Contract Basics: Formation and Requirements

Ever wonder what makes a promise legally binding? A contract is a legally enforceable agreement containing one or more promises. For a valid contract to exist, you need four key elements:

1. Offer - A willingness to enter into a bargain that invites another person's agreement
2. Acceptance - An assent to the offer, typically through a promise or performance
3. Intent - Both parties must intend to be legally bound
4. Consideration - Something of value exchanged between parties

The first two elements (offer and acceptance) create what's called mutual assent or a "meeting of the minds." Without this, no contract exists!

There are two main contract types you'll encounter. In a bilateral contract, both parties make promises (like "I'll mow your lawn if you pay me $20"). In a unilateral contract, one party makes a promise while the other performs an action (like "I'll pay $100 to whoever finds my lost dog").

Not all offers lead to contracts. Invalid offers include jokes, preliminary negotiations, and most advertisements. Once a valid offer exists, it can be terminated through:

• Rejection or counteroffer
• Lapse of time
• Death or incapacity
• Revocation (withdrawal by the offeror)

Remember this! Some offers can't be revoked, including option contracts (where the offeror promises to keep an offer open in exchange for consideration) and firm offers (written promises by merchants to keep offers open for a limited time).

For acceptance to be valid, it must follow the mirror image rule - your acceptance must match the offer's exact terms. Any changes create a counteroffer instead. The moment of acceptance varies but typically occurs when it leaves the acceptor's possession (like dropping a letter in a mailbox).

Consideration and Promissory Estoppel

What makes a promise enforceable? The answer is consideration - something valuable exchanged in a bargain between parties. Without it, most promises can't be legally enforced.

Consideration can take many forms:

• A promise to do something
• Actually doing something (an act)
• Not doing something you have the right to do (forbearance)

Both parties must exchange something of value, though interestingly, the values don't need to be equal. A contract is still valid even if one person gets a much better deal! However, certain types of "consideration" won't work:

• Past consideration (something already given before the contract)
• Gifts (no exchange or bargain exists)
• Illusory promises (commitments that don't actually require anything, like "I'll paint your house if I feel like it")
• Preexisting duties (things you're already legally required to do)

Contract modifications typically require new consideration to be valid. However, there are three exceptions:

1. When unexpected circumstances arise
2. When duties are sufficiently altered
3. For modifications to goods contracts (no consideration needed)

Pro tip: When you're examining a contract problem, always check whether both parties gave something up or received something in return. If not, the promise likely isn't enforceable!

Sometimes a promise can be enforced even without consideration through promissory estoppel. This happens when:

1. Someone makes a promise expecting it to cause another person to act
2. The other person reasonably relies on the promise
3. Enforcing the promise is necessary to avoid injustice

Courts typically limit remedies in promissory estoppel cases to what justice requires, often just putting the person back in their original position rather than giving them full contract benefits.

Statute of Frauds and Contract Defenses

Ever wondered why some agreements need to be in writing? The Statute of Frauds requires certain types of contracts to be in a signed writing to be enforceable. Remember the mnemonic "MY LEGS" for the six contract types that fall under this rule:

1. Marriage contracts (agreements made on consideration of marriage)
2. Contracts that can't be performed within 1 Year
3. Land contracts (transferring interest in real estate)
4. Executor-administrator contracts (promises to pay a deceased person's debts)
5. Goods sales contracts worth $500 or more
6. Suretyship (promises to pay another's debts)

Some exceptions exist. For example, sale of goods contracts over $500 don't need a writing if they involve specially manufactured goods, if the existence of the contract is admitted in court, or if payment has been accepted or goods received.

Important note: A contract may fall into multiple Statute of Frauds categories. As long as it satisfies the requirements for at least one category, it needs to be in writing!

