© 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 7 Contracts: Nature and Classification

© 2007 West Legal Studies in Business, A Division of Thomson Learning 2 What is a contract? What is the objective theory of contracts? What are the four basic elements necessary to the formation of a valid contract? What is the difference between an implied-in-fact contract and an implied-in-law (quasi) contract? How does a void contract differ from a voidable contract? What is an unenforceable contract? Why have plain language laws been enacted? What rules guide the courts in interpreting contracts? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Contracts Function of Contracts: –Fundamental to business. –Creates rights and duties between parties. –Provides stability and predictability. Parties: Promisor (makes the promise) and Promisee (accepts the promise). –Good faith in commercial agreements

© 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Definition of a Contract Agreement that can be enforced in court. Formed by two or more parties. Failure to perform results in breach and damages.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 5 Requirements of a Contract A valid, enforceable contract includes: –Agreement. –Consideration. –Capacity. –Legality. Defenses to formation include: –Genuineness of Assent. –Form.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Types of Contracts--Formation Every contract has at least 2 parties: the Offeror (Promisor) and the Offeree (Promisee). Bilateral Contracts: –Offeror and Offeree exchange promises to each other. –A contract is formed when Offeree promises to perform.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Types of Contracts--Formation Unilateral Contracts: –Offeror wants performance in exchange for his promise. –Contract is formed when Offeree performs. –Contests and lotteries are examples. –Revocation of Offer: modern view is that offer is irrevocable once the Offeree substantially performs. CASE 7.1 Ardito v. City of Providence (2003).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 8 Types of Contracts--Formation Express vs. Implied Contracts. –Express: terms of contract are set forth either in writing or orally.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Types of Contracts--Formation Implied-in-Fact: based on conduct. –Plaintiff furnished service or product. –Plaintiff expects to be compensated. –Defendant had a chance to reject and did not. –CASE 7.2 Homer v. Burman (2001).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Types of Contracts--Formation Formal vs. Informal Contracts. –Formal: require special form or method to be enforceable, e.g., under seal. –Informal: all other contracts. Contract Performance: Executed vs. Executory. –Executed: fully performed by both sides. –Executory: at least one of the parties has not performed.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Contract Enforceability Valid Contract. –Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity. Voidable Contract. –Valid contract that is legally defective and can be avoided (rescinded) by one of the parties. Void Contract. –No contract at all.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Quasi (Implied in Law) Contracts Fictional, created by court to avoid unjust enrichment. Limitations on Quasi-Contractual Recovery. When a contract already exists, quasi contract cannot be used.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Interpretation of Contracts Plain Language Laws. –If language is clear from face of contract, court will enforce a contract according to plain terms. –If language clear, court cannot consider extrinsic evidence.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Interpretation of Contracts Other Rules of Interpretation. –Plain Meaning Rule, Trade usage, Custom, Prior Dealings. –CASE 7.3 Citizens Communications Co. v. Trustmark Insurance (2004).