Describe an example of a contract that you or someone you know entered into (e.g., rental agreement, cell phone agreement, property purchase or lease [e.g., car, home, furniture, etc.], home or car repair, or student loan agreement).
In your description, be sure to provide specific contractual details including parties and subject matter involved.
Describe how each essential element applies to your example.
Critical Analysis Paper
[WLOs: 1 ,2, 3] [CLOs: 1, 2, 3]
Prior to beginning work on this assignment, review Chapters 4, 5, 6, and 7.
In your paper,
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Describe an example of a contract that you or someone you know entered into
(e.g., rental agreement, cell phone agreement, property purchase or lease [e.g.,
car, home, furniture, etc.], home or car repair, or student loan agreement).
o In your description, be sure to provide specific contractual details
including parties and subject matter involved.
Describe how each essential element applies to your example.
The Critical Analysis paper
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Must be three to four double-spaced pages in length (not including title and
references pages) and formatted according to APA StyleLinks to an external
site. as outlined in the Writing Center’s APA Formatting for Microsoft WordLinks
to an external site. resource.
o Consider utilizing level headings to organize your paper. See the APA
Style ElementsLinks to an external site. recourse for assistance.
Must include a separate title page with the following:
o Title of paper in bold font
▪ Space should appear between the title and the rest of the
information on the title page.
o Student’s name
o Name of institution (The University of Arizona Global Campus)
o Course name and number
o Instructor’s name
o Due date
Must utilize academic voice. See the Academic VoiceLinks to an external
site. resource for additional guidance.
Must include an introduction and conclusion paragraph. Your introduction
paragraph needs to end with a clear thesis statement that indicates the purpose
of your paper.
o For assistance on writing Introductions & ConclusionsLinks to an
external site. and Writing a Thesis StatementLinks to an external site.,
refer to the Writing Center resources.
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Must use at least two credible and/or scholarly sources in addition to the
course text.
o The Scholarly, Peer-Reviewed, and Other Credible SourcesLinks to an
external site. table offers additional guidance on appropriate source
types. If you have questions about whether a specific source is
appropriate for this assignment, please contact your instructor. Your
instructor has the final say about the appropriateness of a specific
source.
o To assist you in completing the research required for this
assignment, view Quick and Easy Library ResearchLinks to an external
site. tutorial, which introduces the University of Arizona Global
Campus Library and the research process, and provides some library
search tips.
must document any information used from sources in APA Style as outlined in
the Writing Center’s APA: Citing Within Your PaperLinks to an external
site. guide.
must include a separate references page that is formatted according to APA
Style as outlined in the Writing Center.
o See the APA: Formatting Your References ListLinks to an external
site. resource in the Writing Center for specifications.
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Contracts: Offer, Acceptance, and
Consideration
Prostock-Studio/iStock/Getty images plus
Learning Outcomes
After studying this chapter, you will be able to
Explain the requirements for a valid offer.
Describe the difference between express, implied-in-fact, implied-in-law, bilateral, unilateral,
simple, and formal contracts.
List and explain the five events that can happen after an offer.
Explain the ways an offer may terminate.
Explain acceptance under the common law and the UCC.
Define consideration and recognize situations in which consideration is not present.
Explain click-wrap contracts and sales tax on internet sales.
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A contract is a legally enforceable agreement between two or more people. Although all contracts contain
enforceable promises, not all promises result in contracts. We enter into contracts every day. Consider the following
situation.
On the way to work, you purchase a cup of coffee. While at the café, you use your phone to browse the web and
purchase tickets to a concert. Finally, you order an Uber to take you to work or to class. In each of these examples,
a contract was made. In each case there was a valid offer and acceptance (you’re ordering the drink and the café is
providing it), consideration (the cup of coffee and the money you pay for it), capacity (you are 18 years old and
have mental capacity), and legality (coffee is a legal to purchase). No documents were signed, and no negotiations
took place; nevertheless, valid contracts were formed giving each party certain rights and imposing on each party
equal duties as well.
The vast majority of contracts are routinely completed without a problem and without the interested parties giving
the matter much thought. Problems arise when parties to a contract fail to live up to their agreements or
misunderstand what it is that they agreed to do. In such cases the courts may be called on to settle the dispute in
accordance with established rules of law that determine each party’s rights and obligations.
Many misunderstandings and disagreements can easily be avoided if each party has a basic understanding of the
law of contracts. The following chapters will explore the requirements for the formation of valid contracts and the
remedies available when they are breached.
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4.1 The Elements of a Contract
In order for there to be a valid contract, five essential elements must exist. These include an offer to enter into a
contract, acceptance of the offer by the other party, consideration between the parties, mental capacity, and a legal
purpose for the contract.
Before we get into the details of these five requirements, let’s briefly define each of the required elements.
1. Offer: An invitation for another to enter into a contract.
2. Acceptance: An agreement to enter into a contract under the terms of the offer.
3. Consideration: Anything of legal value that is asked for and received as the price for entering into a
contract.
4. Capacity: The mental competency to enter into a contract. Additionally, there are special rules for people
who are under legal age.
5. Legality: The extent to which the contract is legal and not against public policy.
We will explore each one of these elements in this unit. We will also discuss defenses to contracts, which are legal
excuses for not performing.
Contract law is governed by two different bodies of law; some contracts are governed by the common law and
others by the Uniform Commercial Code (UCC). First you need to identify which body of law a contract is under.
Fortunately, that is quite easy, since all contracts for the sale of goods are governed by the UCC. All other contracts
are under the common law—including, for example, real estate and personal services contracts. Where the UCC
rules are an exception to a basic common law rule, they will be briefly discussed in this chapter, while other issues
concerning the UCC and sale of goods will be explored in later chapters.
Example 4.1. Miranda purchases a motorcycle, rents an apartment, hires Jeremy to paint her living room, and buys
a new iPhone. What are the governing bodies for each of these agreements? The motorcycle and iPhone are goods
and so are governed by the UCC, while renting an apartment and hiring a painter are under the common law.
It is also important to know the correct vocabulary to identify the parties to a contract. The offeror is the person
who makes an offer to the offeree: the person who can accept, reject, or counter the original offer. When an offer is
accepted, contract formation has begun. If the other three requirements are present (consideration, capacity, and
legality), a valid contract is formed.
Example 4.2. Manuela offers to sell Linda her laptop for $450, and Linda accepts the offer. A contract is formed,
since there is a valid offer and acceptance, consideration (something of value is given and received by each party—
the laptop and the $450), and capacity (both parties are of sound mind and are freely entering into the agreement),
and the contract is for a legal purpose. In some cases there is a further requirement that the contract be in a
particular form—for example, in writing—in order for it to be enforceable.
With the basics elements of a contract and the bodies of law governing a contract established, we will continue to
types of contracts.
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4.2 Types of Contracts
Contracts can be classified many ways. This section will discuss some of the more important classifications.
Remember as you read through this material that one contract can have all of the characteristics discussed: It can be
express, bilateral, and formal; or implied, unilateral, and informal.
Valid, Void, and Voidable Contracts
A valid contract is one that meets all legal requirements, meaning that it has all five elements of a contract. A valid
contract is what people generally aim for when they seek to make a contract.
A voidable contract is a contract that can be avoided by one of the parties and either results from a lack of
capacity or has a defense against it. Voidable means that at least one of the parties, and sometimes both, can get out
of the contract without being liable for breach, generally because of some circumstance present when the contract
was made. For example, contracts made by minors (people under a statutory age) are voidable at the option of the
minor.
Lastly, an agreement that is illegal constitutes a void contract, which generally means that it does not have all five
elements of a contract. For example, an illegal contract is void and unenforceable.
Express Contracts Versus Implied-in-Fact and Implied-in-Law Contracts
The word “express” in law means oral or written. Therefore, an express contract is one that is either in writing or
oral.
Example 4.3. Sam says to Ben, “I’ll sell you my Business Law book for $50.” Ben replies, “I’ll take it.” This is an
express contract because it is spoken. It also has all of the elements of a contract; there is an offer and acceptance,
consideration is paid, it is legal to buy and sell books, and we can assume both Ben and Sam are over age 18 and
have mental capacity.
While an express contract is written or oral, you may wonder how a contract can be formed without words. Those
contracts are implied, and there are two types: implied-in-fact and implied in law.
Edwin Tan/ E+/ Getty Images
A contract does not require a written document
or even a single word being spoken, as long as
the parties’ intentions are clear. Here, paying for
groceries after a cashier rings them up
constitutes a contract.
Implied-in-fact contracts have all five elements of a
contract, not by the express words of the parties but by their
actions. Think about the last time you bought groceries. Did
you tell the checkout clerk, “I offer to buy this gallon of milk
at its advertised price”? Probably not, but the clerk
understood that you wanted to enter into a contract and
accepted (by ringing up your order) on behalf of the store.
As long as the parties’ actions plainly indicate an intention to
enter into a contract, and as long as the terms of that contract
can clearly be implied by those actions, a binding contract
can be created even without a single word being spoken.
Consider the following example.
Example 4.4. Dana walks up to a newsstand, places three
quarters on the counter, and takes a copy of her hometown
newspaper. This is an implied-in-fact contract. The offer is
placing the quarters on the counter, and the acceptance is the
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store’s acquiescence to the customer leaving with the paper; consideration is the exchange of money for the paper,
and there is capacity and legality. All five elements are present through gestures.
