What is a Contract?
Text Chapter 4
Business Law II
Prof Stephanie Gardner, JD
What is a Contract?
Agenda:
• Definition of Contract
• Essential elements to establish a Contract
• Nature, Classification & Formation
• Mutual Agreement: Offer & Acceptance
• Consideration: The bargain
• Your Turn
What is a Contract?
• Question: When is the last time you
entered into a contract?
What is a Contract?
When is the last time you entered into a contract?
1. Borrow money from bank
2. Enroll in a health club
3. Employment contract
4. Rental contract
5. Signed up for phone plan
6. Credit card
7. Purchased a car
8. Marriage
9. Metro/bus ticket
10. Sandwich & drink?
What is a Contract?
Definition
• Promise or Agreement
• Creates legal obligation to do or not to do particular
thing
• Each party enjoys a “right” but also has a burden to
perform a “duty”
What is a Contract?
Legal Definition
A contract is formed by a meeting of the
minds of at least two parties, a mutual
assent resulting from the expression of an
offer by the one and an acceptance of
precisely that offer by the other ...
What is a Contract?
Definition
• Promise or Agreement
• Creates legal obligation to do or not to do
particular thing
• Each party enjoys a “right” but also has a
burden to perform a “duty”
• *Legally binding agreement between 2 or
more parties; enforceable in a court of law*
Benefits to Society?
“The Law sets out rights, duties and
obligations .....“
• Contract =
Lawful expectations met +
Remedies enforced
What is a Contract?
Benefits to Society
• Essential to Legal System: Trust,
Predictability & Consistency
• Modern business could not exist without
contracts
• Basis of all Commercial dealings:
“enforceable agreements” as voluntarily
agreed upon between individuals
Proof of Existence
You must be able to prove a contract exists !
Q: Are all legally required elements
present within the terms of this
agreement?
Four Essential Elements
1. Capacity of Parties
2. Mutual Agreement
3. Consideration
4. Legality of Contract
Proof of Existence
Q: Must a contract always be in writing to
be legally enforced?
Proof of Existence
Express vs Implied Contracts
1) Express: a written or oral statements
An agreement that is expressed in written or oral
words; terms are generally “clear & definite"
– Ex.: personal and business contracts
Proof of Existence
Express vs Implied Contracts
2) Implied: manifested by conduct rather than express
language (“implied“ in action & conduct)
- A contract in which agreement between parties has
been inferred from their conduct
Q.: Can I be held to something that I did not agree to?
i) Implied-in-Fact Contracts
ii) Implied-in-Law (“Quasi Contract“)
Mutual Agreement
Meeting of the Minds
Mutual Agreement
Offer + Acceptance
The Offer
1. Promise / commitment communicated
by Offeror to Offeree
2. To perform or refrain from performing
some specific act in the future
The Offer
• Manifestation of willingness to enter into a
legally binding agreement
• Offeror: Person who makes an offer
• Offeree: Person to whom the offer is made
1
The Offer
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The Offer
Are you making me an offer?
Generally, Courts look for 3 factors:
• Clear intent
• Sufficiently definite terms
• Clearly communicated
The Offer
Q: Is an Advertisement an Offer?
Carlill v Carbolic Smoke Ball Co. (1892)
• On 13 November 1891, Carbolic Smoke Ball Co (‘Carbolic’) placed
an advertisement in a local gazette which stated the following:
“100£ reward will be paid by the Carbolic Smoke Ball Co. to any person
who contracts the increasing epidemic influenza, colds, or any diseases
caused by taking cold, after having used the ball three times daily for
two weeks according to the printed directions supplied with each ball.
1,000£ is deposited with the Alliance Bank, Regent Street, showing our
sincerity in the matter.” (note, 1,000£ = +/-128,000£ today)
• Based on the advertisement, Mrs. Carlill purchased a smoke ball and
used it as instructed for two months, at which time she caught
influenza. Carlill contacted Carbolic claiming the 100£ reward.
• Carbolic refused to pay the reward. Carlill sued for damages for
breach of contract.
Carlill v Carbolic Smoke Ball Co.
• Carbolic refused to pay based on 3 grounds:
• i) The advertisement was merely a “sales puff”
• ii) You can’t make an offer to the world
• iii) Carlill never notified the company of her acceptance
You be the judge:
Based on the facts, was the advertisement an offer (or
merely an invitation to treat)?
