CONTRACTS: BASIC PRINCIPLES

CONTRACT VS. PROMISE(Promise: A persons declaration that something will or will not happen in the future.

(Promisor: The person making the promise.

(Promisee: The person to whom the promisor made the promise.

(Contract: An agreement between two or more competent parties, for valuable consideration, to perform or to refrain from performing some act now or in the future.

(Offeror: The person proposing an agreement.

(Offeree: The person to whom the offeror proposes the agreement.

CONTRACT FORMATION(Agreement: The offeror must offer to enter into an agreement, and the offeree must accept the terms of the offerors offer.

(Consideration: Something of value given or promised to convince a party to agree to the deal.

(Contractual Capacity: Both parties must be legally competent to enter into the agreement.

(Legality: The contracts purpose must be to accomplish some goal that is legal and not against public policy.

(Genuineness of Assent: The apparent consent of both parties must be genuine.

(Objective Theory of Contract: The parties assent is judged not by the subjective intent of each party, but by the objective intent that a similarly situated reasonable person would understand the parties to have.

(Form: The agreement must be in whatever form (e.g., written, under seal) the law requires.

BILATERAL AND UNILATERAL CONTRACTS(Bilateral Contract: A bilateral contract arises when the offeror gives her promise in exchange for the offerees return promise (e.g., X promises to deliver a car to Y, and Y promises to pay X an agreed price).

(Unilateral Contract: A unilateral contract arises when the offeree can only accept the offer by performance (e.g., X offers Y $25 to mow Xs yard).

(Once the offeree of a unilateral contract begins to perform, the offeror loses the ability to revoke her offer (e.g., if X offered Y $25 to mow Xs yard, on Y had substantially begun to perform, X could not revoke her offer to pay Y for mowing her yard).

FORMAL AND INFORMAL CONTRACTS(Formal Contract: A contract that requires a special form or method of formation (creation) in order to be enforceable. For example:

(Contract Under Seal: A formalized writing with a special seal attached.

(Recognizance: A promise, made in open court, to perform a specific task or pay a specified sum.

(Negotiable Instrument: A check, note, draft, or certificate of deposit each of which requires certain formalities.

(Letter of Credit: An agreement to pay that is contingent upon the receipt of documents (e.g., invoices and bills of lading) evidencing receipt of and title to goods shipped.

(Informal Contract: A contract that does not require a specified form or method of formation in order to be valid.

(The vast majority of contracts are informal.

EXPRESS AND IMPLIED CONTRACTS(Express Contract: A contract in which the terms of the agreement are explicitly stated orally or in writing.

(Implied-in-Fact Contract: A contract formed in whole or in part by the conduct (as opposed to the words) of the parties. In order to establish an implied-in-fact contract,

(1)the plaintiff must have furnished some service or property to the defendant,

(2)the plaintiff reasonably expected to be paid and the defendant knew or should have known that a reasonable person in the plaintiffs position would have expected to be paid for the service or property rendered, and

(3)the defendant must have had the opportunity to reject the service or property and failed to do so.

EXECUTION AND VALIDITY OF CONTRACTS(Executed Contract: A contract that has been completely performed by both (or all) parties. By contrast,

(An executory contract is a contract that has not yet been fully performed by one or more parties.

(Valid Contract: A contract satisfying all of the requisites discussed earlier agreement, consideration, capacity, legal purpose, assent, and form. By contrast,

(a void contract is a contract having no legal force or binding effect (e.g., a contract entered into for an illegal purpose);

(a voidable contract is an otherwise valid contract that one of the parties may legally avoid, cancel, or annul (e.g., a contract entered into under duress or under false pretenses); and,

(an unenforceable contract is an otherwise valid contract rendered unenforceable by some statute or law (e.g., an oral contract that, due to the passage of time, must be evidenced by a writing to be enforceable).

QUASI CONTRACTS(Quasi Contract: A fictional contract imposed on parties by a court in the interests of fairness and justice, typically to

(1)prevent the unjust enrichment of one party at the expense of the other, and

(2)allow the party whose actions would otherwise unjustly enrich the other party to recover in quantum meruit.

