business laws unit 1

8/13/2019 Business Laws Unit 1

1/46

ContractsAgreements between two entities, creating an enforceableobligation 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 theparties have made and to fix their rights and duties inaccordance with that agreement. The courts must enforce avalid contract as it is made, unless there are grounds that bar itsenforcement.

Statutes prescribe and restrict the terms of a contract where thegeneral public is affected. The terms of an insurance contractthat protect a common carrier are controlled by statute in orderto safeguard the public by guaranteeing that there will befinancial resources available in the event of an accident.

The courts may not create a contract for the parties. When theparties have no express or implied agreement on the essential

terms of a contract, there is no contract. Courts are onlyempowered to enforce contracts, not to write them, for theparties. A contract, in order to be enforceable, must be a valid.The function of the court is to enforce agreements only if theyexist and not to create them through the imposition of suchterms as the court considers reasonable.

It is the policy of the law to encourage the formation of contracts

between competent parties for lawful objectives. As a generalrule, contracts by competent persons, equitably made, are validand enforceable. Parties to a contract are bound by the terms towhich they have agreed, usually even if the contract appears tobe improvident or a bad bargain, as long as it did not resultfromFraud,duress, orUndue Influence.
http://legal-dictionary.thefreedictionary.com/Fraudhttp://legal-dictionary.thefreedictionary.com/Fraudhttp://legal-dictionary.thefreedictionary.com/Undue+Influencehttp://legal-dictionary.thefreedictionary.com/Undue+Influencehttp://legal-dictionary.thefreedictionary.com/Undue+Influencehttp://legal-dictionary.thefreedictionary.com/Undue+Influencehttp://legal-dictionary.thefreedictionary.com/Fraud


2/46

The binding force of a contract is based on the fact that itevinces a meeting of minds of two parties inGood Faith.Acontract, once formed, does not contemplate a right of a partyto reject it. Contracts that were mutually entered into between

parties with the capacity to contract are binding obligations andmay not be set aside due to the caprice of one party or theother unless a statute provides to the contrary.

Types of Contracts

Contracts under SealTraditionally, a contract was anenforceable legal document only if it was stamped with a seal.

The seal represented that the parties intended the agreement toentail legal consequences. No legal benefit or detriment to anyparty was required, as the seal was a symbol of the solemnacceptance of the legal effect and consequences of theagreement. In the past, all contracts were required to be underseal in order to be valid, but the seal has lost some or all of itseffect by statute in many jurisdictions. Recognition by the courtsof informal contracts, such as implied contracts, has also

diminished the importance and employment of formal contractsunder seal.

Express ContractsIn an express contract, the parties state theterms, either orally or in writing, at the time of its formation.There is a definite written or oral offer that is accepted by theofferee (i.e., the person to whom the offer is made) in a mannerthat explicitly demonstrates consent to its terms.

Implied ContractsAlthough contracts that are implied infactand contracts implied in laware both called impliedcontracts, a true implied contract consists of obligations arisingfrom a mutual agreement and intent to promise, which have notbeen expressed in words. It is misleading to label as an impliedcontract one that is implied in law because a contract implied in
http://legal-dictionary.thefreedictionary.com/Good+Faithhttp://legal-dictionary.thefreedictionary.com/Good+Faithhttp://legal-dictionary.thefreedictionary.com/Good+Faithhttp://legal-dictionary.thefreedictionary.com/Good+Faith


3/46


4/46

law is actually an obligation imposed by law and treated as acontract only for the purposes of a remedy. With respect tocontracts implied in fact, the contract defines the duty; in thecase of quasi-contracts, the duty defines and imposes the

agreement upon the parties.

Executed and Executory ContractsAn executed contract isone in which nothing remains to be done by either party. Thephrase is, to a certain extent, a misnomer because thecompletion of performances by the parties signifies that acontract no longer exists. An executory contract is one in whichsome future act or obligation remains to be performed

according to its terms.

Bilateral and Unilateral ContractsThe exchange of mutual,reciprocal promises between entities that entails theperformance of an act, or forbearance from the performance ofan act, with respect to each party, is aBilateral Contract.Abilateral contract is sometimes called a two-sided contractbecause of the two promises that constitute it. The promise that

one party makes constitutes sufficient consideration (seediscussion below) for the promise made by the other.

A unilateral contract involves a promise that is made by onlyone party. The offeror (i.e., a person who makes a proposal)promises to do a certain thing if the offeree performs arequested act that he or she knows is the basis of a legallyenforceable contract. The performance constitutes anacceptance of the offer, and the contract then becomesexecuted. Acceptance of the offer may be revoked, however,until the performance has been completed. This is a one-sidedtype of contract because only the offeror, who makes thepromise, will be legally bound. The offeree may act asrequested, or may refrain from acting, but may not be sued for
http://legal-dictionary.thefreedictionary.com/Bilateral+Contracthttp://legal-dictionary.thefreedictionary.com/Bilateral+Contracthttp://legal-dictionary.thefreedictionary.com/Bilateral+Contracthttp://legal-dictionary.thefreedictionary.com/Bilateral+Contract


5/46

failing to perform, or even for abandoning performance once ithas begun, because he or she did not make any promises.

Unconscionable ContractsAnUnconscionablecontract is one

that is unjust or unduly one-sided in favor of the party who hasthe superior bargaining power. Theadjective unconscionableimplies an affront to fairness anddecency. An unconscionable contract is one that no mentallycompetent person would accept and that no fair and honestperson would enter into. Courts find that unconscionablecontracts usually result from the exploitation of consumers whoare poorly educated, impoverished, and unable to shop around

for the best price available in the competitive marketplace.

The majority of unconscionable contracts occur in consumertransactions. Contractual provisions that indicate gross one-sidedness in favor of the seller include limiting damages or therights of the purchaser to seek court relief against the seller, ordisclaiming aWarranty(i.e., a statement of fact concerning thenature 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 thecircumstances of the parties when the contract was made. Thisdoctrine is applied only where it would be an affront to theintegrity of the judicial system to enforce such a contract.

Adhesion ContractsAdhesion contracts are those that aredrafted by the party who has the greater bargaining advantage,

providing the weaker party with only the opportunity to adhereto (i.e., to accept) the contract or to reject it. (These types ofcontract are often described by the saying "Take it or leave it.")They are frequently employed because most businesses couldnot transact business if it were necessary to negotiate all of theterms of every contract. Not all adhesion contracts are
http://legal-dictionary.thefreedictionary.com/Unconscionablehttp://legal-dictionary.thefreedictionary.com/Unconscionablehttp://legal-dictionary.thefreedictionary.com/Unconscionablehttp://legal-dictionary.thefreedictionary.com/Warrantyhttp://legal-dictionary.thefreedictionary.com/Warrantyhttp://legal-dictionary.thefreedictionary.com/Warrantyhttp://legal-dictionary.thefreedictionary.com/Warrantyhttp://legal-dictionary.thefreedictionary.com/Unconscionable


6/46


7/46

OralAcknowledgmentof a contract and a promise to performconstitute sufficient ratification. The party who was legallycompetent at the time that a voidable contract was signed maynot, 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 ofit, such as construction (i.e., the process of ascertaining theproper explanation of equivocal terms), vary among the differentjurisdictions. When courts must select the law to be applied with

respect to a contract, they consider what the parties intended asto which law should govern; the place where the contract wasentered into; and the place of performance of the contract.Many courts apply the modern doctrine of the "grouping ofcontracts" or the "center of gravity," in which the law of thejurisdiction that has the closest or most significant relationshipwith the matter in issue applies.

