CONTRACTS

Agreements between two entities, creating an enforceable obligation to do, or to refrain from doing, a particular thing.

Nature and Contractual Obligation

The purpose of a contract is to establish the agreement that the parties have made and to fix their rights and duties in accordance with that agreement. The courts must enforce a valid contract as it is made, unless there are grounds that bar its enforcement.

Statutes prescribe and restrict the terms of a contract where the general public is affected. The terms of an insurance contract that protect a common carrier are controlled by statute in order to safeguard the public by guaranteeing that there will be financial resources available in the event of an accident.

The courts may not create a contract for the parties. When the parties have no express or implied agreement on the essential terms of a contract, there is no contract. Courts are only empowered to enforce contracts, not to write them, for the parties. A contract, in order to be enforceable, must be a valid. The function of the court is to enforce agreements only if they exist and not to create them through the imposition of such terms as the court considers reasonable.

It is the policy of the law to encourage the formation of contracts between competent parties for lawful objectives. As a general rule, contracts by competent persons, equitably made, are valid and enforceable. Parties to a contract are bound by the terms to which they have agreed, usually even if the contract appears to be improvident or a bad bargain, as long as it did not result from fraud, duress, or undue influence.

The binding force of a contract is based on the fact that it evinces a meeting of minds of two parties in good faith. A contract, once formed, does not contemplate a right of a party to reject it. Contracts that were mutually entered into between parties with the capacity to contract are binding obligations and may not be set aside due to the caprice of one party or the other unless a statute provides to the contrary.

Types of Contracts

Contracts under Seal Traditionally, a contract was an enforceable legal document only if it was stamped with a seal. The seal represented that the parties intended the agreement to entail legal consequences. No legal benefit or detriment to any party was required, as the seal was a symbol of the solemn acceptance of the legal effect and consequences of the agreement. In the past, all contracts were required to be under seal in order to be valid, but the seal has lost some or all of its effect by statute in many jurisdictions. Recognition by the courts of informal contracts, such as implied contracts, has also diminished the importance and employment of formal contracts under seal.

Express Contracts In an express contract, the parties state the terms, either orally or in writing, at the time of its formation. There is a definite written or oral offer that is accepted by the offeree (i.e., the person to whom the offer is made) in a manner that explicitly demonstrates consent to its terms.

Implied Contracts Although contracts that are implied in fact and contracts implied in law are both called implied contracts, a true implied contract consists of obligations arising from a mutual agreement and intent to promise, which have not been expressed in words. It is misleading to label as an implied contract one that is implied in law because a contract implied in law lacks the requisites of a true contract. The term quasi-contract is a more accurate designation of contracts implied in law. Implied contracts are as binding as express contracts. An implied contract depends on substance for its existence; therefore, for an implied contract to arise, there must be some act or conduct of a party, in order for them to be bound.

A contract implied in fact is not expressed by the parties but, rather, suggested from facts and circumstances that indicate a mutual intention to contract. Circumstances exist that, according to the ordinary course of dealing and common understanding, demonstrate such an intent that is sufficient to support a finding of an implied contract. Contracts implied in fact do not arise contrary to either the law or the express declaration of the parties. Contracts implied in law (quasi-contracts) are distinguishable in that they are not predicated on the assent of the parties, but, rather, exist regardless of assent.

The implication of a mutual agreement must be a reasonable deduction from all of the circumstances and relations that contemplate parties when they enter into the contract or which are necessary to effectuate their intention. No implied promise will exist where the relations between the parties prevent the inference of a contract.

A contract will not be implied where it would result in inequity or harm. Where doubt and divergence exist in the minds of the parties, the court may not infer a contractual relation-ship. If, after an agreement expires, the parties continue to perform according to its terms, an implication arises that they have mutually assented to a new contract that contains the same provisions as the old agreement.

A contract implied in fact, which is inferred from the circumstances, is a true contract, whereas a contract implied in law is actually an obligation imposed by law and treated as a contract only for the purposes of a remedy. With respect to contracts implied in fact, the contract defines the duty; in the case of quasi-contracts, the duty defines and imposes the agreement upon the parties.

Executed and Executory Contracts An executed contract is one in which nothing remains to be done by either party. The phrase is, to a certain extent, a misnomer because the completion of performances by the parties signifies that a contract no longer exists. An executory contract is one in which some future act or obligation remains to be performed according to its terms.

Bilateral and Unilateral Contracts The exchange of mutual, reciprocal promises between entities that entails the performance of an act, or forbearance from the performance of an act, with respect to each party, is a bilateral contract. A bilateral contract is sometimes called a two-sided contract because of the two promises that constitute it. The promise that one party makes constitutes sufficient consideration (see discussion below) for the promise made by the other.

A unilateral contract involves a promise that is made by only one party. The offeror (i.e., a person who makes a proposal) promises to do a certain thing if the offeree performs a requested act that he or she knows is the basis of a legally enforceable contract. The performance constitutes an acceptance of the offer, and the contract then becomes executed. Acceptance of the offer may be revoked, however, until the performance has been completed. This is a one-sided type of contract because only the offeror, who makes the promise, will be legally bound. The offeree may act as requested, or may refrain from acting, but may not be sued for failing to perform, or even for abandoning performance once it has begun, because he or she did not make any promises.

Unconscionable Contracts An unconscionable contract is one that is unjust or unduly one-sided in favor of the party who has the superior bargaining power. The adjective unconscionable implies an affront to fairness and decency. An unconscionable contract is one that no mentally competent person would accept and that no fair and honest person would enter into. Courts find that unconscionable contracts usually result from the exploitation of consumers who are poorly educated, impoverished, and unable to shop around for the best price available in the competitive marketplace.

The majority of unconscionable contracts occur in consumer transactions. Contractual provisions that indicate gross one-sidedness in favor of the seller include limiting damages or the rights of the purchaser to seek court relief against the seller, or disclaiming a warranty (i.e., a statement of fact concerning the nature or caliber of goods sold the seller, given in order to induce the sale, and relied upon by the purchaser).

Unconscionability is ascertained by examining the circumstances of the parties when the contract was made. This doctrine is applied only where it would be an affront to the integrity of the judicial system to enforce such a contract.

Adhesion Contracts Adhesion contracts are those that are drafted by the party who has the greater bargaining advantage, providing the weaker party with only the opportunity to adhere to (i.e., to accept) the contract or to reject it. (These types of contract are often described by the saying "Take it or leave it.") They are frequently employed because most businesses could not transact business if it were necessary to negotiate all of the terms of every contract. Not all adhesion contracts are unconscionable, as the terms of such contracts do not necessarily exploit the party who assents to the contract. Courts, however, often refuse to enforce contracts of adhesion on the grounds that a true meeting of the minds never existed, or that there was no acceptance of the offer because the purchaser actually had no choice in the bargain.

Aleatory Contracts An aleatory contract is a mutual agreement the effects of which are triggered by the occurrence of an uncertain event. In this type of contract, one or both parties assume risk. A fire insurance policy is a form of aleatory contract, as an insured will not receive the proceeds of the policy unless a fire occurs, an event that is uncertain to occur.

Void and Voidable Contracts Contracts can be either void or voidable. A void contract imposes no legal rights or obligations upon the parties and is not enforceable by a court. It is, in effect, no contract at all.

A voidable contract is a legally enforceable agreement, but it may be treated as never having been binding on a party who was suffering from some legal disability or who was a victim of fraud at the time of its execution. The contract is not void unless or until the party chooses to treat it as such by opposing its enforcement. A voidable contract may be ratified either expressly or impliedly by the party who has the right to avoid it. An express ratification occurs when that party who has become legally competent to act declares that he or she accepts the terms and obligations of the contract. An implied ratification occurs when the party, by his or her conduct, manifests an intent to ratify a contract, such as by performing according to its terms. Ratification of a contract entails the same elements as formation of a new contract. There must be intent and complete knowledge of all material facts and circumstances. Oral acknowledgment of a contract and a promise to perform constitute sufficient ratification. The party who was legally competent at the time that a voidable contract was signed may not, however, assert its voidable nature to escape the enforcement of its terms.

Which Law Governs

Although a general body of contract law exists, some aspects of it, such as construction (i.e., the process of ascertaining the proper explanation of equivocal terms), vary among the different jurisdictions. When courts must select the law to be applied with respect to a contract, they consider what the parties intended as to which law should govern; the place where the contract was entered into; and the place of performance of the contract. Many courts apply the modern doctrine of the "grouping of contracts" or the "center of gravity," in which the law of the jurisdiction that has the closest or most significant relationship with the matter in issue applies.

Courts generally apply the law that the parties expressly or impliedly intend to govern the contract, provided that it bears a reasonable relation to the transaction and the parties acted in good faith. Some jurisdictions follow the law of the place where the contract was performed, unless the intent of the parties is to the contrary. Where foreign law governs, contracts may be recognized and enforced under the doctrine of comity (i.e., the acknowledgment that one nation gives within its territory to the legislative, executive, or judicial acts of another nation).

Elements of a Contract

The requisites for formation of a legal contract are an offer, an acceptance, competent parties who have the legal capacity to contract, lawful subject matter, mutuality of agreement, consideration, mutuality of obligation, and, if required under the statute of frauds, a writing.

Offer An offer is a promise that is, by its terms, conditional upon an act, forbearance, or return promise being given in exchange for the promise or its performance. It is a demonstration of willingness to enter into a bargain, made so that another party is justified in understanding that his or her assent to the bargain is invited and will conclude it. Any offer must consist of a statement of present intent to enter a contract; a definite proposal that is certain in its terms; and communication of the offer to the identified, prospective offeree. If any of these elements are missing, there is no offer to form the basis of a contract.

