Business and the Law of Contracts Pennzoil Texaco by alicejenny


Chapter 10
                         Contract Law

• Common Law                       • UCC (next chapter)
   – Judge-made law                   – Uniform
   – Each state differs                 Code
   – There is uniformity about        – All States have
     general contract principles        adopted except
     that run throughout most         – Covers contracts
     states’ laws                       for sale of goods
• English courts adopted rules     • Many countries rely
  from the law merchant that         on Code Law only
  dates back centuries.              for their contract
                                     law framework
            Definition of a Contract

n Sir Wm. Blackstone: “An agreement, upon sufficient
  consideration, to do or not to do a particular thing”
n Modern definition--centers on a promise: “A promise
  or set of promises for the breach of which the law
  gives a remedy, or the performance of which the law
  in some way recognizes a duty.”
n The promise itself creates a manifestation of intent
n Contracts form legal relationships and duties
  between parties
n Not all promises are enforceable contracts – must
  meet the requirements of a contract to create an
  enforceable promise
             Express and Implied

• Express Contracts        • Implied Contract
  – Direct statement by      – Actions and
    the parties of the         circumstances infer
    promises made              and define the terms of
  – May be oral or             the contract
    written                  – May be words, conduct,
  – All important terms        gestures
    are expressly stated     – These contracts are
    between the parties        implied at law
Elements of a Contract
  • 1. An Agreement, through –
      – Offer
      – Acceptance
  • 2. Consideration
  • 3. Contractual Capacity
  • 4. Legality
  • 5. Genuine Consent
  • 6. Writing
      – If necessary under the Statute of Frauds
  If all elements are present, the contract
         is generally termed valid
                   Element #1: The Agreement
                        The Offer
(Mutual Understanding Between Parties; Made by Offer and Acceptance)
• The Offer
   – Creates the Offeror and Offeree
   – 1. Manifestation of Intent
       • Preliminary Negotiations vs. Intent to Offer
   – 2. Definite
   – 3. Communication
   Sometimes terms will be presumed
     i.e. mailed computer is packed properly
   Restatement (2nd) of Contracts: “the manifestation of
     willingness to enter into a bargain, so made as to
     justify another person in understanding that his assent
     to the bargain is invited and will conclude it.”
            Terminating an Offer
• Revocation
   – Withdrawing of offer by the Offeror
• Rejection
   – By Offeree
   – Through lapse of time (Option Contracts are different)
   – Counteroffers are created by rejecting the original
     offer but keeping negotiations open by presenting
     new conditions – result is a counteroffer
• Operation of Law
   – Intervening Illegality
   – Destruction of subject matter
   – Death or insanity of offeror or offeree
     Element #1: THE AGREEMENT
           The Acceptance
• The Acceptance
   – Expression of assent
   – 1. Unconditional
      • Must be a mirror image of
        the offer
      • If conditions are added, they
        create a counteroffer
   – 2. Unequivocal
   – 3. Legally Communicated
               Parker v. Glosson

• Douglas and Sandy Glosson offered to sell 36
  acres, including truck shop, warehouse and
  office they owned jointly.
• Douglas Glosson and Parker agreed on the
• The two men signed the agreement.
• Sandy Glosson refused to sign; deal fell
• Parker sued for breach of contract,
  requesting specific performance or damages.
• Trial court dismissed suit. Parker appealed.
           Parker v. Glosson
• HELD: Affirmed.
• Contract must have mutual assent and meeting
  of the minds to be enforceable.
• Clause 13 of Agreement: “this agreement shall
  become an enforceable contract when a fully
  executed copy has been communicated to both
  parties.” (Buyer and Sellers)
• This language indicates sellers did not intend to
  sell (nor a buyer to buy) until ALL parties signed
  the agreement.
• At the top of the page, “Sellers” were both
  Douglas Glosson and Sandy Glosson.
• Sandy didn’t sign; agreement was not fully
  executed. No contract.
                Bilateral & Unilateral Contracts
                (As With Other Types, Create the Offeror &
                            the Offeree)

