978-0077733711 Chapter 9 Lecture Note

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Chapter 09 – Introduction to Contracts

CHAPTER 09

INTRODUCTION TO CONTRACTS

I. OBJECTIVES:

This chapter, and the contracts chapters that follow, are designed to give the student a feel for

contract law as an evolving social institution rather than as a static body of rules. Accordingly,

emphasis is placed not only on traditional contract doctrines, but also on the U.C.C. and the

Restatement (Second) of Contracts as important sources of modern contract principles. After

reading the chapter and attending class, a student should be able to:

A. Explain what a contract is and why contracts are useful.

B. Distinguish the terms used to describe contracts and apply those terms to actual contracts.

C. Distinguish the applicability of the common law of contracts and Article 2 of the Uniform

Commercial Code and identify which governs a given contract.

D. Identify the circumstances under which promissory estoppel or quasi-contract can afford a

remedy even though no contract exists.

II. ANSWER TO INTRODUCTORY PROBLEM

A. Yes1, a good argument can be made that there was a contract between GSU and Paul. GSU

made an offer to him and he accepted. The terms of the contract would presumably cover any

provisions of any materials made available to Paul at the time of contracting. There was

consideration, legality and capacity. This problem bears similarity to Aronson v. The

University of Mississippi, 2001 Miss. App. LEXIS 385 (Miss. Ct. App. 2001), although the

Aronson case has more complex facts. In that case, the court ruled in favor of the student.

B. A unilateral contract, 2because GSU made a promise (to give the scholarship) that Paul

accepted by doing an act (getting the appropriate score on his SAT).

C. The common law of contracts, 3because this is a contract for a service.

D. Even if a court ruled that GSU did not have a contract with Paul, he has a strong case for

promissory estoppel.

E. Probably not under the deontological approaches because Paul’s right to receive what he has

bargained for as well as his property rights would be compromised. We do not have enough

information to do a consequentialist analysis because we don’t know the reasons that GSU

wanted to change the rules or the overall consequences of changing them. You might have

your class discuss what information would make GSU’s actions ethical under a utilitarian

approach.

III. SUGGESTIONS FOR LECTURE PREPARATION:

A. The Nature of Contracts

1. Define contracts as legally enforceable promises.

2. Note that the first decision point society faced in this context was whether to recognize

the idea of contracts at all–should any promise be legally enforceable?

a. Point out that once we had decided that some promises should be legally enforceable,

we had to decide whether all promises should be made legally enforceable. We

decided that they should not be (we all break promises regularly without fear of being

sued).

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Chapter 09 – Introduction to Contracts

b. Briefly discuss the basic elements of a traditional contract. Subsequent chapters

discuss these elements in detail so that students will be able to distinguish contracts

from unenforceable promises.

B. The Social Utility of Contract

1. Discuss the factors that make the contract device an essential component of a modern

industrial society.

2. Note the “private lawmaking” aspect of contracts.

C. The Evolution of Contract Law

1. Discuss the historical and social forces that shaped contract law and the resultant nature

of classical contract rules.

a. Give examples of the many different ways in which contracts can be formed.

2. Consider bringing examples of online contracts, such as Facebook’s Terms of Use, to the

classroom and using them as a focal point for discussion about standardized contracts in

the information age. Discuss why contract law is so important to e-commerce.

D. Methods of Contracting and Elements of a Contract

1. Discuss interactions that students are likely to have encountered that are essentially

contractual—e.g., leases, lottery tickets, magazine subscriptions, even syllabi. Talk about

what it is that makes these relationships contractual.

2. Note that some level of agreement is at the heart of every contract.

Lambert v. Barron (p. 323): The parties to this case were friends. Barron, a contractor,

was going through some hard economic times due to problems with five pending

projects. His friend, Lambert, was concerned about his financial and emotional well-

being. Lambert had some background in arbitrating constructions cases. He flew to

Farmerville, Barron’s town, to help. Prior to his departure, Barron’s employee had

transmitted various documents pertaining to Barron’s problems to Lambert for Lambert’s

review. Lambert claimed that, as Lambert and Barron were standing on the airport

runway immediately before Lambert returned home, he and Barron agreed to a consulting

contract whereby Barron would pay Lambert for providing consulting services for him.

