s11 Introduction To Contract Law

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Chapter 8
Introduction to Contract Law
LEARNING OBJECTIVES
After reading this chapter, you should understand the following:
1. Why and how contract law has developed

2. What a contract is
3. What topics will be discussed in the contracts chapter of this book
4. What the sources of contract law are
5. How contracts are classified (basic taxonomy)
319
Chapter 8 Introduction to Contract Law
8.1 General Perspectives on Contracts
LEARNING OBJECTIVES
1. Explain contract law’s cultural roots: how it has evolved as capitalism

has evolved.
2. Understand that contracts serve essential economic purposes.
3. Define contract.
4. Understand the basic issues in contract law.
The Role of Contracts in Modern Society
Contract is probably the most familiar legal concept in our society because it is so
central to the essence of our political, economic, and social life. In common
parlance, contract is used interchangeably with agreement, bargain, undertaking, or
deal. Whatever the word, the concept it embodies is our notion of freedom to pursue
our own lives together with others. Contract is central because it is the means by
which a free society orders what would otherwise be a jostling, frenetic anarchy.
So commonplace is the concept of contract—and our freedom to make contracts

with each other—that it is difficult to imagine a time when contracts were rare,
when people’s everyday associations with one another were not freely determined.
Yet in historical terms, it was not so long ago that contracts were rare, entered into
if at all by very few: that affairs should be ordered based on mutual assent was
mostly unknown. In primitive societies and in feudal Europe, relationships among
people were largely fixed; traditions spelled out duties that each person owed to
family, tribe, or manor. People were born into an ascribed position—a status (not
unlike the caste system still existing in India)—and social mobility was limited. Sir
Henry Maine, a nineteenth-century British historian, wrote that “the movement of
the progressive societies has…been a movement from status to contract.”Sir Henry
Maine, Ancient Law (1869), 180–82. This movement was not accidental—it developed
with the emerging industrial order. From the fifteenth to the nineteenth century,
England evolved into a booming mercantile economy, with flourishing trade,
growing cities, an expanding monetary system, the commercialization of
agriculture, and mushrooming manufacturing. With this evolution, contract law
was created of necessity.
Contract law did not develop according to a conscious plan, however. It was a
response to changing conditions, and the judges who created it frequently resisted,
320
preferring the imagined quieter pastoral life of their forefathers. Not until the
nineteenth century, in both the United States and England, did a full-fledged law of
contracts arise together with, and help create, modern capitalism.
Modern capitalism, indeed, would not be possible without contract law. So it is that
in planned economies, like those of the former Soviet Union and precapitalistic
China, the contract did not determine the nature of an economic transaction. That
transaction was first set forth by the state’s planning authorities; only thereafter
were the predetermined provisions set down in a written contract. Modern
capitalism has demanded new contract regimes in Russia and China; the latter
adopted its Revised Contract Law in 1999.
Contract law may be viewed economically as well as culturally. In An Economic

Analysis of Law, Judge Richard A. Posner (a former University of Chicago law
professor) suggests that contract law performs three significant economic
functions. First, it helps maintain incentives for individuals to exchange goods and
services efficiently. Second, it reduces the costs of economic transactions because
its very existence means that the parties need not go to the trouble of negotiating a
variety of rules and terms already spelled out. Third, the law of contracts alerts the
parties to troubles that have arisen in the past, thus making it easier to plan the
transactions more intelligently and avoid potential pitfalls.Richard A. Posner,
Economic Analysis of Law (New York: Aspen, 1973).
The Definition of Contract
As usual in the law, the legal definition of contract1 is formalistic. The Restatement
(Second) of Contracts (Section 1) says, “A contract is 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.” Similarly, the Uniform Commercial Code
says, “‘Contract’ means the total legal obligation which results from the parties’
agreement as affected by this Act and any other applicable rules of law.”Uniform
Commercial Code, Section 1-201(11). As operational definitions, these two are
circular; in effect, a contract is defined as an agreement that the law will hold the
parties to.
Most simply, a contract is a legally enforceable promise. This implies that not every
promise or agreement creates a binding contract; if every promise did, the simple
definition set out in the preceding sentence would read, “A contract is a promise.”
But—again—a contract is not simply a promise: it is a legally enforceable promise.
The law takes into account the way in which contracts are made, by whom they are
made, and for what purposes they are made. For example, in many states, a wager is
1. A legally enforceable set of
promises.
8.1 General Perspectives on Contracts 321

unenforceable, even though both parties “shake” on the bet. We will explore these
issues in the chapters to come.
Overview of the Contracts Chapter
Although contract law has many wrinkles and nuances, it consists of four principal
inquiries, each of which will be taken up in subsequent chapters:
1. Did the parties create a valid contract? Four elements are necessary for
a valid contract:
a. Mutual assent (i.e., offer and acceptance), Chapter 9 "The

Agreement"
b. Real assent (no duress, undue influence, misrepresentation,
mistake, or incapacity), Chapter 10 "Real Assent"
c. Consideration, Chapter 11 "Consideration"
d. Legality, Chapter 12 "Legality"
2. What does the contract mean, and is it in the proper form to carry out
this meaning? Sometimes contracts need to be in writing (or evidenced
by some writing), or they can’t be enforced. Sometimes it isn’t clear
what the contract means, and a court has to figure that out. These
problems are taken up in Chapter 13 "Form and Meaning".
3. Do persons other than the contracting parties have rights or duties
under the contract? Can the right to receive a benefit from the
contract be assigned, and can the duties be delegated so that a new
person is responsible? Can persons not a party to the contract sue to
enforce its terms? These questions are addressed in Chapter 14 "Third-
Party Rights".
4. How do contractual duties terminate, and what remedies are available
if a party has breached the contract? These issues are taken up in
Chapter 15 "Discharge of Obligations" and Chapter 16 "Remedies".
Together, the answers to these four basic inquiries determine the rights and
obligations of contracting parties.

KEY TAKEAWAY
Contract law developed when the strictures of feudalism dissipated, when a

person’s position in society came to be determined by personal choice (by
mutual agreement) and not by status (by how a person was born). Capitalism
and contract law have developed together, because having choices in society
means that people decide and agree to do things with and to each other, and
those agreements bind the parties; the agreements must be enforceable.
EXERCISES
1. Why is contract law necessary in a society where a person’s status is not

predetermined by birth?
2. Contract law serves some economic functions. What are they?

