contracts thomson learning tm

PA R T 1 1 I

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http://www.ali.org/

Uniform Commercial Codehttp://www.law.cornell.edu/uniform/ucc.html

U.S. Treasury Auctionshttp://www.treas.gov/auctions/

National Fraud Information Centerhttp://www.fraud.org/welcome.htm

Gamblers Anonymoushttp://www.gamblersanonymous.org/

National Gambling Impact Study Commissionhttp://govinfo.library.unt.edu/ngisc/index.html

Economic Statisticshttp://www.whitehouse.gov/fsbr/money.html

Federal Reserve Systemhttp://www.federalreserve.gov

CONTRACTS

Mann & Roberts, Business Law and the Regulation of Business, 8e, © 2005, Mason, OH: West Legal Studies in Business

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must enter into contracts with its employees, itssuppliers of goods and services, and its customers

in order to conduct its business operations. Thus, contractlaw is an important subject for the business manager.Contract law is also basic to fields of law treated in otherparts of this book, such as agency, partnerships, corpora-tions, sales of personal property, commercial paper, andsecured transactions.

Even the most common transaction may involve manycontracts. For example, in a typical contract for the saleof land, the seller promises to transfer title, or right ofownership, to the land; and the buyer promises to pay anagreed-upon purchase price. In addition, the seller maypromise to pay certain taxes, and the buyer may promiseto assume a mortgage on the property or to pay the pur-chase price to a creditor of the seller. If the parties havelawyers, they very likely have contracts with theselawyers. If the seller deposits the proceeds of the sale in abank, he enters into a contract with the bank. If the buyer

rents the property, he enters into a contract with the ten-ant. When one of the parties leaves his car in a parking lotto attend to any of these matters, he assumes a contractualrelationship with the owner of the lot. In short, nearlyevery business transaction is based on contract and theexpectations the agreed-upon promises create. It is, there-fore, essential that you know the legal requirements formaking binding contracts.

DEVELOPMENT OF THE

LAW OF CONTRACTS

Contract law, like the law as a whole, is not static. It hasundergone—and is still undergoing—enormous changes.In the nineteenth century, almost total freedom in formingcontracts was the rule. However, contract formation alsoinvolved many technicalities, and the courts imposed con-tract liability only when the parties complied strictly withthe required formalities.

1. Distinguish between contracts that are covered by theUniform Commercial Code and those covered by thecommon law.

2. List the essential elements of a contract.

3. Distinguish among (a) express and implied contracts;(b) unilateral and bilateral contracts; (c) valid, void,

voidable, and unenforceable agreements; and (d) exe-cuted and executory contracts.

4. Explain the doctrine of promissory estoppel.

5. Identify the three elements of enforceable quasi con-tract and explain how it differs from a contract.

Introduction to ContractsA promise is a debt, and I certainly wish to keep all my promises to the letter; I can give no better advice.

THE MAN OF LAW IN THE CANTERBURY TALES BY GEOFFREY CHAUCER (14TH CENTURY)

L e a r n i n g O b j e c t i v e sAfter reading this chapter you should be able to:


CHAPTER 9 INTRODUCTION TO CONTRACTS 165

Figure 9-1Law GoverningContracts

Special provisionof UCC applicable?

General contractlaw governs

Sale of goods? UCC governs

YesYes

No

No

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During the twentieth century, many of the formalitiesof contract formation were relaxed. Today, contractualobligations are usually recognized whenever the partiesclearly intend to be bound. In addition, an increasingnumber of promises are now enforced in certain circum-stances, even though such promises do not complystrictly with the basic requirements of a contract. Inbrief, the twentieth century has left its mark on contractlaw by limiting the absolute freedom of contract and, atthe same time, by relaxing the requirements of contractformation. Accordingly, we can say that it is consider-ably easier now both to get into a contract and to get outof one.

COMMON LAW

Contracts are primarily governed by state common law.An orderly presentation of this law is found in theRestatements of the Law of Contracts, a valuable author-itative reference work extensively relied on and quoted inreported judicial opinions.

THE UNIFORM COMMERCIAL CODE

The sale of personal property is a large part of commer-cial activity. Article 2 of the Uniform Commercial Code(the Code, or UCC) governs such sales in all states exceptLouisiana. A sale consists in the passing of title to goodsfrom seller to buyer for a price. A contract for saleincludes both a present sale of goods and a contract tosell goods at a future time. The Code essentially definesgoods as tangible personal property. Personal property isany property other than an interest in real property(land). For example, the purchase of a television set, an

automobile, or a textbook is a sale of goods. All suchtransactions are governed by Article 2 of the Code, butwhere the Code has not specifically modified generalcontract law, the common law of contracts continues toapply. In other words, the law of sales is a specializedpart of the general law of contracts, and the law of con-tracts governs unless specifically displaced by the Code.See Pittsley v. Houser in Chapter 19.

Uniform Commercial Code: http://www.law.cornell.edu.uniform/ucc.html

TYPES OF CONTRACTS OUTSIDE THE CODE

General contract law (common law) governs all contractsoutside the scope of the Code. Such contracts play a sig-nificant role in commercial activities. For example, theCode does not apply to employment contracts, servicecontracts, insurance contracts, contracts involving realproperty (land and anything attached to it, includingbuildings), and contracts for the sale of intangibles suchas patents and copyrights. These transactions continue tobe governed by general contract law. Figure 9-1 summa-rizes the types of law governing contracts.

See Fox v. Mountain West Electric, Inc. later in thischapter.

DEFINITION

OF CONTRACT

Put simply, a contract is a binding agreement that thecourts will enforce. The Restatement, Second, of Contractsmore precisely defines a contract as “a promise or a set ofpromises for the breach of which the law gives a remedy, or


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166 CONTRACTS PART 3

Figure 9-2Contractual andNoncontractualPromises All promises

Non-contractualpromises

Enforceablenoncontractual

promises

Contractualpromises

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the performance of which the law in some way recognizesa duty.” A promise manifests or demonstrates the intentionto act or to refrain from acting in a specified manner.

Those promises that meet all of the essential require-ments of a binding contract are contractual and will beenforced. All other promises are not contractual, andusually no legal remedy is available for a breach of, or afailure to properly perform, these promises. (The reme-dies provided for breach of contract, which include com-pensatory damages, equitable remedies, reliance damages,and restitution, are discussed in Chapter 18.) Thus, apromise may be contractual (and therefore binding) ornoncontractual. In other words, all contracts are prom-ises, but not all promises are contracts as illustrated byFigure 9-2.

REQUIREMENTS

OF A CONTRACT

The four basic requirements of a contract are as follows:

1. Mutual assent. The parties to a contract must manifestby words or conduct that they have agreed to enterinto a contract. The usual method of showing mutualassent is by offer and acceptance.

