Chapter 10 Business Law Essay

The noted legal scholar Roscoe Pound once said that “the social order rests upon the stability and predictability of conduct, of which keeping promises is a large item. ” Contract law deals with, among other things, the formation and keeping of promises.

A promise is a person’s assurance that the person will or will not do something. Like other types of law, contract law reflects our social values, interests, and expectations at a given point in time.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. Contracts relating to services, real estate, employment, and insurance, for example, generally are governed by the common law of contracts. Contracts for the sale and lease of goods, however, are governed by the UCC—to the extent that the UCC has modified general conduct law.The Function of Contract Law—No aspect of modern life is entirely free of contractual relationship.

Even ordinary consumers in their daily activities acquire rights and obligations based on contract law. Contract law deals with, among other things, the formation and enforcement of agreements between parties (in Latin, pacta sunt servanda—“agreements shall be kept”). By supplying procedures for enforcing private contractual agreements, contract law provides an essential condition for the existence of a market economy.Contract law is necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

Definition of a Contract—A contract is “a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Put simply, a contract is a legally binding agreement between two or more parties who agree to perform or to refrain form performing some act now or in the future.If the contractual promise is not fulfilled, the party who made it is subject to the sanctions of a court.

That party may be required to pay damages for failing to perform the contractual promise; in limited instances, the party may be required to perform the promised act. The Objective Theory of Contracts—In determining whether a contract has been formed, the element of intent is of prime importance. In contract law, intent is determined by what is called the objective theory of contracts, not by the personal or subjective intent, or belief, of a party.The theory is that a party’s intention to enter into a legally binding agreement, or contract, is judged by outward, objective facts as interpreted by a reasonable person, rather than by the party’s own secret, subjective intentions. Objective facts include (1) what the party said when entering in to the contract, (2) how the party acted or appeared, and (3) the circumstances surrounding the transactions.

Requirements of a Valid Contract—There are four requirements that must be met before a valid contract exists.If any of these elements is lacking, no contract will have been formed: (1) An agreement to form a contract includes offer and an acceptance, (2) Any promises made by the parties to the contract must be supported by legally sufficient and bargained-for consideration (something of value received or promised, such as money, to convince a person to make a deal), (3) Both parties entering into contract must have the contractual capacity to do so, (4) The contract’s purpose must be to accomplish some goal that is legal (legality) and not against public policy.Defenses to the Enforceability of a Contract—These requirements typically are raised as defenses to the enforceability of an otherwise valid contract: (1) The apparent consent of both parties must be genuine (genuineness of assent), (2) The contract must be in whatever form the law requires; for example, some contracts must be in writing to be enforceable. Contract Formation—Three classifications, or categories, of contracts are based on how and when a contract is formed. Every contract involves at least two parties. The offeror is the party making the offer.

The offeree is the party whom the offer is made.If the offeree can accept simply by promising to perform, the contract is bilateral contract. Hence, a bilateral contract is a “promise for promise. ” No performance, such as payment of funds or delivery of goods, need take place for a bilateral contract to be formed. The contract comes into existence at the moment the promises are exchanged. (I will borrow you my book when you help me do my homework. ) If the offer is phrased so that offeree can accept the offer only by completing the contract performance, the contract is a unilateral contract.

Hence, a unilateral contract is a “promise for an act. In other words, the time of contract formation in a unilateral contract is not the moment when promises are exchanged but the moment when the contract is performed. (If you can do my homework, I will give you $10. ) Contests, lotteries, and other competitions involving prizes are examples of offers to form unilateral contracts. A problem with Unilateral Contracts—A problem arises in unilateral contracts when the promisor (the one making the promise) attempts to revoke (cancel) the offer after the promisee (the one to whom the promise was made) has begun performance but before the act has been completed.The promisee can accept the offer only on full performance, and under traditional contract principles, an offer may be revoked at any time before the offer is accepted. The present-day view, however, it that an offer to form a unilateral contract becomes irrevocable once performance has begun.

Thus, even though the offer has not yet been accepted, the offeror is prohibited from revoking it for a reasonable time period. Formal versus Informal Contracts—Another classification system divides contracts into formal contracts and informal contracts.Formal contracts are contracts that require a special method of creation (formation) to be enforceable. Contracts under seal are a type of formal contract that involves a formalized writing with a special seal attached. Informal contracts (also called simple contracts) include all others contracts. No special form is required (except for certain types of contracts that must be in writing), as the contracts are usually based on their substance rather than their form.Typically, businesspersons put their contracts in writing to ensure that there is some proof of a contract’s existence should problem arise.

Express versus Implied-in-Fact Contracts—Contracts may also be categorized as express or implied by the conduct of the parties. In an express contract, the terms of the agreement are fully and explicitly stated in words, oral or written. A signed lease for an apartment or a house is an express written contract.

If a classmate calls you on the phone and agrees to buy your textbook from the last semester for $45, an express oral contract has been made.A contract that is implied from the conduct of the parties is called an implied-in-fact contract or implied contract. This type of contract differs from an express contract in that the conduct of the parties, rather than their words, creates and defines the terms of the contract.

Note that a contract may be a mixture of an express contract and an implied-in-fact contract. In other words, a contract may contain some express terms, while others are implied. Requirements for Implied-in-Fact Contracts—For an implied-in-fact contract to arise, certain requirements must be met: (1) The laintiff furnished some service or property, (2) The plaintiff expected to be paid for that service or property, and the defendant knew or should have known that payment was expected, and (3) The defendant has a chance to reject the services or property and did not (example about accountant). Contract Performance—Contracts are also classified according to the degree to which they have been performed. A contract that has been fully performed on both sides is called an executed contract. A contract that has not been fully performed by the parties is called an executory contract.

