CONTRACTS
Agreements between two entities, creating an enforceable obligation to do, or to refrain from doing, a particular thing.
Nature and Contractual Obligation
The purpose of a contract is to establish the
agreement that the parties have made and to fix
their rights and duties in accordance with that
agreement. The courts must enforce a valid con-
tract as it is made, unless there are grounds that
bar its enforcement.
Statutes prescribe and restrict the terms of a
contract where the general public is affected.
The terms of an insurance contract that protect
a common carrier are controlled by statute in
order to safeguard the public by guaranteeing
that there will be financial resources available in
the event of an accident.
The courts may not create a contract for the
parties. When the parties have no express or
implied agreement on the essential terms of a
contract, there is no contract. Courts are only
empowered to enforce contracts, not to write
them, for the parties. A contract, in order to be
enforceable,must be a valid. The function of the
court is to enforce agreements only if they exist
and not to create them through the imposition
of such terms as the court considers reasonable.
It is the policy of the law to encourage the
formation of contracts between competent par-
ties for lawful objectives. As a general rule, con-
tracts by competent persons, equitably made,
are valid and enforceable. Parties to a contract
are bound by the terms to which they have
agreed, usually even if the contract appears to be
improvident or a bad bargain, as long as it did not result from FRAUD, duress, or UNDUE
INFLUENCE.
The binding force of a contract is based on
the fact that it evinces a meeting of minds of two
parties in GOOD FAITH.A contract, once formed,
does not contemplate a right of a party to reject
it. Contracts that were mutually entered into
between parties with the capacity to contract are
binding obligations and may not be set aside due
to the caprice of one party or the other unless a
statute provides to the contrary.
Types of Contracts
Contracts under Seal Traditionally, a contract
was an enforceable legal document only if
it was stamped with a seal. The seal represented
that the parties intended the agreement to entail
legal consequences. No legal benefit or detriment
to any party was required, as the seal was a
symbol of the solemn acceptance of the legal
effect and consequences of the agreement. In the
past, all contracts were required to be under seal
in order to be valid, but the seal has lost some or
all of its effect by statute in many jurisdictions.
Recognition by the courts of informal contracts,
such as implied contracts, has also diminished
the importance and employment of formal contracts
under seal.
Express Contracts In an express contract,
the parties state the terms, either orally or in
writing, at the time of its formation. There is a
definite written or oral offer that is accepted by
the offeree (i.e., the person to whom the offer is
made) in a manner that explicitly demonstrates
consent to its terms.
Implied Contracts Although contracts that
are implied in fact and contracts implied in law
are both called implied contracts, a true implied
contract consists of obligations arising from a
mutual agreement and intent to promise, which
have not been expressed in words. It is misleading
to label as an implied contract one that is
implied in law because a contract implied in law
lacks the requisites of a true contract. The term
quasi-contract is a more accurate designation of
contracts implied in law. Implied contracts are
as binding as express contracts. An implied contract
depends on substance for its existence;
therefore, for an implied contract to arise, there
must be some act or conduct of a party, in order
for them to be bound.
A contract implied in fact is not expressed by
the parties but, rather, suggested from facts and
circumstances that indicate a mutual intention
to contract. Circumstances exist that, according
to the ordinary course of dealing and common
understanding, demonstrate such an intent that
is sufficient to support a finding of an implied
contract. Contracts implied in fact do not arise contrary to either the law or the express declaration
of the parties. Contracts implied in law
(quasi-contracts) are distinguishable in that
they are not predicated on the assent of the parties,
but, rather, exist regardless of assent.
The implication of a mutual agreement
must be a reasonable deduction from all of the
circumstances and relations that contemplate
parties when they enter into the contract or
which are necessary to effectuate their intention.
No implied promise will exist where the relations
between the parties prevent the inference
of a contract.
A contract will not be implied where it
would result in inequity or harm. Where doubt
and divergence exist in the minds of the parties,
the court may not infer a contractual relationship.
If, after an agreement expires, the parties
continue to perform according to its terms, an
implication arises that they have mutually
assented to a new contract that contains the
same provisions as the old agreement.
A contract implied in fact, which is inferred
from the circumstances, is a true contract,
whereas a contract implied in law is actually an
obligation imposed by law and treated as a contract
only for the purposes of a remedy. With
respect to contracts implied in fact, the contract
defines the duty; in the case of quasi-contracts,
the duty defines and imposes the agreement
upon the parties.
Executed and Executory Contracts An executed
contract is one in which nothing remains
to be done by either party. The phrase is, to a certain
extent, a misnomer because the completion
of performances by the parties signifies that a
contract no longer exists. An executory contract
is one in which some future act or obligation
remains to be performed according to its terms.
Bilateral and Unilateral Contracts The
exchange of mutual, reciprocal promises
between entities that entails the performance of
an act, or forbearance from the performance of
an act, with respect to each party, is a BILATERAL
CONTRACT. A bilateral contract is sometimes
called a two-sided contract because of the two
promises that constitute it. The promise that one
party makes constitutes sufficient consideration
(see discussion below) for the promise made by
the other.
A unilateral contract involves a promise that
is made by only one party. The offeror (i.e., a
person who makes a proposal) promises to do a
certain thing if the offeree performs a requested
act that he or she knows is the basis of a legally
enforceable contract. The performance constitutes
an acceptance of the offer, and the contract
then becomes executed. Acceptance of the offer
may be revoked, however, until the performance
has been completed. This is a one-sided type of
contract because only the offeror, who makes
the promise, will be legally bound. The offeree
may act as requested, or may refrain from acting,
but may not be sued for failing to perform,
or even for abandoning performance once it has
begun, because he or she did not make any
promises.
Unconscionable Contracts An UNCONSCIONABLE
contract is one that is unjust or
unduly one-sided in favor of the party who has
the superior bargaining power. The adjective
unconscionable implies an affront to fairness and
decency. An unconscionable contract is one that
no mentally competent person would accept
and that no fair and honest person would enter
into. Courts find that unconscionable contracts
usually result from the exploitation of consumers
who are poorly educated, impoverished,
and unable to shop around for the best price
available in the competitive marketplace.
The majority of unconscionable contracts
occur in consumer transactions. Contractual
provisions that indicate gross one-sidedness in
favor of the seller include limiting damages or
the rights of the purchaser to seek court relief
against the seller, or disclaiming a WARRANTY
(i.e., a statement of fact concerning the nature or
caliber of goods sold the seller, given in order to
induce the sale, and relied upon by the purchaser).
Unconscionability is ascertained by examining
the circumstances of the parties when the
contract was made. This doctrine is applied only
where it would be an affront to the integrity of
the judicial system to enforce such a contract.
Adhesion Contracts Adhesion contracts are
those that are drafted by the party who has the
greater bargaining advantage, providing the
weaker party with only the opportunity to
adhere to (i.e., to accept) the contract or to reject
it. (These types of contract are often described
by the saying “Take it or leave it.”) They are frequently
employed because most businesses
could not transact business if it were necessary
to negotiate all of the terms of every contract.
Not all adhesion contracts are unconscionable,
as the terms of such contracts do not necessarily
exploit the party who assents to the contract.
Courts, however, often refuse to enforce contracts
of adhesion on the grounds that a true
meeting of the minds never existed, or that there
was no acceptance of the offer because the purchaser
actually had no choice in the bargain.
