CONTRACTS
Chapter 10
Meiners, Ringleb & Edwards
The Legal Environment of Business, 12th Edition
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CONTRACT LAW

Provides a mechanism to deal with others

Law of contracts has evolved in commerce over the
centuries

The concept of freedom of contract means there are
responsibilities to those who create legally binding
relationships
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CONTRACT LAW

Common Law
UCC
 Uniform Commercial
 Each state differs
Code
 There is uniformity about
 All States have
general contract principles that
adopted in its entirety
run throughout most states’ laws
except Louisiana
 Years ago, English courts
 Covers contracts for
began to use lex mercatoria
sale of goods
(“the law merchant”)
 Many countries rely on
Code Law only for their
 Roman law of contracts was
basic legal framework
surprisingly sophisticated
covering the Roman Empire

Judge-made law

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DEFINITION OF A CONTRACT
o
Sir Wm. Blackstone: “An agreement, upon sufficient
consideration, to do or not to do a particular thing.”
o
Modern definition--centers on a promise: “A promise or
set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some
way recognizes a duty.”
o
The promise itself creates a manifestation of intent
o
Contracts form legal relationships and duties between
parties
o
Not all promises are enforceable contracts – must
meet the requirements of a contract to create an
enforceable promise
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EXPRESS AND IMPLIED CONTRACTS
Implied Contracts
Express Contracts
o
Direct statement by the
parties of the promises
made
o
May be oral or written
o
All important terms are
expressly stated
between the parties
o
Actions and circumstances
infer and define the terms
of the contract
o
May be words, conduct,
gestures
o
These contracts are
implied at law
o
Ex: At a check out counter
at a grocery store, actions
of the parties create offers/
acceptances
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ELEMENTS OF A CONTRACT
1. An Agreement, through


Offer
RULE:
If all elements are
present, the contract is
generally termed valid
Acceptance
2. Consideration
3. Contractual Capacity

See Exhibit 10.1
4. Legality
5. Genuine Consent
6. Writing

If necessary under the
Statute of Frauds
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OFFER AND ACCEPTANCE



The Offer
 Creates the Offeror and Offeree
 1. Manifestation of Intent
 Preliminary Negotiations vs. Intent to Offer
 2. Definite Terms & Conditions
 3. Communication
 Person returns a dog but does not know of an award
Sometimes terms will be presumed
 i.e. mailed computer is packed properly
Restatement (2nd) of Contracts: “the manifestation of
willingness to enter into a bargain, so made as to justify
another person in understanding that his assent to the
bargain is invited and will conclude it.”
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TERMINATING AN OFFER

Revocation



Withdrawing of offer by the Offeror
Rejection

By Offeree

Through lapse of time (Option Contracts are different)

Counteroffers are created by rejecting the original offer but
keeping negotiations open by presenting new conditions –
result is a counteroffer
Operation of Law

Intervening Illegality

Destruction of subject matter

Death or insanity of offeror or offeree
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THE ACCEPTANCE

The Acceptance – Expression of Assent

1. Unconditional

Must be a mirror image of the offer

If conditions are added, they create a counteroffer

2. Unequivocal

3. Legally Communicated

Bilateral contracts versus unilateral contracts

See Certified Fire Protection v. Precision Construction

See also Exhibit 10.4
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CASE
CERTIFIED FIRE PROTECTION V. PRECISION CONSTRUCTION