8.2 Sources of Contract Law
LEARNING OBJECTIVES
1. Understand that contract law comes from two sources: judges (cases)
and legislation.
2. Know what the Restatement of Contracts is.
3. Recognize the Convention on Contracts for the International Sale of
Goods.
The most important sources of contract law are state case law and state statutes
(though there are also many federal statutes governing how contracts are made by
and with the federal government).
Case Law
Law made by judges is called case law2. Because contract law was made up in the
common-law courtroom by individual judges as they applied rules to resolve
disputes before them, it grew over time to formidable proportions. By the early
twentieth century, tens of thousands of contract disputes had been submitted to the
courts for resolution, and the published opinions, if collected in one place, would
have filled dozens of bookshelves. Clearly this mass of material was too unwieldy
for efficient use. A similar problem also had developed in the other leading
branches of the common law.
Disturbed by the profusion of cases and the resulting uncertainty of the law, a
group of prominent American judges, lawyers, and law teachers founded the
American Law Institute (ALI) in 1923 to attempt to clarify, simplify, and improve the
law. One of the ALI’s first projects, and ultimately one of its most successful, was the
drafting of the Restatement of the Law of Contracts3, completed in 1932. A
revision—the Restatement (Second) of Contracts—was undertaken in 1964 and
completed in 1979. Hereafter, references to “the Restatement” pertain to the
Restatement (Second) of Contracts.
2. Law decided by judges as The Restatements—others exist in the fields of torts, agency, conflicts of laws,
recorded in cases and judgments, property, restitution, security, and trusts—are detailed analyses of the
published. decided cases in each field. These analyses are made with an eye to discerning the
3. An organized codification of various principles that have emerged from the courts, and to the maximum extent
the common law of contracts. possible, the Restatements declare the law as the courts have determined it to be.
324
The Restatements, guided by a reporter (the director of the project) and a staff of
legal scholars, go through several so-called tentative drafts—sometimes as many as
fifteen or twenty—and are screened by various committees within the ALI before
they are eventually published as final documents.
The Restatement (Second) of Contracts won prompt respect in the courts and has
been cited in innumerable cases. The Restatements are not authoritative, in the
sense that they are not actual judicial precedents; but they are nevertheless
weighty interpretive texts, and judges frequently look to them for guidance. They
are as close to “black letter” rules of law as exist anywhere in the American
common-law legal system.
Common law, case law (the terms are synonymous), governs contracts for the sale
of real estate and services. “Services” refer to acts or deeds (like plumbing, drafting
documents, driving a car) as opposed to the sale of property.
Statutory Law: The Uniform Commercial Code
Common-law contract principles govern contracts for real estate and services.
Because of the historical development of the English legal system, contracts for the
sale of goods came to be governed by a different body of legal rules. In its modern
American manifestation, that body of rules is an important statute: the Uniform
Commercial Code (UCC)4, especially Article 25, which deals with the sale of goods.
History of the UCC
A bit of history is in order. Before the UCC was written, commercial law varied,
sometimes greatly, from state to state. This first proved a nuisance and then a
serious impediment to business as the American economy became nationwide
during the twentieth century. Although there had been some uniform laws
concerned with commercial deals—including the Uniform Sales Act, first published
in 1906—few were widely adopted and none nationally. As a result, the law
governing sales of goods, negotiable instruments, warehouse receipts, securities,
and other matters crucial to doing business in an industrial market economy was a
crazy quilt of untidy provisions that did not mesh well from state to state.
The UCC is a model law developed by the ALI and the National Conference of
4. The modern American state
statutory law governing Commissioners on Uniform State Laws; it has been adopted in one form or another
commercial transactions. by the legislatures in all fifty states, the District of Columbia, and the American
territories. It is a “national” law not enacted by Congress—it is not federal law but
5. That part of the Uniform
Commercial Code dealing with uniform state law.
the sale of goods.
8.2 Sources of Contract Law 325

Initial drafting of the UCC began in 1942 and was ten years in the making, involving
the efforts of hundreds of practicing lawyers, law teachers, and judges. A final draft,
promulgated by the ALI, was endorsed by the American Bar Association and
published in 1951. Various revisions followed in different states, threatening the
uniformity of the UCC. The ALI responded by creating a permanent editorial board
to oversee future revisions. In one or another of its various revisions, the UCC has
been adopted in whole or in part in all American jurisdictions. The UCC is now a
basic law of relevance to every business and business lawyer in the United States,
even though it is not entirely uniform because different states have adopted it at
various stages of its evolution—an evolution that continues still.
Organization of the UCC
The UCC consists of nine major substantive articles; each deals with separate
though related subjects. The articles are as follows:
• Article 1: General Provisions

• Article 2: Sales
• Article 2A: Leases
• Article 3: Commercial Paper
• Article 4: Bank Deposits and Collections
• Article 4A: Funds Transfers
• Article 5: Letters of Credit
• Article 6: Bulk Transfers
• Article 7: Warehouse Receipts, Bills of Lading, and Other Documents of
Title
• Article 8: Investment Securities
• Article 9: Secured Transactions
Article 2 deals only with the sale of goods, which the UCC defines as “all
things…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.”Uniform Commercial Code,
Section 2-105. The only contracts and agreements covered by Article 2 are those
relating to the present or future sale of goods.
Article 2 is divided in turn into six major parts: (1) Form, Formation, and
Readjustment of Contract; (2) General Obligation and Construction of Contract; (3)
Title, Creditors, and Good Faith Purchasers; (4) Performance; (5) Breach,
Repudiation, and Excuse; and (6) Remedies. These topics will be discussed in
Chapter 17 "Introduction to Sales and Leases", Chapter 18 "Title and Risk of Loss",
Chapter 19 "Performance and Remedies", Chapter 20 "Products Liability", and
Chapter 21 "Bailments and the Storage, Shipment, and Leasing of Goods".

