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99Legal Environment 4Legal Environment 4thth Ed. Ed.

COPYRIGHT © 2011 South-Western/Cengage Learning. 1

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Quote of the DayQuote of the Day

“The whole duty of government is to prevent crime and to preserve

contracts.”Lord Melbourne,

British Prime Minister



The Purpose of a ContractThe Purpose of a Contract

Contracts exist to make business matters more predictable.

Judicial Activism vs. Judicial Restraint• Judicial restraint makes the law less

flexible but more predictable.• Judicial activism makes the law more

flexible but less predictable.



Issues (and Answers)Issues (and Answers) Agreement

• One party must make a valid offer, and the other party must accept it

Consideration• There has to be bargaining that leads to an

exchange between the parties.

Legality• The contract must be for a lawful purpose.

Capacity• The parties must be adults of sound mind.



ContractsContracts Definition

• A promise that the law will enforce.

Development of Contract Law• Common law once required all contracts to

be in writing, with a seal affixed.• Later, some payment was required before a

contract could be enforced.• Mutual promises became enforceable in the

1600’s.• By the 1900’s, courts began to consider the

fairness of contracts before enforcing them.



Types of Contracts (or Agreements)


Bilateral vs. Unilateral

Express vs. Implied

Executory vs. Executed

Valid vs. Unenforceable vs. Voidable vs. Void

DO NOT CLICK! Let slide “build” on its own.





Bilateral and Unilateral Contracts• Bilateral: both parties make a promise (to

do something) to each other.• Unilateral: one party makes a promise to

the other that the other party can accept only by doing something specific.



Types of Contracts (cont’d)Types of Contracts (cont’d)

Express and Implied Contracts• Express: the two parties to the contract

explicitly state all of the important terms of their agreement.

• Implied: the words and conduct of the parties indicate that the parties intended to make an agreement.




Executory and Executed Contracts• Executory: when one or more parties has

not fulfilled its obligations under the contract.

• Executed: when all parties to the contract have fulfilled their obligations under the contract.




Valid, Unenforceable, Voidable, and Void Agreements• Valid: satisfies the law’s requirements.• Unenforceable: when the parties intend to

form a valid bargain but some rule of law prevents enforcement.

• Voidable: when the law permits one party to terminate the agreement.

• Void: one that neither party can enforce, usually because the purpose is illegal or one of the parties had no legal authority.



Remedies Created by Judicial Activism


Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that:• The defendant made a promise knowing

that the plaintiff would likely rely on it.• The plaintiff did rely on the promise; and• The only way to avoid injustice is to enforce

the promise.



Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show that:• He gave some benefit to the defendant.• He reasonably expected to be paid for the

benefit and the defendant knew this; and• The defendant would be unjustly enriched if

she did not pay. The damages awarded are called quantum

meruit, meaning that the plaintiff gets “as much as he deserved.”





Sources of Contract LawSources of Contract Law Common Law Uniform Commercial Code

• UCC Article 2 governs the sale of goods. “Goods” means anything moveable, except for money, securities, and certain legal rights.

• In a mixed contract, Article 2 governs only if the primary purpose was the sale of goods.

Restatement (Second) of Contracts



Meeting of the MindsMeeting of the Minds The parties can form a contract only if

they had a meeting of the minds.• They must understand each other and

intend to reach an agreement.• A judge will make an objective assessment

of any disagreements about whether a contract was made -- whether or not a reasonable person would conclude that there was an agreement, based on the parties’ conduct.



OfferOffer

Problems with Intent• Invitation to bargain is not an offer.• An advertisement is generally not an offer.• A letter of intent may or may not be an

offer, depending on the writer’s intent.

Problems with Definiteness• The term of the offer must be definite.

An offer is an act or statement that proposes definite terms and permits the other party to create a contract by accepting those terms.



Termination of OffersTermination of Offers Termination by Revocation

• Effective when the offeree receives it. Termination by Rejection

• If an offeree rejects an offer, the rejection immediately terminates the offer.

Termination by Counteroffer• If an offeree counteroffers, it is a

rejection that immediately terminates the offer.



Termination of Offers (cont’d) Termination of Offers (cont’d) Termination by Expiration

• When an offer specifies a time limit for acceptance, that period if binding.

• If the offer specified no time limit, the offeree has a reasonable period in which to accept.

Termination by Destruction• Destruction of subject matter

terminates offer.



AcceptanceAcceptance The offeree must say or do something

to accept.• In a bilateral contract, the offeree generally

must accept by making a promise.• In a unilateral contract, the offeree must

accept by performing.

Mirror Image Rule (Common Law)• Requires that acceptance be on precisely

the same terms as the offer.



UCC and the Battle of FormsUCC and the Battle of Forms Under UCC §2-207, an acceptance that adds

additional or different terms may form a contract for sales of goods in certain cases.• For a sale of goods, the most important factor is

whether the parties believe they have formed an agreement.

• New terms added by the offeree do not void the agreement if accepted by the offeror.

• If terms are changed, a court will rely on general principles of the UCC to create a fair contract.

• If a party wants to contract only on his terms, the agreement must clearly state that.



ConsiderationConsideration Consideration means that there must

be bargaining that leads to an exchange between the parties.

Consideration can be anything that someone might want to bargain for.

A promisor is the person who makes the promise, and promisee, the person to whom the promise is made.



ConsiderationConsideration

The thing bargained for can be:• another promise.• an action without a promise.• a promise to do something or a promise to

refrain from doing something.

“Bargaining is obligating yourself in order to induce the other side to agree.”



BargainA B

There is consideration to support a contract between A and B, when they bargain...

and their bargaining causes BOTH parties ...

…to either give a benefit to the other or to suffer a detriment themselves.

Which causes...

A to give B a benefit

ORA to suffer a

detrimentANDANDANDAND

B to give A a benefit

ORB to suffer a

detriment

Consideration supports a contract!



Mutuality of ObligationsMutuality of Obligations Illusory Promise

• If one party’s promise is conditional, the other party is not bound to the agreement.



“If you understand the contract issues that courts scrutinize, the

agreement you draft is likelier to be enforced. You thus achieve

greater control over your affairs -- the very purpose of a contract.”

“If you understand the contract issues that courts scrutinize, the

agreement you draft is likelier to be enforced. You thus achieve

greater control over your affairs -- the very purpose of a contract.”

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