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Chapter 11
NATURE AND CLASSES OF CONTRACTS: CONTRACTING ON
THE INTERNET
RESTATEMENT
A contract is a set of promises for the breach of which the law gives a remedy. A contract is formed when there is
a binding set of promises that are supported by consideration and voluntarily given by two parties for a lawful
purpose. A contract is formed by an offer and an acceptance issued and intended to be binding by two or more
parties. There are various types and forms of contracts that affect the parties’ rights as well as the degree of
enforceability. Those types of contracts include both formal, express contracts and implied, unwritten
agreements. The Internet presents new issues for contracting and the law is working to accommodate this new
means of doing business.
STUDENT LEARNING OUTCOMES
LO.1: Explain the meaning and importance of privity of a contract.
LO.2: Describe the way in which a contract arises.
LO.3: Distinguish between bilateral and unilateral contracts.
LO.4: Explain the reasoning behind quasi-contract recovery.
LO.5: Explain how Internet contracts involve the same types of issues as offline contracts.
INSTRUCTOR’S INSIGHTS
Break the chapter down into three components – related Learning Outcomes are indicated in ( ):
1. What is the nature of contracts?
Define contract
Give the elements of a contract
2. What are the classes of contracts?
Define and discuss the following:
Formal and informal contracts
Express and implied contracts
Valid, void and voidable contracts
3. How do parties contract on the Internet? (LO.5)
CHAPTER OUTLINE
I. What is the Nature of Contracts?
A. Definition of a contract: a promise or set of promises for the breach of which the law gives a remedy
1. An excellent way to introduce contracts is to have the students briefly tell the class the nature of a
contract that they have entered into in the past 48 hours. You may want to select a few contracts
and have the students “label” them as to which party is the offeror and which is the offeree and
2. An interesting problem for student discussion involves social agreements. Ask the students to solve
the following example:
Pat tells Chris that an exciting concert is coming to town, and he will spend $40 a ticket if Chris will
go to the concert with him. Chris is excited, and she tells Pat that she will attend the concert with
him and that he can pick her up at her place at eight o’clock the evening of the concert. Pat goes to
pick Chris up and finds no one at home. Too embarrassed to attend the concert by himself, he goes
home. Worried that something may have happened to Chris, he tries to reach her by telephone.
The following day, he contacts her and she informs him that she changed her mind; she did not want
to go to the concert with him and did not feel it was necessary to call. Pat becomes very
emotionally upset over the rejection. Two days later, he files a lawsuit against Chris for $80 in
damages for the two unused tickets to the concert and $500 for his emotional trauma. How would
the case be decided?
Answer: In most jurisdictions, Pat would recover nothing because social agreements are not
B. Elements of a contract
1. Agreement
2. Between competent parties
C. Subject matter of contracts
1. Property and services contracts: governed by common law
D. Parties to a contract
1. Promisor/promisee
2. Obligor/obligee
E. How a contract arises (Refer to Figure 11-1)
F. Offer and acceptance by offeror and offeree
H. Freedom of contract
II. What are the Classes of Contracts?
A. Formal and informal contracts
1. Formal contracts
a. Under seal contracts are formal
c. Negotiable instruments are formal contracts
i. Contracts under seal
2. Informal contracts
a. Simple contracts
B. Express and implied contracts
1. Express contracts – in words, spoken or written
2. Implied contracts
a. Acts and conduct of the parties form the agreement
C. Valid and voidable contracts and void agreements
2. Voidable contracts are binding until voided by one of the parties
a. Fraud
3. Void agreements
a. No legal effect
D. Executed and executory contracts
1. Executed contracts are completely performed
E. Bilateral and unilateral contracts
1. Bilateral contracts – a promise in exchange for a promise (See Figure 11-2 in the text for a sample)
3. Students tend to believe that the difference between a bilateral and a unilateral contract is relatively
easy to see. Emphasize that it is very important to distinguish between bilateral and unilateral
contracts and that sometimes this is extremely difficult. Illustrate this by expanding on the text
example:
A house painter offers to paint a homeowner’s house for $1,000 and the owner promises to
pay $1,000 for the job. There is an exchange of promises and a bilateral contract. If the
painter completes the job as promised, but the owner does not pay or pays only a portions
Further examples:
Ask the students whether the result would be the same if the owner had said, “I will pay you
$1,000 if you will promise me that you will paint my house by October 1,” and the house
In the previous example, change “promise me” to “agree” and “I promise” to “I agree”, and ask the
Then ask your students for the results if the owner says to the house painter, “I will pay you $1,000 if
you will paint my house by October 1,” and
a. the house painter completes the job, but is not paid or is paid only a portion of the $1,000 and
sues the owner.
