Contract Law - 2023 Statutory Supplement

Editor’s Note

The law of contracts is vast and ancient. This statutory supplements strives to provide the most essential pieces of modern contract law so students are not puzzled. To focus on critical references for learning contract law basics, I selected black-letter rules that all law students show know to succeed in a first-year course and to pass the bar exam. Selection requires judgments. Some will find this collection too long while others will find it too short. I hope that most readers find it to be just right. But to find these selections appropriate, you must approach them in the proper manner.

To begin, let’s establish what you are reading. Within these pages are rules, comments, and illustrations from the Restatement, Second, Contracts (R. 2d Contracts) and the Uniform Commercial Code (U.C.C.) Article 2, Sales. These are the two core statotury-like materials for most contract law courses. Contract law is state law, so each state will have its own contract law. Yet R. 2d Contracts and U.C.C. explain the general rules of law in virtually all U.S. jurisdictions. You are thus reading the closest approximation of the black-letter rules of national contract law.

The Restatement is effectively a treatise describing common law amid U.S. jurisdictions. You may have learned that treatises are non-binding. Yet R. 2d is a highly persuasive treatise that has almost the force of law in jurisdictions that follow it. Restatement rules, therefore, can be treated as black-letter rules of law in most contract law classrooms. The U.C.C. is a model statute, but it has been adopted in predominant part by virtually every U.S. jurisdiction, so it reflects binding statutory law across the U.S.

The Restatement authors helpfully provided comments and illustrations that make meaning of the rules. The comments explain the rules. Black-letter rules do not necessarily mean what they say to a lay person. Lawyers must read technical rules technically. The comments are your guide to the meaning of contract law rules in the terms and norms of the profession of contract law. On that note: welcome to the legal profession!

I recommend that students read at least the headings of every comment and maintain a functional knowledge regarding how these comments impact the application of the rules. I put these comment-heading in the Index in the back of this book so students are encouraged to become aware of these rule explanations. These explanations often color or change the patent meaning of rules, so you must be aware of them. The comment-headings are a sort of road map showing where you must sometimes take analysis in an unusual or counterintuitive direction.

The illustrations are often derived from quintessential cases. They show how the comments’ explanations of rules are applied in specific instances. If you find yourself confused about how the rules function, consider the illustrations to visualize the application of black-letter rules as explained by specific comments. The illustrations typically demonstrate how a specific comment impacts the plain meaning of the black-letter rule to which it corresponds; for this reason, I have listed the illustrations within corresponding comments. Illustrations often reflect the key facts from cases often taught in contract law courses. If you pay attention to the illustrations, recognizing key facts and identifying what rule and comment it illuminates, you will glean insights about important cases.

I have also included U.C.C. provisions where the statutory law deviates from the common law in an important way. As you probably know, statutes trump common law where they apply. Likewise, the U.C.C. trumps R. 2d Contracts principles where it applies. But the law of sales does not apply to every contract, nor does it provide important distinctions to every cases where it does apply. For this reason, I have included the U.C.C. only where it makes a material difference regarding cases you are likely to see in law school or on the bar exam.

Whenever you read a rule, you should attempt to understand it. One tried and true method for understanding rules is to elementize them, meaning, to break the rule apart into specific elements. By writing each rules in this manner, you begin to internalize the meaning of those rules, which will help you apply, analyze, and judge them later.

Finally, please note that rules, comments, and illustrations that follow are the intellectual property of the American Legal Institute and the National Conference of Commissioners on Uniform State Laws. I purchased limited rights to reproduce these rules for you, but you cannot lawfully copy or distribute them further without authorization from the ALI or ULC.

Good luck in your legal studies!

/s/ Seth C. Oranburg

Introduction

U.C.C. § 2-102 – Scope.

Unless the context otherwise requires, this Article [2] applies to transactions in goods.

Editor’s note. Goods are defined by UCC § 2-105(1). While the U.C.C. definition is paramount when determining whether the U.C.C. applies to a contract, students may sharpen their understanding of this general term with some more specific examples.

