Definition of Contract
Definition (from Restatement (Second) of
Contracts § 1)
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.
A promise is a commitment or an undertaking that
some event will or will not occur in the future. A
promise may be made by using express words or it
may be implied from conduct or some combination of
words and conduct.
Bilateral and Unilateral Contracts
Two types of Contracts—bilateral and unilateral
A bilateral contract is one in which each party
makes a promise of future performance.
A promises to deliver his cow and B promises to pay $100
A unilateral contract is one in which acceptance of
the contract happens through performance.
A promises to pay $100 to the first person who finds his lost
Elements of a Contract
For a contract to be legally enforceable the
following elements must be present.
Legal subject matter.
An offer is a communication that creates in
the offeree the power to form a contract by
an appropriate acceptance.
It must be a manifestation of willingness to
enter into a bargain so made as to justify
another person in understanding that his
assent to that bargain is invited and will
Intent to be Presently Bound
The first element of an offer is a communication
of an intent to be presently bound.
One key issue is whether statements were an
invitation to open negotiations or a present offer.
Are you interested in buying my car for $500?
Will you buy my car for $500?
I will sell you my car for $500?
Objective v. Subjective Intent
Whether an offer has been made is based on objective
statement of intent regardless of subjective intent.
If an objective person would have believed an offer was
being made, it can be accepted.
However, if both parties understood that no offer was
being made, then no contract regardless of objective
If both parties understand that their words are not
intended to form a contract, then no contract
Purpose of contract law is to protect reasonable
expectations of the parties. If neither believed there was
a contract, no K.
Agreements to be Put in Writing
1. A sells bricks. B builds retaining walls and needs
bricks for a job he is doing. A offers to sell B a ton of
bricks for $1000 and B accepts and says “I’ll send over
a written contract for you to sign”. Before the contact
is signed, A decides he wants to raise the price and
tries to back out.
2. Same, but they have done business in the past and
always have a written contract.
3. Same, but the standard practice in the business
community is not to have a written contract
4. Other facts that would be helpful?
Agreements That Contemplate A Future
It is common that people will reach an oral
agreement but plan to reduce the agreement to
Issue: Is there a contract before the formal
signed written document.
Answer: It depends on the intent of the parties.
If they intended to be presently bound, then a K even
before written memorialization.
If they intended that important terms be worked out in
the written agreement and no K until signed, then no
An offer must be sufficiently definite as to terms that a
contract can be completed with acceptance (or it allows
the acceptor to specify the missing terms)
General Rule: To have an enforceable contract, the
parties must manifest their assent to a bargain that is
sufficiently definite and certain to enable a court to
determine what the respective rights and obligations of
the parties are.
It is the contract, not the offer that must be certain.
So, if offer to sell either Horse A or Horse B for $100, the
acceptance provides the certainty.
Courts will supply missing terms if it is
clear that their was an intent to be bound.
Thus, if no time specified, court will often
imply a reasonable time.
Even price can be supplied. Price will be
Courts will look to the course of performance
to determine missing terms if the contract has
Generally an advertisement is not an offer that
can be accepted without further consent by the
seller because quantity isn’t specified and it is
assumed to be limited to those available.
If advertisement is specific enough it can be an
offer, but usually not.
How to protect consumers from abuse by
Consumer protection laws prevent abuse of this, but
not contract law.
Hypo: “$100 Reward to anyone who finds
my lost puppy, “Barfy”. Offer that can be
accepted to create a contract.
Usually do create an offer if the conditions
to fulfill the offer are specific and can only
be fulfilled by one person. Lost Dog, etc.
Acceptance is accomplished through
performance. Finding the dog. Is only
one Barfy and only one person can fulfill.
Meeting of the Minds
It is essential to a bargain that each party
“accepts” an offer from the other.
Thus, must know of an offer to “accept” it.
Contract law is primarily concerned with
protecting reasonable expectations
created by the promises of others. Thus, if
not aware of promise, can’t rely on it.
Assignment of offer
General Rule: Offer can only be accepted
by the intended recipient.
If O offers to pay X $20 to mow his lawn
and Y discovers the offer, Y can’t accept
and form a contract.
