Contracts A – Wellman – Wayne State University – Fall 2012
A. Legal rules allocate entitlements. A makes an offer which entitles B to either counter, decline, or accept. Once B does one of these, A is entitled to certain responses.
B. Contract: An agreement between two or more parties that is a common understanding as to something that has to be done in the future by one or all parties.
1.Contract as defined by R2d: 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 as a duty.
2. Contracts can be written documents or they can be implied at every stage.
3. Legal Effect: Creates obligations for which some sort of legal enforcement will be available if performance is not forthcoming as promised.
a. It is possible to become legally obliged to a person without entering into a contract (e.g., restitution or promissory estoppel).
b. Even if a contract is formed, there are ways out of it (e.g., the other party engaged in bargaining misconduct, like fraud, duress, or undue influence).
c. Three Elements to a Contract:
2. Agreement-as-written (may not correspond with agreement-in-fact)
3. Rights and duties created by the above two elements
C. The Sources of Contract Law
1. Judicial Opinions: Judgement-made law, rules distilled from a composite of court decisions in prior cases.
2. Statutory Law: State statues regarding contracts.
3. The Restatements: A secondary but very persuasive set of rules set forth by the American Law Institute regarding contracts. “Black letter” rules of the general rules. However, these are not laws; they are guidelines that may be adopted by certain judges or states.
4. Legal Commentary: Explanation of the Restatement, written by law professors. Again, these are not law, but they can be helpful in determining and understanding the Restatements and current laws.
5. International Commercial Law: United Nations, conventions on International Sales of Goods, etc.
D. Perspectives of Contract Law:
1. Classical: Clear rules over general standards; indifferent to issues of morality or social policy–reflects laissez faire economics and limited government interference in private transactions.
2. Modern: More attentive to needs of marketplace, less rules than standards; more responsive to issues of social justice and economic power–reflects influence of Universal Commercial Code (UCC) and case law.
3. Formalist Approach: Set of universal rules distilled from decided cases with no need to explain or justify, no use for moral or political values.
4. Sociological Approach: Rules of law evaluated on basis of the social interests they serve.
5. Realistic Approach: Findings of fact and application of rules are affected by personality, point of view, interests, and goals of decision-maker. The formation of legal rules should be the result of a conscious application of all relevant knowledge of human affairs rather than a process of “discovering” neutral principles from which abstract rules can be deduced.
6. Economic Approach: Efficiency–1) “positive”/empirical argument = legal rules tend, in general, to reach “efficient” outcomes and 2) “normative” claim that “inefficient” rules of law should be modified in the direction of greater efficiency.
E. The Lawyering Perspective?
II. CONTRACT FORMATION: The Basis of Contractual Obligation: Mutual Assent and Consideration
A. Two conditions for an enforceable promise (must have 1 of the 2):
2. §90 reliance (promissory estoppel)
B. Two differences between classical law and modern law:
1. Classical contract law showed a preference for clean rules (“legal formalism”) over general standards (“reasonableness”).
2. Traditional contract law was relatively indifferent to issues of morality or social policy presented by contract cases.
C. Mutual Assent: Bargaining through offer and acceptance, ultimately either reaching a deal (“a manifestation of mutual assent”) or breaking off negotiations.
1. A Contract can be formed, however, even when the parties do not engage in bargaining. (E.g., family members, friends, etc., even though they did not go through formal negotiation, may still result in a contract. “non-commercial transactions”)
2. There also can be legal obligations despite there being no contract.
3. Contract obligations can be relieved if the other party has engaged in some form for bargaining misconduct.
4. Intention to be Bound: The Objective Theory of Contract
a. “Meeting of the minds” vs. “mutual assent”
1. “Meeting of the minds” is subjective; focuses on the actual intention of the party, rather than that party’s conduct.
2. “Mutual assent” is objective; focuses on the conduct of the parties from the perspective of a reasonable person rater than their actual, subjective intentions.
b. Signing isn’t necessarily required for there to be a valid and enforceable contract.
c. Post-signing regrets do not relieve you of the contract’s obligations.
d. Case: Ray v. Eurice Bros, Inc. This case showed two important elements:
1. Wording is important, and so is timing.
2. Expectations of the parties – a certain circumscribed set of expectations.
5. Bilateral Contracts: an exchange of promises – a commitment to some course of action to be undertaken in the future, and the commitment is on both sides of the contract (by both parties). Also known as “offer and acceptance.” This binds both parties once the acceptance is given. Both parties are both promisor and promisee since the offeree’s communicated acceptance also constitutes a promise to perform.
1. The Process of Negotiating:
a. The parties engage in a period of pre
1. Offeree can withdraw at any time before completing promise because acceptance = completion.
d. R2d §45: When offeree tenders OR begins the requested performance under a unilateral contract, the offeror becomes bound and cannot revoke offer so long as the offeree completes performance in accord with the terms of the offer.
e. Unilateral vs. Option Contracts
1. Unilateral = no promise involved
2. Option Contract: There is an offer to sell and offeree buys the option from the offeror which buys their promise not to revoke the offer for a period of time.
a. The promise of an option contract is built in with a second promise not to revoke the first promise.
1. Promise to buy/sell under specified terms, and
2. Promise to perform the first promise OR not to revoke first promise.
3. When B’s performance of Promise 1 begins, Promise 2 kicks in and binds A. The promise can only be revoked if B is given reasonable time to accept A’s revocation.
b. Option offers are usually two-tiered.
Tier 1: The option contract components:
Tier 2: A promise not to revoke the offer.
c. The longer the option (the longer the amount of time that the promisor says the promise will not be revokable), the more valuable the contract will be.
d. The promise standing by itself is not enforceable.
e. Money or performance will constitute an option contract.