Chapter 8—Introduction to Contracts –

Classifications, Terminologyand Formation

REED SHEDDREED SHEDD PAGNATTARO PAGNATTARO MOREHEAD MOREHEAD

F I F T E E N T H E D I T I O NF I F T E E N T H E D I T I O N

TheThe Legal & Legal & RegulatoryRegulatory Environment of of BusinessBusiness

McGraw-Hill/IrwinCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights

reserved.

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A contract involves apromise or commitment

(or exchanges of promises or commitments)

to do or not to do something.

Introduction

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Learning Objectives To introduce to fundamental concepts of contracts.

To understand how contracts are classified and the terminology used to describe contracts.

To appreciate the requirements needed to create a contractually-enforced commitment.

To learn how the required elements of a contract are used by courts to decide whether or not a contract exists.

To comprehend how contracts can benefit parties other than the original parties to an agreement.

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think

TANKthink

TANKthinkthink

TANKTANKAll promises are legal contracts.All promises are legal contracts.

a.a. True True b.b. FalseFalse

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Contract May not need to be formal or

written Promise to perform or not

perform Legally enforceable Improves buyer/seller relationship

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Legislation•Uniform Commercial Uniform Commercial CodeCode

•Contracts for goodsContracts for goods

Common Law•Judges’ decisionsJudges’ decisions

•Contracts for other Contracts for other than goodsthan goods

Contract law comes from either

Sources of Contract Law

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Breach Of Contract

Party does not perform Remedies-mitigate damages

Negotiated SettlementNegotiated Settlement

ArbitrationArbitration

Damage Damage AwardAward

Specific Specific PerformancePerformance

RescissionRescission

RestitutionRestitution

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Contract Classifications

ExpressExpress-- Terms Terms

DiscussedDiscussed

Implied-In-Implied-In-FactFact--

No Discussion No Discussion But Implied But Implied

from from ContractContract

Implied-In-Implied-In-LawLaw-- Neither Neither

DiscussionDiscussionNor Conduct Nor Conduct

But One But One Party Unduly Party Unduly

EnrichedEnriched

Bilateral/Unilateral

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Bilateral Contract

PaulPaul PearlPearl

PromisePromise

PromisePromise

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AlexAlex PatPat

PromisePromise

PerformancePerformance

Unilateral Contract

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Contract Enforcement

Enforceable- court uphold validity Unenforceable- party has justifiable reason

for noncompliance Valid- essential requirements present Void- lacks validity/enforceability Voidable- party has right to withdraw

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Contract Performance Executed- promises

performed

Executory- promises not yet performed

Performance important in more complicated transactions

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Contract Formation

Offer

Offeror

Acceptance

Offeree

AGREEMENTCapacity and

Legality

Supported by

Consider-ation

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Offer

Offeror

Acceptance

Offeree

Intent/CommitmentIntent/Commitment

DefinitenessDefiniteness

TerminationTermination

AcceptanceAcceptance•Bilateral- PromiseBilateral- Promise

•Unilateral- PerformanceUnilateral- Performance

•Mirror Image RuleMirror Image Rule

•Silence Silence = Acceptance= Acceptance

•Deposited AcceptanceDeposited Acceptance

•Mailbox RuleMailbox Rule

Offer and Acceptance

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Offer

Offeror

Acceptance

Offeree

Offer Termination

Contract ProvisionContract Provision Lapse Of TimeLapse Of Time RejectionRejection RevocationRevocation Destruction Of SubjectDestruction Of Subject Offeror’s Death or InsanityOfferor’s Death or Insanity Performance Becoming IllegalPerformance Becoming Illegal

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Offeror Offeree

Something Of Legal Value

Something Bargained For

Supported By

Consideration

Offer Acceptance

AGREEMENT

Consideration

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Promissory Estoppel

No consideration

Reliance on promise

Economic injury

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Capacity of Parties Minors

Under age 18 Exceptions for necessaries Voidable/disaffirm

Intoxicated persons/mentally incompetent or impaired

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Voidable Contracts Fraud Misrepresentation Duress Undue Influence Mistake

Mutual Unilateral

Mutual Assent

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Lawful Purpose Restraint Of Trade-

Illegal/Void Examples

Gambling Usurious Unlicensed Exculpatory Unconscionable Prohibited

Covenant Not To Compete

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Third Party Rights3rd parties may be

involved in contracts • intended

• unforseen

3rd parties beneficiaries

• creditor• donee• incidental

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Other Contract Issues

Assignment Transfer of rights to

contract Notice to obligator

Certain contracts cannot be assigned

Novations Original parties relieve obligor

from liability Substitute made

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pop

QUIZpop

QUIZpoppop

QUIZQUIZGeorge, a handyman, is hired to enclose the porch George, a handyman, is hired to enclose the porch on Peter’s vacation cottage in the off-season. No oneon Peter’s vacation cottage in the off-season. No oneis around Peter’s cottage or any of the surroundingis around Peter’s cottage or any of the surroundingcottages. George is accidentally let in to the wrong cottages. George is accidentally let in to the wrong cottage by the property manager and encloses thecottage by the property manager and encloses theporch on Joan’s cottage. Does George have a remedy porch on Joan’s cottage. Does George have a remedy in in contractcontract to be paid for his work? to be paid for his work?

a.a. YesYesb.b. NoNo