MGMT 265 Columbia College Swift Shipping Case Study

You are the manager of a shipping company, Swift Shipping (SS). You have a longtime customer, Vicki Vegetable (VV) who ships produce. Because of your relationship, you often bend SS’s rules for this customer; it would be a shame to lose her business.

VV calls you one day and asks for expedited shipment for a special package. VV wants you to move her shipment from LA to New York as quickly as you can. You ignore SS protocol for written signatures and invoices, and just order a driver to get the shipment moving.

The police pull over your driver for speeding in New Jersey. The police search the truck, and find marijuana hidden in with the veggies. Additionally, because the shipment was not completed, VV refuses to pay for the order.

Discuss the issues raised in Chapter 10 and 11 that both help and hurt your chances to recover payment from VV.

CHAPTER
10
FORMING A CONTRACT
Chris always planned to propose to his girlfriend, Alissa, at Chez Luc, their favorite ritzy
restaurant. When he was ready to pop the question, Chris went on Chez Luc’s website to reserve
a special table. But the website would not grant him a seating time unless he clicked the box that
said: “No one in my party will use a cell phone at Chez Luc.” Chris agreed and was issued a
booking at his waterfront table of choice.
After Alissa’s exuberant “yes” during the appetizer course, the newly engaged couple could
not contain their excitement. First they posted selfies on social media. Then they called their
parents to share the good news … only to be confronted by the angry maître d’, who escorted the
couple out of the dining room for breaching their contract with the restaurant.
The angry maître d’ escorted the couple out of the dining room.
We make promises and agreements all the time—from the casual “I’ll call you later” to more
formal business contracts. These agreements may be long or short, written or oral, negotiable or
not. But they are not necessarily enforceable through the legal system. One of the aims of contract
law is to determine which agreements are worth enforcing. How do we know if an agreement is
“worthy”?
10-1 CONTRACTS
Contract law is based on the notion that you are the best judge of your own welfare. By and large,
you are free to make whatever agreements you want, subject to whatever rules you choose, and
the law will support you. However, this freedom is not limitless: The law imposes seven
requirements, which we will analyze in detail in upcoming chapters.
Contract law is a story of freedom and power, rules and relationships—with drama to spare.
It is important to study this story to avoid your own contract drama. Let’s start with an introduction
to contracts.
10-1a Elements of a Contract
A contract is a legally enforceable agreement. People regularly make promises, but only some of
them are enforceable. For a contract to be enforceable, seven key characteristics must be present.
We will study this “checklist” at length in the next several chapters.
☐ Offer
☐ Acceptance
☐ Consideration
☐ Legality
☐ Capacity
☐ Consent
☐ Writing
CONTRACTS CHECKLIST
Offer. All contracts begin when a person or a company proposes a deal. It might involve
buying something, selling something, doing a job, or anything else. But only proposals made
in certain ways amount to a legally recognized offer.
• Acceptance. Once a party receives an offer, he must respond to it in a certain way. We will
examine the requirements of both offers and acceptances in Chapter 11.
• Consideration. There has to be bargaining that leads to an exchange between the parties.
Contracts cannot be a one-way street; both sides must receive some measurable benefit.
• Legality. The contract must be for a lawful purpose. Courts will not enforce agreements to sell
cocaine, for example.
• Capacity. The parties must be adults of sound mind.
• Consent. Certain kinds of trickery and force can prevent the formation of a contract.
• Writing. While verbal agreements often amount to contracts, some types of contracts must be
in writing to be enforceable.
Let’s apply these principles to the opening scenario. Is the “contract” between Chris and Chez
Luc legally binding? Can Chez Luc kick out—or even sue—Chris for using his phone? In deciding
this issue, a judge would consider whether the parties intentionally made an agreement, which
included:
•
A valid offer and acceptance. The restaurant’s website set forth its terms, which was an
offer. Chris accepted when he clicked the box.
• Consideration. A judge would then carefully examine whether the parties exchanged
something of value that proved that they both meant to be bound by this agreement. And there
was. The restaurant gave up a coveted reservation time in exchange for Chris’s promise to stay
away from his phone.
• Capacity and legality. A judge would also verify that the parties were adults of sound mind
and that the subject matter of the contract was legal. It seems that Chris understood what he
was doing and was of legal age (we certainly hope so, since he was getting engaged).
• Consent. There was no fraud or trickery on the part of the restaurant (the terms were clear, not
buried so that Chris was unaware of them).
• Writing. The terms were in writing (although they did not have to be).
Therefore, the agreement was valid and enforceable. Whether kicking out a newly engaged
couple is good business practice for a restaurant … now, that’s a different story!
Once we have examined the essential parts of contracts, the unit will turn to other important
issues.
•
Third-party interests. If Jerome and Tara have a contract, and if the deal falls apart, can
Kevin sue to enforce the agreement? It depends.
• Performance and discharge. If a party fully accomplishes what the contract requires, his
duties are discharged. But what if his obligations are performed poorly, or not at all?
• Remedies. A court will award money or other relief to a party injured by a breach of contract.
We have seen that a contract is a promise that the law will enforce. As we look more closely
at the elements of contract law, we will encounter some intricate issues, but remember that we are
usually interested in answering three basic questions of common sense, all relating to promises:
•
Contract
A promise that the law will enforce
1. Is it certain that the defendant promised to do something?
2. If she did promise, is it fair to make her honor her word?
3. If she did not promise, are there unusual reasons to hold her liable anyway?
10-1b Types of Contracts
Bilateral and Unilateral Contracts
In a bilateral contract, both parties make a promise. Suppose a producer says to Gloria, “I’ll pay
you $2 million to star in my new romantic comedy, A Promise for a Promise, which we are
shooting three months from now in Santa Fe.” Gloria says, “It’s a deal.” That is a bilateral contract.
Each party has made a promise to do something. The producer is now bound to pay Gloria $2
million, and Gloria is obligated to show up on time and act in the movie. The vast majority of
contracts are bilateral contracts.
Bilateral
A contract where both parties make a promise
contract
In a unilateral contract, one party makes a promise that the other party can accept only
by doing something. These contracts are less common. Suppose the movie producer tacks a sign
to a community bulletin board. It has a picture of a dog with a phone number, and it reads, “I’ll
pay $100 to anyone who returns my lost dog.” If Leo sees the sign, finds the producer, and merely
promises to find the dog, he has not created a contract. Because of the terms on the sign, Leo must
actually find and return the dog to stake a claim to the $100.
Unilateral
contract
A contract where one party makes a promise that the other party can accept only by doing something
Executory and Executed Contracts
A contract is executory when it has been made, but one or more parties have not yet fulfilled their
obligations. Recall Gloria, who agrees to act in the producer’s film beginning in three months. The
moment Gloria and the producer strike their bargain, they have an executory bilateral express
contract. A contract is executed when all parties have fulfilled their obligations. When Gloria
finishes acting in the movie and the producer pays her final fee, their contract will be fully
executed.
Executory
contract
A binding agreement in which one or more of the parties has not fulfilled its obligations Executed
contract
An agreement in which all parties have fulfilled their obligations
Valid, Unenforceable, Voidable, and Void Agreements
A valid contract is one that satisfies all of the law’s requirements. It has no problems in any of
the seven areas listed at the beginning of this chapter, and a court will enforce it. The contract
between Gloria and the producer is a valid contract, and if the producer fails to pay Gloria, she
will win a lawsuit to collect the unpaid fee.
Valid
A contract that satisfies all of the law’s requirements
contract
An unenforceable agreement occurs when the parties intend to form a valid bargain but a
court declares that some rule of law prevents enforcing it. Suppose Gloria and the producer orally
agree that she will star in his movie, which he will start filming in 18 months. The law, as we will
see in Chapter 11, requires that this contract be in writing because it cannot be completed within
one year. If the producer signs up another actress two months later, Gloria has no claim against
him.
Unenforceable
agreement
A contract where the parties intend to form a valid bargain but a court declares that some rule of law
prevents enforcing it
A voidable contract occurs when the law permits one party to terminate the agreement. This
happens, for example, when an agreement is signed under duress or a party commits fraud.
Suppose that, during negotiations, the producer lies to Gloria, telling her that Steven Spielberg has
signed on to be the film’s director. That is a major reason why she accepts the contract. As we will
learn in Chapter 11, this fraudulent agreement is voidable at Gloria’s option. If she later decides
that another director is acceptable, she may choose to stay in the contract. But if she wants to
cancel the agreement and sue, she can do that as well.
Voidable
contract
An agreement that, because of some defect, may be terminated by one party, such as a minor, but not by
both parties
A void agreement is one that neither party can enforce, usually because the purpose of the
deal is illegal or because one of the parties had no legal authority to make a contract.
Void
An agreement that neither party may legally enforce
agreement
Express and Implied Contracts
In an express contract, the two parties explicitly state all important terms of their agreement. The
great majority of binding agreements are express contracts. The contract between the producer and
Gloria is an express contract because the parties explicitly state what Gloria will do, where and
when she will do it, and how much she will be paid. Some express contracts are oral, as that one
was, and some are written.
Express
An agreement with all important terms explicitly stated
contract
In an implied contract, the words and conduct of the parties indicate that they intended an
agreement. Suppose every Friday, for two months, the producer asks Leo to mow his lawn, and
loyal Leo does so each weekend. Then for three more weekends, Leo simply shows up without the
producer asking, and the producer continues to pay for the work done. But on the twelfth weekend,
when Leo rings the doorbell to collect, the producer suddenly says, “I never asked you to mow it.
Scram.” The producer is correct that there was no express contract because the parties had not
spoken for several weeks. But a court will probably rule that the conduct of the parties
has implied a contract. Not only did Leo mow the lawn every weekend, but the producer even paid
on three weekends when they had not spoken. It was reasonable for Leo to assume that he had a
weekly deal to mow and be paid. Naturally, there is no implied contract thereafter.
Implied
contract
A contract where the words and conduct of the parties indicate that they intended an agreement
Today, the hottest disputes about implied contracts often arise in the employment setting.
Many employees have “at will” agreements. This means that the employees are free to quit at any
time and the company has the right to fire them at any time, for virtually any reason. Courts
routinely enforce at-will contracts. But often a company provides its workers with personnel
manuals that guarantee certain rights. The legal issue is whether the handbook implies a contract
guaranteeing the specified rights, as the following case demonstrates.