Courts generally apply the law that the parties expressly orimpliedly intend to govern the contract, provided that it bears areasonable relation to the transaction and the parties acted ingood faith. Some jurisdictions follow the law of the place wherethe contract was performed, unless the intent of the parties is tothe contrary. Where foreign law governs, contracts may berecognized and enforced under the doctrine of comity (i.e., theacknowledgment that one nation gives within its territory to thelegislative, executive, or judicial acts of another nation).

Elements of a Contract

The requisites for formation of a legal contract are an offer, anacceptance, competent parties who have the legal capacity tocontract, lawful subject matter, mutuality of agreement,
http://legal-dictionary.thefreedictionary.com/Acknowledgmenthttp://legal-dictionary.thefreedictionary.com/Acknowledgmenthttp://legal-dictionary.thefreedictionary.com/Acknowledgmenthttp://legal-dictionary.thefreedictionary.com/Acknowledgment


8/46

consideration, mutuality of obligation, and, if required undertheStatute of Frauds,a writing.

OfferAn offer is a promise that is, by its terms, conditional upon

an act, forbearance, or return promise being given in exchangefor the promise or its performance. It is a demonstration ofwillingness to enter into a bargain, made so that another party isjustified in understanding that his or her assent to the bargain isinvited and will conclude it. Any offer must consist of astatement of present intent to enter a contract; a definiteproposal that is certain in its terms; and communication of theoffer to the identified, prospective offeree. If any of these

elements are missing, there is no offer to form the basis of acontract.

Prel iminary negot iat ions, advert isements, invi tations to

b idPreliminary negotiations are clearly distinguished fromoffers because they contain no demonstration of present intentto form contractual relations. No contract is formed whenprospective purchasers respond to such terms, as they are

merely invitations or requests for an offer. Unless thisinterpretation is employed, any person in a position similar to aseller who advertises goods in any medium would be liable fornumerous contracts when there is usually a limited quantity ofmerchandise for sale.An advertisement, price quotation, orcatalogue is customarily viewed as only an invitation to acustomer to make an offer and not as an offer itself. The courtsreason that an establishment might not have sufficient stock to

satisfy potential demand and that it would not be reasonable fora customer to expect to form a binding contract by respondingto advertisements that are intended to make consumers awareof a product for sale. In addition, the courts have held that anadvertisement is an offer for a unilateral contract that can be
http://legal-dictionary.thefreedictionary.com/Statute+of+Fraudshttp://legal-dictionary.thefreedictionary.com/Statute+of+Fraudshttp://legal-dictionary.thefreedictionary.com/Statute+of+Fraudshttp://legal-dictionary.thefreedictionary.com/Statute+of+Frauds


9/46

revoked at the will of the offeror, the business enterprise, priorto performance of its terms.

An exception exists, however, to the general rule on

advertisements. When the quantity offered for sale is specifiedand contains words of promise, such as "first come, firstserved," courts enforce the contract where the store refuses tosell the product when the price is tendered. Where the offer isclear, definite, and explicit, and no matters remain open fornegotiation, acceptance of it completes the contract. Newconditions may not be imposed on the offer after it has beenaccepted by the performance of its terms.

An advertisement or request for bids for the sale of particularproperty or the erection or construction of a particular structureis merely an invitation for offers that cannot be accepted by anyparticular bid. A submitted bid is, however, an offer, which uponacceptance by the offeree becomes a valid contract.

Mistake in sending offerIf an intermediary, such as atelegraph company, errs in the transmission of an offer, mostcourts hold that the party who selected that method ofcommunication is bound by the terms of the erroneousmessage. The same rule applies to acceptances. In reachingthis result, courts regard the telegraph company as the agent ofthe party who selected it. Other courts justify the rule onbusiness convenience. A few courts rule that if there is an errorin transmission, there is no contract, on the grounds that eitherthe telegraph company is anIndependent Contractorand notthe sender's agent, or there has been no meeting of the mindsof the parties. However, an offeree who knows, or should know,of the mistake in the transmission of an offer may not takeadvantage of the known mistake by accepting the offer; he orshe will be bound by the original terms of the offer.
http://legal-dictionary.thefreedictionary.com/Independent+Contractorhttp://legal-dictionary.thefreedictionary.com/Independent+Contractorhttp://legal-dictionary.thefreedictionary.com/Independent+Contractorhttp://legal-dictionary.thefreedictionary.com/Independent+Contractor


10/46

Terminat ion of an o fferAn offer remains open until theexpiration of its specified time period or, if there is no time limit,until a reasonable time has elapsed. A reasonable time isdetermined according to what a reasonable person would

consider sufficient time to accept the offer.

The death or insanity of either party, before an acceptance iscommunicated, causes an offer to expire. If the offer has beenaccepted, the contract is binding, even if one of the parties diesthereafter. The destruction of the subject matter of the contract;conditions that render the contract impossible to perform; or thesupervening illegality of the proposed contract results in the

termination of the offer.

When the offeror, either verbally or by conduct, clearlydemonstrates that the offer is no longer open, the offer isconsidered revoked when learned by the offeree. Where anoffer is made to the general public, it can be revoked byfurnishing public notice of its termination in the same way inwhich the offer was publicized.

Irrevocable offersAn option is a right that is purchased by aperson in order to have an offer remain open at agreed-uponprice and terms, for a specified time, during which it isirrevocable. It constitutes an exception to the general rule thatan offer may be withdrawn prior to acceptance. The offeror maynot withdraw this offer because that party is bound by theconsideration 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 becomesirrevocable as soon as the offeree starts to perform therequested act, because that action serves as consideration toprevent revocation of the offer. Where it is doubtful whether theoffer invites an act (as in the case of a unilateral contract) or a


11/46

promise (as in the case of a bilateral contract), the presumptionis in favor of a promise, and therefore a bilateral contract arises.If an offer to form a unilateral contract requires several acts, it isinterpreted as inviting acceptance by completion of the initial

act. Performance of the balance constitutes a condition to theofferor's duty of performance. Where such an offer invites onlya single act, it includes by implication a subsidiary promise tokeep the offer open if the offeree will commence performance.Some courts hold that an offer for a unilateral contract may berevoked at any time prior to completion of the act bargained for,even after the offeree has partially performed it.Rejection of anofferAn offer is rejected when the offeror is justified in

understanding from the words or conduct of the offeree that heor she intends not to accept the offer, or to take it under furtheradvisement. Rejection might come in the form of an expressrefusal to accept an offer by a counteroffer, which is a newproposal that rejects the offer by implication; or by a conditionalacceptance that operates as a counteroffer. The offer maycontinue, however, if the offeree expressly states that thecounteroffer shall not constitute a rejection of the offer.

If an offer is rejected, the party who made the original offer nolonger has any liability for that offer. The party who rejected theoffer may not subsequently, at his or her own option, convertthe same offer into a contract by a subsequent acceptance. Insuch a case, the consent of the offeror must be obtained for acontract to be formed.

