Suggested Additional Assignments
Research: The Contracts around Us
Students should locate and read one or more of the contracts they have entered into in the past year—an
apartment lease, a university-housing residency agreement, a mobile phone service agreement, terms of
use for a fee-based website, or a retail sales agreement for a personal computer. How long is it? How
much of it do they understand? Are any of the terms particularly surprising or unfair? If students do this
assignment at the start of the unit on contracts they can measure what they’ve learned by reading the
contract again after they’ve completed the unit.
Chapter Overview
Chapter Theme
Contracts make business matters more predictable and are integral to the day-to-day business and
personal life. Understanding how contracts are formed, the rules of contract law, and remedies the law
has created to address harm that can result when formal contract rules don’t apply enables greater control
over one’s life.
Quote of the Day
“The whole duty of government is to prevent crime and to preserve contracts.” –Lord Melbourne
(1779-1848), British prime minister.
Approaching Contract Law
People make promises every day. The law will enforce some but not others. Why? What distinguishes a
promise the law will enforce—a contract—from a promise the law will not enforce? One way for
students to begin to understand the differences between unenforceable promises and contracts is to pose
common examples of the former and ask why the law would not enforce them. For example, suppose one
student asks another out on a date, say to attend a party on the coming Saturday night. The invited
student makes preparations for the date, buying clothes, getting a haircut, whatever fits the situation. The
student who issued the invitation doesn’t show up at the appointed time. Can the student who was stood
up sue the other for breach of contract? Experience tells students the answer is “of course not,” but why
is that so? This promise involves offer and acceptance (“would you like to go to this party with me on
Saturday night? I’ll meet you at your apartment at 10:30.” “Sure! That would be great!”), consideration
(each party promises to do something he or she is not otherwise obligated to do, and each gives his or her
promise in exchange for the other’s promise), contractual capacity (make the parties over the age of 18 to
dispense with this issue), and a legal purpose. Why can’t the disappointed student file a breach of
contract lawsuit as soon as the courts open on Monday?
Certainly one reason the law would not enforce this promise is that while there is offer and acceptance;
there was no intent to form a contract. These parties thought they were agreeing to go on a date, which
does not create contractual expectations, whatever emotional expectations it may raise. However, if one
changes the facts somewhat—a businesswoman at an out-of-town conference arranges for a male escort
from a legitimate companionship service to attend a business/social engagement, then fails to show up at
the appointed time—the parties’ expectations take on the aspect of contract.
One purpose of contract law, then, is to distinguish unenforceable day-to-day promises from
legally-enforceable promises.
Elements of a Contract
• A contract is a legally enforceable agreement. For a contract to be enforceable, seven key
characteristics must be present.
•Offer
•Acceptance
•Consideration
•Legality
•Capacity
•Consent
•Writing (While verbal agreements are often contracts, some types of contracts must be in
writing to be enforceable.)
Is it certain that the defendant promised to do something?
If she did promise, is it fair to make her honor her word?
If she did not promise, are there unusual reasons to hold her liable anyway?
Development of Contract Law
Courts have not always assumed that promises are legally significant. In the twelfth and thirteenth
centuries, promises were not binding unless a person made them in writing and affixed a seal to the
document. This was seldom done, and therefore most promises were unenforceable
Case: Davis v. Mason1
Facts: Mason was a surgeon/apothecary in the English town of Thetford. Davis wished to
apprentice himself to Mason. The two agreed that Davis would work for Mason and learn his
profession. They further agreed that if Davis left Mason’s practice, he would not set up a
competing establishment within 10 miles of Thetford at any time within 14 years. Davis
promised to pay £200 if he violated the agreement not to compete.</Davis began working for
Mason in July 1789. In August 1791, Mason dismissed Davis, claiming misconduct, although Davis
denied it. Davis then established his own practice within 10 miles of Thetford. Mason sued for the £200.