DeMasse v. ITT Corporation
984 P.2d 1138
Arizona Supreme Court, 1999
CASE SUMMARY
Facts: Roger DeMasse and five others were employees at-will at ITT Corporation, where they
started working at various times between 1960 and 1979. Each was paid an hourly wage.
ITT issued an employee handbook, which it revised four times over two decades.
The first four editions of the handbook stated that within each job classification, any layoffs
would be made in reverse order of seniority. The fifth handbook made two important changes.
First, the document stated that “nothing contained herein shall be construed as a guarantee of
continued employment. ITT does not guarantee continued employment to employees and retains
the right to terminate or lay off employees.”
Second, the handbook stated that “ITT reserves the right to amend, modify, or cancel this
handbook, as well as any or all of the various policies [or rules] outlined in it.” Four years later,
ITT notified its hourly employees that layoff guidelines for hourly employees would be based not
on seniority but on ability and performance. About ten days later, the six employees were laid off,
though less-senior employees kept their jobs. The six employees sued. ITT argued that because
the workers were employees at-will, the company had the right to lay them off at any time, for any
reason. The case reached the Arizona Supreme Court.
Issue: Did ITT have the right unilaterally to change the layoff policy?
Decision: No, ITT did not have the right unilaterally to change the layoff policy because a valid
implied contract prevented the company from doing so.
Reasoning: An employer has the right to lay off an at-will employee for virtually any reason. That
means that the employer also has the right unilaterally to change the layoff policy. However, when
the words or conduct of the parties establish an implied contract, the employee is no longer at-will.
In deciding whether there is an implied contract concerning job security, the key issue is
whether a reasonable person would conclude that the parties intended to limit the employer’s right
to terminate the employee. A company makes a contract offer when it puts in the handbook a
statement about job security that a reasonable employee would consider a commitment. The
worker can then accept that offer by beginning or continuing employment. At that point, the parties
have created a binding implied contract. Here, the first handbook declared that layoffs would be
based on seniority. The employees accepted that offer by working, and from that time on, an
implied contract governed the employment relationship. ITT had no right to change the layoff
policy unilaterally.
10-1c Sources of Contract Law
Common Law
Express and implied contracts, promissory estoppel, and quasi-contract were all crafted, over
centuries, by courts deciding one contract lawsuit at a time. Many contract lawsuits continue to be
decided using common law principles developed by courts.
Uniform Commercial Code
Business methods changed quickly during the first half of the twentieth century. Transportation
sped up. Corporations routinely conducted business across state borders and around the world.
These developments presented a problem. Common law principles, whether related to contracts,
torts, or anything else, sometimes vary from one state to another. New York and California courts
often reach similar conclusions when presented with similar cases, but they are under no obligation
to do so. Business leaders became frustrated that, to do business across the country, their
companies had to deal with many different sets of common law rules.
Executives, lawyers, and judges wanted a body of law for business transactions that reflected
modern commercial methods and provided uniformity throughout the United States. It would be
much easier, they thought, if some parts of contract law were the same in every state. That desire
gave birth to the Uniform Commercial Code (UCC), created in 1952. The drafters intended the
UCC to facilitate the easy formation and enforcement of contracts in a fast-paced world. The Code
governs many aspects of commerce, including the sale and leasing of goods, negotiable
instruments, bank deposits, letters of credit, investment securities, secured transactions, and other
commercial matters. Every state has adopted at least part of the UCC to govern commercial
transactions within that state. For our purposes in studying contracts, the most important part of
the Code is Article 2, which governs the sale of goods. “Goods” means anything movable, except
for money, securities, and certain legal rights. Goods include pencils, commercial aircraft,
books, and Christmas trees. Goods do not include land or a house because neither is movable, nor
do they include a stock certificate. A contract for the sale of 10,000 sneakers is governed by the
UCC; a contract for the sale of a condominium in Marina del Rey is governed by the California
common law.
Goods
Are things that are movable, other than money and investment securities
When analyzing any contract problem as a student or businessperson, you must note whether
the agreement concerns the sale of goods. For many issues, the common law and the UCC are
reasonably similar. But sometimes the law is quite different under the two sets of rules.
And so, the UCC governs contracts for a sale of goods, while common law principles govern
contracts for sales of services and everything else. Most of the time, it will be clear whether the
UCC or the common law applies. But what if a contract involves both goods and services? When
you get your oil changed, you are paying in part for the new oil and oil filter (goods) and in part
for the labor required to do the job (services). In a mixed contract, Article 2 governs only if
the primary purpose was the sale of goods.
EXAMStrategy
Question: Leila agrees to pay Kendrick $35,000 to repair windmills. Confident of this cash,
Kendrick contracts to buy Derrick’s used Porsche for $33,000. Then Leila informs Kendrick she
does not need his help and will not pay him. Kendrick tells Derrick that he no longer wants the
Porsche. Derrick sues Kendrick, and Kendrick files suit against Leila. What law or laws govern
these lawsuits?
Strategy: Always be conscious of whether a contract is for services or the sale of goods. Different
laws govern. To make that distinction, you must understand the term goods. If you are clear about
that, the question is easily answered.
Result: Goods means anything movable, and a Porsche surely qualifies. The UCC will control
Derrick’s suit. Repairing windmills is primarily a service. Kendrick’s lawsuit is governed by the
common law of contracts.
10-2 Enforcing Non-Contracts
Now we turn away from “true” contracts and consider two unusual circumstances. Sometimes
courts will enforce agreements even if they fail to meet the usual requirements of a contract. We
emphasize that these remedies are uncommon exceptions to the general rules. Most of the
agreements that courts enforce are the express contracts that we have already studied. Nonetheless,
the next two remedies are still pivotal in some lawsuits. In each case, a sympathetic plaintiff can
demonstrate an injury, but there is no contract. The plaintiff cannot claim that the defendant
breached a contract because none ever existed. The plaintiff must hope for more “creative” relief.
The two remedies can be quite similar. The best way to distinguish them is this:
1. In promissory estoppel cases, the defendant made a promise that the plaintiff relied on.
2. In quasi-contract cases, the defendant did not make any promise, but did receive a benefit
from the plaintiff and retaining that benefit would be unfair.
Promissory
estoppel
A possible remedy for an injured plaintiff in a case with no valid contract, when the plaintiff can show
justifiable reliance on a promise made by the defendant
Quasi-contract
A possible remedy for an injured plaintiff in a case with no valid contract, when the plaintiff can show
benefit to the defendant, reasonable expectation of payment, and unjust enrichment
10-2a Promissory Estoppel
A fierce fire swept through Dana and Derek Andreason’s house in Utah, seriously damaging it.
The good news was that agents for Aetna Casualty promptly visited the Andreasons and helped
them through the crisis. The agents reassured the couple that all the damage was covered by their
insurance, instructed them on which things to throw out and replace, and helped them choose
materials for repairing other items. The bad news was that the agents were wrong: The Andreasons’
policy had expired six weeks before the fire. When Derek Andreason presented a bill for $41,957
worth of meticulously itemized work that he had done under the agents’ supervision, Aetna refused
to pay.
The Andreasons sued—but not for breach of contract because the insurance agreement had
expired. They sued Aetna under the legal theory of promissory estoppel. Even when there is no
contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he
can show that:
•
•
•
The defendant made a promise knowing that the plaintiff would likely rely on it,
The plaintiff did rely on the promise, and
The only way to avoid injustice is to enforce the promise.
Is enforcing the promise the only way to avoid injustice?
Aetna made a promise to the Andreasons; namely, its assurance that all the damage was
covered by insurance. The company knew that the Andreasons would rely on that promise, which
they did by ripping up a floor that might have been salvaged, throwing out some furniture, and
buying materials to repair the house. Is enforcing the promise the only way to avoid injustice? Yes,
ruled the Utah Court of Appeals. The Andreasons’ conduct was reasonable, based on what the
Aetna agent said. Under promissory estoppel, the Andreasons received virtually the same amount
they would have obtained had the insurance contract been valid.
Many promissory estoppel cases involve employment law—bosses make promises that they
fail to keep. The following case illustrates what can happen when you bet on the wrong promise.
Harmon v. Delaware Harness Racing Commission
62 A.3d 1198
Delaware Supreme Court, 2013
CASE SUMMARY
Facts: The Delaware Harness Racing Commission (Commission) hired Donald Harmon to
enforce racetrack rules. After years on the job, Harmon was arrested for improperly changing a
judging sheet to favor a horse. The Commission suspended him without pay pending the outcome
of the criminal case.
John Wayne (yes, his name was John Wayne) was the executive officer of the Commission.
During his suspension, Harmon asked Wayne to find out from the Commission whether it would
reinstate him if he was acquitted. When Wayne asked the commissioners this question, they looked
at each other and then said “Yes.” The commissioners told Wayne he could relay that message to
Harmon. Based on this promise, Harmon decided not to look for other jobs.
Immediately after his acquittal, Harmon asked for his job back. The Commission refused to
reinstate him as promised. Harmon sued the Commission, claiming promissory estoppel. A trial
court sided with Harmon. But the Superior Court reversed, so Harmon appealed to the Supreme
Court of Delaware.
Issue: Was the commissioners’ promise to Harmon enforceable?
Decision: Yes, the commissioners’ promise was enforceable under promissory estoppel.
Reasoning: To prevail on his promissory estoppel claim, Harmon had to prove that (1) the
Commission made a promise to him; (2) which it reasonably expected him to rely on; (3) he did
rely on it, to his detriment; and (4) to avoid injustice, the Commission’s promise must be enforced.
All four of these requirements were met:
1 When Wayne asked if Harmon would be reinstated, the commissioners all looked at each
other before saying “Yes.” This informal vote was clear evidence that a promise was made.
2 The commissioners told Wayne to relay their decision to Harmon. They must have known
Harmon would rely on Wayne’s word.
3 Harmon did not look for other work. Thus, he suffered a substantial detriment.
4 It would be unfair for Harmon to lose income because he relied on a promise from the
commissioners.
