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Chapter 8 Introduction to Contract Law

L E A R N I N G O B JE C T I V E S

After reading this chapter, you should understand the following:

1. Why and how contract law has developed

2. What a contract is

3. What topics will be discussed in the contracts chapter of this book

4. What the sources of contract law are

5. How contracts are classified (basic taxonomy)

8.1 General Perspectives on Contracts L E A R N I N G O B JE C T I V E S

1. Explain contract law’s cultural roots: how it has evolved as capitalism has evolved.

2. Understand that contracts serve essential economic purposes.

3. Define contract.

4. Understand the basic issues in contract law.

The Role of Contracts in Modern Society

Contract is probably the most familiar legal concept in our society because it is so central to the essence of

our political, economic, and social life. In common parlance, contract is used interchangeably

with agreement, bargain, undertaking, or deal. Whatever the word, the concept it embodies is our notion

of freedom to pursue our own lives together with others. Contract is central because it is the means by

which a free society orders what would otherwise be a jostling, frenetic anarchy.

So commonplace is the concept of contract—and our freedom to make contracts with each other—that it is

difficult to imagine a time when contracts were rare, when people’s everyday associations with one

another were not freely determined. Yet in historical terms, it was not so long ago that contracts were

rare, entered into if at all by very few: that affairs should be ordered based on mutual assent was mostly

unknown. In primitive societies and in feudal Europe, relationships among people were largely fixed;

traditions spelled out duties that each person owed to family, tribe, or manor. People were born into an

ascribed position—a status (not unlike the caste system still existing in India)—and social mobility was

limited. Sir Henry Maine, a nineteenth-century British historian, wrote that “the movement of the

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progressive societies has…been a movement from status to contract.” [1] This movement was not

accidental—it developed with the emerging industrial order. From the fifteenth to the nineteenth century,

England evolved into a booming mercantile economy, with flourishing trade, growing cities, an expanding

monetary system, the commercialization of agriculture, and mushrooming manufacturing. With this

evolution, contract law was created of necessity.

Contract law did not develop according to a conscious plan, however. It was a response to changing

conditions, and the judges who created it frequently resisted, preferring the imagined quieter pastoral life

of their forefathers. Not until the nineteenth century, in both the United States and England, did a full-

fledged law of contracts arise together with, and help create, modern capitalism.

Modern capitalism, indeed, would not be possible without contract law. So it is that in planned

economies, like those of the former Soviet Union and precapitalistic China, the contract did not determine

the nature of an economic transaction. That transaction was first set forth by the state’s planning

authorities; only thereafter were the predetermined provisions set down in a written contract. Modern

capitalism has demanded new contract regimes in Russia and China; the latter adopted its Revised

Contract Law in 1999.

Contract law may be viewed economically as well as culturally. In An Economic Analysis of Law, Judge

Richard A. Posner (a former University of Chicago law professor) suggests that contract law performs

three significant economic functions. First, it helps maintain incentives for individuals to exchange goods

and services efficiently. Second, it reduces the costs of economic transactions because its very existence

means that the parties need not go to the trouble of negotiating a variety of rules and terms already

spelled out. Third, the law of contracts alerts the parties to troubles that have arisen in the past, thus

making it easier to plan the transactions more intelligently and avoid potential pitfalls. [2]

The Definition of Contract

As usual in the law, the legal definition of contract is formalistic. The Restatement (Second) of Contracts

(Section 1) says, “A contract is a promise or a set of promises for the breach of which the law gives a

remedy, or the performance of which the law in some way recognizes as a duty.” Similarly, the Uniform

Commercial Code says, “‘Contract’ means the total legal obligation which results from the parties’

agreement as affected by this Act and any other applicable rules of law.” [3] As operational definitions,

these two are circular; in effect, a contract is defined as an agreement that the law will hold the parties to.

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Most simply, a contract is a legally enforceable promise. This implies that not every promise or agreement

creates a binding contract; if every promise did, the simple definition set out in the preceding sentence

would read, “A contract is a promise.” But—again—a contract is not simply a promise: it is a legally

enforceable promise. The law takes into account the way in which contracts are made, by whom they are

made, and for what purposes they are made. For example, in many states, a wager is unenforceable, even

though both parties “shake” on the bet. We will explore these issues in the chapters to come.

Overview of the Contracts Chapter

Although contract law has many wrinkles and nuances, it consists of four principal inquiries, each of

which will be taken up in subsequent chapters:

1. Did the parties create a valid contract? Four elements are necessary for a valid contract:

a. Mutual assent (i.e., offer and acceptance), Chapter 9 "The Agreement"

b. Real assent (no duress, undue influence, misrepresentation, mistake, or

incapacity), Chapter 10 "Real Assent"

c. Consideration, Chapter 11 "Consideration"

d. Legality, Chapter 12 "Legality"

What does the contract mean, and is it in the proper form to carry out this

meaning? Sometimes contracts need to be in writing (or evidenced by some writing), or

they can’t be enforced. Sometimes it isn’t clear what the contract means, and a court has

to figure that out. These problems are taken up in Chapter 13 "Form and Meaning".

Do persons other than the contracting parties have rights or duties under the

contract? Can the right to receive a benefit from the contract be assigned, and can the

duties be delegated so that a new person is responsible? Can persons not a party to the

contract sue to enforce its terms? These questions are addressed inChapter 14 "Third-

Party Rights".

How do contractual duties terminate, and what remedies are available if a party

has breached the contract? These issues are taken up in Chapter 15 "Discharge of

Obligations" and Chapter 16 "Remedies".

Together, the answers to these four basic inquiries determine the rights and obligations of contracting

parties.

