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Chapter 08 - Contract Formation
8-1
Chapter 8
Contract Formation
Learning Objectives
The purpose of this chapter and the next is to introduce students to that body of law known as
contracts, which underlies the buying and selling agreements of the private enterprise system.
The chapter emphasizes a broad, overall coverage of contract law. Special attention is devoted to
the vocabulary and concepts of classification and formation of contracts. Recognizing when
particular forms of contracts are required is also discussed. These topics permit students to
comprehend how many of the other subjects discussed in this book are based, at some level, on
contract law.
References
Benson, P., The Theory of Contract Law: New Essays. Cambridge University Press (2001).
Calamari, J. and J. Perillo, Calamari and Perillo’s Hornbook on Contracts. Thomson West
(2003).
Epstein, R.A., Contract: Freedom and Restraint. Garland Publishers, 2000.
Gilmore, Grant, The Death of Contract. Ohio State University Press (1995).
Gordley, J., Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment.
Oxford University Press (2006).
Matthew, H., Contract Law and Morality. Greenwood Press (1999).
Slawson, W.D., Binding Promises: The Last 20th Century Reformation of Contract Law.
Princeton University Press, 1996.
Treitel, G.H., Some Landmarks of Twentieth Century Contract Law. Clarendon (2002).
Teaching Outline
I. Basic Concept
A. Contract Law in Private Enterprise (LO 8-1)
Emphasize:
That contract law enables people to make agreements legally enforceable.
Why contract law is more important to a private enterprise economy than it is to a state-
controlled economy.
Chapter 08 - Contract Formation
8-2
Additional Matter for Discussion:
Use Sidebar 8.1 on the confidentiality agreement to illustrate how contracts can be used
That perhaps the most important example of state-based legislation impacting contract
law is the Uniform Commercial Code (UCC). Article 2 of the UCC covers the sale of
goods.
II. Contractual Classifications and Terminology (LO 8-2)
A. Bilateral and Unilateral Contracts
committed to perform.
Additional Matter for Discussion:
Figure 8.1 describes a bilateral contract.
Figure 8.2 describes a unilateral contract.
B. Express and Implied-in-Fact Contracts
Case for Discussion:
1. Razdan v. General Motors Corporation, 2000 U.S. App. LEXIS 21446 (7th Cir. 2000).
Chapter 08 - Contract Formation
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Hari Razdan goes to work as an hourly employee in anticipation of being hired full-time
at a salary of $72,800 with benefits. After working for $35 per hour for 6 months,
Razdan is offered a full-time position at $63,600 with full benefits. He refused this offer
but continued to work on an hourly basis until he was terminated 2 years later. Razdan
sues G.M. claiming there was an implied-in-fact contract for full-time employment at
$72,800 per year and that G.M. breached this contract.
Issue: Did an implied-in-fact contract exist for Razdan’s full-time employment?
C. Implied-in-Law or Quasi-Contracts
Emphasize:
That when one party is unjustly enriched at the expense of another, the law may imply a
duty on the first party to pay the second even though there is no contract between the
two parties.
That the doctrine that requires this result is based on an implied-in-law contract. Since
there really is no actual contractual agreement, the phrase quasi-contract is also used.
D. Contractual Enforcement Terminology
Emphasize:
The following terms:
o Enforceable contract
o Unenforceable contract
Additional Matter for Discussion:
How the study of the essential elements of contracts (sections 8-12 of the text) links to
the terminology presented in this section.
E. Contractual Performance Terminology
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Emphasize:
The following terms:
o Executed contracts
o Executory contracts
How these terms relate to other terms, such as bilateral and unilateral contracts.
Additional Matter for Discussion
How the study of the performance of valid, enforceable contracts (chapter 9) is linked to
the terms presented in this section.
III. Contract Formation (LO 8-3)
A. Offer to Contract
Emphasize:
The term offer and explain the terms offeror and offeree.
Definite Terms
Emphasize:
The doctrine of indefiniteness. Note that most advertisements, catalog, and web page
price quotes are considered too indefinite to form the basis for a contract unless they
are specific about the quantity of goods being offered, as well as the intended offeree.
That under the UCC, contracts for the sale of goods can leave open nonquantity terms
to be decided at a future time (§2-305). Note that this rule applies only to sales of
goods.
See Sidebar 8.4 on is there a definite offer.
1. Newman v. Schiff, 778 F.2d 460 (8th Cir. 1985).
The defendant made an offer on CBS News Nightwatch that he would give $100,000 to
8-5
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which had terminated at the show's end.
2. Grove v. Charbonneau Buick-Pontiac, Inc., 240 N.W.2d 853 (1976).
The defendant’s car dealer offered to give a new car to anyone who hit a hole-in-one in
the eighth hole of a local golf tournament. The local golf course had only nine holes, so
each hole was played twice from a different tee. On the 17th tee (second time the
plaintiff played hole number 8) he hit a hole-in-one. When the defendant refused to give
the plaintiff a new car, claiming that the plaintiff had hit his hole-in-one on the 17th
hole rather than on the 8th hole, the plaintiff sued.