Preliminary negotiations, advertisements, invitations to bid Preliminary negotiations are clearly distinguished from offers because they contain no demonstration of present intent to form contractual relations. No contract is formed when prospective purchasers respond to such terms, as they are merely invitations or requests for an offer. Unless this interpretation is employed, any person in a position similar to a seller who advertises goods in any medium would be liable for numerous contracts when there is usually a limited quantity of merchandise for sale.

An advertisement, price quotation, or catalogue is customarily viewed as only an invitation to a customer to make an offer and not as an offer itself. The courts reason that an establishment might not have sufficient stock to satisfy potential demand and that it would not be reasonable for a customer to expect to form a binding contract by responding to advertisements that are intended to make consumers aware of a product for sale. In addition, the courts have held that an advertisement is an offer for a unilateral contract that can be revoked at the will of the offeror, the business enterprise, prior to performance of its terms.

An exception exists, however, to the general rule on advertisements. When the quantity offered for sale is specified and contains words of promise, such as "first come, first served," courts enforce the contract where the store refuses to sell the product when the price is tendered. Where the offer is clear, definite, and explicit, and no matters remain open for negotiation, acceptance of it completes the contract. New conditions may not be imposed on the offer after it has been accepted by the performance of its terms.

An advertisement or request for bids for the sale of particular property or the erection or construction of a particular structure is merely an invitation for offers that cannot be accepted by any particular bid. A submitted bid is, however, an offer, which upon acceptance by the offeree becomes a valid contract.

Mistake in sending offer If an intermediary, such as a telegraph company, errs in the transmission of an offer, most courts hold that the party who selected that method of communication is bound by the terms of the erroneous message. The same rule applies to acceptances. In reaching this result, courts regard the telegraph company as the agent of the party who selected it. Other courts justify the rule on business convenience. A few courts rule that if there is an error in transmission, there is no contract, on the grounds that either the telegraph company is an independent contractor and not the sender's agent, or there has been no meeting of the minds of the parties. However, an offeree who knows, or should know, of the mistake in the transmission of an offer may not take advantage of the known mistake by accepting the offer; he or she will be bound by the original terms of the offer.

Termination of an offer An offer remains open until the expiration of its specified time period or, if there is no time limit, until a reasonable time has elapsed. A reasonable time is determined according to what a reasonable person would consider sufficient time to accept the offer.

The death or insanity of either party, before an acceptance is communicated, causes an offer to expire. If the offer has been accepted, the contract is binding, even if one of the parties dies thereafter. The destruction of the subject matter of the contract; conditions that render the contract impossible to perform; or the supervening illegality of the proposed contract results in the termination of the offer.

When the offeror, either verbally or by conduct, clearly demonstrates that the offer is no longer open, the offer is considered revoked when learned by the offeree. Where an offer is made to the general public, it can be revoked by furnishing public notice of its termination in the same way in which the offer was publicized.

Irrevocable offers An option is a right that is purchased by a person in order to have an offer remain open at agreed-upon price and terms, for a specified time, during which it is irrevocable. It constitutes an exception to the general rule that an offer may be withdrawn prior to acceptance. The offeror may not withdraw this offer because that party is bound by the consideration given by the offeree. The offeree is free, however, to decide whether or not to accept the offer.

Most courts hold that an offer for a unilateral contract becomes irrevocable as soon as the offeree starts to perform the requested act, because that action serves as consideration to prevent revocation of the offer. Where it is doubtful whether the offer invites an act (as in the case of a unilateral contract) or a promise (as in the case of a bilateral contract), the presumption is in favor of a promise, and therefore a bilateral contract arises. If an offer to form a unilateral contract requires several acts, it is interpreted as inviting acceptance by completion of the initial act. Performance of the balance constitutes a condition to the offeror's duty of performance. Where such an offer invites only a single act, it includes by implication a subsidiary promise to keep the offer open if the offeree will commence performance. Some courts hold that an offer for a unilateral contract may be revoked at any time prior to completion of the act bargained for, even after the offeree has partially performed it.

Rejection of an offer An offer is rejected when the offeror is justified in understanding from the words or conduct of the offeree that he or she intends not to accept the offer, or to take it under further advisement. Rejection might come in the form of an express refusal to accept an offer by a counteroffer, which is a new proposal that rejects the offer by implication; or by a conditional acceptance that operates as a counteroffer. The offer may continue, however, if the offeree expressly states that the counteroffer shall not constitute a rejection of the offer.

If an offer is rejected, the party who made the original offer no longer has any liability for that offer. The party who rejected the offer may not subsequently, at his or her own option, convert the same offer into a contract by a subsequent acceptance. In such a case, the consent of the offeror must be obtained for a contract to be formed.

Acceptance Acceptance of an offer is an expression of assent to its terms. It must be made by the offeree in a manner requested or authorized by the offeror. An acceptance is valid only if the offeree knows of the offer; the offeree manifests an intention to accept; the acceptance is unequivocal and unconditional; and the acceptance is manifested according to the terms of the offer.

The determination of a valid acceptance is governed by whether a promise or an act by the offeree was the bargained-for response. Since the acceptance of a unilateral contract requires an act rather than a promise, it is unnecessary to furnish notice of intended performance unless the offeror requested it. If, however, the offeree has reason to believe that the offeror will not learn of the acceptance with reasonable promptness, the duty of the offeror is discharged unless the offeree makes a reasonable attempt to give notice; the offeror learns of the performance; or the offer indicates that no notice is required.

In bilateral contracts, the offer is effective when the offeree receives it. The offeree may accept it until the offeree receives notice of revocation from the offeror. Thereafter, an offer is revoked. Under the majority rule, which is known as the "mailbox rule," an acceptance is effective upon dispatch if the offeror explicitly authorizes that method of acceptance to be employed by the offeree, even if the acceptance is lost or destroyed in transit.

The majority rule is inapplicable, however, unless the acceptance is properly addressed and postage prepaid. It has no application to most option contracts, as acceptance of an option contract is effective only when received by the offeror.

If the acceptance mode used by the offeree is implicitly authorized by the offeror, such as the selection by the offeree of the same method used by the offeror, who neglected to designate a method of communication, an acceptance is effective upon dispatch if it is correctly addressed and the expense of its conveyance is prepaid. As with expressly authorized methods, the acceptance need not ever reach the offeror in order to form the contract.

In some jurisdictions, the use of a method not expressly or impliedly authorized by the offeror, even if more rapid in nature, results in a contract only upon receipt of the acceptance. In most jurisdictions, however, if the acceptance mode is inherently faster, it is deemed to be an impliedly authorized means, and acceptance is effective upon dispatch.

If the acceptance is transmitted by an expressly or impliedly authorized method to the wrong address, it is effective only upon receipt by the offeror. A wrong address is any address other than that implicitly authorized, even if the offeror were in a position to receive the acceptance at the substituted address.

An offeror who specifically states that there is no contract until the acceptance is received is entitled to insist upon the condition of receipt or upon any other provision concerning the manner and time of acceptance specified.

Rejection of the offer or revocation of conditional acceptance is effective upon receipt. A late or defective acceptance is treated as a counteroffer, which will not result in a contract unless the offeror accepts it. If offers cross in the mail, there will be no binding contract, as an offer may not be accepted if there is no knowledge of it.

As a general rule, an offer may be accepted only by the offeree or an authorized agent. If, however, the offer is contained in an option contract, it may be the subject of an assignment or transfer without the consent of the offeror, unless the option involves a purchase on credit or expressly prohibits an assignment.

In contracts that do not involve the sale of goods, acceptance must comply exactly with the requirements of the offer (this is known as the "mirror-image rule"), and must omit nothing from the promise or performance requested. An offer of a prize in a contest, for example, becomes a binding contract when a contestant successfully complies with the terms of the offer. If a response to an offer purports to accept it, but adds qualifications or conditions, then it is a counteroffer and not an acceptance.

Acceptance may be inferred from the offeree's acts, conduct, or silence; but as a general rule, silence, without more, can never constitute acceptance. The effect of silence accompanied by ambiguity must be ascertained from all the circumstances in the case.

Prior dealings between the parties may create a duty to act. Silence or the failure to take some action under such circumstances might constitute acceptance. For example, if the parties have engaged in a series of business transactions involving the mailing of goods and payment by the recipient, the recipient will not be permitted to retain an article without paying for it within a reasonable time, due to their prior dealings. A recipient who does not intend to accept the goods is under a duty to inform the sender. Silence, where there is a duty to speak, prevents the offeree from rejecting an offer and the offeror from claiming that there is no acceptance. If ownership rights are exercised over an item, this might be deemed an acceptance.

Unsolicited goods At common law, the recipient of unsolicited goods in the mail was not required to accept or to return them, but if the goods were used, a contract and a concomitant obligation to pay for them were created. Today, in order to offer protection against unwanted solicitations, some state statutes have modified the common-law rule by providing that where unsolicited merchandise is received as part of an offer to sell, the goods are an out-right gift. The recipient may use the goods and is under no duty to return or pay for them unless he or she knows that they were sent by mistake.

Agreements to agree An "agreement to agree" is not a contract. This type of agreement is frequently employed in industries that require long-term contracts in order to ensure a constant source of supplies and outlet of production. Mutual manifestations of assent that are, in themselves, sufficient to form a binding contract are not deprived of operative effect by the mere fact that the parties agree to prepare a written reproduction of their agreement. In determining whether, on a given set of facts, there is merely an "agreement to agree" or a sufficiently binding contract, the courts apply certain rules. If the parties express their intention—either to be bound or not bound until a written document is prepared—then that intention controls. If they have not expressed their intention, but they exchange promises of a definite performance and agree upon all essential terms, then the parties have formed a contract even though the written document is never signed. If the expressions of intention are incomplete—as, for example, if a material term such as quantity has been left to further negotiation—the parties do not have a contract. The designation of the material term for further negotiation is interpreted as demonstrating the intention of the parties not to be bound until a complete agreement has been reached.