Black’s Law Dictonary defines goods as tangible or movable personal property other than money; esp., articles of trade or items of merchandise. This definition, dating back to the 12th century. This definition generally accords with the U.C.C. definition and includes: basic goods (goods that are used to make other goods), bulk goods (unpackaged goods that are stored, transported, and sold in variable, usually very large, quantities), bulky goods (goods that are obviously difficult to move because of their nature, their number, or their location), capital goods (goods such as equipment and machinery used for the production of other goods or services, a.k.a. industrial goods), commingled goods (goods that are physically mixed or united with other goods in such a way that their individual identity is lost in a product or undifferentiated mass), complementary goods (products that are typically used together, such as pancake syrup and pancake mix, or motion-picture projectors and film, consumer goods (goods bought or used primarily for personal, family, or household purposes, and not for resale or for producing other goods), customers' goods (goods belonging to the customers of a casualty-insurance policyholder), defective goods (goods that are imperfect in some material respect), distressed goods (damaged goods sold at unusually low prices or at a loss), durable goods (consumer goods that are designed to be used repeatedly over a long period; especially large things (such as cars, televisions, and furniture) that most people do not buy often, a.k.a. hard goods), finished goods (manufactured goods that are complete and ready for sale or distribution to consumers), fungible goods (goods that, by nature or trade usage, are the equivalent of any other like unit, such as coffee or grain), future goods (goods that will come into being, such as those yet to be manufactured), goods in transit (goods that have been shipped by the seller but have not yet been received by the purchaser), goods used in manufacture (goods or materials used as an integral part of manufacturing other goods, goods or materials consumed incidentally during the manufacturing process, or goods that are necessary to the existence of the manufacturing process), gray-market goods (goods bearing valid trademarks that are manufactured abroad and imported into the United States to compete with domestically manufactured goods bearing the same valid trademarks, a.k.a. parallel imports), household goods (goods that are used in connection with a home), mobile goods (goods that are normally used in more than one jurisdiction (such as shipping containers and road-construction machinery) and that are held by the debtor as equipment or leased by the debtor to others), nonconforming goods (goods that fail to meet contractual specifications, allowing the buyer to reject the tender of the goods or to revoke their acceptance), ordinary goods (goods that are anything other than mobile goods, minerals, or goods covered by a certificate of title), prize goods (goods captured at sea during wartime), and soft goods (consumer goods, such as clothing, that are not durable goods).

The U.C.C. may not apply to stolen goods (goods that have been wrongfully taken from their owner and goods acquired by robbery, theft, or larceny). See generally Omri Ben-Shahar, Property Rights in Stolen Goods: An Economic Analysis (2010).

Note that the legal definition of goods does not accord with the economic definition, which, according to the Cambridge Dictionary, means a product or service that a person or organization is willing to pay for. The U.C.C. specifically excludes services from its scope. Meanwhile, the legal definition of goods can include what economists define as bads, which are things with negative value, such as refuse, see Hal Varien, Intermediate Microeconomics, at 41 (2006), where one party pays to have the bads removed, see Pennsy Supply, Inc. v. Am. Ash Recycling Corp., 2006 PA Super 54 (2006). The legal definition of goods is thus in some ways narrower and in other ways broader than the economic definition.

U.C.C. § 2-104 – Definitions: Merchant; Between Merchants.

(1) Merchant means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

…

(3) Between merchants means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

1. Assumptions

This Article assumes that transactions between professionals in a given field require special and clear rules which may not apply to a casual or inexperienced seller or buyer. It thus adopts a policy of expressly stating rules applicable between merchants and as against a merchant, wherever they are needed instead of making them depend upon the circumstances of each case as in the statutes cited above. This section lays the foundation of this policy by defining those who are to be regarded as professionals or merchants and by stating when a transaction is deemed to be between merchants.

2. Merchant

The term merchant as defined here roots in the law merchant concept of a professional in business. The professional status under the definition may be based upon specialized knowledge as to the goods, specialized knowledge as to business practices, or specialized knowledge as to both and which kind of specialized knowledge may be sufficient to establish the merchant status is indicated by the nature of the provisions.

The special provisions as to merchants appear only in this Article and they are of three kinds. Sections 2-201(2), 2-205, 2-207 and 2-209 dealing with the statute of frauds, firm offers, confirmatory memoranda and modification rest on normal business practices which are or ought to be typical of and familiar to any person in business. For purposes of these sections almost every person in business would, therefore, be deemed to be a merchant under the language who … by his occupation holds himself out as having knowledge or skill peculiar to the practices … involved in the transaction … since the practices involved in the transaction are non-specialized business practices such as answering mail. In this type of provision, banks or even universities, for example, well may be merchants. But even these sections only apply to a merchant in his mercantile capacity; a lawyer or bank president buying fishing tackle for his own use is not a merchant.

On the other hand, in Section 2-314 on the warranty of merchantability, such warranty is implied only if the seller is a merchant with respect to goods of that kind. Obviously this qualification restricts the implied warranty to a much smaller group than everyone who is engaged in business and requires a professional status as to particular kinds of goods. The exception in Section 2-402(2) for retention of possession by a merchant-seller falls in the same class; as does Section 2-403(2) on entrusting of possession to a merchant who deals in goods of that kind.

