CONTRACTSCONTRACTS

Chapter 10Chapter 10

Contract LawContract 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

Sir Wm. Blackstone: “An agreement, upon sufficient consideration, to do or not to do a particular thing”

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.”

The promise itself creates a manifestation of intent Contracts form legal relationships and duties between

parties 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 AgreementThe 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 AGREEMENTThe 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 #3Capacity

• 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

MinorsMinors

• Defined as a person under the legal age of majority

• Traditionally, the age of majority was 21

• Now it is 18 years old in all states for most contracts

• Minors have partial capacity

• Contract is voidable• Legal policy to protect the

young from the “results of their own folly”

• General Rules– #1: Minors may disaffirm

contracts at their option– #2: If a minor disaffirms a

contract after receiving benefits, restitution must be paid for the benefit

– Some contracts may not be disaffirmed, i.e.

• Enlistment contracts• Marriage contracts • Educational loans• Insurance loans• Medical care

• After reaching majority, the minor may ratify the contract

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 #5Reality 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 Writingand

The Parol Evidence Rule

• Sufficiency of Writing– Writing must set out the

material terms of contract

– Names of parties– Consideration– Subject matter, etc.– Invoices, E-mails, sales

orders, checks, confirmations may satisfy this requirement

• Parol Evidence Rule– Restricts use of oral evidence

when contrary to terms of written contract.

– Oral evidence cannot contradict, change or add terms to written contracts.

– IF a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, THEN

– 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

REMEDIESREMEDIES

• 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 law2. protect commercial parties’ freedom to allocate risks by contract3. 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: Non-breaching 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. FisherScheerer, 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.