Chapter 10 Business Law

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Nature and terminology—Chapter 10

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...
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