Chapter 7 Contracts

7-2 Nature of a Contract A contract is a legally enforceable agreement that is created when two or more competent parties agree to perform, or to avoid performing, certain acts that they have a legal right to do and that meet certain legal requirements. The Uniform Commercial Code (UCC) defines a contract as “the total legal obligation which results from the parties’ agreement as affected by the Uniform Commercial Code or any other applicable rules of law.” Learning Outcome 7-1: Describe the nature of a contract. Page: 108

Sources of Contract Law 7-3 Sources of Contract Law Article 2 of the UCC is relevant to contract law but only applies to transactions in goods or other tangible personal property. Tangible personal property can be defined as personal property that can be moved, such as a vehicle, kitchen table, or computer. Common law, on the other hand, is the source of contract law regarding the sale of fixed assets, services, or intangibles. Learning Outcome 7-2: Identify the sources of contact law. Page: 108

Agreements that Result in a Contract 7-4 All contracts are agreements, but not all agreements are contracts. If an agreement imposes a legal obligation, an enforceable contract results; if it imposes only a social or moral obligation, however, it is not a contract and cannot be legally enforced. Example: Allen promises Kobayashi, a coworker, a ride to a training seminar. Allen failed to keep the promise and Kobayashi missed the seminar. Kobayashi has no legal remedy against Allen because the agreement was based on a social or moral obligation, not a legal obligation. Learning Outcome 7-3: Distinguish between agreements and contracts. Page: 108

7-5 Purposes of a Contract Contracts may be created to establish legal obligations regarding many matters including: The sale of merchandise or services Employment The transfer of ownership of land (real property) or personal property such as a car A contract may be extended and/or terms revised to reflect the parties future wishes. Learning Outcome 7-4: Explain the purpose of a contract. Page: 108

Elements of an Enforceable Contract 7-6 To be legally enforceable, a contract must contain six elements: 1. Offer and Acceptance An offer is made by the offeror and accepted by the offeree . This indicates both parties desire to enter into the agreement. 2. Mutual Agreement The parties must have a clear understanding of what they are undertaking and the contract must show mutual agreement (i.e. meeting of the minds). 3. Consideration Each party to a contract must promise to give up something. The exchange of promises (where each party gives the other something of value) is called consideration. Learning Outcome 7-5: Identify the six elements of an enforceable contract. Page: 109

Elements of an Enforceable Contract (cont.) 7-7 Elements of an Enforceable Contract 4. Competent Parties The parties to a contract must be competent and capable of understanding what they are doing. (Example: legal age, mentally stable) 5. Legality of Purpose The intent of the contract must not violate the law. The courts will not enforce a contract that violates the law. 6. Proper Form Requirements for contracts are known as proper form. Contracts must not only be in writing but also follow a prescribed form, such as containing the signatures of the parties. Learning Outcome 7-5: Identify the six elements of an enforceable contract. Page: 109

7-8 Kinds of Contracts Contracts may be classified in several ways, depending on the manner in which they are created, expressed, or performed. A contract may be: Oral or written Express or implied Formal or simple Entire or divisible Learning Outcome 7-6: Distinguish between the different classifications of contracts, including oral and written, express and implied, formal and simple, and entire and divisible. Page: 110

Kinds of Contracts (cont.) 7-9 Kinds of Contracts (cont.) Oral Contracts: Not in writing or signed by the parties, but it is a real contract created entirely by the conversation of the parties. Written Contracts: Reduced to writing on a permanent surface. A written contract can be simply a handwritten note or any other memorandum containing the terms of the agreement, as long as it is signed by the party or parties who wish to be bound by the agreement. The law does not specify any particular form or language to be used. It is sufficient that the parties clearly express themselves in understandable language. Learning Outcome 7-6: Distinguish between the different classifications of contracts, including oral and written, express and implied, formal and simple, and entire and divisible. Page: 110

Kinds of Contracts (cont.) 7-10 Kinds of Contracts (cont.) Express Contracts: One that specifically states the terms of the agreement between the parties (either written or oral). Implied Contract: A contract where rather than from oral or written words its terms are derived from – the intentions of the parties which is inferred by their actions, or from the customs of the trade, or from conditions or circumstances. Learning Outcome 7-6: Distinguish between the different classifications of contracts, including oral and written, express and implied, formal and simple, and entire and divisible. Page: 110

