Book Title
Business Law with UCC Applications 14th Edition

978-0077733735 Chapter 7 Lecture Notes

April 10, 2019
Chapter 07 - The Essentials of Contract Law
Chapter 7
The Essentials of Contract Law
I. Key Terms
Admiralty court(p. 173) Informal contract (p. 187)
Bilateral contact (p. 185) Law merchant (p. 169)
Breach of contract (p. 185) Objective concept rule (p. 169)
Canon law (p. 171) Pie powder court (p. 186)
Capitalism (p. 170) Privity (p. 173)
Contract (p. 169) Punitive damages (p.182)
Contract of record (p. 188) Quasi-contract (p. 181)
Executed contract (p. 188) Rehabilitate (p. 187)
Executory contract (p. 188) Staple court (p. 180)
Express contract (p. 186) Unenforceable contract (p. 185)
Fair court (p. 173) Unilateral contract (p. 185)
Formal contract (p. 187) Valid contract (p. 185)
Implied contract (p. 186) Void contract (p. 185)
Implied-in-fact contract (p. 186) Voidable contract (p. 185)
Implied-in-law contract (p. 187)
II. Learning Objectives
1. Explain the three theories of contract law.
2. Identify the six elements of a contract.
3. Explain the place of the UCC in contract law.
4. Distinguish contracts from other agreements between different parties.
5. Explain the concept of privity and contract law.
6. Explain the nature of valid, void, voidable, and unenforceable contracts.
7. Contrast unilateral and bilateral contractual arrangements.
8. Outline the difference between express and implied contracts.
9. Discuss the difference between quasi-contracts and implied-in-fact contracts.
10. Differentiate between formal and informal contracts.
11. Explain how executory contracts differ from executed contracts.
III. Major Concepts
7-1 The History of Contract Law
With the Roman law providing a model, with the Roman Catholic Church supplying
political and social support, with canon law supplying a moral framework, and with
practicality guiding their activities over a 300- year period, the merchants of the late
Middle Ages developed a body of active law that was characterized by neutrality,
universality, mutuality, involvement, integration, and evolution. The law merchant was
developed by the merchants themselves. The law merchant also successfully integrated
itself into other legal tradition such as English common law. Many of its provisions still
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Chapter 07 - The Essentials of Contract Law
exist in today’s court decisions and statutes.
7-2 The Multidimensional Nature of Contract Law
Contract law is a multidimensional area of the law, laying out not only what our rights
and duties are, but also whether we have actually under-taken those duties and been
given those rights. To explore this in more detail, we looked at the elements of a contract
and at several additional multidimensional aspects of contract law including the
objectives of contract law, remedies in contract law, contracts and the UCC, contracts and
other agreements, contracts and agency law, and contracts that must be written.
7-3 Contractual Characteristics
Contractual characteristics fall into five categories. These categories are valid, void,
voidable, or unenforceable; unilateral or bilateral; express or implied; informal or formal;
and executory or executed.
IV. Outline
I. The History of Contract Law (7-1)
A. Mercantile Law, Ancient Rome, Capitalism, and the Church
1. The history of contract law is intertwined with the parallel development of Western
mercantile law.
2. Mercantile law is often referred to as the law merchant and as lex mercatoria.
3. The law merchant saw rapid development between the 11th and 13th centuries in
Western Europe.
4. Between the fall of Rome and the rise of the mercantile city states, commercial
transactions were limited to traveling merchants and such with the governing law
emerging from rules within the traditions of the Justinian Code of the Roman Empire.
5. Ancient Roman law was adequate at the time because commerce itself was limited
and the population was low.
6. Changes occurred in that the technological complex adaptive system led to
developments in agriculture resulting in crop surpluses that could be sold; changes in
manor law freed many peasants who began selling in commerce; and Europe had a
population explosion.
7. The changes led to a new group of professional sellers who developed their own
system of laws.
8. The complex adaptive system that resulted came to be called mercantile law or the
law merchant.
9. Mercantile law is closely associated with the development of capitalism.
10. European capitalism began in the 11th and 12th centuries.
11. One of the driving forces behind the growth of capitalism was the Roman Catholic
12. The church encouraged the new class of sellers to establish guilds that followed the
law of the church, a legal tradition that is generally referred to as canon law.
