Chapter 9

Nature of Traditional

and Online Contracts

The movement of the progressive societies has hitherto been a movement from status to contract.

Sir Henry Maine

I. Teacher to Teacher Dialogue:

I like to open the overview of contracts law by identifying two main teaching objectives from this chapter. The first objective is to introduce the notion of apparent versus hidden “parties” to a contract. By apparent, of course, we are talking about the actual participants or signatories to the contract. These are the persons or entities whose rights and obligations we are about to examine and ascertain. By “hidden” parties, I stress the point that a contract is not, in the end, all that private. What elevates a bare agreement between two or more private parties into a legally recognized contract is the willingness of the public, through its courts, to enter the fray and enforce the contract rights and duties. Thus, the first objective is to interject the notion of public policy participation and support of the contracting process.

The second objective is to introduce students to some of the working vocabulary of contract law. As is the case with all specialized forms of endeavor, a contract has a language all its own, and a basic knowledge of some of the key terms used in contracts is essential. The key contract terms used tend to be dichotomous, and you can use that dichotomy as a learning tool. Take, for example, the number of parties to a contract. At least two parties are required in all contracts. One of those two parties has to initiate the contract formation process. The person starting the mutual assent process with a promise is the offeror, the other person is the offeree. Next, look at the dichotomy of the promises being used: Is it a bilateral promise or is it a promise for a unilateral act? Have these promises been expressly made or can they somehow be implied from the circumstances? Does the form that this agreement is taking require certain formalities, such as a negotiable instrument, or can it be done in any informal manner chosen by the parties as long as the elements of contract are met?

Once the parties have formed an agreement, are the performance obligations already fully met or executed, or are there still remaining executory performance obligations on the part of one or more of the parties? In addition, you may have to examine issues of enforceability. If all the elements are in place, the agreement is now considered a valid contract. If one or more of the essential elements is missing, the agreement is not raised to the status of contract and may be legally void. There are also certain situations where a contract is created, but it will not be enforced. If a legal defense is found to be in place, such as a writing requirement, the contract may be an unenforceable contract. Sometimes, certain persons are given a legally recognized power to avoid a contract after it has been entered into. These contracts are voidable, and examples of this sort of situation can be found in cases involving young people with limited mental capacity.

II. Chapter Objectives

· Define contract.

· List the elements necessary to form a valid contract.

· Distinguish between bilateral and unilateral contracts.

· Describe and distinguish between express and implied-in-fact contracts.

· Describe and distinguish among valid, void, voidable, and unenforceable contracts.

III. Key Question Checklist

· What body of contract law will control the formation, rights, duties, and remedies of this agreement?

· Are the four elements of a contract in place?

· How is this contract defined? Formal or informal? Executed or executory?

· Are there any defenses that make the contract unenforceable?

IV. Text Materials

Contracts are the basis for most of our activities. They are voluntarily entered into and the terms become a form of private law between the parties. Most are legally enforceable, with the breaching party being subject to damages ordered by the courts.

Section 1: Definition of a Contract

A contract is an agreement that is enforceable by a court of law or a court of equity.

Parties to a Contract – The offeror makes the offer to the offeree. The contract is created when the offeree accepts the offer.

Elements of a Contract – Enforceable contracts require that there be an offer and acceptance, which form an agreement between the parties. To be a contract the agreement must show mutual assent, consideration, capacity, and legality.

Defenses to the Enforcement of a Contract – There are two defenses to the enforcement of a contract: genuineness of assent and writing and form.

The Evolution of the Modern Law of Contracts – This fits in nicely with the notions of private versus public participants in the contract process as discussed in the teacher-to-teacher dialogue at the beginning of this chapter. It also allows you to get students thinking early on about the “battle of forms” and how the extensive use of forms has severely limited the real bargaining power of the average lay person.

Section 2: Sources of Contract Law

The Common Law of Contracts – This source of contract law developed from primarily state court decisions that became precedent.

The Uniform Commercial Code (UCC) – The UCC has been adopted, in whole or in part, by every state, and takes precedence over common law. Article 2 deals with sales and Article 2A deals with leases.

The Restatement of the Law of Contracts – The Restatement, currently in its second edition, is not law, but merely serves as guidance to the legal community.

Objective Theory of Contracts – This theory applies the reasonable person standard to contracts.

Case 9.1: City of Everett Washington v. Mitchell

Facts: Al and Rosemary Mitchell owned a small secondhand store. At an auction, they purchased a used safe and were told by the auctioneer that the inside compartment of the safe was locked and that there was no key for it. The safe was part of Sumstad Estate. The Mitchells had the safe opened, and found over $32,000 in cash in it. The locksmith who opened the safe called the City of Everett Police, who impounded the money. The City of Everett commenced an interpleader action against Sumstad Estate and the Mitchells. The trial court entered summary judgment in favor of Sumstad Estate. The court of appeals affirmed. The Mitchells appealed.

