Fundamentals of business law, 10e Roger leroy miller © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Nature and Classification Chapter 8 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LEARNING OBJECTIVES What is a contract? What is the objective theory of contracts? What are the four basic elements necessary to the formation of a valid contract? What is the difference between express and implied contracts? © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LEARNING OBJECTIVES (CONT’D) How does a void contract differ from a voidable contract? What is an unenforceable contract? What rules guide the courts in interpreting contracts? © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

introduction Contract law deals with, among other things, the formation and keeping of promises. A promise is a declaration by a person to do or not to do a certain act. Increasingly, contracts are formed online. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An Overview of Contract Law Sources of Contract Law The common law governs all contracts except when it has been modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or by administrative agency regulations. The UCC, however, governs contracts for the sale or lease of goods. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An Overview of Contract Law The Function of Contract Law Contract law establishes what kinds of promises will be legally binding and supplies procedures for enforcing legally binding promises (agreements). The rules of contract law are often followed in business agreements to avoid potential problems. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An Overview of Contract Law The Definition of a Contract A contract is an agreement that can be enforced in court. It is formed by two or more competent parties who agree to perform or to refrain from performing some act now or in the future. Generally, contract disputes arise when there is a promise of future performance. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An Overview of Contract Law The Objective Theory of Contracts In contract law, intent is determined by objective facts, not by the personal or subjective intent, or belief, of a party. Objective facts include: What the party said when entering into the contract How the party acted or appeared The circumstances surrounding the transaction © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Elements of a Contract Requirements of a Valid Contract Agreement—One party must offer to enter into a legal agreement, and the other party must accept the terms of the offer. Consideration—Contracts must be supported by something of value received or promised to convince a person to make a deal. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Elements of a Contract Contractual Capacity—Both parties entering into a contract must possess characteristics qualifying them as competent to do so under the law. Legality—The contract’s purpose must be to accomplish some goal that is legal and not against public policy. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Elements of a Contract Defenses to the Enforceability of a Contract Even if the four requirements of a valid contract are met, a contract may be unenforceable if it lacks voluntary consent or is not in the required legal form. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Contract Formation There are many types of contracts. Contracts are classified based on how and when a contract is formed. Every contract involves at least two parties, the offeror (party making the offer) and the offeree (party to whom the offer is made). See Exhibit 8.1, which illustrates three classifications. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Exhibit 8.1 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Bilateral—A promise for a promise Example: The offerer agrees to buy the offeree’s car for a specified price. Unilateral—A promise for a performance Example: A person buys a lottery ticket, picks the winning number, and submits the ticket at the right place and time © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Formal—Requires a special form for contract formation Examples: Checks, drafts, promissory notes, and certificates of deposit Informal—Requires no special form for contract formation Typically, though, businesspersons put their contracts in writing so there is proof of a contract’s existence in case of problems. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Express—The terms of the agreement are fully and explicitly stated by words (oral, written, or both). Example: A signed lease for an apartment © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Implied—Formed at least in part by the conduct of the parties if certain conditions exist: Offerer furnishes some service or property Offerer expected to be paid and offeree knows this Offerree has a chance to reject the offer and does not © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Contract Performance Contracts are also classified according to their state of performance. Executed—A fully performed contract Executory—A contract not yet fully performed by either party © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Contract Enforceability Valid—A contract that has the four element necessary for contract formation: An agreement (offer and acceptance) Supported by sufficient legal consideration Parties have legal capacity to enter into the contract Legal reason for the contract © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Voidable—A contract in which a party has the option of avoiding or enforcing the contractual obligation. Example: Contracts entered into under fraudulent conditions are voidable at the option of the defrauded party. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Unenforceable—A valid contract that cannot be enforced because of a legal defense. Example: Some contracts must be in writing and if they are not, they will not be enforceable. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Types of Contracts Void—No contract exists, or there is a contract without legal obligations. Example: Contracting to rob a bank or burn down a building) See Exhibit 8.2 to compare and contrast enforceable, voidable, unenforceable, and void contracts © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Exhibit 8.2 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Quasi Contracts Quasi contracts are implied in law. Usually, quasi contracts are imposed to avoid the unjust enrichment of one party at the expense of another. They are wholly different from actual contracts, which are formed by the words and actions of the parties. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Quasi Contracts Limitations on Quasi-Contractual Recovery In some situations, the party who obtains a benefit is not liable for its fair value. When an Actual Contract Exists A quasi contract generally cannot be used when an actual contract covers the area in controversy. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Interpretation of Contracts The common law rules of contract interpretation, including the plain meaning rule, provide the courts with guidelines for deciding disputes over how contract terms or provisions should be interpreted. See Exhibit 8.3 for a graphic summary of how these rules are applied. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Exhibit 8.3 © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Interpretation of Contracts Plain Meaning Rule Increasingly, courts require that contracts be written in plain language so the terms are understandable. A court will enforce the contract according to its plain terms, the meaning of which must be determined from the written document alone. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Interpretation of Contracts Other Rules of Interpretation Generally, a court will interpret the contract as to the parties’ intent expressed in it. The courts follows several rules in interpreting contractual terms. For example, a reasonable, lawful, and effective meaning will be given to all of a contract’s terms. © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.