Offer vs Invitation to Treat
Advertisements
•UK / USA: Advertisements are not offers but
“Invitations to Treat”
•Exception: Advertisement will be considered an offer if:
– i) it is definite and aimed at a specific person or
identifiable group of persons
– ii) it apparent that the advertiser has the intent to bind
himself to the terms of the advertisement
Advertisement as Offers
(See, text p. 100)
Solution 1 Solution 2 Solution 3
Offer: display of Offer: display of Invitation to treat:
merchandise & merchandise display of merchandise &
advertisement advertisement
Invitation to treat:
advertisement
France Switzerland Germany
Belgium Italy England
Principles of European Serbia USA (except if ad contains
Contract Law (PECL): Netherlands words of limitation: ex,
displays & ads by Lithuania ”first customer in door on
professional retailer are George Washington’s
considered offers for as birthday”)
long a supplies/stock last CISG
Rewards & Special Offers
• Reward: Award given for performance of some
service or attainment
– To collect it, the offeree must:
• Have knowledge of it prior to completing the act
• Perform the requested act
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Rewards & Special Offers
Rewards & Special Offers
Termination of an Offer
• Revocation: Withdrawal of an offer by the
offeror that terminates the offer
- US general rule: An offer is like an outstretched
hand, it may be revoked at any moment prior to
acceptance
- Exception: firm offer rule
- Principles of European Contract Law general rule:
most offers considered “firm offers” (reasonable
time test)
Rejection: Express words or conduct by the offeree
to reject an offer terminates the offer
The Counteroffer
Definition: Response by an offeree that contains
terms and conditions different from or in addition
to those of the offer
Legal Effect: Terminates the previous offer (rejects
original offer + at the same time makes a new
offer)
Q: At which point can I revoke my offer before it has
been accepted?
Acceptance of an Offer
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The Acceptance
1. Voluntary agreement by Offeree to be bound by the terms of
the Offer
2. Mirror Image Rule
Terms of Offer = Terms of Acceptance
3. When does Acceptance occur?
Common Law: Mailbox rule - The contract is formed when
acceptance is dispatched by Offeree.
Civil Law: Receipt Rule - The contact is not formed until the
acceptance is received by Offeror.
Parties to a Contract
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Parties to a Contract
General Rule:
If an offer is made and accepted in a business
or commercial context, courts will have a
strong presumption that parties intended to
make a contract
In contrast: Social or domestic agreements
Case study
ABC Clothiers has a contract with Taylor & Sons, a retailer, to
deliver 1,000 summer suits to Taylor’s place of business on or
before May 1.
On April 1st, Taylor receives a letter from ABC informing him that
ABC will not be able to make the delivery as scheduled. Taylor is
very upset, as he had planned a big advertisement campaign.
Taylor wants to file suit against ABC immediately, on April 1.
However, Taylor’s son, Tom, tells his father that filing a lawsuit is
not proper until ABC actually fails to deliver the suits on May 1.
Discussion: Based on the facts above, who is correct?
Group A: Taylor. Provide supporting arguments.
Group B: Taylor’s son, Tom. Provide supporting arguments.
Case study (con’t)
• Anticipatory Breach (Common law)
• Nachfrist Notice (Civil law)
(See text, p.160-161)
Consideration
Common Law Concept
1. Bargained for Exchange - Benefit each party
receives by entering into a contract
2. Mutuality of Obligation - Each party must get
something out of it or the contract is not
enforceable
a) Gifts; past acts
b) Right to terminate / refuse to perform at will?
Consideration
Causa: Civil Law Concept
1. Civil law consideration = "causa” (i.e., the reason
for the parties' consent; each party expects a result)
2. Example: (1) contracts without cause or with an
illegal cause are void; (2) a false cause invalidates
the contract
3. Generally, cause is presumed to exist and is
legitimate under Civil law, even if not expressly
stated in the contract
(See text, p. 105)
“Adequacy of Consideration”
The Pope’s Motorcycle
Promises that Lack Consideration
No Mutuality of Obligation
Type of consideration Description of promise
Illegal consideration • Promise to refrain from doing an illegal act
Illusory promise • Promise where one or both parties can
choose not to perform their obligation
Preexisting duty • Something a person is already under an
obligation to do
• A promise lacks consideration if a person
promises to perform a preexisting duty
Past consideration • Promise based on the past performance
of the promise
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Contracts comparison of legal systems
Common Law Civil Law
Source: Contract law is developed primarily by Source: Comprehensive statutory scheme;
courts established legal norms often applied
Extensive Freedom of Contract: few More Limited Freedom of Contract: many
provisions are implied by law into the contractual provisions are implied by law into the contractual
relationship; Parties given wide scope re terms relationship; Parties less likely to “contract out”
of agreement/broad room for negotiation of standard legal provisions
(example: Force Majeure)
Offer: revocable anytime prior to acceptance; Offer: generally any offer is considered a “firm
exception: Firm Offer – fixed period of time is offer” if reasonable for Offeree to rely on offer
expressly stated being irrevocable
Advertisement: Invitation to Treat (limited Advertisement: Offer (while supplies last)
exceptions)
Acceptance: Mailbox Rule - acceptance upon Acceptance: Receipt Rule - acceptance upon
dispatch by Offeree; Result: contract is formed receipt by Offeror
earlier than in Civil Law
Anticipatory Breach - time is of the essence; Nachfrist Notice - generally, nonperforming
no provision under US law for granting additional party may obtain extension by giving notice to
time other party
Review Common Law System Review of Civil Law System
What is a Contract?
Finally,
Practical Tips for International Contracting
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