CHAPTER 1: NATURE AND CLASSES OF CONTRACT

CHAPTER OBJECTIVES

After studying this chapter you will he able to:

1. List the essential elements of a contract.

2. Describe the way in which a contract arises.

3. State how contracts are classified.

4. Differentiate contracts from agreement that are not contracts.

5. Differentiate formal contracts from simple contracts.

6. Differentiate express contracts from implied contracts.

7. Differentiate contractual liability from quasi-contractual liability.

8. Solve problems involving the classification of contracts.

Practically every personal business activity involves a contract: an enrollment in college, the purchase of a color TV, the renting of an apart­ment. In each transaction relating to the acquisition of raw materials, their manufacture, and the distribution of the finished product by businesses, there are contracts that define the relationship and the rights and obligations of the parties. As pervasive as contracts are in our lives, the legal language of contracts is not very familiar to most of us.

In addition, Chapter 1 deals with something called quasi contracts. These are not true contracts. They lack some essential elements that the law requires of a true contract. Nevertheless, society through its laws has created this special class of obligations that will be enforced in a limited way.

Definition of a Contract.

A contract is a binding agreement, a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Contracts arise out of agreements; hence a contract may be defined as an agreement creating an obligation.

The substance of the definition of a contract is that by mutual agree­ment or assent the parties create enforceable duties or obligations that are legally binding. That is, each party is obligated to do or to refrain from doing certain acts.

Elements of a Contract.

The elements of a contract are: (1) an agreement, (2) between com­petent parties, (3) based upon the genuine assent of the parties, (4) supported by consideration, (5) made for a lawful objective, and (6) in the form re­quired by law, if any.

Subject Matter of Contracts.

The subject matter of a contract may relate to the performance of personal services, such as contracts of employment to work on an assembly line in a factory, to work as a secretary in an office, to sing on television, or to build a house. The contract may provide for the transfer of ownership of property, such as a house (real property) or an automobile (personal prop­erty), from one person to another. A contract may also call for a combination of these things. For example, a builder may contract to supply materials and do the work involved in installing the materials, or a person may contract to build a house and then transfer the house and the land to the buyer.

Parties to a Contract.

A person who makes a promise is the promisor, and the person to whom the promise is made is called the promisee. If the promise is binding, it imposes upon the promisor a duty or obligation and the promisor may be called the obligor. The promisee who can claim the benefit of the obliga­tion is also called the obligee. The parties to a contract are said to stand in privity with each other, and the relationship between them is termed privity of contract.

In written contracts, parties may be referred to by name. More often, however, they are given special names that serve better to identify each party.

For example, the parties to a contract by which one person agrees that an­other may occupy a house upon the payment of money are called landlord and tenant, or lessor and lessee, and the contract between them is known as a lease. Other parties have their distinctive names, such as vendor and vendee, for the parties to a sales contract; shipper and carrier, for the parties to a transportation contract; and insurer and insured, for the parties to an insurance policy.

A party to a contract may be an individual, a partnership, a corpora­tion, or a government. A party to a contract may be an agent acting on behalf of another person. There may be one or more persons on each side of the contract. In some cases there are three-sided contracts, as in the case of a credit card transaction, which involves the company issuing the card, the holder of the card, and the business furnishing goods and services in reliance on the credit card.

In addition to the original parties to the contract, other persons may have rights or duties with respect to it. For example, one party may to some extent assign rights under the contract to a third person. Also, the contract may have been made for the benefit of a third person, as in a life insurance contract, in which case the third person (the beneficiary) is permitted to en­force the contract.