Contracts - Nature & Terminology from West Bus.

Law 8th edition The key points in this chapter include: 1. The function of contract law. 2. The definition of the term contract and the basic elements that are required for contract formation. 3. The objective theory of contracts. 4. The types of contracts. 5. The rules that govern the courts interpretation of contracts. Contract law concerns the formation and keeping of promises, the excuses our soc iety accepts for breaking such promises, and what promises are considered contra ry to public policy and therefore legally void. This chapter introduces the basi c terms and concepts of contract law, including the rules for interpreting contr act language.

I. FUNCTIONS OF CONTRACT LAW A. ENFORCE PROMISES Contract law assures the parties to private agreements that the promises they ma ke will be enforceable. Without the framework that the law provides, businesspersons cou ld rely only on the good faith of others to keep their promises. B. AVOID PROBLEMS The rules of contract law are often followed in business agreements to avoid pot ential problems. C. SUPPORT THE EXISTENCE OF A MARKET ECONOMY Businesspersons can usually rely on the good faith of others to keep their promi ses, but when price changes or adverse economic factors make it costly to comply with a promis e, good faith may not be enough. II. FREEDOM OF CONTRACT AND FREEDOM FROM CONTRACT A. FREEDOM OF CONTRACT Generally, everyone may enter freely into contracts. This freedom is a strongly held public policy, and courts rarely interfere with contracts that have been volunta rily made. B. FREEDOM FROM CONTRACT Illegal bargains, agreements unreasonably in restraint of trade, and unfair cont racts between one party with a great amount of bargaining power and another with little power are

generally not enforced. Contracts are not enforceable if they are contrary to pu blic policy, fairness, and justice. III. THE BASIC REQUIREMENTS OF A CONTRACT A. THE ELEMENTS OF A CONTRACT 1. Agreement Includes an offer and an acceptance. One party must offer to enter into a legal agreement, and another party must accept the offer. 2. Consideration Promises must be supported by legally sufficient and bargained-for consideration . 3. Contractual Capacity Characteristics that qualify the parties to a contract as competent. 4. Legality A contracts purpose must be to accomplish a goal that is not against public poli cy. B. DEFENSES TO THE ENFORCEMENT OF A CONTRACT 1. Genuineness of Assent The apparent consent of both parties must be genuine. 2. Form A contract must be in whatever form the law requires (some contracts must be in writing). IV. THE OBJECTIVE THEORY OF CONTRACTS Intention to enter into a contract is judged by objective (outward) facts as int erpreted by a reasonable person, rather than by a partys subjective intention. Objective facts include (1) what the party said when entering into the contract, (2) how the party acted or appeared, and (3) the circumstances surrounding the transaction. V. TYPES OF CONTRACTS A. BILATERAL VERSUS UNILATERAL CONTRACTS 1. Bilateral Contract A promise for a promiseto accept the offer, the offeree need only promise to per form. 2. Unilateral Contract A promise for an actthe offeree can accept only by completing the contract perfo rmance. A problem arises when the promisor attempts to revoke the offer after the promis ee has begun performance but before the act has been completed. a. RevocationTraditional View The promisee can accept the offer only by performing fully. Offers are revocable until accepted.

b. RevocationModern View The offer becomes irrevocable once performance begins. Thus, even though it has not yet been accepted, the offeror cannot revoke it. B. EXPRESS VERSUS IMPLIED CONTRACTS 1. Express Contract The terms of the agreement are fully and explicitly stated in words (oral or wri tten). 2. Implied-in-Fact Contract Implied from the conduct of the parties. C. QUASI CONTRACTSCONTRACTS IMPLIED IN LAW In the absence of an actual contract, a quasi contract is imposed by a court to avoid the unjust enrichment of one party at the expense of another. Cannot be invoked if t here is an actual contract that covers the area in controversy. D. FORMAL VERSUS INFORMAL CONTRACTS 1. Formal Contract Requires a special form or method of creation to be enforceable (such as a contr act under seal, a formal writing with a special seal attached). 2. Informal Contract All contracts that are not formal. Except for certain contracts that must be in writing, no special form is required. E. EXECUTED VERSUS EXECUTORY CONTRACTS 1. Executed Contract A contract that has been fully performed on both sides. 2. Executory Contract A contract that has not been fully performed by one or more parties. F. VALID, VOID, VOIDABLE, AND UNENFORCEABLE CONTRACTS 1. Valid Contract Has all the elements necessary for contract formation. 2. Void Contract Has no legal force or binding effect (for example, a contract is void if its pur pose was illegal). 3. Voidable Contract Valid contract that can be avoided by one or more parties (for example, contract s by minors are voidable at the minors option). 4. Unenforceable Contract Contract that cannot be enforced because of certain legal defenses (for example, if a contract that must be in writing is not in writing).

VI. INTERPRETATION OF CONTRACTS Rules of contract interpretation provide guidelines for determining the meaning of contracts. The primary purpose of these rules is to determine the parties intent from the language of their agreement and to give effect to that intent. A. THE PLAIN MEANING RULE When the writing is clear and unequivocal, it will be enforced according to its plain terms. The meaning of the terms is determined from the written document alone. B. OTHER RULES OF INTERPRETATION When the writing contains unclear terms, courts use the following rules 1. A reasonable, lawful, and effective meaning is given to all terms. 2. A contract is interpreted as a whole; individual, specific clauses are consid ered subordinate to the contracts general intent. All writings that are part of the same transaction are interpreted together. 3. Terms that were negotiated separately are given greater consideration than st andard terms and terms that were not negotiated separately. 4. A word is given its ordinary, common meaning, and a technical word its techni cal meaning, unless the parties clearly intended otherwise. 5. Specific, exact wording is given greater weight than general language. 6. Written or typewritten terms prevail over preprinted ones. 7. When the language has more than one meaning, it is interpreted against the pa rty who drafted the contract. 8. Evidence of trade usage, prior dealing, and course of performance may be admi tted to clarify meaning. C. PLAIN-LANGUAGE LAWS The federal government and most states require an agreement to be written clearl y, coherently, and in words of common, everyday meaning.