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Business Law Chapter 11 Homework Exists Quasi Contract Will Not Normally Imposed

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9 pages
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5623 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 11
Nature and Terminology
INTRODUCTION
This chapter introduces the topic of contracts by defining a number of terms, giving an overview of the topic,
and looking at the judicial interpretation of contracts. At this point in a discussion of contracts, it may be advisable to
point out that learning the definitions of offer, acceptance, valid, voidable, and the other terms in this chapter are only
a starting point. Memorizing theses definitions will not provide a complete understanding of the concepts.
Contract law shows what promises or commitments our society believes should be legally binding. It shows
what excuses our society will accept for the breaking of promises. And it shows what kinds of promises will be
considered to be against public policy and therefore legally void. The use of contract principles to govern the
relationships of those who make promises to one another dates back thousands of years. Early in history the
importance of contracts was recognized and given legal effect. Modern capitalist society could not exist without the
law of contracts. The foundation for most commercial activity is the contract. We could not order our daily activities
without contracts. The chapters in the contracts unit explain how contracts are formed, how they are discharged, and
what happens when they are not performed.
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CHAPTER OUTLINE
I. An Overview of Contract Law
A. SOURCES OF CONTRACT LAW
Contract law is common law. The common law governs all contracts except when statutory law or
administrative agency regulations have been modified or replaced it.
Statutory lawparticularly the Uniform Commercial Code (UCC)governs all contracts for the sale
of goods. It should be stressed that it is essential to know when the UCC applies.
B. THE FUNCTION OF CONTRACT LAW
Contract law is needed to ensure compliance with a promise or to entitle a nonbreaching party to relief
when a contract is breached. All contractual relationships involve promises, but all promises do not
establish contractual relationships. Most contractual promises are kept; keeping a promise is generally
in the mutual self-interest of the promisor and the promisee.
C. THE DEFINITION OF A CONTRACT
A contract is a promise for the breach of which the law gives a remedy or the performance of which
the law recognizes as a duty (in other words, an agreement that can be enforced in court). A
contract may be formed when two or more parties each promise to perform or to refrain from
performing some act now or in the future.
A party who does not fulfill his or her promise may be subject to sanctions, including damages or,
under some circumstances, being required to perform the promise.
D. THE OBJECTIVE THEORY OF CONTRACTS
The intent to enter into a contract is important in the formation of a contract. The objective theory of
contracts determines intent.
Under this theory, a party’s intention to enter into a contract is judged by outward, objective facts as a
reasonable person would interpret them, rather than by the party’s own secret, subjective intentions.
Objective facts include
What the party said.
How the party acted or appeared.
The circumstances surrounding the transaction.
Any purpose may provide the motivation for performing a contract.
II. Elements of a Contract
A. REQUIREMENTS OF A VALID CONTRACT
The four essential elements of a contract are
Agreement.
Consideration.
Contractual capacity.
Legality.
CHAPTER 11: NATURE AND TERMINOLOGY 3
CASE SYNOPSIS
Case 11.1: Weston v. Cornell University
Cornell University offered Leslie Weston an associate professorship for a term of five years. The offer
came “with tenure” subject to a review of Weston’s performance. She accepted. Cornell later declined to
award her permanent status but extended her appointment for two years “without tenure,” and gave her the
opportunity to resubmit. She agreed. Cornell again denied her permanent status and eventually terminated
her position. Weston filed a suit in a New York state court against Cornell, alleging breach of contract. The
university filed a motion for summary judgment. The court denied the motion. The defendant appealed.
..................................................................................................................................................
Notes and Questions
Written, hard copy correspondence between the parties provided most of the evidence to support
the courts’ conclusions in this case. Does it seem reasonable that an exchange of e-mail can serve
the same purpose? Why or why not? Yes, an exchange of e-mail between the parties to a contract dispute
can serve the same evidentiary purpose as their written, hard copy correspondence. And it seems reasonable
that this is true.
Suppose that Weston had resigned from a tenured position at a different university to accept
Cornell’s original offer. Would the result in this case have been different? No, if Weston had resigned
from a tenured position at a different university to accept Cornell’s original offer, the result in this case would
not have been different.
The dispute in this case concerned the expressed terms of the two offers and acceptances between the
B. DEFENSES TO THE ENFORCEABILITY OF A CONTRACT
Defenses to the formation or enforcement of a contract include
Voluntary consent.
Form.
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III. Types of Contracts
Each of these categories signifies a legal distinction regarding a contract’s formation, performance, or en-
forceability.
A. CONTRACT FORMATION
These contracts are based on how and when a contract is formed.