The second type of implied contract is an implied-in-law contract, or quasi contract. Although it shares the word
“implied,” it is very different from an implied-in-fact contract. For one, an implied-in-law contract is missing one
or more of the elements of a contract. Despite this fact, the courts will sometimes find that a contract exists. An
example of this type of contract will help clarify.
Example 4.5. Suppose you are hit by a car and knocked unconscious. An ambulance takes you to the hospital, and
doctors treat you. When you wake up, you have a bill for $2,500. Since you were not conscious when the
ambulance took you to the hospital, there was no offer and acceptance, but you did receive these medical services.
Would it be fair for you to walk away without having to pay? No. Even though you could not accept or decline, the
law ensures that health care providers are reimbursed for their costs, and so the court will find that a contract exists
to prevent a patient from getting something (the treatment) for nothing—known as unjust enrichment. Finding
that a contract exists eliminates this from happening. If the plaintiff proves the requirements for an implied-in-law
contract, the plaintiff is entitled to recover the fair market value of the benefit that was conferred on the receiving
party.
This contract can also arise when someone receives services without objecting to them. The following example
illustrates this concept.
Example 4.6. Peter had spoken with you about possibly painting your house, but no agreement was made.
However, one day you look out your window and see Peter pull up in his work van and begin to set up his ladder.
You don’t say a word to Peter but simply let him paint the house. Even though there is no contract here, you have
accepted the benefit (you could have told Peter to stop, but you chose not to), and a reasonable person knows that
they have to pay for painting services. Peter is entitled to the fair market value of the paint job. Otherwise, you
would be unjustly enriched.
But what if Peter comes over when you’re not home and paints your house? Because you did not accept (you had
no chance to decline), there is no quasi contract, and Peter cannot recover any money under this theory. (Peter
should have taken a business law course!)
In summary, in an express contract all five elements occur orally or in writing; an implied-in-fact contract has all
five elements via gestures; and an implied-in-law contract is missing one or more of the elements, but the court will
nevertheless declare that a contract is present to prevent unjust enrichment.
Bilateral Contracts Versus Unilateral Contracts
Next we will explore the differences between bilateral and unilateral contracts. If the offeror (the person who
makes an offer to enter into a contract) and offeree (the person to whom a contract offer is made) exchange
promises to perform some act in the future, a bilateral contract is formed. Or stated another way, if the offeror is
looking for a promise from the offeree, then the contract is bilateral. The following examples help demonstrates this
concept.
Example 4.7. Pedro promises to sell his old car to Irving if Irving will promise to pay him $2,000. Irving accepts
the offer.
Example 4.8. Lina promises to babysit for Inga every Saturday for the next 3 months if Inga will promise to pay
her $8 per hour. Inga accepts.
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Example 4.9. Tina promises to sing at Sofia’s club next Friday, Saturday, and Sunday if Sofia will promise to pay
her $5,000 per night. Sofia agrees.
In a bilateral agreement, as soon as an offeror’s promise is accepted, a contract comes into existence, and both
parties are bound. If neither party lives up to the agreement, a suit for breach of contract can result.
In a unilateral contract, one party makes a promise to the other that can only be accepted by the other’s act or
performance; the offeror is seeking not a promise but an act. For example, if Lana offers to pay $100 to anyone
who finds and safely returns Fluffy, her lost cat, Fred can only accept and form a contract by actually returning
Fluffy safely to Lana. If Fred tells Lana, “I’ll find Fluffy later, I promise,” there is no acceptance and no contract,
because in a unilateral contract, the offeror is seeking an act, not a promise.
In the Media:
Texas Lieutenant Governor Dan Patrick Pays Out $25,000 to Democrat
Who Reported Republican Voter Fraud
According to news reports, Texas lieutenant governor Dan Patrick made the following offer after the 2020
presidential election: He announced that he was offering up to $1 million “to incentivize, encourage and
reward people to come forward and report voter fraud” (Mark, 2021). No one responded to the offer for
about a year, but then a Pennsylvania poll worker came forward to report a Republican voter who tried to
vote twice in the prior election. The poll worker, Eric Frank, received a $25,000 check from Patrick but
voiced his disappointment that the reward was not for more money. He was told by Patrick’s spokesperson
that he received the minimum reward because they were “looking at bigger fish”(Mena, 2021).
As a reward contract, the offer to the general public is unilateral and can only be accepted by an act; in this
case, reporting voter fraud. When Frank reported the voter, he accepted the offer and there was contract
formation, making the reward contract enforceable against Patrick.
Question to Consider
1. What would happen if Eric Frank had reported the voter without being aware of the reward offer
and then later learned of it? Would he still be entitled to the money?
Informal Contracts Versus Formal Contracts
An informal contract is any oral or written contract that is not required to follow a specific form or be signed,
witnessed, or sealed. The vast majority of contracts entered into by businesses and private individuals are informal
contracts, even though some may seem rather complex and go on for many pages.
A formal contract may need to be in a particular form, be signed in front of witnesses, have a seal applied (a
raised stamp), or entail a combination of such formalities. If not, the contract is unenforceable.
Applying the Law: Types of Contracts
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4.3 The Offer
As previously noted, the offer is the first of the five elements required to form a contract. To determine whether an
offer was made, the court will consider a number of factors. The first is that the language of the offer must be
definite and certain; the second is that the offer must appear to a reasonable third party to be an offer; the third is
that the offer must be communicated by the offeror to the offeree.
The Language Must Be Definite and Certain
Suppose that Sam tells Ben, “I’ll sell you my car for
$5,000.” While an offer does not need to contain specific
language such as “I promise to sell you” or “I offer to sell
you” in order to be effective, it is important that a reasonable
person under the same circumstances would clearly
understand that an offer was intended by the offeror. In this
case the language “I’ll sell” is clear and definite. Language
such as “I’m thinking about selling,” “I might sell,” “I’d
consider selling,” is not definite and certain, and therefore
the offer is instead categorized as a preliminary negotiation.
Example 4.10. Brianna says to Matias, “I’ll sell you 10
AaronAmat/ Getty Images
grade-A blue widgets at the price of a dollar per widget.”
The first step to purchasing a condo is to make
That is an offer.
an offer. A written offer commonly includes the
Example 4.11. Brianna instead says, “I’ll sell you some price the buyers are willing to pay, the date they
grade-A blue widgets at a price of a dollar per widget,” that can close the transaction, and where they are
is not specific enough, because there is no way of narrowing getting the funds for the purchase.
down what she meant by “some” widgets. Five? Fifty? Five
hundred? Since not even a reasonable person can determine this, there is no offer.
It Must Appear to a Reasonable Third Party That a Contract Was Formed
The language used is always important in helping determine the intent of the parties, but a valid offer can be made
even when no words are spoken, simply by the actions of the parties. If, for example, Muhammad holds out a $20
bill and tells Carol, “I’ll give you this for that fountain pen on your desk,” and Carol takes the money and puts it in
her pocket without saying a word, he will have clearly made an offer and she an acceptance by her actions. This
appears to be a contract.
Example 4.12. On Tyrone’s drive to work one day, his car dies. Tyrone is very upset because this is the fourth time
in 2 weeks that he’s had car trouble, and now he’s going to be late to work again. Tyrone gets out of the car, kicks
the door, and yells, “I’d pay someone $10,000 to drive this piece of junk off a cliff!” Sofia happens to be walking
by and could use $10,000, so she says, “I accept!” Is there a contract? No, because a reasonable person would
realize that Tyrone’s statement is not realistic because he is simply expressing his anger and does not seriously
intend to pay for his car to go over a cliff.
The subjective intent of the offeror and offeree are irrelevant and will not be examined by a court in determining
intent to contract. What is important is not whether an offeror subjectively made an offer in jest but rather whether
the person to whom the offer was made, the offeree, should have realized that the offeror was only joking when
they made the offer. It must be clear to an average person that the offer was not seriously intended; otherwise, the
offeree can accept it and form a valid contract. Examine the following examples.
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Example 4.13. Laverne tells Ernest, “I’d give you a million dollars for a kiss.” Ernest, knowing a good deal when
he hears it, runs to her and gives her a quick smooch before she can change her mind.
Example 4.14. Deborah, exasperated at Gabe’s incessant chatter, tells him, “If you can keep your mouth shut for 5
minutes, I’ll give you an all-expense-paid cruise around the world.” Gabe smiles and remains silent for the required
time period.
In each of the above examples, if the offerees seek to enforce the offerors’ promises, they will have a difficult time.
Laverne and Deborah will almost certainly prevail if they claim that the offers were not seriously intended. Under
the circumstances, a reasonable person should have realized that the offers were intended in jest and were not
serious proposals. But consider the following example.
Example 4.15. Glen, a radio talk show host, is discussing a recent incident in which the governor of the state was
rumored to have had a sexual relationship with an intern. The governor’s opponents are demanding that the
governor be prosecuted for perjury, since he said under oath at a hearing that he had never had sex with “that
woman,” and there now is plenty of evidence that he did. Glen declares that a perjury case in these circumstances
would be ridiculous and states, “No one gets prosecuted for lying about their sex life. I’ll pay $10,000 to anyone
who can show me a case where that’s happened.” Joanna, a law student who has just read a case where a woman
who falsely accused a man of raping her was prosecuted for perjury, promptly sends Glen a copy of the court
decision.
Did Glen make an offer? In all likelihood, a court would say yes, because objectively it sounds as though he is
serious, and he has been reasonably specific with the terms. He may have been joking, but what Glen was really
thinking doesn’t matter! Since there is an offer, Joanna has accepted by doing the requested act, and they have a
contract. Glen must pay the $10,000.
