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.