Definition

A contract is an agreement between legally competent parties to do or not to do something legal for consideration.

Elements

The elements of a contract are mutual assent, consideration, legally competent parties and legal purpose.

Mutual Assent

Mutual assent is also known as ratification and meeting of the minds is typically established through the process of offer and acceptance. However, contracts can also be implied in fact, as discussed below.

Offer

An offer is a display of willingness by a promissor to be legally bound by terms he specifies, made in a way that would lead a reasonable person in the promisee's position to understand that an acceptance is being sought and, if made, results in an enforceable contract.

Revocation

Ordinarily, an offeror is permitted to revoke his offer at any time prior to a valid acceptance. This is partially due to the maxim that an offeror is the "master of his offer."

Options

The general rule stated above applies even when the offeror promises to hold the offer open for a certain period of time. For example, Alice says to Bob, "I'll sell you my watch for $10, and you can have a week to decide." Alice is free to revoke her offer during the week, as long as Bob has not accepted the offer.

However, if the offeree gives some separate consideration (discussed below) to keep the offer open for a certain period of time, the offeror is not permitted to revoke during that period. For example, Alice offers to sell Bob her watch for $10. Bob gives Alice $1 to keep the offer open for a week. Alice is not permitted to revoke during the week.

Counteroffer

A counteroffer is a new offer that varies the terms of the original offer. Therefore, it is simultaneously a rejection of the original offer. For example, Alan says to Betty, "I'll sell you my watch for $10." At this point Betty has the power of acceptance. But Betty responds, "I'll only pay $8." Betty's response is a rejection of Alan's offer but gives Alan a new power of acceptance.

Mere Inquiry

It is possible to phrase what appears to be a counteroffer so that it does not destroy the original power of acceptance. For example, Alan says to Betty, "I'll sell you my watch for $10." Betty responds, "I wonder whether you would take $8." Betty retains her original power of acceptance (unless Alan revokes), but she does not give Alan a new power of acceptance, as she is not making an offer of her own. Therefore, she is not making a counteroffer either. As such, mere inquiries are not counteroffers.

Acceptance

An acceptance is an agreement, by express act or implied from conduct, to the terms of an offer, including the prescribed manner of acceptance, so that an enforceable contract is formed.

Battle of the Forms

When the process of offer and acceptance is not followed, it is still possible to have an enforceable contract, as mentioned above with respect to contracts implied in fact.

Mirror Image Rule

At common law, the terms of a purported acceptance must be the "mirror image" of the terms of the offer. Any variation thereof constitutes a counteroffer (see above).

UCC § 2-207

The Uniform Commercial Code

Uniform Commercial Code

The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...

 ("UCC") dispenses with the mirror image rule in § 2-207, a somewhat confusing and therefore controversial statute that many states have adopted.

Subsection 1

UCC § 2-207(1) provides that a "definite and seasonable expression of acceptance...operates as" an acceptance, even though it varies the terms of the original offer. Such an expression is typically interpreted as an acceptance when it purports to accept and agrees on the following terms of the original offer: subject matter, quantity, and price.

However, such an expression is not interpreted as an acceptance if it is "expressly conditional" on the original offeror's assent to the varied terms, discussed below. This language is known as the proviso. When the proviso is not used, the terms of the contract are determined by subsection 2. When the proviso is used, but there is no assent by the original offeror to the offeree's varied terms, yet the parties go ahead and perform (act like they have a contract, hence a contract implied in fact), the terms of the contract are determined by subsection 3. So, the terms of a contract under 2-207 are never determined by a combination of subsections 2 and 3.

Subsection 2

This part of the statute tells what to do with additional terms. It does not explicitly address what to do with different terms. A minority of states, led by California, infer that this was a typographical error by the drafters. As such, those states treat different terms in the same manner as additional terms. The majority rule, however, is that different terms do not become part of the contract. This is known as the knockout rule.

A term in a purported acceptance is different if it directly contradicts the subject matter of a term present in the original offer. A term in a purported acceptance is additional if it contemplates a subject matter not present at all in the original offer. As already mentioned, subsection 2 does tell what to do with additional terms. They do not become part of the contract if either party is not a merchant.

A merchant is defined elsewhere in the UCC as a party that regularly "deals in goods of the kind" or otherwise gives an impression of knowledge or skill regarding the subject matter of the transaction. If both parties are merchants then additional terms in a purported acceptance do become part of the contract unless any of three exceptions apply.

The exceptions are (out of order): objection by the original offeror in advance; objection by the original offeror within a reasonable time after notice; and material alteration of the contract. The third exception, whether the additional terms materially alter the contract, is the most difficult to apply. Typically, to show it, the merchant must be subjected to undue hardship and/or surprise as a result of the varied term, as measured by the industry involved. It is well established that disclaimer of warranty, indemnification, and arbitration are all clauses that do constitute material alterations.

