Contracts
-
-
Consideration
o Bargained for change in your legal standing
o If there has been a detriment to both sides; there is legal consideration
▪ Even if a profit is made on an item there is still a “loss” because the item is still
given up for money
Form of the contract
o A contract is not always required to be in writing
▪ Sometimes things are taken on credibility
• Secondary problem in this is that certain contracts must be in writing
o If you want full recovery
• Remedy of law
o Only foreseeable damages will be awarded
o Compensatory damages
▪ In a contract action the only damages you’ll receive are
compensatory economic damages
• You’ll only get what’s in the contract (the
benefit of the bargain)
o What was expected at the time of the
formation of the contract
▪ Unless there is a tort
• Fraud
o At the time of the fraud you knew the
action to be false
o Rolling back the odometer as an
example
• Misrepresentation
o An honest mistake
o No knowledge of the mistake
• Fraud will get punitive damages,
misrepresentations will get damages
▪ There are times when the judge will give an equitable
decision with his/her power of equitable discretion
o Full recovery items (statutes of fraud)
▪ In place because it is too easy to be dishonest
• Contracts for the sale of land
• Any interest in land that is greater than month
to month
• Contracts to answer for the debt of another
o Don’t cosign on loans unless you LOVE
them
o All partners in business are cosigners in
the business
•
▪
▪
▪
Contracts for the sale of goods over $500.00
o Not services
• Contracts not capable of being performed in
one year
o Lifetime contracts can be oral
• Contracts in contemplation of a marriage
o Pre-nuptial agreements
• Divorce proceedings
o Marriage settlement agreement (MSA)
▪ Binding agreement between
the ex-spouses
▪ MSA do not relieve
responsibility to a third-party
creditor
Rules of writings
• Any documentations listing the essential terms
signed by the person denying the existence of
the agreement was.
o Can be a cocktail napkin
Parole Evidence Rule (PER)
• Where the parties to a contract express their
agreement in a writing, with the intent that this
is final manifestation of the deal, any other
writings made prior to or at the same time of
those writings are inadmissible to change the
terms of the deal.
o Only loophole, if a prior document can
explain an ambiguity it will be examined
Communication in writing should be worded like it is
going to be read in court
Contracts (cont.)
-
Capacity
o Minors
▪ Contracts with a minor are voidable at the option of the minor
• Don’t deal with minors when it comes to business
▪ If dealing with a minor for the necessities of life
• Food, shelter and clothing
• The court will deem that you have a quasi-contract
o A judge has discretion to look at the deal and accept it or
modify it as he/she sees fit.
• There are some potential remedies
o Not automatic
• Exception
o If the kid uses a fake ID (Fraud) you can sue
▪ Can be awarded wear/tear and depreciation
o Intoxicated/Drugged parties
▪ Contract can be voided because there still has not been a thoughtful agreement
• Mentally incompetent due to the effects of the substance abuse
o Insanity (sometimes retarded)
▪ Must be declared insane (decreed)
▪ Voidable at the discretion of the individual
• Represented by an officer of the court
• It will never make it that far after the decree is handed over
Third Party (non-parties)
-
-
Rights and obligations of non-parties
Assignments (of benefit)
o Example: Insurance payment goes directly to the MD vs. the insured
▪ It is assigned to the MD
▪ The rights do not change amongst the parties as long as there is a release (which
will not happen)
Delegations (Duties)
o Can only delegate a very general duty
▪ Cannot delegate artistic work without permission of the other party
Insurance
-
Liability
o
Workers Compensation
o Medical bills paid
▪ The company controls the medical care
o Loss of earnings
▪ By percentage
o
o
o
o
-
-
Disability rating
▪ Lump sum after determining the percentage
Only for unexpected risks of the job
Required by law
▪ Labor code
Covers people within the course and scope
▪ Doubt will almost always go to the employee
▪ Going to or from work is not course and scope
• Unless you perform ANY assistance for the job
o
Group Health
o Covered by ERISA (Employee Retirement Income Security Act) of 1974
▪ If you sue under ERISA you will only get benefit of the bargain
o Required for companies with 50 full time employees
▪ Per the ACA
o HMO
▪ Health Maintenance Org
▪ Will pay 70%-80%
• 60% if you go outside the HMO
▪ Tells the employee that he/she must go to a specific MD
• Cheaper
• Limited in coverage
o PPO
▪ Preferred Provider Org
▪ Will pay 70%-80%
▪ More expensive
• Can lower costs with a higher deductible
• Can lower costs with a co-pay
Four portions of an insurance company
o Sales
▪ Captive Agents
• Works for one company an agent can represent a principal
• When an agent makes a statement on behalf of a principal it is binding
to the principal
• Known and principal and agency law
▪ General Agents
• Represents multiple carriers
• Aka broker
o Need to be authorized to work on behalf of those companies
▪ Authorization = before the fact
o Ratification (captive and general)
▪ When an agent does something without previous
authority and the principal accepts payment
• After the fact
o
o
When you make a representation, it is making an offer
▪ Telling the company what you are insuring
If you misrepresent your offer, the insurer will attempt to not
pay
▪ Void ab intitio: Void from the beginning
o
-
Underwriting
▪ Assess the risk
o Operations
▪ Envelope stuffers
▪ Send correspondence
o Claims
▪ Function is to not pay the claim
• Not your friend
▪ They look at:
• Coverage
o If you were not truthful on what was insured
• Liability
o If I am at fault, they will not pay
• Damages
Must have an insurable interest
o Insured has a stake in the outcome
An insurance company must have communication with the named insured
o Additional insured do not have to be named.
Make sure that our subcontractors have POI before you bring them onto the project
o Make sure that the sub’s insurance has me named under the policy
Insurance Law
-
If the insurance doesn’t pay
o The most you can sue for is the benefit of the bargain
o When there is a breach of contract
▪ Sue for the breach and a tort of bad faith
Contracts (day three)
Undo Pressure
-
-
Physical duress
o Can’t muscle people into a contract
Emotional duress
o Threats cannot be used to influence a decision
o
Economic duress
o If you get a cartel together and force a price down it is illegal
Unclear Contracts
-
Fast maneuvering
o Adhesion contract
▪ Unfair portions can be removed by the judge
• Known as a “Blue pencil”
Breach of Contract
-
-
-
-
Entitled to damages
o Ensure that you have mitigated your issues prior to going into a lawsuit
▪ Must make an effort to cover the losses
o Will get compensatory
▪ Economic damages only
• Unless the cause of action is an insurance bad faith
o That would be a tort
Violating a covenant
o At the heart of the matter (benefit of the bargain)
▪ “you didn’t paint the house”
Violating a condition
o Supports a covenant
▪ “You didn’t get it done in three days.”
Rescission
o Unwinding the deal
Specific performance
o Forcing the judge to do something
▪ “Judge, I want him to pay me.”
Real Estate
-
If it’s not in writing, it doesn’t exist
Recording Statutes
o County recorder
▪ Deed shows title to the property
• Encumbrances (burdens) are listed on title
o Limitations on the property
-
-
-
-
-
Title can be held in many ways
o Start with a title search
▪ Done at the recorder’s office
o Title insurance
▪ Says that if the title is not correct, the title company will buy out or make it right
o Asset check
▪ To ensure that the loan doesn’t default
• Make sure that the funds are available
o Easements
▪ A right of use of a property
• Can be owned by the government
▪ A right of way
• Roadway to the street
o Best way is “fee simple absolute”
Covenants
o If they run with the land, it must be recorded on title
▪ Enforceable by the law
▪ Some historical covenants are no longer enforceable
▪ If the covenant is not bound by the land, it is an agreement between people
• Known as a condition
Zoning
o Public limitation on private use of land
o Public regulation of land
▪ R1
• Residential Normal
▪ R2
• Residential high density
▪ C1
• Commercial Normal
▪ C2
• Commercial high density
o Easier to change than covenants
o Infrastructure
▪ Those services needed to support the community’s use of land
Master plan
o Growth is projected and tends to be smarter
▪ Without the plan there are variances
• Variance means the land is being used contrary to the zoning
o Conditional Use Permit (CUP) helps existing businesses stay in
place even if the zoning changes over time
Multiple Listing Service (MLS)
o Let’s the realtors know that property is for sale
Escrow
o Collects the paperwork and cash between seller and buyer
-
PITI
o
o
o
o
-
-
-
-
-
Principal
Interest
Taxes
Insurance
▪ Payed into an impound account
Mello – Roos
o Temporary fee (tax) for the amount of strain placed on the infrastructure.
▪ New construction
▪ Payed via impound to city, state, county
HOA
o Make sure that you know the limitations of the HOA and myself
o Payments are ON TOP of Mello – Roos
Condemnation proceeding
o Government wants your land
▪ Gets around the Constitution
o Emanant Domain
Inverse condemnation
o When a project causes damage to the property
▪ Having the govt pay for it
Nuisance
o When you do something on your property that has an unreasonable interference on
another’s property
o It’s a tort
▪ The tort can defended like any other tort
Contract Law For Dummies®
Visit www.dummies.com/cheatsheet/contractlaw to view this book's cheat sheet.