The Offer Must Be Communicated to the Offeree
The third requirement of an offer is that the offer must be communicated to the offeree.
Example 4.16. Daniel returns to his apartment, where he lives alone, and says, “I offer $450 to the first person who
says they want to buy my car.” Since no one heard the offer, it does not exist.
Events After the Offer
Following an offer, there are five events that can take place. They are as follows.
The offer can be revoked.
The offer can expire (lapse of time).
The offer can be rejected or a counteroffer can be made.
The offer can be terminated due to illegality, death, incompetence, or destruction.
The offer can be accepted.
Revocation
As a general rule, an offeror has the right to make a revocation of (cancel) the offer at any time prior to acceptance.
Example 4.17. Emily makes the following offer to Terrell: “I will sell you my Raleigh bike for $100. You can have
until Friday noon to let me know.” Terrell is thinking it over. On Thursday, Emily calls Terrell and says, “Sorry, I
changed my mind. I’m keeping the bike.”
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Can Emily revoke, even when she said Terrell had until Friday? Yes, the promise to hold open an offer to a future
date can only be enforced if the offeree pays money to hold it open. Otherwise, the offeror can “take back” the offer
at any time. To guarantee that the offer remains open, the parties could enter into an option contract.
An option contract exists when the offeree has given the offeror consideration to keep the offer open for a period.
Suppose in the example above, Terrell wants to make sure he has until Friday noon to accept. He can pay Emily
$10 for an option. This means that in exchange for the money, Emily is giving up her right to revoke. If she now
changes her mind on Thursday, Terrell can just ignore the phone call. If he accepts by calling Emily on Friday
morning and saying, “I’ll take that bike,” they will have a contract.
Note that Emily is not getting a down payment with that $10. Terrell still has to pay the full $100 for the bike if he
accepts, and if he declines, he will not necessarily get the $10 back. There is no rule for what happens to the money
paid to hold open the offer, so if Terrell wants it back, he needs to negotiate that with Emily.
Lapse of Time
If nothing is stated as to how long the offer will remain open, the law says that the offer will remain open for a
reasonable amount of time. Here is an example to illustrate this idea.
Example 4.18. Tawana makes the following offer to Jerome: “I will sell you my Dell laptop for $400.” Jerome tells
Tawana that he’ll think about her offer. Two days later, he calls her and agrees to buy the computer under her terms.
They have a contract. But if Jerome called her after a year, his acceptance would be too late.
A reasonable time will vary with the subject matter. An offer to sell fresh raspberries will terminate before the offer
for the laptop. If Tawana’s offer involved pork belly futures, Jerome’s acceptance would likely be too late, since
that type of commodities market fluctuates widely in very short time periods.
Confusion may be avoided if Tawana simply states a time period in her offer. If she says, “You have until 5:00 p.m.
this Friday to call me and accept,” the offer will automatically expire if Jerome does not respond by then.
Rejection or Counteroffer by the Offeree
If an offeree responds to the offer with either a rejection or a counteroffer, the offer terminates. For example,
assume Emily offers to sell Ben her bike for $100. Consider the following possible responses by Ben.
“No, that’s too much.”
“I’ll give you $75.”
In the first example, Ben is rejecting Emily’s offer. In the second, he is making a counteroffer. In both of these
situations, Emily’s offer promptly terminates. If Ben changes his mind later and calls Emily, saying, “I accept! I’ll
give you $100 for that bike,” Ben is actually making an offer to Emily. There is no contract unless Emily chooses to
accept.
But what if the conversation goes as follows?
Emily: “I’ll sell you my bike for $100.”
Ben: “Hmm. That seems a little high. Would you take $75?”
Emily: “No.”
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Ben: “Okay, I accept. I’ll buy the bike for $100.”
This time, they have a contract. Ben’s remark was not an outright rejection, and he is not making a counteroffer
since he does not say he will buy the bike for $75. He is merely engaging in a little negotiation, which has not
affected Emily’s offer. The offer was still open when Ben accepted.
Termination by Death, Incompetence, Destruction, and Illegality
If an offer is made and then, before the offeree accepts, either the offeror or offeree dies or loses mental capacity,
the offer terminates. If Emily offers to sell her bike to Ben for $100 and Emily then dies, the offer is terminated.
But if Emily offers to sell her bike and Ben accepts and then Emily dies, the contract is enforceable. Ben can sue
Emily’s estate to obtain the bike, but of course he has to pay for it.
The exception to this rule is when the offer is part of an option. So if Emily offers to sell her house to Ben for
$100,000, and Ben pays her $75 for a 30-day option, the offer will stay open for the 30 days even if either Emily or
Ben dies. (In that case the estate of the deceased person could perform instead.)
If Emily offers to sell Ben her bike, but before he can accept, Emily’s neighbor backs her SUV over it, turning the
bike into a twisted metal and rubber abstract sculpture, the offer terminates due to destruction of the subject matter.
If Sandra offers to sell Damian a carved ivory statue, and then the government outlaws the sale of ivory (to protect
endangered elephants), the offer terminates due to illegality. In short, termination of the offer before acceptance
occurs upon death, incapacity, or destruction of the subject matter; but the offer is valid if it is an option contract.
Applying the Law: The Offer
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4.4 Acceptance
Acceptance of an offer is the clear agreement to the terms of the offer. For an acceptance to be valid, it must be (a)
made by a person to whom the offer was made, (b) clear, and (c) communicated to the offeror. The first requirement
is simple: only a person to whom an offer was made may accept it. The following example will illustrate this
concept.
Example 4.19. Professor Garcia, an attorney, offers to draft a will for anyone in her Business Law class for $25.
Bill Jones, who is not a student in the class, overhears the offer while passing by the lecture hall and promptly
walks in to accept the offer. Bill’s acceptance is not valid, since the professor’s offer was made only to students in
her class and could be accepted only by them.
The common law and the UCC have very different rules for acceptance. The common law follows the mirror
image rule, meaning that the terms of the acceptance must match the terms of the offer or the acceptance will be
considered a counteroffer.
Example 4.20. Lewis offers to put new roofing on Abigail’s house for $5,000. Abigail accepts his offer of new
roofing for $5,000. The terms of the acceptance match the terms of the offer. There is a contract.
If the acceptance has terms different from those of the offer,
then it is a counteroffer that revokes the original offer. For
example, Peter offers to paint Harry’s house for $3,000, and
Harry responds, “I accept, but be sure to use Benjamin
Moore brand paint.” The acceptance has a new term, one
that was not in the offer dealing with the brand of paint.
Therefore, the offer and acceptance do not match, and there
is no contract. Instead, Harry has made a counteroffer that
Peter can now accept or reject.
If the contract is for the sale of goods, then contract
formation falls under the UCC Article 2, discussed in more
detail in Chapters 7–9.
SeventyFour/ iStock/ Getty Images Plus
If a woodworker offers to build a piece of
custom furniture for $1,000 and deliver it within
Communicating the Acceptance
30 days, and the offeree says, “Great! But I need
it in 15 days,” this would violate the mirror
Suppose an offer has been made to you and you want to image rule and be considered a counteroffer.
accept. You already know what to say (because you just read
the section above). But how should you communicate this acceptance to the offeror?
If the offeror stated already how you are to accept, you must follow the offeror’s instructions. Some examples
follow.
Example 4.21. Carlos offers to sell you his acoustic guitar for $300 and adds that you should reply by email.
Example 4.22. Emily offers to sell you her bike for $100 and says she must receive your acceptance in writing by
3:00 p.m. Thursday.
Example 4.23. Edmund offers to employ you as his butler for $10,000 per month and states that to accept you must
climb the Matterhorn and plant a red flag on the summit that says “I accept.”
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In all of these situations, the offeror has directed the means of acceptance. To contract for the guitar, you must
email Carlos. If you call him, you will actually be making a counteroffer. If you attempt to accept Emily’s offer by
mailing an acceptance on Tuesday that she receives on Friday, that will be another counteroffer. And as for Edmund
. . . well, get out your ice pick and make a reservation for Switzerland if you really want that job! Note that this is
all up to the offeror; there is no requirement that they be reasonable. The offeror can make acceptance just as
difficult or silly as they wish.
Of course, in many situations, the offeror doesn’t give any directions on how to accept. Jake offers to sell Calvin
his Business Law book for $20, and that’s all he says. The rule then is that the offeree can use any reasonable means
of acceptance. In face-to-face transactions, acceptance is usually communicated verbally. As soon as assent is
given, a contract is formed that obligates both parties to render whatever performance was promised.
Since a contract comes into existence as soon as the offeror’s offer is accepted by the offeree, problems can arise
when parties are not dealing face-to-face when a contract is made.
Applying the Law: Acceptance
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4.5 Consideration
Once an offer and acceptance are established, the third element of a contract must be examined. A contract is a
bargained-for exchange between the parties, and consideration is the thing being exchanged, which is the price of
the contract. See Figure 4.1, which depicts Harry contracting Peter to paint his house. In this example, the painting
of Harry’s house and the $3,000 are consideration, since they are the items being exchanged in the contract.
Figure 4.1: Diagramming consideration
Diagramming contracts is a good way to keep track of consideration. Here, Harry has
contracted to pay $3,000; Peter has contracted to paint Harry’s house.
What Is Consideration?
