Chapter 2

Introduction to
Contracts

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 Contents
- An Introduction to Contracts
- The Definition of a Contract
- Purposes of Contracts
- Elements of A Contract
- Classification of Contracts

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Contract (Definition):
Describe the first thing that comes to
your mind when you heard the word
“CONTRACT”?

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 Contract (Definition):
Can you cite the contents of the last
contract you have made?

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 7-5

Nature of a Contract

• A contract is a legally enforceable

agreement that is created when two or
more competent parties agree to
perform, or to avoid performing, certain
acts that they have a legal right to do and
that meet certain legal requirements.

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 7-6

Purposes of a Contract
Contracts may be created for a number of reasons
such as the reasons related to selling of products or
services, transferring of ownership of land (real
estate) or personal property such as cars or sailboat.

The initial purpose may be extended upon the

agreement of both parties such as extending the
employment contract to a partnership.

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 7-7
Elements of an
Enforceable Contract
• To be legally enforceable, a contract must contain six
elements:
1. Offer and Acceptance
• An offer is made by the offeror and accepted by the offeree .
This indicates both parties desire to enter into the agreement.
2. Mutual Agreement
• The parties must have a clear understanding of what they are
undertaking and the contract must show mutual agreement
(i.e. meeting of the minds).
3. Consideration
• Each party to a contract must promise to give up something.
The exchange of promises (where each party gives the other
something of value) is called consideration.
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 7-8

Elements of an
Enforceable Contract (cont.)
• Elements of an Enforceable Contract
4. Competent Parties
• The parties to a contract must be competent and
capable of understanding what they are doing.
(Example: legal age, mentally stable)
5. Legality of Purpose
• The intent of the contract must not violate the law. The
courts will not enforce a contract that violates the law.
(Example: an agreement to kill or steal)
6. Proper Form
• Requirements for contracts are known as proper form.
Contracts must not only be in writing but also follow a
prescribed form, such as containing the signatures of
the parties.
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Essential elements required to
create a contract

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 7-10

Kind of Contracts
Manner of Creation
• Oral Contracts:
– Not in writing or signed by the parties, but it is a real
contract created entirely by the conversation of the
parties.
• Written Contracts:
– A written contract can be simply a handwritten note
or any other memorandum containing the terms of
the agreement, as long as it is signed by the party or
parties who wish to be bound by the agreement.
– The law does not specify any particular form or
language to be used. It is sufficient that the parties
clearly express themselves in understandable
language.
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 Kind of Contracts:
Nature of Contract
• “Express” Contract:
All terms are clearly discussed either written or
spoken words. (Ordering Pizza with the agreement
of all terms and conditions)
• “Implied” Contract:
Not all terms have clearly discussed in either written
or spoken words. (Ordering Pizza without reference
to the price) It is usually decided based on the
conducts or the actions of the parties.

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 7-12

Kinds of Contracts
Performance of the parties
• Formal Contract:
– It is a written contract under seal. The seal may
consist of simply the word Seal.
– Today only a few contracts, such as bonds, mortgages,
and deeds transferring title to real estate, are
required to have a seal.

• Simple Contract:
– It is an informal contract made without seal (even
though the subject matter of the contract may be
extremely complex and may involve huge amounts of
money).

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 Types of Contracts:
Performance of the parties

▪ Entire Contracts or Indivisible Contracts:

A contract that has two or more parts, each part is
dependent on the others for satisfactory
performance. (buying desks and chairs)

▪ Divisible Contracts:
A contract that consists of two or more parts, each part
being independent of the others. (buying mobile &
T.V.)

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 Enforceability of Contracts:
Valid, Void, or Voidable
• “Valid” Contract: All elements of contract satisfied.
• Some contracts are valid but not enforceable, like
an oral contract, even if all elements are provided it
may not considered enforceable if the law requires
to be in writing to be enforceable.

• “Void” Contract: Illegal purpose/subject matter;

unenforceable
• Example: An agreement to kill someone or steal a
property is void and not enforceable.
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