If one party has fully performed but the other has not, the contract is said to be executed on the one side and executory on the other, but the contract is still classified as executory. Contract Enforceability—A valid contract has the elements necessary to entitle at least one of the parties to enforce it in court. Those elements consists of (1) an agreement consisting of an offer and an acceptance of that offer, (2) supported by legally sufficient consideration, (3) made by parties who have the legal capacity to enter into the contract, and (4) made for a legal purpose.

Valid contracts may be enforceable, voidable, or unenforceable.Additionally, a contract may be referred to as a void contract. Voidable Contracts—A voidable contract is a valid contract but one that can be avoided at the option of one or both of the parties. The party having the option can elect either to avoid any duty to perform or to ratify (make valid) the contract. If it is ratified, both parties must fully perform their respective legal obligations. Contracts made by minors, insane persons, and intoxicated persons may be voidable. Additionally, contract entered into under fraudulent conditions are voidable at the option of the defrauded party.Contracts entered into under legally defined duress or undue influence are also voidable.

Unenforceable Contracts—An unenforceable contract is one that cannot be enforced because of certain legal defenses against it. It is not enforceable because a party failed to satisfy a legal requirement of the contract; it is a valid contract rendered unenforceable by some statute or law. For example, certain contracts must be in writing and if they are not, they will not be enforceable except in certain exceptional circumstances. Void Contracts—A void contract is no contract at all. The terms void and contract are contradictory.A void contract produces no legal obligations on any of the parties. For example, a contract can be void because one of the parties was adjudged by a court to be legally insane (and thus lacked the legal capacity to enter into a contract) or because the purpose of the contract was illegal.

Quasi Contracts—Quasi contracts, or contracts implied in law, are not actual contracts. Express contracts and implied-in-fact contracts are actual contracts formed by the words or actions of the parties. Quasi contracts, in contrast, are fictional contracts created by courts and imposed on parties in the interests of fairness and justice.Quasi contracts are therefore equitable, rather than contractual, in nature. Usually, quasi contracts are imposed to avoid the unjust enrichment of one party at the expense of another.

When the court imposes a quasi contract, a plaintiff may recover in quantum meruit, a Latin phrase meaning “as much as her or she deserves. ” Quantum meruit essentially describes the extent of compensation owed under a contract implied in law (example of unconscious man who was found and rescued by the physician; man will have to pay the physician for the reasonable value of the medical services rendered).Limitations on Quasi-contractual Recovery—Although quasi contracts exist to prevent unjust enrichment, the party obtaining the enrichment is not held liable in some situations. Basically, a party who has conferred a benefit on someone else unnecessary or as a result of misconduct or negligence cannot invoke the principle of quasi contract. The enrichment in those situations will not be considered “unjust” (example about a man whose car was mistakenly hand waxed instead washed by the car wash employee; people normally cannot be forced to pay for benefits like this one).When an Actual Contract Exists—The doctrine of quasi contract generally cannot be used when there is an actual contract that covers the matter in controversy. Interpretation of Contracts—Sometimes, parties agree that a contract has been formed but disagree on its meaning or legal effect. One reason this may happen is that one of the parties is not familiar with the legal terminology used in the contract.

To an extent, plain language laws (enacted by the federal government and a majority of the states) have helped to avoid this difficulty.Sometimes, though, a dispute may arise over the meaning of a contract simply because the rights or obligations under the contract are not expressed clearly—no matter how “plain” the language used. The Plain Meaning Rule—When a contract’s writing is clear and unequivocal, a court will enforce it according to its obvious terms. The meaning of the terms must be determined from the face of the instrument—from the written document alone.

This is sometimes referred to as the plain meaning rule.Under this rule, if a contract’s words appear to be clear and unambiguous, a court cannot consider extrinsic evidence—that is, any evidence not contained in the document itself. If a contract’s terms are unclear or ambiguous, however, extrinsic evidence may be admissible to clarify the meaning of the contract. The admissibility of such evidence can significantly affect the court’s interpretation of ambiguous contractual provisions and thus the outcome of litigation. Others Rules of Interpretation—Generally, a court will interpret the language to give effect to the parties’ intent as expressed in their contract.This is the primary purpose of the rules of interpretation—to determine the parties’ intent from the language used in their agreement and to give effect to that intent. A court normally will not make or remake a contract, nor will it interpret the language according to what the parties claim their intent was when they made it.

The courts use the following rules in interpreting contractual terms: 1) Insofar as possible, a reasonable, lawful, and effective meaning will be given to all of a contract’s terms. 2) A contract will be interpreted as a whole; individual, specific clauses will be considered subordinate to the contract’s general intent.All writings that are a part of the same transaction will be interpreted together. 3) Terms that were the subject of separate negotiation will be given greater consideration than standardized terms and terms that were not negotiated separately.

4) A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the parties clearly intended something else. 5) Specific and exact wording will be given grater consideration than general language. 6) Written or typewritten terms will prevail over preprinted ones. ) Because a contract should be drafted in clear and unambiguous language, a party who uses ambiguous expressions is held to be responsible for the ambiguities. Thus, when the language has more than one meaning, it will be interpreted against the party who drafted the contract.

8) Evidence of trade usage, prior dealing, and course of performance may be admitted to clarify the meaning of an ambiguously worded contract. When considering custom and usage, a court will look at what is common to the particular business or industry and to the locale where the contract was made or is to be performed.