Aleatory Contracts An aleatory contract is
a mutual agreement the effects of which are triggered
by the occurrence of an uncertain event.
In this type of contract, one or both parties
assume risk. A fire insurance policy is a form of
aleatory contract, as an insured will not receive
the proceeds of the policy unless a fire occurs, an
event that is uncertain to occur.
Void and Voidable Contracts Contracts can
be either void or VOIDABLE. A void contract
imposes no legal rights or obligations upon the
parties and is not enforceable by a court. It is, in
effect, no contract at all.
A voidable contract is a legally enforceable
agreement, but it may be treated as never having
been binding on a party who was suffering from
some legal disability or who was a victim of
fraud at the time of its execution. The contract is
not void unless or until the party chooses to
treat it as such by opposing its enforcement. A
voidable contract may be ratified either
expressly or impliedly by the party who has the
right to avoid it. An express ratification occurs
when that party who has become legally competent
to act declares that he or she accepts the
terms and obligations of the contract. An
implied ratification occurs when the party, by
his or her conduct, manifests an intent to ratify
a contract, such as by performing according to
its terms. Ratification of a contract entails the
same elements as formation of a new contract.
There must be intent and complete knowledge
of all material facts and circumstances. Oral
ACKNOWLEDGMENT of a contract and a promise
to perform constitute sufficient ratification. The
party who was legally competent at the time that
a voidable contract was signed may not, however,
assert its voidable nature to escape the
enforcement of its terms.
Which Law Governs
Although a general body of contract law
exists, some aspects of it, such as construction
(i.e., the process of ascertaining the proper
explanation of equivocal terms), vary among the
different jurisdictions. When courts must select
the law to be applied with respect to a contract,
they consider what the parties intended as to
which law should govern; the place where the
contract was entered into; and the place of performance
of the contract.Many courts apply the
modern doctrine of the “grouping of contracts”
or the “center of gravity,” in which the law of the
jurisdiction that has the closest or most significant
relationship with the matter in issue applies.
Courts generally apply the law that the parties
expressly or impliedly intend to govern the
contract, provided that it bears a reasonable
relation to the transaction and the parties acted
in good faith. Some jurisdictions follow the law
of the place where the contract was performed,
unless the intent of the parties is to the contrary.
Where foreign law governs, contracts may be
recognized and enforced under the doctrine of
comity (i.e., the acknowledgment that one
nation gives within its territory to the legislative,
executive, or judicial acts of another nation).
Elements of a Contract
The requisites for formation of a legal contract
are an offer, an acceptance, competent
parties who have the legal capacity to contract,
lawful subject matter, mutuality of agreement,
consideration, mutuality of obligation, and, if
required under the STATUTE OF FRAUDS, a writing.
Offer An offer is a promise that is, by its
terms, conditional upon an act, forbearance, or
return promise being given in exchange for the
promise or its performance. It is a demonstration
of willingness to enter into a bargain, made
so that another party is justified in understanding
that his or her assent to the bargain is invited
and will conclude it. Any offer must consist of a
statement of present intent to enter a contract; a
definite proposal that is certain in its terms; and
communication of the offer to the identified,
prospective offeree. If any of these elements are
missing, there is no offer to form the basis of a
contract.
Preliminary negotiations, advertisements,
invitations to bid Preliminary negotiations are
clearly distinguished from offers because they
contain no demonstration of present intent to
form contractual relations. No contract is
formed when prospective purchasers respond to
such terms, as they are merely invitations or
requests for an offer.Unless this interpretation is
employed, any person in a position similar to a
seller who advertises goods in any medium
would be liable for numerous contracts when
there is usually a limited quantity of merchandise
for sale.
An advertisement, price quotation, or catalogue
is customarily viewed as only an invitation
to a customer to make an offer and not as an offer
itself. The courts reason that an establishment
might not have sufficient stock to satisfy potential
demand and that it would not be reasonable for a
customer to expect to form a binding contract by
responding to advertisements that are intended
to make consumers aware of a product for sale. In
addition, the courts have held that an advertisement
is an offer for a unilateral contract that can
be revoked at the will of the offeror, the business
enterprise, prior to performance of its terms.
An exception exists, however, to the general
rule on advertisements. When the quantity
offered for sale is specified and contains words
of promise, such as “first come, first served,”
courts enforce the contract where the store
refuses to sell the product when the price is tendered.
Where the offer is clear, definite, and
explicit, and no matters remain open for negotiation,
acceptance of it completes the contract.
New conditions may not be imposed on the
offer after it has been accepted by the performance
of its terms.
An advertisement or request for bids for the
sale of particular property or the erection or
construction of a particular structure is merely
an invitation for offers that cannot be accepted
by any particular bid. A submitted bid is, however,
an offer, which upon acceptance by the
offeree becomes a valid contract.
Mistake in sending offer If an intermediary,
such as a telegraph company, errs in the transmission
of an offer, most courts hold that the
party who selected that method of communication
is bound by the terms of the erroneous
message. The same rule applies to acceptances.
In reaching this result, courts regard the telegraph
company as the agent of the party who
selected it. Other courts justify the rule on business
convenience. A few courts rule that if there
is an error in transmission, there is no contract,
on the grounds that either the telegraph company
is an INDEPENDENT CONTRACTOR and not
the sender’s agent, or there has been no meeting
of the minds of the parties. However, an offeree
who knows, or should know, of the mistake in
the transmission of an offer may not take advantage
of the known mistake by accepting the
offer; he or she will be bound by the original
terms of the offer.
Termination of an offer An offer remains
open until the expiration of its specified time
period or, if there is no time limit, until a reasonable
time has elapsed. A reasonable time is
determined according to what a reasonable person
would consider sufficient time to accept the
offer.
The death or insanity of either party, before
an acceptance is communicated, causes an offer
to expire. If the offer has been accepted, the contract
is binding, even if one of the parties dies
thereafter. The destruction of the subject matter
of the contract; conditions that render the contract
impossible to perform; or the supervening
illegality of the proposed contract results in the
termination of the offer.
When the offeror, either verbally or by conduct,
clearly demonstrates that the offer is no
longer open, the offer is considered revoked
when learned by the offeree. Where an offer is
made to the general public, it can be revoked by
furnishing public notice of its termination in the
same way in which the offer was publicized.
Irrevocable offers An option is a right that is
purchased by a person in order to have an offer
remain open at agreed-upon price and terms,
for a specified time, during which it is irrevocable.
It constitutes an exception to the general
rule that an offer may be withdrawn prior to
acceptance. The offeror may not withdraw this
offer because that party is bound by the consideration
given by the offeree. The offeree is free,
however, to decide whether or not to accept the
offer.
Most courts hold that an offer for a unilateral
contract becomes irrevocable as soon as the
offeree starts to perform the requested act,
because that action serves as consideration to
prevent revocation of the offer. Where it is
doubtful whether the offer invites an act (as in
the case of a unilateral contract) or a promise (as
in the case of a bilateral contract), the presumption
is in favor of a promise, and therefore a
bilateral contract arises. If an offer to form a
unilateral contract requires several acts, it is
interpreted as inviting acceptance by completion
of the initial act. Performance of the balance
constitutes a condition to the offeror’s duty of
performance.Where such an offer invites only a
single act, it includes by implication a subsidiary
promise to keep the offer open if the offeree will
commence performance. Some courts hold that
an offer for a unilateral contract may be revoked
at any time prior to completion of the act bargained
for, even after the offeree has partially
performed it.