Davis admitted promising to pay the money. But he claimed that the agreement should be declared illegal
and unenforceable. He argued that 14 years was unreasonably long to restrict him from the town of
Thetford and that 10 miles was too great a distance. (In those days, 10 miles might take the better part of a
day to travel.) He added an additional policy argument, saying that it was harmful to the public health to
restrict a doctor from practicing his profession: If the people needed his service, they should have it.
Finally, he said that his “consideration” was too great for this deal. In other words, it was unfair that he
should pay £200 because he did not receive anything of that value from Mason.
Issue: Was the contract too unreasonable to enforce?
Holding: Judgment for Mason. The court enforced the agreement and the 200-pound penalty. The court
found the terms reasonable, and stated that it had no idea how to create a better agreement. The court was
unpersuaded by the public policy argument, stating that the agreement would not injure the public since
all other surgeons were free to practice in the town.
Question: Davis made three primary arguments. What were they?
Answer: Davis argued that the restrictions were too broad, that a contract prohibiting a surgeon from
Question: Is there any substance to Davis’s argument that the restrictions were too broad?
1 Court of King’s Bench, Michaelmas Term, 33d George III, p.118 (1792)
Answer: The argument is a reasonable one, which is currently made on a daily basis in trial courts
Question: Does the court suggest that an employer is free to make any restriction it wishes?
Question: Does the court create a test to determine when such agreements might be unreasonable?
Question: Would it be more useful as precedent if the court instructed where that line should be?
Answer: Not necessarily. Courts generally restrict themselves to answering only the actual issue
Question: This case is over 300 years old. Why are we reading it today? What relevance does it
have to the current law of contracts?
In the case Davis v. Mason, a court considered an early non-compete agreement. Did the court in that case
reach a proper conclusion? What should courts say in similar cases in modern times?
Types of Contracts
In a bilateral contract, both parties make a promise. When the bargain is a promise for a promise, it is a
bilateral agreement. In a unilateral contract, one party makes a promise that the other party can accept
only by actually doing something.
A contract is executory when it has been made, but one or more parties has not yet fulfilled its
obligations. The moment the parties strike their bargain, they have an executory bilateral express contract.
A contract is executed when all parties have fulfilled their obligations.
A valid contract is one that satisfies all of the law’s requirements. It has no problems in any of the seven
areas listed at the beginning of this chapter, and a court will enforce it. An unenforceable agreement
occurs when the parties intend to form a valid bargain but a court declares that some rule of law prevents
enforcing it. A voidable contract occurs when the law permits one party to terminate the agreement.
This happens, for example, when the other party has committed fraud, or when an agreement has been
signed under duress. A void agreement is one that neither party can enforce, usually because the purpose
of the deal is illegal or because one of the parties had no legal authority to make a contract.
Case: Mr. W. Fireworks, Inc. v. Ozuna2
Facts: Mr. W sells fireworks. Under Texas law, retailers may only sell fireworks to the public during the
two weeks immediately before the Fourth of July and during two weeks immediately before New Year’s
Day. And so, fireworks sellers like Mr. W tend to lease property.
Mr. W leased a portion of Ozuna’s land. The lease contract contained two key terms:
“In the event the sale of fireworks on the aforementioned property is or shall become unlawful during the
period of this lease and the term granted, this lease shall become void.”
2 No. 04-08-00820-CVCourt of Appeals of Texas, San Antonio, 2009.
“Lessor(s) agree not to sell or lease any part of said property including any adjoining, adjacent, or
contiguous property to any person(s) or corporation for the purpose of selling fire-works in competition to
the Lessee during the term of this lease, and for a period of ten years after lease is terminated.”
(Emphasis added.)
A longstanding San Antonio city ordinance bans the sale of fireworks inside city limits, and also within
5,000 feet of city limits. Like all growing cities, San Antonio sometimes annexes new land, and its city
limits change. One annexation caused the Ozuna property to fall within 5,000 feet of the new city limit,
and it became illegal to sell fireworks from the property. Mr.W stopped selling fireworks and paying rent
on Ozuna’s land.