1. Bilateral v. Unilateral Contracts
Every contract involves at least two parties: an offeror and an offeree. The offeror promises to do
or not to do something. Whether a contract is unilateral or bilateral depends on what the offeree
must do to accept.
a. Bilateral Contracts
A bilateral contract is a promise for a promise; if the offeree need only promise to perform, the
contract is bilateral.
b. Unilateral Contracts
A unilateral contract is a promise for an act; if an offeree can accept only by complete
performance, a contract is unilateral.
c. Contests, Lotteries, and Prizes
Contests, lotteries, and other competitions involving prizes are examples of offers to form
unilateral contracts. If a person complies with the rules of the contestsuch as by submitting
the right lottery number at the right place and timea unilateral contract is formed.
d. Revocation of Offers for Unilateral Contracts
A unilateral contract’s offer becomes irrevocable once substantial performance is completed.
2. Formal v. Informal Contracts
Formal contracts require a special form or method of formation to be enforceable. Formal
contracts include negotiable instruments, which include checks, drafts, promissory notes, and
certificates of deposit.
All other contracts are informal contracts, or simple contracts. For these, no special form is re-
quired (except for certain types of contracts that must be in writing).
3. Express v. Implied Contracts
a. Express Contracts
An express contract is one in which the terms are expressed in words, oral or written.
b. Implied Contracts
A contract that is implied from the conduct of the parties is an implied-in-fact contract, or
simply an implied contract. The parties’ conduct reveals that they intended to form a contract
and creates and defines its terms.
CHAPTER 11: NATURE AND TERMINOLOGY 5
SPECIAL EXHIBIT
Types of Contracts
The following illustration summarizes the types of contracts discussed in the text.
BILATERAL
A promise for a promise
UNILATERAL
A promise for an act
EXPRESS
Formed by words
unjust enrichment
Requires no special form for
creation
VALID
A contract that has the
necessary elements
option of avoiding or enforcing
UNENFORCEABLE
A valid contract that cannot be
enforced because of a legal
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c. Requirements for Implied Contracts
To establish an implied-in-fact contract
The plaintiff must have furnished some service or property.
The plaintiff must have expected to be paid and the defendant knew or should have
known that payment was expected.
The defendant had a chance to reject the service or property and did not.
d. Mixed Contracts with Express and Implied Terms
A contract may contain some express terms, while others are implied.
CASE SYNOPSIS
Case 11.2: Vukanovich v. Kine
Mark Vukanovich and Larry Kine agreed under a “Letter of Understanding” to buy a certain parcel of real
property in Eugene, Oregon, from Umpqua Bank. The bank accepted their offer, but their joint endeavor fell
apart. Each sought to buy the property separately. The bank accepted Kine’s offer. Vukanovich filed a suit in
an Oregon state court against Kine, alleging breach of an express contract and of the implied covenant of
good faith and fair dealing. The jury returned a verdict in favor of Vukanovich, but the court entered a
judgment in favor of Kine. Vukanovich appealed.
A state intermediate appellate court reinstated the jury verdict. Kine “breached both the express terms of
the parties' ‘Letter of Understanding’ and the implied covenant of good faith and fair dealing.” After the bank
accepted their offer, Kine refused to closelying about whyand repudiated the agreement with Vukanovich.
Kine used confidential information provided by Vukanovich to submit a separate bid. But for Kine’s breach,
Vukanovich would have been part owner of the property.
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Notes and Questions
In recognizing an implied covenant of good faith and fair dealing, does contract law try to correct
for unethical behavior? Imposing sanctions for a breach of an implied covenant of good faith and fair
dealing often helps to correct for unethical behavior. Unlike specific express terms and other implied terms,
the covenant of good faith and fair dealing underlies every contract. This covenant is based on principles of
CHAPTER 11: NATURE AND TERMINOLOGY 7
ENHANCING YOUR LECTURE
  AVOIDING UNINTENDED EMPLOYMENT CONTRACTS
 
Employers have learned many lessons from court decisions. In recent years, for example, the message
has been clear that employers should be cautious about what they say in their employment manuals.
EMPLOYMENT MANUALS AND IMPLIED-IN-FACT CONTRACTS
Promises made in an employment manual may create an implied-in-fact employment contract. If an
employment handbook states that employees will be fired only for specific causes, the employer may be held
to that “promise.” Even if, by state law, employment is “at will”—that is, the employer is allowed to hire and fire
employees at will, with or without causethe at-will doctrine will not apply if the terms of employment are
subject to a contract between the employer and the employee. If a court holds that an implied employment
contract existson the basis of promises made in an employment manualthe employment is no longer at
will. The employer will be bound by the contract and liable for damages for breaching the contract.