(Courts typically will not allow a party who has conferred a benefit on another to recover in quasi contract if the party conferring the benefit did so officiously (e.g., if a car dealership applies, without your asking or agreeing to have it do so, an expensive finish to your car after you agree to buy the car but before you take delivery, you should not have to pay for the unsought benefit) or as a result of misconduct (e.g., a distant cousins murderer cannot sue you to recover a portion of what the cousin left you in her will) or negligence (e.g., a driver who falls asleep at the wheel and loses control of his car, which ends up sideways on the sidewalk in front of you, preventing you from falling into an open manhole in the sidewalk, cannot sue you in quasi-contract for saving you from injury or death).

AGREEMENT(Agreement: A meeting of two or more minds in regard to the terms of a contract, through offer and acceptance.

(Offer: A promise or commitment to perform or refrain from performing some specified future act made by the offeror.

(The offeror must seriously, and objectively, intend to perform or refrain as offered.

(The terms of the offer must be reasonably certain or definite.

(The offeror must communicate the offer to the offeree.

(Acceptance: A voluntary act by the offeree either in the form of words or of conduct which indicates agreement to the terms of the offer.

(The acceptance must be unequivocal and must be communicated to the offeror.

(A third party, other than an agent acting on behalf of the offeree, generally cannot substitute itself for the offeree and accept the offer.

INTENT TO OFFER(A variety of common statements related to business transactions are not offers, including:

(expressions of opinion;

(statements of intention;

(preliminary negotiations;(auctions and other invitations to bid, negotiate, or contract, including most forms of advertisement; and

(agreements to agree to one or more material contract terms or conditions at some later date.REVOKING AN OFFER(Revocation: The withdrawal of an offer, communicated to the offeree prior to the offerees acceptance. Unless an offer is irrevocable, the offeror may revoke any offer not yet accepted at any time without liability. Examples of offers generally deemed to be irrevocable include:

(Firm offers for the sale of goods made by a merchant and subject to the provisions of the Uniform Commercial Code (UCC);

(Option contracts, under which the offeror, in exchange for valuable consideration from the offeree, cannot revoke her offer for a stipulated time period during which the offeree has the sole right of acceptance; and

(The offeree must give the offeror valuable consideration to make an option contract irrevocable.

(Offers on which the offeree has justifiably relied to her detriment (a.k.a. promissory estoppel).

REJECTION AND COUNTEROFFER(Rejection: The terms of the offer may be rejected by the offeree, in which case the offer terminates.

(Any subsequent attempt by the offeree to accept will be construed as a new offer, which the original offeror (now the offeree) may accept.

(Rejection is ordinarily accomplished by words or by conduct evidencing an intent not to accept.

(To be effective, the rejection must be received by the offeror prior to any contrary writing or conduct evidencing acceptance by the offeree.

(Counteroffer: A rejection by the offeree of the original offer, coupled with a new offer made by the original offeree to the original offeror.

(Mirror Image Rule: An offerees acceptance must match the offerors offer exactly. If the offerees acceptance materially changes, adds to, or deletes any terms in the original offer, the offerees attempted acceptance is deemed to constitute a counteroffer, not an acceptance.

TERMINATION BY LAW(Lapse of Time: An offer terminates automatically when the time period specified in the offer expires.

(If no time period is stated in the terms of the offer, then the offer will terminate after a reasonable period of time has expired.

(Destruction of Subject Matter: An offer terminates automatically if the subject matter of the contract (i.e., goods, property) is destroyed prior to acceptance.

(Death or Incompetence: An offerees power to accept is terminated when the offeree or the offeror dies or is deprived of legal capacity to enter into the contract, unless the offer is irrevocable, in which case only the offerees death or incompetence will terminate the offer.

(Illegality: A statute or court action that makes a previously valid offer illegal will automatically terminate the offer.

ACCEPTANCE BY SILENCE(Acceptance by Silence: Generally speaking, silence (or inaction) cannot constitute acceptance even when the offeror indicates that silence or inaction will be taken as acceptance. There are exceptions:

(Acts Consistent with Acceptance: If the offeree, despite having an opportunity to reject, takes the benefit of offered goods or services, he is implied to have accepted the goods or services and agreed to compensate the offeror according to the terms of the offer.

(Prior Dealings: If the offeror and offeree have prior dealings, pursuant to certain standard terms and conditions, the offeree has the duty to reject or risk being bound by his silence.

(Unilateral Contract: Because a unilateral contract requires acceptance by some action on the part of the offeree, acceptance is usually evidenced by the action; and, therefore, notification is unnecessary unless the offeror has specifically requested notification or has no means to determine whether the requested act has been performed.

