HELP COLLEGE OF ARTS AND TECHNOLOGY

IN COLLABORATION WITH
SOUTHERN NEW HAMPSHIRE UNIVERSITY
____________________________________________
BUSINESS LAW [BUS 206]

LECTURE 6
LAW OF CONTRACTS [1]

DEVELOPMENTS OF THE LAW OF CONTRACTS

Arises from social necessity

The vast and complicated institution of business can be conducted efficiently and
successfully only upon the certainty that promises will be fulfilled

Business must be assured not only of supplies of raw materials or manufactured

goods, but of labor, management, capital, and insurance as well

Common experience has shown that promises based solely on personal honesty or
integrity do not have the reliability essential to business

Hence, the development of the law of contracts, which is the law of enforceable
promises

In the nineteenth century virtually absolute autonomy in forming contracts was the
rule. The law imposed contract liability only where the parties strictly complied with
the required formalities

During the twentieth century, contract law experienced tremendous changes. Many of
the formalities of contract formation were relaxed

Today, the law usually recognizes contractual obligations whenever the parties
manifest an intent to be bound

In addition, an increasing number of promises are now enforced in certain

circumstances, even though they do not comply strictly with the basic requirements of
a contract

DEFINITION OF A CONTRACT

A binding agreement that the courts will enforce

A promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a
duty

A promise manifestation of the intention to act or refrain from acting in a

specified way

Those promises that meet all of the essential requirements of a binding

contract are contractual and will be enforced

Contract = an agreement creating an obligation

Thus, a promise may be contractual (and therefore binding) or noncontractual

In other words, all contracts are promises, but not all promises are contracts

REQUIREMENTS OF A CONTRACT

[1] An agreement [2] between competent parties [3] based on the genuine assent of the parties
that is [4] supported by consideration [5] made for a lawful objective, and [6] in the form required
by law, if any

The four basic requirements of a contract are as follows:

[1] Mutual Assent

The parties to a contract must manifest by words or conduct that they have agreed to enter into a
contract. The usual method of showing mutual assent is by offer and acceptance
[2] Consideration

Each party to a contract must intentionally exchange a legal benefit or incur a legal detriment as
an inducement to the other party to make a return exchange
[3] Legality of Object

The purpose of a contract must not be criminal, tortious, or otherwise against public policy
[4] Capacity

The parties to a contract must have contractual capacity. Certain persons, such as those
adjudicated (judicially declared) incompetent, have no legal capacity to contract, while others,
such as minors, incompetent persons, and intoxicated persons, have limited capacity to contract.
All others have full contractual capacity

In addition, though occasionally a contract must be evidenced by a writing to be enforceable, in

most cases an oral contract is binding and enforceable. If all of these essentials are present, the
promise is contractual and legally binding. If any is absent, however, the promise is noncontractual

CLASSIFICATION OF CONTRACTS

Contracts can be classified according to various characteristics, such as method of formation, content, and legal
effect

The standard classifications below are not mutually exclusive. For example, a contract may be express, bilateral,
valid, executory, and informal.

Express and Implied Contracts

Express Contract an agreement that is stated in words, either orally or in writing

Implied in Fact Contract a contract in which the agreement of the parties is inferred from their conduct or deduced
from the facts - Janusauskas V. Fichman (2002)

Parties to a contract may indicate their assent either by express language or by conduct that implies such willingness

Thus, a contract may be:

[1] entirely oral;
[2] partly oral and partly written;
[3] entirely written;
[4] partly oral or written and partly implied from the conduct of the parties; and
[5] wholly implied from the conduct of the parties

The 1st three are known as express contracts, and the last two as implied contracts

Both express and implied contracts are genuine contracts, equally enforceable

The difference between them is merely the manner in which the parties manifest assent

Implied Contracts arises when [1] a person rendered services under circumstance indicating that payment for them is
expected and [2] the other person, knowing such circumstances, accepts the benefit of those services

Implied Contract cannot arise when there is an existing express contract on the same subject Pepsi-Cola Bottling
Co. of Pittsburgh, Inc V. PepsiCo, Inc (2000)

However, the existence of a written contract does not bar recovery on an implied contract for extra work that was not
covered by the contract

CLASSIFICATION OF CONTRACTS (contd)

Formal and Informal Contracts

Formal Contracts - written contracts or agreements whose formality signifies the parties
intention to abide by the terms, and are legally binding because of its particular form or mode of
expression

Example: [1] a letter of credit (a promise to honour drafts or other demands for payment)
[2] negotiable instruments such as a cheque

