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PRDV205: Business Law and Legal Procedures

Unit 4: CONTRACTS   *Contracts come in all shapes and sizes and appear in many aspects of daily life.  For example, you enter into a contract with a broker and/or seller when you purchase a house.  If you seek reliable work done to improve your new house, you enter into a contract with a construction contractor or a general contractor (hence the name).  In the larger business world, companies enter into contracts with other businesses in order to set prices and solidify relationships.

Contracts are legally binding relationships.  In most circumstances, a contract involves an agreement to deliver a specific product or service at a specified time on a specified date.  Violating a contract can result in a lawsuit or a settlement.  While courts may be involved in this resolution process, such disputes may also be settled outside the judicial system.  Laws regarding contracts vary from state to state, so it is always important for you to know the contract law in your area.  This unit will discuss contracts with a focus on what is known as the common law, which is the traditional approach to contracts that has been developed since the late 1700s by English and American judges.  By the end of this unit, you should have a general familiarity with how most contracts are written and enforced, particularly under the common law.*

Unit 4 Time Advisory
This unit should take you approximately 3 hours to complete.

Unit4 Learning Outcomes
Upon successful completion of this unit, you should be able to:
- explain how a contract is formed; - identify the key elements of a contract; - draft a basic contract; and - explain how a contract can be breached and the consequences of such a breach.

4.1 Contracts: A Case Study   - Reading: The Legal and Ethical Environment of Business: “Chapter 6, Introduction" Link: The Legal and Ethical Environment of Business: “Chapter 6, Introduction” (PDF)

 Instructions: Read the introduction to Chapter 6 of the textbook. 
This reading discusses a real contract case involving the actors and
directors Clint Eastwood and Sondra Locke, and the film studio
Warner Bros.  Take some time to think about this case and how it
compares with your own understanding of what a contract is.  Also
consider the legal consequences of breaking a contract, as well as
the ethical implications.  Lastly, as you review this reading and
the readings to follow, be sure to remember that the subject matter
of a contract must not be illegal (for example, a contract for the
sale of illegal drugs) in order for the contract to be valid.  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

4.2 The Elements of a Contract   - Reading: The Legal and Ethical Environment of Business: “Chapter 6, Section 1: Formation" Link: The Legal and Ethical Environment of Business: “Chapter 6, Section 1: Formation” (PDF)

 Instructions: Read Chapter 6, Section 1 of the textbook.  Focus on
the definition of a *bilateral contract* and make sure you can
distinguish a bilateral contract from a unilateral contract.  In
addition, make sure to familiarize yourself with the specific
elements that are required to form a valid common-law contract. 
Lastly, acquaint yourself with the differences between common-law
contracts and contracts formed under the Uniform Commercial Code, or
UCC.  Following your reading, complete the three exercises below the
“Key Takeaways” box at the end of the section.  

 Note that this reading also covers the material you need to know
for subunits 4.2.1-4.2.4, found below.  You can refer to those
subunits for additional guidance on how to approach this reading.  

 Reading this textbook section and completing the exercises should
take approximately 1 hour.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

4.2.1 Offer and Acceptance   Note: this topic is covered by the Chapter 6, Section 1 textbook reading assigned under Subunit 4.1 (above).  For this subunit, review how the important concepts of offer and acceptance give rise to mutual assent in the formation of a contract

4.2.2 Consideration   Note: This topic is covered by the Chapter 6, Section 1 textbook reading assigned under Subunit 4.1 (above).  For this subunit, focus on reviewing the role of the “bargained-for exchange” in the formation of a contract.

4.2.3 Legal Purpose   Note: This topic is covered by the Chapter 6, Section 1 textbook reading assigned under Subunit 4.1 (above). For this subunit, note the importance of a lawful purpose in the creation of a valid contract.

4.2.4 Legal Capacity   Note: This topic is covered by the Chapter 6, Section 1 textbook reading assigned under Subunit 4.1 (above).  For this subunit, ask yourself who has the legal capacity to form a contract and who does not.  Make sure you have a solid understanding of this distinction by the end of your reading.

