Part Two:
Contracts
CONTENTS
Chapter 9
Introduction to Contracts
Chapter 10 Mutual Assent
Chapter 11 Conduct Invalidating Assent
Chapter 12 Consideration
Chapter 13 Illegal Bargains
Chapter 14 Contractual Capacity
Chapter 15 Contracts in Writing
Chapter 16 Third Parties to Contracts
Chapter 17 Performance, Breach, and Discharge
Chapter 18 Contract Remedies
ETHICS QUESTIONS RAISED IN THIS PART
1. Historically, the common law of contracts placed a great deal of emphasis upon “caveat emptor” or let the
buyer beware. In the twentieth century much of this doctrine has been eroded by various consumer
protection laws. Are there ethical reasons why freedom of contract should not be upheld by the law?
2. What obligation should the producer of goods have to produce goods that are without defects? Should
caveat emptor be the rule of law in the area of contracts?
ACTIVITIES AND RESEARCH PROBLEMS
1. Have students bring copies of contracts they have signed to the class. Then carefully read these contracts
and have the class discuss the legal implications of the contracts, whether they were aware of all of the
contractual terms to which they had agreed, and how they might have negotiated a better deal for themselves.
2. Tell your students to assume they have just been offered a top-level management position with a major
corporation. Then have them draft an employment contract that they believe would be fair to both them and
to the corporation.
CHAPTER 9 INTRODUCTION TO CONTRACTS
Chapter 9
INTRODUCTION TO CONTRACTS
A. Development of the Law of Contracts D. Classification of Contracts
1. Common Law 1. Express and Implied Contracts
2. The Uniform Commercial Code 2. Bilateral and Unilateral Contracts
2. Types of Contracts Outside the Code 3. Valid, Void, Voidable, & Unenforceable Contracts
B. Definition of a Contract 4. Executed and Executory Contracts
C. Requirements of a Contract 5. Formal and Informal Contracts
E. Promissory Estoppel
F. Quasi Contracts
Cases in This Chapter
Fox v. Mountain West Electric, Inc.
Steinberg v. Chicago Medical School
Skebba v. Kasch
Jasdip Properties SC, LLC v. Estate of Richardson
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Distinguish between contracts that are covered by the Uniform Commercial Code and those covered by
the common law.
List the essential elements of a contract.
Distinguish among (a) express and implied contracts; (b) unilateral and bilateral contracts; (c) valid,
TEACHING NOTES
A contract is a binding agreement that the courts will enforce. The Restatement
de$nes a contract as “a promise or a set of promises for the breach of which the
law gives a remedy, or the performance of which the law in some way recognizes
a duty.”
A. DEVELOPMENT OF THE LAW OF CONTRACTS
Contract law has undergone enormous changes in the past century — changes
which affect both the rules for making a contract and the enforceability of
contracts. The formalities of contract formation have been relaxed to the point
Common Law
CHAPTER 9 INTRODUCTION TO CONTRACTS
Contracts are primarily governed by state common law, with a clear presentation
found in the Restatements of the Law of Contracts, first promulgated on May 6,
1932. A revised edition — the Restatement, Second, Contracts — was adopted
and promulgated on May 17, 1979.
*** Chapter Outcome ***
Distinguish between contracts covered by the UCC and those covered by the common law.
The Uniform Commercial Code
Article 2 of the Uniform Commercial Code (UCC or the Code) governs the sale of
tangible personal property in all states except Louisiana. A sale is a contract
involving the transfer of title to goods from seller to buyer for a price. The Code
essentially de$nes goods as tangible personal property. Personal property is
any property other than an interest in real property (land).
Types of Contracts Outside the Code
General contract law governs all contracts outside the Code. For example, the
Code does not apply to employment contracts, service contracts, insurance
contracts, contracts involving real property (land and anything attached to it,
CASE 9-1
FOX v. MOUNTAIN WEST ELECTRIC, INC.
Supreme Court of Idaho, 2002
137 Idaho 703, 52 P.3d 848 2002, rehearing denied, 2002
http://scholar.google.com/scholar_case?
q=52+P.3D+848&hl=en&as_sdt=2,34&case=12020421688825080366&scilh=0
Walters, J.