Figure 8.1 Sources of Law
International Sales Law

The Convention on Contracts for the International Sale of Goods
A Convention on Contracts for the International Sale of Goods (CISG) 6 was

approved in 1980 at a diplomatic conference in Vienna. (A convention is a
preliminary agreement that serves as the basis for a formal treaty.) The CISG has
been adopted by more than forty countries, including the United States.
The CISG is significant for three reasons. First, it is a uniform law governing the sale
of goods—in effect, an international Uniform Commercial Code. The major goal of
the drafters was to produce a uniform law acceptable to countries with different
legal, social, and economic systems. Second, although provisions in the CISG are
generally consistent with the UCC, there are significant differences. For instance,
under the CISG, consideration (discussed in Chapter 11 "Consideration") is not
required to form a contract, and there is no Statute of Frauds (a requirement that
certain contracts be evidenced by a writing). Third, the CISG represents the first
attempt by the US Senate to reform the private law of business through its treaty
powers, for the CISG preempts the UCC. The CISG is not mandatory: parties to an
international contract for the sale of goods may choose to have their agreement
governed by different law, perhaps the UCC, or perhaps, say, Japanese contract law.
The CISG does not apply to contracts for the sale of (1) ships or aircraft, (2)
electricity, or (3) goods bought for personal, family, or household use, nor does it
apply (4) where the party furnishing the goods does so only incidentally to the labor
or services part of the contract.
6. An international body of
contract law.

KEY TAKEAWAY
Judges have made contract law over several centuries by deciding cases that
create, extend, or change the developing rules affecting contract formation,
performance, and enforcement. The rules from the cases have been
abstracted and organized in the Restatements of Contracts. To facilitate
interstate commerce, contract law for many commercial
transactions—especially the sale of goods—not traditionally within the
purview of judges has been developed by legal scholars and presented for
the states to adopt as the Uniform Commercial Code. There is an analogous
Convention on Contracts for the International Sale of Goods, to which the
United States is a party.
EXERCISES
1. How do judges make contract law?

2. What is the Restatement of the Law of Contracts, and why was it
necessary?
3. Why was the Uniform Commercial Code developed, and by whom?
4. Who adopts the UCC as governing law?
5. What is the Convention on Contracts for the International Sale of Goods?

8.3 Basic Taxonomy of Contracts
LEARNING OBJECTIVES
1. Understand that contracts are classified according to the criteria of

explicitness, mutuality, enforceability, and degree of completion and
that some noncontract promises are nevertheless enforceable under the
doctrine of promissory estoppel.
2. Keep your eyes (and ears) alert to the use of suffixes (word endings) in
legal terminology that express relationships between parties.
Some contracts are written, some oral; some are explicit, some not. Because
contracts can be formed, expressed, and enforced in a variety of ways, a taxonomy
of contracts has developed that is useful in grouping together like legal
consequences. In general, contracts are classified along four different dimensions:
explicitness, mutuality, enforceability, and degree of completion. Explicitness is the
degree to which the agreement is manifest to those not party to it. Mutuality takes
into account whether promises are given by two parties or only one. Enforceability
is the degree to which a given contract is binding. Completion considers whether
the contract is yet to be performed or whether the obligations have been fully
discharged by one or both parties. We will examine each of these concepts in turn.
Explicitness
Express Contract
An express contract7 is one in which the terms are spelled out directly. The parties
to an express contract, whether it is written or oral, are conscious that they are
making an enforceable agreement. For example, an agreement to purchase your
neighbor’s car for $5,500 and to take title next Monday is an express contract.
Implied Contract (Implied in Fact)
An implied contract8 is one that is inferred from the actions of the parties. When
parties have not discussed terms, an implied contract exists if it is clear from the
conduct of both parties that they intended there be one. A delicatessen patron who
7. A contract in words, orally or asks for a turkey sandwich to go has made a contract and is obligated to pay when
in writing.
the sandwich is made. By ordering the food, the patron is implicitly agreeing to the
8. A contract that is not price, whether posted or not.
expressed but is inferred from
the actions of the parties.
329
The distinction between express and implied contracts has received a degree of
notoriety in the so-called palimony cases, in which one member of an unmarried
couple seeks a division of property after a long-standing live-together relationship
has broken up. When a married couple divorces, their legal marriage contract is
dissolved, and financial rights and obligations are spelled out in a huge body of
domestic relations statutes and judicial decisions. No such laws exist for unmarried
couples. However, about one-third of the states recognize common-law marriage,
under which two people are deemed to be married if they live together with the
intent to be married, regardless of their failure to have obtained a license or gone
through a ceremony. Although there is no actual contract of marriage (no license),
their behavior implies that the parties intended to be treated as if they were
married.
Quasi-Contract
A quasi-contract (implied in law)9 is—unlike both express and implied contracts,

which embody an actual agreement of the parties—an obligation said to be
“imposed by law” in order to avoid unjust enrichment of one person at the expense
of another. A quasi-contract is not a contract at all; it is a fiction that the courts
created to prevent injustice. Suppose, for example, that the local lumberyard
mistakenly delivers a load of lumber to your house, where you are repairing your
deck. It was a neighbor on the next block who ordered the lumber, but you are
happy to accept the load for free; since you never talked to the lumberyard, you
figure you need not pay the bill. Although it is true there is no contract, the law
implies a contract for the value of the material: of course you will have to pay for
what you got and took. The existence of this implied contract does not depend on
the intention of the parties.
Mutuality
Bilateral Contract
The typical contract is one in which the parties make mutual promises. Each is both
promisor and promisee; that is, each pledges to do something, and each is the
recipient of such a pledge. This type of contract is called a bilateral contract10.
9. A contract imposed on a party

Unilateral Contract
when there was none, to avoid
unjust enrichment. Mutual promises are not necessary to constitute a contract. Unilateral contracts11,
10. A contract in which each party in which one party performs an act in exchange for the other party’s promise, are
makes a promise to the other. equally valid. An offer of a reward—for catching a criminal or for returning a lost
cat—is an example of a unilateral contract: there is an offer on one side, and the
11. A contract that is accepted by
performance of the requested other side accepts by taking the action requested.
action, not by a promise.
8.3 Basic Taxonomy of Contracts 330