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





Precision Construction is general contractor that bid on job.
Solicited bids from subcontractors for things such as design & installation
of a sprinkler system for fire prevention. Based on specifications, Certified
Fire submitted a bid of $480,000. Won the bid. Precision began construction.
December 5: Certified got a copy of the contract from Precision, along with
set of construction plans and sprinkler requirements.
 Contract required Certified to have preliminary design draws for system
within 2 weeks and provide an insurance certificate.
January 19: No signed contract or insurance certificate, but Certified billed
Precision for $33,575, although plans were not yet ready for Certified.
January 26: Precision told Certified that it was holding up the project and it
would move ahead without Certified.
February 1: Certified submitted drawings but objected to terms in contract.
February 8: Precision was informed of mistakes in sprinkler system
drawings.
February 16: Precision told Certified that it was ending relationship: Because
contract wasn’t signed; There was no insurance certificate; Drawings were
incorrect.
Certified sued for breach of contract.
Contended it was due payment for the sprinkler system drawings.
Trial court held for Precision -- no contract existed. Certified appealed.
(Continued)
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CASE
CERTIFIED FIRE PROTECTION V. PRECISION CONSTRUCTION

A contract requires offer & acceptance, meeting of minds and consideration.
Meeting of the minds: When parties have agreed upon contract’s essential terms.
Essential “depends on the agreement and its context and also on the subsequent
conduct of the parties, including the dispute which arises and the remedy sought.

Certified argued progress bill it sent to Precision established the price term. Said
Precision’s urging that Certified get started on designs established scope of work
for express design-work-only contract.

Testimony establish that Precision would not execute a contract for only design
drawings. Such drawings are specifically tailored for company – not useful to
another installer.

Price and scope of work terms missing. Parties never agreed to performance time.

Certified also argued it should recover under implied contract.

Such a contract must be “manifested by conduct” – showing intent by parties to
contract, i.e. promises were exchanged and obligations were clear. Not true here.

HELD: Affirmed. No contract was ever made. Too many gaps to fill.

Precision never agreed to a contract for only design-related work. This was a
design and install contract for sprinkler system. No agreed upon price; disputes
included time of performance. The designs are installer-specific.
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CONSIDERATION

Definition: Something of value or something bargained
for in exchange for a promise

This element keeps contract from being a gift.

If consideration is absent, neither party may enforce the
promise or agreement

Traditional Rule: Must create –

Legal detriment to the promisee OR

Legal benefit to the promisor

Actually the legal detriment and benefit usually occur at the same
time.
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ADEQUACY OF CONSIDERATION

Courts do not examine much.

If a party bargains poorly, courts usually won’t
interfere.

Those who bargain take on the risk of their own errors.

There are exceptions such as fraud, duress, etc.

The main concern is an exchange of mutual promises
and obligations by the parties.

See Caley v. Gulfstream Aerospace Corp.
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CASE
CALEY V. GULFSTREAM AEROSPACE CORP.

Gulfstream adopted a dispute resolution policy (DRP) as only procedure to resolve
disputes between Gulfstream and the employees. Mailed policy to employees.

Policy said that DRP would begin in 2 weeks and would be “a condition of
continued employment.” If an employee continued work, then she accepted the
DRP.

Group of employees sued, saying there was no contract and DRP could not be
enforced.

District Court held for Gulfstream. Employees appealed.

HELD: Affirmed.

DRP is an offer and states it is a contract.

Terms of acceptance are continued employment by employees.

Acceptance can be through a promise or an act.

Here the action of continuing employment = acceptance of the offer and a contract.

Employees had a choice to (1) continue employment, accepting DRP or (2)
terminate employment.

There is “bargained for consideration” by mutual promises and obligations.
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ENFORCEABLE PROMISES WITHOUT
CONSIDERATION

Promissory Estoppel or Detrimental Reliance

Use of this doctrine avoids injustice due to the promisee's
reasonable reliance on the promisor’s promise.

Promisor is estopped (prevented) from denying a promise.

Equitable doctrine.

“A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promissee . . . and which
does induce such action or forbearance is binding if injustice can
be avoided only by enforcement of the promise.” Restatement (2nd)
of Contracts

Courts don’t impose the rule lightly.