B. The Characteristics of the Law Merchant
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Chapter 07 - The Essentials of Contract Law
1. Involvement and Law Merchant
a. Involvement requires that those affected by law participate in its making and
b. Merchants were involved in the establishment and the operation of courts that
adjudicated disputes involving contracts and other commercial disagreements.
2. Neutrality of the Law Merchant
a. The law merchant was made up of a fairly neutral system of laws and procedures.
b. Neutrality characterizes any system of laws that is consistently applied in the
same evenhanded way, no matter who the antagonists might be.
c. The law merchant was made up of fairly neutral system of laws and procedures.
d. The actual process of writing these things down was facilitated by the ruling
classes and by professional notaries.
3. Universality and the Law Merchant
a. Universal laws are those that apply to everyone.
b. The universal applicability of the law merchant was made necessary by global
nature of trade in the late middle ages.
c. Some rulers agreed to incorporate the law merchant into their national documents,
such as the Manga Carta in 1215 which contains a clause that specifically grants
safe conduct to foreign merchants in England.
4. Integration of the Law Merchant with Common Law
b. The integration of mercantile law into the diverse legal traditions in Europe was
especially difficult in England where a strong common law tradition had
developed during the late Middle Ages.
c. The first merchant courts in England were established in the 11th century as part
of every royal charter that legalized a local fair and were known as “fair courts”
or “pie powder courts.”
d. The fair courts lost their power with the creation of staple courts under the Staples
Act of 1353.
e. Staples courts heard cases that involved certain set commodities.
f. Staple courts were run by mayors who applied mercantile law, and this worked
well for about two centuries.
g. In the 16th century staple courts were taken over by the judges of the King’s
Court, and common law dominated that court.
5. Evolution of the Law Merchant and Common Law
a. The evolution of law merchant and common law required that the two work in
tandem to deal with their chief competitor, the admiralty courts, by using
arbitration and eventually the statutory law system.
b. Admiralty courts were tribunals set up in seaport towns to handle disputes
involving maritime law, shipping contracts, contests of over docking rights,
collisions at sea, and the like.
c. When the common law judges took over the staples courts, the merchants took
their cases to the admiralty courts to ensure that the law merchant would be used
to settle their disputes.
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Chapter 07 - The Essentials of Contract Law
6. When common law courts obtained jurisdiction over commercial cases handled by
admiralty courts, the merchants fought back by establishing their own arbitration
groups to avoid common law altogether.
7. The common law courts finally began to see the wisdom of integrating common law
with the law merchant and this integration practice became more accepted by the
beginning of the 18th century.
8. In the 19th century, Parliament passed the Bills of Exchange Act and the Sale of
Goods Act both of which codified common law principles which by that time had
been successfully integrated with most law merchant principles.
9. When the National Conference of Commissioners was established in 1895 in the
United States, it developed two model laws, the Uniform Negotiable Instruments Act
which followed the Bills of Exchange Act and the Uniform Sales Act which was
patterned after the Sale of Goods Act.
10. The traditions of the common law and the law merchant were merged, with the
principles of the law merchant dominating the law governing commercial
C. The Restatement of the Law of Contracts
1. Restatements are restatements of the common law written clearly and organized in a
straightforward fashion.
2. Restatements of the Law are written by the American Law Institute, an organization
founded in 1923 consisting of lawyers, judges, and law professors.
3. Restatements are persuasive, not binding.
4. Restatements are adaptive and sometimes do more than restate the law in that they
may create the law as lawyers, judges, and law professors struggle to compromise on
the meaning, intent, and objectives of common law.
5. Early drafting of the Restatement of the Law of Contracts narrowly defined the
interpretation of consideration leaving no room for a situation in which before a
contract exists, a promise is made, relied on, and then broken.
6. Illustrating the role of the drafters in regard to struggles with the law, to remedy the
situation involving a promise being broken outside the confines of a contract, the
concept of promissory estoppel was added to the Restatement.
II. The Multi-Dimensional Nature of Contract Law (7-2)
A. The Elements of a Contract
1. Mutual Assent
a. Once the offer has been properly made by the offeror and accepted properly by
the offeree, then mutual assent exists between them.
b. Situations that might destroy assent include: fraud (both active and passive),
misrepresentation, mistake, duress, and undue influence.
