NATURE AND CLASSES OF CONTRACTS
A. NATURE OF CONTRACTS
1. DEFINITION OF A CONTRACT
GENERAL RULE. A contract is a legally binding agreement. Stated another way, "a contract is a
promise or a set of promises for the breach of which the law gives a remedy, or the performance of which
the law in some way recognizes as a duty." (Restatement, Contracts, 2d)
STUDY HINT. The essence of a contract is that (1) by mutual agreement (2) parties create
obligations that can be legally enforced.
2. ELEMENTS OF A CONTRACT
Elements of a valid contract are: (1) an agreement; (2) competent parties; (3) genuine assent to the
contract; (4) consideration given by each party; (5) legal purpose; and (6) proper form of contract.
3. SUBJECT MATTER OF CONTRACTS
A contract may relate to virtually any type of transaction. Contracts may relate to performance of a
service, sale or transfer of ownership of property, or a combination of such transactions.
4. PARTIES TO A CONTRACT
GENERAL RULES. Parties to a contract may be persons, partnerships, corporations, or
governments. There may be more than two parties to a contract (e.g., a credit card transaction).
With some exceptions, only the parties making a contract have rights or duties under the contract.
STUDY HINTS. Parties can have special names, such as promisor (party making a promise)
and promisee (party to whom a promise is made); lessor (party who leases property) and lessee (party to
whom property is leased). Privity of contract means two parties directly contracted with each other.
5. HOW A CONTRACT ARISES
GENERAL RULES. A contract is created by an agreement. An agreement is made when an
offeror makes an offer, and the offeree accepts the offer by making an acceptance.
STUDY HINTS. A contract cannot be made without both an offer and an acceptance. An
offer may be made to a particular person or an offer may be made to the public. Example of a public
offer: an owner's offer to pay a reward to anyone who returns the owner's lost pet.
6. INTENT TO MAKE A BINDING AGREEMENT
GENERAL RULE. Formation of a contract requires that both the offeror and the offeree intend to
enter into a legally binding agreement.
LIMITATIONS. A contract is not created by: (1) a preliminary agreement; (2) an agreement that
states future plans of the parties but does not obligate the parties to perform such plans; or (3) statements
that merely indicate the parties' desire to do something without actually obligating them to do it.
7. FREEDOM OF CONTRACT
Subject to certain limits, parties may make any agreement they choose.
B. CLASSES OF CONTRACTS
A contract may be classified according to: (1) the form of the contract; (2) how the contract was created; (3)
the validity or binding nature of the contract or agreement; (4) the extent to which the contract has been
performed; or (5) how the offer to contract may be accepted.
8. FORMAL AND INFORMAL CONTRACTS
GENERAL RULE. Classified according to its form, a contract may be either a:
Formal contract: A formal contract is a: (1) contract under seal (seal or equivalent mark is made on or
attached to an agreement); (2) contract of record (agreement recorded with a court, such as an
agreement to forfeit a bond if a party does not appear at a trial, or an agreement made with an
administrative agency); or (3) negotiable instrument (contract that satisfies certain commercial law
requirements, such as a check); or
Informal (simple) contract: any contract other than a formal contract.
LIMITATION. The UCC, for sales of goods, and statutes in some states do not recognize the
binding nature of seals; i.e., agreements are not legally binding merely because they are under seal.
STUDY HINT. Formal and informal contracts are both legally enforceable.
9. EXPRESS AND IMPLIED CONTRACTS
GENERAL RULE. Classified according to how a contract is created, a contract may be either an:
Express contract: agreement is formed by the oral or written words of the parties; or
Implied (implied in fact) contract: agreement is formed by the conduct of the parties.
LIMITATIONS. An implied contract cannot arise if an express contract relating to the subject
matter in question already exists. An implied contractual duty to pay does not generally arise if a
person receives a service or goods from a family member and the service or goods were intended as a
gift. Example: son gratuitously brings meals to and takes care of his elderly father.
STUDY HINTS. Express and implied contracts are both legally enforceable, and they have the
same basic legal effect. An implied contract arises if a person does a service for another party with an
expectation of payment, and the other party accepts the service knowing that payment is expected.
