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CHAPTER 10
CONTRACTS
Basic to the law of contracts is the principle that business has the freedom to enter into and create
nearly any contract. Freedom of contract a requisite for progress, but limits are imposed by
contract law.
CONTRACT LAW—Contract law is primarily state common law. The Restatement of
Contracts, now in its second edition, is an authoritative document that provides an orderly
presentation and summary of the common law of contract. Common law principles of contract
are significantly influenced by many legislative enactments. Of particular importance are Articles
2 and 9 of the Uniform Commercial Code (UCC), which we see in the next chapters.
Definition of a Contract—Blackstone: “an agreement, upon sufficient consideration, to do or
not to do a particular thing.” Restatement: “a promise or a set of promises for the breach of
which the law gives a remedy.” A contract is the legal relationship that consists of the rights and
duties of the contracting parties growing out of promises. Contract law governs the enforceability
of that legal relationship. Not all promises are enforceable contracts. “The duty to keep a contract
at common law means a prediction that you must pay damages if you don’t keep it--and nothing
else.” Oliver Wendell Holmes, The Path of the Law, 10 Harv.L.Rev. 457, 463 (1897). The basic
rules are similar to civil codes’ contract law rules; both are based on the way business
relationships developed in practice. The UCC is a significant addition to (or modification of)
common law rules.
ELEMENTS OF A CONTRACT—The elements include agreement, consideration, legal
capacity of the parties to contract, lawful subject matter, and genuine consent to the contract.
Compliance with the Statute of Frauds may be necessary.
Offer and Acceptance—An agreement means a mutual understanding between the parties as to
the substance of the contract. Agreement is reached through a process of offer and acceptance.
Add. Case: Rappaport v. Buske (S.D. N.Y., 2000)--Rappaport was an entertainment reporter
for NBC’s “Today.” Buske developed a concept for a TV series, “Fabulously Fit and Famous.”
He talked to Rappaport about being the show host. She claimed they “reached a firm oral
understanding pursuant to which Rappaport would be hired as host of the 13-program series, at
a per program salary of $10,000 ... subject to [her] commitments to NBC.” A “letter of intent”
was sent to Rappaport’s agent, which was answered, and a tentative contract worked out. She
objected to some details, such as endorsements, that she said were not a part of the agreement.
She refused to sign. Buske dropped the idea. She sued for breach of contract. Buske moved for
summary judgment.
Decision: Motion granted. Rappaport’s argument is based on the assumption that an oral
contract exists. “However, taking all inferences in plaintiff’s favor, the letter from Rappaport’s
Add. Case: Erickson v. Lindstrom (Ct. App., Minn., 1993)--Lindstrom sued Erickson and won.
The parties entered into a settlement agreement that was approved by the court. Erickson then
refused to abide by the settlement, saying it was invalid because its terms were too vague. He
asserted that the lack of clarity meant there was “no meeting of the minds on essential terms.”
Decision: Agreement upheld: “The settlement of a lawsuit is contractual in nature and subject to
the rules of contract interpretation and enforcement. To constitute a full and enforceable
settlement, there must be such a definite offer and acceptance that it can be said that there has
The Offer—An offer is a promise to do or refrain from doing some specified thing. The party
making an offer to another party to enter into an agreement is called the offeror. The offeree is the
party to whom the offer is made. To be an effective offer, three requirements must be met: clear
manifestation of intent, definite terms and conditions, and communication of the offer.
Manifestation of Intent. In making the proposition, the offeror must have the intent to be bound
to the contract, and that intent must be clearly manifested. Preliminary negotiations are not an
offer. Intent is tested by an objective standard.
Add. Case: Sayer v. Bowley (Sup.Ct., Neb., 1993)--Sayer discussed buying Bowley’s farm. An
agreement was reached on price, the property, and some terms of payment. Terms of financing
were not final and drafts had varying provisions. Sayer paid Bowley $25,000 in earnest money in
reliance on the agreement, took possession, and planted crops (with Bowley’s knowledge). When
the parties failed to agree on a final contract, Sayers sued for specific performance. The court
found that Sayer had failed to prove the existence of a contract, ordered the return of the earnest
money to Sayer and the property to Bowley. Sayers appealed.
