Chapter 8

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FIFTEENTH EDITION
The
Legal & Regulatory
Environment of Business
Chapter 8—
Introduction to Contracts –
Classifications, Terminology
and Formation
REED
McGraw-Hill/Irwin
SHEDD
PAGNATTARO
MOREHEAD
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction
A contract involves a
promise or commitment
(or exchanges of
promises or commitments)
to do or
not to do something.
8-2
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.
8-3
think think think
TANK TANK TANK
All promises are legal contracts.
a. True
b. False
8-4
Contract




May not need to be formal or
written
Promise to perform or not
perform
Legally enforceable
Improves buyer/seller relationship
8-5
Sources of Contract Law
Contract law
comes from either
Legislation
Common Law
•Uniform Commercial •Judges’ decisions
Code
•Contracts for goods
•Contracts for other
than goods
8-6
Breach Of Contract
Negotiated Settlement
Arbitration
 Party does not
perform
 Remediesmitigate damages
Damage
Award
Specific
Performance
Rescission
Restitution
8-7
Contract Classifications
Bilateral/ Express- Implied-In- Implied-InUnilateral
Terms
FactLawDiscussed
No Discussion
Neither
But Implied
Discussion
from
Nor Conduct
Contract
But One
Party Unduly
Enriched
8-8
Bilateral Contract
Promise
Paul
Pearl
Promise
8-9
Unilateral Contract
Promise
Alex
Pat
Performance
8-10
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
8-11
Contract Performance

Executed- promises
performed

Executory- promises not
yet performed

Performance important in
more complicated
transactions
8-12
Contract Formation
Offeror
Offer
Capacity
and
Legality
Offeree
Acceptance
AGREEMENT
Supported
by
Consideration
8-13
Offer and Acceptance
Offeror
Offeree
Offer
Acceptance
Intent/Commitment Acceptance
•Bilateral- Promise
Definiteness
•Unilateral- Performance
Termination
•Mirror Image Rule
•Silence = Acceptance
•Deposited Acceptance
•Mailbox Rule
8-14
Offer Termination
Offeror
Offer
Offeree
Acceptance
 Contract Provision
 Lapse Of Time
 Rejection
 Revocation
 Destruction Of Subject
 Offeror’s Death or Insanity
 Performance Becoming Illegal
8-15
Consideration
Offeror
Offer
Offeree
Acceptance
AGREEMENT
Supported
By
Consideration
 Something Of Legal Value
 Something Bargained For
8-16
Promissory Estoppel
No consideration
Reliance on
promise
Economic
injury
8-17
Capacity of Parties


Minors

Under age 18

Exceptions for necessaries

Voidable/disaffirm
Intoxicated persons/mentally
incompetent or impaired
8-18
Voidable Contracts





Fraud
Misrepresentation
Duress
Undue Influence
Mistake



Mutual
Unilateral
Mutual Assent
8-19
Lawful Purpose


Restraint Of TradeIllegal/Void
Examples







Gambling
Usurious
Unlicensed
Exculpatory
Unconscionable
Prohibited
Covenant Not To Compete
8-20
Third Party Rights
3rd parties may be
involved in
contracts
• intended
• unforseen
3rd parties
beneficiaries
• creditor
• donee
• incidental
8-21
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
8-22
pop
pop
pop
QUIZ QUIZ QUIZ
George, a handyman, is hired to enclose the porch
on Peter’s vacation cottage in the off-season. No one
is around Peter’s cottage or any of the surrounding
cottages. George is accidentally let in to the wrong
cottage by the property manager and encloses the
porch on Joan’s cottage. Does George have a remedy
in contract to be paid for his work?
a. Yes
b. No
8-23
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