Competent Parties A natural person who agrees to a transaction has complete legal capacity to become liable for duties under the contract unless he or she is an infant, insane, or intoxicated.

Infants An infant is defined as a person under the age of 18 or 21, depending on the particular jurisdiction. A contract made by an infant is voidable but is valid and enforceable until or unless he or she disaffirms it. He or she may avoid the legal duty to perform the terms of the contract without any liability for breach of contract. infants are treated in such a way because public policy deems it desirable to protect the immature and naive infant from liability for unfair contracts that he or she is too inexperienced to negotiate on equal terms with the other party.

Once an infant attains majority (i.e., the age at which a person is no longer legally considered an infant), he or she must choose either to disaffirm or avoid the contract, or to ratify or accept it. After reaching the age of majority, a person implicitly ratifies and becomes bound to perform the contract if he or she fails to disaffirm it within a reasonable time, which is determined by the circumstances of the particular case. A person who disaffirms a contract must return any benefits or consideration received under it that he or she still possesses. If such benefits have been squandered or destroyed, the person usually has no legal obligation to recompense the other party. The law imposes liability on the infant in certain cases, however. Although the contract of an infant or other person may be voidable, the person still may be liable in quasi-contract in order to prevent unjust enrichment for the reasonable value of goods or services furnished if they are necessaries that are reasonably required for the person's health, comfort, or education.

The majority of courts hold that an infant who willfully misrepresents his or her age may, nevertheless, exercise the power to avoid the contract. As a general rule, however, the infant must place the adult party in the status quo ante (i.e., his or her position prior to the contract). The jurisdictions are in disagreement in regard to whether an infant is liable in tort (i.e., a civil wrong other than breach of contract) for willful misrepresentation of his or her age. This divergence arises from the rule that a tort action may not be maintained against an infant if it essentially entails the enforcement of a contract. Some courts regard the action for fraud that would be commenced against the infant as being based on the contract. Others rule that the tort is sufficiently independent of the contract so that the granting of relief would not involve indirect enforcement of the contract. The other party, however, is able to avoid a contract entered into on the basis of an infant's fraudulent misrepresentation with respect to age or other material facts because he or she is the innocent victim of the infant's fraud.

Mental incapacity When a party does not comprehend the nature and consequences of the contract when it is formed, he or she is regarded as having mental incapacity. A distinction must be drawn between those persons who have been adjudicated incompetent by a court and have had a guardian appointed, and those mentally incompetent persons who have not been so adjudicated. A person who has been declared incompetent in a court proceeding lacks the legal capacity to enter into a contract with another. Such a person is unable to consent to the contract, as the court has determined that he or she does not understand the obligations and effects of the contract. A contract made by such a person is void and without any legal effect. Neither party may be legally compelled to perform or comply with the terms of the contract. If there has been no adjudication of insanity, a contract made by a mentally incapacitated individual is voidable by him or her.

Many contract principles that apply to minors also apply to insane persons. There is an obligation to recompense the injured party where a voidable contract is avoided, and to pay for necessaries based upon quasi-contract for the reasonable value of the goods or services. The incompetent, a guardian, or a personal representative after death may avoid the contract. The incompetent may ratify a voidable contract only if they recover the capacity to contract. The right to avoid the contract belongs to the incompetent; the other party may not avoid the contractual obligation. A contract that is ordinarily voidable may not be set aside when it is inherently fair to both parties and has been executed to such an extent that the other party cannot be restored to the position that they occupied prior to the contract.

Intoxicated persons A contract made by an intoxicated person is voidable. When a person is inebriated at the time of entering into a contract with another and subsequently becomes sober and either promises to perform the contract or fails to disaffirm it within a reasonable time after becoming sober, then that person has ratified his or her voidable contract and is legally bound to perform.

Subject Matter Any undertaking may be the subject of a contract, provided that it is not proscribed by law. When a contract is formed in restraint of trade, courts will not enforce it, because it imposes an illegal and unreasonable burden on commerce by hindering competition. Contracts that provide for the commission of a crime or any illegal objective are also void.

Future rights and liabilities—performing or refraining from some designated act, or assuming particular risks or obligations—may constitute the basis of a contract. An idea that never assumes concrete form at the time of disclosure, such as a concept for a short story, even though new and unusual, may not, however, be the subject of a contract.

A person may not legally contract concerning a right that he or she does not have. A seller of a home who does not possess clear title to the property may not promise to convey it without encumbrances. Neither may a seller promise that property will not be appropriated by eminent domain, which is an inherent power of government that is not subject to restrictions imposed by individuals.

Mutual Agreement There must be an agreement between the parties, or mutual assent, for a contract to be formed. In order for an agreement to exist, the parties must have a common intention or a meeting of minds on the terms of the contract and must subscribe to the same bargain. Aside from certain statutory exceptions pertaining to the sale of goods, as prescribed by Article 2 of the uniform commercial code (UCC), if any of the proposed terms is not settled, or if no method of settlement is provided, then there is no agreement. The parties may settle one term at a time, but their contract becomes complete only when they assent to the final term. An agreement is binding if the parties concur with respect to the essential terms and intend the agreement to be binding, even though all of the details are not definitely fixed. The quantity of goods are usually essential terms of the contract that must be agreed upon if the contract is to be enforced. Exceptions to the rule requiring the terms of an agreement to be definite and certain are contained in article 2 of the UCC, which permits the courts to imply reasonably the missing terms if the essential terms unambiguously demonstrate the mutual agreement of the parties.

Consideration Consideration is a legal detriment that is suffered by the promisee and that is requested by the promisor in exchange for his or her promise. A valid contract requires some exchange of consideration. As a general rule, in a bilateral contract, one promise is valid consideration for the other. In a unilateral contract, the agreed performance by the offeree furnishes the necessary consideration and also operates as an acceptance of the offer.

Consideration may consist of a promise; an act other than a promise; a forbearance from suing on a claim that is the subject of an honest and reasonable dispute; or the creation, modification, or destruction of a legal relationship. It signifies that the promisee will relinquish some legal right in the present, or that he or she will restrict his or her legal freedom of action in the future as an inducement for the promise of the other party. It is not substantially concerned with the benefit that accrues to the promisor.

Love and affection are not permissible forms of consideration. A promise to make a gift contains no consideration because it does not entail a legal benefit received by the promisor or a legal detriment suffered by the promisee. Because a promise to give a gift is freely made by the promisor, who is not subject to any legal duty to do so, the promise is not enforceable unless there is promissory estoppel. Promissory estoppel is a doctrine by which a court enforces a promise that the promisor reasonably expects will induce action or forbearance on the part of a promisee, who justifiably relied on the promise and suffered a substantial detriment as a result. Where a court enforces a promise by applying this doctrine, promissory estoppel serves as a substitute for the required consideration.

At common law, courts refused to inquire into the adequacy or fairness of a bargain, finding that the payment of some price constituted legally sufficient consideration. If one is seeking to prove mistake, misrepresentation, fraud, or duress—or to assert a similar defense—the inadequacy of the price paid for the promise might represent significant evidence for such defenses, but the law does not require adequacy of consideration in order to find an enforceable contract.

Mutuality of Obligation Where promises constitute the consideration in a bilateral contract, they must be mutually binding. This concept is known as mutuality of obligation. If one party's promise does not actually bind him or hers to some performance or forbearance, it is an illusory promise, and there is no enforceable contract.

Where the contract provides one party with the right to cancel, there might be no consideration because of lack of mutuality of obligation. If there is an absolute and unlimited right to cancel the obligation, the promise by the party with the right of cancellation is illusory, and the lack of consideration means that there is no contract. If the power to cancel the contract is restricted in any manner, the contract is usually considered to be binding. Performance of a void promise in a defective bilateral contract may render the other promise legally binding, however. For example, in virtually all states, an oral contract to transfer title to land is not merely unenforceable, it is absolutely void. (See discussion of the statute of frauds, below.) A seller who orally promises to transfer land to a purchaser, for which the purchaser orally promises a designated sum, may sue the purchaser for the price if the purchaser receives title to the land from the seller. The purchaser is not relieved of his or her promise to pay, because of the performance of the void oral promise by the seller.

A promise to perform an act that one is legally bound to do does not qualify as consideration for another promise.

Past consideration consists of actions that occurred prior to the making of the contractual promise, without any purpose of inducing a promise in exchange. It is not valid, because it is not furnished as the bargained-for exchange of the present promise. There are exceptions to this rule, such as a present promise to pay a debt that has been discharged in bankruptcy, which constitutes valid consideration because it renews a former promise to pay a debt that was supported by consideration.

Most states do not recognize moral obligation as consideration, as there is no acceptable method of setting the parameters of moral duty. Some courts will enforce a moral obligation where there has been a benefit conferred on the promisor.

Statute of Frauds The statute of frauds was enacted by the English Parliament in 1677 and has since been the law in both England and in the United States in varying forms. It requires that certain types of contracts be in writing. The principal characteristic of various state laws modeled after the original statute is the provision that no suit or action shall be maintained on a contract unless there is a note or memorandum of its subject matter, terms and conditions, and the identity of the parties, signed by the party to be charged or obligated under it or an authorized agent. The purpose of the statute is to prevent the proof of a nonexistent agreement through fraud or perjury in actions for breach of an alleged contract.

Reality of Consent

The parties must mutually assent to the proposed objectives and terms of a contract in order for it to be enforceable. The manifestation of the common intent of the parties is discerned from their conduct or verbal exchanges.

