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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Quote of the Day
“The whole duty of government is to
prevent crime and to preserve
contracts.”
Lord Melbourne,
British Prime Minister
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
The Purpose of a Contract
 Contracts exist to make business
matters more predictable.
 Judicial Activism vs. Judicial Restraint
• Judicial restraint makes the law less
flexible but more predictable.
• Judicial activism makes the law more
flexible but less predictable.
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Legal Environment 4th Ed.
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Issues (and Answers)
 Agreement
• One party must make a valid offer, and the
other party must accept it
 Consideration
• There has to be bargaining that leads to an
exchange between the parties.
 Legality
• The contract must be for a lawful purpose.
 Capacity
• The parties must be adults of sound mind.
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Legal Environment 4th Ed.
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Contracts
 Definition
• A promise that the law will enforce.
 Development of Contract Law
• Common law once required all contracts to
be in writing, with a seal affixed.
• Later, some payment was required before a
contract could be enforced.
• Mutual promises became enforceable in the
1600’s.
• By the 1900’s, courts began to consider the
fairness of contracts before enforcing them.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Types of Contracts
(or Agreements)
Bilateral
vs. Unilateral
Express
vs. Implied
Executory
Valid
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vs.
vs. Executed
Unenforceable
vs. Voidable
vs.
Legal Environment 4th Ed.
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Void
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Types of Contracts
(or Agreements)
 Bilateral and Unilateral Contracts
• Bilateral: both parties make a promise (to
do something) to each other.
• Unilateral: one party makes a promise to
the other that the other party can accept
only by doing something specific.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
Types of Contracts (cont’d)
 Express and Implied Contracts
• Express: the two parties to the contract
explicitly state all of the important terms of
their agreement.
• Implied: the words and conduct of the
parties indicate that the parties intended to
make an agreement.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
Types of Contracts (cont’d)
 Executory and Executed Contracts
• Executory: when one or more parties has
not fulfilled its obligations under the
contract.
• Executed: when all parties to the contract
have fulfilled their obligations under the
contract.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
Types of Contracts (cont’d)
 Valid, Unenforceable, Voidable, and
Void Agreements
• Valid: satisfies the law’s requirements.
• Unenforceable: when the parties intend to
form a valid bargain but some rule of law
prevents enforcement.
• Voidable: when the law permits one party to
terminate the agreement.
• Void: one that neither party can enforce,
usually because the purpose is illegal or
one of the parties had no legal authority.
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Legal Environment 4th Ed.
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Remedies Created by
Judicial Activism
 Even when there is no contract, a
plaintiff may use promissory estoppel to
enforce the defendant’s promise if he
can show that:
• The defendant made a promise knowing
that the plaintiff would likely rely on it.
• The plaintiff did rely on the promise; and
• The only way to avoid injustice is to enforce
the promise.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Remedies Created by
Judicial Activism


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Even when there is no contract, a court may
use quasi-contract to compensate a plaintiff
who can show that:
• He gave some benefit to the defendant.
• He reasonably expected to be paid for the
benefit and the defendant knew this; and
• The defendant would be unjustly enriched if
she did not pay.
The damages awarded are called quantum
meruit, meaning that the plaintiff gets “as
much as he deserved.”
Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Sources of Contract Law
 Common Law
 Uniform Commercial Code
• UCC Article 2 governs the sale of goods.
“Goods” means anything moveable, except
for money, securities, and certain legal
rights.
• In a mixed contract, Article 2 governs only if
the primary purpose was the sale of goods.
 Restatement (Second) of Contracts
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Meeting of the Minds
 The parties can form a contract only if
they had a meeting of the minds.
• They must understand each other and
intend to reach an agreement.
• A judge will make an objective assessment
of any disagreements about whether a
contract was made -- whether or not a
reasonable person would conclude that
there was an agreement, based on the
parties’ conduct.
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Legal Environment 4th Ed.
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Offer
An offer is an act or statement that proposes
definite terms and permits the other party to create
a contract by accepting those terms.
 Problems with Intent
• Invitation to bargain is not an offer.
• An advertisement is generally not an offer.
• A letter of intent may or may not be an
offer, depending on the writer’s intent.
 Problems with Definiteness
• The term of the offer must be definite.
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Legal Environment 4th Ed.
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Termination of Offers
 Termination by Revocation
• Effective when the offeree receives it.
 Termination by Rejection
• If an offeree rejects an offer, the
rejection immediately terminates the
offer.
 Termination by Counteroffer
• If an offeree counteroffers, it is a
rejection that immediately terminates
the offer.
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Legal Environment 4th Ed.
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Termination of Offers (cont’d)
 Termination by Expiration
• When an offer specifies a time limit for
acceptance, that period if binding.
• If the offer specified no time limit, the
offeree has a reasonable period in
which to accept.
 Termination by Destruction
• Destruction of subject matter
terminates offer.
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Legal Environment 4th Ed.
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Acceptance
 The offeree must say or do something
to accept.
• In a bilateral contract, the offeree generally
must accept by making a promise.
• In a unilateral contract, the offeree must
accept by performing.
 Mirror Image Rule (Common Law)
• Requires that acceptance be on precisely
the same terms as the offer.
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Legal Environment 4th Ed.
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UCC and the Battle of Forms

Under UCC §2-207, an acceptance that adds
additional or different terms may form a
contract for sales of goods in certain cases.
• For a sale of goods, the most important factor is
whether the parties believe they have formed an
agreement.
• New terms added by the offeree do not void the
agreement if accepted by the offeror.
• If terms are changed, a court will rely on general
principles of the UCC to create a fair contract.
• If a party wants to contract only on his terms, the
agreement must clearly state that.
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Legal Environment 4th Ed.
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Consideration
 Consideration means that there must
be bargaining that leads to an
exchange between the parties.
 Consideration can be anything that
someone might want to bargain for.
 A promisor is the person who makes
the promise, and promisee, the person
to whom the promise is made.
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Legal Environment 4th Ed.
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Consideration
“Bargaining is obligating yourself in order
to induce the other side to agree.”
 The thing bargained for can be:
• another promise.
• an action without a promise.
• a promise to do something or a promise to
refrain from doing something.
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Legal Environment 4th Ed.
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A
Bargain
B
Which
There is consideration
to support a contract
causes...
between A and B, when
they bargain...
A to give B
a benefit
B to give A
a benefit
and their bargaining causes BOTH parties ...
OR
OR
A to suffer a
detriment
AND
B to suffer a
detriment
…to either give a benefit to the other or to
Consideration
suffer a detriment supports
themselves.a contract!
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
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Mutuality of Obligations
 Illusory Promise
• If one party’s promise is conditional, the
other party is not bound to the agreement.
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.
“If you understand the contract
issues that courts scrutinize, the
agreement you draft is likelier to be
enforced. You thus achieve
greater control over your affairs -the very purpose of a contract.”
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Legal Environment 4th Ed.
COPYRIGHT © 2011 South-Western/Cengage Learning.