Time for Acceptance and Option
Time for acceptance: The offer only stays
open as long as the offeror wants it to.
Can revoke the offer at any time. If no time specified,
is a reasonable time.
Option contracts—Can make a separate
contract to make the offer exclusive and to hold
it open for a period of time.
One might get an option on a piece of property and
pay 3% of purchase price for the exclusive right to
buy for the next 12 months.
1. A offers to sell Trigger to B for $100. The next day, A
sends a letter to B revoking the offer. Before the
revocation arrives, B calls and accepts the offer.
2. A offers to sell Trigger to B for $100. B says, “I’ll buy
for $80”. A says “no”. B then accepts the offer at
3. A calls B and leaves a message saying that if B will go
to A’s grandmothers house and mow the lawn, A will
pay him $50. B goes and starts to mow the lawn but
doesn’t tell A he has accepted. When he is half way
done, A call B’s cell phone and tells him the offer is
Rejection Of An Offer Terminates The
Can’t reject and then later accept.
Attempted acceptance is a new offer that
must be accepted by original offeree.
Offer is terminated by a counter-offer
Terminated by revocation of offer.
Revocation is only effective upon receipt
Also terminated by communication that is
inconsistent with the offer being open.
Revocation of a Unilateral Contract
A contract that is accepted by
performance, such as a reward contract
can’t be revoked once performance has
started, unless give a reasonable time to
The offeror as the creator of the power of
acceptance has the right to dictate not only the
terms of any resulting contract, but also the
manor of, and medium by which, the offeree can
exercise the power of acceptance.
Manner of acceptance: This means that the
offer defines how acceptance will occur and
whether the contract is bilateral or unilateral.
Means of acceptance: Whether has to be in
writing, by phone, etc.
Offers that unambiguously communicate a requirement
for a return promise will be treated as offers for a
bilateral contract and a contract will result when the
offeree complies by making a return promise
Offers that unambiguously communicate a requirement
for performance as acceptance will be treated as offers
for unilateral contracts and will require acceptance by
Offers that do not clearly communicate what the offeror
requires will be interpreted as empowering the offeree to
accept in any reasonable manner as the offeree
Acceptance by Exercise of Dominion or
One who receives goods with knowledge or
reason to know that they are being offered for a
price is bound by the terms of the offer if he
exercises dominion and control over them or
does any act inconsistent with the offeror’s
ownership of them.
Most states have laws over-riding this to prevent
stores from sending people unsolicited
merchandise and then charging them, but rule
still applies in other situations.
A contract is different from a promise. A mere
promise is not enforceable in most cases. A
A contract requires that there be obligations
running both directions. This is referred to as
Basic rule is that each party to a contract must
receive something or the promise of something for the
contract to be binding.
Put another way, each party must incur a legal
detriment—give up something—in exchange for what
they are receiving.
Amount of Consideration
Courts generally do not concern themselves with
the amount of consideration.
A promise to give a car for nothing is generally
a promise to sell the same car for $10 will be
enforceable even if $10 is dramatically below fair
Consideration can’t be a sham.
If promise to buy the same car in exchange for an old
left shoe, the court would look through that and say
that was not a real bargain.
Must be a quid pro quo
Each party must give a promise in exchange for
the return promise.
However, the law does not try to examine real
motive. Will be an enforceable contract even if
the consideration wasn’t the real motive for
Consideration can be either a return promise
(bilateral) or performance (unilateral)
Digging a ditch
Agreeing not to build a fence
Agreeing not to compete with a business
Preexisting Legal Duty
Because consideration requires a legal
detriment, promising to do something one is
already required to do or forbearing from doing
something one has no right to do does not
Duty’s owned to third persons. The modern rule
is that a promise to perform a duty or obligation
already owed to someone else in return for
additional consideration is enforceable.
Promisor is incurring a new detriment because
owes a duty to another person that can be
Unenforceable or Voidable Promises
Rule: Certain promises are unenforceable or
voidable. Examples are contracts made by
minors or those who are mentally incapacitated.