Decision: Affirmed. The evidence was insufficient to establish a meeting of the minds on material
terms of the contract. The burden of establishing a contract is on the party seeking specific
performance. The party must show there was a definite offer and an unconditional acceptance.
Add. Case: Chang v. First Colonial Savings (Sup. Ct., Va., 1991)--Chang responded to a bank
ad in the newspaper promising to pay $20,136 for a $14,000 deposit left for 3.5 years. The ad
said the interest rate was 8 3/4%, which was correct, but the $14,000 statement in the ad was a
mistake, it should have been $15,000. After the 3 1/2 years, the bank paid Chang $18,823, the
money plus 8 3/4% interest. Chang sued; won at trial court, lost at appeals court (which held the
ad was an invitation to bargain, not an offer); Chang appealed.
Decision: The court noted that newspaper ads are not offers, but merely invitations to bargain.
But there is an exception to this rule that applies here: “the offer is clear, definite, and explicit,
Definite Terms and Conditions. The terms of the offer must be sufficiently detailed so that each
party’s promises are reasonably certain. An offer that has ambiguous or missing terms cannot
serve as the basis for a contract. [Under the UCC, if the parties clearly intend to make a contract,
an offer or a contract for the sale of goods does not fail for indefiniteness of terms even though
one or more terms are left open.]
Add. Case: Martin v. Yanks Construction (Ct. App., Fla., 1995)--After Hurricane Andrew hit
Florida, homeowner Martin discussed having Yanks do repair work to his house. “A ‘proposal’
was signed by Martin which provided that Yanks was to return the home to its condition before
the hurricane and containing the statement: “Final price for restoration work to be worked out
with Liberty Mutual Insurance company and the general contractor.” The insurance company
paid Martin $107,200 and he decided to hire another contractor. Yanks sued for the $107,200.
The trial court found that Martin breached the contract and awarded Yanks $25,000, the
estimated profit from the contract. Martin appealed.
Decision: Reversed. “The parties’ agreement failed for indefiniteness. ... Here, in the absence of
Communication of the Offer. An acceptance requires knowledge of the offer by the offeree.
Accidental compliance with terms of an unknown offer does not form a contract consistent with
the terms of offer.
Terminating an Offer—Termination of an offer can occur by action of the parties (withdrawal,
rejection, counteroffer, lapse of time) or by the operation of law (intervening illegality,
destruction of the subject matter of the offer, or death or insanity of the offeror or the offeree).
[Note that the UCC provides that a merchant’s firm offers cannot be revoked until that stated
time period expires. The UCC’s firm offer is similar to option contract under the common law.]
An option contract requires the offeror to hold open an offer for a specified time.
Termination by the Parties. Withdrawal of an offer is a revocation. It must be communicated to
the offeree. If the offeree rejects the offer or makes a counteroffer, the offer is terminated. If a
reasonable length of time passes (when no time is specified), the offer expires.
Add. Case: Sharp Bros. Contracting v. Commercial Restoration (Ct. App., Mo., 1960)--Sharp
was a contractor; Commercial did cement finishing work. Commercial sent Sharp a price
quotation for specific cement work. Quote was sent on January 11; it specified “prices quoted
are subject to acceptance within 10 days from date.” Sharp accepted the bid on April 8, after it
won the contract for the main job. Commercial said it would not do the job at the original price
quote; Sharp sued for breach of contract.
Decision: Sharp did not accept the offer within the 10 day period it was open, so there was no
Termination by the Operation of Law. An offer may terminate by intervening illegality; a court
decision or new law that makes the offer illegal. Destruction of the subject matter terminates the
offer as does death or insanity of either party.
The Acceptance—Acceptance is the offeree’s expression of assent or agreement to the exact
terms of the offer. To be effective, an acceptance must be unconditional, unequivocal, and legally
communicated.
Must Be Unconditional. Acceptance must be the mirror image of the offer. The common-law
rule is that a purported acceptance that adds conditions to the original offer is a counteroffer.
[The UCC alleviates the mirror image rule by focusing on the intent of the parties to determine if
a contract has been formed.]
