Contract Formation Notes
Prof. Vlad A. Bursuc
Now that all classes on this topic have concluded, be sure to carefully read the following
Professor's Notes to ensure that your notes and your understanding of the topic are complete
and accurate. Should you have any questions, please do not hesitate to ask!
In case you want to review the PPT for Ch. 8, it is available here.
Overview
A contract is a legally enforceable promise, or an exchange of promises, to do or not to do
something.
The whole key is manifestation of assent
● A contract may be either written or oral and may be either express or implied
○ The law of contracts gives people the certainty they need to rely on promises
○ Contract law gives people confidence to do business with each other
○ Contract law provides flexibility
○ People may agree to anything that is not illegal or against public policy
○ Contract law allows precision in expectations
○ A party may assure the other person conducts themselves (to the
smallest detail) in a way that benefits all their purposes
● A contract rules come from the common law and from the UCC
○ Common Law
■ Formation, performance, breach and remedies
○ UCC
■ Only governs sale of goods.
■ Good = tangible, movable item of personal property
● A bilateral contract is an agreement containing mutual promises
○ When contract formed, all promises remain outstanding (i.e., executory contract)
○ Offeror: “I will pay you $1,000 to paint my house.”
○ Offerree: “I agree to paint your house for $1,000.”
■ Promise ↔ Promise
● A unilateral contract is an agreement with only one promise
○ No contract formed until the offerree performs
○ Offeror: “If you paint my house, then I will pay you $500.”
○ Offerree can only accept by performing
○ Promise ↔ Performance
● An express contract arises where the parties actually discuss the terms of their
agreement
● An implied-in-fact contract arises from conduct of the parties
○ Was there a contract between Sara and the man?
■ There was no express contract
■ The two did not discuss terms
■ There may have been an implied contract
■ Did the deliberate conduct of each party, viewed reasonably under
the circumstances, manifest an intent to enter into a contractual
relationship?
■ What is the customary expectation in this situation?
○ Ask if parties’ behavior indicates intent to contract
■ Treated as express contract
○ E.g., You drop your car off at the mechanic’s and tell him your brake pads need
to be replaced. You expect him to fix it, and he expects you to pay for it.
○ E.g., You visit your doctor and tell him you think you have strep throat. You
expect him to test/treat you, and he expects you to pay for it.
○ E.g., “One day Sara, a street musician, is playing her violin when she notices a
gentleman at an outdoor café who seems to be enjoying her music. When Sara
finishes her song, the man claps and requests an encore. Sara proceeds to play
another song, which the man clearly enjoys. When Sara finishes playing, she
tells the man that he owes her $10
● An implied-in-law contract arises when one party is unjustly enriched at the expense of
the other party
○ Not applicable if other party was either a volunteer or an officious meddler
■ Volunteer – One who confers a benefit with no intent to charge
○ Officious meddler – One who imposes their services without asking
■ E.g., Marcy comes home to find a crew putting a new roof on her house…
without her knowledge. They got the address mixed up. Will Marcy have
to pay?
■ A: No. The roofer is an officious intermeddler (i.e., they have
imposed their services on Marcy against her will). The same is
true if the service provider is a volunteer.
■ E.g., What if, instead, Marcy was home the whole time, hiding with the
lights off, waiting for the roofers to finish?
■ A: Now, justice would require that Marcy pay the roofers the FMV
of the roof. This is the point of a quasi-contract—it provides an
equitable remedy, which is based on fairness.
Contract Formation
There are three essential elements needed to form a contract
1. Offer
2. Acceptance
3. Consideration
Offer
An offer must:
● Be communicated
● Be directed at a specific person(s)
● Indicate a desire to contract
● Create understanding that contract will form upon acceptance
The last element distinguishes an offer from an advertisement
The terms of an offer must be definite and specific
● E.g., Putting a house up for sale for $250k is not an offer, it is an advertisement
● C.f., Under the UCC, a contract for the sale of goods may leave open non-quantity
terms, such as price
An offer terminates when:
● Offerree rejects the offer
● Offerree makes a counteroffer
● Offeror revokes the offer
● Upon offeror’s death or mental incompetence
Revocation
● -Revocation must be communicated to offerree
● Offeror’s death or incompetence
● -Does not matter if offerree is unaware
● -Not revoked if offerree has already accepted
● Example: Ray offers to sell Carmen his iPad for $300…
○ Carmen says, “No thanks”
■ Rejection
○ Carmen says, “I’ll pay $250”
■ Counteroffer (or rejection + Offer)
○ Ray dies before Carmen accepts
■ Revocation by death
○ Carmen shows up at Ray’s door, but Ray throws it open, yelling “I revoke!”
