Law of contracts

What is a contract?
A contract is a legally enforceable promise.

Elements of a contract

To be valid, a contract must generally contain all of the following elements:

 Offer
 Acceptance
 Consideration
 Legality

OFFER:
Contracts always start with an offer. An offer is an expression of a willingness to enter into a
contract on certain terms. It is important to establish what is and is not an offer. Offers must be
firm, not ambiguous, or vague. A person who is making the offer is called the offeror.

Invitation to Treat: Offers are different than an invitation to treat. An invitation to treat is not an
offer. When you list your home for sale, you are not making an offer; you are making an offer to
treat. You are inviting potential buyers to make an offer to you to buy your home. The same is true
with most advertising. The stores are making an offer to treat. They are expressing their willingness
to sell you something if you offer them their asking price. However, they are not bound to accept
your offer. For example, you place an ad online to sell your automobile for a certain price.
Someone makes an offer to buy the automobile from you at full price. Do you have to accept their
offer? No. You are making an offer to treat, and you are not bound to accept their actual offer to
buy your automobile.

Puffery: Advertisers often use puffery to promote their products. So, was the advertising slogan
“Red Bull Gives You Wings” meant to be a true statement or puffery? In a class action lawsuit
filed on Jan. 16, 2013 in the U.S. District Court of the Southern District of New York by Benjamin
Careathers, Mr. Careathers claimed he had been drinking Red Bull since 2002. His lawsuit argued
that Red Bull mislead consumers about the superiority of its products starting with its slogan “Red
Bull gives you wings” and its claims of increased performance, concentration, and reaction speed.
Red Bull eventually settled the lawsuit and emailed a statement to BevNET.com, Inc., a beverage
oriented media company stating, “Red Bull settled the lawsuit to avoid the cost and distraction of
litigation. However, Red Bull maintains that its marketing and labeling have always been truthful
and accurate, and denies any and all wrongdoing or liability.”
Courts will determine whether a statement in advertising is false versus puffery by using the
“reasonable person” standard. In other words, would a reasonable person believe the exaggerated
statement in an advertisement is meant to be true? It is hard to imagine a jury would find that the
Red Bull advertisement that by drinking their product one would grow wings was anything but
puffery.

Counter-Offers: A counter-offer negates the original offer. It alters the original offer, and by
doing, so releases the person making the original offer from any obligation. For example, A makes
an offer to treat regarding the sale of A’s automobile for $10,000.00. B offers A $9,000.00. If A
accepts this offer, B is bound to purchase the vehicle for that price. A does not have to accept B’s
offer and is not bound to. However, A then makes a counter-offer to B that A will sell the vehicle
for $9,500.00. B is not bound to buy the vehicle for that price, but A is now bound to sell the
vehicle to B for that price if B accepts the counter-offer.

ACCEPTANCE:
Acceptance by the offeree (the person accepting an offer) is the unconditional agreement to all the
terms of the offer. There must be what is called a “meeting of the minds” between the parties of
the contract. This means both parties to the contract understand what offer is being accepted. The
acceptance must be absolute without any deviation, in other words, an acceptance in the “mirror
image” of the offer. The acceptance must be communicated to the person making the offer. Silence
does not equal acceptance.

CONSIDERATION:
Consideration is the act of each party exchanging something of value to their detriment. A sells
A’s automobile to B. A is exchanging and giving up A’s automobile while B is exchanging and
giving up B’s cash. Both parties must provide consideration.

Past Consideration: Voluntarily doing something for someone is not consideration. A see’s B’s
lawn needs to be cut so A voluntarily does so. B comes home from work and is so pleased that B
gives A $30 for cutting the lawn. The following week A cuts B’s lawn again without B asking A
to do so. A now asks B for $30 for cutting the lawn and B refuses to do so. A claims they have a
contract since A has provided consideration by mowing B’s lawn, even though it was voluntary.
A is incorrect. B is not obligated to provide consideration to A. There is no contract. However, if
B had asked A to mow the lawn, but did not set the price, A would probably be able to enforce the
contract after mowing the lawn because B requested he do so.

Performance of an Existing Duty: If a person has a duty to do something, such as a public

servant, the performance of the duty is not consideration.