Table of Contents
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: Introducing Contract Law and Contract Formation
Part II: Determining Whether a Contract Is Void, Voidable, or Unenforceable
Part III: Analyzing Contract Terms and Their Meaning
Part IV: Performing the Contract or Breaching It
Part V: Exploring Remedies for Breach of Contract
Part VI: Bringing Third Parties into the Picture
Part VII: The Part of Tens
Icons Used in This Book
Where to Go From Here
Part I: Introducing Contract Law and Contract Formation
Chapter 1: Getting the Lowdown on Contract Law
Grasping the Concept of Contract Law
Defining contract
Comparing different schools of thought on contract rules
Tracing contract law’s roots
Meeting the Key Players: Common Law, the Restatement, and the UCC
Exploring the common law: Tradition and precedent
Capturing general rules in the Restatement
Statutes: Supplanting common law with codes
Brushing up on the Uniform Commercial Code (UCC)
Applying state law in federal court
Applying different sources of contract law
Forming, Defending, and Interpreting Contracts: The Basics
Understanding contract formation
Checking out attack and defense maneuvers
Finding the terms of the contract and building contract-interpretation
skills
Examining Contract Performance, Breach, and Remedies
Recognizing breach of contract
Formulating remedies and establishing losses
Exploring the role of third parties in contract law
Practicing in the Real World of Contracts
Chapter 2: Let’s Make a Deal: Offer and Acceptance
Contract Formation: Getting a Handle on the Essentials
Forming a Contract: Promises, Offers, and Mutual Assent
Making a commitment by making a promise
Turning a promise into an offer by asking for something in return
Giving acceptance by giving or agreeing to give what was requested in
return
Assenting in action or thought: Objective manifestation versus subjective
intent
Forming contracts without words: The implied-in-fact contract
Determining Whether Language Constitutes an Offer
Distinguishing a preliminary inquiry from an offer
Ads, catalogs, and circulars: Distinguishing advertisements from offers
Deciding How Long an Offer Remains Open
Determining Whether the Offeror Can Back Out: Revoking the Offer
Making an option contract
Recognizing statutes that create an option
Relying on the offer
Deciding Whether the Offer Has Been Accepted
Acceptance must match the offer: The mirror-image rule
Acceptance is effective on dispatch: The mailbox rule
Looking at various forms of acceptance
Making Sense of the “Battle of the Forms” and UCC § 2-207
Deciding whether acceptance is conditional
Dealing with additional or different terms
Chapter 3: Sealing the Deal: The Doctrine of Consideration
Checking an Agreement for Consideration
Using a simple Q and A
Making a diagram
Making Distinctions about Consideration
Deciding whether it’s a bargain or a gift promise
Distinguishing between sufficient and adequate consideration
Detecting an Absence of Consideration
Spotting a phony: Nominal consideration
Applying the pre-existing duty rule
Finding past consideration
Tracking Down Illusory Promises
Dealing with satisfaction clauses
Analyzing output and requirements contracts
Spotting illusory promises in settlements
Too Many Blanks: Distinguishing Contracts from Agreements to Agree
Looking for Consideration Substitutes: Enforcing without Consideration
Evaluating the Recital of Consideration in a Contract Term
Chapter 4: Noting Exceptions: Promises Enforceable without a Contract
Examining Exceptions: When Contracts Aren’t Necessary
The Doctrine of Reliance: Looking for a Promise That Induced Action
Determining whether reliance applies
Limiting the remedy for breach of the promise
Deciding Cases That Test the Limits of Reliance: Promissory Estoppel
Deciding whether a charitable pledge is enforceable
Deciding whether a sophisticated party can claim reliance
Remembering that reliance doesn’t usually qualify as acceptance
The Doctrine of Restitution: Creating an Obligation to Prevent Unjust
Enrichment
Battling unjust enrichment with the implied-in-law contract
Determining when a court is likely to find unjust enrichment
Sorting out restitution in a material breach
Part II: Determining Whether a Contract Is Void, Voidable, or Unenforceable
Chapter 5: Introducing Contract Defenses
Leveraging the Power of Policies
Freedom of contract
Efficiency
Fairness
Predictability
Making the Most of Statutes
Protecting consumers with state and federal statutes
Tapping the power of statutes to bring a contract claim
Examining the Courts’ Role in Policing Contracts
Checking into Affirmative Defenses
Distinguishing valid, void, and voidable contracts
Separating matters of law and matters of fact
Chapter 6: Considering Whether an Agreement Is Unenforceable Due to Illegality
or Unfairness
Determining Enforceability When the Legislature Has Spoken
Recognizing illegal agreements that are unenforceable
Noting exceptions: Illegal but enforceable agreements
Making a Public Policy Argument
Examining enforceability in agreements that restrain trade
Examining enforceability in agreements that interfere with family
relationships
Examining enforceability in agreements that encourage torts
Testing an Agreement against the Doctrine of Unconscionability
Applying the doctrine of unconscionability in the UCC
Distinguishing procedural and substantive unconscionability
Challenging Enforceability with the Doctrine of Reasonable Expectations
Chapter 7: Evaluating the Parties’ Ability to Make the Contract
Recognizing Who Can Legally Make a Contract
Passing the mental capacity check
Child’s play? Making contracts with minors
Basing a Contract Defense on One Party’s Bad Actions
Saying things that aren’t true: The fraud defense
Making an offer they can’t refuse: The duress defense
Taking unfair advantage: The undue influence defense
Whoops! The Mistake Defense
Evaluating a mutual mistake defense
Using the mutual mistake defense to escape a release
Finding relief when the mistake is unilateral
Chapter 8: Assessing the Enforceability of Oral Agreements
Asking Whether the Parties Intended to Orally Form a Contract
Challenging Oral Agreements with the Statute of Frauds
Determining whether a transaction is within the statute of frauds
Distinguishing between voidable and unenforceable agreements
Finding a Writing That Satisfies the Statute
Does it describe the contract?
Is it signed by the party against whom enforcement is sought?
Finding Exceptions to the Statute
Revisiting reliance
Finding an exception in the main purpose rule
Examining part performance and restitution
Finding exceptions in UCC § 2-201
Finding a big exception in international contracts
Part III: Analyzing Contract Terms and Their Meaning
Chapter 9: Evaluating Unwritten Terms with the Parol Evidence Rule
Introducing the Parol Evidence Rule
Identifying Parol Evidence: The Stuff outside the Writing
Asking Why the Evidence Is Being Offered
To prove a modification
To prove a defense to formation
To prove an unfulfilled condition
To prove the meaning of a term
To add a term to the agreement
Deciding Whether the Agreement Is Final and Complete
Recognizing the difference between subjective and objective intent
Figuring out whether the agreement is final
Checking whether the agreement is complete
Dealing with a merger clause that says the contract is final and complete
Considering Evidence That Supplements or Contradicts the Agreement
Contrasting the Common Law with the UCC Parol Evidence Rule
Getting Terms in Writing to Avoid the Parol Evidence Rule Quagmire
Chapter 10: Finding Unwritten Terms That Complete the Contract
Finding the Terms of an Incomplete Contract
Using contract rules to fill the gaps
Understanding types of gap-filling rules
Reading In the Duty of Good Faith
Being honest: The subjective duty of good faith
Being reasonable: The objective duty of good faith
Using freedom of contract to refine the definition of good faith
Working with and around the Default Rules
Recognizing default rules when you see them
Using freedom of contract to change the rules and shift the risk
Protecting Buyers through Warranties
Making express warranties
Looking for an implied warranty of title or warranty against
infringement
Checking for an implied warranty of merchantability
Seeking out an implied warranty of fitness for a particular purpose
Shifting the Risk by Disclaiming or Limiting Warranties
Making warranty disclaimers specific and conspicuous
Limiting the remedy for breach
Drafting a disclaimer of warranty
Recognizing the statutory regulation of disclaimers
Chapter 11: Interpreting Contracts
Grasping the Basics of Ambiguity
Doing the Interpretation Two-Step
Understanding How Courts Decide What’s Ambiguous
Applying the rules of interpretation
Examining the baggage the parties bring to the contract
Bringing in objective meaning from outside the contract
Considering subjective evidence: Context and testimony
Deciding What Something Means
Dealing with Misunderstanding
Part IV: Performing the Contract or Breaching It
Chapter 12: Evaluating Whether Contract Modifications Are Enforceable
Considering Modifications Made during Performance
Determining whether consideration is required
Written requirements: Seeing whether the modification is within the
statute of frauds
Dealing with “no oral modification” clauses
Agreeing to future, unilateral modifications
Making Changes after One Party Fully Performed: Accord and Satisfaction
Determining whether the parties formed an accord: Offer and acceptance
Finding consideration: Doing something additional or different
Finding consideration in unliquidated debts and debt-dispute settlements
Figuring out what happens when the accord has been satisfied . . . or not
Distinguishing accord and satisfaction from substituted contract
Applying the rule of UCC § 3-311 to settlements by check
Doing away with consideration by statute or case law
Chapter 13: Deciding Whether Unforeseen Events Excuse Performance
Deciding Whether a Nonperforming Party Is in Breach
Did the event occur after contract formation?
Did performance become impracticable?
Was nonoccurrence of the event a basic assumption?
Did the party seeking to be discharged carry the risk?
