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1

Express and Implied Contracts

Simple contracts may be classified as express contracts or implied contracts according to the way they are created.

2

Express Contracts.

An express contract is one in which the terms of the agreement of the parties are manifested by their words, whether spoken or written.

3

Implied Contracts.

An implied contract (or, as sometimes stated, a contract implied in fact) is one in which the agreement is shown not by words, written or spoken, but by the acts and conduct of the parties.

Such a contract arises when:

a person renders services under circumstances indicating that payment for them is expected and
the other person, knowing such circumstances, accepts the benefit of those services.

An implied contract cannot arise when there is an existing express contract on the same subject.

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

4

Valid and Voidable Contracts and Void Agreements

Contracts may be classified in terms of enforceability or validity.

5

Valid Contracts.

A valid contract is an agreement that is binding and enforceable.

6

Voidable Contracts.

A voidable contract is an agreement that is otherwise binding and enforceable, but because of the circumstances surrounding its execution or the lack of capacity of one of the parties, it may be rejected at the option of one of the parties. For Example, a person who has been forced to sign an agreement that that person would not have voluntarily signed may, in some instances, avoid the contract.

7

Void Agreements.

A void agreement is without legal effect. An agreement that contemplates the performance of an act prohibited by law is usually incapable of enforcement; hence it is void. Likewise, it cannot be made binding by later approval or ratification.

8

Executed and Executory Contracts

Contracts may be classified as executed contracts and executory contracts according to the extent to which they have been performed.

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Executed Contracts.

An executed contract is one that has been completely performed. In other words, an executed contract is one under which nothing remains to be done by either party.

A contract may be executed immediately, as in the case of a cash sale, or it may be executed or performed in the future.

10

Executory Contracts.

In an executory contract, something remains to be done by one or both parties.

For Example, on July 10, Mark agreed to sell to Chris his Pearl drum set for $600, the terms being $200 upon delivery on July 14, with $200 to be paid on July 21, and the final $200 being due July 28. Prior to the July 14 delivery of the drums to Chris, the contract was entirely executory. After the delivery by Mark, the contract was executed as to Mark and executory as to Chris until the final payment was received on July 28.

11

Bilateral and Unilateral Contracts

In making an offer, the offeror is in effect extending a promise to do something, such as pay a sum of money, if the offeree will do what the offeror requests. Contracts are classified as bilateral or unilateral. Some bilateral contracts look ahead to the making of a later contract. Depending on their terms, these are called option contracts or first-refusal contracts.

12

Bilateral Contract.

If the offeror extends a promise and asks for a promise in return and if the offeree accepts the offer by making the promise, the contract is called a bilateral contract. One promise is given in exchange for another, and each party is bound by the obligation.
For Example, when the house painter offers to paint the owner’s house for $3,700 and the owner promises to pay $3,700 for the job, there is an exchange of promises, and the agreement gives rise to a bilateral contract.

13

Unilateral Contract.

In contrast with a bilateral contract, the offeror may promise to do something or to pay a certain amount of money only when the offeree does an act.

Examples of where unilateral contracts commonly appear are when a reward is offered, a contest is announced, or changes are made and disseminated in an employee manual. The offeree does not accept the offer by express agreement, but rather by performance.

14

Case Summary
Unilateral Contract: Pretty Good Bonus!

Facts:
Aon Risk Services, Inc. (ARS Arkansas), and Combined Insurance Companies are subsidiaries of Aon Corporation. The parent corporation issued an “lnterdependency Memo” dated February 2000, which encouraged ARS brokerage offices to place insurance business with Aon-affiliated companies. It also set up a bonus pool for revenues generated under the plan, with Combined agreeing to pay “30% of annualized premium on all life products over 15-year term plus 15% 1st year for all other products.”

John Meadors saw the memo in February 2000, and believed it would entitle him to this compensation over and above his employment contract. Meadors put Combined in touch with Dillard’s Department Stores and on March 24, 2000, Dillard’s and Combined executed a five-year agreement whereby Dillard’s employees could purchase life, disability, and other insurance policies through workplace enrollment.

When Meadors did not receive bonus-pool money generated by the transaction, he sued his employer for breach of a unilateral contract. The employer’s defense was that the memo was not sufficiently definite to constitute an offer.

