance of an offer. It isn’t fair to allow someone to impose a contract on you unless you go out of your way to stop it. Hence your cable TV company cannot force a contract for additional services on you simply because you failed to reject its offer. Yet there are circumstances where failure to respond may have a contractual effect. Past dealings between the parties, for example, can create a situation in which silence constitutes acceptance. Suppose a fire insurance company, according to past practice to which you have assented, sends you a renewal policy (which is in effect a new contract for insurance) and bills you for the premium. If you kept the policy but later refused to pay the premium, you would be liable for the premium. This works to everyone’s benefit: If your house burned down after the original insurance policy had expired but before you had paid the renewal premium, you obviously would want the policy still to be effective. And the insurer is protected from your deciding to pay the premium only when you know you have sustained a casualty loss.
On the other hand, speechless acts can constitute an acceptance. Any conduct that would lead a reasonable observer to believe that the offeree had accepted the offer qualifies as an acceptance. Suppose you say, „Ed, I will pay you fifty dollars to clean my garage on Sunday at nine o’clock a.m.“ If Ed shows up at nine o’clock a.m. on Sunday and begins cleaning, he adequately shows acceptance (assuming you’re home or you otherwise would know he showed up).
To take another example, you don’t normally have to pay for goods shipped to you that you didn’t order (a later section will discuss this in more detail).
otherwise would only have to allow them to be taken back at no cost to you. But if you owned a shop and you put them on display in your store and sold them, you would have accepted the offer to buy them from the wholesaler and you would be obligated to pay the invoice price. Sometimes this is called an implied (as opposed to an express) contract. Either one is a genuine contract.
1.6.2. The Reasonable Person
Throughout this and any other law book, the word „reasonable“ will appear many times. Very often you’ll see references to the reasonable man or the reasonable person. Why is the law so preoccupied with this mythical being?
The answer is that no contract can possibly predict the infinite number of disputes that might arise under it. Similarly, no set of laws regulating liability for personal or property injury can possibly foresee the countless ways human beings and their property can harm other people or property. Since the law can’t provide for every possibility, it has developed the standard of the „reasonable person“ to furnish some uniform standards and to guide the courts.
Through the fiction of the „reasonable person,“ the law creates a standard that the judge or jury may apply to each set of circumstances. It is a standard that reflects community values, rather than the judgment of the people involved in the actual case. Thus a court might decide whether an oral contract was formed by asking whether a „reasonable person“ would conclude from people’s actions that one did exist. Or the court might decide an automobile accident case by asking what a „reasonable person“ might have done in a particular traffic or hazard situation.
A contract usually is .in effect- as soon as the offeree transmits or communicates the acceptance __ unless the offer has expired or the offeror has specified that the acceptance must be received before it is effective, or before an option expires . In these situations, there’s no contract until the offeror receives the answer, and in the way specified, if any.
An agreement to agree is seldom a contract, because it suggests that important terms are still missing. Rarely will a court supply those terms itself. An agreement to agree is another way of saying that there has not yet been a meeting of the minds, although the parties would like there to be. Another common question people have, as funny as it sounds, is whether a joke can be an offer.
That depends on whether a reasonable observer would know it’s a joke, and on whether the acceptance was adequate. In our Edsel example, you probably couldn’t get out of the contract by saying, „How could you think I’d sell this for $1,000? I meant it as ajoke!“ On the other hand, if someone sued you because you „backed out“ on your „promise“ to sell her France for fifteen dollars, the joke would be on her — no one could have reasonably thought you were serious.
Most contracts have conditions. People often use the word „condition“ to mean one of the terms of a contract. But a more precise definition is that a condition is an event that has to occur before one or both parties must perform.
A condition can be a promise. For example, if your friend, from out earlier case, had said, „I’ll buy your mauve Edsel only if you deliver it to me by midnight,“ and you accept that condition, you have both promised him delivery by midnight and made that a condition of the contract. On the other hand, many conditions involve uncertain events not under the direct control of the parties to the contract. Thus neither of them can promise anything about the condition, but the conditions sti]] must be fulfilled for the contract to go forward. Examples are conditioning a home purchase on obtaining financing, on the sale of the buyer’s present home, or on an acceptable home inspection report.
In order for a contract to exist, both sides must give some consideration. There is a crucial principle in contract law ca]]ed mutuality of obligations. It means that both sides have to be committed to giving up something or doing something. If either party reserves an unqualified right to bailout, that person’s promise is illusory: no promise at all.
1.8. In consideration
The doctrine that consideration is critical to formation of a contract came about in the last few centuries. Until then elaborate formality rather than consideration was the chief requirement. The necessary formalities were a sufficient signed writing, a seal or other testation of authenticity, and delivery to whomever would have the rights under the contract. A seal could be an impression on wax or some other surface, bearing the mark (often found on a • signet ring•) of the person making the promise. The vestiges of the seal remain in some contracts, where the initials „L.S.“ (for the Latin locus sigilli, „place of the seal“), or simply the word „seal,“ is printed to represent symbolically the authentication of the contract’s execution. Even today, traditional Jewish wedding contracts are made on these formal bases: a writing by the groom, an attestation by witnesses, and delivery (also witnessed) to the bride.