Issue: Was a contract formed between the seller and buyer of the safe?

Decision: Yes.

Reason: The state supreme court held that under the objective theory of contracts, a contract was formed between the seller and buyer of the safe. The decision was reversed in favor of the Mitchells.

Uniform Electronic Commerce Act Adopted – The Uniform Computer Information Transactions Act (UCITA) establishes uniform legal rules for the formation and enforcement of electronic contracts and licenses. The Uniform Electronic Transactions Act (UETA) provides a legal framework for electronic transactions.

Section 3: Classifications of Contracts

Bilateral and Unilateral Contracts – A bilateral contract is a promise for a promise. The exchange of promises creates the enforceable contract. A unilateral contract is one where the offer can be accepted only by the performance of an act by the offeree.

Incomplete or Partial Performance – Offers can be revoked by the offeror at any time before the offeree has begun performance.

Express and Implied-in-Fact Contracts – Express contracts may be either oral or written, whereas implied-in-fact contracts are implied by the activities of the parties. Implied-in-fact contracts require that the plaintiff supply property or services to the defendant that they expected to be paid for, and that the defendant had an opportunity to reject the property or services and failed to do so.

Case 9.2: Wrench LLC v. Taco Bell Corporation

Facts: Rinks and Shields created a “Psycho Chihuahua” cartoon character that they promoted through their company, Wrench LLC. They were approached by Taco Bell to adapt the character for use in their advertising. Later, the idea was adjusted to include a real dog that was digitally manipulated. Rinks and Shields created several ads, including one in which a male dog passes up a female dog to get to the Taco Bell food. Taco Bell did not enter into an express contract with them, but, a few weeks later, hired Chiat/Day to produce the same style ads, one of which was the male dog passing on up a female dog to get the Taco Bell food. Wrench, Rinks, and Shields sued for breach of an implied contract. The District Court granted summary judgment to Taco Bell, and the plaintiffs appealed.

Issue: Did the plaintiffs state a cause of action for the breach of an implied-in-fact contract?

Decision: Yes.

Reason: The U.S. Court of Appeals held that Taco Bell understood that if they used the “Psycho Dog” concept, it would have to pay the plaintiffs. They found that there was strong circumstantial evidence that Taco Bell was using the concept, and reversed and remanded the case back for trial.

Quasi-Contracts (Implied-in-Law Contracts) – This is an equitable remedy that allows a court to award monetary damages to prevent unjust enrichment and unjust detriment in the case where there is no enforceable contract between the parties.

Formal and Informal Contracts – Contracts may be formal, such as negotiable instruments, letters of credits, recognizances, and contracts under seal, or informal or simple contracts, like leases, sales contracts, and service contracts. The distinction is that formal contracts require a special format or method.

Valid, Void, Voidable, and Unenforceable Contracts – Valid contracts meet all the essential elements and are enforceable by at least one of the parties. A void contract has no legal effect, and neither party can enforce it. Contracts where at least one party can avoid their contractual obligations are voidable contracts. If there is a legal defense to the enforcement of a contract, it is called an unenforceable contract, but the parties may choose to voluntarily perform the contract.

Executed and Executory Contracts – Contracts that have not yet been fully performed by either side are called executory contracts; those that have been completed are executed contracts.

Section 4: Equity

Equity is resorted to when monetary damages are not sufficient or are not a proper remedy.

Equity Saves Contracting Party – This explores a situation in which the court applied equitable remedies to protect the interests of lessees.

The United Nations Convention on Contracts for the International Sale of Goods – The CISG applies to contracts for the international sales of goods. The buyer and seller must have their places of business in different countries. The United States, as well as many other countries, has ratified the CISG.

V. Answers to Business Law Cases

Bilateral or Unilateral Contract

9.1. The contract is a bilateral contract. A contract is bilateral if the offeror’s promise is answered with the offeree’s promise of acceptance. The court found that the agreement between Mr. Bickham and the bank on January 23, 1974, was a bilateral agreement. Bickham agreed to do his banking in return for the bank’s agreement to make loans at 7 1/2 percent. If Bickham had said “If you promise to loan me money at 7 1/2 percent, I will do all my banking with your bank,” the offer would have been to create a unilateral contract.

The court further held that bilateral contracts can only be altered with the consent of both parties and that the bank acted unilaterally in changing the interest rates on the loans. Therefore, the Appellate Court upheld the trial court’s ruling that the bank had breached its contract.

