United States Law/Contract

Contracts are promises that the law will enforce by providing remedies when performance is breached. Generally, an enforceable contract is formed by the mutual assent of the parties to exchange consideration, which means that each party agrees to undertake some legal detriment at the inducement of the other, with the ultimate goal of moving goods or services to the party that values them the most. A "legal detriment" is simply the relinquishment of some legal right, which may be something so simple as the right to spend one's money on something else. It may also mean that the party undertaking the detriment forbears from doing something he or she could otherwise rightly do.

Sources of Law

Uniform Commercial Code (UCC)

The Uniform Commercial Code (UCC) is a collection of laws promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) with the intent that states adopt these codes or modify them for their state then use them to foster and encourage goods transactions. In some variation, all 50 U.S. States have adopted the UCC. The UCC is divided into nine articles, of which UCC Article 2 governs the sales of goods. As such, contracts involving the sale of goods are generally governed by UCC Article 2 and not by common law.

The Restatement (Second) of Contracts

The Restatement (Second) of Law of Contracts is a legal treatise from the second series of the Restatements of Law. It summarizes general, legal theories based on the general principles of contracts as they are treated in common law. What is stated within the Restatement is not binding law; rather, it is persuasive authority. Generally, it is used by law school students in contract-law courses to learn the basics of contract formation and defenses to contract breaches.

Choice of Law

In the United States, there are two bodies of law that govern contracts: codified law and common law. Generally, contracts for the sale of goods are governed by the UCC (codified law) while all other contracts (e.g. contracts for services, land use, or land sale) are governed by the common law.

Goods Defined

Under the UCC, "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 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." UCC 2-105(1). "Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are 'future' goods." UCC 2-105(2).

Predominant Factor Test

If the subject matter of the contract is mixed, including both goods and non-goods, such as services, the court will apply the predominant factor, or "Bonebrake," test in order to determine which laws apply. In order to determine the body of law that governs the contract, the court will look to the predominant objective of the buyer. If the buyer is predominantly seeking to acquire goods and the non-goods are merely incidental to that objective, then the court will apply the Uniform Commercial Code. If the buyer is predominantly seeking to acquire non-goods and the goods are merely incidental to that objective, then the court will apply the common law.

Merchants Defined

"'Merchant' means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill." UCC 2-104. Thus, the UCC defines merchants as ones who deal in goods of the kind involved in the transaction as either a buyer or seller; as ones who, by occupation, hold themselves out as having special knowledge or skills particular to the goods or practices involved in the transaction; or ones who employ someone, such as a broker or other intermediary, to do so.

If the contract is governed by the UCC, there are situations where the rules for merchants differ from the rules for non-merchants. Thus, it is important to determine whether the parties to the contract are merchants. See "Battle of the Forms" under UCC 2-207 (stating that where parties are merchants, an added term by one party without acceptance from the other may become part of their contract and thereby be enforceable).

Mutual Assent

Mutual assent is most easily demonstrated by the ritual of offer and acceptance, but may also be established by the prior course of dealing between the parties to the contract.

Offer

An offer is a manifestation of willingness, by word or by conduct, to enter into a bargain. It must be made in such a way as to justify its recipient in the reasonable belief that assent to the terms of the offer is invited and that assent will form a legally enforceable contract. The party that makes the offer is the "offeror" while the recipient of the offer is the "offeree."

The offeror need not intend for his or her words or conduct to manifest a willingness to enter a bargain; if a reasonable person in the position of the offeree would recognize the words or conduct of the offeror as an offer, then a valid offer exists.

Requirements of a Valid Offer

An offer must be sufficiently certain to enable a court to determine a breach and provide a remedy. Generally, an offer must identify the parties to the contract and name the substance of the consideration. Where other terms are left out, the court may look to the totality of the circumstances to determine the intent of the parties regarding those terms. For instance, an offer may not name a specific time for performance, but if a dispute arises the court may look to the facts of the situation in order to determine a reasonable time for performance.

Termination of an Offer

An offer creates in the offeree a power of acceptance that may be terminated by a variety of acts or events. However, so long as the power of acceptance persists, the offeree may manifest his or her assent to the terms of the offer and complete the formation of an enforceable contract.

Expiration of Time

An offer persists only for the time stated, or for a reasonable time, if no time is stated. A reasonable time is determined by the circumstances. Generally, in negotiations face-to-face or by telephone or other immediate forms of communication the offer is terminated when the parties discontinue negotiations. Where the parties negotiate by methods that are not immediate, the offer will probably persist for a longer time.

Where contracts involve the purchase or sale of commodities, securities, or goods that fluctuate rapidly in price, a reasonable time is normally very short, particularly when the contemplated transaction involves a fixed price.

