LECTURE NOTES CHAPTER 9

NATURE AND CLASSIFICATION

I.

II.

III.

An Overview of Contract Law

A.

SOURCES OF CONTRACT LAW

Contract law is common law. The common law governs all contracts except
when it has been modified or replaced by statutory law or administrative agency
regulations. All contracts for the sale of goods, for example, are governed by
statutory lawparticularly the Uniform Commercial Code (UCC). It should be
stressed that it is essential to know when the UCC applies.

B.

THE FUNCTION OF A CONTRACT

Contract law is needed to ensure compliance with a promise or to entitle a
nonbreaching party to relief when a contract is breached. All contractual
relationships involve promises, but all promises do not establish contractual
relationships.
Most contractual promises are kept; keeping a promise is
generally in the mutual self-interest of the promisor and the promisee.

C.

THE DEFINITION OF A CONTRACT

A contract is an agreement that can be enforced in court. A contract may be
formed when two or more parties each promise to perform or to refrain from
performing some act now or in the future. A party who does not fulfill his or her
promise may be subject to sanctions, including damages or, under some
circumstances, being required to perform the promise.

D.

THE OBJECTIVE THEORY OF CONTRACTS

The intent to enter into a contract is important in the formation of a contract.
Intent is determined by the objective theory of contracts. The theory is that a
partys intention to enter into a contract is judged by outward, objective facts as
they would be interpreted by a reasonable person, rather than by the partys
own secret, subjective intentions. Objective facts include: (1) what the party
said; (2) how the party acted or appeared; and (3) the circumstances
surrounding the transaction.

Elements of a Contract
A.

REQUIREMENTS OF A VALID CONTRACT

The four essential elements of a contract are

Agreement.

Consideration.

Contractual capacity.

Legality.

B.

DEFENSES TO THE ENFORCEABILITY OF A CONTRACT

Defenses to the formation or enforcement of a contract include

Voluntary consent.

Form.

Types of Contracts
Each of these categories signifies a legal distinction regarding a contracts formation,
performance, or enforceability.
A.

CONTRACT FORMATION
These categories are based on when and how a contract is formed.

1.

Bilateral v. Unilateral Contracts

Every contract involves at least two parties: an offeror and an offeree. The
offeror promises to do or not to do something. Whether a contract is
unilateral or bilateral depends on what the offeree must do to accept.
a.

Bilateral Contracts
A bilateral contract is a promise for a promise; if the offeree need only
promise to perform, the contract is bilateral.

b.

Unilateral Contracts
A unilateral contract is a promise for an act; if an offeree can accept
only by complete performance, a contract is unilateral.

2.

Formal v. Informal Contracts

Formal contracts require a special form or method of formation to be
enforceable. Formal contracts include negotiable instruments, which include
checks, drafts, promissory notes, and certificates of deposit. All other
contracts are informal contracts, or simple contracts. For these, no special
form is required (except for certain types of contracts that must be in
writing).

3.

Express v. Implied Contracts

An express contract is one in which the terms are expressed in words,

oral or written.
A contract that is implied from the conduct of the parties is an impliedin-fact contract, or simply an implied contract. The parties conduct reveals that they intended to form a contract and creates and defines its
terms.
To establish an implied-in-fact contract: (1) the plaintiff must have
furnished some service or property; (2) the plaintiff must have expected
to be paid and the defendant knew or should have known that payment
was expected; and (3) the defendant had a chance to reject the service
or property and did not.

B.

CONTRACT PERFORMANCE
Contracts are also classified according to their stage of performance. A contract
that has been performed is an executed contract. A contract that has not been
performed is 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, and it is classified as executory.

C.

CONTRACT ENFORCEABILITY
A valid contract results when all of the elements necessary to contract formation
existwhen the parties agree, through an offer and an acceptance, to form a
contract; the contract is supported by consideration; the contract is for a legal
purpose; and the parties had legal capacity to contract.
1.

Voidable Contracts
A voidable contract is a valid contract in which one or both of the parties
have the option of avoiding his or her legal obligations. If the contract is
avoided, both parties are released. If it is ratified, both parties must
perform.

2.

Unenforceable Contracts

An unenforceable contract is a valid contract that cannot be enforced due to

certain defenses. For example, a valid contract barred by a statute of
limitations is an unenforceable contract.
3.

Void Contracts
A contract that is void is no contract. A void contract gives rise to no legal
obligation on the part of any party. An illegal contract is, for example, a void
contract.