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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
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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.
B. THE FUNCTION OF CONTRACT LAW
Contract law is needed to ensure compliance with a promise or to entitle a nonbreaching party to relief
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
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
II. Elements of a Contract
A. REQUIREMENTS OF A VALID CONTRACT
The four essential elements of a contract are—
• Agreement.
• Consideration.
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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.
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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
cause of action in a different set of circumstances. But on the issue at the center of this case it would have
been generally irrelevant.
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
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
b. Unilateral Contracts
c. Contests, Lotteries, and Prizes
Contests, lotteries, and other competitions involving prizes are examples of offers to form
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
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
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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
IMPLIED IN FACT
Formed at least in part by the
VALID
A contract that has the
necessary elements
VOID
No contract, or a contract
without legal obligation
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c. Requirements for Implied Contracts
To establish an implied-in-fact contract—
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.
the parties’ ‘Letter of Understanding’ and the implied covenant of good faith and fair dealing.” After the bank
accepted their offer, Kine refused to close—lying about why—and repudiated the agreement with Vukanovich.
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
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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
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.”
liability for its contents.
CHECKLIST FOR THE EMPLOYER
1. Inform new employees that statements in an employment handbook are not intended as contractual
terms.
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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
C. CONTRACT ENFORCEABILITY
A valid contract results when all of the elements necessary to contract formation exist—when 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
2. Unenforceable Contracts
3. Void Contracts
A contract that is void is no contract. A void contract gives rise to no legal obligation on the part of
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. 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
A. THE PLAIN MEANING RULE
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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 evidence—the 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”
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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
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).
• Belager-Price v. Lingle, 28 So.3d 706 (Miss.App. 2010) (language in residential subdivision’s covenants
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.
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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.
2. Express Terms Usually Given the Most Weight
• Express terms are given the greatest weight, followed by course of performance, course of
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
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
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
c. Mutual understanding. Subsection (1) makes it clear that the primary search is for a common meaning of
the parties, not a meaning imposed on them by the law. To the extent that a mutual understanding is
displaced by government regulation, the resulting obligation does not rest on “interpretation” in the sense
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–
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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.
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.
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.
d. Misunderstanding. Subsection (2) follows the terminology of § 20, referring to the understanding of each
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.
* * * *
§ 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.
(b) technical terms and words of art are given their technical meaning when used in a transaction within their
technical field.