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Module 10
Contracts
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Learning Objectives
Upon successful completion, the student will be able to :
Describe the role of contract law;
Analyze the elements of a contract;
Explain contract terminating.
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The Role Of Contract Law
Provides a legal mechanism to deal with others
Law of contracts has evolved in commerce over the centuries.
Freedom of contract means responsibilities to those who agree to
create binding relationships.
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Contract Law
Common Law
Judge-made law
Each state differs some
There is uniformity about general contract principles that run through
state laws
Years ago, English courts drew guidance from lex mercatoria (the
law merchant).
It originated in Roman law of contracts covering the Roman Empire
and was comprehensive.
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Contract Law (2)
UCC:
Uniform Commercial Code. Article 2. (next chapter)
All States have adopted except Louisiana
Covers contracts for sale of goods
Many countries rely on Code Law only for their basic legal
framework.
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Definition Of A Contract
Sir Wm. Blackstone: “An agreement, upon sufficient consideration,
to do or not to do a particular thing.”
Modern definition centers on a promise: “A promise or set of
promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes a duty.”
The promise itself creates a manifestation of intent—a willingness to
be bound.
Contracts form legal relationships and duties between parties.
Not all promises are enforceable contracts – must meet
requirements of a contract to be an enforceable promise.
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Types of Contracts
Express Contracts
Direct statement by the parties of the promises made
May be oral or written
Key terms expressly agreed upon by the parties.
Implied Contracts
Actions and circumstances infer and define the terms of the contract.
May be words, conduct, gestures
Contracts are implied at law.
Ex: At a check out counter at a grocery store, actions of the parties
create offers/acceptances.
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Elements Of A Contract
An Agreement, through
Offer and Acceptance
Consideration
Contractual Capacity
Legality
Genuine Consent
Writing
If necessary under Statute of Frauds
RULE: If all elements are present, the contract is generally termed
valid.
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Element #1: Agreement
The Offer
Creates the Offeror and Offeree
1. Manifestation of Intent
Preliminary Negotiations vs. Intent to Offer
Most advertisements are regarded as invitations for others to submit an offer to buy
2. Definite Terms & Conditions
3. Communication
Person returns a dog but does not know of an award
Sometimes terms are presumed, i.e. shipped computer is packed properly
Restatement (2nd) of Contracts: “The manifestation of willingness to enter into a
bargain, so made as to justify another person in understanding that his assent to
the bargain is invited and will conclude it.”
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Terminating An Offer
Revocation
Withdrawing of offer by the Offeror
Rejection
By Offeree
Through lapse of time (Option Contracts are different)
Counteroffers are created by rejecting the original offer but keeping
negotiations open by presenting new conditions – a counteroffer.
By Operation of Law
Intervening Illegality
Destruction of subject matter
Death or insanity of offeror or offeree
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Element #1: The Agreement
The Acceptance – Expression of Assent
1. Unconditional
Must be a mirror image of the offer
If conditions are added, that creates a counteroffer
2. Unequivocal
3. Properly Communicated
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Pena v. Fox
Pena and Fox were in an auto accident. Pena injured.
Pena’s attorney sent settlement offer to Fox’s insurer, USAA.
The offer was for payment of Fox’s policy limits to Pena.
Exchange for her release of claims against Fox.
Offer letter stated the release would apply to Fox only. USAA replied that
payment would mean release of all claims against anyone related to the
accident.
Pena considered reply as a rejection of offer and sued Fox.
Fox requested trial court to enforce settlement agreement offered by USAA.
Trial Court Held: Valid agreement precluded lawsuit by Pena.
She appealed.
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Pena v. Fox (2)
Settlement agreements are governed by contract law.
Formed when mutual assent and “meeting of the minds.”
Acceptance must be “mirror image” of offer in all material respects.
Otherwise it is a counteroffer that rejects the original offer.
USAA’s reply (for Fox) did not mirror Pena’s offer. It changed who
would release claims.
No meeting of the minds and no settlement agreement to bar Pena’s
suit.
REVERSE AND REMANDED.
Case can go forward for further proceedings.
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Bilateral & Unilateral Contracts
Bilateral Contracts
2 promises
A promise in exchange for a
promise
Ex: I promise to pay you $250
to trim my trees; you promise
to trim my trees.
If promise is broken, there may
be responsibility if losses are
incurred.
Unilateral Contracts
Only 1 promise
A promise in exchange for a
performance
Ex: I promise to pay you $250
to trim my trees; you say
nothing but later trim them.