10-2b Quasi-Contract
Don Easterwood leased more than 5,000 acres of farmland in Jackson County, Texas, from PIC
Realty for one year. The next year he obtained a second one-year lease. During each year,
Easterwood farmed the land, harvested the crops, and prepared the land for the following year’s
planting. Toward the end of the second lease, after Easterwood had harvested his crop, he and PIC
began discussing the terms of another lease. As they negotiated, Easterwood prepared the land for
the following year, cutting and plowing the soil. But the negotiations for a new lease failed, and
Easterwood moved off the land. He sued PIC Realty for the value of his work preparing the soil.
Easterwood had neither an express nor an implied contract for the value of his work. How
could he make any legal claim? By relying on the legal theory of a quasi-contract: Even when
there is no contract, a court may use a quasi-contract to compensate a plaintiff who can show
that:
•
•
•
The plaintiff gave some benefit to the defendant,
The plaintiff reasonably expected to be paid for the benefit and the defendant knew this, and
The defendant would be unjustly enriched if he did not pay.
If a court finds all these elements present, it will generally award the value of the goods or
services that the plaintiff has conferred. The damages awarded are called quantum meruit,
meaning that the plaintiff gets “as much as he deserved.” The court is awarding money that it
believes the plaintiff morally ought to have, even though there was no valid contract entitling her
to it. This is judicial activism. The purpose is justice; the name is contradictory.
Quantum
“As much as he deserved.” The damages awarded in a quasi-contract case
meruit
Don Easterwood testified that in Jackson County it was common for a tenant farmer to prepare
the soil for the following year but then move. In those cases, he claimed, the landowner
compensated the farmer for the work done. Other witnesses agreed. The court ruled that indeed
there was no contract, but all elements of quasi-contract had been satisfied. Easterwood gave a
benefit to PIC because the land was ready for planting. Easterwood reasonably assumed he would
be paid, and PIC Realty knew it. Finally, said the court, it would be unjust to let PIC benefit without
paying anything. The court ordered PIC to pay the fair market value of Easterwood’s labors.
The following case poses a question that parents and offspring have debated throughout the
ages: How much does a son deserve? You be the judge.
You Be the Judge
Lund v. Lund
848 N.W.2d 266
North Dakota Supreme Court, 2014
Facts: Wendell Lund was a dutiful son to his parents, Orville and Betty. Like his siblings, he
helped around the house and tended to the land for most of his adult life. He did not pay room and
board.
When Orville and Betty divorced, they split the farm. But Wendell thought he deserved a cut.
He sued both his parents under a theory of quasi-contract. He argued that he went above and
beyond his duties as a son: He paid half of the farm’s real estate taxes and worked the land as if it
was his own. As such, it would be unfair for his parents to retain the benefits of his work.
You Be the Judge: Was it unfair for Wendell’s parents to reap the benefits of his work on the
family farm?
Argument for Wendell: For years of his adult life, Wendell worked the family farm as if it was
his own. Why, you ask? Because he expected that the land would one day indeed be his—and his
parents knew it. Wendell did not just tend to the property; he went so far as to pay half of its real
estate taxes some years. Many adults may help their parents, but few pay their real estate taxes
unless they expect something in return. Orville and Betty are unfairly benefiting from Wendell’s
labor.
Argument for Parents: Your honors, life on a family farm involves community living. Each
family member contributes for the sake of the group, not for the sake of ownership. Wendell and
his siblings each had their share of chores and responsibilities, but they also enjoyed benefits,
including a house, meals, and assistance with work. It would not be unfair for Orville and Betty to
retain the fruits of their family’s labor.
CONTRACTS CHECKLIST
☑ Offer
☐ Acceptance
☐ Consideration
☐ Legality
☐ Capacity
☐ Consent
☐ Writing
10-3 AGREEMENT
Parties form a contract only if they have a meeting of the minds. For this to happen, one side must
make an offer and the other must make an acceptance. An offer proposes definite terms, and an
acceptance unconditionally agrees to them.
Offer
In contract law, an act or statement that proposes definite terms and permits the other party to create a
contract by accepting those terms
Throughout the chapter, keep in mind that courts make objective assessments when evaluating
offers and acceptances. A court will not try to get inside anyone’s head and decide what she was
thinking as she made a bargain. That is, they do not consider what the parties meant to say or do
or thought they said or did. Instead, courts focus on parties’ actual words and conduct, deciding
how a reasonable person would interpret them in context.
10-3a Making an Offer
Bargaining begins with an offer. The person who makes an offer is the offeror. The person to
whom he makes that offer is the offeree. The terms are annoying but inescapable because, like
handcuffs, all courts use them.
Two questions determine whether a statement is an offer:
1. Do the offeror’s words and actions indicate an intention to make a bargain?
2. Are the terms of the offer reasonably definite?
Offeror
The party in contract negotiations who makes the first offer
Offeree The party in contract negotiations who receives the first offer
Zachary says to Sharon, “Come work in my English-language center as a teacher. I’ll pay you
$800 per week for a 35-hour week, for six months starting Monday.” This is a valid offer.
Zachary’s words seem to indicate that he intends to make a bargain, and his offer is definite. If
Sharon accepts, the parties have a contract that either one can enforce.
Invitations to Bargain
An invitation to bargain is not an offer. Suppose Martha telephones Joe and leaves a message
on his answering machine, asking if Joe would consider selling his vacation condo on Lake
Michigan. Joe faxes a signed letter to Martha saying, “There is no way I could sell the condo for
less than $150,000.” Martha promptly sends Joe a cashier’s check for that amount. Does she own
the condo? No. Joe’s fax is not an offer. It is merely an invitation to bargain. Joe is indicating that
he would be happy to receive an offer from Martha. He is not promising to sell the condo for
$150,000 or for any amount.
Problems with Definiteness
It is not enough that the offeror indicate that she intends to enter into an agreement. The terms of
the offer must also be definite. If they are vague, then even if the offeree agrees to the deal, a
court does not have enough information to enforce it, and there is no contract.
You want a friend to work in your store for the holiday season. This is a definite offer: “I offer
you a job as a salesclerk in the store from November 1 through December 29, 40 hours per week
at $10 per hour.” But suppose, by contrast, you say: “I offer you a job as a salesclerk in the store
during the holiday season. We will work out a fair wage once we see how busy things get.” Your
friend replies, “That’s fine with me.” This offer is indefinite. What is a fair wage? $15 per hour?
$20 per hour? What is the “holiday season”? How will the determination be made? There is no
binding agreement.
The following case presents a problem with definiteness, concerning a famous television
series. You want to know what happened? Go to the place. See the guy. No, not the guy in
hospitality. Our friend in waste management. Don’t say nothing. Then get out.
Baer v. Chase
392 F.3d 609
United states Third Circuit Court of Appeals, 2004
CASE SUMMARY
Facts: David Chase was a television writer-producer with many credits, including a popular
detective series called The Rockford Files. He became interested in a new program, set in New
Jersey, about a “mob boss in therapy,” a concept he eventually developed into The Sopranos.
Robert Baer was a prosecutor in New Jersey who wanted to write for television. He submitted
a Rockford Files script to Chase, who agreed to meet with Baer.
When they met, Baer pitched a different idea, concerning “a film or television series about the
New Jersey Mafia.” He did not realize Chase was already working on such an idea. Later that year,
Chase visited New Jersey. Baer arranged meetings for Chase with local detectives and prosecutors,
who provided the producer with information, material, and personal stories about their experiences
with organized crime. Detective Thomas Koczur drove Chase and Baer to various New Jersey
locations and introduced Chase to Tony Spirito. Spirito shared stories about loan sharking, power
struggles between family members connected with the mob, and two colorful individuals known
as Big Pussy and Little Pussy, both of whom later became characters on the show.
Back in Los Angeles, Chase wrote and sent to Baer a draft of the first Sopranos teleplay. Baer
called Chase and commented on the script. The two spoke at least four times that year, and Baer
sent Chase a letter about the script.
When The Sopranos became a hit television show, Baer sued Chase. He alleged that on three
separate occasions, Chase had agreed that if the program succeeded, Chase would “take care of”
Baer and would “remunerate Baer in a manner commensurate to the true value of his services.”
This happened twice on the phone, Baer claimed, and once during Chase’s visit to New Jersey.
The understanding was that if the show failed, Chase would owe nothing. Chase never paid Baer
anything.
The district court dismissed the case, holding that the alleged promises were too vague to be
enforced. Baer appealed.
Issue: Was Chase’s promise definite enough to be enforced?
Decision: No, the promise was too indefinite to be enforced.
Reasoning: To create a binding agreement, the offer and acceptance must be definite enough that
a court can tell what the parties were obligated to do. The parties need to agree on all of the essential
terms; if they do not, there is no enforceable contract.
One of the essential terms is price. The agreement must either specify the compensation to be
paid or describe a method by which the parties can calculate it. The duration of the contract is also
basic: How long do the mutual obligations last?
There is no evidence that the parties agreed on how much Chase would pay Baer, or when or
for what period. The parties never defined what they meant by the “true value” of Baer’s services
or how they would determine it. The two never discussed the meaning of “success” as applied
to The Sopranos. They never agreed on how “profits” were to be calculated. The parties never
discussed when the alleged agreement would begin or end.
Baer argues that the courts should make an exception to the principle of definiteness when the
agreement concerns an “idea submission.” The problem with his contention is that there is not the
slightest support for it in the law. There is no precedent whatsoever for ignoring the definiteness
requirement, in this type of contract or any other.
Affirmed.
Ethics
Was it fair for Chase to use Baer’s services without compensation? Did Baer really expect to get paid,
or was he simply hoping that his work would land him a job?
10-3b Termination of Offers
As we have seen, the great power that an offeree has is to form a contract by accepting an offer.
But this power is lost when the offer is terminated, which can happen in several ways.
Revocation
An offer is revoked when the offeror “takes it back” before the offeree accepts. In general, the
offeror may revoke the offer any time before it has been accepted. Imagine that I call you and say,
“I’m going out of town this weekend. I’ll sell you my ticket to this weekend’s football game for
$75.” You tell me that you’ll think it over and call me back. An hour later, my plans change. I call
you a second time and say, “Sorry, but the deal’s off—I’m going to the game after all.” I have
revoked my offer, and you can no longer accept it.
Revocation
Cancellation of the offer
In the next case, this rule was worth $100,000 to one of the parties.
Nadel v. Tom Cat Bakery
2009 N.Y. Slip Op 32661
Supreme Court, New York County, 2009
CASE SUMMARY
Facts: A Tom Cat Bakery delivery van struck Elizabeth Nadel as she crossed a street. Having
suffered significant injuries, Nadel filed suit. Before the trial began, the attorney representing the
bakery’s owner offered a $100,000 settlement, which Nadel refused.