Figure 8.2 Bilateral and Unilateral Contracts
Enforceability
Void
Not every agreement between two people is a binding contract. An agreement that
is lacking one of the legal elements of a contract is said to be a void
contract12—that is, not a contract at all. An agreement that is illegal—for example,
a promise to commit a crime in return for a money payment—is void. Neither party
to a void “contract” may enforce it.
Voidable
By contrast, a voidable contract13 is one that may become unenforceable by one

party but can be enforced by the other. For example, a minor (any person under
eighteen, in most states) may “avoid” a contract with an adult; the adult may not
enforce the contract against the minor if the minor refuses to carry out the bargain.
But the adult has no choice if the minor wishes the contract to be performed. (A
contract may be voidable by both parties if both are minors.)
Ordinarily, the parties to a voidable contract are entitled to be restored to their

original condition. Suppose you agree to buy your seventeen-year-old neighbor’s
car. He delivers it to you in exchange for your agreement to pay him next week. He
has the legal right to terminate the deal and recover the car, in which case you will
of course have no obligation to pay him. If you have already paid him, he still may
legally demand a return to the status quo ante (previous state of affairs). You must
return the car to him; he must return the cash to you.
A voidable contract remains a valid contract until it is voided. Thus a contract with
12. An agreement that never was a
contract. a minor remains in force unless the minor decides he or she does not wish to be
bound by it. When the minor reaches majority, he or she may “ratify” the
13. A contract that is capable of
being annulled.

contract—that is, agree to be bound by it—in which case the contract will no longer
be voidable and will thereafter be fully enforceable.
Unenforceable
An unenforceable contract14 is one that some rule of law bars a court from
enforcing. For example, Tom owes Pete money, but Pete has waited too long to
collect it and the statute of limitations has run out. The contract for repayment is
unenforceable and Pete is out of luck, unless Tom makes a new promise to pay or
actually pays part of the debt. (However, if Pete is holding collateral as security for
the debt, he is entitled to keep it; not all rights are extinguished because a contract
is unenforceable.) A debt becomes unenforceable, too, when the debtor declares
bankruptcy.
A bit more on enforceability is in order. A promise or what seems to be a promise is

usually enforceable only if it is otherwise embedded in the elements necessary to
make that promise a contract. Those elements are mutual assent, real assent,
consideration, capacity, and legality. Sometimes, though, people say things that
seem like promises, and on which another person relies. In the early twentieth
century, courts began, in some circumstances, to recognize that insisting on the
existence of the traditional elements of contract to determine whether a promise is
enforceable could work an injustice where there has been reliance. Thus developed
the equitable doctrine of promissory estoppel15, which has become an important
adjunct to contract law. The Restatement (Section 90) puts it this way: “A promise
which the promisor should reasonably expect to induce action or forbearance on
the party of the promisee or a third person and which does induce such action or
forbearance is binding if injustice can be avoided only by enforcement of the
promise. The remedy granted for breach may be limited as justice requires.”
To be “estopped” means to be prohibited from denying now the validity of a

promise you made before.
The doctrine has an interesting background. In 1937, High Trees House Ltd. (a
British corporation) leased a block of London apartments from Central London
Properties. As World War II approached, vacancy rates soared because people left
the city. In 1940 the parties agreed to reduce the rent rates by half, but no term was
set for how long the reduction would last. By mid-1945, as the war was ending,
14. A contract for which the occupancy was again full, and Central London sued for the full rental rates from
nonbreaching party has no June on. The English court, under Judge Alfred Thompson Denning (1899–1999), had
remedy for its breach.
no difficulty finding that High Trees owed the full amount once full occupancy was
15. To be prohibited from denying again achieved, but Judge Denning went on. In an aside (called a dicta—a statement
a promise when another “by the way”—that is, not necessary as part of the decision), he mused about what
subsequently has relied on it.

would have happened if in 1945 Central London had sued for the full-occupancy
rate back to 1940. Technically, the 1940 amendment to the 1937 contract was not
binding on Central London—it lacked consideration—and Central London could
have reached back to demand full-rate payment. But Judge Denning said that High
Trees would certainly have relied on Central London’s promise that a reduced-rate
rent would be acceptable, and that would have been enough to bind it, to prevent it
from acting inconsistently with the promise. He wrote, “The courts have not gone
so far as to give a cause of action in damages for the breach of such a promise, but
they have refused to allow the party making it to act inconsistently with it.”Central
London Property Trust Ltd. v. High Trees House Ltd. (1947) KB 130.
In the years since, though, courts have gone so far as to give a cause of action in
damages for various noncontract promises. Contract protects agreements;
promissory estoppel protects reliance, and that’s a significant difference. The law of
contracts continues to evolve.
Degree of Completion
An agreement consisting of a set of promises is called an executory contract16

before any promises are carried out. Most executory contracts are enforceable. If
John makes an agreement to deliver wheat to Humphrey and does so, the contract
is called a partially executed contract17: one side has performed, the other has
not. When John pays for the wheat, the contract is fully performed. A contract that
has been carried out fully by both parties is called an executed contract18.
Terminology: Suffixes Expressing Relationships
Although not really part of the taxonomy of contracts (i.e., the orderly classification
of the subject), an aspect of contractual—indeed, legal—terminology should be
highlighted here. Suffixes (the end syllables of words) in the English language are
used to express relationships between parties in legal terminology. Here are
examples:
• Offeror. One who makes an offer.

• Offeree. One to whom an offer is made.
16. A contract that has yet to be
completed. • Promisor. One who makes a promise.
• Promisee. One to whom a promise is made.
17. A contract in which one party • Obligor. One who makes and has an obligation.
has performed, or partly
performed, and the other party • Obligee. One to whom an obligation is made.
has not. • Transferor. One who makes a transfer.
• Transferee. One to whom a transfer is made.
18. A contract that has been
completed.

KEY TAKEAWAY
Contracts are described and thus defined on the basis of four criteria:
explicitness (express, implied, or quasi-contracts), mutuality (bilateral or
unilateral), enforceability (void, voidable, unenforceable), and degree of
completion (executory, partially executed, executed). Legal terminology in
English often describes relationships between parties by the use of suffixes,
to which the eye and ear must pay attention.
EXERCISES
1. Able writes to Baker: “I will mow your lawn for $20.” If Baker accepts, is
this an express or implied contract?
2. Able telephones Baker: “I will mow your lawn for $20.” Is this an express
or implied contract?
3. What is the difference between a void contract and a voidable one?
4. Carr staples this poster to a utility pole: “$50 reward for the return of
my dog, Argon.” Describe this in contractual terms regarding
explicitness, mutuality, enforceability, and degree of completion.
5. Is a voidable contract always unenforceable?
6. Contractor bids on a highway construction job, incorporating Guardrail
Company’s bid into its overall bid to the state. Contractor cannot accept
Guardrail’s offer until it gets the nod from the state. Contractor gets the
nod from the state, but before it can accept Guardrail’s offer, the latter
revokes it. Usually a person can revoke an offer any time before it is
accepted. Can Guardrail revoke its offer in this case?