Decision:

Judgment for Meadors for $2,406,522.60. A unilateral contract is composed of an offer that invites acceptance in the form of actual performance.

For example, in the case of a reward, the offeree accepts by performing the particular task, such as the capture of the fugitive for which the reward is offered. In this case the offer contained in the Interdependency Memo set out specific percentages of provisions that would go into the bonus pool, and required that the pool be distributed annually. It was sufficiently definite to constitute an offer. Meadors was responsible for the production of the Dillard’s account, and was entitled to the bonus promised in the memo. [Aon Risk Services Inc. v. Meadors, 267 S.W.3d 603 (Ark. App. 2007)]

15

Option and First-Refusal Contracts.

The parties may make a contract that gives a right to one of them to enter into a second contract at a later date. If one party has an absolute right to enter into the later contract, the initial contract is called an option contract. Thus, a bilateral contract may be made today giving one of the parties the right to buy the other party’s house for a specified amount. This is an option contract because the party with the privilege has the freedom of choice, or option, to buy or not buy. If the option is exercised, the other party to the contract must follow the terms of the option and enter into the second contract. If the option is never exercised, no second contract ever arises, and the offer protected by the option contract merely expires.

In contrast with an option contract, a contract may merely give a right of first refusal. This imposes only the duty to make the first offer to the party having the right of first refusal.

16

Quasi Contracts

In some cases, a court will impose an obligation even though there is no contract.

Such an obligation is called a quasi contract, which is an obligation imposed by law.

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Prevention of Unjust Enrichment.

A quasi contract is not a true contract reflecting all of the elements of a contract set forth previously in this chapter. The court is not seeking to enforce the intentions of the parties contained in an agreement. Rather, when a person or enterprise receives a benefit from another, even in the absence of a promise to pay for the benefit, a court may impose an obligation to pay for the reasonable value of that benefit, to avoid unjust enrichment. The spirit behind the law of unjust enrichment is to apply the law “outside the box” and fill in the cracks where common civil law and statutes fail to achieve justice.

A successful claim for unjust enrichment usually requires

a benefit conferred on the defendant,

the defendant’s knowledge of the benefit, and

a finding that it would be unjust for the defendant to retain the benefit without payment.

The burden of proof is on the plaintiff to prove all of the elements of the claim.

18

Restitution damages

Sometimes a contract may be unenforceable because of a failure to set forth the contract in writing in compliance with the statute of frauds. In other circumstances, no enforceable contract exists because of a lack of definite and certain terms. Yet in both situations, one party may have performed services for the benefit of the other party and the court will require payment of the reasonable value of services to avoid the unjust enrichment of the party receiving the services without paying for them.

These damages are sometimes referred to as restitution damages. Some courts refer to this situation as an action or recovery in quantum meruit (as much as he or she deserved).

19

No Free Rides

Facts:

PIC Realty leased farmland to Southfield Farms. After Southfield harvested its crop, it cultivated the land in preparation for the planting in the following year. However, its lease expired, so it did not plant that crop. It then sued PIC for reimbursement for the reasonable value of the services and materials used in preparing the land because this was a benefit to PIC. There was evidence that it was customary for landlords to compensate tenants for such work.

Decision:

Southfield was entitled to recover the reasonable value of the benefit conferred upon PIC. This was necessary in order to prevent the unjust enrichment of PIC. [PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610 (Tex. App. 1992)]

20

Preclusion by an Express Contract.

Courts award relief based on quasi-contractual principles, implying by law a contract where one did not exist in fact. Thus, where an express contract exists, it precludes an unjust enrichment claim.

