Contract Law

The law of contracts consists in general of those rules which define what conduct, verbal or
non-verbal, amounts to a promise, what circumstances must attend a promise to make it
enforceable, what facts operate to justify or excuse non-performance or to discharge the
promise, and what relief, if any, is to be given to persons injured by non- performance.

Introduction

1 WHAT IS A CONTRACT?

We enter into contracts day after day. Taking a seat in a bus amounts to entering into a
contract. You go to a restaurant and take snacks, you have entered into a contract.
In such cases, we do not even realize that we are making a contract. In the case of people
engaged in trade, commerce and industry, they carry on business by entering into contracts.
Contract, ordinarily connotes an agreement between two or more persons—not merely a
shared belief, but a common understanding as to something that is to be done in the future
by one or both of them.
Sometimes, the term contract is used also to refer to a document—the set of papers in which
such an agreement is set forth.

Definition of a contract
Pothier described a contract in this way: “A contract includes a concurrence of intention in
two parties, one who whom promises something to the other, who on his part accepts such
promise.”

Blackstone defined a contract as “an agreement, upon sufficient consideration, to do or not

to do a particular thing.”

Definitions of a contract
Thus a contract is “an agreement, a mutual bargain, or convention” which must involve at
least two contracting parties who have sufficient ability to make a contract.
Powell gave three definitions:
“A contract, according to the common law definition of it, is an agreement between two or
more concerning something to be done, whereby both parties are bound to each other, or
one is bound to the other;
“the consent of two or more persons in the same thing, given with the
intention of constituting, or dissolving lawfully some obligation; and
“A contract is a transaction in which each party comes under an obligation to the other, and
each, reciprocally, acquires a right to what is promised by the other.”

Definitions of a contract
Parsons defined a contract as “an agreement between two or more parties, for the doing or
not doing of some specified thing.”
Parsons’ definition of a contract is like Blackstone’s definition, only Parsons intentionally
omitted the requirement for consideration because he thought that consideration was not
essential to the contract, but was instead more in the nature of proof of the contract.
Anson defined a contract as “an agreement enforceable at law, made between two or more
persons, by which rights are acquired by one or more to acts or forbearances on the part of
the other or others.”
Williston said: “A Contract is a promise, or set of promises, to which the law attaches legal
obligation.”

Definitions of a contract

The RESTATEMENT OF THE LAW OF CONTRACTS § 1 (1932) said: “A contract is a

promise or a 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.”
The RESTATEMENT (SECOND) OF CONTRACTS § 1(1981) repeats that definition
verbatim.

2 Classifications of Contracts
Contracts may be classified in terms of their :

validity or enforceability,
mode of formation, or (3) performance.

Classification according to
validity or enforceability
Contracts may be classified according to their validity as:

valid,
voidable,
void contracts or agreements,
illegal,
or (v) unenforceable.

A valid contract
A contract to constitute a valid contract must have all the essential elements.
If one or more of these elements is/are missing, the contract is voidable, void, illegal or
unenforceable.

A voidable contract
A voidable contract is one which may be repudiated at the will of one of the parties, but until
it is so repudiated it remains valid and binding. It is affected by a flaw (e.g., simple
misrepresentation, fraud, coercion, undue influence), and the presence of anyone of these
defects enables the party aggrieved to take steps to repudiate the contract. It shows that the
consent of the party who has the discretion to repudiate it was not free.

A void contract
An agreement which is not enforceable by either of the parties to it is void. Such an
agreement is without any legal effect ab initio (from the very beginning). Under the law, an
agreement with a minor is void.
It is illogical to use ‘a void contract’ as originally entered into. In fact, in that case there is no
contract at all. It may be called a void agreement. However, a contract originally valid may
become void later.

An illegal agreement
An illegal agreement is one the consideration or object of which
(1) is forbidden by law; or (2) defeats the provisions of any law; or
(3) is fraudulent; or (4) involves or implies injury to the person or property of another; or (5)
the court regards it as immoral, or opposed to public policy.
Example: A promises to obtain for B an employment in the public service, and B promises to
pay … to A. The agreement is illegal.
Every agreement of which the object or consideration is unlawful is not only void as between
immediate parties but also taints the collateral transactions with illegality.

An unenforceable contract

An unenforceable contract is neither void nor voidable, but it cannot be enforced in the court
because it lacks some item of evidence such as writing, registration or stamping.

Classification according to
mode of formation
There are different modes of formation of a contract. The terms of a contract may be stated
in words (written or spoken). This is an express contract. Also the terms of a contract may be
inferred from the conduct of the parties or from the circumstances of the case. This is an
implied contract .
Example If A enters into a bus for going to his destination and takes a seat, the law will imply
a contract from the very nature of the circumstances, and the commuter will be obliged to
pay for the journey.

Classification according to
performance
Another method of classifying contracts is in terms of the extent to which they have been
performed.
Accordingly, contracts are:

(1) executed, and (2) executory

or (1) unilateral, and (2) bilateral.

An executed contract

An executed contract is one wholly performed. Nothing remains to be done in terms of the
contract.
Example A contracts to buy a bicycle from B for cash. A pays cash. B delivers the bicycle.
An executory contract

An executory contract is one which is wholly unperformed, or in which there remains

something further to be done.
Example On June 1, A agrees to buy a bicycle from B. The contract is to be
performed on June 15.
The executory contract becomes an executed one when completely performed.
For instance, in the above example, if both A and B perform their obligations on June 15, the
contract becomes executed. However, if in terms of the contract performance of promise by
one party is to precede performance by another party then the contract is still executory,
though it has been performed by one party.
Example On June 1, A agrees to buy a bicycle from B. B has to deliver the bicycle on June
15 and A has to pay price on July 1. B delivers the bicycle on June 15. The contract is
executory as something remains to be done in terms of the contract.

A Bilateral Contract

A Bilateral Contract is one wherein there is an obligation on the part of both to do or to

refrain from doing a particular thing. In this sense, Bilateral contracts are similar to executory
contracts.

A Unilateral Contract

A Unilateral Contract is one wherein at the time the contract is concluded there is an
obligation to perform on the part of one party only.

An important corollary can be deduced from the distinction between Executed and Executory
Contracts and between Unilateral and Bilateral contracts. It is that a contract is a contract
from the time it is made and not from the time its performance is due. The performance of
the contract can be made at the time when the contract is made or it can be postponed also.

3 Essential elements of a valid

Contract
Blackstone gave three elements of a contract: the agreement,
the consideration,
the subject matter or type of contract.
Powell said that “the ingredients required to form a contract are, First, Parties.
Secondly, Consent.
Thirdly, An obligation to be constituted or dissolved.”

Parsons defined the essentials of a contract to be: the parties,

consideration, assent of the parties,
and the subject matter of the contract.
Benjamin § 1 defined the essentials to be:
parties competent to contract;
mutual assent;
a thing transferred from seller to buyer; and (iv) a price in money paid or promised.

The essential elements of a valid contract can be summed up as follows

Agreement.
Intention to create legal relationship.
Free and genuine consent.
Parties competent to contract.
Lawful consideration.
Lawful object.
Agreements not declared void or illegal.
Certainty of meaning.
Possibility of performance.
Necessary Legal Formalities.
These essential elements are explained briefly.

Agreement
to constitute a contract there must be an agreement.
An agreement is composed of two elements: offer and acceptance.
The party making the offer is known as the offeror,
the party to whom the offer is made is known as the offeree.
Thus, there are essentially to be two parties to an agreement. They both must be thinking of
the same thing in the same sense. In other words, there must be consensus-ad-idem.

Thus, where ‘A’ who owns 2 cars x and y wishes to sell car ‘x’ .
‘B’, an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also.
He thinks that ‘A’ owns only car ‘y’ and is offering to sell the same for the stated price. He
gives his acceptance to buy the same.
There is no contract because the contracting parties have not agreed on the same thing at
the same time,
‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no consensus-ad-idem.

Intention to create legal

relationship
There should be an intention on the part of the parties to the agreement to create a
legal relationship.
An agreement of a purely social or domestic nature is not a contract.
Example A husband agreed to pay £30 to his wife every month while he was abroad. As he
failed to pay the promised amount, his wife sued him for the recovery of the amount. She
could not recover as it was a social agreement and the parties did not intend to create any
legal relations [Balfour v. Balfour (1919)2 K.B.571].
An agreement contained a clause that it “shall not give rise to any legal relationships, or be
legally enforceable, but binding in honour only”. The agreement did not give rise to legal
relations and, therefore, was not a contract. [Jones v. Vernon’s Pools Ltd. (1938) 2 All
E.R. 626].
Free and genuine consent
The consent of the parties to the agreement must be free and genuine. The consent of the
parties should not be obtained by misrepresentation, fraud, undue influence, coercion or
mistake. If the consent is obtained by any of these flaws, then the contract is not valid.

Parties competent to contract

The parties to a contract should be competent to enter into
a contract.
Every person is competent to contract if he
is of the age of majority,
is of sound mind,
and (iii) is not disqualified from contracting by any law to which he is subject.

Thus, there may be a flaw in capacity of parties to the contract. The flaw in capacity may be
due to minority, lunacy, idiocy, drunkenness or status. If a party to a contract suffers from
any of these flaws, the contract is unenforceable except in certain exceptional
circumstances.

Lawful consideration

The agreement must be supported by consideration on both sides. Each party to the
agreement must give or promise something and receive something or a promise in return.
Consideration is the price for which the promise of the other is sought. However, this price
need not be in terms of money. In case the promise is not supported by consideration, the
promise will be nudum pactum (a bare promise) and is not enforceable at law. Moreover, the
consideration must be real and lawful.

Lawful object

The object of the agreement must be lawful and not one which the law disapproves.

Agreements not declared illegal or void

There are certain agreements which have been expressly declared illegal or void by the law.
In such cases, even if the agreement possesses all the elements of a valid agreement, the
agreement will not be enforceable at law.

Certainty of meaning
The meaning of the agreement must be certain or capable of being made certain otherwise
the agreement will not be enforceable at law.
For instance, A agrees to sell 10 metres of cloth. There is nothing whatever to show what
type of cloth was intended. The agreement is not enforceable for want of certainty of
meaning. If, on the other hand, the special description of the cloth is expressly stated, the
agreement would be enforceable as there is no uncertainly as to its meaning. However, an
agreement to agree is not a concluded contract [Punit Beriwala v. Suva Sanyal AIR 1998
Cal. 44].
Possibility of performance

The terms of the agreement should be capable of performance. An agreement to do an act

impossible in itself cannot be enforced.
For instance, A agrees with B to discover treasure by magic. The agreement cannot be
enforced.

Necessary legal formalities

A contract may be oral or in writing. If, however, a particular type of contract is required by
law to be in writing, it must comply with the necessary formalities as to writing, registration
and attestation, if necessary. If these legal formalities are not carried out, then the contract is
not enforceable at law.

4 The sources of Contract

Law
a) Judicial Opinions
b) Statutory Law
c) The Restatements
d) Legal Commentary
e) International Commercial Law

Judicial Opinions

Historically, contract law developed in the Anglo-American system as judge made law, rules
distilled from a composite of court decisions in prior cases.
” A precedent is a prior decision with facts sufficiently similar to the case “sub judice”—under
adjudication— that the court feels obliged to follow it and to render a similar decision.
A regime of law based primarily on precedent is commonly justified on two grounds. it offers
a high degree of predictability of decision,. Such a system also will obviously have the
characteristic—of being static and conservative, generally oriented toward preservation of
the status quo.

Statutory Law

In 1677 the English Parliament enacted what is commonly referred to as the “statute of
frauds.” Subsequently adopted in virtually every American state, this statute requires certain
types of contracts to be evidenced by a signed writing to be enforceable in court.
With this notable exception, until the twentieth century contract law has been largely judge-
made.

The common law character of contract law changed significantly in the twentieth century,
although it is still accurate to characterize contract law as predominantly judge-made rather
than statutory. Probably the most important inroad on the historical character of contract law
was the development of the Uniform Commercial Code, begun in the 1940s. In the 1960s, a
wave of consumer protection statutes at both the federal and state levels modified traditional
contract principles.. Although its name suggests otherwise, the Uniform Commercial Code
(UCC, or the Code) does not govern all commercial transactions.

The Restatements
In 1923, the American Law Institute (ALI) was formed. The major project undertaken by this
organization was the preparation and promulgation of what purported to be accurate and
authoritative summaries of the rules of common law in various fields, including contracts,
torts, and property.
The first such “Restatement” to be issued—and perhaps the most successful in terms of
acceptance and use by the bench and bar—was the Restatement of Contracts, officially
adopted by the ALI in 1932.
The Restatement resembled a statute in form, consisting of “black-letter” statements of the
“general rule” In addition, most sections were supported with at least some commentary and
illustrations. None of the ALI Restatements have the force of law, as does a statute or an
individual court decision.
Although they constitute only secondary authority, the Restatements have in fact proved to
be remarkably persuasive; not infrequently, a court will justify its decision by simply citing
and quoting the Restatement’s rule on a given point. Recognizing that contract law had
undergone substantial development since 1932, the ALI in 1962 began to prepare a revised
version of its Restatement. Finally adopted in full in 1979, the Restatement (Second) of
Contracts reflects some shifts in philosophy from the original Restatement.

Legal Commentary
Authors have sought to clarify the law, to propose solutions for unresolved issues, and in
some cases to argue for legal change. In the aggregate, such commentary has been
extremely influential in shaping the course of the common law of contract. Perhaps the most
weighty of these commentaries are the two multivolume treatises by Professors Samuel
Williston and Arthur Corbin. Williston was the Reporter for the original Restatement of
Contracts, and his ideas were reflected in its organization and content; the Williston treatise
was thus naturally regarded with particular respect by judges who viewed the Restatement
itself as authoritative.

International Commercial Law

Historically, As part of the international reconstruction that took
place after World War II, most countries became parties to a treaty known as the General
Agreement on Tariffs and Trade, or “GATT.”
Two of the central purposes of GATT were reduction of tariff and nontariff barriers to trade
and clarification of member countries’ rules regarding trade (the term “transparency” is used
to refer to this goal).
The United States has been a member of GATT since its inception, although Congress did
not give its formal approval of United States participation until ratification of the 1994
amendments to GATT, which created a central body for administering GATT, the World
Trade Organization (WTO).
In the 50 years since its formation, GATT has been quite successful in reducing trade
barriers.. In 1980 under the sponsorship of the United Nations Commission on International
Trade Law (UNCITRAL), a number of countries adopted a treaty, the United Nations
Convention on the International Sale of Goods (“CISG”). The Convention formally became
effective January 1, 1988. The CISG is analogous to the UCC. Like the UCC it applies to the
sale of goods. Also, like the UCC it has the force of law, because it is a treaty. On the other
hand, there are important differences between the CISG and the UCC.

THE PROCESS OF
CONTRACT
FORMATION

OFFER AND ACCEPTANCE

The RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 22(1) (1981) says that
the manifestation of mutual assent, which forms the basis of a contract, ordinarily takes the
form of an offer and an acceptance.

When did this offer-and-

acceptance paradigm arise?
Pothier (1772) wrote of offers and acceptances exchanged through correspondence, more
than twenty years before the first English case mentioned contract formation based on offer-
and acceptance .

Blackstone did not mention offer-and-acceptance in his Commentaries (1769). He treated

contracts as if they come to life by what is “openly uttered and avowed” at the time of
contracting. Blackstone was essentially describing a barter or a face-to-face transaction in a
marketplace where cash is paid and the buyer carries away the purchased goods.
Contracting by correspondence may not have been frequent in his day, for a national postal
service was not implemented in England until a hundred years later.

According to researchers, the first English case to mention offer was Payne v. Cave, 3 Term.
R. 148, 110 Eng. Rep. 501 (1789), where the court said that a bidder at an auction could
withdraw his bid up until the time the auctioneer’s hammer fell, because “bidding is nothing
but an offer on one side, which is not binding on either side til it is assented to.”

In Cooke v. Oxley, 3 Term R. 653, 100 Eng. Rep. 785 (1790), the court held that an offeror
was free to sell goods to another person up until the time that the offer was accepted,
because without acceptance there was no contract.

OFFER AND
ACCEPTANCE: BILATERAL CONTRACTS
The notion of “contract” typically involves an element of futurity: commitment to some course
of action to be undertaken in the future.
Since they involve an exchange of reciprocal commitments, bilateral contracts were seen by
the classical theorists as typically being the product of a negotiating process usually known
as “offer and acceptance.”

This process was imagined/ proposed as follow :

-First, the parties engage in a period of preliminary negotiation, exchanging communications
of a more or less detailed nature about the type of exchange of performances to which each
would be willing to agree.

Next, one party (the “offeror”) makes an “offer”—a direct, complete proposal that a contract
be entered into, providing for an exchange of defined performances.

This has the effect of creating in the party to which that offer is addressed a “power of
acceptance.”

If that other party (the “offeree”) manifests her “acceptance” of the offer in a legally effective
way, then at that moment a contract comes into being.

If the initial offer is not acceptable, however, the offeree may respond by making a “counter-
offer” of her own, which may in turn be accepted by the original offeror (thus giving rise to a
contract different from the one he originally proposed).

