Contracts

Contracts is one of the great common law subjects. Today, the law of contracts is largely based on case law that has been established over the last century and a half.

The Uniform Commercial Code, or "UCC", represents somewhat of a departure from the common law of contracts. Article II of the UCC, which was written in order to make commercial law uniform among the fifty states, is a statutory code that covers the sale of goods. However, the common law still plays an important role in determining the applicable law here as well. Article II of the UCC does not cover every contract issue that may arise, and where Article II does not cover a contract issue, the common law governs. 

Types of Contracts

Unilateral Contract: A unilateral contract is a promise in exchange for a performance. For example: 

Adam says to Bert, “I will give you $1,000 if you swim across the Hudson River in January.” This is a unilateral contract. Adam is making a promise that Bert can only accept by performing. Once Bert performs, Adam owes Bert the money.

Bilateral Contract: The more common type of contract, the bilateral contract, occurs when a promise is offered in exchange for another promise. In this case, each side owes a duty to the other party. For example:

Jack promises Jill that he will give Jill $10 if Jill, in exchange, promises to go up the hill to fetch a pail of water. Jill agrees. This is a bilateral contract because Jack owes a duty to Jill, to give her $10 and Jill owes Jack a duty, to go up the hill and fetch the pail of water. 

Basic Elements of a Contract

The three basic elements to the formation of any contract are: offer, acceptance and consideration.

Offer
The vast majority of contracts are formed by offers and acceptances of those offers. The offer is legally significant because it establishes the power of acceptance in the offeree. Therefore, if an offer is made, the offeree has the power to conclude a bargain and bind the offeror by accepting the offer in an appropriate manner. 

An offer is an expression of willingness to enter into a bargain made in a way so that the offeree understands that he can accept the offer and conclude a bargain. In order for an offer to be adequate, the offer must demonstrate intent to enter into a bargain and definiteness of terms.
Statements of interest in negotiating for a contract and statements of willingness to potentially enter into contracts are not offers. Examples of statements that are not offers include “Would you pay . . .?” “I quote you a price of . . .” “I would consider . . .” etc. An offer must demonstrate intent to be bound. Examples of offers include: “I will sell you…” and “I will buy…”

It should be noted that, contrary to popular belief, advertisements in newspapers, radio or other media outlets generally DO NOT constitute offers. Thus, if a store advertises suits for $200 in a newspaper ad, the store can generally cancel the sale at any time and refuse to sell the suits for that price.

Acceptance
An offer can be accepted at any time while the offer is still valid. An offer becomes no longer valid when it is revoked by the offeror, when it is rejected by the offeree, or when its time period elapses.

An offer can generally be accepted in any reasonable manner. This can be verbal, or, in some cases, by starting to perform. If an acceptance letter is sent through the mail, the offer is deemed accepted as soon as the letter is sent. Note that acceptance for unilateral contracts can only be accomplished by performance.

Consideration
The rule of consideration is what sets the law of contracts apart from the rules of gifts and other property transfers. To be enforceable, a contract must call for each party to give up something of value. Otherwise, the arrangement is not a contract, but a gratuitous (free) promise. A gratuitous promise is not enforceable in court. This rule of consideration is also sometimes known as the “mutuality of obligation” rule. For example: 

Ben promises to wash Jerry’s car in exchange for Jerry’s promise to pay him $500. Ben and Jerry have each bargained for the other’s promise. Ben considers his promise to wash Jerry’s car as the price he needs to pay to get Jerry’s promise to pay him $500, and Jerry considers his promise to pay $500 as the price he has to pay for Ben’s promise to wash his car. This exchange of promises is consideration. 

Uncle promises Nephew that he will pay Nephew $5,000 if he does not swear in public or smoke or drink or gamble until he reaches age 21. This promise is enforceable. Even though Uncle did not actually receive any economic benefit from Nephew’s good behavior, the fact that Nephew agreed to give up behavior that he was legally allowed to engage in, this is consideration. 

