Unit 7 AS: Analyze a Contractual Situation

BLAW 2051 Unit 4

Introduction to Contracts

Introduction to Contracts

The next several units will explore the law of contracts, a topic at the core of Business Law. Some of the most important business relationships are contractual. Businesses enter contracts to sell products or services, to purchase inventory, to lease premises for business operations. Businesses can even have contracts with their employees. So, having a functional understanding of contracts is a must for any successful business person.

What is a Contract?

Simply put, a contract is a "set of legally enforceable promises" (Kubasek, 2015). A contract is made up of four elements:

Agreement - An offer that has been accepted forms an agreement. An offer is a proposal to contract by an offeror, and an acceptance is the consent to the offer by the offeree.

Consideration - This is a mutually bargained-for exchange.

Capacity - This is the legal ability to enter a contract. Capacity is presumed, but there are some situations where we prevent people from entering contracts, mostly as a means of protection.

Legal object - This requires that the contract is formed for a lawful purpose.

Sources of Contract Law

Contract law comes from two sources. The majority of contract law is common law, made through the resolution of disputes in the courts. The Restatement (Second) of Contracts serves as a summary of the majority rule of law on contracts, but isn't law itself. Each state has its own law within its judicial decisions. A second source of contract law is the Uniform Commercial Code (UCC). Businesses rely on contracts, and having different laws in different states posed a barrier to uniformity in contracting. To address this, the Uniform Commercial Code was drafted as a proposal for a series of statutes to govern a commercial transaction for the sale or lease of goods. For the UCC to become law in any state, that state's legislative body must adopt it as part of the state's statutes.

Classifications of Contracts

Contracts are classified in different ways, and in order to understand the rights and obligations created by a contract, one should understand the way in which the contract can be classified.

All contracts are either bilateral or unilateral. In a bilateral contract, the parties each exchange a binding promise with the other. In a unilateral contract, one party exchanges a binding promise for another parties' action. In a bilateral contract, if one party does not complete their promise, the contract is breached. In a unilateral contract, however, if the action is not completed, there is no breach. The lack of action prevents the contract from being fully formed as the element of agreement is missing.

All contracts are either express or implied. Express contracts are contracts that are expressed in words - whether oral or written. In contrast, implied contracts (or implied-in-fact) arise from actions of both parties. At times, there are situations where neither an express nor an implied contract exists, but a court wants to hold parties responsible to an obligation as if that party had entered a contract because of unjust enrichment. This is called a quasi-contract (or implied-in-law contract).

All contracts are valid, void, voidable or unenforceable. People enter contracts aiming for them to be valid, which means that all of the elements required of a contract are present. A valid contract is also called an enforceable contract. A void contract is an effort at contracting but there is a failure of one or more of the required elements. A contract is voidable if one of the parties has the ability to withdraw from the contract without the consent of the other. An unenforceable contract is an otherwise valid contract that is subject to a defense rendering the contract unable to be enforced by a

court.

All contracts are either executed or executory. Contracts that are executory are in the process of being performed. When the terms of a contract are fully performed, the contract is executed.

Finally, most contracts are simple contracts, or informal contracts, unless the contract falls under one of the four types of formal contracts. Formal contracts are (1) contracts under seal, (2) recognizances, (3) letters of credit, and (4) negotiable instruments.

First Element of Contract: The Agreement

The element of agreement requires two components - the offer and the acceptance. These two components come together to form an agreement.

An offer has three elements. An offer requires a serious intention to be bound to a promise, clear and reasonably definite terms of the promise, and communication to the offeree.

Serious intention - This is determined with reference to objective indications of the offeror's intent. Intention is what a reasonable person would believe the offeree meant given the facts and circumstances under which the offer is made.

Definite Terms - This requires that the material terms of the contract are known or can be ascertained. Terms that should be definite include the parties to the contract, the subject matter of the contract, and the exchange in return.

Communication - The offeree must know of an offer in order to accept it. So, the offer must be communicated to the offeree.

As a general rule, an offer can be revoked any time before it is accepted, and a revocation is effective when the offeree becomes aware of the revocation. So, if an offer is revoked via U.S. mail, the revocation will be effective when the mail is received by the offeree. When an offer is rejected, or when the offeree makes a counteroffer, the original offer is terminated.

To form an agreement, an acceptance must follow the offer. The acceptance should be the mirror image of the offer, including the same serious intention to be bound to the same terms, communicated to the offeror. Acceptance can be communicated via any reasonable means, unless a method of communication is required by the offer.

An acceptance is effective when the acceptance is placed in the mail (when using this method for acceptance) even though the offeror may not yet know that their offer has been accepted. This is called the mailbox rule. The mailbox rule certainly applies to acceptances via U.S. Mail, but whether it applies to other means of communication of acceptance may vary depending on the state and the method of communication.

At this time, you may be asking yourself what happens when an offer is revoked via mail (effective on receipt) and an offeree thereafter mails an acceptance (effective on dispatch). In this case, a valid contract is formed, and the revocation, once received by the offeree, has no effect. The import of these rules may lead contracting parties to more instantaneous forms of communication, say via phone, to place another party on notice of a revocation or an acceptance.

Conclusion

Businesses rely heavily on contracting, and as such must keep abreast of contract law. To communicate with other contracting parties and with legal advisors about contracts, it is important to learn the various contract terms, and use them. In addition, being able to classify contracts is essential in determining the rights and duties under those contracts, an issue that will be important in the next few units.

(CSLO 1, CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business

law.

Chapter 13 - Introduction to Contracts Chapter 14 - The Agreement