Of course, a contract may never come into being at all; the offeree may simply reject the
offer without making one of her own in return. Or, the offeree may delay too long in
accepting, so that the power of acceptance created by the offer has been terminated either
by a time limit (explicit or implicit) contained in the offer itself or by the offeror’s withdrawal
(“revocation”) of his offer.

OFFER AND ACCEPTANCE:

UNILATERAL CONTRACTS
As bilateral contract is formed when the parties exchange promises of performance to take
place in the future: Each party is both a promisor and a promisee;
the offeree’s communicated acceptance also constitutes in effect her promise to perform.
However, if the offeror should offer to exchange his promise of a future performance only in
return for the offeree’s actual rendering of performance, rather than her mere promise of
future performance, then the transaction would give rise to a unilateral contract.

In that case, only one party (the offeror) would be a promisor, and the offeree’s rendering of
performance would also constitute her acceptance of the offer.

The Offer

A contract begins with an offer.

The offer is an expression of willingness to contract on certain terms.
It allows the other party to accept the offer and provides the basis of the agreement.
The first step in finding a contract is to establish that there is an offer and who is making it.
Many communications will lack this necessary intention and thus will not be offers. They may
be statements of intention, supplies of information or invitations to treat.
Although the distinction between an offer and other steps in the negotiating process is easy
to state in theory, in practice, difficult cases arise.

OFFER/PROPOSAL
An offer is synonymous with proposal. The offeror or proposer expresses his willingness “to
do” or “not to do” something with a view to obtain acceptance of the other party to such act
or abstinence. Thus, there may be “positive” or “negative” acts which the proposer is willing
to do.
Examples (1) A offers to sell his book to B. A is making an offer to do something, i.e., to sell
his book. It is a positive act on the part of the proposer.

OFFER DEFINITION
The RESTATEMENT OF THE LAW OF CONTRACTS (1932) says: “An offer is a promise
which is in its terms conditional upon an act, forbearance or return promise being given in
exchange for the promise or its performance.”
The RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 24 (1981) defines an
offer this way: “An offer is the manifestation of willingness to enter into a bargain, so made
as to justify another person in understanding that his assent to that bargain is invited and will
conclude it.”

The Texas Supreme Court cited the RESTATEMENT (SECOND)’s definition in City of
Houston v. Williams, 353 S.W.3d 128, 144 (Tex. 2011), where the Court said: “In order to
qualify as a contract, the document or documents must evidence the parties’ intent to be
bound. . . . That intention must be manifested in a way that justifies a promisee’s
understanding that a promise has been made to him.”
The Court thus converted the offer-and-acceptance paradigm into the enforceable-promise
paradigm.

Characteristics of the offer

An offer is an expression of willingness to contract on specified terms, made with the
intention that it is to be binding once accepted by the person to whom it is addressed.
There must be an objective manifestation of intent by the offeror to be bound by the offer if
accepted by the other party. Therefore, the offeror will be bound if his words or conduct are
such as to induce a reasonable third party observer to believe that he intends to be bound,
even if in fact he has no such intention. This was held to be the case where a university
made an offer of a place to an intending student as a result of a clerical error.

An offer can be addressed to a single person, to a specified group of persons, or to the world
at large.
An example of the latter would be a reward poster for the return of a lost pet.

Characteristics of the offer

An offer may be made expressly (by words) or by conduct.

An offer must be distinguished from an invitation to treat and from declaration of intention to
offer.

Offer / declaration of
intention to offer

A person may make a statement without any intention of creating a binding obligation. It may
amount to a mere declaration of intention and not to a proposal.

Example
An auctioneer, N advertised that a sale of office furniture would take place at a particular
place.
H travelled down about 100 Km to attend the sale but found the furniture was withdrawn
from the sale.
H sued the auctioneer for his loss of time and expenses.
Held: N was not liable [Harris v. Lickerson. (1875)
L.R.S. Q.B. 286.].

Offer/ an invitation to treat

By an invitation to treat, a person does not make an offer but invites another party to do so.
Whether a statement is an offer or an invitation to treat depends primarily on the intention
with which it is made.
An invitation to treat is not made with the intention that it is to be binding as soon as the
person to whom it is addressed communicates his assent to its terms.

A prospectus issued by a college for admission to various courses is not an offer. It is only
an invitation to offer. A prospective student by filling up an application form attached to the
prospectus is making the offer.
An auctioneer, at the time of auction, invites offers from the would-be-bidders. He is not
making a proposal.
A display of goods with a price on them in a shop window is construed an invitation to offer
and not an offer to sell.

Case of Carlill v Carbolic Smoke Ball Company [1893] 2 QB 256. A medical firm advertised
that its new drug, a carbolic smoke ball, would cure flu, and if it did not, buyers would receive
£100. When sued, Carbolic argued the advert
was not to be taken as a legally binding offer; it was merely an invitation to treat, a mere puff
or gimmick. However, the Court of Appeal held that the advertisement was an offer. An
intention to be bound could be inferred from the statement that the advertisers had
deposited £1,000 in their bank "shewing our sincerity".

In a departmental store, there is a self- service. The customers picking up articles and take
them to the cashier’s desk to pay. The customers action in picking up particular goods is an
offer to buy. As soon as the cashier accepts the payment a contract is entered into
[Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. (1953) 1
Q.B. 401].

Likewise, prospectus issued by a company for subscription of its shares by the members of
the public, the price lists, catalogues and quotations are mere invitations to offer.

An offer is the final expression of willingness by the offeror to be bound by his offer should
the other party choose to accept it. Where a party, without expressing his final willingness,
proposes certain terms on which he is willing to negotiate, he does not make an offer, he
only invites the other party to make an offer on those terms. This is perhaps the basic
distinction between an offer and an invitation to offer.

HOW AN OFFER IS MADE?

An offer can be made by (a) any act or (b) omission of the party proposing by which he
intends to communicate such proposal or which has the effect of communicating it to the
other An offer can be made by an act in the following ways:
(a) by words (whether written or oral)
The written offer can be made by letters, telegrams, telex messages, advertisements…
The oral offer can be made either in person or over telephone.
(b) by conduct. The offer may be made by positive acts or signs so that the person acting or
making signs means to say or convey. However silence of a party can in no case amount to
offer by conduct. An offer can also be made by a party by omission (to do something). This
includes such conduct or forbearance on one’s part that the other person takes it as his
willingness or assent. An offer implied from the conduct of the parties or from the
circumstances of the case is known as implied offer.

Specific and General Offer

An offer can be made either:
to a definite person or a group of persons, or
2. to the public at large.
The first mode of making offer is known as specific offer and the second is known as a
general offer.
In case of the specific offer, it may be accepted by that person or group of persons to whom
the same has been made.
The general offer may be accepted by any one by complying with the terms of the offer.
Essential requirements of a valid offer
An offer must have certain essentials in order to constitute it a valid offer.
These are:
The offer must be made with a view to obtain acceptance.
The offer must be made with the intention of creating legal relations. [Balfour v. Balfour
(1919) 2 K.B. 571.]
The terms of offer must be definite, unambiguous and certain or capable of being made
certain. The terms of the offer must not be loose, vague or ambiguous.

Examples
(1) A offers to sell to B “a hundred quintals of oil”. There is nothing whatever to show what
kind of oil was intended. The offer is not capable of being accepted for want of certainty.
(2) A who is a dealer in coconut oil only, offers to sell to B “one hundred quintals of oil”. The
nature of A’s trade affords an indication of the meaning of the words, and there is a valid
offer.

Essential requirements of a valid

offer
An offer must be distinguished from (a) a mere declaration of intention or (b) an invitation to
offer or to treat.
The offer must be communicated to the offeree. An offer must be communicated to the
offeree before it can be accepted. This is true of specific as well as general offer.

The offer must not contain a term the non-compliance of which may be assumed to amount
to acceptance. Thus, the offeror cannot say that if the offeree does not accept the offer
within two days, the offer would be deemed to have been accepted.

A tender is an offer as it is in response to an invitation to offer.

Tenders commonly arise where, for example, a hospital invites offers to supply eatables or
medicines. The persons filling up the tenders are giving offers. However, a tender may be
either:
specific or definite; where the offer is to supply a definite quantity of goods, or
standing; where the offer is to supply goods periodically or in accordance with the
requirements of the offeree.
In the case of a definite tender, the suppliers submit their offers for the supply of specified
goods and services. The offeree may accept any tender (generally the lowest one). This will
result in a contract.
Cross Offers Where two parties make identical offers to each other, in ignorance of each
other’s offer, the offers are known as cross-offers and neither of the two can be called an
acceptance of the other and, therefore, there is no contract.
Example: H wrote to T offering to sell him 800 tons of iron at 69s. per ton. On the same day
T wrote to H offering to buy 800 tons at 69s. Their letters crossed in the post. T contended
that there was a good contract. Held: that there was no contract. [Tinn v. Hoffman & Co.
(1873) 29 L.T. Exa. 271.].

Essential Requirements of a Valid Offer

Recap
Must be made with a view to obtain acceptance.
Must be made with the intention of creating legal relations.
Terms of offer must be definite, unambigous and certain or capable of being made certain.
It must be distinguished from mere declaration of intention or an invitation to offer.
It must be communicated to the offeree.
The offer must not contain a term the non-compliance of which may be assumed to amount
to
acceptance.
A tender is an offer as it is in response to an invitation to offer.
The Special terms, forming part of the offer, must be duly brought to the notice of the offeree
at the time the offer is made.
Two identical cross-offers do not make a contract.

ACCEPTANCE

a-Acceptance definition

The RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 35(1) (1981) says: “An
offer gives to the offeree a continuing power to complete the manifestation of mutual assent
by acceptance of the offer.”

An acceptance is a final and unqualified expression of assent to the terms of an offer.

Again, there must be an objective manifestation, by the recipient of the offer, of an intention
to be bound by its terms.
An offer must be accepted in accordance with its precise terms if it is to form an agreement.
It must exactly match the offer and ALL terms must be accepted.

An offer may be accepted by conduct (for example, an offer to buy goods can be accepted
by sending them to the offeror)
Acceptance has no legal effect until it is communicated to the offeror (because it could cause
hardship to the offeror to be bound without knowing that his offer had been accepted).

Communication by post gives rise to special practical difficulties. An offer is posted. The
offeree receives the offer and posts her acceptance. The letter of acceptance will take
several days to arrive. At what point is the acceptance good? If one waits until the offeror
receives the letter, how will the offeree know when this is? The offeree has known from the
time she posted the letter that she has accepted the offer. There is also the occasional
problem of the letter that never arrives at its destination.

To overcome these problems, the courts devised an exception to the general requirement of
communication (which would have been that the acceptance is only good when the letter
arrives). The exception was devised in the cases of Adams v Lindsell (1818) and Household
Fire Insurance v Grant (1879).
These decisions establish the ‘postal acceptance rule’, that is, that acceptance is complete
when posted. This puts the risk of delay and loss on the offeror. It is important to understand
that the rule is an exception to the general rule requiring communication.

The postal acceptance rule will only prevail in certain circumstances. It will prevail where use
of the post was reasonably contemplated by the parties or stipulated by the offeror. See
Household Fire Insurance v Grant (1879).
It may be that the post is the only reasonable form of communication available. See
Henthorn v Fraser (1892).
The postal acceptance rule will not allow a contract to be concluded by posting the
acceptance where the letter is incorrectly addressed by the offeree. The offer may accept
the risk of delay occasioned by the post but not the carelessness of the offeree: LJ Korbetis
v Transgrain Shipping BV (2005).

The operation of the postal acceptance rules creates practical difficulties. The greatest
problem is that contracts can be formed without the offeror being aware of the contract. For
example, an offeror makes an offer. Unbeknown to him, the offeree accepts. The offeror
then revokes the offer before receiving the postal acceptance. The offeror contracts with
another party over the same matter – and then receives the postal acceptance from the
original offeree. The offeror is now in breach of his contract with the original offeree.
Partly because of these problems and partly because of technological advances (the post is
no longer a such crucial method of communication), courts seem to be confining the scope
of the postal acceptance rule. This is a rationale behind the decision in Holwell Securities v
Hughes (1974). In this case, the postal acceptance rule did not apply because the offeror did
not intend that it would apply. While this case is authority for the proposition that the terms of
an offer must be met for acceptance to be valid, it also illustrates the reservations modern
courts have over the postal acceptance rule.

As modern forms of communication such as fax and email have become almost
instantaneous, courts have shown a marked reluctance to extend the postal acceptance rule
to these new forms of communication. However, in an early case involving a telegram, a
form of the postal acceptance rule was applied. See Bruner v Moore (1903).
In later cases involving telexes, the courts refused to extend the application of the postal
acceptance rules. See Entores v Miles Far East Corp (1955) and Brinkibon Ltd v Stahag
Stahl (1982).
These cases are also important for the principles they establish with respect to
instantaneous forms of communication.

English contract law awaits a case involving an almost instantaneous communication – such
as a fax or an email. It is clear that a contract can be formed through such mediums (see, for
example, Allianz Insurance Co- Egypt v Aigaion Insurance Co SA (2008)). Because of the
technology involved in both these forms of communication they are not entirely
instantaneous. An email, in particular, may take some time to arrive at its destination,
depending upon the route it takes to its recipient. As Poole has suggested, there are two
possible approaches to the email communication of the acceptance: postal analogy or
receipt rule.

The general rule is that a postal acceptance takes effect when the letter of acceptance is
posted (even if the letter may be lost, delayed or destroyed).
However, the postal rule will not apply if it is excluded by the express terms of the offer. An
offer which requires acceptance to be communicated in a specified way can generally be
accepted only in that way.

If acceptance occurs via an instantaneous medium such as email, it will take effect at the
time and place of receipt.
Note that an offeror cannot stipulate that the offeree's silence amounts to acceptance.

A communication fails to take effect as an acceptance where it attempts to vary the terms of
an offer.
In such cases it is a counter-offer, which the original offeror can either accept or reject.
For example, where the offeror offers to trade on its standard terms and the offeree purports
to accept, but on its own standard terms, that represents a counter-offer. Making a
counteroffer amounts to a rejection of the original offer which cannot subsequently be
restored or accepted (unless the parties agree).

An offer may be revoked at any time before its acceptance, however the revocation must be
communicated to the offeree.
Although revocation need not be communicated by the offeror personally (it can be made by
a reliable third party), if it is not communicated, the revocation is ineffective..

Once an offer has been accepted, the parties have an agreement. That is the basis for a
contract, but is not sufficient in itself to create legal obligations.
A contract is not created unless the other requirements are met.
Thus there may be no consideration; or impossibility or illegality may prevent any duty of
performance from arising.

b-What Constitutes an Acceptance?

The RESTATEMENT OF THE LAW OF CONTRACTS § 52 (1932) says that an “acceptance
of an offer is an expression of assent to the terms thereof made by the offeree in a manner
requested or authorized by the offeror.”
The RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 50(1) (1981) provides
that “acceptance of an offer is a manifestation of assent to the terms thereof made by the
offeree in a manner invited or required by the offer.”

Series of Communications
Sometimes the last document in a series of communications can culminate in a contract. In
Patton v. Rucker, 29 Tex. 402, 1867 WL 4538, *5 (Tex. 1867) (Coke, J.), the Court wrote:
A letter properly signed, and containing the necessary particulars of the contract, is
sufficient. But it must be such a letter as shows an existing and binding contract, as contract
distinguished from a pending negotiation, a concluded agreement, and not an open treaty, in
order to bind the party from whom it proceeds.

When Does The Acceptance Become Effective?

The acceptance must be communicated to the offeror to be effective. In Patton v. Rucker, 29
Tex. 402, 1867 WL 4538, *5 (Tex. 1867) (Coke, J.), the Court wrote:
It is not only necessary that the minds of the contracting parties should meet on the subject-
matter of the contract, but they must communicate that fact to each other, so that both may
know that their minds do meet, and it is then only that the mutual assent necessary to a valid
contract exists, and not until then that the contract is concluded.
In a barter transaction, and in a face-to-face marketplace transaction, acceptance or
rejection of an offer is communicated immediately.
When an offer is communicated by courier, or mail, or telegraph, where there is a time-delay
between the time the offer is “sent” and the time it is “received” by the offeree, things can
happen in between the sending of the offer and the receipt of the offer.
Can the offeror revoke the offer before the offer is received?
What happens if the offeree mails his acceptance before learning of the revocation?
What if the acceptance is mailed after the offer is revoked but before the offeree learns that
the offer was revoked?

Pothier, in his treatise on SALES (1762), expressed the view that an offer sent by
correspondence could be withdrawn any time before it is received and accepted by the
offeree, and that an acceptance would be ineffective even if it is sent before notice of
revocation is received.

Pothier’s rational was that mutual assent or concurrence of wills never occurred, since the
offeror’s assent was extinguished before the offeree’s assent arose.
This was not the view of English Common Law. In Adams v. Lindsell, 1 B & Ald. 681 (1818),
the court held that, where the offer was sent by mail, the acceptance became effective when
it was mailed to the offeror. Thus, a rescission of the offer was ineffective after the
acceptance was mailed, even if the offeror had no actual knowledge that the offer had been
accepted.

This case presents the first instance of what is known to AngloAmerican Contract Law as the
“mailbox rule.”

The idea behind the mailbox rule is

that an acceptance of an offer is
effective as soon as it is mailed.