8.4 Cases
Explicitness: Implied Contract
Roger’s Backhoe Service, Inc. v. Nichols
681 N.W.2d 647 (Iowa 2004)
Carter, J.
Defendant, Jeffrey S. Nichols, is a funeral director in Muscatine.…In early 1998

Nichols decided to build a crematorium on the tract of land on which his funeral
home was located. In working with the Small Business Administration, he was
required to provide drawings and specifications and obtain estimates for the
project. Nichols hired an architect who prepared plans and submitted them to the
City of Muscatine for approval. These plans provided that the surface water from
the parking lot would drain onto the adjacent street and alley and ultimately enter
city storm sewers. These plans were approved by the city.
Nichols contracted with Roger’s [Backhoe Service, Inc.] for the demolition of the
foundation of a building that had been razed to provide room for the crematorium
and removal of the concrete driveway and sidewalk adjacent to that foundation.
Roger’s completed that work and was paid in full.
After construction began, city officials came to the jobsite and informed Roger’s
that the proposed drainage of surface water onto the street and alley was
unsatisfactory. The city required that an effort be made to drain the surface water
into a subterranean creek, which served as part of the city’s storm sewer system.
City officials indicated that this subterranean sewer system was about fourteen feet
below the surface of the ground.…Roger’s conveyed the city’s mandate to Nichols
when he visited the jobsite that same day.
It was Nichols’ testimony at trial that, upon receiving this information, he

advised…Roger’s that he was refusing permission to engage in the exploratory
excavation that the city required. Nevertheless, it appears without dispute that for
the next three days Roger’s did engage in digging down to the subterranean sewer
system, which was located approximately twenty feet below the surface. When the
underground creek was located, city officials examined the brick walls in which it
was encased and determined that it was not feasible to penetrate those walls in
335
order to connect the surface water drainage with the underground creek. As a
result of that conclusion, the city reversed its position and once again gave
permission to drain the surface water onto the adjacent street and alley.
[T]he invoices at issue in this litigation relate to charges that Roger’s submitted to
Nichols for the three days of excavation necessary to locate the underground sewer
system and the cost for labor and materials necessary to refill the excavation with
compactable materials and attain compaction by means of a tamping process.…The
district court found that the charges submitted on the…invoices were fair and
reasonable and that they had been performed for Nichols’ benefit and with his tacit
approval.…
The court of appeals…concluded that a necessary element in establishing an

implied-in-fact contract is that the services performed be beneficial to the alleged
obligor. It concluded that Roger’s had failed to show that its services benefited
Nichols.…
In describing the elements of an action on an implied contract, the court of appeals

stated in [Citation], that the party seeking recovery must show:
(1) the services were carried out under such circumstances as to give the recipient
reason to understand:
(a) they were performed for him and not some other person, and
(b) they were not rendered gratuitously, but with the expectation of compensation
from the recipient; and
(2) the services were beneficial to the recipient.
In applying the italicized language in [Citation] to the present controversy, it was

the conclusion of the court of appeals that Roger’s’ services conferred no benefit on
Nichols. We disagree. There was substantial evidence in the record to support a
finding that, unless and until an effort was made to locate the subterranean sewer
system, the city refused to allow the project to proceed. Consequently, it was
necessary to the successful completion of the project that the effort be made. The
fact that examination of the brick wall surrounding the underground creek
indicated that it was unfeasible to use that source of drainage does not alter the fact
that the project was stalemated until drainage into the underground creek was fully
8.4 Cases 336

explored and rejected. The district court properly concluded that Roger’s’ services
conferred a benefit on Nichols.…
Decision of court of appeals vacated; district court judgment affirmed.
CASE QUESTIONS
1. What facts must be established by a plaintiff to show the existence of an

implied contract?
2. What argument did Nichols make as to why there was no implied
contract here?
3. How would the facts have to be changed to make an express contract?
Mutuality of Contract: Unilateral Contract
SouthTrust Bank v. Williams
775 So.2d 184 (Ala. 2000)
Cook, J.
SouthTrust Bank (“SouthTrust”) appeals from an order denying its motion to

compel arbitration of an action against it by checking-account customers Mark
Williams and Bessie Daniels. We reverse and remand.
Daniels and Williams began their relationship with SouthTrust in 1981 and 1995,
respectively, by executing checking-account “signature cards.” The signature card
each customer signed contained a “change-in-terms” clause. Specifically, when
Daniels signed her signature card, she “agree[d] to be subject to the Rules and
Regulations as may now or hereafter be adopted by the Bank.” (Emphasis
added.)…[Later,] SouthTrust added paragraph 33 to the regulations:…
ARBITRATION OF DISPUTES. You and we agree that the transactions in your

account involve ‘commerce’ under the Federal Arbitration Act (‘FAA’). ANY
CONTROVERSY OR CLAIM BETWEEN YOU AND US…WILL BE SETTLED BY BINDING
ARBITRATION UNDER THE FAA.…
8.4 Cases 337

This action…challenges SouthTrust’s procedures for paying overdrafts, and alleges

that SouthTrust engages in a “uniform practice of paying the largest check(s) before
paying multiple smaller checks…[in order] to generate increased service charges for
[SouthTrust] at the expense of [its customers].”
SouthTrust filed a “motion to stay [the] lawsuit and to compel arbitration.” It based
its motion on paragraph 33 of the regulations. [T]he trial court…entered an order
denying SouthTrust’s motion to compel arbitration. SouthTrust appeals.…
Williams and Daniels contend that SouthTrust’s amendment to the regulations,

adding paragraph 33, was ineffective because, they say, they did not expressly assent
to the amendment. In other words, they object to submitting their claims to
arbitration because, they say, when they opened their accounts, neither the
regulations nor any other relevant document contained an arbitration provision.
They argue that “mere failure to object to the addition of a material term cannot be
construed as an acceptance of it.”…They contend that SouthTrust could not
unilaterally insert an arbitration clause in the regulations and make it binding on
depositors like them.
SouthTrust, however, referring to its change-of-terms clause insists that it

