Page 177 - Encyclopedia of Business and Finance

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Contracts

FORMATION OF A CONTRACT While the existence of consideration is critical to the
A contract consists of one individual making an offer, enforceability of a contract, the quantity or quality of con-
another accepting the offer, and the existence of consider- sideration is immaterial. Generally, courts are not con-
ation between the contracting parties. cerned with the value or adequacy of consideration and
will not interfere with a bargain entered into between the
parties because of insufficient consideration. Certain acts
OFFER
or forbearance cannot constitute consideration. A preex-
An offer is the expression of a willingness to enter into a isting duty to perform or refrain from performing may
bargain. An offer must be directed to a particular offeree not be consideration for a contract. Therefore, fulfilling
and be sufficiently clear so as to justify another individual an existing contractual obligation or refraining from an
in the belief that acceptance of the offer would constitute unlawful act cannot constitute consideration. An excep-
an agreement. Although an offer need not set forth all tion to this rule is that the agreement to pay a preexisting
terms of the potential bargain (even the price may be left debt may be consideration. A promise to make a gift is not
to be later determined), a valid offer must identify the consideration, nor is a moral obligation. A promise not to
fundamental elements of the proposed agreement. An
sue, so long as the right to sue actually exists, may be con-
offer may be revoked at any time before it is accepted or sideration.
before it is reasonably relied upon by another individual.
DEFENSES
ACCEPTANCE
In its most basic form, a contract exists where there is an
Acceptance of an offer is the communication by the offer, an acceptance of the offer, and consideration to sup-
offeree of mutual assent, that is, the agreement to be port the contract. Despite the existence of these three ele-
bound by the terms of an offer. An offer may be accepted ments, enforcement of a contract may be denied if a
only by a person to whom the offer was directed and only sufficient defense to the formation of a contracts is pres-
before the offer terminates or is revoked. A valid accept- ent.
ance must be communicated to the offeror by the same or In order for an individual to enter into a contract,
similar means under which the offer was communicated,
that person must have the legal capacity to do so. At com-
and must be unequivocal to make the agreement binding.
mon law, minors, individuals who are mentally ill, persons
At common law, it is generally held that any deviation
under the influence of alcohol or drugs, and those under
from the terms of the offer is not an acceptance, but rather
a legal guardianship lack legal capacity to contract. The
a rejection and a counteroffer. If the offer identifies a spe-
rule as to minors is that a contract of a minor is voidable,
cific mode of acceptance, such as form, date, time, or
not void. That is, a minor has the option to make a con-
place, that mode must be followed for an acceptance to be tract valid or not. However, if a minor enjoys the benefit
valid. Generally, an acceptance is not effective until it of a contract, the minor is obligated either to repay the
comes into the possession of the offeror, although some other party or to fulfill the minor’s obligations under the
states employ the mailbox rule, which makes acceptance contract. In addition to capacity, an individual must have
sent by U.S. mail effective upon its deposit in the mail. If the legal competency to enter a contract. Competency is
an offer specifically invites acceptance by performance of generally defined as the mental ability of a party to con-
a specified act, performance of that act by the offeree con- tract. In other words, a legally competent person is one
stitutes acceptance without notification of the offeror. who possesses the ability to recognize and understand the
Except in very limited circumstances, such as where the contractual obligations that will result. Courts will assume
parties have a pattern of previous dealings or where it that capacity and competency exist until it is proved oth-
would be inequitable to find otherwise, silence does not erwise.
constitute acceptance.
If the parties to a contract make a mutual mistake
with regard to that contract, such as a mutual misunder-
CONSIDERATION standing, there is no mutual assent and therefore no con-
An offer and acceptance alone do not create a valid and tract. Clerical errors, known as scrivener’s errors, will
binding contract. A third element, consideration, must generally be corrected by a court. That is, rather than find-
exist. Consideration is a bargained-for exchange, that is, ing the contract invalid, the court will merely correct the
the existence of mutuality of obligation. Both parties must error.
derive some benefit—or, alternatively, both parties must A contract that is based on a fraudulent misrepresen-
experience some detriment or forbearance—for a contract tation of a material term is unenforceable. A fraudulent
to exist. Without consideration, an offer and acceptance misrepresentation is material if the maker intended for the
represent merely a naked, unenforceable promise. misrepresentation to induce the other party to enter the

154 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION