Essentials of Business Law 10th Edition Liuzzo Solutions Manual

Essentials of Business Law 10th
Edition Liuzzo Solutions Manual

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Ch 07 – Introduction to Contracts
Essentials of Business Law, 10th edition
INSTRUCTOR’S MANUAL
Chapter 7 Introduction to Contracts
LESSON OVERVIEW
In Chapter 7 we are introduced to the legal meaning of the term contract. A contract is an
agreement that may be legally recognized and enforced by a court of law, and, 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. We
differentiate a contract from an agreement, state the purpose of a contract, and explore the
elements that make a contract enforceable. The chapter also briefly introduces the kinds
of contracts—oral or written, express or implied, formal or simple, and entire or divisible.
This chapter also discusses the status of a contract—is the contract in the process of
completion, or completed? Finally we take a look at the enforceability of the contracts.
Students need to recognize that Chapter 7 merely offers an introduction to these topics
which will be explored in detail within the later chapters.
7-1
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
CHAPTER OUTLINE
A. THE NATURE OF A CONTRACT

B. AGREEMENTS THAT RESULT IN CONTRACTS
C. PURPOSES OF A CONTRACT
D. ELEMENTS OF AN ENFORCEABLE CONTRACT
1. Offer and Acceptance
2. Mutual Agreement
3. Consideration
4. Competent Parties
5. Legality of Purpose
6. Proper Form
E. KINDS OF CONTRACTS
1. Oral Contracts
2. Written Contracts
3. Express Contracts
4. Implied Contracts
5. Formal Contracts
6. Simple Contracts
7. Entire Contracts
8. Divisible Contracts
F. STATUS OF CONTRACTS
1. Executory Contracts
2. Executed Contracts
G. ENFORCEABILITY OF CONTRACTS
1. Valid Contracts
2. Void Contracts
3. Voidable Contracts
H. CHAPTER SUMMARY
I. CHAPTER ASSESSMENT
1. Matching Key Terms
2. True/False Quiz
7-2
whole or part.
3. Discussion Questions
4. Thinking Critically About the Law
5. Case Questions
6. Case Analysis
7. Legal Research
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook
margins, and placed in bold in the copy. They are listed here for your quick reference.
▪ contract ▪ written contract

▪ tangible personal property ▪ express contract
▪ offer ▪ implied contract
▪ offeror ▪ formal contract
▪ offeree ▪ simple contract
▪ acceptance ▪ entire contract
▪ mutual agreement ▪ divisible contract
▪ consideration ▪ executory contract
▪ competent ▪ executed contract
▪ legality of purpose ▪ valid contract
▪ proper form ▪ void contract
▪ oral contract ▪ voidable contract
7-3
whole or part.
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and
information that should be understood upon completion of the chapter. You may want to
access the PowerPoint (PPT) slides for Chapter 7 when you begin the study of the
chapter and discuss each Learning Outcome. Each Learning Outcome will be covered
separately in the Instructor Notes, but they are shown here in total as an overview of the
sections being presented in Chapter 7. These slides should be used to reinforce the main
points of the lecture.
After completing this chapter, the students will be able to:
1. Describe the nature of a contract.

2. Identify the sources of contract law
3. Distinguish between agreements and contracts.
4. Explain the purpose of a contract.
5. Identify the six elements of an enforceable contract.
6. Distinguish between the different classifications of contracts, including oral and
written, express and implied, formal and simple, and entire and divisible.
7. Explain the status of contracts and differentiate between executory and executed
contracts.
8. Describe the enforceability of contracts in terms of valid, void, and voidable
contracts.
LECTURE OUTLINE
7-4
whole or part.
A. THE NATURE OF A CONTRACT

A contract is an agreement legally enforceable in a court 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. The
Uniform Commercial Code (UCC) defines a contract as “the total legal obligation
which results from the parties’ agreement as affected by the Uniform Commercial
Code or any other applicable rules of law” [UCC 1-201(11)].
B. SOURCES OF CONTRACT LAW
The part of the UCC that is relevant to contract law is Article 2. However, Article
2 applies only to transactions in goods or other tangible personal property.
(Though many states use the same principles for other forms of contracts.)
Tangible personal property may be defined as personal property that can be
moved, such as a vehicle, kitchen table, or computer. Common law, on the other
hand, is the source of contract law regarding the sale of fixed assets, services, or
intangibles. If an agreement imposes a legal obligation, an enforceable contract
results; if it imposes only a social or moral obligation, however, it is not a contract
and is not legally enforceable.
C. AGREEMENTS THAT RESULT IN CONTRACTS
All contracts are agreements, but not all agreements are contracts. Since
agreements very often deal with personal or social matters they cannot be
enforced by law. If an agreement imposes a legal obligation, an enforceable
contract results. For an agreement to become a contract a legally recognized form
of consideration must pass.
D. PURPOSE OF A CONTRACT
Contracts may be created for any number of legal reasons. A contract also may be
extended and revised by mutual agreement as needed to reflect the wishes of the
parties.
E. ELEMENTS OF AN ENFORCEABLE CONTRACT