Rejection of an offer An offer is rejected
when the offeror is justified in understanding
from the words or conduct of the offeree that
he or she intends not to accept the offer, or to
take it under further advisement. Rejection
might come in the form of an express refusal to
accept an offer by a counteroffer, which is a
new proposal that rejects the offer by implication;
or by a conditional acceptance that operates
as a counteroffer. The offer may continue,
however, if the offeree expressly states that the
counteroffer shall not constitute a rejection of
the offer.
If an offer is rejected, the party who made
the original offer no longer has any liability for
that offer. The party who rejected the offer may
not subsequently, at his or her own option, convert
the same offer into a contract by a subsequent
acceptance. In such a case, the consent of
the offeror must be obtained for a contract to be
formed.
Acceptance Acceptance of an offer is an
expression of assent to its terms. It must be
made by the offeree in a manner requested or
authorized by the offeror. An acceptance is valid
only if the offeree knows of the offer; the offeree
manifests an intention to accept; the acceptance
is unequivocal and unconditional; and the
acceptance is manifested according to the terms
of the offer.
The determination of a valid acceptance is
governed by whether a promise or an act by the
offeree was the bargained-for response. Since
the acceptance of a unilateral contract requires
an act rather than a promise, it is unnecessary
to furnish notice of intended performance
unless the offeror requested it. If, however, the
offeree has reason to believe that the offeror
will not learn of the acceptance with reasonable
promptness, the duty of the offeror is discharged
unless the offeree makes a reasonable
attempt to give notice; the offeror learns of the
performance; or the offer indicates that no
notice is required.
In bilateral contracts, the offer is effective
when the offeree receives it. The offeree may
accept it until the offeree receives notice of
revocation from the offeror. Thereafter, an offer
is revoked. Under the majority rule, which is
known as the “mailbox rule,” an acceptance is
effective upon dispatch if the offeror explicitly
authorizes that method of acceptance to be
employed by the offeree, even if the acceptance
is lost or destroyed in transit.
The majority rule is inapplicable, however,
unless the acceptance is properly addressed and
postage prepaid. It has no application to most
option contracts, as acceptance of an option contract
is effective only when received by the offeror.
If the acceptance mode used by the offeree is
implicitly authorized by the offeror, such as the
selection by the offeree of the same method used
by the offeror, who neglected to designate a
method of communication, an acceptance is
effective upon dispatch if it is correctly
addressed and the expense of its conveyance is
prepaid. As with expressly authorized methods,
the acceptance need not ever reach the offeror in
order to form the contract.
In some jurisdictions, the use of a method
not expressly or impliedly authorized by the
offeror, even if more rapid in nature, results in a
contract only upon receipt of the acceptance. In
most jurisdictions, however, if the acceptance
mode is inherently faster, it is deemed to be an
impliedly authorized means, and acceptance is
effective upon dispatch.
If the acceptance is transmitted by an
expressly or impliedly authorized method to the
wrong address, it is effective only upon receipt
by the offeror. A wrong address is any address
other than that implicitly authorized, even if the
offeror were in a position to receive the acceptance
at the substituted address.
An offeror who specifically states that there
is no contract until the acceptance is received is
entitled to insist upon the condition of receipt
or upon any other provision concerning the
manner and time of acceptance specified.
Rejection of the offer or revocation of conditional
acceptance is effective upon receipt. A
late or defective acceptance is treated as a counteroffer,
which will not result in a contract
unless the offeror accepts it. If offers cross in the
mail, there will be no binding contract, as an
offer may not be accepted if there is no knowledge
of it.
As a general rule, an offer may be accepted
only by the offeree or an authorized agent. If,
however, the offer is contained in an option contract,
it may be the subject of an assignment or
transfer without the consent of the offeror,
unless the option involves a purchase on credit
or expressly prohibits an assignment.
In contracts that do not involve the sale of
goods, acceptance must comply exactly with the
requirements of the offer (this is known as the “mirror-image rule”), and must omit nothing
from the promise or performance requested. An
offer of a prize in a contest, for example,
becomes a binding contract when a contestant
successfully complies with the terms of the offer.
If a response to an offer purports to accept it,
but adds qualifications or conditions, then it is a
counteroffer and not an acceptance.
Acceptance may be inferred from the
offeree’s acts, conduct, or silence; but as a general
rule, silence, without more, can never constitute
acceptance. The effect of silence
accompanied by AMBIGUITY must be ascertained
from all the circumstances in the case.
Prior dealings between the parties may create
a duty to act. Silence or the failure to take
some action under such circumstances might
constitute acceptance. For example, if the parties
have engaged in a series of business transactions
involving the mailing of goods and
payment by the recipient, the recipient will not
be permitted to retain an article without paying
for it within a reasonable time, due to their
prior dealings. A recipient who does not intend
to accept the goods is under a duty to inform
the sender. Silence, where there is a duty to
speak, prevents the offeree from rejecting an
offer and the offeror from claiming that there is
no acceptance. If ownership rights are exercised
over an item, this might be deemed an acceptance.
Unsolicited goods At COMMON LAW, the
recipient of unsolicited goods in the mail was
not required to accept or to return them, but if
the goods were used, a contract and a concomitant
obligation to pay for them were created.
Today, in order to offer protection against
unwanted solicitations, some state statutes have
modified the common-law rule by providing
that where unsolicited merchandise is received
as part of an offer to sell, the goods are an outright
gift. The recipient may use the goods and is
under no duty to return or pay for them unless
he or she knows that they were sent by mistake.
Agreements to agree An “agreement to
agree” is not a contract. This type of agreement
is frequently employed in industries that require
long-term contracts in order to ensure a constant
source of supplies and outlet of production.
Mutual manifestations of assent that are, in
themselves, sufficient to form a binding contract
are not deprived of operative effect by the mere
fact that the parties agree to prepare a written
reproduction of their agreement. In determining
whether, on a given set of facts, there is
merely an “agreement to agree” or a sufficiently
binding contract, the courts apply certain rules.
If the parties express their intention—either to
be bound or not bound until a written document
is prepared—then that intention controls.
If they have not expressed their intention, but
they exchange promises of a definite performance
and agree upon all essential terms, then the
parties have formed a contract even though the
written document is never signed. If the expressions
of intention are incomplete—as, for example,
if a material term such as quantity has been
left to further negotiation—the parties do not
have a contract. The designation of the material
term for further negotiation is interpreted as
demonstrating the intention of the parties not
to be bound until a complete agreement has
been reached.
Competent Parties A natural person who
agrees to a transaction has complete legal capacity
to become liable for duties under the contract
unless he or she is an infant, insane, or
intoxicated.
Infants An infant is defined as a person
under the age of 18 or 21, depending on the particular
jurisdiction. A contract made by an
infant is voidable but is valid and enforceable
until or unless he or she disaffirms it. He or she
may avoid the legal duty to perform the terms of
the contract without any liability for breach of
contract. INFANTS are treated in such a way
because public policy deems it desirable to protect
the immature and naive infant from liability
for unfair contracts that he or she is too inexperienced
to negotiate on equal terms with the
other party.
