CONTRACTS
Chapter 10
Contract Law
• Common Law
– Judge-made law
– Each state differs
– There is uniformity about
general contract principles
that run throughout most
states’ laws
• English courts adopted rules
from the law merchant that
dates back centuries.
• UCC (next chapter)
– Uniform
Commercial
Code
– All States have
adopted except
Louisiana
– Covers contracts
for sale of goods
• Many countries rely
on Code Law only
for their contract
law framework
Definition of a Contract
n Sir Wm. Blackstone: “An agreement, upon sufficient
consideration, to do or not to do a particular thing”
n 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.”
n The promise itself creates a manifestation of intent
n Contracts form legal relationships and duties
between parties
n Not all promises are enforceable contracts – must
meet the requirements of a contract to create an
enforceable promise
Express and Implied
Contracts
• Express Contracts
– Direct statement by
the parties of the
promises made
– May be oral or
written
– All important terms
are expressly stated
between the parties
• Implied Contract
– Actions and
circumstances infer
and define the terms of
the contract
– May be words, conduct,
gestures
– These contracts are
implied at law
Elements of a Contract
• 1. An Agreement, through –
– Offer
– Acceptance
• 2. Consideration
• 3. Contractual Capacity
• 4. Legality
• 5. Genuine Consent
• 6. Writing
– If necessary under the Statute of Frauds
If all elements are present, the contract
is generally termed valid
Element #1: The Agreement
The Offer
(Mutual Understanding Between Parties; Made by Offer and Acceptance)
• The Offer
– Creates the Offeror and Offeree
– 1. Manifestation of Intent
• Preliminary Negotiations vs. Intent to Offer
– 2. Definite
– 3. Communication
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.”
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
Element #1: THE AGREEMENT
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
Parker v. Glosson
• Douglas and Sandy Glosson offered to sell 36
acres, including truck shop, warehouse and
office they owned jointly.
• Douglas Glosson and Parker agreed on the
terms.
• The two men signed the agreement.
• Sandy Glosson refused to sign; deal fell
through.
• Parker sued for breach of contract,
requesting specific performance or damages.
• Trial court dismissed suit. Parker appealed.
Parker v. Glosson
• HELD: Affirmed.
• Contract must have mutual assent and meeting
of the minds to be enforceable.
• Clause 13 of Agreement: “this agreement shall
become an enforceable contract when a fully
executed copy has been communicated to both
parties.” (Buyer and Sellers)
• This language indicates sellers did not intend to
sell (nor a buyer to buy) until ALL parties signed
the agreement.
• At the top of the page, “Sellers” were both
Douglas Glosson and Sandy Glosson.
• Sandy didn’t sign; agreement was not fully
executed. No contract.
Bilateral & Unilateral Contracts
(As With Other Types, Create the Offeror &
the Offeree)
• Bilateral Contracts
• 2 promises
• A promise in exchange
for a promise
• Ex: I promise to pay you
$250 to trim my trees;
you promise to trim the
trees.
• If promises are broken,
there may be
responsibility if losses
are incurred.
• Unilateral Contract
• Only 1 promise
• A promise in exchange
for a performance
• Ex: I promise to pay you
$250 to trim my trees;
you go out and do it.
• Once performance has
been made, the other
party’s duty arises to
fulfill his/her promise.
Element #2: Consideration
(If consideration is absent, neither party
may enforce the promise or agreement)
• Definition: Something of value or something
bargained for in exchange for a promise
• This element keeps contract from being a gift
• 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
Adequacy of Consideration
• Adequacy of Consideration
– Courts generally don’t care
– 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.
Caley v. Gulfstream Aerospace
• Gulfstream adopted a dispute resolution policy (DRP);
policy is 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.
Caley v. Gulfstream Aerospace
• HELD: Affirmed.
• DRP is an offer and states it is a contract.
• Term of acceptance is continued employment by
employees. Consideration is continued employment
that Gulfstream could end otherwise.
