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Chapter 6

Chapter 6 – Formation of Contracts


Department
Business Administration
Course Code
BUS 393
Professor
Richard Yates
Chapter
6

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Chapter 6 – Formation of Contracts
The Contractual Relationship
Contract – voluntary exchange of promises, creating obligations that if
defaulted on can be enforced and remedied by the courts
Allows people to create and define their own rules/regulations; restricted by
common law and legislation
Elements of a Contract
1. Consensus – mutual agreement, involving an offer and acceptance
2. Consideration – commitment to do something, the price each is willing to pay
3. Capacity – be legally capable of understanding/entering the agreement
4. Legality – agreement must be legal
5. Intention – parties must be serious when making the agreement
Important Terms and Definitions
Formal and Simple Contracts
Formal contract - sealed by the party to be bound
Simple (parol) contract – may be verbal or written, not under seal
Express and Implied Contracts
Express Contract - parties expressly state their agreement
Implicit Contract – contract inferred from the conduct of the parties
Valid, Void, and Voidable Contracts
Valid contract – legally binding on both parties
Void contract – does not qualify as a binding contract because an
essential element is missing
Voidable contract – valid, but one party has the right to escape
Unenforceable and Illegal Contracts
Unenforceable contract – eg. required to be in writing and is not
Illegal contract – involves the performance of an unlawful act; void,
courts will not return parties to original positions (unless one party is
innocent)
Bilateral and Unilateral Contracts
Bilateral – contract in which both parties make commitments and
assume obligations
Unilateral contract – no exchange of promises, one party performs
what has been requested by the other
Consensus
“The meeting of the minds” of contracting parties
Not necessary for both parties to have read the contract or understood it
completely, but both parties must have had the opportunity to do so and
terms must be unambiguous
Case: an agreement to continue negotiations is not a contract
Offer
Offer – contains all significant terms of the contract, a tentative promise
contingent upon acceptance of the offeree; terms must be clear, and terms
may be implied
Must explicitly state the property, parties, and prices
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