Once an infant attains majority (i.e., the age
at which a person is no longer legally considered
an infant), he or she must choose either to disaffirm
or avoid the contract, or to ratify or accept
it. After reaching the age of majority, a person
implicitly ratifies and becomes bound to perform
the contract if he or she fails to disaffirm it
within a reasonable time, which is determined
by the circumstances of the particular case. A
person who disaffirms a contract must return
any benefits or consideration received under it
that he or she still possesses. If such benefits
have been squandered or destroyed, the person
usually has no legal obligation to recompense
the other party. The law imposes liability on the
infant in certain cases, however. Although the
contract of an infant or other person may be voidable, the person still may be liable in quasicontract
in order to prevent UNJUST ENRICHMENT
for the reasonable value of goods or
services furnished if they are necessaries that are
reasonably required for the person’s health,
comfort, or education.
The majority of courts hold that an infant
who willfully misrepresents his or her age may,
nevertheless, exercise the power to avoid the
contract. As a general rule, however, the infant
must place the adult party in the status quo ante
(i.e., his or her position prior to the contract).
The jurisdictions are in disagreement in regard
to whether an infant is liable in TORT (i.e., a civil
wrong other than breach of contract) for willful
misrepresentation of his or her age. This divergence
arises from the rule that a tort action may
not be maintained against an infant if it essentially
entails the enforcement of a contract.
Some courts regard the action for fraud that
would be commenced against the infant as being
based on the contract. Others rule that the tort
is sufficiently independent of the contract so
that the granting of relief would not involve
indirect enforcement of the contract. The other
party, however, is able to avoid a contract
entered into on the basis of an infant’s fraudulent
MISREPRESENTATION with respect to age or
other material facts because he or she is the
innocent victim of the infant’s fraud.
Mental incapacity When a party does not
comprehend the nature and consequences of the
contract when it is formed, he or she is regarded
as having mental incapacity. A distinction must
be drawn between those persons who have been
adjudicated incompetent by a court and have
had a guardian appointed, and those mentally
incompetent persons who have not been so
adjudicated. A person who has been declared
incompetent in a court proceeding lacks the
legal capacity to enter into a contract with
another. Such a person is unable to consent to
the contract, as the court has determined that he
or she does not understand the obligations and
effects of the contract. A contract made by such
a person is void and without any legal effect.
Neither party may be legally compelled to perform
or comply with the terms of the contract.
If there has been no adjudication of insanity, a
contract made by a mentally incapacitated individual
is voidable by him or her.
Many contract principles that apply to
minors also apply to insane persons. There is an
obligation to recompense the injured party
where a voidable contract is avoided, and to pay
for necessaries based upon quasi-contract for
the reasonable value of the goods or services.
The incompetent, a guardian, or a PERSONAL
REPRESENTATIVE after death may avoid the contract.
The incompetent may ratify a voidable
contract only if they recover the capacity to contract.
The right to avoid the contract belongs to
the incompetent; the other party may not avoid
the contractual obligation. A contract that is
ordinarily voidable may not be set aside when it
is inherently fair to both parties and has been
executed to such an extent that the other party
cannot be restored to the position that they
occupied prior to the contract.
Intoxicated persons A contract made by an
intoxicated person is voidable.When a person is
inebriated at the time of entering into a contract
with another and subsequently becomes sober
and either promises to perform the contract or
fails to disaffirm it within a reasonable time after
becoming sober, then that person has ratified his
or her voidable contract and is legally bound to
perform.
Subject Matter Any undertaking may be the
subject of a contract, provided that it is not proscribed
by law. When a contract is formed in
restraint of trade, courts will not enforce it,
because it imposes an illegal and unreasonable
burden on commerce by hindering competition.
Contracts that provide for the commission of a
crime or any illegal objective are also void.
Future rights and liabilities—performing or
refraining from some designated act, or assuming
particular risks or obligations—may constitute
the basis of a contract. An idea that never
assumes concrete form at the time of disclosure,
such as a concept for a short story, even though
new and unusual, may not, however, be the subject
of a contract.
A person may not legally contract concerning
a right that he or she does not have. A seller
of a home who does not possess clear title to the
property may not promise to convey it without
encumbrances. Neither may a seller promise
that property will not be appropriated by EMINENT
DOMAIN, which is an inherent power of
government that is not subject to restrictions
imposed by individuals.
Mutual Agreement There must be an agreement
between the parties, or mutual assent, for
a contract to be formed. In order for an agreement
to exist, the parties must have a common
intention or a meeting of minds on the terms of the contract and must subscribe to the same
bargain. Aside from certain statutory exceptions
pertaining to the sale of goods, as prescribed by
Article 2 of the UNIFORM COMMERCIAL CODE
(UCC), if any of the proposed terms is not settled,
or if no method of settlement is provided,
then there is no agreement. The parties may settle
one term at a time, but their contract
becomes complete only when they assent to the
final term.An agreement is binding if the parties
concur with respect to the essential terms and
intend the agreement to be binding, even
though all of the details are not definitely fixed.
The quantity of goods are usually essential terms
of the contract that must be agreed upon if the
contract is to be enforced. Exceptions to the rule
requiring the terms of an agreement to be definite
and certain are contained in article 2 of the
UCC, which permits the courts to imply reasonably
the missing terms if the essential terms
unambiguously demonstrate the mutual agreement
of the parties.
Consideration Consideration is a legal
detriment that is suffered by the promisee and
that is requested by the promisor in exchange for
his or her promise. A valid contract requires
some exchange of consideration. As a general
rule, in a bilateral contract, one promise is valid
consideration for the other. In a unilateral contract,
the agreed performance by the offeree furnishes
the necessary consideration and also
operates as an acceptance of the offer.
Consideration may consist of a promise; an
act other than a promise; a forbearance from
suing on a claim that is the subject of an honest
and reasonable dispute; or the creation, modification,
or destruction of a legal relationship. It
signifies that the promisee will relinquish some
legal right in the present, or that he or she will
restrict his or her legal freedom of action in the
future as an inducement for the promise of the
other party. It is not substantially concerned
with the benefit that accrues to the promisor.
Love and affection are not permissible forms
of consideration. A promise to make a gift contains
no consideration because it does not entail
a legal benefit received by the promisor or a legal
detriment suffered by the promisee. Because a
promise to give a gift is freely made by the
promisor, who is not subject to any legal duty to
do so, the promise is not enforceable unless
there is PROMISSORY ESTOPPEL. Promissory
estoppel is a doctrine by which a court enforces
a promise that the promisor reasonably expects
will induce action or forbearance on the part of
a promisee, who justifiably relied on the promise
and suffered a substantial detriment as a result.
Where a court enforces a promise by applying
this doctrine, promissory estoppel serves as a
substitute for the required consideration.
At common law, courts refused to inquire
into the adequacy or fairness of a bargain, finding
that the payment of some price constituted
legally sufficient consideration. If one is seeking
to prove mistake, misrepresentation, fraud, or
duress—or to assert a similar defense—the
inadequacy of the price paid for the promise
might represent significant evidence for such
defenses, but the law does not require adequacy
of consideration in order to find an enforceable
contract.
Mutuality of Obligation Where promises
constitute the consideration in a bilateral contract,
they must be mutually binding. This concept
is known as mutuality of obligation. If one
party’s promise does not actually bind him or
hers to some performance or forbearance, it is
an illusory promise, and there is no enforceable
contract.
Where the contract provides one party with
the right to cancel, there might be no consideration
because of lack of mutuality of obligation.
If there is an absolute and unlimited right to
cancel the obligation, the promise by the party
with the right of cancellation is illusory, and the
lack of consideration means that there is no contract.