Determining Whether a Buyer’s Purpose Was Frustrated
Figuring Out What Happens When a Party’s Performance Is Excused
Using our old friends reliance and restitution
Allocating the loss when a performance is partially excused
Using Freedom of Contract to Allocate Risk
Drafting a “force majeure” clause to identify events excusing
nonperformance
No excuses: Drafting a “hell or high water” clause
Chapter 14: Checking for Conditional Language
Defining Condition in Legal Terms
Telling the difference between a promise and a condition
Determining whether a condition is express or implied
Tapping the Power of Express Conditions
Determining Whether Courts Will Find an Implied Condition
Sorting Out Conditions Precedent, Concurrent, and Subsequent
Deciding Who Must Go First
Checking out the default order of performance
Making agreements about the order of performance
Determining Whether a Party Has Substantially Performed
Considering how the type of breach affects the outcome
Running tests to find substantial performance
Deciding whether a breach with respect to time is material
Solving the problem by drafting express conditions
Looking at Conditions in the UCC
Rule § 2-601: Making a “perfect tender”
Rule § 2-612: Dealing with installment contracts
Excusing Conditions
Finding promise: Interpreting your way out of a condition
Using restitution when a condition bars recovery
Finding a divisible contract
Claiming waiver to excuse a condition
Throwing yourself on the mercy of the court to excuse a condition
Chapter 15: Breaching the Contract by Anticipatory Repudiation
Recognizing the Two Types of Anticipatory Repudiation
Determining Whether a Party Has Repudiated
Insecurity and assurances: Using UCC § 2-609 to identify repudiation
Applying the rule to the common law
Figuring Out What Happens after Repudiation
Deciding whether the breaching party can retract the repudiation
Seeking remedies for the breach when the injured party accepts the
repudiation
Ignoring the repudiation: Not the best option
Part V: Exploring Remedies for Breach of Contract
Chapter 16: Examining How Courts Handle Breach of Contract
Mastering the Rule of the Expectancy
Seeing the expectancy in context
Accounting for expenses
Justifying breach: The economist’s notion of the efficient breach
Recognizing How Contract Law Limits the Damages for Breach
Concluding whether the breach caused the loss
Determining whether the loss is established with certainty
Limiting damages with the rule of foreseeability
Asking whether the non-breaching party mitigated the loss
Using Reliance and Restitution as Remedies
Chapter 17: Exploring Remedies in Article 2 of the UCC
Comparing Common-Law and UCC Remedies
Recognizing the key difference
Understanding just how similar they really are
Giving the Buyer a Remedy When the Seller Is in Breach
Seeking specific performance: Getting the promised goods
Buying substitute goods and calculating cover damages
Making the buyer whole by calculating market damages
Adding consequential damages for losses caused by the breach
Including incidental damages and subtracting savings
Keeping the goods and claiming damages
Providing the Seller a Remedy When the Buyer’s in Breach
Seeking the contract price as damages
Selling to someone else and calculating resale damages
Deciding whether to complete the manufacture of the goods
Making the seller whole by calculating market damages
Solving the mystery of lost profits
Chapter 18: Checking for Additional Remedies
Deciding Whether Equitable Remedies Should Be Granted
Awarding specific performance . . . or not
Stopping a party with an injunction
Undoing or Revising the Contract
Unwinding the contract through rescission
Rewriting the contract through reformation
Letting the Parties Determine the Remedies for Breach
Calculating liquidated damages
Providing for limited remedies
Awarding Transaction Costs on Top of Damages
Getting attorney’s fees
Recovering transaction costs
Punitive damages? Fuhgeddaboudit!
Finding the Law that Governs the Contract
Selecting the governing law through a choice-of-law clause
Selecting the place of trial through a choice-of-forum clause
Resolving a Dispute through Alternative Dispute Resolution
Resolving disputes through arbitration
Trying mediation
Part VI: Bringing Third Parties into the Picture
Chapter 19: Deciding Whether a Third Party Can Enforce or Interfere with a
Contract
Determining Whether a Party Is a Third-Party Beneficiary
Creating a creditor beneficiary by telling someone to pay your debt
Creating a donor beneficiary by making a gift
Creating an incidental beneficiary: Another name for loser
Asking three key questions to identify third-party beneficiaries
Changing a third-party beneficiary’s rights
Interfering with Someone Else’s Contract: A Big No-No
Finding the tort of tortious interference with contract
Considering claims that the interference is improper
Chapter 20: Acknowledging the Rights and Duties of Third Parties
Breaking Down a Contract into Rights and Duties
Determining Whether Rights May Be Assigned
Applying the general rule: Freely assigning rights
Spotting exceptions to the assignment of rights
Determining Whether Duties May Be Delegated
Applying the general rule: Freely delegating duties
Back to the source: Spotting exceptions to the delegation of duties
Using UCC § 2-609 to get assurances
Prohibiting Assignment and Delegation
Drafting an effective prohibition
Recognizing key limitations on prohibition
Substitutions: Making a New Contract through Novation
Part VII: The Part of Tens
Chapter 21: Ten Questions to Ask When Analyzing a Contracts Problem
Was a Contract Formed?
Is a Promise Enforceable without a Contract?
Does a Party Have a Defense to the Contract That Was Formed?
Where Do You Find the Terms of the Contract?
Do the Parties’ Interpretations of the Contract’s Language Differ?
Is a Party in Breach?
Did a Condition Have to Occur Before a Performance Was Due?
Did a Breach Occur Before Performance Was Due?
What Are the Remedies for Breach?
How Does the Contract Affect Third Parties?
Chapter 22: Ten Notable People (And Philosophies) in Contract Law
Lord Mansfield
Christopher Columbus Langdell
Samuel Williston
Arthur Corbin
Benjamin N. Cardozo
Karl N. Llewellyn
E. Allan Farnsworth
Ian Macneil
Richard Posner
Stewart Macaulay
Appendix: Glossary
Cheat Sheet
Contract Law For Dummies
®
by Scott J. Burnham with Joe Kraynak
Contract Law For Dummies®
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About the Author
Scott J. Burnham, a graduate of New York University School of Law, is the Curley
Professor of Commercial Law at Gonzaga University School of Law in Spokane,
Washington. For 30 years, he has taught Contracts at law schools throughout the U.S. and
internationally. As a practicing lawyer and consultant on contract matters, he has a good
sense of the practical application of contracts principles, and as a prolific writer on legal
topics, he has the ability to convey those principles with clarity.
Dedication
To everyone who studies contract law — may you grow to love her as much as I do!
Author’s Acknowledgments
Thanks to acquisitions editors Michael Lewis and David Lutton, who chose me to author
this book and ironed out all the preliminary details to make it possible, and to Larry
Garvin, who recommended me for the gig.
Elizabeth Rea, my project editor, deserves a loud cheer for serving as a gifted and patient
collaborator and editor — shuffling chapters back and forth, shepherding the text and
graphics through production, making sure any technical issues were properly resolved,
and serving as the unofficial quality control manager. Copy editor Danielle Voirol earns
the editor of the year award for ferreting out my typos, misspellings, grammatical errors,
and other language foe paws (or is it faux pas?), in addition to assisting Elizabeth as
reader advocate. I also tip my hat to the Composition crew for doing such an outstanding
job of transforming my text and graphics into such an attractive book. My deepest thanks
go to wordsmith Joe Kraynak, who was able to successfully blend my knowledge of
Contracts with his knowledge of writing.
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Introduction
In The Paper Chase, a TV series based on a 1973 movie about the adventures of first-year
law students at Harvard, Professor Kingsfield, the Contracts professor, tells his students
the following:
The study of law is something new and unfamiliar to most of you, unlike any other
schooling you have ever known before. You teach yourselves the law, but I train your
minds. You come in here with a skull full of mush, and, if you survive, you leave
thinking like a lawyer.
Getting you to think like a lawyer is the goal of law school, but reaching that goal can
seem more arduous than it has to be. When you take the course called Contracts, for
example, you’ll probably find that you’re mostly reading cases, and you never see a
contract.
One reason for this disconnect is that the course in Contracts is traditionally designed to
teach you “legal method” — skills such as reading cases, analysis, and synthesis — and
not the substance of contract law, which is often sort of incidental. The only problem is
that you have to know the rules and principles of contract law in order to have some
grist for the analytical mill.
Because your casebook may not present the material in an easily accessible and
understandable format, Contract Law For Dummies is designed to plug that gap. It can
help you wrap your brain around the most fundamental concepts and help you see the
forest, not just the trees. Consider this book your stepstool up to the higher-complexity
coverage you’ll encounter in your classes.
About This Book
Contract law isn’t exactly a science or an art; it’s a little of each. As a science, contract
law is governed by certain principles and rules. As an art, contract law often requires
creativity as courts apply the rules and interpret the language of contracts. Because of
this, Contract Law For Dummies contains a little of both. It presents the rules that govern
contracts and provides numerous examples to help you apply those rules to different
fact situations. This presentation enables you, as a budding contract lawyer, to do the
following:
More accurately predict a court’s ruling on any given contract dispute.
Know when you have to follow a rule and when you can change it.
Draft contracts that more effectively protect your clients’ interests.
Pass your law school and bar exams.
This book is organized so you can read it from cover to cover or skip around to only
those parts, chapters, or sections that capture your current fancy or serve your present
needs. I’ve been teaching contract law for 30 years and practiced it for 7 years before that,
and I’ve developed a unique approach that has been very successful for my students.
This book follows that approach, presenting what you need to know in the order that
tends to be most effective.
As you’ll soon discover, however, developing the skills required for understanding and
practicing contract law — and doing it well — isn’t always a linear path. While
discovering new concepts and ways to interpret the language of contracts, you often
must skip back to review what you thought you already knew and understood. This book
is optimized for skipping around to find exactly what you need whenever you happen to
need it.
Conventions Used in This Book
I use several conventions in this book to call your attention to certain items. For
example:
Italic highlights new, somewhat technical terms (such as objective manifestation
and parol evidence), which I follow up with straight- forward, easy-to-understand
definitions.
Boldface text indicates keywords and phrases in bulleted and numbered lists.
Monofont
highlights web addresses.
A widget is a hypothetical good bought and sold in Contracts classes.
Contracts with a capital C refers to the study of the subject, and contracts with a
small c refers to agreements.
I generally cite the North Carolina version of the Uniform Commercial Code
(UCC), because the Uniform version is under copyright, whereas an enacted
statute is in the public domain.
