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Chapter 10

Nature and ClassificationINTRODUCTION

This chapter introduces the topic of contracts by defining a number of terms, giving an overview of the topic, and looking at the judicial interpretation of contracts. At this point in a discussion of contracts, it may be advisable to point out that learning the definitions of offer, acceptance, valid, voidable, and the other terms in this chapter are only a starting point. Memorizing theses definitions will not provide a complete understanding of the concepts.

Contract law shows what promises or commitments our society believes should be legally binding. It shows what excuses our society will accept for the breaking of promises. And it shows what kinds of promises will be considered to be against public policy and therefore legally void. The use of contract principles to govern the relationships of those who make promises to one another dates back thousands of years. Early in history the importance of contracts was recognized and given legal effect. Modern capitalist society could not exist without the law of contracts. The foundation for most commercial activity is the contract. We could not order our daily activities without contracts. The chapters in the contracts unit explain how contracts are formed, how they are discharged, and what happens when they are not performed.

CHAPTER OUTLINE

I. An Overview of Contract LawA. SOURCES OF CONTRACT LAW

• Contract law is common law. The common law governs all contracts except when statutory law or administrative agency regulations have been modified or replaced it.

• Statutory law—particularly the Uniform Commercial Code (UCC)—governs all contracts for the sale of goods. It should be stressed that it is essential to know when the UCC applies.

B. THE FUNCTION OF CONTRACTSContract law ensures compliance with a promise or to entitle a nonbreaching party to relief when a contract is breached. All contractual relationships involve promises, but all promises do not establish contractual relationships. Most contractual promises are kept; keeping a promise is generally in the mutual self-interest of the promisor and the promisee.

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2 UNIT TWO: CONTRACTS AND E-CONTRACTS

C. DEFINITION OF A CONTRACT

• A contract is a promise for the breach of which the law gives a remedy or the performance of which the law recognizes as a duty (in other words, an agreement that can be enforced in court). A contract may be formed when two or more parties each promise to perform or to refrain from performing some act now or in the future.

• A party who does not fulfill his or her promise may be subject to sanctions, including damages or, under some circumstances, being required to perform the promise.

D. THE OBJECTIVE THEORY OF CONTRACTSThe intent to enter into a contract is important in the formation of a contract. The objective theory of contracts determines intent.

Under this theory, a party’s intention to enter into a contract is judged by outward, objective facts as a reasonable person would interpret them, rather than by the party’s own secret, subjective intentions. Objective facts include—

• What the party said.• How the party acted or appeared.• The circumstances surrounding the transaction.

Any purpose may provide the motivation for performing a contract.

CASE SYNOPSIS—

Case 10.1: Pan Handle Realty, LLC v. Olins

Pan Handle Realty, LLC, and Robert Olins signed a one-year lease for a new luxury home. The day before Olins was to move in, however, he reneged. Pan Handle was unable to secure a new tenant for the term of the lease, and filed a suit in a Connecticut state court against Olins. The court ruled in Pan Handle’s favor. Olins appealed.

A state intermediate appellate court affirmed. “There is no evidence in the record to support the defendant's contention that he did not intend to be bound by the lease when he signed it * * * . The defendant's apparent unilateral change of heart regarding the lease agreement does not negate the parties' prior meeting of the minds that occurred at the time the lease was executed. There is ample evidence in the record evincing the intent of the parties to be bound by the lease when they signed it.”

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Notes and Questions

The defendant never moved into the house. Why then did the court find that he breached the lease? Under the lease, Pan (the plaintiff) was obligated to make modifications to the premises—specifically, for example, by removing the furnishings—and Olins (the defendant) had other obligations— paying a certain amount of rent, for example. Pan met its obligations, but Olins did not. The defendant issued a stop payment order on his rental check and told Pan simply that he “is unable to pursue any further interest in the property.” Pan made substantial efforts, including spending $80,000 to “restage” the property, but was not able to find a


CHAPTER 10: NATURE AND CLASSIFICATION 3

new tenant. In Pan’s suit against Olins, the court found that the plaintiff proved the parties had entered into an enforceable lease agreement, the defendant had breached that agreement, and the breach had caused the plaintiff damages in lost rent and utility bills for the period of the lease.

On finding that the defendant breached the lease, what did the court impose as a sanction? How was this determined? On finding that the defendant (Olins) breached the lease, the court awarded the plaintiff (Pan) “compensatory damages in the amount of $146,000–$138,000 in unpaid rent for the term of the lease and $8,000 in utility fees incurred by the plaintiff during the lease period—plus interest, and attorney's fees.” On Olins’s (the defendant’s) appeal, a state intermediate appellate court affirmed the lower court’s judgment and award. The appellate court set out the standard for this award, stating, “As in any other contract action the measure of damages is that the award should place the injured party in the same position as he would have been in had the contract been fully performed.” Thus, “the unpaid rent * * * may be used by the court in computing the losses suffered by the plaintiff by reason of the defendant's breach.”

Did the measure of damages assessed in this case place Pan in the same position that it would have been in if the lease had been fully performed? Yes, the measure of damages imposed on Olins (the defendant) in this case placed Pan (the plaintiff) in the same position that it would have been in if the lease had been fully performed. And that is the standard measure of compensatory damages. On finding that the defendant breached the lease, the court awarded the plaintiff “compensatory damages in the amount of $146,000–$138,000 in unpaid rent for the term of the lease and $8,000 in utility fees incurred by the plaintiff during the lease period—plus interest, and attorney's fees.” On the defendant’s appeal, a state intermediate appellate court affirmed the lower court’s judgment and award.

Before the lease period began, Pan spent funds to meet its obligations under the parties’ contract. But this was not compensable as damages because the lease required Pan to undertake these duties and they were accomplished before the defendant’s breach. Later, in an attempt to reduce the amount of the damages, Pan spent additional funds in an unsuccessful effort to find a new tenant. Neither court included these funds in the measure of damages.

II. Elements of a ContractA. REQUIREMENTS OF A VALID CONTRACT

The four essential elements of a contract are—

• Agreement.• Consideration.• Contractual capacity.• Legality.

B. DEFENSES TO THE ENFORCEABILITY OF A CONTRACTDefenses to the formation or enforcement of a contract include —

• Voluntary consent.• Form.

III. Types of ContractsEach category represents a distinction regarding contract formation, performance, or enforceability.



SPECIAL EXHIBIT—

Types of Contracts

The following illustration summarizes the types of contracts discussed in the text.


BILATERALA promise for a promise

UNILATERALA promise for an act

EXPRESSFormed by words

IMPLIED IN FACTFormed at least in part by the

parties’ conduct

QUASI CONTRACTImposed by law to prevent

unjust enrichment

FORMALRequires a special form for

creation

INFORMALRequires no special form for

creation

EXECUTEDA fully performed contract

EXECUTORYA contract not yet fully

performed

VALIDA contract that has the necessary elements

VOIDNo contract, or a contract without legal obligation

VOIDABLEA contract that a party has the option of avoiding or enforcing

UNENFORCEABLEA valid contract that cannot be

enforced because of a legal defense


A. CONTRACT FORMATION

These contracts are based on how and when a contract is formed.