There is no minimum amount of consideration required to effect a contract. A price is only how people agree to value something, so there’s no absolute standard of whether a price is fair or reasonable. The courts presume that people will only make deals that they consider
worthwhile. So if you make a contract to sell your car for one dollar, a court will probably enforce it. (But don’t sell it for $1,000 and just report a one-dollar sale to the state to avoid paying the full sales tax. It’s unethical, illegal, and dangerous: many states have systems in place to check for just such abuses.) The exception is something that would „shock the conscience ofthe court.“
Consideration is any promise, act, or transfer of value that induces a party to enter a contract. Consideration is a bargained-for benefit or advantage, or a bargained-for detriment or disadvantage. A benefit might be receiving $10. First dibs on Super Bowl tickets might be an advantage. A disadvantage may involve promising not to do something, such as a promise not to sue someone. For these purposes, even quitting smoking, done with the reasonable expectation of some reward or benefit from someone else, is regarded as a detriment: Even though it’s good for your health, it cost you effort that you otherwise would not have made. And even if it were effortless, your commitment to forbear from engaging in lawful conduct would still constitute consideration.
For example, you could agree to give your car to your friend in exchange for her promise that she’ll stop letting her schnauzer out late at night. Your friend is giving up what is presumably her right to let her dog out any time she wants. In return, you are giving up that Edsel. Other types of consideration include a promise to compromise an existing dispute. Consideration has to be a new obligation, because someone who promises to do what he or she is already obligated to do hasn’t suffered any detriment, or bestowed anything the other party wasnet: already entitled to.
For example, suppose you agree to have a contractor paint your house this Thursday for $500.
Before starting, though, his workers demand higher wages. He tells you on Wednesday night that he settled the strike but now the job will cost $650. You need the house painted before you leave town n Friday, and there’s no time to hire another contractor, so you agree to the new price. But the new „agreement“ (the new price) is not enforceable by him. Under the original contract, he already had to paint your house for $500. He should have figured the possible increased costs into the original price. You didn’t get anything of benefit from the modified „contract,“ since you already had his promise to paint the house. There is no new contract because there is no new consideration. Therefore, you only owe $500 __ the old agreement remains in effect. Along the same lines, police officers are never entitled to reward money posted for catching fugitives or turning in information leading to someoneos conviction. That‘s their job.
Just because consideration has to be new doesnot mean a contract can never be voluntarily renegotiated. It only means that no one can force another party to renegotiate by taking advantage of an existing agreement. In the housepainting example, you may agree to a renegotiation even though it would technically not be enforceable. Perhaps you think the painter „deserved“ more than he had agreed to take, or want to maintain a good to relationship with him. (Considerations like these are what motivate many sports teams to „renegotiate“ their stars’ salaries. Though they have no legal obligation to do so, they nonetheless may decide to keep their stars „happy.“)
While it‘s true you can go to the other party and ask for more money, keep in mind that whenever you get involved in a deal, you are taking a risk that it might be less beneficial for you than you planned when you agreed to the contract terms. The other party doesn’t have to ensure your profit, unless the two of you included that in your bargain.
Based on the rule of consideration, a promise to make a gift is not usuaUy enforceable, if it truly is only a promise to make a gift, because a gift lacks the two-sided obligation discussed above. But if the person promising the gift is asking for anything in return, even by implication, a contract may be formed. The key, again, is consideration.
I wrote earlier that consideration is a two-way street, and that both parties must get some for a contract to be formed. There is an exception to that rule. Sometimes a contract will be formed by the reliance of one party on another person“s promise, even if the one making the promise hasnot gained anything. The concept of reliance is that a contract may be formed if one party reasonably relies on the other’s promise. That means that he or she does more than expect to receive what was promised. He or she has to do something that wouldn’t have been done, or fail to do something that would have been done, but for the promise. If that reliance causes some loss, he or she may have an enforceable contract.
Suppose that rich Aunt Alice loves your kids. On previous occasions she has asked you to buy them expensive presents and has reimbursed you for them. This past summer, she told you she would like you to build a swimming pool for the kids, and send her the bill. You did so, but moody Aunt Alice changed her mind. Now she refuses to pay for the pool, and claims you can’t enforce a promise to make a gift. The pool, however, is no longer considered a gift. You acted to your detriment in reasonable reliance on her promise, by taking on the duty to pay for a swimming pool you would not nonnally have built.
Alice has to pay if you prove that she induced you to build the pool, especially ifthis understanding was consistent with many previous gifts. Remember,