Kinds of Contracts (cont.) 7-11 Kinds of Contracts (cont.) Formal Contract: Also referred to as specialty contract, it is a written contract under seal. The seal may consist of simply the word Seal or L.S. (locus sigilli), a scroll, a wafer, or an impression on the paper. Today only a few contracts, such as bonds, mortgages, and deeds conveying title to real estate, are required to have a seal. Many states have stopped using the seal entirely. Simple Contract: It is an informal contract made without seal (even though the subject matter of the contract may be extremely complex and may involve huge amounts of money). Learning Outcome 7-6: Distinguish between the different classifications of contracts, including oral and written, express and implied, formal and simple, and entire and divisible. Page: 111

Kinds of Contracts (cont.) 7-12 Kinds of Contracts (cont.) Entire Contract: Also known as an indivisible contract, it has two or more parts. Each part is dependent on the others for satisfactory performance. Such a contract must be completely performed. Divisible Contract: It is made up of two or more parts, and each part is independent of the others. Learning Outcome 7-6: Distinguish between the different classifications of contracts, including oral and written, express and implied, formal and simple, and entire and divisible. Page: 112

7-13 Status of Contracts Contracts may call for performance over an extended period. At any particular time, a contract may be – Awaiting the first to commence obligation In the process of completion Fully completed. Learning Outcome 7-7: Explain the status of contracts and differentiate between executory and executed contracts. Page: 113

Executory or Executed Contracts 7-14 Executory Contract: A contract where a future act or obligation remains to be performed under its terms. A contract is completely executory if no part of it has been performed. It is partly executory if some parts have been performed and some have yet to be performed. Executed Contract: If all the terms of the agreement have been fully performed by both parties, it is an executed contract. It is more a record of an agreement that has been completed by all the parties. Learning Outcome 7-7: Explain the status of contracts and differentiate between executory and executed contracts. Page: 113

Example: Executory Contracts 7-15 Example: Executory Contracts Facts: Lee, a secretary, signed a contract with an employment agency that agreed to find him a job. Lee agreed to pay the agency 50% of his first month’s salary. The agency found him a new job. A month later Lee sent the agency a check for 50 % of his first month’s salary as agreed. The contract is now fully executed as there are no further legal obligations left to either party. Learning Outcome 7-7: Explain the status of contracts and differentiate between executory and executed contracts. Page: 114

Enforceability of Contracts 7-16 Enforceability of Contracts It is important to determine whether a contract is valid, void, or voidable, because not all contracts can be enforced. Valid contracts are agreements resulting in obligations that are legally enforceable. Void contracts are agreements that lack one or more of the essential elements of a contract. Voidable contracts are agreements that may be rejected by one of the parties for a legally acceptable reason. Learning Outcome 7-8: Describe the enforeability of contracts in terms of valid, void, and voidable contracts. Page: 114

Enforceability of Contracts (cont.) 7-17 Enforceability of Contracts (cont.) Valid Contracts: A majority of the contracts entered into business transactions are of this type. Meets all the requirements of a contract because all six essential elements present. Recall the six elements are offer and acceptance, mutual agreement, consideration, competent parties, legality of purpose and proper form. Learning Outcome 7-8: Describe the enforeability of contracts in terms of valid, void, and voidable contracts. Page: 114

Enforceability of Contracts (cont.) 7-18 Enforceability of Contracts (cont.) Void Contract An agreement that lacks one or more of the essential elements of a contract is a void contract. It cannot be enforced and is not a true contract. Learning Outcome 7-8: Describe the enforeability of contracts in terms of valid, void, and voidable contracts. Page: 115

Enforceability of Contracts (cont.) 7-19 Enforceability of Contracts (cont.) Voidable Contract An contract that may be rejected by one party (for a legally acceptable reason) is a voidable. Such a contract is valid and enforceable unless and until rejected by party who has the right to reject. For instance, in a contract between a minor and an adult, the adult must perform his or her part of the agreement, unless and until the minor decides to withdraw from the contract. Learning Outcome 7-8: Describe the enforeability of contracts in terms of valid, void, and voidable contracts. Page: 115

Example: Enforceability of Contracts 7-20 Facts: Braun, a minor, agreed with dealer to buy car. Dealer must perform as agreed, but Braun, who is not legally a competent party, can withdraw. The fact that Braun is a minor and thus not legally competent renders the contract voidable. Learning Outcome 7-8: Describe the enforeability of contracts in terms of valid, void, and voidable contracts. Page: 115