Subsection 3

This part of the statue only applies when the proviso language from subsection 1 is used. When the proviso is used, there is no contract formed at that time unless the original offeror assents to the terms that the party purporting to accept has made "expressly conditional."

For example, a buyer sends a purchase order with its own terms. The seller sends an acknowledgement with additional and/or different terms and uses the proviso. The buyer must accept the seller's additional and/or different terms, or else no contract is formed at that time.

Frequently, however, the buyer in such a situation does not accept the seller's terms, typically through silence, that is, not signing and returning the form to the seller. Subsection 3 is designed to deal with this situation.

When the parties begin to perform the contract, they form a contract implied in fact. The terms of that contract are determined by this subsection. They consist of those terms both forms agree on. Any pertinent term upon the forms do not agree are not part of the contract but instead are supplied by the Code's gap fillers.

Note that whether the parties are merchants is irrelevant for this subsection. However, private parties do not typically send and receive purchase orders or invoices, so in hypotheticals, the parties typically are merchants.

For example, the Brown Company (buyer) sends a purchase order to the Smith Company (seller) for 100 widgets. Brown's terms are silent as to arbitration. Smith sends an acknowledgement, making its acceptance of Brown's offer "expressly conditional" on Brown's assent to Smith's additional term that any dispute arising from the transaction be resolved by arbitration. Brown does not sign and return Smith's form, but Smith goes ahead and fulfills the order. Brown receives the widgets and pays for them. The forms do not agree as to the term of arbitration. Therefore, if a dispute arises, the arbitration clause is not part of the contract. Instead, a UCC gap-filling provision is used. Since the Code does not supply arbitration, Brown is able to avoid Smith's term and bring an action in court.

Consideration

Consideration is something of value given by a promissor to a promisee in exchange for something of value given to a promisee to a promissor. Typical examples of things of value are acts, forbearances, and/or promises to do so. The latter referring to those things that a party has a legal privilege to do in the first place. So, promising to refrain from committing a tort or crime is not a thing of value for purposes of consideration.

This is known as the bargain theory of consideration and requires that the promises to exchange the things be reciprocally induced. This is especially important for the discussion of past consideration, below.

Sufficiency

Consideration must be sufficient, but courts do not weigh the adequacy of consideration, partially because in a capitalistic society private parties are entitled and expected to determine the value of things for themselves. In other words, the things being exchanged must have some value in the eyes of the law, but the general rule is that courts do not care how much. Love and affection, for example, would not constitute sufficient consideration, but a penny would. However, sufficient consideration that is grossly inadequate may be deemed unconscionable, discussed below.

Moreover, things that ordinarily constitute sufficient consideration may be deemed insufficient when they are being exchanged for fungible things. For example, $1 is ordinarily sufficient consideration, and $100 is ordinarily sufficient consideration. However, if Alan and Betty agree to exchange $1 for $100, it would not be an enforceable contract for lack of consideration. An exception to this exception is when there is special significance to the $1 bill itself, such as if it was the first dollar a person made in business and carries tremendous sentimental value, similar to the peppercorn rule. Fungible things do not have to be money, though. They can be grains stored in a silo, for example. One bushel of grain being exchanged for 100 bushels of the same grain would not be sufficient consideration.

Past Consideration

Past consideration is an oxymoron, because past acts cannot constitute consideration. For example, an employer lays off an employee but promises to give him a pension in exchange for his long and faithful service to the company. It is impossible for the employee to presently promise to have worked all those years for the pension. He worked for the paychecks that the company promised in the past, not knowing whether a pension lay in the future. He might have hoped to one day receive a pension, but the company did not promise one until his layoff. Note, in this situation, the employee may be able to prevail on a claim of promissory estoppel, but there is no contract for lack of consideration.

Statute of Frauds

Ordinarily, contracts do not have to be in writing to be enforceable. However, certain types of contracts do have to be reduced to writing to be enforceable, to prevent frauds and perjuries, hence the name statute of frauds, which also makes it not a misnomer (fraud need not be present to implicate the statute of frauds).

Types of Contracts Implicated

Typically the following types of contracts implicate the statute of frauds:

• Land, including leases over a year and easements
• Suretyships (promises to answer for the debts, defaults, or miscarriages of another)
• Consideration of marriage (not to actually get married but to give a dowry, for example)
• Goods over a certain amount of money (usually $500, as in the UCC)
• Contracts that cannot be performed within one year

For example, a two-year employment contract naturally cannot be performed within one year. Interestingly, lifetime contracts do not fall within the statute of frauds, because life can end at any time, certainly within one year from the time of execution.