“notified” Daniels and Williams of the amendment in January 1997 by enclosing in
each customer’s “account statement” a complete copy of the regulations, as
amended. Although it is undisputed that Daniels and Williams never affirmatively
assented to these amended regulations, SouthTrust contends that their assent was
evidenced by their failure to close their accounts after they received notice of the
amendments.…Thus, the disposition of this case turns on the legal effect of Williams
and Daniels’s continued use of the accounts after the regulations were amended.
Williams and Daniels argue that “[i]n the context of contracts between merchants
[under the UCC], a written confirmation of an acceptance may modify the contract
unless it adds a material term, and arbitration clauses are material terms.”…
Williams and Daniels concede—as they must—…that Article 2 governs “transactions

in goods,” and, consequently, that it is not applicable to the transactions in this
case. Nevertheless, they argue:
It would be astonishing if a Court were to consider the addition of an arbitration

clause a material alteration to a contract between merchants, who by definition are
sophisticated in the trade to which the contract applies, but not hold that the
addition of an arbitration clause is a material alteration pursuant to a change-of-
8.4 Cases 338

terms clause in a contract between one sophisticated party, a bank, and an entire
class of less sophisticated parties, its depositors.…
In response, SouthTrust states that “because of the ‘at-will’ nature of the

relationship, banks by necessity must contractually reserve the right to amend
their deposit agreements from time to time.” In so stating, SouthTrust has precisely
identified the fundamental difference between the transactions here and those
transactions governed by [Article 2].
Contracts for the purchase and sale of goods are essentially bilateral and executory
in nature. See [Citation] “An agreement whereby one party promises to sell and the
other promises to buy a thing at a later time…is a bilateral promise of sale or
contract to sell”.…“[A] unilateral contract results from an exchange of a promise for
an act; a bilateral contract results from an exchange of promises.”…Thus, “in a
unilateral contract, there is no bargaining process or exchange of promises by
parties as in a bilateral contract.” [Citation] “[O]nly one party makes an offer (or
promise) which invites performance by another, and performance constitutes both
acceptance of that offer and consideration.” Because “a ‘unilateral contract’ is one
in which no promisor receives promise as consideration for his promise,” only one
party is bound.…The difference is not one of semantics but of substance; it
determines the rights and responsibilities of the parties, including the time and the
conditions under which a cause of action accrues for a breach of the contract.
This case involves at-will, commercial relationships, based upon a series of

unilateral transactions. Thus, it is more analogous to cases involving insurance
policies, such as [Citations]. The common thread running through those cases was
the amendment by one of the parties to a business relationship of a document
underlying that relationship—without the express assent of the other party—to
require the arbitration of disputes arising after the amendment.…
The parties in [the cited cases], like Williams and Daniels in this case, took no action
that could be considered inconsistent with an assent to the arbitration provision. In
each case, they continued the business relationship after the interposition of the
arbitration provision. In doing so, they implicitly assented to the addition of the
arbitration provision.…
Reversed and remanded.
8.4 Cases 339

CASE QUESTIONS
1. Why did the plaintiffs think they should not be bound by the arbitration
clause?
2. The court said this case involved a unilateral contract. What makes it
that, as opposed to a bilateral contract?
3. What should the plaintiffs have done if they didn’t like the arbitration
requirement?
Unilateral Contract and At-Will Employment
Woolley v. Hoffmann-La Roche, Inc.
491 A.2d 1257 (N.J. 1985)
Wilntz, C. J.
Plaintiff, Richard Woolley, was hired by defendant, Hoffmann-La Roche, Inc., in

October 1969, as an Engineering Section Head in defendant’s Central Engineering
Department at Nutley. There was no written employment contract between plaintiff
and defendant. Plaintiff began work in mid-November 1969. Sometime in December,
plaintiff received and read the personnel manual on which his claims are based.
[The company’s personnel manual had eight pages;] five of the eight pages are
devoted to “termination.” In addition to setting forth the purpose and policy of the
termination section, it defines “the types of termination” as “layoff,” “discharge
due to performance,” “discharge, disciplinary,” “retirement” and “resignation.” As
one might expect, layoff is a termination caused by lack of work, retirement a
termination caused by age, resignation a termination on the initiative of the
employee, and discharge due to performance and discharge, disciplinary, are both
terminations for cause. There is no category set forth for discharge without cause.
The termination section includes “Guidelines for discharge due to performance,”
consisting of a fairly detailed procedure to be used before an employee may be fired
for cause. Preceding these definitions of the five categories of termination is a
section on “Policy,” the first sentence of which provides: “It is the policy of
Hoffmann-La Roche to retain to the extent consistent with company requirements,
the services of all employees who perform their duties efficiently and effectively.”
In 1976, plaintiff was promoted, and in January 1977 he was promoted again, this
latter time to Group Leader for the Civil Engineering, the Piping Design, the Plant
8.4 Cases 340

Layout, and the Standards and Systems Sections. In March 1978, plaintiff was
directed to write a report to his supervisors about piping problems in one of
defendant’s buildings in Nutley. This report was written and submitted to plaintiff’s
immediate supervisor on April 5, 1978. On May 3, 1978, stating that the General
Manager of defendant’s Corporate Engineering Department had lost confidence in
him, plaintiff’s supervisors requested his resignation. Following this, by letter dated
May 22, 1978, plaintiff was formally asked for his resignation, to be effective July 15,
1978.
Plaintiff refused to resign. Two weeks later defendant again requested plaintiff’s
resignation, and told him he would be fired if he did not resign. Plaintiff again
declined, and he was fired in July.
Plaintiff filed a complaint alleging breach of contract.…The gist of plaintiff’s breach

of contract claim is that the express and implied promises in defendant’s
employment manual created a contract under which he could not be fired at will,
but rather only for cause, and then only after the procedures outlined in the
manual were followed. Plaintiff contends that he was not dismissed for good cause,
and that his firing was a breach of contract.
Defendant’s motion for summary judgment was granted by the trial court, which
held that the employment manual was not contractually binding on defendant, thus
allowing defendant to terminate plaintiff’s employment at will. The Appellate
Division affirmed. We granted certification.
The employer’s contention here is that the distribution of the manual was simply an
expression of the company’s “philosophy” and therefore free of any possible
contractual consequences. The former employee claims it could reasonably be read
as an explicit statement of company policies intended to be followed by the
company in the same manner as if they were expressed in an agreement signed by
both employer and employees.…
This Court has long recognized the capacity of the common law to develop and
adapt to current needs.…The interests of employees, employers, and the public lead
to the conclusion that the common law of New Jersey should limit the right of an
employer to fire an employee at will.
In order for an offer in the form of a promise to become enforceable, it must be