Example 4.24. Norma offers to sell Leopold her stamp collection for $1,000. Leopold accepts. A valid contract is
formed, the consideration for which is as follows: the $1,000 that Leopold must pay to Norma and the stamp
collection that Norma must turn over to Leopold.
Consideration can be either of the benefit form, as in the preceding case in which Leopold gets the benefit of the
stamp collection and Norma is entitled to the benefit of the money, or the detriment (also called forbearance) form,
as when someone gives up something they have a legal right to do.
Example 4.25. Jenny accidentally hits Theo with her car. Jenny’s insurance company offers Theo $15,000 in
compensation for his injuries, but in exchange he must sign a full release.
Here, the consideration to Theo is the promise to give him $15,000. If Theo accepts, his consideration to the
insurance company is his giving up his right to sue based on the accident. Since Theo has a right to bring a lawsuit,
his release is consideration to the insurance company, and they have a binding contract.
But if Jared, a business law student, threatens to sue Aaron on grounds that Aaron’s personality constitutes
intentional infliction of obnoxiousness and only agrees to drop the case if Aaron will promise to pay him $500,
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Jared’s forbearance from suing is not consideration. Jared did not in good faith believe he had a right to sue, so
Aaron is not bound to pay the money.
It is important to focus on the idea that a contract involves an exchange to understand the concept of consideration.
Suppose Maya, who is cleaning out her garage, says to Josh, “I offer you this bike.” Josh replies, “Great! I accept.”
Maya then changes her mind and decides to sell the bike on Craigslist. Can Josh sue for breach successfully? Josh
thinks there is an offer and acceptance, after all. But alas for his case, there is no consideration. While Maya did
promise him the bike, he gave nothing in return. Thus, Maya’s promise is merely an unenforceable gift promise.
What Isn’t Consideration?
To have a contract, we see that there generally must be consideration flowing in both directions. However,
sometimes there are things that at first glance seem to be consideration but legally don’t qualify. This category
includes past consideration, preexisting legal duties, and illusory promises.
Also, note that some promises are simply too vague to qualify. If Darrel promises Jane a diamond ring in 3 months’
time in exchange for her love and affection, there is no consideration. If your mother promises you $1,000 at the
end of the semester if you are a good student this term, it might sound like a unilateral offer to you, but in fact you
will not be giving consideration. What Mom thinks is good may not be the same as what you consider being good!
Past Consideration
If a benefit has already been given, there is no present bargained-for exchange, and thus no consideration and no
binding agreement. Consider the following examples.
Example 4.26. Helen, the owner of ABC Company, wishes to reward the loyal service of Matthew, an employee.
She drafts an agreement that reads as follows: “In consideration of Matthew’s faithful service to ABC Company
throughout the past 30 years, ABC Company hereby promises to pay to Matthew a yearly pension of $20,000 per
year.” Matthew accepts.
Example 4.27. Yin, grateful for Mark having saved his life, tells him, “In consideration of your bravery in rescuing
me from the path of an oncoming truck, I promise to give you $50,000.” Mark accepts.
In both of the above examples, past consideration is given, and there is no contract. In reality, Helen and Yin want
to make a gift to reward past service, and gift promises are not enforceable. Matthew’s 30 years of faithful service
are certainly valuable, as is Mark’s good deed. But there is no exchange involved in these situations, since the
benefits from Matthew and Mark have already been given without any bargaining.
Preexisting Duty
It is not consideration to do what one is already obligated to do. Consider these examples.
Example 4.28. Mara, a police officer, gives information that leads to the arrest of a bank robber. Mara attempts to
claim the $10,000 reward the bank has offered.
Example 4.29. Al, a company’s accountant, agrees to recheck the company’s tax returns in exchange for a
percentage of the tax savings he can realize for the company.
Neither Mara nor Al has given consideration to make a contract. They are already obligated to perform the duties
for which they seek additional compensation: The police officer has a duty to the public to catch criminals, and the
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accountant has a preexisting duty to find the largest legal refund he can for his employer. Mara and Al are not
giving anything new or different than they are already required to give.
A common example in which the preexisting duty rule comes into play is in the area of agreements modifying a
preexisting debt. In general, a person who owes a debt to another cannot enter into an agreement to pay a lesser
amount, since there is no consideration for the new agreement.
Example 4.30. Daniel owed Carla $50,000 that was due last June. Now, in November, he still hasn’t paid anything,
and Carla is starting to think he never will. Daniel now proposes that in exchange for his paying $40,000 next
week, Carla promise to take that sum as payment in full. Carla, feeling she may never see the money otherwise,
agrees.
Can Carla collect the $40,000, then turn around and sue Daniel for the remaining $10,000 on the original debt? In
most states, the answer is yes. She is not bound to her promise to accept the lesser sum as full payment, because she
received no new consideration. Daniel’s payment of the $40,000 was just part of what he already owed: He had a
preexisting legal duty to pay that money. The result could be different if there was a good faith dispute as to the
amount actually owed. If Daniel owed the money because he had bought 50,000 widgets from Carla and he claims
that 20,000 of them were defective, and they agree to settle for $40,000, both parties are bound. Also, if the money
is paid before it is due, or if it is accompanied by some new item of consideration, or if the settlement occurs in a
bankruptcy proceeding, the creditor’s promise to accept a lesser amount as payment in full is generally binding.
Illusory Promises
In order for consideration to be valid, each party to an agreement must be obligated under the contract. There are
situations in which both parties to a contract appear to be giving consideration, but in fact someone is making an
illusory promise and not actually committing to do anything. An example follows.
Example 4.31. Wendy offers to sell Oscar “1,000 widgets at $1 per widget, delivery to be on or before June 1.
Seller reserves the right to cancel at any time without penalty.” Oscar accepts.
At first look, this appears to be a binding agreement because we seem to have an offer and acceptance, and Oscar
has promised to pay $1,000, which is consideration on his part. However, because Wendy included a right to cancel
that is completely unrestricted, she has not committed to selling a single widget to Oscar. Basically, Wendy has said
she will sell Oscar the widgets if she feels like it.
As a result, if Oscar doesn’t receive the widgets by June 1, he will be unable to sue Wendy for breach of contract.
Wendy’s promise was illusory, or an illusion of a promise. Thus, there was no consideration from Wendy to Oscar
to support a contract.
Distinguishing Illusory Promises and Requirement Contracts
While promises to buy anything one wishes, chooses, desires, or wants are illusory, a promise to buy as much of a
given item as one will need or require is valid consideration. Consider the following examples.
Example 4.32. ABC Company promises to buy from XYZ Company “all the heating oil it needs next winter for
$3.00 per gallon.”
Example 4.33. Carl, a carpenter, promises to buy from Jan’s Hardware “all the hardware supplies he needs for his
business during the next year at a discount of 25% off regular retail prices.”
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Each of the above examples represents a valid requirement contract with valid consideration, even though they
may look suspiciously similar to illusory promises. In enforcing these contracts, the courts impose an implied duty
of good faith on the parties. As long as the goods, materials, or services contracted for are likely to be needed by
the offeror during the period of time in question, the courts hold that there is valid consideration for the promise
and will enforce it. In the above examples, ABC Company is likely to need some heating oil next winter, and Carl
will need hardware supplies to practice his trade.
Beyond the Book:
Scarlet Johansson Sues Disney for Breach of Contract
Watch: https://www.youtube.com/watch?v=uIQ4r6N1eLA (https://www.youtube.com/watch?
v=uIQ4r6N1eLA)
In this video, the commentator explains the recent lawsuit by actor Scarlett Johansson against Disney. She
entered into a contract with Marvel to star in the movie Black Widow and agreed to be paid based on the box
office performance numbers, which included bonuses when ticket sales reached certain numbers. She
contends that Disney, as the owner of Marvel, agreed that the movie would be exclusively released to
theaters. But when Disney released the movie, it released it on streaming services as well as in theaters.
Black Widow set a box office record of $80 million in North America and an additional $78 million
overseas, but it also made $60 million on Disney Plus, a streaming service. Ticket sales steeply declined in
subsequent weeks, making the film one of the lowest grossing Marvel movies.
Questions to Consider
1. Where in the contract did it state that the release to movie theaters would be exclusively in movie
theaters?
2. How would you determine what suppressed ticket sales? Was it the COVID-19 pandemic, the
release to streaming services, the performance of Scarlett Johansson, or some other factor?
3. How could this controversy have been avoided?
4. If Disney did breach the contract, how did the breach allegedly benefit Disney?
Exceptions to the Consideration Requirement
Promises to give money to charities are binding without return consideration in most states, since charities serve an
important role in society. If you pledge $100 to the Cancer Fund Drive, you will probably be held to it!
Another exception is promissory estoppel. ABC Inc. promises Karen the job of vice president of the California
office for the next 5 years at a salary of $100,000 per year. The company requires a formal acceptance by appearing
at the next board of directors meeting. Karen says she will be there, quits her current job, and moves to Los
Angeles. Can ABC renege on its job offer? Because the company made a promise, and Karen has reasonably relied
on it to her detriment, ABC may be bound.
Applying the Law: Consideration
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4.6 E-Contracts
This section refers to contracts that are formed on the internet, called e-contracts or electronic contracts. In most
instances, the rules of traditional contract law have been used to interpret these agreements, as discussed in the
following sections.
Click-Wrap Contracts
If you are presented with a 50-page paper contract, it is likely you will turn the pages without reading the terms.