A third group of sections includes 2-103(1)(b), which provides that in the case of a merchant good faith includes observance of reasonable commercial standards of fair dealing in the trade; 2-327(1)(c), 2-603 and 2-605, dealing with responsibilities of merchant buyers to follow seller's instructions, etc.; 2-509 on risk of loss, and 2-609 on adequate assurance of performance. This group of sections applies to persons who are merchants under either the practices or the goods aspect of the definition of merchant.

3. Such Knowledge or Skill

The or to whom such knowledge or skill may be attributed by his employment of an agent or broker … clause of the definition of merchant means that even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or business personnel who are familiar with business practices and who are equipped to take any action required.

U.C.C. § 2-105(1) – Definitions: Goods.

Goods means all things (including specially manufactured goods) 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,

• investment securities (Article 8) and

• things in action.

Goods also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty.

1. Phraseology

The phraseology of the prior uniform statutory provision has been changed so that the definition of goods is based on the concept of movability and the term chattels personal is not used. It is not intended to deal with things which are not fairly identifiable as movables before the contract is performed.

Growing crops are included within the definition of goods since they are frequently intended for sale. The concept of industrial growing crops has been abandoned, for under modern practices fruit, perennial hay, nursery stock and the like must be brought within the scope of this Article. The young of animals are also included expressly in this definition since they, too, are frequently intended for sale and may be contracted for before birth. The period of gestation of domestic animals is such that the provisions of the section on identification can apply as in the case of crops to be planted. The reason of this definition also leads to the inclusion of a wool crop or the like as goods subject to identification under this Article.

The exclusion of money in which the price is to be paid from the definition of goods does not mean that foreign currency which is included in the definition of money may not be the subject matter of a sales transaction. Goods is intended to cover the sale of money when money is being treated as a commodity but not to include it when money is the medium of payment.

As to contracts to sell timber, minerals, or structures to be removed from the land Section 2-107(1) (Goods to be severed from Realty: recording) controls.

The use of the word fixtures is avoided in view of the diversity of definitions of that term. This Article in including within its scope things attached to realty adds the further test that they must be capable of severance without material harm thereto. As between the parties any identified things which fall within that definition become goods upon the making of the contract for sale.

Investment securities are expressly excluded from the coverage of this Article. It is not intended by this exclusion, however, to prevent the application of a particular section of this Article by analogy to securities (as was done with the Original Sales Act in Agar v. Orda, 264 N.Y. 248, 190 N.E. 479, 99 A.L.R. 269 (1934)) when the reason of that section makes such application sensible and the situation involved is not covered by the Article of this Act dealing specifically with such securities (Article 8).

U.C.C. § 1-201(b) – General Definitions: Agreement; Contract

(3) Agreement, as distinguished from contract, means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in Section 1-303.

…

(12) Contract, as distinguished from agreement, means the total legal obligation that results from the parties’ agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable laws.

1. Agreement

As used in the Uniform Commercial Code the word agreement is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts.

Chapter 1 | What Is a Contract?

R. 2d Contracts § 1 – Contract Defined

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.

a. Other meanings.

The word contract is often used with meanings different from that given here. It is sometimes used as a synonym for agreement or bargain. It may refer to legally ineffective agreements, or to wholly executed transactions such as conveyances; it may refer indifferently to the acts of the parties, to a document which evidences those acts, or to the resulting legal relations. In a statute the word may be given still other meanings by context or explicit definition. As is indicated in the Introductory Note to the Restatement of this Subject, definition in terms of promise excludes wholly executed transactions in which no promises are made; such a definition also excludes analogous obligations imposed by law rather than by virtue of a promise.

b. Act and resulting legal relations.

As the term is used in the Restatement of this Subject, contract, like promise, denotes the act or acts of promising. But, unlike the term promise, contract applies only to those acts which have legal effect as stated in the definition given. Thus the word contract is commonly and quite properly also used to refer to the resulting legal obligation, or to the entire resulting complex of legal relations. Compare Uniform Commercial Code § 1-201(11), defining contract in terms of the total legal obligation which results from the parties’ agreement.

c. Set of promises.

A contract may consist of a single promise by one person to another, or of mutual promises by two persons to one another; or there may be, indeed, any number of persons or any number of promises. One person may make several promises to one person or to several persons, or several persons may join in making promises to one or more persons. To constitute a set, promises need not be made simultaneously; it is enough that several promises are regarded by the parties as constituting a single contract, or are so related in subject matter and performance that they may be considered and enforced together by a court.

d. Operative acts other than promise.

The definition does not attempt to state what acts are essential to create a legal duty to perform a promise. In many situations other acts in addition to the making of a promise are essential, and the formation of the contract is not completed until those acts take place. For example, an act may be done as the consideration for a contract (see § 71), and may be essential to the creation of a legal duty to perform the promise (see § 17). Similarly, delivery is required for the formation of a contract under seal (see § 95). Such acts are not part of the promise, and are not specifically included in the brief definition of contract adopted here.

e. Remedies.