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K E Y T A K E A W A Y

Contract law developed when the strictures of feudalism dissipated, when a person’s position in society

came to be determined by personal choice (by mutual agreement) and not by status (by how a person was

born). Capitalism and contract law have developed together, because having choices in society means that

people decide and agree to do things with and to each other, and those agreements bind the parties; the

agreements must be enforceable. E X E R C I S E S

1. Why is contract law necessary in a society where a person’s status is not predetermined

by birth?

2. Contract law serves some economic functions. What are they? [1] Sir Henry Maine, Ancient Law (1869), 180–82.

[2] Richard A. Posner, Economic Analysis of Law (New York: Aspen, 1973).

[3] Uniform Commercial Code, Section 1-201(11).

8.2 Sources of Contract Law L E A R N I N G O B JE C T I V E S

1. Understand that contract law comes from two sources: judges (cases) and legislation.

2. Know what the Restatement of Contracts is.

3. Recognize the Convention on Contracts for the International Sale of Goods.

The most important sources of contract law are state case law and state statutes (though there are also

many federal statutes governing how contracts are made by and with the federal government).

Case Law

Law made by judges is called case law. Because contract law was made up in the common-law courtroom

by individual judges as they applied rules to resolve disputes before them, it grew over time to formidable

proportions. By the early twentieth century, tens of thousands of contract disputes had been submitted to

the courts for resolution, and the published opinions, if collected in one place, would have filled dozens of

bookshelves. Clearly this mass of material was too unwieldy for efficient use. A similar problem also had

developed in the other leading branches of the common law.

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Disturbed by the profusion of cases and the resulting uncertainty of the law, a group of prominent

American judges, lawyers, and law teachers founded the American Law Institute (ALI) in 1923 to attempt

to clarify, simplify, and improve the law. One of the ALI’s first projects, and ultimately one of its most

successful, was the drafting of theRestatement of the Law of Contracts, completed in 1932. A revision—the

Restatement (Second) of Contracts—was undertaken in 1964 and completed in 1979. Hereafter, references

to “the Restatement” pertain to the Restatement (Second) of Contracts.

The Restatements—others exist in the fields of torts, agency, conflicts of laws, judgments, property,

restitution, security, and trusts—are detailed analyses of the decided cases in each field. These analyses

are made with an eye to discerning the various principles that have emerged from the courts, and to the

maximum extent possible, the Restatements declare the law as the courts have determined it to be. The

Restatements, guided by a reporter (the director of the project) and a staff of legal scholars, go through

several so-called tentative drafts—sometimes as many as fifteen or twenty—and are screened by various

committees within the ALI before they are eventually published as final documents.

The Restatement (Second) of Contracts won prompt respect in the courts and has been cited in

innumerable cases. The Restatements are not authoritative, in the sense that they are not actual judicial

precedents; but they are nevertheless weighty interpretive texts, and judges frequently look to them for

guidance. They are as close to “black letter” rules of law as exist anywhere in the American common-law

legal system.

Common law, case law (the terms are synonymous), governs contracts for the sale of real estate and

services. “Services” refer to acts or deeds (like plumbing, drafting documents, driving a car) as opposed to

the sale of property.

Statutory Law: The Uniform Commercial Code

Common-law contract principles govern contracts for real estate and services. Because of the historical

development of the English legal system, contracts for the sale of goods came to be governed by a different

body of legal rules. In its modern American manifestation, that body of rules is an important statute:

theUniform Commercial Code (UCC), especially Article 2, which deals with the sale of goods.

History of the UCC

A bit of history is in order. Before the UCC was written, commercial law varied, sometimes greatly, from

state to state. This first proved a nuisance and then a serious impediment to business as the American

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economy became nationwide during the twentieth century. Although there had been some uniform laws

concerned with commercial deals—including the Uniform Sales Act, first published in 1906—few were

widely adopted and none nationally. As a result, the law governing sales of goods, negotiable instruments,

warehouse receipts, securities, and other matters crucial to doing business in an industrial market

economy was a crazy quilt of untidy provisions that did not mesh well from state to state.

The UCC is a model law developed by the ALI and the National Conference of Commissioners on Uniform

State Laws; it has been adopted in one form or another by the legislatures in all fifty states, the District of

Columbia, and the American territories. It is a “national” law not enacted by Congress—it is not federal

law but uniform state law.

Initial drafting of the UCC began in 1942 and was ten years in the making, involving the efforts of

hundreds of practicing lawyers, law teachers, and judges. A final draft, promulgated by the ALI, was

endorsed by the American Bar Association and published in 1951. Various revisions followed in different

states, threatening the uniformity of the UCC. The ALI responded by creating a permanent editorial board

to oversee future revisions. In one or another of its various revisions, the UCC has been adopted in whole

or in part in all American jurisdictions. The UCC is now a basic law of relevance to every business and

business lawyer in the United States, even though it is not entirely uniform because different states have

adopted it at various stages of its evolution—an evolution that continues still.

Organization of the UCC

The UCC consists of nine major substantive articles; each deals with separate though related subjects. The

articles are as follows:

Article 1: General Provisions

Article 2: Sales

Article 2A: Leases

Article 3: Commercial Paper

Article 4: Bank Deposits and Collections

Article 4A: Funds Transfers

Article 5: Letters of Credit

Article 6: Bulk Transfers

Article 7: Warehouse Receipts, Bills of Lading, and Other Documents of Title

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Article 8: Investment Securities

Article 9: Secured Transactions

Article 2 deals only with the sale of goods, which the UCC defines as “all things…which are movable at the

time of identification to the contract for sale other than the money in which the price is to be paid.” [1] The

only contracts and agreements covered by Article 2 are those relating to the present or future sale of

goods.

