CONTRACT VS.

PROMISE

Promise: A persons declaration that something will or will not

happen in the future.

Promisor: The person making the promise.

Promisee: The person to whom the promisor made the

promise.

Contract: An agreement between two or more competent parties,

for valuable consideration, to perform or to refrain from
performing some act now or in the future.

Offeror: The person proposing an agreement.

Offeree: The person to whom the offeror proposes the

agreement.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 1

Business Law Today: The Essentials (7th ed.)

CONTRACT FORMATION

Agreement: The offeror must offer to enter into an agreement, and

the offeree must accept the terms of the offerors offer.

Consideration: Something of value given or promised to convince

a party to agree to the deal.

Contractual Capacity: Both parties must be legally competent to

enter into the agreement.

Legality: The contracts purpose must be to accomplish some goal

that is legal and not against public policy.

Genuineness of Assent: The apparent consent of both parties must

be genuine.

Objective Theory of Contract: The parties assent is judged

not by the subjective intent of each party, but by the objective
intent that a similarly situated reasonable person would
understand the parties to have.

Form: The agreement must be in whatever form (e.g., written,

under seal) the law requires.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 2

Business Law Today: The Essentials (7th ed.)

BILATERAL AND UNILATERAL CONTRACTS

Bilateral Contract: A bilateral contract arises when the offeror

gives her promise in exchange for the offerees return promise
(e.g., X promises to deliver a car to Y, and Y promises to pay X an
agreed price).

Unilateral Contract: A unilateral contract arises when the offeree

can only accept the offer by performance (e.g., X offers Y $25 to
mow Xs yard).

Once the offeree of a unilateral contract begins to perform,

the offeror loses the ability to revoke her offer (e.g., if X
offered Y $25 to mow Xs yard, on Y had substantially begun
to perform, X could not revoke her offer to pay Y for mowing
her yard).

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 3

Business Law Today: The Essentials (7th ed.)

FORMAL AND INFORMAL CONTRACTS

Formal Contract: A contract that requires a special form or

method of formation (creation) in order to be enforceable. For
example:

Contract Under Seal: A formalized writing with a special

seal attached.

Recognizance: A promise, made in open court, to perform a

specific task or pay a specified sum.

Negotiable Instrument: A check, note, draft, or certificate of

deposit each of which requires certain formalities.

Letter of Credit: An agreement to pay that is contingent

upon the receipt of documents (e.g., invoices and bills of
lading) evidencing receipt of and title to goods shipped.

Informal Contract: A contract that does not require a specified

form or method of formation in order to be valid.

The vast majority of contracts are informal.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 4

Business Law Today: The Essentials (7th ed.)

EXPRESS AND IMPLIED CONTRACTS

Express Contract: A contract in which the terms of the agreement

are explicitly stated orally or in writing.

Implied-in-Fact Contract: A contract formed in whole or in part

by the conduct (as opposed to the words) of the parties. In order to
establish an implied-in-fact contract,
(1)

the plaintiff must have furnished some service or property

to the defendant,

(2)

the plaintiff reasonably expected to be paid and the

defendant knew or should have known that a reasonable
person in the plaintiffs position would have expected to be
paid for the service or property rendered, and

(3)

the defendant must have had the opportunity to reject the

service or property and failed to do so.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 5

Business Law Today: The Essentials (7th ed.)

EXECUTION AND VALIDITY OF CONTRACTS

Executed Contract: A contract that has been completely

performed by both (or all) parties. By contrast,

An executory contract is a contract that has not yet been

fully performed by one or more parties.

Valid Contract: A contract satisfying all of the requisites

discussed earlier agreement, consideration, capacity, legal
purpose, assent, and form. By contrast,

a void contract is a contract having no legal force or binding

effect (e.g., a contract entered into for an illegal purpose);

a voidable contract is an otherwise valid contract that one of

the parties may legally avoid, cancel, or annul (e.g., a
contract entered into under duress or under false pretenses);
and,

an unenforceable contract is an otherwise valid contract

rendered unenforceable by some statute or law (e.g., an oral
contract that, due to the passage of time, must be evidenced
by a writing to be enforceable).

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 6

Business Law Today: The Essentials (7th ed.)

QUASI CONTRACTS

Quasi Contract: A fictional contract imposed on parties by a court

in the interests of fairness and justice, typically to
(1)

prevent the unjust enrichment of one party at the expense of

the other, and

(2)

allow the party whose actions would otherwise unjustly

enrich the other party to recover in quantum meruit.

Courts typically will not allow a party who has conferred a benefit
on another to recover in quasi contract if the party conferring the
benefit did so officiously (e.g., if a car dealership applies, without
your asking or agreeing to have it do so, an expensive finish to
your car after you agree to buy the car but before you take delivery,
you should not have to pay for the unsought benefit) or as a result
of misconduct (e.g., a distant cousins murderer cannot sue you to
recover a portion of what the cousin left you in her will) or
negligence (e.g., a driver who falls asleep at the wheel and loses
control of his car, which ends up sideways on the sidewalk in front
of you, preventing you from falling into an open manhole in the
sidewalk, cannot sue you in quasi-contract for saving you from
injury or death).

