1. C H A P T E R
09
Introduction to Contracts
Contracts are agreements made
up of big words and little type.
Sam Ewing
quoted in the
Saturday Evening Post
May 1993
9-1
2. Learning Objectives
• Explain the nature and purpose of
contracts
• Describe the elements of a contract
• Distinguish applicability of common
law of contracts and Art. 2 of the
Uniform Commercial Code
• Identify non-contract obligations
9-2
3. Contracts
• Not every promise is legally enforceable
• But when a set of promises has the status
of contract, a person injured by a breach
of that contract is entitled to call on the
government (courts) to force the
breaching party to honor the contract
• Contract law is ancient law, but has
evolved to reflect social change
9-3
4. Elements of a Contract
• (1) agreement made of an offer and an
acceptance, (2) made voluntarily, (3)
supported by consideration, (4) between
parties with capacity to contract, and (5)
made for a lawful purpose
• See Figure 1, page 318
9-4
5. Lambert v. Barron
• Facts:
– Lambert and Barron had friendly as well as
professional relationship
– Barron had financial troubles, so Lambert flew from
New Orleans to Farmerville to meet with Barron
– Lambert claims that he and Barron orally
contracted for Lambert to provide consulting
services for one year at a monthly rate of $3100
– Barron paid one invoice, but refused to pay on a
second, claiming that he had not agreed to such a
price or term
9-5
6. Lambert v. Barron
• Procedural History and Issue:
– Lambert sued for breach of contract and lost
– Issue on appeal: was there a valid contract?
• Trial Court Ruling:
– Two competing views without evidence that
contract was formed or that substantive
business benefit was realized by Barron from
his friend
– No contract formed, lower court ruling
affirmed
9-6
7. Contract Concepts and Types
• Bilateral contracts: two parties make
promises to one another
• Unilateral contracts: one party makes a
promise
– Frequent buyer cards are offers for
unilateral contracts; gaining points on
the cards accept the offer and creates
a contract
9-7
8. Contract Concepts and Types
• Valid contract: binding and enforceable
agreement
• Voidable contract: agreement otherwise
binding, but due to circumstances
surrounding execution or lack of capacity,
may be rejected at option of one party
• Void contract: agreement without legal
effect because prohibited by law
9-8
9. Contract Concepts and Types
• Express contract: agreement of parties
manifested by words, written or oral
• Implied contract: agreement not shown
by words, but by acts and conduct of
parties
• Difference between express & implied
contracts relates to manner of proving
the existence of the contract, not the
effect; one or the other arises
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10. Sources of Governing Law
• Two bodies of law govern contracts:
– Article 2 of Uniform Commercial Code
– Common law of contracts
• Uniform Commercial Code (UCC) is
statutory law in every state, but the
common law of contracts is evolving
• UCC contains nine articles
9-10
11. UCC Article 2
• Article 2 expressly applies to
contracts for the sale of goods [2–
102] (numbers in brackets refer to
specific Code sections)
– UCC [1–105]: goods are tangible,
movable, personal property
– Does not apply to sale of services,
intangible property (stocks,
intellectual property), or real
estate
9-11
12. The UCC and Hybrid Contracts
• Many contracts involve goods and
services
• Test that courts most frequently apply
to decide whether Article 2 applies is
to ask which element – goods or
services – predominates in the
contract
– See
Olé Mexican Foods, Inc. v. Hanson Staple Comp
9-12
14. International Contract Law
• United Nations Convention on
Contracts for the International Sale of
Goods (CISG) is body of contract rules
that harmonizes contract principles from
many legal systems
– Seventy-seven nations, including Canada
and the United States, are parties to CISG
• See
UN Commission on International Trade Law
website
9-14
15. International Contract Law
• CISG automatically
applies to a contract
for the sale of goods
between commercial
parties from nations
that agreed to CISG
unless the parties
expressly opt out of
the CISG in their
contract
9-15
16. Non-Contract Obligations
• Sometimes the law enforces an
obligation to pay for certain losses or
benefits even in the absence of
mutual agreement and exchange of
value; the court then applies:
– Quasi-contract theory
– Promissory estoppel
9-16
17. Quasi-Contract Theory
• Quasi-contract is an obligation imposed
by law to prevent unjust enrichment of
one party in certain circumstances
– E.g., work performed by painter thinking work
justified by contract & other party, who receives
benefit of work, denies work was justified
– E.g., company induces Joe to buy a product
franchise by grossly misstating average revenues
of franchisees; Joe discovers deception and
elects to cancel the contract
9-17
18. Quasi-Contract Remedies
• Plaintiff recovers either the reasonable
value of the benefit conferred on the
defendant (reasonable price) or value
of labor (quantum meruit)
9-18
19. Palese v. Delaware State Lottery Office
• Palese allegedly bought winning lottery ticket,
but ticket destroyed (only play slip existed)
• Plaintiff's sued defendants alleging unjust
enrichment in the lottery prize's accrual to
state's general fund
• Ticket created valid contract with terms on
back of ticket and only those with a winning
ticket are eligible to receive prize money
• Claim dismissed
9-19
20. Promissory Estoppel
• A court may apply doctrine of
promissory estoppel when one party
relies upon another party’s promise to
his or her detriment (detrimental
reliance), but there’s no contract
– Court will force promisor to fulfill
promise or pay compensation
– Example: Aceves v. U.S. Bank
9-20
22. Test Your Knowledge
• True=A, False = B
– Every promise is legally enforceable
– The main element of a contract is
fairness
– In a bilateral contract, two parties make
promises to one another
– The UCC is statutory law in every state
– The UCC applies to the sale of goods
and services
9-22
23. Test Your Knowledge
• Multiple Choice