The legal remedies available when a promise is broken are of various kinds. Direct remedies of damages, restitution and specific performance are the subject of Chapter 16. Whether or not such direct remedies are available, the law may recognize the existence of legal duty in some other way such as recognizing or denying a right, privilege or power created or terminated by the promise.

1. A orally agrees to sell land to B; B orally agrees to buy the land and pays $ 1000 to A. The agreement is unenforceable under the Statute of Frauds. B’s right to restitution of the $ 1000, however, is governed by the same rules as if the agreement were enforceable. B has a right to recover the $ 1000 paid if A refuses to convey the land, but not if A is ready and willing to convey. See § 140 and the provisions on restitution in § 375. By virtue of this indirect recognition of the duty to convey, the agreement is a contract.

f. Varieties of contracts.

The term contract is generic. As commonly used, and as here defined, it includes varieties described as voidable, unenforceable, formal, informal, express, implied (see Comment a to § 4), unilateral, bilateral. In these varieties neither the operative acts of the parties nor the resulting relations are identical.

g. Binding promise.

A promise which is a contract is said to be binding. As the term contract is defined, a statement that a promise is binding does not necessarily mean that any particular remedy is available in the event of breach, or indeed that any remedy is available. Because of the limitations inherent in stating or illustrating rules for the legal relations resulting from promises, it frequently becomes necessary to indicate that a legal duty to perform arises from the facts stated, assuming the absence of other facts. In order to avoid the connotation that the duty stated exists under all circumstances, the word binding or a statement that the promisor is bound is used to indicate that the duty arises if the promisor has full capacity, if there is no illegality or fraud in the transaction, if the duty has not been discharged, and if there are no other similar facts which would defeat the prima facie duty which is stated.

R. 2d Contracts § 2 – Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee.

(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

a. Acts and resulting relations.

"Promise as used in the Restatement of this Subject denotes the act of the promisor. If by virtue of other operative facts there is a legal duty to perform, the promise is a contract; but the word promise is not limited to acts having legal effect. Like contract, however, the word promise" is commonly and quite properly also used to refer to the complex of human relations which results from the promisor’s words or acts of assurance, including the justified expectations of the promisee and any moral or legal duty which arises to make good the assurance by performance. The performance may be specified either in terms describing the action of the promisor or in terms of the result which that action or inaction is to bring about.

b. Manifestation of intention.

Many contract disputes arise because different people attach different meanings to the same words and conduct. The phrase manifestation of intention adopts an external or objective standard for interpreting conduct; it means the external expression of intention as distinguished from undisclosed intention. A promisor manifests an intention if he believes or has reason to believe that the promisee will infer that intention from his words or conduct. Rules governing cases where the promisee could reasonably draw more than one inference as to the promisor’s intention are stated in connection with the acceptance of offers (see §§ 19 and 20), and the scope of contractual obligations (see §§ 201, 219).

c. Promise of action by third person; guaranty.

Words are often used which in terms promise action or inaction by a third person, or which promise a result obtainable only by such action. Such words are commonly understood as a promise of conduct by the promisor which will be sufficient to bring about the action or inaction or result, or to answer for harm caused by failure. An example is a guaranty that a third person will perform his promise. Such words constitute a promise as here defined only if they justify a promisee in an expectation of some action or inaction on the part of the promisor.

d. Promise of event beyond human control; warranty.

Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain, and may be dealt with as if the warrantor could cause the fact to be as he asserted. It is then immaterial that the actual condition of affairs may be irrevocably fixed before the promise is made.

Words of warranty, like other conduct, must be interpreted in the light of the circumstances and the reasonable expectations of the parties. In an insurance contract, a warranty by the insured is usually not a promise at all; it may be merely a representation of fact, or, more commonly, the fact warranted is a condition of the insurer’s duty to pay (see § 225(3)). In the sale of goods, on the other hand, a similar warranty normally also includes a promise to answer for damages (see Uniform Commercial Code § 2-715).

1. A, the builder of a house, or the inventor of the material used in part of its construction, says to B, the owner of the house, I warrant that this house will never burn down. This includes a promise to pay for harm if the house should burn down.

2. A, by a charter-party, undertakes that the good ship Dove, having sailed from Marseilles a week ago for New York, shall take on a cargo for B on her arrival in New York. The statement of the quality of the ship and the statement of her time of sailing from Marseilles include promises to pay for harm if the statement is untrue.

e. Illusory promises; mere statements of intention.

