Chapter 9 Contracts

Definition of a Contract Definition A contract is an agreement that is enforceable by a court of law. A contract is a promise or a 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 Restatement (Second) of Contracts Parties to a Contract Every contract involves at least two parties. The offeror is the party who makes an offer to enter into a contract. The offeree is the party to whom the offer is made. In making an offer, the offeror promises to do—or to refrain from doing—something if the offeree promises to do something specified. The offeree then has the power to create a contract by accepting the offeror’s offer.

Elements of a Contract For a contract to be enforceable, the following four basic elements must be met: 1. Agreement. This requires an offer and an acceptance of the offer by the offeree. There must be mutual assent by the parties. 2. Consideration.The promise must be supported by a bargained-for consideration that is legally sufficient. Gratuitous promises are not considered supported by valid consideration. 3. Contractual capacity.Parties to a contract must have contractual capacity. Certain parties, such as persons adjudged insane or minors, may not have contractual capacity. 4. Lawful object.Contracts to accomplish illegal objects or contracts that are against public policy are void.

Defenses to the Enforcement of a Contract Two defenses may be raised to the enforcement of contracts: 1. Genuineness of assent. The consent of the parties to create a contract must be genuine. If the consent is obtained by duress, undue influence, or fraud, there is no real consent. 2. Writing and form. The law requires that certain contracts be in writing or in certain form. Failure of such a contract to be in writing or to be in proper form may be raised against the enforcement of the contract.

Objective Theory of Contracts The objective theory of contracts holds that the intent to enter into an express or implied-in-fact contract is judged by the reasonable person standard. The law deems that a contract is entered into if a reasonable person would conclude that the parties intended to create a contract after considering (1)the words and conduct of the parties, and (2)the surrounding circumstances. For example, no valid contract results from offers that are made in jest, anger, or undue excitement. Under the objective theory of contracts, the subjective intent of a party to enter into a contract is irrelevant. See Welles v. Academy of Motion Picture Arts and Sciences case (pp )

Classification of Contracts There are several types of contracts. They differ somewhat in formation, enforcement, performance, and discharge. Bilateral and Unilateral Contracts Contracts are classified as bilateral or unilateral, depending on what the offeree must do to accept the offeror’s offer. A contract is a bilateral contract if the offeror’s offer can be accepted by the offeree’s promise; a “promise for a promise” situation, in other words. This exchange of promises creates an enforceable contract. No act of performance is necessary to create a bilateral contract. A contract is a unilateral contract if the offeror’s offer can be accepted only by the performance of an act by the offeree. There is no contract until the offeree performs the requested act. An offer to create a unilateral contract cannot be accepted by a promise to perform. It is a “promise for an act.” The language of the offeror’s promise must be carefully scrutinized to determine whether it is an offer to create a bilateral or a unilateral contract. If there is any ambiguity as to which it is, it is presumed to be a bilateral contract.

Revocation of offer in unilateral contract An offer to create a unilateral contract can be revoked by the offeror any time prior to the offeree’s perfomance. However, the offer cannot be revoked if the offeree has begun or has substantially completed performance.

Express and Implied-in-Fact Contracts An actual contract (as distinguished from a quasi-contract) may be either express or implied-in-fact. Express contracts are stated in oral or written words. Implied-in-fact contracts are implied from the conduct of the parties. The following elements must be established to create an implied-in-fact contract: 1.The plaintiff provided property or services to the defendant. 2.The plaintiff expected to be paid by the defendant for the property or services and did not provide the property or services gratuitously. 3.The defendant was given an opportunity to reject the property or services provided by the plaintiff but failed to do so. See Ethics Spotlight : “Scrabble” Owner Held Liable on an Implied-in-Fact Contract (p 249)

Quasi-Contracts (Implied-in-law Contracts) The equitable doctrine of quasi-contract, also called implied-in-law contract, allows a court to award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed between the parties. Recovery is generally based on the reasonable value of the services received by the defendant. The doctrine of quasi-contract is intended to prevent unjust enrichment and unjust detriment. It does not apply where there is an enforceable contract between the parties. A quasi-contract is imposed where: 1.One person confers a benefit on another who retains the benefit, and 2.It would be unjust not to require that person to pay for the benefit received. See Powell v. Thompson Powell Case (pp )

Enforceability of Contracts Valid contract A valid contract meets all the essential elements to establish a contract, and as such is enforceable by (at least) one of the parties. Void contract A void contract has no legal effect. It is as if no contract had ever been created. If a contract is void, neither party is obligated to perform, and neither party can enforce the contract. For example, a contract to commit a crime is void. Voidable contract A voidable contract is one in which at least one party has the option to void his or her contractual obligations. If the contract is voided, both parties are released from their obligations under the contract. If the party with the option chooses to ratify the contract, both parties must fully perform their

Enforceability of Contracts Cont. Obligations. With certain exceptions, contracts may be voided by minors, insane persons, intoxicated persons, persons acting under duress or undue influence or fraud, and in cases involving mutual mistake. Unenforceable contract With an unenforceable contract, there is some legal defense to the enforcement of the contract. The parties may voluntarily perform a contract that is unenforceable.