Article 2 is divided in turn into six major parts: (1) Form, Formation, and Readjustment of Contract; (2)

General Obligation and Construction of Contract; (3) Title, Creditors, and Good Faith Purchasers; (4)

Performance; (5) Breach, Repudiation, and Excuse; and (6) Remedies. These topics will be discussed

in Chapter 17 "Introduction to Sales and Leases", Chapter 18 "Title and Risk of Loss", Chapter 19

"Performance and Remedies", Chapter 20 "Products Liability", and Chapter 21 "Bailments and the

Storage, Shipment, and Leasing of Goods".

Figure 8.1 Sources of Law

International Sales Law

The Convention on Contracts for the International Sale of Goods

A Convention on Contracts for the International Sale of Goods (CISG) was approved in 1980 at a

diplomatic conference in Vienna. (A convention is a preliminary agreement that serves as the basis for a

formal treaty.) The CISG has been adopted by more than forty countries, including the United States.

The CISG is significant for three reasons. First, it is a uniform law governing the sale of goods—in effect,

an international Uniform Commercial Code. The major goal of the drafters was to produce a uniform law

acceptable to countries with different legal, social, and economic systems. Second, although provisions in

the CISG are generally consistent with the UCC, there are significant differences. For instance, under the

CISG, consideration (discussed in Chapter 11 "Consideration") is not required to form a contract, and

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there is no Statute of Frauds (a requirement that certain contracts be evidenced by a writing). Third, the

CISG represents the first attempt by the US Senate to reform the private law of business through its treaty

powers, for the CISG preempts the UCC. The CISG is not mandatory: parties to an international contract

for the sale of goods may choose to have their agreement governed by different law, perhaps the UCC, or

perhaps, say, Japanese contract law. The CISG does not apply to contracts for the sale of (1) ships or

aircraft, (2) electricity, or (3) goods bought for personal, family, or household use, nor does it apply (4)

where the party furnishing the goods does so only incidentally to the labor or services part of the contract. K E Y T A K E A W A Y

Judges have made contract law over several centuries by deciding cases that create, extend, or change the

developing rules affecting contract formation, performance, and enforcement. The rules from the cases

have been abstracted and organized in the Restatements of Contracts. To facilitate interstate commerce,

contract law for many commercial transactions—especially the sale of goods—not traditionally within the

purview of judges has been developed by legal scholars and presented for the states to adopt as the

Uniform Commercial Code. There is an analogous Convention on Contracts for the International Sale of

Goods, to which the United States is a party. E X E R C I S E S

1. How do judges make contract law?

2. What is the Restatement of the Law of Contracts, and why was it necessary?

3. Why was the Uniform Commercial Code developed, and by whom?

4. Who adopts the UCC as governing law?

5. What is the Convention on Contracts for the International Sale of Goods? [1] Uniform Commercial Code, Section 2-105.

8.3 Basic Taxonomy of Contracts L E A R N I N G O B JE C T I V E S

1. Understand that contracts are classified according to the criteria of explicitness,

mutuality, enforceability, and degree of completion and that some noncontract

promises are nevertheless enforceable under the doctrine of promissory estoppel.

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2. Keep your eyes (and ears) alert to the use of suffixes (word endings) in legal terminology

that express relationships between parties.

Some contracts are written, some oral; some are explicit, some not. Because contracts can be formed, expressed, and

enforced in a variety of ways, a taxonomy of contracts has developed that is useful in grouping together like legal

consequences. In general, contracts are classified along four different dimensions: explicitness, mutuality,

enforceability, and degree of completion. Explicitness is the degree to which the agreement is manifest to those not

party to it. Mutuality takes into account whether promises are given by two parties or only one. Enforceability is the

degree to which a given contract is binding. Completion considers whether the contract is yet to be performed or

whether the obligations have been fully discharged by one or both parties. We will examine each of these concepts in

turn.

Explicitness

Express Contract

An express contract is one in which the terms are spelled out directly. The parties to an express contract,

whether it is written or oral, are conscious that they are making an enforceable agreement. For example,

an agreement to purchase your neighbor’s car for $5,500 and to take title next Monday is an express

contract.

Implied Contract (Implied in Fact)

An implied contract is one that is inferred from the actions of the parties. When parties have not

discussed terms, an implied contract exists if it is clear from the conduct of both parties that they intended

there be one. A delicatessen patron who asks for a turkey sandwich to go has made a contract and is

obligated to pay when the sandwich is made. By ordering the food, the patron is implicitly agreeing to the

price, whether posted or not.

The distinction between express and implied contracts has received a degree of notoriety in the so-called

palimony cases, in which one member of an unmarried couple seeks a division of property after a long-

standing live-together relationship has broken up. When a married couple divorces, their legal marriage

contract is dissolved, and financial rights and obligations are spelled out in a huge body of domestic

relations statutes and judicial decisions. No such laws exist for unmarried couples. However, about one-

third of the states recognize common-law marriage, under which two people are deemed to be married if

they live together with the intent to be married, regardless of their failure to have obtained a license or

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gone through a ceremony. Although there is no actual contract of marriage (no license), their behavior

implies that the parties intended to be treated as if they were married.

Quasi-Contract

A quasi-contract (implied in law) is—unlike both express and implied contracts, which embody an actual

agreement of the parties—an obligation said to be “imposed by law” in order to avoid unjust enrichment of

one person at the expense of another. A quasi-contract is not a contract at all; it is a fiction that the courts

created to prevent injustice. Suppose, for example, that the local lumberyard mistakenly delivers a load of

lumber to your house, where you are repairing your deck. It was a neighbor on the next block who ordered

the lumber, but you are happy to accept the load for free; since you never talked to the lumberyard, you

figure you need not pay the bill. Although it is true there is no contract, the law implies a contract for the

value of the material: of course you will have to pay for what you got and took. The existence of this

implied contract does not depend on the intention of the parties.

Mutuality

Bilateral Contract

The typical contract is one in which the parties make mutual promises. Each is both promisor and

promisee; that is, each pledges to do something, and each is the recipient of such a pledge. This type of

contract is called a bilateral contract.