TAKING PRECAUTIONS
Employers who wish to avoid potential liability for breaching unintended employment contracts should
therefore make it clear to employees that the policies expressed in an employment manual are not to be
interpreted as contractual promises. An effective way to do this is to inform employees, when initially giving
them the handbook or discussing its contents with them, that the handbook is not intended as a contract and
to include a disclaimer to that effect in the employment manual. The disclaimer might read as follows: “This
policy manual describes the basic personnel policies and practices of our Company. You should understand
that the manual does not modify our Company’s ‘at will’ employment doctrine or provide employees with any
kind of contractual rights.”
The employer should make the disclaimer clear and prominent so that the applicant cannot later claim
that it was the employer’s fault that the employee did not see the disclaimer. A disclaimer will be clear and
prominent if it is set off from the surrounding text by the use of larger type, a different color, all capital letters,
or some other device that calls the reader’s attention to it.
In the handbook, the employer should also avoid making definite promises that employees will be fired
only for cause, that they will not be fired after they have worked for a certain length of time except for certain
reasons, or the like. The handbook itself should include a clear and prominent disclaimer of contractual
liability for its contents.
CHECKLIST FOR THE EMPLOYER
1. Inform new employees that statements in an employment handbook are not intended as contractual
terms.
2. Include a clear and prominent disclaimer to this effect in employment applications.
3. Avoid including in the handbook any definite promises relating to job security, and include a clear and
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
prominent disclaimer of contractual liability for any statements made within the handbook.
B. CONTRACT PERFORMANCE
Contracts are also classified according to their stage of performance. A contract that has been
performed is an executed contract. A contract that has not been performed is an executory contract. If
one party has fully performed but the other has not, the contract is said to be executed on the one side
and executory on the other, and it is classified as executory.
C. CONTRACT ENFORCEABILITY
A valid contract results when all of the elements necessary to contract formation existwhen the parties
agree, through an offer and an acceptance, to form a contract; the contract is supported by
consideration; the contract is for a legal purpose; and the parties had legal capacity to contract.
1. Voidable Contracts
A voidable contract is a valid contract in which one or both of the parties have the option of avoiding
his or her legal obligations. If the contract is avoided, both parties are released. If it is ratified, both
parties must perform.
2. Unenforceable Contracts
An unenforceable contract is a valid contract that cannot be enforced due to certain defenses. For
example, a valid contract barred by a statute of limitations is an unenforceable contract.
3. Void Contracts
A contract that is void is no contract. A void contract gives rise to no legal obligation on the part of
any party. An illegal contract is, for example, a void contract.
IV. Quasi Contracts
A quasi contract is not based on an express promise to pay for a benefit received or on conduct implying such
a promise. Quasi contracts, or contracts implied in law, are imposed by courts to avoid unjust enrichment
the theory that individuals should not be allowed to profit or enrich themselves inequitably at the expense of
others. The plaintiff recovers in quantum meruit.
A. LIMITATIONS ON QUASI-CONTRACTUAL RECOVERY
There are situations in which the recipient of a benefit is not liable. People cannot normally be forced to
pay for benefits thrust on them, for example.
B. WHEN AN ACTUAL CONTRACT EXISTS
A quasi contract will not normally be imposed when there is a contract that covers the matter.
V. Interpretation of Contracts
The most important principle to keep in mind in considering these rules is that the law attempts not just to
enforce a contract but to enforce the contract the parties made.
A. THE PLAIN MEANING RULE
CHAPTER 11: NATURE AND TERMINOLOGY 9
1. Ambiguity
A contract is ambiguous when
The intent of the parties cannot be determined from the language.
2. Extrinsic Evidence
If a contract is ambiguous, a court may interpret it against the party who drafted it or the court may
consider extrinsic evidencethe testimony of the parties, additional agreements or
communications, or other information relevant to determining the parties’ intent.
CASE SYNOPSIS
Case 11.3: Wagner v. Columbia Pictures Industries, Inc.
Robert Wagner entered into an agreement with Spelling-Goldberg Productions (SGP over the rights to
“Charlie's Angels.” The contract entitled Wagner to 50 percent of the net profits that SGP received “for the
right to exhibit photoplays of the series and from the exploitation of all ancillary, music and subsidiary rights.”
SGP hired Ivan Goff and Ben Roberts to write the episodes of the “Charlie’s Angels” television series under a
contract that gave the writers the right to make and market films based on the material. In 1995, Columbia
bought the movie rights to the material from the writers’ heirs. In 2000 and 2003, Columbia produced and
distributed two “Charlie's Angels” films. Wagner filed a suit in a California state court against Columbia,
claiming a share of the profits from the films. The court issued a summary judgment in Columbia's favor.
