Chapter 08 – Contract Formation
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What it means to say that illegal contracts are void.
Sidebar 8.7 gives a common example of a contract with legality issues.
There are several exceptions to the general rule that courts will take no action on an
illegal contract.
Contracts that Restrain Trade
Emphasize:
When contracts that restrain trade often are illegal and void. Mention that chapter 16
will discuss antitrust law discusses these contracts and their illegality.
How covenants not to compete are used and when they are enforceable.
IV. When a “Meeting of the Minds” Is Lacking
A. Fraud or Innocent Misrepresentation
Emphasize:
What constitutes fraud and misrepresentation and how they affect capacity to contract.
B. Mistake
Emphasize:
The difference between a unilateral mistake and a mutual mistake.
C. Duress or Undue Influence
Emphasize:
What constitutes duress and undue influence and how they affect capacity to contract.
Cases for Discussion:
1. American Telephone and Telegraph Co. v. United States, 1997 U.S. App.Lexis 26291
(Fed.Cir.).
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had no authority to make the contract, and the contract was void as illegal. The trial
court declared the contract illegal, but granted AT&T unjust enrichment.
Issue: Was the contract void as illegal? Should unjust enrichment have been granted?
contract by declaring it an implied-in-fact contract and granting unjust enrichment. The
court suggested that AT&T could recover its goods from the Navy or sue for their
wrongful retention and use.
2. Lindemann v. Eli Lilly & Co., 816 F.2d 199 (5th Cir. 1987).
Plaintiff farmers sued defendant manufacturer because purchased chemicals failed to
control weeds. Defendant raised a damage limitation clause from the purchase contract.
3. McCutheon v. United Homes Corp., 486 P.2d 1093 (1971).
The plaintiff fell down a poorly lit flight of stairs leading from her apartment, and when
she sued the defendant lessor for negligence, the defendant raised the defense that the
plaintiff lessee had signed a contract agreeing to give up her rights to sue the defendant
for injury that occurred on the premises.
V. Contract Form LO (8-4)
A. Oral Contracts
Emphasize:
That oral contracts generally are as enforceable as written ones.
That in certain situations, the law requires contracts to be in a written, signed format.
Additional Matters to Consider:
Discuss common situations when students make a contract—in retail stores, in
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restaurants, or when they are in conversation with friends and family.
What kind of language is typically used in these situations? Point out that we seldom
use formal language of contractual promises or obligations.
B. Statute of Frauds
Emphasize:
The law requiring that certain contracts be in writing is known as the statute of frauds.
The statute of frauds requires certain types of business-related contracts to be in writing.
See Sidebar 8.10—“Are Electronic Contracts Considered Writings?”
Sale of an Interest in Land
Emphasize:
That although “sales of interest in land” covers a contract to sell land, it includes
Cannot Be Performed within One Year
Emphasize:
That courts usually interpret the one-year requirement to mean that the contract must
specify a period of performance longer than one year.
Additional Matter to Consider:
modifications need to be included and must be given in writing.
Others
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Emphasize:
That in addition to basic contracts covered by the statue of frauds, other contracts
must be in writing in various states.
C. Exceptions to the Writing Requirement
Emphasize:
That in addition to understanding that the statute of frauds requires certain types of
contracts to be in writing, it is important to know there are exceptions to the writing
requirement.
Part Performance
Emphasize:
That the doctrine of part performance creates an exception to the requirement that
sales of land must be in writing.
Rules Involving Goods
Emphasize:
That the UCC creates a number of situations that allow the enforcement of oral
agreements involving the sale of goods.
See Sidebar 8.11 lists exceptions to the writing requirement for transactions
involving the sale of goods.
Judicial Admissions
Emphasize:
1. Bazak International Corp. v. Mast Industries, Inc., 535 N.E.2d 633 (N.Y. 1989.)
Marketing director of seller-defendant met with buyer-plaintiff’s president. The two
negotiated the terms of an oral agreement for certain fabrics. Subsequently, following
the seller’s instructions, the buyer sent five purchase orders by telecopy to the seller’s
office. On each order form was the handwritten language “As presented by [the seller’s
representative].” The seller confirmed having received the purchase orders and never
objected to the terms set forth. When the seller failed to deliver the fabrics, the buyer
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sued.
2. McIntosh v. Murphy, 469 P.2d 177 (1970).
The plaintiff and the defendant entered into a one-year oral contract concerning a
management employment position in an automobile dealership in Hawaii. The plaintiff,
relying on the oral promises of the defendant, moved to Hawaii from California. After
being employed for 2 1/2 months, the plaintiff was released from employment. He sued
the defendant, who raised the defense of the statute of frauds.
Held: Substantial reliance on an oral promise is sufficient to remove the case from the
statute of frauds. In the particular instance, the court stated that the plaintiff’s reliance
was both substantial and reasonable.
Answers to Review Questions and Problems
Basic Concepts
1. Contract Law in Private Enterprise
The impersonal business dealings necessary to a complex private market economy are
difficult to imagine without the assurance that mutual promises will be carried out. Contract
2. Sources of Contract Law
a. The common law of contracts is that body of principles that have developed from court
decisions.
b. The UCC is the Uniform Commercial Code, adopted by states as the law governing
commercial transactions. Since the UCC is adopted in whole or in part in all states, the
law of commercial transactions is fairly uniform throughout the United States.
Contractual Classifications and Terminology
3. Bilateral and Unilateral Contracts
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a. Bilateral contracts involve an exchange of promises. Unilateral contracts arise when an
offeror makes a promise and asks for action in return.
b. Bilateral contracts are more common.
4. Express and Implied-in–Fact Contracts
a. Students’ answers will vary. An express contract might arise when the seller (child)
5. Implied–in–Law or Quasi–Contracts
6. Contractual Enforcement Terminology
7. Contractual Performance Terminology
8. Offer to Contract
9. Acceptance of Offer
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10. Consideration
a. No, Jefferson has not received new consideration from Goldberg to support the
11. Capacity of Parties to Contract
12. Lawful Purpose
13. When a Meeting of the Minds is Lacking
The situation involves fraud. The specific elements which are demonstrated by Chatter to
establish fraud in the scenario is an intent to deceive. Chatter promises to keep the user’s
data private but does not do so and thereby it is an intent to deceive the user.
14. Laura advertises a used car for $20,000. David asks why it is so expensive and Laura states
that it is only two years old. David agrees to purchase the car for $20,000. But when he
arrives home, he discovers the book value of the car is only $12,000. May David avoid the
contract under the doctrine of mutual mistake?
Contract Form
15. Written versus Oral Contracts
a. Generally, oral contracts are equally enforceable as written ones.
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16. Statute of Frauds
a. Requiring contracts to be in a written form and signed by the party being sued reduces
17. Exceptions to the Writing Requirement
The statute of frauds does not apply to prevent enforcement of this contract because the
goods have been specially manufactured for Elegante.
Business Discussion #1
1. When does the negotiation end and a binding contract exist?
The answer to this question is found in the language used by the buyer and seller. A contract
comes into being when both parties have expressed commitments to be bound to specific
commitments takes on many forms and varies from situation to situation.
2. If there is a conflicting language in the buyer’s purchase order and the seller’s
confirmation, which language controls?
Since, the facts involve goods, the terms of the Uniform Commercial Code control.
Generally, the seller’s confirmation controls the terms of the contract unless such form
3. How can you determine when a contract has been performed fully?