Contracts

This begins our discussion of the law of contracts. The American law of contracts comes originally from the common law, judge made, court made law. In law school, we begin our study of the law of contracts by looking at cases, judicial decisions made by courts in lawsuits between individual parties. Throughout most of our history, much of the law of contracts has evolved through the common law process. But in the twentieth century, contract law has begun to develop statutory components. The uniform commercial code now provides rules of commerce for the sale of goods, for negotiable instruments, for security interests, and for some other aspect of the law of contract. As this website evolves, we will be providing links to UCC aspects of the law of contracts. Also, in the last fifty years, states and the federal government have increasingly regulated the fairness of transactions with consumer protection, unfair trade practices and other statutes.

You probably think of a contract as a piece of paper on which two people put their signatures to bind each other to a bargain. And it can be. But lawyers think of a contract in a more complicated way. Contracts may be formed by a telephone call, an exchange of correspondence, the filling of a shipping order. Many contracts need not be written. What then is a contract, and what are the minimum requirements to make a contract enforceable.

Exchange of Promises. A contract may be viewed as an exchange of enforceable promises. In a contract, each party makes a promise in exchange for the promise of the other. In most cases, without reciprocal promises, there is no contract. If you promise your son a car, that's not a contract, its a mere promise to make a gift. But if you promise your son a car if he graduates with an A average, is that a contract. What's missing?

If you said a second promise, you are right, at least in part. You have promised your son a car, but he hasn't promised you to make straight A's. But if your son promises to make straight A's in exchange for your promise to give him a car, then do you have a contract? We suppose the answer is your intent, and we'll say more about intent later. But, you say, it cannot be a contract, because the promises weren't in writing. Some contracts must be in writing, but that's not our focus right now. We'll have more to say about as well.

Offer and Acceptance. When parties exchange contract promises, it stands to reason that somebody goes first. You say, "Son, if you agree to make straight A's, I'll agree to give you a car on graduation." And then he says, "OK dad, its a deal". You have made an offer to your son. An offer says, in so many words, I give you the power to make a contract. The offer does not make a contract. It offers to make a contract. A communication is an offer, if it tells the other power, "say yes, and you have a deal." But, you say, you don't recall making an offer the last time that you signed a contract. You just missed the offer, probably, because it went by so fast.

Examples of offers. When you buy a car, you make an offer. The sales person typically hands you "a contract" But he invites you to sign first. He wants you to make the offer, because he wants the right to accept, or reject your offer. Then he takes your offer into the dealer, still holding in his hands the power to accept. When he returns, if he has signed, or if the manager has signed, then he has accepted your offer. But if he says, "Sorry, but my manager won't take this deal, he needs $500 more," he has rejected your offer. When the buyer a real estate purchase agreement, before the seller, that too is an offer. When the seller crosses out the buyer's proposed price puts in a higher price and signs the purchase agreement, that is a rejection of the buyer's offer and constitutes a counter-offer, and offer back to the buyer to form a contract.

A contract is formed by exchange of offer and acceptance. In the next panels we will discuss the rules for contract formation, the rules for contract enforcement, and the remedies for breach of contract.

There are all sorts of legal rules governing specific problems which arise in the context of exchange of offer and acceptance. How long does an offer last? What happens if someone tries to accept after you change your mind? What happens if your offer is accepted, but with just a minor change in the terms? What happens if someone accepts your offer by mail, but in the meantime you've sent a letter cancelling your offer, and the two letters cross in the mail. Generally, we say that offer and acceptance must match exactly. Lawyers' call this the mirror image rule. Since a contract is a meeting of the minds, the two parties must agree exactly. But there are exceptions to this rule, especially in commercial law of sales.

Consideration. A contract is an exchange of promises, as we have said. Consideration is a fancy way of stating what a contracting party will receive. A contract is not really a contract, is it, if consideration flows only in one direction. Hence the statement that a contract cannot be enforced unless there is "consideration." Ordinarily the question of consideration is not of significant importance. The courts don't usually supervision whether the consideration has been adequate. Absent fraud or some other exceptional circumstance, you cannot get out of your contract to buy a television because you paid too much consideration. At times, the question of consideration arises in connection with contract modification. Suppose, for example, you agree to purchase a television for $450. All the documents are signed. Later, you receive a phone call from the merchant, who tells you that he has had to mark up the televisions by $50 to cover a price increase from the manufacturer. Suppose you agree to pay the additional $50. What have you gotten in return for this contract amendment? The traditional common law of contracts might have refused to enforce the amendment, on the grounds that there was "no consideration" for the amendment. The Uniform Commercial Code takes a different approach, which will be discussed in a subsequent panel.

What is consideration? A contract is formed by an exchange of "legally enforceable promises." This is, in one sense a circular definition, as one Minnesota Court has stated:

By the most common definition, a contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law recognizes as a duty. This amounts to saying that a contract is a legally enforceable promise. But a promise is legally enforceable only if it is a contract. Thus nothing less than the whole body of applicable precedents suffices to define the term 'contract.'

Not every promise is enforceable, the Court continued:

However, the fact that a promise was given does not necessarily mean that a contract was made. It is clear that not every promise is legally enforceable. Much of the vast body of law in the field of contracts is concerned with determining which promises should be legally enforced. On the one hand, in a civilized community men must be able to assume that those with whom they deal will carry out their ...expectations. On the other hand, it is neither practical nor reasonable to expect full performance of every assurance given, whether it be thoughtless, casual and gratuitous, or deliberately and seriously made.

So how do we distinguish between contractual promises and other promises. "The test that has been developed by the common law for determining the enforceability of promises is the doctrine of consideration:"

This is a crude and not altogether successful attempt to generalize the conditions under which promises will be legally enforced. Consideration requires that a contractual promise be the product of a bargain. However, in this usage, 'bargain' does not mean an exchange of things of equivalent, or any, value. It means a negotiation resulting in the voluntary assumption of an obligation by one party upon condition of an act or forbearance by the other. Consideration thus insures that the promise enforced as a contract is not accidental, casual, or gratuitous, but has been uttered intentionally as the result of some deliberation, manifested by reciprocal bargaining or negotiation. In this view, the requirement of consideration is no mere technicality, historical anachronism, or arbitrary formality. It is an attempt to be as reasonable as we can in deciding which promises constitute contracts. Although the doctrine has been criticized, no satisfactory substitute has been suggested. It is noteworthy that the civil law has a corresponding doctrine of 'causa' which, to the eye of a common-law lawyer, is not much different than consideration.

Consideration is an important element of a contract, the Court continued:

Consideration, as essential evidence of the parties' intent to create a legal obligation, must be something adopted and regarded by the parties as such. Thus, the same thing may be consideration or not, as it is dealt with by the parties. In substance, a contractual promise must be of the logical form: 'If . . . (consideration is given) . . . then I promise that . . ..' Of course, the substance may be expressed in any form of words, but essentially this is the logical structure of those promises enforced by the law as contracts.

Mistakes. A short discussion of mistakes in contract law by an Arizona lawyer.

Professor Smith's Outline

Cornell Site. Brief discussion of contract law and links