Contract Defenses

Once you have determined that a contract has been formed you must determine whether or not the contract is unenforceable by virtue of a defense related to the formation of the contract. There are several possible defenses related to the formation of a contract, including: 

Indefiniteness: The contract terms are not clear enough to be enforceable.

Mistake: One or both parties were mistaken as to a basic assumption behind the contract.

Misrepresentation and nondisclosure: One party committed some sort of a fraud in negotiating for the contract.

Duress and undue influence: One party was forced or coerced into signing the contract.

Unconscionability: The contract’s terms are so unfair that it would be unjust to enforce them.

Statute of frauds: Some contracts must be in writing to be enforceable. For these contracts, if they are not in writing, a court will not enforce them.

Lack of capacity: Minors and certain other incompetent people are generally not able to make binding contracts.

Illegality: A contract that calls for an illegal performance is unenforceable.

Contract Remedies

Once you have determined that a valid contract has been established and that there has been a breach of that contract, you must decide what remedy the damaged party will receive for the breach.

On the other hand, if no contract has been formed, you must determine whether or not one party benefited from his contact with the other party and whether or not the party who provided the benefit should be repaid for the benefit he provided.

There are two kinds of remedies in contract law: 

(A) Monetary Damages

Monetary damages means money that the court awards the victim of a breach of contract. There are 3 basic types of monetary damages, any one of which can be awarded by a court in a breach of contract action:

1. Expectation Damages: These damages seek to put the aggrieved party in the position that she would have been in had the contract been fulfilled. In other words, the person who breached the contract has to pay the victim of the breach enough so that the victim has as much money as she would have had if the contract had been fulfilled. For example:

        Sunshine offers to sell Squeeze Me one thousand bushels of oranges for $5 per bushel to be delivered on April 1st. Squeeze Me agrees. On March 31st, the price of oranges reaches $9 per bushel and, the next day, Sunshine refuses to deliver the oranges to Squeeze Me. Squeeze Me is now the victim of a breach of contract. The court, in order to put Squeeze Me in the position they would have been in had Sunshine not breached, will award expectation damages. In this case, expectation damages will be measured by taking the market price of the oranges, $9 per bushel, and subtracting from it the contract price, $5 per bushel. Therefore, given the market price of oranges, Squeeze Me would have had $9,000 worth of oranges had Sunshine not breached. Taking the $9,000 value of the oranges and subtracting the $5,000 that Squeeze Me would have paid for the oranges, expectation damages will come to $4,000.

            Expectation damages are the preferred contract remedy and will generally be awarded unless there is a reason that they cannot be awarded.

        2.  Reliance Damages: Reliance damages are awarded to give back to the victim of a breach whatever money or service was put in as a result of the contract. These damages serve the goal of putting the victim of the breach in the position he would have been in had the promise not been made in the first place. For example:

        Tony promises to give Cornelius $10,000 to buy a car. In reliance on the promise, Cornelius spends $9,000 buying a car. Tony then reneges on the promise. In this case, because it was foreseeable that Cornelius would rely on the promise, the courts will award him reliance damages in the amount of $9,000, thereby putting him in the same position he would have been in had the promise never been made.             

    3. Restitution: Restitution is ordered by a court in cases where the awarding of some money is necessary to prevent “unjust enrichment.” It involves forcing the beneficiary of a performance to pay for something, even if that payment would not ordinarily be enforceable under regular contract law. Restitution is typically awarded where a party has given another party a service or item with a reasonable expectation of being paid for it, but there is no enforceable contract under which the giver of the item can collect from the beneficiary. Courts will typically award the giver of the performance reasonable value for the service in such a case. 

(B) Specific Performance

Specific performance is an equitable remedy where the court orders the breaching party to actually perform on the contract. In general, money damages are the preferred contract remedy and thus, forcing a party to actually perform under a contract is not usually done. However, there are some cases in which a court will order a party to perform if monetary damages would not be adequate to give the party what he or she expected under the contract. For example, if the contract calls for the sale of a unique painting and the seller breached the contract, the court may order the seller to turn over the painting. This is because awarding money would not really compensate the buyer for what he was supposed to get under the contract.