CASE: Certified Fire Protection v. Precision Construction (S. Ct., NV, 2012)—Precision, a
general contractor, got a bid from Certified to install fire suppression system. Certified had to
provide design within two weeks and other materials. It did not provide the work but billed
Precision for work done. After more delays and mistakes in plans, Precision dumped Certified,
which sued for breach for work done. Trial court held no contract existed; Certified appealed.
Decision: There is nothing in the contract to indicate that Precision was to pay Certified
piecemeal as it pokes along. Price and scope of work terms were missing and the parties never
Questions: 1. The appeals court held that no contract ever came into existence, so there could be
no breach of contract. But it Certified did work, so why can it not recover for that?
There was no contract, so Certified cannot insist on payment for work Precision did not want if
Certified was not going to fulfill the contract as offered. No doubt Precision did real work, but it
2. Would it have been hard to avoid this problem if Certified did not like the terms in
Precision’s contract?
Yes. Certified should have forced the issue if it really did not like the terms. Then it could have
Add. Case: Parker v. Glosson (Ct. App., NC, 2007)—Doug and Sandy Glosson offered to sell
their business and 36 acres. Parker agreed to buy it and signed a contract. Doug signed the
contract, but Sandy did not. Parker sued for breach of contract and asked the court for specific
performance or damages. The trial court dismissed; Parker appealed.
Decision: Affirmed. There was no meeting of the minds and so no contract. One condition
needed to form this particular contract was both of the Glossons had to sign it for it to be
Add. Case: Ardente v. Horan (Sup. Ct., RI, 1976)--Ardente offered to buy Horan’s house for
$250,000; Horan indicated that the price was fine and sent a contract for that price. Ardente
returned the contract, signed at that price, and said they wanted certain furniture to remain in
the house. Horan then refused to sell the house to Ardente, who sued for performance of the
contract.
Decision: There was an offer and a counteroffer. The counteroffer was the original contract that
added the terms about the furniture. That offer extinguished the original offer, so Horan was not
Add. Case: E-Z Cash Advance v. Harris (Sup. Ct., Ark., 2001)--E-Z Cash provides loans to
people presenting checks that are held until next payday. Harris gave E-Z a check for $400 that
it agreed to hold until payday. Rather than repay, Harris kept rolling over the loan and then
could not repay. She sued E-Z contending that the service charges it imposed were a form of
interest that amounted to a higher interest rate than allowed by state law. E-Z moved to dismiss
the suit and compel arbitration as provided in the loan agreement. The trial court refused to
compel arbitration, holding that the agreement lacked mutuality and was not enforceable. E-Z
appealed.
Decision: Affirmed. “The essential elements of a contract include: (1) competent parties, (2)
subject matter, (3) legal consideration, (4) mutual agreement, and (5) mutual obligations. ...
Add. Case: Smith v. Hammons (Ct. App., Missouri, 2002)--Smith sued Hammons for breach of
a verbal contract in which Hammons agreed to hire Smith for two years at $150,000 per year,
plus living space, a share of profits, and an assistant, to develop a magic show for Hammons.
The transaction did not occur and Smith sued to recover in quantum meruit for providing
valuable expertise in the entertainment business to Hammons. Hammons contended there were
only negotiations, not a contract. The jury found for the defendant; Smith appealed.
Decision: Affirmed. “It is hornbook law that the existence of an enforceable contact is dependent
upon agreement of the parties, or meeting of the minds, upon the terms of that contract.” There
Add. Case: Normile v. Miller (Sup. Ct., NC, 1985)--Miller offered her property for sale through
Hawkins. Another realtor, Byer, showed the property to N&K who made an offer to buy the
property on a standard form contract, on which they stated that their offer must be accepted by
5:00 PM on August 5. The offer was presented to Miller on August 4; she made several changes
in the offer, signed it, and returned it to N&K on the 4th. Before they returned on the 5th, Segal
made an offer to Miller for her property, which she accepted. N&K then accepted Miller’s
counteroffer, but Miller sold to Segal. N&K sued to get the property.
Decision: The contract with Segal was valid; N&K did not accept the contract offered to them by
Miller until after Miller and Segal made a deal. N&K’s claim that they had an exclusive right to
buy the property until 5:00 PM on the 5th was not correct; they made an offer to Miller with that
Must Be Unequivocal. Acceptance must be unequivocal (definite). “I see” or “What a good
idea,” fail the unequivocal test and there is no acceptance. As a general rule, silence is not
acceptance for the simple reason that it is not unequivocal; it could mean yes or no to the offeree.
