Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 7 Introduction to Contracts
LESSON OVERVIEW
In Chapter 7 we are introduced to the legal meaning of the term contract. A contract is a legally
enforceable agreement that is created when two or more competent parties agree to perform, or to avoid
performing, certain acts that they have a legal right to do and that meet certain legal requirements. We
differentiate a contract from an agreement, state the purpose of a contract, and explore the elements that
make a contract enforceable. The chapter also briefly introduces the kinds of contracts—oral or written,
express or implied, formal or simple, and entire or divisible. This chapter also discusses the status of a
contract—is the contract in the process of completion, or completed? Finally we take a look at the
enforceability of the contracts. Students need to recognize that Chapter 7 merely offers an introduction
to these topics which will be explored in detail within the later chapters.
CHAPTER OUTLINE
A. THE NATURE OF A CONTRACT (p. 106)
B. AGREEMENTS THAT RESULT IN CONTRACTS (p. 106)
C. PURPOSES OF A CONTRACT (p. 106)
D. ELEMENTS OF AN ENFORCEABLE CONTRACT (p. 107)
1. Offer and Acceptance (p. 107)
2. Mutual Agreement (p. 107)
3. Consideration (p. 107)
4. Competent Parties (p. 107)
5. Legality of Purpose (p. 107)
6. Proper Form (p. 107)
E. KINDS OF CONTRACTS (p. 108)
1. Oral Contracts (p. 108)
2. Written Contracts (pp. 110-108)
3. Express Contracts (p. 109)
4. Implied Contracts (pp. 109-110)
5. Formal Contracts (p. 110)
6. Simple Contracts (p. 110)
7. Entire Contracts (p. 111)
8. Divisible Contracts (p. 111)
F. STATUS OF CONTRACTS (p. 111)
1. Executory Contracts (pp. 111-112)
2. Executed Contracts (p. 112)
G. ENFORCEABILITY OF CONTRACTS (p. 112)
1. Valid Contracts (pp. 112-113)
2. Void Contracts (p. 113)
3. Voidable Contracts (p. 114)
H. CHAPTER SUMMARY (pp. 114-115)
I. CHAPTER ASSESSMENT (p. 115)
1. Matching Key Terms (pp. 115-116)
2. True/False Quiz (p. 116)
3. Discussion Questions (pp. 116-117)
4. Thinking Critically About the Law (pp. 117-118)
5. Case Questions (pp. 118-119)
6. Case Analysis (pp. 119-121)
7. Legal Research (p. 121)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ contract (p. 106)
§ tangible personal property (p. 106)
§ offer (p. 107)
§ offeror (p. 107)
§ offeree (p. 107)
§ acceptance (p. 107)
§ mutual agreement (p. 107)
§ consideration (p. 107)
§ competent (p. 107)
§ legality of purpose (p. 107)
§ proper form (p. 107)
§ oral contract (p. 108)
§ written contract (p. 108)
§ express contract (p. 109)
§ implied contract (p. 109)
§ formal contract (p. 110)
§ simple contract (p. 110)
§ entire contract (p. 111)
§ divisible contract (p. 111)
§ executory contract (p. 111)
§ executed contract (p. 112)
§ valid contract (p. 112)
§ void contract (p.113)
§ voidable contract (p. 114)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 7 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 7. The corresponding text
page numbers and PPT slides are listed next to each outcome. These slides should be used to reinforce
the main points of the lecture.
After completing this chapter, the students will be able to:
1. Describe the nature of a contract. (p. 106, PPT slide 2)
2. Identify the sources of contract law (p. 106, PPT slide 3)
3. Distinguish between agreements and contracts. (p. 106, PPT slide 4)
4. Explain the purpose of a contract. (p. 106, PPT slide 5)
5. Identify the six elements of an enforceable contract. (p. 107, PPT slides 6-7)
6. Distinguish between the different classifications of contracts, including oral and written, express
and implied, formal and simple, and entire and divisible. (pp. 108-111, PPT slides 8-11)
7. Explain the status of contracts and differentiate between executory and executed contracts. (pp.
111-112, PPT slide 12-14)
8. Describe the enforceability of contracts in terms of valid, void, and voidable contracts. (pp.
112-114, PPT slides 15-17)
LECTURE OUTLINE
A. THE NATURE OF A CONTRACT
A contract is a legally enforceable agreement that is created when two or more competent parties agree
to perform, or to avoid performing, certain acts that they have a legal right to do and that meet certain
legal requirements. The Uniform Commercial Code (UCC) defines a contract as “the total legal
obligation which results from the parties’ agreement as affected by the Uniform Commercial Code or
any other applicable rules of law” [UCC 1-201(11)].