AcceptanceAcceptance of an offer is an expression of assentto its terms. It must be made by the offeree in a mannerrequested or authorized by the offeror. An acceptance is validonly if the offeree knows of the offer; the offeree manifests anintention to accept; the acceptance is unequivocal and


12/46

unconditional; and the acceptance is manifested according tothe 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-forresponse. Since the acceptance of a unilateral contract requiresan act rather than a promise, it is unnecessary to furnish noticeof intended performance unless the offeror requested it. If,however, the offeree has reason to believe that the offeror willnot learn of the acceptance with reasonable promptness, theduty of the offeror is discharged unless the offeree makes areasonable 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 offereereceives it. The offeree may accept it until the offeree receivesnotice of revocation from the offeror. Thereafter, an offer isrevoked. Under the majority rule, which is known as the"mailbox rule," an acceptance is effective upon dispatch if theofferor explicitly authorizes that method of acceptance to be

employed by the offeree, even if the acceptance is lost ordestroyed in transit.

The majority rule is inapplicable, however, unless theacceptance is properly addressed and postage prepaid. It hasno application to most option contracts, as acceptance of anoption 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 ofthe same method used by the offeror, who neglected todesignate a method of communication, an acceptance iseffective upon dispatch if it is correctly addressed and theexpense of its conveyance is prepaid. As with expressly


13/46

authorized methods, the acceptance need not ever reach theofferor 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. Inmost jurisdictions, however, if the acceptance mode isinherently faster, it is deemed to be an impliedly authorizedmeans, and acceptance is effective upon dispatch.

If the acceptance is transmitted by an expressly or impliedlyauthorized method to the wrong address, it is effective only

upon receipt by the offeror. A wrong address is any addressother than that implicitly authorized, even if the offeror were in aposition to receive the acceptance at the substituted address.

An offeror who specifically states that there is no contract untilthe acceptance is received is entitled to insist upon thecondition of receipt or upon any other provision concerning themanner and time of acceptance specified.

Rejection of the offer or revocation of conditional acceptance iseffective upon receipt. A late or defective acceptance is treatedas a counteroffer, which will not result in a contract unless theofferor accepts it. If offers cross in the mail, there will be nobinding contract, as an offer may not be accepted if there is noknowledge 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 anoption contract, it may be the subject of an assignment ortransfer without the consent of the offeror, unless the optioninvolves a purchase on credit or expressly prohibits anassignment.


14/46

In contracts that do not involve the sale of goods, acceptancemust comply exactly with the requirements of the offer (this isknown as the "mirror-image rule"), and must omit nothing fromthe promise or performance requested. An offer of a prize in a

contest, for example, becomes a binding contract when acontestant successfully complies with the terms of the offer. If aresponse to an offer purports to accept it, but addsqualifications or conditions, then it is a counteroffer and not anacceptance.

Acceptance may be inferred from the offeree's acts, conduct, orsilence; but as a general rule, silence, without more, can never

constitute acceptance. The effect of silence accompaniedbyAmbiguitymust be ascertained from all the circumstances inthe case.

Prior dealings between the parties may create a duty to act.Silence or the failure to take some action under suchcircumstances might constitute acceptance. For example, if theparties have engaged in a series of business transactions

involving the mailing of goods and payment by the recipient, therecipient will not be permitted to retain an article without payingfor it within a reasonable time, due to their prior dealings. Arecipient who does not intend to accept the goods is under aduty to inform the sender. Silence, where there is a duty tospeak, prevents the offeree from rejecting an offer and theofferor from claiming that there is no acceptance. If ownershiprights are exercised over an item, this might be deemed an

acceptance.Unsol ic i ted goodsAtCommon Law, the recipient ofunsolicited goods in the mail was not required to accept or toreturn them, but if the goods were used, a contract and aconcomitant obligation to pay for them were created. Today, in
http://legal-dictionary.thefreedictionary.com/Ambiguityhttp://legal-dictionary.thefreedictionary.com/Ambiguityhttp://legal-dictionary.thefreedictionary.com/Ambiguityhttp://legal-dictionary.thefreedictionary.com/Common+Lawhttp://legal-dictionary.thefreedictionary.com/Common+Lawhttp://legal-dictionary.thefreedictionary.com/Common+Lawhttp://legal-dictionary.thefreedictionary.com/Ambiguity


15/46

order to offer protection against unwanted solicitations, somestate statutes have modified the common-law rule by providingthat where unsolicited merchandise is received as part of anoffer to sell, the goods are an out-right gift. The recipient may

use the goods and is under no duty to return or pay for themunless he or she knows that they were sent by mistake.

Ag reements to agreeAn "agreement to agree" is not acontract. This type of agreement is frequently employed inindustries that require long-term contracts in order to ensure aconstant source of supplies and outlet of production. Mutualmanifestations of assent that are, in themselves, sufficient to

form a binding contract are not deprived of operative effect bythe mere fact that the parties agree to prepare a writtenreproduction of their agreement. In determining whether, on agiven set of facts, there is merely an "agreement to agree" or asufficiently binding contract, the courts apply certain rules. If theparties express their intentioneither to be bound or not bounduntil a written document is preparedthen that intentioncontrols. If they have not expressed their intention, but they

exchange promises of a definite performance and agree uponall essential terms, then the parties have formed a contracteven though the written document is never signed. If theexpressions of intention are incompleteas, for example, if amaterial term such as quantity has been left to furthernegotiationthe parties do not have a contract. Thedesignation of the material term for further negotiation isinterpreted as demonstrating the intention of the parties not to

be bound until a complete agreement has been reached.

Competent PartiesA natural person who agrees to atransaction has complete legal capacity to become liable forduties under the contract unless he or she is an infant, insane,or intoxicated.


16/46

InfantsAn infant is defined as a person under the age of 18 or21, depending on the particular jurisdiction. A contract made byan infant is voidable but is valid and enforceable until or unlesshe or she disaffirms it. He or she may avoid the legal duty to

perform the terms of the contract without any liability for breachof contract.Infantsare treated in such a way because publicpolicy deems it desirable to protect the immature and naiveinfant from liability for unfair contracts that he or she is tooinexperienced to negotiate on equal terms with the other party.

Once an infant attains majority (i.e., the age at which a personis no longer legally considered an infant), he or she must

choose either to disaffirm or avoid the contract, or to ratify oraccept it. After reaching the age of majority, a person implicitlyratifies and becomes bound to perform the contract if he or shefails to disaffirm it within a reasonable time, which is determinedby the circumstances of the particular case. A person whodisaffirms a contract must return any benefits or considerationreceived under it that he or she still possesses. If such benefitshave been squandered or destroyed, the person usually has no

legal obligation to recompense the other party. The law imposesliability on the infant in certain cases, however. Although thecontract of an infant or other person may be voidable, theperson still may be liable in quasi-contract in order topreventUnjust Enrichmentfor the reasonable value of goods orservices furnished if they are necessaries that are reasonablyrequired for the person's health, comfort, or education.

