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How Contracts Arise
Chapter 5
Business Law
Essential Questions
• Explain the elements of legal contracts.
• What are the differences among valid,
void, voidable and uneforceable
• What are the differences between
unilateral and bilateral contracts?
• What are the differences between express
and implied contracts?
• Contract:
– Any agreement enforceable by law
• The Three Theories of Contract Law:
– Equity Theory:
• Parties exchanged things of equal value
– Will Theory:
• Parties agreed to the terms set forth
– Free-Will
– Formalist Theory:
• “Meeting of the minds”
The Elements of a Contract:
1. Offer:
A proposal by one party to another intended to
create a legally binding agreement
2. Acceptance:
The second party’s unqualified willingness to go
along with the first party’s proposal
– Genuine Agreement: Offer and Acceptance
3. Capacity:
The legal ability to enter a contract
4. Consideration:
The exchange of things of value
5. Legality:
People cannot enter into contracts to commit
illegal acts
Characteristics of a Contract
Valid, void, voidable, or unenforceable
Express or implied
Bilateral or unilateral
Oral or written
Valid, Void, Voidable, or
• Valid:
– Legally good
• Void:
– No legal effect
• Voidable Contract:
– When a party to a contract is able to void or
cancel the contract
• Unenforceable Contract:
– One the court will not uphold
Express or Implied
• Express Contract:
– Stated in words and may be either oral or
• Implied Contract:
– Actions of the parties
• Getting gas
Bilateral or Unilateral
• Bilateral Contract:
– Contains two promises
• Exchange for doing something
• Unilateral Contract:
Bilateral Contract
Promise made
– Contains a promise by
offeree at
Unilateral Contract
Promise by
Act performed
by offeree at
Oral or Written
• Oral Contract:
– When two or more people form a contract by
speaking to each other
• Written Contract:
– Assures that both parties know the exact
terms of the contract and also provides proof
that the agreement was made
Offer and Acceptance
– Makes the offer
– Receives the offer
Three Basic Requirements:
1. Made seriously
2. Definite and certain
3. Communicated to the offeree
Serious Intent
• If A.B. was having a bad with his car and
said, “Hey J.B., give me five bucks and it’s
yours”, does this hold up in court?
• Invitations to Negotiate:
– Most advertisements in newspapers,
magazines, and catalogs
Definiteness and Certainty
• If Shane borrows Jeffs IPod and says I will
pay part of the price if I can use this for a
week. Does this hold up in court?
– No, must be definite, part is not
Communication to the Offeree
• Offers may be made by telephone, letter,
telegram, fax machine, e-mail, or by any
other method that communicates the offer
to the offeree
Requirements of an Acceptance
• Unconditional Acceptance:
– Must not change the terms of the original offer
in any way
• The mirror image rule:
• Counteroffer:
– Any change in the terms of the offer
• House, Car, etc.
• Methods of Acceptance:
– According to common law an acceptance that
must be sent over long distances is effective
when it is sent
Termination of an Offer
• Revocation:
– Taking back of an offer by the offeror
• Before it has been accepted
• Rejection:
– Refusal of an offer by the offeree brings the
offer to an end
• Counteroffer:
– Ends the first offer
• Expiration of Time:
– A set time or deadline for the acceptance
must be honored
• Reasonable time
• Death or Insanity:
– If the offeror dies or becomes insane before
the offer is accepted, the offer comes to an