10. VALID AND VOIDABLE CONTRACTS AND VOID AGREEMENTS
GENERAL RULE. Classified according to its validity, a contract or agreement is either a:
Valid contract: legally binding contract that is made in accordance with all legal requirements;
Voidable contract: contract that may be set aside by a party because of circumstances surrounding the
making of the contract or because a party lacked contractual capacity (examples: a contract made by a
party as the result of fraudulent conduct by the other contracting party or a minor's contract to buy a
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camera or clothing; or
Void agreement: agreement that is of no legal effect; frequently an illegal agreement.
STUDY HINT. A void agreement cannot be made valid by a subsequent ratification (approval).
11. EXECUTED AND EXECUTORY CONTRACTS
Classified according to the degree that it has been performed, a contract is either an:
Executed contract: contract that has been fully performed; or
Executory contract: contract that has not been fully performed by all parties.
12. BILATERAL AND UNILATERAL CONTRACTS
GENERAL RULE. Classified according to how an offeree can accept an offer, a contract is a:
Bilateral contract: contract is formed by an offeree's accepting an offer by making the requested
Unilateral contract: contract is formed by an offeree's accepting an offer by actually doing the
LIMITATION. An offeree cannot accept an offer for a unilateral contract by promising to do an
act; an offer for a unilateral contract can be accepted only by performing the requested act.
STUDY HINTS. Whether an offer is for a bilateral or unilateral contract is determined by the
offeror's intent; focus on what the offeror is demanding in return for his or her promise. Two types of
bilateral contracts are: (1) an option contract which grants a person the legal right (but not obligation) to
accept an existing offer; and (2) a right of first refusal contract which grants a party a right to accept an
offer if and when the offer is made.
13. QUASI CONTRACTS
GENERAL RULES. Quasi contract is a contract implied by law (i.e., by a court) to prevent unjust
enrichment. Elements generally required to establish quasi contract are: (1) plaintiff gave a
nongratuitous benefit (good or service) to the defendant; (2) the defendant realized an actual benefit; and
(3) it would be unfair to allow the defendant to keep the benefit without paying for it.
LIMITATIONS. Quasi contract requires a party to pay only the reasonable value for the
benefit received; it does not require a party to reimburse the other party for all expenses or losses that the
other party may have incurred. In general, quasi contract will not permit a party to recover the
reasonable value of a benefit given or restitution damages (the value of something given):
simply because a benefit has been given to another person (unjust enrichment must be proven);
when a party merely seeks to recover unexpected expenses that are required in order to perform a
when a party seeks to recover a greater amount than is required to be paid by an existing express
contract (in other words, in an express contract, quantum meruit recovery for the reasonable value of a
benefit that is given is not allowed; only the stated contract price can be recovered);
when a party seeks to recover the value of a benefit that is given to a third party pursuant to a contract
between two other parties; or
the value of goods or services that were given as a gift.
STUDY HINTS. Quasi contract may require payment for a benefit even though there is not a
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valid express or implied contract that requires payment. Recovery under quasi contract does not
require proof that the defendant did anything wrong. When appropriate, quasi-contractual relief may
be given if: (1) a benefit is given by mistake; (2) a benefit is given (but not paid for) in expectation of the
making of a contract which is never made; or (3) a benefit is given (but not paid for) pursuant to a
voidable or void contract that is subsequently set aside.
REVIEW OF TERMS AND PHRASES
Select the term or phrase that best matches a statement or definition stated below. Each term or phrase is the best
match for only one statement or definition.
Terms and Phrases
a. Bilateral contract f. Informal (simple) contract k. Quasi contract
b. Executory contract g. Offeree l. Unilateral contract
c. Express contract h. Offeror m. Valid contract
d. Formal contract i. Privity of contract n. Voidable contract
e. Implied contract j. Quantum meruit o. Void agreement
Statements and Definitions
____ 1. Contract that is formed by an offeree's accepting an offer by promising to do a requested act.
____ 2. Contract that is created by the conduct of the parties.
____ 3. Contract that may be avoided by a party because it was not properly formed.
____ 4. Contract implied in law in order to avoid unjust enrichment.
____ 5. Party who makes an offer.
____ 6. Remedy allowing a party to recover for the reasonable value of services or goods.
____ 7. Agreement that is of no legal effect.
____ 8. Contract that is created by a written or oral agreement.
____ 9. Legally binding contract that cannot be set aside by a party.
____10. Party to whom an offer is made.
____11. Contract that is formed by an offeree's accepting an offer by doing a requested act.
____12. Relationship between two parties who have entered into a contract with one another.
____13. Contract that is legally binding because of the formality with which it is executed, such as a contract
____14. Contract that has not been fully performed by the contracting parties.
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____15. Any contract that is not a formal contract.