Held: Charbonneau’s offer to give the new car as a prize was accepted by the making of
3. O’Keefe v. Lee Calan Imports, Inc., 262 N.E.2d 758 (1970).
Plaintiff saw an automobile advertised in the Chicago Sun-Times for $1,095. When the
plaintiff went to the defendant’s place of business and attempted to buy the car for that
price, he was notified that the price was an error and that the defendant would not honor
the advertised price. The plaintiff sued, arguing that the advertised price was an offer
that he had accepted.
B. Acceptance of Offer
Emphasize:
How unilateral and bilateral contracts are accepted.
Mirror Image Rule
Emphasize:
That for an acceptance to create a binding contract, standard contract laws requires
that the acceptance must “mirror” the offer, that is, must match it exactly.
UCC Battle of the Forms
Chapter 08 - Contract Formation
8-6
Emphasize:
How the UCC has changed the mirror image rule.
Silence Not Acceptance
Emphasize:
How course of dealing and conduct can imply acceptance and thus provide
exceptions to the rule that silence is not acceptance.
Mailbox Rule
Emphasize:
The deposited acceptance rule is also called the mailbox rule.
Sidebar 8.5 highlights the relevance of the mailbox rule in modern business
transactions.
Additional Case for Discussion:
1. Sharp Electronics Corporation v. Deutsche Financial Services Corporation, 216 F.3d
388 (4th Cir. 2000).
Sharp Electronics sold merchandise to Montgomery Ward. Deutsche Financial loaned
money to Montgomery Ward by paying Sharp for the merchandise shipped after
approving the invoice faxed by Sharp. Essentially Deutsche Financial agreed to pay for
Chapter 08 - Contract Formation
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nature, Deutsche Financial can and did state the limitation of its financial commitment.
Promise to Make a Gift
Emphasize:
The different situations when promises may be enforceable even though no
consideration is present.
1. Esquire Radio & Electronics, Inv. C. Montgomery Ward & Co., 804 F.2d 787 (2d.Cir.
1986).
Esquire Radio & Electronics (Esquire) helped develop and import consumer electronics
Chapter 08 - Contract Formation
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arrangement continued for many years, the buy-back terms were never expressly set
forth. On several occasions, Esquire became concerned about its large inventories of
spare parts. Each time Esquire was assured that Ward would buy the parts, and Ward
urged Esquire to inventory even more. In 1984, Ward terminated its relationship with
Esquire and refused to buy Esquire’s existing spare-parts inventory. Esquire sued.
Issue: Must Ward pay for the spare parts that Esquire has in inventory?
accumulate spare parts by promising that the parts would be repurchased. Esquire
reasonably and foreseeably relied on such promises and was injured.
2. Widmer v. Gibble Oil Co., 421 S.W.2d 886 (1967).
When the plaintiff oil company attempted to collect the $67.80 balance on the
defendant’s credit card account, the defendant sent a check to the company for $9.01
and marked the check “full payment of all accounts to date.” The plaintiff cashed the
check. The defendant maintained that there had been an accord and satisfaction.
owed for a liquidated debt cannot be an accord and satisfaction.
D. Capacity of Parties to Contract
Emphasize:
That the term capacity refers to a person’s ability to be bound by a contract.
That courts have traditionally held three classes of persons to lack capacity to be bound
by contractual promises: minors, intoxicated persons, and mentally incompetent
persons.
Minors
Emphasize:
How a minor may disaffirm or ratify a contract.
Intoxicated and Mentally Incompetent Persons
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Emphasize:
That except when a court has judged an adult to be mentally incompetent, that adult
does not lose capacity to contract simply because of intoxication or mental
impairment.
That a contract is voidable by the intoxicated or mentally impaired person.
Cases for Discussion:
1. Libby, McNeil & Libby v. United Steelworkers, 809 F.2d 1432 (9th Cir. 1987).
Libby, McNeil & Libby (Libby) sought a judgment declaring that the collective
bargaining agreement it had with the United Steelworkers did not obligate it to pay
certain pension benefits. Libby contended that it had never agreed to pay the benefits,
and if it had, it had done so by mistake. The magistrate found that Libby had agreed to
include in its agreement whatever pension benefits American Can Co. provided in its
plan, which included the contested ones.
Held: A unilateral mistake will excuse Libby from the contract only if the Union knew
2. Discuss the implications of the experienced 13-year-old baseball card collector who
bought a Nolan Ryan rookie card from an inexperienced sales clerk for $12. The shop
owner sought to rescind the sale on the basis that the card was a $1,200 card that had
been mistakenly marked $12. Eventually, the parties agreed to auction the card for
charity. It brought $5,000.
3. Leenawee County Bd. of Health v. Messerly, 295 N.W.2d 903 (1980).
Seller intended to sell and buyers intended to buy rental income property. In fact the
property had no value either as income property or single-family residence due to its
condemnation by the county health department as unfit for habitation. The buyer sued
for rescission.
E. Lawful Purpose
Emphasize:
