Nature of Contracts
You have likely experienced the disappointment of having someone fail to do something he or she promised to do. And if you're anything like a regular human, you yourself have likely failed to complete some project or other action that you had promised to do. In this and subsequent chapters, we will discuss promises and when failure to fulfill those promises can be remedied by the legal system involving contracts.
A contract is an enforceable agreement created when two or more parties agree to perform (or not perform) certain acts. Simply put, it is a set of legally binding promises.
You may enter into thousands of agreements over the course of your life, but not all those agreements will be considered contracts. This is because you may agree to perform certain acts that aren't legally enforceable. Only enforceable agreements are contracts. Think of a few contracts you have entered this week and we can discuss those in class.
Contract law is based on the premise that our legal system promotes freedom of contract. State and federal courts will protect your rights under a private contract with your neighbor, for example, just as it will protect your rights under the U.S. Constitution. Enforcement of contracts is necessary to drive our country's economic engine and promote fairness in society.
Elements of a Contract
Although not all business law books agree, we'll start with the understanding that contracts have just three basic elements: offer, acceptance, and consideration. There is a lot packed into those few words. The offer is a key component of the contract and consists of the terms and conditions set by one party, known as the offeror, and presented to the other party, known as the offeree. Acceptance is the agreement of the offeree to the terms of the offer. The final element is consideration. Put simply, consideration is what each party gets in exchange for completing the responsibilities under the agreement. We'll discuss these elements in much more detail below.
Types of Contracts
A basic understanding of how contracts can be classified will assist with your study because it will help you make some distinctions that will allow you to interpret whether or not a contract is valid and how best to interpret the contract.
Bilateral versus Unilateral Contracts
If the offeree can accept by promising to perform, the contract is bilateral. A bilateral contract is often described as an agreement where a promise is given in return for a promise. Should you agree to buy the couch I have for sale on the Rexburg Garage Sale Facebook page, we'll have a bilateral contract because I promise to give you the couch and you promise to pay me the $10 I'm asking. The contract comes into existence once we commit to the deal.
Unilateral contracts differ in that the offer can only be accepted by performance. It can also be defined as a promise for an act. For example, if I write on the Rexburg Facebook page that I'll pay anyone that mows my lawn today the sum of $25, I've created a unilateral offer. Once anyone shows up to my house and mows my yard (some acceptable quality), that person has accepted my offer and created the unilateral contract, meaning that I must now pay $25.
But what if you start mowing my yard, unbeknownst to me, when I get on Facebook and rescind my offer. Perhaps I delete the post or add a comment saying, "never mind - the kid next door agreed to do it for $10." You may think that because you can only accept by performing, that my revocation would negate your claim for the $25. However, this probably seems a bit harsh as well. As a result, modern courts have stated that if you have "substantially undertaken" the act of mowing my yard, that I can no longer rescind the offer and I'll be obligated to pay you the $25.
Express versus Implied Contracts
In an express contract, the terms of the agreement are fully and explicitly stated in words, oral or written. If you accept my Facebook offer to buy my couch (either orally or through a comment on the Facebook page), we have entered into an express contract.
A contract that is implied from the conduct of the parties is called an implied contract. Courts will find an implied contract if the following elements are met:
- The plaintiff provided some service or property.
- The plaintiff expected to be paid for that service or property.
- The defendant knew or should have known that payment was expected.
- The defendant had an opportunity to reject the services or property and did not.
An example may help you understand this point. Imagine that you visit a local law office to inquire what the attorney would charge to write a will. The attorney gives you her price range and gives you a list of the documents she would require to help you with your estate plan. The next day you return along with the requested documents and the attorney quickly gets to work writing your will. In this example, all elements are met, meaning that there is an implied contract and you will have to pay the attorney a fee within the price range quoted to you earlier.
Remember that express or implied contracts are actual contracts formed by words or actions of the parties. Quasi contracts are not actual contracts. Rather, we'll treat them as contracts to avoid injustice. As a note, quasi is a latin word that means "as if."
When one party confers a benefit on another without a contract (either due to a mistake or a defective contract), one party may be unjustly enriched. Imagine that you move into your first home and decide you should install a sprinkler system. Unbeknownst to you, your neighbor is starting a similar project and recently ordered all the parts for installation. The local sprinkler supply business mistakenly delivers those parts to you rather than your neighbor. Upon receipt, you are befuddled, but think it must be a blessing for paying your tithing, so you install your sprinkler system with your neighbor's parts.