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 7

Business Law Today: The Essentials (7th ed.)

AGREEMENT

Agreement: A meeting of two or more minds in regard to the

terms of a contract, through offer and acceptance.

Offer: A promise or commitment to perform or refrain from

performing some specified future act made by the offeror.

The offeror must seriously, and objectively, intend to

perform or refrain as offered.

The terms of the offer must be reasonably certain or

definite.

The offeror must communicate the offer to the offeree.

Acceptance: A voluntary act by the offeree either in the

form of words or of conduct which indicates agreement to
the terms of the offer.

The acceptance must be unequivocal and must be

communicated to the offeror.

A third party, other than an agent acting on behalf of the

offeree, generally cannot substitute itself for the offeree
and accept the offer.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 8

Business Law Today: The Essentials (7th ed.)

INTENT TO OFFER

A variety of common statements related to business transactions

are not offers, including:

expressions of opinion;

statements of intention;

preliminary negotiations;

auctions and other invitations to bid, negotiate, or contract,

including most forms of advertisement; and

agreements to agree to one or more material contract terms

or conditions at some later date.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 9

Business Law Today: The Essentials (7th ed.)

REVOKING AN OFFER

Revocation: The withdrawal of an offer, communicated to the

offeree prior to the offerees acceptance. Unless an offer is
irrevocable, the offeror may revoke any offer not yet accepted at
any time without liability. Examples of offers generally deemed to
be irrevocable include:

Firm offers for the sale of goods made by a merchant and

subject to the provisions of the Uniform Commercial Code
(UCC);

Option contracts, under which the offeror, in exchange for

valuable consideration from the offeree, cannot revoke her
offer for a stipulated time period during which the offeree has
the sole right of acceptance; and

The offeree must give the offeror valuable

consideration to make an option contract irrevocable.

Offers on which the offeree has justifiably relied to her

detriment (a.k.a. promissory estoppel).

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 10

Business Law Today: The Essentials (7th ed.)

REJECTION AND COUNTEROFFER

Rejection: The terms of the offer may be rejected by the offeree,

in which case the offer terminates.

Any subsequent attempt by the offeree to accept will be

construed as a new offer, which the original offeror (now the
offeree) may accept.

Rejection is ordinarily accomplished by words or by

conduct evidencing an intent not to accept.

To be effective, the rejection must be received by the offeror

prior to any contrary writing or conduct evidencing
acceptance by the offeree.

Counteroffer: A rejection by the offeree of the original offer,

coupled with a new offer made by the original offeree to the
original offeror.

Mirror Image Rule: An offerees acceptance must match

the offerors offer exactly. If the offerees acceptance
materially changes, adds to, or deletes any terms in the
original offer, the offerees attempted acceptance is deemed
to constitute a counteroffer, not an acceptance.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 11

Business Law Today: The Essentials (7th ed.)

TERMINATION BY LAW

Lapse of Time: An offer terminates automatically when the time

period specified in the offer expires.

If no time period is stated in the terms of the offer, then the

offer will terminate after a reasonable period of time has
expired.

Destruction of Subject Matter: An offer terminates automatically

if the subject matter of the contract (i.e., goods, property) is
destroyed prior to acceptance.

Death or Incompetence: An offerees power to accept is

terminated when the offeree or the offeror dies or is deprived of
legal capacity to enter into the contract, unless the offer is
irrevocable, in which case only the offerees death or incompetence
will terminate the offer.

Illegality: A statute or court action that makes a previously valid

offer illegal will automatically terminate the offer.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 12

Business Law Today: The Essentials (7th ed.)

ACCEPTANCE BY SILENCE

Acceptance by Silence: Generally speaking, silence (or inaction)

cannot constitute acceptance even when the offeror indicates that
silence or inaction will be taken as acceptance. There are
exceptions:

Acts Consistent with Acceptance: If the offeree, despite

having an opportunity to reject, takes the benefit of offered
goods or services, he is implied to have accepted the goods or
services and agreed to compensate the offeror according to
the terms of the offer.

Prior Dealings: If the offeror and offeree have prior

dealings, pursuant to certain standard terms and conditions,
the offeree has the duty to reject or risk being bound by his
silence.

Unilateral Contract: Because a unilateral contract requires

acceptance by some action on the part of the offeree,
acceptance is usually evidenced by the action; and, therefore,
notification is unnecessary unless the offeror has
specifically requested notification or has no means to
determine whether the requested act has been performed.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 13

Business Law Today: The Essentials (7th ed.)