Dean Langdell criticized the mail box rule for bilateral contracts in his SUMMARY OF THE
LAW OF CONTRACTS ¶ 24, at 15 (1880), saying that when a contract is based on an
exchange of promises, the acceptance is really a counter-offer by the offeree that must be
accepted by the offeror before a contact is made. Since an offer is not effective unless it is
communicated, an acceptance that is an offer of future performance must be received to
become effective.
In Langdell’s words: “the letter of acceptance must come to the knowledge of the offerer for
the same reason that the letter containing the original offer must come to the knowledge of
the offeree.” Id. at 19 ¶ 15.1.
Williston noted that the reason for the rule, “given in modern cases,” is that the offeror
expressly or impliedly authorized acceptance by mail or telegram.

The RESTATEMENT OF THE LAW OF CONTRACTS (1932) adopts the mailbox rule in
Section 66, illustration 1. The RESTATEMENT (SECOND) OF CONTRACTS § 63 (1981)
adopts the mailbox rule, “unless the offer provides otherwise,” but imposes the additional
requirement that the offeree use due diligence to advise the offeror that the offer has been
accepted or that notice of acceptance be received by the offeror “seasonably.”

Section 63 treats option contracts differently; acceptance of an option contract is not

effective until it has been received by the offeror.

Definition of an OPTION contract

An OPTION contract is an agreement in which a seller (writer) conveys to a buyer (holder) of

a contract the right, but not the obligation, to buy or sell a specific quantity of something at a
specified price on or before a specified date. The option writer has the obligation to fulfill his
side of the contract if the option holder decides to exercise the option.

When the offer is to create a unilateral contract, the

RESTATEMENT OF THE LAW OF CONTRACTS §
45 (1932) makes the offer binding when performance begins: “If an offer for a unilateral
contract is made, and part of the consideration requested in the offer is given or tendered by
the offeree in response thereto, the offeror is bound by a contract, the duty of immediate
performance of which is conditional on the full consideration being given or tendered within
the time stated in the offer, or, if no time is stated therein, within a reasonable time.”

When the Acceptance Varies From the Offer.

When terms of the acceptance varies from the terms of the offer, courts traditionally found
that no contract was formed (applying the
“mirror image” rule). The U.S. Supreme Court, in Eliason v. Henshaw, 17 U.S. 225, 228,
1819
WL 1971, *2 (1819) (Washington, J.).
It is an undeniable principle of the law of contracts, that an offer of a bargain by one person
to another, imposes no obligation upon the former, until it is accepted by the latter, according
to the terms in which the offer was made. Any qualification of, or departure from, those
terms, invalidates the offer, unless the same be agreed to by the person who made it. Until
the terms of the agreement have received the assent of both parties, the negotiation is open,
and imposes no obligation upon either.

Leake’s 1867 treatise also said that where the acceptance varies from the offer, there is no
agreement.
Langdell’s SUMMARY said: “An offer can only be accepted in the terms in which it is made.
Acceptance, therefore, which modifies the offer in any particular, will go for nothing.”

Early Texas cases took a strict view of the mirror image rule. The mirror image rule was
expressed (without naming the rule) by the Texas Supreme Court in Patton v. Rucker, 29
Tex. 402, 1867 WL 4538, *6 (Tex. 1867) (Coke, J.):
An acceptance of a proposal to sell, in order to bind the maker of the proposition and
conclude the contract, must be unconditional and unqualified. The exact terms of the
proposition, without addition or variation, must be acceded to before the proposition is
withdrawn; otherwise, the maker of the proposition is not bound by the acceptance.

In a major relaxation of the mirror image rule,

U.C.C. § 2-207 (1962) gives the offeree the flexibility to bring a contract into being, by
issuing an acceptance that contains additional or different terms from those in the offer, as
long as the offer did not preclude variations in the acceptance, and the variations from the
offer are not material, and the offeror does not object within a reasonable time after receiving
the acceptance.

The Battle of the Forms

Under the Common Law’s mirror image rule, if the acceptance did not exactly match the
offer, no contract was created. Thus, the contract, if any, had the terms of the last offer or
counter-offer that was accepted without modification by the other contracting party.

The RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 59 (1981) adopted the

mirror image rule:
“[a] reply to an offer which purports to accept it but is conditional on the offeror’s assent to
terms additional to or different from those offered is not an acceptance but is a counter-
offer.”

Sales transactions have increasingly been conducted based on the seller’s and the buyer’s
forms.
The “battle of the forms” describes the situation where the offer is a form and the acceptance
is a form that contains additional or different terms from the offer. by saying that if the
acceptance is a form that contains additional or different terms from the form offer, the form
acceptance is binding on the offeror unless the offer limits acceptance to the terms of the
offer, or the acceptance materially alters the offer, or the offeror gives notice of an objection
to the variations within a reasonable time.

This provision has been heavily criticized. Article 19 of the CISG sets out the mirror image
rule, but if the deviations in the acceptance are not material, they become part of the
contract, unless the offeror objects.
Examples of changes that are material, and therefore are governed by the “mirror image”
rule, are “price, payment, quality and quantity of the goods, place and time of delivery, extent
of one party’s liability to the other or the settlement of disputes ”

Review
For a contract to be formed, there must be an acceptance of the offer. The acceptance must
be an agreement to each of the terms of the offer. It is sometimes said that the acceptance
must be a ‘mirror image’ of the offer.
The acceptance can be by words or by conduct.
Acceptance occurs when the offeree’s words or conduct give rise to the objective inference
that
the offeree assents to the offeror’s terms.
If the offeree attempts to add new terms when accepting, this is a counter-offer and not an
acceptance. A counter-offer implies a rejection of the original offer, which is thereby
destroyed and cannot subsequently be accepted.
Where the offeree queries the offer and seeks more information, this is neither an
acceptance nor a rejection and the original offer stands.
In some cases, the parties will attempt to contract on (differing) standard forms. In this
instance, there will be a ‘battle of the forms’ with offers and counter-offers passing to and fro.
The Court of Appeal has held that the ‘last shot’ wins this ‘battle of the forms’.
Question: The Last shot rule?

THE PROCESS OF
CONTRACT
FORMATION

2.Consideration
The concept of ‘consideration’ is the principal way in which English courts decide whether an
agreement that has resulted from the exchange of offer and acceptance should be legally
enforceable.
In fact, one of the signal features of English Contract Law is the requirement that, to be
enforceable, a promise, not made enforceable by a seal or recordation with a court, must be
supported by consideration.
It is only where there is an element of mutuality about the exchange, with something being
given by each side, that a promise to perform will be enforced. A promise to make a gift will
not generally be treated as legally binding. It is the presence of consideration which makes
this promise binding as a contract. It is possible to see consideration as an important
indication that the parties intended their agreement to be legally binding as a contract.

Although there is a separate requirement of an intention to create legal relations, it is clear

that historically this requirement was also fulfilled by the requirement of consideration. While
the doctrine of consideration is crucial to English contract law, it has been applied with some
flexibility in recent years.
At common law a promise is only enforceable if supported by consideration.

In some circumstances, English courts will find that a promise given without consideration is
legally binding. These instances are decided upon on the basis of the doctrine of ‘promissory
estoppel’ and in this area the courts are concerned to protect the reasonable reliance of the
party who has relied upon the promise. These instances arise where there is a variation of
existing legal obligations.

While in English law documents under seal did not require consideration, documents under
seal have been eliminated in most American states, leaving the requirement of consideration
for most contracts.

The source of the requirement of “consideration” has an obscure origin. Treatise writers from
Powell through Parsons attributed the English doctrine of consideration to the concept of
causa in Civil Law (i.e., Roman law), but more recent writers reject that hypothesis.
Regardless of its origin, today the requirement of consideration remains a primary divider in
Common Law jurisdictions between contracts that are enforceable and those that are not.

The affixing of a seal to the contract proved the contract. this suggested that consideration
was not always required to make a contract enforceable. If consideration was not required of
all contracts, then its more likely role was as proof that the promisor intended to be legally
bound to perform the contract, and consideration was therefore merely one way to prove the
promisor’s intent to be bound.

The necessity and legitimacy of the requirement of consideration has been questioned many
times, but as Justice Oliver Wendell Holmes, Jr. wrote: “A common law judge could not say:
‘I think the doctrine of consideration a bit of historical nonsense, and shall not enforce it in
my court.’ Whatever its source, the requirement of consideration continues in Anglo-
American law to separate enforceable from unenforceable contracts.
The majority of agreements that qualify as legally enforceable contracts contain a bargained
for change in legal position between the parties, i.e., valuable consideration.
While substitute doctrines may permit enforcement of an agreement, only the presence of
valuable consideration on both sides of the bargain will make an executory bilateral contract
fully enforceable from the moment of formation.
Simply stated, consideration is the price for enforceability in the courts.

Definition of consideration
What is necessary for a promise to become binding is something in return.
The contract is defined as an exchange, a bargain. Even though this element of
consideration exists English courts can refuse to enforce a promise. They may examine the
intention of the parties
English contract law has the particularity of consideration.

The RESTATEMENT OF THE LAW OF CONTRACTS § 75 2 (1932) defines consideration:

Section 75. DEFINITION OF CONSIDERATION.
(1) Consideration for a promise is (a) an act other than a promise, or (b) a forbearance, or (c)
the creation, modification or destruction of a legal relation, or (d) a return promise, bargained
for and given in exchange for the promise.
(2) Consideration may be given to the promisor or to some other person. It may be given by
the promisee or by some other person.

The RESTATEMENT OF THE LAW OF CONTRACTS § 75(1)(d) (1932) says that to

constitute consideration reciprocal promises must be bargained for. Section 75, Comment b,
says that “consideration must actually be bargained for as the exchange for the promise.”
RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS § 71 (1981) says that “to
constitute consideration, a performance or promise must be bargained for.”

Elements of Consideration

With some exceptions a promise must be supported by consideration in order to be

enforceable. Consideration requires a bargained exchange in which each party incurs a legal
detriment.

Two elements are necessary to constitute consideration:

(i) there must be a bargained for exchange between the parties; and
(ii) that which is bargained for must be considered of legal value or, as it is traditionally
stated, it must constitute a benefit to the promisor or a detriment to the promisee.
Example: Jeff promises to sell his used television to Kristen for $100 in exchange for
Kristen’s promise to pay $100. Both elements of consideration are found in this example.
First, Jeff’s promise was bargained for. Jeff’s promise induced a detriment in the promisee,
Kristen. Kristen’s detriment induced Jeff to make the promise. Second, both parties suffered
detriments. The detriment to Jeff was the transfer of ownership of the television, and the
detriment to Kristen was the payment of $100 to Jeff.

Consideration Must Be Bargained For

In James v. Fulcrod, 5 Tex. 512, 1851 WL 3915 (Tex. 1851) (Hemphill, C.J.), the Court said
that “consideration may be defined to be something that is given in exchange, something
that is mutual, or something which is the inducement to the contract, and it must be a thing
which is lawful and competent in value to sustain the assumption.” The issue of what
constitutes consideration is a question of law.

In Philpot v. Gruninger, 81 U.S. 570, 577 (1871) (Strong, J.), the Court said: “Nothing is
consideration that is not regarded as such by both parties.”
The rule was again stated in Fire Ins. Ass’n v. Wickham, 141 U.S. 564, 579 (1891) (Brown,
J.), where the Court said: “To constitute a valid agreement there must be a meeting of minds
upon every feature and element of such agreement, of which the consideration is one. The
mere presence of some incident to a contract which might, under certain circumstances, be
upheld as a consideration for a promise, does not necessarily make it the consideration for
the promise in that contract. To give it that effect, it must have been offered by one party,
and accepted by the other, as one element of the contract.”

Oliver Wendell Holmes, Jr., wrote in THE COMMON LAW (1881): It is the essence of a
consideration, that, by the terms of the agreement, it is given and accepted as the motive or
inducement of the promise. Conversely, the promise must be made and accepted as the
conventional motive or inducement for furnishing the consideration. The root of the whole
matter is the relation of reciprocal conventional inducement, each for the other, between
consideration and promise.

Consideration is a bargained-for performance or return promise which is given by the

promisee in exchange for the promisor's promise. Consideration need not be furnished by or
to the parties themselves as long as it is part of the bargained exchange.
Even if the promisor's promise induced performance or a return promise by the promisee, if
such inducement was not sought by the promisor, there is no bargained exchange. In such
circumstances, the promise is merely an unenforceable gift.

Legal Detriment
A legal detriment exists where the party:
engages in an act that the party was not previously obligated – whether statutorily or
contractually – to perform; or
refrains from exercising a legal right

Under the pre-existing duty rule, a promise regarding a pre-existing obligation to the other
party does not constitute a legal detriment

2.1) Legal Detriment to Promisee

Legal detriment will result if the promisee does something he is under no legal obligation to
do or refrains from doing something that he has a legal right to do. It is important to
remember that the detriment to the promisee need not involve any actual loss to the
promisee or benefit to the promisor.

Example: Uncle promises Nephew $5,000 if he will refrain from drinking, smoking, swearing,
and gambling until he reaches age 21. Nephew’s refraining is a legal detriment, and because
it was bargained for, Uncle must pay the $5,000 if Nephew so refrains. [See Hamer v.
Sidway, 124 N.Y. 538 (1891)]
Note: Remember that the promisor must have sought to induce the detrimental act by his
promise

2.2) Legal Benefit to Promisor

A legal benefit to the promisor is simply the reverse side of legal detriment. In other words, it
is a forbearance or performance of an act by the promisee which the promisor was not
legally entitled to expect or demand, but which confers a benefit on the promisor.

Professor Langdell has pointed out the

irrelevancy of the notion of benefit to the
promisor, and makes detriment to the
promisee the universal test of consideration. This simplified definition has met with much
favor. It is concise, and it preserves the historic connection between the modern simple
contract and the ancient assumpsit in its primitive form of an action for damage to a
promisee by a deceitful promisor.”

Williston (1920) addressed the question of a benefit to the promisee or a detriment to the
promisor. Williston noted that Pollock and Langdell had suggested that a promise is
consideration sufficient to make a contract if it promises either a benefit to the promisee or a
detriment to the promisor. Williston noted Leake’s alternative standing that a promise to do
or not do something is consideration whenever the act or forbearance itself would constitute
consideration. Williston sided with Leake, citing a 1701 case where Lord Holt said: “where
the doing a thing will be a good consideration, a promise to do that thing will be too.”
The Texas Supreme Court, in Benson v. Phipps, 87 Tex. 578, 29 S.W. 1061, 1061 (1895),
said that “a promise to do what one is not bound to do, or to forbear what one is not bound
to forbear, is a good consideration for a contract.”
In the recent past, the Texas Supreme Court defined “consideration” as “‘either a benefit to
the promisor or a loss or detriment to the promisee.’” Northern Nat. Gas Co. v. Conoco, Inc.,
986 S.W.2d 603, 607 (Tex. 1998) (Hecht, J.).

Consideration must be ‘sufficient’ but need not be

‘adequate’
These words can seem interchangeable at first glance but they actually mean something
very different in this context. The requirement that consideration must be ‘sufficient’ means
that what is being put forward must be something which the courts will, or have recognised
as legally capable of constituting consideration.

The fact that it need not be ‘adequate’ indicates that the courts are not generally interested
in whether there is a match in value between what is being offered by each party, so no
need for proportionality. Thus in Thomas v Thomas (1842) the promise to pay £1 per annum
rent was clearly ‘sufficient’ to support the promise of a right to live in a house: the payment
of, or promise to pay, money is always going to be treated as being within the category of
valid consideration. On the other hand, the fact that £1 per annum was not a commercial
rent was irrelevant, because the courts do not concern themselves with issues of ‘adequacy’.

Consider the case of Chappell v Nestlé (1960). You will see that Lord Somervell justifies the
courts’ approach to the issue of ‘adequacy’ by reference to ‘freedom of contract’: ‘A
contracting party can stipulate for what consideration he chooses’. The courts will not
interfere just because it appears that a person has made a bad bargain. The person may
have other, undisclosed, reasons for accepting consideration that appears inadequate. In
the case of Chappell v Nestlé the reasoning was presumably that the requirement to send in
the worthless wrappers would encourage more people to buy the company’s chocolate.

If a bargain gives a party a choice of alternative obligations, each alternative on its own must
constitute sufficient consideration for the return promise.

Adequacy of consideration relates to whether the bargain involves an exchange of equal

value. Generally, however, courts do not concern themselves with whether consideration is
adequate, honoring the concept of freedom of contract. On the other hand, courts do require
consideration to be "sufficient", which relates to whether there is a legal detriment incurred
as part of a bargained exchange of promises or performances.

Existing obligations as good consideration

There are three aspects to this topic, dealing with three different types of existing obligation
which may be argued to constitute ‘consideration’.
Obligations which arise under the law, independently of any contract.
Obligations which are owed under a contract with a third party.
Obligations to perform an existing obligation under a contract to the same contracting party.
The third situation is, essentially, concerned with the variation of existing contractual
obligations as between the parties and the extent to which such variations can become
binding.

