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CHAPTER 9 : LAW OF CONTRACTS

Common Law
Contracts are primarily governed by state common law, with a clear presentation found in the
Restatements of the Law of Contracts, first promulgated on May 6, 1932. A revised edition —
the Restatement, Second, Contracts — was adopted and promulgated on May 17, 1979.

The Uniform Commercial Code


Article 2 of the UCC governs the sale of tangible personal property in all states except
Louisiana. A sale is a contract involving the transfer of title to goods from seller to buyer for
a price. The Code essentially defines goods as tangible personal property. Personal
property is any property other than real property (land).
Types of Contracts Outside the Code
General contract law governs all contracts outside the Code. For example, the Code does not
apply to employment contracts, service contracts, insurance contracts, contracts involving
real property (land and anything attached to it, including buildings), and contracts for the
sale of intangibles such as patents and copyrights. These transactions continue to be
governed by general contract law.

DEFINITION OF A CONTRACT
A contract is not a "thing," but a relationship between parties, which entails mutual rights and
duties contained in a set of promises that the courts will enforce. A contract, then, can be
defined as:
"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 as a duty."
A breach is the failure to perform contractual promises properly.
It is important to note that while all contracts are promises, not all promises are contracts.
Some promises are unenforceable and, therefore, are not contracts. For a promise to be
enforced, it must include all essential requirements of a legal, binding contract.

REQUIREMENTS OF A CONTRACT
Mutual Assent — The parties must show by words or conduct that they have agreed to enter into a
contract. The usual method of showing mutual assent is by offer and acceptance.
Consideration — Each party to a contract must intentionally exchange a legal benefit or incur a legal
detriment as an inducement to the other party to make a return exchange.
Legality of Object — The purpose of a contract must not be criminal, tortious, or against public
policy.
Capacity — The parties must have contractual capacity. Some persons, such as adjudicated
incompetents (persons placed under guardianship by a court order), have no legal capacity to contract,
while others, such as minors, nonadjudicated incompetent persons, and intoxicated persons, have
limited capacity to contract.
In some instances a contract must be evidenced by a writing to be enforceable; but in most cases, an
oral contract is binding and enforceable.

SEE CASE OF: Steinberg v. Chicago Medical School


CLASSIFICATION OF CONTRACTS
Express and Implied Contracts
Parties may indicate their willingness to enter into a contract either in words (express) or by conduct
implying such willingness (implied in fact). Both are contracts, equally enforceable. The difference
between them is merely the manner in which the parties manifest their assent.
Bilateral and Unilateral Contracts
When two promises are exchanged, a bilateral contract is established, and each party is both a
promisor and a promisee. A unilateral contract is where a promise is exchanged for an act.

Valid, Void, Voidable, and Unenforceable Contracts


By definition a valid contract is one that meets all of the requirements of a binding contract.
A void contract is an agreement that does not meet all of the requirements of a binding contract; it is
not actually a contract but merely a promise or agreement with no legal effect.
A voidable contract, on the other hand, is a contract, but because of the way it was formed, the law
permits one or more of the parties to avoid the legal duties the contract creates, making the contract
unenforceable.
An unenforceable contract is a contract, but is unenforceable as there is no remedy for a breach.

Executed and Executory Contracts


Where performance has been fully completed by all parties, the contract is said to be executed.
Executory contracts are those where performance has only been partially completed or not begun.
Thus, every contract that is completely performed will have an executory and executed phase.

PROMISSORY ESTOPPEL
As a general rule, promises are not enforceable if they do not meet all of the requirements of a
contract. One exception is promissory estoppel. Noncontractual promises are enforced under the
doctrine of promissory estoppel in order to avoid injustice, when the promise is made under
circumstances that should lead the promisor reasonably to expect that the promisee would take a
definite and substantial action or forbearance in reliance on the promise and the promisee takes such
action or forbearance.