2. Consideration. Each party to a contract must inten-tionally exchange a legal benefit or incur a legaldetriment as an inducement to the other party tomake a return exchange.

3. Legality of object. The purpose of a contract mustnot be criminal, tortious, or otherwise against publicpolicy.

4. Capacity. The parties to a contract must have con-tractual capacity. Certain persons, such as adjudi-cated incompetents, have no legal capacity tocontract, while others, such as minors, incompetentpersons, and intoxicated persons, have limitedcapacity to contract. All others have full contractualcapacity.

In addition, though in a limited number of instances acontract must be evidenced by a writing to be enforce-able, in most cases an oral contract is binding andenforceable. Moreover, there must be an absence ofinvalidating conduct, such as duress, undue influence,misrepresentation, or mistake. (See Figure 9-3.) As thefollowing case shows, a promise meeting all of theserequirements is contractual and legally binding.However, if any requirement is unmet, the promise isnoncontractual. We will consider these requirements sep-arately in succeeding chapters.



Figure 9-3Validity ofAgreements

Void

Void or Voidable

Unenforceable

Mutual Assent?

Consideration?

Yes

Capacity?

Yes

Invalidating Conduct?

Yes

Subject Matter Legal?

No

Statute of FraudsSatisfied?

Yes

Valid Contract

Yes

No

No

No

Yes

No

No

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Steinberg v. Chicago Medical SchoolIllinois Court of Appeals, 1976

41 Ill.App.3d 804, 354 N.E.2d 586

zFACTS Robert Steinberg applied for admission to theChicago Medical School (http://www.finchcms.edu/) as afirst-year student and paid an application fee of $15. Theschool, a private educational institution, rejected his

application. Steinberg brought an action against theschool, claiming that it did not evaluate his and otherapplications according to the academic entrance criteriaprinted in the school’s bulletin. Instead, he argues, the



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school based its decisions primarily on nonacademic con-siderations, such as family connections between the appli-cant and the school’s faculty and members of its board oftrustees and the ability of the applicant or his family todonate large sums of money to the school. Steinbergasserts that by evaluating his application according tothese unpublished criteria, the school breached the con-tract it had created when it accepted his application fee.The trial court granted the defendant’s motion to dismiss,and Steinberg appealed.

DECISION Trial court’s dismissal reversed and caseremanded.

OPINION Dempsey, J. A contract is an agreementbetween competent parties, based upon a considerationsufficient in law, to do or not do a particular thing. It isa promise or a set of promises for the breach of whichthe law gives a remedy, or the performance of which thelaw in some way recognizes as a duty. [Citation.] A con-tract’s essential requirements are: competent parties,valid subject matter, legal consideration, mutuality ofobligation and mutuality of agreement. Generally, par-ties may contract in any situation where there is no legalprohibition, since the law acts by restraint and not byconferring rights. [Citation.] However, it is basic con-tract law that in order for a contract to be binding theterms of the contract must be reasonably certain anddefinite. [Citation.]

A contract, in order to be legally binding, must bebased on consideration. [Citation.] Consideration hasbeen defined to consist of some right, interest, profit orbenefit accruing to one party or some forbearance, disad-vantage, detriment, loss or responsibility given, suffered,or undertaken by the other [Citation.] Money is a valu-able consideration and its transfer or payment or promisesto pay it or the benefit from the right to its use, will sup-port a contract.

In forming a contract, it is required that both partiesassent to the same thing in the same sense [citation] andthat their minds meet on the essential terms and condi-tions. [Citation.] Furthermore, the mutual consent essen-tial to the formation of a contract must be gathered fromthe language employed by the parties or manifested bytheir words or acts. The intention of the parties gives char-acter to the transaction, and if either party contracts ingood faith he is entitled to the benefit of his contract nomatter what may have been the secret purpose or intentionof the other party. [Citation.]

Steinberg contends that the Chicago Medical School’sinformational brochure constituted an invitation to make

an offer; that his subsequent application and the submis-sion of his $15 fee to the school amounted to an offer;that the school’s voluntary reception of his fee constitutedan acceptance and because of these events a contract wascreated between the school and himself. He contends thatthe school was duty bound under the terms of the contractto evaluate his application according to its stated stan-dards and that the deviation from these standards notonly breached the contract, but amounted to an arbitraryselection which constituted a violation of due process andequal protection. He concludes that such a breach did infact take place each and every time during the past tenyears that the school evaluated applicants according totheir relationship to the school’s faculty members or mem-bers of its board of trustees, or in accordance with theirability to make or pledge large sums of money to theschool. Finally, he asserts that he is a member and aproper representative of the class that has been damagedby the school’s practice.

The school counters that no contract came into beingbecause informational brochures, such as its bulletin, donot constitute offers, but are construed by the courts tobe general proposals to consider, examine and negotiate.The school points out that this doctrine has been specif-ically applied in Illinois to university informational pub-lications.

* * *We agree with Steinberg’s position. We believe that he

and the school entered into an enforceable contract; thatthe school’s obligation under the contract was stated in theschool’s bulletin in a definitive manner and that by accept-ing his application fee—a valuable consideration—theschool bound itself to fulfill its promises. Steinbergaccepted the school’s promises in good faith and he wasentitled to have his application judged according to theschool’s stated criteria.

INTERPRETATION An agreement meeting all ofthe requirements of a contract is binding and legallyenforceable.

ETHICAL QUESTION Is it ethical for a schoolto consider any factors other than an applicant’s merit?Explain.

CRITICAL THINKING QUESTION Shouldthe courts resolve this type of dispute on the basis of con-tract law? Explain.



Practical AdviceWhenever possible, try to use written express contracts that specify allof the important terms rather than using implied in fact contracts.

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FACTS Lockheed Martin Idaho Technical Company(“LMITCO”) (http://www.lockheedmartin.com/) requestedbids for a comprehensive fire alarm system in its twelvebuildings located in Idaho Falls. Mountain West Electric,Inc. (MWE) and Fox met and discussed working togetheron the project. MWE was in the business of installing elec-trical wiring, conduit and related hookups and attach-ments. Fox provided services in designing, drafting,testing, and assisting in the installation of fire alarm sys-tems, and in ordering specialty equipment necessary forsuch projects. The parties decided that it would be betterfor them to work together on the project than for each ofthem to bid separately for the entire job. They furtheragreed that Fox would work under MWE. The parties pre-pared a document defining each of their roles entitled“Scope and Responsibilities.”

Fox prepared a bid for the materials and services thathe would provide, which was incorporated into MWE’sbid to LMITCO. MWE was the successful bidder andwas awarded the LMITCO fixed price contract. In May1996, Fox began performing various services at the direc-tion of MWE’s manager. During the course of the project,many changes and modifications to the LMITCO con-tract were made.

