Sunday, December 23, 2012

Elements of a Contract

A contract is an agreement between two entities, either people to people, people to companies, companies to companies, between the government and you etc. Every contract, according to textbooks, has six elements: Offer, Acceptance, Mutual Assent, Capacity, Consideration, and Legality. You can probably tell from the title what each one means, and you'd be right.

But just for arguments sake, let's look at each one. First, Offer and Acceptance. There has to be an offer to buy, or an offer to sell. When you pick up Call of Duty 4 at Gamestop, marked $60, take it to the counter and buy it with your credit card, you get a written receipt. That's Offer and Acceptance -- a contract. An offer to sell was made, and you accepted it at face value and bought it.

Since the clerk only asked you to pay the price marked on the game, and you accepted that, it was Mutual Assent. Capacity relates to the ability of the two parties to enter a contract. The store is established to sell games. It's a known entity. You are just Joe Blow, but you have a credit card. In other words, you both have the ability (capacity) to make the transaction.

Consideration simply means the thing of value needed for the transaction. Call of Duty 4 had a $60 value. You had $60 on VISA to pay for it. The $60 is the consideration paid for the thing of value (to you). Legality simply means the transaction is regarded by the government or lawmakers (local, state or Federal) as having value, AND being between two parties that have reasonable intelligence and free will. In other words, the clerk didn't hold a gun on you and force you to buy it. In other words, based on all the elements described, it was legal.

The legal basis for all business transactions between buyers and sellers in the U.S. is the Uniform Commercial Code (UCC). You can Google it. It's pages and pages long, and contains all the details I'm leaving out, such as delivery of the goods to you, and the means used.  It can be interesting reading. In our example above, you took delivery when the clerk handed you a bag with your game in it.  You assume when you get home and open up the game, that there'll be a CD in it that will work on your Xbox 360. If not, that's also covered by the UCC. And the store policies.  Did you make a note of them?

The governments and all business transactions in the U.S. are based on the Rule of Law. That's why we're lucky we live here. It's order out of what could be chaos or anarchy. If you don't like it, go to other countries and see how they handle it. You'll find that sometimes you have to add a bribe to get what you're legally entitled to. We're lucky we don't (unless it's illegal).

In the transaction above, there is no negotiation. The price is marked and that's what you pay if you want it. Most transactions are governed this way. When you click "I Accept" on the Internet, or put something in "Your cart" on Amazon, then pay for it, you did so with no ability to negotiate. In other words, the transaction was essentially one sided -- in favor of the seller. This is no different than when you open a bank account, buy a CD, sign a mortgage, or buy a Christmas card.

Most of us make simple non-negotiable buy/sell transactions daily. In many other countries, everything except government fees can be negotiated to a degree. When you sell your crystal candlestick holders at your yardsale, its covered by the UCC.  The difference here is that your buyer may have said "Will you take $3 instead of $5?" And you may have said, "What about $4" and both made the deal. This transaction, although very different from the Call of Duty 4 purchase, contains all six elements, including terms equally agreed to by both parties (the candlesticks and the $4).

That's why the UCC exists, to bring balance and fairness to transactions. However, all that's out the window when you click "I Accept" for an Internet purchase. You have agreed to 100% of the seller's terms, with absolutely no input from you. Take 'em or leave 'em. Either buy it under their terms or go somewhere else.  How do you like that? Have you ever signed an agreement where some of the terms weren't in your favor? Or, as is usually the case, only gave you very limited rights? If you look carefully at product sales agreements, you'll  see that the only right you may have is 1) return the product for a refund -- or not, 2) go to arbitration (always in the vendor's favor -- and potentially costly), or 3) take the seller to court -- always expensive.  Is there a better way?

More on this in the future. Join the site to leave a comment, its free.

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