• Bilateral Contracts         • Unilateral Contract
• 2 promises                  • Only 1 promise
• A promise in exchange       • A promise in exchange
  for a promise                 for a performance
• Ex: I promise to pay you    • Ex: I promise to pay you
  $250 to trim my trees;        $250 to trim my trees;
  you promise to trim the       you go out and do it.
  trees.                      • Once performance has
• If promises are broken,       been made, the other
  there may be                  party’s duty arises to
  responsibility if losses      fulfill his/her promise.
  are incurred.
          Element #2: Consideration
         (If consideration is absent, neither party
         may enforce the promise or agreement)
• Definition: Something of value or something
  bargained for in exchange for a promise
• This element keeps contract from being a gift
• Traditional Rule: Must create –
   – Legal detriment to the promisee OR
   – Legal benefit to the promisor
   – Actually the legal detriment and benefit usually
     occur at the same time
       Adequacy of Consideration
• Adequacy of Consideration
   – Courts generally don’t care
   – If a party bargains poorly,
     courts usually won’t interfere.
   – Those who bargain take on the
     risk of their own errors.
   – There are exceptions such as
     fraud, duress, etc.
   – The main concern is an
     exchange of mutual promises
     and obligations by the parties.
   – See Caley v. Gulfstream Aerospace Corp.
              Caley v. Gulfstream Aerospace

• Gulfstream adopted a dispute resolution policy (DRP);
  policy is only procedure to resolve disputes between
  Gulfstream and the employees.
• Mailed policy to employees.
• Policy said that DRP would begin in 2 weeks and would
  be “a condition of continued employment.”
• If an employee continued work, then she accepted the
• Group of employees sued, saying there was no contract
  and DRP could not be enforced.
• District Court held for Gulfstream. Employees appealed.
          Caley v. Gulfstream Aerospace

• HELD: Affirmed.
• DRP is an offer and states it is a contract.
• Term of acceptance is continued employment by
  employees. Consideration is continued employment
  that Gulfstream could end otherwise.
• Acceptance can be through a promise or an act.
• Here the action of continuing employment = acceptance
  of the offer and a contract.
• Employees had a choice to 1) continue employment,
  thereby accepting DRP or 2) quit.
• There is “bargained for consideration” by mutual
  promises and obligations.
             Enforceable Promises Without
• Promissory Estoppel or Detrimental Reliance
   – Doctrine to avoid injustice due to the promisee's reasonable
     reliance on the promisor’s promise.
   – Promisor is estopped (prevented) from denying a promise.
   – Equitable doctrine.
   – “A promise which the promisor should reasonably expect to
     induce action or forbearance on the part of the promissee . . .
     and which does induce such action or forbearance is binding if
     injustice can be avoided only by enforcement of the promise.”
     Restatement (2nd) of Contracts
   – Courts don’t impose the rule lightly.
   – Sometimes used in promises to charities, especially if
     organization relies on the donation to act in some way.
       • e.g. beginning construction based on promises of charitable
          Hinson v. N&W Construction Company

• N&W Construction prepared bid to submit to MJCC to
  build a facility. N&W received bids from subcontractors in
  preparing its bid to MJCC.
• Hinson quoted $92,000 as bid as plumbing sub; next
  lowest bid was $139,000. N&W used Hinson’s bid to
  prepare its bid to MJCC.
• N&W was low bidder and awarded contract by MJCC.
  Contacted Hinson that it needed plumbing work to begin.
  Hinson failed to sign and return plumbing subcontract
  and refused to due the job.
• N&W then hired next lowest bidder; paid added $47,000
  to get work done. N&W sued Hinson based on
  promissory estoppel.
• Trial court granted summary judgment to N&W, awarding
  $47,000. Hinson appealed.      Continued
     Hinson v. N&W Construction Company

• Ct. of Appeals held: Affirmed.
• Hinson admits he provided a quote. Also testified
  that he reviewed plans & specs for the building, and
  was satisfied with his quote of $92,000.
• Hinson refused to do the plumbing because, “I just
  had a lot of other jobs going.”
• Promissory estoppel arises when “making of a
  promise, even though without consideration . . . “
  that plaintiff (here N&W) relied upon.
• “Refusal to enforce it would be virtually to sanction
  the perpetuation of fraud or would result in other
                      Element #3
• Refers to the legal ability to create a
• Some have limited capacity to contract
   – Minors
   – Intoxicated persons
   – Insane persons
• If there is no capacity, the contract is void
• If there is partial capacity, the contract is
  voidable – may disaffirm
       Void and Voidable Contracts