MWE presented a written contract to Fox on August 7,1996. MWE and Fox subsequently disagreed on the

procedure for the compensation of the change orders.MWE proposed a flow-down procedure, whereby Foxwould receive whatever compensation LMITCO decidedto pay MWE. Fox found this unacceptable and suggesteda bidding procedure to which MWE objected. OnDecember 5, 1996, Fox met with MWE to discuss thecontract but the parties agreed upon no compensationarrangement with respect to change orders. Fox left theproject on December 9, 1996, after delivering theremaining equipment and materials to MWE. MWE con-tracted with Life Safety Systems to complete theLMITCO project.

Fox filed a complaint in July 1998 seeking monetarydamages representing money due and owing for materi-als and services provided by Fox to MWE. MWEanswered and counterclaimed seeking monetary dam-ages resulting from the alleged breach of the parties’agreement by Fox. Following a court trial, the districtcourt found that an implied-in-fact contract existedbetween the parties based on the industry standard’sflow-down method of compensation. The court foundin favor of MWE. Fox appealed.

DECISION The decision of the district court isaffirmed.

Fox v. Mountain West Electric, Inc.Supreme Court of Idaho, 2002

137 Idaho 703, 52 P.3d 848 2002; rehearing denied, 2002

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CLASSIFICATION

OF CONTRACTS

Contracts can be classified according to various charac-teristics, such as method of formation, content, and legaleffect. The standard classifications are (1) express orimplied contracts; (2) bilateral or unilateral contracts; (3)valid, void, voidable, or unenforceable contracts; and (4)executed or executory contracts. These classifications arenot mutually exclusive. For example, a contract may beexpress, bilateral, valid, executory, and informal.

EXPRESS AND IMPLIED CONTRACTS

Parties to a contract may indicate their assent either inwords or by conduct implying such willingness. Forinstance, a regular customer known to have an account at

a drugstore might pick up an item at the drugstore, showit to the clerk, and walk out. This is a perfectly valid con-tract. The clerk knows from the customer’s conduct thatshe is buying the item at the specified price and wants itcharged to her account. Her actions speak as effectively aswords. Such a contract, formed by conduct, is an impliedor, more precisely, an implied in fact contract; in contrast,a contract in which the parties manifest assent in words isan express contract. Both are contracts, equally enforce-able. The difference between them is merely the mannerin which the parties manifest their assent.




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OPINION Walters, J.

IMPLIED-IN-FACT CONTRACTThis Court has recognized three types of contractual rela-tionships:

First is the express contract wherein the parties expresslyagree regarding a transaction. Secondly, there is theimplied in fact contract wherein there is no expressagreement, but the conduct of the parties implies anagreement from which an obligation in contract exists.The third category is called an implied in law contract,or quasi contract. However, a contract implied in law isnot a contract at all, but an obligation imposed by lawfor the purpose of bringing about justice and equitywithout reference to the intent or the agreement of theparties and, in some cases, in spite of an agreementbetween the parties. It is a non-contractual obligationthat is to be treated procedurally as if it were a contract,and is often refered (sic) to as quasi contract, unjustenrichment, implied in law contract or restitution.

[Citation.]“An implied in fact contract is defined as one where the

terms and existence of the contract are manifested by theconduct of the parties with the request of one party and theperformance by the other often being inferred from the cir-cumstances attending the performance.” [Citation.] Theimplied-in-fact contract is grounded in the parties’ agree-ment and tacit understanding. [Citation.] “The generalrule is that where the conduct of the parties allows the dualinferences that one performed at the other’s request andthat the requesting party promised payment, then the courtmay find a contract implied in fact.” [Citations.]

[UCC §] 1–205(1) defines “course of dealing” as “asequence of previous conduct between the parties to a par-ticular transaction which is fairly to be regarded as estab-lishing a common basis of understanding for interpretingtheir expressions and other conduct.”

* * *Although the procedure was the same for each change

order, in that MWE would request a pricing from Fox forthe work, which was then presented to LMITCO, eachparty treated the pricings submitted by Fox for the changeorders in a different manner. This treatment is not suffi-cient to establish a meeting of the minds or to establish acourse of dealing when there was no “common basis ofunderstanding for interpreting [the parties’] expressions”under [UCC §] 1–205(1).

* * * After a review of the record, it appears that thedistrict court’s findings are supported by substantial andcompetent, albeit conflicting, evidence. This Court will notsubstitute its view of the facts for the view of the districtcourt.

Using the district court’s finding that pricings submittedby Fox were used by MWE as estimates for the changeorders, the conclusion made by the district court that animplied-in-fact contract allowed for the reasonable com-pensation of Fox logically follows and is grounded in thelaw in Idaho. [Citation.]

This Court holds that the district court did not err infinding that there was an implied-in-fact contract using theindustry standard’s flow-down method of compensationfor the change orders rather than a series of fixed pricecontracts between MWE and Fox.

UNIFORM COMMERCIAL CODEFox contends that the district court erred by failing toconsider previous drafts of the proposed contract betweenthe parties to determine the terms of the parties’ agree-ment. Fox argues the predominant factor of this transac-tion was the fire alarm system, not the methodology ofhow the system was installed, which would focus on thesale of goods and, therefore, the Uniform CommercialCode (“UCC”) should govern. Fox argues that in usingthe UCC various terms were agreed upon by the parties inthe prior agreement drafts, including terms for the timingof payments, payments to Fox’s suppliers and prerequi-sites to termination.

MWE contends that the UCC should not be used,despite the fact that goods comprised one-half of thecontract price, because the predominant factor at issueis services and not the sale of goods. MWE points outthat the primary issue is the value of Fox’s servicesunder the change orders and the cost of obtainingreplacement services after Fox left the job. MWE fur-ther argues that the disagreement between the partiesover material terms should prevent the court from usingUCC gap fillers. Rather, MWE contends the intent andrelationship of the parties should be used to resolve theconflict.

This Court in [citation], pointed out “in determiningwhether the UCC applies in such cases, a majority ofcourts look at the entire transaction to determine whichaspect, the sale of goods or the sale of services, predomi-nates.” [Citation.] It is clear that if the underlying transac-tion to the contract involved the sale of goods, the UCCwould apply. [Citation.] However, if the contract onlyinvolved services, the UCC would not apply. [Citation.]This Court has not directly articulated the standard to beused in mixed sales of goods and services, otherwiseknown as hybrid transactions.

The Court of Appeals in Pittsley v. Houser, [citation],focused on the applicability of the UCC to hybrid transac-tions. The court held that the trial court must look at thepredominant factor of the transaction to determine if theUCC applies. [Citation.]



Practical AdviceBecause it is uncertain whether the offeree in a unilateral contract willchoose to perform, use bilateral contracts wherever possible.