What one party secretly intended is irrelevant if his or her conduct appears to demonstrate agreement. In a few limited cases, however, where there is no stated expression of the parties' intent, their subjective intentions may establish an enforceable contract if both believe in the same terms of the contract.

There will be no binding contract without the real consent of the parties. Apparent consent may be vitiated because of mistake, fraud, innocent misrepresentation, duress, or undue influence, all of which are defenses to the enforcement of the contract.

Mutual Mistake When there is a mutual mistake of fact with respect to the subject of the contract, the subjective intention of the parties is evaluated by the courts to determine whether there had been, in fact, a meeting of the minds of the parties.

If the mutual mistake significantly changed the subject matter of the contract, a court will refuse to enforce the contract. If, however, the difference in the subject matter of the contract concerned some incidental quality that has no (or negligible) effect on the value of the contract, the contract is binding, even though the mistake altered or removed what had been the incentive to one or both parties to enter the contract.

Unilateral Mistake Ordinarily, a unilateral mistake (i.e., an error made by one party) affords no basis for avoiding a contract, but a contract that contains a typographical error may be corrected. A contract may be avoided if the error in value in what is to be exchanged is substantial, or if the mistake is caused by or known to the other party. Unilateral mistakes frequently occur where a contractor submits an erroneous bid for a public contract. Where such a bid is accepted, the contractor will be permitted to avoid the contract only if the agreement has not been executed or if the other party can be placed in the position that they occupied prior to the contract. If the mistake is obvious, the contract will not be enforced, but if it is inconsequential, the contract will be upheld. The mistake must consist of a clerical error or a mistake in computation, as an error in judgment will not permit a contractor to avoid a contract.

Mistake of Law When a party who has full knowledge of the facts reaches an erroneous conclusion as to their legal effect, such a mis-take of law will not invalidate a contract or affect its enforceability.

Illiteracy Illiteracy neither excuses a party from the duty of learning the contents of a written contract nor prevents the mutual agreement of the parties. An illiterate person is capable of giving real consent to a contract; the person has a duty to ask someone to read the contract to him or her and to explain it, if necessary. Illiteracy can, however, serve as a basis for invalidating a contract when considered in relation to other factors, such as fraud or overreaching. If the person whom the illiterate designates to read or explain the contract misrepresents it and acts in collusion with the other party to the contract, the contract may be set aside.

Fraud Fraud prevents mutual agreement to a contract because one party intentionally deceives another as to the nature and the consequences of a contract. It is the willful misrepresentation or concealment of a material fact of a contract, and it is designed to persuade another to enter into that contract. If a special relation-ship exists, such as that of attorney and client, nondisclosure of a material fact is fraud. Many courts have held that mere silence concerning a material fact did not constitute fraud, but the emerging trend is to find a duty to disclose and, therefore, deliberate concealment of a material fact gives rise to an action for fraud.

A contract that is based on fraud is void or voidable, because fraud prevents a meeting of the minds of the parties. If the fraud is in the factum, (i.e., during the execution of the contract) so that the party would not have signed the document if he or she understood its nature, then the contract is void ab initio (i.e., from its inception). The signatory is not bound if a different contract is substituted for the one that he or she had intended to execute. If, however, a party negligently chooses to sign the contract without reading it, then no fraud exists and the contract is enforceable. If the fraud is in the inducement, by which a party is falsely persuaded to sign a contract, the terms of which he or she knows and understands, then the contract is not void but is voidable by the innocent party, as that party executes what is intended to be executed. If, however, due to fraud, a contract fails to express the agreement that the parties intended it to express, then the defrauded party may seek a decree of reformation, by which the court will rewrite a written agreement to conform with the original intent of the parties.

Misrepresentation without Fraud A contract may be invalidated if it was based on any innocent misrepresentation pertaining to a material matter on which one party justifiably relied.

Duress Duress is a wrongful act or threat by one party that compels another party to perform some act, such as the signing of a contract, which he or she would not have done voluntarily. As a result, there is no true meeting of minds of the parties and, therefore, there is no legally enforceable contract. Blackmail, threats of physical violence, or threats to institute legal proceedings in an abusive manner can constitute duress. The consensus of most jurisdictions is that the threat to commence legal proceedings, which otherwise might be justifiable, becomes wrongful when done with the corrupt intent to coerce a transaction that bears no relation to the subject of such proceedings and is grossly unjust to the victim.

A contract that is induced by duress is either void or voidable. If the duress consists of one party taking the other's hand as a mechanical instrument by which to sign his or her name to a contract, then the contract is void ab initio for lack of any intent on the victim's part to perform the act. The result is the same if the victim is compelled to sign a contract at gunpoint without any knowledge of its contents. These are highly unusual situations. In most cases involving duress, the contract is voidable, and the person who was subjected to the duress may ask the court to declare the contract unenforceable.

Undue Influence Undue influence is unlawful control exercised by one person over another in order to substitute the first person's will for that of the other. It generally occurs in two types of situations. In the first, a person takes advantage of the psychological weakness of another, in order to influence that person to agree to a contract to which, under normal circumstances, he or she would not otherwise consent. The second situation entails undue influence based on a fiduciary relationship that exists between the parties. This occurs where one party occupies a position of trust and confidence in relation to the other, as in familial or professional-client relationships. The question of whether the assent of each party to the contract is real or induced by factors that inhibit the exercise of free choice determines the existence of undue influence. Mere legitimate persuasion and suggestion that do not destroy free will are not considered undue influence and have no effect on the legality of a contract.

Assignments

An assignment of a contract is the transfer to another person of the rights of performance under it. Contracts were not assignable at early common law, but today most contracts are assignable unless the nature of the contract or its provisions demonstrates that the parties intend to make it personal to them and therefore incapable of assignment to others.

Joint and Several Contracts

Joint and several contracts always entail multiple promises for the same performance. Two or more parties to a contract who promise to the same promisee that they will give the same performance are regarded as binding themselves jointly, severally, or jointly and severally.

Promises impose several liability only when promisors singly promise to pay or to act. If the three promisors singly promise to pay the party $500, it is as though there are three discrete and individual contracts, except that the promisee is to receive a total of only $500. The three promisors do not promise as a unit, but each individually assumes to pay the entire sum.

Joint liability ensues only when promisors make one promise as a unit. If three promisors promise to pay $500, then the three will owe the debt as a unit, not individually. The party may enforce the contract only against one promisor or against any number of joint promisors. The promisee is entitled, however, to only one award of the amount due.

Promises impose joint and several liability when the promisors promise both as a unit and individually to pay or perform according to the terms of the contract.

If a promisor who is jointly or jointly and severally liable on a contract performs or pays the promisee in full, then the other promisors are thereby discharged from their obligations on the contract to the promisee, as he or she may only collect the amount due to him or her. The promisor who performed, however, has a right to contribution from the co-promisors—that is, the right to receive from the other co-promisors their proportionate share of the debt. The general rule is that a co-obligor who has paid in excess of his or her proportionate share is entitled to contribution, unless there is a particular agreement to the contrary.

Joint and several promises can exist if a promisor promises to pay two promisees a certain sum of money. The promisees are joint and several promisees or obligees, and the promisor has the duty to pay. Both promisees are entitled to performance of the promise jointly and separately, even though there is only one promise made to two people. Any one of the joint obligees in a contract has the power to discharge the promisor from the obligation. If the promisor pays one promisee, this payment operates as a discharge of the promisor's liability under the contract. The promisee who has not been paid may not compel the promisor to pay him or her, as the promisor has been discharged by the payment to the other promisee. The unpaid promisee may seek contribution from the promisee who has been paid, however.

Third-Party Beneficiaries

There are only two principal parties, the offeror and the offeree, to an ordinary contract. The terms of the contract bind one or both parties to render performance to the other in consideration of receiving, or having received, the other's performance. Contracts sometimes specify that the benefits accruing to one party will be conferred upon a third party. The effect of a third-party contract is to provide, to a party who has not assented to it, a legal right to enforce the contract.

A creditor beneficiary is a nonparty to a contract who receives the benefit when a promise is made to satisfy a legal duty. For example, suppose that a debtor owed a creditor $500. The debtor lends $500 to a third person, who promises to use the money to pay the debtor's debt. The third person is the promisor, who makes the promise to be enforced. The debtor is the promisee, to whom the promise is made. The contract is between the debtor and the third person, the promisor, and the consideration for the promise is the $500 loan that the promisor received from the debtor. The creditor is the third-party beneficiary. If the promisor refuses to pay the creditor $500, then the creditor may sue the promisor and prevail. Although the creditor is not a party to their contract, both the debtor and the promisor intend that the creditor should be the beneficiary of the contract and have enforceable rights against the promisor, since he or she is to pay the creditor. The debtor or the creditor may sue to enforce the promisor's promise to pay. The creditor's right to enforce the contract between the debtor and the promisor is effective only when he or she learns of, and assents to, the contract. The creditor may also sue the debtor for the $500, as the debtor had a legal duty to pay this loan. The debtor then may sue the promisor for breach of contract for refusing to pay the creditor.

A donee beneficiary of the contract is a non-party who benefits from a promise that is made for the purpose of making a gift to him or her. A donor wishes to give a donee $200 as an anniversary present. The donor plans to sell a television set for $200 to a purchaser, who promises to pay the donee the $200 directly. The donee is a donee beneficiary of the purchaser's promise to pay the money and may enforce this claim against the purchaser. The donee has no claim against the donor, the promisee, as the donor has no legal duty to the donee but is merely giving the donee a gift. However, the donor will be able to sue the purchaser for refusal to pay the donee, because it would be a breach of the terms of their contract of sale.

