Unit 4: Contracts
This unit discusses contracts, which come in all shapes and sizes. You enter into a contract with a broker and seller when you purchase a house. Businesses enter into contracts with other businesses to set prices and solidify relationships. If you want reliable work done on your house, you will have a contract with a contractor (hence the name).
Contracts are legally-binding relationships. In most circumstances, a contract involves an agreement to deliver a product or service at a specified time on a specified date. Violating a contract can result in a lawsuit or some kind of settlement. While courts can be involved in this process, these situations can also be settled outside of the judicial system. Laws regarding contracts vary from state to state, so it is always important to know the contract law in your area. This unit discusses contracts in detail, but it cannot cover everything. By the end of this unit, you should be familiar with how most contracts are written and enforced.
Completing this unit should take you approximately 5 hours.
Upon successful completion of this unit, you will be able to:
- identify and discuss the essential elements of a valid contract;
- explain unilateral and bilateral contracts, and identify examples of these types of contracts;
- identify and describe situations in which a contract can fail;
- summarize the remedies available for breach of contract;
- apply elements of contract law to hypothetical contract law problems; and
- describe the different types of negotiable instruments and explain the UCC requirements for this type of formal contract.
4.1: The Nature and Classification of Contracts
Read this introduction to Chapter 6. Note that the text defines a contract as "a legally enforceable promise". This unit will discuss what it takes to make a promise legally enforceable, as well as what happens when such a promise is broken and what remedies are available to the damaged party.
Read this brief overview of contracts, which highlights what you should be aware of regarding the role of contracts in business law. Parties are free to choose the conditions of their contracts, and they can decide on the exact terms of the contract. Contracts are important to business transactions because they allow for flexibility and clarity.
Read this article for more information on negotiable instruments. Be sure to review Article 3 of the Uniform Commercial Code (UCC) for an explanation of the law in the United States that governs negotiable instruments.
4.2: Contract Formation
Read this section, which discusses the issue of legal capacity to contract. Capacity relates to a party's ability to understand the nature and effect of his or her actions. If a party lacks capacity to contract, he or she has the option to void the agreement. For this reason, most businesses are reluctant to enter into contracts with minors, because by law, minors lack capacity.
Read this article on the formalities of a contract. While the most basic contracts require few or no formalities, in certain situations formalities must be followed. Formalities are necessary to provide clarity. Formalities also serve to prevent fraud and/or unnecessary costs that may arise from disputes over terms and conditions of the agreement.
4.3: End of Contract and Enforcement
Read this section. Once a contract is formed and the parties are bound by the contract, they generally have a legal obligation to perform according to the terms of the contract. Be sure you understand when the performance required is only substantial versus strict performance. Also note the distinction between the prevalent "reasonable person" standard and the less common contractual standard of personal satisfaction. While one party's breach of a contract may result in damages, the party may have defenses against the claim. You should be aware of these defenses, and of the remedies available for a party that is the victim of a breach.
Watch this video, which explains breach of contract and the consequences of breach of contract.
Read this article on unenforceable contracts. Contracts become unenforceable when the court determines that they do not meet the necessary legal requirements. For example, an agreement may meet all of the basic requirements of contract law, but still not be enforceable because the statute of limitations has run out.
Watch this video, which defines oral contracts and explains how they differ from written contracts. Note the Statute of Frauds requirements for written contracts, which is important because it helps to prevent dishonesty in transactions and eliminates the likelihood of confusion.
Unit 4 Assessment
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Take this assessment to see how well you understood this unit.
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