Contract Law Essentials

Goal of Contract Law

To make sure people keep their promises; contract law is all about relationships developed through the common law.

Contract (Definition 1)

An agreement between parties that contains a set of promises, whereby each party is under a legal duty to fulfill those promises, with the right of a remedy if the other party fails to do so.

Contract (Definition 2)

A binding written or verbal agreement to do or not to do something that is enforceable at law.

Freedom of Contract

The principle that parties can form binding agreements (contracts) on any term and for any lawful purpose without government interference.

Objective Theory of Contracts

The doctrine that there must be an objective intention to enter into a contract on certain terms (a party cannot accidentally enter into a contract).

Four Essential Elements of a Contract

(1) Agreement, (2) Consideration, (3) Capacity, and (4) Legality.

Express Contract

A contract where all terms are clearly stated by both parties, either verbally or in writing.

Implied Contract

An agreement that arises implicitly because of the conduct of the parties (not in writing).

Formal Contract

An express contract that the law specifically requires to be in a particular written format.

Informal Contract

Every other kind of contract, whether verbal or in writing, that does not require a specific format.

Bilateral Contract

An agreement whereby each party makes a promise to the other ("a promise for a promise").

Unilateral Contract

An agreement when one person promises something in return for an action by the other ("a promise for an act").

Enforceable (Valid) Contract

A contract where all four elements exist; if one party fails to perform, the other party can sue for breach.

Unenforceable Contract

A contract where all four elements appear to be present, but it cannot be performed for legal reasons (e.g., lack of required form).

Voidable Contract

A contract where all four elements appear to be present, but one of the parties has a lawful option to set it aside.

Void Contract

An agreement that has no legal standing because one of the four essential elements is missing.

Agreement (Components)

An agreement is reached when two elements are present: (a) Offer and (b) Acceptance.

Offer (Definition & Parties)

A promise to do (or not to do) an action at some point in the future; the proposal of the deal made by the offeror to the offeree.

Three Elements of a Valid Offer

(1) Intention (serious objective intent), (2) Certainty (ascertainable terms), and (3) Communication (to the offeree).

Offer: Intention Requirement

The offeror must have a serious, objective intention; jokes, mumbling, adverts, and auctions are NOT offers.

Offer: Certainty Requirement

Both parties and the courts must be able to ascertain: (1) the parties, (2) subject matter, (3) consideration, and (4) payment & delivery.

Offer: Communication Requirement

An offer must be communicated to the offeree: verbally, in written form, or via a third party.

Revocation

The offeror withdraws (revokes) the offer before the offeree accepts it.

Rejection

An offer is terminated if it is rejected by the offeree.

Counteroffer

Rejecting the original offer while making a new offer at the same time.

Mirror Image Rule

An acceptance must "mirror" the terms of the offer exactly; if not, it is not an acceptance, but a counteroffer.

Termination of Offer by Operation of Law

An offer automatically terminates upon: (a) Lapse of time (specified period expires), or (b) Destruction of subject matter, Death of a party, Incapacity, or Illegality.

Acceptance (Three Requirements)

For an acceptance to form a contract, it must be: (1) Unequivocal, (2) Communicated, and (3) Timely.

Consideration (Definition)

The value given in exchange for a promise in a contractual agreement; every promise must be supported by something of value ("the price of the promise").

Consideration: Sufficiency Rule

Consideration must be of legally sufficient value; it must be sufficient, but need not be adequate (economic fairness is not evaluated).

Promissory Estoppel (Requirements)

Courts enforce a promise without consideration when: (1) A clear promise is made, (2) Promisor expected reliance, (3) Promisee reasonably relied on it and suffered loss, and (4) Injustice would occur without enforcement.

Pre-Existing Duty Rule

If you already have a legal or contractual duty to do something, you cannot demand additional consideration to fulfill that pre-existing obligation.

Past Consideration

You cannot demand consideration for an event or act that has already taken place in the past.

Capacity (General Rule)

Parties to a contract must be sober, mentally competent adults.

Capacity: Mentally Incompetent Persons

Contracts can be: (1) Void (if previously adjudicated incompetent/guardian appointed), (2) Voidable (if incompetent at signing), or (3) Valid (if signed during a lucid interval).

Capacity: Minors

Contracts entered into by minors are voidable (avoided contracts), but can be ratified upon reaching the age of majority.

Capacity: Intoxicated Persons

Contracts entered into while intoxicated can be Voidable (if understanding was completely impaired) or Valid (if the nature of the transaction was understood).

Legality (General Rule)

The purpose for entering into the contract must be legal; an agreement to do something prohibited by law is void and unenforceable.