While the jury was deliberating, the bakery’s lawyer again offered Nadel the $100,000
settlement. She decided to think about it during lunch. Later that day, the jury sent a note to the
judge. The bakery owner told her lawyer that if the note indicated the jury had reached a verdict,
that he should revoke the settlement offer.
Back in the courtroom, the bakery’s lawyer said, “My understanding is that there’s a note….
I was given an instruction that if the note is a verdict, my client wants to take the verdict.”
Nadel’s lawyer then said, “My client will take the settlement. My client will take the
settlement.”
The trial court judge allowed the forewoman to read the verdict, which awarded Nadel—
nothing. She appealed, claiming that a $100,000 settlement had been reached.
Issue: Did Nadel’s lawyer accept the settlement offer in time?
Decision: No, the bakery owner’s lawyer revoked the offer before acceptance.
Reasoning: An offer definitely existed. And the twice-repeated statement, “My client will take the
settlement,” indicates a clear desire to accept the proposal. The problem is that the acceptance
came too late.
Analyzing the timeline, the bakery owner’s attorney indicated that if a verdict had been
returned, he revoked the offer. This notice was given before the attempted acceptance. And so,
since a verdict had in fact been returned, the offer was no longer open.
The parties did not reach a binding settlement agreement.
Rejection
If an offeree clearly indicates that he does not want to take the offer, then he has rejected it. A
rejection immediately terminates the offer. Suppose a major accounting firm telephones you and
offers a job, starting at $80,000. You respond, “Nah. I’m gonna work on my surfing for a year or
two.” The next day you come to your senses and write the firm, accepting its offer. No contract.
Your rejection terminated the offer and ended your power to accept.
Counteroffer
A party makes a counteroffer when it responds to an offer with a new and different proposal.
Frederick faxes Kim, offering to sell a 50 percent interest in the Fab Hotel in New York for only
$135 million. Kim faxes back, offering to pay $115 million. Moments later, Kim’s business partner
convinces her that Frederick’s offer was a bargain, and she faxes an acceptance of his $135 million
offer. Does Kim have a binding deal? No. A counteroffer is a rejection. The parties have no
contract at any price.
Counteroffer
An offer made in response to a previous offer
Expiration
When an offer specifies a time limit for acceptance, that period is binding. If the offer specifies no
time limit, the offeree has a reasonable period in which to accept.
Destruction of the Subject Matter
A used car dealer offers to sell you a rare 1938 Bugatti for $7.5 million if you bring cash the next
day. You arrive, suitcase stuffed with cash—just in time to see a stampeding herd of escaped circus
elephants crush the Bugatti. The dealer’s offer terminated.
☐ Offer
☑ Acceptance
☐ Consideration
☐ Legality
☐ Capacity
☐ Consent
☐ Writing
CONTRACTS CHECKLIST
10-3c Acceptance
As we have seen, when there is a valid offer outstanding, it remains effective until it is terminated
or accepted. An offeree accepts by saying or doing something that a reasonable person would
understand to mean that he definitely wants to take the offer. Assume that Ellie offers to sell Gene
her old iPad for $50. If Gene says, “I accept your offer,” then he has indeed accepted, but there is
no need to be so formal. He can accept the offer by saying, “It’s a deal” or “I’ll take it,” or any
number of things. He need not even speak. If he hands her a $50 bill, he also accepts the offer.
It is worth noting that the offeree must say or do something to accept. Marge telephones
Vick and leaves a message on his voice mail: “I’ll pay $75 for your business law textbook from
last semester. I’m desperate to get a copy, so I will assume you agree unless I hear from you by
6:00 tonight.” Marge hears nothing by the deadline and assumes she has a deal. She is mistaken.
Vick neither said nor did anything to indicate that he accepted.
Mirror Image Rule
If only he had known! A splendid university, an excellent position as department chair—gone.
And all because of the mirror image rule. The Ohio State University wrote to Philip Foster offering
him an appointment as a professor and chair of the art history department. His position was to
begin July 1, and he had until June 2 to accept the job. On June 2, Foster telephoned the dean and
left a message accepting the position, effective July 15. Later, Foster thought better of it and wrote
the university, accepting the school’s starting date of July 1. Too late! Professor Foster never did
occupy that chair at Ohio State. The court held that since his acceptance varied the starting date, it
was a counteroffer. And a counteroffer, as we know, is a rejection.
The common law mirror image rule requires that acceptance be on precisely the same terms
as the offer. If the acceptance contains terms that add to or contradict the offer, even in minor
ways, courts generally consider it a counteroffer.
Mirror
image
A contract doctrine that requires acceptance to be on exactly the same terms as the offer
rule
The UCC and the Battle of the Forms
Today, businesses use standardized forms to purchase most goods and services. This practice
creates enormous difficulties. Sellers use forms they have prepared, with all conditions stated to
their advantage, and buyers employ their own forms, with terms they prefer. The forms are
exchanged in the mail or electronically, with neither side clearly agreeing to the other party’s
terms. The problem is known as the “battle of forms.” Once again, the UCC has entered the fray,
attempting to provide flexibility and common sense for those contracts involving the sale of goods.
Under the UCC, an acceptance that adds additional or different terms often will create a contract.
And, perhaps surprisingly, the additional terms will often become part of the contract.
UCC §2–207 dramatically modifies the mirror image rule for the sale of goods. Under this
provision, an acceptance that adds additional or different terms will often create a contract. The
rule is intricate, but it may be summarized this way:
For the sale of goods, the most important factor is whether the parties believe they have a
binding agreement. If their conduct indicates that they have a deal, they probably do.
• If the offeree adds new terms to the offer, acceptance by the offeror generally creates a
binding agreement.
• If the offeree changes the terms of the offer, a court will probably rely on general principles of
the UCC to create a fair contract.
• If a party wants a contract on its terms only, with no changes, it must clearly indicate that.
Suppose Wholesaler writes to Manufacturer, offering to buy “10,000 wheelbarrows at $50 per
unit. Payable on delivery, 30 days from today’s date.” Manufacturer writes back, “We accept your
offer of 10,000 wheelbarrows at $50 per unit, payable on delivery. Interest at normal trade rates
for unpaid balances.” Manufacturer clearly intends to form a contract. The company has added a
new term, but there is still a valid agreement.
•
EXAMStrategy
Question: Elaine sends an offer to Raoul. Raoul writes, “I accept. Please note, I will charge 2
percent interest per month for any unpaid money.” He signs the document and sends it back to
Elaine. Do the two have a binding contract?
Strategy: Slow down—this is trickier than it seems. Raoul has added a term to Elaine’s offer. In
a contract for services, acceptance must mirror the offer, but not so in an agreement for the sale of
goods.
Result: If this is an agreement for services, there is no contract. However, if this agreement is for
goods, the additional term may become part of an enforceable contract.
Question: Assume that Elaine’s offer concerns goods. Is there an agreement?
Strategy: Under UCC §2-207, an additional term will generally become part of a binding
agreement for goods, unless …?
Result: The parties have probably created a binding contract unless Elaine indicated in her offer
that she would accept her terms only, with no changes.
10-3d Communication of Acceptance
The offeree must communicate his acceptance for it to be effective. The questions that typically
arise concern the method, the manner, and the time of acceptance.
Method and Manner of Acceptance
The “method” refers to whether acceptance is done in person or by mail, telephone, email, text, or
fax. The “manner” refers to whether the offeree accepts by promising, by making a down payment,
by performing, and so forth. If an offer demands acceptance in a particular method or manner,
the offeree must follow those requirements. An offer might specify that it be accepted in writing,
or in person, or before midnight on June 23. An offeror can set any requirements she wishes. Omri
might say to Oliver, “I’ll sell you my bike for $200. You must accept my offer by standing on a
chair in the lunchroom tomorrow and reciting a poem about a cow.” Oliver can only accept the
offer in the exact manner specified if he wants to form a contract.
If the offer does not specify a type of acceptance, the offeree may accept in any reasonable
manner and method. An offer generally may be accepted by performance or by a promise, unless
it specifies a particular method. The same freedom applies to the method. If Masako emails Eric
an offer to sell 1,000 acres in Montana for $800,000, Eric may accept by email or mail. Both are
routinely used in real estate transactions, and either is reasonable.
Time of Acceptance: The Mailbox Rule
An acceptance is generally effective upon dispatch, meaning the moment it is out of the
offeree’s control. Terminations, on the other hand, are effective when received. When Masako
sends her offer to sell land to Eric and he mails his acceptance, the contract is binding the moment
he puts the letter into the mail. In most cases, this mailbox rule is just a detail. But it becomes
important when the offeror revokes her offer at about the same time the offeree accepts. Who
wins? Suppose Masako’s offer has one twist:
•
•
•
•
On Monday morning, Masako faxes her offer to Eric.
On Monday afternoon, Eric writes “I accept” on the fax, and Masako mails a revocation of her
offer.
On Tuesday morning, Eric mails his acceptance.
On Thursday morning, Masako’s revocation arrives at Eric’s office.
•
On Friday morning, Eric’s acceptance arrives at Masako’s office.
Outcome? Eric has an enforceable contract. Masako’s offer was effective when it reached
Eric. His acceptance was effective on Tuesday morning, when he mailed it. Nothing that happens
later can “undo” the contract.
CHAPTER CONCLUSION
Contracts govern countless areas of our lives, from intimate family issues to multibillion
dollar corporate deals. Understanding contract principles is essential for a successful business or
a professional career and is invaluable in private life. Courts no longer rubber-stamp any agreement
that two parties have made. If we know the issues that courts scrutinize, the agreement we draft is
likelier to be enforced. We thus achieve greater control over our affairs—the very purpose of a
contract.
CHAPTER
11
REQUIREMENTS FOR A CONTRACT
Soheil Sadri, a California resident, did some serious gambling at Caesar’s Tahoe casino in Nevada.
And lost. To keep gambling, he wrote checks to Caesar’s and then signed two memoranda pledging
to repay money advanced. After two days, with his losses totaling more than $22,000, he went
home. Back in California, Sadri stopped payment on the checks and refused to pay any of the
money he owed Caesar’s. The casino sued and recovered … nothing. Sadri relied on an important
legal principle to defeat the suit: A contract that is illegal is void and unenforceable.