A B

promises topay $10

promises tomow lawn

PromisorPromisee

PromiseePromisor

A B

promises to pay $10

mows lawn

Promisor Promisee

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The test for inclusion or exclusion is not whether theyare mixed, but, granting that they are mixed, whethertheir predominant factor, their thrust, their purpose,reasonably stated, is the rendition of service, with goodsincidentally involved (e.g., contract with artist for paint-ing) or is a transaction of sale, with labor incidentallyinvolved (e.g., installation of a water heater in a bath-room). This test essentially involves consideration of thecontract in its entirety, applying the UCC to the entirecontract or not at all.

[Citation.] This Court agrees with the Court of Appeals’analysis and holds that the predominant factor test shouldbe used to determine whether the UCC applies to transac-tions involving the sale of both goods and services.

One aspect that the Court of Appeals noted in its opin-ion in Pittsley, in its determination that the predominantfactor in that case was the sale of goods, was that the pur-chaser was more concerned with the goods and less con-cerned with the installation, either who would provide it orthe nature of the work. MWE and Fox decided to work onthis project together because of their differing expertise.MWE was in the business of installing electrical wiring,

while Fox designed, tested and assisted in the installationof fire alarm systems, in addition to ordering specialtyequipment for fire alarm projects.

The district court found that the contract at issue in thiscase contained both goods and services; however, the pre-dominant factor was Fox’s services. The district courtfound that the goods provided by Fox were merely inciden-tal to the services he provided, and the UCC would provideno assistance in interpreting the parties’ agreement.

This Court holds that the district court did not err infinding that the predominant factor of the underlyingtransaction was services and that the UCC did not apply.

INTERPRETATION An implied in fact contractis formed by the conduct of the parties; where a contractprovides for both goods and services, the common lawapplies if the predominate factor of the contract is theprovision of services.

CRITICAL THINKING QUESTION Whyshould the legal rights of contracting parties depend onwhether a contract is or is not for the sale of goods?

BILATERAL AND UNILATERAL CONTRACTS

In the typical contractual transaction, each party makes atleast one promise. For example, if Adelle says to Byron,“If you promise to mow my lawn, I will pay you $10,”and Byron agrees to mow Adelle’s lawn, Adelle and Byronhave made mutual promises, each agreeing to do some-thing in exchange for the promise of the other. When acontract is formed by the exchange of promises,each party is under a duty to the other. This kind of con-tract is called a bilateral contract, because each party isboth a promisor (a person making a promise) and apromisee (the person to whom a promise is made).

But suppose that only one of the parties makes a prom-ise. Adelle says to Byron, “If you will mow my lawn, I willpay you $10.” A contract will be formed when Byron hasfinished mowing the lawn and not before. At that time,Adelle becomes contractually obligated to pay $10 toByron. Adelle’s offer was in exchange for Byron’s act ofmowing the lawn, not for his promise to mow it. Because

Byron never made a promise to mow the lawn, he wasunder no duty to mow it. This is a unilateral contractbecause only one of the parties has made a promise.

Thus, whereas a bilateral contract results from theexchange of a promise for a return promise, a unilateralcontract results from the exchange of a promise either forperforming an act or for refraining from doing an act.Where it is not clear whether a unilateral or bilateral con-tract has been formed, the courts presume that the partiesintended a bilateral contract. Thus, if Adelle says toByron, “If you will mow my lawn, I will pay you $10,”and Byron replies, “OK, I will mow your lawn,” a bilat-eral contract is formed.

Can You Contract by Fax?

MANAGERIALi n s i g h t

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Roberta Maxwell is trying to buy a new home. She and her hus-band have made an offer on a two-story contemporary house inChapel Hill, North Carolina. In fact, this dream home is the onefor which Roberta and her husband have been searching formore than two years.

Now, after a few days of negotiation, the owner agrees toRoberta’s price. There’s only one glitch. The owner’s wife, whosename is on the deed, has already moved to Ohio, and she will notbe returning. The owner suggests that he fax the contract to hiswife, who will sign it and zap it back. But will the contract be legal?

The answer is probably yes. Still, Roberta and her husbandwill need to be careful.

As fax machines proliferate, more and more business transac-tions, including contract negotiations, are being conducted long-distance. For the first time in history, parties can exchangewritten agreements within minutes, even if they are separated byan ocean or two, or one or more continents. With the inventionof the fax, however, came a number of vexing legal questions,and so far, the courts have yet to address fully the issues raised.To protect yourself, consider the following when attempting tocontract by fax:

• Is the faxed document a copy of the original contract or theoriginal contract itself? To ensure that the fax serves as anoriginal contract, have it signed. You may want to protectyourself even further by having any signature on the docu-ment notarized before the fax is sent. You also should state inthe contract that both the faxed contract and the faxed signa-ture are intended to serve as originals.

• Is the fax a written contract or an oral contract? Again, makecertain that the fax document is signed if you want it to serveas a written contract. You should also include language in

your faxed document that defines the document as a writtencontract. This is important because the statute of fraudsrequires certain contracts to be in writing and to be signed.

• Will the printing on the faxed contract deteriorate over time?If so, follow the fax up with an original hard copy sent bymail. To avoid any questions about the original nature of thefaxed contract, add language to the contract that defines thehard copy as an original counterpart of the faxed contract.

• Is the faxed contract a final agreement? Because of the easeof transmission, faxed documents tend to fly back and forthbetween parties. To ensure that your faxed contract serves asthe final agreement, state in the contract that it is the finaland complete agreement of the parties. Also, be certain todate the faxed contract and to keep on file all faxed docu-ments related to the negotiation.

• Will the faxed contract stand up in court? Most likely, if youhave followed the steps outlined above. Section 2-206 of theUniform Commercial Code allows for the acceptance of con-tracts by any reasonable manner and method under the cir-cumstances. This part of the Code is meant to offer flexibilityto contracting parties and to allow them to use new technolo-gies. The Restatement of Contracts, Section 65, takes a simi-lar approach.

• Are there circumstances under which faxed contracts won’twork? Yes, there are times when you cannot contract by fax.For example, some states require that any land transfer beaccompanied by a signed and sealed deed, which eliminatesthe use of a fax. In addition, a corporate seal is usually invalidif faxed. In the United States, different states have enacteddifferent laws related to contracts, as have different countries.Therefore, always check appropriate legal requirementsbefore you attempt to contract by fax.

VALID, VOID, VOIDABLE, ANDUNENFORCEABLE CONTRACTS

By definition a valid contract is one that meets all of therequirements of a binding contract. It is an enforceablepromise or agreement.

A void contract is an agreement that does not meet allof the requirements of a binding contract. Thus, it is nocontract at all; it is merely a promise or agreement thathas no legal effect. An example of a void agreement is anagreement entered into by a person whom the courts havedeclared incompetent.