1. Bilateral v. Unilateral ContractsEvery contract involves at least two parties: an offeror and an offeree. The offeror promises to do or not to do something. Whether a contract is unilateral or bilateral depends on what the offeree must do to accept.

a. Bilateral ContractsA bilateral contract is a promise for a promise; if the offeree need only promise to perform, the contract is bilateral.

b. Unilateral ContractsA unilateral contract is a promise for an act; if an offeree can accept only by complete performance, a contract is unilateral.

c. Revocation of Offers for Unilateral ContractsA unilateral contract’s offer becomes irrevocable once substantial performance is completed.

2. Formal v. Informal Contracts

• Formal contracts require a special form or method of formation to be enforceable. Formal contracts include negotiable instruments, which include checks, drafts, promissory notes, and certificates of deposit.

• All other contracts are informal contracts, or simple contracts. For these, no special form is re-quired (except for certain types of contracts that must be in writing).

3. Express v. Implied Contracts

• An express contract is one in which the terms are expressed in words, oral or written.

• A contract that is implied from the conduct of the parties is an implied-in-fact contract, or simply an implied contract. The parties’ conduct reveals that they intended to form a contract and creates and defines its terms.

a. Requirements for Implied ContractsTo establish an implied-in-fact contract—

• The plaintiff must have furnished some service or property.• The plaintiff must have expected to be paid and the defendant knew or should have

known that payment was expected.• The defendant had a chance to reject the service or property and did not.

b. Mixed Contracts with Express and Implied TermsA contract may contain some express terms, while others are implied. Implied terms include a covenant of good faith and fair dealing.



CASE SYNOPSIS—

Case 10.2: Vukanovich v. Kine

Mark Vukanovich and Larry Kine agreed under a “Letter of Understanding” to buy a certain parcel of real property in Eugene, Oregon, from Umpqua Bank. The bank accepted their offer, but their joint endeavor fell apart. Each sought to buy the property separately. The bank accepted Kine’s offer. Vukanovich filed a suit in an Oregon state court against Kine, alleging breach of an express contract and of the implied covenant of good faith and fair dealing. The jury returned a verdict in favor of Vukanovich, but the court entered a judgment in favor of Kine. Vukanovich appealed.

A state intermediate appellate court reinstated the jury verdict. Kine “breached both the express terms of the parties' ‘Letter of Understanding’ and the implied covenant of good faith and fair dealing.” After the bank accepted their offer, Kine refused to close—lying about why—and repudiated the agreement with Vukanovich. Kine used confidential information provided by Vukanovich to submit a separate bid. But for Kine’s breach, Vukanovich would have been part owner of the property.

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Notes and Questions

In recognizing an implied covenant of good faith and fair dealing, does contract law try to correct for unethical behavior? Imposing sanctions for a breach of an implied covenant of good faith and fair dealing often helps to correct for unethical behavior. Unlike specific express terms and other implied terms, the covenant of good faith and fair dealing underlies every contract. This covenant is based on principles of justice, equity, and, in some ways, ethics. Recognizing and enforcing the covenant can prevent unjust enrichment, which occurs when a party enjoys a benefit it does not deserve. In enforcing the covenant or awarding relief for its breach, a court can correct for a contracting party’s unethical behavior.

ENHANCING YOUR LECTURE—

AVOIDING UNINTENDED EMPLOYMENT CONTRACTSEmployers have learned many lessons from court decisions. In recent years, for example, the message

has been clear that employers should be cautious about what they say in their employment manuals.

EMPLOYMENT MANUALS AND IMPLIED-IN-FACT CONTRACTS

Promises made in an employment manual may create an implied-in-fact employment contract. If an employment handbook states that employees will be fired only for specific causes, the employer may be held to that “promise.” Even if, by state law, employment is “at will”—that is, the employer is allowed to hire and fire employees at will, with or without cause—the at-will doctrine will not apply if the terms of employment are subject to a contract between the employer and the employee. If a court holds that an implied employment contract exists—on the basis of promises made in an employment manual—the employment is no longer at will. The employer will be bound by the contract and liable for damages for breaching the contract.



TAKING PRECAUTIONS

Employers who wish to avoid potential liability for breaching unintended employment contracts should therefore make it clear to employees that the policies expressed in an employment manual are not to be interpreted as contractual promises. An effective way to do this is to inform employees, when initially giving them the handbook or discussing its contents with them, that the handbook is not intended as a contract and to include a disclaimer to that effect in the employment manual. The disclaimer might read as follows: “This policy manual describes the basic personnel policies and practices of our Company. You should understand that the manual does not modify our Company’s ‘at will’ employment doctrine or provide employees with any kind of contractual rights.”

The employer should make the disclaimer clear and prominent so that the applicant cannot later claim that it was the employer’s fault that the employee did not see the disclaimer. A disclaimer will be clear and prominent if it is set off from the surrounding text by the use of larger type, a different color, all capital letters, or some other device that calls the reader’s attention to it.

In the handbook, the employer should also avoid making definite promises that employees will be fired only for cause, that they will not be fired after they have worked for a certain length of time except for certain reasons, or the like. The handbook itself should include a clear and prominent disclaimer of contractual liability for its contents.

CHECKLIST FOR THE EMPLOYER

1. Inform new employees that statements in an employment handbook are not intended as contractual terms.

2. Include a clear and prominent disclaimer to this effect in employment applications.

3. Avoid including in the handbook any definite promises relating to job security, and include a clear and prominent disclaimer of contractual liability for any statements made within the handbook.

B. CONTRACT PERFORMANCEA contract that has been performed is an executed contract. A contract that has not been performed is an executory contract. If one party has fully performed but the other has not, the contract is executed on the one side and executory on the other, and it is classified as executory.

C. CONTRACT ENFORCEABILITYA valid contract results when all of the elements necessary to contract formation exist—when the parties agree, through an offer and an acceptance, to form a contract; the contract is supported by consideration; the contract is for a legal purpose; and the parties had legal capacity to contract.

1. Voidable ContractsA voidable contract is a valid contract in which one or both of the parties have the option of avoiding his or her legal obligations. If the contract is avoided, both parties are released. If it is ratified, both parties must perform.

2. Unenforceable ContractsAn unenforceable contract is a valid contract that cannot be enforced due to certain defenses. For example, a valid contract barred by a statute of limitations is an unenforceable contract.



3. Void ContractsA contract that is void is no contract. A void contract gives rise to no legal obligation on the part of any party. An illegal contract is, for example, a void contract.