REVIEW OF CONCEPTS
Write T if the statement is true, write F if it is false.
____ 1. Every agreement is a valid, legally binding contract.
____ 2. Contracts may relate to virtually any type of legal transaction, including performing services.
____ 3. Individuals and corporations can make contracts, but government agencies cannot.
____ 4. An agreement that does not actually obligate the parties to do anything is not a binding contract.
____ 5. In general, an agreement is not a legally binding contract unless the parties sufficiently indicate an
intent to be legally bound by the terms of the agreement.
____ 6. Statutes in some states no longer recognize the binding nature of seals.
____ 7. Informal contracts are not legally binding.
____ 8. An offeree cannot accept an offer for a bilateral contract by merely promising to do the act requested
by the offeror.
____ 9. An offeree cannot accept an offer for a unilateral contract by merely promising to do the act requested
by the offeror.
____10. An option contract is a contract that gives one party the right or choice to accept an existing offer
within a stated period of time.
____11. A right of first refusal contract gives a party the right to accept an offer only if another party
subsequently decides to make the offer.
____12. An offeree can accept an offer for a bilateral contract by promising to perform the requested act. A
contract is formed when the offeree communicates this promise to the offeror.
____13. In some cases, a party may have a duty under quasi contract to pay for benefits received even though
the party never contractually agreed to pay for such benefits.
____14. Quasi contract requires that a person must pay for any benefit that is ever received from another.
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____15. If a party enters into an express contract agreeing to perform services for a stated price, then that party
is entitled to recover only that amount; the party is not entitled to use the remedy of quantum meruit to
recover the reasonable value for such services.
REVIEW OF CHAPTER - APPLICATION OF CONCEPTS
MULTIPLE CHOICE QUESTIONS
____ 1. Bruce and Seller were negotiating Bruce's proposed purchase of a grocery store from Seller. In which
situation did the parties manifest the necessary intent to enter into a legally binding contract for the sale
of the store?
a. Bruce and Seller signed a complete, definite agreement whereby Bruce agreed to buy the store
from Seller and Seller agreed to sell the store to Bruce upon the terms stated in the agreement.
b. Bruce and Seller signed a preliminary agreement whereby they indicated their intention to
continue to negotiate terms for the sale of the store.
c. Bruce and Seller signed an agreement whereby Bruce indicated his desire to buy the store from
Seller and Seller indicated his desire to sell the store to Bruce upon terms that the parties would
later agree upon.
d. a and c.
____ 2. An implied contract is created in which of the following situations?
a. Abe voluntarily helped to paint his parents' fence.
b. Bob and Pamela entered into a complete, written contract for the sale of Bob's car to Pamela.
c. Rosa and Nan made an oral contract whereby Nan agreed to clean Rosa's home for $70.
d. Kim requested Pete's Pest Control to fumigate her home, and Pete's did as requested. There was
no express contract, but Pete's expected payment and Kim was aware of this expectation.
____ 3. Chris agreed to sell stolen goods to Gray, and Gray agreed to buy the goods. Under these facts:
a. This agreement is a void agreement.
b. This agreement is a voidable contract.
c. This agreement is a valid contract.
d. This agreement is legally enforceable if Chris and Gray subsequently ratify the agreement.
____ 4. Jackie offered to pay Glen $500 in consideration for Glen's complete trimming of all trees located on
Jackie's property. This offer is an offer for a unilateral contract. Under these facts:
a. Glen can accept the offer by promising to trim the trees.
b. Glen can accept the offer by completely trimming the trees.
c. Glen can accept the offer by promising to trim the trees or by completely trimming the trees.
d. Glen cannot accept the offer; offers for unilateral contracts are illegal.
____ 5. Diane and Rick entered into a signed, written contract whereby Diane promised to sell a motel to Rick
for $200,000 and Rick promised to pay Diane $200,000 for the motel. Rick then paid the $200,000
purchase price to Diane, but Diane has not conveyed title to the motel to Rick. Under these facts:
a. This contract is a formal contract.
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b. This contract is an executed contract.
c. This contract is a bilateral contract.
d. There is no contract until Diane conveys title to the motel to Rick.