This is a unilateral contract offered by the owner, which can be accepted only by performance of the
act (painting the house). In (a), the house painter accepted the offer and would prevail in the
The difficult problems for your students are in resolving the following:
The owner says to the house painter, “I will pay you $1,000 to paint my house by October 1.”
The house painter says to the owner, “I agree and promise you excellent work,” but does
not do the job, and the owner sues for damages after paying another painter $1,300 to
The point for students to remember is that an agreement should be clarified in writing if possible so
that both parties know whether it is a unilateral contract offer or a bilateral contract. This
CASE BRIEF: Aon Risk Services, Inc. v. Meadors
267 S.W.3d 603 (Ark. App. 2007)
FACTS: AON Corporation sent out an “Interdependency Memo” to its AON Risk Services and
Combined Insurance Companies subsidiaries. The memo encouraged the brokerage offices to
spread business to AON-affiliated companies, and created a bonus-pool for the revenues
created by the transactions. Meadors, a broker under the AON Corporation, generated a
successful agreement between Combined and Dillard Department Stores.
Meadors did not receive the bonus-pool money generated from the transaction, and
sued for breach of unilateral contract.
ISSUE: Were the terms of the Memo sufficiently definite to constitute an offer?
REASONING: The Memo has definite terms and is an offer because it specified the percentage of premiums
that will go into the bonus-pool and also required that the pool be distributed annually. Due to
the unilateral nature of this contract, Meadors could accept the offer simply by performing the
particular task required.
DISCUSSION POINTS: Have the students discuss the Aon Risk Services, Inc. v. Meadors case where an
insurance agent won his case based on a unilateral contract theory.
4. Option and first-refusal contracts
a. Option: absolute right to enter into a contract
F. Quasi contracts
1. Prevention of unjust enrichment (use Cher example in text)
2. Explain the difference between an implied contract and a quasi contract. Students will probably
Bidwell took his auto to German Motors, Inc., for repairs. He specifically directed the mechanic to
repair the engine. Instead of repairing the engine, the mechanic replaced it with a rebuilt engine.
Bidwell did not know this until he was handed the bill for the work. The mechanic claimed that
replacement of the engine was the most economical thing to do. Was Bidwell liable for the cost of
the engine was being replaced. He therefore was not in the position of accepting services under
circumstances such that a reasonable person would realize that compensation was expected by the
person rendering the services. Ask your students what the result should have been if:
a. Bidwell had driven away, not paying for anything – materials or labor. The replacement engine
b. Bidwell had insisted on removal of the replacement engine and repair of the old engine. The
c. The mechanic had offered to put the old engine back in and repair it for $1,200, but Bidwell had
d. Bidwell had wanted the old engine back in the car. The mechanic had agreed, but the scrap
CASE BRIEF: PIC Realty Corp. v. Southfield Farms, Inc.
832 S.W.2d 610 (Tex. App. 1992)
FACTS: PIC Realty leased farmland to Southfield Farms. After Southfield harvested its crop, it
cultivated the land in preparation for the planting of the following year. However, its lease
expired, so that it did not plant that crop. It then sued PIC for reimbursement for the reasonable
value of the services and materials used in preparing the land, as this was a benefit to PIC.
There was evidence that it was customary for landlords to compensate tenants for such work.
ISSUE: Is Southfield entitled to compensation?
REASONING: Southfield was entitled to recover the reasonable value of the benefit conferred upon PIC. This
was necessary in order to prevent the unjust enrichment of PIC.
3. In circumstances in which there is no contract, quasi contract benefit can be used – e.g., person who
4. When quasi-contractual liability does not exist
a. Unexpected cost
5. Extent of recovery – reasonable value
CASE BRIEF: Sununu v. Philippine Airlines, Inc.
792 F.Supp.2d 39 (D. D.C. 2011)
FACTS: Facing financial turbulence, Philippine Airlines (PAL) sought to renegotiate its aircraft lease
contract (ALC) with World Airlines (WA). WA refused to negotiate with PAL. PAL retained John
Sununu, the former Governor of New Hampshire and the former Chief of Staff to President
George H. W. Bush, and Sununu’s partner, Victor Frank, to represent it. Sununu and Frank sent
a contract proposal to PAL, which included a proposed “success fee” of $600,000 if they
persuaded WA to accept a modification of the lease contract. PAL gave Sununu and Frank a
ISSUE: May an unjust enrichment claim be raised when an express contract exists between two
parties?
REASONING: Judgment for PAL. Sununu and Frank conferred a benefit on PAL through their efforts to
persuade WA to negotiate with PAL; and PAL accepted and retained the benefit for the
renegotiated lease. There can be no claim, however, for unjust enrichment when an express
contract exists between two parties. A court awards relief based on quasi-contractual principles,
implying by law a contract, only where one did not exist in fact. The court stated:
To grant PAL’s summary judgment motion is not to condone its conduct. The airline can
rightly be accused of stinginess for enforcing the formalistic terms of the contract in
The lesson is one that should be taught in law and business schools across America: When in
doubt, write it out.
