1. © 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 7 Contracts: Nature and Classification

2. © 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

3. © 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

4. © 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.

5. © 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.

6. © 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.

7. © 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).

8. © 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.

9. © 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).

10. © 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.

11. © 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.

12. © 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.

13. © 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.

14. © 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).