Two years later, San Antonio’s border shifted again. This time, the city disannexed some property and
shrank. The new city limit placed Ozuna’s property just beyond the 5,000 foot no-fireworks zone. Ozuna
then leased a part of his land to Alamo Fireworks, a competitor of Mr. W.
Mr. W sued for breach of contract, arguing that Ozuna had no right to lease to a competitor for a period of
ten years. The trial court granted Ozuna’s motion for summary judgment. Mr. W appealed.
Issue: Did Ozuna breach his contract with Mr. W by leasing his land to a competitor?
Holding: The property owners [argue] that when the city ordinance made the sale of fireworks illegal on
the subject properties, the leases became void, resulting in the property owners and Mr. W no longer
having an enforceable agreement. Mr. W’s argues that the provision restricting the property owners from
leasing to competitors survived the agreement. This is inconsistent with the meaning of “voidable”
contracts. For example, when a minor enters into a contract, that contract is not void, but is voidable at the
election of the minor. This means that the minor may set aside the entire contract at his option, but he is
not entitled to enforce portions that are favorable to him and at the same time disaffirm other provisions
that he finds burdensome. He is not permitted to retain the benefits of a contract while repudiating its
obligations. Here, while Mr. W is arguing that the illegalization of the sale of fireworks made the contract
“voidable,” it is still seeking to enforce the provision of the contract prohibiting the property owners from
leasing to competitors. We decline to adopt such an interpretation. Further, contracts requiring an illegal
act are void. We therefore hold that the illegalization of the sale of the fireworks on the respective
properties did not trigger the provision in the leases prohibiting the property owners from leasing to
competitors of Mr. W. We affirm the judgment of the trial court.
Question: When did the lease become void?
Question: What is the effect of the lease becoming void?
Express and Implied Contracts
In an express contract, the two parties explicitly state all important terms of their agreement. The vast
majority of contracts are express contracts. Some express contracts are oral, and some are written. In an
implied contract, the words and conduct of the parties indicate that they intended an agreement.
Students often find implied contracts difficult to understand, perhaps because the other paired terms
introduced in this section present two faces of some aspect of contract: bilateral and unilateral, executory
and executed. People do not enter negotiations with intent to form an implied contract. Implied contract
is not another method of forming a contract, but a remedy a court may apply after the fact if there was no
valid contract between the parties but their words and conduct manifest implied intent that certain
promises would be legally enforceable.
You Be the Judge: DeMasse v ITT Corporation3
Facts: Roger DeMasse and five others had been hourly employees-at-will at ITT Corporation for many
years. ITT issued an employee handbook, which it revised four times over two decades. The first four
editions of the handbook stated that within each job classification, any layoffs would be made in reverse
order of seniority. The fifth handbook made two important changes. First, the document stated that the
handbook did not guarantee continued employment. Second, the handbook stated that “ITT reserves the
right to amend, modify or cancel this handbook, as well as any or all of the various policies [or rules]
outlined in it.” Four years later, ITT notified its hourly employees that layoff guidelines for hourly
employees would not be based on seniority but on ability and performance. About ten days later, the six
employees were laid off, though less senior employees kept their jobs. The six employees sued.
You Be The Judge: Did ITT have the right to unilaterally change the layoff policy?
Holding: Judgment for the employees. The case came to the Arizona Supreme Court from the Ninth
Circuit, which certified this question: Once a seniority-layoff policy becomes part of the employment
contract based on the employee’s reliance on the company handbook, may the employer thereafter
unilaterally change the handbook policy and layoff employees without regard to seniority? The Arizona
Supreme Court said the answer was “no.”
The court emphasized that an implied contract carries just as much force as an express contract. The
manner of contract formation does not matter. Assuming that the handbook created reasonable
expectations of a seniority-layoff plan, it was binding on the company. The company had no right
unilaterally to modify the agreement.