COMMUNICATING ACCEPTANCE(When the offeror and offeree cannot or chose not to deal face to face, acceptance is effective when communicated by the offeree to the offeror by an authorized means.

(The Mailbox Rule: An acceptance is effective once the offeree places it in the mailbox.

(Note that, whereas a revocation becomes effective upon its receipt by the offeree, an acceptance becomes effective upon its dispatch by the offeree to the offeror.

(In addition to any modes of acceptance expressly stated in the offer, common law recognizes the following impliedly authorized methods:

(1)Any means that is as fast or faster than the method identified as acceptable by the offeror; and

(2)U.S. Mail is always impliedly acceptable when the parties are bargaining at a distance.

EFFECTIVE TIME OF ACCEPTANCE(As a general rule, acceptance is effective at the time it is communicated by the offeree via an authorized means of communication (the mailbox rule), subject to the following exceptions:

(1)if the acceptance is not properly dispatched, it will be effective when received by the offeror;

(2)if the offeror conditioned the offer on receipt of the offerees acceptance, it will be effective when received by the offeror; and

(3)if the acceptance is sent after a rejection, whichever is received first by the offeror is given effect.

(If the acceptance is not communicated by an authorized means, it will be effective when the offeror receives it.

CONSIDERATION(Consideration: Value given in return for a promise. Consideration must be (1) legally sufficient and (2) bargained for by the party receiving it.

(Legally sufficient consideration may take the form of:

(1)promising to do something that the promisee has no prior legal duty to do (e.g., promising to pay money for the promisors goods);

(2)performing an action that the promisee is not otherwise obligated to undertake (e.g., painting the promisors house); or

(3)refraining from exercising a legal right that the promisee is otherwise entitled to exercise (e.g., dismissing a viable lawsuit against the promisor).

(Consideration is bargained for if it is sought by the promisor in exchange for the promisors promise and given by the promisee in exchange for the promisors promise.

(Courts will generally not inquire into the adequacy of the consideration, as long as the promisor bargained for it.

INSUFFICIENT CONSIDERATION(Preexisting Duty: A promise to do (or refrain from doing) what one already has a legal duty to do (or refrain from doing) generally does not constitute legally sufficient consideration.

(However, under the unforeseen difficulties doctrine, an existing contract may be modified to account for unforeseen difficulties that arise during the course of performance. In such a case, the promisees obligation under the modified contract is new consideration.

(Likewise, if the parties agree to replace an existing contract with a new, superseding contract, the promise to perform the new contract is a new promise; and, thus, not a promise to perform a pre-existing legal duty.

(Past Consideration: Promises made in return for acts or events that have already taken place are unenforceable for lack of sufficient consideration.

(Illusory Promises: If the terms of a contract call for performance in such uncertain terms that the promisor has not definitely promised to do (or refrain from doing) anything, the contract is unenforceable for lack of sufficient consideration.

ACCORD AND SATISFACTION(Accord and Satisfaction: An agreement between an obligor (debtor) and obligee (creditor), by which the obligor agrees to pay the obligee some amount owed under the contract (generally less than the amount in dispute) in exchange for a discharge of all obligations owed by the obligor to the obligee.

(For accord and satisfaction to occur, the amount of the obligors debt to the obligee must be in dispute, or unliquidated.

(Liquidated Debt: A debt whose amount has been ascertained, fixed, agreed on, settled, or exactly determined.

(Unliquidated Debt: A debt, the amount of which may be the subject of honest disagreement.

RELEASES AND COVENANTS NOT TO SUE(Release: An agreement whereby one party forfeits its rights to pursue a legal claim against another party.

(Releases are generally binding if they are:

(1)given in good faith,

(2)written, and

(3)accompanied by consideration.

(Covenant Not to Sue: An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.

PROMISSORY ESTOPPEL(Promissory Estoppel: When a promisor makes a clear and definite promise on which the promisee justifiably relies, the promisor may be bound by the promise, even if it was insufficient to form the basis of a valid, legally binding contract.

(Promissory estoppel requires the following elements:

(1)the promise was clear and definite;

(2)the promisee justifiably relied on the promise;

(3)the promisees reliance was substantial and of a definite character; and

(4)enforcing the promise will serve the best interests of justice.Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 1Business Law Today: The Essentials (7th ed.)