SEE CASE OF: Gorham vs. Benson Optical


CHAPTER 10 : MUTUAL ASSENT

ESSENTIALS OF AN OFFER
An offer is a definite proposal or undertaking made by one person (the offeror) to another (the offeree)
indicating a willingness to enter into a contract. An offer gives the offeree the power to create a
contract by acceptance. An offer must have these elements: 1) Communication, 2) Intent, 3)
Definiteness.
Communication
Three elements are required:
• The offeree must know about the offer in order to accept it.
• The offer must communicated to the offeree in an intentional manner.
• The offer must be made or authorized by the offeror.
Intent
To have legal effect an offer must show an intent to enter into a contract. It is not necessary that the
terms of an offer be absolutely specific, but only that the intent to contract is clear. Proposals such as
invitations to negotiate, advertisements, and auctions do not constitute an intentional offer, but merely
invite another party to make an offer. Acceptance of such a proposal creates an offer only and does not
create a contract.
Preliminary Negotiations — If a communication creates in the mind of a reasonable person in the
position of the offeree an expectation that his acceptance will conclude a contract, then the
communication is an offer. If it does not, then the communication is a preliminary negotiation. Words
such as "Would you pay ____?", or "My best price is ____.", do not suggest that an outright offer is
being made. On the other hand words such as "My best quote would be ____ " or "The price I am
asking is ____" suggest that the offeror intends to and is making an offer. Hesitancy or equivocation
indicate that the party may be willing to make an offer as opposed to the actual making of an offer.
Advertisements — A public announcement or advertisement generally set forth terms indicating only
an invitation to deal. It may, however, set forth an offer where the terms are clearly stated and all that
is required of the offeree is some specific action.
Auction Sales — With Reserve–The auctioneer may withdraw the goods and the bidder may withdraw
her bid at any time. Without Reserve–The auctioneer may only withdraw goods put up for bid if no
bid is made within a reasonable time.

DURATION OF OFFERS
An offer will stay open until it is either accepted or until one of the following occurrences terminates
it: 1) lapse of time; 2) revocation; 3) rejection; 4) counteroffer; 5) death or incompetence of the offeror
or offeree; 6) destruction of the subject matter to which the offer relates; 7) subsequent illegality of the
type of contract proposed by the offer.
Lapse of Time
A contract offer will remain open for a reasonable time unless a specified time is stated. If an offer is
to be held open for a specific period of time, the period begins to run on the day the offeree receives it.
Revocation
Is done by the offeror, generally at any time prior to its acceptance by the offeree. EXCEPTIONS:
Option Contracts — by which the offeror is bound to hold open an offer for a specified period of
time.
Firm Offers Under the Code — A merchant is bound to keep an offer to buy or sell goods open for a
stated period if he gives assurance in a signed writing that it will be kept open.
Statutory Irrevocability — under which certain offers such as bids made to a state and
preincorporation stock subscription agreements are irrevocable.
Irrevocable Offers of Unilateral Contracts — Traditionally, the offeror could revoke an offer for a
unilateral contract up until the offeree completed performance. The modern view, codified by the
Restatement, holds that the offer may not be revoked for a reasonable time once the offeree has begun
performance.
Promissory Estoppel — The doctrine of promissory estoppel is used in some cases to prevent an
offeror from revoking an offer prior to its acceptance if the offeree was induced by the offer to take
action in reliance on it.
Rejection
An offeree may accept or reject an offer as he desires. The offeree does not have to formally reject the
offer, but may simply let the offer lapse without taking action. Once the offeror receives the rejection,
the offer terminates, and the offeree cannot change his mind and accept.
Counteroffer
Sometimes, after receiving an offer, the offeree may let the offeror know she is interested and willing
to contract, but on terms or conditions different from those proposed by the offeror. This proposal of
different terms or conditions, in fact, creates a new offer called a counteroffer. A counteroffer usually
terminates the original offer, but not always so. A counteroffer can also be in the form of a conditional
acceptance, which says “I accept your offer, but only if you agree to add this additional or different
term.”
Death or Incompetency
The death or incompetency of either the offeror or the offeree terminates an offer because a dead
person or an incompetent person cannot legally accept an offer or enter into a contract.
Destruction of Subject Matter
Destruction of the specific subject matter of an offer also terminates the offer. For example, a car
which has been totaled after an offer was made cannot be sold under the original offer.
Subsequent Illegality
If the performance or subject matter of an offer becomes illegal after the offer is made, but before it is
accepted, the offer is terminated.

