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CONTRACTS CONTRACTS What Is a Contract  A contract


What Is a Contract?

   A contract is a legally enforceable promise
    or set of promises
   Contract law is state law and is generally
    found in the Common Law.
   With some contracts, the Uniform
    Commercial Code may apply.
The Uniform Commercial Code

   Had its beginning in the Law Merchant.
       Principles eventually became part of the
        Common Law.
   Prior uniform laws:
       Uniform Negotiable Instruments Act 1896
       Uniform Sales Act 1906
The Uniform Commercial Code
   Created by American Law Institute and the
    National Conference of Commissioners on
    Uniform State Laws (1952)
   Purposes:
       Promote fair dealing and higher standards of
        behavior in the marketplace
       Establish a uniform law to govern commercial
        transactions that take place across state lines
UCC has 11 Articles
   Art 1 General Provisions and Definitions
   Art 3 Negotiable Instruments
   Art 4 Banking
   Art 9 Secured Transactions
    Article 2 of the UCC
   Article 2 applies to Contracts for the Sale of Goods
       Goods are
            Tangible
            Moveable
   Creation of Practical Contract Rules
       UCC is more flexible than contract law
   Good Faith and Fair Dealing
       All parties must act in good faith
       Implied Warranties
       Merchant
Not all contracts                       SPECIAL STATE
Supercedes C.L.                         STATUTE
  if it applies                         Not uniform
Does not have a rule   COMMON LAW       Supercedes C.L.
for every C.L. rule    OF CONTRACTS
                       Case law rules
                       State law-may
                       May be changed
                         by statutes

   Not “law,” only a private summary
   Generally followed by most courts
   Offer + acceptance = agreement
   Consideration
   Competent parties
   True assent
   Legality
   Form required by law
Types of Contracts
   Valid, Unenforceable, Voidable and Void
       Valid contracts meet all legal requirements
       Unenforceable contracts meet basic legal
        requirements but will not be enforced due to
        some other legal rule
       Voidable contracts may be canceled by one or
        both of the parties
       Void contracts lack one or more of the basic
        requirements for a contract
Types of Contracts

   Unilateral and Bilateral Contracts
       In a unilateral contract, only one of the parties
        makes a promise
            The other party performs an act in exchange for
             the promise
       In a bilateral contract, both parties make a
   Offer + Acceptance = Agreement
   Did one of the parties indicate to the other party
    that he or she was willing to enter into an
    agreement on certain terms and conditions?
   Did the other party indicate that he or she was
    willing to agree to those terms and conditions?
   Courts look at the intent of the parties
   Over the phone, Mr. Smith, of Smith Builders, Inc,
    offers to build Mr. Jones a new garage for
   Mr. Smith says that they can begin work on June
    15. Mr. Jones says he needs time to think about
    it, and will call back.
    Mr. Jones never calls back, but on June 15,
    Smith Builders arrive to begin construction.
   Did they have a valid contract? Why or why not?
   Does it matter that any agreement was verbal?
   Express
   Implied in fact
   Implied in law/Quasi-contract
     What Is an Offer?
   An offer is the manifestation of a willingness to enter
    into a contract if the other person agrees to the terms
       Offeror - party makes the offer
       Offeree - party to whom the offer has been made
   Intent
       Objective
       Present intent to contract
            Not: preliminary negotiations, offers made in jest, anger,
             undue influence
       How definite the supposed offer is
       Whether the offeror has communicated it to the offeree
   Did the offeror specifically indicate what he was
    willing to do and what he wanted the offeree to do
    or agree to do in return?
   The more specific the proposal, the more likely
    the court will call it an offer
   Under UCC 2-204, if the parties are acting as
    though they have a contract, that is enough to
    create a binding agreement
   Gap filling provisions in the UCC fill in the blanks
    for price, quantity, delivery, and time for payment
Communication to the Offeree
   Act of communicating the offer indicates
    that the offeror is willing to be bound by its
   Failure to communicate offer may be
    indication that offeror has not yet decided
    to enter into a binding agreement
   Example: private reward
   Advertisements
       Courts generally hold that ads for the sale of goods at a
        specified price are not offers, but are invitations to
        negotiate or to make an offer
       Specific ads are considered offers under certain
   Rewards
       Unilateral Contracts
   Auctions
       Invitation to offer
   Bids
       Invitation to offer

   How can an offer terminate?
   These are not the same as the ways in
    which a contract terminates. A contract
    does not exist yet.