A gambling contract is illegal unless it is specifically authorized by state statute. In California,
as in many states, gambling on credit is not allowed. However, do not become too excited at the
prospect of risk-free wagering. Casinos responded to cases like Sadri by changing their practices.
Most now extend credit only to a gambler who agrees that disputes about repayment will be settled
in Nevada courts. Because such contracts are legal in that state, the casino is able to obtain a
judgment against a defaulting debtor.
A contract that is illegal is void and unenforceable.
Sometimes parties fail to create a valid contract even when they exchange an offer and
acceptance. Sadri’s agreement was not a binding contract because of a problem with legality. This
is one of five “deal breakers” that we present in this chapter:
1. Consideration: Each party must gain some value from a contract.
2. Legality: Illegal bargains are not enforceable.
3. Capacity: Both parties must have the legal ability to form a contract.
4. Fraud and certain types of mistake make a contract unenforceable.
5. Writing is required for some contracts.
If parties exchange an offer and acceptance, and if there are no problems in any of the five
areas presented in this chapter, then a valid contract exists.
11-1 CONSIDERATION
Consideration is the inducement, price, or promise that causes a person to enter into a contract
and forms the basis for the parties’ exchange. The central idea of consideration is simple: Contracts
must be a two-way street. If one side gets all the benefit and the other side gets nothing, then an
agreement lacks consideration and is not an enforceable contract. Consideration is proof that the
parties intended to be bound to their promises.
Consideration
The inducement, price, or promise that causes a person to enter into a contract and forms the basis for the
parties’ exchange
There are two basic elements of consideration:
1. Value. Both parties must get something of measurable value from the contract. That thing
can be money, groceries, agreement promise not to sue, or anything else that has real value.
2. Exchange. The two parties must have bargained for whatever was exchanged and struck a
deal: “If you do this, I’ll do that.” If you just decide to deliver a cake to your neighbor’s
house without her knowing, that may be something of value, but since you two did not
bargain for it, there is no contract, and she does not owe you the price of the cake.
☐ Offer
☐ Acceptance
☑ Consideration
☐ Legality
☐ Capacity
☐ Consent
☐ Writing
CONTRACTS CHECKLIST
Let’s take an example: Sally’s Shoe Store and Baker Boots agree that she will pay $20,000
for 100 pairs of boots. They both get something of value—Sally gets the boots, Baker gets the
money. A contract is formed when the promises are made because a promise to give something of
value counts. The two have bargained for this deal, so there is valid consideration.
Let’s look at another example. Marvin works at Sally’s. At 9 a.m., he is in a good mood and
promises to buy his coworker a Starbucks during the lunch hour. The delighted coworker agrees.
Later that morning, the coworker is rude to Marvin, who then changes his mind about buying the
coffee. He is free to do so. His promise created a one-way street: the coworker stood to receive all
of the benefit of the agreement, while Marvin got nothing. Because Marvin received no value,
there is no contract.
11-1a What Is Value?
As we have seen, an essential part of consideration is that both parties must get something of value.
That item of value can be either an “act,” a “forbearance,” or a promise to do either of these.
Act
A party commits an act when she does something she was not legally required to do in the first
place. She might do a job, deliver an item, or pay money, for example. An act does not count if
the party was simply complying with the law or fulfilling her obligations under an existing
contract. Thus, for example, suppose that your professor tells the university that she will not post
final grades unless she is paid an extra $5,000. Even if the university agrees to this outrageous
demand, that agreement is not a valid contract because the professor is already under an obligation
to post final grades.
Forbearance
A forbearance is, in essence, the opposite of an act. A plaintiff forbears if he agrees not to do
something he had a legal right to do. An entrepreneur might promise a competitor not to open a
competing business, or an elderly driver (with a valid driver’s license) might promise concerned
family members that he will not drive at night.
Promise to act or Forbear. A promise to do (or not do) something in the future counts as
consideration. When evaluating whether consideration exists, the promise to mow someone’s lawn
next week is the equivalent of actually doing the yardwork.
In the movies, when a character wants to get serious about keeping a promise—
really serious—he sometimes signs an agreement in blood. As it turns out, this kind of thing
actually happens in real life. In the following case, did the promise of forbearance have value? Did
a contract signed in blood count? You be the judge.
You Be the Judge
Kim v. Son
2009 Cal. app. LEXIS 2011, 2009 WL 597232 Court of Appeal of California, 2009
Facts: Stephen Son was a part-owner and -operator of two corporations. Because the businesses
were corporations, Son was not personally liable for the debts of either one.
Jinsoo Kim invested a total of about $170,000 in the companies. Eventually, both of them
failed, and Kim lost his investment. Son felt guilty over Kim’s losses.
Later, Son and Kim met in a sushi restaurant and drank heroic quantities of alcohol. At one
point, Son pricked his finger with a safety pin and wrote the following in his own blood: “Sir,
please forgive me. Because of my deeds, you have suffered financially. I will repay you to the best
of my ability.” In return, Kim agreed not to sue him for the money owed.
Son later refused to honor the bloody document and pay Kim the money. Kim filed suit to
enforce their contract.
The judge determined that the promise did not create a contract because there had been no
consideration.
You Be the Judge: Was there consideration?
Argument for Kim: As a part of the deal made at the sushi restaurant, Kim agreed not to sue Son.
What could be more of a forbearance than that? Kim had a right to sue at any time, and he gave
the right up. Even if Kim was unlikely to win, Son would still prefer not to be sued.
Besides, the fact that Son signed the agreement in blood indicates how seriously he took the
obligation to repay his loyal investor. At a minimum, Son eased his guilty conscience by making
the agreement, and surely that is worth something.
Argument for Son: Who among you has not at one point or another become intoxicated,
experienced emotions more powerful than usual, and regretted them the next morning? Whether
calling an ex-girlfriend and professing endless love while crying or writing out an agreement in
your own blood, it is all the same.
A promise not to file a meritless lawsuit has no value at all. It did not matter to Son whether
or not Kim filed suit because Kim could not possibly win. If this promise counts as value, then the
concept of consideration is meaningless because anyone can promise not to sue any time. Son had
no obligation to pay Kim. And the bloody napkin does not change that fact because it was made
without consideration of any kind. It is an ordinary promise, not a contract that creates any legal
obligation.
11-1b What Constitutes Exchange?
The parties must bargain for the consideration. Something is bargained for if it is sought by
the promisor and given by the promisee in exchange for their respective promises. Eliza hires Joe
to be her public relations manager for $15,000 a year. Both Eliza and Joe have made promises to
induce the other’s action. But what if the going rate for a PR manager with Joe’s experience is
$65,000?
Bargained
for
When something is sought by the promisor and given by the promisee in exchange for their promises
Joe made a bad deal, but that does not mean it lacked consideration. Courts do not analyze
the economic terms of an exchange to determine whether consideration was adequate. For
consideration to be adequate in the eyes of the law, it must provide some benefit to the promisor
or some detriment to the promisee, but these need not amount to much.
Here, both Eliza and Joe are promisor and promisee; each receives a benefit and incurs a
detriment, so consideration exists.
Law professors often call this the “peppercorn rule,” a reference to a Civil War–era case in
which a judge mused, “What is a valuable consideration? A peppercorn.” Even the tiniest benefit
to a plaintiff counts, so long as it has a measurable value.
EXAMStrategy
Question: 50 Cent has been rapping all day, and he is very thirsty. He pulls his Ferrari into the
parking lot of a convenience store. The store turns out to be closed, but luckily for him, a vending
machine sits outside. While walking over to it, he realizes that he has left his wallet at home.
Frustrated, he whistles to a 10-year-old kid who is walking by. “Hey kid!” he shouts. “I need to
borrow fifty cents!” “I know who you are!” the kid replies. Fiddy tries again. “No, no, I need
to borrow fifty cents!” The kid walks over. “Well, I’m not going to just give you my last fifty
cents. But maybe you can sell me something.” 50 Cent cannot believe it, but he really is very
thirsty. He takes off a Rolex. “How about this?” “Deal,” the kid says, handing over two quarters.
Can 50 Cent get his watch back?
Strategy: Even in extreme cases, courts rarely take an interest in how much consideration is given
or whether everyone got a “good deal.” Even though the Rolex may be worth thousands of times
more than the quarters, the quarters still count under the peppercorn rule.
Result: After this transaction, 50 Cent may have second thoughts, but they will be too late. The
kid committed an act by handing over his money—he was under no legal obligation to do so. And
50 Cent received something of small, but measurable, value. So there is consideration to support
this deal, and 50 Cent would not get his watch back.
11-2 LEGALITY
In the opening scenario, we saw that gambling agreements are illegal unless specifically authorized
by a state statute. In this section, we examine a type of clause common in employment contracts.
A non-compete agreement is a contract in which one party agrees not to compete with another in
a stated type of business. For example, an anchorwoman for an NBC news affiliate in Miami might
agree that she will not anchor any other Miami station’s news for one year after she leaves her
present employer. Non-competes are often valid, but they are sometimes illegal and void.
The two most common settings for legitimate noncompetition agreements are the sale of a
business and an employment relationship.
☐ Offer
☐ Acceptance
☐ Consideration
☑ Legality
☐ Capacity
☐ Consent
☐ Writing
CONTRACTS CHECKLIST
11-2a Non-compete Agreements: Sale of a Business
Kory has operated a real estate office, Hearth Attack, in a small city for 35 years, building an
excellent reputation and many ties with the community. She offers to sell you the business and its
goodwill for $300,000. But you need assurance that Kory will not take your money and promptly
open a competing office across the street. With her reputation and connections, she would ruin
your chances of success. You insist on a non-compete clause in the sale contract. In this clause,
Kory promises that for one year, she will not open a new real estate office or go to work for a
competing company within a 10-mile radius of Hearth Attack. Suppose, six months after selling
you the business, Kory goes to work for a competing realtor two blocks away. You seek an
injunction (a court order) to prevent her from working. Who wins?