Wagner appealed.
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Notes and Questions
This case can be used a springboard to explain the parol evidence rule, which is discussed more fully in a
later chapter. Under this rule, parol evidence of the negotiations underlying a contract is admissible to explain,
but not to contradict, the meaning of its terms. Did Wagner’s offered evidence of the “Love Song
agreement explain or contradict the “Charlie’s Angels” contract? The court concluded, “The problem
with Wagner's extrinsic evidence is that it does not explain the contract language, it contradicts it. Under the
parol evidence rule, extrinsic evidence is not admissible to contradict express terms in a written contract. . . .
CHAPTER 11: NATURE AND TERMINOLOGY 11
Thus, as Justice Holmes explained, parol evidence is not admissible to show that when the parties ‘said five
hundred feet they agreed it should mean one hundred inches, or that Bunker Hill Monument should signify the
Old South Church [Goode v. Riley, 153 Mass. 585, 28 N.E. 228 (1891)].’
Under what circumstances might SGP have held the movie rights to “Charlie’s Angels” as
“subsidiary” to its primary “right to exhibit photoplays of the series”? The court explained that “if SGP
held the motion picture rights to ‘Charlie's Angels’ from the beginning or if it acquired them by exercising its
[five-year] right . . . as producer to purchase the rights from Goff and Roberts, then it could be said to have
acquired those rights by exploiting its right to exhibit photoplays of the series and [Wagner] would be entitled
to a share of the profits. But if SGP . . . purchased the motion picture rights to ‘Charlie's Angels’ on the open
market, independent of any right it had as producer of the TV series, then it could not be said to have
acquired those rights by exploiting its right to exhibit photoplays of the series and [Wagner] would not be
entitled to a share of the net profits.” With the substitution of Columbia for SGP, the latter is what occurred in
this case.
ADDITIONAL CASES ADDRESSING THIS ISSUE
The Plain Meaning Rule
Recent cases applying the plain meaning rule include the following.
The Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., __ F.3d __ (5th Cir. 2010) (the owner of a mobile
offshore drilling rig that was damaged by fire while berthed at the shipyard owned by a contractor that was
performing welding on the vessel “controlled” the vessel, and thus under the parties' contract was required to
indemnify the contractor against the loss).
Dominic Wenzell, D.M.D. P.C. v. Ingrim, 228 P.3d 103 (Alaska 2010) (a covenant not to compete
contained in a purchase agreement for a private dental clinic was intended to prevent only competition with
the clinic by the seller, for a certain period of time within a certain distance, not to prevent all practice of
dentistry).
Smith v. West Suburban Medical Center, 397 Ill.App.3d 995, 922 N.E.2d 549 (1 Dist. 2010) (an
agreement, which provided that a college agreed to indemnify a medical center against claims arising out of
the activities of the college's students in a clinical training program, required the college to indemnify the
medical center concerning a patient's negligence claim, which arose from injuries allegedly sustained when
she fell off a stool after being escorted to an x-ray room by a student).
Belager-Price v. Lingle, 28 So.3d 706 (Miss.App. 2010) (language in residential subdivision’s covenants
that the “subject property can be used to build and construct only one single-family residence and
appurtenances thereto” was not ambiguous as to its purpose, but clearly notified the property owner that the
lot was to be used for residential purposes).
B. OTHER RULES OF INTERPRETATION
When the writing is unclear, a court will interpret the language to give effect to the parties’ intent as
expressed in their contract. A court will not make or remake a contract nor interpret the language
according to what the parties claim their intent was when they made it.
1. Rules the Courts Use
In interpreting the terms, the following rules apply. If the terms are still susceptible to more than one
meaning, a court will consider extrinsic evidence.
A reasonable, lawful, and effective meaning will be given to all of a contract’s terms.
A contract will be interpreted as a whole; individual clauses will be considered subordinate to
the contract’s general intent. All writings that are part of the same transaction will be
interpreted together.
Terms that were negotiated separately will be given greater consideration than standardized
terms and terms that were not negotiated separately.
A word will be given its ordinary, commonly accepted meaning, and a technical word or term
will be given its technical meaning, unless the parties clearly intended something else.
Specific and exact wording will be given greater consideration than general language.
Written or typewritten terms prevail over printed ones.
When the language used has more than one meaning, it will be interpreted against the party
who drafted the contract.