A voidable contract, on the other hand, though defec-tive, is not wholly lacking in legal effect. A voidable

contract is a contract; however, because of the manner inwhich the contract was formed or a lack of capacity of aparty to it, the law permits one or more of the parties toavoid the legal duties the contract creates. If the contractis voided, both of the parties are relieved of their legalduties under the agreement. For instance, through inten-tional misrepresentation of a material fact (fraud),Thomas induces Regina to enter into a contract. Reginamay, upon discovery of the fraud, notify Thomas that byreason of the misrepresentation, she will not perform herpromise, and the law will support Regina. Although thecontract induced by fraud is not void, it is voidable at theelection of Regina, the defrauded party. Thomas, thefraudulent party, may make no such election. If Regina


Practical AdviceBe careful to avoid entering into void, voidable, and unenforceablecontracts.

Practical AdviceTake care not to make promises on which others may detrimentallyrely.


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elects to avoid the contract, Thomas will be released fromhis promise under the agreement, although he may beliable for damages under tort law for fraud.

A contract that is neither void nor voidable maynonetheless be unenforceable. An unenforceable contractis one for the breach of which the law provides no rem-edy. For example, a contract may be unenforceablebecause of a failure to satisfy the requirements of thestatute of frauds, which requires certain kinds of con-tracts to be evidenced by a writing to be enforceable.Also, the statute of limitations imposes restrictions on thetime during which a party has the right to bring a lawsuitfor breach of contract. After the statutory time period haspassed, a contract is referred to as unenforceable, ratherthan void or voidable. Figure 9-3 lists the requirements ofa binding contract and the consequences of failing to sat-isfy each requirement.

EXECUTED AND EXECUTORY CONTRACTS

A contract that has been fully carried out by all of the par-ties to it is an executed contract. Strictly speaking, an exe-cuted contract is no longer a contract, because all of theduties under it have been performed; but having a termfor such a completed contract is useful. By comparison,

the term executory contract applies to contracts that arestill partially or entirely unperformed by one or more ofthe parties.

PROMISSORY

ESTOPPEL

As a general rule, promises are not enforceable if they donot meet all the requirements of a contract. Nevertheless,in certain circumstances, the courts enforce noncontrac-tual promises under the doctrine of promissory estoppelin order to avoid injustice. A noncontractual promise isenforceable when it is made under circumstances thatshould lead the promisor reasonably to expect that thepromisee, in reliance on the promise, would be induced byit to take definite and substantial action or to forbear, andthe promisee does take such action or does forbear. (SeeFigure 9-2). For example, Gordon promises Constancenot to foreclose for a period of six months on a mortgageGordon owns on Constance’s land. Constance thenexpends $100,000 to construct a building on the land.His promise not to foreclose is binding on Gordon underthe doctrine of promissory estoppel.

FACTS In early September 1993, Carl Gorhamreceived a phone call from Ed Iwinski about a job oppor-tunity with Benson Optical. At that time, Gorham earned$38,000 annually as a store manager for LensCrafters, butindicated he was interested in employment with BensonOptical. Iwinski, who had been offered the job of chiefoperating officer (COO) for Benson Optical but was notyet part of the decision-making process on hiring, toldGorham that he would forward Gorham’s name to BensonOptical. The next day, Benson Optical’s eastern regionalmanager, Sue Opahle, called Gorham to schedule an inter-view for an area manager position.

On September 15, 1993, Opahle interviewed Gorhamin Chicago. During this interview, Gorham came to believethat Iwinski was Opahle’s boss and the COO at BensonOptical. On September 18, Opahle telephoned Gorhamand offered him the job of area manager for half of NorthCarolina and some stores in Florida and Kentucky at a$50,000 annual salary and discussed relocation. Afterdescribing the terms of employment Opahle promised tosend a confirming letter and employee packet in two days.Gorham told Opahle that he accepted the position provi-sionally, and unless he notified her otherwise within twodays, he would give LensCrafters his notice of termination.

Gorham v. Benson OpticalCourt of Appeals of Minnesota, 1995

539 N.W.2d 798

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When Gorham did not receive the packet on September20, he called Benson Optical where someone informed himthat the packet was in the mail and reassured him that thedeal was finalized so he could give LensCrafters notice. OnSeptember 21, Gorham gave LensCrafters his two-weeknotice of resignation. LensCrafters attempted to keepGorham in its employment with an offer of a raise, butGorham declined. When Gorham received the packet afew days later, it contained two shortcomings, which hecalled to Benson’s attention. Gorham received a correctedletter, which asked that he sign and return it as acceptanceof the terms of employment. Gorham signed this letter, butnever returned it because he had started having reserva-tions about his employment with Benson Optical.

On about September 30, Iwinski informed BensonOptical’s vice president of human resources, Fran Scibora,that he was declining the COO position. Scibora, Opahle,and Benson Optical’s chief financial officer, DominicSblendorio, immediately contacted Gorham and threeother new employees who had been recommended byIwinski, asking for their reactions to the fact that Iwinskiwould not be working for Benson Optical. Gorhamresponded that Iwinski’s absence did not change his deci-sion to accept the job. When Gorham asked if Iwinski’sdeparture affected Gorham’s job, Scibora assured him thatit would not.

Gorham’s last day of work for LensCrafters wasOctober 1. On October 3, he flew to Minneapolis forBenson Optical’s national sales meeting. The meeting thenturned into another interview in which they reviewedGorham’s skills and aptitudes. Scibora finally told Gorhamthat he did not possess the skills necessary for the areamanager position. Gorham had the clear impression thathe had been or would be terminated. This group also metwith and terminated three other employees whom Opahlehad hired at Iwinski’s suggestion. In a letter to Gorhamdated October 15, Benson Optical explained that it hadterminated his position because Iwinski had declined thejob as COO, because of a “change [in] the requirements ofthe Area Manager’s position,” and because Gorham’s“skills and abilities did not satisfy the requirements for thenew direction in which the company is going.” Gorhambrought suit claiming breach of contract and promissoryestoppel. The district court granted Benson Optical’smotion for summary judgment on all claims, and Gorhamappealed.

DECISION The district court’s summary judgment onGorham’s promissory estoppel claim reversed andremanded.

OPINION Davies, J. A party may manifest acceptanceof an agreement by written or spoken words, or by con-duct and actions. [Citation.] The record establishes that a

contract existed here before October 4 because, eventhough Gorham did not return the acceptance letter toBenson Optical, he demonstrated his acceptance by ver-bally agreeing to take the job, resigning his former employ-ment, flying to Chicago at his own expense, and reportingfor the sales meeting on October 3. He also admitted that,at that time, he considered himself hired.

The hiring letter, however, fell short as a matter of lawof guaranteeing Gorham employment for 90 days as heclaims. The relevant statement merely informed Gorhamthat he needed to produce in 90 days or face termination.Because the contract was at-will and there are no issues offact as to its terms, the district court properly granted sum-mary judgment on Gorham’s breach of contract claim.

Gorham alternatively contends that the district courterred in granting summary judgment for Benson Opticalon the promissory estoppel claim. We agree.