■ Revocation
Acceptance
Acceptance is the offerree’s manifestation of assent
● In a bilateral contract, acceptance occurs when offerree makes the required promise
● In a unilateral contract, acceptance occurs when offerree performs the requested act
● If the offer specifies an exclusive mode of acceptance, the offerree must strictly comply
○ “Acceptance must occur in writing on pink paper with purple ink.”
● However, if specified mode is not clearly exclusive, any reasonable method is effective
○ “Acceptance may occur in writing on pink paper with purple ink.” (can accept this
one via email or with regular paper)
● Note: An offer cannot make failure to act a form of acceptance
○ The offer cannot impose a duty on the offerree by stating, “If you do not wish to
accept, deliver written notice by Friday.”
○ Note, the offerree still may choose to accept this method of acceptance
Consideration
Consideration is the receipt of a legal benefit or the suffering of a legal detriment
● Any promise to do something one has no obligation to do
● Any promise to refrain from doing something one has the right to do
● Any performance when there is no obligation for one to perform
● E.g., When nephew turns 21, his rich uncle promises to give him $1M on his 30th
birthday if nephew promises not to drink or smoke until then.
○ Nephew has legal right to drink and smoke, so refraining from doing so until he is
30 is valid consideration.
Consideration must be bargained for
● Prior consideration does not count
○ The value cannot be exchanged before entering into the contract
○ E.g., Agreeing to pay someone $50k for their past service to the company is not
valid consideration.
● Pre-existing obligations do not count
○ Prevents a party from beginning work on a contract and then asking for more
money halfway through the performance
○ E.g., Tony agrees to repair Rachel’s car for $500. After he begins work on the
car, he is prohibited from demanding $100 more to complete the repair
○ -If he discovered new work that needed to be done on the car, it would change
our answer
● The amount is irrelevant, but the genuineness is highly relevant
■ E.g., Paying $1 for a new car is valid consideration if the parties actually
bargained for the exchange.
■ An accord and satisfaction is when a party agrees not to sue another party for
a fixed amount of money.
■ The lawsuit must be reasonably certain to occur
■ E.g., Comcast bills you $150 for your monthly cable bill. You dispute the
bill because your internet was down the entire month. You and Comcast
agree that you will pay $75 and Comcast will not sue you for the full
amount. Without new consideration, you could not legally contract to only
pay Comcast $75 for a $150 obligation
An option is an agreement that the offeror will keep the offer open exclusively for the offerree
■ Requires separate consideration
■ Open for finite period of time
■ Exampe of an Option Contract: Anthony sees a plot of land for sale on the side of
Highway 316. He contacts the seller, Bart, who offers to sell Anthony the land for
$400,000. Anthony believes he wants the land for that price, but he wants some time to
think about it.
■ Anthony agrees to pay Bart $50,000 if he will hold his offer open for two weeks.
○ If Anthony decides not to buy the land, he pays Bart $50,000.
○ If Anthony decides to buy the land, he pays the Bart $450,000.
Promissory Estoppel
Promissory estoppel arises when a promisee justifiably relies on a promise to his or her
detriment
● Equitable remedy to help offerree when contract does not exist
● I.e., Offerree reasonably relies on an offer and incurs expenses. If offeror revokes offer,
there is no contract formed, but offerree is still injured and cannot sue for breach of
contract.
■ The promisor must know the promisee is likely to rely on the promise
■ Reliance must be reasonable
● E.g., Robert lives and works in Georgia. One day, a Colorado company, Rally Software,
calls him and says, “We like your work. We think it’d be great if you’d come to Boulder to
work for us. As soon as you get here, we’ll hammer out the specifics.” Robert excitedly
responds, “Awesome! My family and I can’t wait!” Two weeks later, Robert quits his job
in Georgia, sells his house, and moves to Boulder with his wife and four kids. Once he’s
there, the Rally refuses to hire him.
■ Will Robert be able to recover damages for breach of contract?
■ A: No. There was no contract. There was not a definite offer, so there could be
no acceptance. Also, there was no consideration.
● Will Robert be able to recover damages?
● A: Probably. Per promissory estoppel, he relied on the Rally’s promise to his
detriment.
● What if all this happened in one day, including the company withdrawing the offer?
● A: Probably not. The company wouldn’t reasonably expect Robert to suffer such a
detriment in this timeframe.
Capacity
Capacity is one’s ability to be bound by a contract
● A minor lacks capacity
○ Under 18 years old
○ Voidable by minor
○ The minor may disaffirm the K at any point before or shortly after they reach legal
age
○ If the contract is for necessities—food, shelter, medical care, clothing—minor
may have to pay reasonable value.
○ If minor misrepresents their age to the other party, they may be bound.
● Mentally impairment may lead to a lack of capacity
○ Test: Did person have the capability to understand the nature and purpose of the
contract?