B. SOURCES OF CONTRACT LAW
The part of the UCC that is relevant to contract law is Article 2. However, Article 2 applies only to
transactions in goods or other tangible personal property. Tangible personal property can be defined
as personal property that can be moved, such as a vehicle, kitchen table, or computer. Common law, on
the other hand, is the source of contract law regarding the sale of fixed assets, services, or intangibles.
If an agreement imposes a legal obligation, an enforceable contract results; if it imposes only a social or
moral obligation, however, it is not a contract and is not legally enforceable.
C. AGREEMENTS THAT RESULT IN CONTRACTS
All contracts are agreements, but not all agreements are contracts. Since agreements very often deal
with personal or social matters they cannot be enforced by law. If an agreement imposes a legal
obligation, an enforceable contract results.
D. PURPOSE OF A CONTRACT
Contracts may be created for any number of reasons. A contract also may be extended and revised as
needed to reflect the wishes of the parties.
E. ELEMENTS OF AN ENFORCEABLE CONTRACT
To be legally enforceable, a contract must contain six elements:
(1) offer and acceptance, (2) mutual agreement, (3) consideration, (4) competent parties, (5) legality of
purpose, and (6) proper form.
If one of these elements is missing, the courts will usually refuse to enforce the contract.
1. Offer and Acceptance
An offer is a proposal made by one party, the offeror, to another party, the offeree, that
indicates a willingness to enter into a contract. An acceptance is an indication made by
the offeree that he or she agrees to be bound by the terms of the offer.
2. Mutual Agreement
The parties to a contract must have a clear understanding of what they are undertaking.
The contract must show mutual agreement, sometimes referred to as a meeting of the
minds.
3. Consideration
In most cases, each party to a contract must promise either to give up something of
value that he or she has a legal right to keep, or to do something that he or she is not
otherwise legally required to do. This exchange of promises is called consideration.
4. Competent Parties
The parties to a contract must be competent, that is, be capable of understanding what
they are doing. They must be of legal age and normal mentality. The functioning of a
party’s mind must not be impaired by injury, mental disease, or the influence of drugs or
alcohol.
5. Legality of Purpose
The intent of the contract must not violate the law. It must have legality of purpose. The
courts will not enforce a contract to do something that violates the law.
6. Proper Form
Certain contracts, such as those involving the sale of personal property for $500 or
more, or those that cannot be fulfilled within a year, must be in writing to be
enforceable. Other kinds of contracts must not only be in writing, but must also follow a
prescribed form (containing the signatures of the parties). These requirements for
contracts are known as proper form.
F. KINDS OF CONTRACTS
Contracts may be classified in several ways, depending on the manner in which they are created,
expressed, or performed.
1. Oral Contracts
An oral contract is one that is not in writing or signed by the parties. That is, it is a real
contract created entirely by the conversation of the parties.
2. Written Contracts
A written contract is one that is reduced to writing on a permanent surface. Although
an oral contract may be just as binding as a written contract, it is advisable to put a
contract in writing if the transaction is important or complicated, if the contract involves
a large amount of money, or if the contract will extend over a long period of time.
The law does not specify any particular form or language to be used. It is sufficient that
the parties clearly express themselves in understandable language.
A written contract can be simply a handwritten note.
3. Express Contracts
A contract that specifically states the agreement of the parties, either orally or in writing,
is called an express contract. The term is used to distinguish such contracts from others
in which the meaning or the intention of the parties is inferred from their actions.
4. Implied Contracts
The terms of some agreements can be understood from the actions or conduct of the
parties, from the customs of the trade, or from the conditions or circumstances, rather
than from oral or written words. A transaction of this kind is considered an implied
contract.
An implied contract results when a person accepts goods or services that cannot
reasonably be considered a gift. A person who stands idly by while another confers an
unrequested benefit implies a promise to pay a reasonable amount for the benefit. Such a
promise of payment, however, is not implied if goods were delivered or the services
rendered during the absence of, and without the knowledge of, the recipient.
5. Formal Contracts
A formal contract, or specialty contract, is a written contract under seal. The seal on a
formal contract may consist of simply the word Seal or L.S. (which means locus sigilli,
the place of the seal), a scroll, a wafer, or an impression on the paper.
6. Simple Contracts
A simple contract is an informal contract made without seal—even though the subject
matter of the contract may be extremely complex and may involve huge amounts of
money.
7. Entire Contracts
An entire contract, or indivisible contract, has two or more parts. Each part is
dependent upon the others for satisfactory performance. Such a contract must be
completely performed. The law of sales specifically states that “unless otherwise agreed,
all goods called for by a contract for sale must be tendered [offered] in a single delivery
and payment is due only on such tender” (UCC 2-307).