IV. Quasi ContractsA quasi contract is not based on an express promise to pay for a benefit received or on conduct implying such a promise. Quasi contracts, or contracts implied in law, are imposed by courts to avoid unjust enrichment—the theory that individuals should not be allowed to profit or enrich themselves inequitably at the expense of others. The plaintiff recovers in quantum meruit.

A. LIMITATIONS ON QUASI-CONTRACTUAL RECOVERYThere are situations in which the recipient of a benefit is not liable. People cannot normally be forced to pay for benefits thrust on them, for example.

B. WHEN AN ACTUAL CONTRACT EXISTSA quasi contract will not normally be imposed when there is a contract that covers the matter.

V. Interpretation of ContractsThe most important principle to keep in mind in considering these rules is that the law attempts not just to enforce a contract but to enforce the contract the parties made.

A. PLAIN-LANGUAGE LAWS

• The federal government and most of the states regulate legal writing through plain-language laws. These laws cover a variety of consumer agreements, including residential leases, as well as federal and state government forms and other legal documents.

• If a party to a contract violates a plain-language statute, the contract may be void—unless the party made a good faith effort to comply with the statute. Some states allow proposed contracts to be submitted to the state attorney general, whose approval eliminates any liability.

B. THE PLAIN MEANING RULEWhen a contract is in writing that is not subject to conflicting meanings, a court will enforce the writing according to its plain meaning. The meaning of the words must be determined from the face of the instrument—a court cannot consider evidence extrinsic evidence.

1. AmbiguityA contract is ambiguous when—

• The intent of the parties cannot be determined from the language.• The contract lacks a provision on a disputed issue.• A term is susceptible to more than one interpretation.• There is uncertainty about a provision.

2. Extrinsic EvidenceIf a contract is ambiguous, a court may interpret it against the party who drafted it or the court may consider extrinsic evidence—the testimony of the parties, additional agreements or communications, or other information relevant to determining the parties’ intent.



CASE SYNOPSIS—

Case 10.3: Wagner v. Columbia Pictures Industries, Inc.

Robert Wagner entered into an agreement with Spelling-Goldberg Productions (SGP) over the rights to “Charlie's Angels.” The contract entitled Wagner to 50 percent of the net profits that SGP received “for the right to exhibit photoplays of the series and from the exploitation of all ancillary, music and subsidiary rights.” SGP hired Ivan Goff and Ben Roberts to write the episodes of the “Charlie’s Angels” television series under a contract that gave the writers the right to make and market films based on the material. In 1995, Columbia bought the movie rights to the material from the writers’ heirs. In 2000 and 2003, Columbia produced and distributed two “Charlie's Angels” films. Wagner filed a suit in a California state court against Columbia, claiming a share of the profits from the films. The court issued a summary judgment in Columbia's favor. Wagner appealed.

A state intermediate appellate court affirmed. The contract “unambiguously” stated the conditions under which the parties were to share the films’ profits, and those conditions had not occurred. An “agreement is the writing itself.” Extrinsic evidence is not admissible “to show intention independent of an unambiguous written instrument.” In this case, even if the parties intended Wagner to share in the profits from all sources, “they did not say so in their contract.” Under the contract, Wagner was entitled to share in the profits from the exercise of the movie rights to “Charlie's Angels” if those rights were exploited as “ancillary” or “subsidiary” to the primary “right to exhibit photoplays of the series” but not if those rights were acquired separately. Columbia obtained those rights separately.

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Notes and Questions

This case can be used a springboard to explain the parol evidence rule, which is discussed more fully in a later chapter. Under this rule, parol evidence of the negotiations underlying a contract is admissible to explain, but not to contradict, the meaning of its terms. Did Wagner’s offered evidence of the “Love Song” agreement explain or contradict the “Charlie’s Angels” contract? The court concluded, “The problem with Wagner's extrinsic evidence is that it does not explain the contract language, it contradicts it. Under the parol evidence rule, extrinsic evidence is not admissible to contradict express terms in a written contract. . . . Thus, as Justice Holmes explained, parol evidence is not admissible to show that when the parties ‘said five hundred feet they agreed it should mean one hundred inches, or that Bunker Hill Monument should signify the Old South Church [Goode v. Riley, 153 Mass. 585, 28 N.E. 228 (1891)].’ ”

Under what circumstances might SGP have held the movie rights to “Charlie’s Angels” as “subsidiary” to its primary “right to exhibit photoplays of the series”? The court explained that “if SGP held the motion picture rights to ‘Charlie's Angels’ from the beginning or if it acquired them by exercising its [five-year] right . . . as producer to purchase the rights from Goff and Roberts, then it could be said to have acquired those rights by exploiting its right to exhibit photoplays of the series and [Wagner] would be entitled to a share of the profits. But if SGP . . . purchased the motion picture rights to ‘Charlie's Angels’ on the open market, independent of any right it had as producer of the TV series, then it could not be said to have acquired those rights by exploiting its right to exhibit photoplays of the series and [Wagner] would not be entitled to a share of the net profits.” With the substitution of Columbia for SGP, the latter is what occurred in this case.



Under what circumstance would the Wagners have been entitled to a share of the profits from the Charlie’s Angels movies even though the evidence of the Love Song contract was irrelevant? The court explained that “if SGP held the motion picture rights to ‘Charlie's Angels’ from the beginning or if it acquired them by exercising its [five-year] right . . . as producer to purchase the rights from Goff and Roberts, then it could be said to have acquired those rights by exploiting its right to exhibit photoplays of the series,” which was the “unambiguous” meaning of the SGP contract with the Wagners. In that circumstance, the Wagners would have been entitled to a share of the profits from the movies.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

The Plain Meaning RuleCases applying the plain meaning rule include the following.

• The Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., __ F.3d __ (5th Cir. 2010) (the owner of a mobile offshore drilling rig that was damaged by fire while berthed at the shipyard owned by a contractor that was performing welding on the vessel “controlled” the vessel, and thus under the parties' contract was required to indemnify the contractor against the loss).

• Dominic Wenzell, D.M.D. P.C. v. Ingrim, 228 P.3d 103 (Alaska 2010) (a covenant not to compete contained in a purchase agreement for a private dental clinic was intended to prevent only competition with the clinic by the seller, for a certain period of time within a certain distance, not to prevent all practice of dentistry).

• Smith v. West Suburban Medical Center, 397 Ill.App.3d 995, 922 N.E.2d 549 (1 Dist. 2010) (an agreement, which provided that a college agreed to indemnify a medical center against claims arising out of the activities of the college's students in a clinical training program, required the college to indemnify the medical center concerning a patient's negligence claim, which arose from injuries allegedly sustained when she fell off a stool after being escorted to an x-ray room by a student).

• Belager-Price v. Lingle, 28 So.3d 706 (Miss.App. 2010) (language in residential subdivision’s covenants that the “subject property can be used to build and construct only one single-family residence and appurtenances thereto” was not ambiguous as to its purpose, but clearly notified the property owner that the lot was to be used for residential purposes).

