Business Law Summary - Common Law Contracts

Business Law: Common Law Contracts - Formation, Enforcement, and Discharge

Definition of Contract

  • A contract is a voluntary agreement between two or more parties that is enforceable by law.

  • It consists of promises for which the law will provide a remedy if breached.

  • Terms of the contract become a private law between the parties.

Parties to a Contract

  • Each contract involves at least two parties:

  • Offeror: The party making the offer.

  • Offeree: The party receiving the offer.

Classification of Contracts

  • Bilateral Contract:

  • Both parties make promises.

  • No act of performance is necessary immediately.

  • Unilateral Contract:

  • Offer can be accepted only through performance of an act.

Elements of a Valid Contract

  1. Agreement:

  • Comprises an offer by the offeror and acceptance by the offeree (mutual assent).

  1. Consideration:

  • A promise must be supported by something of legal value, which could include money, goods, or services.

  1. Contractual Capacity:

  • Parties must have the legal capacity to enter into a contract.

  1. Lawful Object:

  • The purpose of the contract must be lawful; illegal contracts are void.

Defenses to Contract Enforcement

  • Genuineness of Assent: Consent must be genuine and not attained through:

  • Duress

  • Undue Influence

  • Fraud

  • Writing and Form: Certain contracts must be in writing to be enforceable.

Sources of Contract Law

  • Common Law: Primarily developed by state courts.

  • Uniform Commercial Code (UCC): Covers commercial transactions, specifically:

  • Article 2: Sales of goods.

  • Article 2A: Leases of goods.

  • Restatement of Law of Contracts: A compilation of contract law principles that serves as guidance but is not law.

Offer and Acceptance

  • Offer: A clear communication of willingness to enter into a contract, including:

  • Identification of parties

  • Subject matter and quantity

  • Consideration

  • Time of performance

  • Acceptance:

  • Must be a manifestation of assent to the exact terms of the offer (Mirror Image Rule: any deviation is a counteroffer).

  • Mailbox Rule: Acceptance is effective when sent out, even if lost in transmission.

Consideration

  • Must involve a bargained-for exchange involving legal value:

  • Legal detriment suffered by the promisee or benefit received by the promisor.

  • Gratuitous Promises: Unenforceable due to lack of consideration.

Consideration Issues

  1. Illegal Consideration: Contracts that involve illegal acts are not enforceable.

  2. Illusory Promises: Only one party has the right to alter performances, leading to lack of consideration.

  3. Preexisting Duty: A promise to do something one is already obligated to do does not constitute valid consideration.

  4. Past Consideration: Consideration for promises made based on past events is generally not valid.

Contractual Capacity

  • Legal Capacity: Presumed unless the party is a minor, insane, or intoxicated at contract formation.

  • Minors: May void contracts; however, they can ratify contracts upon reaching the age of majority.

  • Mentally Incompetent Persons: Contracts may be void or voidable if a party is legally insane or adjudged insane at contract formation.

Lawful vs. Illegal Contracts

  • Lawful Contracts: Enforceable as they have a legal objective.

  • Illegal Contracts: Void and unenforceable, including:

  • Contracts committing criminal acts.

  • Contracts contrary to public policy.

Exculpatory Agreements

  • Provisions that relieve liability for ordinary negligence but can’t apply for intentional torts.

Restrictive Agreements in Employment Contracts

  • Confidentiality, Non-Solicitation, Noncompete Agreements:

  • Legal agreements to protect business interests but must be reasonable in scope.

Unconscionable Contracts

  • Contracts deemed oppressive or unjust may not be enforceable by the courts, focusing on inequality in bargaining power and lack of reasonable alternatives for the adhering party.

Third-Party Rights and Discharge

  • Third-Party Beneficiaries: Defined as intended or incidental beneficiaries:

  • Intended Beneficiary: Has rights to enforce the contract.

  • Incidental Beneficiary: Gains a benefit unintentionally and lacks enforcement rights.

Assignment and Delegation

  • Assignment: Transfer of rights from one party to another.

  • Rights that cannot be assigned include personal service contracts, future rights, and contracts where risk would materially change.

  • Delegation of Duties: Transfer of contractual duties where obligations remain with the original party unless specifically allowed.

Conditions and Covenants

  • Covenant: An unconditional promise to perform.

  • Conditions: A promise contingent upon specific occurrences, including:

  • Condition Precedent: Must occur before obligation arises.

  • Condition Subsequent: Discharges an obligation if it occurs.

Discharge of Performance

  • By Agreement: Mutual rescission, novation, or accord and satisfaction can terminate contractual obligations.

  • Impossibility: Nonperformance may be excused if due to destruction of subject matter or changes in legality of contract.

  • Statute of Limitations: Specifies the time period within which legal actions must be initiated.