FUNDAMENTALS OF

BUSINESS LAW, 10E

ROGER LEROY MILLER

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 NATURE AND
CLASSIFICATION
CHAPTER 8

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 LEARNING OBJECTIVES

1. What is a contract? What is the

objective theory of contracts?
2. What are the four basic elements
necessary to the formation of a valid
contract?
3. What is the difference between
express and implied contracts?

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 LEARNING OBJECTIVES (CONT’D)

4. How does a void contract differ from

a voidable contract? What is an
unenforceable contract?
5. What rules guide the courts in
interpreting contracts?

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 INTRODUCTION

• Contract law deals with, among other

things, the formation and keeping of
promises.
• A promise is a declaration by a person
to do or not to do a certain act.
• Increasingly, contracts are formed
online.

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 AN OVERVIEW OF CONTRACT LAW

• Sources of Contract Law

• The common law governs all contracts
except when it has been modified or
replaced by statutory law, such as the
Uniform Commercial Code (UCC), or by
administrative agency regulations.
• The UCC, however, governs contracts for
the sale or lease of goods.

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 AN OVERVIEW OF CONTRACT LAW

• The Function of Contract Law

• Contract law establishes what kinds of
promises will be legally binding and
supplies procedures for enforcing legally
binding promises (agreements).
• The rules of contract law are often
followed in business agreements to avoid
potential problems.

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 AN OVERVIEW OF CONTRACT LAW

• The Definition of a Contract

• A contract is an agreement that can be enforced
in court. It is formed by two or more competent
parties who agree to perform or to refrain from
performing some act now or in the future.
• Generally, contract disputes arise when there is a
promise of future performance.

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 AN OVERVIEW OF CONTRACT LAW

• The Objective Theory of Contracts

• In contract law, intent is determined by
objective facts, not by the personal or
subjective intent, or belief, of a party.
• Objective facts include:
• What the party said when entering into the contract
• How the party acted or appeared
• The circumstances surrounding the transaction

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 ELEMENTS OF A CONTRACT

• Requirements of a Valid Contract

1. Agreement—One party must offer to enter
into a legal agreement, and the other party
must accept the terms of the offer.
2. Consideration—Contracts must be
supported by something of value received
or promised to convince a person to make
a deal.

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 ELEMENTS OF A CONTRACT

3. Contractual Capacity—Both parties

entering into a contract must possess
characteristics qualifying them as
competent to do so under the law.
4. Legality—The contract’s purpose must be
to accomplish some goal that is legal and
not against public policy.

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 ELEMENTS OF A CONTRACT

• Defenses to the Enforceability of a

Contract
• Even if the four requirements of a valid
contract are met, a contract may be
unenforceable if it lacks voluntary consent
or is not in the required legal form.

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 TYPES OF CONTRACTS

• Contract Formation
• There are many types of contracts. Contracts are
classified based on how and when a contract is
formed.
• Every contract involves at least two parties, the
offeror (party making the offer) and the offeree
(party to whom the offer is made).
• See Exhibit 8.1, which illustrates three
classifications.

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 EXHIBIT 8.1

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 TYPES OF CONTRACTS

1. Bilateral—A promise for a promise

• Example: The offerer agrees to buy the
offeree’s car for a specified price.
2. Unilateral—A promise for a
performance
• Example: A person buys a lottery ticket,
picks the winning number, and submits
the ticket at the right place and time

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 TYPES OF CONTRACTS

3. Formal—Requires a special form for

contract formation
• Examples: Checks, drafts, promissory notes,
and certificates of deposit
4. Informal—Requires no special form
for contract formation
• Typically, though, businesspersons put their
contracts in writing so there is proof of a
contract’s existence in case of problems.
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 TYPES OF CONTRACTS

5. Express—The terms of the agreement

are fully and explicitly stated by
words (oral, written, or both).
• Example: A signed lease for an apartment

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 TYPES OF CONTRACTS

6. Implied—Formed at least in part by

the conduct of the parties if certain
conditions exist:
• Offerer furnishes some service or property
• Offerer expected to be paid and offeree
knows this
• Offerree has a chance to reject the offer
and does not

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 TYPES OF CONTRACTS

• Contract Performance
• Contracts are also classified according to
their state of performance.
• Executed—A fully performed contract
• Executory—A contract not yet fully performed by either
party

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 TYPES OF CONTRACTS

• Contract Enforceability
• Valid—A contract that has the four
element necessary for contract formation:
• An agreement (offer and acceptance)
• Supported by sufficient legal consideration
• Parties have legal capacity to enter into the contract
• Legal reason for the contract

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 TYPES OF CONTRACTS

• Voidable—A contract in which a party has

the option of avoiding or enforcing the
contractual obligation.
• Example: Contracts entered into under fraudulent
conditions are voidable at the option of the defrauded
party.

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 TYPES OF CONTRACTS

• Unenforceable—A valid contract that

cannot be enforced because of a legal
defense.
• Example: Some contracts must be in writing and if they are not, they will
not be enforceable.

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 TYPES OF CONTRACTS

• Void—No contract exists, or there is a

contract without legal obligations.
• Example: Contracting to rob a bank or
burn down a building)
• See Exhibit 8.2 to compare and contrast
enforceable, voidable, unenforceable, and
void contracts

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 EXHIBIT 8.2

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 QUASI CONTRACTS

• Quasi contracts are implied in law.

• Usually, quasi contracts are imposed
to avoid the unjust enrichment of one
party at the expense of another.
• They are wholly different from actual
contracts, which are formed by the
words and actions of the parties.

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 QUASI CONTRACTS

• Limitations on Quasi-Contractual
Recovery
• In some situations, the party who obtains a
benefit is not liable for its fair value.
• When an Actual Contract Exists
• A quasi contract generally cannot be
used when an actual contract covers the
area in controversy.

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 INTERPRETATION OF CONTRACTS

• The common law rules of contract

interpretation, including the plain
meaning rule, provide the courts with
guidelines for deciding disputes over
how contract terms or provisions
should be interpreted.
• See Exhibit 8.3 for a graphic summary
of how these rules are applied.

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 EXHIBIT 8.3

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 INTERPRETATION OF CONTRACTS

• Plain Meaning Rule

• Increasingly, courts require that contracts
be written in plain language so the terms
are understandable.
• A court will enforce the contract
according to its plain terms, the meaning
of which must be determined from the
written document alone.

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 INTERPRETATION OF CONTRACTS

• Other Rules of Interpretation

• Generally, a court will interpret the
contract as to the parties’ intent
expressed in it.
• The courts follows several rules in
interpreting contractual terms. For
example, a reasonable, lawful, and
effective meaning will be given to all of a
contract’s terms.

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