If a minor (M) enters into a contract to buy a car
from S, S can’t enforced the contract against M
because he did not have the legal capacity to
enter into the contract.
Problem: If M shows up with the money after
the deal has been made, can S refuse to sell?
Unenforceable or Voidable Promises
Answer: there is valid consideration that
supports a contract. M’s promise to pay $1000
creates a binding contract. M can enforce that
contract and S can’t argue that he isn’t required
to sell the car if M shows up with the money.
Rule: Such contracts are voidable to protect
those who lack capacity. It is not an excuse
for those with capacity to breach a contract. In
other words, a promise by a minor is not
illusory and thus does act as consideration
to bind the contract.
Exclusive Contracts And Best Efforts
Where one party contracts with another for the
exclusive right to market or sell something for
their mutual benefit, there is an implied
obligation to use best efforts to make the
contract beneficial. Thus, if
Held: Is a breach of contract. Although there is
nothing in the contract that says that P will make
significant efforts to make the contract profitable, law
implies an obligation to use best efforts.
Consideration From Or To Third Parties
Rule: There is no requirement that the
return promise or performance which
constitutes the bargained exchange must
come from the promisee or that the return
promise or performance been done for the
Promissory Estoppel is a concept that
allows for the enforcement of a promise
that isn’t supported by consideration or
even a bargain.
Is based on the fact that the promisee has
foreseeably and materially changed his
position in reliance on the promise.
Key concept is detrimental reliance.
Basic Rule: A promise
which the promisor should reasonably expect to induce action or
on the part of the promisee or a third person
and which does induce such action or forbearance
is binding if injustice can be avoided only by enforcement of the
The remedy granted for breach may be limited as justice
The detrimental reliance required to enforce a promise
must involve significant adverse consequences such that
justice cries out for enforcement.
Statute of Frauds
In the 1600s England passed a law
requiring certain contracts to be in writing.
As a result, all American states had similar
laws. Although the rule has eroded over
time, still exists in most states.
Rationale for the Rule?
What types of contracts should be in
writing as a matter of law?
Statute of Frauds
In most states the statute requires the following
to be in writing:
Contracts that by their terms can’t be fulfilled within a
A special promise to answer for the debt of another
An agreement made upon consideration of marriage
An agreement for a lease for more than one year
An agreement for the sale of land
An agreement that by its terms is not to be performed
during the lifetime of the promisor
Statute of Frauds
The writing required does not have to be a
formal contract. Need only be a writing
Signed by the party to be charged
Reasonably identifying that a contract has
States with reasonable certainty the essential
General Rule: The primary concern of contract
law is the protection of the reasonable
expectations of persons who have become
parties to the contract.
There are two issues
What does the contract say?
What did the parties mean?
Protecting reasonable expectations is easier
said than done, because the court has to
determine what expectations are reasonable.
With oral contracts, contract interpretation is largely a
question of fact for the jury.
What did the parties say?
What was it reasonable for them to understand under the
With written questions, contract interpretation is much
more a question of law.
The written contract gives us objective terms.
Question becomes, what do these words mean as a matter
Note, that such a question can be examined fresh by the
Restatement Sect. 201
1. Where the parties have attached the same meaning
to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning
2. Where the parties have attached different meanings
to a promise or agreement or a term, it is interpreted in
accordance with the meaning attached by one of them if
at the time the agreement was made
A) that party did not know of any different meaning attached by
the other, and the other knew the meaning attached by the first
B) that party had no reason to know of any different meaning
attached by the other, and the other had reason to know the
meaning attached by the first party, or
3. Except as stated in this section, neither party is
bound by the meaning attached by the other, even
though the result may be a failure of mutual assent.
Interpreting Written Contracts
rules for determining the reasonable
Course of performance—what have these parties
done in the past in regard to contracts of this type.
Course of dealing—Similar to above. Evidence of
their prior dealings with each other.
Usage of Trade—what is the industry standard
interpretation of a particular term. Community
Interpretation against drafter—The person who
writes the contract has responsibility for making it
clear. Any ambiguities will be charged against them.
Where there is a written contract, extrinsic
evidence is ordinarily not admissible to prove the
intent of the parties.