What if buying goods or services on the internet requires that you read a lengthy document? Most people scroll to
the bottom of the form and click the box that says “I have read and agree to all terms and conditions.” However, the
simple act of clicking on the box is the same as providing a signature on a written contract. On the internet, such
agreements are sometimes called click-wrap contracts, and they are just as legitimate and enforceable as a
traditional paper contract.
Example 4.34. Emily buys a software program for graphics from an internet site. She clicks “I accept” without
reading, since she must do this to download the program. Later the program crashes her computer, and she loses
valuable data. Now Emily discovers that the company’s liability is limited by her “acceptance” of its warranty,
which provides it will only refund the purchase price.
Click-wrap agreements are generally held to be enforceable as long as certain conditions are met. The user must be
required to take some affirmative action such as clicking a checkbox manifesting their agreement to the terms and
conditions or clicking a button that states that the user agrees to the terms and conditions. In addition, the terms and
conditions must be readily available to the user either through a hyperlink or in a text box conspicuously displayed
close to the “I agree” checkbox or button. In ADP, LLC v. Lynch (2016), two employees were presented with stock
options electronically. Within the electronic document was also a restrictive covenant agreement that if they left
their jobs at ADP, they could not work for a competing company. After leaving the company, they were sued for
violating the restrictive covenant. The employees argued that the agreement was not enforceable because it was
signed by clicking, but the court held that mandatory click-through agreements are enforceable and that accepting
the stock option included accepting the restrictive covenant contained within.
Sales Tax
Since the use of e-contracts and e-commerce has increased dramatically, states have had to grapple with how to
collect sales tax. Before e-commerce, sales tax was collected in person in the state in which a sale was made. By
2020 e-commerce accounted for around 14% of all retail sales in the United States (Chevalier, 2022). Many states
initially had no laws about collecting sales tax on these transactions, but in a 2018 decision, the Supreme Court
ruled in South Dakota v. Wayfair that a state can require tax collection from online retailers and other remote sellers
that do not have a physical presence in the state. States set either a minimum amount of money or a minimum
number of transactions that the business must meet (a “transactional threshold”) before the seller is required to
collect state sales tax.
Example 4.35. Book Exchange Company has an office and warehouse in Illinois but does only online and mail
order business in other states. Book Exchange can be made responsible for collecting sales tax once it reaches the
Illinois threshold of either $100,000 in cumulative gross receipts or 200 or more separate transactions. For a
detailed state-by-state list of sales tax rules for internet sales, see the Sales Tax Institute’s Economic Nexus State by
State
Chart
at
(https://www.salestaxinstitute.com/resources/economic-nexus-state-guide) .
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Chapter Summary
The law of contracts involves learning new vocabulary. Types of contracts include valid contracts, those that have
all five elements; void contracts, those that are missing one or more elements; and voidable contracts, those that can
be avoided by a party such as a minor. Express contracts have all five elements expressed orally or in writing;
implied-in-fact contracts have all five elements through gestures; and implied-in-law contracts are missing one or
more of the elements of a contract, but to avoid unjust enrichment, the court will find that a contract exists.
Bilateral contracts are a promise for a promise, whereas unilateral contracts are a promise for an act. Informal
contracts have no requirements for their form, but formal contracts must be in a particular form as well as having
requirements for the signature, notarization, and seals. All contracts have five elements: an offer, acceptance,
consideration, capacity, and legality.
Offers require language that is definite and certain, must be communicated to the offeree, and must appear to a
reasonable party that a contract was entered into. If these elements are missing, then the statement by the offeror is
a preliminary negotiation and does not lead to contract formation. Offers may terminate by different events prior to
acceptance, such as death of the parties or loss of capacity.
Once a valid offer is made, the offeree can accept the terms of the offer. If acceptance occurs, then the contract is
still enforceable despite the death or incapacity of the parties. The offeror can take back the offer prior to
acceptance by revoking the offer. The offeree may terminate the contract by rejecting the offer. Offers may lapse if
the offeree does not accept within a reasonable time, unless the contract is an option, which holds the offer open.
Under the common law, acceptance must be a mirror image, which means that the terms must match the terms of
the offer and not add or subtract from the original terms of the offer. If the acceptance is different from the offer,
then it is a counteroffer, in which case the original offer is terminated and the offeree has now become the offeror.
Under the UCC, acceptance does not have to be a mirror image but can include additional terms and still form a
contract.
The third element of a contract is consideration, which means that the parties exchange their promises and the
exchange causes them to both act. Past consideration, which is when the act happens before the promise, is not
consideration; nor is an illusory contract, which is a promise that is not specific; nor is a preexisting duty, which
means that the party was already obligated to act. Under e-commerce, special types of e-contracts exist, such as
click-wrap contracts. E-commerce presents challenges in collecting taxes that states are dealing with by legislating
how they will collect money from out-of-state sellers.
Focus on Ethics: Breach of Contract Damages for the Loss of One’s Life’s
Work
Hlatky v. Steward Health Care System, Inc. 484 Mass. 566 (2020)
(http://masscases.com/cases/sjc/484/484mass566.html)
Dr. Lynn Hlatky was a prominent cancer researcher who had 3 decades of research experience, had been
faculty at Harvard Medical School, and had a cancer research lab at Boston’s St. Elizabeth’s Hospital for 5
years. In 2010 Steward Health Care System, LLC , a for-profit hospital chain, purchased St. Elizabeth’s, and
the assets of Hlatky’s cancer lab were moved into a nonprofit corporation controlled by Steward. These
assets consisted of the federal grant monies she received for her research. Steward then entered into a 3-year
contract with Hlatky “to continue to provide support and suitable office space” for her lab and to pay her
annual salary. Steward withdrew its support of the lab before the 3 years were up and let the nonprofit file
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for bankruptcy, which led to the destruction of Hlatky’s lab, including the incineration of tens of thousands
of cell samples. She sued for breach of contract, and though Steward argued that it was only liable to her for
the loss of compensation for losing her job, she was awarded $10.2 million in damages to reestablish her
lab.
Questions to Consider
1. When scientists have federal grants supporting their labs, it is not unusual for them to move their
labs to a different venue. Assuming that Hlatky had notice from Steward that it was going to
withdraw support, were the actions by Steward ethical?
2. Steward argued that the $10.2 million was a “windfall” to Hlatky and she should only receive lost
compensation. The court awarded the damages for the loss of her life’s work, the first case in the
United States to find damages on such a theory. Do you think paying damages for the loss of one’s
life’s work is fair compensation for Steward to pay? Or do you think damages should have been
limited to her loss of employment?
3. The judges were conflicted on appeal about whether to limit how Hlatky could use the money
awarded at trial. Some of the judges thought the money should be limited to establishing a new lab;
others believed she should use it as she saw fit without restrictions. If the award was compensation
for her life’s work, should it have been restricted or not? (After interest was paid, the actual amount
awarded was around $17 million.)
Case Study: Hamer v. Sidway
124 N.Y. 538, 27 N.E. 256, LEXIS 1396 (N.Y. Court of Appeals 1891)
(https://www.nycourts.gov/reporter/archives/hamer_sidway.htm)
Facts: Mr. Story was concerned about his 15-year-old nephew’s lifestyle. The uncle promised the nephew
that if he refrained from drinking liquor, using tobacco, swearing, and playing cards or billiards for money
until his 21st birthday, the uncle would pay him $5,000. (At the time the contract was formed, it was legal
for a 15-year-old to smoke, gamble, and drink liquor.) The nephew agreed and in fact refrained from all the
activities outlined by his uncle.
Since there was no dispute that the nephew complied with his uncle’s wishes, when the uncle died, the
nephew sued for the $5,000 promised to him. The uncle’s executor refused to pay the money, saying there
was no contract.
Issue: Was there a contract? Did the nephew give consideration?
Discussion: The estate contended that because the nephew was only doing what was good for him, he did
not give consideration. The nephew was not harmed, and the uncle received no benefit. But because the
nephew had a legal right to drink, smoke, swear, and play cards and billiards for money, and he gave up
those rights in exchange for his uncle’s promise to pay $5,000, the nephew had undertaken a detriment at
the uncle’s behest. As the judge noted in his opinion:
Courts will not ask whether the thing which forms the consideration does in fact benefit the
promise . . . or is of any substantial value to anyone. It is enough that something is promised,
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done, forborne, or suffered by the party to whom the promise is made as consideration for the
promise made to him.
Holding: The court ruled that there was consideration, and thus there was a binding contract.
Questions to Consider
1. Analyze whether the uncle made an offer.
a. Was there intent to contract? Do you think the uncle was serious?
b. Were the terms reasonably definite?
c. Would this be express or implied? Unilateral or bilateral?
d. If the uncle had instead promised, “If you mend your ways and behave yourself until you are
21, I’ll pay you $5,000,” would that be an offer?
e. Suppose the uncle promised, “If you refrain from drinking liquor and smoking tobacco, I’ll
pay you $5,000 when I’m convinced you’re going to stick with it.” Would that be a valid
offer?
2. Did the nephew accept the offer? Could he have accepted by promising to adopt a healthy lifestyle?
3. What was the consideration in this contract?
Case Study: Kelley v. Cooper
751 S.E.2d 889, 325 Ga. App. 145 (Ga. Ct. App. 2013) (https://caselaw.findlaw.com/ga-court-ofappeals/1650631.html)
Facts: Christopher Kelley and Melissa Cooper were living together, moved into a home, and had two
children. Cooper left her job at Kelley’s request to stay home and take care of the children. Eventually,
Kelley proposed to Cooper and gave her a ring valued at around $10,000. Shortly after the proposal, Cooper
found out that Kelley had been in a 2-year relationship with another woman. When she confronted him, he
promised not to see other women again and reaffirmed his promise to marry her. Subsequently, she
confronted him again about his relationship with another woman, and this time he asked her to move out
with the children. She sued him for breach of contract to marry and unjust enrichment.