Obligations which arise

under law
Person carrying out duties which they are required to do under general law (i.e. independent
of contract), will not provide consideration, unless they do something extra

An example of the first type of existing obligation would be where a public official (such as a
firefighter or a police officer) agrees to carry out one or more of their duties in return for a
promise of payment from a member of the public. In that situation the promise of payment
will not generally be enforceable. This is either because there is no consideration for the
promise (the public official is only carrying out an existing duty) or, more probably, because
public policy generally suggests that the law should not encourage the opportunities for
extortion that enforcing such a promise would create.
Where, however, the official does more than is required by the existing obligation, then the
promise of payment will be enforceable.

Smith offers a $10,000 reward for recovery of his kidnapped daughter.

Jones, a police officer assigned to this case, recovers the daughter.
Jones’s performance of her official duty is not sufficient consideration

Obligations which are owed under a contract with a third

party
In the second type of situation, which regards the performance of, or promise to perform, an
existing obligation owed under a contract with a third party.
The promise to perform an existing obligation owed to a third party can constitute good
consideration.

Traditionally, when a preexisting duty was owed to a third party, courts held that the new
promise did not constitute consideration.
However, the modern view adopted by the Second Restatement and the majority of
jurisdictions states that the new promise constitutes consideration. [See Restatement
(Second) of Contracts §73]

Example: Saul Pimon contracts with Pam Promotor to sing at a concert in New York for
$25,000. Later, when Pimon threatens to cancel, Dud Dooright, a Pimon fan, offers to pay
Pimon an additional $5,000 if he sings at the concert.
Pimon appears and sings as agreed.
Under the traditional view, Pimon cannot enforce Dooright’s promise to pay the additional
$5,000, but under the majority view Pimon can enforce the promise because Pimon did not
owe a duty to Dooright under the original contract.

A promises B to teach for one hour at the University.

B promises to pay £X for that teaching.
C, one of the university students, promises to pay £Y for the hours teaching.
A agrees to do the teaching.
In this situation if A does the promised hours teaching they can claim both £X from B and £Y
from C. Although A has done no more than contractually obliged to do under the contract
with B, this is held to be valid consideration for the promise by C to pay £Y.
The consideration from A can be seen as the ‘detriment’ of being open to liability for breach
of contract to both B and C should A fail to perform.

Obligations to perform an existing obligation under a

contract to the same
contracting party
This is essentially where there is a variation to an existing contractual obligation between
contracting parties – this is the most difficult to employ as consideration. This results from
the fact that a principle which was clear, though impractical in some circumstances, has now
been modified and the extent of this modification is unclear.

Traditionally found not to be consideration. See

Stilk v. Myrick (1809); cf. Hartley v. Ponsonby (1857). Basic concern of courts here has been
to minimise risk of extortion and duress.
Now distinction needs to be drawn between
contractual duties to supply goods or services and
contractual duties to pay debts.

– Regarding (i) see Williams v. Roffey (1990): if one party’s promise to perform an existing
contractual duty to supply goods or services confers an extra practical benefit on the other
party, it will be sufficient consideration to make a promise given in return binding – as long
as no duress is involved and the parties are involved in genuine renegotiations of the
contract.

Duties to pay debts – where some person owes another person money, a promise by the
latter to accept a smaller repayment will only be binding if the debtor provides some extra
element as consideration.

New or Different Consideration Promised

If the promisee has given something in addition to what she already owes in return for the
promise she now seeks to enforce, or has in some way agreed to vary her preexisting duty,
such as by accelerating performance, there is consideration. It is important to note that it is
usually immaterial how slight the change is, because courts are anxious to avoid the
preexisting duty rule.

Voidable Obligation
A promise to perform a voidable obligation (i.e., ratification) is enforceable despite the
absence of new consideration. Thus, an infant’s (i.e., minor’s) ratification of a contract upon
reaching the age of majority is enforceable without new consideration, as is a defrauded
person’s promise to go through with the tainted contract after learning of the fraud.

Illusory Promises
An illusory promise cannot serve as consideration. An illusory promise may exist where a
promise is subject to a condition which is within the control of the promisor, especially where
such condition is related to the contract performance, or when the promisor, at the time of
the promise is made, knows that such condition cannot occur.

Agreements for exclusive dealings may appear to be based on an illusory promise since the
promisor's performance is subject to conditions within its control. Nevertheless, common law
and the UCC have recognized an implied promise to use best efforts in an agreement for
exclusive dealings, which furnishes the necessary consideration. [See Wood v. Lucy, Lady
Duff-Gordon, 222 N.Y. 88 (1917) (involving an agreement by the defendant to give the
plaintiff the exclusive right to market its name and designs); UCC § 2-306(2)]

Presumption of Consideration
In 1855, the Texas Legislature enacted a statute that provided that every contract in writing
made after the effective date of the statute “shall be held to import a consideration as fully,
and in the same manner as sealed instruments have heretofore done.” The law was
broadened in 1873 to apply to any instrument in writing.

In 1890, the Texas Legislature enacted Revised Statute art. 4488 providing that all written
instruments import a consideration. Revised Statute art. 1265 provided that a denial of
consideration for a written instrument must be sworn. The sworn plea did not, however, put
the burden on the party seeking enforcement to prove consideration. It was the party
seeking to avoid enforcement had the burden to prove lack of consideration. Newton v.
Newton, 77 Tex. 508, 14 S. W. 157, 158 (1890).

Lack of Consideration as a Defense to a Contract Claim.

Since the Common Law required consideration in order for a promise to become binding, a
lack of consideration meant that no binding promise had been made. “Lack of consideration
occurs when the contract, at its inception, does not impose obligations on both parties.”
Burges v. Mosley, 304 S.W.3d 623, 628 (Tex. App.--Tyler 2010, no pet.). The defense must
be pled and verified by affidavit. Tex. R. Civ. P. 93.9.
Legislative Modifications of the Requirement of Consideration
The requirement of consideration is a court-created rule, but it is subject to legislative
override. many American legislatures eliminated contracts under seal, which effectively
eliminated contracts made without consideration that relied purely on the form of the contract
(i.e., a seal) for enforceability. U.C.C. § 1-107 permits a party, without consideration, to
release another party from liability for a breach of contract by signing and delivering a written
waiver or renunciation. Under the Common Law, promises to leave an offer open were not
binding due to lack of consideration. U.C.C. § 2-205 permits a merchant, without
consideration, to make a “firm offer” that remains open for a set period of time not to exceed
three months. U.C.C. § 2- 209(1) provides: “[a]n agreement modifying a contract within this
Article needs no consideration to be binding.”

Promissory estoppel

The doctrine of promissory estoppel is concerned with the modification of existing contracts.
The position under the classical common law of contract was that such modification would
only be binding if consideration was supplied and a new contract formed.

Thus in a contract to supply 50 tons of grain per month at £100 per ton for 5 years, if the
buyer wanted to negotiate a reduction in the price to
£90 per ton, because of falling grain prices, this could only be made binding if the buyer
gave something in exchange (for example, agreeing to contribute to the costs of
transportation). Alternatively the two parties could agree to terminate their original
agreement entirely, and enter into a new one. The giving up of rights under the first
agreement by both sides would have sufficient mutuality about it to satisfy the doctrine of
consideration.

Generally the modification of a contract requires consideration in order to be binding. The

doctrine of promissory estoppel, however, provides that in certain circumstances a promise
may be binding even though it is not supported by consideration.

The main use of the doctrine has been in relation to the modification of contracts, but it is not
clear whether it is limited in this way. The doctrine is only available as a shield, not a sword;
there must have been reliance on the promise; it must be inequitable to allow the promisor to
withdraw the promise; but it may well be possible to revive the original terms of the contract
by giving reasonable notice.

The equitable doctrine of promissory estoppel has developed to supplement the common
law rules. This allows, in certain circumstances, promises to accept a modified performance
of a contract to be binding, even in the absence of consideration.
The origin of the modern doctrine of promissory estoppel is found in cases such as Hughes v
Metropolitan Railways but was more widely developed in the judgment of Denning J in the
case of Central London Property Trust Ltd v High Trees House Ltd (1947).
The facts of the case concerned the modification of the rent payable on a block of flats
during the Second World War. The importance of the case, however, lies in the statement of
principle which Denning set out – to the effect that ‘a promise intended to be binding,
intended to be acted on, and in fact acted on, is binding so far as its terms properly apply’.
Applying this principle, Denning held that a promise to accept a lower rent during the war
years was binding on the landlord, despite the fact that the tenant had supplied no
consideration for it.

The limitations on promissory estoppel

The doctrine of estoppel has been considered in a number of reported cases since 1947 and
now has fairly clearly defined limits.
Need for existing legal relationship It is generally accepted that promissory estoppel
operates to modify existing legal relationships, rather than to create new ones. The main
proponent of the opposite view is Lord Denning who, in Evenden v Guildford City FC (1975),
held that promissory estoppel could apply in a situation where there appeared to be no
existing legal relationship at all between the parties.

Need for reliance At the heart of the concept of promissory estoppel is the fact that the
promisee has relied on the promise. It is this that provides the principal justification for
enforcing the promise.

A ‘shield not a sword’ This is related to the first point (concerning the need for an existing
relationship). The phrase derives from the case of Combe v Combe (1951). A wife was trying
to sue her former husband for a promise to pay her maintenance. Although she had provided
no consideration for this promise, at first instance she succeeded on the basis of promissory
estoppel. The Court of Appeal, however, including Lord Denning, held that promissory
estoppel could not be used as the basis of a cause of action in this way. Its principal use was
to provide protection for the promisee. As Lord Denning put it: consideration ‘remains a
cardinal necessity of the formation of a contract, though not of its modification or discharge.’

Must be inequitable for the promisor to go back on the promise The doctrine of promissory
estoppel has its origins in equitable ‘waiver’. It is thus regarded as an equitable doctrine. The
importance of this is that a judge is not obliged to apply the principle automatically, as soon
as it is proved that there was a promise modifying an existing contract which has been relied
on. There is a residual discretion whereby the judge can decide whether it is fair to allow the
promise to be enforced.

The way that this is usually stated is that it must be inequitable for the promisor to withdraw
the promise. What does ‘inequitable’ mean? It will cover situations where the promisee has
extracted the promise by taking advantage of the promisor.
This was the case, for example, in D & C Builders v Rees (1966) where the promise of a firm
of builders to accept part payment as fully discharging a debt owed for work done was held
not to give rise to a promissory estoppel, because the debtor had taken advantage of the
fact that she knew that the builders were desperate for cash. Impropriety is not necessary,
however, as shown by The Post Chaser (1982), where the promise was withdrawn so
quickly that the other side had suffered no disadvantage from their reliance on it. In those
circumstances it was not inequitable to allow the promisor to escape from the promise.

Doctrine is generally suspensory Whereas a contract modification which is supported by

consideration will generally be of permanent effect, lasting for the duration of the contract,
the same is not true of promissory estoppel. Sometimes the promise itself will be time
limited. Thus in High Trees House it was accepted that the promise to take the reduced rent
was only to be applicable while the Second World War continued. Once it came to an end,
the original terms of the contract revived. In other cases, the promisor may be able to
withdraw the promise by giving reasonable notice.

Where ‘promise’ is prohibited by legislation Evans v Amicus Healthcare Ltd (2003)

concerned the use of embryos created by IVF prior to the breakdown of the couple’s
relationship. The man wished the embryos to be destroyed, the woman to have the embryos
used. In this context it was found, inter alia, that the man had not given such assurances to
the woman as to create a promissory estoppel because the relevant legislation allowed him
to withdraw his consent to the storage of the embryos at any time.

A clear and unambiguous statement Where the words used to make the statement claimed
as the basis for a promissory estoppel were ambiguous and capable of being interpreted in
several ways (including one which would not support the estoppel) then the words could not
be said to found an estoppel unless the representee sought and obtained clarification of the
statement.

PROMISSORY ESTOPPEL OR DETRIMENTAL RELIANCE

Consideration is not necessary if the facts indicate that the promisor should be estopped
from not performing. A promise is enforceable if necessary to prevent injustice if:
The promisor should reasonably expect to induce action or forbearance; and
Such action or forbearance is in fact induced.

If the elements for promissory estoppel are present, some jurisdictions will award
expectation damages (i.e., what was promised under the contract), but the Second
Restatement provides that the remedy “may be limited as justice requires.” Thus, a
jurisdiction following the Second Restatement might award only reliance damages (i.e.,
whatever the promisee spent in reliance on the promise), which usually is something less
than expectation damages, but theoretically can exceed them.

THE PROCESS OF
CONTRACT
FORMATION

REQUIREMENT THAT
NO DEFENSES EXIST
Even if an agreement is supported by valuable consideration or a recognized substitute,
contract rights may still be unenforceable because there is a defense to formation of the
contract, because there is a defect in capacity (making the obligations voidable by one of the
parties), or because a defense to enforcement of certain terms exists.

ABSENCE OF MUTUAL ASSENT

Mutual Mistake as to Existing Facts
A mutual mistake is generally a mistaken assumption shared by both parties. Thus, when
both parties entering into a contract are mistaken about existing facts (not future
happenings) relating to the agreement, the contract may be voidable by the adversely
affected party if:
The mistake concerns a basic assumption on which the contract is made (e.g., the parties
think they are contracting for the sale of a diamond but in reality the stone is a cubic
zirconia);
The mistake has a material effect on the agreed-upon exchange (e.g., the cubic zirconia is
worth only a hundredth of what a diamond is worth); and
The party seeking avoidance did not assume the risk of the mistake.

a. Not a Defense If Party Bore the Risk Mutual mistake is not a defense if the party asserting
mistake as a defense bore the risk that the assumption was mistaken. This commonly
occurs when one party is in a position to better know the risks than the other party (e.g.,
contractor vs. homeowner) or where the parties knew that their assumption was doubtful
(i.e., when the parties were consciously aware of their ignorance). In other words, to be a
defense it must be a mistake, not a mere uncertainty.
– Examples: 1) Homeowner contacts builder regarding the cost of installing an inground
pool. Builder bids $15,000 and Homeowner accepts. While digging the hole for the pool,
Builder encounters an unexpected slab of granite. Blasting away the granite will add 20% to
Builder’s costs, making the contract unprofitable. Builder will be held to have assumed the
risk.

Mistake in Value Generally Not a Defense If the parties to a contract make assumptions as
to the value of the subject matter, mistakes in those assumptions will generally not be
remedied—even though the value of the subject matter is generally a basic assumption and
the mistake creates a material imbalance—because both parties usually assume the risk
that their assumption as to value is wrong. However, it is possible for the facts to show that
the adversely affected party
did not assume the risk in determining value.

Example: Roger finds a stone that appears to be valuable and shows it to his friend Betsy.
The two properly determine that the stone is a topaz. Roger believes the topaz is worth
$500, and Betsy believes the topaz is worth $50, but Roger agrees to sell it to Betsy for
$200. The parties subsequently discover that the topaz is worth $600. Roger cannot void the
contract because he knew that the parties did not know the true value of the stone, and so
assumed the risk that their valuation was incorrect.

Compare: Same facts as above, but because Roger and Betsy did not know the value of a
topaz, they took it to Jeweler, who told them the stone was worth $200. Subsequently, Roger
discovers that Jeweler knows nothing about topaz stones and determines that the stone was
worth $600. Roger can void the contract for mutual mistake and force Betsy to return the
stone because here the facts show that the parties did not intend to assume the risk of
determining value (because they sought out an expert to determine the true value).

ABSENCE OF MUTUAL ASSENT

Unilateral Mistake
Unilateral mistakes arise most commonly when one party makes a mechanical error in
computation. If only one of the parties is mistaken about facts relating to the agreement, the
mistake will not prevent formation of a contract. However, if the nonmistaken party knew or
had reason to know of the mistake made by the other party, the contract is voidable by the
mistaken party.

As is the case with mutual mistake, for the contract to be voidable, the mistake must have a
material effect on the agreed upon exchange and the mistaken party must not have borne
the risk of the mistake.
Materiality is determined by the overall impact on both parties. Ordinarily this is proven by
showing the exchange is much less desirable to the mistaken party and more advantageous
to the nonmistaken party.
Example: Seller agrees to sell Buyer a number of different items of hardware. Seller
computes the total price at $15,000, and Buyer agrees to pay this amount. Subsequently,
Seller discovers that he made an error in computation and the price should be
$17,000. In this situation, the preferred analysis is that there is a contract at $15,000,
assuming that Buyer was reasonably unaware of the unilateral computation error. Note also
that the error was not an error in the offer; the mistake was antecedent to the offer by Seller.
When Seller stated the offer at
$15,000, he meant $15,000.

Compare: Homeowner asks four contractors to submit bids to build a two- car garage on
Homeowner’s property. When Homeowner receives the bids they are: $17,000, $19,000,
$19,500, and
$9,000. The last bid was due to a
typographical error. Homeowner will not be able to snap up the $9,000 offer because he
should have known, based on the other bids, that the $9,000 bid probably contained an
error.

a. Unilateral Mistake May Be Canceled in Equity There is authority in a number of cases that
contracts with errors, such as mistakes in computation, may be canceled in equity, assuming
that the nonmistaken party has not relied on the contract. There is also modern authority
indicating that a unilateral mistake that is so extreme that it outweighs the other party’s
expectations under the agreement will be a ground for cancellation of the contract.

b. Error in Judgment An error in judgment by one of the parties as to the value or quality of
the work done or goods contracted for will not result in a voidable contract, even if the
nonmistaken party knows or has reason to know of the mistake made by the other party.