It is assumed that the written agreement
supersedes prior discussions or negotiations
and reflects the intent of the parties.
Exception exists where even applying rules of
contract interpretation, the language is still
But, have to try to resolve without extrinsic
B enters into a contract to buy a car from
S. B is drunk and doesn’t know what he is
Same, but B has schizophrenia.
Capacity to contract—It is assumed that adults have
the capacity to form contracts. If evidence is offered to
refute this assumption, it may establish total incapacity,
in which case the contract is void.
Infants and minors—Persons below the established
age of majority are termed “infants” and their contracts
are voidable (or in the case of very young, void)
May be avoided either by guardian or by minor themselves
Fact that minor misrepresented his age doesn’t matter in regards
to the formation of a contract, but may give the other party right
If minor comes of age after the contract was formed, can still be
disavowed for a reasonable time. But acts that indicate an
intention to affirm the contract will make it binding.
Parties with Mental Defects or Illness
Where a party to a contract lacks cognitive
ability or understanding, the contract may be
voidable without regard to whether the other
party knew or had reason to know of the mental
impairment. (Mental retardation, schizophrenia)
Where a party has impaired motivational control,
the contract is usually held to be voidable only if
the other party knew or had reason to know of
the mental impairment. (Alcoholism; manic
If an agreement is obtained by coercion which
constitutes duress, the contract can be voided if
the agreement is also unfair.
Requires an improper threat of sufficient gravity
to induce the other party to manifest assent to
an agreement and assent must have been
induced by this threat. I.e., no agreement if not
for the duress.
Must communicate an intention to cause harm or loss
to the other party.
Must threaten action that is unlawful or tortuous.
Threat can either be express or implied.
A threat is improper if the resulting exchange is not on
fair terms, and
The threatened act would harm the recipient and would not
significantly benefit the party making the threat, or
The effectiveness of the threat in inducing the manifestation of
assent is significantly increased by prior unfair dealing by the
party making the threat, or
What is threatened is otherwise a use of power for illegitimate
If a party’s manifestation of assent is induced by an
improper threat by the other party that leaves the victim
no reasonable alternative, the contract is voidable by
Undue influence may be available as a defense
where a person entered into an unfair
transaction induced by improper persuasion.
Victim is prevented from exercising free choice due to
the other party taking conscious advantage of a
weakened mental state or condition of dependency.
Breach of a fiduciary relationship which can exist
despite the absence of any conscious wrongdoing.
The first type of undue influence is halfway
between lack of capacity and duress.
Using a position of power over someone in
a weakened or inferior position.
Weakened state may not be enough to be
incapacity and the behavior may not be
enough to be duress, but when combined with
an unfair bargain, they make the contract
Second type is premised on fiduciary relationship.
Fiduciary relationship exists where one party occupies a
position of trust and confidence with respect to the other.
Rule: If a contract between fiduciary and dependent is
found to produce an unfair result for the dependent, it will
be voidable even if no pressure or other wrongful
Rat: Fiduciary has an obligation of utmost faith and fair
dealing and can’t act in an adversarial way to dependent.
Thus, not allowed to gain any advantage.
Mistake is only a defense under limited circumstances.
For a mistake to get you out of a contract, must be a
mistake as to a fact that exists, not a mistake about what
will happen in the future. All bad contracts are a mistake
General Rule (Restatement. 152)
Mistake must relate to facts that exist at the time the contract is
The mistake must relate to a basic assumption upon which the
contract was made
Mistake must have a material impact on the bargain
The party seeking relief must not have assumed the risk of this
Mistake was mutual
Assuming The Risk Of Mistake
May occur because the contract assigns
the risk of mistake to that party or puts the
burden of investigating a matter on a
Law may allocate risk of mistake to one
party because they came into the contract
with limited knowledge, but didn’t make
the necessary investigation.
Must prove all of the elements of mutual
mistake, plus prove either
that the other party knew that you were under
a mistaken belief, or
the contract is so unfair under the
circumstances that it shouldn’t be enforced.