The statute of frauds requires the signature of the party against whom enforcement is sought (the party to be sued for failure to perform). For example, Bob contracts with the Smith Company for two years of employment. The employer would need to sign the writing.

Writing

Moreover, the writing for purposes of satisfying the statute of frauds does not need to be the actual contract. It might be a letter, memorializing and formalizing an oral arrangement already made over the phone. Therefore, the signed writing does not need to contain all of the terms that the parties agreed to. At common law, only the essential terms were required in the signed writing. Under the UCC, the only term that must be present in the writing is the quantity.

The writing also does not need to be one document, but if there are multiple documents, they must all obviously refer to the same transaction, and they all must be signed.

Signature

The signature itself does not need to be a full name. Any mark made with the intent to authenticate the writing is satisfactory, such as initials or even such as an X by an illiterate party.

Exceptions

No writing is required when:

• Goods have been received and accepted;
• Payment has been made and accepted;
• Goods are specially manufactured (there is no market for them); or
• under the UCC, the party against whom enforcement is being sought admits a certain quantity of goods.

The last exception applies up to the quantity admitted, which may include the entire contract. This reversed the rule at common law that permitted a defendant to testify that he indeed contracted with the plaintiff but refuses to perform because it is not in writing.

Substantive

• Buchwald v. Paramount
  Buchwald v. Paramount
  Buchwald v. Paramount was a breach of contract lawsuit filed and decided in California in which humorist and writer Art Buchwald alleged that Paramount Pictures stole his script idea and turned it into the 1988 movie Coming to America...
  
  , unconscionability procuring a contract
• Williams v. Walker-Thomas Furniture Co.
  Williams v. Walker-Thomas Furniture Co.
  Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 , was a court opinion, written by Judge J. Skelly Wright, that had a definitive discussion of unconscionability as a defense to enforcement of contracts in American contract law. As a staple of first-year law school contract law courses, it has...
  
  , unconscionability

Misrepresentation or Fraud

• Laidlaw v. Organ
  Laidlaw v. Organ
  Laidlaw v. Organ, 15 U.S. 178 , is a case decided by the United States Supreme Court that established caveat emptor in the U.S.-Facts:Organ purchased 111 hogsheads of tobacco from Laidlaw & Co. on February 18, 1815...
  
  15 U.S. 178 (1817), on caveat emptor
  Caveat emptor
  Caveat emptor is Latin for "Let the buyer beware". Generally, caveat emptor is the property law doctrine that controls the sale of real property after the date of closing.- Explanation :...
  
  
• Obde v. Schlemeyer 56 Wash 2d 449, 353 P2d 672 (Supreme Court of Washington, 1960) termite
  Termite
  Termites are a group of eusocial insects that, until recently, were classified at the taxonomic rank of order Isoptera , but are now accepted as the epifamily Termitoidae, of the cockroach order Blattodea...
  
   infested house
  House
  A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...
  
   not revealed to buyers. Even though no questions asked, seller still liable for failure to disclose.
• Smith v. Bolles
  Smith v. Bolles
  Smith v. Bolles, , was an action to recover out-of-pocket damages for alleged fraudulent representations in the sale of shares of mining stock. The plaintiff was denied benefit of the bargain damages. The case is important in contract law, specifically legal remedies and compensating...
  
  , 132 U.S. 125 (1889) damages for misrepresentation of share sale did not entitle the buyer to get money as if the representation were true

Illegality

• ProCD v. Zeidenberg
  ProCD v. Zeidenberg
  ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 , is a United States contract case involving a "shrink wrap license". One issue presented to the court was whether a shrink wrap license was valid and enforceable. Judge Easterbrook wrote the opinion for the court and found such a license was valid and...
  
  , copyrights
• SCO v. DaimlerChrysler
  SCO v. DaimlerChrysler
  The SCO Group v. DaimlerChrysler was a lawsuit filed in the United States, in the state of Michigan. In December 2003, SCO sent a number of letters to Unix licensees. In these letters, SCO demanded that the licensees certify certain things regarding their usage of Linux. DaimlerChrysler, a former...
  
  , license agreements
• Specht v. Netscape Communications Corp.
  Specht v. Netscape Communications Corp.
  Specht v. Netscape, 306 F.3d 17 , is a case in the United States Court of Appeals for the Second Circuit regarding the enforceability of browse-wrap software licenses...
  
  , software license
  License
  The verb license or grant licence means to give permission. The noun license or licence refers to that permission as well as to the document recording that permission.A license may be granted by a party to another party as an element of an agreement...
  
   agreements

UCC

Generally, contract

Contract

A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 law in transactions involving the sale of goods has become highly standardized nationwide as a result of the widespread adoption of the Uniform Commercial Code

Uniform Commercial Code

The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...