Unenforceable / Void Purposes under Legality

Agreements contrary to public policy, unconscionable contracts, contracts entered via fraudulent misrepresentation, or contracts made under duress / undue influence.

Voluntary Consent (Enforceability)

A contract is NOT enforceable if both parties have not genuinely agreed with knowledge and assent (undermined by Mistake, Misrepresentation, or Duress).

Unilateral Mistake

One party is mistaken about a material fact; generally does not excuse performance.

Bilateral Mistake

Both parties are mistaken about the same material fact; renders the contract voidable (note: must be mistake of material fact, NOT of value or quantity).

Fraudulent Misrepresentation (Elements)

(a) Misrepresentation of a material fact (by words or actions), (b) Clear intention to deceive, (c) Innocent party relied on the misrepresentation, and (d) Innocent party suffered harm as a result.

Duress

A contract is voidable if one party is forced into it; any use of threats, blackmail, or extortion amounts to duress and renders the contract unenforceable.

Statute of Frauds (Contracts Requiring Written Format)

(1) Real Estate, (2) Sale of Goods over $500, (3) Mortgages, (4) Promissory Notes, (5) Terms longer than 12 months (1 year), and (6) Prenuptial agreements.

Breach of Contract & Remedy

Breach occurs when a party fails to fulfill their obligations under a valid contract; a Remedy is the relief available to the innocent party.

Contract Remedy vs. Tort Remedy Goal

Contract Law puts the innocent party in the position they would have been in HAD THE CONTRACT BEEN PERFORMED; Tort Law puts the innocent party back in the position had the tort NEVER HAPPENED.

Compensatory Damages

An award of money intended to compensate the innocent party for the "loss of bargain" (to cover direct losses and costs actually incurred).

Consequential Damages

An award of money to compensate the innocent party for foreseeable costs resulting from the breach; damages that flow from the breach as a consequence, but are not direct actual losses.

Punitive Damages

An award of money intended to: (a) punish the breaching party for failing to perform, and (b) deter others from similar breaches in the future.

Nominal Damages

An award of a nominal amount ($1) when the innocent party has not suffered any actual financial loss, but there has still been a legal breach.

Mitigation of Damages

The innocent party has a legal duty to mitigate (reduce) the value of loss they sustain as a result of the breach.

Liquidated Damages

A provision where parties to a contract agree in advance how much compensation will be paid IF there is a breach.

Remedies in Equity (When Granted)

Standards of fairness and justice granted when remedies at law (damages) are insufficient to put the innocent party in the position they would have been in had the contract been performed.

Rescission and Restitution

Rescission cancels the contract (places the party where they would be had the contract NEVER been entered into); Restitution requires returning any money paid or property transferred.

Specific Performance

A court order compelling the breaching party TO DO something they are contractually obligated to do (carry out their specific obligation).

Injunction

A court order directing a person to STOP DOING something (NOT TO DO an action that would hinder what they are contractually obligated to do).

Why was the UCC created?

Before the UCC, every state had different contract laws, creating confusion in interstate commerce. The UCC created a uniform set of commercial rules across all states to simplify and streamline business transactions.

UCC Article 2

Governs contracts for the SALE of goods — the passing of title (ownership) from the seller to the buyer for a price.

UCC Article 2A

Governs contracts for the LEASE of goods — transferring the right to possess and use goods for a period of time in exchange for a price.

Article 2A: Lessor

The party who transfers the right to use the goods for a specified time.

Article 2A: Lessee

The party who acquires the right to use the goods for a specified time.

What are "Goods" under the UCC?

Goods must be tangible (physical existence) AND movable.

What does UCC Article 2 NOT cover?

Real property (real estate), Services (legal/accountancy), and Intangible property (stocks, bonds, copyrights).

Merchant Definition (UCC)

(1) A person who regularly deals in goods of the kind involved in the contract; OR (2) A person who holds themselves out as having special knowledge or skills related to the goods.

How does the UCC modify Common Law?

The UCC applies where a contract is silent. Parties are still free to negotiate on whatever terms they want — the UCC fills in the gaps.

UCC Open Term: Price

If price is not named, the default is a "reasonable price" at the time of delivery. (UCC 2-305(1))

UCC Open Term: Payment

If payment is not named, the default is "due at the time and place at which the buyer is to receive the goods." (UCC 2-310(a))

UCC Open Term: Delivery

If delivery is not named, the default is "buyer normally takes delivery at the seller's place of business." (UCC 2-308(a))

UCC Open Term: Quantity

The ONE term that CANNOT be left open. Courts will not arbitrarily impose a quantity on the parties.