When I refer to “the Code,” I mean the UCC. And when you see “the Restatement,”
I’m referring to the Second Restatement of Contracts.
What You’re Not to Read
You can safely skip anything you see in a gray shaded box. We stuck this material in a
box (called a sidebar) for the same reason that most people stick stuff in boxes: to get it
out of the way so you don’t trip over it. However, you may find the brief asides in the
sidebars engaging, entertaining, and perhaps even mildly informative.
Foolish Assumptions
In writing this book, I made a few foolish assumptions, mostly about your motivation
and how you’re going to use this book:
You’re planning to master U.S. contract law. This book mentions English law,
international law, and the contract law of other countries only in passing.
You’re eager to tackle contract law.
You’re probably going to supplement this text with more formal study, including
coursework, additional reading, assignments, and briefing the cases.
You understand that my approach to teaching contract law is only one of many
effective ways.
In class, you won’t say, “But Burnham says. . . .”
I make no assumptions concerning how much you already know about contract law —
you needn’t know anything to get started.
How This Book Is Organized
To assist you in navigating this book’s contents, I divvied up the chapters that comprise
this book into seven distinct parts. This section provides a quick overview of what I
cover in each part.
Part I: Introducing Contract Law and Contract
Formation
In a contract law case, one of the first things the court has to determine is whether the
parties even have a contract. The chapters in this part introduce and explain the
essential elements of contract formation (offer, acceptance, and consideration) along
with notable exceptions — promises that are enforceable without a contract.
As a bonus, Chapter 1 provides an overview of contract law and introduces you to the
two sources of governing rules: the Restatement of Contracts and the Uniform
Commercial Code (UCC).
Part II: Determining Whether a Contract Is Void,
Voidable, or Unenforceable
To challenge the formation of a contract in the court of law, a party may present a
contract defense — proof claiming that certain additional facts undermine the contract’s
formation and destroy its enforceability. This part explains different contract defenses,
including whether a party did anything illegal or unfair and whether the parties had the
ability to make a contract, as well as the factors that determine whether an oral
agreement is enforceable.
Part III: Analyzing Contract Terms and Their Meaning
Contract disputes arise when the parties don’t concur on which terms they agreed to or
what the terms mean. One party may claim that the parties agreed to a term that doesn’t
appear in the written contract. A contract may have gaps that fail to address unforeseen
circumstances. Or the language in a contract may be ambiguous. The chapters in this
part discuss several strategies that the courts use to plug the gaps in a contract and
interpret what the language really means . . . or at least what it would mean to reasonable
people standing in the parties’ shoes.
Part IV: Performing the Contract or Breaching It
Whether the parties formed a contract is only half the story. The other half deals with the
performance of that contract. The chapters in this part tackle nonperformance issues.
Here you find out whether changes made to a contract after formation are enforceable,
whether the occurrence of unforeseen events or the nonoccurrence of certain conditions
excuses performance, and how one party may breach a contract even before performance
is due.
Part V: Exploring Remedies for Breach of Contract
If a party breaches the contract, the courts must decide how to remedy the breach in a
way that’s fair for both parties. This isn’t tort law, where the courts try to punish the
wrongdoer. In contract law, the goal is to give the non-breaching party what she expected
from the performance of the contract but no more than that. The non-breaching party
shouldn’t get a windfall at the expense of the breaching party.
The chapters in this part introduce and explain the various methods available to the
courts to remedy a breach.
Part VI: Bringing Third Parties into the Picture
A contract often affects more than the parties who made it. A contract is like a piece of
property that can be carved up and bought and sold. When parts are transferred, third
parties can get involved in performance and enforcement of the contract. The chapters in
this part help you recognize the rights and duties of those third parties and decide under
which circumstances third parties are allowed to enforce contracts and may have duties
to perform under a contract.
Part VII: The Part of Tens
Every For Dummies book includes a Part of Tens — chapters containing ten bite-sized,
easily digestible tips, tricks, or insights. Here I offer ten key questions to ask when
analyzing a contract problem and ten famous people and philosophies in contract law.
Icons Used in This Book
Throughout this book, icons appear in the margins to call your attention to different
types of information. Here are the icons and a brief description of each.
Everything in this book is important (except for the stuff in the shaded
boxes), but some information is even more important. When you see this icon, read
the text next to it not once but two or three times to tattoo it on your gray matter.
Tips provide insider insight from behind the scenes. When you’re looking for
a better, faster way to do something, check out these tips.
This icon appears when you need to be extra vigilant or seek additional
guidance before moving forward. Don’t skip this important information — I’m
warning you!
Certain cases have strongly influenced contract law and how the courts
interpret the law and language of contracts. To spot these key cases, look for the Key
Case icon.
Contract law makes a lot more sense when you see how it applies to fact
situations, so I use hypothetical situations liberally throughout the book to
illustrate and simplify the explanation of certain concepts. The Example icon flags
these hypotheticals so you can easily spot them.
Where to Go From Here
Contract Law For Dummies is designed to take you from ground zero to a fundamental
understanding of contract law. If you’re interested in the big-picture view of contract law
in theory and practice, check out Chapter 1. Otherwise, read the book from cover to
cover, skip around by using the table of contents as your guide, or head to the index if
you need guidance on a more specific topic.
Part I
Introducing Contract Law and Contract
Formation
In this part . . .
Chapter 1 begins by exploring the fundamentals of contract law — what it is, how it came
into being, and which sources provide the rules and principles that govern contracts.
Here, you discover the basics of contract formation, contract defenses, and contract
interpretation, and you find out what generally happens when parties don’t fulfill their
contractual obligations.
The remaining chapters in this part focus on contract formation. You encounter the three
essential elements of contract formation — offer, acceptance, and consideration — and
find out when promises are enforceable even if parties haven’t met the requirements to
form a contract.
Chapter 1
Getting the Lowdown on Contract Law
In This Chapter
Wrapping your brain around the concept of contract law
Grasping the fundamental rules and principles that govern contracts
Understanding contract formation, defenses, and interpretation
Getting up to speed on performance, breach, and remedies
Contract law may feel overwhelming, especially when you’re in a class that reads and
analyzes case after case after case. Adding to that load are the many sources of contract
law, including the common law, the Restatement of Contracts (Restatement), the Uniform
Commercial Code (UCC), federal and state statutes, and rules that govern when parties
are allowed or prohibited from coming up with their own contract terms.
Although all the details swirling around the topic of contract law are important, placing
those details in context makes them more manageable and enables you to see the big
picture. That’s what this chapter is all about. Here, you get the eye-in-the-sky view of
contract law and a framework on which to hang the rich tapestry of policies, principles,
and rules collectively referred to as contract law.
Grasping the Concept of Contract Law
Contrary to popular belief, contract law isn’t just a bunch of rules and regulations that
govern agreements between people. It’s not developed and imposed from above by some
rule-making authority. It developed naturally over the course of thousands of years
through the interactions and transactions between people like you and me — the parties
who form contracts.
In this section, I explain what a contract is, present a few different perspectives on the
principles that should drive the formation of contract rules, and briefly explore how
contract law developed into what it is today.
From coconuts to contracts: Grasping the purpose of
contracts
To begin to grasp what contract law is all about, imagine a group of people on a desert island trying to
figure out ways to govern their relationships. They want to be a community, but they also want each
person to have autonomy. Collectively, they decide that each person may own property and make
agreements about what to do with that property. They discover that the free exchange of property
increases the wealth and well-being of both parties; for example, if one person has a surplus of
coconuts and a shortage of fish and another person has a surplus of fish but no coconuts, the two may
exchange goods for their mutual benefit.
If the parties take the next step and decide that they can promise in advance to perform such
exchanges, their agreement indicates the beginnings of contract law. As certain issues arise, the
islanders form rules that address those issues, such as how quickly the parties must perform, the
acceptable quality of the coconuts and fish, and the consequences for nonperformance. Their system
of contract law grows organically from the ground up, not from the top down.
Defining contract
A contract is simply a promise or set of promises enforceable by law. Which agreements
are enforceable by law varies from culture to culture — what’s acceptable in one culture
may not be acceptable in another. If I agree to sell you my house, for example, the houseselling culture says that I can’t make any untruthful statements about the house. But if I
agree to play a hand in the World Series of Poker, then the poker culture says that I can’t
make any truthful statements about my hand.
The United States doesn’t have a monolithic contract law with uniform rules. Contract
law is nuanced and fact intensive. A “rule” may differ, for example, depending on whether
the parties are two giant corporations having their lawyers negotiate an agreement or
family members making an agreement over the dinner table.
Comparing different schools of thought on contract
rules
The overriding principles that guide the formation of contract rules vary according to
different schools of thought. Depending on your perspective, you may think that the
rules should be based on what is
Customary and reasonable: In most systems of contract law, the rule that
develops is usually based on what’s customary and reasonable. With nearly every
issue that arises in contract law, just think about what’s reasonable, and you’ll
usually discover the “rule.”
Economically efficient: My economist friends think that rules should be based on
what’s most economically efficient. According to the economists, people enter
contracts for their mutual financial benefit; for example, you agree to sell and I
agree to buy your car for $7,000, because right now, the $7,000 is worth more to
you than the car, and the car is worth more to me than the $7,000 I have in my
piggy bank. Throughout this book, I sometimes share the economist’s
perspective, but if you haven’t studied Econ (or read Economics For Dummies
[Wiley]), stick with asking what’s reasonable and you’ll come up with the rule
most of the time.
Fair for the little guy: According to my friends in the Critical Studies movement,
the people in power, who happened to be rich white men, made the rules. The rich
guys came up with rules that are favorable to them, so contract law needs to
watch out for the little guy, who gets the worst of it in contracts.