Lambert billed Barron for $34,100 owed on the alleged contract, and Barron refused to

pay. Lambert sued him. Did Barron’s acceptance of Lambert’s help indicate the formation

of a contract, or was it merely an indication of a person accepting the help of a friend?

The court found that it was the latter, and no contract was formed.

Points for Discussion: What factors point toward the fact that this was not just a person

accepting the gratis help of a friend? Consider using the example of a college student

borrowing money from his/her parents. What should the parties to do make it clear that

there is a contract to repay the loan and not just a gift?

E. Basic Contract Concepts and Types

1. Discuss the elements of contracts and the common transactions that are, in fact, contracts.

a. Note that in bilateral contracts, both parties are bound and a contract is created when

they exchange promises to do something in the future (assuming that the other

elements of a binding contract are present).

b. Note that in unilateral contracts, one of the parties has promised to pay for a specified

future performance by the other party (a promise for an act), rather than a promise to

perform in the future (a promise for a promise). Point out that unilateral contracts

cause some problems in the areas of offer and acceptance and mutuality of

obligation, but that despite some evidence of disfavor, courts sometimes use

unilateral contract terminology to produce just results. You might bring in a “frequent

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Chapter 09 – Introduction to Contracts

buyer” card to show an example of an offer for a unilateral contract and a lease to

show an example of a bilateral contract.

3. Define a valid contract and distinguish it from an unenforceable contract.

4. Distinguish between voidable and void contracts. A void contract is never enforceable

under any circumstances. A voidable contract is enforceable unless and until a party with

the power to cancel the contract exercises that power.

5. Distinguish between express and implied contracts.

a. Note that a contract may be partially express and partially implied. For example,

Frank hires Sally to paint his house. They expressly agree on the price, completion

date, and color and quality of the paint. Even though they make no express

statements about the quality of the job Sally is to do, the courts will imply a promise

on Sally’s part to do a workmanlike job of painting. For a contemporary business

problem involving implied contract issues, you may wish to refer students to the

Employment Law chapter’s discussion of those employment cases in which the issue

is whether employer statements in employee handbooks, etc., become part of the

employment contract. A further discussion of implied contracts can be found in

Symons v. Heaton, a text case that appears later in the chapter.

5. Distinguish between executed and executory contracts. You may wish to distinguish this

usage of the word “executed” from its more common business usage to denote the signing

of a document.

E. The Uniform Commercial Code

1. Discuss the nature and origins of the UCC.

a. Discuss the ways in which Code rules exhibit some of the basic tendencies attributed

to “modern” contract rules. Discuss the “good faith” and “unconscionability” rules in

particular as examples of this phenomenon. Discuss the content of the good faith

requirement.

b. Note that although the UCC is a statutory source of law, it is in an evolutionary

process because it is subject to revision. Discuss the fact that there is an ongoing

project to draft revisions of Article 2 and note that an offshoot of Article 2. UCITA

(the Uniform Computer Information Transactions Act) has been drafted, offered for

enactment in about ten states, and has now been enacted by several states. Only two

states have enacted UCITA so far.

c. Note the Code distinction between merchants and non-merchants. Give some familiar

examples of each.

d. Discuss the application of the Code–Code rules technically apply only to contracts

for the sale of “goods.” Discuss the meaning of goods and show how goods differ

from real estate, services, and intangibles. Point out that Code application does not

depend on the amount of money involved in the contract or whether the parties are

merchants. Note, however, that even where a contract for the sale of goods is clearly

at issue, the Code has not changed all contract rules. Thus, the body of law that

applies to such cases includes specific Code principles together with all general

contract principles that have not been changed by the Code. Discuss Problem Cases

#7 and 9.

1) Note that many contemporary contract cases are “mixed” cases because they

involve elements of both goods and services (e.g., a construction contract). The

test most frequently used by the courts to determine whether or not the Code

applies is which element (goods or services) “predominates” in the contract.

Contracts calling for services involving significant elements of skill or judgment

are unlikely to be decided under the Code. See Problem Case #1.