The elements of promissory estoppel are: A promisewhich the promisor should reasonably expect to induceaction or forbearance * * * on the part of the promiseeand which does induce such action or forbearance is bind-ing if injustice can be avoided only by enforcement of thepromise. Restatement of Contracts § 90 [citation], quotedin Grouse v. Group Health Plan.

Respondents argue that promissory estoppel is notavailable when a contract exists. This is true (but with oneexception). [Citation.]

In Grouse, however, the supreme court in effect foundan exception to this rule. The exception applies when thecontract is of a type that provides no basis for a contractrecovery, i.e., an at-will employment contract. Then thereis no bar to a promissory estoppel claim.

In Grouse, the supreme court applied the doctrine ofpromissory estoppel to facts very similar to the presentcase and allowed the plaintiff to recover reliance damages.There, a pharmacy offered a pharmacist a job and, afterthe pharmacist accepted, resigned his current position, anddeclined another job offer, the pharmacy hired someoneelse. * * *

Significant to this case, the Grouse court stated, in dic-tum: “[U]nder appropriate circumstances we believe sec-tion 90 [of the Restatement] would apply even afteremployment has begun.” [Citation.] Gorham presents thespecific hypothetical situation the Grouse court’s dictumaddressed—a short time actually on the job. And, inde-pendent of the hypothetical and like Grouse himself,Gorham relied on the promise of a new job when he quithis job with LensCrafters and declined any renegotiationswith them. Gorham came to Minneapolis to begin workon October 4, believing that he had been hired. Within aday, Benson Optical terminated him. These facts showGorham’s reasonable reliance on Benson Optical’s promiseof employment, his declining any other job in deference tohis new job with Benson Optical, and the injustice to him



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Weichert Co. Realtors v. RyanSupreme Court of New Jersey, 1992

128 N.J. 427, 608 A.2d 280

zFACTS In March 1987, William Tackaberry, a realestate agent for Weichert Co. Realtors, informed ThomasRyan, a local developer, that he knew of property Ryan

might be interested in purchasing. Ryan indicated he wasinterested in knowing more about the property.Tackaberry disclosed the property’s identity and the seller’s

QUASI CONTRACTS

In addition to express and implied in fact contracts, thereare implied in law or quasi contracts, which were notincluded in the previous classification of contracts for thereason that a quasi (meaning “as if”) contract is not acontract at all. The term quasi contract is used becausethe remedy granted for quasi contract is similar to one ofthe remedies available for breach of contract.

A quasi contract is not a contract because it is basedneither on an express nor on an implied promise. Rather,a contract implied in law or quasi contract is an obliga-tion imposed by law to avoid injustice. For example,Willard by mistake delivers to Roy a plain, unaddressedenvelope containing $100 intended for Lucia. Roy isunder no contractual obligation to return it, but Willardis permitted to recover the $100 from Roy. The law

imposes a quasi-contractual obligation on Roy in orderto prevent his unjust enrichment at the expense ofWillard. Such a recovery requires three essential ele-ments: (1) a benefit conferred upon the defendant (Roy)by the plaintiff (Willard); (2) the defendant’s (Roy’s)appreciation or knowledge of the benefit; and (3) accept-ance or retention of the benefit by the defendant (Roy)under circumstances making it inequitable for him toretain the benefit without compensating the plaintiff forits value.

Not infrequently, quasi contracts are used to provide aremedy when the parties enter into a void contract, anunenforceable contract, or a voidable contract that isavoided. In such a case, the law of quasi contracts willdetermine what recovery is permitted for any perform-ance rendered by the parties under the invalid, unenforce-able, or invalidated agreement.

when, on his first day of “employment,” he went througha hostile reinterview process that led to his immediate ter-mination.

We see no relevant difference between Gorham, whoreported to the national sales meeting on his first day ofemployment, and Grouse, who was denied even one day onthe job. Both men relied to their detriment on the promiseof a new job, only to discover that the opportunity had dis-integrated before they ever actually started working.Neither man had a “good faith opportunity to perform hisduties.” [Citation.] Given these facts, Gorham’s claim fitssquarely within the spirit of Grouse and is entitled to thebenefit of promissory estoppel leading to reliance damages.

* * *The district court erred when it granted summary judg-

ment against Gorham’s promissory estoppel claim.* * *

* * * The doctrine of promissory estoppel allowsGorham to recover good faith reliance damages when

Benson Optical terminated him on his first day of employ-ment, after Gorham had detrimentally and reasonablyrelied on the promise of new employment. Summary judg-ment on the promissory estoppel claim is reversed andremanded for further proceedings.

INTERPRETATION The courts will enforce apromise that the promisor should reasonably expect toinduce detrimental reliance by the promisee if the promiseetakes such action and justice requires enforcement.

ETHICAL QUESTION Did Benson Optical actethically in terminating Gorham and the three otheremployees hired at Iwinski’s suggestion? Explain.

CRITICAL THINKING QUESTION Whatcould Gorham have done to better protect his interests?Explain.


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proposed price. Tackaberry also stated that the purchaserwould have to pay Weichert a 10 percent commission.Tackaberry met with the property owner and gathered infor-mation concerning the property’s current leases, income,expenses, and development plans. Tackaberry also collectedtax and zoning documents relevant to the property. In a face-to-face meeting on April 4, Tackaberry gave Ryan the data hehad gathered and presented Ryan with a letter calling for a10 percent finder’s fee to be paid to Weichert by Ryan upon“successfully completing and closing of title.” Tackaberryarranged a meeting, held three days later, where Ryan con-tracted with the owner to buy the land. Ryan refused, how-ever, to pay the 10 percent finder’s fee to Weichert. The trialand appellate courts found that Ryan and Weichert hadentered into a binding contract. Ryan appealed.

DECISION Judgment for Weichert modified andremanded to the trial court to determine the amount ofplaintiff’s recovery.

OPINION Stein, J. We consider two issues: whetherRyan and Tackaberry entered into an enforceable agree-ment and, if not, whether Weichert is entitled to recoverthe reasonable value of Tackaberry’s services on a theoryof quantum meruit. A contract arises from offer andacceptance, and must be sufficiently definite “that the per-formance to be rendered by each party can be ascertainedwith reasonable certainty.” [Citations.] Thus, if partiesagree on essential terms and manifest an intention to bebound by those terms, they have created an enforceablecontract. [Citations.] Where the parties do not agree to oneor more essential terms, however, courts generally holdthat the agreement is unenforceable. [Citations.]