Unilateral Contract

Mutual promises are not necessary to constitute a contract. Unilateral contracts, in which one party

performs an act in exchange for the other party’s promise, are equally valid. An offer of a reward—for

catching a criminal or for returning a lost cat—is an example of a unilateral contract: there is an offer on

one side, and the other side accepts by taking the action requested.

Figure 8.2 Bilateral and Unilateral Contracts

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Enforceability

Void

Not every agreement between two people is a binding contract. An agreement that is lacking one of the

legal elements of a contract is said to be a void contract—that is, not a contract at all. An agreement that is

illegal—for example, a promise to commit a crime in return for a money payment—is void. Neither party

to a void “contract” may enforce it.

Voidable

By contrast, a voidable contract is one that may become unenforceable by one party but can be enforced

by the other. For example, a minor (any person under eighteen, in most states) may “avoid” a contract

with an adult; the adult may not enforce the contract against the minor if the minor refuses to carry out

the bargain. But the adult has no choice if the minor wishes the contract to be performed. (A contract may

be voidable by both parties if both are minors.)

Ordinarily, the parties to a voidable contract are entitled to be restored to their original condition.

Suppose you agree to buy your seventeen-year-old neighbor’s car. He delivers it to you in exchange for

your agreement to pay him next week. He has the legal right to terminate the deal and recover the car, in

which case you will of course have no obligation to pay him. If you have already paid him, he still may

legally demand a return to the status quo ante (previous state of affairs). You must return the car to him;

he must return the cash to you.

A voidable contract remains a valid contract until it is voided. Thus a contract with a minor remains in

force unless the minor decides he or she does not wish to be bound by it. When the minor reaches

majority, he or she may “ratify” the contract—that is, agree to be bound by it—in which case the contract

will no longer be voidable and will thereafter be fully enforceable.

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Unenforceable

An unenforceable contract is one that some rule of law bars a court from enforcing. For example, Tom

owes Pete money, but Pete has waited too long to collect it and the statute of limitations has run out. The

contract for repayment is unenforceable and Pete is out of luck, unless Tom makes a new promise to pay

or actually pays part of the debt. (However, if Pete is holding collateral as security for the debt, he is

entitled to keep it; not all rights are extinguished because a contract is unenforceable.) A debt becomes

unenforceable, too, when the debtor declares bankruptcy.

A bit more on enforceability is in order. A promise or what seems to be a promise is usually enforceable

only if it is otherwise embedded in the elements necessary to make that promise a contract. Those

elements are mutual assent, real assent, consideration, capacity, and legality. Sometimes, though, people

say things that seem like promises, and on which another person relies. In the early twentieth century,

courts began, in some circumstances, to recognize that insisting on the existence of the traditional

elements of contract to determine whether a promise is enforceable could work an injustice where there

has been reliance. Thus developed the equitable doctrine ofpromissory estoppel, which has become an

important adjunct to contract law. The Restatement (Section 90) puts it this way: “A promise which the

promisor should reasonably expect to induce action or forbearance on the party of the promisee or a third

person and which does induce such action or forbearance is binding if injustice can be avoided only by

enforcement of the promise. The remedy granted for breach may be limited as justice requires.”

To be “estopped” means to be prohibited from denying now the validity of a promise you made before.

The doctrine has an interesting background. In 1937, High Trees House Ltd. (a British corporation) leased

a block of London apartments from Central London Properties. As World War II approached, vacancy

rates soared because people left the city. In 1940 the parties agreed to reduce the rent rates by half, but no

term was set for how long the reduction would last. By mid-1945, as the war was ending, occupancy was

again full, and Central London sued for the full rental rates from June on. The English court, under Judge

Alfred Thompson Denning (1899–1999), had no difficulty finding that High Trees owed the full amount

once full occupancy was again achieved, but Judge Denning went on. In an aside (called a dicta—a

statement “by the way”—that is, not necessary as part of the decision), he mused about what would have

happened if in 1945 Central London had sued for the full-occupancy rate back to 1940. Technically, the

1940 amendment to the 1937 contract was not binding on Central London—it lacked consideration—and

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Central London could have reached back to demand full-rate payment. But Judge Denning said that High

Trees would certainly have relied on Central London’s promise that a reduced-rate rent would be

acceptable, and that would have been enough to bind it, to prevent it from acting inconsistently with the

promise. He wrote, “The courts have not gone so far as to give a cause of action in damages for the breach

of such a promise, but they have refused to allow the party making it to act inconsistently with it.” [1]

In the years since, though, courts have gone so far as to give a cause of action in damages for various

noncontract promises. Contract protects agreements; promissory estoppel protects reliance, and that’s a

significant difference. The law of contracts continues to evolve.

Degree of Completion

An agreement consisting of a set of promises is called an executory contract before any promises are

carried out. Most executory contracts are enforceable. If John makes an agreement to deliver wheat to

Humphrey and does so, the contract is called apartially executed contract: one side has performed, the

other has not. When John pays for the wheat, the contract is fully performed. A contract that has been

carried out fully by both parties is called an executed contract.

Terminology: Suffixes Expressing Relationships

Although not really part of the taxonomy of contracts (i.e., the orderly classification of the subject), an

aspect of contractual—indeed, legal—terminology should be highlighted here. Suffixes (the end syllables

of words) in the English language are used to express relationships between parties in legal terminology.

Here are examples:

Offeror. One who makes an offer. Offeree. One to whom an offer is made.

Promisor. One who makes a promise.

Promisee. One to whom a promise is made.

Obligor. One who makes and has an obligation.

Obligee. One to whom an obligation is made.

Transferor. One who makes a transfer.

Transferee. One to whom a transfer is made.