Issue: Is a promise to marry someone enforceable, and is a subsequent refusal to marry a breach of contract
for which the court will award money damages?
Discussion: In Georgia marriage is encouraged by law, and the promise to marry is enforceable. The object
of such a promise is not illegal or against public policy. Additionally, the court upheld Cooper’s claims of
unjust enrichment because she testified that she quit her job and agreed to stay home and raise the children
in reliance on his promise to marry.
Holding: The trial court awarded her $50,000.
Questions to Consider
1. About half the states still recognize a lawsuit for breach of a promise to marry. The other half have
declared these laws against public policy. One reason, they contend, is that they encourage people
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to go forward with a marriage they do not want. Do you think that allowing lawsuits for breach of a
promise to marry serve a moral and legal purpose?
2. How do you think a court could determine the amount of damages to award someone for breach of
this type of contract? How long into the future do you think one could argue their damages extend?
3. Do you think that courts and the law should be involved in matters regarding the intimacy of
parties and familial relationships? How difficult do you think it would be to prove such an action?
And what impacts does such a lawsuit have on a family that has children?
Critical Thinking Questions
1. The law sometimes defines a contract as a bargained-for exchange. Explain what this means.
2. Contracts allow people to make their own agreements in their own terms. How does this benefit the flow of
business? What would happen if courts did not honor the contracts people made, and how would that
impact commerce?
Hypothetical Case Problems
Case 1. While driving back to college one snowy evening, Helen skids off the road into a ditch across the street
from an old farmhouse. The occupants of the farm, hearing the crash, rush out to assist Helen, taking her into their
home and applying first aid until an ambulance can arrive. Helen is from a very wealthy family, and 2 days after the
accident, the farmers receive a phone call from Helen’s father. “I am so grateful,” he says. “I want to pay for your
assistance to my daughter. I will send you a check for $10,000 for taking care of her.” The farmers accept.
A. Is there consideration for the father’s promise to the farmers? If so, would you characterize the
consideration as a detriment or a benefit? If not, under what theory would you argue that consideration
does not exist?
Case 2. Elevated Industries always appreciates suggestions from its loyal employees about ways to improve their
working conditions. Elevated is located in a large factory building that the employees enter every day by walking
down a long hallway. On the walls are announcements of particular interest to them. One day an announcement
said, “$500 reward to the employee who submits the best suggestion for improving safety.” Elevated was
considering several suggestions when it decided to increase the amount to $1,000. One week prior to the
announcement of the $1,000 reward, Nathan’s suggestion was approved, and he was awarded $500. However,
Nathan is disappointed that he made a suggestion and was not paid the $1,000.
A.
B.
C.
D.
What type of contract is this?
How can employees accept the contract?
Is there consideration for Nathan’s suggestion and award of $500?
Is there consideration for Nathan’s suggestion and potential award of $1,000? Why or why not?
Case 3. Carla contracts to drive Martin’s race car in an upcoming race in exchange for $1,000. Now Martin learns
that the prize money has been increased, and he tells Carla, “If you win, I’ll pay you $1,500.” Carla wins the race.
A. Does Martin owe her $1,000 or $1,500?
B. Suppose instead Carla had contracted to sell Martin three race cars for $75,000 each. Now she tells Martin
that because some components have gone up in price, she will only sell him the three cars if he pays an
extra $10,000 per car. Martin isn’t happy, but he really wants the cars, so he agrees. Is Martin bound to pay
the extra money?
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Key Terms
Click on each key term to see the definition.
acceptance
The offeree’s agreement to enter into the contract under the terms of the offer.
bilateral contract
A contract in which a promise is exchanged for another promise.
click-wrap contracts
Online agreements that users agree to by clicking a button.
consideration
An exchange of promises that compels a party to act.
contract
An agreement that may be enforced; a bargained-for exchange.
counteroffer
A response to an offer that has different terms than the offer.
express contract
A contract that is either oral or in writing.
formal contract
A contract that is required to have a certain format, such as being in writing and signed with a seal; or one
requiring certain content, such as a lease.
illusory promise
A contract that promises nothing; a contract that sounds like a promise but is worded so as not to commit the
offeror.
implied-in-fact contracts
Contracts that have all five elements of a contract through gestures or pantomime.
implied-in-law contract
A contract missing one or more of the elements of a contract, but to prevent unjust enrichment, the court will find
that a contract exists. Also known as a quasi contract.
informal contract
A contract that is not required to be in a specific form.
mirror image rule
Under the common law, a rule that says the terms of the acceptance must match the terms of the offer or it will
be considered a counteroffer.
offer
A promise to buy or sell goods or perform services.
offeree
The person to whom an offer is made and who has the power to accept and form a contract.
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offeror
The person who makes an offer.
option contract
An offer that does not lapse, because consideration has been paid to keep the offer open for a set period of time.
promissory estoppel
An exception to the consideration requirement that occurs when a party relies to their detriment on another’s
promise.
requirement contract
A contract in which a buyer has agreed either to buy all the specified goods that the buyer needs (requirements)
or all that the seller produces (output).
revocation
An offeror’s cancellation of the offer.
unilateral contract
A promise (offer) in which the offeror is seeking an act rather than a promise for acceptance.
unjust enrichment
A situation in which someone benefits from the receipt of goods and services without paying the required
restitution.
valid contract
A contract that has all five elements of a contract and is therefore enforceable.
voidable contract
A contract that can be avoided by a minor or a person lacking capacity.
void contract
A contract that is missing one or more elements of a contract and therefore unenforceable.
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Contracts: Capacity, Legality, Defenses to
Contracts, and the Statute of Frauds
Barry Austin Photography/ Photodisc/ Getty Images
Learning Outcomes
After studying this chapter, you will be able to
Explain contractual capacity and how it relates to minors and incompetent persons.
List the types of illegal contracts and explain each type.
Name the defenses to contracts and explain the impact of a defense on a contract.
List the types of contracts required to be in writing to be enforceable.
Explain the parol evidence rule and how it applies in court.
After determining that an offer, acceptance, and consideration are present, it must next be determined whether
each party to the contract has the mental capacity to enter into the agreement and whether the contract is legal.
Most people are assumed to have the mental ability to enter a contract, but there are two exceptions: minors
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(people under age 18) and those with limited mental fitness. If capacity is lacking, there can be contract
formation, but as we discussed in the previous chapter, the party lacking capacity has the right to “avoid” or “get
out of” the contract with few consequences, making the contract voidable. Likewise, the contract must also have
a legal purpose. If not, the contract is void.
Once the five elements of a contract are present and a valid enforceable contract is formed, defenses also allow a
party to get out of the contract. Defenses include lack of capacity, mistake, duress, undue influence, fraud,
illegality, and having an oral contract when the law requires a written one.
In this chapter we will explore when both parties have capacity to enter into an agreement, what contracts are
illegal, possible defenses to contracts, and the parol evidence rule. Each of these concepts presents different
aspects of contracts and will better equip you to enter into agreements in your business and personal lives.
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5.1 Capacity
The fourth element of a contract, capacity, means that a party has the mental faculties to enter into a contract.
There are two areas to look at when assessing someone’s contractual capacity: age and mental competency. First,
let’s look at age.
Capacity and Age: Minors
A minor is a person who has not reached the age of majority, which is set by statute in any given state. The most
common age for majority is 18. By law, if a minor enters into a contract prior to age 18, the contract is voidable
at the option of the minor, because minors have the right of disaffirmance. Disaffirmance means that the minor
may avoid the contract, or choose to get out of the contract they made while a minor without being liable for
breach. This rule exists because young and inexperienced minors lack the mental judgment to gauge whether
entering into a contract is for their benefit. Picture, if you will, a fast-talking, slick salesperson persuading a
teenager to buy a car on a complicated installment contract the teen is unlikely to understand!
Example 5.1. Mary, age 16, buys a used car from Dan for $3,000. She drives the car for 6 months, crashes it, has
the wreck towed back to Dan’s house, and shows up on his doorstep, demanding her money back.
Can Mary actually get away with this? Yes, she can. She is a minor, and she has disaffirmed. When a minor
disaffirms, they have the duty to return the property in whatever shape it’s in. In exchange, in a majority of
jurisdictions, the other party must return the minor’s money. So Dan must give Mary back her $3,000. A few
states even allow a minor to disaffirm for a few days after attaining majority.
A minor can disaffirm by saying or doing something that would indicate to a reasonable person that the minor
does not intend to go through with the contract. Let’s look at an example.
Example 5.2. Renaldo, a minor, buys a car from the local dealership on an installment payment plan. He makes
the down payment of $1,000 and has made three monthly payments when the car is stolen. Renaldo stops
making payments to the dealer.
Renaldo’s cessation of payments would indicate that he does not intend to be bound to the contract, so this is an
implied disaffirmance. He also does not have a legal duty to return the car, because he does not have it. The car
dealership must return to Renaldo all of the money he has paid for the car.
If a person makes a contract while a minor, comes of age, and wishes to remain in the contract, then the minor
can ratify (affirm) the contract. Once you ratify, you lose the right to disaffirm. Ratification can be either express
or implied. For example, if the minor keeps the car or makes a payment after reaching age 18, that is ratification.