____ 6. Laurie is the owner of the High Water Cafe. Laurie promised to pay a $5,000 retirement bonus to her
piano player, Ike, as gratitude for his many years of music, and he accepted her gesture with great
humility. Ike did not promise anything in return. Laurie later reneged on her promise and refused to
pay the bonus to Ike. Under these facts, Laurie’s promise is:
a. Legally enforceable because promises are legally binding on a promisor.
b. Legally enforceable because Ike agreed to accept it and agreements are legally binding on the
parties to the agreement.
c. Legally enforceable because the promise was made as part of a contract and contracts are legally
d. Legally unenforceable because the promise was not made as part of a contract.
____ 7. Dick offered to sell his car to Jacqueline for $2,000 and she accepted the offer by promising to pay the
requested price. Both parties were competent to make a contract, and they drew up the contract in the
proper form. Under these facts, this contract is:
____ 8. Kirk offered to sell his video store to Edward for $50,000 and Edward accepted. Both parties were
competent and the contract was in proper form. However, Kirk fraudulently lied about the past profits
of the business. Under these facts, the contract is:
____ 9. In a signed writing, Patty offered to sell her business to Carol for $50,000. In this same writing, Patty
promised not to revoke this offer for 30 days in exchange for $500 paid by Carol. Under these facts:
a. The parties have entered into a legally enforceable quasi contract.
b. The parties have entered into a legally enforceable right of first refusal.
c. The parties have entered into a legally enforceable option contract.
d. The parties have entered into a legally unenforceable future agreement.
____ 10. Which of the following agreements is a formal contract?
a. A contract to sell an office building.
b. An invitation to a formal wedding reception.
c. A defendant’s agreement to pay a $5,000 fine, which agreement is recorded with a court.
d. A notarized will.
____ 11. Martha promised to buy Josh, her son, a car when he graduated from college. Josh did not promise to
do anything in exchange for this promise. Years later, Josh graduated from college and he demanded
that Martha buy him a car as she had promised years before. Martha refused. Under these facts, did
Martha have a legal obligation to purchase the car for Josh?
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a. Yes. Martha promised to buy Josh a car when he graduated from college.
b. Yes. Martha and Josh entered into a contract regarding the purchase of the car.
c. Yes. Martha had a quasi contractual obligation to purchase the car for Josh.
d. No. Martha and Josh did not enter into a legally enforceable contract regarding the purchase of
____ 12. Larry owned an apartment building and he rented one apartment to Rhonda. Larry contracted with
Ace Painters to have Rhonda’s apartment painted. Ace painted Rhonda’s unit, but Larry refused to
pay Ace. Under these facts:
a. Larry has a contractual obligation to pay Ace for painting Rhonda’s apartment.
b. Rhonda has a contractual obligation to pay Ace for painting her apartment.
c. Rhonda has a quasi contractual obligation to pay Ace for painting her apartment.
d. a and c.
____ 13. Select the correct answer regarding quasi contract?
a. Quasi contract relief is not available unless parties have entered into a legally enforceable
b. Quasi contract relief is available even though parties have not entered into a legally enforceable
c. Quasi contract relief is available whenever one party receives a benefit from someone else.
d. b and c.
Answer the following question, briefly explaining your answer.
Dan drove his car to Ty's Garage and requested Ty's to fix the radio. Before leaving, Dan noticed a mechanic
getting ready to work on his car's engine. Dan overheard the mechanic say that he was going to overhaul the
engine. Dan did not say anything to correct this mistake. When Dan returned, Ty's had overhauled the engine.
The reasonable value of this work was $500. Ty's demanded $750, which included damages for profits Ty's lost
because it worked on Dan's car instead of working on other jobs. Under these facts:
1. Should Dan be required by quasi contract to pay for the engine overhaul?
2. If Dan is required to pay, how much must Dan pay?
RIDING THE INTERNET
Barbara is planning to sell an old truck and a 20-acre parcel of land in order to raise cash for a new business. She
is also planning to do some bookkeeping work in order to earn additional funds. Under these facts:
1. Locate the Uniform Commercial Code (UCC) on the Internet, and identify the web site where it is located.
2. Refer to UCC Article 2, and determine whether the contract to sell the truck, the contract to sell the land,
and/or the contract to render the bookkeeping services are subject to UCC Article 2.
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