• Void: Contract does not exist at law
   – One of elements is missing – lacks a
     requirement of a contract
   – i.e. contract with a legally insane person
   – i.e. contract for an illegal subject matter
   – Courts won’t accept disputes
• Voidable: One party to the contract has right to
  avoid legal obligation
• Is valid but capable of being voided by a
   – i.e. minors contracts
   – i.e. contracts with person under influence of
     drugs or alcohol
   – i.e. fraud by one of the parties
                                  • General Rules
• Defined as a person under          – #1: Minors may disaffirm
  the legal age of majority            contracts at their option
• Traditionally, the age of          – #2: If a minor disaffirms a
                                       contract after receiving
  majority was 21
                                       benefits, restitution must
• Now it is 18 years old in all        be paid for the benefit
  states for most contracts          – Some contracts may not
• Minors have partial                  be disaffirmed, i.e.
  capacity                               • Enlistment contracts
• Contract is voidable                   • Marriage contracts
• Legal policy to protect the            • Educational loans
  young from the “results of             • Insurance loans
  their own folly”                       • Medical care
                                  • After reaching majority, the
                                    minor may ratify the contract
                        Element # 4:
• If a contract is lacking legality, courts will not
  enforce it
• Subject Matter Must Be Lawful
  – Criminal activities; sale of prohibited drugs;
    gambling activities in some states
• Interest rates on loans that violate usury laws
  – Court may strike entire bargain as unenforceable or
    only a part that concerns illegal subject matter
    Unenforceable Contracts
• Contract that courts will not
  enforce because of change in law
   – Ex: Company agrees to ship
     wheat to Iran. After shipment is at
     sea, U.S. government declares no
     U.S. firms may trade with Iran.
   – Result: unenforceable under U.S.
     law even if seen as legal in Iran
   Legality & Contract Contrary to Public Policy
• Exculpatory Agreements (contracts written to escape
• Unconscionable Agreements (unequal bargaining power)
   – Outcome is grossly unfair to an innocent party.
• Contracts in Restraint of Trade
   – Contracts that restrain trade or unreasonably restrict
   – Covenant not to compete may be restraint of trade
       • Limited by time, territory and ancillary to the contract
       • Different states differ on this subject
   – Covenants not to compete often used in sale of
     business or employment contracts & often legal.
                     DCS Sanitation Management
                             v. Castillo
• DCS operates in 13 states. Cleans food processing plants, including
  Tyson Foods in Dakota City, Nebraska.
• Castillo and other employees signed noncompete agreements with
  DCS for “one year following the date of termination of employment
  for any reason, I will not directly or indirectly engage in, or in any
  manner be concerned with or employed by any person, firm or
  corporation in competition with [DCS] or engage in providing
  contract cleaning services within a radius of 100 miles of any
  customer of [DCS]. . . .”
• DCS lost contract with Tyson to a competitor.
• Competitor hired Castillo and other former DCS employees to work
  with it, doing about the same work as before.
• DCS sued employees for breach of contract.
• District court held for Castillo. DSC appealed.
              DCS Sanitation Management
                   v. Castillo, cont.
• HELD: Affirmed.
• The Nebraska court will not reform an
  agreement to make it enforceable.
• Noncompete agreement is valid if 1) doesn’t
  injure public; 2) is not greater than reasonably
  necessary to protect the employer’s interests;
  and 3) “is not unduly harsh and oppressive to
  the employee.”
• These noncompete agreements were overbroad
  and unenforceable.
• Breadth of agreements effectively put former
  employees out of work in an extensive region.
                              Element #5
           Reality of Consent/Genuine Consent

