MGMT 311 Chapter 12 Contract Formation PowerPoint PDF

BUSINESS LAW TEXT AND CASES CHAPTER 12: CONTRACT FORMATION © 2018 Cengage. May not be scan...

BUSINESS LAW TEXT AND CASES CHAPTER 12: CONTRACT FORMATION © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  An Overview of Contract Law  Sources of Contract Law: The common law governs all contracts except when it has been modified or replaced by a statutory law.  For example, a contract for the sale and lease of goods, once a matter of common law, is now governed by the Uniform Commercial Code (a statutory law).  The function of contract law is to assure that the promises parties make in a private agreement will be enforceable. 2 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  An Overview of Contract Law  What is a Promise?  A person’s declaration that he will perform or will refrain from performing some present or future act.  The promisor is the party making the promise, while the promisee is the person to whom the promise is made. 3 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  An Overview of Contract Law  Definition of a Contract: A contact is “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law is some way recognizes as a duty.”  An agreement formed by two or more parties who agree to perform or to refrain from performing some act now or in the future. 4 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  Every contract involves at least two parties:  The offeror is the party making the offer to form a contract.  The offeree is the party to whom the offer is made.  Whether the contract is classified as bilateral or unilateral depends on what the offeree must do to accept the offer and bind the offeror to a contract. 5 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  If the offeree can accept an offer simply by promising to perform, the contract is a bilateral contract.  It is an exchange of a promise by the offeror for a promise by the offeree.  This is the most common type of contract.  The contract is formed at the exchange of the promises, not at later performance. 6 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  If the offer is phrased so that the offeree can accept only be actual performance (not by a promise to perform), the contract is a unilateral contract.  It is an exchange of a promise by the offeror for actual performance by the offeree. 7 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Unilateral Contracts  Jerry places an advertisement offering to pay $500 for the return of his missing dog.  Is Jerry asking for you promise to return his dog?  Are you obligated to search for his dog?  Do you get the $500 if you search for the dog but do not find and return it?  Only the actual return of the dog forms a (unilateral) contract. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  Contracts can also be described as either express or implied contracts.  Express contract: The terms of the agreement (whether oral or written) are explicitly stated.  Implied contract: The parties’ conduct create and define the terms of the contract.  A contract can also be a mixture of an express and an implied contract—with some express terms and some implied terms. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Types of Contracts  Implied contracts are typically formed when: 1. The plaintiff furnished some goods or services; 2. The plaintiff expected to be paid and the defendant knew or should have known that payment was expected; and 3. Defendant had a chance to reject the goods or services and did not. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Implied Contract Abel is at a hot dog stand and simply holds up two fingers. He receives two hot dogs. He does not pay. Abel entered into an implied contract. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Quasi Contracts  As previously stated, express and implied contracts are actual contracts formed by the words or actions of the parties.  Quasi contracts (or contracts implied in law) are fictional contracts that the courts impose on the parties “as if” the parties had entered into an actual contract.  Quasi contracts are imposed by the courts to avoid the unjust enrichment of one party at the expense of the other. 12 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Quasi Contracts  During a Texas hard freeze a few winters ago, your water pipes break, flooding your home.  Without any words or conduct on your part, a plumber repairs the leak, saving you thousands of dollars of repairs.  You do not pay the customary fee because you say there was no contact. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Quasi Contracts  Remember: When an actual contract already exists that covers the matter in controversy, the doctrine of quasi contract generally cannot be used. 14 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  In addition to formation, contracts are also categorized by performance.  An executed contract is one that has been fully performed by both (or all) of the parties.  An executory contract is one that has not been fully performed by one or more parties. 15 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  Finally, in addition to formation and performance, a contract is also categorized by its enforceability.  There are four categories:  Valid: A contract with an agreement, consideration, contractual capacity, form, and legality (later).  Voidable: A valid contract that can be (but does not have to be) legally avoided, canceled, or annulled by one of the parties. 16 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Contracts  There are four categories (cont.):  Unenforceable: An otherwise valid contract that may be rendered unenforceable by statute or other law (e.g., state statute says that a particular contract must be in writing to be enforceable).  