* * *In some circumstances, however, courts will allow

recovery even though the parties’ words and actions areinsufficient to manifest an intention to agree to the prof-fered terms. Recovery based on quasi-contract, sometimesreferred to as a contract implied-in-law, “is wholly unlikean express or implied-in-fact contract in that it is ‘imposedby the law for the purpose of bringing about justice with-out reference to the intention of the parties.’ ” [Citations.](“In the case of actual contracts, the agreement defines theduty, while in the case of quasi-contracts the duty definesthe contract.”) Courts generally allow recovery in quasi-contract when one party has conferred a benefit onanother, and the circumstances are such that to deny recov-ery would be unjust. See, e.g., [citation]; Restatement ofRestitution § 53 (1937). Quasi-contractual liability “restson the equitable principle that a person shall not beallowed to enrich himself unjustly at the expense ofanother.” [Citation.]

Applying that principle, courts have allowed quasi-contractual recovery for services rendered when a party

confers a benefit with a reasonable expectation of payment.[Citations.] That type of quasi-contractual recovery isknown as quantum meruit (“as much as he deserves”), andentitles the performing party to recoup the reasonable valueof services rendered. [Citations.]

Accordingly, a broker seeking recovery on a theory ofquantum meruit must establish that the services were per-formed with an expectation that the beneficiary would payfor them, and under circumstances that should have putthe beneficiary on notice that the plaintiff expected to bepaid. [Citation.] Courts have allowed brokers to recover inquantum meruit when a principal accepts a broker’s serv-ices but the contract proves unenforceable for lack ofagreement on essential terms—for instance, the amount ofthe broker’s commission. [Citations.] Thus, a broker whomakes a sufficient showing can recover fees for servicesrendered even absent express or implied agreement con-cerning the amount of the fee.

Application of the foregoing principles to the transac-tion between Weichert and Ryan demonstrates that therecord is insufficient to support a finding that Tackaberryand Ryan mutually manifested assent to the essential termsof the contract. First, Ryan never expressly assented to theterms of Tackaberry’s offer. Although Ryan expressedinterest in learning more about the Pitt property during theinitial March phone call, neither his expression of interestnor his agreement to meet with Tackaberry to learn moreabout the transaction was sufficient to establish the“unqualified acceptance” necessary to manifest expressassent. [Citation.] Moreover, Ryan refused to agree to theten-percent figure during the April 4th meeting, and there-after consistently rejected that term. Thus, the partiesnever formed an express contract.

* * *The record clearly establishes, however, that Tackaberry

is entitled to recover in quantum meruit for the reasonablevalue of his services. The trial court’s factual finding thatTackaberry was the procuring cause of the sale is sup-ported by substantial evidence. Further, the proofsadduced at trial firmly establish that Tackaberry furnishedRyan with information about the Pitt property with anexpectation that Ryan would pay a brokerage fee, andRyan himself admitted throughout the trial that he hadalways intended to compensate Tackaberry for his services.Given those circumstances, to deny Tackaberry compensa-tion for services rendered would unjustly enrich Ryan* * *. [Citation.]

INTERPRETATION The courts impose a quasi-contractual obligation to pay the reasonable value of abenefit conferred in order to avoid unjust enrichment.

CRITICAL THINKING QUESTION Whydoes the law allow a recovery in quasi contract?



C O N C E P T R E V I E W

Requirements of aContract

Law of Contracts

Classification ofContracts

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Chapter Summary

Definition of Contract a binding agreement that the courts will enforce

Common Law most contracts are primarily governed by state common law, including con-tracts involving employment, services, insurance, real property (land and anything attachedto it), patents, and copyrights

The Uniform Commercial Code Article 2 of the UCC governs the sales of goods • Sale the transfer of title from seller to buyer• Goods tangible personal property (personal property is all property other than an

interest in land)

Mutual Assent the parties to a contract must manifest by words or conduct that they haveagreed to enter into a contract

Consideration each party to a contract must intentionally exchange a legal benefit or incura legal detriment as an inducement to the other party to make a return exchange

Legality of Object the purpose of a contract must not be criminal, tortious, or otherwiseagainst public policy

Capacity the parties to a contract must have contractual capacity

Express and Implied Contracts• Implied in Fact Contract contract where the agreement of the parties is inferred from

their conduct• Express Contract an agreement that is stated in words either orally or in writing

Bilateral and Unilateral Contracts• Bilateral Contract contract in which both parties exchange promises• Unilateral Contract contract in which only one party makes a promise

Contracts, Promissory Estoppel, and Quasi Contracts

Contract Promissory Estoppel Quasi Contract

Type of Promise Contractual Noncontractual NoneVoidUnenforceableInvalidated

Requirements All of the essential elements Detrimental and justifiable Benefit conferred andof a contract reliance knowingly accepted

Remedies Equitable Promise enforced to the Reasonable value of benefitCompensatory extent necessary to avoid conferredReliance injusticeRestitution



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6. Mary Dobos was admitted to Boca Raton CommunityHospital (http://www.brch.com) in serious condition with anabdominal aneurysm. The hospital called upon NursingCare Services, Inc., to provide around-the-clock nursing serv-ices for Mrs. Dobos. She received two weeks of in-hospitalcare, forty-eight hours of postrelease care, and two weeks ofat-home care. The total bill was $3,723.90. Mrs. Dobosrefused to pay, and Nursing Care Services, Inc., brought anaction to recover. Mrs. Dobos maintained that she was notobligated to render payment in that she never signed a writ-ten contract, nor did she orally agree to be liable for theservices. The necessity for the services, reasonableness of thefee, and competency of the nurses were undisputed. AfterMrs. Dobos admitted that she or her daughter authorizedthe forty-eight hours of postrelease care, the trial courtordered compensation of $248 for that period. It did not

allow payment of the balance, and Nursing Care Services,Inc., appealed. Decision?

7. St. Charles Drilling Co. contracted with Osterholt to installa well and water system that would produce a specifiedquantity of water. The water system failed to meet its war-ranted capacity, and Osterholt sued for breach of contract.Does the UCC apply to this contract?

8. On March 4, 1970, Helvey brought suit against the WabashCounty REMC (REMC) (http://www.wvpa.com/DistributionCo-ops/wabashco/wabash.html) for breach of implied andexpress warranties. He alleged that REMC furnished electric-ity in excess of 135 volts to Helvey’s home, damaging his 110-volt household appliances. This incident occurred on January10, 1966. In defense, REMC pleads that the UniformCommercial Code’s Article 2 statute of limitations of four

1. Owen telephones an order to Hillary’s store for certaingoods which Hillary delivers to Owen. Nothing is said byeither party about price or payment terms. What are thelegal obligations of Owen and Hillary?

2. Minth is the owner of the Hiawatha Supper Club, which heleased during 1972 and 1973 to Piekarski. During theperiod of the lease, Piekarski contracted with Puttkammerfor the resurfacing of the access and service areas of thesupper club. The work, including labor and materials, hada reasonable value of $2,540, but Puttkammer was neverpaid because Piekarski went bankrupt. Puttkammerbrought an action against Minth to recover the amountowed to him by Piekarski. Will Puttkammer prevail?Explain.

