Chapter 9 – Introduction to Contracts

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Introduction to Contracts

PA ET RHC 09

Contracts are agreements made up of big words and little type.

Sam Ewingquoted in the Saturday Evening Post May 1993

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Learning Objectives

• Explain the nature and purpose of contracts

• Describe the elements of a contract• Distinguish applicability of common

law of contracts and Art. 2 of the Uniform Commercial Code

• Identify non-contract obligations

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• Not every promise is legally enforceable• But when a set of promises has the

status of contract, a person injured by a breach of that contract is entitled to call on the government (courts) to force the breaching party to honor the contract

• Contract law is ancient law, but has evolved to reflect social change

Contracts

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• (1) agreement made of an offer and an acceptance, (2) made voluntarily, (3) supported by consideration, (4) between parties with capacity to contract, and (5) made for a lawful purpose

• See Figure 1, page 318

Elements of a Contract

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Lambert v. Barron

• Facts: – Lambert and Barron had friendly as well as

professional relationship– Barron had financial troubles, so Lambert flew from

New Orleans to Farmerville to meet with Barron– Lambert claims that he and Barron orally

contracted for Lambert to provide consulting services for one year at a monthly rate of $3100

– Barron paid one invoice, but refused to pay on a second, claiming that he had not agreed to such a price or term

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• Procedural History and Issue: – Lambert sued for breach of contract and lost– Issue on appeal: was there a valid contract?

• Trial Court Ruling: – Two competing views without evidence that

contract was formed or that substantive business benefit was realized by Barron from his friend

– No contract formed, lower court ruling affirmed

Lambert v. Barron

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• Bilateral contracts: two parties make promises to one another

• Unilateral contracts: one party makes a promise– Frequent buyer cards are offers for

unilateral contracts; gaining points on the cards accept the offer and creates a contract

Contract Concepts and Types

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• Valid contract: binding and enforceable agreement

• Voidable contract: agreement otherwise binding, but due to circumstances surrounding execution or lack of capacity, may be rejected at option of one party

• Void contract: agreement without legal effect because prohibited by law

Contract Concepts and Types

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• Express contract: agreement of parties manifested by words, written or oral

• Implied contract: agreement not shown by words, but by acts and conduct of parties

• Difference between express & implied contracts relates to manner of proving the existence of the contract, not the effect; one or the other arises

Contract Concepts and Types

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• Two bodies of law govern contracts: – Article 2 of Uniform Commercial Code– Common law of contracts

• Uniform Commercial Code (UCC) is statutory law in every state, but the common law of contracts is evolving

• UCC contains nine articles

Sources of Governing Law

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• Article 2 expressly applies to contracts for the sale of goods [2–102] (numbers in brackets refer to specific Code sections)– UCC [1–105]: goods are tangible,

movable, personal property– Does not apply to sale of

services, intangible property (stocks, intellectual property), or real estate

UCC Article 2

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• Many contracts involve goods and services

• Test that courts most frequently apply to decide whether Article 2 applies is to ask which element – goods or services – predominates in the contract– See Olé Mexican Foods, Inc. v. Hanson

Staple Company

The UCC and Hybrid Contracts

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The UCC or Common Law

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• United Nations Convention on Contracts for the International Sale of Goods (CISG) is body of contract rules that harmonizes contract principles from many legal systems– Seventy-seven nations, including Canada

and the United States, are parties to CISG• See UN Commission on International

Trade Law website

International Contract Law

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• CISG automatically applies to a contract for the sale of goods between commercial parties from nations that agreed to CISG unless the parties expressly opt out of the CISG in their contract

International Contract Law

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• Sometimes the law enforces an obligation to pay for certain losses or benefits even in the absence of mutual agreement and exchange of value; the court then applies:– Quasi-contract theory– Promissory estoppel

Non-Contract Obligations

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Quasi-Contract Theory

• Quasi-contract is an obligation imposed by law to prevent unjust enrichment of one party in certain circumstances– E.g., work performed by painter thinking work

justified by contract & other party, who receives benefit of work, denies work was justified

– E.g., company induces Joe to buy a product franchise by grossly misstating average revenues of franchisees; Joe discovers deception and elects to cancel the contract

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Quasi-Contract Remedies

• Plaintiff recovers either the reasonable value of the benefit conferred on the defendant (reasonable price) or value of labor (quantum meruit)

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• Palese allegedly bought winning lottery ticket, but ticket destroyed (only play slip existed)

• Plaintiff's sued defendants alleging unjust enrichment in the lottery prize's accrual to state's general fund

• Ticket created valid contract with terms on back of ticket and only those with a winning ticket are eligible to receive prize money

• Claim dismissed

Palese v. Delaware State Lottery Office

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Promissory Estoppel

• A court may apply doctrine of promissory estoppel when one party relies upon another party’s promise to his or her detriment (detrimental reliance), but there’s no contract– Court will force promisor to fulfill

promise or pay compensation– Example: Aceves v. U.S. Bank

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Review

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Test Your Knowledge

• True=A, False = B– Every promise is legally enforceable – The main element of a contract is

fairness– In a bilateral contract, two parties

make promises to one another– The UCC is statutory law in every state– The UCC applies to the sale of goods

and services

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• Multiple Choice– A void contract refers to an

agreement that is: a) Binding and enforceable agreementb) Otherwise binding, but due to

circumstances surrounding execution or lack of capacity, may be rejected at option of one party

c) Without legal effect because prohibited by law

Test Your Knowledge

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• Multiple Choice– Non-contract obligations include

all of the following except: a) Quasi-contract theoryb) Promissory estoppelc) The CISG doctrined) Quantum meruit

Test Your Knowledge

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Thought Question

• What contracts have you entered into recently?