Sometimes used in promises to charities, especially if
organizations rely on the donation to act in some way.


e.g. Beginning construction based on promises of charitable
contribution.
See Hinson v. N&W Construction Company, Inc.
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CASE
HINSON V. N&W CONSTRUCTION COMPANY, INC.
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N&W Construction prepared bid to submit to MJCC to build kitchen facility at
training center. N&W received oral bids from plumbing subcontractors in
preparing its bid to MJCC.
Hinson quoted $92,000 as bid as plumbing sub; next lowest bid was $139,000.
N&W used Hinson’s bid to prepare its bid to MJCC. N&W was low bidder and
awarded contract by MJCC. Then contacted Hinson that it needed plumbing work
to begin. Hinson failed to sign and return plumbing subcontract and refused to
due the job.
N&W then hired next lowest bidder; paid additional $47,000 to get work done.
N&W sued Hinson based on promissory estoppel.
Trial court granted summary judgment to N&W, awarding $47,000. Hinson
appealed.
Ct. of Appeals held: Affirmed.
Hinson admits he provided a verbal quote. Also testified that he reviewed plans &
specs for the building, & was satisfied with his quote of $92,000.
Hinson refused to do the plumbing because, “I just had a lot of other jobs going.”
Promissory estoppel arises when “making of a promise, even though without
consideration . . . “ that plaintiff (here N&W) relied upon.
“Refusal to enforce it would be virtually to sanction the perpetuation of fraud or
would result in other injustice.”
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CAPACITY TO CONTRACT

Refers to the legal ability to create a contract

Some have limited capacity to contract

Minors

Intoxicated persons

Insane persons

If there is no capacity, the contract is void

If there is partial capacity, the contract is voidable –
may disaffirm

NOTE: Until the mid 19th century, married women did
not have capacity to make contracts independent of
their husbands.
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VOID AND VOIDABLE CONTRACTS
Void Contracts

Contract does not exist at
law




One of elements is
missing – lacks a
requirement of a
contract
i.e. Contract with a legally
insane person
i.e. Contract for an illegal
subject matter
Courts won’t accept disputes
Voidable Contracts

One party to the contract
has right to avoid legal
obligation

Is valid but capable of
being voided by a
circumstance

i.e. Minors contracts

i.e. Contracts with person
under influence of drugs or
alcohol

i.e. Fraud by one of the
parties
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MINORS







Defined as a person under the
legal age of majority
Traditionally, the age of
majority was 21
Now it is 18 years old in all
states for most contracts
Minors have partial capacity
Contract is voidable
Legal policy to protect the
young from the “results of their
own folly”

General Rules

#1: Minors may disaffirm
contracts at their option

#2: If a minor disaffirms a
contract after receiving
benefits, restitution must be
paid for the benefit

Some contracts may not be
disaffirmed, i.e.

Enlistment contracts

Marriage contracts

Educational loans

Insurance loans

Medical care
After reaching majority, the
minor may ratify the contract
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INTERNATIONAL PERSPECTIVE
“PROBLEMS ENFORCING CONTRACTS”

Study by World Bank looked at problem of enforcing a
contract in various countries

Problem: Lack of effective contract law

Problem: Lack of honest and efficient judicial
enforcement

Effect: Discouragement of foreign firms from investing
in poor countries

Effect: Discouragement of foreign firms even to do
business in poor countries

See examples of comparisons of number of legal
procedures, duration and costs in China, India, Mexico,
Germany, Canada, U.K. and U.S.
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LEGALITY


If a contract is lacking legality, courts will not enforce it
Subject Matter Must Be Lawful


Criminal activities; sale of prohibited drugs;
gambling activities in some states
Interest rates on loans that violate usury laws

Court may strike entire bargain as unenforceable or
only a part that concerns illegal subject matter
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UNENFORCEABLE CONTRACTS

Contract is actually valid when made, but courts won’t
enforce it

i.e. Unconscionable contracts

i.e. Exculpatory agreements

Ex: Company agrees to ship wheat to Iran. After
shipment is at sea, U.S. government declares no
U.S. firms may trade with Iran.

Result: Unenforceable under U.S. law even if seen
as legal in Iran
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CONTRACT CONTRARY TO PUBLIC POLICY


Exculpatory Agreements (types of those contracts written to
completely escape liability)
Unconscionable Agreements (unequal bargaining power)
 Outcome is grossly unfair to an innocent party.