Once performance has
occurred, the other party’s duty
arises to fulfill his/her promise.
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Element #2: Consideration
Definition: Something of value or something bargained for in
exchange for a promise.
This element keeps contract from being a gift.
Traditional Rule: Must create –
Legal detriment to the promisee or
Legal benefit to the promisor
The legal detriment and benefit usually occur at the same time.
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Adequacy Of Consideration
Courts generally do not care if not fair market value.
If a party bargains poorly, courts usually will not interfere.
Those who bargain take on the risk of their own errors.
There are exceptions such as fraud, duress, etc.
The main concern is an exchange of mutual promises and
obligations by the parties.
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Caley v. Gulfstream Aerospace Corp.
Gulfstream adopted a dispute resolution policy (DRP) to resolve all
disputes between Gulfstream and employees.
Mailed policy to employees.
Policy said DRP would begin in 2 weeks and would be “a condition
of continued employment.” If an employee continued work, the DRP
was accepted as binding.
Some employees sued, saying there was no contract because no
consideration so the DRP could not be enforced.
District Court held for Gulfstream. Employees appealed.
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Caley v. Gulfstream Aerospace Corp. (2)
HELD: Affirmed.
DRP is an offer and states it is a contract.
Acceptance is continued employment by employees. Acceptance
can be through a promise or an act.
Here the act of continuing employment = acceptance of the offer and
a contract.
Employees had a choice to 1) continue employment, accepting DRP
There is “bargained for consideration” by mutual promises and
obligations.
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Enforceable Promises Without Consideration
Promissory Estoppel or Detrimental Reliance
Use of this equitable doctrine avoids injustice due to promisee‘s
reasonable reliance on the promisor’s promise.
Promisor is estopped (prevented) from denying a promise.
“A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promissee . . . and which does
induce such action or forbearance is binding if injustice can be avoided
only by enforcement of the promise.”
Restatement (2nd) of Contracts
Courts do not impose the rule lightly.
Sometimes used in promises to charities, especially if organizations rely
on the promises to act in some way.
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Hinson v. N&W Construction Company
N&W Construction prepared to submit a bid to Mississippi Job Corps
Center (MJCC) to build kitchen facility at training center. N&W received
bids from plumbing subcontractors in preparing its bid to MJCC.
Hinson quoted $92,000 as bid as plumbing sub; next lowest bid was
$139,000. N&W used Hinson’s bid to prepare its bid.
N&W was low bidder and awarded contract by MJCC. N&W contacted
Hinson that it needed plumbing work to begin. Hinson refused to do the
job.
Trial court granted summary judgment to N&W, awarding $47,000.
Hinson appealed.
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Hinson v. N&W Construction Company (2)
Ct. of Appeals Affirmed.
Hinson admits he provided a quote. Testified that he reviewed plans
and specs for the building and was satisfied with his quote of
$92,000.
Hinson refused to do the plumbing because “I just had a lot of other
jobs going.”
Promissory estoppel arises when “making of a promise, even though
without consideration . . .” that plaintiff (N&W) relied upon.
“Refusal to enforce it would be virtually to sanction the perpetuation
of fraud or would result in other injustice.”
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Element #3 Capacity
Refers to the legal ability to create a contract
Some have limited capacity to contract
Minors
Intoxicated persons
Insane persons
If there is no capacity, the contract is void
If there is partial capacity, the contract is voidable – may disaffirm
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Void and Voidable Contracts
VOID
Contract does not exist at law
One of elements is missing –
lacks a requirement of a
contract
i.e. Contract for an illegal
subject matter
Courts won’t accept disputes
VOIDABLE
Is valid but capable of being
voided by a circumstance
One party to the contract has
right to avoid legal obligation
i.e. Minors contracts
i.e. Contracts with person
under influence of drugs
i.e. Fraud by one of the parties
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Minors
Defined as a person under the legal age of majority
Traditionally, the age of majority was 21
Now it is 18 years old in all states for most contracts
Minors have partial capacity
Contracts are voidable
Policy to protect the young from the “results of their own folly”
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Minors (2)
General Rules
#1: Minors may disaffirm contracts at their option
#2: If a minor disaffirms a contract after receiving benefits, restitution
must be paid for the benefit
Some contracts may not be disaffirmed, i.e.