The majority of courts hold that an infant who willfullymisrepresents his or her age may, nevertheless, exercise thepower to avoid the contract. As a general rule, however, theinfant must place the adult party in the status quo ante (i.e., hisor her position prior to the contract). The jurisdictions are indisagreement in regard to whether an infant is liable
http://legal-dictionary.thefreedictionary.com/Infantshttp://legal-dictionary.thefreedictionary.com/Infantshttp://legal-dictionary.thefreedictionary.com/Unjust+Enrichmenthttp://legal-dictionary.thefreedictionary.com/Unjust+Enrichmenthttp://legal-dictionary.thefreedictionary.com/Unjust+Enrichmenthttp://legal-dictionary.thefreedictionary.com/Unjust+Enrichmenthttp://legal-dictionary.thefreedictionary.com/Infants


17/46

in TORT(i.e., a civil wrong other than breach of contract) forwillful misrepresentation of his or her age. This divergencearises from the rule that a tort action may not be maintainedagainst an infant if it essentially entails the enforcement of a

contract. Some courts regard the action for fraud that would becommenced against the infant as being based on the contract.Others rule that the tort is sufficiently independent of thecontract so that the granting of relief would not involve indirectenforcement of the contract. The other party, however, is ableto avoid a contract entered into on the basis of an infant'sfraudulentMisrepresentationwith respect to age or othermaterial facts because he or she is the innocent victim of the

infant's fraud.

Mental incapacityWhen a party does not comprehend thenature and consequences of the contract when it is formed, heor she is regarded as having mental incapacity. A distinctionmust be drawn between those persons who have beenadjudicated incompetent by a court and have had a guardianappointed, and those mentally incompetent persons who have

not been so adjudicated. A person who has been declaredincompetent in a court proceeding lacks the legal capacity toenter into a contract with another. Such a person is unable toconsent to the contract, as the court has determined that he orshe does not understand the obligations and effects of thecontract. A contract made by such a person is void and withoutany legal effect. Neither party may be legally compelled toperform or comply with the terms of the contract. If there has

been no adjudication of insanity, a contract made by a mentallyincapacitated individual is voidable by him or her.

Many contract principles that apply to minors also apply toinsane persons. There is an obligation to recompense theinjured party where a voidable contract is avoided, and to pay
http://legal-dictionary.thefreedictionary.com/Misrepresentationhttp://legal-dictionary.thefreedictionary.com/Misrepresentationhttp://legal-dictionary.thefreedictionary.com/Misrepresentationhttp://legal-dictionary.thefreedictionary.com/Misrepresentation


18/46

for necessaries based upon quasi-contract for the reasonablevalue of the goods or services. The incompetent, a guardian, oraPersonal Representativeafter 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 contractbelongs to the incompetent; the other party may not avoid thecontractual obligation. A contract that is ordinarily voidable maynot be set aside when it is inherently fair to both parties and hasbeen executed to such an extent that the other party cannot berestored to the position that they occupied prior to the contract.

Intox icated personsA contract made by an intoxicated person

is voidable. When a person is inebriated at the time of enteringinto a contract with another and subsequently becomes soberand either promises to perform the contract or fails to disaffirm itwithin a reasonable time after becoming sober, then that personhas ratified his or her voidable contract and is legally bound toperform.

Subject MatterAny undertaking may be the subject of a

contract, provided that it is not proscribed by law. When acontract is formed in restraint of trade, courts will not enforce it,because it imposes an illegal and unreasonable burden oncommerce by hindering competition. Contracts that provide forthe commission of a crime or any illegal objective are also void.

Future rights and liabilitiesperforming or refraining from somedesignated act, or assuming particular risks or obligationsmayconstitute the basis of a contract. An idea that never assumesconcrete form at the time of disclosure, such as a concept for ashort 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 orshe does not have. A seller of a home who does not possess
http://legal-dictionary.thefreedictionary.com/Personal+Representativehttp://legal-dictionary.thefreedictionary.com/Personal+Representativehttp://legal-dictionary.thefreedictionary.com/Personal+Representativehttp://legal-dictionary.thefreedictionary.com/Personal+Representative


19/46

clear title to the property may not promise to convey it withoutencumbrances. Neither may a seller promise that property willnot be appropriated byEminent Domain, which is an inherentpower of government that is not subject to restrictions imposed

by individuals.

Mutual AgreementThere must be an agreement between theparties, or mutual assent, for a contract to be formed. In orderfor an agreement to exist, the parties must have a commonintention or a meeting of minds on the terms of the contract andmust subscribe to the same bargain. Aside from certainstatutory exceptions pertaining to the sale of goods, as

prescribed by Article 2 of theUniform Commercial Code(UCC),if any of the proposed terms is not settled, or if no method ofsettlement is provided, then there is no agreement. The partiesmay settle one term at a time, but their contract becomescomplete only when they assent to the final term. An agreementis binding if the parties concur with respect to the essentialterms and intend the agreement to be binding, even though allof the details are not definitely fixed. The quantity of goods are

usually essential terms of the contract that must be agreedupon if the contract is to be enforced. Exceptions to the rulerequiring the terms of an agreement to be definite and certainare contained in article 2 of the UCC, which permits the courtsto imply reasonably the missing terms if the essential termsunambiguously demonstrate the mutual agreement of theparties.

ConsiderationConsideration is a legal detriment that issuffered by the promisee and that is requested by the promisorin exchange for his or her promise. A valid contract requiressome exchange of consideration. As a general rule, in abilateral contract, one promise is valid consideration for theother. In a unilateral contract, the agreed performance by the
http://legal-dictionary.thefreedictionary.com/Eminent+Domainhttp://legal-dictionary.thefreedictionary.com/Eminent+Domainhttp://legal-dictionary.thefreedictionary.com/Uniform+Commercial+Codehttp://legal-dictionary.thefreedictionary.com/Uniform+Commercial+Codehttp://legal-dictionary.thefreedictionary.com/Uniform+Commercial+Codehttp://legal-dictionary.thefreedictionary.com/Uniform+Commercial+Codehttp://legal-dictionary.thefreedictionary.com/Eminent+Domain


20/46

offeree furnishes the necessary consideration and alsooperates 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 subjectof an honest and reasonable dispute; or the creation,modification, or destruction of a legal relationship. It signifiesthat the promisee will relinquish some legal right in the present,or that he or she will restrict his or her legal freedom of action inthe future as an inducement for the promise of the other party. Itis not substantially concerned with the benefit that accrues tothe promisor.

Love and affection are not permissible forms of consideration. Apromise to make a gift contains no consideration because itdoes not entail a legal benefit received by the promisor or alegal detriment suffered by the promisee. Because a promise togive a gift is freely made by the promisor, who is not subject toany legal duty to do so, the promise is not enforceable unlessthere isPromissory Estoppel.Promissory estoppel is a doctrine

by which a court enforces a promise that the promisorreasonably expects will induce action or forbearance on the partof a promisee, who justifiably relied on the promise and suffereda substantial detriment as a result. Where a court enforces apromise by applying this doctrine, promissory estoppel servesas a substitute for the required consideration.

At common law, courts refused to inquire into the adequacy orfairness of a bargain, finding that the payment of some priceconstituted legally sufficient consideration. If one is seeking toprove mistake, misrepresentation, fraud, or duressor to asserta similar defensethe inadequacy of the price paid for thepromise might represent significant evidence for such defenses,
http://legal-dictionary.thefreedictionary.com/Promissory+Estoppelhttp://legal-dictionary.thefreedictionary.com/Promissory+Estoppelhttp://legal-dictionary.thefreedictionary.com/Promissory+Estoppel


21/46

but the law does not require adequacy of consideration in orderto find an enforceable contract.