Words of promise which by their terms make performance entirely optional with the promisor whatever may happen, or whatever course of conduct in other respects he may pursue, do not constitute a promise. Although such words are often referred to as forming an illusory promise, they do not fall within the present definition of promise. They may not even manifest any intention on the part of the promisor. Even if a present intention is manifested, the reservation of an option to change that intention means that there can be no promisee who is justified in an expectation of performance.

On the other hand, a promise may be made even though no duty of performance can arise unless some event occurs (see §§ 224, 225(1)). Such a conditional promise is no less a promise because there is small likelihood that any duty of performance will arise, as in the case of a promise to insure against fire a thoroughly fireproof building. There may be a promise in such a case even though the duty to perform depends on a state of mind of the promisor other than his own unfettered wish (see § 228), or on an event within the promisor’s control.

3. A says to B, I will employ you for a year at a salary of $ 5,000 if I go into business. This is a promise, even though it is wholly optional with A to go into business or not.

f. Opinions and predictions.

A promise must be distinguished from a statement of opinion or a mere prediction of future events. The distinction is not usually difficult in the case of an informal gratuitous opinion, since there is often no manifestation of intention to act or refrain from acting or to bring about a result, no expectation of performance and no consideration. The problem is frequently presented, however, whether words of a seller of goods amount to a warranty. Under Uniform Commercial Code § 2-313(2) a statement purporting to be merely the seller’s opinion does not create a warranty, but the buyer’s reliance on the seller’s skill and judgment may create an implied warranty that the goods are fit for a particular purpose under Uniform Commercial Code § 2-315. In any case where an expert opinion is paid for, there is likely to be an implied promise that the expert will act with reasonable care and skill.

A promise often refers to future events which are predicted or assumed rather than promised. Thus a promise to render personal service at a particular future time commonly rests on an assumption that the promisor will be alive and well at that time; a promise to paint a building may similarly rest on an assumption that the building will be in existence. Such cases are the subject of Chapter 11. The promisor may of course promise to answer for harm caused by the failure of the future event to occur; if he does not, such a failure may discharge any duty of performance.

4. A, on seeing a house of thoroughly fireproof construction, says to B, the owner, This house will never burn down. This is not a promise but merely an opinion or prediction. If A had been paid for his opinion as an expert, there might be an implied promise that he would employ reasonable care and skill in forming and giving his opinion.

g. Promisee and beneficiary.

The word promisee is used repeatedly in discussion of the law of contracts, and it cannot be avoided here. In common usage the promisee is the person to whom the promise is made; as promise is defined here, the promisee might be the person to whom the manifestation of the promisor’s intention is communicated. In many situations, however, a promise is complete and binding before the communication is received (see, for example, §§ 63 and 104(1)). To cover such cases, the promisee is defined here as the addressee. As to agents or purported agents of the addressee, see § 52 Comment c.

In the usual situation the promisee also bears other relations to the promisor, and the word promisee is sometimes used to refer to one or more of those relations. Thus, in the simple case of a loan of money, the lender is not only the addressee of the promise but also the person to whom performance is to be rendered, the person who will receive economic benefit, the person who furnished the consideration, and the person to whom the legal duty of the promisor runs. As the word promisee is here defined, none of these relations is essential.

Contractual rights of persons not parties to the contract are the subject of Chapter 14. The promisor and promisee are the parties to a promise; a third person who will benefit from performance is a beneficiary. A beneficiary may or may not have a legal right to performance; like promisee, the term is neutral with respect to right and duties. A person who is entitled under the terms of a letter of credit to draw or demand payment is commonly called a beneficiary, but such a person is ordinarily a promisee under the present definition. See Uniform Commercial Code § 5-103.

R. 2d Contracts § 3 – Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

a. Agreement distinguished from bargain.

Agreement has in some respects a wider meaning than contract, bargain or promise. On the other hand, there are contracts which do not require agreement. See, e.g., §§ 82-90, 94, 104. The word agreement contains no implication that legal consequences are or are not produced. It applies to transactions executed on one or both sides, and also to those that are wholly executory. The word contains no implication of mental agreement. Such agreement usually but not always exists where the parties manifest assent to a transaction.

b. Manifestation of assent.

Manifestation of assent may be made by words or by any other conduct (see § 19). Even silence in some circumstances is such a manifestation (see § 69). Compare the definition of agreement in Uniform Commercial Code § 1-201(3).

c. Bargain distinguished from agreement.

Bargain has a narrower meaning than agreement, since it is applicable only to a particular class of agreements. It includes agreements which are not contracts, such as transactions where one party makes a promise and the other gives something in exchange which is not consideration, or transactions where what would otherwise be a contract is invalidated by illegality. As here defined, it includes completely executed transactions, such as exchanges of goods (barters) or of services, or sales where goods have been transferred and the price paid for them, although such transactions are not within the scope of this Restatement unless a promise is made.

d. Offer.

