CONTRACT VS. PROMISE


Promise: A person’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 1
Business Law Today: The Essentials (7th ed.)
CONTRACT FORMATION

Agreement: The offeror must offer to enter into an
agreement, and the offeree must accept the terms of the
offeror’s 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 contract’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 2
Business Law Today: The Essentials (7th ed.)
BILATERAL AND UNILATERAL CONTRACTS

Bilateral Contract: A bilateral contract arises when the
offeror gives her promise in exchange for the offeree’s 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 X’s 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 X’s yard, on Y had
substantially begun to perform, X could not revoke her
offer to pay Y for mowing her yard).
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 3
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 4
Business Law Today: The Essentials (7th ed.)
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 plaintiff’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 5
Business Law Today: The Essentials (7th ed.)
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).
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 6
Business Law Today: The Essentials (7th ed.)
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 cousin’s 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).
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 7
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 8
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 9
Business Law Today: The Essentials (7th ed.)
REVOKING AN OFFER

Revocation: The withdrawal of an offer, communicated to
the offeree prior to the offeree’s 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”).
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 10
Business Law Today: The Essentials (7th ed.)
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 offeree’s acceptance must
match the offeror’s offer exactly. If the offeree’s
acceptance materially changes, adds to, or deletes any
terms in the original offer, the offeree’s attempted
acceptance is deemed to constitute a counteroffer, not
an acceptance.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 11
Business Law Today: The Essentials (7th ed.)
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 offeree’s 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 offeree’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 12
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 13
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 14
Business Law Today: The Essentials (7th ed.)
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
offeree’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 15
Business Law Today: The Essentials (7th ed.)
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 promisor’s goods);
(2) performing an action that the promisee is not
otherwise obligated to undertake (e.g., painting the
promisor’s 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 promisor’s promise and
given by the promisee in exchange for the promisor’s
promise.

Courts will generally not inquire into the adequacy
of the consideration, as long as the promisor
bargained for it.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 16
Business Law Today: The Essentials (7th ed.)
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 promisee’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 17
Business Law Today: The Essentials (7th ed.)
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
obligor’s 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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 18
Business Law Today: The Essentials (7th ed.)
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.
Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 19
Business Law Today: The Essentials (7th ed.)
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 promisee’s 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. 20
Business Law Today: The Essentials (7th ed.)