Even if a contract meets all formation requirements, it might still be unenforceable if one of these five defenses applies:

1. Lack of capacity - The person couldn't understand what they were agreeing to due to:

   • Being under 18 (infancy)
   • Mental illness or defect
   • Intoxication

2. Duress - Someone was forced to agree through improper threats

3. Illegality - The contract violates public policy (like hiring someone to commit a crime)

4. Unconscionability - The contract is extremely unfair, either in how it was formed (procedural) or in its terms (substantive)

5. Misrepresentation - Someone made false statements that induced agreement, either through:

   • Fraudulent statements (knowing they were false)
   • Material misstatements (important enough to affect decisions)

Contract Interpretation and Conditions

When disputes arise, courts must determine what contract terms actually mean. During interpretation, courts look at several factors:

• The contract's words and surrounding circumstances
• The parties' purpose for entering the agreement
• Relevant context when the contract was formed

Courts follow these standards when interpreting contracts:

1. They prefer interpretations that make all terms reasonable and effective
2. Specific terms outweigh general language
3. Negotiated terms outweigh standard boilerplate language
4. Ambiguities are interpreted against whoever drafted the contract

Contract problems often involve indefinite terms (terms left open or uncertain), ambiguous terms (having multiple possible meanings), or omitted terms (things the parties didn't address). Courts may void contracts with indefinite essential terms, but they'll typically supply reasonable terms for minor issues.

Real-world example: If your contract to paint someone's house doesn't specify when payment is due, courts will imply a "reasonable time" for payment - typically when the service is completed.

Every contract includes a duty of good faith - parties must act with fairness, reasonableness, and honesty when performing.

The parol evidence rule limits what evidence can be used to interpret contracts. When a written agreement is intended to be final (integrated), courts generally won't allow external evidence that contradicts or adds to it. However, there are four exceptions where external evidence is permitted:

1. To establish whether an agreement is integrated
2. To clarify ambiguous terms
3. To support a defense to enforceability (like fraud)
4. To determine appropriate remedies

Conditions are uncertain events that must occur before performance is required. For example, "I'll pay you when you finish the job" makes payment conditional on job completion. Conditions can be:

• Express (explicitly stated) or constructive (implied by law)
• Excused in certain situations, like when one party prevents the condition from occurring in bad faith

Performance, Breach, and Interpretation Issues

What happens when someone doesn't fulfill their contract obligations? A breach occurs when a party fails to perform by the due date. The injured party can sue if the breach is material - significant enough to substantially deprive them of what they bargained for.

Four factors determine if a breach is material:

1. The injured party's loss of benefit
2. Whether compensation can adequately cover the loss
3. The hardship the breaching party would suffer
4. The likelihood the breaching party can fix the problem

You don't always have to wait for a breach to occur. Anticipatory repudiation happens when a party clearly states they won't perform or takes action making performance impossible. For example, if Jack contracted to paint your house Friday but calls Thursday saying he won't do it, that's anticipatory repudiation.

Good to know: If you have reasonable grounds to believe the other party won't perform, you can suspend your own performance and demand adequate assurances that they'll fulfill their obligations.

Sometimes parties enter contracts based on incorrect beliefs. A mistake is a belief not in accordance with facts at the time of contract formation. There are two types:

1. Mutual mistakes occur when both parties have the same mistaken belief. These may allow a party to avoid performance if:

   • The mistake concerns a basic assumption of the contract
   • It materially affects the agreed exchange
   • The affected party doesn't bear the risk of the mistake

2. Unilateral mistakes happen when only one party is mistaken. These rarely excuse performance unless the mistake would cause unconscionability or the other party knew about or caused the mistake.

Parties bear the risk of a mistake when:

• The contract allocates that risk to them
• A court determines it's reasonable for them to bear it
• They're "consciously ignorant" (aware of limited knowledge but proceeding anyway)

Changed Circumstances and Delivery of Goods

Sometimes events make contract performance impossible or extremely difficult. Three doctrines may excuse performance in these cases:

1. Impossibility applies when performance truly cannot be done by anyone due to:

   • Death or incapacity of a necessary person
   • Destruction of necessary items
   • Legal prohibitions

2. Impracticability applies when performance would cause extreme difficulty, expense, or loss.

3. Frustration of purpose applies when the main reason for entering the contract has been substantially frustrated, making the other party's performance virtually worthless.

For all three doctrines, the changed circumstance must have been a basic assumption of the contract, not foreseeable, and not the party's fault.

When contracts involve goods, the perfect tender rule applies to deliveries. If goods don't exactly conform to the contract, the buyer has three options:

1. Reject the entire delivery (must notify seller promptly and hold goods with reasonable care)
2. Accept the entire delivery (can't reject later but may revoke acceptance under certain conditions)
3. Accept some units and reject others (for commercial units that can be separated)

Real-world example: If you ordered 10 identical chairs and 3 arrived damaged, you could accept the 7 good ones and reject the damaged ones.