The difference between a creditor beneficiary and a donee beneficiary becomes significant when the parties to a contract attempt to alter the rights of the third-party beneficiary. The promisor and the promisee have no right or power to alter the accrued rights of the donee beneficiary without consent unless this power was expressly reserved in the contract, regardless of whether the donee knows about the contract. A donee beneficiary's rights become effective when the contract is made for his or her benefit, regardless of whether he or she knows about the contract. In contrast, a creditor beneficiary's rights vest only when the creditor beneficiary learns of, and assents to, the contract.

Conditions and Promises of Performance

The duty of performance under many contracts is contingent upon the occurrence of a designated condition or promise. A condition is an act or event, other than a lapse of time, that affects a duty to render a promised performance that is specified in a contract. A condition may be viewed as a qualification placed upon a promise. A promise or duty is absolute or unconditional when it does not depend on any external events. Nothing but a lapse of time is necessary to make its performance due. When the time for performance of an unconditional promise arrives, immediate performance is due. A dependent or conditional promise is not effective until the occurrence of some external event that the parties have specified. An implied condition is one that the parties should have reasonably comprehended to be part of the contract because of its presence by implication.

Types of Conditions Conditions precedent, conditions concurrent, and conditions subsequent are types of conditions that are commonly found in contracts. A condition precedent is an event that must exist as a fact before the promisor incurs any liability pursuant to it. For example, suppose that an employer informs an employee that if the employee successfully completes an accounting course, he or she will receive $500. The completion of the course must exist as a fact before the employer will be liable to the employee; when that fact occurs, the employer becomes liable.

A condition concurrent must exist as a fact when both parties to a contract are to perform simultaneously. Neither party has a duty to perform until the other has performed or has tendered performance. Practically speaking, however, the party who wants to complete the transaction must perform in order to establish the duty of performance by the other party. The performances are concurrently contingent upon each other. Concurrent conditions are usually found in contracts for the sale of goods and in contracts for the conveyance of land.

A condition subsequent is one that, when it exists, ends the duty of performance or payment under the contract. For example, suppose that an insurance contract provides that suit against it for a loss covered by the policy must be commenced within one year of the insured's loss. If the destruction of the insured's building by fire is a risk that the policy covers, then the insured must file suit against the insurer within the time specified, or the condition subsequent will end the duty of the company pursuant to the policy.

Substantial Performance The failure to comply strictly with the terms of a condition will not prevent recovery if there has been substantial performance of the contractual obligation. Courts created this doctrine in order to prevent forfeitures and to ensure justice. Where recovery is permitted for substantial performance, it is offset by damages for injuries caused by failure to render complete performance. Courts determine whether there has been a breach or a substantial performance of a contract by evaluating the purpose to be served; the excuse for deviation from the letter of the contract; and the cruelty of enforced adherence to the contract. If the deviation from the contract were accidental and resulted in only a trivial difference between what was required by the contract and what was performed, the plaintiff will receive only nominal damages.

Satisfactory Performance A contract may be contingent upon the satisfaction of a person's opinion, taste, or fancy. Most courts apply a good-faith test in determining whether rejection of a performance was reasonable. If a rejection is made in bad faith, the court will enforce the contract.

If satisfaction can be measured with reference to the commercial value or caliber of the subject matter of the contract, the performance must be proved to be deficient in these respects and the dissatisfaction must be proven to be sufficiently reasonable and well-founded to justify non-enforcement of the contract. The test is: What would satisfy a reasonable person? The condition of satisfaction need not be met when the expression of dissatisfaction is made in bad faith and not related to the quality or commercial value of the subject of the contract.

Divisible Contracts The entire performance of a contract can be a condition to the other party's duty to perform. If the contract is legally divisible, the performance of a divisible portion can fulfill the condition precedent to the other party's corresponding divisible performance. A contract is divisible when the performance of each party is divided into two or more parts; each party owes the other a corresponding number of performances; and the performance of each part by one party is the agreed exchange for a corresponding part by the other party. If it is divisible, the contract, for certain purposes, is treated as though it were a number of contracts, as in employment contracts and leases. If an employer hires a prospective employee for one year at a weekly salary, the contract is divisible. Each week's performance is a constructive or implied condition precedent to the employee's right to a week's salary. The right to the salary is not contingent on performance of the obligation to work for one year. In most contracts of employment, the courts allow recovery to the employee for the number of weeks or months of service rendered, on the theory that such contract is divisible. The same is true for a lease of real property or an apartment. If the lease is breached before the entire term has expired, the tenant is liable for the remaining rent as each month occurs, but is not liable prior to that time. In effect, the court treats the lease as a contract for each month, with rent due on the first of each month. In a divisible contract, the performance of a separate unit that is treated as a separate contract entitles the performing party to immediate payment, whereas in an entire contract, the party who is first to perform must render full performance in order to be entitled to performance from the other party.

Breach of Conditions Compliance with a condition can be excused under certain circumstances. As a general rule, if the facts would excuse compliance with a condition, they will also excuse performance of a promise. An excuse for nonperformance of a condition can exist in many forms, such as a waiver (the intentional relinquishment of a known right) of performance of the condition.

If an unintentional failure to perform a condition would result in a forfeiture, a court may excuse compliance in order to prevent injustice. The duty of performance by the other party arises just as though the condition has been fulfilled if compliance with a condition is excused.

Discharge of Contracts

The duties under a contract are discharged when there is a legally binding termination of such duty by a voluntary act of the parties or by operation of law. Among the ways to discharge a contractual duty are impossibility or impracticability to perform personal services because of death or illness; or impossibility caused by the other party.

The two most significant methods of voluntary discharge are accord and satisfaction and novation. An accord is an agreement to accept some performance other than that which was previously owed under a prior contract. Satisfaction is the performance of the terms of that accord. Both elements must occur in order for there to be discharge by these means.

A novation involves the substitution of a new party while discharging one of the original parties to a contract by agreement of all three parties. A new contract is created with the same terms as the original one, but the parties are different.

Contractual liability may be voluntarily discharged by the agreement of the parties, by estoppel, and by the cancellation, intentional destruction, or surrender of a contract under seal with intent to discharge the duty.

The discharge of a contractual duty may also occur by operation of law through illegality, merger, statutory release, such as a discharge in bankruptcy, and objective impossibility. Merger takes place when one contract is extinguished because it is absorbed into another.

There are two types of impossibility of performance that discharge the duty of performance under a contract. Subjective impossibility is due to the inability of the individual promisor to perform, such as by illness or death. Objective impossibility means that no one can render the performance. The destruction of the subject matter of the contract, the frustration of its purpose, or supervening impossibility after the contract is formed are types of objective impossibility. "Impracticability" because of extreme and unreasonable difficulty, expense, injury, or loss involved is considered part of impossibility.

Breach of Contract

An unjustifiable failure to perform all or some part of a contractual duty constitutes a breach of contract. It ensues when a party who has a duty of immediate performance fails to perform, or when one party hinders or prevents the performance of the other party.

A total, major, material, or substantial breach of contract constitutes a failure to perform properly a material part of the contract. A partial or minor breach of contract is merely a slight deviation from the bargained-for performance. A breach may occur by anticipatory repudiation, whereby the promisor, without justification and before committing a breach, makes an affirmative statement to the promisee, indicating that he or she will not or cannot perform the contractual duties.

The differences in the types of breach are significant in ascertaining the kinds of remedies and damages available to the aggrieved party.

Remedies

Damages, reformation, rescission, restitution, and specific performance are the basic remedies available for breach of contract.

Damages The term damages signifies a sum of money awarded as a compensation for injury caused by a breach of contract. The type of breach governs the extent of the damages to be awarded.

Failure to perform The measure of damages in breach-of-contract cases is the sum that would be necessary to recompense the injured party for the amount of losses incurred through breach of contract. The injured party should be placed in the position that he or she would have occupied if the contract had been performed, and they are entitled to receive the benefit of the bargain, the net gain that would have accrued to them under the contract. The injured party is not, however, to be put in a better position than he or she would have occupied had performance taken place.

Damages for anticipatory repudiation are ordinarily assessed as of the scheduled performance dates that are fixed by the breached contract. The measure of damages for the breach of an installment contract is determined at the time each installment is due.

When the parties have included a liquidated damages clause in a contract, it generally will be enforced. Such clause is a prior agreement by the parties as to the measure of damages upon breach. Additional damages may not be claimed.

Partial performance When the defendant has failed to complete performance of an agreement according to its terms, the plaintiff may recover such damages as will compensate him or her to the same extent as though the contract had been completely performed. The customary measure of damages is the reasonable expense of completion. Completion refers to a fulfillment of the same work, if possible, which does not involve unreasonable economic waste. The injured party is not automatically entitled to recover the difference between the contract price and the amount it would cost to have the work completed when a contract is breached after partial performance; he or she will be entitled to recover that amount only if completion is actually accomplished at a greater cost.

A provision in a building contract that allows the owner, in the event of a default by the contractor, to complete the job and to deduct the expenses from the contract price does not preclude the owner's recovering damages also where the contractor intentionally leaves the work undone. A plaintiff may also recover the monetary value of materials that are lost through a breach of contract.

A plaintiff contractor who subsequently performs the work upon breach of a contract will ordinarily recover the reasonable value of the labor and materials that he or she has furnished, with the contract price used as a guideline. The award may not properly exceed the benefit that the owner received in the properly completed work, and it will be reduced by the amount of damages that the owner incurs as a result of the contractor's failure to complete performance of the contractual obligation. If the value of the work performed exceeds the contract price, the contractor will not receive the excess.

Where a contract for the performance of services exists with payment to be made in installments, and the obligation to pay for each installment constitutes an independent promise, the individual who is entitled to payment may recover only the installments that are due when the suit is brought.

