What is a contract?
A contract is a promise or set of promises for the breach of which the law provides a remedy, or the performance of which the law imposes a duty (Rest. 1). A contract is an exchange relationship created by oral agreement, between two or more persons, containing at least one promise, and is enforceable at law.
Definition of “contract”
· Exchange relationship
§ Parties bind themselves to each in contractual relationship
§ Purpose is exchange- reciprocal nature:
· Each party gives up something to get something
· Created by oral agreement
§ Doesn’t need to be written down, but harder to prove if not written
· Between two or more persons
§ Must be voluntary, consensual
§ Acting with free will and intent to be bound
· NOT subjective (i.e. no requirement for minds to be in accord)
· Objective: one party must be reasonably lead to understand that agreement was reached
o At least one promise
· Commitment for the future, some assumption of liability lasting beyond the instant of agreement
o If not lasting liability, nothing to enforce
· Undertaking to act or refrain from acting in specified way at some future time
o Implied- inferred from conduct or circumstances of transaction
· Enforceable at law
§ If contract has been entered into and breached, courts can enforce by giving remedy for breach
§ Primary remedy for breach is NOT necessary specific performance- typically compensatory damages to disappointed party (financial loss)
Restatement §1: A contract is a promise or a set of promises for the breach of which the law provides a remedy, or the performance of which the law recognizes a duty.
Bilateral and Unilateral Contracts
o Exchange of the offeror’s promise for an offeree’s act
o One party promises to do something, other party is free to act or not
§ Not an exchange of promises, but one party makes the promise and the other simply has to act; promisee is NOT BOUND by the promise
o ACCEPTANCE THROUGH ACTION
§ Offeree must know about the offer in order to accept (ex. Offeree must know that prize is being offered for finding lost dog- if didn’t and brings dog back, doesn’t get the reward)
o Once performance has occurred, offer has been accepted and cannot revoke (but performance must be beyond mere preparations)
o If performance has commenced but is not yet complete, the offer becomes temporarily irrevocable
§ HINT: look for an offer of an award or reward!
· Bilateral Contracts:
o Each party exchanges promises
o A promise of future performance
IS THERE AN AGREEMENT?
The Objective Test and Common Law Offer and Acceptance
Courts examine and give legal effect to the outward manifestation of the parties, regardless of what either party may have privately or secretly intended. What would a reasonable person in the situation of the offeree understand by the words used and conduct engaged in by the offeror?
Mutual assent: both parties must intend to enter the contract and must agree with the other to do so on mutually acceptable terms
· Must employ outward signals (words, actions) that are observed and given meaning by another
· Examples of Lack of Intent in a Letter of Intent:
o Letter that says “subject to” a subsequent formal action (like a purchase or dealings) likely means NO intent to be bound
o Document says “further negotiation necessary” likely means NO intent for document to be binding
o If document/words reference procedure that must be followed before closing, NOT binding
Objective Theory of Contracts
· Objective test: Subjective mind of parties does not have anything to do with contract formation, therefore
o Agreement must be apparent from the manifestation of assent, reasonable interpreted, a contract has been formedà doesn’t matter what parties “thought” or “believed”
· Now, a little subjective but still mostly objective (“meeting of minds” not required)
§ Manifestation of assent determined by:
· Reasonable person in position of the party to whom the manifestation was made, i.e. HOW the words/actions should have been understood if interpreted reasonable in the context of the transaction by a person with the knowledge and attributes of the agreeing party
Restatement §21- Intention to be legally bound
· Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.
· (a) Manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties.
· (b) manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and though moment of formation cannot be determined
· Rules of Offer and Acceptance
o Determines if a contract came into existence at all where parties dispute whether their communications resulted in the formation of a contract
o Even if contract formed, determination of which communication constituted offer and which was the acceptance can resolve disputes about content of the contract
o Rules are relevant to determination of which state’s law governs the contract or which state’s courts have jurisdiction to hear the dispute
o Offeror- makes the offer
o Offeree- person to whom the offer is made
§ Offer creates power of acceptance in offeree to signify acceptance of the transaction on the proposed terms
§ Rejects- offer lapses, no contract
§ Counteroffer- terminates original offer, and role reversal (offeree becomes offeror)
Article 2 of the Uniform Commercial Code applies is it is a transaction in goods
· (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
· (2) An agreement sufficient to constitute a contract may be found even though the moment of its making is undetermined.
· (3) Even though one or more terms are left open a contract for sale
ce of revocation that clearly indicates offeror is no longer willing to enter contract Rest. §42
§ Indirect: Offeror takes action clearly inconsistent with continued intent to enter contract and offeree obtains reliable information of the action
· Ex. Offeree learns from a reliable source that a property has been sold to someone else Rest. §43
· Death or incapacity of offeror: **exception to objective theory- offeree doesn’t need to know! Terminates power to accept Rest. §48
§ Ex. A mails letter to revoke offer on July 1. B accepts offer on July 2. B receives notice of revocation on July 3. Revocation not valid.
· Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.
· (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.
· (3) Acceptance by a promise requires that the offeree complete every act
essential to the making of the promise.
Offeree’s manifestation of assent:
o Volitional act
o Performed freely
o With intent to enter a contract on the terms of the offer
§ Determined objectively: would a reasonable person in the offeror’s position have understood the manifestation as an acceptance?
§ Can only be accepted by the offeree, the person in whom the offeror intended to create the power of acceptance
o Remember, the offeree must accept in the manner and within the time specified by the offeror (the offeror’s terms)
Restatement §30: If method of acceptance not specified, may be given in any reasonable method under the circumstances
· If time is not specified, reasonable time depends on the nature of the contract proposed, usages or business, and other circumstances of the case
Modes of Acceptance
· Acceptance of a unilateral contract: full performance of the requested actà don’t need to communicate intention to act, just need to communicate that performance has been completed
o NOTE: once offeree has begun performance of contract (part performance) offeror’s power of revocation is stayed for a reasonable period
Restatement §51: Effect of partial performance without knowledge of offer
Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept
by completing the requested performance