A bargain is ordinarily made by an offer by one party and an acceptance by the other party or parties, the offer specifying the two subjects of exchange to which the offeror is manifesting assent (see §§ 22 and 24).

e. Contract distinguished from bargain.

A contract is not necessarily a bargain. Thus, a promise to make a gift, if made under seal, may be a contract (see § 95), but it is not a bargain. Other contracts which are not bargains are the subject of §§ 82-94. Such contracts do not require manifestations of mutual assent in the form of offer and acceptance.

Chapter 2 | Capacity and Incapacity

R. 2d Contracts § 12 – Capacity to Contract

(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances.

(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is

(a) under guardianship, or

(b) an infant, or

(c) mentally ill or defective, or

(d) intoxicated.

a. Total and partial incapacity.

Capacity, as here used, means the legal power which a normal person would have under the same circumstances. See Restatement, Second, Agency § 20; Restatement, Second, Trusts § 18. Incapacity may be total, as in cases where extreme physical or mental disability prevents manifestation of assent to the transaction, or in cases of mental illness after a guardian has been appointed. Often, however, lack of capacity merely renders contracts voidable. See § 7. Incapacity sometimes relates only to particular types of transactions; on the other hand, persons whose capacity is limited in most circumstances may be bound by particular types of transactions. In cases of partial disability, the law of mistake or of misrepresentation, duress and undue influence may be relevant. See Chapters 6 and 7, particularly §§ 153, 157, 161(d), 163, 164, 167, 169(c) and 177, Comment b to § 172 and Comment c to § 175.

b. Types of incapacity.

Historically, the principal categories of natural persons having no capacity or limited capacity to contract were married women, infants, and insane persons. Those formerly referred to as insane are included in the more modern phrase mentally ill, and mentally defective persons are treated similarly. Statutes sometimes authorize the appointment of guardians for habitual drunkards, narcotics addicts, spendthrifts, aged persons or convicts as in cases of mental illness. Even without the appointment of a guardian, civil powers of convicts may be suspended in whole or in part during imprisonment; and American Indians are for some purposes treated as wards of the United States government. The contractual powers of convicts and Indians are beyond the scope of the Restatement of this Subject. As to convicts, see Model Penal Code § 306.5.

c. Inability to manifest assent.

In order to incur a contractual duty, a party must make a promise, manifesting his intention; in most cases he must manifest assent to a bargain. See §§ 2, 17, 18. The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct. See § 19. Hence if physical disability prevents a person from acting, or if mental disability is so extreme that he cannot form the necessary intent, there is no contract. Similarly, even if he intends to engage in the conduct, there is no contract if the other party knows or has reason to know that he does not intend the resulting appearance of assent. See § 20. In such cases it is proper to say that incapacity prevents the formation of a contract.

d. Married women.

At common law a married woman had no capacity to incur contractual duties, although courts of equity recognized a limited power with respect to property conveyed to her separate use. Modern statutes in most States have given married women full power to contract, and they are therefore omitted from the list in subsection (2) of persons who may not have full capacity. In some States, however, capacity is still denied with respect to particular types of contracts, such as contracts between husband and wife, contracts of suretyship, contracts for the sale of real property, or contracts relating to the management of community property.

e. Artificial persons.

The contractual powers of artificial persons such as corporations and governmental agencies are beyond the scope of the Restatement of this Subject. The tendency of modern legislation is to restrict the assertion of the defense of ultra vires by business corporations, and in effect to give them full capacity; what was once lack of capacity then resembles lack of authority as used in the law of agency. See Model Business Corporation Act § 6 (1961). Where partnerships or unincorporated associations have no power to contract as such, contracts made in their names bind the members instead. Compare Restatement, Second, Agency § 20; Restatement, Second, Trusts §§ 97, 98.

f. Necessaries.

Persons having no capacity or limited capacity to contract are often liable for necessaries furnished to them or to their wives or children. Though often treated as contractual, such liabilities are quasi-contractual: the liability is measured by the value of the necessaries rather than by the terms of the promise. The rules governing such liabilities are beyond the scope of the Restatement of this Subject. See Restatement of Restitution §§ 62, 112-17, 139.

R. 2d Contracts § 13 – Persons Affected by Guardianship

A person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.

a. Rationale.

The reason for appointing a guardian of property is to preserve the property from being squandered or improvidently used. The guardianship proceedings are treated as giving public notice of the ward’s incapacity and establish his status with respect to transactions during guardianship even though the other party to a particular transaction may have no knowledge or reason to know of the guardianship: the guardian is not required to give personal notice to all persons who may deal with the ward. The control of the ward’s property is vested in the guardian, subject to court supervision; that control and supervision are not to be impaired or avoided by proof that the ward has regained his reason or has had a lucid interval, unless the guardianship is terminated or abandoned.

