The Nature and Origins of Contracts

CHAPTER 9

THE NATURE AND ORIGINS OF CONTRACTS

Outline

I.What is a Contract?

A contract is a legally enforceable promise or set of promises containing an agreement supported by consideration, voluntarily entered into by parties with capacity, for a legal purpose.

II.Why Have Contracts?

Contracts are necessary in any kind of market economy where goods and services are exchanged by people acting in their own interests.

IIIHow Has Contract Law Developed?

Many of the current rules of contract law were developed in the 18th and 19th centuries. The law has evolved from a free-market theory to a developing concept of protecting consumers and workers

IV.The Uniform Commercial Code

The UCC has been adopted in whole or in part by each state in the U.S. The American Law Institute and the National Conference of Commissioners on Uniform State Laws established the UCC to govern commercial transactions that often take place across state lines.

V.Article 2

The Uniform Commercial Code (UCC) Article 2 governs contracts for the sale of goods. "Goods" must be distinguished from "services." The sale of goods (tangible personal property) falls under Article 2, while services do not fall under the UCC at all.

Example: Conwell v. Gray Loon Outdoor Marketing Group, Inc.: The website creation and maintenance is neither tangible nor moveable and therefore is a service. The common law should be applied to this contract.

A.Creation of Practical Contract Rules

UCC is more flexible than common law contracts and rewards people’s legitimate expectations.

B.Cyber-Contracts

The drafters amended the definition of “goods” to exclude information.

C.The UCC imposes a duty of good faith and fair dealing under Article 2.

Some sections of the Code impose a different and higher standard of behavior for "merchants."

VI.Contracts for the International Sale of Goods

The U.N. Convention on the International Sale of Goods (CISG) is similar to the Uniform Commercial Code and applies to U.S. companies unless they choose not to have the law apply and give notice in their contracts that is law does not apply.

V.Types of Contracts

A.Valid, Unenforceable, Voidable, and Void Contracts

1.A valid contract meets the legal requirements for a contract and is therefore enforceable in court.

2.An unenforceable contracts meet legal requirements but will not be enforced by a court.

3.A voidable contract may be cancelled by one or both parties.

4.A void contracts lack one or more of the basic requirements for a contract and therefore has no legal force or effect.

Example: Dodd v. American Family Mutual Insurance Co.: The court found that the contract was voidable from the outset due to misrepresentation. A material misrepresentation on an insurance policy renders the coverage voidable at the insurance company’s option.

B.Unilateral and Bilateral Contracts

1.Unilateral contract is a contract with only one promise by one party (for example, an offer for a reward).

2.A bilateral contract consists of promises by both parties.

C.Executed and Executory Contracts

1.An executed contract has been completely performed by all parties.

2.An executory contract has not been fully performed.

D.Express and Implied Contracts

1.A contract is express if the parties have directly stated its terms.

2.A contract is implied if the actions of the parties indicate an agreement has been reached.

Example: Anderson v. Hannaford Brothers Co.: The court found that there was an implied contract between Hannaford and its customers that the company would take reasonable measures to protect the credit and debit card information.

VI.Quasi Contract

A quasi-contract is a contract implied in law to avoid unjust enrichment by one party at the expense of another.

Example: Palese v. Delaware State Lottery Office.: The court did not allow Palese to recover under the theory of quasi-contract. Palese had entered into a contract, but lost proof of the contract. He may not recover under the theory of quasi-contract if a contract did exist.

VII.Promissory Estoppel

Promissory Estoppel is a doctrine permitting a plaintiff to recover damages from a defendant who makes a promise that he knows will induce reliance, and where the plaintiff actually and reasonably relies on the promise to his detriment.

Learning Objectives

1.You should understand the evolution of contract theory from a laissez faire perspective to a consumer-protection perspective.

2.You should be able to identify the elements of a contract.

3.You must know the difference between bilateral and unilateral contracts.

4.You must know the difference between void, voidable, unenforceable and valid contracts.

5.You must know the difference between express and implied contracts.

6.You must know the difference between executed and executory contracts.

7.You must be familiar with quasi-contract, and the difference between a contract implied in law and one implied in fact.

8. You must be familiar with promissory estoppel and, the fact that in some situations promissory estoppel can be substituted for some required element of a contract.

