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Chapter Nine

Introduction to Contracts

Nature of Contracts

• Agreement- Legally Enforceable Promise
• The law of contracts deals with the enforcement of promises
• not every promises are legally enforceable
• Contracts give us the ability to enter into agreements with others with confidence that we may call on the law-not merely the good faith of the other party-to make sure that those agreements will be honored
• contracting lets us create a type of private law-the terms of the agreements we make-that governs our relations with others
• Contracts facilitate the planning that is necessary in a modem, industrialized society
• The central principle of contract law that emerged from this period was freedom of contract
• contracts should be enforced because they are the products of the free wills of their creators, who should, within broad limits, be free to determine the extent of their obligations
• However large organizations used to exploit their greater bargaining power by dictating the terms of their agreements
• Contract law evolved to reflect these changes to increase in government regulation of private contractual relationships
• Legislatures commonly dictate many of the basic terms of insurance contracts. Employment contracts are governed by a host of laws concerning maximum hours worked, minimum wages paid

Contracts

• Elements?
• To qualify as a contract, a set of promises must

be based on a voluntary agreement,

• Which is made up of an offer and an

acceptance of that offer.

• In addition, there usually must be

consideration to support each party's promise.

• The contract must be between parties who

have capacity to contract

• Offer/Acceptance
• Voluntary/Capacity
• Legal/Consideration

Concepts/Types

Bilateral vs. Unilateral

• Unilateral: only one party makes a promise
• Bilateral: both parties exchange promises and the contract is formed as soon as the promises are

exchanged

• Perks promises to give any customer a free cup of coffee if the customer buys 10 cups of coffee and has his "frequent buyer" card stamped 10 times
• In this case, Perks has made an offer for a unilateral contract, a contract that will be created with a customer only if and when the customer buys 10 cups of coffee and has his card stamped ten times
• If Perks Café promises to pay John Mall $1,000 a month if John Mall will promise to lease a kiosk in the mall to Perks for the holiday season,
• Perks has made an offer for a bilateral contract because it is offering a promise in exchange for a promise

Valid, Unenforceable, Voidable, Void

• valid contract is one that meets all of the legal requirements for a binding contract; enforceable in court
• An unenforceable contract is one that meets the basic legal requirements for a contract but may not be enforceable because of some other legal rule (statute of frauds, a rule that requires certain kinds of
• contracts to be evidenced by a writing)
• Voidable contracts are those in which one or more of the parties have the legal right to cancel their obligations under the contract (For example, a contract that is induced by fraud or duress is voidable (cancellable) at the election of the injured party ) injured party has the right to cancel the contract if he chooses
• Void contracts are agreements that create no legal obligations and for which no remedy will be given. Contracts to commit crimes, such as "hit" contracts, are classic examples of void contracts 9-

Status of apparent contract

Voidable

(Valid unless and until it is repudiated by the plaintiff.)

Status of apparent contract

Void

( Of no legal effect between the parties)

Unenforceable

( Valid on its face but has a technical defect. No legal action can be brought on it)

Illegal

( Breaks the law or contrary to public interest. Generally treated as void)

Sources of Law

Uniform Commercial Code- Art. 2

• The Uniform Commercial Code, or UCC, is statutory law in

every state.

• Sale of Goods
• Tangible, Moveable Property

Common Law

• The common law of contracts is court-made law that, like all

court-made law, is in a constant state of evolution

• Services
• Intangible Goods
• Real Estate

“Noncontracts”

• the law enforces an obligation to pay for certain losses or benefits even in the absence of mutual agreement and exchange of value.
• Quasi-Contract: Requiring all the elements of a binding contract before contractual obligation is imposed can cause injustice in some cases. One person may have provided goods or services to another person who benefited from them but has no contractual obligation to pay for them because no facts exist that would justify a court in implying a promise to pay for them.
• Jones paints Smith's house by mistake, thinking it belongs to Reed. Smith knows that Jones is painting his house but does not inform him of his error. Is this binding??
• There are no facts from which a court can infer that Jones and Smith have a contract because the parties have had no prior discussions or dealings.
• however, enabling Smith to get a free paint job and Perkins to avoid paying for the goods he resold would unjustly enrich them at the expense of Jones and Thomas
• The courts imply as a matter of law a promise by the benefited party to pay the reasonable value of the benefits he received.
• This idea is called quasi-contract (or contract implied in law) because it represents an obligation imposed by law to avoid injustice, not a contractual obligation created by voluntary consent
• In general, however, quasi-contract liability is imposed when one party confers a benefit on another who knowingly accepts it and retains it under circumstances that make it unjust to do so without paying.
• So, if Jones painted Smith's house while Smith was away on vacation, Smith would probably not be liable for the reasonable value of the paint job because he did not knowingly accept it and because he has no way to return it to Jones

Promissory Estoppel

• In numerous situations one person may rely on a promise made by

another even though the promise and surrounding circumstances are not

sufficient to justify the conclusion that a contract has been created

because one or more of the required elements is missing.

• Elements: A promise that the promisor should foresee is likely to induce

reliance, reliance on the promise by the promisee, and injustice as a result

of that reliance

• in Ricketts v. Scothorn, a grandfather's promise to pay his granddaughter

interest on a demand note he against him after she had quit her job in

reliance on his promise

• The Nebraska Supreme Court acknowledged that such promises were

traditionally unenforceable because they were gratuitous and not

supported by any consideration, but held that the granddaughter's

reliance prevented her grandfather from raising his lack of consideration

defense.

• They said that persons who made promises that produced such reliance

were estopped, or equitably prevented, from raising any defense they had

to the enforcement of their promise

Assignment

6. Elizabeth Balano owned a building. In 1990, David Paufthausen, a carpenter

and an artist, asked Balano for permission to renovate her building

because he hoped to convert the building into a fine art print shop. Balano

approved Pauffhausen's request, with the understanding that he would

pay her $60.00 per month after he "got the business up and running."

Over the course of Paufthausen's extensive renovations, Balano at various

times signed notes to various town authorities approving his work and

allowing him to procure permits. She also gave him a signed note in

1991stating: "ToWhom it may Concern-David can use my house as long as

he needs it" The building was revamped sufficiently to allow Paufthausen

to hosttwo art shows in 1994and 1995.Balano died in October of 1995.

Her personal representatives offered Paufthausen one year of free rent,

after which his rent would be $60 per month, but for no definite term.

Paufthausen rejected the offer, presumably because the tenancy after the

one-year period could be terminated at will. Pauffhausen filed a claim for

$12,300 Contracts had done on the building. Does Pauffhausen have any

basis for his claim?

Assignment Solutions Ch.

• 5. Yes. This case fits squarely into the frame of promissory estoppel. TWA

repeatedly promised to place Chow on a priority list with Singapore, and in

doing so must have realized that their promises would induce Chow's

failure to make arrangements with Singapore himself. It was reasonable

for Chow to rely on TWA's promise. TWA had superior communications

ability and was familiar with the policies of other airlines with regard to

priority lists. Hoo Song Chow v. Transworld Airlines , 544 N.E.2d 548 (Ind.

Ct. App. 1989).

• 6. Yes. Although Elizabeth's note that "David can use my house as long as

he needs it" does not constitute an express contract, a number of

communications indicated a contract implied in fact. Elizabeth’s consent to

and support for David's renovations, her statement that when he had it

functioning as a print shop “he could pay her $60.00 a month rent," and

her written statement that David could “use my house as long as he needs

it,” are all consistent with the idea of a contract. Paffhausen v. Balano , 708

A.2d 269 (Maine Sup. Jud. Ct. 1998).