To be legally enforceable, a contract must contain six elements:
7-5
whole or part.
(1) offer and acceptance, (2) mutual agreement, (3) consideration, (4) competent
parties (legal capacity), (5) legality of purpose, and (6) proper form.
If one of these elements is missing, the courts will usually refuse to enforce the
contract.
1. Offer and Acceptance
An offer is a proposal made by one party, the offeror, to another party,
the offeree that indicates a willingness to enter into a contract. An
acceptance is an indication made by the offeree that he or she agrees to be
bound by the specific terms of the offer.
2. Mutual Agreement
The parties to a contract must have a clear understanding of what they are
undertaking. The contract must show mutual agreement, sometimes
referred to as a meeting of the minds or “genuineness of assent.”
3. Consideration
In most cases, each party to a contract must promise either to give up
something of value that he or she has a legal right to keep, or to do
something that he or she is not otherwise legally required to do. This
exchange of value (something of value which may include valuable
promises) is called consideration.
4. Competent Parties (Capacity)
The parties to a contract must be competent, that is, be capable of
understanding what they are doing or have legal capacity to act. They
must be of legal age and normal mentality. The functioning of a party’s
mind must not be impaired by injury, mental disease, or the influence of
drugs or alcohol.
5. Legality of Purpose
7-6
whole or part.
The intent of the contract must not violate the law. It must have legality of
purpose. The courts will not enforce a contract to do something that
violates the law or otherwise public policy.
6. Proper Form
Certain contracts, such as those involving the sale of real property of any
kind, personal property for $500 or more, or those that cannot be fulfilled
within a year, must be in writing to be enforceable. Other kinds of
contracts must not only be in writing, but must also follow a prescribed
form (containing the signatures of the parties). These requirements for
contracts are known as proper form.
F. KINDS OF CONTRACTS
Contracts may be classified in several ways, depending on the manner in which
they are created, expressed, or performed.
1. Oral Contracts
An oral contract is one that is not in writing or signed by the parties. That
is, it is a real contract created entirely by the conversation of the parties.
2. Written Contracts
A written contract is one that is reduced to writing on a permanent
surface. Although an oral contract may be just as binding as a written
contract, it is advisable to put a contract in writing if the transaction is
important or complicated, if the contract involves a large amount of
money, or if the contract will extend over a long period of time.
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. A written contract can be simply a handwritten note.
3. Express Contracts
A contract that specifically states the agreement of the parties, either orally
or in writing, is called an express contract. The term is used to
distinguish such contracts from others in which the meaning or the
intention of the parties is inferred from their actions.
7-7
whole or part.
4. Implied Contracts
The terms of some agreements may be understood from the actions or
conduct of the parties, from the customs of the trade, or from the
conditions or circumstances surrounding the transaction, rather than from
oral or written words. A transaction of this kind is considered an implied
contract.
An implied contract results when a person accepts goods or services that
cannot reasonably be considered a gift. A person who stands idly by while
another confers an unrequested benefit implies a promise to pay a
reasonable amount for the benefit. Such a promise of payment, however, is
not implied if goods were delivered or the services rendered during the
absence of, and without the knowledge of, the recipient. A classic
implied contract is a customer sitting at a restaurant table and ordering the
meal. It is implied that by eating the meal, the customer will pay for it.
5. Formal Contracts
A formal contract, or specialty contract, is a written contract which may
be just signed or signed under seal. The seal on a formal contract may
consist of simply the word Seal or L.S. (which means locus sigilli, the
place of the seal), a scroll, a wafer, or an impression on the paper. Some
states place a higher status on contracts under seal versus other signed
contracts.
6. Simple Contracts
A simple contract 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.
7. Entire Contracts
An entire contract, or indivisible contract, has two or more parts. Each
part is dependent upon the others for satisfactory performance. Such a
contract must be completely performed. The law of sales specifically
states that “unless otherwise agreed, all goods called for by a contract for
7-8
whole or part.
sale must be tendered [offered] in a single delivery and payment is due