COMMUNICATION OF ACCEPTANCE
General Rule
Bilateral offers require that acceptance be communicated to the offeror. In the case of unilateral offers,
notice of acceptance to the offeror is usually not required.
Silence as Acceptance
Usually an offeree’s silence will not constitute acceptance. The policy behind this rule is to prevent
the offeror from requiring affirmative conduct on the part of the offeree in order to decline an offer.
Effective Moment
We have already seen that an offer, a revocation, a rejection, and a counteroffer are all effective when
they are received. An acceptance, however, is usually effective when it is sent, or upon dispatch. This
is true unless the offer specifically states otherwise, the offeree responds by some unauthorized means,
or the acceptance follows a prior rejection.

Stipulated Provisions In The Offer — Sometimes an offer may specify what method of
communication is to be used. The acceptance must be by this method to be valid.
Authorized and Unauthorized Means — In the past, an authorized means of communication was:
• whatever means of communication the offeror specified in the offer, or
• if no means was specified, the same means the offeror used when making the offer.
Today, other means of communication are common — electronic mail, voice mail, or private-delivery
express mail. The Restatement and the Code now provide a broader definition of authorized means:
any reasonable means to communicate, unless the offer stipulates otherwise.
Traditionally, acceptance communicated by any unauthorized means only occurred when received by
the offeror if it was received within the time during which the authorized means would have arrived.
The Restatement provides that, if an unauthorized means of communication of an acceptance is
received within the same time period it would take to communicate by an authorized means, the
unauthorized means of acceptance is effective upon dispatch.
Defective Acceptances
A late or defective acceptance does not create a contract.

VARIANT ACCEPTANCES
An acceptance that contains terms different from or additional to those in the offer is called a variant
acceptance. Variant acceptances are treated differently under common law than they are by the Code.

Common Law
Under common law, an acceptance must be a mirror image of the offer. It may not change, add to,
subtract from, or qualify in any way the terms of the offer. If any variations from the offer occur in the
acceptance, a counteroffer is created which does not form a contract.
Code
The mirror image rule of common law is modified by the Code, primarily because of the realities of
modern business practices, particularly the use of standardized business forms. The Code focuses on
the intent of the parties to determine if an offer was accepted without conditions. Here the issue
becomes whether the seller's different or additional terms become part of the contract. The Code
provides rules to resolve these disputes depending on whether the parties are merchants and on
whether the terms are additional or different terms.

CHAPTER 11 : CONDUCT INVALIDATING ASSENT

A. DURESS
Wrongful act or threat that overcomes the free will of a party. There are two basic types:
Physical Compulsion
When a party compels another to agree to a contract through actual physical force; renders the
agreement void.
Improper Threats
Using economic and social coercion, leaving the victim with no reasonable alternative to agreeing with
the more powerful party; threat may be explicit or inferred from words or conduct. A subjective test is
used to determine whether the threat actually induced assent on the part of the person claiming to be
the victim of duress; makes the contract voidable at the option of the coerced party.

B. UNDUE INFLUENCE
Taking unfair advantage of a person, by reason of a dominant position based on a confidential
relationship, renders a contract voidable. Examples of situations giving rise to a confidential
relationship are those of guardian/ward, trustee/beneficiary, spouses to each other, principal/agent,
parent/child, attorney/client, physician/patient, and clergy/parishioner.

C. FRAUD
Fraud prevents agreement from being knowingly given. There are two distinct types: fraud in the
execution and fraud in the inducement.
Fraud in the Execution
A misrepresentation that deceives the other party as to the nature of a document evidencing the
contract; renders the agreement void (extremely rare).
Fraud in the Inducement
An intentional misrepresentation of material fact by one party to another, who then consents to a
contract in justifiable reliance on the misrepresentation; renders the contract voidable by the defrauded
party.
The requisite elements of fraud in the inducement are:
1. A false representation
Includes assertion of something not true, concealment of a fact, expressly denying knowledge of a
known fact, and statement of a misleading half-fact. Silence alone is not automatically false
representation.
2. of a fact (not just an opinion)
An event that actually took place or something that actually exists, not just a belief or a prediction of a
future event. May or may not include a statement of law.
3. that is material (relating to something of importance to the contract)
Must be likely to induce a reasonable person to manifest assent (or the maker must know that the
recipient is likely to do so).
4. made with knowledge of its falsity and the intention to deceive, and
Known as scienter; can consist of actual knowledge, lack of belief in the statement or reckless
indifference to truthfulness.
5. which representation is justifiably relied on.
If the misrepresentation did not influence the complainer's decision, he has no right to relief.