Promissory Estoppel: In some instances, one party is not providing consideration but is relying
on a reasonable promise made by another. A party that that is induced to action based on the
reasonable promise may be able to enforce the promise under the legal theory of promissory
estoppel.
This is explained in the Restatement (Second) of Contracts[1] § 90. Promise Reasonably Inducing
Action Or Forbearance:

(1) A promise which the promisor should reasonably expect to induce action or forbearance on
the part of the promisee or a third person and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise. The remedy granted for
breach may be limited as justice requires.
(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without
proof that the promise induced action or forbearance.

For example, A works for B who has promised to provide A retirement benefits if A works for B
for 25 years. After A is employed with B for 15 years, B tells A that the retirement benefits will
now be half the amount originally promised. A can enforce the original promise under the theory
of promissory estoppel even though A has provided no consideration. A can make the case that A
was induced and acted on this promise.

LEGALITY:
The fourth required element of a valid contract is legality. The basic rule is that courts will not
enforce an illegal bargain. Contracts are only enforceable when they are made with the intention
that they legal, and that the parties intend to legally bind themselves to their agreement. An
agreement between family members to go out to dinner with one member covering the check is
legal but is not likely made with the intent to be a legally binding agreement. Just as a contract to
buy illegal drugs from a drug dealer is made with all the parties knowing that what they are doing
is against the law and therefore not a contract that is enforceable in court.

Lack of Mental Capacity: The capacity to enter into a contract may be compromised by mental
illness or intellectual deficiency. Issues of dementia and Alzheimer’s can blur the lines of
competency to sign a contract. Competency to enter into a contract requires more than a transient
surge of lucidity. It requires the ability to understand not only the nature and quality of the
transaction, but an understanding of its significance and consequences. If a person is found to lack
the mental capacity to enter into a contract, then the contract is not automatically void but it is
voidable.

Minors and Contracts: Minors under the age of 18-years-old are allowed to sign contracts, but
they are voidable at the minor’s election. The exception to this rule is that contracts for necessities
are not voidable. Necessities are general goods or services necessary for subsistence, health,
comfort, or education. The burden to prove a contract is for necessities for a minor is on the
plaintiff. Minors can affirm their contract made while a minor formally or by actions upon reaching
the age of 18.

Contracts That Must Be In Writing: As already mentioned above, not all contracts have to be
in a written format. However, some absolutely do, or they are voidable. Under the common law
doctrine of the “Statute of Frauds,” which has been codified in the General Obligations Law
(GOB), contracts for the purchase of real property (GOB § 5-703), contracts that cannot be
performed in less than 1 year, and contracts that guarantee the debt of another (co-signers) (GOB
§ 5-701) must all be in writing. It is important to understand that just about any form of writing is
acceptable. A handwritten contract to purchase real property on a napkin is acceptable if all the
elements of a contract are met. The use of email and text message may also acceptable under GOB
§ 5-701(4).

UNILATERAL VERSUS BILATERAL CONTRACTS: Most contracts are bilateral, meaning

both parties are in agreement and the four basic elements of a contract exist. For example, B
offers to buy A’s automobile for a specific price and A accepts the offer and agrees to give B the
automobile upon receipt of those specific funds. Both parties are agreeing to the contractual
arrangement. It is bilateral. In a unilateral contract, one party is making an offer and promise if
someone does something in return. There is no agreement necessarily between two individuals as
there is in a bilateral contract. However, an offer is made and if another individual accepts the
offer and performs, an enforceable contract exists. An example would be if A offers a reward of
$100 to the person who finds and returns A’s missing cat. If B finds and returns the cat to A, A
would be bound to pay B the $100 reward. This is a unilateral contract.

GIFT VERSUS CONTRACT:

Gifts are very similar to contracts, but they are different. Gifts do require an offer, acceptance, and
delivery of the gift, but are generally not enforceable. If A promises to give B a birthday gift but
fails to do so, B cannot enforce the promise. There is no consideration provided by B. However,
B is also in no worse position than before the promise was made. From a legal standpoint, if a
party does not follow through with the promise of a gift, the parties are in no worse position
because of it, and therefore there is no cause of action.