Void: A contract with no legal or binding effect. 17 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of a Contract  Requirements of a Valid Contract:  Agreement (Offer and acceptance).  Consideration (Legally sufficient and bargained-for).  Contractual Capacity (All parties must be competent).  Legal (Purpose of contract must be legal at time of execution). 18 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of a Contract  Requirements of a Valid Contract:  Agreement (Offer and acceptance).  Consideration (Legally sufficient and bargained-for).  Contractual Capacity (All parties must be competent).  Legal (Purpose of contract must be legal at time of execution). 19 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  First Element: Agreement  An agreement consists of an offer and an acceptance.  Parties must agree on the terms of the contract and manifest to each other their mutual assent (agreement) to the contract.  Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  The Offer  An offer is a promise to do or refrain from doing some specified action in the future.  The one making the offer is called the offeror; the party receiving it is the offeree.  Requirements of an offer:  Offeror must have a serious intention to be bound by the offer;  The offer’s terms must be reasonably certain or definite; and  The offer must be communicated to and received by the offeree. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  The Offer: 1st Element Intention: Intention is judged by what a reasonable person in the offeree’s position would conclude about the offer (objective determination). What is an example of an offer without sufficient intention? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  The Offer: 1 Element st  The following statements are generally not considered offers because the necessary intent is usually lacking:  Expressions of opinion.  Statements of future intent.  Preliminary negotiations.  Advertisements (invitations to negotiate). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  The Offer: 2 nd Element  The offer’s terms must be reasonably certain or definite.  This generally means that an offer must express the following items:  Identification of the parties;  Object or subject matter of the contract;  Consideration to be paid; and  Time of payment, delivery, or performance. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  The Offer: 3 Element rd  The offer must be communicated to and received by the offeree.  One cannot agree to a bargain without knowing that it exists. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Termination of Offer  The communication of an offer to an offeree gives the offeree the power to transform the offer into a binding contract by an acceptance.  Of course, the offeree does not have to accept the offer.  However, the right to accept the offer does not © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Termination of Offer  An offer can be terminated by the action of the parties by:  Revocation by the offeror  Rejection by the offeree, or  A counteroffer by the offeree. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Termination of Offer By Revocation  The offeror’s act of withdrawing an offer is known as revocation.  Once an offer is revoked, it no longer exists.  Unless the offer is irrevocable, an offer can be revoked by the offeror any time and for any reason before the offeree accepts it.  However, the revocation is effective only when the offeree actually receives it. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Termination of Offer By Revocation  Remember, an offer can be revoked at any time and for any reason before it is accepted.  Abel offers to sell his bicycle to Ben for $100 and says he will keep the offer open for 20 days.  The next day, however, Abel changes his mind about selling the bicycle.  Can he revoke his offer? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Termination of Offer By Revocation  However, an offeror cannot revoke an irrevocable offer.  What makes it irrevocable?  Abel offers to sell his bicycle to Ben for $100 and says he will keep the offer open for 20 days if Ben pays him $10 for keeping the offer open.  If Ben pays the $10, Abel cannot revoke the offer withing the 20-day time period; it is irrevocable. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Termination of Offer By Revocation  Since an offer can be revoked any time before it is accepted, when can one revoke an offer for a unilateral contract?  Traditional view: revocation permissible until full performance by the offeree.  Modern view: no revocation once performance has been substantially undertaken. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Termination of Offer By Revocation  Since an offer can be revoked any time before it is accepted, how can one revoke an offer for a bilateral contract.  Revocation may be accomplished by:  Express repudiation of the offer; or  Performance of acts that are inconsistent with the existence of the offer and made known to the offeree. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Termination of Offer By Rejection  An offer can also be terminated by the offeree’s rejection of the offer.  If the offeree rejects the offer, the offer is terminated, and no contract is created.  Any subsequent attempt to accept by the offeree will be considered a new offer by the original offeree.  Rejection is effective only when it is actually received by the offeror. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Termination of Offer by Counteroffer  A counteroffer is a rejection of the original offer by the offeree and the simultaneous making of a new offer by the offeree.  