C. OTHER RULES OF INTERPRETATIONWhen the writing is unclear, a court will interpret the language to give effect to the parties’ in tent as expressed in their contract. A court will not make or remake a contract nor in terpret the language according to what the parties claim their intent was when they made it.

1. Rules the Courts UseIn interpreting the terms, the following rules apply. If the terms are still susceptible to more than one meaning, a court will consider extrinsic evidence.



• A reasonable, lawful, and effective meaning will be given to all of a contract’s terms.

• A contract will be interpreted as a whole; individual clauses will be considered subordinate to the contract’s general intent. All writings that are part of the same transaction will be interpreted together.

• Terms that were negotiated separately will be given greater consideration than standardized terms and terms that were not negotiated separately.

• A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the parties clearly intended something else.

• Specific and exact wording will be given greater consideration than general language.

• Written or typewritten terms prevail over printed ones.

• When the language used has more than one meaning, it will be interpreted against the party who drafted the contract.

• When evidence of trade usage, prior dealings between the parties, and previous course of performance under the contract is admitted, what each of the parties does in pursuance of the contract will be interpreted as consistent with what the other does and with any relevant usage of trade and course of dealing and performance.

2. Express Terms Usually Given the Most Weight

• Express terms are given the greatest weight, followed by course of performance, course of dealing, and usage of trade, in that order.

• When considering custom and usage, a court will look at the customs and usage of trade of the particular business and the locale where the contract was made or is to be performed.

ADDITIONAL BACKGROUND—

Contract Interpretation

The terms of an agreement or promise generally define the obligation. When the parties to a contract have adopted a writing as the final expression of all or part of their agreement, interpretation focuses on the writing. In the Restatement (Second) of Contracts, Sections 201, 202, 203, and 206, general rules are provided concerning the determination or effect that the meaning of the promise or agreement may have on the scope of contractual obligations. The following is the text of those sections with Comments.

§ 201. Whose Meaning Prevails

(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made



(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

Comment:

a. The meaning of words. Words are used as conventional symbols of mental states, with standard ized meanings based on habitual or customary practice. Unless a different intention is shown, language is interpreted in accordance with its generally prevailing meaning. See § 202(3). Usages of varying degrees of generality are recorded in dictionaries, but there are substantial differences between English and American usages and between usages in different parts of the United States. Differences of usage also exist in various localities and in different social, economic, religious and ethnic groups. All these usages change over time, and persons engaged in transactions with each other often develop temporary usages peculiar to themselves. Moreover, most words are commonly used in more than one sense.

b. The problem of context. Uncertainties in the meaning of words are ordinarily greatly reduced by the context in which they are used. The same is true of other conventional symbols, and the meaning of conduct not used as a conventional symbol is even more dependent on its setting. But the context of words and other conduct is seldom exactly the same for two different people, since connotations depend on the entire past experience and the attitudes and expectations of the person whose understanding is in question. In general, the context relevant to interpretation of a bargain is the context common to both parties. More precisely, the question of meaning in cases of misunderstanding depends on an inquiry into what each party knew or had reason to know, as stated in Subsections (2) and (3). See § 20 and Illustrations. Ordinarily a party has reason to know of meanings in general usage.

c. Mutual understanding. Subsection (1) makes it clear that the primary search is for a common meaning of the parties, not a meaning imposed on them by the law. To the extent that a mutual un derstanding is displaced by government regulation, the resulting obligation does not rest on “interpretation” in the sense used here. The objective of interpretation in the general law of contracts is to carry out the understanding of the parties rather than to impose obligations on them contrary to their understanding: “the courts do not make a contract for the parties.” Ordinarily, therefore, the mutual understanding of the parties prevails even where the contractual term has been defined differently by statute or administrative regulation. But parties who used a standardized term in an unusual sense obviously run the risk that their agreement will be misinterpreted in litigation.

Illustrations:

1. A and B agree that A will sell goods to B “f.o.b.” the place of destination. Prior correspondence shows that the price has been adjusted on the assumption that B’s insurance policies will cover the goods dur ing shipment. Notwithstanding the normal meaning of the “f.o.b.” term declared in Uniform Commercial Code § 2-319, it may be found that the parties have “otherwise agreed” under that section and that B bears the risk in transit.

2. A signs a negotiable promissory note payable to B’s order, and C signs his name on the back without more. Under Uniform Commercial Code § 3-402, C’s signature is an indorsement, and evidence of a contrary



understanding is not admissible except for the purpose of reformation of the instrument. This conclusion does not rest on interpretation of the writing.

3. A agrees to sell beer to B at a specified price per barrel. At the time of the agreement both parties and others in their trade use as standard barrels wooden barrels which originally hold 31 gallons and hold less as they continue in use. A statute defines a barrel as 31 1/2 gallons. The statute does not prevent interpretation of the agreement as referring to the barrels in use.

d. Misunderstanding. Subsection (2) follows the terminology of § 20, referring to the understanding of each party as the meaning “attached” by him to a term of a promise or agreement. Where the rules stated in Subsections (1) and (2) do not apply, neither party is bound by the understanding of the other. The result may be an entire failure of agreement or a failure to agree as to a term. There may be a binding contract despite failure to agree as to a term, if the term is not essential or if it can be supplied. See § 204. In some cases a party can waive the misunderstanding and enforce the contract in accordance with the understanding of the other party.

Illustrations:

4. A agrees to sell and B to buy a quantity of eviscerated “chicken.” A tenders “stewing chicken” or “fowl”; B rejects on the ground that the contract calls for “broilers” or “fryers.” Each party makes a claim for damages against the other. It is found that each acted in good faith and that neither had reason to know of the difference in meaning. Both claims fail.

5. A orders goods from B, using A’s standard form. B acknowledges the order, using his own standard form. Each form provides that no terms are agreed to except those on the form and that the other party agrees to the form. One form contains an arbitration clause; the other does not. The goods are delivered and paid for. Later a dispute arises as to their quality. There is no agreement to arbitrate the dispute.

* * * *

§ 202. Rules in Aid of Interpretation

(1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.

(2) A writing is interpreted as a whole, and all writings that are part of the same transaction are in terpreted together.

(3) Unless a different intention is manifested,

(a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;

(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

(4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.

(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are



interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

Comment:

a. Scope of special rules. The rules in this Section are applicable to all manifestations of intention and all transactions. The rules are general in character, and serve merely as guides in the process of interpretation. They do not depend upon any determination that there is an ambiguity, but are used in determining what meanings are reasonably possible as well as in choosing among possible meanings.

b. Circumstances. The meaning of words and other symbols commonly depends on their context; the meaning of other conduct is even more dependent on the circumstances. In interpreting the words and conduct of the parties to a contract, a court seeks to put itself in the position they occupied at the time the contract was made. When the parties have adopted a writing as a final expression of their agreement, interpretation is directed to the meaning of that writing in the light of the circumstances. See §§ 209, 212. The circumstances for this purpose include the entire situation, as it appeared to the parties, and in appropriate cases may include facts known to one party of which the other had reason to know. See § 201.

