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 instrumentsLetters 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.