Mutuality of ObligationWhere promises constitute the

consideration in a bilateral contract, they must be mutuallybinding. This concept is known as mutuality of obligation. If oneparty's promise does not actually bind him or hers to someperformance or forbearance, it is an illusory promise, and thereis 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 cancelthe obligation, the promise by the party with the right ofcancellation is illusory, and the lack of consideration means thatthere is no contract. If the power to cancel the contract isrestricted in any manner, the contract is usually considered tobe binding. Performance of a void promise in a defectivebilateral 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 absolutelyvoid. (See discussion of the statute of frauds, below.) A sellerwho orally promises to transfer land to a purchaser, for whichthe purchaser orally promises a designated sum, may sue thepurchaser for the price if the purchaser receives title to the landfrom the seller. The purchaser is not relieved of his or herpromise to pay, because of the performance of the void oralpromise by the seller.

A promise to perform an act that one is legally bound to do doesnot qualify as consideration for another promise.

Past consideration consists of actions that occurred prior to themaking of the contractual promise, without any purpose ofinducing a promise in exchange. It is not valid, because it is not


22/46


23/46

parties' intent, their subjective intentions may establish anenforceable contract if both believe in the same terms of thecontract.

There will be no binding contract without the real consent of theparties. 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 MistakeWhen there is a mutualMistake of Factwithrespect to the subject of the contract, the subjective intention ofthe 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 ofthe contract, a court will refuse to enforce the contract. If,however, the difference in the subject matter of the contractconcerned some incidental quality that has no (or negligible)effect on the value of the contract, the contract is binding, eventhough the mistake altered or removed what had been theincentive to one or both parties to enter the contract.

Unilateral MistakeOrdinarily, a unilateral mistake (i.e., an errormade by one party) affords no basis for avoiding a contract, buta contract that contains a typographical error may be corrected.A contract may be avoided if the error in value in what is to beexchanged is substantial, or if the mistake is caused by orknown to the other party. Unilateral mistakes frequently occurwhere a contractor submits an erroneous bid for aPublic

Contract.Where such a bid is accepted, the contractor will bepermitted to avoid the contract only if the agreement has notbeen executed or if the other party can be placed in the positionthat they occupied prior to the contract. If the mistake isobvious, the contract will not be enforced, but if it isinconsequential, the contract will be upheld. The mistake must
http://legal-dictionary.thefreedictionary.com/Mistake+of+Facthttp://legal-dictionary.thefreedictionary.com/Mistake+of+Facthttp://legal-dictionary.thefreedictionary.com/Mistake+of+Facthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Public+Contracthttp://legal-dictionary.thefreedictionary.com/Mistake+of+Fact


24/46

consist of a clerical error or a mistake in computation, as anerror in judgment will not permit a contractor to avoid a contract.

Mistake of LawWhen a party who has full knowledge of the

facts reaches an erroneous conclusion as to their legal effect,such a MIS-TAKE OF LAWwill not invalidate a contract or affect itsenforceability.

IlliteracyIlliteracy neither excuses a party from the duty oflearning the contents of a written contract nor prevents themutual agreement of the parties. An illiterate person is capableof 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, ifnecessary. Illiteracy can, however, serve as a basis forinvalidating a contract when considered in relation to otherfactors, such as fraud or overreaching. If the person whom theilliterate designates to read or explain the contractmisrepresents it and acts in collusion with the other party to thecontract, the contract may be set aside.

FraudFraud prevents mutual agreement to a contract becauseone party intentionally deceives another as to the nature andthe consequences of a contract. It is the willfulmisrepresentation or concealment of a material fact of acontract, and it is designed to persuade another to enter intothat contract. If a special relation-ship exists, such as that ofattorney and client, nondisclosure of a material fact is fraud.Many courts have held that mere silence concerning a materialfact did not constitute fraud, but the emerging trend is to find aduty to disclose and, therefore, deliberate concealment of amaterial fact gives rise to an action for fraud.

A contract that is based on fraud is void or voidable, becausefraud prevents a meeting of the minds of the parties. If the fraudis in the factum, (i.e., during the execution of the contract) so


25/46

that the party would not have signed the document if he or sheunderstood its nature, then the contract is void ab initio (i.e.,from its inception). The signatory is not bound if a differentcontract is substituted for the one that he or she had intended to

execute. If, however, a party negligently chooses to sign thecontract without reading it, then no fraud exists and the contractis enforceable. If the fraud is in the inducement, by which aparty is falsely persuaded to sign a contract, the terms of whichhe or she knows and understands, then the contract is not voidbut is voidable by the innocent party, as that party executeswhat is intended to be executed. If, however, due to fraud, acontract fails to express the agreement that the parties intended

it to express, then the defrauded party may seek a decree ofreformation, by which the court will rewrite a written agreementto conform with theOriginal Intentof the parties.

Misrepresentation without FraudA contract may beinvalidated if it was based on any innocent misrepresentationpertaining to a material matter on which one party justifiablyrelied.

DuressDuress is a wrongful act or threat by one party thatcompels another party to perform some act, such as the signingof 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 legalproceedings in an abusive manner can constitute duress. The

consensus of most jurisdictions is that the threat to commencelegal proceedings, which otherwise might be justifiable,becomes wrongful when done with the corrupt intent to coerce atransaction that bears no relation to the subject of suchproceedings and is grossly unjust to the victim.
http://legal-dictionary.thefreedictionary.com/Original+Intenthttp://legal-dictionary.thefreedictionary.com/Original+Intenthttp://legal-dictionary.thefreedictionary.com/Original+Intent


26/46

A contract that is induced by duress is either void or voidable. Ifthe duress consists of one party taking the other's hand as amechanical instrument by which to sign his or her name to acontract, then the contract is void ab initiofor lack of any intent

on the victim's part to perform the act. The result is the same ifthe victim is compelled to sign a contract at gunpoint withoutany knowledge of its contents. These are highly unusualsituations. In most cases involving duress, the contract isvoidable, and the person who was subjected to the duress mayask the court to declare the contract unenforceable.

Undue InfluenceUndue influence is unlawful control exercised

by one person over another in order to substitute the firstperson's will for that of the other. It generally occurs in twotypes of situations. In the first, a person takes advantage of thepsychological weakness of another, in order to influence thatperson to agree to a contract to which, under normalcircumstances, he or she would not otherwise consent. Thesecond situation entails undue influence based on a fiduciaryrelationship that exists between the parties. This occurs where

one party occupies a position of trust and confidence in relationto the other, as in familial or professional-client relationships.The question of whether the assent of each party to the contractis real or induced by factors that inhibit the exercise of freechoice determines the existence of undue influence. Merelegitimate persuasion and suggestion that do not destroy freewill are not considered undue influence and have no effect onthe legality of a contract.

Assignments

An assignment of a contract is the transfer to another person ofthe rights of performance under it. Contracts were notassignable at early common law, but today most contracts are


27/46


28/46


29/46

example, suppose that a debtor owed a creditor $500. Thedebtor lends $500 to a third person, who promises to use themoney to pay the debtor's debt. The third person is thepromisor, who makes the promise to be enforced. The debtor is

the promisee, to whom the promise is made. The contract isbetween the debtor and the third person, the promisor, and theconsideration for the promise is the $500 loan that the promisorreceived from the debtor. The creditor is the third-partybeneficiary. If the promisor refuses to pay the creditor $500,then the creditor may sue the promisor and prevail. Althoughthe creditor is not a party to their contract, both the debtor andthe 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 creditormay sue to enforce the promisor's promise to pay. Thecreditor's right to enforce the contract between the debtor andthe promisor is effective only when he or she learns of, andassents to, the contract. The creditor may also sue the debtorfor the $500, as the debtor had a legal duty to pay this loan. Thedebtor then may sue the promisor for breach of contract for

refusing to pay the creditor.

