THE LEGAL ENVIRONMENT
OF BUSINESS
A Critical Thinking Approach
Fourth Edition
Nancy K. Kubasek
Bartley A. Brennan
M. Neil Browne
© 2006 Prentice Hall
Ch. 10-1
THE LEGAL ENVIRONMENT OF BUSINESS
CHAPTER 10
The Law of Contracts and Sales - I
© 2006 Prentice Hall
Ch. 10-2
THE LEGAL ENVIRONMENT OF BUSINESS
Definition, Sources and Classifications of Contract
Law
Definition
A contract is a legally enforceable
exchange of promises or an
exchange of a promise for an act.
© 2006 Prentice Hall
Ch. 10-3
THE LEGAL ENVIRONMENT OF BUSINESS
Purpose of Contracts
To provide businesses and
individuals with predictability and
security via understandable rules
for the formation and performance
of agreements; as well as
recognized remedies for breach
© 2006 Prentice Hall
Ch. 10-4
THE LEGAL ENVIRONMENT OF BUSINESS
Sources of Contract Law
Case Law or Common Law
Real Property
Services
Employment
Statutory Law
UCC Art. 2—Sales of Goods
Consumer protection
statutes
© 2006 Prentice Hall
Ch. 10-5
THE LEGAL ENVIRONMENT OF BUSINESS
Classifications of Contracts
Express and implied
Unilateral and bilateral
Void, Voidable, and Valid
Executed and executory
Quasi-contract
© 2006 Prentice Hall
Ch. 10-6
THE LEGAL ENVIRONMENT OF BUSINESS
Elements of a Legal Contract
Offer
Genuine assent
Acceptance
Competent
parties
Consideration
Legal object
© 2006 Prentice Hall
Ch. 10-7
THE LEGAL ENVIRONMENT OF BUSINESS
Requirements of the Offer
Objective intent to be bound
Definiteness
Communication to offeree
© 2006 Prentice Hall
Ch. 10-8
THE LEGAL ENVIRONMENT OF BUSINESS
Termination of Offers
Lapse of time
Death of party
Destruction of subject
matter
Rejection by offeree
Revocation by offeror
© 2006 Prentice Hall
Ch. 10-9
THE LEGAL ENVIRONMENT OF BUSINESS
Requirements for Acceptance
Intent to accept
Communication to offeror
“Mirror Image Rule” (Common Law)
Terms in the purported ‘acceptance’ that vary from the
terms of the offer constitute a rejection and counteroffer
NOTE: UCC Art. 2-207, where applicable, displaces the
common law rule.
© 2006 Prentice Hall
Ch. 10-10
THE LEGAL ENVIRONMENT OF BUSINESS
Consideration
Definition
A bargained-for exchange of promises in which
a legal detriment is suffered by the promisee
Adequacy
Preexisting Duty Rule
Promises Enforceable without
Consideration—Promissory estoppel and
unjust enrichment
© 2006 Prentice Hall
Ch. 10-11
THE LEGAL ENVIRONMENT OF BUSINESS
Liquidated & Unliquidated Debts
Liquidated debts: no dispute about amount
Result - preexisting duty to pay allows claim
based on underlying agreement despite partial
payment
Unliquidated debt: amount claimed is disputed
Result - there is new consideration for second
agreement to make partial payment; therefore,
claim based upon first underlying agreement
not supported
Legal term: ‘Accord and satisfaction’
© 2006 Prentice Hall
Ch. 10-12
THE LEGAL ENVIRONMENT OF BUSINESS
Genuine Assent
Problems with Genuine Assent:
Fraud
Duress
Undue Influence
Mutual Mistake
© 2006 Prentice Hall
Ch. 10-13
THE LEGAL ENVIRONMENT OF BUSINESS
Fraud
Misrepresentation of a material fact
Made with intent to deceive
Reasonable reliance
Injury
© 2006 Prentice Hall
Ch. 10-14
THE LEGAL ENVIRONMENT OF BUSINESS
Duress
Wrongful act or threat
Prevents a party from exercising free will
Interferes with ‘meeting of the minds’
Threats can be physical, or mental
© 2006 Prentice Hall
Ch. 10-15
THE LEGAL ENVIRONMENT OF BUSINESS
Undue Influence
Unbalanced power relationship
Abuse of trust: doctor-patient; lawyerclient
Coercive influence
Detriment to the subservient party
© 2006 Prentice Hall
Ch. 10-16
THE LEGAL ENVIRONMENT OF BUSINESS
Mistake
Unilateral
Court will not rescind the contract
Bilateral
Court may rescind the contract
© 2006 Prentice Hall
Ch. 10-17
THE LEGAL ENVIRONMENT OF BUSINESS
Competency
DEFINITION
The ability to understand the
nature of the transaction and
the consequences of entering
into at the time the contract is
formed
© 2006 Prentice Hall
Major Issues:
Minors
Insanity
Intoxication
Ch. 10-18
THE LEGAL ENVIRONMENT OF BUSINESS
Legal Object
General Rule
Contracts with illegal subject matter are void
Statutory Law:
Contracts with unlicensed vendors are
unenforceable
Case Law:
Unreasonable noncompetition agreements
are unenforceable
© 2006 Prentice Hall
Ch. 10-19
THE LEGAL ENVIRONMENT OF BUSINESS
Contracts That Must Be in Writing
Statute of Frauds 1677
Contracts for the sale of land
Contracts to pay the debts of another
Contracts not performable in one year
Sale of goods of $500 or more
Contracts in consideration of marriage
Contracts of an executor to answer for debts of
deceased
© 2006 Prentice Hall
Ch. 10-20
THE LEGAL ENVIRONMENT OF BUSINESS
Parol Evidence Rule
Elements:
Where there is a written contract
Any oral agreements made prior to
or contemporaneously with
That vary, alter, or contradict
Are not admissible
© 2006 Prentice Hall
Ch. 10-21
THE LEGAL ENVIRONMENT OF BUSINESS
Exceptions to the Parol Evidence Rule
Although offers of oral agreements are not
admissible to contradict the written
agreement, oral agreements are admissible
for the following purposes:
1. to clarify ambiguities
2. to prove fraud, mistake, illegality,
duress, etc.
3. to fill in a gap (supplement) the writing
© 2006 Prentice Hall
Ch. 10-22
THE LEGAL ENVIRONMENT OF BUSINESS
Third-Party Beneficiary Contracts
Donee-beneficiaries
Where the parties intend to make a gift
Creditor-beneficiaries
Where the intent is to fulfill an
obligation
© 2006 Prentice Hall
Ch. 10-23
THE LEGAL ENVIRONMENT OF BUSINESS
Assignments
Assignment is the present transfer
of an existing right.
Note: Rights are assigned; duties are delegated.
© 2006 Prentice Hall
Ch. 10-24
THE LEGAL ENVIRONMENT OF BUSINESS
Assignments-Requirements
Obligor must receive notice of
assignment
Assignment not valid when:
It results in material change in the
duty of obligor
Prohibited by statute
Prohibited by contract
© 2006 Prentice Hall
Ch. 10-25
THE LEGAL ENVIRONMENT OF BUSINESS
Assignment Process
Obligor
Obligee-Promisee-Assignor
(A)
(B)
(C)
Assignee
© 2006 Prentice Hall
Ch. 10-26
THE LEGAL ENVIRONMENT OF BUSINESS
Summary
A contract is a legally enforceable promise
Minimal requirements for enforceability:
Offer
Acceptance
Consideration
Genuine assent
Competent parties
Legal object
© 2006 Prentice Hall
Ch. 10-27