   I offer to sell you my home         for
    $100,000. I will keep the offer open until
    October 15.
   On September 20, someone makes me an
    offer of $120,000.
   I accept the $120,000 offer, and revoke the
    offer I made to you.
   Can I do that?
   Consideration is paid to keep an option
But consider…
   I am an antique car dealer, and you are a
   I send you a letter in which I offer to sell you a
    particular car for $100,000. I will keep the offer
    open until October 15.
   On September 20, someone makes me an offer of
   I accept the $120,000 offer, and revoke the offer I
    made to you.
   Can I do that? What is different about this
Under the UCC, you can create a
   If the seller is a MERCHANT (someone in
    the business of selling the product. Not a
    casual seller.)
   The offer is made in writing AND
   It will be kept open for up to 3 months.

A FIRM OFFER is enforceable w/o any
   consideration being paid.
What Is an Acceptance?

   Present intent to contract on the part of the
       Assent may be express or
       Offeree must accept offer
        on offeror’s terms
What Is an Acceptance?
   Accepting an Offer for a Unilateral Contract
       Performance of requested act or making the requested
   Accepting an Offer for a Bilateral Contract
       Make promise requested in offer
   Silence as Acceptance
       The law generally requires some affirmative indication of
       In some cases, silence is viewed as acceptance
   Who Can Accept an Offer?
       Original offeree or agent
        Acceptance must “mirror” the offer.
        Offeree must accept the offeror’s
              terms exactly.
   UCC Exception: The Battle of the Forms
 Offeror can specify the manner of
  acceptance, and offeree must use.
 If don’t use offeror’s terms – becomes a
 Acceptance by Shipment
       An order requesting prompt or current shipment
        of goods impliedly invites acceptance by a
        promise to ship or by prompt shipment of the
   When parties negotiate by correspondence,
    communications have crossed in the mail.
    So the courts developed the MAILBOX
   Acceptance takes place at the time the
    message is given to the transmitting
    agency for delivery.
   Acceptance is effective when mailed, so a
    K is formed at that time
See Morrison v. Thoelke, 155 So. 2d 889;
1963 Fla. App. LEXIS 3084 (1963).
   B.s (of real estate) made a written offer (by
    signing a K) and mailed it to S.s in another
   S.s signed it and mailed it back. Before the
    K is received, the S.s called and canceled.
    Can they do that?
    Another Example:
   12/23      S, by letter, through his attorney, offered to
    sell B property for $240,000
   1/10       B, by his attorney, sent a written reply
    offering $230,000
   Same day…         B’s attorney phoned S’s attorney
    and in the course of the conversation, informed him
    of B’s reply
   Later the same day… B sent a telegram purporting
    to accept S’s original offer of $240,00
   Telegram was delivered the same day, prior to the
    receipt of the reply offering $230,000.
   Was a contract formed?
(Acceptance will not be effective when mailed,
but only if and when it is received.)
1.   Incorrect address or insufficient postage.
2.   Offeror protects him/herself – Say in offer:
     Acceptance is not effective until it is
   3. Offeree doesn’t use proper form
       If offeror specifies means, and offeree doesn’t
        use it, response is not an acceptance but a
       If offeror hasn’t specified means, offeree can
        use any reasonable means.
           Usually, same form as the offer was in, or
            anything faster.
           (But if offer was by mail, and the acceptance
            cannot be mailed and received within the time
            limit, that form is not reasonable.)
   4. §40 of the Restatement of Contracts
       If offeree first mails a rejection & then tries to
        accept, the 2nd response is a counteroffer
        unless it is received first.
   1/1 Tom mails an offer
   1/3 Mary receives the offer
   1/5 Mary mails a rejection
   1/6 Mary mails an acceptance
   1/7 Tom receives the rejection
   1/8 Tom receives the acceptance
1.    Apply the Mailbox Rule as if the
      Restatement exception did not exist.
     1.   Is there a contract?
     2.   When is the rejection effective?
     3.   When is the acceptance effective?
     4.   Apply the Restatement exception.
2.    Apply the Restatement exception.
     1.   Is there a contract?
   (Over the phone, Mr. Smith, of Smith Builders, Inc,
    offers to build Mr. Jones a new garage for $30,000.
    Mr. Smith says that they can begin work on June 15.
    Mr. Jones says he needs time to think about it, and
    will call back. Mr. Jones never calls back, but on
    June 15, Smith Builders arrive to begin construction.
    Did they have a valid contract? Why or why not?)
   Mr. Jones is at home when Smith Builders arrive. He
    knows he has never authorized the work, but
    decides he will say nothing until the garage is
    completed. Then he hopes he will not have to pay.
1.When Ms. Williams is 12 years old, her
  wealthy uncle gives her a document in
  which he promises to transfer to her
  Blackacre estate when she turns twenty-
  one. She accepts his offer. Ms. Williams
  turns twenty-one, but her uncle refuses to
  give her the property.
Was there a valid contract?
The Idea of Consideration
   Legal Value
       Promisee does or agrees to do something he or
        she had no prior legal duty to do in exchange for
        the promisor’s promise
       Promisee agrees not to do something he or she
        has a legal right to do in exchange for the
        promisor’s promise
   Adequacy of Consideration
   Bargained for and Given in Exchange
Valid Consideration
   There is valid consideration if there is:
       A bargained for exchange
       Of a promise, act, or forbearance
       That had legal value
            Not preexisting duty
            Not past consideration
            Not illusory promise or
       A recognized exception
Rules of Consideration
   Preexisting Duties
   Promises to Discharge Debts for Part
   Past Consideration
       Moral Obligations
   Forbearance to Sue
   Mutuality of Obligation
   Capacity
       Ability of a person to do a legally valid act
       Three major classes of persons with limited capacity
            Minors
            People who are mentally impaired
            Intoxicated persons