At common law, an acceptance had to mirror the offer exactly (“mirror image rile”).  Any change in the offer’s terms automatically terminates the offer and substitutes a counteroffer. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Termination of Offer By Operation of Law  In addition to the specific actions by the parties, an offer can also be terminated by operation of law.  This means that the law declares that an offer is terminated and cannot be accepted. 1. Lapse of Time:  An offer terminates automatically when the period of time specified in the offer has passed.  If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Termination by Operation of Law 2. Destruction of the Subject Matter: If the subject of the offer is destroyed before the acceptance of the offer, then the offer is canceled.  Notice of the destruction to the offeree is not required. 3. Death or Incompetence of a Party: Similarly, if either the offeror or offeree dies before the acceptance of the offer, then the offer is canceled.  Unless the offer was an irrevocable offer. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Acceptance  Acceptance is the voluntary statement or act from the offeree that indicates his/her assent (agreement) to the terms of the offer.  The acceptance must be unequivocal and communicated to the offeror.  Generally, only the person to whom an offer is made may accept it. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Acceptance  For the acceptance to be unequivocal, it cannot change the terms of the original offer or impose any new conditions.  If it does, it will be considered a counteroffer.  Generally, the offeree’s silence (or inaction) will not constitute acceptance. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  Communication of Acceptance  With a unilateral contract, acceptance is “communicated” when substantial performance is evident, and notification is not necessary.  With a bilateral contract, communication of acceptance is necessary because it is an exchange of mutual promises. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  Timeliness of Acceptance  General Rule: In bilateral contracts, acceptance is timely if it is made before the offer is terminated.  Either by its terms or by operation of law.  Acceptance takes effect at the time the offeree sends or delivers the communication via the manner expressly or impliedly authorized by the 40 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. offeror.  Timeliness of Acceptance  If acceptance is authorized and made by mail, it is effective upon dispatch (in control of USPS), and not when it is actually received by offeror.  This is referred to as the Mailbox Rule.  The Mailbox Rule does not apply to instantaneous communications (face-to-face or email). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41  Manner of Acceptance  The offer may specify expressly or impliedly how (i.e., the manner or means) an acceptance must be made.  If the offer does so, then there is no acceptance if the authorized means is not used.  If the offeror does not indicate a required manner of acceptance, then it can be accepted by any reasonable means. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42  Manner of Acceptance  Substitute Method of Acceptance:  If the offeree accepts the offer by a substitute means, the acceptance may still be effective if the substituted method serves the same purpose as the authorized means.  However, if a substitute means is used, acceptance is not effective on dispatch but upon receipt by offeror. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43  Elements of a Contract  Requirements of a Valid Contract:  Agreement (Offer and acceptance).  Consideration (Legally sufficient and bargained-for).  Contractual Capacity (All parties must be competent).  Legal (Purpose of contract must be legal at time of execution). 44 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of Consideration  Consideration is usually defined as the value given in return for a promise (in a bilateral contract) or in return for a performance (in a unilateral contract).  Generally, consideration must have both:  “Legally Sufficient Value” and  A “Bargained-for- Exchange.” 45 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of Consideration  A valid contract must have legal value and may consist of the following:  A promise to do something that one has no prior legal duty to do.  The performance of an action that one is otherwise not obligated to undertake.  The refraining from an action that one has a legal right to undertake (called a forbearance). 46 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of Consideration  Consideration in a bilateral contract normally consists of a promise in return for a promise.  Consideration in a unilateral contract involves a promise in return for performance (an action). 47 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Consideration: Bargained-For- Exchange  Consideration must also provide the basis for the bargain struck between the contracting parties.  The item of value must be given or promised by the promisor in return for the promisee’s promise or performance.  This element distinguishes contracts from gifts. 48 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of Consideration  General Rule: A court will not normally question the adequacy of consideration based solely on the comparative value of the things exchanged.  Adequacy of Consideration involves how much consideration is given; concerns the fairness of the bargain. 49 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Agreements That Lack Consideration  An agreement that lacks consideration is not a valid contract.  