21

When in Doubt, Write It Out

Facts:

Facing financial turbulence, Philippine Airlines (PAL) sought to renegotiate its aircraft lease contract (ALC) with World Airlines (WA). WA refused to negotiate with PAL. PAL retained John Sununu, the former Governor of New Hampshire and the former Chief of Staff to President George H. W. Bush and Sununu’s partner Victor Frank to represent it. Sununu and Frank sent a contract proposal to PAL, which included a proposed “success fee” of $600,000 if they persuaded WA to accept a modification of the lease contract. PAL gave Sununu and Frank a verbal go-ahead but did not sign the proposed contract. Thereafter PAL sent a contract that was different from that proposed by Sununu and Frank, containing a success fee of 4 percent of savings if they were able to reach a settlement to reduce the remaining obligation of PAL to WA in accordance with either of two very specific settlement offers. Caught up in the actual intense settlement negotiations with WA on behalf of PAL Sununu and Frank signed the contract. Thereafter, they were successful in obtaining an amendment to the lease contract, saving PAL $12.8 million. PAL refused to pay a success fee of $520,000 because the actual settlement did not meet the contractual criteria, which was limited to just the two specific settlement offers. Sununu and Frank sued PAL for unjust enrichment and other contract theories.

Decision:

Judgment for PAL.

Sununu and Frank conferred a benefit on PAL through their efforts to persuade WA to negotiate with PAL; and PAL accepted and retained the benefit for the renegotiated lease. There can be no claim, however, for unjust enrichment when an express contract exists between two parties. A court awards relief based on quasi-contractual principles, implying by law a contract, only where one did not exist in fact. The court stated:

To grant PAL’s summary judgment motion is not to condone its conduct. The airline can rightly be accused of stinginess for enforcing the formalistic terms of the contract in spite of the plaintiffs’ earnest efforts on its behalf…. PAL may have violated Sununu and Frank’s trust, but it did not violate the law.

… Sununu and Frank seem to have done their best to serve their client, but they made a reckless bet by trusting PAL. They were accustomed to handshake deals in which personal relationships count for more than legal documents, so they made little effort to put their understanding with PAL on paper. When they ran into a client who didn’t play by the same rules, they paid the price.

The lesson is one that should be taught in law and business schools across America: When in doubt, write it out.

22

Extent of Recovery.

When recovery is allowed in quasi contract, the plaintiff recovers the reasonable value of the benefit conferred on the defendant, or the fair and reasonable value of the work performed, depending on the jurisdiction and the circumstances of the case itself. The customary method of calculating damages in construction contract cases is actual job costs plus an allowance for overhead and profits minus amount paid.

23

Contracting on the Internet

Doing business online for consumers is very similar to doing business through a catalog purchase or by phone. Before placing an order, a buyer is commonly concerned about the reputation of the seller.

The basic purchasing principle of caveat emptor still applies: buyer beware! The Internet provides valuable tools to allow a buyer to research the reputation of the seller and its products.

The intellectual property principles as well as the contractual principles, the law of sales, and privacy laws you are about to study—all apply to e-commerce transactions.

When you are purchasing an item online, you must carefully read all of the terms and conditions set forth on the seller’s Web site when assessing whether to make a contemplated purchase. The proposed terms may require that any disputes be litigated in a distant state or be resolved through arbitration with restricted remedies, or there may be an unsatisfactory return policy, warranty limitations, or limitation of liability. Generally, the Web site terms become the contract of the parties and are legally enforceable.

24

The federal Electronic Signatures in Global and National Commerce Act (E-Sign) and the Uniform Electronic Transactions Act (UETA) mandate parity between paper and electronic contracts.

The basic legal rules that govern contracts offline are the very same rules that govern online contracts, and basic civil procedure rules apply.

For Example, California buyer Paul Boschetto bought a 1964 Ford Galaxy that had been advertised on eBay to be “in awesome condition” from a Milton, Wisconsin resident, J. Hansing, for $34,106. On delivery Boschetto discovered that the car had rust, extensive dents, and would not start. His lawsuit against Hansing in U.S. District Court in California was dismissed for lack of personal jurisdiction. (The formation of a contract with a nonresident defendant was not, standing alone, sufficient to create personal jurisdiction in California.)

25

bilateral contract

agreement under which one promise is given in exchange for another.

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contract

a binding agreement based on the genuine assent of the parties, made for a lawful object, between competent parties, in the form required by law, and generally supported by consideration.

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executed contract

agreement that has been completely performed.

28

executory contract

agreement by which something remains to be done by one or both parties.

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express contract

agreement of the parties manifested by their words, whether spoken or written.

30

formal contract

written contracts or agreements whose formality signifies the parties’ intention to abide by the terms