4.2.5 Drafting a Contract   - Activity: The Saylor Foundation’s “Draft a Basic Contract” Link: The Saylor Foundation’s “Draft a Basic Contract” (PDF)

 Instructions: In this activity you will draft a valid, effective
contract.  Please keep in mind all the elements covered in Subunit
4.2, above, that need to be considered when making an effective
contract.  Also be sure to include all the important terms that are
specified for the contract that is given in this activity’s example
scenario.  Once you have completed your draft, use this
[rubric](http://www.saylor.org/site/wp-content/uploads/2013/12/PRDV205-Activity-4.2.5-DraftaBasicContract-Rubric-FINAL.pdf)
to assess your work.  

 Completing this activity should take approximately 30 minutes.

4.3 Termination and Breach   - Reading: The Legal and Ethical Environment of Business: “Chapter 6, Section 2: Performance and Discharge, Breach, Defenses, Equitable Remedies" Link: The Legal and Ethical Environment of Business: “Chapter 6, Section 2: Performance and Discharge, Breach, Defenses, Equitable Remedies” (PDF)

 Instructions: Read Chapter 6, Section 2 of the textbook.  Once a
contract is formed and the parties are bound by that contract, the
parties generally have a legal obligation to perform according to
the terms of the contract.  Be sure you understand when the
performance required is only *substantial*, versus when the
performance is characterized as *strict performance*.  Also note the
distinction between the prevalent *reasonable person* standard and
the less-common contractual standard of *personal satisfaction*. 
While one party's breach of a contract may result in damages, that
party may also have defenses against such a claim.  Make sure you
understand these defenses. Lastly, focus on the remedies that are
available to a party that is the victim of a breach.  When you are
finished reading, complete the two exercises below the “Key
Takeaways” box at the end of the section.  

 Note that this reading also covers the material you need to know
for subunits 4.3.1 and 4.3.2, found below.  You can refer to those
subunits for additional guidance on how to approach this reading.  

 Reading this textbook section and completing the exercises should
take approximately 1 hour.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

4.3.1 Breach   Note: This topic is covered by the Chapter 6, Section 2 textbook reading assigned under Subunit 4.2 (above).  For this subunit, focus in particular on reviewing hte portions of the reading that address the concept of breach.  Note that there are different kinds of breach, and that each type of breach has a different consequence.

4.3.2 Remedies and Damages   Note: This topic is covered by the Chapter 6, Section 2 textbook reading assigned under Subunit 4.2 (above).  There are various remedies available to a non-breaching party when a contract is breached.  As you review this reading, be sure to familiarize yourself with these remedies.  Note that the awarding of monetary damages is only one kind of remedy, and that this option may not be available in every instance.

4.4 Assignment and Delegation   - Reading: The Legal and Ethical Environment of Business: “Chapter 6, Section 3: Assignment, Delegation, and Commonly Used Contracts Clauses” Link: The Legal and Ethical Environment of Business: “Chapter 6, Section 3: Assignment, Delegation, and Commonly Used Contracts Clauses” (PDF)

 Instructions: Read Section 3 from Chapter 6 of the textbook.  Focus
in particular on this reading’s discussion of the concepts of
*assignment* and *delegation*.  Simply stated, in many circumstances
– and depending on the terms of the contract – a party to a contract
may assign his or her rights to a third party, or delegate his or
her duties to a third party.  Make sure you understand the
differences that exist between these two different options.  

 Note that this reading also covers the material you need to know
for subunits 4.4.1 and 4.4.2, found below.  You can refer to those
subunits for additional guidance on how to approach this reading.  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

4.4.1 Assignment   Note: This topic is covered by the Chapter 6, Section 3 textbook reading assigned under Subunit 4.3 (above).  In addition to familiarizing yourself with the ways that contracts can be assigned, be sure you are able to identify the circumstances in which a contract cannot be assigned.

4.4.2 Delegation   Note: This topic is covered by the Chapter 6, Section 3 textbook reading assigned under Subunit 4.3 (above).  As with the process of assignment, there are circumstances in which a party's duties under a contract cannot be delegated.  Note in particular the restrictions that may apply to situations in which personal performance is intended.