Illustrations:

1. A contracts with B to do concrete work on a bridge, to be paid for according to “the number of square yards of concrete surface included in the bridge deck.” An estimate included in the proposal for bids and an estimate submitted by A to B after award are shown to have been based on the top surface only, not including the side and bottom surfaces. On a finding that this was the mutual understanding, the contract is to be so interpreted.

2. In a written agreement between A and B it is stated that B owns half of the stock of C Company, that “A has rendered valuable services to C Company for which B desires to compensate A in the sum of $25,000 payable in the manner hereinafter set forth,” and that B will pay A “one-half of all money received from C Company, such as dividends, or profits until A has been paid the said amount of $25,000.” It is shown that the written agreement was executed after the services were rendered, that there was no prior explicit understanding that A would be compensated, and that before signing the written agreement A and B orally agreed that the $25,000 was to be a “bonus out of B’s profit,” “double or nothing,” “a gamble.” The written agreement is to be interpreted in accordance with the oral agreement.

c. Principal purpose. The purposes of the parties to a contract are not always identical; particularly in business transactions, the parties often have divergent or even conflicting interests. But up to a point they commonly join in a common purpose of attaining a specific factual or legal result which each regards as necessary to the attainment of his ultimate purposes. Moreover, one party may know or have reason to know the purpose of the other and thus that his meaning is one consistent with that purpose. Determination that the parties have a principal purpose in common requires interpretation, but if such a purpose is disclosed further interpretation is guided by it. Even language which is otherwise explicit may be read with a modification needed to make it consistent with such a purpose.

Illustrations:

3. A promises B as follows: “In consideration of your supplying my nephew C with china and earthenware during the coming year, I guarantee the payment of any bills you may draw on him on account thereof to the amount of $200.” C is engaged in the business of selling such goods. B sells C $2,000 of china during the year and draws bills for their price in varying amounts. C pays $1,000 and then defaults. A’s promise is to be



interpreted as a continuing undertaking, not limited to the first $200 of purchases.

4. A agrees with his divorced wife B and C, trustee, to pay to C $1,200 each year for the benefit of D, the 10-year-old son of A and B, until D enters college, and to pay $2,200 each year for the period of D’s higher education but not more than four years. At age 19 D completes high school and is inducted into the army. Upon a finding that the main purpose of the agreement is to provide for D’s maintenance and education, the agreement is to be interpreted as not requiring payments during D’s military service.

d. Interpretation of the whole. Meaning is inevitably dependent on context. A word changes meaning when it becomes part of a sentence, the sentence when it becomes part of a paragraph. A longer writing similarly affects the paragraph, other related writings affect the particular writing, and the circumstances affect the whole. Where the whole can be read to give significance to each part, that read ing is ]preferred; if such a reading would be unreasonable, a choice must be made. See § 203. To fit the immediate verbal context or the more remote total context particular words or punctuation may be disregarded or supplied; clerical or grammatical errors may be corrected; singular may be treated as plural or plural as singular.

Illustrations:

5. A written agreement between A and B for the exchange of real estate provides that A and B will each pay a $200 commission to C, a broker, “upon the signing of this agreement by both parties hereto.” The last sentence of the agreement states, “The commission being due and payable upon the transfer of the properties.” It is shown that A refused to sign the agreement until the last sentence was added. The agreement is to be interpreted to make the commission due only when both the signing and the trans fer take place.

6. A agrees to appoint B exclusive distributor in a specified area for a new product to be manufactured by A, and B agrees to use his best efforts to promote sale of the product. The written agreement includes an initial retail price list and a provision that A will sell to B at the lowest price and highest discount it gives to any distributor. Whether the parties intend to be bound before any other distributor is appointed or any price fixed is a question of the meaning of the entire agreement in its context. If they do, the agreement has the effect of an agreement to sell at a reasonable price at the time for delivery. See Uniform Commercial Code § 2-305.

7. A contracts in writing to build a house for B according to specifications, and C, a surety company, guarantees A’s performance. After completion and acceptance the house and its contents are damaged by hot water because of defective work by the plumbing and heating subcontractor. In determining the responsibility of A and C, the contract, specifications and surety bond are to be read together.

e. General usage. In the United States the English language is used far more often in a sense which would be generally understood throughout the country than in a sense peculiar to some locality or group. In the absence of some contrary indication, therefore, English words are read as having the meaning given them by general usage, if there is one. This rule is a rule of interpretation in the absence of contrary evidence, not a rule excluding contrary evidence. It may also yield to internal indications such as inconsistency, absurdity, or departure from normal grammar, punctuation, or word order.

Illustrations:

8. A issues to B a fire insurance policy covering lumber stored in “sheds.” In the absence of contrary in-dication, lumber in the basement of a two-story warehouse is not covered.

9. A leases restaurant premises to B. The lease provides that A will pay for electricity and that B will “pay for



gas or fuel used in the preparation of food.” In the absence of contrary indication, “fuel” should be read not to include electricity.

f. Technical terms. Parties to an agreement often use the vocabulary of a particular place, vocation or trade, in which new words are coined and common words are assigned new meanings. But technical terms are often misused, and it may be shown that a technical word or phrase was used in a non-technical sense. Moreover, the same word may have a variety of technical and other meanings. “Mules” may mean animals, shoes or machines; a “ram” may mean an animal or a hydraulic ram; “zebra” may refer to a mammal, a butterfly, a lizard, a fish, a type of plant, tree or wood, or merely to the letter “Z”.

Illustrations:

10. The facts being otherwise as stated in Illustration 9, there is a local usage in the restaurant trade that “fuel” includes electricity used in cooking. In the absence of contrary indication, “fuel” may be read in accordance with the usage. But a provision in the lease that if B installs a new electric range he will also install a special meter and pay for electricity used by the range would show that the par ties did not adopt the local usage.

11. A contract for the sale of horsemeat scraps calls for “minimum 50% protein.” As both parties know, by a usage of the business in which they are engaged, 49.5 per cent is treated as the equivalent of 50 per cent. The contract is to be interpreted in accordance with the usage.

g. Course of performance. The parties to an agreement know best what they meant, and their action under it is often the strongest evidence of their meaning. But such “practical construction” is not conclusive of meaning. Conduct must be weighed in the light of the terms of the agreement and their possible meanings. Where it is unreasonable to interpret the contract in accordance with the course of performance, the conduct of the parties may be evidence of an agreed modification or of a waiver by one party. See Uniform Commercial Code § 2-208. Or there may be simply a mistake which should be corrected. The rule of Subsection (4) does not apply to action on a single occasion or to action of one party only; in such cases the conduct of a party may be evidence against him that he had knowledge or reason to know of the other party’s meaning, but self-serving conduct is not entitled to weight.

