How Contracts Arise
Chapter 5
Business Law
Essential Questions
• Explain the elements of legal contracts.
• What are the differences among valid,
void, voidable and uneforceable
contracts?
• What are the differences between
unilateral and bilateral contracts?
• What are the differences between express
and implied contracts?
Contracts
• Contract:
– Any agreement enforceable by law
• The Three Theories of Contract Law:
– Equity Theory:
• Parties exchanged things of equal value
– Will Theory:
• Parties agreed to the terms set forth
– Free-Will
– Formalist Theory:
• “Meeting of the minds”
•
The Elements of a Contract:
1. Offer:
•
A proposal by one party to another intended to
create a legally binding agreement
2. Acceptance:
•
The second party’s unqualified willingness to go
along with the first party’s proposal
– Genuine Agreement: Offer and Acceptance
3. Capacity:
•
The legal ability to enter a contract
4. Consideration:
•
The exchange of things of value
5. Legality:
•
People cannot enter into contracts to commit
illegal acts
Characteristics of a Contract
•
•
•
•
Valid, void, voidable, or unenforceable
Express or implied
Bilateral or unilateral
Oral or written
Valid, Void, Voidable, or
Unenforceable
• Valid:
– Legally good
• Void:
– No legal effect
• Voidable Contract:
– When a party to a contract is able to void or
cancel the contract
• Unenforceable Contract:
– One the court will not uphold
Express or Implied
• Express Contract:
– Stated in words and may be either oral or
written
• Implied Contract:
– Actions of the parties
• Getting gas
Bilateral or Unilateral
• Bilateral Contract:
– Contains two promises
• Exchange for doing something
• Unilateral Contract:
Offer
Unilateral
Contract
Bilateral Contract
Agreement
Acceptance
Promise made
Promise
by
– Contains a promise by
only
one
person
to
bydo
offeree at
offeror
offeror’s
something
Unilateral Contract
request
Offer
Promise by
offeror
Agreement
Acceptance
Act performed
by offeree at
offeror’s
request
Oral or Written
• Oral Contract:
– When two or more people form a contract by
speaking to each other
• Written Contract:
– Assures that both parties know the exact
terms of the contract and also provides proof
that the agreement was made
Offer and Acceptance
•
Offeror:
– Makes the offer
•
Offeree:
– Receives the offer
•
Three Basic Requirements:
1. Made seriously
2. Definite and certain
3. Communicated to the offeree
Serious Intent
• If A.B. was having a bad with his car and
said, “Hey J.B., give me five bucks and it’s
yours”, does this hold up in court?
• Invitations to Negotiate:
– Most advertisements in newspapers,
magazines, and catalogs
Definiteness and Certainty
• If Shane borrows Jeffs IPod and says I will
pay part of the price if I can use this for a
week. Does this hold up in court?
– No, must be definite, part is not
Communication to the Offeree
• Offers may be made by telephone, letter,
telegram, fax machine, e-mail, or by any
other method that communicates the offer
to the offeree
Requirements of an Acceptance
• Unconditional Acceptance:
– Must not change the terms of the original offer
in any way
• The mirror image rule:
• Counteroffer:
– Any change in the terms of the offer
• House, Car, etc.
• Methods of Acceptance:
– According to common law an acceptance that
must be sent over long distances is effective
when it is sent
Termination of an Offer
• Revocation:
– Taking back of an offer by the offeror
• Before it has been accepted
• Rejection:
– Refusal of an offer by the offeree brings the
offer to an end
• Counteroffer:
– Ends the first offer
• Expiration of Time:
– A set time or deadline for the acceptance
must be honored
• Reasonable time
• Death or Insanity:
– If the offeror dies or becomes insane before
the offer is accepted, the offer comes to an
end