A donee beneficiaryof the contract is a non-party who benefitsfrom a promise that is made for the purpose of making a gift tohim or her. A donor wishes to give a donee $200 as ananniversary present. The donor plans to sell a television set for$200 to a purchaser, who promises to pay the donee the $200directly. The donee is a donee beneficiary of the purchaser's

promise to pay the money and may enforce this claim againstthe purchaser. The donee has no claim against the donor, thepromisee, as the donor has no legal duty to the donee but ismerely giving the donee a gift. However, the donor will be ableto sue the purchaser for refusal to pay the donee, because itwould be a breach of the terms of their contract of sale.


30/46

The difference between a creditor beneficiary and a doneebeneficiary becomes significant when the parties to a contractattempt to alter the rights of the third-party beneficiary. Thepromisor and the promisee have no right or power to alter the

accrued rights of the donee beneficiary without consent unlessthis power was expressly reserved in the contract, regardless ofwhether the donee knows about the contract. A doneebeneficiary's rights become effective when the contract is madefor his or her benefit, regardless of whether he or she knowsabout the contract. In contrast, a creditor beneficiary's rightsvest only when the creditor beneficiary learns of, and assentsto, the contract.

Conditions and Promises of Performance

The duty of performance under many contracts is contingentupon the occurrence of a designated condition or promise. Acondition is an act or event, other than a lapse of time, thataffects a duty to render a promised performance that isspecified in a contract. A condition may be viewed as a

qualification placed upon a promise. A promise or duty isabsolute or unconditional when it does not depend on anyexternal events. Nothing but a lapse of time is necessary tomake its performance due. When the time for performance ofan unconditional promise arrives, immediate performance isdue. A dependent or conditional promise is not effective untilthe occurrence of some external event that the parties havespecified. An implied condition is one that the parties should

have reasonably comprehended to be part of the contractbecause of its presence by implication.

Types of ConditionsConditions precedent, conditionsconcurrent, and conditions subsequent are types of conditionsthat are commonly found in contracts. A condition precedent is


31/46

an event that must exist as a fact before the promisor incursany liability pursuant to it. For example, suppose that anemployer informs an employee that if the employee successfullycompletes an accounting course, he or she will receive $500.

The completion of the course must exist as a fact before theemployer 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 toa contract are to perform simultaneously. Neither party has aduty to perform until the other has performed or has tenderedperformance. Practically speaking, however, the party who

wants to complete the transaction must perform in order toestablish the duty of performance by the other party. Theperformances are concurrently contingent upon each other.Concurrent conditions are usually found in contracts for the saleof goods and in contracts for the conveyance of land.

A condition subsequent is one that, when it exists, ends theduty of performance or payment under the contract. For

example, suppose that an insurance contract provides that suitagainst it for a loss covered by the policy must be commencedwithin one year of the insured's loss. If the destruction of theinsured's building by fire is a risk that the policy covers, then theinsured must file suit against the insurer within the timespecified, or the condition subsequent will end the duty of thecompany pursuant to the policy.

Substantial PerformanceThe failure to comply strictly with theterms of a condition will not prevent recovery if there has beensubstantial performance of the contractual obligation. Courtscreated this doctrine in order to prevent forfeitures and toensure justice. Where recovery is permitted for substantialperformance, it is offset by damages for injuries caused by


32/46

failure to render complete performance. Courts determinewhether there has been a breach or a substantial performanceof a contract by evaluating the purpose to be served; theexcuse for deviation from the letter of the contract; and the

cruelty of enforced adherence to the contract. If the deviationfrom the contract were accidental and resulted in only a trivialdifference between what was required by the contract and whatwas performed, the plaintiff will receive only nominal damages.

Satisfactory PerformanceA contract may be contingent uponthe satisfaction of a person's opinion, taste, or fancy. Mostcourts apply a good-faith test in determining whether rejection

of a performance was reasonable. If a rejection is made in badfaith, the court will enforce the contract.

If satisfaction can be measured with reference to thecommercial value or caliber of the subject matter of thecontract, the performance must be proved to be deficient inthese respects and the dissatisfaction must be proven to besufficiently reasonable and well-founded to justify non-

enforcement of the contract. The test is: What would satisfy areasonable person? The condition of satisfaction need not bemet when the expression of dissatisfaction is made in bad faithand not related to the quality or commercial value of the subjectof the contract.

Divisible ContractsThe entire performance of a contract canbe a condition to the other party's duty to perform. If thecontract is legally divisible, the performance of a divisibleportion can fulfill the condition precedent to the other party'scorresponding divisible performance. A contract is divisiblewhen the performance of each party is divided into two or moreparts; each party owes the other a corresponding number ofperformances; and the performance of each part by one party is


33/46

the agreed exchange for a corresponding part by the otherparty. If it is divisible, the contract, for certain purposes, istreated as though it were a number of contracts, as inemployment contracts and leases. If an employer hires a

prospective employee for one year at a weekly salary, thecontract is divisible. Each week's performance is a constructiveor implied condition precedent to the employee's right to aweek's salary. The right to the salary is not contingent onperformance of the obligation to work for one year. In mostcontracts of employment, the courts allow recovery to theemployee for the number of weeks or months of servicerendered, on the theory that such contract is divisible. The

same is true for a lease of real property or an apartment. If thelease is breached before the entire term has expired, the tenantis liable for the remaining rent as each month occurs, but is notliable prior to that time. In effect, the court treats the lease as acontract for each month, with rent due on the first of eachmonth. In a divisible contract, the performance of a separateunit that is treated as a separate contract entitles the performingparty to immediate payment, whereas in an entire contract, the

party who is first to perform must render full performance inorder to be entitled to performance from the other party.

Breach of ConditionsCompliance with a condition can beexcused under certain circumstances. As a general rule, if thefacts would excuse compliance with a condition, they will alsoexcuse performance of a promise. An excuse fornonperformance of a condition can exist in many forms, such as

a waiver (the intentional relinquishment of a known right) ofperformance of the condition.

If an unintentional failure to perform a condition would result inaForfeiture,a court may excuse compliance in order to preventinjustice. The duty of performance by the other party arises just
http://legal-dictionary.thefreedictionary.com/Forfeiturehttp://legal-dictionary.thefreedictionary.com/Forfeiturehttp://legal-dictionary.thefreedictionary.com/Forfeiturehttp://legal-dictionary.thefreedictionary.com/Forfeiture


34/46


35/46

There are two types of impossibility of performance thatdischarge the duty of performance under a contract. Subjectiveimpossibilityis due to the inability of the individual promisor toperform, such as by illness or death. Objective

impossibilitymeans that no one can render the performance.The destruction of the subject matter of the contract, thefrustration of its purpose, or supervening impossibility after thecontract is formed are types of objective impossibility."Impracticability" because of extreme and unreasonabledifficulty, expense, injury, or loss involved is considered part ofimpossibility.

Breach of Contract

An unjustifiable failure to perform all or some part of acontractual duty constitutes a breach of contract. It ensueswhen a party who has a duty of immediate performance fails toperform, or when one party hinders or prevents theperformance of the other party.

A total, major, material, or substantial breach of contractconstitutes a failure to perform properly a material part of thecontract. A partial or minor breach of contract is merely a slightdeviation from the bargained-for performance. A breach mayoccur byAnticipatory Repudiation,whereby the promisor,without justification and before committing a breach, makes anaffirmative statement to the promisee, indicating that he or shewill not or cannot perform the contractual duties.