Illustrations:

12. A discloses to B a secret formula for an antiseptic liquid and B agrees to pay monthly royalties based on amounts sold. Fifty years later the formula has been published in medical journals. After continuing to pay for 25 years more, B contends that the duty to pay royalties ended when the formula ceased to be secret. B’s conduct strongly negates the contention.

13. Several railroads agree in writing to share working expenses and taxes of X, another railroad, on a “wheelage basis.” For several years they pay shares in proportion to their stock ownership in the other railroad. Then all but one agree that they have been mistaken and that future payments will be made on a basis of use of X’s physical properties. Stock ownership is so plainly unrelated to any possible meaning of “wheelage” that the course of performance does not support an interpretation of “wheelage basis” as requiring payments in proportion to stock ownership.

h. Preference for consistency. Subsection (5) states a rule fairly implied in Subsections (1) and (2); words and conduct are interpreted in the light of the circumstances, and writings are interpreted as a whole. A meaning



consistent with all the circumstances is preferred to a meaning which requires that part of the context be disregarded. But the parties may have agreed to displace normal meanings, may have modified a prior understanding, or may have agreed to confusing or self-contradictory terms. They may even have entirely failed to agree, though each thought there was an agreement. See §§ 20, 201.

* * * *

§ 203. Standards of Preference in Interpretation

In the interpretation of a promise or agreement or a term thereof, the following standards of performance are generally applicable:

(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is pre ferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;

(b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;

(c) specific terms and exact terms are given greater weight than general language;

(d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

Comment:

a. Scope. The rules of this Section are applicable to all manifestations of intention and all transactions. They apply only in choosing among reasonable interpretations. They do not override evidence of the meaning of the parties, but aid in determining meaning or prescribe legal effect when meaning is in doubt.

b. Superfluous terms. Since an agreement is interpreted as a whole, it is assumed in the first instance that no part of it is superfluous. The parties may of course agree to supersede prior manifestations of intention; indeed, this is the normal effect of an integrated agreement. See § 213. But, particularly in cases of integrated agreements, terms are rarely agreed to without reason. Where an integrated agreement has been negotiated with care and in detail and has been expertly drafted for the particular transaction, an interpretation is very strongly negated if it would render some provisions superfluous. On the other hand, a standard form may include provisions appropriate only to some of the transactions in which the form is to be used; or the form may be used for an inappropriate transaction. Even agreements tailored to particular transactions sometimes include overlapping or redundant or meaningless provisions. The preference for an interpretation which gives meaning to every part of an agreement does not mean that every part is assumed to have legal consequence. Parties commonly direct their attention to performance rather than breach, and it is enough that each provision has meaning to them as a guide to performance. Stipulations against particular legal consequences are not uncommon. Thus it is not unusual to define the intended performance with precision and then to provide for tolerances within which variation is permitted. See Uniform Commercial Code § 2-508(2).

c. Unreasonable and unlawful terms. In the absence of contrary indication, it is assumed that each term of an agreement has a reasonable rather than an unreasonable meaning, and that the agreement is intended to be



lawful rather than unconscionable, fraudulent or otherwise illegal. But parties are free to make agreements which seem unreasonable to others, and circumstances may show that even an agreement innocent on its face has an illegal purpose. The search is for the manifested intention of the parties. If a term or a contract is unconscionable or otherwise against public policy, it should be dealt with directly rather than by spurious interpretation. See § 208 and Uniform Commercial Code § 2-302 and Comment.

Illustration:

1. A licenses B to manufacture pipes under A’s patents, and B agrees to pay “a royalty of 50 cents per 1,000 feet for an output of 5,000,000 or less feet per year, and for an output of over 5,000,000 feet per year at the rate of 30 cents per thousand feet.” The 60 cent rate is payable on the first 5,000,000 feet, the 30 cent rate only on the excess. The more literal reading is unreasonable, since it would involve a smaller payment for 6,000,000 feet than for 4,000,000 feet.

d. Priority of express terms. Just as parties to agreements often depart from general usage as to the meaning of words or other conduct, so they may depart from a usage of trade. Similarly, they may change a pattern established by their own prior course of dealing. Their meaning in such cases is ordinarily to be ascertained as a fact; no penalty is attached by the law of contracts to their failure to conform to the usages of others or to their own prior usage. Course of performance may establish meaning, or it may show mistake or oversight or modification or waiver. See § 202. The priorities stated in Subsection (b) are those stated in Uniform Commercial Code §§1-205 and 2-208, rephrased to fit the different context of the Restatement.

e. General and specific terms. People commonly use general language without a clear consciousness of its full scope and without awareness that an exception should be made. Attention and understand ing are likely to be in better focus when language is specific or exact, and in case of conflict the specific or exact term is more likely to express the meaning of the parties with respect to the situation than the general language. If the specific or exact can be read as an exception or qualification of the general, both are given some effect, in accordance with the rule stated in Subsection (a). Compare Uniform Commercial Code § 2-317. But the rule yields to manifestation of a contrary intention.

f. Superseded standard terms. The rule stated in Subsection (d) has frequent application in cases of standardized documents. Printed forms are often misused, and there may be a question whether the parties manifested assent to a printed term on a writing. A printed provision that is clearly part of an integrated contract is normally to be interpreted as consistent with other terms, but in cases of inconsistency a handwritten or typewritten term inserted in connection with the particular transaction ordinarily prevails. Similarly, a typewritten term may be superseded by drawing a line through it, modified by interlineations, or controlled by an inconsistent handwritten insertion in another part of the agreement. It is sometimes said generally that handwritten terms control typewritten and printed terms, and typewritten control printed. See Uniform Commercial Code § 3-118(b); compare § 2-316(1) (disclaimer of express warranty), § 3-110(3) (instrument payable both to order and to bearer). But the rule yields to manifestation of a contrary intention.

Illustrations:

2. A, an agent of C, authorized to make contracts for C, writes a letter to B beginning “We offer,” and stating a proposal in detailed and clear language, signed “C by A, Agent.” At the bottom of the office stationery which A uses for the offer there is printed “All contracts and orders taken are subject to the approval of the executive office.” A portion of the letter is typed over a portion of this printing. A jury’s finding that the printed words were not part of the letter and that it is therefore an offer will not be set aside.



3. A charter party contains the printed provision “vessel to have turn in loading.” There is written be low this, “vessel to be loaded promptly.” The printed and written provisions are given the consistent meaning that the vessel shall take its turn in loading, though this involves considerable delay, but when its turn arrives, the vessel shall be loaded promptly.

4. A’s agent B draws checks on the C bank, imprinting the amounts with perforations made by a checkwriting machine. The amounts are also handwritten in figures. In case of conflict, since the perforated amounts are more difficult to alter, they control the handwritten figures. See Uniform Commercial Code § 3-118(b), (c).