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Chapter 09 – Introduction to Contracts

Audio Visual Artistry v. Tanzer (p. 327): The Tennessee Court of Appeals holds

that the trial court was correct in concluding that the UCC, rather than the

common law, controlled the mixed good-and services contract at issue. The court

determined that the goods aspect of the contract for a “smart-home” sound

system predominated over the services aspect; hence, the UCC provided the

controlling rules.

Points for Discussion: Ask the students what the contract contemplated in terms

of good and services. Why does the court conclude that the goods aspect of the

contract predominated? (The components of the sound system were critical

under the contract’s language and purpose, and those components clearly were

goods. AVA’s business centered around the furnishing of goods, with services —

delivery and installation—seeming incidental by comparison. Also, more than

80% of the contract price pertained to the goods sold, as opposed to the services

aspect of the deal.)

2) Note also, however, the tendency of Code principles to “bleed-over” into

traditional contract cases. This is especially true of general Code ideas such as

“good faith” and “unconscionability.”

F. Discuss the CISG (See The Global Business Environment on p. 325).

G. The Restatement (Second) of Contracts

1. Discuss the nature and origins of the Restatement Second.

a. Note that although the Restatements do not have the force of law, they have been

very influential in the evolution of the legal areas that they address.

b. Point out the “modern” contract nature of many of the Restatement Second’s

provisions.

H. “Noncontract” Obligations

1. Explain the relationship of the “noncontract” obligations covered in this chapter to

contract obligations. Explain why courts created these doctrines.

a. Discuss the doctrine of quasi-contract. In some cases the courts, to avoid unjust

enrichment, will, as a matter of law imply a promise on a person’s part to pay for

benefits that he has received from another.

1) Note that quasi-contract liability is not truly contractual in the sense that it is not

based on any agreement between the parties. Quasi-contract is a device used by

the courts to impose liability in some cases where the elements of a contract are

not present. In fact, quasi-contract recovery is not available to a party when there

is a valid contract that covers the subject matter in question.

Symons v. Heaton (p. 331): The Supreme Court of Wyoming affirms the lower

court’s grant of summary judgment to the defendant (The Estate of Gary Plachek)

in a case brought by Plachek’s long-time friend, Curtis Symons. Symons based

his case on three alternative theories: implied contract; unjust enrichment; and

promissory estoppel. He lost on all three claims.

Points for Discussion: Ask the students to note the key facts, including the

circumstances under which Symons moved in with his long-time friend

(Plachek), hauled him around, and did all sorts of things for Plachek while

Plachek did little but sleep and drink to excess. So why doesn’t Symons win in

his claim against Plachek’s estate for the value of the care and services he

provided to Plachek? Ask the students about each of Symons’s claims. Why

does he lose on the implied contract theory? (Among other things, no conduct

suggesting an agreement that if Symons stayed around and provided services, he

would be paid. Do your students agree?) Why does he lose on the unjust

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Chapter 09 – Introduction to Contracts

enrichment claim? (Symons admitted he stayed because he wanted to stay, and

that he was fulfilling a commitment he had made to Plachek’s mother. Do your

students agree that there was no unjust enrichment?) Why does he lose on the

promissory estoppel claim? (There was no clear and definite promise on which

Symons relied to his detriment.)

2) Distinguish between quasi-contract liability and implied contract liability. In

implied contract cases liability is imposed because the courts believe that the

parties in fact reached an agreement despite their failure to express all the

agreement’s terms. In quasi-contract cases no actual agreement exists, but courts

infer the existence of a promise to pay as a means of avoiding an injustice.

Consider Symons again (see above).

b. Discuss the doctrine of promissory estoppel. Although traditional contract

principles afforded no protection to those who relied on the promises of others when

the other elements of a binding contract were not present, courts in this century have

been increasingly willing to do so.

1) Discuss the elements of promissory estoppel. Note the fundamental difference

between liability based on promissory estoppel and liability based on contract:

promissory estoppel protects reliance–contract law protects bargains. Again,

note Symons (see above).