 ("UCC"). However, there is still significant diversity in the interpretation of other kinds of contracts, depending upon the extent to which a given state

U.S. state

A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...

 has codified its common law of contracts or adopted portions of the Restatement (Second) of Contracts.

Arbitration

Parties are permitted to agree to arbitrate disputes arising from their contracts. Under the Federal Arbitration Act

Federal Arbitration Act

In United States law, the Federal Arbitration Act is a statute that provides for judicial facilitation of private dispute resolution through arbitration. It applies in both state courts and federal courts, as was held in Southland Corp. v. Keating...

 (which has been interpreted to cover all contracts arising under federal or state law), arbitration clauses are generally enforceable unless the party resisting arbitration can show unconscionability, fraud or something else that undermines the entire contract.

Other Causes of Action

Breach of contract is the primary cause of action in contract law. However, there are others that are properly covered by contract law, namely promissory estoppel and quasi-contract (contracts implied in law, of which there are two types).

Promissory Estoppel

Promissory estoppel is a separate cause of action

Cause of action

In the law, a cause of action is a set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party. The term also refers to the legal theory upon which a plaintiff brings suit...

 than breach of contract, requiring separate elements to be shown. It is a common misconception that promissory estoppel is a substitute for consideration in the United States.

Elements

The elements of promissory estoppel are:

• an express or implied promise;
• detrimental reliance by the promisee foreseeable to a reasonable person in the promissor's position;
• actual detrimental reliance by the promisee (worsening of his position); and
• for specific performance (as opposed to reliance damages), injustice can only be avoided by enforcing the promise.

Quasi-contract

The terms quasi-contract and contract implied in law are synonymous. There are two types of quasi-contract. One is an action in restitution. The other is unjust enrichment. Note, therefore, that it is improper to say that quasi-contract, implied in law contract, and unjust enrichment are all synonymous, because unjust enrichment is only one type of the broader category of quasi-contracts (contracts implied in law).

Contracts implied in law differ from contracts implied in fact in that contracts implied in law are not true contracts. Contracts implied in fact are ones that the parties involved presumably intended. In contracts implied in law, one party may have been completely unwilling to participate, as shown below, especially for an action in restitution. There has been no mutual assent, in other words, but public policy essentially requires a remedy.

Restitution

The full name of this cause of action is "restitution for actions required to preserve another’s life or health." It is available when a party supplies goods or services to someone else, even though the recipient is unaware or does not consent. Unawareness and non-consent can both be due to unconsciousness, but the latter also includes incapacity, which in turn refers to mental incompetence and/or infancy (minority).

The elements of this cause of action are:

• the supplier acts "unofficiously," that is, isn't interfering in the affairs of the recipient for no reson;
• the supplier acts with the intent to charge money for doing so;
• the goods or services are necessary to prevent the recipient from suffering serious bodily injury or pain;
• the recipient is unable to consent;
• the supplier has no reason to know that the recipient would not consent if he could; and,
• if the recipient is "extremely" mentally incompetent or young and objects, the non-consent is immaterial.

Unjust Enrichment

The elements of this cause of action are:

• conferral of a benefit on another;
• the other's knowledge of the benefit;
• the other's acceptance or retention of the benefit;
• circumstances requiring the other to pay the fair value for the benefit to avoid inequity.

Expectation damages

The remedy for breach of contract is expectation damages, or "benefit of the bargain." At law, this is monetary compensation. At equity, it can be specific performance or an injunction, among other things.

For example, Dan and Pam have an enforceable contract for the sale of Dan's watch. The price they agreed to was $10. The actual value of the watch is $15. Pam would be able to successfully pursue a claim for $5. She might elect this route if she did not want to keep the watch but sell it to a third party for a profit. Alternatively, Pam could successfully pursue a claim whereby the court would order Dan to sell the watch for the original price. She might elect this route if she actually wanted the watch for herself.

Quantum meruit

The remedy for quasi-contracts (contracts implied in law) is quantum meruit, the reasonable or "fair market" value of goods or services rendered.

See also

• English contract law
  English contract law
  English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
  
  
• United States tort law
  United States tort law
  This article addresses torts in United States law. As such, it covers primarily common law. Moreover, it provides general rules, as individual states all have separate civil codes...
  
  
• Civil Procedure in the United States
  Civil procedure in the United States
  Civil procedure in the United States consists of the rules of civil procedure that govern procedure in the federal courts, the 50 state court systems, and in the territorial courts. Like much of American law, civil procedure is not reserved to the federal government in the Constitution...