* * * *

§ 206. Interpretation Against the Draftsman

In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

Comment:

a. Rationale. Where one party chooses the terms of a contract, he is likely to provide more carefully for the protection of his own interests than for those of the other party. He is also more likely than the other party to have reason to know of uncertainties of meaning. Indeed, he may leave meaning deliberately obscure, intending to decide at a later date what meaning to assert. In cases of doubt, therefore, so long as other factors are not decisive, there is substantial reason for preferring the meaning of the other party. The rule is often invoked in cases of standardized contracts and in cases where the draft ing party has the stronger bargaining position, but it is not limited to such cases. It is in strictness a rule of legal effect, sometimes called construction, as well as interpretation: its operation depends on the positions of the parties as they appear in litigation, and sometimes the result is hard to distinguish from a denial of effect to an unconscionable clause.

b. Compulsory contract or term. The rule that language is interpreted against the party who chose it has no direct application to cases where the language is prescribed by law, as is sometimes true with respect to insurance policies, bills of lading and other standardized documents. In some cases, however, the statute or regulation adopts language which was previously used without compulsion and was interpreted against the drafting party, and there is normally no intention to change the established meaning. Moreover, insurers are more likely than insureds to participate in drafting prescribed forms and to review them carefully before putting them into use.

TEACHING SUGGESTIONS

1. In introducing the subject of contracts, ask students under what circumstances they believe the law should enforce a promise that the promisor does not wish to keep. Begin the discussion by asking students to recognize contracts that they recently entered into—buying a textbook, buying a cheeseburger, buying a compact disc. Under what circumstances do they think that they should be held to these contracts? Under what circumstances do they think that they might be excused? Concepts that can be woven into



the discussion include:

a. Although it is a good idea to keep promises, there are times when they should be excused.

b. Some duties arise from consensual acts, but some duties are nonconsensual.

c. There is not always a legal duty to do or not to do something because it seems like the right thing to do.

d. There are costs as well as advantages to requiring that society enforce promises.

e. There may be reasons for forcing a person to enter into a commitment.

2. Divide students into small groups (four to five persons) and require each group to think of a contract for each of the following combinations:

a. Bilateral, informal, executed contract.

b. Bilateral, informal, executory contract.

c. Unilateral, informal, executed contract.

d. Bilateral, formal, executed contract.

Have each group share their ideas with the entire class.

Note: Any combinations of the types of contracts discussed in the text will work. Allow approximately fifteen to twenty minutes for the groups to complete four descriptions, and another fifteen to twenty minutes to discuss the groups’ descriptions with the class.

3. Discuss the circumstances under which the failure to make good on a social contract—such as at tending the prom—can give rise to civil liability.

4. Students often confuse implied-in-fact and implied-in-law contracts. They might find it easier to distinguish between the two types of contracts by viewing implied-in-fact contracts as looking at actions leading up to what occurred and implied-in-law contacts as looking at the results.

Cyberlaw Link

Are contracts entered into over the Internet enforceable? If so, are they express or implied contracts? Formal or informal? What other issues discussed in this chapter must be considered for online contracting?

DISCUSSION QUESTIONS

1. What is the objective theory of contracts? Intent to enter into a contract is important in the contract’s formation. Intent is determined by the objective theory of contracts. That is, it is judged by outward, ob jective facts as they would be interpreted by a reasonable person, rather than by the party’s own secret, subjective intentions. These facts include what the party said, how he or she acted or appeared, and the circumstances surrounding the



transaction. Generally, courts examine objective facts, conduct, and circumstances surrounding a particular transaction to determine whether the parties made a contract and, if so, what its terms are.

2. What distinguishes a bilateral contract from a unilateral contract? Every contract has an offeror and an offeree. The offeror promises to do or not to do something. What the offeree must do to accept the offer determines whether the contract is unilateral or bilateral. A bilateral contract is a promise for a promise—if the offeree need only promise to perform, the contract is bilateral. A unilateral contract is a promise for an act—if the offeree can accept only by complete performance, the contract is unilateral. A unilateral contract’s offer becomes irrevocable once performance has begun. Under a unilateral contract, only the promisor is obligated to perform (because in accepting, the promisee has already performed). Under a bilateral contract, both parties are obligated to perform.

3. What is the difference between express and implied contracts? An express contract is one in which the terms are expressed in words, oral or written. An implied contract is one that is implied from the conduct of the par-ties—the parties’ conduct reveals their intent to form a contract and creates and defines its terms. To create an implied contract: (1) one party must furnish a service or property; (2) the party must do so expecting to be paid and the other party must or should know that payment is expected; and (3) the other party must have a chance to reject the service or property and not reject it.

4. How does a quasi contract differ from an express or an implied-in-fact contract? A quasi contract is not based on an express promise or on conduct implying a promise; in other words, a quasi contract is not based on a contract. Quasi contracts are imposed by courts to avoid unjust enrichment. The doctrine under which the court imposes a quasi contract is called quantum meruit, or “as much as he deserves,” and that also describes the extent of compensation that a court will award. The recipient of a benefit does not have to pay for it if it was thrust on him or her. A quasi contract will not normally be imposed when there is a contract that covers the matter.

5. What might be the most important term of an implied contract to perform work? In a contract for work, there is an implied duty to do the work skillfully, carefully, and in a workmanlike manner.

6. What is the difference between a formal contract and an informal contract? Formal contracts are enforceable because of their special form or method of formation. Formal contracts include contracts under seal. All other contracts are informal contracts—they require no special form is required (except for certain types that must be in writing).

7. How does a party distinguish between an executed and an executory contract? This is a contract classification based on performance. An executed contract is one that has been performed. An executory contract is one that has not been performed. If a contract is executed on one side and executory on the other (that is, if one party has fully performed and the other has not), it is classified as executory.

8. What are the differences among valid, void, voidable, and unenforceable contracts? A valid contract results when all elements of contract formation exist—through an offer and an acceptance, two or more parties agree to form a contract; the parties have capacity to contract; the contract is supported by consideration; and the contract is for a legal purpose. A void contract (such as an illegal contract) is no contract—it gives rise to no obligation on the part of any party. A voidable contract is a valid contract under which one or both of the parties has the option of avoiding his or her obligations—if the contract is avoided, both parties are released; if it is ratified, both parties must perform. An unenforceable contract is a valid contract that cannot be enforced due to certain defenses (such as a statute of limitations).



9. What is the plain meaning rule? When the law attempts to enforce a contract, it attempts to enforce the contract that the parties made. When a contract is in writing that is clear and unequivocal, a court will en force the writing according to its plain meaning—this is the plain meaning rule. The meaning of the words will be determined from the face of the instrument; a court will not consider extrinsic evidence (including prior agreements or contemporaneous oral agreements).