Defective performance Damages for defective performance of a contractual agreement are measured by calculating the difference in value between what is actually tendered and what is required as performance under the agreement. If the performance tendered is either of no value or unsuitable for the purpose that the contract contemplated, the proper measure of damages is the sum that is necessary to repair the defect. If a defect can be easily remedied through repairs, the measure of damages is the price of the repairs performed.

Generally, the total contract price may not be recovered for substantial performance. If the plaintiff furnished materials for items that were manufactured for the plaintiff in such a manner as to be rendered worthless, the proper measure of damages ordinarily has been held to be the discrepancy between the contract price and the market price of such items if they had been manufactured according to the contract terms.

When a building or construction contract is defectively performed, the proper measure of damages is the difference between the value of the property with the defective work, and its value had there been strict compliance with the contract. Where the contractor deliberately deviates from the contractual agreement, but there has been no substantial performance, damages are determined by the actual expense of reconstructing the building according to the terms of the contract.

Delay in performance The loss precipitated by the wrongful delay of the performance of a contract is calculated by fixing the rental or use of the property or interest as a result of the loss incurred through increased material and labor expenses, as distinguished from what the value would have been had the contract been performed on time.

Reformation Reformation is an equitable remedy that is applied when the written agreement does not correspond to the contract that was actually formed by the parties, as a result of fraud or mutual mistake in drafting the original document. Quasi-contractual relief for the reasonable value of services rendered is also available, although it applies only when there is no enforceable contract.

Rescission Rescission terminates the contract, and the parties are restored to the position of never having entered into the contract in the first place.

Restitution Restitution is a remedy that is designed to restore the injured party to the position that they occupied prior to the formation of the contract.

Specific Performance Specific performance is an equitable remedy by which a contracting party is required to execute, as nearly as practicable, a promised performance when monetary damages would be inadequate to compensate for the breach. A contract to sell land is specifically enforceable because land is considered to be unique and not compensable by money. In addition, property that has sentimental value, as well as antique, heirloom, or one-of-a-kind articles, are viewed as unique, and therefore it would be impossible to estimate damages. A personal-service contract or an employment contract, however, cannot be specifically enforced because the thirteenth amendment to the U.S. Constitution prohibits slavery. If, however, the contract proscribes a person from performing some act, breach of that negative covenant may be specifically enforced.

Parol Evidence Rule

Tentative terms discussed in preliminary negotiations are subsumed by the provisions of the contract executed by the parties. The parol evidence rule governs the admissibility of evidence other than the actual agreement when a dispute arises over a written contract. When parties memorialize their agreements in writing, all prior oral and written agreements, and all contemporaneous oral agreements, merge in the writing, which is also known as an integration. The written contract may not be modified, altered, or varied by parol or oral evidence, provided that it has been legally executed by a person who intends for it to represent the final and complete expression of his or her understanding of the contract. This is not the case, however, where there has been some mistake or fraud in the drafting of the document.

The parol evidence rule effectuates the presumed intention of the parties; achieves certainty and finality as to the rights and duties of the contracting parties; and prevents fraudulent and perjured claims. It has no application to subsequent oral contracts that modify or discharge the written contract, however.

Ambiguity

Ambiguity in the terms of a contract exists when the court cannot, after applying the rules or tools of interpretation, give a meaning to the language used in an agreement or document. The plain-meaning rule is often applied judicially to ascertain whether a contract is ambiguous. If the contract appears to the trial judge to be clear and unequivocal on its face, then there is no need for parol evidence. However, when a writing is ambiguous, parol evidence is admissable only to elucidate, not to vary, the instrument as written.

Courts have used other rules to resolve ambiguous terms. Where neither party knows, or has reason to know, of the ambiguity, or where both parties know or have reason to know of it, the ambiguous term is given the meaning that each party intended it to convey. As a practical matter, this means that if the parties give the equivocal expression the same meaning, then a contract is formed; but if they give it a different meaning, then there is no contract, at least if the ambiguity pertains to a material term, as there is no meeting of their minds. Where one party knows, or has reason to know, of the ambiguity, and the other does not, it conveys the meaning given to it by the latter—which means, in essence, that there is a contract predicated upon the meaning of the party who is without fault.

Contracts for the Sale of Goods

The nature of a transaction determines the type of contract law that applies. General contract law described above applies to such transactions as service agreements and sales of real property. Contracts for the sale of goods, however, are governed by Article 2 of the UCC, which has been adopted, at least in part, in every state. The UCC defines "goods" as all things that are movable at the time of the sale.

The drafters of the UCC adhered to a more liberal view of contracts, so some of its provisions differ significantly from those that are found in general contract law. A contract for the sale of goods may be made in any manner that is sufficient to show agreement, and courts may consider the conduct of the parties when making this determination. An offer to sell goods may be made in any manner that invites acceptance. Courts also may consider the course of performance between the parties when determining whether a contract for the sale of goods exists.

The UCC provides for, and recognizes, certain warranties that relate to the goods being sold. For example, an affirmation of fact or a promise made by the seller to the buyer creates an express warranty. Sales also create implied warranties, such as the implied warranties of merchantability and fitness for a particular purpose. Remedies and other damages for breach of a sale-of-goods contract are also governed by the UCC. In addition to monetary damages, buyers and sellers may take several actions when the other party breaches a sales contract. For example, a seller who has been injured by a breach of contract may withhold delivery of the goods; resell the goods that are subject to the contract; or recover monetary damages. A buyer may seek to "cover" by making a good-faith purchase of substitute goods from a different seller, and then may recover from the original seller any difference between the substitute contract and the original contract.

further readings

Collins, Hugh. 1999. Regulating Contracts. New York: Oxford Univ. Press.

DiMatteo, Larry A. 1998. Contract Theory: The Evolution of Contractual Intent. East Lansing: Michigan State Univ. Press.

Hare, J. I. Clark. 2003. The Law of Contracts. Clark, N.J.: Lawbook Exchange.

Marsh, P.D.V. 2001. Contract Negotiation Handbook. Burlington, Vt: Gower.

Contracts

Sections within this essay:

Background

A contract is an agreement between two parties that creates an obligation to do or refrain from doing a particular thing. The purpose of a contract is to establish the terms of the agreement by which the parties have fixed their rights and duties. Courts must enforce valid contracts, unless one party has legal grounds to bar enforcement.

Consumers and commercial entities both depend on the enforceability of contracts when conducting business relations. When consumers or commercial entities enter a contract to buy goods or services at a particular price, in a particular amount, or of a particular quality, they expect the seller to deliver goods and services that conform to the contract. Manufacturers, wholesalers, and retailers similarly expect that their goods and services will be bought in accordance with the terms of the contract.

A legal action for breach of contract arises when at least one party's performance does not live up to the terms of the contract and causes the other party to suffer economic damage or other types of measurable injury. The injury may include any loss suffered by the plaintiff in having to buy replacement goods or services at a higher price or of a lower quality from someone else in the market. It may also include the costs and expenses incurred by the plaintiff in having to locate replacement goods or services in the first place.

Contract disputes may be governed by the common law, statutory law, or both. Each state has developed its own common law of contracts, which consists of a body of jurisprudence developed over time by trial and appellate courts on a case-by-case basis. Many states have been influenced by the Restatement (Second) of Contracts, which was approved by the American Law Institute (ALI) in 1979.

For contracts involving commercial transactions, all fifty states have enacted, at least partially, a body of statutory law called the Uniform Commercial Code (UCC), which governs a variety of commercial relations involving consumers and merchants, among others. Article 2 of the U.C.C. governs the sale of goods, which are defined by the code as items that are "movable" at the time of the contract. The National Conference of Commissioners on Uniform States Laws, along with the ALI and the American Bar Association, approved a revised version of Article 2 in 2003. However, as of February 2006, no state had adopted the revised version.

State legislatures have also enacted a host of other statutes governing contracts that affect the public interest. For example, most states have passed legislation governing the terms of insurance contracts to guarantee that sufficient financial resources will be available for residents who are injured by accident. Congress has passed a number of laws governing contracts as well, ranging from laws that regulate the terms of collective bargaining agreements between labor and management to laws that regulate false advertising and promote fair trade.

Elements of a Contract

The requisite elements that must be established to demonstrate the formation of a legally binding contract are (1) offer; (2) acceptance; (3) consideration; (4) mutuality of obligation; (5) competency and capacity; and, in certain circumstances, (6) a written instrument.

Offer

An offer is a promise to act or refrain from acting, which is made in exchange for a return promise to do the same. Some offers anticipate not another promise being returned in exchange but the performance of an act or forbearance from taking action. For example, a painter's offer to paint someone's house for $100 is probably conditioned on the homeowner's promise to pay upon completion, while a homeowner's offer to pay someone $100 to have his or her house painted is probably conditioned upon the painter's successfully performing the job. In either case, an offeree's power of acceptance is created when the offeror conveys a present intent to enter a contract in certain and definite terms that are communicated to the offeree.

Courts distinguish preliminary negotiations from formal legal offers in that parties to preliminary negotiations lack a present intent to form a contract. Accordingly, no contract is formed when parties to preliminary negotiations respond to each other's invitations, requests, and intimations. Advertisements and catalogues, for example, are treated as forms of preliminary negotiations. Otherwise, the seller of the goods or services would be liable for countless contracts with consumers who view the ad or read the catalogue, even though the quantity of the merchandise may be limited.

However, sellers must be careful to avoid couching their advertisements in clear and definite terms that create the power of acceptance in consumers. For example, sellers have been found liable to consumers for advertising a definite quantity of goods for sale at a certain price on a "first come, first serve" basis, after consumers showed up and offered to pay the advertised price before the goods sold out. In such situations, the seller may not withdraw the offer on grounds that market factors no longer justify selling the goods at the advertised price. Instead, courts will compel them to sell the goods as advertised.