See Walker v. Walker-Thomas Furniture

Contracts in Restraint of Trade
 Contracts that restrain trade or unreasonably restrict
competition
 Covenant not to compete may be restraint of trade unless
 Limited by time, territory and ancillary to the contract
 Different states differ on this subject
 Covenants not to compete often used in sale of business or
employment contracts
o
See Arthur J. Gallagher & Co. v. Babcock
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CASE
ARTHUR J. GALLAGHER & CO. V. BABCOCK
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Arthur J. Gallagher & Co. is in the insurance business. Subsidiary, GBSI, handles
employee-benefit insurance programs. GBSI purchased a Louisiana insurance
broker, Babcock.
• Paid almost $3 million for his business
• Part of the deal: Babcock & several employers went to work for GBSI
Agreed to a restrictive covenant. If they left, they would not compete with GBSI in
Louisiana for 2 years
Few years later: Babcock and others quit GBSI and went to work for a
competitor. Drew away 13 clients to their new employer.
Gallagher sued Babcock for violating agreement that contained a non-solicitation
agreement and non-competition agreement.
Gallagher contended that Babcock & the employees solicited GBSI clients in
competition with their former employer.
Trial court upheld agreements, but limited the geographic restriction to 9 parishes
in which Babcock could not compete with GBSI.
• This was rather than restricting Babcock to the whole state.
Jury awarded Gallagher $1.2 million in damages + attorneys fees.
Babcock and other GBSI employees appealed.
(Continued)
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CASE
ARTHUR J. GALLAGHER & CO. V. BABCOCK

Defendants said non-competition provisions were not valid because (1) Their
language (2) Their geographic scope

Agreements unambiguously prohibited defendants from competing against
Gallagher or soliciting its clients for 2 years after employment was terminated.

Employees agreed they would not “serve,” “sell to,” “market,” “accept,” “aid,”
“consult,” “place,” “counsel,” or “consult” re: insurance services with customers
or prospective customers of Gallaher

Provisions in this agreement is less restrictive than allowed under state law.

Gallagher allowed former employees to work in similar business, just not on
accounts they worked on while employed with Gallagher.

In Louisiana non-compete clauses are limited to geographic areas under “a like
business” and agreement must specify “parishes, municipalities or parts
thereof” in which employer operates.

Court may rely on contractual severability clause to excise the geographic
areas in which an employer does not conduct such business.

District court agreed with Defendants. Eliminated 55 parishes where Gallagher
did not provide insurance service. This was not an error by the District Court

HELD: District Court decision was AFFIRMED.
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REALITY AND GENUINENESS OF CONSENT




This concept deals with an individual’s choice of entering into
agreements.
If reality is missing, there is no meeting of the minds.
 If there is unilateral mistake over a simple error, then contract
usually can be avoided. (typographical error - $20,000 instead
of $200,000).
Without this element, the contract is void or voidable (depending
on the circumstances).
Examples:
 Fraud
 Misrepresentation
 Duress
 Undue influence
 Statutory Exceptions: Pressure by salesperson, i.e. Federal
Trade Commission’s Cooling-Off Rule re: door-to-door sales
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CONTRACTS IN WRITING AND THE STATUTE OF
FRAUDS

Contracts do not always have to be in writing to be
enforceable, however

Written contracts are always good as evidence of the
agreement, and

Some contracts require a writing

Sale of land or interests therein

Contracts that cannot be performed within 1 year

Promise to pay the debt of another, including debts of an estate

Promises made in consideration of marriage
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SUFFICIENCY OF THE WRITING
o
Writing must set out the material terms of contract
o
Names of parties
o
Consideration
o
Subject matter, etc.
o
Invoices, E-mails, sales orders, checks, confirmations
may satisfy this requirement

See “Digital Signatures”
•
•
Electronic Signatures in Global & National Commerce Act (E-Sign)
2000 federal law.
Technology & contracts
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THE PAROLE EVIDENCE RULE
o
Restricts use of oral evidence when that evidence is
contrary to terms of written contract.
o
Oral evidence cannot contradict, change or add terms
to written contracts.
o
IF a written contract is incomplete, ambiguous, proves
fraud, mistake, or misrepresentation, THEN
o
Oral evidence may explain the problems.