Example 5.3. Mary, a minor, buys a car from Dan. Then she turns 18. Now of majority age, Mary tells Dan she
considers the contract to be binding. A week later, she changes her mind and wants to disaffirm. Mary cannot
disaffirm, because she came of age and expressly ratified the contract.
Example 5.4. Renaldo, a minor, buys a car from Dealer. Then he turns 18. He makes a payment on the car. Now
the car is stolen, and Renaldo wants to disaffirm. He cannot, because he has already ratified. He must continue to
pay for the car.
The right of minors to disaffirm contracts can place a heavy burden on merchants who sell goods to minors on a
regular basis. As a result, most business owners are wary about doing business with minors. One way the
merchant can do business without worrying about the minor disaffirming is by having an adult cosign any
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contract with a minor. If this is done, then the adult cosigning is liable for paying for the goods even if the minor
decides to disaffirm the contract.
Emancipated Minors
Sometimes a person who is still a minor may wish to be treated legally as an adult and seeks permission from the
court to be declared emancipated, or free from the supervision of their parents. Emancipation means that the
minor is now liable for their contracts.
In the Media:
Britney Spears’s Emancipation
It is not only minors who can be emancipated from adult control.
When she was 26, Britney Spears was placed in a
conservatorship—a legal arrangement in which all decisions
about the person are given to a conservator, or in this case a
committee of people that included her father—on the grounds that
the performer suffered from “dementia.” According to news
reports, the conservator controlled her spending, communications,
and personal decisions for over 13 years, while Spears was one of
the top-selling artists of the time. She tried to hire her own
lawyers to challenge the ruling, but the court held that she lacked
capacity and therefore could not enter into a contractual
agreement with attorneys. A publicity campaign, #FreeBritney,
publicized her plight and led to a court hearing in which Spears
spoke publicly about her confinement and inability to make any
decisions about her own life. In November 2021 a judge ended
the conservatorship, giving her back control of her day-to-day life
and her estate.
Chelsea Guglielmino/ Getty Images
The campaign #FreeBritney
publicized the singer’s plight and
led to a court hearing in which
Spears spoke publicly about her
inability to make her own
decisions about her life. In 2021 a
judge ended the conservatorship.
Questions to Consider
1. Britney Spears was placed into a conservatorship because of mental health issues. What did this
then allow the committee to do with regard to her personal life and her assets?
2. Why was it so difficult for Spears to free herself from the conservatorship? Does it seem ironic
that a conservatorship is meant to protect the person, yet in this case it appeared to do more harm
than good? What would have been the outcome if she had not had the money or people to help
her get out of the conservatorship?
Example 5.5. John, a minor, works full time, is married, and has a baby. John has not spoken with his own
parents for more than 5 years; neither has he received any support from them. In states that view independence as
emancipation even without a court procedure, John’s contracts are binding.
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Contracts for Necessaries
Minors are liable for goods they purchase when they are considered necessaries: food, clothing, and shelter.
Educational expenses are also treated as necessaries in some states. Necessaries are generally those items that are
for the health and safety of the minor. If the minor purchases these goods, the minor is liable and cannot
disaffirm the contract.
Example 5.6. Michael, a minor, comes home from boarding school to find his family home locked up and
deserted. None of his friends are around, so he goes to a hotel for a few nights. Michael will be held liable for the
reasonable value of staying in the hotel, since shelter was a necessary for him and he had to provide it for
himself.
Example 5.7. Michael’s parents do not provide him with adequate winter clothing. He goes to the store and
purchases on credit a coat, gloves, hat, and boots. Michael is personally liable for these items.
Why are minors liable for necessaries but not liable for other goods? The reason is that because merchants do not
want to enter into contracts with minors when they can disaffirm, the law stepped in to protect the ability of
minors to provide themselves with health and safety items. By making the minor liable for these items,
merchants are more likely to enter into contracts to provide them, because the minor does not have the option to
disaffirm.
Capacity and Mental Incompetence
To have a valid contract, both parties must have sufficient mental competency to understand the nature and
circumstances of the transaction at the time the contract is made. This does not necessarily mean they would
understand every word of legalese in a long, complicated written contract, but it does require that they have
mental acuity.
Example 5.8. Cassandra’s landlord comes to her door to ask if she intends to renew her lease for another year.
Cassandra, a paranoid schizophrenic who is not taking her medication, is suffering from complex hallucinations
and thinks the Central Intelligence Agency is spying on her and will report her if she doesn’t sign. Not wanting
to be on a government blacklist, Cassandra signs the new lease. Cassandra lacks capacity and can void the
contract when her hallucinations subside.
Mental illness can take many forms, some more serious than others. In the most serious cases, if a person
presents a danger to themself or others, the court may declare the person mentally unfit. In those cases, the
person’s contracts are void. If, on the other hand, a person suffers from mental illness but is not declared unfit by
a court, their contracts are voidable, and they can attempt to disaffirm by proving their lack of mental capacity.
The relevant time period for determining one’s capacity is when the contract is made. The law generally
presumes both parties have capacity unless there is something in evidence that puts it in question. Then the
burden is on the party who lacks capacity to prove that they did not have the mental wherewithal to enter into a
contract. People can lack capacity for a variety of reasons, including mental illness and neurological diseases like
Alzheimer’s that impact the ability to comprehend the obligations of a contract.
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5.2 Illegality
The last and final element of a contract is legality. If the contract fails to meet this requirement, it will be deemed
void and unenforceable. An agreement may be considered illegal if it
violates a statute,
results in the commission of a tort, or
violates public policy.
What violates a state statute will vary among states, but typically usurious loan agreements and gambling
contracts violate state statutes. Usury statutes set the permissible amount of interest that can be charged on a
loan or credit transaction by a commercial lender, such as a bank. If a creditor charges a higher amount than
permitted by state law, then the agreement is void for illegality.
Example 5.9. Brenda went to the State Street Bank to arrange a loan on a new house. The bank agreed to loan
her the money at the rate of 25% interest. The maximum interest permissible in Brenda’s state is 21.5%. The
agreement is illegal and void.
Laws pertaining to gambling have changed dramatically in the past decade, and now only two states prohibit
gambling: Utah and Hawaii. Each state that permits gambling decides what type is permissible, where gambling
can be located, and the minimum age for the activity. At least some types of gambling are illegal in most states,
however.
Beyond the Book:
U.S. Sports Betting
Watch: https://www.youtube.com/watch?v=f80VhklrkNc (https://www.youtube.com/watch?
v=f80VhklrkNc)
It might be hard to believe, but gambling in the United States was once an illegal activity for which
people were jailed. It was criticized by the church as evil and considered a vice. Nevertheless, since the
beginning of the 20th century, laws prohibiting gambling have been slowly eroding. In 2018 the U.S.
Supreme Court overturned a 1992 statute that prohibited betting on professional and amateur sports. Now
each state regulates what type of betting may occur, where, and by whom, which results in a wide variety
of rules. Some states allow gambling but do not permit betting on games involving in-state college teams;
others prohibit mobile betting but allow gamblers to place wagers at particular physical sites located in
the state; others prohibit any type of wagering on high school sports.
One controversy has been whether to permit online or mobile betting, but as states have realize the
windfall they receive from taxes on gambling, it has become more prevalent. For an interactive map of
sports betting in the United States, see https://www.american gaming.org/research/state-gaming-map/
(https://www.americangaming.org/research/state-gaming-map/) .
Questions to Consider
1. What impact do you think legalizing betting on college sports will have on their integrity?
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2. Does making gambling legal increase social or economic problems for communities? What if
there is an increase in gambling addiction? Should the state factor the cost of rehabilitation into
the profits received?
An example of the second type of illegality occurs when the contract subject matter might not be illegal but the
circumstances are such that performing the contract will result in a tort.
Example 5.10. Sree hires Dan to sink a well on what Dan believes is her property. When Dan discovers that in
fact the location Sree specified is on her neighbor Kai’s property, Dan refuses to perform the job. Sree cannot sue
Dan for breach, because their agreement would have resulted in a trespass on Kai’s real estate.
Agreements that violate public policy are those that go against the public good; these can be more difficult to
determine. For example, some employers require their employees to sign a covenant or agreement not to
compete. These state that if the employee leaves the current employer, they may not take a job with a competitor
within a certain geographic area for a period of time.
Example 5.11. Big Sports Marketing hired Ian as a new employee. Ian signed an employment agreement in
which he agreed that if he left Big Sports Marketing, he would not work for a competitor in the state of Georgia
for 5 years.
In the above example, the law will typically scrutinize both the time and geographic limit. This contract appears
to be overly broad. Forbidding Ian from working in an entire state and for such a long period will seriously
impact his ability to work. Some jurisdictions will invalidate the contract completely, leaving Ian free to take a
job with a competitor. Others take a “blue pencil” approach and rewrite the clause and enforce it as a reasonable
restriction, such as barring Ian from competing in the Atlanta metro area, where Big Sports is located, for 1 year.
Another example of a contract clause that is sometimes void as against public policy is an exculpatory clause,
which says that one party will not be liable, even if they are negligent. This means that these clauses will not be
enforced if the situation involves deliberate misconduct, gross negligence, or a public duty.
Focus on Ethics:
Exculpatory Clauses and Extreme Sports
Participants in extreme sports are often asked to sign a waiver of
liability or exculpatory clause prior to engaging in the sport.