   Contracts are VOIDABLE by the incompetent
Minors’ Contracts
   The Reason for Minors’ Incapacity
       May not be able to bargain effectively with older, more
        experienced persons
   Ability To Disaffirm
       Minors may disaffirm their contracts at any time during
        their minority and for a reasonable time after attaining
   Ratification
       A minor who does not disaffirm within a reasonable time
        after attaining majority is held to have ratified the contract
        and loses the right to disaffirm
Minors’ Contracts
   The Consequences of Disaffirming
       Minors who successfully disaffirm a contract are
        entitled to the return of any consideration they
        have given the adult party to the contract
   Barriers to Disaffirmance
       Because of potential unfairness to adults, some
        courts have created exceptions to the general
        rule that minors can disaffirm their contracts
Minors’ Contracts
   Emancipation
   Misrepresentation of Age by Minors
   Necessaries
       Things essential to a minor’s continued existence
        and general welfare
       Minors are generally liable on a quasi contract
        basis for the reasonable value of necessaries
        furnished to them
Contracts of Mentally Impaired and
Intoxicated Persons

   Theory of Incapacity
   The Test of Incapacity
       Whether the party at the time the contract was
        entered into, had sufficient mental capacity to
        understand the nature and effect of the contract
   The Effect of Incapacity
       Contract is voidable at the election of that person
Contracts of Mentally Impaired and
Intoxicated Persons
   Necessaries
       Liability is for the reasonable value of necessities
   The Right to Disaffirm
       People lacking mental capacity can disaffirm their
        contracts, and on disaffirmance, must return any
        consideration they received that they still have
   Ratification
       People who regain their capacity can ratify their contracts
1.   Attorney White has been the wealthy Widow
     Black's financial advisor for years. Attorney
     White has recently gone into the real estate
     development business and persuades Widow
     Black that it would be a wise investment to
     purchase from him, land in Florida that he is
     planning to develop into a resort area. Two
     years later, when no work is even begun, Widow
     Black discovers that the land is unfit for such a
   The Need for Real Consent
       Agreement must be voluntary to be enforceable
   The Parties’ Duty of Care
       Parties who enter into contracts are required to exercise
        reasonable caution and judgment
   The Remedy
       Contracts entered into as a result of misrepresentation,
        fraud, duress, undue influence, and certain kinds of
        mistake are voidable: RECISSION
   Ratification
       One who waits too long to complain has indicated
        satisfaction with the agreement despite the initial lack of
   Knowledge of Falsity
       Misrepresentation can result from an honest mistake or
   Materiality
       A material fact is one that would contribute to a reasonable
        person’s decision to enter the contract
   Fact versus Opinion
       An actionable misrepresentation must concern a present or
        past fact
   Justifiable Reliance
       Reliance must be justified
   Detriment
       Party was harmed by reliance
   What is a “Knowingly Made” Misstatement?
   Intent to Deceive
       Scienter refers to the mental state of the
   Fraud by Silence
       caveat emptor
   Fraud in the Execution
   The Remedy for Fraud
Duress and Undue Influence
   General Nature
       One party to an agreement interfered with the other
        party’s ability to resist entering into the agreement
   Duress