Preexisting Duty: A promise to do what one already has a legal duty to do does not constitute legally sufficient consideration (therefore no contract).  The preexisting duty may arise from a previous contract or may be imposed by law. 50 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Agreements That Lack Consideration  In August, Abel and Ben enter into a contract where Abel will sell his A&M-tu tickets to Ben for $500.  A week before the game, the tickets are now worth $6,000.  Ben agrees to pay this amount, but later only pays the $500.  Can Abel sue Ben for the remaining $5,500? 51 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Agreements That Lack Consideration  Jerry’s car is stolen, and he offers a $500 reward for its recovery and return (a unilateral contract).  Sheriff Brown finds the car and returns it to Jerry.  Is Sheriff Brown contractually entitled to the reward? 52 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Agreements That Lack Consideration  Promises made in return for actions that have already taken place are unenforceable (known as “past consideration”).  It is no consideration because the bargained-for exchange element is missing.  One can bargain for something to take place in the present or future, 53 but not in the past. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Agreements That Lack Consideration  Illusory Promises:  If the terms of the contract express such uncertainty of actual performance that the promisor has not definitely promised to do anything, the promise is said to be illusory (i.e., without consideration).  Simply, the promisor has not promised to do anything (no promise at all). 54 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of a Contract  Requirements of a Valid Contract:  Agreement (Offer and acceptance).  Consideration (Legally sufficient and bargained-for).  Contractual Capacity (All parties must be competent).  Legal (Purpose of contract must be legal at time of execution). 55 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity  Contractual capacity is the legal ability to enter into a contractual relationship.  Historically, the law has given special protection to certain people to ensure they are not disadvantaged in a contract.  For example, a person determined by a court to be mentally incompetent cannot enter into a valid contract. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Minors  The general rule is that a minor can enter into any contract that an adult can, except contracts prohibited by law for minors.  However, a contract entered into by a minor is voidable at the option of that minor, subject to © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. certain exceptions.  Contractual Capacity: Minors  The legal avoidance of a contractual obligation by a minor is called disaffirmance.  A minor must simply express his or her intent not to be bound to the contract.  The minor must disaffirm the entire contract, not merely a portion of it.  Only the minor may disaffirm; any adult to the contract remains bound, unless and until the minor’s disaffirmance releases her. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Minors  A minor can disaffirm a contract at any time during his minority, or for a reasonable period after the minor reaches the age of majority.  General Rule: A minor can disaffirm a contract even if he has lied about his age. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Minors  What are a minor’s obligations on disaffirmance?  Most courts hold that the minor need only return the goods subject to the contract, provided the goods are in the minor’s possession or control. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Intoxication Since most of you are under the age of 21, you may not know this concept: Intoxication is a condition in which a person’s normal capacity to act or think is inhibited by alcohol or some other drug. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Intoxication  A contract entered into by an intoxicated person may be either valid or voidable.  The contract is enforceable if the person understood the legal consequences of the agreement despite his/her intoxication.  It may be voidable if the person was so intoxicated as to lack the necessary mental capacity to contract. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Intoxication  In making this determination, we start with the presumption that contract is valid; the intoxicated person must overcome this presumption.  Courts will look at objective indications of the intoxicated person’s condition to determine if he or she lacked the required capacity.  Many factors go into such a determination such as amount of alcohol consumed, age of person, fairness of contract, etc. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Intoxication  Courts look at objective indications of the intoxicated person’s condition to determine if he or she lacked the required capacity.  Many factors go into such a determination such as amount of alcohol consumed, age of person, fairness of contract, etc.  The presumption will be that contract is valid; the intoxicated person must overcome this presumption. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Intoxication  If the person proves he was too intoxicated to contract, then he may disaffirm the contract.  The party must disaffirm either while still intoxicated or within a reasonable time after becoming sober.  The person claiming intoxication typically must be able to return all consideration received. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Mental Incompetence  Contracts made by mentally incompetent persons may be void, voidable, or valid.  