8. Divisible Contracts
A divisible contract is one that is made up of two or more parts, each part being
independent of the others. In the case of a contract for the sale of goods, a party to such
a contract must be paid upon request for any part of the contract performed as agreed,
even though the entire contract is not performed. The law of sales provides that “where
the circumstances give either party to a contract for sale the right to make or demand
delivery in lots, the price, if it can be apportioned, may be demanded for each lot” (UCC
2-307).
G. STATUS OF CONTRACTS
Contracts frequently have a long life. At any particular time, a contract may be awaiting the first act of
the parties to execute its terms, in the process of completion, or completed.
1. Executory Contracts
An executory contract is one in which some future act or obligation remains to be
performed under its terms. A contract is completely executory if no part of it has been
performed. It is partly executory if some parts have been performed and some have yet
to be performed.
2. Executed Contracts
A contract in which all of the terms of the agreement have been fully performed by both
parties is an executed contract. An executed contract is not really a contract at all. It is
more a record of an agreement that has been completed in all respects by all the parties.
H. ENFORCEABILITY OF CONTRACTS
It is important to determine whether a contract is valid, void, or voidable, because not all contracts can
be enforced.
1. Valid Contracts
The vast majority of contracts entered into in any business day are valid. A valid
contract is an agreement resulting in an obligation that is legally enforceable. It meets
all the requirements of a contract because all six essential elements are present.
2. Void Contracts
An agreement that lacks one or more of the essential elements of a contract is a void
contract from the very beginning. That is, it is not a true contract at all and is therefore
unenforceable.
3. Voidable Contracts
An agreement that may be rejected by one of the parties for a legally acceptable reason
is a voidable contract. Such a contract is valid and enforceable unless and until it is
rejected by the party who has the right to withdraw.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcomes in Chapter 7. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Describe the nature of a contract.
A contract is a legally enforceable agreement.
Text Pages: 106
PowerPoint: Slide 2
LO2. Identify the sources of contract law.
Common law is the source of contract law regarding the sale of fixed assets, services, or intangibles.
Text Pages: 106
PowerPoint: Slides 3
LO3. Distinguish between agreements and contracts.
All contracts are agreements, but not all agreements are contracts. In some cases, agreements are of a
social nature and are not enforceable by law.
Text Pages: 106
PowerPoint: Slide 4
LO4. Explain the purpose of a contract.
Contracts may be created for any number of reasons. They may relate, for example, to the sale of
merchandise or services, to employment, or to the transfer of ownership of land (real property) or
personal property.
Text Pages: 106
PowerPoint: Slide 5
LO5. Identify the six elements of an enforceable contract.
The six elements of an enforceable contract are (1) offer and acceptance, (2) mutual agreement, (3)
consideration, (4) competent parties, (5) legality of purpose, and (6) proper form.
Text Pages: 107
PowerPoint: Slides 6-7
Discussion Questions: 26-29
Thinking Critically About the Law: 32, 34, 35, 36
Case Questions: 39
Case Analysis: 40-42
LO6. Distinguish between the different classifications of contracts, including oral and written,
express and implied, formal and simple, and entire and divisible.
An oral contract is one that is legally enforceable and is created entirely by the conversation of the
parties. A written contract is one that is reduced to writing in a permanent form.
Express contracts specifically state the agreement of the parties, either orally or in writing. Implied
contracts are agreements, the terms of which are inferred from the conduct of the parties, the customs
of the trade, or the circumstances.
A formal contract, or specialty contract, is a written contract under seal. A simple contract is an
informal contract made without seal—even though the subject matter of the contract is extremely
complex.
An entire contract has two or more parts, each dependent upon the others for satisfactory performance.
A divisible contract is one that consists of two or more parts, each part being independent of the others.
Text Pages: 108-111
PowerPoint: Slides 8-11
Thinking Critically About the Law: 33
Case Analysis: 43
LO7. Explain the status of contracts and differentiate between executory and executed contracts.
Contracts frequently have a long life. At any particular time, a contract may be awaiting the first act of
the parties to execute its terms, in the process of completion, or completed. An executory contract is
one in which some future act or obligation remains to be performed under its terms. An executed
contract is one in which the terms of the agreement have been fully performed by both parties.
Text Pages: 111-112
PowerPoint: Slides 12-14
Case Questions: 37-38
LO8. Describe the enforceability of contracts in terms of valid, void, and voidable contracts.
Valid contracts are agreements resulting in obligations that are legally enforceable. Void contracts are
agreements that lack one or more of the essential elements of a contract. Voidable contracts are
agreements that may be rejected by one of the parties for a legally acceptable reason.
Text Pages: 112-114
PowerPoint: Slides 14-17
Discussion Questions: 30-31