Examples

1) Seller offers to sell her car to Buyer for $500, and Buyer accepts. Buyer knows that
Seller’s car has a market value of $1,500 and that this fact is unknown to Seller. The
contract is enforceable.

2) Seller advertises a particular dredge for sale. After an employee of Buyer inspects the
dredge, Buyer offers $35,000 for it, which Seller accepts. Prior to the delivery of the dredge,
Buyer discovers that the dredge will not perform certain operations in shallow water, which
was the central purpose Buyer intended for the dredge. The contract is not voidable by
Buyer because Buyer’s unilateral mistake was a mistake in judgment about goods
contracted for.
ABSENCE OF MUTUAL ASSENT
3Mistake by the Intermediary (Transmission)
When there is a mistake in the transmission of an offer or acceptance by an intermediary,
the prevailing view is that the message as transmitted is operative unless the other party
knew or should have known of the mistake.

Example: Harry put his home up for sale at the price of $340,000. After viewing the home,
Sally called her attorney and asked him to prepare an offer to purchase the home for
$313,000. The attorney misunderstood Sally and prepared an offer for $330,000 and
transmitted the offer to Harry. Harry accepted. Assuming that the attorney had the power to
bind Sally, a contract was formed to buy the house for $330,000, despite the attorney’s
mistake in transmitting the price.

Compare: Same facts as above, but Sally asked her attorney to prepare an offer for
$318,000 and the attorney misunderstood and submitted an offer for
$380,000. Here, Sally probably would not be bound because Harry probably should have
known of the error as the offer substantially exceeded his asking price.

ABSENCE OF MUTUAL ASSENT

Misunderstanding—Ambiguous Contract Language

Contract language with at least two possible meanings leads to different results depending
on the awareness of the parties. Most often there is no contract because there is no meeting
of the minds.

Neither Party Aware of Ambiguity— No Contract If neither party was aware of the ambiguity
at the time of contracting, there is no contract unless both parties happened to intend the
same meaning.

Example: Buyer agrees to purchase cotton from Seller when the cotton is delivered by a ship
named Peerless. This is the total expression of the agreement. It is subsequently determined
that Buyer contemplated a ship named Peerless that was to dock in September while Seller
contemplated a ship named Peerless that was to dock in December. Neither party was
aware that there were two ships named Peerless. Their subsequent expression of the ship
each intended indicates that they did not intend the same ship at the time of contracting.
Therefore, there is no contract.

b. Both Parties Aware of Ambiguity—No Contract If both parties were aware of the ambiguity
at the time of contracting, there is no contract unless both parties in fact intended the same
meaning.
c. One Party Aware of Ambiguity— Contract If one party was aware of the ambiguity and the
other party was not at the time of contracting, a contract will be enforced according to the
intention of the party who was unaware of the ambiguity.

Example: Collector agrees to purchase a Picasso sketch from Gallery. It is subsequently

determined that Gallery has two sketches and that Gallery intended to sell one of these to
Collector while Collector intended to buy the other one. Collector did not know that Gallery
owned two sketches; Gallery, of course, knew that it did. Here, there is a contract for the
sketch that Collector had in mind because this is a situation in which one party knew of the
ambiguity (Gallery) while the other party did not (Collector).

d. Subjective Intention of Parties Controls While the objective test is used in contract law
generally, the latent ambiguity situation is unique in that the courts look to the subjective
intention of the parties. This is because the objective test simply does not work in this
situation. The objective manifestations of the parties appear to be perfectly clear but
subsequent facts indicate the latent ambiguity. It is then necessary to receive evidence of
what each party subjectively thought at the time of contracting.

ABSENCE OF MUTUAL
ASSENT
Misrepresentation

Fraudulent Misrepresentation
Negligent innocet Misrepresentation

a. Fraudulent Misrepresentation (Fraud in the Inducement)—Contract Voidable

A misrepresentation is a false assertion of fact. It is fraudulent if it is intended to induce a
party to enter into a contract and the maker knows or believes the assertion is false or knows
that he does not have a basis for what he states or implies with the assertion. A fraudulent
assertion can be inferred from conduct; i.e., concealment or sometimes even nondisclosure
may be considered a misrepresentation. If a party induces another to enter into a contract by
using fraudulent misrepresentation (e.g., by asserting information she knows is untrue), the
contract is voidable by the innocent party if she justifiably relied on the fraudulent
misrepresentation. This is a type of fraud in the inducement

Example: Buyer agreed to buy a painting from Seller because Seller told her that the
painting previously had been owned by Bubbles Springfield, a famous rock star. In fact,
Seller knew that Springfield had never owned the painting. Buyer’s promise is voidable if she
justifiably relied on Seller’s misrepresentation.
1) Concealment and Nondisclosure An action intended to prevent another from learning a
fact is the equivalent of asserting that a fact does not exist. Similarly, if a party frustrates an
investigation by the other party or falsely denies knowledge of a fact, it can be considered a
misrepresentation. Note, however, that nondisclosure without concealment usually is not a
misrepresentation. A party is not required to tell everything he knows to the other party, but if
the nondisclosure is either material or fraudulent, the contract is voidable for
misrepresentation. [See Restatement (Second) of Contracts §§159 - 164]

2) Distinguish—Fraud in the Factum If one of the parties was tricked into giving assent to the
agreement under circumstances that prevented her from appreciating the significance of her
action, the agreement cannot be enforced; it is void.

Example: Joe Rocket, a famous football player, signs autographs after each game. After one
game, a fan handed him a paper to sign that was in reality the last page of a contract. The
contract is void due to fraud in the factum because Rocket was tricked into signing it.

b. Nonfraudulent Misrepresentation— Contract Voidable If Material Even if a

misrepresentation is not fraudulent, the contract is voidable by the innocent party if the
innocent party justifiably relied on the misrepresentation and the misrepresentation was
material.

A misrepresentation is material if:

it would induce a reasonable person to agree, or
the maker knows that for some special reason it is likely to induce the particular recipient to
agree, even if a reasonable person would not.

Example: Same facts as in the painting example, except that Seller truly believed that the
painting had once belonged to Springfield. Because a famous prior owner would likely make
a reasonable person agree to buy a painting, the misrepresentation is material. Therefore,
Buyer’s promise is voidable if she justifiably relied on Seller’s misrepresentation.

c. Justified Reliance A party’s reliance on a misrepresentation must be justified for the

contract to be voidable; i.e., he is not entitled to relief if the reliance was unreasonable under
the circumstances. However, the mere fact that the misrepresentation could have been
revealed by the exercise of reasonable care does not mean reliance was unjustified.

For example, a party’s failure to read a contract or use care in reading it will not necessarily
preclude him from avoiding the contract.
Example: Able and Baker agree that Able will mow Baker’s lawn weekly for $50. Able draws
up a contract, hands it to Baker, and states that it is the written version of their agreement. In
fact, the writing states that Baker will pay Able $60 per week for the mowing. Baker signs the
contract without reading it, despite having an opportunity to do so. Baker can void the
contract.

d. Innocent Party May Rescind Agreement The innocent party need not wait until she is sued
on the contract, but may take affirmative action in equity to rescind the agreement. The right
to rescind the agreement exists even if the terms are fair or beneficial to the misled party.
The right to void or rescind such a contract may be lost, however, if the party so induced
affirms the contract in question.

e. Remedies for Fraud In addition to rescission, remedies for material misrepresentation or

fraud include all remedies available for breach
In a contract for the sale of goods, neither rescission nor the return of the goods is
inconsistent with a claim for damages. [UCC §2-721] Note that the time period to bring an
action for fraud does not run until the party knows or should have known of the fraud

PUBLIC POLICY DEFENSES— ILLEGALITY

If either the consideration or the subject matter of a contract is illegal, this will serve as a
defense to enforcement. Contracts may be illegal because they are inconsistent with the
Constitution, violate a statute, or are against public policy as declared by the courts.

Some Typical Cases of Illegality Some of the most common areas in which problems of
illegality have arisen are:
Agreements in restraint of trade;
Gambling contracts;
Usurious contracts;
Agreements obstructing administration of justice;
Agreements inducing breach of public fiduciary duties; and
Agreements relating to torts or crimes.

PUBLIC POLICY DEFENSES— ILLEGALITY

Effect of Illegality
Generally Contract Is Void: Illegal consideration or subject matter renders a contract void
and unenforceable. In a close case, a court may sever an illegal clause from the contract
rather than striking down the entire contract.
Effect Depends on Timing of Illegality:
If the subject matter or consideration was illegal at the time of the offer, there was no valid
offer.
If it became illegal after the offer but before acceptance, the supervening illegality operates
to revoke the offer.
If it became illegal after a valid contract was formed, the supervening illegality operates to
discharge the contract because performance has become impossible .
3. Limitations on Illegality
Defense
a. Plaintiff Unaware of Illegality If the plaintiff contracted without knowledge that the
agreement was illegal and the defendant acted with knowledge of the illegality, the innocent
plaintiff may recover on the contract.

b. Parties Not in Pari Delicto A person may successfully seek relief if he was not as culpable
as the other.
Example: Punter, a casual bettor, may recover against Booker, a professional bookie.

c. Licensing—Revenue Raising vs. Protection If a contract is illegal solely because a party

does not have a required license, whether the contract will be enforceable depends on the
reason for the license:
1) Revenue Raising—Contract Enforceable If the license is required merely to raise revenue
(e.g., a city requires all vendors at a fair to pay a $25 license fee), the contract generally is
enforceable.
2) Protection of Public—Contract Not Enforceable If the license is required to ensure that the
licensee meets minimum requirements to protect the public welfare (e.g., a license to
practice law, medicine, accounting, etc.), the contract is void. This means that even if the
unlicensed party performs perfectly under the contract, the party cannot collect any damages

DEFENSES BASED ON LACK OF CAPACITY

■1. Legal Incapacity to Contract Individuals in certain protected classes are legally incapable
of incurring binding contractual obligations. Timely assertion of this defense by a promisor
makes the contract voidable at his election.

a. Contracts of Infants (Minors)

■1) Who Is an Infant?

The age of majority in most jurisdictions is 18. However, in many states, married persons
under age 18 are considered adults.
.

■2) Effect of Infant’s Contract

Infants generally lack capacity to enter into a contract binding on themselves. However,
contractual promises of an adult made to an infant are binding on the adult. In other words, a
contract entered into between an infant and an adult is voidable by the infant but binding on
the adult
■ 3) Disaffirmance An infant may choose to disaffirm a contract any time before (or shortly
after) reaching the age of majority. If a minor chooses to disaffirm, she must return anything
that she received under the contract that still remains at the time of disaffirmance. However,
there is no obligation to return any part of the consideration that has been squandered,
wasted, or negligently destroyed.

■a) Exceptions Most states have created a small number of statutory exceptions to the rule
that minors can disaffirm their contracts (e.g., student loan agreements, insurance contracts,
agreements not to reveal an employer’s proprietary information, etc.).

■ b) Contracts for Necessaries “Necessaries” generally includes food, shelter, clothing,

medical care, medicines, and other items necessary for the minor’s subsistence, health, or
education. A minor may disaffirm a contract for necessaries but in most states will be liable
in restitution for the value of benefits received

■4) Affirmance upon Majority An infant may affirm, i.e., choose to be bound by his contract,
upon reaching majority. He affirms either expressly or by conduct, e.g., failing to disaffirm the
contract within a reasonable time after reaching majority.

■ b. Mental Incapacity One whose mental capacity is so deficient that he is incapable of

understanding the nature and significance of a contract may disaffirm when lucid or by his
legal representative. He may likewise affirm during a lucid interval or upon complete
recovery, even without formal restoration by judicial action. In other words, the contract is
voidable. As in the case of infants, mentally incompetent persons are liable in quasi- contract
for necessaries furnished to them.

■ c. Intoxicated Persons One who is so intoxicated that he does not understand the nature
and significance of his promise may be held to have made only a voidable promise if the
other party had reason to know of the intoxication. The intoxicated person may affirm the
contract upon recovery. Once again, there may be quasi- contractual recovery for
necessaries furnished during the period of incapacity

■2. Duress and Undue Influence Contracts induced by duress (e.g., “sign the contract or I’ll
break your legs”) or undue influence are voidable and may be rescinded as long as not
affirmed.

■a. Duress There are two types of duress. In the first, a party is physically forced to sign
against her will; e.g., a stronger person grabs her hand and signs the contract with the
victim’s hand or the victim signs the contract at gunpoint. With this type of physical-
compulsion duress, the contract is void.

■ The much more common type of duress arises when a party’s assent to a contract is
induced by an improper threat by the other party that leaves the victim no reasonable
alternative. In these cases, the contract is voidable by the victim. [See Restatement
(Second) of Contracts §175]
■ Examples of this type of duress include threats of bodily harm to the victim or her family
and threats to bring unfounded criminal or civil charges.

■Example: Able tells Baker that Baker must sign a business contract with Able in which all
provisions greatly favor Able.
Able states that if Baker fails to sign, Able will hire someone to hurt Baker’s teenage
daughter. Baker signs the agreement. The contract is voidable at Baker’s option.

■ 1) Economic Duress Generally Not a Defense Generally, taking advantage of another

person’s economic needs is not a defense. However, withholding something someone wants
or needs will constitute economic duress if:
The party threatens to commit a wrongful act that would seriously threaten the other
contracting party’s property or finances; and

There are no adequate means available to prevent the threatened loss.

■ Example: Barry buys his dream home for

$700,000. A few years later, Barry loses his job, stops making mortgage payments, and is
threatened with foreclosure. Because of the economy, houses are not selling in Barry’s
neighborhood, so his friend Freida offers to buy Barry’s house for the $500,000 that he owes
on it. Before the closing, Barry finds a job and does not want to sell the house. Barry is
bound; his economic duress is not a defense.

■ b. Undue Influence Undue influence is unfair persuasion of a party who is under the
domination of the person exercising the persuasion or who by virtue of the relationship
between them is justified in assuming that that person will not act in a manner inconsistent
with his welfare. [Restatement (Second) of Contracts §177]
■ The elements of undue influence are often described as undue susceptibility to pressure
by one party and excessive pressure by the other. Other factors considered are the
unfairness of the resulting bargain and the availability of independent advice.

STATUTE OF FRAUDS
■ In most instances, an oral contract is valid. However, certain agreements, by statute, must
be evidenced by a writing signed by the party sought to be bound.
■ 1. Writing Requirement The Statute of Frauds does not require a formal written contract.
Among other things, the writing could be a receipt, a letter, a check with details in the memo
line, or a written offer that was accepted orally.

■ The Statute requires only one or more writings, signed by the party to be charged, that:
reasonably identify the subject matter of the contract,
indicate that a contract has been made between the parties, and
state with reasonable certainty the essential terms of the unperformed promises.
[Restatement (Second) of Contracts §131].

■a. Electronic Record Satisfies Writing Requirement

Whenever a law, such as the Statute of Frauds, requires a record to be in writing, an
electronic record satisfies that law. [Uniform Electronic Transactions Act (“UETA”) §7(c)]
Thus, the writing requirement may be satisfied by an e-mail.

■ b. Essential or Material Terms If a writing does not contain the essential terms of the
agreement, it does not satisfy the Statute and the contract cannot be enforced. There is no
definitive list of essential terms. They vary depending on the situation. What is essential
depends on the agreement, its context, and the subsequent conduct of the parties, including
the dispute that has arisen. There must be enough in the writing to enable a court to enforce
the contract. If an element is contained in the writing, evidence is admissible to explain the
particulars. If, however, a term is missing and cannot be supplied by implication or rule of
law, evidence will not be admitted to add it.

The essential terms normally include

■ the identity of the parties,
■description of the subject matter,
■ and the terms necessary to make the contract definite.

■2. Signature Requirement The signature requirement is liberally construed by most courts.
A signature is any mark or symbol made with the intention to authenticate the writing as that
of the signer. It need not be handwritten; it can be printed or typed. Under the UCC, even a
party’s initials or letterhead may be sufficient.
■ a. Electronic Signature The signature requirement may be satisfied by an electronic
signature. As with paper signatures, whether a record is “signed” is a question of fact. No
specific technology is necessary to create a valid signature. If the requisite intent is present,
one’s name as part of an e-mail may suffice as a signature, as may the firm name on a
facsimile (fax).

■ 3. Agreements Covered
■ a. Executor or Administrator Promises Personally to Pay Estate Debts A promise by an
executor or administrator to pay the estate’s debts out of his own funds must be evidenced
by a writing.
■ b. Promises to Pay Debt of Another (Suretyship Promises)
■ 1) Must Be a Collateral Promise A promise to answer for the debt or default of another
must be evidenced by a writing. The promise may arise as a result of a tort or contract, but it
must be collateral to another person’s promise to pay, and not a primary promise to pay.

■Example: “Give him the goods, and if he does not pay, I will.” This promise is a collateral
promise and must be evidenced by a writing. But if the promise is, “Give him the goods, and
I will pay for them,” the promise is a primary promise and need not be evidenced by a
writing.