D. NONFRAUDULENT MISREPRESENTATION
Negligent Misrepresentation — made without due care in ascertaining its truthfulness; renders
agreement voidable.
Innocent Misrepresentation — made without knowledge of its falsity but with due care; renders
contract voidable.
E. MISTAKE
A mistake is an understanding that does not match existing fact.
Mutual Mistake
Both parties have a common but erroneous belief forming the basis of the contract; renders the contract
voidable by either party.
Unilateral Mistake
When only one of the parties is mistaken; usually no relief for unilateral mistake unless the error is
known or should be known by the nonmistaken party.
Assumption of Risk of Mistake
Either party may assume the risk of a mistake, and therefore will not be able to avoid the contract.
Effect of Fault upon Mistake
The mistaken party cannot avoid the contract obligation if she simply did not read what she was
signing.
Mistake in Meaning of Terms
In some cases, a term of the contract can have different meanings for the seller and the buyer, without
either party knowing that the other party has a different understanding. This renders the contract void.
If, however, one party knows that the other party has a different understanding, the contract stands
with the second party's interpretation of the terms.

CHAPTER 12 : CONSIDERATION

A. LEGAL SUFFICIENCY
Consideration is the legal value which supports a promise in a contract relationship; it is the
inducement to make a contract enforceable. To be legally sufficient, the consideration for the promise
must be either a legal detriment to the promisee or a legal benefit to the promisor. In other words, the
promisor must receive something of legal value or the promisee must give up something of legal value
in return for the promise.
Legal detriment does not mean harm, but rather something which the promisee was previously under
no legal obligation to do or refrain from doing. Legal benefit means the obtaining by the promisor of
that which he had no prior legal right to obtain.

SEE CASE OF : Pearsall v. Alexander


Adequacy
Legal sufficiency has nothing to do with adequacy of consideration. The requirement of legally
sufficient consideration is not at all concerned with whether the bargain was “fair” or either good or
bad for either party. The requirement is simply: (1) that the parties have freely agreed to an exchange
and (2) that the subject matter exchanged, or promised in exchange, either imposed a legal detriment
on the promisee or conferred a legal benefit on the promisor.
Unilateral Contracts
In a unilateral contract, one party (the promisor) exchanges a promise for an action (or restraint from
acting) from another party (the promisee). The promisee does not make a promise in return, but
simply fulfills the action or the restraint to complete the contract.
Bilateral Contracts
In a bilateral contract there is an exchange of promises. Thus, each party is both a promisor and a
promisee.
Pre-Existing Obligations
The law does not regard the performance of (or the promise to perform) a preexisting obligation,
whether public or private, as either a legal detriment or a legal benefit.
Modification of a Pre-Existing Contract — The Pre-Existing Duty rule under common law requires
that a contract modification or amendment be supported by additional and new consideration. This
rule is different from the UCC, which provides that contract modifications are binding despite no new
consideration provided they intend to do so and act in good faith. Also, if a valid controversy develops
regarding a party’s obligations, a subsequent modification that clarifies the dispute and that is
unsupported by consideration, will be valid.
Substituted Contracts — A substituted contract results when the parties to a contract mutually agree
to rescind their original contract and enter into a new one. This situation actually involves three
separate contracts: the original contract, the agreement of rescission, and the substituted contract.
Settlement of an Undisputed Debt — An undisputed (liquidated) debt is an obligation whose
existence and amount are not contested. Under the common law, the payment of a lesser sum in return
for the discharge of a fully matured, undisputed debt is not sufficient to support the promise of
discharge.
Settlement of a Disputed Debt — A disputed (unliquidated) debt is an obligation whose existence or
amount is contested. The giving up or compromise of a disputed claim constitutes legally sufficient
consideration if the dispute is honest and not frivolous.
B. BARGAINED-FOR EXCHANGE
A bargained-for exchange requires a mutually agreed upon exchange of consideration.
Past Consideration
Past consideration is an act done before the contract is made. The element of exchange is missing
where a promise is given for an act already done. Past consideration is no consideration.
Third Parties
Consideration to support a promise may be given to a person other than the promisor if the promisor
bargains for that exchange. Conversely, consideration may be given by some person other than the
promisee.