Regardless of view, everyone would probably agree that one of the most difficult
problems facing contract law today is the ease with which consumers can bind
themselves to contracts by clicking I AGREE to the “terms and conditions” that nobody
reads. This is quite different from the contract created by a carefully negotiated exchange
of drafts. Or is it? Throughout your career in contract law, you’ll struggle to determine
whether the same rules apply to both situations.
Tracing contract law’s roots
Most contract law in the United States comes from England, where it was largely based
on the tradition commonly referred to as the common law, meaning the law made by
judges. Many of the rules of commercial law that govern buying, selling, and financing
come from medieval times. Anytime parties traded, they had to have an understanding of
the deal they were making. They made their own rules, called the law merchant, to govern
their situation.
As the law became more specialized, various areas of contract law were spun off and now
stand on their own. Insurance law, banking law, and government procurement law are all
areas of contract law that you don’t study in a standard Contracts course. One authority
has called contract law “the law of leftovers” — general principles that remain
irrespective of the substance of the transaction.
Meeting the Key Players: Common Law, the
Restatement, and the UCC
Although you’ll find no definitive collection of the rules and regulations that govern
contracts, you can find guidance from three primary resources: the common law, the
Restatement of Contracts, and the Uniform Commercial Code (UCC, or the Code). I refer
to these resources throughout the book, so you need to have a general understanding of
how each resource contributes to contract law.
Exploring the common law: Tradition and precedent
In the Anglo-American (meaning English and American) tradition, contract law was
common law — judges decided each dispute on the basis of tradition and recorded
precedent. Imagine yourself the lord of the manor in Merrie Olde England, and the parties
to a dispute look to you for wisdom. You’d likely ask, “What have we done in the past?
Does it make sense today?” — the same questions today’s judges ask!
In a common-law system, if you want to find out what the outcome is likely to be under a
particular fact pattern, you have to read all the applicable cases (the reported court
decisions) and synthesize them. That’s what you do in your legal research and writing
class and you sometimes do in your Contracts class when you have a string of cases to
read. You don’t read them in isolation; you try to see the connections and be prepared to
say why one case came out one way and one came out another way.
Because of the common-law rule of stare decisis (“let the decision stand”),
courts generally follow precedent. Therefore, you can fairly accurately predict what a
court will do in the future based on what courts have done in the past. Because that
predictive power is important to businesses entering transactions, contract law is
slow to change.
Capturing general rules in the Restatement
Although the common-law approach is effective, sometimes you just want to know what
the general rule is, devoid of any particular fact situation. Having to read all the cases on
point to find a rule would be a pain. Fortunately, someone has always been willing to
read all those cases and try to synthesize them into black-letter rules — attempts to
capture the essence of each rule. In the 18th century, that someone was Sir William
Blackstone, who wrote Commentaries on the Laws of England (1765–1769). In those days,
lawyers, including many of our Founding Fathers, relied on Blackstone for this purpose.
Now contract law has the Restatement.
The Restatements of Law are an effort by the American Law Institute (a group of law
professors, lawyers, judges, and other interested parties) to reduce the law to workable
sets of black-letter rules. The First Restatement of Contracts came out in 1932. The
principal reporter was Samuel Williston, who wrote one of the great multivolume
treatises on contract law. The rules in this Restatement are somewhat rigid and don’t
always reflect modern legal thinking, which often takes into consideration a number of
mushy factors instead of drawing bright lines.
A Second Restatement of Contracts was promulgated in 1981, with Allan
Farnsworth as reporter. When I refer to “the Restatement,” I mean the Second
Restatement.
Although the Restatement is a great resource, recognize its limitations:
It’s not enacted law, so it has only persuasive authority. If you’re citing law to a
judge, the judge wants to know what the higher courts in that jurisdiction have
held, not what the Restatement says.
It represents a limited number of views. People hold conflicting views of what
should be the rule, with some jurisdictions following one line of reasoning and
others following another. The Restatement generally chooses the majority view in
this situation, so you may get the misimpression from its statement of a rule that
the law is more settled than it is. And on a few occasions, the Restatement states
the minority view because the drafters thought it represented the better view.
Many publications of the Restatement for students contain only the rules. The
complete edition includes commentaries and illustrations to help you more fully
understand each rule.
Statutes: Supplanting common law with codes
Although contract law is traditionally common law, statutes enacted by legislatures are
increasingly taking over the role of common law. The courts have to follow the laws
enacted by the legislature, so if the law has a statute on point, that should be the starting
point for a court.
As you’re probably aware, many European countries have civil law systems based largely
on systematic arrangements of statutes called codes. Such systems have an authoritative
source to go to in order to find the governing contract law. Louisiana, because of its
French origins, has a civil code of Contracts, and so do many other states.
In the mid-19th century, a “codification” movement in England and the U.S. sought to
codify the law in order to make it more accessible, and the codifiers won out in a number
of states, including California, which has codified the law of Contracts in its Civil Code.
But these codes often just state common-law rules and principles, leaving the courts
plenty of room to interpret the statute and apply it to a particular situation.
Contract law is mostly state law rather than federal law. Although no federal
common law of contracts exists, a number of federal statutes govern contracts. Most
of these are in the consumer and credit areas, so when you have a transaction in
these areas, check for any relevant federal statutes.
Brushing up on the Uniform Commercial Code (UCC)
If each state had the same statutes governing contracts, then the law would be easier to
find and more predictable, which is especially important in commercial law that applies
to many interstate transactions. Congress could probably enact an American Commercial
Code based on its authority to regulate interstate commerce, but Congress has left this
project to the states. The states have turned to the assistance of the Uniform Law
Commission (ULC) — a private group with representatives from every state that aspires
to write model statutes that get the law right and that are enactable.
When the ULC agrees on a model statute, the process is only just beginning,
because the model statute isn’t yet law. State legislatures must enact the statutes for
them to become law.
The ULC, with the assistance of the American Law Institute (the folks responsible for the
Restatements) has had great success getting states to enact the Uniform Commercial
Code (UCC), which contains a number of Articles addressing various aspects of
commercial law. Karl Llewellyn first drafted this model statute in the 1940s, and states
began to enact it in the 1960s. Article 2, which deals with the sale of goods, is the Article
most relevant to contract law.
Varying the model statutes in state laws
The ULC is frequently unable to achieve its goal of uniformity, because states can and
often do alter the Uniform version. So although every state has enacted the UCC
(Louisiana has not enacted Article 2), they’ve all enacted slightly different versions. In
this book, I generally cite the North Carolina version, not out of some love for the Firstin-Flight state but because the Uniform version is under copyright, whereas an enacted
statute is in the public domain.
In your law studies, you’ll probably be working with the Restatement and the
Uniform version of the UCC as promulgated by the ULC. But remember, when you
have a research question in a certain jurisdiction, you need to look up the law in that
state to make sure that it’s the same.
Note: Attempts to revise UCC Article 2 have come to an end, but Article 1 underwent a
revision process in 2001. Most states have enacted Revised Article 1, which is also used
on the Multistate Bar Exam, so that’s the version of Article 1 that I refer to. Again, when
doing research in a jurisdiction, you must find out which is the applicable law in your
jurisdiction.
Looking at some important UCC principles
Although UCC Article 2 gets the most press in this book, you also encounter references
to UCC Article 1, which deals with basic principles and definitions that apply throughout
the Code, including Article 2.
Some of the basic principles found in Article 1 are so important that I cite them
repeatedly. I discuss two of the most significant provisions next.
Freedom of contract: Letting parties agree to a different rule
One important principle of UCC Article 1 is what I call the freedom of contract provision.
Section 1-302(a), as enacted in North Carolina at 25-1-302(a), provides the following:
§ 25-1-302. Variation by agreement.
(a) Except as otherwise provided in subsection (b) of this section or elsewhere in
[the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial
Code] may be varied by agreement.
This important rule offers guidance on how to think of “the law.” Contract law is not a
bunch of regulations that parties to a contract must follow. Often, contract law facilitates
a transaction by providing a rule that kicks in if the parties neglect to provide their own
rule. These rules are often called default rules because, like the default settings on your
computer, they apply unless you change them. But very often, as UCC § 1-302(a) states,
contract law gives the parties the freedom of contract to come up with their own rule.
Some of the rules are regulatory, and unfortunately the Code isn’t always helpful in
identifying whether a particular rule is regulatory (can’t be changed) or facilitatory (can
be changed by the parties’ mutual agreement).
Note, for example, that § 1-302(b) states some obligations that the parties can’t get out of
by agreement. But that same provision goes on to say that you can “determine standards
by which the performance of those obligations is to be measured.” You can’t, for
example, agree not to be reasonable, but you can agree, “It is to be considered reasonable
if we do A, B, and C.” Figuring out the interplay between what is permissible in some
circumstances and not permissible in others is one of the greatest challenges in studying
contract law.
As you study Contracts, try to identify which are the regulatory rules that
have to be followed and which are the facilitatory rules that the parties are free to
change. Take a nuanced view. If the court doesn’t let the parties change the rule, ask
why — was it because the parties were in a particular state? Entered into a particular
kind of transaction? Had an imbalance of power?
Supplementing the UCC with common law
Another important provision in Article 1 is § 1-103(b), which points out that the Code is
not the exclusive law applicable to a transaction. As enacted in North Carolina at § 25-1103(b), it provides the following:
(b) Unless displaced by the particular provisions of this Chapter [the Uniform
Commercial Code], the principles of law and equity [. . .] supplement its provisions.
This rule makes clear that the Code doesn’t address every topic, and where it’s
incomplete, courts will fill in gaps in the Code with rules derived from the common law.