Add. Case: Wilkie v. Banse (Sup. Ct., Neb., 1958)--Banse and Wilkie discussed real estate
possibilities. Banse gave Wilkie a contract stating that all developments would be on a 50-50
basis, but Wilkie did not sign. He discussed projects with Banse, but simply held the contract.
Banse moved ahead; spending significant sums. Months later, as work progressed and it
appeared the developments would be successful, Wilkie signed the contracts and demanded to be
a 50-50 partner; Banse refused; Wilkie sued; trial court dismissed his case; Wilkie appealed.
Decision: Affirmed. “A party who seeks to compel performance of a written contract and an
accounting of the profits alleged to have accrued therefrom has the burden of proving the
Must Be Properly Communicated. In general, in communicating an acceptance any reasonable
method is adequate. Problems arise when the offeror specifies one mode of communicating
acceptance but the offeree uses another. The timeliness of acceptance is important, especially
when the distance between the parties creates the potential for long passages of time between the
offer and the acceptance. The courts created the general rule that if the method of acceptance is
reasonable under the circumstances, the acceptance is effective when sent. The mailbox rule,
states that acceptance is effective when it is mailed and revocation is effective when it is received
by the offeree.
Add. Case (Mailbox Rule): Cushing v. Thomson (Ct. App., N.H., 1978)--Cushing (a member of
a group called Portsmouth Clamshell Alliance) sued Governor Thomson. Alliance sought
performance of a contract for use of the NH National Guard Armory in Portsmouth. The trial
court ruled that a binding contract existed. Thomson appealed. The facts were as follows:
1. On March 30, the Armory office received an application from Cushing for the use of the
Armory to hold a dance on April 29.
2. On March 31, the office mailed an offer to rent the Armory on April 29. The contract required
acceptance by the renter signing a copy of the agreement and returning it within five days of
receipt.
3. On April 3, Cushing received the offer and signed it on behalf of the Alliance.
4. On April 4, Cushing received a call from the office the Governor had ordered withdrawal of
the rental offer, and the offer was being withdrawn. Cushing stated that he had already signed
the contract.
5. On April 5, a written confirmation of the withdrawal was sent by the office to Cushing.
6. On April 6 the office received by mail the signed contract dated April 3, postmarked April 5.
Decision: A contract existed. Acceptance is effective when mailed. “Plaintiffs introduced the
sworn affidavit of Mr. Cushing in which he stated that on April 3, he executed the contract and
placed it in the outbox for mailing. Moreover plaintiffs’ counsel represented to the court that it
Note about Unilateral Contracts: Special considerations govern acceptance of unilateral
contracts in states that make that distinction. They are accepted by performance. Concerned that
an offeror could revoke the offer just before the offeree was to complete the performance, most
courts take the view that if performance has started the offeror may lose the right to revoke the
offer.
Add. Case (Option Contract): Humble Oil v. Westside (Sup. Ct., Tx., 1968)--Humble signed an
option contract with Westside. It gave Humble an exclusive and irrevocable option to buy some
land for $35,000 within 60 days. Humble paid $50 for the option. After two weeks, Humble sent
a letter saying it would exercise the option and that it wanted Westside to pay for some work on
utilities. Two weeks later, Humble sent a letter saying Westside should ignore the earlier letter
and Humble would take the property as is. Westside refused, claiming that the earlier letter was
an acceptance with different terms, which was a rejection of the option contract, which Westside
decided to reject. Humble could not then revive the option. Humble sued, demanding Westside
sell it the land for $35,000. Trial court dismissed the case; Humble appealed.
Decision: Reversed. “The mere fact that the parties may choose to negotiate before accepting an
option does not mean that the option contract is repudiated.” “Under an option, the act
necessary to raise a binding promise to sell, is not ... an acceptance of the offer, but rather the
Consideration—Consideration is something of value or something bargained for in exchange
for a promise. It is the element of a contract that keeps it from being gratuitous (a gift). The
definition of consideration requires either a legal detriment to the promisee or a legal benefit to
the promisor.