9. You should understand the significance of the Uniform Commercial Code and the circumstances in which it applies.

10.You should understand the practical differences between application of the U.C.C. and common law.

11.You should know that the CISG is a uniform code for international contracts.

12.You should have an awareness of cyber-contracts.

Learning Hints

1.Probably the most important social factor underlying the change from nineteenth century contract law to twenty-first century contract law was the rise of the large private group, mainly the corporation. This development produced countless disparities of bargaining power and resulting injustices when such groups contracted with individuals or smaller groups. The response to this was government intervention, often to set the terms of the contract in order to protect the weaker party to the contract.

2.One of the most significant changes in modern contract law has been the adoption of the Uniform Commercial Code, which is in effect in all states except Louisiana (the only civil law state). This Code changes the common law rules in some important respects, and it is generally more flexible and commerce-friendly than common law.

3.The Uniform Commercial Code (UCC) applies to any contract for the sale of goods. It is not limited to contracts where the parties are merchants.

4.An unenforceable contract cannot serve as the basis for a lawsuit by either party to the contract because it cannot be enforced. However, it is technically still a contract, even though unenforceable, and may be valid for other purposes. For example, the fact that a contract is unenforceable will not block a suit for intentional interference with contractual relations because technically a contract exists, though it is unenforceable, and can be interfered with.

5.Among the things that might happen when a contract is voidable are that the party with the power to avoid the contract (such as a party who has been defrauded) may choose to go ahead and perform the contract and bind the other party to the contract; the party with the power to avoid the contract may refuse to perform the contract and assert a defense if sued by the other party to the contract; the party with the power to avoid the contract may choose to rescind if the contract is executed; i.e., has already been performed. Rescission is a remedy whereby the court effectively cancels the transaction and restores each party to his pre-contract position.

6."Void contract" is a contradiction in terms because such an agreement is not a contract at all, since it lacks one or more requirements for a contract and has no legal affect.

7.Perhaps the most important feature of an express contract is that the parties have stated its terms in words, either oral or written.

8.Note that technically a contract is executed only when all parties have fully performed.

9.Quasi-contract is a strange legal fiction that is applied in a variety of different situations. All of the situations involve the idea of unjust enrichment, because they all involve a benefit conferred on the defendant by the plaintiff (the enrichment), with the defendant's knowledge at the time the benefit was conferred, under circumstances where it would be unjust for the defendant not to pay the plaintiff for the benefit.

10.Under Article 2 of the Uniform Commercial Code, "goods" are moveable, tangible objects. In every contract problem, you must first ask yourself whether the contract is one for the sale of goods. If the contract does involve the sale of goods, the applicable UCC rule will apply. If the contract is not for the sale of goods, or it is for the sale of goods but no UCC rule covers the situation, common law contract rules will apply instead. As you will see in the later contracts chapters, common law contract rules and UCC rules are sometimes very different.

True-False

In the blank provided, put "T" if the statement is True or "F" if the statement is False.

_____1.Article 2 of the Uniform Commercial Code covers the sale of services, such as tax preparation services.

_____2.All United States companies must comply with the Convention on the International Sale of Goods (CISG).

_____3.The UCC does not apply in cases where both parties are merchants.

_____4.Even if both parties intend to create a contract, no enforceable contract exists unless expressly created under the U.C.C.

_____5.Marty Minor cancels his contract for the purchase of electronic equipment from Circuit City. This is an example of a voidable contract.

_____6.An express contract must be in writing.

_____7.Quasi-contract is a legal fiction created by a court to avoid injustice

_____8.Your car breaks down on a lonely road late at night. You call Tom’s Tow on your cell phone and they send a tow truck to pick up you and your car. This is an example of an implied contract.

_____9.If a person voluntarily receives a benefit from another party where it would be unfair to keep the benefit without paying for it, this is a situation where the doctrine of promissory estoppel would apply.

_____10.Courts treat contracts as bilateral rather than unilateral whenever it is possible to do so.

Multiple Choice

Circle the best answer.

1.An executed contract is:

a.A contract fully performed by all persons.

b.Voidable by either party.

c.A contract that only may be enforced by one party.

d.A void contract.

