1. Chapter 7
The Essentials of Contract Law

2. Learning Objectives
1. Define contract.
2. Explain the origin of the law merchant.
3. Discuss the relationship between common law
and the law merchant.
4. Identify the four elements of a contract.
5. Explain the objectives of contract law.

3. Learning Objectives
6. Explain the place of the UCC in contract law.
7. Distinguish contracts from other agreements.
8. Explain the role of privity and agency on contract
law.
9. List the contracts that must be in writing to be
enforceable.
10. List the characteristics of a contract.

4. The Basics of Contract Law
• Contract
– Agreement:
•
•
•
•
between two or more competent parties
based on mutual promises
to do or refrain from doing some particular thing
that is neither illegal nor impossible
– Results in an obligation or a duty that can be enforced
in a court of law

5. Mercantile Law, Ancient Rome, Capitalism, and
the Church
• Law Merchant (mercantile law)
– Outlines the laws and the procedures followed by
merchants in commercial transactions.
• Mercantile law originated among the merchants
themselves who needed a formalized way to deal with
one another when disputes arose.

6. The Development of the Law Merchant
• Canon Law
– the Church encouraged merchants to establish guilds
that followed the law of the Church
• Merchants should never engage in fraud and always
follow a good faith approach to contract development

7. The Characteristics of the Law Merchant
Neutrality
Universality
Mutuality
Involvement
Integration
Evolution

8. The Characteristics of the Law Merchant
• Neutrality
– characterizes any system of laws that is consistently
applied in the same evenhanded way, no matter who
the antagonists might be
• Universal laws
– those that apply to everyone regardless of their social
status or their place of origin

9. The Characteristics of the Law Merchant
• Mutuality (reciprocity)
– notion that commercial arrangements always involve a
process of evenhanded give and take between the
parties.
• Involvement
– requires that those affected by the law to participate in
its making and its execution.

10. Fair Courts and Staples Courts
• Fair Courts
– empowered to hear cases involving commercial
disputes
– since juries were inevitably made up of merchants, the
law merchant was used to adjudicate the cases.

11. Fair Courts and Staples Courts
• Staple Courts
– heard cases that involved certain set commodities.
– run by mayors who were forced to learn and apply
mercantile law.

12. Admiralty Courts, Arbitration, and
Statutory Law
• Admiralty Courts
– tribunals set up in seaport towns to handle disputes
involving maritime law, shipping contracts, contests
over docking rights, collisions at sea, and the like

13. 7-13

14. 7-14

15. The Objectives of Contract Law
• The court’s goal in the remedy phase of a contract
dispute is to place the injured party in as good a
position as he or she would have been had the
contract been carried out

16. The Payment of Damages
• Compensatory
damages
– equal to the real
financial loss suffered by
the innocent victim
• Incidental damages
– paid by the breaching
party to make up for any
expenses paid by the
victim to prevent any
additional loss.
7-16

17. The Payment of Damages
• Consequential damages • Punitive damages
– indirect damages that
result because of special
circumstances that exist
with a particular
contract
– designed to punish the
wrongdoer for his or her
outrageous conduct
– Typically not awarded in
contract cases
7-17

18. Contracts and the UCC
• The Uniform Commercial Code (UCC) is a model
set of laws designed to govern almost all
commercial transactions
• Article 2 of the UCC sets down the rules that
govern sales-of-goods contracts

19. Contracts and Other Agreements
• All contracts are agreements, but not all
agreements are contracts.
• To be enforceable, an agreement must
conform to the law of contracts.
• Courts normally won’t enforce:
– Social agreements
– Dates
– Dinner engagements
– Agreements to marry

20. Contracts and Privity
• Privity
– both parties have a legally recognized interest in the
subject of the contract if they are to be bound by it
– Unintended beneficiaries (third parties) have no
standing to sue

21. Contracts and Agency Law
• An agent is a party who has been hired or
appointed by a principal to perform some sort of
work, usually of a business nature, for the principal
• Agents can bind the principal to a contract, even if
the principal is not present.

22. Contractual Characteristics
• Valid contract
– one that is legally binding and fully enforceable by the court
• Void contract
– one that has no legal effect whatsoever
• Voidable contract
– one that may be avoided or canceled by one of the parties
• Unenforceable contract
– one that, because of some rule of law, cannot be upheld by a
court of law

23. Contractual Characteristics
• Unilateral contract
– an agreement in which one party makes a promise to
do something in return for an act of some sort
• Bilateral contract
– one in which both parties make promises
• Breach of contract
– occurs when one of the two parties fails to keep the
promise

24. Contractual Characteristics
• Express contract
– requires some sort of written or spoken expression
indicating a desire to enter the contractual relationship
• Implied contract
– created by the actions or gestures of the parties
involved in the transaction
– implied-in-law (quasi-contract) – created by court to
prevent unjust enrichment

25. Contractual Characteristics
• Informal contract
– Any oral or written contract that is not under seal or is
not a contract of record
• Formal contract
– has to be (1) written; (2) signed, witnessed, and placed
under the seal of the parties; and (3) delivered
– Contract of record – created by court for public policy
reasons

26. Contractual Characteristics
• Executory contract
– A contract that has not yet been fully performed by the
parties is called an
• Executed contract
– When a contract’s terms have been completely and
satisfactorily carried out by both parties

27. Question?
What is an agreement between two or more
competent parties?
A. Deal
B. Bond
C. Treaty
D. Contract

28. Question?
When both parties have a legally recognized
interest in the subject of the contract it is
called ________.
A. Privity
B. Judgment
C. Contractual obligation
D. Gordon defense

29. Question?
What type of contract is one in which both
parties make promises?
A. Voided contract
B. Unilateral contract
C. Express contract
D. Bilateral contract