2. Consideration
a. Consideration is the thing of value promised to the other party in exchange for
something else of value promised by the other party.
b. Courts are generally not concerned with the adequacy of consideration unless the
consideration is unconscionable.
c. Parties can settle disputes through an accord and satisfaction.
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Chapter 07 - The Essentials of Contract Law
d. Past consideration, pre-existing duties, illusory promises, and future gifts are not
e. Situations involving promissory estoppels will not eliminate a party’s
responsibility to compensate an innocent party, even without consideration.
3. Capacity
a. Capacity is the legal ability to make a contract.
b. Questions involving capacity arise with minors and parties with mental
4. Legality
a. Any contract to commit a crime or a tort would be illegal and, therefore, void.
b. Some contracts are made illegal by statutory law.
c. Some contracts are made illegal by courts based on public policy.
B. The Objectives of Contract Law
1. Rehabilitation in Contract Law
a. If the court finds that one of the parties breached the contract, that party will have
to rehabilitate the innocent party by compensating that party for any loss that
results from the breach.
b. The courts say that the objective of this rehabilitation is to place the innocent
party in as good a position as he or she would have been had the contract been
2. The Payment of Damages
a. Actual or compensatory damages are meant to make up for a financial loss
suffered by an innocent victim.
b. Incidental damages are those that are paid by the breaching party to make up for
any expenses paid by the victim to prevent any additional loss.
c. Consequential damages are indirect damages that result because of special
circumstances that exist with a particular contract.
d. Punitive damages are designed to punish the wrongdoer for his or her outrageous
conduct; and, while they are not generally awarded in breach of contract cases,
there are exceptions.
3. Recovery Limits and Equitable Relief
a. The innocent party cannot take advantage of the breach by deliberately raising the
amount of damages that the other party must pay which is referred to as the duty
to mitigate the damages or just the duty to mitigate.
b. An equitable remedy called specific performance is an exception to the rule that
says that the courts cannot force a party to go through with a contract.
c. Equitable remedies are those that are imposed by the courts when the payment of
money would not compensate for the loss suffered by the innocent party.
d. An injunction, a court order issued by a court directing a party to refrain from
some activity that represents a breach of contract, is a type of equitable remedy.
C. Multi-Dimensional Principles of Contract Law
1. Contracts and the Uniform Commercial Code
a. The Uniform Commercial Code (UCC) is a model set of laws designed to govern
almost all commercial transactions.
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Chapter 07 - The Essentials of Contract Law
b. The UCC replaced the Uniform Sales Act which followed the British Sale of
Goods Act, and which preserved the law merchant as integrated within English
common law.
c. The UCC is a compendium of the laws that affect most of the areas of contract
law covered in the law merchant.
d. Other types of contracts, such as employment contracts and real property
contracts are covered by common law and by special statutes.
2. Contracts and Other Agreements
a. All contracts are agreements, but not all agreements are contracts.
b. At the very least that to be a legally recognized contract, an agreement must
possess the four elements of a contract: mutual assent, consideration, capacity,
and legality.
3. Contracts and Privity
a. The general rule of contract law is that the parties must stand in privity to one
b. Privity means that all parties must have a legally recognized interest in the subject
of the contract if they are to be bound by it.
c. It is possible for two or more parties to provide benefits to a third party under the
terms of a contract although there is a distinction between intended beneficiaries
and incidental beneficiaries.
d. An exception to the general rule of privity exists in cases involving warranties and
product liability.
4. Contracts and Agency Law
a. An agent is a party who has been hired or appointed by a principal to perform
some sort of work, usually of a business nature, for the principal.
b. Agents can bind the principal to a contract, even if the principal is not present.
5. Contracts and the Statute of Frauds
a. The Statute of Frauds is a law that outlines those contracts that must be in writing
to be enforceable in court.
b. The six types of contracts must be in writing to be enforceable are (1) contracts
that cannot be completed within one year; (2) contracts involving land; (3)
contracts inconsideration of marriage; (4) contracts made by executors to pay a
debt of the estate out of his or her own finances; (5) a promise to pay the debt of
another; and (6) contracts for the sale of goods valued at $500 or more.
6. Exceptions to the Statutory Rule
a. The statute says that a contract for the sale of goods valued at $500 or more must
be in writing unless the contract is for specially manufactured goods.
b. The writing becomes unnecessary with a sale of goods contract if the goods have
already been shipped and accepted or a payment has been received and accepted.