These contractual agreements state that they will either limit or
completely protect a business from liability in the event the
patron is injured or killed while participating in the activity.
The enforcement of exculpatory clauses varies widely, however,
and one of their most interesting aspects is that in some states, a
patron can sign a form that will turn out to be completely
unenforceable. For example, in one case a skier ran into a metal
pole that formed part of the ski lift line, sustaining serious
injuries. He had signed such a clause, which a Vermont court held
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violated public policy because as landowners, the ski resort had a
duty to warn of and fix dangers that could have been foreseen and
corrected. In a Colorado case, however, a completely different
ruling resulted. In this case members of a church group from
Texas traveled to Colorado to partake in a rappelling activity
sponsored by a business located in Colorado. All of the
participants signed a release form. One of the participants died
during the descent from rappelling. The court took into
consideration the degree to which outdoor-recreation companies
in Colorado depend on out-of-state tourists for revenue. This
dependency made the court more inclined to enforce the clause
under Colorado law, because not to enforce it would make the
business less likely to accept out-of-state customers.
Questions to Consider
Kirkikis/ iStock/ Getty Images
1. Exculpatory clauses were originally intended to protect a
Even though ski resorts often ask
business from liability for negligence that occurred on
skiers to sign a waiver of liability,
the owner’s premises. Does it seem fair to customers to
the resorts are still responsible for
preclude them from a lawsuit when the owner is
warning of possible dangers and
responsible for creating the danger?
maintaining safe facilities, and
2. Consider the economic outcomes of exculpatory clauses.
they can be liable for resulting
By preventing lawsuits, an enforceable exculpatory
injuries.
clause saves the business significant amounts of money.
Should the business have a higher standard of care as a
result? Should safer premises be considered the consideration for giving up the right to sue?
Sometimes a contract is so unfair to one party that it is said to be unconscionable and void as against public
policy. This generally comes up only in cases in which there is disparate bargaining power; that is, when one
party has all of the power in the negotiations, and the other party therefore cannot bargain for better terms. These
types of contracts will be examined in more detail in the unit on the Uniform Commercial Code (UCC).
Generally, an illegal bargain will be void. There may be an exception if the illegal part can logically be severed
from the legal portion, or if voiding the contract would result in a protected party being injured. For example, if
Acme Insurance is not licensed to do business in Rhode Island but nonetheless issues a homeowner’s policy to
Fred, who lives there, Acme will not escape liability on the policy when Fred’s house burns down by claiming it
was void for illegality.
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5.3 Defenses to Contracts
Sometimes it appears that there is an agreement, but when we examine the circumstances more closely, we can
see that one of the parties has an excuse for getting out of the contract. These excuses are called defenses, and
they allow one of the parties to exit the contract without liability. Let’s take a closer look at the specific grounds
for voiding a contract on this basis.
Mutual Mistake of Material Fact
If both parties to a contract make a mistake about a material fact (something a reasonable person would
consider in choosing to make the contract), either one can void the contract.
Example 5.12. If Jeremy contracts to sell his yacht to Keisha for $1 million, and it is unknown at the time that
the yacht has already sunk to the bottom of the slip where it was moored, the contract is voidable.
A classic case involving a mutual mistake had a seller contracting to sell bales of cotton to a buyer. The contract
seemed very specific, calling for the 125 bales of cotton to be shipped from Bombay, India, to Liverpool,
England, on a ship called Peerless. As it turns out, there were two ships called Peerless, both carrying Surat
cotton, both sailing from Bombay to Liverpool. One was scheduled to arrive in October, and the other in
December. The buyer was thinking of the October ship, and when his cargo wasn’t on the Peerless, he sued for
breach. But all along the seller had the December ship in mind. The parties never truly agreed on the terms,
because of their factual mistake. Thus, the contract was voided by the seller, and the buyer was out of luck
(Raffles v. Wichelhaus, 1864 (https://www.bailii.org/ew/cases/EWHC/Exch/1864/J19.html) ).
Note that a mistake in value is not a mistake of fact. If you buy a
painting on eBay that is correctly identified as being by Juan Picasso,
and you pay $5,000 for it because you did not know that the famous
Picasso’s first name is Pablo, you will not be able to avoid the contract
when you discover the painting is worth only $500 instead of the
millions you planned on getting.
A unilateral mistake by one party to the contract generally will not
void the agreement, either. If Bret offers to sell milk wholesale to
Organic Grocery for $1.44 per gallon when he meant to type in $1.55
and Organic accepts his offer, Bret cannot get out of the contract.
There is a possible exception if the other party knew or should have
known about the mistake. For example, if Sam offers to sell his deluxe
mansion in Beverly Hills for $50,000, it is quite obvious that some
zeros were left out, and a court might let Sam avoid the contract.
Fraud
JannHuizenga / iStock / Getty Images
If an artist accidentally writes a
$4.00 price on a large original
painting instead of the intended
$400, they may be able to get out of
the contract if the buyer knew or
In addition to being a tort, fraud is another way to avoid a contract, as
discussed in Chapter 2. For simplicity, since either party could be a
plaintiff or defendant in a contract fraud case, we will refer to the
person committing the fraud as “Unethical Person” and the person
seeking to void the contract as “Victim.”
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should have known this was a
mistake.
There are two basic types of contract fraud. The first is fraud in the
execution, in which the Victim is deceived in such a way that they do
not even realize they’ve made a contract. For example, suppose Victim
(Vic) is asked by Unethical Person (UP) to sign a guest book, but there is a carbon sheet underneath that transfers
Vic’s signature to a contract to buy UP’s car. The contract will be voidable at Vic’s option: He could still buy the
car if he wanted to.
The second type of fraud is fraud in the inducement, in which Vic knows he is making a contract but is deceived
as to some aspect of the subject matter. The remainder of our examples deal with this type, which is far more
common.
Fraud in the inducement often involves the failure to disclose material information. Such silence might qualify
as fraud if the party is a merchant, such as a salesperson on a car lot who fails to disclose that a car has been in
an accident. Fiduciaries also have a duty to disclose. A fiduciary is a person in whom the law has placed the
highest trust. Another situation in which silence can be fraudulent is when Unethical Person’s original statement,
though true at the time, ends up giving Victim a mistaken impression.
Example 5.13. Unethical Person tells Victim, who is considering buying UP’s house, “According to the last
inspection, there is no sign of termites.” This is true, but before Vic makes an offer, UP discovers termites in the
house. Because it was UP’s statement that has given Vic the idea the house is termite-free, UP is committing
fraud by not giving Vic an update.
Silence can also be fraud if there is active concealment of information; in other words, if Unethical Person is
doing something to cover up a material fact.
Example 5.14. Unethical Person’s house has a bad fire. Rather than make real repairs, UP takes the insurance
money and makes cosmetic repairs, painting over the smoke damage, installing some new drywall, but not
replacing burned-out support beams. Vic buys the house and 2 weeks later falls through the living room ceiling
when a beam collapses. Vic can void the contract and get his money back or sue for damages to repair the house
properly.
The final situation in which silence can be fraud is when the information is unusual, something Victim would not
normally check out, and Unethical Person is aware it could be a deal breaker.
Example 5.15. Unethical Person’s house has no usable water source. The well is contaminated with industrial
pollutants, and the house is too far from the center of town to connect with a water main. UP “forgets” to tell Vic
this fun fact about the house. When Vic discovers the problem, he will have a good case against UP for fraud.
Keep in mind that predictions and opinions are generally not statements of fact and therefore are not fraudulent.
If another student tells you to sign up for Business Law because it’s dead easy and you later decide it’s actually a
really hard class, you cannot sue, because that is an opinion. If your advisor tells you, “Business Law is the
greatest class in the whole world! A life-changing experience! Fantastic!,” this is called puffery and is not a basis
for fraud. If your stockbroker tells you, “This one will be a winner,” and the stock you buy tanks, your broker
was merely making a prediction, and this is not fraud.
In addition to an intentional misrepresentation of a material fact, made with intent to deceive, remember that Vic
must also show that he reasonably relied on UP’s statement. In a contract case, to prove the final element of
damage, Vic does not have to have an economic loss to avoid the contract. His damage is that the deal he thought
he was getting is not the one he wound up with!
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Remember, fraud is intentional. Sometimes negligent or innocent misrepresentation may affect the legal status of
a contract, but the rules differ from state to state.
Duress
Duress occurs when one party uses wrongful coercion to get the other to make a contract. For example, UP
shows Vic a gun/threatens to beat him up/burn his house down/beat up his girlfriend/file criminal charges against
Vic, in order to get Vic to pay $10,000 for UP’s car. All of these threats are unlawful coercion and would be
duress, allowing Vic to void the contract (once he feels safe!). If UP threatens Vic with a civil lawsuit, that is
perfectly lawful, and Vic cannot void the bargain. This is an example of what lawyers call tactics; in other words:
Do what I want or I’ll sue you.
Undue Influence
The concept of undue influence is difficult to define but easy to recognize, since it almost always is going to
involve one of two fact patterns: (a) The parties have a fiduciary relationship, or (b) one party is highly
dependent on another due to illness, age, infirmity, or the like. In these situations, the dominant person is seeking
to take advantage of the weaker person. For example, suppose Mabel is an elderly woman who is unable to leave
her condo. Her neighbor Will gets her groceries, picks up her prescription medications, and does her yardwork.
Now Will suggests that Mabel sell him the condo for 40% under market value. He does not have to threaten her
to have undue influence, because Mabel…
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