accepted. Acceptance will depend on what the promisor bargained for: he may have
bargained for a return promise that, if given, would result in a bilateral contract,
both promises becoming enforceable. Or he may have bargained for some action or
8.4 Cases 341

nonaction that, if given or withheld, would render his promise enforceable as a

unilateral contract. In most of the cases involving an employer’s personnel policy
manual, the document is prepared without any negotiations and is voluntarily
distributed to the workforce by the employer. It seeks no return promise from the
employees. It is reasonable to interpret it as seeking continued work from the
employees, who, in most cases, are free to quit since they are almost always
employees at will, not simply in the sense that the employer can fire them without
cause, but in the sense that they can quit without breaching any obligation. Thus
analyzed, the manual is an offer that seeks the formation of a unilateral
contract—the employees’ bargained-for action needed to make the offer binding
being their continued work when they have no obligation to continue.
The unilateral contract analysis is perfectly adequate for that employee who was
aware of the manual and who continued to work intending that continuation to be
the action in exchange for the employer’s promise; it is even more helpful in
support of that conclusion if, but for the employer’s policy manual, the employee
would have quit. See generally M. Petit, “Modern Unilateral Contracts,” 63 Boston
Univ. Law Rev. 551 (1983) (judicial use of unilateral contract analysis in employment
cases is widespread).
…All that this opinion requires of an employer is that it be fair. It would be unfair to
allow an employer to distribute a policy manual that makes the workforce believe
that certain promises have been made and then to allow the employer to renege on
those promises. What is sought here is basic honesty: if the employer, for whatever
reason, does not want the manual to be capable of being construed by the court as a
binding contract, there are simple ways to attain that goal. All that need be done is
the inclusion in a very prominent position of an appropriate statement that there is
no promise of any kind by the employer contained in the manual; that regardless of
what the manual says or provides, the employer promises nothing and remains free
to change wages and all other working conditions without having to consult anyone
and without anyone’s agreement; and that the employer continues to have the
absolute power to fire anyone with or without good cause.
Reversed and remanded for trial.
8.4 Cases 342

CASE QUESTIONS
1. What did Woolley do to show his acceptance of the terms of employment

offered to him?
2. In part of the case not included here, the court notes that Mr. Woolley
died “before oral arguments on this case.” How can there be any
damages if the plaintiff has died? Who now has any case to pursue?
3. The court here is changing the law of employment in New Jersey. It is
making case law, and the rule here articulated governs similar future
cases in New Jersey. Why did the court make this change? Why is it
relevant that the court says it would be easy for an employer to avoid
this problem?
8.4 Cases 343

8.5 Summary and Exercises
Summary
Contract law developed as the status-centered organization of feudal society faded and people began to make
choices about how they might order their lives. In the capitalistic system, people make choices about how to
interact with others, and—necessarily—those choices expressed as promises must be binding and enforceable.
The two fundamental sources of contract law are (1) the common law as developed in the state courts and as
summarized in the Restatement (Second) of Contracts and (2) the Uniform Commercial Code for the sale of
goods. In general, the UCC is more liberal than the common law in upholding the existence of a contract.
Types of contracts can be distinguished by four criteria: (1) express and implied, including quasi-contracts
implied by law; (2) bilateral and unilateral; (3) enforceable and unenforceable; and (4) completed (executed) and
uncompleted (executory). To understand contract law, it is necessary to master these distinctions and their
nuances.
344
EXERCISES
1. a. Mr. and Mrs. Smith, an elderly couple, had no relatives.

When Mrs. Smith became ill, the Smiths asked a friend,
Henrietta, to help with various housekeeping chores,
including cleaning and cooking. Although the Smiths never
promised to pay her, Henrietta performed the chores for
eighteen months. Henrietta now claims that she is entitled to
the reasonable value of the services performed. Is she
correct? Explain.
b. Assume instead that the Smiths asked Mrs. Smith’s sister,
Caroline, who lived nearby, to help with the housekeeping.
After eighteen months, Caroline claims she is entitled to the
reasonable value of the services performed. Is she correct?
Explain.
2. A letter from Bridge Builders Inc. to the Allied Steel Company stated,
“We offer to purchase 10,000 tons of No. 4 steel pipe at today’s quoted
price for delivery two months from today. Your acceptance must be
received in five days.” Does Bridge Builders intend to create a bilateral
or a unilateral contract? Why?
3. Roscoe’s barber persuaded him to try a new hair cream called Sansfree,
which the barber applied to Roscoe’s hair and scalp. The next morning
Roscoe had a very unpleasant rash along his hairline. Upon investigation
he discovered that the rash was due to an improper chemical compound
in Sansfree. If Roscoe filed a breach of contract action against the
barber, would the case be governed by the Uniform Commercial Code or
common law? Explain.
4. Rachel entered into a contract to purchase a 2004 Dodge from Hanna,
who lived in the neighboring apartment. When a dispute arose over the
terms of the contract, Hanna argued that, because neither she nor
Rachel was a merchant, the dispute should be decided under general
principles of common law. Rachel, on the other hand, argued that Hanna
was legally considered to be a merchant because she sold the car for
profit and that, consequently, the sale was governed by the Uniform
Commercial Code. Who is correct? Explain.
5. Lee and Michelle decided to cohabit. When they set up house, Michelle
gave up her career, and Lee promised to share his earnings with her on a
fifty-fifty basis. Several years later they ended their relationship, and
when Lee failed to turn over half of his earnings, Michelle filed suit on
8.5 Summary and Exercises 345

the basis of Lee’s promise. What kind of contract would Michelle allege
that Lee had breached? Explain.
6. Harry and Wilma were divorced in 2008, and Harry was ordered in the
divorce decree to pay his ex-wife $10,000. In 2009 and 2010 Harry was
hospitalized, incurring $3,000 in bills. He and Wilma discussed the
matter, and Wilma agreed to pay the bill with her own money, even
though Harry still owed her $5,000 from the divorce decree. When Harry
died in late 2010, Wilma made a claim against his estate for $8,000 (the
$3,000 in medical bills and the $5,000 from the decree), but the estate
was only willing to pay the $5,000 from the decree, claiming she had
paid the hospital bill voluntarily and had no contract for repayment. Is
the estate correct? Explain.
7. Louie, an adult, entered into a contract to sell a case of scotch whiskey
to Leroy, a minor. Is the contract void or voidable? Explain.
8. James Mann owned a manufacturing plant that assembled cell

phones. A CPA audit determined that several phones were
missing. Theft by one or more of the workers was suspected.
Accordingly, under Mann’s instructions, the following sign was
placed in the employees’ cafeteria:
Reward. We are missing phones. I want all employees to watch for

thievery. A reward of $500 will be paid for information given by
any employee that leads to the apprehension of employee
thieves.
—James Mann
Waldo, a plant employee, read the notice and immediately called

