Breach of Contract

Introduction to Contracts

In these last two weeks, we will focus on the law of contracts.  Contract law is critical. It governs what promises and commitments will be enforced by a court, and as such, it encourages business.  Our discussion of this subject will rely upon two main bodies of law that govern contracts: the Uniform Commercial Code (especially Article Two on sales contracts) and the common law.  The common law governs all contracts unless another statute supersedes it.   The Uniform Commercial Code (UCC) trumps the common law on sales contracts.

To begin, a contract is an agreement that can be enforced by the courts. As you will see, the courts will not enforce all promises. The court will only enforce promises (with a limited exception for promissory estoppel) that meet certain requirements.  These requirements are 1) agreement; consideration; 3) contractual capacity; and 4) legality.  Agreement requires both offer and acceptance. It is important to note that there must be intent to enter into a contract for this element to be met. However, this intent is an objective standard. It does not require that each party subjectively intend to enter a contract. It merely requires that an objective observer would believe that the parties intended to enter into a contract.  Courts will only enforce agreements when something of value, received or promised, is used to convince a person to contract. This something of value is known as consideration. Consideration is the primary mechanism the courts use to distinguish what agreements are enforceable in the courts and which are not.

Additionally, both parties to a contract must have capacity to enter into a contract. Capacity in this context requires the parties to a contract to be competent.  Minors and incompetent individuals lack capacity to enter into a contract.  Finally, the contract must be legal. This is a requirement that parties may not contract to do anything illegal or against public policy.  A contract results when all the elements discussed above exist. Once a valid contract is formed, both parties are entitled to whatever they were promised on punishment of court sanctions. Failure to carry out contractual duties is known as a breach.  However, where one of the elements doesn’t exist the contract may be void or voidable. A void contract gives no legal obligation to either party. For example, an illegal contract simply will not be enforced. A voidable contract is one where the elements were not met, but nonetheless, one party may enforce it against the other at that party’s discretion. These typically arise where one party lacks capacity. In these cases for example, a minor has the option to either void the contract or be bound by it.

Another important issue in the law of contracts concerns the interpretation of them. When a contract is in writing that is not subject to conflicting meanings, a court will enforce the writing according to its plain meaning. Under this rule, the meaning of words will be determined from the fact of the contract, and the court will not consider extrinsic evidence beyond the four corners of the contract.  However, it is frequently the case that there is some ambiguity and gaps in the contractual language. In these cases, the court will hear testimony about these terms. It is particularly notable that the UCC will often require the court to consider carefully the history of the parties dealings with each other under a specific contract or over time as well as the custom in an industry.  

Offer, Acceptance and Consideration

As you know from the previous lecture, agreement and consideration are two elements that must exist for a contract to be valid. In this lecture, we will examine these elements in more detail.

To form an agreement, there must be an offer. The elements of an effective offer are: 1) a serious intent by the offeror to be bound by the offer; 2) reasonably certain or definite, contractual terms; and 3) communication of the offer by the offeror to the offeree.  As stated earlier, courts apply the objective theory of contracts for determining intent. Intent is not determined by the offeror’s subjective mental state. It is determined by what a reasonable person in the offeree’s position would conclude about intent.   That said expressions of opinion, simple advertisements, and preliminary negotiations are not considered valid offers.  This is for two reasons. First, there is no real intent to be bound immediately. Second, these generally lack sufficient specificity to be enforced by the courts.

The definiteness requirement exists so that a court can determine if a breach has occurred (and consequently a proper remedy by made available).  An offer must have specific terms.  Specific terms would include terms relating to price, quantity, time for performance etc. Under the UCC, this requirement is more relaxed as the courts can use various gap fillers contained there to fill in the contract. However, even under the UCC a quantity term must be specified.

Finally, the offer must be communicated to the offeree. For example, a person cannot claim a reward for doing a task if they are unaware of the reward’s existence.  Once the offer has been made, it may be terminated by law or revoked by the actions of the parties. Either of these cut-off the offeree’s power to accept the offer.  The revocation by the parties may occur in three ways.  It may be withdrawn by the offeror. This may be done any time before acceptance (even if the offeror has promised to keep the offer open as long as no consideration is offered in exchange for keeping the offer open).  However, the revocation must be communicated to the offeree.  This communication can be expressly stated, or it can be implied (if for example, the offeror sells goods that were covered by offer to another).  Offers may also be rejected by the offeree.  Finally, a counter-offer by the offeree will also revoke the original offer. Offers also expire by the operation of law when the time specified in the offer (or a reasonable time) has passed. Offers also expire on the death or incompetence of the offeror or offeree.   Once the offer is made, the agreement is formed when there is acceptance.   This acceptance must be unequivocal and communicated to the offer. Typically, only the offeree may accept the contract, and silence will ordinarily not be construed as acceptance. The communication to accept may either be determined by the offeror or it may done in any reasonable fashion.

The next element of a valid contract to discuss is consideration.  Consideration is anything of legal value that is bargained for.   The term legal value is not synonymous with economic value.   For example, a promise may often have legal value.  And consideration may consist of goods, money, performance, or a return promise.  The only requirements for consideration to be valid is that it must be legally sufficient or have value in the eyes of the law. As long as this barrier is met, the courts will not ordinarily question whether the consideration is adequate i.e., fair.

However, there are some rules about what does not count as legally sufficient consideration. A promise to do something one already has a duty to do is not legally sufficient under the preexisting duty rule. This is because there is no legal detriment or benefit. For example if someone is working as a cook, the cook may not renegotiate the contract when the restaurant gets busy.   Additionally, past consideration or promises made with respect to events that have already taken place are unenforceable.  This is because there is no bargain that is leading to the promise.

https://content.grantham.edu/at/BA260/2014/w7-vid-lec/w7-vid-lec.mp4