A little digging by your neighbor uncovers the mistake and the neighbor along with the manager for the supply business show up at your home demanding the parts. When discovering that you have already installed them, they demand payment. Can they demand that you pay the contract amount? No! There wasn't a contract! Rather, they will seek quasi-contractual damages, which is simply the reasonable value of the benefit conferred. This would likely result in you paying the wholesale amount for the parts (what the supply business had to pay for them) rather than the higher amount that your neighbor agreed to pay. This makes sense; the supply business does have some fault in this after all so the courts won't reward them with the profits of 2 contracts when they only entered 1.
You've likely read contracts that are difficult to understand. The reasons are varied, but one consensus is that this is due to laziness. It's rather simple to cut and paste language you find online and incorporate it into new agreements. For an attorney to rewrite a contract into "plain English" can be time consuming, so they tend to perpetuate contract clauses from those that have been passed down for the last several hundred years (thanks, England!). Yet even if you have a contract that avoids this "legalese," the parties may disagree as to the meaning of the contract language.
When courts are called on to interpret contract language, they will first interpret it using the plain language rule. This rule dictates that the language will be interpreted using its ordinary and contemporary meaning. However, some contract clauses may still seem ambiguous. This occurs when the parties' intent cannot be determined or when a term can reasonably be interpreted in varying ways. When this occurs, courts tend to interpret the provision against the party that drafted the contract.
An offer is a promise to perform or refrain from performing some act in the future. To be a valid offer, it must be a serious offer, the terms must be relatively certain, and it must be communicated.
The first requirement is that the offer must be serious. This means that jokes cannot be actual offers. To determine whether the offer was serious, determine whether or not a reasonable person would consider that the offer was legitimate. Offers made in anger or over-excitement are likewise not serious. Similarly, opinions (i.e., I think you'll get another 100,000 miles out of that car!), statements of future intent (I plan to sell my house next year for $200,000), and preliminary negotiations are not offers. And as confusing as it may seem, advertisements are generally not considered offers. Rather, these are seen as invitations for others to come to the store and make an offer to buy the advertised product or service.
The second general requirement of an offer is that the terms must be relatively certain or definite. In order to enforce the contract, a court must be able to ascertain the terms of the agreement. In general, the contract must include the identities of the parties, the subject matter of the contract (i.e., the work to be performed), and the consideration to be paid.
Finally, the offer must be communicated to the offeree. If the offeree does not know about the offer, he or she cannot accept.
Termination of an Offer
Say that I offer you $300 to mow my lawn for the remainder of the summer. You pause to think about whether or not you could acquire a lawn mower, transport it to my house, and if it's even worth your time. While you are thinking, I say, "oh never mind; I'll just get the kid next door to do it." You may feel wronged assuming you were about to accept my offer, but you would have no legal recourse. This is because the law recognizes that offers are not indefinite; they can be terminated for a number of reasons. As my parents told me - you snooze, you lose.
Revocation occurs when the offeror takes back the offer before the offeree accepts. This is what occurred in my example above. It occurs when the offeror takes back the offer either through communication or any act that is inconsistent with the offer that is also communicated to the offeree. For example, assume that instead of telling you that I'm revoking my offer to pay you $300 to mow my lawn, I tell Alisha while in your presence that I'm happy that she took my offer to mow my lawn for the remainder of the summer. Doing so is also considered revocation and you cannot accept the offer to mow my lawn.
Termination by Actions of the Offeree
If the offeree rejects the offer, the offer terminates. In the example above, if you reject my offer to mow my lawn, you can't come back and accept my offer the next day or even 1 minute later. But what if you ask, "is that the best you could offer?" Did you reject? The answer is no - you're simply asking for additional information which is not a rejection. As a result, you could still accept my offer.
Imagine that you respond by saying, "I'll do it for $400." The law considers this a counteroffer which the law interprets as a rejection of the original offer and new offer. Notice how the original offeree becomes the new offeror. Now the original offeror becomes the offeree and can choose to accept or reject the new offer.
These rules involve the mirror image rule. Under this rule, if the acceptance does not exactly mirror the offer, it is considered a counteroffer.