Mann, stating, “I accept your offer. I promise to watch other
employees and provide you with the requested information.” Has
a contract been formed? Explain.
9. Almost every day Sally took a break at lunch and went to the
International News Stand—a magazine store—to browse the newspapers
and magazines and chat with the owner, Conrad. Often she bought a
magazine. One day she went there, browsed a bit, and took a magazine
off the rack. Conrad was busy with three customers. Sally waved the
magazine at Conrad and left the store with it. What kind of a contract, if
any, was created?
10. Joan called Devon Sand & Gravel and ordered two “boxes” (dump-truck
loads) of gravel to be spread on her rural driveway by the “shoot and
run” method: the tailgate is partially opened, the dump-truck bed is
lifted, and the truck moves down the driveway spreading gravel as it

goes. The driver mistakenly graveled the driveway of Joan’s neighbor,

Watson, instead of Joan’s. Is Devon entitled to payment by Watson?
Explain.

SELF-TEST QUESTIONS
1. An implied contract
a. must be in writing
b. is one in which the terms are spelled out
c. is one inferred from the actions of the parties
d. is imposed by law to avoid an unjust result
e. may be avoided by one party
2. The Convention on Contracts for the International Sale of Goods

is
a. an annual meeting of international commercial purchasing

agents.
b. contract law used in overseas US federal territories
c. a customary format or template for drafting contracts
d. a kind of treaty setting out international contract law, to
which the United States is a party
e. the organization that develops uniform international law
3. An unenforceable contract is
a. void, not a contract at all

b. one that a court will not enforce for either side because of a
rule of law
c. unenforceable by one party but enforceable by the other
d. one that has been performed by one party but not the other
e. too indefinite to be valid
4. Betty Baker found a bicycle apparently abandoned near her

house. She took it home and spent $150 repairing and painting it,
after which Carl appeared and proved his ownership of it. Under
what theory is Betty able to get reimbursed for her
expenditures?
a. express contract
b. implied contract
c. apparent or quasi-contract
d. executory contract

e. none: she will not get reimbursed
5. Alice discusses with her neighbor Bob her plan to hire

Woodsman to cut three trees on her side of their property line,
mentioning that she can get a good deal because Woodsman is
now between jobs. Bob says, “Oh, don’t do that. My brother is
going to cut some trees on my side, and he can do yours too for
free.” Alice agrees. But Bob’s brother is preoccupied and never
does the job. Three weeks later Alice discovers Woodsman’s rates
have risen prohibitively. Under what theory does Alice have a
cause of action against Bob?
a. express contract
b. promissory estoppel
c. quasi-contract
d. implied contract
e. none: she has no cause of action against Bob
SELF-TEST ANSWERS
1. c
2. d
3. c
4. c
5. b

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This is “Introduction to Contract Law”, chapter 8 from the book The Law, Sales, and Marketing (index.html) (v.

This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/

After reading this chapter, you should understand the following:

1. Why and how contract law has developed

8.1 General Perspectives on Contracts

1. Explain contract law’s cultural roots: how it has evolved as capitalism

The Role of Contracts in Modern Society

So commonplace is the concept of contract—and our freedom to make contracts

Contract law may be viewed economically as well as culturally. In An Economic

The Definition of Contract

8.1 General Perspectives on Contracts 321

Overview of the Contracts Chapter

a. Mutual assent (i.e., offer and acceptance), Chapter 9 "The

8.1 General Perspectives on Contracts 322

Contract law developed when the strictures of feudalism dissipated, when a

1. Why is contract law necessary in a society where a person’s status is not

8.1 General Perspectives on Contracts 323

8.2 Sources of Contract Law

Statutory Law: The Uniform Commercial Code

History of the UCC

8.2 Sources of Contract Law 325

Organization of the UCC

• Article 1: General Provisions

8.2 Sources of Contract Law 326

Figure 8.1 Sources of Law

International Sales Law

A Convention on Contracts for the International Sale of Goods (CISG) 6 was

8.2 Sources of Contract Law 327

1. How do judges make contract law?

8.2 Sources of Contract Law 328

8.3 Basic Taxonomy of Contracts

1. Understand that contracts are classified according to the criteria of

Implied Contract (Implied in Fact)

A quasi-contract (implied in law)9 is—unlike both express and implied contracts,

9. A contract imposed on a party

8.3 Basic Taxonomy of Contracts 330

Figure 8.2 Bilateral and Unilateral Contracts

By contrast, a voidable contract13 is one that may become unenforceable by one

Ordinarily, the parties to a voidable contract are entitled to be restored to their

8.3 Basic Taxonomy of Contracts 331

A bit more on enforceability is in order. A promise or what seems to be a promise is

To be “estopped” means to be prohibited from denying now the validity of a

8.3 Basic Taxonomy of Contracts 332

An agreement consisting of a set of promises is called an executory contract16

Terminology: Suffixes Expressing Relationships

• Offeror. One who makes an offer.

8.3 Basic Taxonomy of Contracts 333

8.3 Basic Taxonomy of Contracts 334

Explicitness: Implied Contract

Roger’s Backhoe Service, Inc. v. Nichols

681 N.W.2d 647 (Iowa 2004)

Defendant, Jeffrey S. Nichols, is a funeral director in Muscatine.…In early 1998

It was Nichols’ testimony at trial that, upon receiving this information, he

The court of appeals…concluded that a necessary element in establishing an

In describing the elements of an action on an implied contract, the court of appeals

(2) the services were beneficial to the recipient.

In applying the italicized language in [Citation] to the present controversy, it was

8.4 Cases 336

Decision of court of appeals vacated; district court judgment affirmed.