When a non-compete agreement is ancillary to the sale of a business, it is enforceable if
reasonable in time, geographic area, and scope of activity. In other words, a court will not
enforce a non-compete agreement that lasts an unreasonably long time, covers an unfairly large
area, or prohibits the seller of the business from doing a type of work that she never had done
before. Measured by this test, Kory is almost certainly bound by her agreement. One year is a
reasonable time to allow you to get your new business started. A 10-mile radius is probably about
the area that Hearth Attack covers, and realty is obviously a fair business from which to prohibit
Kory. A court will grant the injunction, barring Kory from her new job.
If, on the other hand, the non-compete agreement had prevented Kory from working anywhere
within 200 miles of Hearth Attack, and she started working 50 miles away, a court would refuse
to enforce the contract.
11-2b Non-compete Agreements: Employment Contracts
Employers have legitimate worries that workers might go to a competitor and take with them
significant business or trade secrets and other proprietary information. Some employers, though,
place harsh restrictions on their employees simply to prevent them from leaving. An employee
with a burdensome non-compete might be willing to tolerate harsh treatment just to avoid
unemployment. A national sandwich chain required its sandwich-makers to sign a non-compete
that would ban them from working at just about any other fast-food restaurant.
If you have ever been employed, there is more than a one-in-three chance that you had a noncompete. These clauses currently affect nearly 30 million American workers at all salary levels
and across industries. Many employees do not negotiate their non-competes—or even realize they
have one until the shocking day when they try to leave their jobs.
Non-competes limit an individual’s right to make a living and choose their work. For this
reason, a growing number of states have restrictions on the enforceability of employment-related
non-competes. Some states have statutes prohibiting non-competes in certain industries; others
limit their duration. In other states, employment restrictions are highly scrutinized for fairness.
In the absence of specific state statutes, non-compete agreements are enforceable only if
they meet all of the following standards:
They are reasonably necessary for the protection of the employer. Judges usually enforce
these agreements to protect trade secrets and confidential information. They may protect
customer lists that have been expensive to produce.
• They provide a reasonable time limit. A reasonable time for a software engineer might be
less than one for a chef because technology changes at a rapid pace.
• They have a reasonable geographic limit. Barring an employee from working in tiny Rhode
Island is very different from Texas. Courts look closely to make sure that the restrictions are
no broader than necessary to meet the employer’s objective.
• They are not harsh or oppressive to the employee. New York City has over 7,000 fast-food
restaurants. Prohibiting a low-wage sandwich-maker with no company secrets from working at
any of them is an unfair burden.
• They are not contrary to public policy. Employers who hide terms or sneak them into
contracts after the employee has accepted the job may be acting illegally.
The legality of a non-compete depends on the facts of each case: the type of work, industry,
and restrictions imposed. Note, though, that many firms ask employees to sign non-competes that
are unenforceable. California generally prohibits non-competes, but research shows that California
businesses require non-competes from their workers more than employers in any other state. For
this reason, it is important that every employee know the legal limits of these clauses.
Was the non-compete in the following case styled fairly, or was the employee clipped?
•
King v. Head Start Family Hair Salons, Inc.
886 So.2d 769
Supreme Court of Alabama, 2004
CASE SUMMARY
Facts: Kathy King was a single mother supporting a college-age daughter. For 25 years, she had
worked as a hairstylist. For the most recent 16 years, she had worked at Head Start, which provided
haircuts, coloring, and styling for men and women. King was primarily a stylist, though she had
also managed one of the Head Start facilities.
King quit Head Start and began working as manager of a Sports Clips shop, located in the
same mall as the store she just left. Sports Clip offered only haircuts and primarily served men and
boys. Head Start filed suit, claiming that King was violating the noncompetition agreement that
she had signed. The agreement prohibited King from working at a competing business within a
two-mile radius of any Head Start facility for 12 months after leaving the company. The trial court
issued an injunction enforcing the non-compete. King appealed.
Issue: Was the non-compete agreement valid?
Decision: The agreement was only partly valid.
Reasoning: Head Start does business in 30 locations throughout Jefferson and Shelby counties.
Virtually every hair-care facility in those counties is located within two miles of a Head Start
business and is thus covered by the non-competition agreement. The contract is essentially a
blanket restriction, entirely barring King from this business.
King must work to support herself and her daughter. She is 40 years old and has worked in the
hair-care industry for 25 years. She cannot be expected at this stage in life to learn new job skills.
Enforcing the noncompetition agreement would create a grave hardship for her. The contract
cannot be permitted to impoverish King and her daughter.
On the other hand, Head Start is entitled to some of the protection it sought in this agreement.
The company has a valid concern that if King is permitted to work anywhere she wants, she could
take away many customers from Head Start. The trial court should fashion a more reasonable
geographic restriction, one that will permit King to ply her trade while ensuring that Head Start
does not unfairly lose customers. For example, the lower court could prohibit King from working
within two miles of the Head Start facility where she previously worked, or some variation on that
idea.
Reversed and remanded.
11-2c Exculpatory Clauses
You decide to capitalize on your expert ability as a skier and open a ski school in Colorado called
“Pike’s Pique.” But you realize that skiing sometimes causes injuries, so you require anyone
signing up for lessons to sign this form:
I agree to hold Pike’s Pique and its employees entirely harmless in the event that I am injured in
any way or for any reason or cause, including but not limited to any acts, whether negligent or
otherwise, of Pike’s Pique or any employee or agent thereof.
The day your school opens, Sara Beth, an instructor, deliberately pushes Toby over a cliff
because Toby criticizes her clothes. Eddie, a beginning student, “blows out” his knee attempting
an advanced racing turn. And Maureen, another student, reaches the bottom of a steep run and
slams into a snowmobile that Sara Beth parked there. Maureen, Eddie, and Toby’s families all sue
Pike’s Pique. You defend based on the form you had them sign. Does it save the day?
The form on which you are relying is an exculpatory clause, that is, one that attempts to
release you from liability in the event of injury to another party. Exculpatory clauses are common.
Ski schools use them, and so do parking lots, landlords, warehouses, and day-care centers. All
manner of businesses hope to avoid large tort judgments by requiring their customers to give up
any right to recover. Is such a clause valid? Sometimes. Courts often—but not always—ignore
exculpatory clauses, finding that one party was forcing the other party to give up legal rights that
no one should be forced to surrender.
exculpatory
clause
A contract provision that attempts to release one party from liability in the event the other party is injured
An exculpatory clause is generally unenforceable when it attempts to exclude an
intentional tort or gross negligence. When Sara Beth pushes Toby over a cliff, that is the
intentional tort of battery. A court will not enforce the exculpatory clause. Sara Beth is clearly
liable.1 As to the snowmobile at the bottom of the run, if a court determines that was gross
negligence (carelessness far greater than ordinary negligence), then the exculpatory clause will
again be ignored. If, however, it was ordinary negligence, then we must continue the analysis.
An exculpatory clause is generally unenforceable when the affected activity is in
thepublic interest, such as medical care, public transportation, or some essential
service. What about Eddie’s suit against Pike’s Pique? Eddie claims that he should never have
been allowed to attempt an advanced maneuver. His suit is for ordinary negligence, and the
exculpatory clause probably does bar him from recovery. Skiing is a recreational activity. No one
is obligated to do it, and there is no strong public interest in ensuring that we have access to ski
slopes.
An exculpatory clause is generally unenforceable when the parties have greatly unequal
bargaining power. When Maureen flies to Colorado, suppose that the airline requires her to sign
a form contract with an exculpatory clause. Because the airline almost certainly has much greater
bargaining power, it can afford to offer a “take it or leave it” contract. But because the bargaining
power is so unequal, the clause is probably unenforceable.
An exculpatory clause is generally unenforceable unless the clause is clearly written and
readily visible. Thus, if Pike’s Pique gave all ski students an eight-page contract, and the
exculpatory clause was at the bottom of page 7 in small print, the average customer would never
notice it. The clause would probably be void.
EXAMStrategy
Question: Shauna flew a World War II fighter aircraft as a member of an exhibition flight team.
While the team was performing in a delta formation, another plane collided with Shauna’s aircraft,
causing her to crash-land, leaving her permanently disabled. Shauna sued the other pilot and the
team. The defendants moved to dismiss based on an exculpatory clause that Shauna had signed.
The clause was one paragraph long and stated that Shauna knew team flying was inherently
dangerous and could result in injury or death. She agreed not to hold the team or any members
liable in case of an accident. Shauna argued that the clause should not be enforced against her if
she could prove the other pilot was negligent. Please rule.
Strategy: The issue is whether the exculpatory clause is valid. Courts are likely to declare such
clauses void if they concern vital activities like medical care, exclude an intentional tort or gross
negligence, or arise from unequal bargaining power.
Result: This is a clear, short clause, between parties with equal bargaining power, and does not
exclude an intentional tort or gross negligence. The activity is unimportant to the public welfare.
The clause is valid. Even if the other pilot was negligent, Shauna will lose, meaning the court
should dismiss her lawsuit.
☐ Offer
☐ Acceptance
☐ Consideration
☐ Legality
☑ Capacity
☐ Consent
☐ Writing
11-3 CAPACITY
CONTRACTS CHECKLIST
For Kevin Green, it was love at first sight. She was sleek, as quick as a cat, and a beautiful deep
blue. He paid $4,600 cash for the used Camaro. The car soon blew a gasket, and Kevin demanded
his money back. But the Camaro came with no guarantee, and Star Chevrolet, the dealer, refused.
Kevin repaired the car himself. Next, some unpleasantness on the highway left the car a worthless
wreck. Kevin received the full value of the car from his insurance company. Then he sued the
dealer, seeking a refund of his purchase price. The dealer pointed out that it was not responsible
for the accident, and that the car had no warranty of any kind. Yet the court awarded Kevin the
full value of his car. How can this be?
The automobile dealer ignored legal capacity. Kevin Green was only 16 years old when he
bought the car, and a minor, said the court, has the right to cancel any agreement he made, for any
reason. Capacity is the legal ability of a party to enter a contract. Someone may lack capacity
because of his young age or mental infirmity. Two groups of people usually lack legal capacity:
minors and those with a mental impairment.
Capacity
The legal ability to enter into a contract
11-3a Minors
A minor is someone under the age of 18. Because a minor lacks legal capacity, she normally can
create only a voidable contract. A voidable contract may be canceled by the party who lacks
capacity. Notice that only the party lacking capacity may cancel the agreement. So a minor who
enters into a contract generally may choose between enforcing the agreement or negating it. The
other party, however, has no such right.