       Wrongful threat
       Plaintiff’s free will was overcome
   Undue Influence
       Confidential relationship
       Plaintiff was induced to make an unfavorable agreement
   The Nature of Mistake
   Mutual Mistake
       Untrue belief by both parties about a material fact
       Either party can rescind
   Unilateral Mistake
       Mistaken party may be able to rescind if meets
        certain conditions, or
       If other party knew or should have known of the
        mistake and is trying to take unfair advantage of
   Washington hires Jefferson to kill his
    (Washington's) wife. They execute a formal
    written agreement, which indicates that
    Washington will pay Jefferson $5,000 down and
    $10,000 when the job is done. Jefferson has
    until September 18 to complete the job.
    September 18 comes and goes, and
    Washington's wife is still very much alive.
    Jefferson has gotten cold feet, but has spent the
    $5,000. Washington comes to Attorney Ogden,
    and wants to sue Jefferson for breach of
   Illegality
       Agreement is unenforceable if either its formation or its
        performance is illegal or contrary to public policy
   Types of Illegality
       Requires commission of an illegal act
       Made illegal by statute
       Contrary to public policy
       Unconscionable
   The Presumption of Legality
       Doubts are resolved in favor of legality unless parties clearly
        intended an illegal bargain
Contracts to Commit Illegal Acts

   Agreements to Commit Crimes
       An agreement that calls for the commission of a
        crime is illegal
   Agreements to Commit Torts
       A contract that cannot be performed without
        committing a tort is illegal
Contracts Made Illegal by Statute
   Wagering Statutes
       Most states prohibit or regulate gambling
       Agreements in violation of these are illegal
   Statutes Declaring Bargains Void or
       Examples of statutes passed by states making
        certain agreements void or voidable are usury
        laws and Sunday laws
Contracts Made Illegal by Statute
   Regulatory Statutes
       Agreements by unlicensed persons to perform
        regulated services or engage in regulated
        businesses are illegal and unenforceable
       The failure to obtain a license required by a
        statute whose sole purpose is to raise revenue
        does not affect the legality of unlicensed
        persons’ agreements
Contracts Contrary to Public Policy
   The Idea of Public Policy
       What courts believe is in the best interest of
   Contracts Injurious to Public Service
       Bribes
   Contracts to Influence Fiduciaries
       Prizes, rewards, or other inducements
       May be enforced if full disclosure to, and
        agreement of beneficiary
   Parties possess severely unequal
    bargaining power
   The dominant party unreasonably uses its
    unequal bargaining power to obtain
    oppressive or manifestly unfair contract
   Adhering party has no reasonable
   Fine print that hides oppressive contract
   Standard pre-printed contracts that are
    used industry-wide that contain oppressive
       Confession of judgment clauses
   Contracts that exploit underprivileged,
    unsophisticated, uneducated, or illiterate
Examples (cont’d)
   Contracts written in language
    incomprehensive to laypersons
   Contracts that deny rights and remedies to
       Exculpatory clauses
   Mr. Thomas and Mr. Johns agree orally that Mr.
    Thomas will build a new warehouse for Mr.
    Johns at a cost of $100,000. Construction is set
    to begin in three years with no payment due until
    the construction is completed.
   Two days before the three years is up, Mr.
    Johns changes his mind and indicates that he
    will not pay for the warehouse.
The Statute of Frauds