The rules governing contracts made by a guardian are beyond the scope of the Restatement of this Subject. A contract purporting not to bind the guardian personally but to bind the ward’s estate raises problems much like those raised by a similar contract made by a trustee. See Restatement, Second, Trusts §§ 262, 263, 271. But the powers of guardians are usually defined by statute, and are ordinarily much narrower than those of trustees.

b. Non-contractual obligations.

Property under guardianship may be reached in some circumstances to redress the torts of the ward or to satisfy his quasi-contractual obligations. See Restatement of Restitution § 139. The guardian is not required, in order to defend the ward against contractual liability arising out of a transaction during guardianship, to restore the other party to his original position, since such a requirement might force the guardian to use other property to replace property dissipated by the ward. Compare Restatement of Restitution § 62. But the other party may be able to reclaim the consideration received by the ward if it can be found. In some cases, as where necessaries have been furnished, the other party, to avoid unjust enrichment, may recover the fair value of the consideration received by the ward. See Comment f to § 12.

1. A, under guardianship by reason of mental illness, buys an old car from B for $ 300, giving a promissory note for that amount. A subsequently abandons the car. A is not liable on the note. B may reclaim the car or, if the car is found to be a necessary, has a claim for having furnished it to A.

c. Types of guardianship.

The rule of this Section had its origin in cases of insanity. It does not apply to cases where a person is committed or voluntarily admitted to an asylum or hospital without the appointment of a guardian, or where a guardian of the person only is appointed. In such cases the adjudication may have evidentiary value under § 15, but there may be a voidable contract notwithstanding mental illness or defect. Nor does the rule apply to infants: parents are natural guardians of the person but not the property of an infant, and the appointment of a guardian of the infant’s property does not prevent the infant from affirming his contract when he becomes of age.

Unless a statute provides otherwise, the rule governing insane persons applies also to persons under guardianship by reason of mental illness or defect or as habitual drunkards, narcotics addicts, spendthrifts, aged persons or convicts. In some states it makes no difference that the guardian is known as a committee, conservator, or curator, or by some other title, but in others, conservatorship is a less drastic procedure not conclusive and sometimes not even probative on the issue of incompetency. Where a statute authorizes the appointment of a guardian on the voluntary application of the ward-to-be without any adjudication of disability, the ward may retain some capacity to contract, subject to subsequent judicial approval, either where the guardian consents or where the guardian’s control of the property is not impaired.

2. Shortly after commitment to a hospital for the insane and while still confined, A conveys land to B, taking back a purchase-money mortgage. Subsequently C is appointed guardian of A’s property. On A’s behalf, C ratifies the conveyance and sues to enforce the mortgage by foreclosure. B has no defense: since A was not under guardianship, the conveyance and mortgage were voidable, not void. See § 15.

d. Termination of guardianship.

When the reason for guardianship ceases, the guardianship should ordinarily be terminated by judicial decree. But when the ward recovers from mental illness, for example, the guardianship is sometimes abandoned without any formality. In such cases, if the guardian dies or is removed and no successor is appointed, the guardianship is no longer conclusive of contractual incapacity, and the same may be true in other cases if the ward resumes full control of his property without interference over a substantial period of time.

R. 2d Contracts § 14 – Infants

Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.

a. Who are infants.

The common law fixed the age of twenty-one as the age at which both men and women achieve full capacity to contract, and the rule that the critical moment is the beginning of the preceding day was established on the ground that the law disregards fractions of a day. In almost every State these rules have been changed by statute. It appears that 49 States have lowered the age of majority, either generally or for contract capacity, to less than twenty-one; usually, the age is eighteen. The birthday rather than the preceding day is the date of majority in some States; in some both men and women have full capacity upon marriage.

b. Obligations which are not voidable.

Infants’ contracts were at one time classified as void, voidable or valid, but the modern rule in the absence of statute is that they are voidable by the infant. See § 7. Compare Restatement, Second, Agency § 20. An infant may be bound by obligations imposed by law independently of contract, such as tort and quasi-contractual obligations. See Comment f to § 12, Restatement of Restitution § 139. In addition, certain contracts are held binding, ordinarily by statute, such as recognizances for appearance in court or contracts made with judicial approval. Modern statutes also sometimes deny the power of disaffirmance as to such transactions as withdrawal of bank deposits or payment of life insurance premiums.

c. Restoration of consideration.