The rejection of an offer terminates the offeree's power of acceptance and ends the offeror's liability for the offer. Rejection might come in the form of an express refusal to accept the offer or by implication when the offeree makes a counteroffer that is materially different from the offeror's original proposal. Most jurisdictions also recognize an offeror's right to withdraw or revoke an offer as a legitimate means of terminating the offer.

Offers that are not rejected, withdrawn, or revoked generally continue until the expiration of the time period specified by the offer, or, if there is no time limit specified, until a reasonable time has elapsed. A reasonable time is determined according to what a reasonable person would consider sufficient time to accept the offer under the circumstances. Regardless of how much time has elapsed following an offer, the death or insanity of either party before acceptance is communicated normally terminates an offer, as does the destruction of the subject matter of the proposed contract and any intervening conditions that would make acceptance illegal.

Sometimes offerees are concerned that an offer may be terminated before they have had a full opportunity to evaluate it. In this case, they may purchase an "option" to keep the offer open for a designated time. During that time the offer is deemed irrevocable, though some jurisdictions allow the offeror to revoke the offer by paying the offeree an agreed upon sum to do so.

Acceptance

Acceptance of an offer is the expression of assent to its terms. Acceptance must generally be made in the manner specified by the offer. If no manner of acceptance is specified by the offer, then acceptance may be made in a manner that is reasonable under the circumstances. An acceptance is only valid, however, if the offeree knows of the offer, the offeree manifests an intention to accept, and the acceptance is expressed as an unequivocal and unconditional agreement to the terms of the offer.

Many offers specify the method of acceptance, whether it be oral or written, by phone or in person, by handshake or by ceremony. Other offers leave open the method of acceptance, allowing the offeree to accept in a reasonable manner. Most consumer transactions fall into this category, as when a shopper "accepts" a merchant's offer by taking possession of a particular good and paying for it at the cash register. But what constitutes a "reasonable" acceptance will vary according to the contract.

Some offers may only be accepted by the performance or non-performance of a particular act. Once formed, these types of agreements are called unilateral contracts, and they are discussed more fully later in this essay. Other offers may only be accepted by a return promise of performance from the offeree. Once formed, these agreements are called bilateral contracts, and they are also discussed more fully later in this essay.

Problems can arise when it is not clear whether an offer anticipates the method of acceptance to come in the form of performance or a return promise. Section 32 of the Restatement (Second) of Contracts attempts to address this issue by providing that "in case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering performance, as the offeree chooses." A growing number of jurisdictions are adopting this approach.

Jurisdictions are split as to the time when an air-mailed acceptance becomes effective. Under the majority approach, known as "the mailbox rule," an acceptance is effective upon dispatch in a properly addressed envelope with prepaid postage, even if the acceptance is lost or destroyed in transit. Under the minority approach, acceptance is effective only upon actual receipt by the offeror, no matter what precautions the offeree took to ensure that the acceptance was properly mailed.

In certain cases acceptance can be implied from a party's conduct. Suppose a consumer orders a personal computer (PC) with exact specifications for its central processing unit (CPU), hard drive, and memory. Upon receipt, the consumer determines that the PC does not match the specs. If the consumer nonetheless pays the full amount on the invoice accompanying the PC without protest, the consumer has effectively communicated a legally binding acceptance of the non-conforming good.

Acceptance cannot generally be inferred from a party's silence or inaction. An exception to this rule occurs when two parties have a prior course of dealings in which the offeree has led the offeror to believe that the offeree will accept all goods shipped by the offeror unless the offeree sends notice to the contrary. In such instances, the offeree's silence or inaction constitutes a legally binding acceptance upon which the offeror can rely.

Consideration

Each party to a contract must provide something of value that induces the other to enter the agreement. The law calls this exchange of values "consideration." The value exchanged need not consist of currency. Instead, it may consist of a promise to perform an act that one is not legally required to do or a promise to refrain from an act that one is legally entitled to do. For example, if a rich uncle promises to give his nephew a new sports car if he refrains from smoking cigarettes and drinking alcohol for five years, the law deems both the uncle's promise and the nephew's forbearance lawful consideration.

A court's analysis as to whether a contract is supported by sufficient consideration typically focuses more on the promise or performance of the offeree than the promise or performance of the offeror. Courts often say that no consideration will be found unless the offeree suffers a "legal detriment" in making the return promise or in performing the act requested by the offeror. As a general rule, legal detriment is found if the offeree relinquishes a legal right in fulfilling his or her contractual duties. Thus, promises to give love and affection or make a gift or donation are not sufficient consideration to support a contract because no one is under a legal duty to give or refrain from giving these things to others. Similarly a promise to perform an act that has already been completed in the past fails to offer consideration to support a new agreement.

Mutuality of Obligation

Closely related to the concept of consideration is the mutuality of obligation doctrine. Under this doctrine, both parties must be bound to perform their obligations or the law will treat the agreement as if neither party is bound to perform. When an offeree and offeror exchange promises to perform, one party may not be given the absolute and unlimited right to cancel the contract. Such arrangements attempt to allow one party to perform at her leisure, while ostensibly not relieving the other party of his obligations to perform. Most courts declare these one-side arrangements null for lack of mutuality of obligation. Some courts simply invalidate such contracts for lack of consideration, reasoning that a party who is given absolute power to cancel a contract suffers no legal detriment.

To avoid having a contract subsequently invalidated by a court, the parties must be careful to limit their discretion to cancel the contract or otherwise not perform. As long as the right to avoid performance is dependent on some condition or event outside the control of the party seeking to cancel the contract, courts will find that mutuality of obligation exists. Thus, a farmer might lawfully be given the right to cancel a crop-watering service if the right to cancel were conditioned upon the amount of rain that fell during a given season, something outside the farmer's control. But a court would find mutuality lacking if the farmer were given the right to terminate the service short of full performance simply by giving notice of his or her intention to cancel.

Competency and Capacity

A natural person who enters a contract possesses complete legal capacity to be held liable for the duties he or she agrees to undertake, unless the person is a minor, mentally incapacitated, or intoxicated. A minor is defined as a person under the age of 18 or 21, depending on the jurisdiction. A contract made by a minor is voidable at the minor's discretion, meaning that the contract is valid and enforceable until the minor takes some affirmative act to disavow the contract. Minors who choose to disavow their contracts entered may not be held liable for breach. The law assumes that minors are too immature, naïve, or inexperienced to negotiate on equal terms with adults, and thus courts protect them from being held accountable for unwisely entering contracts of any kind.

When a party does not understand the nature and consequences of an agreement that he or she has entered, the law treats that party as lacking mental capacity to form a binding contract. However, a party will not be relieved from any contractual duties until a court has formally adjudicated the issue after taking evidence concerning the party's mental capacity, unless there is an existing court order declaring the party to be incompetent or insane. Like agreements with minors, agreements with mentally incapacitated persons are voidable at that person's discretion. However, a guardian or personal representative may ratify an agreement for an incapacitated person and thereby convert the agreement into a legally binding contract.

Contracts entered into by persons under the influence of alcohol and drugs are also voidable at that person's discretion, but only if the other party knew or had reason to know the degree of impairment. As a practical matter, courts rarely show sympathy for defendants who try to avoid contractual duties on grounds that they were intoxicated. However, if the evidence shows that the sober party was trying to take advantage of the intoxicated party, courts will typically intervene to void the contract. Persons who are intoxicated from prescription medication are treated the same as persons who are mentally incompetent or insane and are generally relieved from their contractual responsibilities more readily than are persons intoxicated from non-prescription drugs or alcohol.

Writing Requirement

Not every contract need be in writing to be valid and binding on both parties. But nearly every state legislature has enacted a body of law that identifies certain types of contracts that must be in writing to be enforceable. In legal parlance this body of law is called the statute of frauds.

Named after a seventeenth-century English statute, the statute of frauds is designed to prevent a plaintiff from bringing an action for breach of contract based on a nonexistent agreement for which the only proof of the agreement is the plaintiff's perjured testimony. The statue of frauds attempts to accomplish this objective by prohibiting the enforcement of particular contracts, unless the terms of the contract are expressly reflected by written note, memorandum, or agreement that is signed by the parties or their personal representatives.

As originally conceived, the statute of frauds applied to four types of contracts: (1) promises to pay a debt owed by another person; (2) promises to marry; (3) promises to perform an act that cannot possibly be performed within a year from that date of the promise; and (4) agreements involving real estate. However, most states have since expanded the class of contracts that must be in writing to be enforceable. For example, in many jurisdictions long term leases, insurance contracts, agreements for the sale of securities, and contracts for the sale of goods above a specified amount are unenforceable unless the terms of the parties' agreement are memorialized in writing.

Contract Formation Under the U.C.C.

The U.C.C. does not require a specific manner of expression in order for two parties to enter into an agreement. Under § 2-204, "A contract for the sale of goods may be made in any manner sufficient to show agreement, including offer and acceptance, conduct by both parties which recognizes the existence of a contract" and other means. The revised version of the U.C.C., as approved in 2003, also allows a contract to be formed through the interaction of "electronic agents," which include computer programs that may initiate a transaction without human review.

Types of Contracts

Contracts under Seal

Early English common law required all contracts to be stamped with a seal before a party could enforce them in court. The seal memorialized the parties' intention to honor the terms of the contract. No consideration was required, since the seal symbolized a solemn promise undertaken by all parties to the contract.

