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Unformatted text preview: 1 LECTURE NOTES: CHAPTER 10 “NATURE AND TERMINOLOGY” INTRODUCTION Chapter 10 introduces the topic of contracts by defining a number of terms, giving an overview of the topic, and looking at the judicial interpretation of contracts. Contract law shows what promises or commitments our society believes should be legally binding. It shows what excuses our society will accept for the breaking of promises. And it shows what kinds of prom- ises will be considered to be against public policy and therefore legally void. The use of contract principles to govern the relationships of those who make promises to one another dates back thousands of years. Early in history the importance of contracts was recognized and given legal effect. Modern capitalist society could not exist without the law of contracts. The foundation for most commercial activity is the contract. We could not order our daily activities without contracts. The chapters in the contracts unit explain how contracts are formed, how they are discharged, and what happens when they are not performed. I. An Overview of Contract Law A. SOURCES OF CONTRACT LAW Contract law is common law. The common law governs all contracts except when statutory law or administrative agency regulations have been modified or replaced it. Statutory law—particularly the Uniform Commercial Code (UCC)—governs all contracts for the sale of goods. It should be stressed that it is essential to know when the UCC applies. B. THE FUNCTION OF CONTRACT LAW Contract law is needed to ensure compliance with a promise or to entitle a nonbreaching party to relief when a contract is breached. All contractual relationships involve promises, but all promises do not establish contractual relationships. Most contractual promises are kept; keeping a promise is generally in the mutual self-interest of the promisor and the promisee. C. DEFINITION OF A CONTRACT A contract is a promise for the breach of which the law gives a remedy or the performance of which the law recognizes as a duty (in other words, an agreement that can be enforced in court). A contract may be formed when two or more parties each promise to perform or to refrain from performing some act now or in the future. A party who does not fulfill his or her promise may be subject to sanctions, including damages or, under some circumstances, being required to perform the promise. D. THE OBJECTIVE THEORY OF CONTRACTS The intent to enter into a contract is important in the formation of a contract. The objective theory of contracts determines intent. Under this theory, a party’s intention to enter into a contract is judged by outward, objective facts as a reasonable person would interpret them, rather than by the party’s own secret, subjective intentions. 2 Objective facts include: (1) what the party said; (2) how the party acted or appeared; and (3) the circumstances surrounding the transaction....
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This note was uploaded on 01/20/2012 for the course ACCOUNTING 101 taught by Professor Dubai during the Spring '11 term at Abu Dhabi University.
- Spring '11