■2) Main Purpose Must Not Be Pecuniary Interest of Promis or If the main purpose or
leading object of the promisor is to serve a pecuniary interest of his own, the contract is not
within the Statute of Frauds even though the effect is still to pay the debt of another.

■ Example: Ernie contracted with ABC Co. to have some machines custom-made for his
factory. He promised ABC Co.’s supplier that if it would continue to deliver materials to ABC,
Ernie would guarantee ABC Co.’s payment to the supplier. This promise need not be in
writing because Ernie’s main purpose in guaranteeing payment was to assure that ABC Co.
had adequate supplies to build his machines.

■ c. Promises in Consideration of Marriage A promise the consideration for which is

marriage must be evidenced by a writing. This applies to promises that induce marriage by
offering something of value (other than a return promise to marry— e.g., “if you marry my
son, I will give the two of you a house”).
■d. Interest in Land A promise creating an interest in
land must be evidenced by a writing. This includes not only
agreements for the sale of real property, but also other agreements pertaining
to land.(Leases,Mortgages, Easements)

■ f. Goods Priced at $500 or More A contract for the sale of goods for a price of $500 or
more is within the Statute of Frauds and generally must be evidenced by a signed writing to
be enforceable. Note that a writing is sufficient even though it omits or incorrectly states a
term, but the contract is not enforceable beyond the quantity of goods shown in the writing.
■ When Writing Not Required There are three situations described in UCC section 2-201(3)
in which contracts are enforceable without the writing described above.

2) Merchants—Confirmatory Memo Rule In contracts between merchants, if one party, within

a reasonable time after an oral agreement has been made, sends to the other party a written
confirmation of the understanding that is sufficient under the Statute of Frauds to bind the
sender, it will also bind the recipient if: (i) he has reason to know of the confirmation’s
contents; and (ii) he does not object to it in writing within 10 days of receipt. [UCC §2-201(2)]

4. Effect of Noncompliance with the Statute Under the majority rule, noncompliance with the
Statute of Frauds renders the contract unenforceable at the option of the party to be charged
(i.e., the party being charged may raise the lack of a sufficient writing as an affirmative
defense). If the Statute is not raised as a defense, it is waived.

5. Remedies If Contract Is Within Statute If a contract is within the Statute of Frauds and
there is noncompliance with the Statute with no applicable exception, in almost all cases a
party can sue for the reasonable value of the services or part performance rendered, or the
restitution of any other benefit that has been conferred.
This recovery would be in quantum meruit rather than a suit on the contract. The rationale is
that it would be unjust to permit a party to retain benefits received under the failed contract
without paying for them.

6. Contract Made by Agent The problem: A given contract is required under state law to be
evidenced by a writing. An agent now purports to enter into such a contract on behalf of her
principal. Must the agent’s authority also be in writing? Most states would answer no, except
for contracts involving interests in real property. A few states would answer yes as to all such
contracts pursuant to the states’ equal dignities statutes. However, even where written
authority would otherwise be required, written authority may be dispensed with if the agent
contracted in the presence and under the direction of the principal or if the principal later
ratified the contract in writing.
UNCONSCIONABILITY
The concept of unconscionability allows a court to refuse to enforce a provision or an entire
contract (or to modify the contract) to avoid “unfair” terms. It is sometimes said that there are
two types of unconscionability: substantive unconscionability (i.e., unconscionability based
on price alone) and procedural unconscionability (i.e., unconscionability based on unfair
surprise or unequal bargaining power). However, few cases recognize substantive
unconscionability based on unfair price alone. Instead, the cases have dealt mostly with
procedural unconscionability.

1. Common Instances of Procedural Unconscionability

a. Inconspicuous Risk-Shifting Provisions Standardized printed form contracts often contain
a material provision that seeks to shift a risk normally borne by one party to the other.
Examples of such provisions are:
(i) Confession of judgment clauses, which are illegal in most states;
(ii) Disclaimer of warranty provisions; and
(iii) “Add-on” clauses that subject all of the property purchased from a seller to repossession
if a newly purchased item is not paid for.
Typically, such clauses are found in the fine print (“boilerplate”) in printed form contracts.
Courts have invalidated these provisions because they are inconspicuous or
incomprehensible to the average person, even if brought to his actual attention.

b. Contracts of Adhesion—“Take It or Leave It” Courts will deem a clause unconscionable

and unenforceable if the signer is unable to procure necessary goods, such as an
automobile, from any seller without agreeing to a similar provision. The buyer has no choice.

c. Exculpatory Clauses An exculpatory clause releasing a contracting party from liability for
his own intentional wrongful acts is usually found to be unconscionable because such a
clause is against public policy in most states. Exculpatory clauses for negligent acts may be
found to be unconscionable if they are inconspicuous (as discussed above), but commonly
are upheld if they are in contracts for activities that are known to be hazardous (e.g., a
contract releasing a ski hill operator for liability for negligence often will be upheld).

d. Limitations on Remedies A contractual clause limiting liability for damages to property

generally will not be found to be unconscionable unless it is inconspicuous. However, if a
contract limits a party to a certain remedy and that remedy fails of its essential purpose, a
court may find the limitation unconscionable and ignore it. Note that under the UCC any
limitation on consequential damages for personal injury caused by consumer goods is prima
facie unconscionable. [See UCC §2-719]
Example: An automobile dealership sells a car and the contract provides that the dealer’s
liability for defects in the car is limited to repair or replacement. Generally, such a clause is
not unconscionable. However, if a particular customer brings his car back numerous times
for the same problem and the dealer is unable to effectively fix the car, the remedy fails of its
essential purpose, and a court may ignore the limiting clause and allow the normal remedies
for breach.

2. Timing Unconscionability is determined by the circumstances as they existed at the time

the contract was formed.

3. Effect If Court Finds Unconscionable Clause If a court finds as a matter of law that a
contract or any clause of the contract was unconscionable when made, the court may:
refuse to enforce the contract; (ii) enforce the remainder of the contract without the
unconscionable clause; or (iii) limit the application of any clause so as to avoid an
unconscionable result. [UCC §2-302]

Question on MISREPRESENTATION

Alfonso is on the board of directors of Woodex Ltd, a company which supplies wooden home
extensions in kit form for assembly by the purchaser. Alfonso tells Bella that he is willing to
sell her some of his shares in the company. Alfonso says that ‘D-I-Y’ extensions are the
thing of the future, and that they do not need the approval of the local council under the
building regulations. Alfonso also declares to Bella that Woodex has firm plans to open a
branch in the Midlands. Alfonso urges Bella to look at the company order book, but Bella
declines and buys a block of shares without looking at the books. One month later Bella
discovers that the extensions do require council approval and that Woodex has hardly any
orders. Soon afterwards Woodex Ltd goes into liquidation without opening a branch office
and its shares become worthless. Advise Bella.

TERMS OF
CONTRACTS
Interpretation of Contracts
Once the contract has been formed, it must be interpreted. Most disputes revolve around not
whether the contract exists but what the terms mean.
Language being what it is, it is not unusual for reasonable people to disagree about the
meaning of a contract, a term in the contract, or even the implications of the placement of a
comma in a sentence. The devils, as is sometimes said, are in the details. While many
contractual terms are expressly set forth in the contract, others are implied.

As a rule, courts will imply reasonable terms to give effect to the intentions of the parties, but
will not go so far as to draft a new contract.
Interpreting contracts is often difficult due to bad drafting or bad grammar.

The courts use two approaches to contract interpretation: strict and liberal.
The strict approach concerns itself with the plain or dictionary meanings of the words and
holds the parties to an objective reading of the contract.
The more subjective liberal approach assesses the overall purpose of the contract and
intention of the parties.

GENERAL RULES OF CONTRACT CONSTRUCTION

There are a number of general rules of construction applied by the courts when interpreting
contracts. The following are among the more frequently invoked:
1. Construed as a Whole Contracts will be construed as a “whole”; specific clauses will be
subordinated to the contract’s general intent.

2. Ordinary Meaning of Words The courts will construe words according to their “ordinary”
meaning unless it is clearly shown that they were meant to be used in a technical sense.

3. Inconsistency Between Provisions

If provisions appear to be inconsistent, written or typed provisions will prevail over printed
provisions (which indicate a form contract).

4. Preference to Construe Contract as Valid and Enforceable

It is important to note that the courts generally will try to reach a determination that a contract
is valid and enforceable. Hence, they will be inclined to construe provisions in such a fashion
as to make them operative. Obviously, this general policy will not be carried so far as to
contravene the intention of the parties.

5. Ambiguities Construed Against Party Preparing Contract

Ambiguities in a contract are construed against the party preparing the contract, absent
evidence of the intention of the parties. This is particularly true when there is no evidence of
fraud, mutual mistake, duress, or knowledge by one party of unilateral mistake; and both
parties are represented by counsel.
6. Course of Performance
Where a contract involves repeated occasions for performance by either party and the other
party has the opportunity to object to such performance, any course of performance
accepted is relevant in determining the meaning of the contract. [UCC §1-303(a), (d)]

U.C.C. § 1-303(a) defines “course of performance” in this way:

(a) A “course of performance” is a sequence of conduct between the parties to a particular
transaction that exists if: (1) the agreement of the parties with respect to the transaction
involves repeated occasions for performance by a party; and (2) the other party, with
knowledge of the nature of the performance and opportunity for objection to it, accepts the
performance or acquiesces in it without objection.
U.C.C. § 2-202 permits a final expression to be explained or supplemented by evidence of
course of performance,
unless the final expression was a “complete and exclusive statement of the terms of the
agreement.”

7. Course of Dealing
The parties’ course of dealing may be used to explain a contract. A course of dealing is a
sequence of conduct concerning previous transactions between the parties to a particular
transaction that may be regarded as establishing a common basis of their understanding.
[UCC §1-303(b), (d)]

Under the English Uniform Sales Act (1895), where the price was not fixed in the contract,
and the manner of calculating the price was not described in the contract, the court was
allowed to determine a price based on “the course of dealing between the parties.”
§ 9(1). U.C.C. § 1-303(b) defines “course of dealing” in this way:
(b) A “course of dealing” is a sequence of conduct concerning previous transactions between
the parties to a particular transaction that is fairly to be regarded as establishing a common
basis of understanding for interpreting their expressions and other conduct.
U.C.C. § 2-202 permits a final expression to be explained or supplemented by evidence of
course of dealing, unless the final expression was a “complete and exclusive statement of
the terms of the agreement.”

8. Usage of Trade
A usage of trade may also be used to explain a contract. A usage of trade is a practice or
method of dealing, regularly observed in a particular business setting so as to justify an
expectation that it will be followed in the transaction in question. [UCC §1-303(c), (d)]
9. Priorities of Conflicting Rules Express terms are given greater weight than course of
performance, course of dealing and usage of trade. Course of performance is given greater
weight than course of dealing or usage of trade, and course of dealing is given greater
weight than usage of trade.

Express terms
Course of performance

Course of dealing

Usage of trade

The “Four Corners” Rule

The “four corners rule” is widely applied in interpreting deeds, will, and contracts. What may
be the first application of the “four corners rule” in America is Lynn’s Lessee v. Downes, 1
Yeates 518, 1795 WL 730 (Pa. 1795), where the court said: “The will is obscurely penned;
but the intention of the testator, extracted from the words of the will taken all together, shall
govern its construction, and not the opinion of his family.”
This case expressed the “four corners rule” as a rule limiting the court’s inquiry into the intent
of the parties to the words of the deed, or contract, or will itself, without evidence of
other things.

Subsequent cases were all Pennsylvania cases repeating the rule until the case of Hoxie v.
Hoxie, 7 Paige Ch. 187, 4 N.Y. Ch. Ann. 118 (N.Y. Ch. 1838), which said: “The construction
of a will must depend upon the intention of the testator, to be ascertained from a full view of
everything contained within the four corners of the instrument.”

The next case to apply the rule was Dismukes v. Wright, 3&4 Dev. & Bat. 346, 1839 WL 528
(N.C. 1839), where the court said: “ In the construction of deeds, the first rule is, that the
intention of the parties is, if possible, to be supported; and the second rule is, that this
intention is to be ascertained by the deed itself; that is, from all parts of it taken together. In
general, no expression can be contradicted or explained by extrinsic evidence; and the
intention collected from the four corners of the deed, is to govern the construction of every
passage in it,”

In Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. 420,

544 (1837) (Taney, C.J.), Chief Justice
Taney wrote, without citation to authority: “The charter to the bridge is a written instrument
which must speak for itself, and be interpreted by its own terms.” This can be taken as an
expression of the four corners rule.

In Ulbricht v. Friedsam, 159 Tex. 607, 325 S.W.2d 669, 672 (Tex. 1959) (Griffin, J.), the
Court said: “It is elementary that unless the deed be ambiguous, it is the duty of all courts to
construe the deed within its four corners. In such construction the court seeks the intention
of the parties as shown by the deed.”
In Luckel v. White, 819 S.W.2d 459, 462, 463 (Tex. 1991) (Gammage, J.), the Court recited
the “four corners rule”: “The primary duty of a court when construing such a deed is to
ascertain the intent of the parties from all of the language in the deed by a fundamental rule
of construction known as the ‘four corners’ rule ”

Section 1.201(b)(3) of the U.C.C. defines “agreement” as “the bargain of the parties in fact,
as found in their language or inferred from other circumstances, including course of
performance, course of dealing, or usage of trade ”
While the U.C.C. permits the court to look beyond the four corners of the agreement to
ascertain meaning, the meaning is determined from the language of the agreement or from
their actual behaviors. U.C.C. Section 2-202 sets out a parol evidence rule that applies
where the parties have reached a “final expression” of their agreement, banning evidence of
a contrary prior agreement or contemporaneous oral agreement.
However, Section 2-202 permits a final expression to be explained or supplemented by
evidence of course of performance, course of dealing, or usage of trade, and evidence of
consistent additional terms, unless the final expression was a “complete and exclusive
statement of the terms of the agreement.”

PAROL EVIDENCE RULE

In interpreting and enforcing a contract, questions often arise as to whether the written
instrument is the complete embodiment of the parties’ intention. Where the parties to a
contract express their agreement in a writing with the intent that it embody the final
expression of their bargain, the writing is an “integration.” Any other expressions—written or
oral— made prior to the writing, as well as any oral expressions contemporaneous with the
writing, are inadmissible to vary the terms of the writing.

Example: Buyer is interested in purchasing a new car from Dealer. He settles on a particular
car, and Buyer and Dealer begin to negotiate the terms of the sale. During the negotiations,
Dealer tells Buyer that if he agrees to buy the car “today,” Dealer will provide free car
washes for as long as Buyer owns the car. The two parties finally come to an agreement on
price and sign a written contract. The written contract contains a clause providing that it is
the full agreement between the parties. However, it does not provide for free car washes.
Absent an applicable exception, the parol evidence rule would prevent Buyer from
introducing evidence in court of the oral agreement concerning car washing services that
was made prior to the execution of the written contract.
RESTATEMENT (SECOND) OF THE LAW OF CONTRACTS §§ 213 & 215 adopt the Parol
Evidence Rule.
Section 213 says that “[a] binding integrated agreement discharges prior agreements to the
extent that it is inconsistent with them,” and that “[a] binding completely integrated
agreement discharges prior agreements to the extent that they are within its scope.”
Section 215 says that “[a] binding completely integrated agreement discharges prior
agreements to the extent that they are within its scope.”

1. Purpose Its name notwithstanding, the parol evidence rule is not generally regarded as a
rule of evidence, but rather as a rule of substantive contract law.
It is designed to carry out the apparent intention of the parties and to facilitate judicial
interpretation by having a single clean source of proof (the writing) on the terms of the
bargain.

2. Is the Writing an “Integration”? The question of whether a writing is an “integration” of all

agreements between the parties can be broken down into two further subquestions:
(i) Is the writing intended as a final expression?
(ii) Is the writing a complete or partial integration?

Is the Writing Intended as a Final Expression?

Writings that evidence a purported contract are not necessarily the “final” expression of that
contract. Thus, for example, the parties might only have intended such writings to be
preliminary to a final draft. If so, the parol evidence rule will not bar introduction of further
evidence. Any relevant evidence is admissible to show that the parties did not intend the
writing to be final. Note that the more complete the agreement appears to be on its face, the
more likely it is that it was intended as an integration.

Is the Writing a Complete or Partial Integration?

After establishing that the writing was “final,” one should determine if the integration was
“complete” or only “partial.” If complete, the writing may not be contradicted or
supplemented; if partial, it cannot be contradicted, but it may be supplemented by proving up
consistent additional terms. As with the finality component, whether an integration is
complete or partial depends on the intent of the parties. All relevant evidence is admissible
for the purpose of making the determination, even the evidence whose admissibility is
challenged.
The UCC presumes all writings are partial integrations unless there is evidence that the
parties intended a writing to be the complete agreement. [UCC
§2-202(b)]

Effect of Merger Clause : A merger clause is a statement in a writing reciting that the
agreement is the complete agreement between the parties. The presence of a merger
clause is often determinative in large commercial contracts in which both parties are
represented by lawyers. The modern trend, however, is to consider the clause as one factor
in determining the integration issue.

Evidence Outside Scope of Rule

Because the rule prohibits admissibility only of extrinsic evidence that seeks to vary,
contradict, or add to an “integration,” other forms of extrinsic evidence may be admitted
where they will not bring about this result, i.e., they will fall outside the scope of the parol
evidence rule.