Enlistment contracts
Marriage contracts
Educational loans
Insurance loans
Medical care
After reaching majority, the minor may ratify the contract
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Element # 4: Legality
If a contract is lacking legality, courts will not enforce
Subject Matter Must Be Lawful
Criminal activities; sale of prohibited drugs; gambling activities in some
states
Interest rates on loans that violate usury laws
Court may strike entire bargain as unenforceable or only a part that
concerns illegal subject matter
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Unenforceable Contracts
Contract is actually valid when made, but courts will not enforce it
i.e. Unconscionable contracts
i.e. Exculpatory agreements
Subsequent Illegality: Ex: Company agrees to ship wheat to Iran. After
shipment is at sea, U.S. government declares no U.S. firms may trade
with Iran. Result: Unenforceable under U.S. law even if seen as legal in
Iran
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Contract Contrary To Public Policy
Exculpatory Agreements (types of those contracts written to
completely escape liability)
Unconscionable Agreements (unequal bargaining power)
Outcome is grossly unfair to an innocent party.
Contracts in Restraint of Trade
Contracts that restrain trade or unreasonably restrict competition
Covenant not to compete may be restraint of trade unless
Covenants not to compete often used in sale of business or
employment contracts
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Element #5: Reality And Genuineness Of
Consent
Concerns people entering into agreements of knowingly with free
will.
If real consent is missing, there is no meeting of the minds.
If there is unilateral mistake over a simple error, the error can be avoided.
(typographical error – $100,000 instead of $10,000; the $100,000 not
enforceable).
Without this element, the contract is void or voidable.
Examples:
Fraud
Misrepresentation
Duress
Undue influence
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Element #6: Contracts In Writing &
The Statute of Frauds (1677)
Contracts do not always have to be in writing to be enforceable,
however written contracts are always good evidence of the
agreement in case of dispute.
Some contracts require a writing:
Sale of land or interests therein
Contracts that cannot be performed within 1 year
Promise to pay the debt of another, including debts of an estate
Promises made in consideration of marriage
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Sufficiency of Writing
Writing must set out the material terms of contract
Names of parties
Consideration
Subject matter
Invoices, E-mails, sales orders, checks, confirmations may satisfy
this requirement; need not be a formal contract
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Parol Evidence Rule
Restricts use of oral evidence when that evidence is contrary to
terms of written contract.
Oral evidence cannot contradict, change or add terms to written
contracts.
If a written contract is incomplete, ambiguous, or there is evidence
of fraud, mistake, or misrepresentation, then oral evidence may
explain the problems or agreement beyond what was written.
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Deschamps v. Treasure State Trailer Court
Rasmussen sold Deschamps a mobile home trailer park in Great
Falls, Montana. 96 residential spaces for $1,445,000.
Contract explained how Rasmussen would be paid over time.
After sale was completed, Rasmussen died. His estate inherited the
asset (revenue from sale).
Deschamps found significant problems with park’s water system.
Required $400,000 in repairs.
cost of the water system repairs made payments impossible.
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Deschamps v. Treasure State Trailer Court (2)
Estate sued; Deschamps countersued: contract breach/fraud.
Deschamps contended Rasmussen said that water system was in
good condition and that occupancy rate was higher than in fact it
was.
Trial Court held for estate, finding Deschamps’ claims were
precluded by parol evidence rule. He appealed.
HELD: Affirmed. When language of contract is clear and
unambiguous, look at the substance of the contract.
Contract said Deschamps did not rely on any oral assurances or
presentations by Rasmussen. He cannot claim otherwise.
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Deschamps v. Treasure State Trailer Court (3)
Deschamps signed a contract prepared by his real estate agent,
containing statement that Deschamps did not relied on assurances
by Rasmussen.
Agreement provided
Rasmussen had not conducted an inspection nor warranted property’s condition.
Deschamps had right/duty to inspect property prior to purchase.
Special disclaimer of reliance on Rasmussen’s assurances.
Inspection was waived or satisfied.
Agreement could only be amended by a writing.
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Substantial Performance (Usually in good faith)
Usual remedy is the contract price minus damages resulting from lack of
complete performance
Material Breach
Performance substantially less than required
Damages now due to non-breaching party
Executed Contract
Fully performed; nothing left undone
If fully performed, damages for the price of performance may be sought as a
remedy
Executory Contract
Not fully performed
If partial delivery of products, buyer need not pay total price
Performance
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Discharge Of Contracts
Assignment (transfer of rights to another) and Delegation (transfer of
duties to another)
Many contracts can be assigned or delegated; exceptions are contracts
for services.
Third-Party Beneficiary is a party not part of original contract who
acquires rights under the contract. Common for credit contracts.