• 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,
thereby accepting DRP or 2) quit.
• There is “bargained for consideration” by mutual
promises and obligations.
Enforceable Promises Without
Consideration
• Promissory Estoppel or Detrimental Reliance
– Doctrine to avoid 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
organization relies on the donation to act in some way.
• e.g. beginning construction based on promises of charitable
contribution.
Hinson v. N&W Construction Company
• N&W Construction prepared bid to submit to MJCC to
build a facility. N&W received bids from 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.
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 added $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.
Continued
Hinson v. N&W Construction Company
• Ct. of Appeals held: Affirmed.
• Hinson admits he provided a quote. Also testified
that he reviewed plans & specs for the building, and
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.”
Element #3
Capacity
• 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
Void and Voidable Contracts
• Void: 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: 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
Minors
• General Rules
• 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”
– #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
Element # 4:
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
Unenforceable Contracts
• Contract that courts will not
enforce because of change in law
– 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
Legality & Contract Contrary to Public Policy
(Unenforceable)
• Exculpatory Agreements (contracts written to escape
liability)
• Unconscionable Agreements (unequal bargaining power)
– Outcome is grossly unfair to an innocent party.
• 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 & often legal.
DCS Sanitation Management
v. Castillo
• DCS operates in 13 states. Cleans food processing plants, including
Tyson Foods in Dakota City, Nebraska.
• Castillo and other employees signed noncompete agreements with
DCS for “one year following the date of termination of employment
for any reason, I will not directly or indirectly engage in, or in any
manner be concerned with or employed by any person, firm or
corporation in competition with [DCS] or engage in providing
contract cleaning services within a radius of 100 miles of any
customer of [DCS]. . . .”
• DCS lost contract with Tyson to a competitor.
• Competitor hired Castillo and other former DCS employees to work
with it, doing about the same work as before.
• DCS sued employees for breach of contract.
• District court held for Castillo. DSC appealed.
DCS Sanitation Management
v. Castillo, cont.
• HELD: Affirmed.
• The Nebraska court will not reform an
agreement to make it enforceable.
• Noncompete agreement is valid if 1) doesn’t
injure public; 2) is not greater than reasonably
necessary to protect the employer’s interests;
and 3) “is not unduly harsh and oppressive to
the employee.”
• These noncompete agreements were overbroad
and unenforceable.
• Breadth of agreements effectively put former
employees out of work in an extensive region.
Element #5
Reality of Consent/Genuine Consent
• If consent is missing, there is no meeting of the minds
– If there is unilateral mistake over a simple error, then
contract usually avoided. (typo error - $20,000
instead of $200,000)
• Without this element, the contract is void or voidable
(depending on the circumstances)
– Fraud
– Misrepresentation
– Duress
– Undue influence
– Statutory Exceptions: Pressure by salesperson, i.e.
Federal Trade Commission’s Cooling-Off Rule re:
door-to-door sales
Element #6 (Sometimes Needed)
Contracts in Writing & The Statute
of Frauds (1677)
• Contracts do not have to be in writing to be
enforceable, HOWEVER
• Written contracts are always good as evidence of the
agreement, MOREOVER
• Some contracts require a writing
– Sale of land or interests in land
– Contracts that cannot be performed (finished)
within 1 year
– Promise to pay the debt of another, including
debts of an estate
– Promises made in consideration of marriage
Sufficiency of the Writing
and
The Parol Evidence Rule
• Parol Evidence Rule
• Sufficiency of Writing
– Writing must set out the – Restricts use of oral
evidence when contrary to
material terms of
terms of written contract.
contract
– Oral evidence cannot
– Names of parties
contradict, change or add
– Consideration
terms to written contracts.
– Subject matter, etc.
– IF a written contract is
– Invoices, E-mails, sales
incomplete, ambiguous,
orders, checks,
proves fraud, mistake, or
confirmations may
misrepresentation, THEN
satisfy this requirement
– Oral evidence may explain
the problems.