   The Effect of Failure to Comply
       In most states, the statues of frauds makes oral
        contracts that come within its provision
Contracts Covered by the Statute of
   Contracts to Answer for the Debt of Another (co-
   Contracts Transferring an Interest in Land
   Bilateral Contracts Not Capable of Being
    Performed within One Year
       Construe as possible to perform within a year
   UCC: contracts for sale of goods where price is
    $500 or more
Contracts Covered by the Statute of
 UCC: contracts for sale of goods where
  price is $500 or more
 The Code’s Statute of Frauds
       Specially manufactured goods
       Admission
       Part performance
       Merchant’s failure to object to memo within 10
Interpreting Contracts

   The Necessity of Interpretation
       Interpretation of uncertain or ambiguous terms is
        a question for the jury
       Courts attempt to give the agreement the
        meaning that a reasonable person would be
        expected to give it in light of the surrounding
        facts and circumstances
Interpreting Contracts
   Rules of Construction
       The court attempts to determine the principal
        objective of the parties
       If parties are both members of the same trade,
        courts presume the parties intended words’
        meanings to be controlled by trade usage
       Written terms control over printed terms
       Ambiguities are resolved against the party who
        drafted the contract
4 Corners Rule
   The writing constitutes the entire
   The contract is “integrated.”
   It may contain a merger
The Parole Evidence
   The Purpose of the Rule
       Writing it the best evidence of
   Exceptions to the Parole Evidence Rule
       Lack of Voluntary Consent
       Ambiguous Contracts
       Incomplete Writings
       Subsequent Oral Contracts
       Conditions Precedent
   (Mr. Thomas and Mr. Johns agree orally that Mr.
    Thomas will build a new warehouse for Mr.
    Johns at a cost of $100,000. Construction is set
    to begin in three years with no payment due until
    the construction is completed. Two days before
    the three years is up, Mr. Johns changes his
    mind and indicates that he will not pay for the
   What if Mr. Thomas had already purchased all
    the supplies needed to build the warehouse?
   Promise induces action on the part of
    another in reliance of that promise
   Reliance must be reasonable and
    foreseeable under the circumstances
   Promissor is “estopped” from denying the
    existence of a contract.
v. GIRARDOT, 251 Ga. App. 101; 553
S.E.2d 638; 2001 Ga. App. LEXIS 932
   Mr. Simpson purchases a
    fire insurance policy on his home for 3 years at a
    cost of $300.
   At the end of 3 years, his house has not caught
    fire, but the insurance company still has his
   He feels that the insurance company should
    have to reimburse him the $300, since they
    have paid nothing on the policy.
   Definition
       Party’s duty to perform is qualified by the
        happening of some event or condition
   Types of Conditions
       Condition Precedent
            Performance excused unless condition occurs
       Condition Subsequent
            Performance excused if condition occurs
       Concurrent Conditions
            Tender of performance precedes right to demand

   The Creation of Conditions
       Express Conditions
            Created by oral or written statements in the
       Implied Conditions (Constructive)
            Nature of parties’ contract lead courts to imply a
             condition on the parties’ duties of performance
Standards of Performance
   Complete or Satisfactory Performance
       Some kinds of contractual duties can be completely and
        perfectly performed
            Payment of money
   Substantial Performance
       Performance that falls short of complete performance in
        minor respects but does not deprive the promisee of a
        material part of the consideration that was bargained for
   Material Breach
       Performance fails to reach the degree of perfection the
        other party is justified in expecting under the
Standards of Performance
   Anticipatory Breach
       Promissor, prior to the time for performance, indicates an
        intent not to perform his or her duties under the contract
1.   Mr. Brown enters into an agreement with Mr.
     Green in which Mr. Green will supply him with
     specially treated siding Mr. Brown uses in his
     construction business. Despite the existence
     of an alarm system and security guards, an
     arsonist burns Mr. Green’s warehouse to the
     ground destroying his supply of the siding.
     When Mr. Green fails to perform, can Mr.
     Brown recover from him in a breach of
     contract action?
Excuses for Nonperformance
   Prevention
       Promisee who causes promisor’s failure of performance
        cannot complain about the failure
   Impossibility
       If it is impossible to perform, the duty to perform is
        discharged and the promissory is not liable for material
       Intervening Illegality
       Destruction of Subject Matter
       Commercial Impracticability
       Commercial Frustration
Commercial Impracticability
   Due to something unforeseeable
   More than just an increase in prices
    135 Ga. App. 799; 219 S.E.2d 167; 1975
    Ga. App. LEXIS 1831 (1975)
Discharge and Rescission
   The Nature of Discharge
       Parties are released from their obligations under
        a contract
   Discharge by Agreement
   Discharge by Waiver
   Discharge by Alteration
   Discharge by Statute of Limitations