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Chapter 07 - The Essentials of Contract Law
c. If one of the parties reduces the contract to writing and sends that writing to the
other party, that unsigned paper will be sufficient as a writing under the statute
unless the receiving party objects in writing within 10 days.
d. In a court action if the party that has invoked the Statute of Frauds to escape
enforcement has also admitted under oath that the contract exists, no writing is
7. Rules of Interpretation
a. Courts have developed rules of construction to guide judges as they interpret the
written word.
b. The standard construction rule which tells judges that their primary objective in
the interpretation of a written contract is to uncover the goals that the parties had
when they entered the contract in the first place.
c. Courts must also interpret any ambiguous clause against the party who actually
wrote the contract.
d. Under the UCC, it is not always necessary to have all of the terms just as long as
the judge has enough information to determine a “reasonably certain basis for
giving an appropriate remedy.”
III. Contractual Characteristics (7-3)
A. Valid, Void, Voidable, and Unenforceable Contracts
1. A valid contract is one that is legally binding and fully enforceable by the court.
2. A void contract is one that has no legal effect whatsoever.
3. A voidable contract is one that may be avoided or canceled by one of the parties.
4. An unenforceable contract is one that, because of some rule of law, cannot be upheld
by a court of law.
B. Unilateral and Bilateral Contracts
1. A unilateral contract is an agreement in which one party makes a promise to do
something in return for an act of some sort.
2. A bilateral contract is one in which both parties make promises.
C. Express and Implied Contracts
1. Express Contracts
a. When contracting parties accept mutual obligations, either through oral discussion
or written communication, they have created an express contract.
b. Oral negotiations in many cases will be reduced to writing, but this is not always
2. Implied Contracts
a. A contract implied by the direct or indirect acts of the parties is known as an
implied-in-fact contract.
b. An implied-in-law contract, also called a quasi-contract, is imposed by a court
when someone is unjustly enriched.
c. A quasi-contract is not a contract in the true sense of the word, because it is
created by the court.
D. Informal and Formal Contracts
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Chapter 07 - The Essentials of Contract Law
1. Informal Contracts
a. Any oral or written contract that is not under seal or is not a contract of record is
considered an informal contract.
b. An informal contract is also known as a simple contract.
2. Formal Contracts
a. Under common law principles, a formal contract differs from other types of
contracts in that it has to be (1) written; (2) signed, witnessed, and placed under
the seal of the parties; and (3) delivered.
b. The UCC removed the requirement for a seal in sale-of-goods contracts.
3. Contracts of Record
a. A special type of formal contract is known as a contract of record.
b. In support of the contract, an accompanying judgment may be issued in favor of
one of the parties by the court.
c. A contract of record is not a contract
d. in the true sense of the word, because it is court created.
E. Executory and Executed Contracts
1. A contract that has not yet been fully performed by the parties is called an executory
2. When a contract’s terms have been completely and satisfactorily carried out by both
parties, it is an executed contract.
V. Background Information
A. Cross-Cultural Notes
1. In China, judges may act as mediators in contractual disputes, often applying powers
that exceed those of American judges.
2. Traditionally, the Japanese seek harmony in all things. Japanese businesses, therefore,
generally avoid litigation. Referring a dispute to a third party, such as a court, is
considered an embarrassment. Evidence of this fact is the smaller number of lawyers
per capita in Japan as compared to the U.S. The number of lawyers in Japan,
however, has been on the rise.
3. Early Roman law, like Anglo-Saxon law and other early legal systems, recognized
only executed contracts that involved face-to-face dealings and an exchange of
property at the moment the deal was made. With the expansion of the Roman Empire
and increased foreign trade, rules to address unfulfilled promises developed, allowing
a new flexibility in commerce.
4. An article available from the website of the American Bar Association, at
e_newsletter_home/estate_qadri_2.html, by Shahzad Q. Qadri discusses the marriage
contract under Muslim law and the mahr. As explained in the article, the mahr is not
a bride price, but can be loosely translated as a marriage gift.
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Chapter 07 - The Essentials of Contract Law
B. Historical Fact
1. Many contracts are informally sealed with a handshake, a gesture commonly used to
signify agreement. The handshake is a Western custom that is thought to have
originated when hands were extended to show they held no weapons. The parties to
the agreements then shook hands as a symbolic gesture of mutual trust.