DISCUSSION POINTS: Thinking Things Through
Twelve Years of Litigation
Discuss the problems with parties proceeding without a signed contract. Point out to the students that even with
sophisticated parties and large projects, too much is left up-in-the-air to provide certainty in performance and
payment. Not having a written, signed agreement creates a risk of extra charges, nonpayment and litigation.
III. How Do Parties Contract on the Internet?
A. Buyer beware – no certification for companies and reliability
B. Buyers must read the terms carefully
1. Arbitration may be required
2. Warranty limitations
D. B2B is business-to-business E-commerce
1. Brings multiple buyers and suppliers together
E. E-sign – electronic signatures in Global and National Commerce Act gives parity to paper and electronic
contracts
G. UETA – also mandates parity between electronic and written contracts
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Definition of a contract. A contract is a binding agreement. This means that the contract can be enforced or
2. Unilateral Contract. The letter which conveyed the message that applicants would be admitted to the police
academy upon passing the medical and psychological exams was an “offer” to enter a unilateral contract.
3. Implied contracts and quasi contracts. Both implied contracts and quasi contracts share the characteristic
that there is no express agreement between the parties. However, in the case of the implied contract, there
In the case of the quasi contract, there is no agreement. The contract of the parties does not express or
manifest any agreement and in fact ordinarily negates or precludes the existence of an agreement.
In summary, an implied contract is a contract based on the actual agreement of the parties, but a quasi
4. Implied-in-fact contracts. The requirements for recovery under a contract implied-in-fact are: (1) valuable
services were rendered; (2) for the person sought to be charged; (3) which services were accepted by the
person sought to be charged, used, or enjoyed by him or her; and (4) under such circumstances as
5. Form of contract. The form of a signature on a contract controls primary and secondary liability, but not the
6. Significance of seal. No. A contract to build a house is binding without a seal. [Cooper v. G.E. Construction
Co., 158 S.E. 2d 305 (Ga. App.)]
Authors’ Comment: Generally speaking, a seal is never necessary to make a binding contract. If there is a
seal, its presence may have some effect in certain situations. For example, in many states the sealed
Now and then, statutes will specify that a particular instrument be signed and sealed. Such a statute makes
an exception to the above general rule.
It may also be noted that even at common law, the seal was not an essential element of a contract. That is,
the common law permitted an oral offer and acceptance to give rise to a contract. If there was a writing,
7. Express contracts; implied-in-fact contracts; unjust enrichment. To have an express contract, the terms of the
agreement of the parties must be manifested by their words, either spoken or written. To establish a legally
binding agreement, the terms must be sufficiently definite to enable the court to determine the meaning and
fix exactly the legal liabilities of the parties. Do the phrases "I will take care of you" and "trust the Great
Oracle" amount to a commitment to pay Larson a specific amount of money, $6,700 per month? The jury did
Larson also could pursue an unjust enrichment claim, where there is no contractual relationship between the
parties but the defendant accepts a benefit under such circumstances that it would be unjust to retain the
As reported in a local newspaper, after the verdict against Larson he stated in part: "I'm not bitter…it's just
8. Objective intent as essential to contract. No. The services were rendered under circumstances such that a
reasonable person would regard them as a gift and not expect to be paid for them.
Accordingly, no contract to compensate for the services would be implied by the law; and because no
9. Quasi contracts. Yes. When a homeowner permits repairs to be made with knowledge that they are being
made by a stranger who would expect to be paid for such repairs, there is a quasi -contractual duty to pay for
10. Limitations on quasi-contractual liability. No. Harriet was not liable in quasi contract because she did not
know that Landry was painting her house and had done nothing to cause him to paint the house. Therefore,
11. Quasi-contractual liability when the agreement is not binding. Yes. Margrethe had furnished Charles with
certain financial benefits in the expectation that she would receive a benefit at some future time. Because of
12. Rejection of benefit as bar to quasi-contractual liability. No. The owners made it clear to the plaintiff that they
did not want a continuation of the benefits; therefore, they could not be required to pay for them when the
13. Unjust enrichment. Judgment for Partipilo. Because the improvements were made to Hallman’s land,
Hallman should be the one to pay the tax increase. When Partipilo paid it, Hallman received a benefit to
14. Implied contracts. No. The circumstances under which the report was requested and prepared would not
make a reasonable person in the position of the teacher believe that the report was being prepared for the
15. Contrast between civil law and criminal law. The rule that an illegal contract does not exist (void) is true only
as between the parties to the illegal contract. As between the government that declared the contract illegal
LAWFLIX
Paper Moon (1973) (PG)
In this movie for which Tatum O’Neal was given an Oscar, the ongoing issue between Annie and her alleged
management system for classroom use.