Rule: a mistake can be so fundamental
that there simply isn’t a contract because
there was no agreement
Events That Excuse Performance
It is hard to get out of contracts. Contract liability is strict
liability. It is an accepted maxim that contracts are to be
kept. The obligor is therefore liable in damages for
breach of contract even if he is without fault and even if
circumstances have made the contract more
burdensome or less desirable than he had anticipated.
Impossibility: Contract duties can be excused by the
occurrence of an event if the contract was made on the
basic assumption that this event would not occur.
Events that excuse include those that make performance
of the contract literally impossible or that make
performance commercially impracticable.
Events That Excuse Performance
Death or disability of one whose existence is
necessary for the performance of the contract duty
Destruction without the fault of the promisor of the
subject matter of the contract or a thing necessary for
the performance of the contract
Supervening governmental action that prohibits or
purports to prohibit the performance of the contract.
The above do not excuse performance if it can
be shown the party to be charged assumed the
risk of performance becoming impossible.
Does not excuse if performance can be
accomplished in some other method.
Mere impracticability will only excuse performance in
very limited circumstances.
Four basic elements must exist
First, the occurrence of an event that has made performance
impossible or impracticable.
Death, fire, illness, crop failures, governmental regulations.
Second, the event must have occurred without the fault of the
party who seeks relief due to the occurrence of the event.
Third, the nonoccurrence of the event must have been a basic
assumption upon which the contract was made
Fourth, whether the party seeking the relief has agreed to
assume the risk of the event now asserted as a basis for
Remedies and Damages
Expectation Damages (Benefit of the Bargain). This is the most
frequent and standard way of awarding damages. The idea is to
place the innocent party in the position they would have been in had
the contract been performed.
Thus, if contracted to purchase 3 bales of wheat for $15 dollars a bale
and cost of wheat goes up, so have to buy for $22, damages are $21.
Duty to mitigate damages. Thus, if contract to Sell 3 bales of
wheat for $20 a bale and the contract is breached, you can’t let the
wheat rot and collect $60. Must try to find another buyer. Damages
would be the difference in sale price. Thus, if can only sell for $17,
damages are $9 plus out of pocked expenses in finding new buyer.
Savings are deducted from damages. If B contracts to build a house
for 175K and before he starts the Owner cancels the contract. B’s
damages are 175K less the cost to build. If cost to build was $160K,
damages are $15K
Only foreseeable damages can be recovered.
General damages, those that naturally arise from breach of the
contract of that type, are recoverable. Are presumed to be
foreseeable because they are the natural damages from the
breach of a contract of that type.
Special Damages—Damages that arise as a consequence of
special facts and circumstances relating to the specific
transaction. Such damages are not ordinarily recoverable
because they are not foreseeable.
Rule: Special Damages can only be recovered if it is shown that
they were within the contemplation of the breaching party at the
time the contract was made.
Many contracts expressly say that no liability for consequential
damages, and these are generally enforceable even if breaching
party was aware of consequential damages.
If expectation damages cannot be proven or
have not been proven, the non-breaching party
may recover reliance damages.
Measured by the amount of money necessary to
compensate the innocent party for expenses or loss
incurred in reasonable reliance upon the contract that
K to build a house. A breaches. B has incurred
$4k in preparing to build the house. Can
recover that amount in lieu of proving what profit
would have been.
Can’t exceed benefit of the bargain damages.
Recovery in restitution is designed to require the
defendant to disgorge the money value of he
benefit that the defendant received from partial
performance of the contract.
Not really damages.
Designed to put the parties back in the position
they were before the contract.
Often used when found that there was not a
valid contract, such as a voidable contract, or
contract terminated due to mistake or
If the parties put into the contract a provision
stipulating what the damages will be paid if there
is a breach, it will be enforced if not found to be
Basic issue regarding validity is whether they are
punitive or are simply an attempt to fix in
advance the fair amount of damage.
Penalty clauses will not be enforced.
Specific Enforcement or Performance
An order of the court requiring the breaching
party to fulfill the contracts.
Only able to get if there is no adequate way to
compensate with money. Usually because the
item or service is very unique and can’t be
Sale of a unique parcel of land
Replacement goods not available because of a