CONTRACTS OUTLINEAccording to Justice Oliver Wendell Holmes “Our law does not enforce every promise which a man may make. Promises made as ninety-nine promises out of a hundred are, by word of mouth or simple writing, are not binding unless there is a consideration for them. That is, as it is commonly explained, unless the promisee has either conferred a benefit on the promisor, or incurred a detriment, as the inducement to the promise.” http://www.constitution.org/cmt/owh/commonlaw07.htm

Promises are made by individuals all of the time yet not all promises are legally enforceable. Contracts are promises that are legally enforceable and for which the law will give a remedy if breached.

Which types of promises are not legally enforceable? Why?

What purpose do legally enforceable promises, i.e. contracts, serve in society and business? If a business person knows that a contract will be enforceable then business relationships will benefit from certainty, predictability and stability. If a business person knows that there will be a remedy at law if one breaches their contract then they may be deterred from committing a breach.

Objective Theory of Contract Law

“In the law of contract the use of moral phraseology led to equal confusion, as I have shown in part already, but only in part. Morals deal with the actual internal state of the individual's mind, what he actually intends. From the time of the Romans down to now, this mode of dealing has affected the language of the law as to contract, and the language used has reacted upon the thought. We talk about a contract as a meeting of the minds of the parties, and thence it is inferred in various cases that there is no contract because their minds have not met; that is, because they have intended different things or because one party has not known of the assent of the other. Yet nothing is more certain than that parties may be bound by a contract to things which neither of them intended, and when one does not know of the other's assent. Suppose a contract is executed in due form and in writing to deliver a lecture, mentioning no time. One of the parties thinks that the promise will be construed to mean at once, within a week. The other thinks that it means when he is ready. The court says that it means within a reasonable time. The parties are bound by the contract as it is interpreted by the court, yet neither of them meant what the court declares that they have said. In my opinion no one will understand the true theory of contract or be able even to discuss some fundamental questions intelligently until he has understood that all contracts are formal, that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs — not on the parties' having meant the same thing but on their having said the same thing. Furthermore, as the signs may be addressed to one sense or another — to sight or to hearing — on the nature of the sign will depend the moment when the contract is made. If the sign is tangible, for instance, a letter, the contract is made when the letter of acceptance is delivered. If it is necessary that the minds of the parties meet, there will be no contract until the acceptance can be read; none, for example, if the acceptance be snatched from the hand of the offerer by a third person…”

The Path of the Law, Oliver Wendell Holmes, Jr., 10 Harvard Law Review 457 (1897)

http://www.constitution.org/lrev/owh/path_law.htm

Does Holmes agree with the objective theory of contracts which is the generally accepted of determining whether the parties ever intended to enter into a contract? The objective theory asks: would a “reasonable person” in the shoes of the parties think there was intent to contract as determined by the party’s words (written or oral), conduct and circumstances?

Why would a court consider the inner thoughts, feelings and subjective intent of the parties to be irrelevant?

Sources of Contract LawIn most jurisdictions the laws pertaining to contracts are a matter of common-law and have not been codified into statutes. To determine the prevailing rule of law in a contract case reference must be made to prior cases and judicial decisions. Another source of contract law is the Restatement Second of Contracts (“Restatement”) compiled by the American Law Institute. This is a scholarly treatise that summarizes what the common-law rule on contracts as it currently exists in most jurisdictions in the United States. The Restatement is a source of persuasive authority for judges but it does not carry the authority of a statute. Contracts involving the sale of “goods” are governed by the Uniform Commercial Code (UCC) Article 2. Most states have enacted their own version of the uniform commercial code to govern business transactions involving goods. Goods are defined as tangible moveable items of personal property. Goods include items such as books, clothing, furniture, etc. Also included are intangible items of personal property like copyright, trademark and stock. Non-goods which would fall within the purview of the common-law and not the uniform commercial code would include real estate, i.e. houses, building, land and anything permanently attached to the real estate (known as “fixtures”) and services.

Types of ContractsContracts are classified in several ways and their classification is based on how they are created. “Express’ contracts are created by the words of the parties – words which can be either in writing or orally spoken. “Implied in fact” contracts are created by the actions, conduct and circumstances of the parties as evaluated by the objective standard for contract formation. A “Quasi” contract is not a contract but a remedy devised by the courts to prevent one party from being unjustly enriched at the expense of another party. Quasi contracts arise when one party knowingly receives a benefit of some sort – either goods or services – and retains the benefit without payment. In those situations the judge will order the party who has knowingly benefited to compensate the other party for the reasonable value of the goods or services received.

What are the public policy and business reasons for awarding compensation in the situation of a quasi-contract?

Closely related to the concept of quasi contract is the doctrine of “promissory estoppel”. The law also gives a remedy in situations where one party has reasonably relied upon a promise made by another party and due to such reliance suffered a detriment (“detrimental reliance”). The remedy awarded to the party who has acted in detrimental reliance is their reliance damages.

Copyright 2010 R.Kowal