Deschamps v. Treasure State
Trailer Court
• In 2003, Deschamps bought a mobile home trailer park in
Great Falls, Montana from Rasmussen. Time payments.
• Rasmussen died. 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.
• Estate sued; Deschamps sued for 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.
Deschamps v. Treasure State
Trailer Court
• HELD: Affirmed. When language of contract is clear, look at the
contract. Contract expressly stated that Deschamps did not rely on any
oral assurances or representations by Rasmussen.
• Deschamps cannot now claim otherwise. He signed a contract
prepared by his real estate agent containing a statement that
Deschamps had not relied upon oral assurances by Rasmussen.
• Agreement stated
– 1) Rasmussen did not warrant 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
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
Discharge of Contracts
(Terminating Contractual Obligations)
• Assignment (transfer of rights to another) or delegation
(transfer of duties to another)
• Third-Party Beneficiary is one not part of original contract
who acquires rights under the contract.
• Performance
– Total performance = discharge and payment accordingly
– Substantial performance: Usual remedy is the contract
price minus damages resulting from lack of complete
performance
• Discharge by 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
• One party dies or is incapacitated
• Law passed making performance illegal
• Subject matter of contract is totally destroyed
– The impossibility doctrine has been extended to
commercial impracticability or frustration (unforeseen
event creates an “extreme or unreasonable difficulty,
expense, injury or loss”)
• Wartime shortages
• Crop failures
• Loss of needed supplies due to sudden international
embargoes
• Courts often expect at least part performance
REMEDIES
• Monetary Damages ($$)
– Compensatory
Damages
– Actual Damages
– Expectancy Damages
– Liquidated Damages
– Nominal Damages
– Punitive Damages (only
if there is tort related to
breach of contract)
– Special Damages
• Equitable Remedies
– Specific
Performance
– Injunction
– Restitution
• Mitigation of Damages
– Injured party is
required to make
efforts to mitigate or
lessen losses
Economic Loss Rule
In breach of contract, if no tort involved, damages are only
those related to economic losses suffered by the breach.
1. maintain fundamental distinction between tort and
contract law
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
suffered due to the breach.
• Accounting evidence and specific calculations are
necessary evidence to be presented.
• No punitive damages. (Parties often try to assert fraud, a
tort, to try to get these damages.)
DeRosier v. Utility Systems of America
• 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 some 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 $22,829 damages to pay another
company to remove the dirt. Awarded him $8,000 in consequential
for delay damages for 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 pay $22,829.
DeRosier v. Utility Systems of America
• Special or consequential damages flow naturally from the
breach, but are not recoverable unless they are reasonably
foreseeable by parties at time of breach.
• HELD: District Court erred in awarding DeRosier $8,000 in
consequential damages as not building house right now.
• HELD: District court had sufficient basis for calculating
and granting $22,829 in general damages.
• HELD regarding DeRosier’s duty to mitigate: Nonbreaching DeRosier could decline the offer of USA to
remove dirt for $9,500.
• Did not unreasonably reject USA’s offer since he thought it
their duty to remove, so did not fail to mitigate his general
damages.
• Reversed in part; affirmed in part.
Quasi Contract
(Also called quantum meruit)
• Quasi (means “almost”) – not a true
contract
• 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) comes to your house and
paves your driveway.
• Do you have to pay the bill when it is
sent to you? Yes (at least in part)
under quasi contract.
Scheerer v. Fisher
Scheerer, a real estate agent helped Fisher arrange to buy
commercial real estate. Price was $20 million.
Seller & Fisher each promised Scheerer 2% commission.
Deal fell apart. Fisher formed new company, and had 3rd
party, Antonio, buy the property & then sell it to Fisher’s new
company.
Scheerer learned of deal (got no commission from sale) and
sued for breach of contract on quantum meruit.
Trial Court held no contract or basis of payment. Appeal
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.