For example, the Code says very little about the defenses to contract formation that I
explain in Chapters 5 through 7 of this book. Section 1-103(b) says that in a case
involving the sale of goods, those defenses apply, but you have to look to the common
law to see what they are.
Applying state law in federal court
Many contracts cases are heard in federal court. Most of those cases got there on the
jurisdictional basis of diversity — under federal law, parties who are citizens of different
states are allowed to use the federal courts if the amount of money at issue is over a
certain dollar amount set by Congress. In such cases, the federal court uses the
principles of Choice of Law (as I explain in Chapter 18) to decide which state’s law
governs the transaction. The federal court is in effect sitting as the state’s highest court
and asking, “What would the judges on that court do in this situation?”
Whenever you see that a contracts case is in federal court, ask how that court
got jurisdiction. If the answer is diversity, then identify the state whose law the court
is applying. If the court got jurisdiction in some other way — for example, because
it’s a matter of admiralty law (law on the high seas) or because the United States is a
party — then the court follows general principles of contract law rather than the law
of any particular state.
Be careful when you research contract law questions, particularly online.
Your search results for the decisions of a particular state often include federal court
decisions from the circuit in which the state is located. But you have to read the
federal court decision carefully to find out which state’s law it’s applying. If it’s not
applying the law of your state, the federal court isn’t a very good authority. And even
if the court applies your state’s laws, remember that the federal court decision is
only persuasive authority in your state.
Inferring a state rule that makes little sense
When federal courts take a contract case on the basis of diversity, the federal courts defer to state law,
regardless of whether they agree with it. A good example of how this plays out in the real world is in the
case of Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir. 1994).
In this case, Judge Richard Posner of the 7th circuit Federal Court of Appeals was given the task of
ruling on a case where Illinois law applied. The rule in issue had three possible interpretations, but the
Illinois courts had not yet expressed their opinion on the matter. Although Judge Posner preferred the
view adopted only in California, his job was to try to figure out how the courts in Illinois would decide the
case.
Judge Posner concluded that Illinois would probably not agree with his preferred view and said in
effect, We are hearing this case because of diversity, and Illinois law applies. Illinois would likely follow
a rule that makes less sense, but I am going to have to hold my nose and go along with the state rule
because that is what a federal judge has to do in a diversity case.
You might think it would make more sense for the federal court judges to ask the state court judges
what they would do, and many states have a procedure for doing that. Sometimes when the state has
insufficient precedent, the state court takes a “certified question” from the federal court in order to
assist the federal court in resolving a dispute.
Applying different sources of contract law
When you look at a contract case, you often need to consider several different sources of
contract laws, including common law, the Restatement, the UCC, and federal and state
statutes.
Suppose a client in Montana purchased a wheelchair for personal use and the
seller refuses to fix it, even though it came with a warranty. Is she entitled to relief?
At first glance, the case seems pretty simple, but it gets complicated in a hurry when
you start to consider all sources of law that may come into play, which include the
following:
Federal consumer protection law, because the case involves a consumer
The federal Magnuson-Moss Warranty Act, because it involves a warranty
Montana UCC Article 2, because it involves the sale of goods
The Montana Wheelchair Warranty Act, a statute that specifically addresses this
transaction
State consumer protection statutes and other relevant statutes
General principles of contract law in Montana, found both in statutes and in cases
A word about international law and the CISG
Uniformity is helpful in governing both interstate and international transactions. More than 70 countries,
including the United States, have adopted the United Nations Convention on Contracts for the
International Sale of Goods (CISG). By default, the CISG applies to transactions for the sale of goods
between businesses located in countries that have adopted it. You can find the text of the CISG at
www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html.
Many U.S. lawyers contract around application of the CISG by putting in their international contracts a
choice of law provision (see Chapter 18) specifying that the UCC of a particular state governs the
agreement. Other lawyers, particularly in contracts that contain an arbitration clause (see Chapter 18),
specify that the UNIDROIT Principles of International Commercial Contracts will apply. For the text of the
UNIDROIT Principles, promulgated by the International Chamber of Commerce, visit
www.unidroit.org/english/principles/contracts/main.htm.
The parties’ contract, because it’s part of their own private contract law (You’d
have to examine the contract terms carefully; the parties’ agreement to a term
doesn’t necessarily make it enforceable. To the extent the federal and state law is
regulatory, the contract would have to follow that law, but to the extent it’s
facilitatory, the parties would be free to provide their own rules.)
If you like solving puzzles like this, welcome to the world of contracts!
Forming, Defending, and Interpreting
Contracts: The Basics
Knowing the rules that govern contracts is only half the battle. You have to be able to
apply those rules to different situations. Because contract law is so fact dependent, it’s
always coming up with exceptions to the rules to deal with particular circumstances. No
book covers all the possible variables and exceptions, but knowing the rules and the
principles behind them gives you a firm foundation to build on. This section provides a
framework for understanding Contracts.
Look at the big picture. Doing so may be difficult because no one agrees on a
single best way to organize the study of Contracts. The topics are like a deck of cards
that you can shuffle up and deal in various ways. Whether you start with remedies or
with consideration, what’s important is seeing how the pieces all fit together.
Understanding contract formation
Every contract starts at the point of formation. As I explain in Chapters 2 and 3, a contract
is a bargained-for exchange that requires the following three ingredients:
Offer: Party A’s promise to Party B in exchange for something
Acceptance: Party B’s assent to Party A’s offer
Consideration: What each party offers in exchange for the other party’s promise
If the parties didn’t form a contract (because one of the essential ingredients was
missing), that may not be the end of the story. Based on the theories of reliance and
restitution (see Chapter 4), even in the absence of a contract, parties may be required by
law to compensate another party because they made a promise or received a benefit:
Reliance: If one person relies on another person’s promise, the promise may be
enforceable even in the absence of a bargain. For example, I promise to give you
my car when you graduate, and you pass up another free-car offer as a result. I
may be required to compensate you for your loss. Contract law uses reliance to
restore the injured party to the position she was in before she relied on the
promise.
Restitution: If Party A confers a benefit on Party B without forcing it on her and
without intending it as a gift, then even though Party B never offered
consideration in exchange for that benefit, Party A may have a right to receive
restitution. Contract law uses restitution to make the benefitted party give up the
benefit, restoring her to the position she was in before the benefit was conferred.
Checking out attack and defense maneuvers
When a deal fulfills the requirements of offer, acceptance, and consideration, the
agreement is presumptively an enforceable contract, but either party may challenge the
contract via a contract defense, otherwise known as a defense to formation. A party may
base its contract defense on different grounds, such as the characteristics of one of the
parties (under the age of 18 or having impaired judgment), something one party did to
the other (fraud, duress, or undue influence), or something wrong with the contract itself
(mutual mistake, illegality, unconscionability, or an oral contract when the law requires
the contract to be evidenced by a writing). Chapter 5 introduces contract defenses, and
Chapters 6 through 8 discuss the specifics.
Finding the terms of the contract and building contractinterpretation skills
A contract rarely contains a comprehensive list of terms the parties agreed to, nor does it
provide for everything that might happen in the future. If the contract is indefinite or
incomplete, contract law provides ways to clarify the terms and fill the gaps. If the
agreement is part written and part oral, contract law uses the parol evidence rule to
determine which unwritten terms to include. Some terms not included in the contract
may need to be added due to course of performance (a history of how the parties acted
under the present agreement), course of dealing (how the parties performed under other,
similar contracts), or trade usage (how other parties in the industry perform). Finally,
even after finding all the terms, the parties may have a disagreement regarding
interpretation of unclear language in the contract. Chapters 9 through 11 address these
issues.
Examining Contract Performance, Breach, and
Remedies
After parties form a contract, the parties must perform (do what they promised to do). If a
party doesn’t perform and she’s in breach, then contract law must determine a just
remedy for the breach — usually an amount of money sufficient to compensate the nonbreaching party for what he lost as a result of the breach. This section explores breach,
remedies for breach, and the role of third parties.
Recognizing breach of contract
Breach of contract is a deceptively easy concept to grasp — it means that the party didn’t
keep his promise. Sometimes, however, a party who didn’t keep his promise may actually
not be in breach, as in the following situations:
The parties didn’t actually have a contract. One of the best and most common
responses to an allegation of breach of contract is to launch a contract defense to
try to prove that contract formation never happened. A party accused of breach
may say, “Ha-ha! I can’t be in breach because we never had a contract!”
The parties modified the contract, omitting the promise. See Chapter 12 for
details on making changes to a contract.
Performance was excused. Performance may be excused because of an
unanticipated event that prevented it or because performance was conditional
and the condition never occurred. The most common condition is the other
party’s performance: The claim is that if you didn’t perform, then I don’t have to
perform. See Chapters 13 and 14 for details on circumstances that excuse
performance.
The other party repudiated prior to the performance deadline. One of the other
parties may have made an anticipatory repudiation — telling the other party in
advance of the time for performance that he doesn’t plan to perform the contract
and thus letting the non-repudiating party off the hook. Chapter 15 covers
anticipatory repudiation.
Formulating remedies and establishing losses
If parties have a contract and one party breaches, then the injured, non-breaching party
is entitled to a remedy. The goal here is to give the injured party the expectancy — the
position the party would’ve been in had the contract been performed. In addition to the
expectancy, reliance and restitution come back as two additional remedies for breach.
Chapters 16 to 18 cover the various remedies in greater detail.
In contract law, the principal remedy, the expectancy, puts the non-breaching
party where she would’ve been had the contract been performed, not back where she
was before the contract was formed.
