Regulations and Requirements - Business Law: Contracts

Leimberg, Satinsky, Doyle, Jackson, Tools & Techniques of Financial Planning, 7th Edition, Chapter 24
Downes, Goodman, Dictionary of Finance and Investment Terms, 5th Edition

Contract
An agreement among two or more parties by which rights or acts are exchanged for lawful consideration. Includes a promise or promises by one or both parties to perform or refrain from performing an act or acts.

Elements of a contract

  1. Agreement - Must be mutual assent by the parties with an offer by one party and acceptance by another. The mutual assent may be in writing or oral.
  2. Consideration - Something of value one party gives to another in exchange for a promise or act. Consideration can be in the form of money, commodities or personal services.
  3. Contractual capacity - The parties must be able to enter into a legally binding agreement. Minors, intoxicated individuals and mentally incompetent individuals are among those deemed to lack capacity to enter into a legally binding contract.
  4. Legality - An agreement to perform an illegal act or contrary to public policy is not an enforceable contract.
  5. Legal form - The contract must be in a form required by law or acceptable by law. Contracts are not always required to be in writing, but all contracts involving real estate must be in writing.

Types of contracts
  1. Express - Parties state the terms of the agreement to which they will be found, usually in writing.
  2. Implied - Terms of agreement can be reasonably inferred by acts of the parties, even if not expressed in writing or orally.
  3. Bilateral - All parties exchange promises to perform.
  4. Unilateral - One party makes a promise in anticipation of some act. There is no reciprocal promise.
  5. Executed - All parties have completed their promises.
  6. Executory - Contract only partially performed or totally unperformed by the parties.

Legal validity

  1. Valid and enforceable - All elements of legal and binding contract present.
  2. Void - Contract without legal force or effect.
  3. Voidable - Contact that can be annulled by either party after signing because it is legally defective or allows one party to rescind the contract.
  4. Unenforceable - A contract that cannot be verified for legal enforcement or fails to meet certain requirements.
Agency
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  5. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  6. Savings

    What Women Investors Are Doing Right

    Women's risk aversion, penchant for research – and lack of male-style "irrational exuberance" – means their investing strategies often put them ahead.
  7. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  8. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What are the primary risks an investor should consider when investing in the retail ...

    The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
  6. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!