Business Law for the Entrepreneur
and Manager
Chapter 4 – Contract Law
Frank Cavico and Bahaudin G. Mujtaba
© Cavico & Mujtaba, 2008
Chapter Topics
• Contract Law In The United States
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Classification of Contracts
Remedies for Breach of Contract
The Requirements of a Valid Contact
Summary
© Cavico & Mujtaba, 2008
Contract Law
• A contract is an agreement between two or more persons
that is enforceable at law
• When an agreement between the parties meets all the
requirements of a contract, the law makes the agreement
binding on the parties thereto
• A contract is an agreement, but an agreement is not
necessarily a contract. A “mere” agreement arises when
two or more persons’ minds meet on any subject,
regardless of how trivial; yet a contract emerges only when
the parties intend to be legally bound by the terms of their
agreement
© Cavico & Mujtaba, 2008
Contract Law in the United States
Classification of Contracts
• The initial order of business is to define the types of contracts that are
possible under Anglo-American common law
• An express contract is one based on words – oral or written – in which
the parties signify their intention to enter into a contract as well as the
terms of the contract by words expressed at the time of the agreement
• An implied contract is one in which the duties and obligations the
parties assume are not done so expressly, but rather are implied by
their acts and conduct or deduced from the circumstances
• The quasi-contract is a very unique feature of the old common law, as
it is not a “real” contract as the express and implied ones. Rather, a
quasi-contract is a legal fiction created by the law in order to prevent
the unjust enrichment of one person at the expense of another
© Cavico & Mujtaba, 2008
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A valid contract is one that is enforceable by the courts and contains
the following elements, all of which will be addressed in detail in this
chapter:
1. mutual agreement between the parties to do or not do a certain thing,
which must be a genuine agreement;
2. the parties must be competent to contract;
3. the promises and obligations of each party to the contract must be
supported by the common law requirement of “consideration”;
4. the subject matter and purposes of the contract must be legal and lawful;
and
5. in some cases, the contract must be evidenced by a writing. A void
contract is a legal nullity; it has no legal effect; and is not enforceable in
court
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A voidable contract is an enforceable contract; but one party thereto
has the choice to perform or reject the contract and withdraw without
liability
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• Contracts also can be executory and executed. An executed
contract is one whose terms have been fully performed by
all the contract parties; whereas an executory contract is
one in which the terms of the contract have not yet been
fully carried out by all the contract parties
• The final classification of contracts in the common law
system is the important differentiation between unilateral
and bilateral contracts. In a unilateral contract, an act is
done in consideration of a promise
• In a bilateral contract situation, there is a mutual exchange
of promises to perform some future act; that is, one
promise is made in consideration for the promise of the
other contract promise
© Cavico & Mujtaba, 2008
Remedies for Breach of Contract
• The basic types of relief are damages, rescission, specific
performance, an injunction, and reformation
• There are several types of damages that may be awarded
for a breach of contract:
1. Rescission is an order from a court that cancels contract and
releases the injured party from all contractual obligations
2. In specific performance a court may compel the defendant
contract party to carry out the terms of the contract
3. An injunction is a court order forbidding a defendant from doing
a particular act
4. Reformation, which is an order by a court in essence rewriting
the terms of an agreement to conform to the actual intent of the
parties which was not reflected in the contract due to some type of
error or mistake
© Cavico & Mujtaba, 2008
The Requirements of a Valid Contact
A. Mutual Agreement:
– Offer: is the legally recognized beginning to the contract; it is the
proposal to enter into a contact
– Acceptance: An offer can become a contract only if it is accepted
by the offeree. The acceptance is the expression of assent by the
offeree to the terms of the offer, by which the offeree exercises the
power conferred upon him/her by the offeror to create a legally
binding agreement. There are five requirements to have a valid
acceptance:
1. The offeree must know of the offer
2. The offeree must manifest an intention to accept
3. The acceptance must be unqualified and unconditional
4. The acceptance must be made in a manner requested or
authorized by the offeror
5. The acceptance must be communicated to the offeror
© Cavico & Mujtaba, 2008
B. Consideration
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The general rule of law maintains that a contract will
not be enforced unless it is supported by
“consideration.” If there is no consideration present,
then ordinarily an agreement is not enforceable even
if the promises thereto are in writing
C. Capacity
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Capacity means that the parties must be fully legally
competent to contract; but it does not mean that a
party must be intellectually competent to contract.