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K E Y T A K E A W A Y

Contracts are described and thus defined on the basis of four criteria: explicitness (express, implied, or

quasi-contracts), mutuality (bilateral or unilateral), enforceability (void, voidable, unenforceable), and

degree of completion (executory, partially executed, executed). Legal terminology in English often

describes relationships between parties by the use of suffixes, to which the eye and ear must pay

attention. E X E R C I S E S

1. Able writes to Baker: “I will mow your lawn for $20.” If Baker accepts, is this an express

or implied contract?

2. Able telephones Baker: “I will mow your lawn for $20.” Is this an express or implied

contract?

3. What is the difference between a void contract and a voidable one?

4. Carr staples this poster to a utility pole: “$50 reward for the return of my dog, Argon.”

Describe this in contractual terms regarding explicitness, mutuality, enforceability, and

degree of completion.

5. Is a voidable contract always unenforceable?

6. Contractor bids on a highway construction job, incorporating Guardrail Company’s bid

into its overall bid to the state. Contractor cannot accept Guardrail’s offer until it gets

the nod from the state. Contractor gets the nod from the state, but before it can accept

Guardrail’s offer, the latter revokes it. Usually a person can revoke an offer any time

before it is accepted. Can Guardrail revoke its offer in this case? [1] Central London Property Trust Ltd. v. High Trees House Ltd. (1947) KB 130.

8.4 Cases Explicitness: Implied Contract

Roger’s Backhoe Service, Inc. v. Nichols

681 N.W.2d 647 (Iowa 2004)

Carter, J.

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Defendant, Jeffrey S. Nichols, is a funeral director in Muscatine.…In early 1998 Nichols decided to build a

crematorium on the tract of land on which his funeral home was located. In working with the Small

Business Administration, he was required to provide drawings and specifications and obtain estimates for

the project. Nichols hired an architect who prepared plans and submitted them to the City of Muscatine

for approval. These plans provided that the surface water from the parking lot would drain onto the

adjacent street and alley and ultimately enter city storm sewers. These plans were approved by the city.

Nichols contracted with Roger’s [Backhoe Service, Inc.] for the demolition of the foundation of a building

that had been razed to provide room for the crematorium and removal of the concrete driveway and

sidewalk adjacent to that foundation. Roger’s completed that work and was paid in full.

After construction began, city officials came to the jobsite and informed Roger’s that the proposed

drainage of surface water onto the street and alley was unsatisfactory. The city required that an effort be

made to drain the surface water into a subterranean creek, which served as part of the city’s storm sewer

system. City officials indicated that this subterranean sewer system was about fourteen feet below the

surface of the ground.…Roger’s conveyed the city’s mandate to Nichols when he visited the jobsite that

same day.

It was Nichols’ testimony at trial that, upon receiving this information, he advised…Roger’s that he was

refusing permission to engage in the exploratory excavation that the city required. Nevertheless, it

appears without dispute that for the next three days Roger’s did engage in digging down to the

subterranean sewer system, which was located approximately twenty feet below the surface. When the

underground creek was located, city officials examined the brick walls in which it was encased and

determined that it was not feasible to penetrate those walls in order to connect the surface water drainage

with the underground creek. As a result of that conclusion, the city reversed its position and once again

gave permission to drain the surface water onto the adjacent street and alley.

[T]he invoices at issue in this litigation relate to charges that Roger’s submitted to Nichols for the three

days of excavation necessary to locate the underground sewer system and the cost for labor and materials

necessary to refill the excavation with compactable materials and attain compaction by means of a

tamping process.…The district court found that the charges submitted on the…invoices were fair and

reasonable and that they had been performed for Nichols’ benefit and with his tacit approval.…

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The court of appeals…concluded that a necessary element in establishing an implied-in-fact contract is

that the services performed be beneficial to the alleged obligor. It concluded that Roger’s had failed to

show that its services benefited Nichols.…

In describing the elements of an action on an implied contract, the court of appeals stated in [Citation],

that the party seeking recovery must show:

(1) the services were carried out under such circumstances as to give the recipient reason to understand:

(a) they were performed for him and not some other person, and

(b) they were not rendered gratuitously, but with the expectation of compensation from the recipient; and

(2) the services were beneficial to the recipient.

In applying the italicized language in [Citation] to the present controversy, it was the conclusion of the

court of appeals that Roger’s’ services conferred no benefit on Nichols. We disagree. There was substantial

evidence in the record to support a finding that, unless and until an effort was made to locate the

subterranean sewer system, the city refused to allow the project to proceed. Consequently, it was

necessary to the successful completion of the project that the effort be made. The fact that examination of

the brick wall surrounding the underground creek indicated that it was unfeasible to use that source of

drainage does not alter the fact that the project was stalemated until drainage into the underground creek

was fully explored and rejected. The district court properly concluded that Roger’s’ services conferred a

benefit on Nichols.…

Decision of court of appeals vacated; district court judgment affirmed. C A S E Q U E S T I ON S

1. What facts must be established by a plaintiff to show the existence of an implied

contract?

2. What argument did Nichols make as to why there was no implied contract here?

3. How would the facts have to be changed to make an express contract?

Mutuality of Contract: Unilateral Contract

SouthTrust Bank v. Williams

775 So.2d 184 (Ala. 2000)

Cook, J.

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SouthTrust Bank (“SouthTrust”) appeals from an order denying its motion to compel arbitration of an

action against it by checking-account customers Mark Williams and Bessie Daniels. We reverse and

remand.