C. CONTRACTS WITHOUT CONSIDERATION


Certain promises are enforceable even though they are not supported by consideration.
Promises to Perform Prior Unenforceable Obligations
The courts may enforce a new promise that originally was not enforceable or has become
unenforceable.
Promise To Pay Debts Barred By The Statute Of Limitations — The statute of limitations provides
a time limit on bringing a legal action, but the debtor can become liable again for an expired debt by
freely admitting that the debt is owed, by making partial payment, or by making a new promise to pay
without pleading the statute.
Promise To Pay Debts Discharged In Bankruptcy — The Bankruptcy Act limits the enforceability
of such promises, but in some cases, they may be enforceable.
Voidable Promises — A new promise to fulfill a previous voidable (but not avoided) promise may be
enforced, as long as the new promise is not voidable.
Moral Obligations — Under common law, promises to pay these are not enforceable. The
Restatement imposes an obligation on promisors "to the extent necessary to prevent injustice" and
provides for enforcement of a promise to pay for a benefit already received by mistake.
Promissory Estoppel
Sometimes noncontractual promises are enforced under the doctrine of promissory estoppel where one
party has relied, to her detriment, on the promise made by another party.
Contracts Under Seal
Under the common law, a promise under seal was binding without consideration. In some states a
promise under seal is still binding. Most states, however, have created laws which remove the
distinction between contracts under seal and written, unsealed contracts.
Promises Made Enforceable by Statute
Some gratuitous promises that otherwise would be unenforceable have been made binding by statute.
Most significant among these are certain promises that are made enforceable by the Uniform
Commercial Code, including:
Contract Modifications — contract for sale of goods can be modified in good faith, even without
consideration.
Renunciation — any claim or right arising from a breach can be discharged with a written, signed
renunciation.
Firm (Irrevocable) Offer — if by a merchant, is not revocable for lack of consideration during the
stated time of the offer, or for a reasonable time.
CHAPTER 14 : CONTRACTUAL CAPACITY

A. MINORS
A person who is under the age of majority (usually 18 years)
Liability on Contracts
A minor’s contract, whether executory or executed, is generally voidable at his option.
Disaffirmance — either express or implied, as long as it shows an intention not to be bound.
A minor may disaffirm a contract at any time before reaching the age of majority, and in some cases
within a reasonable time after reaching the age of majority, if she did not first ratify the contract after
she came of age.
Ratification — After a minor becomes of age, she may choose to adopt or ratify a
contract, which makes the contract binding ab initio (from the beginning).

SEE CASE OF : Dodson v. Shrader


Liability for Necessaries
Contractual incapacity does not excuse a minor from paying for the reasonable value for necessaries —
those things that reasonably supply personal needs, such as food, shelter, medicine, and clothing.

SEE CASE OF : Zelnick v. Adams


Liability for Misrepresentation of Age
Most states allow a minor who lies about her age to nevertheless disaffirm a contract, but either (a)
require restitution or (b) allow the defrauded party to recover damages against the minor in tort. Some
states, however, prohibit disaffirmance if a minor misrepresents her age and the adult, in good faith,
reasonably relies on the misrepresentation.
Liability for Tort Connected with Contract
A minor who commits a tort that is so greatly interwoven with and connected to a contract may not be
liable for the results of his tortious conduct. If the minor violates the terms of the contract in
committing the tort, it may be possible to recover damages from the tort without enforcing the contract.

B. INCOMPETENT PERSONS
Person under Guardianship
Contracts made by a person placed under guardianship by court order are void. A party dealing with
an individual under guardianship may be able to recover the fair value of any necessaries provided.
Mental Illness or Defect
A contract entered into by a mentally incompetent person (one who is unable to understand the nature
and consequences of his acts) is voidable. Some states and the Restatement also recognize mental
incompetence if the mental condition impairs a person’s ability to act in a reasonable manner and the
contract is grossly unfair. Like minors and persons under guardianship, an incompetent person is
liable for necessaries furnished him on the principle of quasi contract, the amount of recovery being
the reasonable value of the goods or services.

C. INTOXICATED PERSONS
A contract entered into by an intoxicated person is voidable if the unintoxicated party has reason to
know that, because of intoxication, the other person is unable to understand the nature and
consequences of his actions or is unable to act in a reasonable manner. Like incompetent persons,
intoxicated persons are liable in quasi contract for necessaries furnished during their incapacity.