Aceves v. U.S. Bank (p. 334): Aceves obtained a loan from Option One (which

later transferred its interest to U.S. Bank) to buy a house. The loan was secured

by a 30-year mortgage (deed of trust) on the house at an initial rate of 6.35

percent that would become adjustable after two years. When the interest became

adjustable, Aceves could no longer afford the payments. Aceves received a

foreclosure notice. She filed for bankruptcy under Chapter 7, which imposed a

stay on the foreclosure. U.S. Bank told her that it would “work with her” on a

loan modification/mortgage reinstatement once her loan was out of bankruptcy.

U.S. Bank filed a motion in bankruptcy court to lift the stay. The loan servicing

company contacted Aceves’ lawyer asking permission to speak with Aceves

directly to discuss “loss mitigation.” Relying on the bank’s promise to work with

her on loan modification, Aceves did not resist the bank’s motion and did not

seek bankruptcy relief under Chapter 13. The bankruptcy court lifted the stay.

Aceves’ home was nevertheless foreclosed upon and she was evicted. She filed

suit against the bank on several theories, including promissory estoppel. Her

theory was that the bank did not intend to work with her to reinstate the mortgage

and modify the loan, but only promised to do so in order to persuade her to

forego bankruptcy proceedings. The bank filed a demurrer, and the trial court

decided in its favor. Aceves appealed. The issue on appeal is whether Aceves’

complaint stated a claim for promissory estoppel. The court applied the four

elements of promissory estoppel to the facts and found that the complaint did

state a claim for promissory estoppel.

Points for Discussion: This case is one person’s story from the “mortgage

foreclosure crisis” of recent years. You might expand on the type of mortgage

Aceves had and the difference between bankruptcy under Chapters 7 and 13

Does your class agree with the court’s analysis of the applicability of promissory

estoppel’s elements—e.g., was the promise made here clear and unambiguous?

Why wasn’t the last-minute offer that Aceves refused considered to be a

fulfillment of the bank’s promise to negotiate?

Additional Examples: Problem Cases #3, #5, and #6.

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Chapter 09 – Introduction to Contracts

2) Note that promissory estoppel is a classic example of an imprecise (what is

“injustice?”) modern contract law rule. It enables courts to impose liability in the

name of fairness in cases where no liability would exist under classical contract

principles.

3) Note, however, that promissory estoppel is unlikely to apply if a person relies on

expectations that are not traceable to a fairly clear promise.

Ethics in Action (p. 335): Quasi-contract plainly rests on an ethics-related

foundation–the idea that, in some circumstances, it is unjust to receive a benefit

from others without paying for it. Another way of stating this is to say that just as

the benefits one obtains from others pursuant to the performance of a freely

bargained contract are matters of right, both legal and moral, in some situations

one may have received benefits from another without being legally or morally

entitled to them. If the circumstances are such that it is impossible to return such

benefits (e.g., a free paint job), quasi-contract forces the recipient to make just

compensation for them. The ethical basis for promissory estoppel may be found

in the idea featured prominently in the ethical and public policy problems in

Chapters 6 and 7; that those who unjustifiably cause harm to another are duty

bound to compensate that other for his injuries. Promisors who make promises

which they should reasonably expect to induce detrimental reliance on the part of

the promisee are accordingly held liable for the promisee’s reliance losses.

Promissory estoppel is not, however, perfectly ethically analogous to tort liability

due to the role of the promisee in the process. Certainly, it may be said that “but

for” the promisor’s promise, the promisee would not have relied and suffered

loss. But this ignores the question whether the promisee was reasonable in

relying on a promise which was otherwise legally unenforceable and, if not, on

what ethical basis the law finds itself in the business of protecting reliance which

is, in this sense, unreasonable.

IV. RECOMMENDED REFERENCES

A. RESTATEMENT (SECOND) OF CONTRACTS (1983).

B. E. Allan Farnsworth, CONTRACTS (3rd ed. 2004).

C. Kevin M. Teeven, The Origins of Promissory Estoppel: Justifiable Reliance and Commercial

Uncertainty Before Williston’s Restatement, 34 U. Mem. L. Rev. 499 (2004).

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