Adequacy of Consideration—Courts generally do not like to inquire into the adequacy of
consideration given in a contract. In a business transaction, this places the bargaining
responsibility on the parties to the contract.
CASE: Caley v. Gulfstream Aerospace (11th Cir., 2005)—Gulfstream adopted a new
employment dispute resolution policy. It sent the policy to all employees and told them it took
effect in two weeks as a condition of continued employment. If you kept working, you consented
to this new term of the employment contract. Some employees sued, contending there was no
contract. Trial court held for Gulfstream. Employees appealed.
Decision: Affirmed. There is a contract. An offer was made—if you want to keep working here,
you can, subject to the new policy. Acceptance was indicated by continuing to work, rather than
Questions: 1. The appeals court held that continued employment was evidence of acceptance of
the offer and employment was consideration. Since the employees were already working, why
was there consideration? Was there a change in anything?
The employer had the right to fire employees at any time, and employees had the right to quit at
any time, so the consideration offered by both parties was to agree to continue to work together
2. If the case had come out the opposite, how could an employer change the terms of the working
arrangement (contract)?
The alternative would likely be the employer having to pay something to the employees to accept
such a change, sort of like a collective bargaining agreement where all terms must be spelled out
Add. Case: Hamer v. Sidway (Ct. App., NY, 1891)--William E. Story, Sr., was the uncle of
William E. Story, II. The uncle promised his 16-year-old nephew that he would pay him $5,000 if
he would refrain from “drinking, using tobacco, swearing, and playing cards or billiards for
money” until he was 21. Upon turning 21, the nephew wrote to the uncle to say that he had
performed his part of the agreement and wanted the $5,000. The uncle wrote to the nephew:
“Your letter ... came to hand all right, saying that you had lived up the promise made to me
several years ago. I have no doubt but you have, for which you shall have five thousand dollars,
as I promised you.” The uncle died without having paid. By then, Hamer had acquired the
nephew’s interest in the $5,000 by assignment. Hamer sued Sidway, executor of the uncle’s
estate, for payment of the money owed. The executor refused to pay, stating that there had been
no consideration by the nephew for receipt of the money. The court reviewed the agreement,
discussing the element of consideration as a part of the contract.
Decision. By refraining from drinking, etc. for money, the nephew had provided consideration to
establish a contract with his uncle. Hamer, having been assigned the right to the contract by the
nephew, was entitled to collect $5,000 from Sidway, the executor. “Courts will not ask whether
Add. Case: Trengen v. Mongeon (Sup. Ct., N.D., 1973)--When 83 and 87 years old, the
Mongeons executed a deed to their son Ernest for land that was worth about $80,000. He
promised to pay them $1,800 a year for as long as either of them was alive. Several years later,
after he had made payments of $10,800, his sister (Trengen) became guardian for their parents.
She sued to recover the land, claiming that there was insufficient consideration given for the
land and that Ernest had used undue influence to get the deal. The trial court dismissed; Trengen
appealed.
Decision: Affirmed. The issue was if consideration was sufficient. It was. “Where a written
contract is complete, clear, and unambiguous, and contains mutual contractual covenants, or the
Add. Case: Bennett v. Amer. Elec. Power (Ct. App., Ohio, 2001)--AEP Employees developed a
process that AEP patented. Each employee signed a patent agreement that gave AEP complete
rights to patents of employees. When AEP patented the invention, it gave each employee a
document that assigned AEP rights to this patent: “In consideration of the sum of One Dollar
(1.00), and of other good and valuable consideration paid to the undersigned Assignor, by the
Assignee [AEP] ... the undersigned Assignor by these presents do hereby sell, assign, transfer
and set over ... unto [AEP] the entire right, title and interest in and to the invention.” The
invention was profitable. Some employees sued, contending there was no contract because the
promised consideration of $1 was never paid. The trial court held for AEP. The employees
appealed.
Decision: Affirmed. A valid contract was formed when the employees signed the document
granting patent rights to AEP. The consideration mentioned was $1 and “other good and
valuable consideration.” That is the same consideration they had been promised
Add. Case: Meyer v. Mitnick (Ct. App., Mich., 2001)--Barry Meyer and Robyn Mitnick became
engaged in August, when Barry gave Robyn an engagement ring that cost $19,500. In November,
Barry asked Robyn to sign a prenuptial agreement, which she refused to do. The engagement
was broken. Robyn refused to return the ring. Barry sued. Robyn contended the ring was an
unconditional gift. Barry contended that the ring was a conditional gift given in contemplation
of marriage, which did not occur. The trial court held for Barry. Robyn appealed.