10. What are some of the other rules regarding the interpretation of contracts? (1) When a writing is ambiguous, a court will interpret its language to give effect to the parties’ intent as expressed in their contract. (This is an important point: a court will not make or remake a contract nor interpret the language according to what the parties claim their intent was when they made it.) (2) A reasonable, lawful, and effective meaning will be given to all of a contract’s terms. (3) A contract will be interpreted as a whole; individual clauses will be considered subordinate to the contract’s general intent. (4) All writings that are part of the same transaction will be interpreted together, although terms that were negotiated separately will be given greater consideration than standardized terms and terms that were not negotiated separately. (5) A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be given its technical meaning, unless the parties clearly intended something else. (6) Specific and exact wording will be given greater consideration than general language. (7) Written or typewritten terms prevail over printed ones. (8) When the language used has more than one meaning, it will be interpreted against the party who drafted the contract. (9) When evidence of trade usage, prior dealings between the parties, and previous course of performance under the contract is admitted, what each of the parties does under the contract will be interpreted as consistent with what the other does and with any relevant usage of trade and course of dealing and performance.

ACTIVITY AND RESEARCH ASSIGNMENTS

1. Have each student keep track of all contracts entered into within a given three-day period. At the end of the three days, discuss the contracts made by the students with the class.

2. Ask students to bring to class copies of written contracts into which they have entered. In discussing these contracts, have students classify them according to the types of contracts outlined in the text. As students study subsequent chapters and their familiarity with the elements of contracts increases, return to these contracts. Have the class discuss the contracts’ legal implications. Read the fine print and ask the students whether they were aware of all the terms to which they agreed. By the end of the contracts’ unit, the students should have a better idea of how they might have negotiated a better deal for themselves before signing.

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

Footnote 2: The Hopkinses hired Uhrhahn Construction & Design, Inc., to work on their home. Each project’s proposal stated that any changes would be only “upon written orders.” During the work, the Hopkinses orally asked for changes, which Uhrhahn implemented and the Hopkinses paid for. At one point, the Hopkinses asked Uhrhahn to use Durisol blocks instead of cinder blocks, as specified in the written contract, asserting that the cost would be the same. Uhrhahn orally agreed, but discovered that using Durisol blocks was more costly. The Hopkinses refused to pay more. Uhrhahn sued. The court ruled in Uhrhahn’s favor. The Hopkinses appealed. In Uhrhahn Construction & Design, Inc. v. Hopkins, a state intermediate appellate court affirmed, finding a valid implied-in-fact contract between the parties. The contract stated that any changes would be in writing, but both parties waived that term when they agreed to changes in the work, as often happens in construction. The builder did the work, and the buyer accepted it and paid for it.



Given that the parties agreed to the rest of the work that was performed, does it appear that Uhrhahn, the experienced contractor, misled Hopkins into thinking the Durisol blocks could be used instead of cinder block? There was no evidence that Uhrhahn misled the Hopkinses about anything. He had no experience with Durisol but agreed to make the change. The homeowners presumed the Durisol was easy to use, but the trial court established that it is more difficult to use than cinder block. Perhaps Uhrhahn should have investigated the matter more before doing the work and discussed it with the Hopkinses, but he was not trying to run up a larger bill.

If Uhrhahn had not done the orally agreed-to work, could the Hopkinses have recovered for breach of contract? Yes, presumably, although the parties would then have been arguing opposite sides of the question of the existence of the contract. If Uhrhahn had done the work but had not done it well, could the Hopkinses have maintained a claim for breach of contract? Yes. In a contract for work, there is an implied duty to do the work skillfully, carefully, and in a workmanlike manner. It would constitute a clear breach off contract to fail to perform the work in a skillful and workmanlike manner.

What might be the most important term of an implied contract to perform work? In a contract for work, there is an implied duty to do the work skillfully, carefully, and in a workmanlike manner.

Should a court accept without proof a party’s assertion that something was or was not done “by mistake”? Explain. No, in part because the temptation might be irresistible to make this contention in almost any case. Thus, even if it were legal, as it would be if a court were to accept it, it could be unethical, encouraged by avarice or self-interest, or caused by carelessness.

Suppose that Hopkins and Uhrhahn had not agreed to deviate from the contract on previous occasions and that Hopkins had not paid for any additional work performed by Uhrhahn. How might this have changed the court’s ruling in this case? The outcome would probably not have been different. The dispute, and the court’s decision and reasoning, would still have centered on the cinder blocks and their cost, and whether there were an implied contract between the parties on that point. The question would still have been whether the parties waived the requirement of a writing for a change to their written contract, and the court would most likely still have concluded that they did, based on the parties’ agreement and conduct, and the custom in the construction trade.

Would the outcome of this case have been different if the parties had communicated by e-mail for all details regarding changes in the work performed? Why or why not? E-mail would most likely have constituted “written orders” within the term of the parties’ contract, and thus the outcome would not have been different. The reasons for that outcome might have been different, however, because the court might have then based its decision on the existence of a writing.

Footnote 3: Seawest Services Association operated a water distribution system that served a residential area. The Copenhavers owned a home within the area. They did not have an express contract with Seawest, but they paid the firm’s charges for water and system upgrades. When a dispute arose between the parties, the Copenhavers refused to pay more. Seawest filed a suit against the Copenhavers in a Washington state court. The court held the Copenhavers liable for the unpaid bills. They appealed. In Seawest Services Association v. Copenhaver, a state intermediate appellate court affirmed. A quasi contract exists when a person knowingly receives a benefit from another party and it would be “inequitable for the [person] to retain the benefit without the payment of its value.” The Copenhavers enjoyed the benefits of Seawest’s services and would be unjustly enriched if they were not to pay for them. They had bought the home, knowing that they could not receive water without paying Seawest.

If the Copenhavers had not known when they bought their home that Seawest provided the water, would they still have been liable for the unpaid charges in this case? Most likely, yes. Whether they were aware



of the specific water service when they bought their house, they should have known that the service was provided and that payment would be expected by the provider. (This assumes, of course, that the water was not supplied from an on-site well. But they should have known this, too, when they bought the house.).

In recognizing quasi contracts, does the law try to correct for unethical behavior? Discuss. Quasi contracts do often help to correct for unethical behavior. Unlike express and implied contracts, quasi contracts do not require an agreement with another party. Rather, quasi contracts are based on principles of justice, equity, and, in some ways, ethics. Quasi contracts prevent unjust enrichment, which occurs when a party enjoys a benefit it does not deserve. In Seawest Services, for example, the Copenhavers arguably stole water services by refusing to pay for them. In enforcing a quasi contract, the court corrected for the Copenhavers’ unethical behavior.

Could the Copenhavers have successfully argued that by forcing them to pay a price to which they had not agreed Seawest was unjustly enriched at their expense? No. The Copenhavers had bought their home, knowing that they could not receive water without paying Seawest. The Copenhavers enjoyed the benefits of Seawest’s services and would be unjustly enriched if they were not to pay for them. This assumes that the price sought by Seawest for its services was reasonable.


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