Exploring the role of third parties in contract law
Third parties are people who aren’t parties to the contract but who are affected by it in
some way. They may be third-party beneficiaries of the contract (they stand to receive
something), or they may have rights assigned or duties delegated to them by parties to
the contract. Contracts classes rarely cover the role of third parties in contract law, but
this is an important topic in the real world. Chapters 19 and 20 explain what you need to
know.
Practicing in the Real World of Contracts
Getting lost in the study of Contracts or any legal subject is easy. The rules keep piling
up, you can’t keep them all straight, and pretty soon you’re drowning under them. Take a
deep breath and try to see the big picture as I present it in this chapter.
Most contract issues are solved through negotiation, not litigation, so contract lawyers,
especially the most skillful of them, rarely see the inside of a courtroom. As you’re
studying case after case — the way Contracts is typically taught — fight the urge to
become overly litigation-oriented and bogged down in minutiae.
Use your skills to see how you can use contract law in planning and drafting
agreements. Contracts then becomes a matter of preventive law: Having read how
people screwed up in past cases, you’re going to get it right so you and your clients
don’t end up in court. When you think of Contracts as planning and drafting, you
appreciate more the principle of freedom of contract. If you know the rules, then
you’re better able to draft around them.
Chapter 2
Let’s Make a Deal: Offer and Acceptance
In This Chapter
Recognizing the three requirements of contract formation
Making a contract through offer and acceptance
Gauging the time an offer stays open and whether and when the offeror can back out
Knowing how to proceed when the parties exchange different forms
A contract is a promise or set of promises enforceable by law. The waters get a little
murky, however, when you begin to explore how the law determines whether parties
have formed a contract. Questions arise, such as What constitutes an offer? Did the offeree
signal acceptance? Was the offer still open when the acceptance occurred?
Questions also arise regarding the manner and method of acceptance. Was the agreement
formed by promise (a commitment to do something) or performance (actually doing
something)? Does clicking the Agree button on a website or entering an electronic
signature count as acceptance? What if the party on the receiving end of a form offer
signals acceptance with a form of her own, complete with additional or different terms?
This chapter answers these questions and more.
Contract Formation: Getting a Handle on the
Essentials
In the Anglo-American legal system, a contract is binding if it fulfills the following three
contract formation requirements:
Offer: One party (the offeror) promises the other party (the offeree) something in
return for something else. To legally qualify as an offer, it must specify what the
offeror wants in return.
What’s binding? It’s a cultural thing
Each culture may draw the line between nonbinding talk and binding commitments in a different place.
In theory, a society could treat all promises as legally enforceable. Five-year-olds seem to live in such a
culture — they scream, “But, Mommy, you promised,” as though that alone were sufficient to require
enforcement. Other societies may make entering into an enforceable agreement very difficult. A few
hundred years ago, English society required that you put a seal on a document to make it binding.
Fortunately for the practice of international law, most societies accept written agreements signed by
both parties as a sufficient indication of intent to make a binding commitment, but exceptions do exist.
The counsel for a multinational company recently told me about a deal he made in which the other
country’s law required that both parties sign every page and have the signing witnessed by a team of
notaries.
Currently in the U.S. and elsewhere, electronic contracting challenges the tradition of signing contracts
by hand. Society must now determine how parties can form binding contracts in the culture of
cyberspace.
Don’t let the -or and -ee suffixes confuse you. Just remember that the or is on the giving end, as in promisor (the party making the promise), and the -ee
is on the receiving end, as in promisee (the party to whom the promise is made).
Acceptance: The offeree gives the offeror whatever was requested in the offer.
Consideration: The consideration is whatever each party brings to the table. For
example, if I contract with you to be your attorney, you bring money, and I bring
my services.
Mix all three ingredients, and you have a contract. The rest of this chapter explains how
to determine whether the requirements of offer and acceptance have been satisfied.
Chapter 3 tackles the third requirement: consideration.
A contract signals the end of “just talk” and the beginning of serious
business. After a contract is made, if a dispute arises, one party can take the other to
court to seek enforcement. Contract formation is all about distinguishing between
“just talk” and the binding commitment that has legal ramifications.
Forming a Contract: Promises, Offers, and
Mutual Assent
It takes two parties to make a contract. A party is a person or entity who agrees to be
bound by the contract. (See how much fun contract law can be? One person is a party!)
Part VI explains how a third party, one who’s not bound by the contract, may become
involved.
To make a contract, both parties must give their mutual assent; that is, they must
willingly agree to the terms of the contract. To determine whether the parties have
formed a contract, you must carefully examine the facts to find assent by both parties.
This section describes how parties give their assent and reveals that not all promises are
legally binding commitments.
Making a commitment by making a promise
A promise is a commitment to do or not to do something, regardless of whether the word
promise is actually used. So to determine whether a party has made a promise, look for
the commitment behind the words.
For example, if Joe says to Mary, “I promise to give you $200 tomorrow,”
that’s a commitment; Joe has pledged to do something. If Mary says to Joe, “I’ll give
you my bicycle tomorrow,” that’s also a commitment, even though Mary didn’t utter
the word promise.
When one person promises something to another as in this example, it’s a gift promise. It
may be morally binding, but it’s not legally binding. To become legally binding, the
promise must be accompanied by a request for something in return, as I explain in the
next section.
Turning a promise into an offer by asking for something
in return
To turn a gift promise into an offer, add the condition that the offeree must do or give
something in return. That something can be either a promise (a commitment to do
something) or a performance (actually doing something).
When Joe says to Mary, “I promise to give you $200 tomorrow,” that’s just a
gift promise. But if Joe says to Mary, “I promise to give you $200 tomorrow if you
promise to give me your bicycle tomorrow,” now he’s made an offer. He’s promised
to do something but only if she promises to do something in return.
Note: To my economist friends, contracts are exchanges that maximize utility — the
usefulness of whatever the parties agree to exchange. Joe makes his offer because Mary’s
bicycle is more useful for him than is his $200. If Mary can make better use of the $200
than she can her bicycle, she’s likely to agree to the exchange. With both parties better
off than they were, the exchange has increased the sum total of human happiness. It’s a
win-win situation. Way to go, Contracts!
Giving acceptance by giving or agreeing to give what
was requested in return
Acceptance occurs when the offeree gives or agrees to give the offeror whatever he asked
for in return for his promise (see the section “Acceptance must match the offer: The
mirror-image rule,” later in this chapter). As with the offer, the acceptance requires no
formal language. If Joe offers to buy Mary’s bicycle for $200 and she says, “It’s a deal!”
that’s all it takes. At that very moment, Boom! — a contract falls from the sky.
Don’t make the mistake of confusing contract formation with contract
performance. As soon as Joe presents his offer and Mary accepts it, they’ve formed a
contract. If Joe comes to get the bicycle the next day and Mary says, “Ha-ha! I
changed my mind. I’m not selling you my bicycle,” then she has breached the
contract. See Part IV for info on breach of contract.
Assenting in action or thought: Objective manifestation
versus subjective intent
One of the great debates in contract law revolves around whether assent is found in the
parties’ subjective intent to form a contract or in their objective manifestations:
Subjective intent: What the parties were thinking when they formed the contract
Objective manifestation: What the parties did, such as their words or their
outward expressions
Meeting of the minds? Nonsense!
Courts sometimes speak of the need for a “meeting of the minds” in order to establish the intent to be
legally bound. But courts don’t really mean that. Because they don’t know whether the minds actually
met, judges look for words or conduct that a disinterested (impartial) observer would regard as
indicating agreement to the contract. Such words or conduct constitute the “objective manifestation of
assent” that can bind the parties.
Don’t describe assent by using that offensive expression (which I refuse to repeat here, because I don’t
want to encourage you to say it). Instead, say that a contract requires an “objective manifestation of
assent.” This doesn’t exactly roll off your tongue as easily as that other expression, but that’s how you
should say it and how judges should, too.
Verifying what’s going on in someone’s mind is impossible, so courts look for assent in
the objective manifestations of the parties, not in their intent. This section explains how
the objective theory of assent plays out in practice and highlights its importance.
Seeing objective manifestation in practice
The reason I use so many examples in explaining Contracts is that the rules mean
something only in context, and seeing a rule applied in different contexts is how you
come to understand the law in action. This section contains two examples of how
objective manifestation of assent plays out in practice: In one example, someone claims
the agreement was a joke, and in the other, someone makes an inadvertent arm
movement at an auction.
Suppose that the day after Mary agreed to sell her bicycle to Joe, she has a
change of heart and says, “I didn’t really mean it when I said, ‘It’s a deal.’ I was just
joking.” Mary is claiming that no contract was formed because in her mind, she
didn’t intend her words to be taken seriously.
Unfortunately for Mary, contract law isn’t concerned with what was or wasn’t in her head
but with her objective manifestations. The question is not whether she thought she was
serious — that would involve looking at subjective thoughts. The question is whether a
reasonable person standing in Joe’s shoes would’ve thought she was serious by looking
at her objective manifestations — whether she appeared to be serious when she spoke
the words. If the answer is yes, then based on the objective theory of assent, Mary is
bound to the contract even if in her heart of hearts she was joking.
A TV commercial for a dandruff shampoo contained a wonderful example of
the objective theory of assent. The setting is an auction, which is a great place to
explore contract-formation essentials and the nuances of assent. The auctioneer
opens the bidding by saying, “Who will give $2,000 for a date with supermodel
Cindy?” A guy in the audience lifts his paddle with #18 on it in order to use it to
scratch his head. The auctioneer immediately slams down his gavel and says, “Sold
to number 18 for $2,000!”