• If consent is missing, there is no meeting of the minds
   – If there is unilateral mistake over a simple error, then
      contract usually avoided. (typo error - $20,000
      instead of $200,000)
• Without this element, the contract is void or voidable
  (depending on the circumstances)
   – Fraud
   – Misrepresentation
   – Duress
   – Undue influence
   – Statutory Exceptions: Pressure by salesperson, i.e.
      Federal Trade Commission’s Cooling-Off Rule re:
      door-to-door sales
         Element #6 (Sometimes Needed)
        Contracts in Writing & The Statute
                of Frauds (1677)

• Contracts do not have to be in writing to be
  enforceable, HOWEVER
• Written contracts are always good as evidence of the
  agreement, MOREOVER
• Some contracts require a writing
   – Sale of land or interests in land
   – Contracts that cannot be performed (finished)
     within 1 year
   – Promise to pay the debt of another, including
     debts of an estate
   – Promises made in consideration of marriage
               Sufficiency of the Writing
               The Parol Evidence Rule

• Sufficiency of Writing     • Parol Evidence Rule
   – Writing must set out the – Restricts use of oral
     material terms of            evidence when contrary to
     contract                     terms of written contract.
   – Names of parties           – Oral evidence cannot
   – Consideration                contradict, change or add
                                  terms to written contracts.
   – Subject matter, etc.
                                – IF a written contract is
   – Invoices, E-mails, sales     incomplete, ambiguous,
     orders, checks,              proves fraud, mistake, or
     confirmations may            misrepresentation, THEN
     satisfy this requirement
                                – Oral evidence may explain
                                  the problems.
     Deschamps v. Treasure State
           Trailer Court
• In 2003, Deschamps bought a mobile home trailer park in
  Great Falls, Montana from Rasmussen. Time payments.
• Rasmussen died. Estate inherited the asset.
• Deschamps found significant problems with park’s water
  system. Required $400,000 in repairs.
• In 2006, Deschamps stopped making payments to the
• Estate sued; Deschamps sued for contract breach/fraud.
• Deschamps contended Rasmussen said that water system
  was in good condition and that occupancy rate was higher
  than in fact it was.
• Trial Court held for estate, finding Deschamps’ claims were
  precluded by parol evidence rule. He appealed.
       Deschamps v. Treasure State
             Trailer Court
• HELD: Affirmed. When language of contract is clear, look at the
  contract. Contract expressly stated that Deschamps did not rely on any
  oral assurances or representations by Rasmussen.
• Deschamps cannot now claim otherwise. He signed a contract
  prepared by his real estate agent containing a statement that
  Deschamps had not relied upon oral assurances by Rasmussen.
• Agreement stated
   – 1) Rasmussen did not warrant property’s condition
   – 2) Deschamps had right/duty to inspect property prior to purchase
   – 3) Special disclaimer of reliance on Rasmussen’s assurances
   – 4) Inspection was waived or satisfied
   – 5) Clause in agreement said this was entire agreement and
     superseded any oral agreements
   – 6) Agreement could only be amended by a writing
• Substantial Performance (Usually in good faith)
   – Usual remedy is the contract price minus damages
     resulting from lack of complete performance
• Material Breach
   – Performance substantially less than required
   – Damages now due to non-breaching party
• Executed Contract
   – Fully performed; nothing left undone
   – If you have fully performed, damages for the price of
     performance may be sought as a remedy
• Executory Contract
   – Not fully performed
   – If partial delivery of products, buyer need not pay total
     contract price
                 Discharge of Contracts
         (Terminating Contractual Obligations)
• Assignment (transfer of rights to another) or delegation
  (transfer of duties to another)
• Third-Party Beneficiary is one not part of original contract
  who acquires rights under the contract.
• Performance
   – Total performance = discharge and payment accordingly
   – Substantial performance: Usual remedy is the contract
     price minus damages resulting from lack of complete
• Discharge by breach (non-breaching party is discharged)
   – Material breach: Performance is substantially less than
     the contract provides
   – Anticipatory breach or repudiation: A party indicates
     inability or lack of desire to perform
• Discharge by Agreement of the Parties: rescission,
  novation, accord & satisfaction
         Discharge by Impossibility
– An unforeseeable, unanticipated event occurs that
  makes performance impossible
   • One party dies or is incapacitated
   • Law passed making performance illegal
   • Subject matter of contract is totally destroyed