If the power to cancel the contract is
restricted in any manner, the contract is usually
considered to be binding. Performance of a void
promise in a defective bilateral contract may
render the other promise legally binding, however.
For example, in virtually all states, an oral
contract to transfer title to land is not merely
unenforceable, it is absolutely void. (See discussion
of the statute of frauds, below.) A seller who
orally promises to transfer land to a purchaser,
for which the purchaser orally promises a designated
sum, may sue the purchaser for the price if
the purchaser receives title to the land from the
seller. The purchaser is not relieved of his or her
promise to pay, because of the performance of
the void oral promise by the seller.
A promise to perform an act that one is
legally bound to do does not qualify as consideration
for another promise.
Past consideration consists of actions that
occurred prior to the making of the contractual
promise, without any purpose of inducing a promise in exchange. It is not valid, because it is
not furnished as the bargained-for exchange of
the present promise. There are exceptions to this
rule, such as a present promise to pay a debt that
has been discharged in BANKRUPTCY, which
constitutes valid consideration because it renews
a former promise to pay a debt that was supported
by consideration.
Most states do not recognize moral obligation
as consideration, as there is no acceptable
method of setting the parameters of moral duty.
Some courts will enforce a moral obligation
where there has been a benefit conferred on the
promisor.
Statute of Frauds The statute of frauds was
enacted by the English Parliament in 1677 and
has since been the law in both England and in
the United States in varying forms. It requires
that certain types of contracts be in writing. The
principal characteristic of various state laws
modeled after the original statute is the provision
that no suit or action shall be maintained
on a contract unless there is a note or memorandum
of its subject matter, terms and conditions,
and the identity of the parties, signed by
the party to be charged or obligated under it or
an authorized agent. The purpose of the statute
is to prevent the proof of a nonexistent agreement
through fraud or perjury in actions for
breach of an alleged contract.
Reality of Consent
The parties must mutually assent to the proposed
objectives and terms of a contract in order
for it to be enforceable. The manifestation of the
common intent of the parties is discerned from
their conduct or verbal exchanges.
What one party secretly intended is irrelevant
if his or her conduct appears to demonstrate
agreement. In a few limited cases,
however, where there is no stated expression of
the parties’ intent, their subjective intentions
may establish an enforceable contract if both
believe in the same terms of the contract.
There will be no binding contract without
the real consent of the parties. Apparent consent
may be vitiated because of mistake, fraud, innocent
misrepresentation, duress, or undue influence,
all of which are defenses to the enforcement
of the contract.
Mutual Mistake When there is a mutual
MISTAKE OF FACT with respect to the subject of
the contract, the subjective intention of the parties
is evaluated by the courts to determine
whether there had been, in fact, a meeting of the
minds of the parties.
If the mutual mistake significantly changed
the subject matter of the contract, a court will
refuse to enforce the contract. If, however, the
difference in the subject matter of the contract
concerned some incidental quality that has no
(or negligible) effect on the value of the contract,
the contract is binding, even though the
mistake altered or removed what had been the
incentive to one or both parties to enter the contract.
Unilateral Mistake Ordinarily, a unilateral
mistake (i.e., an error made by one party)
affords no basis for avoiding a contract, but a
contract that contains a typographical error may
be corrected. A contract may be avoided if the
error in value in what is to be exchanged is substantial,
or if the mistake is caused by or known
to the other party.Unilateral mistakes frequently
occur where a contractor submits an erroneous
bid for a PUBLIC CONTRACT.Where such a bid is
accepted, the contractor will be permitted to
avoid the contract only if the agreement has not
been executed or if the other party can be placed
in the position that they occupied prior to the
contract. If the mistake is obvious, the contract
will not be enforced, but if it is inconsequential,
the contract will be upheld. The mistake must
consist of a clerical error or a mistake in computation,
as an error in judgment will not permit a
contractor to avoid a contract.
Mistake of Law When a party who has full
knowledge of the facts reaches an erroneous
conclusion as to their legal effect, such a MISTAKE
OF LAW will not invalidate a contract or
affect its enforceability.
Illiteracy Illiteracy neither excuses a party
from the duty of learning the contents of a written
contract nor prevents the mutual agreement
of the parties. An illiterate person is capable of
giving real consent to a contract; the person has
a duty to ask someone to read the contract to
him or her and to explain it, if necessary. Illiteracy
can, however, serve as a basis for invalidating
a contract when considered in relation to other
factors, such as fraud or overreaching. If the person
whom the illiterate designates to read or
explain the contract misrepresents it and acts in
collusion with the other party to the contract,
the contract may be set aside.
Fraud Fraud prevents mutual agreement to
a contract because one party intentionally deceives another as to the nature and the consequences
of a contract. It is the willful misrepresentation
or concealment of a material fact of a
contract, and it is designed to persuade another
to enter into that contract. If a special relationship
exists, such as that of attorney and client,
nondisclosure of a material fact is fraud. Many
courts have held that mere silence concerning a
material fact did not constitute fraud, but the
emerging trend is to find a duty to disclose and,
therefore, deliberate concealment of a material
fact gives rise to an action for fraud.
A contract that is based on fraud is void or
voidable, because fraud prevents a meeting of
the minds of the parties. If the fraud is in the
factum, (i.e., during the execution of the contract)
so that the party would not have signed
the document if he or she understood its nature,
then the contract is void ab initio (i.e., from its
inception). The signatory is not bound if a different
contract is substituted for the one that he
or she had intended to execute. If, however, a
party negligently chooses to sign the contract
without reading it, then no fraud exists and the
contract is enforceable. If the fraud is in the
inducement, by which a party is falsely persuaded
to sign a contract, the terms of which he
or she knows and understands, then the contract
is not void but is voidable by the innocent party,
as that party executes what is intended to be executed.
If, however, due to fraud, a contract fails
to express the agreement that the parties
intended it to express, then the defrauded party
may seek a decree of reformation, by which the
court will rewrite a written agreement to conform
with the ORIGINAL INTENT of the parties.
Misrepresentation without Fraud A contract
may be invalidated if it was based on any
innocent misrepresentation pertaining to a
material matter on which one party justifiably
relied.
Duress Duress is a wrongful act or threat by
one party that compels another party to perform
some act, such as the signing of a contract,
which he or she would not have done voluntarily.
As a result, there is no true meeting of minds
of the parties and, therefore, there is no legally
enforceable contract. Blackmail, threats of physical
violence, or threats to institute legal proceedings
in an abusive manner can constitute
duress. The consensus of most jurisdictions is
that the threat to commence legal proceedings,
which otherwise might be justifiable, becomes
wrongful when done with the corrupt intent to
coerce a transaction that bears no relation to the
subject of such proceedings and is grossly unjust
to the victim.
A contract that is induced by duress is either
void or voidable. If the duress consists of one
party taking the other’s hand as a mechanical
instrument by which to sign his or her name to
a contract, then the contract is void ab initio for
lack of any intent on the victim’s part to perform
the act. The result is the same if the victim is
compelled to sign a contract at gunpoint without
any knowledge of its contents. These are
highly unusual situations. In most cases involving
duress, the contract is voidable, and the person
who was subjected to the duress may ask the
court to declare the contract unenforceable.
Undue Influence Undue influence is
unlawful control exercised by one person over
another in order to substitute the first person’s
will for that of the other. It generally occurs in
two types of situations. In the first, a person
takes advantage of the psychological weakness of
another, in order to influence that person to
agree to a contract to which, under normal circumstances,
he or she would not otherwise consent.