A buyer accepts goods by:

• Indicating acceptance to the seller
• Failing to reject within a reasonable time
• Acting inconsistently with the seller's ownership (like using or reselling the goods)

Once goods are accepted, a buyer can only revoke acceptance if:

• The nonconformity substantially impairs the goods' value
• The buyer reasonably assumed the seller would fix the problem but they didn't
• The buyer couldn't detect the problem before acceptance or the seller provided assurances

Third Parties and Performance Issues

Contracts can sometimes involve people who weren't original parties to the agreement. A third party may:

1. Receive benefits as a beneficiary - There are two types:

   • Intended beneficiaries can sue to enforce the contract (they were specifically meant to benefit)
   • Incidental beneficiaries cannot sue (they benefit only by chance)

2. Be assigned rights from an existing contract - Rights can be transferred unless:

   • The assignment materially changes the other party's duty
   • It materially impairs the return performance
   • The law or contract forbids assignment

3. Be delegated duties to perform - Duties can be transferred unless:

   • The other party has a substantial interest in having the original party perform
   • The law or contract forbids delegation
   • Importantly, delegation doesn't release the original party from liability

When contracts are breached, courts can award different types of damages (monetary compensation):

• Liquidated damages - Set by the parties in the contract
• Nominal damages - Token amount when no actual loss occurred or can't be proven
• Expectation damages - Places the injured party where they would have been if the contract had been performed
• Reliance damages - Places the injured party where they would have been if the contract had never been made

Test tip: Damages are limited by three important principles: avoidability (injured parties must try to minimize their losses), foreseeability (losses must be reasonably anticipated), and certainty (damages must be established with reasonable certainty).

Restitution is another remedy that prevents unjust enrichment by requiring the return of benefits conferred. It can be awarded as:

• Money equal to the reasonable value of performance or the other party's enrichment
• Specific restitution (returning the actual item)

Even without a formal contract, courts may imply a quasi-contract to prevent unjust enrichment when one party has benefited another in good faith.

Remedies and Contract Enforcement

When damages aren't enough to make things right, courts may order specific performance - requiring the breaching party to fulfill their contractual obligations. This remedy is typically used when:

1. Money damages would be inadequate (often with unique items like land or art)
2. The contract terms are definite enough to enforce
3. The order wouldn't be too difficult for courts to supervise

Personal service contracts (like hiring a singer or actor) generally can't be specifically enforced - courts won't force people to work for others.

An injunction is another non-monetary remedy that:

• Directly enforces a duty not to do something
• Indirectly enforces performance by preventing inconsistent actions

When calculating expectation damages (the most common type), courts consider:

1. The value lost from the breaching party's non-performance
2. Any incidental or consequential losses suffered
3. Any costs the injured party avoided by not having to fully perform

If lost profits can't be proven, courts may award reliance damages instead, compensating for expenditures made in reliance on the contract.

Important concept: Restitution can sometimes be awarded even without a valid contract. If one person confers a benefit on another in good faith, courts may imply a "quasi-contract" to prevent unjust enrichment.

All remedies have limitations. For damages, courts consider:

• Avoidability - Did the injured party reasonably try to minimize their losses?
• Foreseeability - Could the breaching party have reasonably anticipated these damages?
• Certainty - Can the damages be established with reasonable certainty?

For specific performance, courts ensure:

• Monetary damages would truly be inadequate
• Contract terms are definite enough to enforce
• The order wouldn't be disproportionately burdensome to supervise

Final Contract Enforcement Considerations

When deciding whether to order specific performance or an injunction, courts carefully weigh the burden of enforcement. The remedy must not create disproportionate challenges for the court to monitor and enforce.

Courts generally prefer to award damages when possible, as they're simpler to administer. Specific performance is typically reserved for truly unique situations where monetary compensation can't adequately address the harm.

Even when specific performance is appropriate, courts have discretion in crafting the remedy to ensure justice while minimizing enforcement difficulties. The ultimate goal is to put the injured party in the position they would have been in had the contract been performed, without creating undue hardship on either party or the court system.

Final takeaway: When analyzing contract disputes, always consider what remedy would be most appropriate. Different situations call for different solutions, and understanding the full range of available remedies is essential for mastering contract law.