Daniels and Williams began their relationship with SouthTrust in 1981 and 1995, respectively, by

executing checking-account “signature cards.” The signature card each customer signed contained a

“change-in-terms” clause. Specifically, when Daniels signed her signature card, she “agree[d] to be subject

to the Rules and Regulations as may now or hereafter be adopted by the Bank.” (Emphasis

added.)…[Later,] SouthTrust added paragraph 33 to the regulations:…

ARBITRATION OF DISPUTES. You and we agree that the transactions in your account involve

‘commerce’ under the Federal Arbitration Act (‘FAA’). ANY CONTROVERSY OR CLAIM BETWEEN YOU

AND US…WILL BE SETTLED BY BINDING ARBITRATION UNDER THE FAA.…

This action…challenges SouthTrust’s procedures for paying overdrafts, and alleges that SouthTrust

engages in a “uniform practice of paying the largest check(s) before paying multiple smaller checks…[in

order] to generate increased service charges for [SouthTrust] at the expense of [its customers].”

SouthTrust filed a “motion to stay [the] lawsuit and to compel arbitration.” It based its motion on

paragraph 33 of the regulations. [T]he trial court…entered an order denying SouthTrust’s motion to

compel arbitration. SouthTrust appeals.…

Williams and Daniels contend that SouthTrust’s amendment to the regulations, adding paragraph 33, was

ineffective because, they say, they did not expressly assent to the amendment. In other words, they object

to submitting their claims to arbitration because, they say, when they opened their accounts, neither the

regulations nor any other relevant document contained an arbitration provision. They argue that “mere

failure to object to the addition of a material term cannot be construed as an acceptance of it.”…They

contend that SouthTrust could not unilaterally insert an arbitration clause in the regulations and make it

binding on depositors like them.

SouthTrust, however, referring to its change-of-terms clause insists that it “notified” Daniels and Williams

of the amendment in January 1997 by enclosing in each customer’s “account statement” a complete copy

of the regulations, as amended. Although it is undisputed that Daniels and Williams never affirmatively

assented to these amended regulations, SouthTrust contends that their assent was evidenced by their

failure to close their accounts after they received notice of the amendments.…Thus, the disposition of this

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case turns on the legal effect of Williams and Daniels’s continued use of the accounts after the regulations

were amended.

Williams and Daniels argue that “[i]n the context of contracts between merchants [under the UCC], a

written confirmation of an acceptance may modify the contractunless it adds a material term, and

arbitration clauses are material terms.”…

Williams and Daniels concede—as they must—…that Article 2 governs “transactions in goods,” and,

consequently, that it is not applicable to the transactions in this case. Nevertheless, they argue:

It would be astonishing if a Court were to consider the addition of an arbitration clause a material

alteration to a contract between merchants, who by definition are sophisticated in the trade to which the

contract applies, but not hold that the addition of an arbitration clause is a material alteration pursuant to

a change-of-terms clause in a contract between one sophisticated party, a bank, and an entire class of less

sophisticated parties, its depositors.…

In response, SouthTrust states that “because of the ‘at-will’ nature of the relationship, banks by necessity

must contractually reserve the right to amend their deposit agreements from time to time.” In so stating,

SouthTrust has precisely identified the fundamental difference between the transactions here and those

transactions governed by [Article 2].

Contracts for the purchase and sale of goods are essentially bilateral and executory in nature. See

[Citation] “An agreement whereby one party promises to sell and the other promises to buy a thing at a

later time…is a bilateral promise of sale or contract to sell”.…“[A] unilateral contract results from an

exchange of a promise for an act; a bilateral contract results from an exchange of promises.”…Thus, “in a

unilateral contract, there is no bargaining process or exchange of promises by parties as in a bilateral

contract.” [Citation] “[O]nly one party makes an offer (or promise) which invites performance by another,

and performance constitutes both acceptance of that offer and consideration.” Because “a ‘unilateral

contract’ is one in which no promisor receives promise as consideration for his promise,” only one party is

bound.…The difference is not one of semantics but of substance; it determines the rights and

responsibilities of the parties, including the time and the conditions under which a cause of action accrues

for a breach of the contract.

This case involves at-will, commercial relationships, based upon a series of unilateral transactions. Thus,

it is more analogous to cases involving insurance policies, such as [Citations]. The common thread

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running through those cases was the amendment by one of the parties to a business relationship of a

document underlying that relationship—without the express assent of the other party—to require the

arbitration of disputes arising after the amendment.…

The parties in [the cited cases], like Williams and Daniels in this case, took no action that could be

considered inconsistent with an assent to the arbitration provision. In each case, they continued the

business relationship after the interposition of the arbitration provision. In doing so, they implicitly

assented to the addition of the arbitration provision.…

Reversed and remanded. C A S E Q U E S T I ON S

1. Why did the plaintiffs think they should not be bound by the arbitration clause?

2. The court said this case involved a unilateral contract. What makes it that, as opposed to

a bilateral contract?

3. What should the plaintiffs have done if they didn’t like the arbitration requirement?

Unilateral Contract and At-Will Employment

Woolley v. Hoffmann-La Roche, Inc.

491 A.2d 1257 (N.J. 1985)

Wilntz, C. J.

Plaintiff, Richard Woolley, was hired by defendant, Hoffmann-La Roche, Inc., in October 1969, as an

Engineering Section Head in defendant’s Central Engineering Department at Nutley. There was no

written employment contract between plaintiff and defendant. Plaintiff began work in mid-November

1969. Sometime in December, plaintiff received and read the personnel manual on which his claims are

based.

[The company’s personnel manual had eight pages;] five of the eight pages are devoted to “termination.”

In addition to setting forth the purpose and policy of the termination section, it defines “the types of

termination” as “layoff,” “discharge due to performance,” “discharge, disciplinary,” “retirement” and

“resignation.” As one might expect, layoff is a termination caused by lack of work, retirement a

termination caused by age, resignation a termination on the initiative of the employee, and discharge due

to performance and discharge, disciplinary, are both terminations for cause. There is no category set forth

for discharge without cause. The termination section includes “Guidelines for discharge due to

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performance,” consisting of a fairly detailed procedure to be used before an employee may be fired for

cause. Preceding these definitions of the five categories of termination is a section on “Policy,” the first

sentence of which provides: “It is the policy of Hoffmann-La Roche to retain to the extent consistent with

company requirements, the services of all employees who perform their duties efficiently and effectively.”