The second situation entails undue
influence based on a fiduciary relationship that
exists between the parties. This occurs where
one party occupies a position of trust and confidence
in relation to the other, as in familial or
professional-client relationships. The question
of whether the assent of each party to the contract
is real or induced by factors that inhibit the
exercise of free choice determines the existence
of undue influence. Mere legitimate persuasion
and suggestion that do not destroy free will are
not considered undue influence and have no
effect on the legality of a contract.
Assignments
An assignment of a contract is the transfer to
another person of the rights of performance
under it. Contracts were not assignable at early
common law, but today most contracts are
assignable unless the nature of the contract or its
provisions demonstrates that the parties intend
to make it personal to them and therefore incapable
of assignment to others.
Joint and Several Contracts
Joint and several contracts always entail
multiple promises for the same performance.
Two or more parties to a contract who promise
to the same promisee that they will give the
same performance are regarded as binding themselves jointly, severally, or jointly and severally.
Promises impose several liability only when
promisors singly promise to pay or to act. If the
three promisors singly promise to pay the party
$500, it is as though there are three discrete and
individual contracts, except that the promisee is
to receive a total of only $500. The three
promisors do not promise as a unit, but each
individually assumes to pay the entire sum.
Joint liability ensues only when promisors
make one promise as a unit. If three promisors
promise to pay $500, then the three will owe the
debt as a unit, not individually. The party may
enforce the contract only against one promisor
or against any number of joint promisors. The
promisee is entitled, however, to only one award
of the amount due.
Promises impose joint and several liability
when the promisors promise both as a unit and
individually to pay or perform according to the
terms of the contract.
If a promisor who is jointly or jointly and
severally liable on a contract performs or pays
the promisee in full, then the other promisors
are thereby discharged from their obligations on
the contract to the promisee, as he or she may
only collect the amount due to him or her. The
promisor who performed, however, has a right
to contribution from the co-promisors—that is,
the right to receive from the other co-promisors
their proportionate share of the debt. The general
rule is that a co-obligor who has paid in
excess of his or her proportionate share is entitled
to contribution, unless there is a particular
agreement to the contrary.
Joint and several promises can exist if a
promisor promises to pay two promisees a certain
sum of money. The promisees are joint and
several promisees or obligees, and the promisor
has the duty to pay. Both promisees are entitled
to performance of the promise jointly and separately,
even though there is only one promise
made to two people. Any one of the joint obligees
in a contract has the power to discharge the
promisor from the obligation. If the promisor
pays one promisee, this payment operates as a
discharge of the promisor’s liability under the
contract. The promisee who has not been paid
may not compel the promisor to pay him or her,
as the promisor has been discharged by the payment
to the other promisee. The unpaid
promisee may seek contribution from the
promisee who has been paid, however.
Third-Party Beneficiaries
There are only two principal parties, the
offeror and the offeree, to an ordinary contract.
The terms of the contract bind one or both parties
to render performance to the other in consideration
of receiving, or having received, the
other’s performance. Contracts sometimes specify
that the benefits accruing to one party will be
conferred upon a third party. The effect of a
third-party contract is to provide, to a party who
has not assented to it, a legal right to enforce the
contract.
A creditor beneficiary is a nonparty to a contract
who receives the benefit when a promise is
made to satisfy a legal duty. For example, suppose
that a debtor owed a creditor $500. The
debtor lends $500 to a third person, who promises
to use the money to pay the debtor’s debt.
The third person is the promisor, who makes the
promise to be enforced. The debtor is the
promisee, to whom the promise is made. The
contract is between the debtor and the third person,
the promisor, and the consideration for the
promise is the $500 loan that the promisor
received from the debtor. The creditor is the
third-party beneficiary. If the promisor refuses
to pay the creditor $500, then the creditor may
sue the promisor and prevail. Although the
creditor is not a party to their contract, both the
debtor and the promisor intend that the creditor
should be the beneficiary of the contract and
have enforceable rights against the promisor,
since he or she is to pay the creditor. The debtor
or the creditor may sue to enforce the promisor’s
promise to pay. The creditor’s right to enforce
the contract between the debtor and the
promisor is effective only when he or she learns
of, and assents to, the contract. The creditor may
also sue the debtor for the $500, as the debtor
had a legal duty to pay this loan. The debtor then
may sue the promisor for breach of contract for
refusing to pay the creditor.
A donee beneficiary of the contract is a nonparty
who benefits from a promise that is made
for the purpose of making a gift to him or her. A
donor wishes to give a donee $200 as an anniversary
present. The donor plans to sell a television
set for $200 to a purchaser, who promises to pay
the donee the $200 directly. The donee is a
donee beneficiary of the purchaser’s promise to
pay the money and may enforce this claim
against the purchaser. The donee has no claim
against the donor, the promisee, as the donor
has no legal duty to the donee but is merely giving the donee a gift. However, the donor will be
able to sue the purchaser for refusal to pay the
donee, because it would be a breach of the terms
of their contract of sale.
The difference between a creditor beneficiary
and a donee beneficiary becomes significant
when the parties to a contract attempt to alter
the rights of the third-party beneficiary. The
promisor and the promisee have no right or
power to alter the accrued rights of the donee
beneficiary without consent unless this power
was expressly reserved in the contract, regardless
of whether the donee knows about the contract.
A donee beneficiary’s rights become effective
when the contract is made for his or her benefit,
regardless of whether he or she knows about the
contract. In contrast, a creditor beneficiary’s
rights vest only when the creditor beneficiary
learns of, and assents to, the contract.
Conditions and Promises
of Performance
The duty of performance under many contracts
is contingent upon the occurrence of a
designated condition or promise. A condition is
an act or event, other than a lapse of time, that
affects a duty to render a promised performance
that is specified in a contract. A condition may
be viewed as a qualification placed upon a
promise. A promise or duty is absolute or
unconditional when it does not depend on any
external events. Nothing but a lapse of time is
necessary to make its performance due. When
the time for performance of an unconditional
promise arrives, immediate performance is due.
A dependent or conditional promise is not effective
until the occurrence of some external event
that the parties have specified. An implied condition
is one that the parties should have reasonably
comprehended to be part of the
contract because of its presence by implication.
Types of Conditions Conditions precedent,
conditions concurrent, and conditions subsequent
are types of conditions that are commonly
found in contracts. A condition
precedent is an event that must exist as a fact
before the promisor incurs any liability pursuant
to it. For example, suppose that an employer
informs an employee that if the employee successfully
completes an accounting course, he or
she will receive $500. The completion of the
course must exist as a fact before the employer
will be liable to the employee; when that fact
occurs, the employer becomes liable.
A condition concurrent must exist as a fact
when both parties to a contract are to perform
simultaneously. Neither party has a duty to perform
until the other has performed or has tendered
performance. Practically speaking,
however, the party who wants to complete the
transaction must perform in order to establish
the duty of performance by the other party. The
performances are concurrently contingent upon
each other. Concurrent conditions are usually
found in contracts for the sale of goods and in
contracts for the conveyance of land.
A condition subsequent is one that, when it
exists, ends the duty of performance or payment
under the contract. For example, suppose that
an insurance contract provides that suit against
it for a loss covered by the policy must be commenced
within one year of the insured’s loss. If
the destruction of the insured’s building by fire
is a risk that the policy covers, then the insured
must file suit against the insurer within the time
specified, or the condition subsequent will end
the duty of the company pursuant to the policy.