Disaffirmance
A minor who wishes to escape from a contract generally may disaffirm it; that is, he may notify
the other party that he refuses to be bound by the agreement. Because Kevin was 16 when he
signed, the deal was voidable. When the Camaro blew a gasket and the lad informed Star Chevrolet
that he wanted his money back, he was disaffirming the contract, which he could do for any reason
at all. Kevin was entitled to his money back. If Star Chevrolet had understood the law of capacity,
it would have towed the Camaro away and returned the young man’s $4,600. At least the dealership
would have had a repairable automobile.
Disaffirm
To give notice of refusal to be bound by an agreement
Restitution
A minor who disaffirms a contract must return the consideration he has received, to the
extenthe is able. Restoring the other party to its original position is called restitution. The
consideration that Kevin Green received in the contract was, of course, the Camaro. If Star
Chevrolet had delivered a check for $4,600, Kevin would have been obligated to return the car.
Restitution
Restoring an injured party to its original position
What happens if the minor is not able to return the consideration because he no longer has it
or it has been destroyed? Most states hold that the minor is still entitled to his money back. Kevin
Green got his money and Star Chevrolet received a fine lesson.
11-3b Mentally Impaired Persons
A person suffers from a mental impairment if, by reason of mental illness or defect, he
isunable to understand the nature and consequences of the transaction. The mental
impairment can be insanity that has been formally declared by a court, or mental illness that has
never been ruled on but is now evident. The impairment may also be due to some other mental
illness, such as schizophrenia, or to mental retardation, brain injury, senility, or any other cause
that renders the person unable to understand the nature and consequences of the contract.
A party suffering a mental impairment generally creates only a voidable contract. The
impaired person has the right to disaffirm the contract, just as a minor does. But again, the contract
is voidable, not void. The mentally impaired party generally has the right to full performance if
she wishes.
But the law creates an exception: If a person has been adjudicated insane, then all of his future
agreements are void. “Adjudicated insane” means that a judge has made a formal finding that a
person is mentally incompetent and has assigned the person a guardian.
11-3c Intoxication
Similar rules apply in cases of drug or alcohol intoxication. When one party is so intoxicated that
he cannot understand the nature and consequences of the transaction, the contract is voidable.
We wish to stress that courts are highly skeptical of intoxication arguments. If you go out
drinking and make a foolish agreement, you are probably stuck with it. Even if you are too drunk
to drive, you are probably not nearly too drunk to make a contract. If your blood alcohol level is,
say, 0.08, your coordination and judgment are poor. Driving in such a condition is dangerous. But
you probably have a fairly clear awareness of what is going on around you.
To back out of a contract on the grounds of intoxication, you must be able to provide evidence
that you did not understand the “nature of the agreement” or the basic deal that you made.
☐ Offer
☐ Acceptance
☐ Consideration
☐ Legality
☐ Capacity
☑ Consent
☐ Writing
CONTRACTS CHECKLIST
11-4 REALITY OF CONSENT
Smiley offers to sell you his house for $300,000, and you agree to buy it in writing. After you
move in, you discover that the house is sinking into the earth at the rate of 6 inches per week. In
12 months, your only access to the house may be through the chimney. You sue, seeking
to rescind, or cancel, the agreement. You argue that when you signed the contract, you did not
truly consent because you lacked essential information. In this section, we look at fraud and
mistake.
Rescind
To cancel a contract
11-4a Fraud
Fraud begins when a party to a contract says something that is factually wrong. “This house has
no termites,” says a homeowner to a prospective buyer. If the house is swarming with the nasty
pests, the statement is a misrepresentation. But does it amount to fraud? An injured person must
show the following:
1. The defendant knew that his statement was false or he made the statement recklessly and
without knowledge of whether it was false,
2. The false statement was material, and
3. The injured party justifiably relied on the statement.
Fraud
Intending to induce the other party to contract, knowing the words are false or uncertain that they are true
Element One: Intentional or Reckless Misrepresentation of Fact
The injured party must show a false statement of fact. Notice that this does not mean the statement
was necessarily a “lie.” If a homeowner says that the famous architect Stanford White designed
her house, but Bozo Loco actually did the work, it is a false statement.
Now, if the owner knows that Loco designed the house, she has committed the first element
of fraud. And, if she has no idea who designed the house, her assertion that it was “Stanford White”
also meets the first element.
But, the owner might have a good reason for the error. Perhaps a local history book identifies
the house as a Stanford White. If she makes the statement with a reasonable belief that she is telling
the truth, she has made an innocent misrepresentation (discussed in the next section) and not fraud.
Opinions and “puffery” do not amount to fraud. An opinion is not a statement of fact. A
seller says, “I think land values around here will be going up 20 or 30 percent for the foreseeable
future.” That statement is pretty enticing to a buyer, but it is not a false statement of fact. The
maker is clearly stating her own opinion, and the buyer who relies on it does so at his peril. A close
relative of opinion is something called “puffery.”
Get ready for one of the most astonishing experiences you’ve ever had! This paragraph on
puffery is going to be the finest part of any textbook you have ever read! “But what happens,” you
might wonder, “if this paragraph fails to astonish? What if I find the issue dull, the writing
mediocre, and the legal summary incomprehensible? Can I sue for fraud?” No. The promises we
made were mere puffery. A statement is puffery when a reasonable person would realize that it is
a sales pitch, representing the exaggerated opinion of the seller. Puffery is not a statement of fact.
Element Two: Materiality
The injured party must demonstrate that the statement was material, or important. A minor
misstatement does not meet this second element of fraud. Was the misstatement likely to
significantly influence the decision of the misled party? If so, it was material.
Imagine a farmer selling a piece of his land. He measures the acres himself and calculates a
total of 200. If the actual acreage is 199, he has almost certainly not made a material misstatement.
But if the actual acreage is 150, he has.
Element Three: Justifiable Reliance
The injured party must also show that she actually did rely on the false statement and that her
reliance was reasonable. Suppose the seller of a gas station lies through his teeth about the
structural soundness of the building. The buyer believes what he hears but does not much care
because he plans to demolish the building and construct a day-care center. There was a material
misstatement but no reliance, and the buyer may not rescind.
The reliance must be justifiable—that is, reasonable. If the seller of wilderness land tells Lewis
that the area is untouched by pollution, but Lewis can see a large lake on the property covered with
6 inches of oily, red scum, Lewis is not justified in relying on the seller’s statements. If he goes
forward with the purchase, he may not rescind.
Plaintiff ’s Remedies for Fraud
In the case of fraud, the injured party generally has a choice of rescinding the contract or
suing for damages or, in some cases, doing both. The contract is voidable, which meant that the
injured party is not forced to rescind the deal but may if he wants. Fraud permits the injured party
to cancel. Alternatively, the injured party can sue for damages—the difference between what the
contract promised and what it delivered.
Nancy learns that the building she bought has a terrible heating system. A new one will cost
$12,000. If the seller told her the system was “like new,” Nancy may rescind the deal. But it may
be economically harmful for her to do so. She might have sold her old house, hired a mover, taken
a new job, and so forth. What are her other remedies? She could move into the new house and sue
for the difference between what she got and what was promised, which is $12,000, the cost of
replacing the heating system.
In some states, a party injured by fraud may both rescind and sue for damages. In these states,
Nancy could rescind her contract, get her deposit back, and then sue the seller for any damages
she has suffered. Her damages might be, for example, a lost opportunity to buy another house or
wasted moving expenses.
Innocent Misrepresentation
If all elements of fraud are present except the misrepresentation of fact was not made intentionally
or recklessly, then innocent misrepresentation has occurred. So, if a person misstates a material
fact and induces reliance, but he had good reason to believe that his statement was true, then he
has not committed fraud. Most states allow rescission of a contract, but not damages, in such a
case.
Misrepresentation A statement that is factually wrong
11-4b Mistake
A mistake can take many forms. It may be a basic error about an essential characteristic of the
thing being sold. It could be an erroneous prediction about future prices, such as an expectation
that oil prices will rise. It might be a mechanical error, such as a builder offering to build a new
home for $300 when he clearly meant to bid $300,000. Some mistakes lead to voidable contracts;
others create enforceable deals. The first distinction is between unilateral and mutual mistakes.
Unilateral Mistake
A unilateral mistake occurs when one party enters a contract under a mistaken assumption; the
other is not mistaken. It is not easy for the mistaken party to rescind a contract—the more astute
party may simply have made a better bargain. So, to rescind a contract, a mistaken party must
show something more than just a regrettable deal.
Unilateral
Occurs when only one party negotiates based on a factual error
mistake
To rescind for unilateral mistake, the mistaken party must demonstrate that he entered
the contract because of a basic factual error and that the nonmistaken party knew or had
reason to know of the error.
In many contract negotiations, one party knows more, which helps him secure favorable deals.
The law of unilateral mistake draws the line where one party takes unfair advantage of what he
knows to be another’s error. If the nonmistaken party knows or has reason to know of the
other party’s error, courts will not allow him to profit by snapping it up.
Fernando is an art dealer who specializes in nineteenth-century French painting. At Fiona’s
flea market stall, he sees a painting that he suspects is by Gustave Courbet. Knowing the painting
could be worth millions, Fernando offers Fiona $100 for it. She accepts his offer because she thinks
the painting is, at best, by one of Courbet’s students. Fernando then does further research, which
confirms his guess. He ultimately auctions the masterpiece for $2.4 million. For Fiona to be able
to rescind the contract, she must show that Fernando’s hunch was much more than a lucky guess,
that he had known certainly that the painting was by Courbet. Practically speaking, cases like these
are difficult for plaintiffs to win because they must prove that the nonmistaken party knew and that
the parties had not assumed the risk of the error.
Mutual Mistake
A mutual mistake occurs when both contracting parties share the same mistake. If the contract
is based on a fundamental factual error by both parties, the contract is voidable by either
one.
Mutual
Occurs when both parties negotiate based on the same fundamental factual error
mistake
But what types of errors are important enough to warrant rescission? Generally, when the
parties are mistaken as to the existence or the identity of the contract’s subject matter, the contract
is voidable. Believing himself the rightful owner, Arthur contracts to sell a parcel of land to James.
When it is later discovered that the land never belonged to Arthur, James can rescind the contract.
Both parties were mistaken as to the existence of Arthur’s land.