– A void contract refers to an agreement
that is:
a) Binding and enforceable agreement
b) Otherwise binding, but due to
circumstances surrounding execution
or lack of capacity, may be rejected at
option of one party
c) Without legal effect because
prohibited by law
9-23
24. Test Your Knowledge
• Multiple Choice
– Non-contract obligations include all
of the following except:
a) Quasi-contract theory
b) Promissory estoppel
c) The CISG doctrine
d) Quantum meruit
9-24
Donald Lambert and Don Barron were friends and had a long-standing professional relationship based on their public service together on the Louisiana State Board of Licensed Contractors from the 1980s. In 1998, Barron’s business began experiencing financial strain. Barron and Lambert talked by phone during the summer of 1998 about Barron’s personal problems and financial difficulties, and Lambert was concerned about his friend’s depressed mental state. On November 11, 1998, Lambert flew from New Orleans to Farmerville to meet with Barron. Prior to Lambert’s flight, Barron’s employee had faxed and overnighted copies of various construction contracts and correspondence relating to Barron’s problematic construction projects for Lambert to review. Lambert contends that, while standing on the airport runway before he boarded the plane for his return trip home that day, he and Barron contracted for Lambert to provide consulting services for Barron. Lambert told Barron at that time that he customarily charged his clients $3,100 per month, and the minimum term for his services was one year. He also charged 10 percent of any amount recouped by his clients in settlement. In late 2000, Lambert billed Barron for a $34,100 balance owed on the alleged oral contract. Lambert’s letter dated October 30, 2000, requested payment and stated, “I have preformed (sic) my service for you and I must request that you pay me the balance due me of $34,100.” Two weeks later, Barron wrote Lambert a letter rejecting the claim. Lambert sued. The trial court dismissed Lambert’s suit, and Lambert appealed.
Court: “This case involves the special setting of parties with a prior friendship and the aid and advice freely given between friends that existed before Lambert first broached the subject of a consulting contract…. From our review of the testimony of the two men, we also conclude that there was no clear agreement given by Barron…. Absent a direct oral or written acceptance by Barron, Lambert’s proof of the contract rests on his receipt of certain documentation of Barron’s troubled construction projects and invoices for consulting fees sent to Barron. The bulk of the documentation regarding Barron’s five construction projects was forwarded to Lambert days before the Farmerville meeting. Lambert’s review of the details of those construction contracts and Barron’s problems with the projects would have been performed in preparation for the Farmerville meeting without any contract binding his friend. More importantly, Barron provided Lambert that documentation without any indication that his friend’s review of the projects would require compensation…. From our review of this evidence, we find that the trial court could determine that no tacit acceptance of Lambert’s offer for services was made by Barron. Particularly lacking from the record is evidence of any substantive business benefit realized by Barron from his consultant friend. The trial court ultimately held that the parties’ relationship was that of a “friend helping a friend,” such that Lambert could not have reasonably believed that a contract had been formed.”
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The hyperlink is to the case opinion on the Findlaw.com website. Parties to a contract that provided for the sale of goods, following a dispute, entered into a settlement agreement which provided, in relevant part, that Ole Mexican Foods would purchase certain products in certain amounts. Ole Foods claimed that it had the right to reject Hanson Staple Co’s product under the UCC if the product did not meet implied warranties. Court held that those implied warranties are applicable to an agreement only if its predominant purpose is the sale of goods and not the settlement of litigation.
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As of 1 August 2011, UNCITRAL reports that 77 States have adopted the CISG. Hyperlink is to the CISG texts on the UN Commission on International Trade Law (UNCITRAL) website.
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Hyperlink is to the opinion on the Findlaw.com website.
Hyperlink is to the case opinion. Aceves had a loan, then filed for Chapter 7 bankruptcy and intended to convert to Chapter 13. Aceves contacted the bank, which promised to work with her on a loan reinstatement and modification if she would forgo further bankruptcy proceedings. In reliance on that Mrs. Aceves did not convert her bankruptcy case to a chapter 13 proceeding or oppose the bank’s motion to lift the bankruptcy stay. The bank did not work with plaintiff in an attempt to reinstate and modify the loan, and instead completed the foreclosure. Aceves sued for promissory estoppel. The decision did not reach the merits of the dispute, holding only that the action could proceed because the plaintiff stated a legally-recognized claim. The court relied on the doctrine of promissory estoppel, which is between fraud and contract. Explained the court, “The elements of a promissory estoppel claim are (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) [the] reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance.”
False. False. The elements include (1) agreement (offer and acceptance) (2) between competent parties (3) based on genuine assent of the parties that is (4) supported by consideration, (5) made for a lawful purpose, and (6) in the form required by law, if any . True. True. False. The UCC applies ONLY to the sale of goods.
The correct answer is (c). (a) refers to a valid contract. (b) refers to a voidable contract.
The correct answer is (c). The CISG is an international body of law regarding the sale of goods.
Opportunity to discuss the contracting each person does almost every day.