3. Jonathan writes to Willa, stating, “I’ll pay you $150 if youreseed my lawn.” Willa reseeds Jonathan’s lawn asrequested. Has a contract been formed? If so, what kind?

4. Calvin uses fraud to induce Maria to promise to pay moneyin return for goods he has delivered to her. Has a contractbeen formed? If so, what kind? What are the rights ofCalvin and Maria?

5. Anna is about to buy a house on a hill. Prior to the pur-chase, she obtains a promise from Betty, the owner of theadjacent property, that Betty will not build any structurethat would block Anna’s view. In reliance on this promise,Anna buys the house. Is Betty’s promise binding? Why orwhy not?

Valid, Void, Voidable, and Unenforceable Contracts• Valid Contract one that meets all of the requirements of a binding contract• Void Contract no contract at all; without legal effect• Voidable Contract contract capable of being made void• Unenforceable Contract contract for the breach of which the law provides no remedy

Executed and Executory Contracts• Executed Contract contract that has been fully performed by all of the parties• Executory Contract contract that has yet to be fully performed

Promissory Estoppel doctrine enforcing noncontractual promises where there has been jus-tifiable reliance on the promise and justice requires the enforcement of the promise

Quasi Contract an obligation not based upon contract that is imposed by law to avoidinjustice; also called an implied in law contract

Questions

Case Problems



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years has passed, thereby barring Helvey’s suit. Helveyargues that providing electrical energy is not a transactionin goods under the UCC but rather a furnishing of servicesthat would make applicable the general contract six-yearstatute of limitations. Is the contract governed by the UCC?Why?

9. In April, Jack Duran, president of Colorado CarpetInstallation, Inc., began negotiations with Fred and ZumaPalermo for the sale and installation of carpeting, carpetpadding, tile, and vinyl floor covering in their home. Durandrew up a written proposal that referred to ColoradoCarpet as “the seller” and to the Palermos as the “cus-tomer.” The proposal listed the quantity, unit cost, andtotal price of each item to be installed. The total price of thejob was $4,777.75. Although labor was expressly includedin this figure, Duran estimated the total labor cost at $926.Mrs. Palermo orally accepted Duran’s written proposalsoon after he submitted it to her. After Colorado Carpetdelivered the tile to the Palermo home, however, Mrs.Palermo had a disagreement with Colorado Carpet’s tileman and arranged for another contractor to perform thejob. Colorado Carpet brought an action against thePalermos for breach of contract. Does the UCC apply tothis contract?

10. On November 1, the Kansas City Post Office EmployeesCredit Union merged into the Kansas City Telephone CreditUnion to form the Communications Credit Union (CreditUnion) (http://www.cccreditu.org). Systems Design andManagement Information (SDMI) develops computer soft-ware programs for credit unions, using Burroughs (nowUnisys) (http://www.unisys.com) hardware. SDMI andBurroughs together offered to sell to Credit Union both asoftware package, called the Generic System, andBurroughs hardware. Later in November, a demonstrationof the software was held at SDMI’s offices, and the CreditUnion agreed to purchase the Generic System software.This agreement was oral. After Credit Union was convertedto the SDMI Generic System, major problems with the sys-tem immediately became apparent. SDMI filed suit againstCredit Union to recover the outstanding contract price forthe software. Credit Union counterclaimed for damagesbased upon breach of contract and negligent and fraudulentmisrepresentation. Does the UCC apply to this contract?

11. Insul-Mark is the marketing arm of Kor-It Sales, Inc.(http://www.korit.com). Kor-It manufactures roofing fas-teners and Insul-Mark distributes them nationwide. In late1985, Kor-It contracted with Modern Materials, Inc.(http://www.plantfloor.com/in/modernmaterialsinc.htm) tohave large volumes of screws coated with a rust-proofingagent. The contract specified that the coated screws mustpass a standard industry test and that Kor-It would payaccording to the pound and length of the screws coated.Kor-It had received numerous complaints from customersthat the coated screws were rusting, but Modern Materialsunsuccessfully attempted to remedy the problem. Kor-It ter-minated its relationship with Modern Materials and

brought suit for the deficient coating. Modern Materialscounterclaimed for the labor and materials it had furnishedto Kor-It. The trial court held that the contract (1) was forperformance of a service, (2) not governed by the UCC, (3)governed by the common law of contracts, and (4) there-fore, barred by a two-year statute of limitations. Insul-Mark appealed. Decision?

12. Max E. Pass, Jr. and his wife, Martha N. Pass, departed inan aircraft owned and operated by Mr. Pass from PlantCity, Florida, bound for Clarksville, Tennessee. Somewhereover Alabama the couple encountered turbulence, and Mr.Pass lost control of the aircraft. The plane crashed killingboth Mr. and Mrs. Pass. Approximately four and a halfmonths prior to the flight in which he was killed, Mr. Passhad taken his airplane to Shelby Aviation, an aircraft serv-ice company, for inspection and service. In servicing the air-craft, Shelby Aviation replaced both rear wing attach pointbrackets on the plane. Three and one half years after thecrash, Max E. Pass, Sr., father of Mr. Pass and administra-tor of his estate, and Shirley Williams, mother of Mrs. Passand administratrix of her estate, filed suit against ShelbyAviation. The lawsuit alleged that the rear wing attachpoint brackets sold and installed by Shelby Aviation weredefective because they lacked the bolts necessary to securethem properly to the airplane. The plaintiffs asserted claimsagainst the defendant for breach of express and impliedwarranties under Article 2 of the Uniform CommercialCode (“UCC”), which governs the sale of goods. ShelbyAviation contended that the transaction with Mr. Pass hadbeen primarily for the sale of services, rather than of goods,and that consequently Article 2 of the UCC did not coverthe transaction. Does the UCC apply to this transaction?Explain.

13. Richardson hired J. C. Flood Company, a plumbing contrac-tor, to correct a stoppage in the sewer line of her house. Theplumbing company’s “snake” device, used to clear the lineleading to the main sewer, became caught in the under-ground line. To release it, the company excavated a portionof the sewer line in Richardson’s backyard. In the process,the company discovered numerous leaks in a rusty, defectivewater pipe that ran parallel with the sewer line. To meetpublic regulations, the water pipe, of a type no longerapproved for such service, had to be replaced either then orlater, when the yard would have to be excavated again. Theplumbing company proceeded to repair the water pipe.Though Richardson inspected the company’s work daily anddid not express any objection to the extra work involved inreplacing the water pipe, she refused to pay any part of thetotal bill after the company completed the entire operation.J. C. Flood Company then sued Richardson for the costs oflabor and material it had furnished. Richardson argued thatshe requested correction only of a sewer obstruction andhad never agreed to the replacement of the water pipe. Forwhat, if anything, is Richardson liable? Explain.

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