Additional Case: Britt v. Chestnut Hill College4
Facts: Joseph Britt, a detective, enrolled in a Master’s Degree program at Chestnut Hill College in
Pennsylvania. Chestnut Hill promised students credit for life experience. The college promised Britt
important credits for his life experience if he enrolled, and after he did enroll, the school awarded the
promised credits.
Britt took a one-week required course entitled “Gender Stereotyping,” taught by Professor Klee. As part
of a classroom exercise, Klee directed another student, who Britt claimed was a “known” homosexual, to
make physical advances toward Britt. The student complied by telling Britt that he was attracted to him
and by touching Britt above the knee. Britt rejected the student’s advances. The next day, Klee assigned
that same student to serve as a “facilitator” to “deal with Britt’s anger.” Klee became openly critical of
Britt’s attitude and performance in the class and awarded him a “C” grade for the course.
Britt claimed that Klee thereafter did everything within his power to sabotage Britt’s reputation and
academic career. Klee arranged to have himself assigned as Britt’s academic advisor and, after doing so,
personally revoked, and successfully persuaded other instructors to revoke, the life experience credits that
had been granted to Britt upon admission to the college. The revocation of those credits caused Britt not
to graduate as scheduled.
Britt sued. The trial court dismissed his contract claim, essentially ruling that a college had an absolute
right to award and revoke credits as it saw fit. Britt appealed.
Issue: Did Britt have an implied contractual right to receive credits from the college for life experience?
Holding: Judgment for the college reversed. The court reinstated Britt’s contract claim. In the words of
the court:
3 194 Ariz.500, 984 P.2d 1138 Supreme Court of Arizona, 1999
4 429 Pa.Super. 263, 632 A.2d 557, 1993 Pa.Super.LEXIS 3356 Pennsylvania Superior Court, 1993
The economic reality is that colleges and universities are competing to attract non-traditional age
students and many of those institutions have designed programs to cater to them. Through
advertising and recruitment campaigns, an increasing number of colleges and universities are
inducing students who wish to return to school with flexible schedules, evening and weekend classes,
and academic credit for life experience. Students, in turn, attracted by these options, may seek to
apply to a particular institution and inquire as to the requirements they will have to meet in order to
achieve their degree. Where an individual is induced to enroll in a university or college based upon
an award of certain life experience credits, the institution cannot then, after the student’s enrollment,
revoke those credits.
We point out that, by reaching this conclusion, we are in no way attempting to interfere with an
academic institution’s rights to develop its curriculum and set requirements for a given degree.
However, where a college or university promises a student, upon enrollment, a certain amount of life
experience credits, the purpose of which is to enable that student to graduate at an accelerated rate,
provided that he or she successfully completes the course chosen, the institution cannot breach its
promise. Where a student can prove that such an agreement was made, the university or college
cannot revoke the life experience credits.
Question: What should Britt argue to convince the court of his implied contract claim?
Answer: The college made a deal and should be forced to stick to it. This college, like many, is
Question: What should the college argue to refute Britt’s claim?
Answer: This is not a business deal. All we have here is an unhappy college student. If Britt wins
on the contract issue, can he also sue to have his grade of “C” raised to an “A”? Can all students file
General Question: Has your college, or that of a friend, made any promises that it has failed to
keep? In your view, did the promises create a contract? Was the contract express or implied?
Promissory Estoppel and Quasi-Contract
Courts created promissory estoppel and quasi-contract as “fall-back” remedies for cases in which the
plaintiff cannot prove a valid contract with the defendant. They are not equivalent to a claim of breach of
contract for at least two reasons: both require a plaintiff to convince the court, as an essential element of
the claim, that justice requires a judgment for the plaintiff, and in both a successful plaintiff will almost
invariably receive a smaller award of damages—reliance damages or restitution damages, as the case may
be—than would be the case in a claim for breach of contract.