Validity Issues

A party to a written contract can attack the agreement’s validity. The party acknowledges
(concedes) that the writing reflects the agreement but asserts, most frequently, that the
agreement never came into being because of any of the following:
1) Formation Defects: Formation defects (e.g., fraud, duress, mistake, and illegality) may be
shown by extrinsic evidence.
2) Conditions Precedent to Effectiveness :Where a party asserts that there was an oral
agreement that the written contract would not become effective until a condition occurred, all
evidence of the understanding may be offered and received. This would be a condition
precedent to effectiveness. The rationale is that you are not altering a written agreement by
means of parol evidence if the written agreement never came into being. It should be borne
in mind that parol evidence of such a condition precedent will not be admitted if it contradicts
the express language of the written contract.

Example: Giorgio and Susan sign what appears to be a complete contract, but agree orally
that the agreement is not to become binding unless Susan can secure financing, or until her
home office approves, or the like. The nonhappening of the stipulated event may be shown
because the parol evidence rule does not come into play until a binding contract exists.
Note that parol evidence is not admissible to show a condition that limits or modifies a duty
under an existing or formed contract.

Collateral Agreements and Naturally Omitted Terms

Parol evidence is often said to be admissible if the alleged parol agreement is collateral to
the written obligation (i.e., related to the subject matter but not part of the primary promise)
and does not conflict with it. This “collateral agreement” doctrine is hard to apply because it
is conclusory. The Restatements of Contracts include a similar concept with a more
definitive approach: the naturally omitted terms doctrine. The doctrine allows evidence of
terms that would naturally be omitted from the written agreement.

A term would naturally be omitted if:

(i) It does not conflict with the written integration; and
(ii) It concerns a subject that similarly
situated parties would not ordinarily be
expected to include in the written
instrument.
[Restatement (First) of Contracts, §240; Restatement (Second) of Contracts,
§216]

Example: Seller offered to sell his sister his ranch. The deed gave Seller an option to
repurchase, but the parties orally agreed that the option could not be transferred to a third
party. Oral evidence of the agreement was not barred by the parol evidence rule. The court
held that when family members are contracting, they would not ordinarily be expected to put
such a term into the written contract. [See Masterson v. Sine, 68 Cal. 2d 222 (1968)]

Interpretation

If there is uncertainty or ambiguity in the written agreement’s terms or a dispute as to the

meaning of those terms, parol evidence can be received to aid the fact-finder in reaching a
correct interpretation of the agreement. If the meaning of the agreement is plain, parol
evidence is inadmissible.

Showing of “True
Consideration”

The parol evidence rule will not bar extrinsic evidence showing the “true consideration” paid.

Example: A contract states that

$10 has been given as full and complete consideration. Extrinsic evidence will be
admitted, by way of a defense, to show that this sum has never been paid.

Reformation
If a party to a written agreement alleges facts (e.g., mistake) entitling him to reformation of
the agreement, the parol evidence rule is inapplicable. Why? Because the plaintiff is
asserting as a cause of action that despite the apparently unambiguous terms of the written
agreement, those terms do not in fact constitute the agreement between the parties.

Subsequent Modifications
Parol evidence can be offered to show subsequent modifications of a written contract,
because the parol evidence rule applies only to prior or contemporaneous negotiations. In
short, the parties may show that they have altered the integrated writing after its making.

Additional Terms Under Article 2

As noted above, under Article 2 a party cannot contradict a written contract but he may add
consistent additional terms unless: (i) there is a merger clause, or (ii) the courts find from all
of the circumstances that the writing was intended as a complete and exclusive statement of
the terms of the agreement. [See UCC §2-202]
Article 2 also provides that a written contract’s terms may be explained or supplemented by
evidence of course of performance, course of dealing, and usage of trade— regardless of
whether or not the writing appears to be ambiguous.

GAP-FILLING
Many contracts omit certain details of the parties’ agreement. In the early Common Law,
material omissions were fatal to the contract. However, in more recent times courts have
been willing to fill in the gaps (called “gap- filling) in order to achieve a contract that the
parties intended. Court have assisted in completing contracts for some time.

Parsons (5th ed. 1866) stated the law on implying omitted terms in a contract:
The law, as we have already had occasion to say in reference to various topics, frequently
supplies by its implications the wants of express agreements between the parties. But it
never overcomes by its implications the express provisions of parties. If these are illegal, the
law avoids them. If they are legal, it yields to them, and does not put in their stead what it
would have put by implication if the parties had been silent. The general ground of a legal
implication is, that the parties to the contract would have expressed that which the law
implies, had they thought of it, or had they not supposed it was unnecessary to speak of it
because the law provided for it. But where the parties do themselves make express
provision, the reason of the implication fails.
Sir Edward Fry’s TREATISE ON THE SPECIFIC PERFORMANCE OF CONTRACTS (1858)
said: “Besides the express terms of the contract, there are others which, in the absence of
any expression to the contrary, are implied by presumption. With regard to such terms,
therefore, whether they be necessary terms or not, the silence of the contract does not
render it incomplete: thus, an agreement to sell land, not specifically expressing what
interest, is taken to be an agreement to sell the whole of the vendor's interest. An agreement
to sell a house simply, implies that the interest sold is the fee simple; and an agreement to
renew is presumed to be for the same term as the preceding lease.”

Time For Performance

Where the parties failed to specify a time for performance, the court will infer a reasonable
time.
Self v. King, 28 Tex. 552, 1866 WL 4032, *2 (Tex. 1866) (Moore, J.) (“[W]hen no specific
time is fixed for the delivery of cumbrous property, it is the settled construction that it is
payable within a reasonable time, which is generally a question of law, but often of law and
fact”).

Under Section 2-309(1), where merchants fail to specify the time for a sale to be concluded,
a reasonable time is supplied. If the contract calls for successive performances with no
ending time provided, Section 2-309(2) allows either party to terminate at any time. If the
date for payment is not specified, U.C.C. § 2-310 requires payment when the goods are due
to be delivered.

Failure to Specify Price

In Bendalin v. Delgado, 406 S.W.2d 897, 900 (Tex. 1966) (Walker, J.), the Supreme Court
said that where a contract is complete except as to price, the contract “is not so incomplete
that it cannot be enforced.” Instead, "it will be presumed that a reasonable price was
intended.”

The Court cited a U.S. Supreme Court case, two Texas court of civil appeals cases, and
Williston’s Law of Contracts (3d ed. 1957), § 41. U.C.C. § 2-305 applies to contracts with an
“open price term,” and it provides that the parties can conclude a contract that (I) does not
specify a price, or (ii) provides that an agreement will later be reached and no agreement is
reached, or (iii) establishes a market standard or other measure of price. In that case, the
law implies a reasonable price at the time for delivery. If a later agreement on price is
thwarted by a party, the other party can either cancel the contract or fix a reasonable price. If
the price is to be set by a party to the contract, that party must use good faith

Failure to Specify Quantity

An “output” contract provides for the buyer to purchase everything the seller can produce, or
for the seller to sell everything that the buyer wants, within a certain period.
Early contract cases had difficulty in finding such contracts to be enforceable. U.C.C. §2-306
recognizes output contracts for “such actual output or requirements as may occur in good
faith . . . .” Neither party can demand performance for outputs or requirements that are
"unreasonably disproportionate" to stated estimates or to normal output or requirements.

WARRANTIES
English warranty law developed as express warranties incident to sales transactions, where
the item purchased was not as it was expected or represented to be.
Under the doctrine of caveat emptor, the fact an item was not what the buyer expected gave
rise to no claim (i.e., there were no implied warranty as to the quality of the goods).
However, if the sale involved an express warranty, and that warranty was breached, then the
deficiency in the item purchased was actionable under the Form of Action called Deceit, a
cause of action which today we would classify as a tort.

According to Professor Williston, the law of warranty is at least a century older than the rise
of Special Assumpsit. He says that the first breach of warranty claim brought in Assumpsit,
the forerunner of modern contract claims, occurred in 1778.395 In Southwestern Bell
Telephone Co. v. FDP Corp., 811 S.W.2d 572,
576 (Tex. 1991) (Phillips, C.J.), the Court said: “The UCC recognizes that breach of contract
and breach of warranty are not the same cause of action.” This bifurcation goes back
centuries in English Contract Law. In Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349,
352 (Tex. 1987) (Spears, J.), the Court said: “[i]mplied warranties are created by operation of
law and are grounded more in tort than in contract.” See Section XX in 175 Years of
Contract Law.

EXPRESS WARRANTIES
(Wheeler, J.): “The representations as to what the defendants would do, when used as
inducements to others to contract with them, became assurances and undertakings which
they were bound to fulfill. They were obligatory upon them, and must be so held, or the
contract would be void for the want of mutuality. If such assurances were not binding, there
could be no binding promise to perform an act in future.”

The Uniform Sales Act § 12 (1906) recognized express warranties as affirmations, not part
of the promise. Uniform Commercial Code Section 2-313 (1962) says this about warranties:
“[T]he whole purpose of the law of warranty is to determine what it is that the seller has in
essence agreed to sell . . . .” The U.C.C. (1962) lists several express warranties, although to
some extent they impliedly arise by operation of law, if certain things occur. Under
U.C.C. Section 2.313(b), a warranty can arise even when the seller does not “use formal
words such as ‘warrant’ or ‘guarantee,’” and can arise even if the seller does not “have a
specific intention to make a warranty.”
IMPLIED WARRANTIES
Various implied warranties have been recognized in law going back centuries.
Williston noted in his treatise on Sales (1920) that early English law did not imply a warranty
of title, but that by Blackstone’s time such an implied warranty impliedly arose.
Under Roman law, and later under French, Spanish and Italian law, the vendor impliedly
warranted that goods sold were merchantable.

In McKinney v. Fort, 10 Tex. 220, * 8 (Tex. 1853) (Hemphill, C.J.), the Supreme Court said:
“The rule at common law now appears to be that the purchaser buys at his own risk, unless
the seller give either an express warranty, or unless the law implies a warranty from the
circumstances of the case or the nature of the thing sold, or unless the seller be guilty of a
fraudulent concealment or representation in respect to a material inducement to the sale. A
fair price implies a warranty of title, but not, unless under special circumstances, a warranty
of soundness. A purchaser must, at his own risk, attend to the quality of the article which he
buys, supposed to be within the reach of his observation and judgment.

In Brantley v. Thomas, 22 Tex. 270, 1858 WL 5635, *3 (Tex. 1858) (Bell, J.), the Texas
Supreme Court recognized three implied warranties in merchant transactions: that in a sale
by sample, the goods will correspond to the sample; that goods shall correspond to the
order; that goods are merchantable and suitable to the market where they are sold.

Justice Bell noted the rule of caveat emptor, but said it does not apply where the purchaser
does not have the opportunity to inspect and must rely on the vendor (as in an interstate
sale). This point was reconfirmed by the Texas Supreme Court in White, Ward & Erwin v.
Hager, 248 S.W. 319 (Tex. Com. App. 1923, opinion adopted) (Powell, J.). In City Bank v.
First Nat. Bank, 45 Tex. 203, * 10 (Tex. 1876) (Gould, Assoc. J), the Supreme Court held
that the indorsement of a check amounted to a representation and warranty that the check
was genuine, citing 2 Parsons on Notes and Bills.

The Uniform Sales Act (1906) recognized various implied warranties.

The UCC (1962) contains a number of implied warranties in the sale of goods.
The CISG (1980) contains implied warranties of merchantability, fitness for a particular
purpose (provided that the purpose was made known to the seller, unless non-reliance is
shown), representativeness of samples or models, and an implied warranty of customary
packaging. These implied warranties can be waived or disclaimed by agreement.
In Humber v. Morton, 426 S.W.2d 554, 555 (Tex. 1968) (Norvell, J.), the Court recognized
an implied warranty, in an agreement between a homebuilder and an owner, that the home
would be constructed in a good and workmanlike manner and that the home would be
suitable for human habitation.

In Centex Homes v. Buecher, 95 S.W.3d 266, 275 (Tex. 2002) (Phillips, C.J.), the Court held
that “the implied warranty of habitability extends only to latent defects. It does not include
defects, even substantial ones, that are known by or expressly disclosed to the buyer.” The
Court also held that “the implied warranty of good workmanship may be disclaimed by the
parties when their agreement provides for the manner, performance or quality of the desired
construction,” but that “the warranty of habitability may not be disclaimed generally.”

Warranties and Conditions

The words “warranty” and “condition” are often used interchangeably and inconsistently.
The word “warranty” should be used only to describe any term in a contract the breach of
which gives rise to various remedies but none so drastic as the termination of the contract.
The word “condition” should be used only to describe any term the breach of which is so
serious and fundamental that the remedies include termination of the contract.

MODIFICATION OF CONTRACT TERMS

1. Consideration
Under general contract law, a final contract cannot be modified unless the modification is
supported by new consideration.
The modern view, however, permits modification without consideration if: (i) the modification
is due to circumstances that were unanticipated by the parties when the contract was made
and
it is fair and equitable. [See Restatement (Second) of Contracts §89]

The UCC is even more liberal with regard to modification. Under the UCC, promises of new
and different terms by the parties to a sales contract are valid without consideration, but
good faith is required to make a modification enforceable

2. Writing
A written contract can be modified orally.
For sales of goods contracts, however, the modification must be in writing if the contract as
modified falls within the Statute of Frauds.
Thus, if the contract as modified is for $500 or more, it must be evidenced by a writing; if the
contract as modified is for less than $500, no writing is necessary. [UCC §2-209]
Examples:
Seller agrees to sell Buyer his car for $525 and the parties put the contract in writing to
satisfy the Statute of Frauds.
Subsequently, Buyer discovers that he can afford to spend only $475 on a car. Buyer calls
Seller and tells Seller of his trouble. Seller agrees to lower the price to $475. A writing is no
longer necessary, and either party can enforce the oral modification.

2) Mary phones Paul and asks Paul for his price on widgets. Paul informs Mary that he
currently is selling widgets for $3 each. Mary asks Paul to send her 150 widgets. Paul
agrees, and tells Mary that he will ship them the next day. The contract is enforceable
without a writing. A few hours later, Mary phones Paul back and asks Paul whether he could
send her 200 widgets instead of 150. Paul agrees. The contract as modified is not
enforceable absent a written memorandum satisfying the Statute of Frauds. The original
contract remains enforceable.

Provisions Prohibiting Oral Modification Not Effective at Common

Law
The common law rule is that even if a written contract expressly provides that it may be
modified only by a writing, the parties can orally modify the contract.

UCC Recognizes No-

Modification Clauses Under the UCC
Even if a contract is not within the Statute of Frauds, if it explicitly provides that it may not be
modified or rescinded except by a signed writing, that provision will be given effect. [UCC §2-
209]

Contract Between Merchant and Nonmerchant

If a contract is between a merchant and a nonmerchant and the provision requiring written
modification is on the merchant’s form, the provision will not be given effect unless it is
separately signed by the nonmerchant.

Waiver
If the parties attempt to orally modify a contract that requires written modification (either
because of a contract clause or the Statute of Frauds), it is technically ineffective as a
modification, but can operate as a waiver. Such a waiver will be found whenever the other
party has changed position in reliance on the oral modification.
a) Retraction of Waiver
A party who makes a waiver affecting an executory (not yet performed) portion of the
contract may retract the waiver if she notifies the other party that strict performance of the
waived terms is required. The waiver may not be retracted, however, if the other party
detrimentally relied on it. [UCC §2-209(5)]

Example: A contract between Buyer and Seller for 800 widgets contains a clause requiring
all modifications to be in writing. The parties orally agree to reduce the number to 400
widgets. Buyer later decides he wants 800 widgets after all. If Seller relied on the oral
modification in making contracts with other parties for widgets and does not have stock
available, Buyer cannot retract the waiver. If, however, Seller did not change his position in
reliance on the waiver, Buyer may retract the waiver and enforce the contract for the full 800
widgets

3. Parol Evidence Rule Does Not Apply

As noted above, parol evidence is admissible to show subsequent oral modifications of a
written contract.
THE END OF A CONTRACT

Events that Discharge Contractual Duties

A party's contractual duties may be discharged by the following types of occurrences:
complete performance
rescission of the contract
substitute contract
accord and satisfaction
novation
an account stated
avoidance of duties in a voidable contract
illegality
Bankruptcy
rejection of proper tender
occurrence of a condition subsequent
breach by the other party
impracticability and frustration of purpose
failure of consideration

Rescission of the contract

When Available
Writing Requirement
Consideration
When Available

Parties to a contract may mutually agree to rescind their contract where:

there are duties still to be performed by both parties; and
any vested third party rights will not be affected.

Writing Requirement

The common law generally permits oral rescissions, even if the contract falls within the
statute of frauds. An exception exists where the rescission would result in a transfer of title to
land.

In contracts for the sale of goods, a rescission must be in writing if there is a signed
agreement that expressly requires any rescission to be in a signed writing. Where such
provision appears on a form supplied by a merchant, the form must be signed by the other
party unless the other party is also a merchant. [UCC § 2-209(2)]

Consideration

If both parties' duties are executory, an agreement to rescind is binding without additional
consideration since the release of each party's rights provides the consideration. If one party
has fully performed, the other party must furnish consideration to support the rescission.