See Issue Spotter “Liars’ Contest?”
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CASE
DESCHAMPS V. TREASURE STATE TRAILER COURT

In 2003, Rasmussen agreed to sell Deschamps a mobile home trailer park in
Great Falls, Montana. 96 residential spaces for $1,445,000.

Contract explained how Rasmussen would be paid over time.

After sale was completed, Rasmussen died. His estate inherited the asset.

Deschamps found significant problems with park’s water system. Required
$400,000 in repairs.

In 2006, Deschamps stopped making payments to the estate.

Claimed the cost of the water system repairs made payments impossible.

Estate sued; Deschamps countersued: contract breach/fraud.

Deschamps contended


Rasmussen said that water system was in good condition and that
occupancy rate was higher than in fact it was.
Trial Court held for estate, finding Deschamps’ claims were precluded by parol
evidence rule. He appealed.
(Continued)
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CASE
DESCHAMPS V. TREASURE STATE TRAILER COURT

HELD: Affirmed. When language of contract is clear and unambiguous, look
at the substance of the contract itself.

Here contract clearly, expressly stated that Deschamps did not rely on any
oral assurances or presentations by Rasmussen.

Deschamps cannot now claim otherwise.

Deschamps signed a contract prepared by his real estate agent, containing
statement that Deschamps had not relied upon assurances by Rasmussen.

Agreement provided

(1) Rasmussen had not conducted an inspection nor warranted property’s
condition.

(2) Deschamps had right/duty to inspect property prior to purchase.

(3) Special disclaimer of reliance on Rasmussen’s assurances.

(4) Inspection was waived or satisfied.

(5) Clause in agreement said this was entire agreement and superseded
any oral agreements.

(6) Agreement could only be amended by a writing.
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PERFORMANCE




Substantial Performance (Usually in good faith)
 Usual remedy is the contract price minus damages resulting
from lack of complete performance
Material Breach
 Performance substantially less than required
 Damages now due to non-breaching party
Executed Contract
 Fully performed; nothing left undone
 If you have fully performed, damages for the price of
performance may be sought as a remedy
Executory Contract
 Not fully performed
 If partial delivery of products, buyer need not pay total contract
price

See Issue Spotter “Do You Have to Eat the Loss?”

See
Exhibit 10.5
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ASSIGNMENT AND DELEGATION

Assignment (transfer of rights to another) and
Delegation (transfer of duties to another)


Many contracts can be assigned or delegated; although
exceptions do occur in contracts for services.
Third-Party Beneficiary is party not part of original
contract who acquires rights under the contract.

Usually occurs in credit contracts
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BREACH

Breach (non-breaching party is discharged)

Material breach: Performance is substantially less than
the contract provides

Anticipatory breach or repudiation: A party indicates
inability or lack of desire to perform

Discharge by Agreement of the Parties: rescission,
novation, accord & satisfaction

Discharge by Impossibility

An unforeseeable, unanticipated event occurs that makes
performance impossible

The impossibility doctrine has been extended to commercial
impracticability or frustration
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REMEDIES
 Monetary
Damages ($$)
 Equitable
Remedies

Compensatory Damages

Specific Performance

Actual Damages

Injunction

Expectancy Damages

Restitution

Liquidated Damages

Nominal Damages

Punitive Damages (if
there is tort related to
breach of contract)

Special Damages
 Mitigation

of Damages
Injured party is required to
make efforts to mitigate or
lessen losses
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ECONOMIC LOSS RULE

In breach of contract case, if there is no tort involved, damages
are only those related to economic losses suffered by the breach.