In 1976, plaintiff was promoted, and in January 1977 he was promoted again, this latter time to Group

Leader for the Civil Engineering, the Piping Design, the Plant Layout, and the Standards and Systems

Sections. In March 1978, plaintiff was directed to write a report to his supervisors about piping problems

in one of defendant’s buildings in Nutley. This report was written and submitted to plaintiff’s immediate

supervisor on April 5, 1978. On May 3, 1978, stating that the General Manager of defendant’s Corporate

Engineering Department had lost confidence in him, plaintiff’s supervisors requested his resignation.

Following this, by letter dated May 22, 1978, plaintiff was formally asked for his resignation, to be

effective July 15, 1978.

Plaintiff refused to resign. Two weeks later defendant again requested plaintiff’s resignation, and told him

he would be fired if he did not resign. Plaintiff again declined, and he was fired in July.

Plaintiff filed a complaint alleging breach of contract.…The gist of plaintiff’s breach of contract claim is

that the express and implied promises in defendant’s employment manual created a contract under which

he could not be fired at will, but rather only for cause, and then only after the procedures outlined in the

manual were followed. Plaintiff contends that he was not dismissed for good cause, and that his firing was

a breach of contract.

Defendant’s motion for summary judgment was granted by the trial court, which held that the

employment manual was not contractually binding on defendant, thus allowing defendant to terminate

plaintiff’s employment at will. The Appellate Division affirmed. We granted certification.

The employer’s contention here is that the distribution of the manual was simply an expression of the

company’s “philosophy” and therefore free of any possible contractual consequences. The former

employee claims it could reasonably be read as an explicit statement of company policies intended to be

followed by the company in the same manner as if they were expressed in an agreement signed by both

employer and employees.…

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This Court has long recognized the capacity of the common law to develop and adapt to current

needs.…The interests of employees, employers, and the public lead to the conclusion that the common law

of New Jersey should limit the right of an employer to fire an employee at will.

In order for an offer in the form of a promise to become enforceable, it must be accepted. Acceptance will

depend on what the promisor bargained for: he may have bargained for a return promise that, if given,

would result in a bilateral contract, both promises becoming enforceable. Or he may have bargained for

some action or nonaction that, if given or withheld, would render his promise enforceable as a unilateral

contract. In most of the cases involving an employer’s personnel policy manual, the document is prepared

without any negotiations and is voluntarily distributed to the workforce by the employer. It seeks no

return promise from the employees. It is reasonable to interpret it as seeking continued work from the

employees, who, in most cases, are free to quit since they are almost always employees at will, not simply

in the sense that the employer can fire them without cause, but in the sense that they can quit without

breaching any obligation. Thus analyzed, the manual is an offer that seeks the formation of a unilateral

contract—the employees’ bargained-for action needed to make the offer binding being their continued

work when they have no obligation to continue.

The unilateral contract analysis is perfectly adequate for that employee who was aware of the manual and

who continued to work intending that continuation to be the action in exchange for the employer’s

promise; it is even more helpful in support of that conclusion if, but for the employer’s policy manual, the

employee would have quit. See generally M. Petit, “Modern Unilateral Contracts,” 63 Boston Univ. Law

Rev. 551 (1983) (judicial use of unilateral contract analysis in employment cases is widespread).

…All that this opinion requires of an employer is that it be fair. It would be unfair to allow an employer to

distribute a policy manual that makes the workforce believe that certain promises have been made and

then to allow the employer to renege on those promises. What is sought here is basic honesty: if the

employer, for whatever reason, does not want the manual to be capable of being construed by the court as

a binding contract, there are simple ways to attain that goal. All that need be done is the inclusion in a

very prominent position of an appropriate statement that there is no promise of any kind by the employer

contained in the manual; that regardless of what the manual says or provides, the employer promises

nothing and remains free to change wages and all other working conditions without having to consult

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anyone and without anyone’s agreement; and that the employer continues to have the absolute power to

fire anyone with or without good cause.

Reversed and remanded for trial. C A S E Q U E S T I ON S

1. What did Woolley do to show his acceptance of the terms of employment offered to

him?

2. In part of the case not included here, the court notes that Mr. Woolley died “before oral

arguments on this case.” How can there be any damages if the plaintiff has died? Who

now has any case to pursue?

3. The court here is changing the law of employment in New Jersey. It is making case law,

and the rule here articulated governs similar future cases in New Jersey. Why did the

court make this change? Why is it relevant that the court says it would be easy for an

employer to avoid this problem?

8.5 Summary and Exercises Summary Contract law developed as the status-centered organization of feudal society faded and people began to

make choices about how they might order their lives. In the capitalistic system, people make choices about

how to interact with others, and—necessarily—those choices expressed as promises must be binding and

enforceable.

The two fundamental sources of contract law are (1) the common law as developed in the state courts and

as summarized in the Restatement (Second) of Contracts and (2) the Uniform Commercial Code for the

sale of goods. In general, the UCC is more liberal than the common law in upholding the existence of a

contract.

Types of contracts can be distinguished by four criteria: (1) express and implied, including quasi-contracts

implied by law; (2) bilateral and unilateral; (3) enforceable and unenforceable; and (4) completed

(executed) and uncompleted (executory). To understand contract law, it is necessary to master these

distinctions and their nuances. E X E R C I S E S

1.