2.Brown enters into an agreement on October 1 with Superior Siding to install vinyl siding on his home beginning on October 15. The job will take Superior three weeks to complete and Brown will pay the $15,000 cost of the siding when the job is complete. Which of the following is most true?

a.This is an example of an implied contract.

b.This is an example of an executory contract.

c.This is an example of a quasi contract.

d.This is an example of an executed contract.

3.Acme contracts to sell 1,000 widgets to Jones for $5,000. This is an example of:

a.a bilateral contract.

b. a sale of goods that is covered by Article 2 of the U.C.C.

c.a valid contract.

d.all of the above.

4.Don mistakenly planted two new flowering trees on Bob's property. Bob knew that Don was planting the trees, but didn't inform him.

Under what theory is Bob obligated to pay Don for the value of the trees?

a.Promissory estoppel.

b.Express contract.

c.Contract implied in fact.

d.Quasi-contract.

5.Which of the following statements concerning the International Sale of Goods is not correct?

a.The CISG only applies to contracts for the commercial sale of goods.

b.The CISG has no writing requirement unless the contract contains a written provision for it.

c.The CISG applies to U.S. companies unless they choose not to have the law apply and give notice of that fact within the contract.

d.The CISG applies to every contract for the international sale of goods.

6.Tammy orally agrees to sell her house to Finch for $100,000. Which of the following is true?

a.This is an unenforceable contract because a contract for the sale of real estate must be in writing to be enforceable.

b.This is an implied contract.

c.This is a quasi contract.

d.This is a unilateral contract.

7.Harold tells Sally, “I will give you $25,000 if you can graduate from college with a GPA of 3.0 or better.” Which of the following is most true?

a.This is not a bilateral contract because only Harold is making a promise.

b.Harold may be bound to pay Sally if she does as he asks because of implied contract.

c.This is an example of a unilateral contract.

d.All of the above.

8.Harvey promises to pay Hal $500 if he breaks Howard’s legs because Howard failed to pay back a loan to Harvey. This is an example of a(n):

a.void contract.

b.voidable contract.

c.implied contract.

d.bilateral contract.

9.Beaver and Gilbert start mowing Frank’s lawn without talking to Frank first. Frank is home and sees the boys mowing the lawn. The boys work hard and ask Frank for payment after completing the job. Which of the following is the best chance for Beaver and Gilbert to recover a fair price for mowing Frank’s lawn?

a.Frank and the boys had an implied contract.

b.Frank and the boys had an express contract.

c.The boys may be able to recover under quasi contract theory.

d.The boys can recover because this is a bilateral contract.

10.Which of the following is true?

a.Courts in the 19th century were more likely to interfere in private contracts than are courts today.

b.Courts today are more likely to protect big businesses instead of consumers.

c.Many contracts today are effected or controlled to some extent by legislation at both the state and federal level.

d.The U.C.C. has brought complete uniformity to commercial transactions in all states.

Short Essay

1.Darla had her hair colored by a local beauty salon. Unfortunately, her hair turned green as a result. She wants to sue the salon for damages under a theory of breach of implied warranty under the U.C.C. May she do so? Why or why not.

2.Assume that rather than having her hair colored at a local salon in the above situation, Darla purchased hair color at a local drug store. After her hair turned green, Darla wants to sue the manufacturer of the hair-coloring product for breach of implied warranty under the U.C.C. May she do so? Why or why not?

3.Tammy is a teacher. She sells her used car to Barb, a beautician. Does Article 2 of the U.C.C. apply to Tammy? Is Tammy a merchant?

4.What is the important legal difference between a void contract and a voidable contract?

5.Amy agrees to sell her used car to Kendra for $5,000. Amy delivers the car and the title to Kendra and Kendra pays Amy with a certified check. Discuss this situation using the terminology covered in the chapter.

6.Paula tells Paul that she will pay him $2,000 if he will paint the outside of her house. A week later, Paul shows up at Paula’s house and begins painting. After Paul has been painting Paula’s house for two days, she tells him she is not going to pay him anything because they did not have a contract. Discuss the rights of the parties in this situation.

7.Would Article 2 of the U.C.C. apply to the sale and installation of replacement windows in Johnson’s house?

8.Why are courts today more willing to interfere in contracts than they were a century ago?

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