Essentials Of Business Law

Chapter 6

Introduction To Contracts

McGraw-Hill/Irwin Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Contract

Legally enforceable agreement Between two or more parties Agree to perform, or to avoid performing

certain legal acts

Contains six elements

Only legal obligations, not social or moral obligations, are enforceable

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Purposes Of A Contract

Sale of merchandise or services

Employment

Transfer of ownership of land or personal property

May be extended or otherwise revised

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Elements Of An Enforceable Contract

1. Offer and acceptance Offer

• Proposal made by offeror to offeree• Indicates willingness to enter contract

Acceptance• Indication by offeree to agree to be bound by the

terms of the offer

2. Mutual agreement Clear understanding of agreement Meeting of the minds

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Elements Of An Enforceable Contract

3. Consideration Exchange of promises Each party gives up something of value

4. Competent parties Capacity to understand Legal age Normal mentality Not impaired by injury, mental disease,

drugs, or alcohol

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Elements Of An Enforceable Contract

5. Legality of purpose Purpose of contract must be legal

6. Proper form Must be in writing when:

• Over $500• Longer than one year

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Types Of Contracts

Oral contract Created from the conversation of the parties

• Not in writing • Not signed by parties

Example: discussion of the terms of a purchase with a salesperson

Written contract Written in a permanent form Can be handwritten, typed, or printed Reduces the risk of possible disagreements later

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Types Of Contracts

Express contract Explicitly states the agreement of the parties Can be oral or written

Implied contract Terms of the agreement are implied from:

• Conduct of the parties• Customs of the trade• Conditions or circumstances

Neither oral nor written

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Types Of Contracts

Formal contract Written contract with a seal

Simple contract Informal contract without a seal Can be written, oral, or implied

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Types Of Contracts

Entire contract Contains two or more parts Each part is dependant on the other Goods must be offered in a single delivery, after

which payment can be demanded

Divisible contract Contains two or more parts Each part is independent of the others Goods can be delivered in lots, payment can be

demanded for each lot

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Status Of Contracts

Executory contract A future act or obligation remains to be

performed Completely executory if no part of the contract

has been performed Partly executory if some provision have been

performed

Executed contract Terms of agreement have been fully

performed

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Enforceability Of Contracts

Valid contract Legally enforceable Contains six essential elements

• Offer and acceptance• Mutual agreement• Consideration• Competent parties• Legality of purpose• Proper form

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Enforceability Of Contracts

Void contract Lacks one or more essential elements

Voidable contract May be rejected by one of the parties for a

legal reason Example: agreement with a minor