   The Theory of Remedies
       If a party does not perform as promised under
        the contract, and performance has not been
        excused or discharged, then the other party is
        entitled to a remedy for the breach of the
        contractual promise
Remedies at law
   Damages in Contract Cases
       Compensatory Damages
            Loss in value of promised performance
       Consequential Damages
            Foreseeable losses from special circumstances of
             particular contract
       Nominal Damages
            Award for purely technical breach of contract
       Liquidated Damages
            Damages specified in contract for breach
       Punitive Damages
            Damages to punish, usually unavailable

   The Duty to Mitigate Damages
1.   (Mr. Brown enters into an agreement with Mr. Green in which Mr.
     Green will supply him with specially treated siding Mr. Brown
     uses in his construction business. Despite the existence of an
     alarm system and security guards, an arsonist burns Mr. Green
     warehouse to the ground destroying his supply of the siding.)
    Suppose Mr. Brown later discovers that Mr.
     Green burned his own warehouse. Additionally,
     Mr. Green is the only one in the country that
     manufactures this specially treated siding, and
     he has ample supplies and facilities to
     manufacture more. Can Mr. Brown now sue for
     breach of contract? If so, what might be an
     appropriate remedy?
Equitable Remedies
 Specific Performance
    Promissor ordered to perform contract

     where subject matter is unique
 Injunctions

    Ordered to prevent irreparable injury

    284; 568 S.E.2d 178; 2002 Ga. App. LEXIS 890
Third-Party Beneficiary Contracts
   Donee Beneficiaries
       Promisee’s primary purpose is contracting was to
        make a gift of the contracted performance to the
        third party
   Creditor Beneficiaries
       Promisor’s performance will satisfy a legal duty
        that the promisee owes to a third party
   Donee and Creditor Beneficiaries can
    enforce the contract
A contracts with B to put a roof on B’s house upon B’s promise
to pay C $5000 (because A owes C $5000).


          (Obligor)      B   Roof on house     A   (Assignor)
          $5000                          Assignment of
            3rd Party
Third-Party Beneficiary Contracts
   Incidental Beneficiaries
       Performance of contract intended solely for the
        benefit of the promisee also incidentally benefits
        a third person
       Incidental beneficiaries acquire no rights under
        the contract
       Incidental beneficiaries cannot enforce rights
        even though they benefit from another’s contract
Assignment of Contracts

   Definitions
       An assignment is a transfer of rights under a
       The assignor is the person who makes an
       The assignee is the person who accepts the
Assignment of Contracts
   What Contracts Are Assignable?
       Assignments that do not involve personal
        relationships or increase the promisor’s burden
        are enforceable
            Contracts that are nonassignable include:
               Contracts that expressly forbid assignment
               Assignments contrary to public policy
               Contracts involving personal rights
The Consequences of Assignment

   The Rights and Duties of Assignees
       An assignee is entitled to all the rights his or her
        assignor had under the assigned contract
       Assignee can enforce implied guarantees against
       Assignee may be liable for duties expressly or
        impliedly delegated with the assignment
The Consequences of Assignment
   The Rights and Duties of Assignees
       Assignors who are paid for making an
        assignment are potentially liable to assignees for
        certain implied guarantees
            The assigned claim is valid
            The assignor has good title to the rights assigned
            The assignor will not do anything to impair the
             value of the assignment
            Any written instrument representing the assigned
             claim is genuine
The Consequences of Assignment

   Delegation of Duties
       When a promisor appoints another to perform his
        duties under a contract, this is called a
       Duties cannot be delegated if the performance
        depends on the personal skill, character, or
        judgment of the promisor

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