Rule based on three policies

1. Maintain fundamental distinction between tort and contract
law
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2. Protect commercial parties’ freedom to allocate risks by
contract

3. Encourage the party best situated to assess the risk of
economic loss

Damages are only those related to lost profits and costs due to
the breach.

Accounting evidence and specific calculations are necessary
evidence to be presented.

No punitive damages or mental distress awards. (Parties often try
to assert a tort along with breach of contract in order to get these
damages.)
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CASE
DEROSIER V. UTILITY SYSTEMS OF AMERICA, INC.

DeRosier owned land on a hillside. Before house could be built, lot needed to be
filled with dirt. Asked Utility Systems of America (USA), working on nearby
construction, if it would dump excess fill dirt on his lot. USA saved money doing
this instead of hauling the dirt away.

DeRosier obtained permit from city to allow 1,500 cubic yards of fill to be
dumped on his property. Gave permit to USA.

Later Rosier found USA dumped 6,500 cu. yd., so 5,000 cu. yd. had to be
removed since permit was violated.

USA denied responsibility; offered to remove the excess for $9,500.

DeRosier sued.

Trial Court granted him $22,829 damages paid to another company to remove
the dirt. Also awarded him $8,000 in consequential damages for delay of time
lost in constructing new house.

USA appealed, saying DeRosier failed to mitigate damages by not having USA
move the dirt for only $9,500 rather than $22,829 paid to another contractor.
(Continued)
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
DEROSIER V. UTILITY SYSTEMS OF AMERICA, INC.

Consequential damages usually refers to items of damages which can be
distinguished from general damages.

Special or consequential damages flow naturally from the breach, but are not
recoverable unless they are reasonably foreseeable by parties at time of
breach.

USA contended no claim for delay damages was in pleading and no evidence
of monetary loss caused by delay was introduced at trial.

HELD: District Court erred in awarding DeRosier $8,000 in consequential
damages.

HELD: District court had sufficient basis for calculating and granting $22,829
in general damages.

HELD: Regarding DeRosier’s duty to mitigate: Non-breaching DeRosier
could decline the offer of USA to remove dirt for $9,500.

Did not unreasonably reject USA’s offer and did not fail to mitigate his general
damages.

HELD: Reversed in part; affirmed in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
INTERNATIONAL PERSPECTIVE
“CONTRACTING WITH THE JAPANESE”

U.S. contracts tend to try to cover all contingencies.

Japanese view contracts as secondary to the ongoing relationships
of the parties.

Contracts with the Japanese should be brief and flexible, not
detailed.

Long, detailed contracts may be viewed with suspicion.

Strong statement (“That just won’t work”) likely to be viewed as an
insult.

The Japanese often want “good faith clauses” in contracts with
Westerners.

Consensus among the negotiating teams is very important.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
QUASI CONTRACTS

Quasi (means “almost”) – not a true contract

Closely related to quantum meruit recovery

Legal concept used by courts to prevent injustice

Courts apply this classification in equity (out of a sense
of fairness) to give relief to innocent parties

Example: You watch as a crew (in good faith) come to
your house and pave your driveway.

Do you have to pay the bill when it is sent to you? Yes,
under quasi contract.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
SCHEERER V. FISHER
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
Scheerer, a real estate agent. Helped arrange to buy
commercial real estate for $20 million.
Seller & Fisher each promised to pay Scheerer 2% commission.
Deal fell apart.
Fisher formed a new company, & had 3rd party, Antonio, buy the
property & then sell it to Fisher’s new company.
Scheerer learned of deal (had gotten no commission from it) &
sued for breach of contract on quantum meruit compensation.
Trial Court held no contract or basis of payment. Scheerer
appealed.
HELD: Reversed.
Defendants took action to deny Scheerer compensation for
services rendered.
Although original contract failed, law implies a promise to pay
some reasonable compensation for services rendered.
Allegations state a valid quantum meruit claim.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.