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Learning Objectives
• What is a contract? What are the four basic
elements necessary to the formation of a valid,
contract?
• What are the various types of contracts?
• What are the requirements of an offer?
• How can an offer be accepted?
• What are the elements of consideration?

CHAPTER 7

Contracts: Nature,
Classification,
Agreement and
Consideration

© 2005 West Legal Studies in Business
A Division of Thomson Learning

© 2005 West Legal Studies in Business
A Division of Thomson Learning

Contracts

Contracts

• Function of Contracts

2

• Definition of a Contract

– Fundamental to business.
– Creates rights and duties between parties.
– Provides stability and predictability.

– Agreement that can be enforced in court.
– Formed by two or more parties.
– Failure to perform results in breach and
damages.

• Parties: Promisor (makes the promise) and
Promisee (accepts the promise).

• Objective Theory.
– Reasonable person standard.
– Circumstances surrounding contract formation.

– Good faith in commercial agreements.

© 2005 West Legal Studies in Business
A Division of Thomson Learning

3

© 2005 West Legal Studies in Business
A Division of Thomson Learning

Requirements of a Contract

Types of Contracts

• A valid, enforceable contract includes:

4

• Every contract has at least 2 parties: the
Offeror (Promisor) and the Offeree
(Promisee).
• Bilateral Contracts.

– Agreement.
– Consideration.
– Capacity.
– Legality.

– Offeror and Offeree exchange promises to each
other.
– A contract is formed when Offeree promises to
perform.

• Defenses to formation include:
– Genuineness of Assent.
– Form.

© 2005 West Legal Studies in Business
A Division of Thomson Learning

5

© 2005 West Legal Studies in Business
A Division of Thomson Learning

6

1

Types of Contracts

Types of Contracts

• Unilateral Contracts.

• Express vs. Implied 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.
– Ardito v. City of Providence (2003).
© 2005 West Legal Studies in Business
A Division of Thomson Learning

– Express: terms of contract are set forth either
in writing or orally.
– 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.

– Implied-in-Law (Quasi Contract).
•Fictional, created by court to avoid unjust
enrichment.
7

© 2005 West Legal Studies in Business
A Division of Thomson Learning

Types of Contracts

Contract Enforceability

• Formal vs. Informal Contracts

8

• Valid Contract.
– Four Elements: Agreement, Consideration, Legal
Purposes, Parties have legal capacity.

– Formal: require special form or method to be
enforceable, e.g., under seal.
– Informal: all other contracts.

• Voidable Contract.
– Valid contract that is legally defective and can be
avoided (rescinded) by one of the parties.

• Executed vs. Executory Contracts
– Executed: fully performed by both sides.
– Executory: at least one of the parties has not
performed.

© 2005 West Legal Studies in Business
A Division of Thomson Learning

• Void Contract.
– No contract at all.

9

© 2005 West Legal Studies in Business
A Division of Thomson Learning

10

Quasi Contracts

Agreement: Offer

• Implied-in-Law Contracts (Quasi Contract).

• Agreement = Offer and Acceptance.
• An offer is the Offeror’s promise to perform.
An offer requires:

– Fictional, created by court to avoid unjust
enrichment.
– Limitations on Quasi-Contractual Recovery.

– Serious, objection intention.
•Opinions are not offers.
•Good Intentions are not offers.
•Preliminary Negotiations are not offers.
•Agreements to...
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