Revocation

At any time prior to acceptance by the offeree, the offeror may revoke the offer, thus terminating the power of acceptance. Revocation may be direct or indirect. A direct revocation is a communication that is a manifestation of unwillingness to enter the proposed bargain. An indirect revocation occurs where the offeror takes some definite action that is inconsistent with the offer remaining open and the offeree learns of this by a reliable source. However, an offeror would not be wise to rely on indirect revocation; a direct revocation is much more certain.

Rejection

An unequivocal rejection by the offeree of the terms of the offer will terminate the power of acceptance. Under irrevocable offers, or option contracts, a rejection will not terminate the power of acceptance unless reasonably relied on by the offerer in good faith, and then only to the extent to avoid injustice.

Counteroffer

A counteroffer is a communication by the offeree that proposes to add, subtract, or modify the terms of the offer. Thus, it is functionally equivalent to a rejection of the original offer and the creation of a new offer, which creates a new power of acceptance in the party that had been the offeror.

An offeree need not intend for his or her communication to be a counteroffer; a communication by the offeree that purports to be an acceptance but adds, subtracts, or modifies the terms of the offer is a counteroffer.

When a counteroffer consists of changes to the terms of the original offer (rather than a proposal of completely new terms), this is also known as a conditional acceptance.

Death or Incapacity

The death or incapacity of the offeror terminates the power of acceptance.

Acceptance

An acceptance of an offer is an overt manifestation of assent to the terms in a way invited or required by the offeror

Option Contracts

In order to avoid the termination of an offer by a lapse of time, an offer may be held open by an option contract, which is a new contract between the parties to the underlying contract. There are several ways to create an option contract.

Option by Consideration

The simplest way to create an option is by paying consideration. That is, the offeree pays something to the offeror in exchange for the offeror's relinquishment of the power to revoke the offer. Thus, each party incurs a legal detriment.

The consideration need not be large and in a minority of jurisdictions an option may be created by nothing more than a signed writing that recites a purported consideration.

Equitable Option

Where an offer invites acceptance by performance and the offeree begins to perform, the offeror must then allow the offeree a reasonable time to complete performance before revoking the offer, thus creating an option contract. This protects the offeree from providing a partial performance of his or her duties under the contract without receiving compensation.

Option by Promissory Estoppel

Where an offeror makes an offer that he or she intends or reasonably foresees will induce action or forbearance of a substantial character on the part of the offeree and the offeree acts or forbears to his or her own detriment, the offer will remain open to the extent required to prevent injustice.

Firm Offers under the UCC

Under the Uniform Commercial Code section 2-205, where a merchant makes an offer in a signed writing that states it shall remain open, the offer shall remain open for the stated time, or for a reasonable time, in neither case to exceed three months.

Acceptance

Acceptance of an offer is the manifestation of assent to the terms thereof, made by the offeree in a manner invited or required by the offer. Generally, a person only has the power of acceptance when the offer has been addressed to him or when he is a member of the class to which the offer has been directed. An offeree's power of acceptance is not assignable, except where the offeree has paid consideration to keep the offer open.

The offeree must know of the offer in order to accept it. For instance, if A and B simultaneously send the other an offer pertaining to the same matter with the same terms, no contract is formed until either A or B accepts the other's offer.

Mailbox Rules

Communications of acceptance are effective upon dispatch. All other communications (rejections, revocations, counteroffers, etc.) are effective upon receipt.

A communication has been received when it comes into the possession of the person to whom it is addressed, or into the possession of an authorized agent of the person to whom it is addressed, or when it is deposited in a place that has been authorized for such communications by the person to whom it is addressed.

If an acceptance is lost or delayed, then no contract is formed.

If an acceptance is first sent by a slow method but a rejection is then sent by a quick method, a contract is still formed because the acceptance was effective upon dispatch.

If two parties send each other offers and then one of them decides to revoke its own offer before the other one accepts, there is no contract.

Consideration

Consideration is comprised of two elements:

1. Each party must incur a legal detriment by promise or performance.
2. The detriment incurred by each party must induce the promise or performance of the other.

This has been called reciprocal mutual inducement, or "reciprocal conventional inducement" (Oliver Wendell Holmes, Jr.).

Legal Detriment

A party incurs a legal detriment by doing or promising to do something he or she is not legally required to do, or refraining or promising to refrain from doing something he or she has a legal right to do.

Remedies (or Damages)

Expectancy

Puts the parties in the place they would be if the contract had been fully performed. For example, if a man agrees to sell a teenager a $5000 rock for $5 bird then decides not to, he would owe the teenager $4995 ($5000 - $5) in expectation damages.

Reliance

Puts the parties in the place they were before the contract had ever existed. For example, if a man agrees with a boy to trade a hat for an apple and the boy spends $5 to buy the apple, but the man later decides not to trade, the man would owe the boy $5 in reliance damages.

Restitution

The party who was unjustly enriched must pay the other party the amount he was unjustly enriched. For example, if a doctor performs an emergency procedure on an unconscious dying victim, the victim is liable for the medical fees for restitution damages.