– The impossibility doctrine has been extended to
  commercial impracticability or frustration (unforeseen
  event creates an “extreme or unreasonable difficulty,
  expense, injury or loss”)
   • Wartime shortages
   • Crop failures
   • Loss of needed supplies due to sudden international
   • Courts often expect at least part performance

• Monetary Damages ($$)           • Equitable Remedies
  – Compensatory                     – Specific
    Damages                            Performance
  – Actual Damages                   – Injunction
  – Expectancy Damages               – Restitution
  – Liquidated Damages            • Mitigation of Damages
  – Nominal Damages                  – Injured party is
                                       required to make
  – Punitive Damages (only             efforts to mitigate or
    if there is tort related to        lessen losses
    breach of contract)
  – Special Damages
                 Economic Loss Rule
In breach of contract, if no tort involved, damages are only
those related to economic losses suffered by the breach.
    1. maintain fundamental distinction between tort and
    contract law
    2. protect commercial parties’ freedom to allocate risks
    by contract
    3. encourage the party best situated to assess the risk
    of economic loss
• Damages are only those related to lost profits and costs
   suffered due to the breach.
• Accounting evidence and specific calculations are
   necessary evidence to be presented.
• No punitive damages. (Parties often try to assert fraud, a
   tort, to try to get these damages.)
    DeRosier v. Utility Systems of America

• DeRosier owned land on a hillside.
• Before house could be built, lot needed to be filled with dirt.
• Asked Utility Systems of America (USA), working on nearby
  construction, if it would dump some excess fill dirt on his lot.
• USA saved money doing this instead of hauling the dirt away.
• DeRosier obtained permit from city to allow 1,500 cubic yards of fill
  to be dumped on his property. Gave permit to USA.
• Later Rosier found USA dumped 6,500 cu. yd., so 5,000 cu. yd. had
  to be removed since permit was violated.
• USA denied responsibility; offered to remove the excess for $9,500.
• DeRosier sued. Trial Court granted $22,829 damages to pay another
  company to remove the dirt. Awarded him $8,000 in consequential
  for delay damages for time lost in constructing new house.
• USA appealed, saying DeRosier failed to mitigate damages by not
  having USA move the dirt for only $9,500 rather than pay $22,829.
    DeRosier v. Utility Systems of America
• Special or consequential damages flow naturally from the
  breach, but are not recoverable unless they are reasonably
  foreseeable by parties at time of breach.
• HELD: District Court erred in awarding DeRosier $8,000 in
  consequential damages as not building house right now.
• HELD: District court had sufficient basis for calculating
  and granting $22,829 in general damages.
• HELD regarding DeRosier’s duty to mitigate: Non-
  breaching DeRosier could decline the offer of USA to
  remove dirt for $9,500.
• Did not unreasonably reject USA’s offer since he thought it
  their duty to remove, so did not fail to mitigate his general
• Reversed in part; affirmed in part.
              Quasi Contract
       (Also called quantum meruit)
• Quasi (means “almost”) – not a true
• Legal concept used by courts to
  prevent injustice
• Courts apply this classification in
  equity (out of a sense of fairness) to
  give relief to innocent parties
• Example: You watch as a crew (in
  good faith) comes to your house and
  paves your driveway.
• Do you have to pay the bill when it is
  sent to you? Yes (at least in part)
  under quasi contract.
                 Scheerer v. Fisher
Scheerer, a real estate agent helped Fisher arrange to buy
commercial real estate. Price was $20 million.
Seller & Fisher each promised Scheerer 2% commission.
Deal fell apart. Fisher formed new company, and had 3rd
party, Antonio, buy the property & then sell it to Fisher’s new
Scheerer learned of deal (got no commission from sale) and
sued for breach of contract on quantum meruit.
Trial Court held no contract or basis of payment. Appeal
HELD: Reversed. Defendants took action to deny Scheerer
compensation for services rendered.
Although original contract failed, law implies a promise to
pay some reasonable compensation for services rendered.
Allegations state a valid quantum meruit claim.

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