Substantial Performance The failure to
comply strictly with the terms of a condition
will not prevent recovery if there has been substantial
performance of the contractual obligation.
Courts created this doctrine in order to
prevent forfeitures and to ensure justice. Where
recovery is permitted for substantial performance,
it is offset by damages for injuries caused
by failure to render complete performance.
Courts determine whether there has been a
breach or a substantial performance of a contract
by evaluating the purpose to be served; the
excuse for deviation from the letter of the contract;
and the cruelty of enforced adherence to
the contract. If the deviation from the contract
were accidental and resulted in only a trivial difference
between what was required by the contract
and what was performed, the plaintiff will
receive only nominal damages.
Satisfactory Performance A contract may
be contingent upon the satisfaction of a person’s
opinion, taste, or fancy. Most courts apply a
good-faith test in determining whether rejection
of a performance was reasonable. If a rejection is
made in bad faith, the court will enforce the
contract.
If satisfaction can be measured with reference
to the commercial value or caliber of the
subject matter of the contract, the performance
must be proved to be deficient in these respects
and the dissatisfaction must be proven to be sufficiently reasonable and well-founded to justify
non-enforcement of the contract. The test is:
What would satisfy a reasonable person? The
condition of satisfaction need not be met when
the expression of dissatisfaction is made in bad
faith and not related to the quality or commercial
value of the subject of the contract.
Divisible Contracts The entire performance
of a contract can be a condition to the
other party’s duty to perform. If the contract is
legally divisible, the performance of a divisible
portion can fulfill the condition precedent to
the other party’s corresponding divisible performance.
A contract is divisible when the performance
of each party is divided into two or
more parts; each party owes the other a corresponding
number of performances; and the
performance of each part by one party is the
agreed exchange for a corresponding part by the
other party. If it is divisible, the contract, for
certain purposes, is treated as though it were a
number of contracts, as in employment contracts
and leases. If an employer hires a prospective
employee for one year at a weekly salary, the
contract is divisible. Each week’s performance is
a constructive or implied condition precedent
to the employee’s right to a week’s salary. The
right to the salary is not contingent on performance
of the obligation to work for one year.
In most contracts of employment, the courts
allow recovery to the employee for the number
of weeks or months of service rendered, on the
theory that such contract is divisible. The same
is true for a lease of real property or an apartment.
If the lease is breached before the entire
term has expired, the tenant is liable for the
remaining rent as each month occurs, but is not
liable prior to that time. In effect, the court
treats the lease as a contract for each month,
with rent due on the first of each month. In a
divisible contract, the performance of a separate
unit that is treated as a separate contract entitles
the performing party to immediate payment,
whereas in an entire contract, the party who is
first to perform must render full performance
in order to be entitled to performance from the
other party.
Breach of Conditions Compliance with a
condition can be excused under certain circumstances.
As a general rule, if the facts would
excuse compliance with a condition, they will
also excuse performance of a promise.An excuse
for nonperformance of a condition can exist in
many forms, such as a waiver (the intentional
relinquishment of a known right) of performance
of the condition.
If an unintentional failure to perform a condition
would result in a FORFEITURE, a court
may excuse compliance in order to prevent injustice.
The duty of performance by the other party
arises just as though the condition has been fulfilled
if compliance with a condition is excused.
Discharge of Contracts
The duties under a contract are discharged
when there is a legally binding termination of
such duty by a VOLUNTARY ACT of the parties or
by operation of law. Among the ways to discharge
a contractual duty are impossibility or
impracticability to perform personal services
because of death or illness; or impossibility
caused by the other party.
The two most significant methods of voluntary
discharge are ACCORD AND SATISFACTION
and novation. An accord is an agreement to
accept some performance other than that which
was previously owed under a prior contract. Satisfaction
is the performance of the terms of that
accord. Both elements must occur in order for
there to be discharge by these means.
A novation involves the substitution of a
new party while discharging one of the original
parties to a contract by agreement of all three
parties. A new contract is created with the same
terms as the original one, but the parties are different.
Contractual liability may be voluntarily discharged
by the agreement of the parties, by
estoppel, and by the cancellation, intentional
destruction, or surrender of a contract under
seal with intent to discharge the duty.
The discharge of a contractual duty may also
occur by operation of law through illegality,
merger, statutory release, such as a discharge in
bankruptcy, and objective impossibility. Merger
takes place when one contract is extinguished
because it is absorbed into another.
There are two types of impossibility of performance
that discharge the duty of performance
under a contract. Subjective impossibility is due to
the inability of the individual promisor to perform,
such as by illness or death.Objective impossibility
means that no one can render the
performance. The destruction of the subject matter
of the contract, the frustration of its purpose,
or supervening impossibility after the contract is
formed are types of objective impossibility.
“Impracticability” because of extreme and unreasonable difficulty, expense, injury, or loss involved
is considered part of impossibility.
Breach of Contract
An unjustifiable failure to perform all or
some part of a contractual duty constitutes a
breach of contract. It ensues when a party who
has a duty of immediate performance fails to
perform, or when one party hinders or prevents
the performance of the other party.
A total, major, material, or substantial
breach of contract constitutes a failure to perform
properly a material part of the contract. A
partial or minor breach of contract is merely a
slight deviation from the bargained-for performance.
A breach may occur by ANTICIPATORY
REPUDIATION, whereby the promisor, without
justification and before committing a breach,
makes an affirmative statement to the promisee,
indicating that he or she will not or cannot perform
the contractual duties.
The differences in the types of breach are
significant in ascertaining the kinds of remedies
and damages available to the aggrieved party.
Remedies
Damages, reformation, RESCISSION, restitution,
and SPECIFIC PERFORMANCE are the basic
remedies available for breach of contract.
Damages The term damages signifies a sum
of money awarded as a compensation for injury
caused by a breach of contract. The type of
breach governs the extent of the damages to be
awarded.
Failure to perform The measure of damages
in breach-of-contract cases is the sum that
would be necessary to recompense the injured
party for the amount of losses incurred through
breach of contract. The injured party should be
placed in the position that he or she would have
occupied if the contract had been performed,
and they are entitled to receive the benefit of the
bargain, the net gain that would have accrued to
them under the contract. The injured party is
not, however, to be put in a better position than
he or she would have occupied had performance
taken place.
Damages for anticipatory repudiation are
ordinarily assessed as of the scheduled performance
dates that are fixed by the breached contract.
The measure of damages for the breach of
an installment contract is determined at the
time each installment is due.
When the parties have included a LIQUIDATED
DAMAGES clause in a contract, it generally
will be enforced. Such clause is a prior agreement
by the parties as to the measure of damages
upon breach. Additional damages may not
be claimed.
Partial performance When the defendant
has failed to complete performance of an agreement
according to its terms, the plaintiff may
recover such damages as will compensate him or
her to the same extent as though the contract
had been completely performed. The customary
measure of damages is the reasonable expense of
completion. Completion refers to a fulfillment
of the same work, if possible, which does not
involve unreasonable economic waste. The
injured party is not automatically entitled to
recover the difference between the contract price
and the amount it would cost to have the work
completed when a contract is breached after
partial performance; he or she will be entitled to
recover that amount only if completion is actually
accomplished at a greater cost.