Farnsworth believes he is selling Corbin a topaz; and Corbin thinks he is buying a topaz. In
fact, both are wrong:The stone turns out to be a diamond. Since the parties made a material error
as to the subject of their contract, there was no valid assent and either one can rescind.
The defense of mistake is not a cure-all for all bad deals. Courts will not rescind contracts on
the basis of a prediction error, a mistaken value, or where the parties assume the risk of error.
Prediction error. Imagine you purchased a used electric car, predicting that its value would
certainly skyrocket when gas prices rise. But the market for your vehicle, well … tanks. You made
a bet that proved wrong, and have no right to rescind.
Mistake of Value. Here is one case in which it pays to know less. Suppose that Fiona, the flea
market vendor, sold the nineteenth-century masterpiece for $100 to Marguerite, a financial analyst,
with no inkling of its real worth. Both Fiona and Marguerite shared the same mistake in their
estimate of the painting’s market value. Sadly for Fiona, Marguerite will reap the benefit of her
bargain because a mistaken value alone is not enough to take back a deal.
Conscious Uncertainty. No rescission is permitted when one of the parties knows he is taking on
a risk, that is, he realizes there is uncertainty about the quality of the thing being exchanged. Rufus
offers 10 acres of mountainous land to Priscilla. “I can’t promise you anything about this land,”
he says, “but they’ve found gold on every adjoining parcel.” Priscilla, eager for gold, buys the
land, digs long and hard, and discovers—mud. She may not rescind the contract. She understood
the risk she was assuming, and there was no mutual mistake.
EXAMStrategy
Question: Joe buys an Otterhound named Barky from Purity Dog Shop. He pays $2,500 for the
puppy, the high cost due to the certificate Purity gives him indicating that the puppy’s parents were
both AKC champions (elite dogs). Two months later, Joe sells the hound to Emily for $2,800. Joe
and Emily both believe that Barky is descended from champions. Then a state investigation reveals
that Purity has been cheating and its certificates are fakes. Barky is a mixed-breed dog, worth about
$100. Emily sues Joe. Who wins?
Strategy: Both parties are mistaken about the kind of dog Joe is selling, so this is an instance of
mutual mistake. What is the rule in such cases?
Result: If the two sides agree based on an important factual error, the contract is voidable by the
injured party. A mutt is entirely different from a dog that might become a champion. The parties
erred about the essence of their deal. Joe’s good faith does not save him, and Emily is entitled to
rescind.
11-5 CONTRACTS IN WRITING
Lynn and Howard were in love. And when people are in love, they say all kinds of things. In their
case, they promised that if either ever won the lottery, they would split the winnings. (You can tell
where this is going, right?)
☐ Offer
☐ Acceptance
☐ Consideration
☐ Legality
☐ Capacity
☐ Consent
☑ Writing
CONTRACTS CHECKLIST
Time passed. Although Howard moved into Lynn’s house, they never married. Fourteen years
later, the relationship was on the brink. One fateful night, on the way home from dinner, they
stopped at a convenience store and bought several $20 lottery tickets.
When people are in love, they say all kinds of things.
Next thing Howard knew, Lynn was gone—along with the lottery tickets. For over a month,
she refused to take his calls. Finally, Lynn returned—with a shiny new car, an eviction notice for
Howard, and no intention of sharing a million-dollar lottery prize.
If the former lovers had read this chapter, they would never have slid into such a mess. Lynn
and Howard’s case involves the Statute of Frauds, the law that tells us which contracts must be
written.
The Statute of Frauds is not exactly news. Parliament passed the original Statute of Frauds in
1677. The purpose was to prevent lying (fraud) in civil lawsuits. The statute required that, in
several types of cases, a contract would be enforced only if it was in writing. Almost all states in
our own country later passed their own statutes making the same requirements. It is important to
remember, as we examine the rules and exceptions, that Parliament and the state legislatures all
had a commendable, straightforward purpose in passing their respective Statute of Frauds: to
provide a court with the best possible evidence of whether the parties intended to make a contract.
Statute
Requires certain contracts to be in writing
of
Frauds
A plaintiff may not enforce any of the following agreements unless the agreement, or some
memorandum of it, is in writing and signed by the defendant. The agreements that must be in
writing are those:
•
•
•
•
•
•
For any interest in land,
That cannot be performed within one year,
In which a party promises to pay the debt of another,
Made by an executor to pay a debt of the estate,
Made in consideration of marriage, and
For the sale of goods of $500 or more.
A plaintiff may not enforce any of these six types of agreements unless the agreement, or some
memorandum of it, is in writing and signed by the defendant.
11-5a Contracts That Must Be in Writing
Agreements for an Interest in Land
A contract for the sale of any interest in land must be in writing to be enforceable. Notice the
phrase “interest in land.” This means any legal right regarding land. A house on a lot is an interest
in land. A mortgage, an easement, and a leased apartment are all interests in land. As a general
rule, leases must therefore be in writing, although many states have created an exception for shortterm leases of a year or less.
Exception: Full Performance by the Seller. If the seller completely performs her side of a
contract for an interest in land, a court is likely to enforce the agreement even if it was oral. Adam
orally agrees to sell his condominium to Maggie for $150,000. Adam delivers the deed to Maggie
and expects his money a week later, but Maggie fails to pay. Most courts will allow Adam to
enforce the oral contract and collect the full purchase price from Maggie.
Exception: Part Performance by the Buyer. The buyer of land may be able to enforce an oral
contract if she paid part of the purchase price and either entered upon the land or made
improvements to it. Suppose that Eloise sues Grover to enforce an alleged oral contract to sell a
lot in Happydale. She claims they struck a bargain in January. Grover defends based on the Statute
of Frauds, saying that even if the two did reach an oral agreement, it is unenforceable. Eloise
proves that she paid 10 percent of the purchase price, and that in February she began excavating
on the lot to build a house, and that Grover knew of the work. Eloise has established part
performance and will be allowed to enforce her contract.
start here
Agreements that Cannot Be Performed within One Year
Contracts that cannot be performed within one year are unenforceable unless they are in writing.
This one-year period begins on the date the parties make the agreement. The critical phrase here
is “cannot be performed within one year.” If a contract could be completed within one year, it need
not be in writing. Betty gets a job at Burger Brain, throwing fries in oil. Her boss tells her she can
have Fridays off for as long as she works there. That oral contract is enforceable whether Betty
stays one week or 57 years. It could have been performed within one year if, say, Betty quit the
job after six months. Therefore, it does not need to be in writing.
If the agreement will necessarily take longer than one year to finish, it must be in writing to
be enforceable. If Betty is hired for three years as manager of Burger Brain, the agreement is
unenforceable unless put in writing. She cannot perform three years of work in one year.
The following case picks up the story of Lynn and Howard and their war over a winning lottery
ticket. Who wants to be a millionaire? They both do. Who will win? Only one of them.
Browning v. Poirier
165 So.3d 663
Florida Supreme Court, 2015
CASE SUMMARY
Facts: Howard Browning and Lynn Poirier were romantic partners. Early on, they promised to
share any lottery winnings equally. Fourteen years after that oral promise, they purchased a
million-dollar winning ticket. But after Poirier collected the prize, she refused to give Browning
half.
Browning sued Poirier for breach of oral contract. Poirier claimed their agreement was
unenforceable because the Statute of Frauds requires promises that cannot be performed within a
year to be in writing.
Issue: Will the court enforce this open-ended promise to share future lottery winnings?
Decision: Yes. This promise does not have to be in writing because it can be performed within
one year.
Reasoning: This promise could have been completed within a year of its making. If either
Browning or Poirier had won the lottery that first year after their vow to share, the agreement
would have been fully performed. Likewise, if either Browning or Poirier had ended the deal
during its first year, it would also have been completed. Nothing in the contract terms demonstrates
that it could not be fulfilled within one year, so it is enforceable. Poirier must share the winnings
with Browning.
Type of Agreement
Enforceability
Cannot be performed within
one year. Example: An offer
of employment for three
years.
Must be in writing
to be enforceable.
Might be performed within
one year, although could take
many years to
perform. Example: “As long
as you work here at Burger
Brain, you may have Fridays
off.”
Enforceable
whether it is oral
or written, because
the employee
might quit
working a month
later.
Promise to Pay the Debt of Another
When one person agrees to pay the debt of another as a favor to that debtor, it is called a collateral
promise, and it must be in writing to be enforceable. A student applies for a $10,000 loan to help
pay for college, and her father agrees to repay the bank if the student defaults. The bank will insist
that the father’s promise be in writing because his oral promise alone is unenforceable.
Promise Made by an Executor of an Estate
An executor is the person who is in charge of an estate after someone dies. The executor’s job is
to pay debts of the deceased, obtain money owed to him, and disburse the assets according to the
will. In most cases, the executor will use only the estate’s assets to pay those debts, but occasionally
she might offer her own money. An executor’s promise to use her own funds to pay a debt of the
deceased must be in writing to be enforceable.
Promise Made in Consideration of Marriage
This is not the stuff of fairy tales: Barney is a multimillionaire with the integrity of a gangster and
the charm of a tax collector. He proposes to Li-Tsing, who promptly rejects him. Barney then
pleads that if Li-Tsing will be his bride, he will give her an island he owns off the coast of
California. Li-Tsing begins to see his good qualities and accepts. After they are married, Barney
refuses to deliver the deed. Li-Tsing will get nothing from a court either because a promise made
in consideration of marriage must be in writing to be enforceable.
11-5b What the Writing Must Contain
Each of the five types of contract described earlier must be in writing in order to be enforceable.
What must the writing contain? It may be a carefully typed contract, using precise legal
terminology, or an informal memorandum scrawled on the back of a paper napkin at a business
lunch. The writing may consist of more than one document, written at different times, with each
document making a piece of the puzzle. However, there are some general requirements. The
contract or memorandum:
•
•
Must be signed by the defendant and
Must state with reasonable certainty the name of each party, the subject matter of the
agreement, and all the essential terms and promises.
Signature
A Statute of Frauds typically states that the writing must be “signed by the party to be charged
therewith,” in other words, the defendant. Judges define “signature” very broadly. Using a pen to
write one’s name, though sufficient, is not required. A secretary who stamps an executive’s
signature on a letter fulfills this requirement. Any other mark or logo placed on a document to
indicate acceptance, even an “X,” will likely satisfy the …