Lockheed Martin Idaho Technical Company (“LMITCO”) requested bids for a
comprehensive $re alarm system in its twelve buildings located in Idaho
Falls. At a prebid meeting, MWE [Mountain West Electric, Inc.] and Fox met
and discussed working together on the project. MWE was in the business of
installing electrical wiring, conduit and related hookups and attachments. Fox
provided services in designing, drafting, testing and assisting in the
CHAPTER 9 INTRODUCTION TO CONTRACTS
installation of $re alarm systems, and in ordering specialty equipment
necessary for such projects. The parties concluded that it would be more
advantageous for them to work together on the project than for each of them
Fox prepared a bid for the materials and services that he would provide,
which was incorporated into MWE’s bid to LMITCO. MWE was the successful
bidder and was awarded the LMITCO $xed price contract. In May 1996, Fox
began performing various services at the direction of MWE’s manager.
During the course of the project, many changes and modi$cations to the
LMITCO contract were made.
A written contract was presented to Fox by MWE on August 7, 1996. A
dispute between MWE and Fox arose over the procedure for the
compensation of the change orders. MWE proposed a 0ow-down procedure,
whereby Fox would receive whatever compensation LMITCO decided to pay
MWE. This was unacceptable to Fox. Fox suggested a bidding procedure to
* * *
Implied-in-Fact Contract
* * *
This Court has recognized three types of contractual relationships:
First is the express contract wherein the parties expressly agree regarding a
transaction. Secondly, there is the implied in fact contract wherein there is
no express agreement, but the conduct of the parties implies an agreement
from which an obligation in contract exists. The third category is called an
implied in law contract, or quasi contract. However, a contract implied in law
is not a contract at all, but an obligation imposed by law for the purpose of
CHAPTER 9 INTRODUCTION TO CONTRACTS
bringing about justice and equity without reference to the intent or the
agreement of the parties and, in some cases, in spite of an agreement
between the parties. It is a non-contractual obligation that is to be treated
procedurally as if it were a contract, and is often refered (sic) to as quasi
contract, unjust enrichment, implied in law contract or restitution.
[Citation.]
* * *
Although the procedure was the same for each change order, in that MWE
would request a pricing from Fox for the work, which was then presented to
LMITCO, each party treated the pricings submitted by Fox for the change
orders in a different manner. This treatment is not suffcient to establish a
meeting of the minds or to establish a course of dealing when there was no
“common basis of understanding for interpreting [the parties’] expressions”
under [UCC §] 1-205(1).
* * * After a review of the record, it appears that the district court’s
finding are supported by substantial and competent, albeit conflicting,
evidence. This Court will not substitute its view of the facts for the view of
the district court.
This Court holds that the district court did not err in $nding that there was
an implied-in-fact contract using the industry standard’s 0ow-down method
of compensation for the change orders rather than a series of $xed price
contracts between MWE and Fox.
Uniform Commercial Code
Fox contends that the district court erred by failing to consider previous
drafts of the proposed contract between the parties to determine the terms
CHAPTER 9 INTRODUCTION TO CONTRACTS
of the parties’ agreement. Fox argues the predominant factor of this
transaction was the $re alarm system, not the methodology of how the
system was installed, which would focus on the sale of goods and, therefore,
the Uniform Commercial Code (“UCC”) should govern. Fox argues that in
using the UCC various terms were agreed upon by the parties in the prior
agreement drafts, including terms for the timing of payments, payments to
Fox’s suppliers and prerequisites to termination.
This Court in [citation], pointed out “in determining whether the UCC
applies in such cases, a majority of courts look at the entire transaction to
determine which aspect, the sale of goods or the sale of services,
predominates.” [Citation.] It is clear that if the underlying transaction to the
contract involved the sale of goods, the UCC would apply. [Citation.]
However, if the contract only involved services, the UCC would not apply.
[Citation.] This Court has not directly articulated the standard to be used in
mixed sales of goods and services, otherwise known as hybrid transactions.
The Court of Appeals in Pittsley v. Houser, [citation], focused on the
applicability of the UCC to hybrid transactions. The court held that the trial
court must look at the predominant factor of the transaction to determine if
the UCC applies. [Citation.]
The test for inclusion or exclusion is not whether they are mixed, but,
granting that they are mixed, whether their predominant factor, their
[Citation.] This Court agrees with the Court of Appeals’ analysis and holds
that the predominant factor test should be used to determine whether the
UCC applies to transactions involving the sale of both goods and services.