The differences in the types of breach are significant inascertaining the kinds of remedies and damages available tothe aggrieved party.

Remedies
http://legal-dictionary.thefreedictionary.com/Anticipatory+Repudiationhttp://legal-dictionary.thefreedictionary.com/Anticipatory+Repudiationhttp://legal-dictionary.thefreedictionary.com/Anticipatory+Repudiation


36/46

Damages, reformation,Rescission,restitution, andSpecificPerformanceare the basic remedies available for breach ofcontract.

DamagesThe term damagessignifies a sum of moneyawarded as a compensation for injury caused by a breach ofcontract. The type of breach governs the extent of the damagesto be awarded.

Failure to performThe measure of damages in breach-of-contract cases is the sum that would be necessary torecompense the injured party for the amount of losses incurred

through breach of contract. The injured party should be placedin the position that he or she would have occupied if thecontract had been performed, and they are entitled to receivethe benefit of the bargain, the net gain that would have accruedto them under the contract. The injured party is not, however, tobe put in a better position than he or she would have occupiedhad performance taken place.

Damages for anticipatory repudiation are ordinarily assessed asof the scheduled performance dates that are fixed by thebreached contract. The measure of damages for the breach ofan installment contract is determined at the time eachinstallment is due.

When the parties have included aLiquidated Damagesclausein a contract, it generally will be enforced. Such clause is a prioragreement by the parties as to the measure of damages upon

breach. Additional damages may not be claimed.

Partial perform anceWhen the defendant has failed tocomplete performance of an agreement according to its terms,the plaintiff may recover such damages as will compensate himor her to the same extent as though the contract had been
http://legal-dictionary.thefreedictionary.com/Rescissionhttp://legal-dictionary.thefreedictionary.com/Rescissionhttp://legal-dictionary.thefreedictionary.com/Rescissionhttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Liquidated+Damageshttp://legal-dictionary.thefreedictionary.com/Liquidated+Damageshttp://legal-dictionary.thefreedictionary.com/Liquidated+Damageshttp://legal-dictionary.thefreedictionary.com/Liquidated+Damageshttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Specific+Performancehttp://legal-dictionary.thefreedictionary.com/Rescission


37/46

completely performed. The customary measure of damages isthe reasonable expense of completion. Completion refers to afulfillment of the same work, if possible, which does not involveunreasonable economic waste. The injured party is not

automatically entitled to recover the difference between thecontract price and the amount it would cost to have the workcompleted when a contract is breached after partialperformance; he or she will be entitled to recover that amountonly if completion is actually accomplished at a greater cost.

A provision in a building contract that allows the owner, in theevent of a default by the contractor, to complete the job and to

deduct the expenses from the contract price does not precludethe owner's recovering damages also where the contractorintentionally leaves the work undone. A plaintiff may alsorecover the monetary value of materials that are lost through abreach of contract.

A plaintiff contractor who subsequently performs the work uponbreach of a contract will ordinarily recover the reasonable value

of the labor and materials that he or she has furnished, with thecontract price used as a guideline. The award may not properlyexceed the benefit that the owner received in the properlycompleted work, and it will be reduced by the amount ofdamages that the owner incurs as a result of the contractor'sfailure to complete performance of the contractual obligation. Ifthe value of the work performed exceeds the contract price, thecontractor will not receive the excess.

Where a contract for the performance of services exists withpayment to be made in installments, and the obligation to payfor each installment constitutes an independent promise, theindividual who is entitled to payment may recover only theinstallments that are due when the suit is brought.


38/46

Defective perform anceDamages for defective performance ofa contractual agreement are measured by calculating thedifference in value between what is actually tendered and whatis required as performance under the agreement. If the

performance tendered is either of no value or unsuitable for thepurpose that the contract contemplated, the proper measure ofdamages is the sum that is necessary to repair the defect. If adefect can be easily remedied through repairs, the measure ofdamages is the price of the repairs performed.

Generally, the total contract price may not be recovered forsubstantial performance. If the plaintiff furnished materials for

items that were manufactured for the plaintiff in such a manneras to be rendered worthless, the proper measure of damagesordinarily has been held to be the discrepancy between thecontract price and the market price of such items if they hadbeen manufactured according to the contract terms.

When a building or construction contract is defectivelyperformed, the proper measure of damages is the difference

between the value of the property with the defective work, andits value had there been strict compliance with the contract.Where the contractor deliberately deviates from the contractualagreement, but there has been no substantial performance,damages are determined by the actual expense ofreconstructing the building according to the terms of thecontract.

Delay in p erformanceThe loss precipitated by the wrongfuldelay of the performance of a contract is calculated by fixing therental or use of the property or interest as a result of the lossincurred through increased material and labor expenses, asdistinguished from what the value would have been had thecontract been performed on time.


39/46

ReformationReformation is an equitable remedy that isapplied when the written agreement does not correspond to thecontract that was actually formed by the parties, as a result offraud or mutual mistake in drafting the original document.

Quasi-contractual relief for the reasonable value of servicesrendered is also available, although it applies only when there isno enforceable contract.

RescissionRescission terminates the contract, and the partiesare restored to the position of never having entered into thecontract in the first place.

RestitutionRestitution is a remedy that is designed to restorethe injured party to the position that they occupied prior to theformation of the contract.

Specific PerformanceSpecific performance is an equitableremedy by which a contracting party is required to execute, asnearly as practicable, a promised performance when monetarydamages would be inadequate to compensate for the breach. Acontract to sell land is specifically enforceable because land isconsidered to be unique and not compensable by money. Inaddition, property that has sentimental value, as well asantique, heirloom, or one-of-a-kind articles, are viewed asunique, and therefore it would be impossible to estimatedamages. A personal-service contract or an employmentcontract, however, cannot be specifically enforced becausetheThirteenth Amendmentto the U.S. ConstitutionprohibitsSlavery.If, however, the contract proscribes a personfrom performing some act, breach of that negative covenantmay be specifically enforced.

Parol Evidence Rule
http://legal-dictionary.thefreedictionary.com/Thirteenth+Amendmenthttp://legal-dictionary.thefreedictionary.com/Thirteenth+Amendmenthttp://legal-dictionary.thefreedictionary.com/Thirteenth+Amendmenthttp://legal-dictionary.thefreedictionary.com/Slaveryhttp://legal-dictionary.thefreedictionary.com/Slaveryhttp://legal-dictionary.thefreedictionary.com/Slaveryhttp://legal-dictionary.thefreedictionary.com/Slaveryhttp://legal-dictionary.thefreedictionary.com/Thirteenth+Amendment


40/46

Tentative terms discussed in preliminary negotiations aresubsumed by the provisions of the contract executed by theparties. TheParol Evidencerule governs the admissibility ofevidence other than the actual agreement when a dispute

arises over a written contract. When parties memorialize theiragreements in writing, all prior oral and written agreements, andall contemporaneous oral agreements, merge in the writing,which is also known as an integration. The written contract maynot be modified, altered, or varied by parol or oral evidence,provided that it has been legally executed by a person whointends for it to represent the final and complete expression ofhis or her understanding of the contract. This is not the case,

however, where there has been some mistake or fraud in thedrafting of the document.