If a court has previously determined a person to be mentally incompetent, any contract made by that person is automatically void (no contract exists).  Only a court-appointed guardian representing the mentally incompetent individual may enter into a contract on his or her behalf. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Contractual Capacity: Mental Incompetence  A party who has not been previously determined to be mentally incompetent by a court may disaffirm a contract if at the time of contracting that person:  (1) did not know he was entering into a contract; or  (2) lacked the mental capacity to understand its nature, purpose, and consequences.  The contract is voidable at the option of the mentally incompetent person, but not the other party. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Elements of a Contract  Requirements of a Valid Contract:  Agreement (Offer and acceptance).  Consideration (Legally sufficient and bargained-for).  Contractual Capacity (All parties must be competent).  Legal (Purpose of contract must be legal at time of execution). 68 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Legality  For a contract to be valid and enforceable, it must be formed for a legal purpose.  A contract to do something that is prohibited by law is illegal, void from the outset, and unenforceable.  Similarly, a contract to commit a tort is contrary to public policy, and also illegal and unenforceable. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Legality: Contrary to Statute  Statutes often set forth rules specifying what may be included in contracts and what is prohibited.  A contract to commit a crime is in violation of a statute and is therefore unenforceable and void.  What about a contract to buy and sell marijuana in Colorado? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Legality: Contrary to Statute  A person who loans money to another at an interest rate above the state’s lawful maximum interest rate commits usury.  Usurious contracts are illegal and may be void in their entirety, although most states simply limit the interest the lender is permitted to collect. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Legality: Contrary to Statute  Gambling is the creation of risk for the purpose of assuming it.  Most gambling contracts are illegal and unenforceable— even in states where certain forms of regulated gambling are permitted. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Legality: Contrary to Public Policy  Some contracts are not enforceable because of the negative impact they would have on society.  Contracts in Restraint of Trade: If two or more parties enter into an agreement not to compete against each other and their only objective is to restrict competition, the agreement is void. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Effect of Illegality  An illegal contract is void and both parties are usually considered to be in pari delicto (equally at fault).  If the contract is executory, neither party can enforce it.  If it has been executed, neither party can recover damages.  Generally, the courts do not care if one wrongdoer in an illegal contract is unjustly enriched at the expense of the other. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Statute of Frauds  Each state has adopted its own Statute of Frauds.  This statute requires that certain types of contracts must be evidenced by a signed writing (or its electronic equivalent) in order to be enforceable.  The primary purpose of the statute is to prevent harm to innocent parties by requiring written evidence of agreements concerning important transactions.  The statute denies enforceability to certain contracts that do not comply with its writing requirements. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 75  Contracts That Require a Writing  There are five different types of contracts that must be in writing and signed in order to be enforceable. We will only discuss two of these:  Contracts involving interests in land.  Contracts that cannot (by its terms) be performed within one year from the day after the date of formation. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 76  Contracts Involving Interests in Land  A contract for the sale of land is not enforceable unless it is in writing.  Land is real property and includes all physical objects that are permanently attached to the soil (buildings, fences, trees, etc.).  The writing must describe the property with sufficient certainty so that © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. it can be identified.77  The One-Year Rule  A contract that cannot, by its own terms, be performed within one year from the date it was formed must be in writing.  The one year begins to run on the date the contract is made, not from the date upon which performance begins. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 78  The One-Year Rule  If performance is possible within one year, even if it is highly improbable, an oral contract is enforceable.  Moreover, even if performance actually took longer than one year, an oral contract would still be enforceable as long as performance was possible within one year. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 79  The One-Year Rule  When performance of a contract is objectively impossible during the one- year period, the contract must be in writing to be enforceable.  If the time for performance is of an uncertain duration but depends upon some contingency that may occur within one year, an oral contract is enforceable. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 80  The One-Year Rule © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 81