Informal Contracts - all other contracts, whether oral or written, are simple contracts as they do
not depend upon formality for their legal validity

Valid, Void, Voidable, and Unenforceable Contracts

Valid Contract one that meets all of the requirements of a binding contract; enforceable

Void Contract does not meet all of the requirements of a binding contract; without legal effect

Voidable Contract not wholly lacking in legal effect; a contract capable of being made void

Unenforceable Contract neither void nor voidable; a contract for the breach of which the law
provides no remedy

CLASSIFICATION OF CONTRACTS (contd)

Executed and Executory Contracts

Executed Contracts - a contract that has been fully performed by all of the parties; nothing
remains to be done by either party Marsh V. Rheinecker (1994)

Executory Contracts - a contract that has yet to be fully performed by one or both parties
DiGeneraro V. Rubbermaid, Inc (2002)

Bilateral and Unilateral Contracts

Bilateral Contracts - a contract in which both parties exchange promises; agreement under
which one promise is given in exchange for another

Example: Ali extends a promise and asks for a promise in return and if Kim accepts the offer by
making the promise then one promise is given in exchange for another and either party is bound
by the obligation

Unilateral Contracts - contract under which only one party makes a promise

Thus, whereas a bilateral contract results from the exchange of a promise for a return promise,
a unilateral contract results from the exchange of a promise either for an act or for a forbearance
(refraining) from acting

If a contract is not clearly unilateral or bilateral, the courts presume that the parties intended a
bilateral contract

PROMISSORY ESTOPPEL
Definition

a doctrine enforcing some non-contractual promises

Requirements

a promise made under circumstances that should lead the promisor reasonably to
expect that the promise would induce the promisee to take definite and substantial
action or forbearance in reliance on the promise, and the promisee does take such
action or forbearance
Remedy

a court will enforce the promise to the extent necessary to avoid injustice

QUASI CONTRACTS
Definition

an obligation not based on contract that is imposed to avoid injustice

Implied in law contracts
Quasi means as if
court imposed obligation to prevent unjust enrichment in the absence of a contract Thayer V.
Dial Industrial Sales, Inc (2000)
Prevention of unjust enrichment court is not seeking to enforce the intentions of the parties
contained in an agreement
Requirements

a court will impose a quasi contract when (Hiram College V. Courtad (2005)):
[1] the plaintiff confers a benefit upon the defendant;
[2] the defendant knows or appreciates the benefit; and
[3] the defendant's retention of the benefit is inequitable (unjust) without payment
Remedy

the plaintiff recovers the reasonable value of the benefit she conferred upon the defendant
plaintiff cannot recover lost profits or other kinds of damages that would be recovered in a suit for
breach of a contract

GENERAL INFORMATION
Parties to a contract

Promisor - person who makse a promise

Promisee - person to whom the promise is made

Obligor - if promise binding imposes a duty or obligation on the promisor

Obligee - promisee who can claim the benefit of the obligation

Subject matter of a contract

Tenancy - landlord and tenant

Lease - lessor and lessee

Sales contract - Vendor and vendee/purchaser

Transportation contract - shipper and carrier

Insurance policy - insurer and insured

Privity of contract

relationship between a promisor and the promisee or between two or more contracting parties

only party to a contract has any rights against another party to the contract Hooper V. Yakima County (1995)

A person cannot be bound by the terms of a contract to which that person is not a party Walsh V. Telesector
Resources Group Inc (1996)

Freedom of Contract

Choice is with the parties

Law does not require parties to be fair, or kind, or reasonable, or to share gains or losses equitably

CASE STUDY

QUESTION 1: A building owner requests a professional roofer to make

emergency repairs to the roof of a building is there an obligation to pay for
such services if it is performed although no agreement has been made about
compensation?

QUESTION 2: (a) Mark agreed to sell to Chris his Pearl drum set for $600.00, the
terms being $200.00 upon delivery on July 14, with $200.00 to be paid on July
21, and the final $200.00 being due July 28. Has the contract been executed?
(b) After the delivery by Mark, has the contract been executed by Mark? How
about Chris? When does the contract deemed executed by Chris?

QUESTION 3: When the house painter offers to paint the owners house for
$3,700.00 and the owner promises to pay $3,700.00 for the job, is there an
exchange of promises? Discuss

QUESTION 4: The Tyler family posts notices throughout the community offering
to pay a $100.00 reward for the safe return of their lost golden retriever puppy,
Henry. When will a contract be formed? What kind of contract is this?