UCC Acceptance Rule

Acceptance can be made by any reasonable means (email, text, or even prompt shipment of goods) within a reasonable time.

Common Law vs. UCC: Offer Certainty

Common Law requires strict certainty of all terms. The UCC allows open terms — a contract can still be valid even if certain terms are missing (except quantity).

Common Law vs. UCC: Mirror Image Rule

Common Law strictly requires acceptance to mirror the offer. The UCC is more flexible — additional or different terms in an acceptance do not automatically make it a counteroffer.

Perfect Tender Rule

Under the UCC, the seller must deliver goods that conform to the contract in every way. If the goods fail in any respect to conform, the buyer has the right to: (a) accept all of the goods; (b) reject all of the goods; or (c) accept the conforming goods and reject the non-conforming goods.

Seller's Obligation — Conforming Goods

The seller's primary obligation under the UCC is to deliver goods that meet the exact specifications and requirements agreed upon in the contract.

Open Delivery — Place of Delivery

If the contract is silent on delivery location, the place of delivery will be: (a) the seller's business premises; (b) the seller's residence; or (c) the location of the goods.

Delivery by Carrier — Shipment Contract

If the contract requires the seller to ship goods by carrier, and it is a shipment contract, the seller must deliver the goods to the carrier. Risk of loss passes to the buyer at that point.

Delivery by Carrier — Destination Contract

If it is a destination contract, the seller must deliver the goods all the way to the buyer's location. Risk of loss does not pass until the goods arrive at the destination.

Limitations on the Perfect Tender Rule — Seller's Right to Cure

If the seller delivers non-conforming goods and there is still time remaining under the contract, the seller has the right to cure the defect by delivering conforming goods within the contract period.

Limitations on the Perfect Tender Rule — Commercial Impracticability

Unforeseen events that make performance commercially impractical may excuse the seller's obligation to perform under the UCC.

Limitations on the Perfect Tender Rule — Destruction of Goods

If an unexpected event destroys the goods BEFORE risk of loss has passed to the buyer, the contract can be set aside.

Buyer's Obligation — Payment

Unless the contract states otherwise, the buyer must make payment for the goods when they are received.

Buyer's Obligation — Right of Inspection

Unless the contract states otherwise, the buyer has the right to inspect the goods before making payment.

Buyer's Obligation — Acceptance

Acceptance is deemed to have taken place if, after having an opportunity to inspect, the buyer: (a) indicates the goods are conforming; (b) fails to reject the goods within a reasonable time; or (c) performs an act inconsistent with the seller's right of ownership.

UCC Remedies — Key Threshold Question

When either the seller or buyer breaches their obligations under the UCC, the first question to ask is: WHERE ARE THE GOODS? (a) Still with the seller? (b) In transit? (c) With the buyer?

UCC Seller's Remedies — Goods Still with Seller

If the buyer breaches and the goods are still in the seller's possession, the seller may: (a) withhold delivery of the goods; (b) resell the goods and recover the difference in price; or (c) cancel the contract.

UCC Seller's Remedies — Goods in Transit

If the buyer breaches while the goods are in transit, the seller may stop delivery of the goods by notifying the carrier to withhold delivery.

UCC Seller's Remedies — Goods with Buyer

If the buyer breaches after receiving the goods, the seller may recover the full contract price from the buyer.

UCC Buyer's Remedies — Seller Fails to Deliver

If the seller fails to deliver conforming goods, the buyer may: (a) cancel the contract; (b) recover any money already paid; or (c) "cover" — purchase substitute goods from another seller and recover the difference in cost.

Cover (Buyer's Remedy)

The buyer's right under the UCC to purchase substitute goods from another seller when the original seller fails to deliver conforming goods. The buyer may recover the difference between the cover price and the original contract price.

UCC Buyer's Remedies — Non-Conforming Goods Accepted

If the buyer accepts non-conforming goods, the buyer may recover damages equal to the difference between the value of the goods as delivered and the value they would have had if they had conformed to the contract.

UCC Hierarchy of Contract Terms

When sources of contract terms conflict under the UCC, the following order of priority applies: (1) Express terms; (2) Course of performance; (3) Course of dealing; (4) Usage of trade; (5) UCC gap-filler provisions.

Course of Dealing

An established pattern of prior conduct between the parties to a particular transaction, used as evidence of how they intended to carry out the current transaction.

Course of Performance

The conduct of the parties under the specific contract in question after its formation, used to interpret how the parties intended to perform that particular agreement.

Usage of Trade

A practice or method of dealing regularly observed in a particular industry or trade, used to interpret contract terms when express terms are absent