D. Legality
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The contract cannot be for the attainment of an
objective that is prohibited by any law
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D. Writing
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As a general rule, oral contracts are just as
enforceable as written contracts, yet only if the terms
can be proven in court. However, there are certain
classes of contracts that will not be enforced unless
their terms are evidenced by a writing. This rule is
commonly known in Anglo-American law as the
Statute of Frauds. There are six categories of
contracts that must be evidenced by a writing:1)
Contract to sell land, 2) executory, bilateral contracts
that are by their own terms incapable of being
performed within a year from the date in which the
contract was formed, 3) contract of guaranty, 4) an
agreement by an executor, administrator, or personal
representative to pay the debts of an estate from his or
her own personal funds, 5) contracts made in
consideration of marriage, and 6) contracts made in
consideration of marriage.
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1. Genuineness of the Agreement
There are four major doctrines in Anglo-American law
that render the consent to the agreement invalid:
Mistake: two types of mistake – unilateral mistakes and mutual
or bilateral mistakes
Fraud: is a very general legal formulation which covers a wide
variety of legal wrongs based on misrepresenting facts
Duress: is the forcing of a person to enter into a contract by
means of threats to the person, his or her family, or property
Undue influence:??
© Cavico & Mujtaba, 2008
2. Third Party Rights and Obligations in
Contracts
A contract creates both rights and obligations.
As a general rule, a person not a party to the
contract neither has any right to the benefits
derived from the contract nor any obligation
to discharge the duties therein. There are three
chief exceptions to this rule:
1) third party beneficiary contracts
2) assignments of contract rights
3) delegation of contract duties
© Cavico & Mujtaba, 2008
3.
Performance and Discharge of Contracts
The fundamental contract law concept of “discharge”
basically means that contract obligations have come to an
end; and as such the duties of the parties have been
terminated. Discharge can occur in an assortment of
ways. The most prevalent method of contract discharge is
for the contract to be performed by the parties
There are, however, three major potential troublesome
areas with a party’s performance:
1) The time of performance
2) Satisfactory performance
3) Substantial performance
© Cavico & Mujtaba, 2008
• Contracts can be discharged by the occurrence or failure of a
“condition” in a contract. A condition typically is an express
“conditional” clause in a contract that states that some event must
occur before one party has a duty to perform or refrain from
performing. There are two main types of condition clauses– condition
precedent and condition subsequent
• The next area of discharge of contracts deals with the doctrine of
discharge caused by impossibility of performance. The general rule is
that a party’s duty to perform is discharged where, after the contract is
made, the promised performance has become, without that party’s
fault, impossible to perform
• Discharge, finally, can be caused by the agreement of the parties. The
parties may mutually agree to rescind, that is, cancel, their contract,
thereby terminating it and discharging both parties’ obligations
© Cavico & Mujtaba, 2008
Summary
• The popular use of contracts is mostly seen in the
international business arena, specifically by Western
nations, such as the United States. However, as
industrialized nations continue to work with developing
countries in terms of exporting and importing, and the
manufacturing of goods, contracts are highly
recommended
© Cavico & Mujtaba, 2008
Reference
1.
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Cavico, F. & Mujtaba, B. G., (2008). Business Law for the Entrepreneur
and Manager. ILEAD Academy Publications; Davie, Florida, USA. ISBN:
978-0-9774-2115-2.
Cavico, F. and Mujtaba, B. G. (2008). Legal Challenges for the Global
Manager and Entrepreneur. Kendal Hunt Publishing; United States.
© Cavico & Mujtaba, 2008