A provision in a building contract that
allows the owner, in the event of a default by the
contractor, to complete the job and to deduct
the expenses from the contract price does not
preclude the owner’s recovering damages also
where the contractor intentionally leaves the
work undone. A plaintiff may also recover the
monetary value of materials that are lost
through a breach of contract.
A plaintiff contractor who subsequently
performs the work upon breach of a contract
will ordinarily recover the reasonable value of
the labor and materials that he or she has furnished,
with the contract price used as a guideline.
The award may not properly exceed the
benefit that the owner received in the properly
completed work, and it will be reduced by the
amount of damages that the owner incurs as a
result of the contractor’s failure to complete
performance of the contractual obligation. If
the value of the work performed exceeds the
contract price, the contractor will not receive
the excess.
Where a contract for the performance of
services exists with payment to be made in
installments, and the obligation to pay for each
installment constitutes an independent promise,
the individual who is entitled to payment may
recover only the installments that are due when
the suit is brought.
Defective performance Damages for defective
performance of a contractual agreement are
measured by calculating the difference in value between what is actually tendered and what is
required as performance under the agreement. If
the performance tendered is either of no value
or unsuitable for the purpose that the contract
contemplated, the proper measure of damages is
the sum that is necessary to repair the defect. If
a defect can be easily remedied through repairs,
the measure of damages is the price of the
repairs performed.
Generally, the total contract price may not
be recovered for substantial performance. If the
plaintiff furnished materials for items that were
manufactured for the plaintiff in such a manner
as to be rendered worthless, the proper measure
of damages ordinarily has been held to be the
discrepancy between the contract price and the
market price of such items if they had been
manufactured according to the contract terms.
When a building or construction contract is
defectively performed, the proper measure of
damages is the difference between the value of
the property with the defective work, and its
value had there been strict compliance with the
contract. Where the contractor deliberately
deviates from the contractual agreement, but
there has been no substantial performance,
damages are determined by the actual expense
of reconstructing the building according to the
terms of the contract.
Delay in performance The loss precipitated
by the wrongful delay of the performance of a
contract is calculated by fixing the rental or use
of the property or interest as a result of the loss
incurred through increased material and labor
expenses, as distinguished from what the value
would have been had the contract been performed
on time.
Reformation Reformation is an equitable
remedy that is applied when the written agreement
does not correspond to the contract that
was actually formed by the parties, as a result of
fraud or mutual mistake in drafting the original
document. Quasi-contractual relief for the reasonable
value of services rendered is also available,
although it applies only when there is no
enforceable contract.
Rescission Rescission terminates the contract,
and the parties are restored to the position
of never having entered into the contract in the
first place.
Restitution Restitution is a remedy that is
designed to restore the injured party to the position
that they occupied prior to the formation of
the contract.
Specific Performance Specific performance
is an equitable remedy by which a contracting
party is required to execute, as nearly as practicable,
a promised performance when monetary
damages would be inadequate to compensate
for the breach. A contract to sell land is specifically
enforceable because land is considered to
be unique and not compensable by money. In
addition, property that has sentimental value, as
well as antique, heirloom, or one-of-a-kind articles,
are viewed as unique, and therefore it
would be impossible to estimate damages. A
personal-service contract or an employment
contract, however, cannot be specifically
enforced because the THIRTEENTH AMENDMENT
to the U.S. Constitution prohibits SLAVERY. If,
however, the contract proscribes a person from
performing some act, breach of that negative
covenant may be specifically enforced.
Parol Evidence Rule
Tentative terms discussed in preliminary
negotiations are subsumed by the provisions of
the contract executed by the parties. The PAROL
EVIDENCE rule governs the admissibility of evidence
other than the actual agreement when a
dispute arises over a written contract. When
parties memorialize their agreements in writing,
all prior oral and written agreements, and all
contemporaneous oral agreements, merge in the
writing, which is also known as an integration.
The written contract may not be modified,
altered, or varied by parol or oral evidence, provided
that it has been legally executed by a person
who intends for it to represent the final and
complete expression of his or her understanding
of the contract. This is not the case, however,
where there has been some mistake or fraud in
the drafting of the document.
The parol evidence rule effectuates the presumed
intention of the parties; achieves certainty
and finality as to the rights and duties of
the contracting parties; and prevents fraudulent
and perjured claims. It has no application to
subsequent oral contracts that modify or discharge
the written contract, however.
Ambiguity
Ambiguity in the terms of a contract exists
when the court cannot, after applying the rules
or tools of interpretation, give a meaning to the
language used in an agreement or document.
The plain-meaning rule is often applied judicially
to ascertain whether a contract is ambiguous.
If the contract appears to the trial judge to be clear and unequivocal on its face, then there
is no need for parol evidence. However, when a
writing is ambiguous, parol evidence is admissable
only to elucidate, not to vary, the instrument
as written.
Courts have used other rules to resolve
ambiguous terms.Where neither party knows, or
has reason to know, of the ambiguity, or where
both parties know or have reason to know of it,
the ambiguous term is given the meaning that
each party intended it to convey. As a practical
matter, this means that if the parties give the
equivocal expression the same meaning, then a
contract is formed; but if they give it a different
meaning, then there is no contract, at least if the
ambiguity pertains to a material term, as there is
no meeting of their minds. Where one party
knows, or has reason to know, of the ambiguity,
and the other does not, it conveys the meaning
given to it by the latter—which means, in essence,
that there is a contract predicated upon the
meaning of the party who is without fault.
Contracts for the Sale of Goods
The nature of a transaction determines the
type of contract law that applies. General contract
law described above applies to such transactions
as service agreements and sales of real
property. Contracts for the sale of goods, however,
are governed by Article 2 of the UCC,
which has been adopted, at least in part, in every
state. The UCC defines “goods” as all things that
are movable at the time of the sale.
The drafters of the UCC adhered to a more
liberal view of contracts, so some of its provisions
differ significantly from those that are
found in general contract law. A contract for the
sale of goods may be made in any manner that is
sufficient to show agreement, and courts may
consider the conduct of the parties when making
this determination. An offer to sell goods
may be made in any manner that invites acceptance.
Courts also may consider the COURSE OF
PERFORMANCE between the parties when determining
whether a contract for the sale of goods
exists.
The UCC provides for, and recognizes, certain
warranties that relate to the goods being sold.
For example, an affirmation of fact or a promise
made by the seller to the buyer creates an express
warranty. Sales also create implied warranties,
such as the implied warranties of merchantability
and fitness for a particular purpose. Remedies
and other damages for breach of a sale-of-goods
contract are also governed by the UCC. In addition
to monetary damages, buyers and sellers may
take several actions when the other party
breaches a sales contract. For example, a seller
who has been injured by a breach of contract may
withhold delivery of the goods; resell the goods
that are subject to the contract; or recover monetary
damages. A buyer may seek to “cover” by
making a good-faith purchase of substitute goods
from a different seller, and then may recover from
the original seller any difference between the substitute
contract and the original contract.
FURTHER READINGS
Collins,Hugh. 1999. Regulating Contracts. New York: Oxford
Univ. Press.
DiMatteo, Larry A. 1998. Contract Theory: The Evolution of
Contractual Intent. East Lansing: Michigan State Univ.
Press.
Hare, J. I. Clark. 2003. The Law of Contracts. Clark, N.J.:
Lawbook Exchange.
Marsh, P.D.V. 2001. Contract Negotiation Handbook.
Burlington, Vt: Gower.