CHAPTER 9 INTRODUCTION TO CONTRACTS
One aspect that the Court of Appeals noted in its opinion in Pittsley, in its
determination that the predominant factor in that case was the sale of
goods, was that the purchaser was more concerned with the goods and less
concerned with the installation, either who would provide it or the nature of
the work. MWE and Fox decided to work on this project together because of
their di-ering expertise. MWE was in the business of installing electrical
wiring, while Fox designed, tested and assisted in the installation of $re
alarm systems, in addition to ordering specialty equipment for $re alarm
projects.
B. DEFINITION OF A CONTRACT
A contract is not a “thing,” but a relationship between its parties. This
relationship entails mutual rights and duties contained in what is essentially a
set of promises that the courts will enforce. A contract, then, can be defined as:
“a binding agreement for the breach of which the law gives a remedy or the
performance of which the law in some way recognizes as a duty.”
A breach is the failure to perform contractual promises properly.
It is important to note that while all contracts are promises, not all promises are
contracts. Some promises are unenforceable and, therefore, are not contracts.
For a promise to be enforced, it must include all essential requirements of a
legal, binding contract.
NOTE: See Figure 9-2.
CASE 9-2
STEINBERG v. CHICAGO MEDICAL SCHOOL
Illinois Court of Appeals, 1976
41 Ill.App.3d 804, 354 N.E.2d 586
http://scholar.google.com/scholar_case?case=13765816040578352414&q=354+N.E.2d+586&hl=en&as_sdt=2,34
CHAPTER 9 INTRODUCTION TO CONTRACTS
Dempsey, J.
In December 1973 the plainti-, Robert Steinberg, applied for admission to
the defendant, the Chicago Medical School, as a first-year student for the
academic year 1974-75 and paid an application fee of $15. The Chicago
Medical S School is a private, not-for-pro$t educational institution,
incorporated in the State of Illinois. His application for admission was
rejected and Steinberg $led a[n] * * * action against the school, claiming that
it had failed to evaluate his application * * * according to the academic
entrance criteria printed in the school’s bulletin. specifically, his complaint
alleged that the school’s decision to accept or reject a particular applicant for
the first-year class was primarily based on such nonacademic considerations
* * *
The defendant $led a motion to dismiss, arguing that the complaint failed
to state a cause of action because no contract came into existence during its
transaction with Steinberg inasmuch as the school’s informational publication
did not constitute a valid offer. The trial court sustained [ruled in favor of] the
motion to dismiss and Steinberg appeals from this order.
* * *
A contract is an agreement between competent parties, based upon a
consideration suffcient in law, to do or not do a particular thing. It is a
promise or a set of promises for the breach of which the law gives a remedy,
or the performance of which the law in some way recognizes as a duty.
[Citation.] A contract’s essential requirements are: competent parties, valid
subject matter, legal consideration, mutuality of obligation and mutuality of
CHAPTER 9 INTRODUCTION TO CONTRACTS
[Citation.] Money is a valuable consideration and its transfer or payment or
promises to pay it or the benefit from the right to its use, will support a
contract.
In forming a contract, it is required that both parties assent to the same
thing in the same sense [citation] and that their minds meet on the essential
terms and conditions. [Citation.] Furthermore, the mutual consent essential
to the formation of a contract must be gathered from the language employed
by the parties or manifested by their words or acts. The intention of the
parties gives character to the transaction, and if either party contracts in
good faith he is entitled to the benefit of his contract no matter what may
have been the secret purpose or intention of the other party. [Citation.]
Steinberg contends that the Chicago Medical School’s informational
brochure constituted an invitation to make an offer; that his subsequent
application and the submission of his $15 fee to the school amounted to an
offer; that the school’s voluntary reception of his fee constituted an
acceptance and because of these events a contract was created between the
school and himself. He contends that the school was duty bound under the
terms of the contract to evaluate his application according to its stated
The school counters that no contract came into being because
informational brochures, such as its bulletin, do not constitute offers, but are
construed by the courts to be general proposals to consider, examine and
negotiate. The school points out that this doctrine has been specifically
applied in Illinois to university informational publications.
* * *
We agree with Steinberg’s position. We believe that he and the school
entered into an enforceable contract; that the school’s obligation under the
contract was stated in the school’s bulletin in a de$nitive manner and that by
accepting his application fee—a valuable consideration—the school bound
CHAPTER 9 INTRODUCTION TO CONTRACTS
* * *
[Reversed and remanded.]