COMMUNICATING ACCEPTANCE

When the offeror and offeree cannot or chose not to deal face to
face, acceptance is effective when communicated by the offeree to
the offeror by an authorized means.

The Mailbox Rule: An acceptance is effective once the

offeree places it in the mailbox.

Note that, whereas a revocation becomes effective upon its

receipt by the offeree, an acceptance becomes effective upon
its dispatch by the offeree to the offeror.

In addition to any modes of acceptance expressly stated in the

offer, common law recognizes the following impliedly authorized
methods:
(1)

Any means that is as fast or faster than the method

identified as acceptable by the offeror; and

(2)

U.S. Mail is always impliedly acceptable when the parties

are bargaining at a distance.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 14

Business Law Today: The Essentials (7th ed.)

EFFECTIVE TIME OF ACCEPTANCE

As a general rule, acceptance is effective at the time it is

communicated by the offeree via an authorized means of
communication (the mailbox rule), subject to the following
exceptions:
(1)

if the acceptance is not properly dispatched, it will be

effective when received by the offeror;

(2)

if the offeror conditioned the offer on receipt of the

offerees acceptance, it will be effective when received by the
offeror; and

(3)

if the acceptance is sent after a rejection, whichever is

received first by the offeror is given effect.

If the acceptance is not communicated by an authorized means,

it will be effective when the offeror receives it.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 15

Business Law Today: The Essentials (7th ed.)

CONSIDERATION

Consideration: Value given in return for a promise. Consideration

must be (1) legally sufficient and (2) bargained for by the party
receiving it.

Legally sufficient consideration may take the form of:

(1)

promising to do something that the promisee has no

prior legal duty to do (e.g., promising to pay money for
the promisors goods);

(2)

performing an action that the promisee is not otherwise

obligated to undertake (e.g., painting the promisors
house); or

(3)

refraining from exercising a legal right that the

promisee is otherwise entitled to exercise (e.g.,
dismissing a viable lawsuit against the promisor).

Consideration is bargained for if it is sought by the promisor

in exchange for the promisors promise and given by the
promisee in exchange for the promisors promise.

Courts will generally not inquire into the adequacy of

the consideration, as long as the promisor bargained for
it.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 16

Business Law Today: The Essentials (7th ed.)

INSUFFICIENT CONSIDERATION

Preexisting Duty: A promise to do (or refrain from doing) what

one already has a legal duty to do (or refrain from doing) generally
does not constitute legally sufficient consideration.

However, under the unforeseen difficulties doctrine, an

existing contract may be modified to account for unforeseen
difficulties that arise during the course of performance. In
such a case, the promisees obligation under the modified
contract is new consideration.

Likewise, if the parties agree to replace an existing contract

with a new, superseding contract, the promise to perform
the new contract is a new promise; and, thus, not a promise to
perform a pre-existing legal duty.

Past Consideration: Promises made in return for acts or events

that have already taken place are unenforceable for lack of
sufficient consideration.

Illusory Promises: If the terms of a contract call for performance

in such uncertain terms that the promisor has not definitely
promised to do (or refrain from doing) anything, the contract is
unenforceable for lack of sufficient consideration.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 17

Business Law Today: The Essentials (7th ed.)

ACCORD AND SATISFACTION

Accord and Satisfaction: An agreement between an obligor

(debtor) and obligee (creditor), by which the obligor agrees to pay
the obligee some amount owed under the contract (generally less
than the amount in dispute) in exchange for a discharge of all
obligations owed by the obligor to the obligee.

For accord and satisfaction to occur, the amount of the

obligors debt to the obligee must be in dispute, or
unliquidated.

Liquidated Debt: A debt whose amount has been

ascertained, fixed, agreed on, settled, or exactly
determined.

Unliquidated Debt: A debt, the amount of which may

be the subject of honest disagreement.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 18

Business Law Today: The Essentials (7th ed.)

RELEASES AND COVENANTS NOT TO SUE

Release: An agreement whereby one party forfeits its rights to

pursue a legal claim against another party.

Releases are generally binding if they are:

(1)

given in good faith,

(2)

written, and

(3)

accompanied by consideration.

Covenant Not to Sue: An agreement to substitute a contractual

obligation for some other type of legal action based on a valid
claim.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 19

Business Law Today: The Essentials (7th ed.)

PROMISSORY ESTOPPEL

Promissory Estoppel: When a promisor makes a clear and

definite promise on which the promisee justifiably relies, the
promisor may be bound by the promise, even if it was insufficient
to form the basis of a valid, legally binding contract.

Promissory estoppel requires the following elements:

(1)

the promise was clear and definite;

(2)

the promisee justifiably relied on the promise;

(3)

the promisees reliance was substantial and of a definite

character; and

(4)

enforcing the promise will serve the best interests of justice.

Ch. 7: Contracts: Nature, Classification, Agreement, and Consideration - No. 20

Business Law Today: The Essentials (7th ed.)