Promissory Estoppel
Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s
promise if he can show that:
• The defendant made a promise knowing that the plaintiff would likely rely on it
• The plaintiff did rely on the promise
• The only way to avoid injustice is to enforce the promise.
Case: Donald L. Harmon v. Delaware Harness Racing Commission5
Facts: The Delaware Harness Racing Commission (Commission) hired Donald Harmon to be the
Presiding Judge of harness racing (charged with enforcing racetrack rules). After years on the job,
Harmon was arrested for improperly changing a judging sheet to favor a horse. The Commission
suspended him without pay pending the outcome of the criminal case.
John Wayne (yes, his name was John Wayne) was the executive officer of the Commission. During his
suspension, Harmon asked Wayne if the Commission would reinstate him upon being acquitted. When
Wayne asked the commissioners they looked at each other and then said “Yes.” The commissioners told
Wayne he could relay that message to Harmon. Based on this promise, Harmon decided not to look for
other jobs.
Immediately after his acquittal, Harmon asked for his job back. After some time, the Commission refused
to reinstate him as promised. Harmon sued the Commission, claiming promissory estoppel. A trial court
sided with Harmon and awarded him $102,273, representing the wages he would have earned if the
Commission had kept its promise. But the Superior Court reversed the decision, so Harmon appealed to
the Supreme Court of Delaware.
Issue: Was the commissioners’ promise to Harmon enforceable?
Excerpts from Justice Berger’s Decision: To prevail on a promissory estoppel claim, a plaintiff must
establish that: (i) a promise was made; (ii) it was the reasonable expectation of the promisor to induce
action or forbearance on the part of the promisee; (iii) the promisee reasonably relied on the promise and
took action to his detriment; and (iv) such promise is binding because injustice can be avoided only by
enforcement of the promise.
The first element is a promise. The trial court reasoned that [because] no [formal] vote was taken before
the members said “Yes,” Wayne could not have reasonably believed that the Commission wanted him to
commit to reinstate Harmon. But the fact that the Commission members all looked at each other before
answering Wayne’s question could be construed as a vote, albeit an informal one. Second, the
Commission did not address all matters by vote. It was not hiring or reinstating Harmon at the time
Wayne conveyed its position to Harmon. The Commission was only promising to take action in the
future. In short, there was evidence that the promise was made.
The second element is that the Commission reasonably expected Harmon to rely on Wayne’s
representations. Wayne had authority to transmit the Commission’s decision to Harmon. If Wayne’s
testimony is credited, there is no real dispute about this point.
The third element is that Harmon reasonably relied on the Commission’s promise and took action to his
detriment. But for the Commission’s promise to reinstate him, [Harmon] would have looked for other
work. He was offered several horse training opportunities, but he could not pursue them because, if he
did, he would not be allowed to return to his position as a judge. This testimony satisfies Harmon’s
burden of showing reliance to his detriment.
The final element of a promissory estoppel claim is a finding that the promise must be enforced to avoid
injustice. That is another way of saying that it would be unjust not to enforce the Commission’s promise
because Harmon suffered damages by relying on it. During the time that he was waiting to be reinstated,
Harmon could not accept another job, and suffered lost income as a result. That lost income constitutes
damages.
Based on the foregoing, the judgment of the Superior Court is reversed.
Question: What are the elements of promissory estoppel in this case?
Answer: A plaintiff must establish that: (i) a promise was made; (ii) it was the reasonable expectation of
5 62 A.3d. 1198 Supreme Court of Delaware, 2013.
Question: How did Harmon reasonably rely on the Commission’s promise and take action to his
detriment?
Question: Who is the promise in this caes?
Quasi-Contract
Even when there is no contract, a court may use quasi-contract to compensate a plaintiff who can show
that:
• The plaintiff gave some benefit to the defendant
• The plaintiff reasonably expected to be paid for the benefit and the defendant knew this; and
• The defendant would be unjustly enriched if he did not pay.