Decision: Affirmed. Marriage is an implied condition of the transfer of title to the ring, so the
Add. Disc. Preexisting Duty and Past Consideration: Consideration is a present detriment to
the promisee and a benefit to the promisor; hence, consideration cannot be based upon past
consideration or a duty that already existed before the new agreement was made. An existing
contract can be changed so long as there is new consideration to support a new agreement.
Enforceable Promises without Consideration—There are circumstances where consideration
for a promise is not required by the courts for the promise to be enforceable. The doctrine used
by the courts is called promissory estoppel or detrimental reliance.
CASE: Hinson v. N&W Construction (Ct. App., Miss., 2004)—N&W was bidding on a large
construction job. Hinson bid for the plumbing subcontracting job as a part of the N&W bid. He
bid $92,000. N&W won the job and called Hinson to do the plumbing work but he refused.
N&W paid another plumber $139,000 to do the work. N&W sued Hinson and was awarded
$47,000 in damages. Hinson appealed, claiming there was no contract to enforce as there was no
consideration.
Decision: Affirmed. Hinson must pay under promissory estoppel. He knew N&W would rely on
Questions: 1. Hinson did not sign anything and never received any payment from N&W, so
should Hinson be responsible? Why did N&W not get something in writing?
Oral contracts can be binding, so no writing would necessarily be required, so that is not a key
point. Hinson did not deny the conversation. This is a promissory estoppel case, not a breach of
2. Since the next bid was 50% higher than Hinson’s isn’t it likely that his bid was poorly done
and he would have suffered a big loss?
Maybe so, but the difference was not so large as to give N&W reason to believe that there was a
Add. Case: Hoffman v. Red Owl Stores (Sup. Ct., Wisc., 1965)--Hoffman, a bakery owner,
wanted to own a grocery store. In 1959, he contacted Red Owl, a chain of supermarkets.
Conversations concluded that they might establish a store in Wautoma. In 1960, Lukowitz told
Hoffman would need $18,000 to invest. Upon his advice to get more experience, Hoffman leased
a building and began operating a grocery store in Wautoma. Lukowitz advised Hoffman to sell
the store, assuring him that Red Owl would find him a larger store. Hoffman sold the store in
1961. He told Red Owl that he had the $18,000 for startup. Red Owl selected a site and Hoffman
got an option on the land for a $1,000 payment. Upon assurances of Red Owl, Hoffman sold his
bakery, incurring a loss. In November, Lukowitz and Hoffman met. A document titled “Proposed
Financing for an Agency Store” said that Hoffman was to contribute $24,100 instead of the
original $18,000. Through loans, Hoffman came up with the required money. A week later,
Hoffman was told that the deal would be for $26,000. Hoffman objected to this and negotiations
ended. He sued for breach of contract. Red Owl defended that no contract had been completed
due to a lack of consideration. There was no agreement and no financing plan that had been
agreed upon. Hoffman contended that Red Owl was liable in promissory estoppel. Court held for
Hoffman, stating that an “injustice would result if plaintiffs were not granted damages.” Red
Owl appealed.
Decision: Affirmed. “Injustice would result ... if Hoffman was not granted some relief because of
Capacity to Contract—The term capacity refers to a party’s ability to perform legally valid
acts, acquire legal rights, and incur legal liabilities. Generally, minors, intoxicated persons, and
the insane lack capacity to contract or have partial capacity, which allows them to later disaffirm
a contract. A party claiming incapacity has the burden of proof.
Void and Voidable Contracts—A valid contract is one in which all the elements of a contract
are present. Such contracts are enforceable at law. A void contract is one that does not exist at
law, such as a contract whose subject matter is illegal or a contract made by an individual
without capacity to make a contract. Voidable contracts are valid contracts, but one of the parties
to the contract has the right to avoid legal obligation without incurring liability. For this reason,
the contract is not void but rather is voidable, or capable of becoming void at one party’s option.
