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Contract
Enforceability

Master the essential elements that make a contract legally binding: from offer and acceptance to consideration and capacity.

CPA Regulation (REG)

What Is a Contract?

A contract is a legally enforceable agreement between two or more parties that creates mutual obligations. For a contract to be enforceable in court, it must satisfy specific legal requirements.

On the CPA REG exam, you must identify whether a given scenario forms an enforceable contract by analyzing its core elements and potential defenses.

The Six Essential Elements

1. Offer
A definite proposal made with intent to be bound
2. Acceptance
Unqualified assent to the terms of the offer
3. Consideration
Something of value exchanged by each party
4. Capacity
Legal ability to enter a contract (age, mental state)
5. Legality
The contract's purpose must be lawful
6. Consent
Genuine agreement free from fraud, duress, or mistake

Contract Formation Flow

Offer Acceptance Consideration Capacity Legality Consent Enforceable Contract

Offer and Acceptance

1
Offer requirements: The offeror must demonstrate intent to be bound, definite terms (parties, subject matter, price, quantity), and communication to the offeree.
2
Acceptance must be unqualified: A counteroffer is a rejection of the original offer. Under common law, the mirror image rule requires exact acceptance of all terms.
3
UCC exception: Under the UCC (sale of goods), additional terms in acceptance may become part of the contract between merchants.

The Role of Consideration

Consideration is the bargained-for exchange between the parties. Each side must give up something of legal value: a promise, an act, or forbearance from acting.

✓ Valid Consideration
A promise to pay money in exchange for services: both sides gain and give something of value.
✕ Not Consideration
A gift or moral obligation: past consideration (something already done) is generally not valid consideration.

Capacity and Legality

Capacity
Parties must have legal ability to contract. Minors, intoxicated persons, and mentally incompetent persons may lack capacity, making contracts voidable.
Legality
The contract's subject matter must be lawful. Agreements to commit crimes, restrain trade illegally, or violate public policy are void.

Void vs. Voidable vs. Unenforceable

Void Voidable Unenforceable
Legal Effect No contract exists Valid until disaffirmed Valid but court won't enforce
Who Can Act Neither party Injured party only Neither in court
Example Illegal gambling contract Minor's contract Oral contract requiring writing
Ratification? ✕ Cannot ratify ✓ Can ratify ✓ Can cure defect

Defenses to Enforceability

Even when all six elements are present, a contract may still be unenforceable if a defense applies. These defenses attack the quality of consent or compliance with legal formalities.

Fraud
Material misrepresentation of fact with intent to deceive, relied upon by the other party
Duress
Threats of harm or wrongful pressure that force a party to enter the contract involuntarily
Mistake
Mutual mistake of material fact may allow rescission; unilateral mistake generally does not
Statute of Frauds
Certain contracts must be in writing to be enforceable (real estate, guarantees, etc.)

The Statute of Frauds

The Statute of Frauds requires certain contracts to be evidenced by a writing signed by the party to be charged. Remember the mnemonic: MY LEGS.

M
Marriage: Contracts made in consideration of marriage (e.g., prenuptial agreements)
Y
Year: Contracts that cannot be performed within one year from the date of making
L
Land: Contracts for the sale or transfer of an interest in real property
E
Executor: Promises by an executor to pay estate debts from personal funds
G
Goods: Sale of goods priced at \($500\) or more under the UCC
S
Suretyship: Promises to answer for the debt of another

How to Analyze Enforceability

1
Identify the offer: Was there a definite proposal with intent to be bound and communicated to the offeree?
2
Confirm acceptance: Did the offeree accept without qualification? Check for counteroffers or conditional acceptance.
3
Verify consideration: Is there a bargained-for exchange? Watch for past consideration, pre-existing duties, or gift promises.
4
Check capacity and legality: Are all parties competent adults? Is the subject matter lawful?
5
Assess consent and defenses: Was there fraud, duress, or undue influence? Does the Statute of Frauds require a writing?

Example 1: Simple Service Contract

✓
Offer: Alex made a definite proposal with clear terms (paint house, \($3{,}000\)).
✓
Acceptance: Beth's "I accept" is unqualified assent.
✓
Consideration: Alex's painting services exchanged for Beth's promise to pay \($3{,}000\).
✓
Capacity, Legality, Consent: Both adults, lawful purpose, no defenses.

Example 2: Minor's Contract

1
Elements present: Offer, acceptance, consideration (\($8{,}000\) for the car), legality, and consent all exist.
2
Capacity issue: Carlos is a minor (under 18). He lacks full contractual capacity.
3
Contract is voidable: Carlos has the right to disaffirm the contract. The dealer cannot.

Example 3: Statute of Frauds

1
All six elements are present: Offer, acceptance, consideration, capacity, legality, and genuine consent.
2
Statute of Frauds applies: Sale of real property must be evidenced by a signed writing. An oral agreement is insufficient.
3
Exception check: Part performance (deposit + possession + improvements) may override the Statute of Frauds, but a deposit alone is typically insufficient.

Common Mistakes on the Exam

✕ Past Consideration
Thinking "I'll pay you for what you already did" is valid consideration. Past acts cannot serve as consideration for a new promise.
✕ Confusing Void and Voidable
A minor's contract is voidable (the minor can enforce it), not void. An illegal contract is void (neither party can enforce it).
✕ Ignoring the Mailbox Rule
Acceptance is effective when dispatched (mailed), not when received. Revocation is effective when received, not when sent.

Summary of Key Rules

Element / Defense Rule Effect if Missing
Offer Definite terms + intent + communication No contract formed
Acceptance Mirror image (common law) or UCC flexibility No contract formed
Consideration Bargained-for exchange of legal value No contract formed
Capacity Adults of sound mind, not intoxicated Voidable by incapacitated party
Legality Lawful purpose Void: no legal effect
Genuine Consent Free from fraud, duress, undue influence Voidable by injured party
Statute of Frauds Writing required for MY LEGS contracts Unenforceable in court

Question 1 of 5

A 17-year-old purchases a laptop for \($1{,}200\) from an electronics store. Two weeks later, the minor wants to return the laptop and recover the full purchase price. Which of the following is correct?

Question 2 of 5

Which of the following is not required to be in writing under the Statute of Frauds?

Question 3 of 5

Baker offers to sell 100 widgets to Carr for \($5{,}000\). Carr replies, "I accept, but delivery must be by Friday." Under the common law, what is the legal effect of Carr's response?

Question 4 of 5

Martin promises to pay his neighbor \($500\) "because you were so kind to watch my dog last month while I was away." Is Martin's promise enforceable?

Question 5 of 5

What is the most likely outcome of Green's lawsuit?