○ A court may judge a person mentally incompetent
○ Drunks – Lucy v. Zehmer (1954)
■ One evening in December 1952 after several drinks, Zehmer (D) wrote a
contract on a restaurant bill in which he agreed to sell his farm to Lucy (P)
for $50,000. Zehmer later insisted that he had been intoxicated and
thought the matter was a joke, not realizing that Lucy had been serious.
■ Lucy claimed that he was not intoxicated and believed that Zehmer was
also sober. Zehmer testified that he was already “high as a Georgia pine”
when he began drinking with Lucy. He claimed that he was merely bluffing
to try to get Lucy to admit he did not actually have $50,000.
■ Lucy brought suit for specific performance when Zehmer refused to
complete the transaction. The trial court ruled for Zehmer holding that
Lucy had not established a right to specific performance.
■ In this case Zehmer’s acts and words could be reasonably interpreted by
Lucy as an offer to sell his farm. The parties discussed the matter for over
forty minutes, addressed the issue of examination of title, and both
Zehmer and his wife signed the agreement.
Void & Voidable
Contracts are void if they involve:
● An illegal purpose
○ If parties agree to do something illegal, they may not sue to enforce the contract
● Unconscionability
○ Substantive – The terms are so one-sided that they “shock the conscience of the
court”
○ Procedural – The way the contract is negotiated is excessively unfair
Contracts are voidable if they involve:
● Fraud – Intentional misstatement that an innocent party relies on to their detriment
● Misrepresentation – Misstatement that an innocent party relies on to their detriment.
Must be material
● Duress – Force or threat
○ E.g., Taking care of an elderly person IOT get into their will
○ E.g., Lindsay Lohan’s parents taking advantage of her to get part of her earnings
(after she is an adult)
● Undue influence – Taking advantage of someone based on relationship
Mistakes
What if the parties are genuinely mistaken?
● Mutual mistake – If both parties are mistaken as to a material fact, they may rescind the
contract
○ Material fact – Without this fact, the parties would not have contracted
○ Rescind – As if the contract never existed
○ E.g., Two parties contract to buy-sell timber rights on a tract of land in Montana.
It turns out that all the timber was destroyed in a forest fire the week before the
contract, and neither party knew about it. Both parties are mistaken as to a
material fact; therefore, the contract may be rescinded.
● Unilateral mistake – If only one party is mistaken, the contract is still valid
○ Mistakes in judgment are not grounds for rescission
○ E.g., Miguel’s of Miguel’s Clothing Shop turned off the TV at halftime of the ATL
vs. SF game in January, believing that the Falcons had the game in the bag. He
then picked up the phone and ordered 1,000 t-shirts with the words, “Dirty Birds
are Super Bowl Bound 2013!” It turns out the Falcons lost the game. Miguel has
made an error in judgment and this is not grounds to rescind the contract.
● Limited Exception: Mistakes in calculation may possibly be rescinded
○ E.g., Donny’s Plumbers bids on a contract job to install all of the urinals at the
new Falcons stadium. Mistakenly putting a decimal point in the wrong place,
they accidentally bid 70% lower than any other bid and 50% lower than the job
would even cost them. This may be grounds for rescinding the contract if the
general contractor should have known a mistake was made.
Statute of Frauds
The statute of frauds requires a writing for the following contracts to be enforceable
1. Sales of interests in land
2. Performance that cannot be completed in one year
3. Sale of goods for $500 or more
4. Collateral promise to pay another’s debt
Purposes of the Statute of Frauds
● Designed to prevent potential deception or fraud from oral contracts
● Contract must only be evidenced in writing, signed by “party against whom enforcement
is sought”
● Makes a contract unenforceable
● 1+ Year Performance
○ Covers contracts that expressly state a term longer than one year
○ A contract with an “employment term for 20-months” term would count
○ A contract with an “employment term for life” would not count
● Collateral Promise to Pay Another’s Debt
○ E.g., A shareholder agrees to pay corporation’s loans back if the corporation fails
to pay its debts
● Example: Johnny signs an employment contract with the following term:
○ “Employment for the next 20 months”
■ Statue of frauds applies because cannot be completed within one year
○ “Employment for life”
■ Statue of frauds does not apply because Johnny could die in the next 12
months
● Example: Heidi manages a local restaurant and enters into a contract with the following
language:
○ “I’ll pay you $500 for 50 new dinner plates”
■ Statue of frauds applies because contract is for the sale of goods and is
for $500
○ “I’ll pay you $500 to paint the restaurant’s interior”
■ Statue of frauds does not apply because payment is for services—not
sale of goods
There are three exceptions
● Partial performance (real estate)
○ Made improvements or paid part of purchase price
● Rules involving goods (UCC)
○ E.g., specialty manufactured goods
● Judicial admissions
○ Defendant admits that a contract exists