Accord and Satisfaction

An accord is an agreement between parties of a pre-existing contract that the obligee will
accept the performance stated in the accord in satisfaction of the obligor's contractual duty.
Performance of the accord suspends the contractual duty but if the obligor breaches the
accord, the obligee may bring action on the original contract or the accord. [Restatement §
281]

Substitute Contract

Unlike an accord and satisfaction which merely suspends the original contractual duty, a
substitute contract immediately discharges all duties under the original contract. If the obligor
breaches the substitute contract, an action may be brought on the substitute contract alone.

Novation

A novation is an agreement by which a new party replaces one of the original parties to a
contract, extinguishing the duties of the parties under the old contract and substituting a new
contract between the remaining original party and the new party.

Account Stated
An account stated is an agreement by a creditor and debtor as to the amount due under a
contract. Failure to object by the recipient of the account stated manifests assent to be
bound by its terms, such as when a debtor opens an account with a creditor, who sends the
debtor a statement of the amount due on his account. "The account stated does not itself
discharge any duty but is an admission by each party of the facts asserted and a promise by
the debtor to pay according to its terms." [Restatement § 282(2)]

Release of a Co-obligor

A release, rescission or accord and satisfaction that discharges one co-obligor releases
other co- obligors that are jointly responsible for performing the duty in question. In order to
avoid this result, an obligee may enter into a contract not to sue the obligor, thus preserving
the right to bring action against the other co- obligors. [Restatement § 295(2)]

Impracticability and frustration of

purpose

Supervening Impossibility and Impracticability of Performance

Partial Impracticability
Supervening Frustration of Purpose
Existing Impracticability and Frustration of Purpose
Temporary Impracticability and Frustration

Supervening Impossibility and Impracticability of Performance

If, after a contract is formed, circumstances arise which make a party's performance
impossible or impracticable, his duty to render that performance is discharged.
In order to prove impracticability:
an event must have occurred that makes performance, or
performance in the contemplated sense, impossible or impracticable;
the party seeking relief must not have been at fault in causing the event to occur;
non-occurrence of the event must have been a basic assumption upon which the contract
was made;
and 4) the party seeking relief must not have assumed the risk of the event occurring.
[Restatement § 261]

Applying the same criteria, UCC § 2-615 provides that a seller's delayed delivery or non-
delivery of goods based on impracticability is not a breach. The proposed revision expands
the availability of the impracticability excuse to "performance" and "non-performance" of any
and all sellers' contractual duties
Events that may make performance of the contract impossible
include:
death or disability of a person indispensable to performance of the contract
destruction of the subject matter of the contract or other thing necessary for the performance
of the contract, provided the destruction is not the fault of the party asserting impossibility
failure of a specific thing necessary for performance to come into existence
supervening governmental action that makes performance of the contract illegal
where performance would subject the party to potential harm
shortages or significant price increases in materials due to embargo or war
other circumstances that would involve "extreme or unreasonable difficulty,
expenses, injury or loss." [Restatement § 261, comment d]

Increased cost alone does not excuse performance but an alternative performance that
requires an unreasonable expenditure of resources may make performance of the contract
impracticable.

Partial Impracticability
If the circumstances giving rise to the impracticability affect only part of the performance, and
the promisor can render substantial performance of his obligations, he must do so, as well
as make reasonable substitute performance if available. Performance will be discharged
only if the partial impracticability makes the remaining performance substantially more
burdensome.
In goods contracts, if the impracticability affects only a part of the seller's capacity to
perform, the seller must allocate production and deliveries among its customers. [UCC § 2-
615(b)]

Supervening Frustration of Purpose

If, after the contract is formed, circumstances arise which substantially frustrate a party's
purpose in entering into the contract, the party's remaining duties are discharged, provided:
the party seeking discharge was not at fault;
the nonoccurrence of such event was a basic assumption on which the contract was made;
and
the language or the circumstances do not prohibit excuse based on frustration of purpose.
[Restatement § 265]

This principle does relieve a party for mere "economic" or "commercial" frustration, where all
that is frustrated is the party's ability to make a profit but not the actual purpose of the
contract.

Existing Impracticability and Frustration of Purpose

If the impracticability or frustration of purpose exists at the time the contract was made, no
duty to perform arises where:
the party raising the excuse, without fault, had no reason to know of the facts giving rise to
the impracticability or frustration; and
the non-existence of such facts is a basic assumption on which the contract was made.
[Restatement § 266]

Temporary Impracticability and Frustration

Where a party is unable to perform due to a temporary impracticability, e.g., illness, the other
party may be able to suspend performance of the contract, and if there is a reasonable
probability that substantial performance will not occur, cancel the contract. When the
temporary impracticability ceases, if the delay will make the performance substantially more
burdensome, the obligation may be discharged.

The Breach of the

contract

What Constitutes a Breach

Any non-performance of a contractual duty which has become due constitutes a breach. An
anticipatory repudiation of obligations also serves to breach a contract.

In contracts for the sale of goods, in addition to repudiation, a seller breaches the contract by
offering a tender or delivery of non-conforming goods, and the buyer breaches by wrongfully
rejecting goods, wrongfully revoking acceptance of goods, or failing to make a payment
when due.

The Texas Supreme Court recently defined breach of contract in Greene v. Farmers Ins.
Exchange, 446 S.W.3d 761, 765 (Tex. 2014) (Johnson, J.).: “‘Breach’ of a contract occurs
when a party fails to perform an act that it has contractually promised to perform.” Whether a
party has breached a contract is a question of law for the court, not a question of fact for the
jury, when the facts of the parties’ conduct are undisputed or conclusively established.
Sullivan v. Barnett, 471 S.W.2d 39, 44 (Tex.1971)

Material Breach in Non-

Goods Contracts
If a party fails to perform a promise and the breach is material, and no cure is forthcoming,
the aggrieved party may:
cancel the contract and sue for all damages under the contract;
Or
continue the contract and sue for partial damages
If the breach is not material, the aggrieved party may not cancel the contract and can only
sue for partial damages.

Factors which are relevant to a determination of whether a breach is material are:

the extent to which the aggrieved party will be deprived of the benefit he reasonably
expected;
the extent to which the aggrieved party can be adequately compensated for the benefit of
which he will be deprived;
the extent to which the breaching party will suffer forfeiture;
the likelihood that the breaching party will cure his failure, taking into account all the
circumstances including any reasonable assurances;
the extent to which the breaching party has acted according to standards of good faith and
fair dealing. [Restatement § 241]

Anticipatory Repudiation
What Constitutes a Repudiation
A party repudiates a contractual duty by:
making a statement indicating that he will breach the contract
engaging in a voluntary affirmative act that renders him unable to perform the duty
failing to provide an assurance of due performance in response to such a request by the
other party when there exists reasonable grounds to believe that the obligor will not perform.
[Restatement §§ 250, 251; UCC § 2-609(4), proposed revised § 2-610(2)]

Effect of Anticipatory Repudiation

In non-goods contracts, anticipatory repudiation by one party
entitles the other party to:
bring an action for damages for total breach
discharge his remaining obligations. [Restatement § 253]

In goods contracts, an anticipatory repudiation which will substantially impair the value of the
contact to the aggrieved party, allows the aggrieved party to:
await performance by the repudiating party for a commercially
reasonable time
seek remedy for breach even if he has notified the repudiating party that he would await
performance and has urged retraction
suspend his own performance. [UCC § 2-610]

Retraction of Repudiation

In goods contracts, a repudiating party may retract his repudiation up to the time his next
performance under the contract is due, unless the aggrieved party has since:
cancelled
materially changed his position
otherwise indicated that he considers the repudiation final. [UCC § 2- 611]
The Restatement likewise allows for retraction of repudiation under similar circumstances
but without terminating the right of retraction upon the repudiating party's next performance
installment. [Restatement § 256]

Non-conforming Tender of Goods

Rejection of Non-conforming Tender
[a] Generally
Within a reasonable time after delivery or tender of goods, a buyer may reject goods that fail
to conform to the contract. In order for the rejection to be effective, the buyer must
seasonably notify the seller of such rejection. [UCC § 2-602] The buyer cannot reject the
goods once he has accepted them.

[b] Single lot contracts

If the non-conformity occurs under a single lot contract, the buyer may:
reject the whole lot;
accept the whole lot; or
accept any commercial unit and reject the remainder [UCC § 2-601]

The UCC adopts the "perfect tender" rule for single lot contracts, and thus, the buyer may
reject goods for any nonconformity, even if the seller has substantially performed.
Nevertheless, the buyer's rejection must be exercised in good faith, and the seller is entitled
to cure the non-conformity under certain conditions

[c] Installment contracts

The perfect tender rule, otherwise applicable to goods contracts, does not apply to
installment contracts. A buyer may reject an installment only if the non-conformity
substantially impairs the value of the installment, and cannot be cured, by means such as
allowances against the price, or by a further delivery or partial rejection. [UCC § 2-612]
Substantial impairment may pertain to the quality of the goods, timing of tender, quantity,
etc.

Any material burden in curing the non- conformity must fall on the seller but the buyer must
cooperate in curing the defective tender. For example, the buyer must make a reasonable
minor outlay of time or money to cure an overshipment. [UCC § 2-612, comment 5]

[2] Acceptance of Goods

An acceptance of a tender or delivery of goods can occur in one of the following ways:
after a reasonable opportunity to inspect, the buyer indicates to the seller either that the
goods conform to the contract or that he will retain them despite their non- conformity;
after a reasonable opportunity to inspect, the buyer fails to make an effective rejection; or
the buyer engages in any act that is inconsistent with the seller's ownership of the goods.
[UCC § 2-606]

[3] Revocation of Acceptance of Non-conforming Goods

A buyer who initially accepts non-conforming goods may revoke the acceptance, if the non-
conformity substantially impairs its value to him, and the buyer accepted it:
on the reasonable assumption that the non-conformity would be cured and it has not been
seasonably cured; or
without discovering such non-conformity if his acceptance was reasonably induced by the
difficulty of discovery before acceptance or by the seller's assurances. [UCC § 2-608(1)]

The buyer must notify the seller of the revocation within a reasonable time after he discovers
or should have discovered such defects and before there is any substantial change in the
condition of the goods. The revocation is not effective until the buyer notifies the seller of it.

REMEDIES

Types of Remedies
Expectation damages
Reliance damages
Restitution
Stipulated damages (liquidated damages)
Incidental Damages
Consequential Damages
Interest
Punitive damages
Specific Enforcement

Damages Under the Civil Law

The French Civil Code §1149 (1804) provided:, “[t]he damages and interest due to the
creditor are, in general, to the amount of the loss which he has sustained or of the gain of
which he has been deprived; saving the exceptions and modifications following”:
§ 1150, “[t]he debtor is only bound for the damages and interest which were foreseen, or
which might have been foreseen at the time of the contract, when it is not in consequence of
his fraud that the obligation has not been executed”;
§1151, “[e]ven in the case where the non-performance of the contract results from the fraud
of the debtor, the damages and interest must not comprehend, as regards the loss sustained
by the creditor and the gain of which he has been deprived, any thing which
is not the immediate and direct consequence of the non- performance of the contract.”
Expectation damages
Expectation damages compensate the injured party for the benefit he would have received
had the contract not been breached, minus any amount he would have spent in performance
of the contract. Such damages must be proven with certainty, and may be measured by the
contract price, loss in value, or lost profits.

Expectation damages – which may be general or consequential – must be foreseeable.

Hadley v. Baxendale, 156 Eng. Rep. 145 (1845).
General damages are the natural and probable consequence of a breach and are deemed to
have been within the contemplation of the breaching party. A party seeking general
damages need not offer further proof that the damages were foreseeable.
.
Consequential (or special) damages arise from the special facts and circumstances of the
case and are not deemed to be within the contemplation of the breaching party unless he
was made aware of such specific facts and circumstances. A party seeking consequential
damages must demonstrate that the damages were foreseeable at the time the contract was
formed.

Reliance damages

Reliance damages compensate the injured party for expenses or loss incurred in reasonable
reliance on the contract that was breached. Reliance damages are only awarded when
expectation damages cannot be proven, and may not exceed the anticipated benefit of the
bargain.

Restitution
Restitution compensates a party for the benefit conferred on the other party as a result of
partial performance or reliance, and is aimed at preventing unjust enrichment. Restitution
damages may be measured by:
the reasonable value of the benefit received in terms of what it would have cost to obtain
such benefit from another source
the extent to which the value of the party's property has been increased or his other interests
advanced.

Restitution may be available:

in cases of breach, to either party
where a contract is unenforceable (e.g., due to lack of consideration or writing)
where a contract is voidable
where a duty is excused or discharged due to impracticability, frustration of purpose, non-
occurrence of a condition, or disclaimer by a beneficiary
in void contracts to a party not in pari delicto
Restitution by Injured Party

An party injured by a breach is entitled to restitution for any benefit he conferred on the
breaching party by way of partial performance or reliance. Restitution is not available,
however, if the injured party has performed all of his contractual duties and the breaching
party owes no performance other than payment for a definite sum of money for the injured
party's performance. [Restatement § 373]

Restitution by Breaching Party

Where the aggrieved party justifiably suspends his performance on the ground that other
party's breach discharged his remaining duties, the breaching party is entitled to restitution
for any benefit he conferred by way of part performance or reliance in excess of the loss that
he caused the aggrieved party by his breach. [Restatement § 374(1)]

Stipulated damages (liquidated

damages)
At the time the contract is formed, the parties may agree to a fixed sum of money or a set
formula for setting damages in the event of a breach. Stipulated damages will be enforced if
they reflect an honest effort to anticipate the harm caused by a breach. Stipulated damages
will be deemed invalid if they represent an attempt to punish the breaching party, such as in
the case of unreasonably large damages.

Under common law, the reasonableness of stipulated damages

must reflect:
the anticipated or actual harm caused by the breach; and
the difficulties of proof of loss.

In sales contracts, stipulated damages must be reasonable in light of:

the anticipated or actual harm caused by the breach;
the difficulties of proof of loss; and
the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

Incidental Damages
Incidental damages are available under several UCC provisions, for both buyers and sellers.
Incidental damages suffered by a seller due to a buyer's breach include any commercially
reasonable charges, expenses or commissions incurred by:
the stoppage of delivery
the transportation, care and custody of goods after the buyer's breach
the return or resale of the goods
actions otherwise resulting from the buyer's breach. [UCC § 2- 710]
Incidental damages suffered by a buyer as a result of a seller's breach include expenses
reasonably incurred in:
inspection, receipt, transportation and care and custody of goods rightfully
rejected
any commercially reasonably changes, expenses, or commissions in connection with
effecting cover
any other reasonable expense incident to the delay or other seller's
breach. [UCC § 2-715(1)]

Consequential Damages

The existing version of Article 2 does not provide for recovery of consequential damages by
sellers. The proposed revision provides for such recovery arising out of a buyer's breach,
except in consumer contracts. A seller's consequential damages include any loss resulting
from general or particular requirements and needs of which the buyer at the time of
contracting had reason to know and which could not reasonably be preventing by resale
otherwise. [proposed revised UCC § 2-710(2), (3)]

Consequential damages suffered by a buyer due to a seller's breach include:

any loss resulting from general or particular requirements and needs of which the seller at
the time of contracting had reason to know and which could not reasonably be preventing by
cover or otherwise
injury to person or property proximately resulting from any breach of warranty. [UCC § 2-
715(2)]

Interest
Interest on damages may be awarded, calculated from the time the performance was due
minus all deductions to which the party in breach is entitled, under the following
circumstances:
if the breach consists of a failure to pay a definite sum of money
if the breach consists of failure to render performance with a fixed or ascertainable monetary
value as justice requires on the amount that would have been just compensation had it been
paid when performance was due. [Restatement § 354]

Punitive damages

Punitive damages are generally not available in contract actions, but if the conduct that
causes the breach also constitutes a tort, punitive damages may be awarded.

Specific Enforcement
Specific enforcement is a remedy in the form of a court order that the breaching party render
performance of the contract. Specific performance is not available if expectation damages
are adequate to put the aggrieved party in as good a position as he would have been had
the contract been fully performed.
Expectation damages are deemed to be an inadequate remedy:
where the subject matter is unique
in real property transactions
in goods contracts, "where goods are unique or in other proper circumstances," e.g., where
the goods are in short supply. [UCC § 2- 716]

Precise the termination in this contract

"Term; This agreement shall become effective upon the date hereof, and shall remain
in effect for a period of 5 years (intial term).
The agreement may be cancelled before the completion of the initional term by either party
by providing the other a 30 days prior written notice of such cancellation.
Notwithstanding the foregoing, this agreement shall terminate in the event of a material
breach of any term, convenant or agreement herein by either party that continues
unremedied or uncorrected for a period of 15 days after written notice thereof, or if either
party ceases its business or operations covered under this agreement… The term of this
agreement may be extended for successive periods of 1 year (each a "Renewal Term") upon
written acceptance of the legal representatives of both parties.
The term of this agreement will not automatically renew upon expiration of the initial term or
any renewal term (if any), notwithstanding any previous agreement of course of dealings
between the parties. The mere expiration or termination of this agreement does not entitle
either party to demand payment of any compensation”.