An infant need not take any action to disaffirm his contracts until he comes of age. If sued upon the contract, he may defend on the ground of infancy without returning the consideration received. His disaffirmance revests in the other party the title to any property received by the infant under the contract. If the consideration received by the infant has been dissipated by him, the other party is without remedy unless the infant ratifies the contract after coming of age or is under some non-contractual obligation. But some states, by statute or decision, have restricted the power of disaffirmance, either generally or under particular circumstances, by requiring restoration of the consideration received. Where the infant seeks to enforce the contract, the conditions of the other party’s promise must be fulfilled. The problems arising when an infant seeks to disaffirm a conveyance or executed contract are beyond the scope of the Restatement of this Subject, whether the disaffirmance is attempted before or after he comes of age. As to what constitutes ratification, see § 85.

R. 2d Contracts § 15 – Mental Illness or Defect

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect

(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or

(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.

a. Rationale.

A contract made by a person who is mentally incompetent requires the reconciliation of two conflicting policies: the protection of justifiable expectations and of the security of transactions, and the protection of persons unable to protect themselves against imposition. Each policy has sometimes prevailed to a greater extent than is stated in this Section. At one extreme, it has been said that a lunatic has no capacity to contract because he has no mind; this view has given way to a better understanding of mental phenomena and to the doctrine that contractual obligation depends on manifestation of assent rather than on mental assent. See §§ 2, 19. At the other extreme, it has been asserted that mental incompetency has no effect on a contract unless other grounds of avoidance are present, such as fraud, undue influence, or gross inadequacy of consideration; it is now widely believed that such a rule gives inadequate protection to the incompetent and his family, particularly where the contract is entirely executory.

b. The standard of competency.

It is now recognized that there is a wide variety of types and degrees of mental incompetency. Among them are congenital deficiencies in intelligence, the mental deterioration of old age, the effects of brain damage caused by accident or organic disease, and mental illnesses evidenced by such symptoms as delusions, hallucinations, delirium, confusion and depression. Where no guardian has been appointed, there is full contractual capacity in any case unless the mental illness or defect has affected the particular transaction: a person may be able to understand almost nothing, or only simple or routine transactions, or he may be incompetent only with respect to a particular type of transaction. Even though understanding is complete, he may lack the ability to control his acts in the way that the normal individual can and does control them; in such cases the inability makes the contract voidable only if the other party has reason to know of his condition. Where a person has some understanding of a particular transaction which is affected by mental illness or defect, the controlling consideration is whether the transaction in its result is one which a reasonably competent person might have made.

1. A, a school teacher, is a member of a retirement plan and has elected a lower monthly benefit in order to provide a benefit to her husband if she dies first. At age 60 she suffers a nervous breakdown, takes a leave of absence, and is treated for cerebral arteriosclerosis. When the leave expires she applies for retirement, revokes her previous election, and elects a larger annuity with no death benefit. In view of her reduced life expectancy, the change is foolhardy, and there are no other circumstances to explain the change. She fully understands the plan, but by reason of mental illness is unable to make a decision based on the prospect of her dying before her husband. The officers of the plan have reason to know of her condition. Two months after the changed election she dies. The change of election is voidable.

c. Proof of incompetency.

Where there has been no previous adjudication of incompetency, the burden of proof is on the party asserting incompetency. Proof of irrational or unintelligent behavior is essential; almost any conduct of the person may be relevant, as may lay and expert opinions and prior and subsequent adjudications of incompetency. Age, bodily infirmity or disease, use of alcohol or drugs, and illiteracy may bolster other evidence of incompetency. Other facts have significance when there is mental illness or defect but some understanding: absence of independent advice, confidential or fiduciary relationship, undue influence, fraud, or secrecy; in such cases the critical fact often is departure from the normal pattern of similar transactions, and particularly inadequacy of consideration.

d. Operative effect of incompetency.

Where no guardian has been appointed, the effect on executory contracts of incompetency by reason of mental illness or defect is very much like that of infancy. Regardless of the other party’s knowledge or good faith and regardless of the fairness of the terms, the incompetent person on regaining full capacity may affirm or disaffirm the contract, or the power to affirm or disaffirm may be exercised on his behalf by his guardian or after his death by his personal representative. There may, however, be related obligations imposed by law independently of contract which cannot be disaffirmed. See Comment f to § 12, Comment b to § 14. And if the other party did not know of the incompetency at the time of contracting he cannot be compelled to perform unless the contract is effectively affirmed.

2. A, an incompetent not under guardianship, contracts to sell land to B, who does not know of the incompetency. A continues to be incompetent. On discovering the incompetency, B may refuse to perform until a guardian is appointed, and if none is appointed within a reasonable time may obtain a decree canceling the contract.

e. Effect of performance.

Where the contract has been performed in whole or in part, avoidance is permitted only on equitable terms. In