2. The nineteenth century was considered the golden age of contract law. At that time,
contract law was a general branch of law that was suited for a free and expanding
market. Much economic and social legislation proposed in the United States during
this period and in the early twentieth century was denounced by the Supreme Court as
unconstitutional because it interfered with “freedom of contract.” In basing its
decisions on the “freedom of contract” principle, the Supreme Court was
demonstrating that it had accepted the will theory of contract law.
3. In seventeenth century England, because people made many unsealed and, therefore,
informal and unenforceable contracts, the power of local courts in contract disputes
declined. Unsealed contracts were accepted as valid, provided there was
4. The use of a seal or a signet ring has been associated with legal transactions for
centuries. Roman lawyers displayed their rings at legal proceedings. Also, the use of a
seal for the purchase of property was mentioned in the Old Testament: “And I bought
the field of Hanameel my uncle’s son, that was in Anathoth, and weighed him the
money, even seventeen shekels of silver. And I subscribed the evidence, and sealed it,
and took witnesses, and weighed him the money in the balances” (Jeremiah 32:9–10).
5. The Statute of Frauds as it exists in most U.S. jurisdictions is based on a 1677 act
passed by the English parliament known as “An Act for the Prevention of Frauds and
C. State Variations
1. In Nebraska, a surrogate parent contract (a contract by which a woman is to be
compensated for bearing a child of a man who is not her husband) is void and
2. Tennessee’s statute of frauds at T.C.A. § 29-2-101 has a provision in its statute of
frauds protecting lenders through providing requirements for writings in connection
with promises to lend money or extend credit.
D. Quotations
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Chapter 07 - The Essentials of Contract Law
1. Corruptissima republicans, plurimae leges. (When the state is the most corrupt, then
you have the most laws.)
— Tactitus, first century A.D., Roman historian.
VI. Terms
1. When an offer is accepted and there is consideration, the process is called “objective
manifestation of mutual assent.” This process is commonly referred to as “making a
deal.” The word deal comes through the Old English “dael” or “dal,” meaning
“division” or “portion.”
VII. Related Cases
1. In Bagley v. Mt. Bachelor, Inc., 356 Or. 543, 340 P.3d 27 (2014), the Oregon held that
enforcement of an anticipatory release of a ski operators liability for its own negligence
would be unconscionable. The court noted that the release was a take-it-or-leave-it type
arrangement and that the plaintiff had no opportunity to bargain as to its terms. The court also
noted that the defendant had the ability to guard against hazards.
2. In Hernandez v Banks, 65 A.3d 59 (D.C. App. 2013), a property owner brought an action
against tenants who had entered into lease with property's former owner, seeking possession
of the property on grounds that former owner lacked mental capacity to enter into lease.
Rather than rule that the lease was void as a matter of law, the court adopted a voidable
VIII. Teaching Tips and Additional Resources
1. The U.S. Small Business Administration has information for small businesses
including information regarding starting a business at
2. Findlaw.com has a site devoted to contract law issues at
3. An article titled the “Top 10 Reasons to Avoid Breaching a Contract” can be
found at
4. An article discussing the importance of clear contract language titled “Lessons
Learned the Hard Way: Business Contracts” can be found at
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Chapter 07 - The Essentials of Contract Law
5. Information regarding the American Law Institute, a body involved with
developing proposed uniform laws such as the Uniform Commercial Code, can be
found at http://www.ali.org/index.cfm?fuseaction=about.overview.
6. Discuss with the students what constitutes a contract and why contracts are
necessary. Ask students to surmise how and when contracts originate. Suggest that
they write down at least three questions they have about the nature of contracts
and encourage them to refer to these questions periodically throughout the
chapters on contracts to see if they have found any answers.
7. Divide the class into small groups and have each group create one situation in
which there is an implied-in-fact contract and one in which there is an
implied-in-law contract, or quasi-contract. Have each group share their examples
and identify each type of contract.
8. Insurance policies are a form of contract that are heavily regulated. The National
Association of Insurance Commissioners website at http://www.naic.org/ contains
information regarding many current insurance topics. An interactive map is
available at http://www.naic.org/state_web_map.htm allowing users to obtain
information regarding individual state departments of insurance. Consumer
information is available at http://www.naic.org/index_consumer.htm.
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