When evidence of trade usage, prior dealings between the parties, and previous course of
performance under the contract is admitted, what each of the parties does in pursuance of the
contract will be interpreted as consistent with what the other does and with any relevant usage
of trade and course of dealing and performance.
2. Express Terms Usually Given the Most Weight
Express terms are given the greatest weight, followed by course of performance, course of
dealing, and usage of trade, in that order.
When considering custom and usage, a court will look at the customs and usage of trade of
the particular business and the locale where the contract was made or is to be performed.
ADDITIONAL BACKGROUND
Contract Interpretation
The terms of an agreement or promise generally define the obligation. When the parties to a contract
have adopted a writing as the final expression of all or part of their agreement, interpretation focuses on the
writing. In the Restatement (Second) of Contracts, Sections 201, 202, 203, and 206, general rules are
provided concerning the determination or effect that the meaning of the promise or agreement may have on
the scope of contractual obligations. The following is the text of those sections with Comments.
§ 201. Whose Meaning Prevails
(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is
interpreted in accordance with the meaning attached by one of them if at the time the agreement was made
(a) that party did not know of any different meaning attached by the other, and the other knew the meaning
attached by the first party; or
(b) that party had no reason to know of any different meaning attached by the other, and the other had reason
to know the meaning attached by the first party.
(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though
the result may be a failure of mutual assent.
Comment:
a. The meaning of words. Words are used as conventional symbols of mental states, with standardized
meanings based on habitual or customary practice. Unless a different intention is shown, language is
interpreted in accordance with its generally prevailing meaning. See § 202(3). Usages of varying degrees of
generality are recorded in dictionaries, but there are substantial differences between English and American
usages and between usages in different parts of the United States. Differences of usage also exist in various
localities and in different social, economic, religious and ethnic groups. All these usages change over time,
and persons engaged in transactions with each other often develop temporary usages peculiar to themselves.
Moreover, most words are commonly used in more than one sense.
b. The problem of context. Uncertainties in the meaning of words are ordinarily greatly reduced by the
context in which they are used. The same is true of other conventional symbols, and the meaning of conduct
not used as a conventional symbol is even more dependent on its setting. But the context of words and other
conduct is seldom exactly the same for two different people, since connotations depend on the entire past
Illustrations:
1. A and B agree that A will sell goods to B “f.o.b.” the place of destination. Prior correspondence shows that
the price has been adjusted on the assumption that B’s insurance policies will cover the goods during
shipment. Notwithstanding the normal meaning of the “f.o.b.” term declared in Uniform Commercial Code § 2-
14 UNIT THREE: CONTRACTS AND E-CONTRACTS
319, it may be found that the parties have “otherwise agreed” under that section and that B bears the risk in
transit.
2. A signs a negotiable promissory note payable to B’s order, and C signs his name on the back without more.
Under Uniform Commercial Code § 3-402, C’s signature is an indorsement, and evidence of a contrary
understanding is not admissible except for the purpose of reformation of the instrument. This conclusion does
not rest on interpretation of the writing.
3. A agrees to sell beer to B at a specified price per barrel. At the time of the agreement both parties and
others in their trade use as standard barrels wooden barrels which originally hold 31 gallons and hold less as
they continue in use. A statute defines a barrel as 31 1/2 gallons. The statute does not prevent interpretation
of the agreement as referring to the barrels in use.
d. Misunderstanding. Subsection (2) follows the terminology of § 20, referring to the understanding of each
party as the meaning “attached” by him to a term of a promise or agreement. Where the rules stated in
Subsections (1) and (2) do not apply, neither party is bound by the understanding of the other. The result
may be an entire failure of agreement or a failure to agree as to a term. There may be a binding contract
despite failure to agree as to a term, if the term is not essential or if it can be supplied. See § 204. In some
cases a party can waive the misunderstanding and enforce the contract in accordance with the understanding
of the other party.
Illustrations:
4. A agrees to sell and B to buy a quantity of eviscerated “chicken.” A tenders “stewing chicken” or “fowl”; B
rejects on the ground that the contract calls for “broilers” or “fryers.” Each party makes a claim for damages
against the other. It is found that each acted in good faith and that neither had reason to know of the
difference in meaning. Both claims fail.
5. A orders goods from B, using A’s standard form. B acknowledges the order, using his own standard form.
Each form provides that no terms are agreed to except those on the form and that the other party agrees to
the form. One form contains an arbitration clause; the other does not. The goods are delivered and paid for.
Later a dispute arises as to their quality. There is no agreement to arbitrate the dispute.
* * * *
§ 202. Rules in Aid of Interpretation
(1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose
of the parties is ascertainable it is given great weight.
(2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted
together.

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