Performance
Total performance = discharge and payment accordingly
Substantial performance: Usual remedy is the contract price minus
damages resulting from lack of complete performance
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Discharge Of Contracts (2)
Breach (non-breaching party is discharged)
Material breach: Performance is substantially less than the contract
provides
Anticipatory breach or repudiation: A party indicates inability or lack of
desire to perform
Discharge by Agreement of the Parties: Rescission—parties agree
to walk away, Novation—parties agree to substitute new contract,
Accord & Satisfaction—parties are satisfied by alternative
performance.
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Discharge by Impossibility
An unforeseeable, unanticipated event occurs that makes
performance impossible
“Extreme or unreasonable difficulty, expense, injury or loss . . . .”
(Restatement (Second) of Contracts)
One party dies or is incapacitated.
Law passed making performance illegal
Subject matter of contract is destroyed
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Discharge by Impossibility (2)
The impossibility doctrine has been extended to commercial
impracticability or frustration
Wartime shortages
Extreme weather causes crop failures
Loss of needed supplies due to sudden international embargoes
Difficult to be enforced in courts – courts generally expect at least part
performance
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Remedies
Monetary Damages ($$)
Compensatory Damages
Actual Damages
Expectancy Damages
Liquidated Damages
Nominal Damages
Punitive or Exemplary (if there is tort related to breach of contract)
Special Damages
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Remedies (2)
Equitable Remedies
Specific Performance
Injunction
Restitution
Mitigation of Damages
Injured party must make efforts to mitigate or lessen losses.
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Economic Loss Rule
In breach of contract, if no tort involved, damages are only those related to
economic losses suffered by the breach.
Rule based on three policies
Maintain distinction between tort and contract law
Protect commercial parties’ freedom to allocate risks by contract
Encourage the party best situated to assess the risk of economic loss
Damages are only those related to lost profits and costs due to the breach.
Accounting evidence and specific calculations are necessary evidence to be
No punitive damages or mental distress awards. (Parties often try to assert
a tort, usually fraud, along with breach of contract to try to get these
damages.)
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DeRosier v. Utility Systems of America
DeRosier owned land on a hillside. Before house could be built, lot
needed to be filled with dirt.
Asked Utility Systems of America (USA), working nearby, if it would
dump some of their excess dirt on his lot.
USA saved money doing this instead of hauling the dirt away.
DeRosier obtained permit from city to allow 1,500 cubic yards of fill
to be dumped on his property. Gave permit to USA. USA dumped
6,500 cu. yd., so 5,000 cu. yd. had to be removed.
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DeRosier v. Utility Systems of America (2)
USA denied responsibility; offered to remove the excess for $9,500.
DeRosier hired another firm for $22,829 to remove excess dirt.
DeRosier sued USA. Trial Court granted him $22,829 damages paid
to remove the dirt. Also awarded him $8,000 in consequential
damages for delay of time lost in constructing new house.
USA appealed, saying DeRosier failed to mitigate damages by not
having USA move the dirt for only $9,500 rather than $22,829 paid
to another contractor.
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DeRosier v. Utility Systems of America (3)
Consequential damages refers to damages distinguished from general
damages.
Consequential damages flow naturally from the breach, but are not recoverable
unless they are reasonably foreseeable by parties at time of breach.
USA contended no claim for delay damages was in evidence.
HELD: District Court erred in awarding DeRosier $8,000 in consequential
damages.
HELD: District court had sufficient basis for calculating and granting $22,829 in
general damages.
HELD: Regarding DeRosier’s duty to mitigate: Non-breaching DeRosier could
decline the offer of USA to remove dirt for $9,500. Did not unreasonably reject
USA’s offer and did not fail to mitigate his general damages.
Reversed in part; affirmed in part.
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Quasi Contract
(Also called quantum meruit)
Quasi (means “almost”) – not a true contract
Equity concept used by courts to prevent injustice
Example: You watch as a crew (in good faith) come to your house
and pave your driveway. You cannot let them do the job and not
pay them anything for their work.
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Scheerer v. Fisher
Scheerer, a real estate agent, helped arrange $20 million deal between Seller
and buyer (Fisher). Was due 2% commission from each. Deal fell apart.
But Fisher formed a new company and had 3rd party buy the property and then
sell it to Fisher’s company.
Scheerer learned of deal and sued for compensation based on quantum meruit.
Trial Court held no contract or basis of payment. Scheerer appealed.
HELD: Reversed.
Defendants acted to deny Scheerer compensation for services rendered.
Although original contract failed, law implies a promise to pay some reasonable
compensation for services rendered.
Allegations state a valid quantum meruit claim.
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THE END
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