Termination by Lapse of Time
Offers simply can't stay open forever. If I offer in May to pay you $300 to mow my lawn for the rest of the summer, you can't accept my offer during the last week of August and expect the full $300. In fact, you probably couldn't even expect me to honor my offer at all. This is because offers only remain open for a reasonable amount of time. What is reasonable will vary from situation to situation. Of course, if the offer says that the offer will remain open for a certain amount of time, we use that specified time period rather than the more obscure definition of "reasonable time."
Termination by Destruction, Death, or Illegality
If the subject matter of the contract is destroyed, then the offer is automatically terminated. Therefore, if I offer to sell you my house and my house is destroyed before you can accept, the offer is rescinded...though I'm trying to figure out any possible reason you would want to buy a home that's been destroyed. But this same rule applies if either party dies before acceptance or if the subject matter of our contract becomes illegal.
Acceptance is defined as the voluntary agreement, through words or conduct, to the terms of the offer. By accepting, the offeree creates a binding contract. The acceptance must be definite and must be communicated to the offeror. This touches on the mirror image rule discussed above. If the acceptance adds new terms or alters the terms of the offer in any way, the acceptance will be deemed a rejection and a counteroffer.
The offeree's silence cannot usually be deemed an acceptance. However, if the parties have prior dealings, courts will generally allow the silence of one party to act as acceptance if the other party knew or should have known that the silence would be interpreted as acceptance. Let's say you sell IBC root beer to faculty every morning. I usually accept a case every morning and pay you by Venmo that afternoon. One morning you come in and say, "Here's your daily ration Brother Hales!" but I don't look up from my desk so you leave the drinks and move on to another teacher's office. Because of our history, the law requires me to reject the offer. Therefore, if I watch you come in, drop off the root beer, and say nothing as you leave, my silence constitutes acceptance and I have to pay you.
We finally arrive at the last element of contract formation. Consideration is the value the each party receives in return for entering the contract. If we contract to sell a candy bar for $1, the consideration is simple. One party gets a candy bar out of the deal, while the other party gets money. The consideration can be seen as the motivation a party has to enter the agreement - the quid pro quo, the "this for that."
Consideration may consist of:
- A promise to do something that one party has no duty to do.
- The performance of an action that one party is not obligated to perform.
- Refraining from doing something that one party has the right to undertake.
That last one can be a little interesting. For example, I could tell my child that I'll pay him $1,000 a year that he doesn't kiss a girl between the ages of 15-18 (my neighbors actually have this agreement with their children). Does my child have every legal right to kiss a girl during those years? Yes, he does. So even though this may seem to be an odd case of consideration, it fits our definition and my child could sue me if I don't agree to pay when the money is due.
Courts generally do not question whether or not the consideration is adequate. Using the example above, a judge may feel that my child's failure to kiss a girl is worth much more than $1,000 a year. Another judge may feel that my agreement to sell a fridge on Craigslist for $80 is too low, and I should have pushed for $100. Nonetheless, the law recognizes that people must be allowed to enter into agreements that they feel are fair at the time they entered the contract. We are free to enter contracts, even when the contracts are not completely fair. However, if a contract seems so extremely one-sided, the court may want to look into it further to ensure that one party was misled to the point that the agreement was fraudulent. We'll discuss this matter further down the road.
Some agreements lack consideration. For example, let's say you're attacked when you pick up the last fries sold at the Chick-fil-a in the Crossroads (because I swear they never have enough ready!). After you are punched and beaten, a security guard pulls the attackers from you and says that she'll keep the attackers away if you pay her $20. Afraid of being attacked again, you agree to the offer. Fortunately, when you later refuse to pay the security guard for the protection she gave you, the court will find that the contract failed for consideration, because she already had a duty to protect you.
But sometimes unforeseen difficulties arise. If you agree to dig a swimming pool for your neighbor, you may agree to do it for $10,000. However, when you start digging, you find that the ground is not soil, but a massive slab of granite. Trying to dig the hole would now cost you twice as much. In such circumstances, it's possible that the courts would not apply the preexisting duty rule mentioned above and allow the parties to renegotiate.
Finally, courts will not enforce a contract if the consideration is for actions or events that already happened (past consideration) or promises that are illusory. An illusory promise is one that expresses such uncertainty, that there is no promise at all. An example would be my oft-stated promise to give everyone in the class extra credit...if I feel like it at the end of the semester. As you can see, I'm not really promising anything at all.