As soon as the auctioneer opens the bidding, he’s inviting bids or offers from the
attendees. As soon as the guy in the audience lifts his paddle, which everyone knows is
how you enter a bid, he has made his offer. When the auctioneer brings his hammer
down and says, “Sold!” that’s acceptance.
The commercial ends there, but imagine the winning bidder’s response: “Hey, wait a
minute. I didn’t intend to make an offer — my intention was to scratch my head.” But
contract law would say, “Sorry. We don’t care what your subjective intention was. You
objectively manifested your assent when you raised the paddle. A reasonable person in
the shoes of the auctioneer would think you had made an offer, and he accepted it, so a
contract was formed!”
Leonard v. Pepsico: Collecting for a jet
In the case of Leonard v. Pepsico, Pepsi issued a catalog of items a person could buy with Pepsi Points.
Consumers could buy Pepsi products to earn points, and although people had to submit a minimum of 15
Pepsi Points with their order, they could purchase additional points for 10 cents each. To advertise the
promotion, Pepsi ran a commercial in which a teenager is buying all sorts of stuff with Pepsi points — a
T-shirt for 75 points, a leather jacket for 1,450 points, sunglasses for 175 points — and finally he
descends from the sky and lands in front of his school in his own Harrier Jump Jet (one of those jet
planes that can descend straight down). As he lands, the commercial displays “HARRIER FIGHTER
7,000,000 PEPSI POINTS.”
After watching the ad, Mr. Leonard sent in an order form with 15 Pepsi Points plus $700,000 and change
(to cover postage and handling) and demanded the Harrier Jump Jet. Pepsi claimed no contract had
been formed. One of Pepsi’s defenses was that because the ad and the catalog didn’t constitute an
offer but were invitations to make an offer, they could decline to accept Leonard’s offer. They also
defended on the grounds that even if they had made an offer, it wasn’t a serious offer. They argued that
Leonard’s thinking it was serious didn’t matter.
The court decided in favor of Pepsico. It held that Pepsi’s objective manifestations in the ad would lead a
reasonable person to conclude that Pepsi was joking. Leonard was tossed out of court. To decide for
yourself whether a reasonable person would think Pepsi was joking, watch the Pepsi Harrier Jet
Commercial video on YouTube.
Appreciating the importance of objective manifestation of assent
The theory of objective manifestation of assent has significant consequences. Because a
contract is formed objectively, whether a party reads or understands it is irrelevant. For
example, if I sign a ten-page contract and then claim no contract was formed because I
never read it or didn’t understand it, I’d have no case. The court would look for objective
manifestation of assent and find it in my signature.
Similarly, when I travel to Uruguay and rent a car, I have to sign a rental agreement that’s
written in Spanish. Claiming that no contract was formed, I might say, “No hablo
español!” But contract law would point to my signature on the contract and respond,
“¡Manifestación objetiva de consentimiento mutuo!” which translates to “Objective
manifestation of assent!”
Objective manifestation of assent also comes into play with online contracts. The offeree
usually has an opportunity to read the Terms and Conditions but skips that part and
clicks the Agree button or its equivalent. That qualifies as an objective manifestation of
assent.
Although objective manifestation seals the deal, it doesn’t necessarily mean
that the contract is enforceable. In some cases, the offeror, knowing that the offeree
won’t read or understand the contract, slips one-sided terms into it to take unfair
advantage. Contract law has ways of dealing with this, as I explain in Chapter 6.
However, although the courts may scrutinize such a contract more carefully and may
not enforce all the terms, they usually conclude that a contract was formed.
Forming contracts without words: The implied-in-fact
contract
As long as other objective manifestations are present, you don’t even need words to
form a contract. Parties may, through their actions, form an implied-in-fact contract — a
real contract (that is, a bargained-for contract) found in the conduct of the parties rather
than in their words. For example, suppose you go into your favorite fast-food restaurant
and see that the manager is busy with customers. You grab a bottle of water out of the
cooler, and, catching her eye, you point to the bottle and she nods. You then take a seat
and start drinking the water. Even though the two of you have not exchanged words, little
doubt exists that you entered into a contract to pay for that water. This is an implied-infact contract.
Determining Whether Language Constitutes an
Offer
An offer requires a promise, and a promise requires a commitment, but sometimes what
a person says doesn’t rise to the level of commitment and is therefore not an offer. The
test is whether the language is so complete that it requires nothing more than acceptance
to form a contract. If the language requires something more than acceptance, then it’s
probably not an offer. Using this test typically disqualifies the following as offers:
Preliminary inquiries
Advertisements
Circulars (offers that were sent to multiple persons) if the offerees know they
were sent to multiple persons
Catalogs
Of these four, preliminary inquiries and advertisements are the most common. The
following sections explain how to distinguish inquiries and advertisements from genuine
offers and how circulars and catalog listings fit in with advertisements.
Distinguishing a preliminary inquiry from an offer
A preliminary inquiry is like a fishing expedition: The parties merely discuss what they’d
hypothetically be willing to offer or accept. To test whether a party has presented an
offer, ask whether a reasonable person would think that no more than an acceptance is
required to form a contract. Carefully scrutinize the language and the context.
Suppose Mary says to Tom, “How much would you sell your house for?” Tom
responds, “I’d like to get $100,000 for it.” Mary says, “I accept!” Have the two parties
formed a contract? Mary clearly uttered a manifestation of acceptance, but does what
Tom said constitute an offer? The test is whether a reasonable person observing this
conversation would think that when Tom said, “I’d like to get $100,000 for it,” he was
committing to sell his house for $100,000. I think a reasonable person would
conclude that this isn’t the language of an offer. He was expecting Mary to make him
an offer. It’s not the same as saying something like, “Give me $100,000 for it, and it’s
yours.” Tom’s statement is more along the lines of a preliminary inquiry than an
offer.
Similarly, if Tom puts a sign outside his house that says, “For Sale. $100,000,” that’s not
an offer. Mary can’t simply accept the offer by handing Tom a suitcase with $100,000 in it,
because that’s not the customary practice for this type of transaction. Customary
practice is to put a for-sale sign outside a house to solicit offers to buy the house, not to
get people to give an acceptance. Based on the language and the context, more than
acceptance is required to form a contract.
Ads, catalogs, and circulars: Distinguishing
advertisements from offers
An advertisement is generally not an offer. It’s an invitation to make an offer. Assume a
store advertised in the newspaper, “Golden 50" HDTVs $500.” If this were an offer, the
store would legally be obligated to sell a TV to everyone who accepted the offer, even if
the store ran out of those TVs. If the store couldn’t deliver on its commitment, it would
be found in breach.
Contract law comes to the aid of the store by saying that the ad is merely an invitation to
make an offer. Technically, when a customer goes to the store and says, “I’d like to buy
one of those TVs you advertised,” the customer is making an offer. The store can then
either accept or reject it.
Similarly, a catalog is not an offer but an invitation to make an offer. For example, if I
order something from a store catalog and they’re unable to supply it, the store isn’t in
breach. I make my offer when I submit my order. If they can’t fill my order, they decline
my offer.
What’s a widget?
In Contracts classes, professors are always coming up with hypotheticals that involve buying and
selling widgets. This may lead you to wonder, What’s a widget? The answer: A widget is a hypothetical
good bought and sold in Contracts and Economics classes. Think of it as a gadget, a whatchamacallit, or
a thingamajig.
Of course, stores could take advantage of this arrangement by employing the bait and
switch — advertise an incredible deal (the bait) and then offer a deal that’s not so great
(the switch). Contract law has no solution for this problem, but most jurisdictions have
enacted consumer protection laws that make the bait and switch a legal violation. This is
why stores often add language to their advertisements, such as “while supplies last” or
“quantities limited.”
Another way to resolve the issue of multiple acceptances and limited supplies is to make
an item available only to the first person who accepts. If I have six friends over to my
house, for example, and say to them, “I’ll sell this widget for $10,” five of them may
accept. I’d be in trouble if the remaining four filed a breach of contract claim against me.
A reasonable person in this situation would probably say that because the six offerees
knew I had only one widget for sale, a reasonable way to resolve which of them got it
would be the first to accept.
An advertisement may be an offer if it’s so clear and definite that only acceptance is
required to form the contract. Circulars are especially vulnerable because each recipient
might not reasonably know that others have received the same circular. If I send a letter
to six friends offering to sell a widget for $10, this may constitute an offer. If each
recipient didn’t know I’d sent the offer to others, then I could be bound by multiple
acceptances, because each offeree might reasonably think I had one widget and was
offering it to him or her exclusively.
Deciding How Long an Offer Remains Open
An offer remains open for whatever time period is reasonable. What’s reasonable varies
according to facts and circumstances. If late in the day on Friday I offer to sell you 1,000
shares of Megalomart stock for $20 a share, you may reasonably expect the offer to
remain open until the opening bell on Monday, because the share value won’t change
over the weekend. If we’re standing on the floor of the New York Stock Exchange during
the trading day, however, and I say the same thing to you, the offer may be open for only
a few seconds, because values may be very volatile. (Some old cases state that an offer
made during a face-to-face meeting lapses when that meeting ends.)
The offeror may override the “reasonable period” rule by setting a specific time period.
On Friday, for example, I can say to you, “I’ll sell you 1,000 shares of Megalomart stock for
$20 a share, and this offer is open until Tuesday noon.” Unless another offer-terminating
rule applies, the offer remains open until that time. One of those rules is that the death of
the offeror or offeree terminates the offer.
Determining Whether the Offeror Can Back
Out: Revoking the Offer
Keeping an offer open indefinitely would result in keeping the offeror on the hook until
the offeree got around to accepting it, which is obviously unfair to the offeror. Because of
this, contract law allows the offeror to back out under certain ...
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