only on such tender” (UCC 2-307).
8. Divisible Contracts
A divisible contract is one that is made up of two or more parts, each part
being independent of the others. In the case of a contract for the sale of
goods, a party to such a contract must be paid upon request for any part of
the contract performed as agreed, even though the entire contract is not
performed. The law of sales provides that “where the circumstances give
either party to a contract for sale the right to make or demand delivery in
lots, the price, if it can be apportioned, may be demanded for each lot”
(UCC 2-307).
G. STATUS OF CONTRACTS
Contracts frequently have a long life. At any particular time, a contract may be
awaiting the first act of the parties to execute its terms, in the process of
completion, or completed.
1. Executory Contracts
An executory contract is one in which some future act or obligation
remains to be performed under its terms. A contract is completely
executory if no part of it has been performed. It is partly executory if some
parts have been performed and some have yet to be performed. What
constitutes substantial performance for payment is case specific in each
court case.
2. Executed Contracts
A contract in which all of the terms of the agreement have been fully
performed by both parties is an executed contract. An executed contract
is not really a contract at all. It is more a record of an agreement that has
been completed in all respects by all the parties.
H. ENFORCEABILITY OF CONTRACTS
7-9
whole or part.
It is important to determine whether a contract is valid, void, or voidable, because

not all contracts can be enforced.
1. Valid Contracts
The vast majority of contracts entered into in any business day are valid. A
valid contract is an agreement resulting in an obligation that is legally
enforceable. It meets all the requirements of a contract because all six
essential elements are present.
2. Void Contracts
An agreement that lacks one or more of the essential elements of a
contract is a void contract from the very beginning. That is, it is not a true
contract at all and is therefore unenforceable or even recognized as a legal
contract..
3. Voidable Contracts
An agreement that may be rejected by one of the parties for a legally
acceptable reason is a voidable contract. Such a contract is valid and
enforceable unless and until it is rejected by the party who has the right to
withdraw.
7-10
whole or part.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcomes in
Chapter 7.
LO1. Describe the nature of a contract.
A contract is a legally enforceable agreement.
LO2. Identify the sources of contract law.

Common law is the source of contract law regarding the sale of fixed assets,
services, or intangibles.
LO3. Distinguish between agreements and contracts.

All contracts are agreements, but not all agreements are contracts. In some cases,
agreements are of a social nature and are not enforceable by law.
LO4. Explain the purpose of a contract.

Contracts may be created for any number of reasons. They may relate, for
example, to the sale of merchandise or services, to employment, or to the transfer
of ownership of land (real property) or personal property.
LO5. Identify the six elements of an enforceable contract.

The six elements of an enforceable contract are (1) offer and acceptance, (2)
mutual agreement, (3) consideration, (4) competent parties, (5) legality of
purpose, and (6) proper form.
LO6. Distinguish between the different classifications of contracts, including oral

and written, express and implied, formal and simple, and entire and divisible.
An oral contract is one that is legally enforceable and is created entirely by the
conversation of the parties. A written contract is one that is reduced to writing in a
permanent form.
Express contracts specifically state the agreement of the parties, either orally or in
writing. Implied contracts are agreements, the terms of which are inferred from
the conduct of the parties, the customs of the trade, or the circumstances.
A formal contract, or specialty contract, is a written contract under seal. A simple
contract is an informal contract made without seal—even though the subject
matter of the contract is extremely complex.
An entire contract has two or more parts, each dependent upon the others for
satisfactory performance. A divisible contract is one that consists of two or more
parts, each part being independent of the others.
7-11
whole or part.
LO7. Explain the status of contracts and differentiate between executory and
executed contracts.
Contracts frequently have a long life. At any particular time, a contract may be
awaiting the first act of the parties to execute its terms, in the process of
completion, or completed. An executory contract is one in which some future act
or obligation remains to be performed under its terms. An executed contract is one
in which the terms of the agreement have been fully performed by both parties.
LO8. Describe the enforceability of contracts in terms of valid, void, and voidable
contracts.
Valid contracts are agreements resulting in obligations that are legally
enforceable. Void contracts are agreements that lack one or more of the essential
elements of a contract. Voidable contracts are agreements that may be rejected by
one of the parties for a legally acceptable reason.
Chapter 7 Assessment Answers

Matching Legal Terms
1. k 4. l 7. c 10. g 13. e
2. a 5. i 8. j 11. f 14. o
3. b 6. h 9. d 12. n 15. m
True/False Quiz
16. F 19. T 22. T 25. T
17. F 20. F 23. T
18. F 21. T 24. T
Discussion Questions
26. Example 7.11 depicts an example of a typical offer and acceptance: Gorbea
offered Diaz Sign Company $800 to erect a specific sign within 30 days. Diaz
Sign Company indicated its acceptance of the offer by signing the contract.
7-12
whole or part.
27. In Example 7.11, there was no confusion regarding the amount, the specifications,
or the time limits for completion of the transaction. There was, in effect, a
meeting of the minds.
28. In Example 7.11, the Diaz Sign Company constructed and installed the sign
within the specified time.
29. A party who lacks competence might not be of legal age or normal mentality. The
functioning of a party’s mind must not be impaired by injury, mental disease, or
the influence of drugs or alcohol (see Chapter 9).
30. An example of a contract that would not be enforceable because it lacks legality
of purpose would be one that involves gambling (not sanctioned by the state), or
an agreement that requires one or both parties to violate the law (see Chapter 12).
31. Examples of agreements that would need to be in writing to be enforceable would
be those involving $500 or more, or those that cannot be fulfilled within a year
(see Chapter 13).
Thinking Critically About the Law

