Chapter 9

Contracts: Nature
and Terminology
© 2004 West Legal Studies in Business
A Division of Thomson Learning 1
 Introduction
Promise is a declaration that something will or
will not happen in the future.
What is a Contract?
 Contract is an agreement (based on a promise) that
can be enforced in court.
What law governs?
 Service contracts - common law of contracts.
 Sale and lease contracts - Uniform Commercial Code
(UCC).
© 2004 West Legal Studies in Business
A Division of Thomson Learning
2
 §1: Function of Contract Law
Designed to provide stability and predictability,
as well as certainty, for both, buyers and sellers
in the marketplace.
Necessary to ensure compliance with a promise
or to entitle the innocent party to some form of
relief.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
3
 §2: Definition of a Contract
A contract is a:
 Promise or set of promises,
 For breach of which,
 The law provides a remedy, or
 The performance of which the law in some way
recognizes as a duty.
Objective Theory of Contacts. Circumstances to
determine intent of parties.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
4
 §3: Elements of a Contract
Agreement (Offer and Acceptance).
Consideration.
Contractual Capacity.
Defense:
 Legality.
 Genuineness of assent.
 Form.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
5
 §4: Types of Contracts
Bilateral v. Unilateral.
 Bilateral - Offeree must only promise to perform
(“promise for a promise”).
 Unilateral - Offeree can accept the offer only by
completing the contract performance (“promise for an
act”).
• Irrevocable: Offer cannot be revoked once
performance has begun.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
6
 Types of Contracts
Express v. Implied In Fact.
 Express: Words (oral or written).
 Implied In Fact: Conduct creates and
defines the terms of the contract.
Requirements:
• PL furnished good or service
• PL expected to be paid
• DEF had chance to reject and did not.
 Case 9.1: Homer v. Burman (2001).
© 2004 West Legal Studies in Business
A Division of Thomson Learning
7
 Types of Contracts [3]
Quasi Contracts - Implied in law.
 Fictional contracts created by courts.
 Imposed on parties for the interest of fairness and
justice.
 Equitable remedies.
 Quantum Meruit.
Case 9.2: Industrial Lift v. Mitsubishi (1982).

© 2004 West Legal Studies in Business

A Division of Thomson Learning
8
 Types of Contracts [4]
Formal v. Informal.
Executed v. Executory.
 Executed - A contract that has been fully performed
on both sides.
 Executory - A contract that has not been fully
performed on either side.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
9
 Enforceability
Valid.
 Elements: Agreement, consideration, contractual
capacity, and legality.
Void.
 No contract.
Voidable (unenforceable).
 Valid contract can be avoided or rescinded.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
10
 §5: Interpretation of Contracts
 Plain Meaning Rule: Courts give terms their obvious
meaning.
 Ambiguous Terms. If terms are ambiguous, court will
attempt to interpret ambiguous contract terms in a
reasonable, lawful, effective manner.
 Contracts are interpreted as a whole.
 Terms negotiated separately given greater weight.
 Ordinary, common meaning given.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
11
 Interpretation of Contracts
 Ambiguous Terms (cont’d)
 Specific wording given greater weight than general language.
 Written or typewritten given greater weight than preprinted.
 Ambiguous terms interpreted against the drafter.
 Trade usage, prior dealing, course of performance to allowed
to clarify.
Case 9.3: Dispatch Automation v. Richards
(2002).

© 2004 West Legal Studies in Business

A Division of Thomson Learning
12
 Law on the Web
‘Lectric Law Library on Contracts.

 Legal Research Exercises on the Web.

© 2004 West Legal Studies in Business

A Division of Thomson Learning
13