In addition, the court held that each of the subsequently executed notes were bilateral contracts. The court stated that although the agreement was silent at the time, it would impute a “reasonable time” into the agreement. Bickham v. Washington Bank & Trust Company, 515 So.2d 457 (La.App. 1987).

Implied‑in‑Fact Contract

9.2. Yes, an implied‑in‑fact contract can result from the conduct of unmarried persons who live together. An implied‑in‑fact contract arises where (1) the plaintiff provided property or services to the defendant, (2) the plaintiff expected to be paid for the property or services, and did not provide the property or services gratuitously, and (3) the defendant was given an opportunity to reject the property or services, but failed to

do so.

Here the plaintiff provided services while the defendant provided property. There is no more reason to presume that services are contributed as a gift. It is better to presume that the parties intended to deal fairly with each other. To hold otherwise would disproportionately enrich one partner at the expense of the other. Therefore, the court held that courts may inquire into the conduct of the parties to determine whether that conduct demonstrates an implied‑in‑fact contract. Marvin v. Marvin, 557 P.2d 106 (Cal. 1976).

VI. Answers to Issues in Business Ethics Cases

9.3. The contract is a unilateral contract. A unilateral contract is one in which the offer can only be accepted by the performance of an act by the offeree. Here, there is no contract until the offeree performs the requested act. The offer cannot be accepted by Chenard promising to get a hole‑in‑one. This would constitute a bilateral agreement. The court held that where Chenard, the offeree, shot a hole‑in‑one, he had accepted the offeror’s offer of a unilateral contract thereby obligating performance of the promise. Accordingly, the Appellate Court upheld the Superior Court’s ruling that Chenard is entitled to the car. Chenard v. Marcel Motors, 387 A.2d 596 (Maine 1978).

9.4. No, Winkle does not receive the profit-sharing bonus. Under the equitable doctrine of quasi‑contract, a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed between the parties. This doctrine does not apply where there is an enforceable contract between the parties. In this case, there was a written employment contract between the parties. Thus, for Winkle to be entitled to the profit‑sharing bonus the court must find that the written employment contract was altered in writing or by an executed oral contract.

Winkle testified that the agreement to receive profit‑sharing was an oral agreement. Thus, the question becomes whether the oral agreement was executed, i.e., fully performed. The court held that because Winkle had not been paid his salary and bonus, the contract was not executed. Accordingly the appellate court reversed the trial court’s holding that Winkle was entitled to his bonus. Winkle v. Family Health Care, P.C., 668 P.2d 208 (Mont. 1983).

VII. Terms

· bilateral contract—A contract entered into by way of exchange of promises of the parties: a “promise for a promise.”

· common law of contracts—Contract law developed primarily by state courts.

· equity—A doctrine that permits judges to make decisions based on fairness, equality, moral rights, and natural law.

· executed contract—A contract that has been fully performed on both sides: a completed contract.

· executory contract—A contract that has not been fully performed. With court approval, executory contracts may be rejected by a debtor in bankruptcy.

· express contract—An agreement that is expressed in written or oral words.

· formal contract—A contract that requires a special form or method of creation.

· implied-in-fact contract—A contract where agreement between parties has been inferred from their conduct.

· informal contract—A contract that is not formal. Valid informal contracts are fully enforceable and may be sued upon if breached.

· legally enforceable contract—If one party fails to perform as promised, the other party can use the court system to enforce the contract and recover damages or other remedy.

· objective theory of contracts—A theory that says the intent to contract is judged by the reasonable person standard and not by the subjective intent of the parties.

· offeree—The party to whom an offer to enter into a contract is made.

· offeror—The party who makes an offer to enter into a contract.

· quasi- or implied-in-law contract—An equitable doctrine whereby a court may award monetary damages to a plaintiff for providing work or services to a defendant even though no actual contract existed. The doctrine is intended to prevent unjust enrichment and unjust detriment.

· Restatement of the Law of Contracts—A compilation of model contract law principles drafted by legal scholars. The Restatement is not law.

· unenforceable contract—A contract where the essential elements to create a valid contract are met, but there is some legal defense to the enforcement of the contract.

· Uniform Commercial Code—Comprehensive statutory scheme that includes laws that cover most aspects of commercial transactions.

· unilateral contract—A contract in which the offeror’s offer can be accepted only by the performance of an act by the offeree: a “promise for an act.”

· valid contract—A contract that meets all of the essential elements to establish a contract: a contract that is enforceable by at least one of the parties.

· void contract—A contract that has no legal effect: a nullity.

· voidable contract—A contract where one or both parties have the option to avoid their contractual obligations. If a contract is avoided, both parties are released from their contractual obligations.

 

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