Business Law Chapter 1 An Introduction to Contracts

Business Law Chapter 1: An Introduction to Contracts

What is a contract? • The legal definition of a contract is a promise (or set of promises) that, when breached by one party, gives the other party a legal remedy.

Technical contracts • These contracts have formal requirements and are often governed by specific statutes. Examples of these technical contracts are: • Negotiable instruments • Letters of Credit • Contracts “under seal”

The Basic Elements of all Contracts • Mutual Assent: (a valid offer and acceptance) • Consideration • Legality of subject • Capacity

Mutual Assent • Mutual assent is the final product of a valid offer and acceptance. • Also often referred to as “meeting of the minds”

Offer • An offer is an expression by a party (usually called the offeror) that he or she is willing to enter into a bargain

The Power of Acceptance • The power of acceptance refers to the right of the person receiving the offer to accept it and create a binding contract.

Offers can be made by words, by actions, or any combination of both • An offer can be made without any words at all.

How long is an offer valid? • An offer expires by its own terms, or after a reasonable period of time. • A ‘reasonable period of time’ depends on all of the surrounding circumstances in a particular case.

Acceptance • A valid offer creates the power of acceptance in another.

Communicating an acceptance • The person accepting the offer (the offeree) must communicate this acceptance to the offeror.

The Mailbox Rule • This rule states that an acceptance is legally effective when it is deposited in the U. S. postal system.

Can a person accept by silence? • Actions alone can indicate acceptance.

Terminating the power of acceptance A person’s power of acceptance can be terminated by: • • A revocation of the offer by the offeror A rejection of the offer by the offeree Lapse of time Death or subsequent incapacity of either party • The failure of a required condition

Counteroffers • Counteroffers are new offers, not an acceptance of the original offer.

Language required to create a contract • There is no magic formula of words that must be used in order to create a contract.

Consideration • The basic reason for a contract; a person gives up something of value in exchange for receiving something of value through the contract.

Capacity • When a person has legal “capacity”, it simply means that he or she has the legal authority to enter into binding, legal agreements.

Subject of contract must be legal • A contract that involves illegal activity will not be enforced through the court system, for obvious reasons.

Types of Contracts • There are many different types of contracts.

Classifying a contract by performance • Contracts can be classified by the manner in which the parties fulfill it.

Unilateral contracts • Unilateral Contract: A contract in which one party makes a promise in exchange for an action by the other party.

Bilateral Contracts • A bilateral contract involves a promise in exchange for another promise.

Executory and executed contracts • An executory contract is one that has not yet been completely performed. • An executed contract is one in which all required actions have been completed.

Void and voidable contracts • A “void” contract is a contract that is invalid. • A void contract cannot be enforced. • A voidable contract is a contract that could be invalidated, but has not yet been ruled void.

The Statute of Frauds • The Statute of Frauds is a statute that requires certain types of contracts to be reduced to writing before they are considered legally enforceable.