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a. Mr. and Mrs. Smith, an elderly couple, had no relatives. When Mrs. Smith became

ill, the Smiths asked a friend, Henrietta, to help with various housekeeping

chores, including cleaning and cooking. Although the Smiths never promised to

pay her, Henrietta performed the chores for eighteen months. Henrietta now

claims that she is entitled to the reasonable value of the services performed. Is

she correct? Explain.

b. Assume instead that the Smiths asked Mrs. Smith’s sister, Caroline, who lived

nearby, to help with the housekeeping. After eighteen months, Caroline claims

she is entitled to the reasonable value of the services performed. Is she correct?

Explain.

A letter from Bridge Builders Inc. to the Allied Steel Company stated, “We offer to

purchase 10,000 tons of No. 4 steel pipe at today’s quoted price for delivery two months

from today. Your acceptance must be received in five days.” Does Bridge Builders intend

to create a bilateral or a unilateral contract? Why?

Roscoe’s barber persuaded him to try a new hair cream called Sansfree, which the

barber applied to Roscoe’s hair and scalp. The next morning Roscoe had a very

unpleasant rash along his hairline. Upon investigation he discovered that the rash was

due to an improper chemical compound in Sansfree. If Roscoe filed a breach of contract

action against the barber, would the case be governed by the Uniform Commercial Code

or common law? Explain.

Rachel entered into a contract to purchase a 2004 Dodge from Hanna, who lived in

the neighboring apartment. When a dispute arose over the terms of the contract, Hanna

argued that, because neither she nor Rachel was a merchant, the dispute should be

decided under general principles of common law. Rachel, on the other hand, argued that

Hanna was legally considered to be a merchant because she sold the car for profit and

that, consequently, the sale was governed by the Uniform Commercial Code. Who is

correct? Explain.

Lee and Michelle decided to cohabit. When they set up house, Michelle gave up her

career, and Lee promised to share his earnings with her on a fifty-fifty basis. Several

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years later they ended their relationship, and when Lee failed to turn over half of his

earnings, Michelle filed suit on the basis of Lee’s promise. What kind of contract would

Michelle allege that Lee had breached? Explain.

Harry and Wilma were divorced in 2008, and Harry was ordered in the divorce

decree to pay his ex-wife $10,000. In 2009 and 2010 Harry was hospitalized, incurring

$3,000 in bills. He and Wilma discussed the matter, and Wilma agreed to pay the bill

with her own money, even though Harry still owed her $5,000 from the divorce decree.

When Harry died in late 2010, Wilma made a claim against his estate for $8,000 (the

$3,000 in medical bills and the $5,000 from the decree), but the estate was only willing

to pay the $5,000 from the decree, claiming she had paid the hospital bill voluntarily and

had no contract for repayment. Is the estate correct? Explain.

Louie, an adult, entered into a contract to sell a case of scotch whiskey to Leroy, a

minor. Is the contract void or voidable? Explain.

James Mann owned a manufacturing plant that assembled cell phones. A CPA audit determined

that several phones were missing. Theft by one or more of the workers was suspected.

Accordingly, under Mann’s instructions, the following sign was placed in the employees’ cafeteria:

Reward. We are missing phones. I want all employees to watch for thievery. A reward of $500 will

be paid for information given by any employee that leads to the apprehension of employee

thieves.

—James Mann

Waldo, a plant employee, read the notice and immediately called Mann, stating, “I accept your

offer. I promise to watch other employees and provide you with the requested information.” Has

a contract been formed? Explain.

Almost every day Sally took a break at lunch and went to the International News

Stand—a magazine store—to browse the newspapers and magazines and chat with the

owner, Conrad. Often she bought a magazine. One day she went there, browsed a bit,

and took a magazine off the rack. Conrad was busy with three customers. Sally waved

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the magazine at Conrad and left the store with it. What kind of a contract, if any, was

created?

Joan called Devon Sand & Gravel and ordered two “boxes” (dump-truck loads) of

gravel to be spread on her rural driveway by the “shoot and run” method: the tailgate is

partially opened, the dump-truck bed is lifted, and the truck moves down the driveway

spreading gravel as it goes. The driver mistakenly graveled the driveway of Joan’s

neighbor, Watson, instead of Joan’s. Is Devon entitled to payment by Watson? Explain. S E L F - T E S T QU E S T I O N S

1. An implied contract

a. must be in writing

b. is one in which the terms are spelled out

c. is one inferred from the actions of the parties

d. is imposed by law to avoid an unjust result

e. may be avoided by one party

The Convention on Contracts for the International Sale of Goods is

a. an annual meeting of international commercial purchasing agents.

b. contract law used in overseas US federal territories

c. a customary format or template for drafting contracts

d. a kind of treaty setting out international contract law, to which the United States

is a party

e. the organization that develops uniform international law

An unenforceable contract is

a. void, not a contract at all

b. one that a court will not enforce for either side because of a rule of law

c. unenforceable by one party but enforceable by the other

d. one that has been performed by one party but not the other

e. too indefinite to be valid

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Betty Baker found a bicycle apparently abandoned near her house. She took it home and spent

$150 repairing and painting it, after which Carl appeared and proved his ownership of it. Under

what theory is Betty able to get reimbursed for her expenditures?

a. express contract

b. implied contract

c. apparent or quasi-contract

d. executory contract

e. none: she will not get reimbursed

Alice discusses with her neighbor Bob her plan to hire Woodsman to cut three trees on her side

of their property line, mentioning that she can get a good deal because Woodsman is now

between jobs. Bob says, “Oh, don’t do that. My brother is going to cut some trees on my side, and

he can do yours too for free.” Alice agrees. But Bob’s brother is preoccupied and never does the

job. Three weeks later Alice discovers Woodsman’s rates have risen prohibitively. Under what

theory does Alice have a cause of action against Bob?

a. express contract

b. promissory estoppel

c. quasi-contract

d. implied contract

e. none: she has no cause of action against Bob S E L F - T E S T A N S WE R S

1. c

2. d

3. c

4. c

5. b