32. When addressing the issue of the fairness of the law, students need to recognize
that the objective of this aspect of the law is to protect minors who may not be
equal in their experience and bargaining savvy to adults. In cases in which a
minor’s experience and judgment is equal to that of an adult, the law would give a
minor an unfair advantage by allowing him or her to withdraw from a contract
simply because he or she is a minor.
33. Students should address the issue of the nature of the communication embodied in
an implied contract and the willingness of the parties to abide by such
communication.
34. Arguments relating to whether legislatures should interfere with the free will of
contracting parties will be spirited. Some students might suggest that when a
legislature declares some activities to be illegal, it is demonstrating a paternal,
“big brother” mentality. Others will counter that some individuals need
government action to protect them from themselves and their weaknesses.
35. Students should note the effect of inflation on laws that specify a monetary
amount.
36. It would be clearly unethical for an underage person, who looks much older, to
enter into a contract with another person who in good faith expects the underage
party to fulfill the terms of the contract.
Case Questions
7-13
whole or part.
37. a. Executory b. Valid
38. a. Neither b. Void
39. a. Y b. Y c. Y
d. Fiscus and Badger e. Y f. The

construction of a
barbecue
g. Y h. The exchange of promises; i. Y

Badger will build the barbecue
and Fiscus will pay $300.
j. The agreement covered

all the important details,
including payment,
completion date, and
subject matter.
Case Analysis
40. Principle of law: To be enforceable a contract must include all six elements: (1)
offer and acceptance, (2) mutual agreement, (3) consideration, (4) competent
parties, (5) legal purpose, and (6) proper form.
Decision: Because mutual understanding was not present, the contract could not
be enforced. However, Esposito may be required to pay the reasonable value for
the repairs under the doctrine of unjust enrichment.
41. Principle of law: Consideration is an essential element to an enforceable contract.
Decision: The court ruled for the nephew, because his promise was forbearance,
that is, he avoided doing something that he had a legal right to do. (Although the
nephew had no legal right to drink and gamble, he did have a legal right to use
tobacco and swear.)
42. Principle of law: Proper form is an essential element to an enforceable contract.
Decision: Decision for Evans. The contract for this matter must be in writing to
be enforceable.
43. Principle of law: A divisible contract between parties allows a seller to collect
for the merchandise delivered or the portion of work performed.
Decision: If this case were to be brought to court, the ruling would probably be in
favor of Grogan.
7-14
whole or part.
Legal Research
44. Students should include information related to topics included in the interview
and might range from the many steps prudent small business persons take in the
course of conducting business, to the steps the interviewee routinely follows to
avoid problems involving contracts.
45. Students may retrieve the following Web sites: http://www.id.uscourts.gov/terms-
cd.htm#sectC; http://definitions.uslegal.com; http://www.duhaime.org/.
BONUS ACTIVITIES
• Ask students to find a sample contract online and, as a class, discuss whether each
contract has all of the needed elements as discussed in the chapter.
• Direct a class discussion on students’ personal experiences with various forms of
contracts (i.e. lease or sublease contract, buying a car, fitness club membership,
etc.). Ask students how the contracts were valid, void, or voidable. Discuss
whether the contracts were oral, written, formal, simple, express, or implied.
7-15
whole or part.

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Essentials of Business Law 10th

Edition Liuzzo Solutions Manual

Essentials of Business Law, 10th edition

Chapter 7 Introduction to Contracts

A. THE NATURE OF A CONTRACT

▪ contract ▪ written contract

points of the lecture.

After completing this chapter, the students will be able to:

1. Describe the nature of a contract.

A. THE NATURE OF A CONTRACT

E. ELEMENTS OF AN ENFORCEABLE CONTRACT

sale must be tendered [offered] in a single delivery and payment is due

It is important to determine whether a contract is valid, void, or voidable, because

LO2. Identify the sources of contract law.

LO3. Distinguish between agreements and contracts.

LO4. Explain the purpose of a contract.

LO5. Identify the six elements of an enforceable contract.

LO6. Distinguish between the different classifications of contracts, including oral

Chapter 7 Assessment Answers

16. F 19. T 22. T 25. T

17. F 20. F 23. T

18. F 21. T 24. T

Thinking Critically About the Law

37. a. Executory b. Valid

38. a. Neither b. Void

d. Fiscus and Badger e. Y f. The

g. Y h. The exchange of promises; i. Y

j. The agreement covered

contract has all of the needed elements as discussed in the chapter.

• Direct a class discussion on students’ personal experiences with various forms of

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