The parol evidence rule effectuates the presumed intention ofthe parties; achieves certainty and finality as to the rights andduties of the contracting parties; and prevents fraudulent andperjured claims. It has no application to subsequent oralcontracts that modify or discharge the written contract, however.

Ambiguity

Ambiguity in the terms of a contract exists when the courtcannot, after applying the rules or tools of interpretation, give ameaning to the language used in an agreement or document.The plain-meaning rule is often applied judicially to ascertainwhether a contract is ambiguous. If the contract appears to thetrial judge to be clear and unequivocal on its face, then there isno need for parol evidence. However, when a writing isambiguous, parol evidence is admissable only to elucidate, notto 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
http://legal-dictionary.thefreedictionary.com/Parol+Evidencehttp://legal-dictionary.thefreedictionary.com/Parol+Evidencehttp://legal-dictionary.thefreedictionary.com/Parol+Evidence


41/46

ambiguity, or where both parties know or have reason to knowof it, the ambiguous term is given the meaning that each partyintended it to convey. As a practical matter, this means that ifthe 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 amaterial term, as there is no meeting of their minds. Where oneparty knows, or has reason to know, of the ambiguity, and theother does not, it conveys the meaning given to it by the latterwhich means, in essence, that there is a contract predicatedupon 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 lawthat applies. General contract law described above applies tosuch transactions as service agreements and sales of realproperty. Contracts for the sale of goods, however, aregoverned by Article 2 of the UCC, which has been adopted, atleast 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 ofcontracts, so some of its provisions differ significantly fromthose that are found in general contract law. A contract for thesale of goods may be made in any manner that is sufficient toshow agreement, and courts may consider the conduct of theparties when making this determination. An offer to sell goodsmay be made in any manner that invites acceptance. Courtsalso may consider theCourse of Performancebetween theparties when determining whether a contract for the sale ofgoods exists.

The UCC provides for, and recognizes, certain warranties thatrelate to the goods being sold. For example, an affirmation of
http://legal-dictionary.thefreedictionary.com/Course+of+Performancehttp://legal-dictionary.thefreedictionary.com/Course+of+Performancehttp://legal-dictionary.thefreedictionary.com/Course+of+Performance


42/46

fact or a promise made by the seller to the buyer creates anexpress warranty. Sales also create implied warranties, such asthe implied warranties of merchantability and fitness for aparticular purpose. Remedies and other damages for breach of

a sale-of-goods contract are also governed by the UCC. Inaddition to monetary damages, buyers and sellers may takeseveral actions when the other party breaches a sales contract.For example, a seller who has been injured by a breach ofcontract may withhold delivery of the goods; resell the goodsthat are subject to the contract; or recover monetary damages.A buyer may seek to "cover" by making a good-faith purchaseof substitute goods from a different seller, and then may recover

from the original seller any difference between the substitutecontract and the original contract.

Further readings

Collins, Hugh. 1999. Regulating Contracts.New York: OxfordUniv. 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 NegotiationHandbook.Burlington, Vt: Gower.

ContractsChristopher C. Langdell, 1871


43/46

The 1871 publication ofA Selection of Cases on the Law ofContractsby Christopher Columbus Langdell revolutionizedlegal education. The book, which consisted of a collection ofmostly English judicial opinions, was meant to assist the

professor in developing within the student a scientific approachto the law. Langdell chose the cases for the fundamentalprinciples they contained. Students were expected to dispensewith the idea that they were attending a vocational school.Instead, they were to apply the principles they learned in thescientific search for truth. In his preface Langdell said that hesought to "select, classify, and arrange all cases which hadcontributed in any important degree to the growth, development,

or establishment of any of its essential doctrines."

Contracts

PREFACE

I entered upon the duties of my present position, a year and ahalf ago, with a settled conviction that law could only be taughtor learned effectively by means of cases in some form. I had

entertained such an opinion ever since I knew anything of thenature of law or legal study; but it was chiefly through myexperience as a learner that it was formed, as well assubsequently strengthened and confirmed. Of teaching indeed,as a business, I was entirely without experience; nor had I givenmuch consideration to that subject, except so far as propermethods of teaching are involved in proper methods of study.

Now, however, I was called upon to consider directly the subjectof teaching, not theoretically but practically, in connection with alarge school with its more or less complicated organization, itsdaily routine, and daily duties. I was expected to take a largeclass of pupils, meet them regularly from day to day, and givethem systematic instruction in such branches of law as had


44/46

been assigned to me. To accomplish this successfully, it wasnecessary, first, that the efforts of the pupils should go hand inhand with mine, that is, that they should study with directreference to my instruction; secondly, that the study thus

required of them should be of the kind from which they mightreap the greatest and most lasting benefit; thirdly, that theinstruction should be of such a character that the pupils might atleast derive a greater advantage from attending it than fromdevoting the same time to private study. How could thisthreefold object be accomplished? Only one mode occurred tome which seemed to hold out any reasonable prospect ofsuccess; and that was, to make a series of cases, carefully

selected from the books of reports, the subject alike of studyand instruction. But here I was met by what seemed at first tobe an insuperable practical difficulty, namely, the want of books;for though it might be practicable, in case of private pupilshaving free access to a complete library, to refer them directlyto the books of reports, such a course was quite out of thequestion with a large class, all of whom would want the samebooks at the same time. Nor would such a course be without

great drawbacks and inconveniences, even in the case of asingle pupil. As he would always have to go where the bookswere, and could only have access to them there during certainprescribed hours, it would be impossible for him to economizehis time or work to the best advantage; and he would be liableto be constantly haunted by the apprehension that he wasspending time, labor, and money in studying cases which wouldbe inaccessible to him in after life.

It was with a view to removing these obstacles, that I was firstled to inquire into the feasibility of preparing and publishingsuch a selection of cases as would be adapted to my purposeas a teacher. The most important element in that inquiry wasthe great and rapidly increasing number of reported cases in


45/46

every department of law. In view of this fact, was there anysatisfactory principle upon which such a selection could bemade? It seemed to me that there was. Law, considered as ascience, consists of certain principles or doctrines. To have

such a mastery of these as to be able to apply them withconstant facility and certainly to the ever-tangled skein ofhuman affairs, is what constitutes a true lawyer; and hence toacquire that mastery should be the business of every earneststudent of law. Each of these doctrines has arrived at itspresent state by slow degrees; in other words, it is a growth,extending in many cases through centuries. This growth is to betraced in the main through a series of cases; and much the

shortest and best, if not the only way of mastering the doctrineeffectually is by studying the cases in which it is embodied. Butthe cases which are useful and necessary for this purpose atthe present day bear an exceedingly small proportion to all thathave been reported. The vast majority are useless and worsethan useless for any purpose of systematic study. Moreover, thenumber of fundamental legal doctrines is much less than iscommonly supposed; the many different guises in which the

same doctrine is constantly making its appearance, and thegreat extent to which legal treatises are a repetition of eachother, being the cause of much misapprehension. If thesedoctrines could be so classified and arranged that each shouldbe found in its proper place, and nowhere else, they wouldcease to be formidable from their number. It seemed to me,therefore, to be possible to take such a branch of the law asContracts, for example, and, without exceeding comparatively

moderate limits, to select, classify, and arrange all the caseswhich had contributed in any important degree to the growth,development, or establishment of any of its essential doctrines;and that such a work could not fail to be of material service toall who desire to study that branch of law systematically and inits original sources


46/46

business laws unit 1

Documents