With the onset of the industrial era during the eighteenth century, however, sealed contracts were increasingly seen as an impractical and inefficient impediment to fast paced commercial relations. Sealed contracts were gradually replaced by other types of agreements, including express and implied contracts. In fact, nearly all jurisdictions have eliminated the legal effect of sealed contracts. Thus, contracts under seal will not generally be enforced unless they are supported by independent consideration.

Express and Implied Contracts

Express contracts consist of agreements in which the terms are stated by the parties. The terms may be stated orally or in writing. But the contract as a whole must reflect the intention of the parties. As a general rule, if an express contract between the parties is established, a contract embracing the identical subject cannot be implied in fact, as the law will not normally imply a substitute promise or contract for an express contract of the parties.

Contracts implied in fact are inferred from the facts and circumstances of the case or the conduct of the parties. However, such contracts are not formally or explicitly stated in words. The law makes no distinction between contracts created by words and those created by conduct. Thus, a contract implied in fact is just as binding as an express contracts that arises from the parties' declared intentions, with the only difference being that for contracts implied in fact courts will infer the parties' intentions from their business relations and course of dealings.

Whereas courts apply the same legal principles to express contracts and contracts implied in fact, a different body of principles is applied to contracts implied in law. Also known as quasi-contracts, contracts implied in law are agreements imposed by courts despite the absence of at least one element essential to the formation of a binding agreement. The law creates these types of fictitious agreements to prevent one party from being unjustly enriched at the expense of another.

For example, suppose that a husband and wife ask a third party to hold a sum of money in trust for their children. But instead of holding the money in trust, the third party absconds with it. The law will not allow the third party to keep the money simply because all the requisite elements of a formal contract have not been proven by the husband and wife. Although the law is generally wary of imposing contracts on parties who did not agree to their terms, courts will find that a contract implied in law exists when (1) the defendant has been enriched at the expense of the plaintiff; (2) the enrichment was unjust (3) the plaintiff's own conduct has not been inequitable; and (4) it is otherwise reasonable for the court to do so in light of the relationship between the parties and the circumstances of the case.

Bilateral and Unilateral Contracts

A bilateral contract arises from the exchange of mutual, reciprocal promises between two persons that requires the performance or non-performance of some act by both parties. The promise made by one party constitutes sufficient consideration for the promise made by the other party. A unilateral contract involves a promise made by only one party in exchange for the performance or non-performance of an act by the other party. Stated differently, acceptance of an offer to form a unilateral contract cannot be achieved by making a return promise, but only by performance or non-performance of some particular act. Accordingly, acceptance of an offer to enter a unilateral contract can be revoked until performance is complete or until the date has passed for nonperformance.

It should be remembered, however, that courts are asked to interpret contracts long after they have been formed. As a result, courts will often take into account how the parties actually acted on the terms of a particular contract. Not surprisingly, courts will avoid interpreting a contract as unilateral or bilateral when such an interpretation would leave one party in the lurch or the opposite interpretation would yield a more commercially reasonable result. This is not to say that courts do not enforce one-sided agreements, but only that the evidence of the parties' understanding must be clear before a court will do so.

Breach of Contract: Definition

An unjustifiable failure to perform all or some part of a contractual duty is a breach of contract. A breach may occur when one party fails to perform in the manner specified by the contract or by the time specified in the contract. A breach may also occur if one party only partially performs his or her duties or fully performs them in a defective manner.

Courts distinguish total breaches from partial breaches. A total breach of contract is the failure to perform a material part of the contract, while a partial breach results from merely a slight deviation. In determining whether a breach is total or partial, courts typically examine the following factors: (1) the extent to which the non-breaching party obtained the substantial benefit of the contract despite the breach; (2) the extent to which the non-breaching party can be adequately compensated for the breach with money damages; (3) the extent to which the breaching party has already performed or made preparations for performance; (4) the extent to which the breaching party mitigated the hardship on both parties by not fully performing; (5) the willful, negligent, or innocent behavior of the breaching party; and (6) the likelihood that the breaching party will perform the remainder of the contract if allowed.

Breach of Contract: Defenses

A number of defenses are available to defendants who are sued for breach of contract. For example, a defendant might assert that no breach was committed because the parties never actually formed a contract due to the lack of an offer, an acceptance, consideration, mutuality of obligation, or a writing. Alternatively, a defendant might assert that he or she lacked capacity to enter the contract, arguing that the contract should be declared void on the grounds that the defendant was incompetent, insane or intoxicated at the time it was entered.

The law also affords defendants several other defenses in breach of contract actions. They include: (1) unconscionability; (2) mistake; (3) fraud; (4) undue influence; and (5) duress. Each of these are discussed below.

Unconscionability

Unconscionable contracts are those that violate public policy by being so unjust as to offend the court's sense of fairness. Sometimes called "contracts against public policy," unconscionable contracts usually result from a gross disparity in the parties' bargaining power, as can happen when one party is a savvy business person and the other party is elderly, illiterate, or not fluent in English. But a mere disparity in bargaining power will not suffice to overturn an otherwise valid contract, unless a court finds that the resulting contract is one that no mentally competent person would enter and that no fair and honest person would accept.

Mistake

Ordinarily, to constitute a valid defense in an action for breach of contract the mistake must be a mutual one made by all of the parties to the contract. However, when the mistake is obvious from the face of the contract, knowledge of the mistake will be imputed to each party. Thus, a contract that by its terms designates a horse as the subject matter will be enforced unless both parties agree that a different subject matter was intended. On the other hand, if the same contract designates a pig as the subject matter in 99 paragraphs of the agreement, but mentions a horse in only one paragraph, a court will not force the defendant to sell his horse if it is obvious that the one paragraph contains an error.

Fraud

Fraud occurs when one party intentionally deceives another party as to the nature and consequences of a contract, and the deceived party is injured as a result. In most cases, fraud requires an affirmative act, such as a willful misrepresentation or concealment of a material fact. In a few cases where a special relationship exists between the parties, such as between attorney and client, simple nondisclosure of a material fact may amount to fraud. Regardless of the underlying relationship between the parties, however, a court will not void a contract due to fraud unless the defendant demonstrates that he or she was induced to enter the contract by fraudulent conduct and not merely that the plaintiff made a false statement at some point in time.

Undue Influence

Undue influence occurs when one party exercises such control over a second party as to overcome the independent judgment and free will of the second party. In reviewing claims of undue influence, courts look to see whether the plaintiff preyed on and exploited a known psychological or physical weakness when securing the defendant's assent to a contract. However, evidence that the plaintiff merely used aggressive and unsavory tactics in securing the defendant's asset will not suffice to overturn a contract on grounds of undue influence, unless those tactics had the effect of substituting the plaintiff's will and judgment for the defendant's.

Duress

Duress consists of any wrongful act that coerces another person to enter a contract that he or she would not have entered voluntarily. Blackmail, physical violence, a show of force, and threats to institute legal proceedings in an abusive manner may all constitute sufficient duress to void a contract. However, a defendant claiming duress must demonstrate that sufficient harm was threatened or inflicted to justify finding that the defendant had no reasonable choice but to enter the contract on the terms dictated by the plaintiff.

Breach of Contract: Remedies

The five basic remedies for breach of contract include the following: money damages, restitution, rescission, reformation, and specific performance. A money damage award includes a sum of money that is given as compensation for financial losses caused by a breach of contract. Parties injured by a breach are entitled to the benefit of the bargain they entered, or the net gain that would have accrued but for the breach. The type of breach governs the extent of damages that may be recovered.

If the breach is a total breach, a plaintiff can recover damages in an amount equal to the sum or value the plaintiff would have received had the contract been fully performed by the defendant, including lost profits. If the breach is only partial, the plaintiff may normally seek damages in an amount equal to the cost of hiring someone else to complete the performance contemplated by the contract. However, if the cost of completion is prohibitive and the portion of the unperformed contract is small, many courts will only award damages in an amount equal to the difference between the diminished value of the contract as performed and the full value contemplated by the contract.

For example, if the plaintiff agreed to pay the defendant $200,000 to build a house, but the defendant only completed 90 percent of the work contemplated by the contract, a court might be inclined to award $20,000 in damages if it would cost the plaintiff twice as much to hire someone else to finish the last 10 percent. The same principles apply to damages sought for contracts that are fully performed, but in a defective manner. If the defect is significant, the plaintiff can recover the cost of repair. But if the defect is minor, the plaintiff may be limited to recovering the difference between the value of the good or service actually received and the value of the good or service contemplated by the contract.

Restitution is a remedy designed to restore the injured party to the position occupied prior to the formation of the contract. Parties seeking restitution may not request to be compensated for lost profits or other earnings caused by a breach. Instead, restitution aims at returning to the plaintiff any money or property given to the defendant under the contract. Plaintiffs typically seek restitution when contracts they have entered are voided by courts due to a defendant's incompetence or incapacity. The law allows incompetent and incapacitated persons to disavow their contractual duties but generally only if the plaintiff is not made worse off by their disavowal.

Parties that are induced to enter into contracts by mistake, fraud, undue influence, or duress may seek to have the contract set aside or have the terms of the contract rewritten to do justice in the case. Rescission is the name for the remedy that terminates the contractual duties of both parties, while reformation is the name for the remedy that allows courts to change the substance of a contract to correct inequities that were suffered. Like contracts implied in law, however, courts are reluctant to rewrite contracts to reflect the parties' actual agreement, especially when the contract as written contains a mistake that could have been rectified through pre-contract investigation. Thus, one court would not reform a contract that stipulated an incorrect amount of acreage being purchased, since the buyer could have ascertained the correct amount by obtaining a land survey before entering the contract. Little Stillwater Holding Corp. v. Cold Brook Sand & Gravel Corp., 151 Misc. 2d 457, 573 N.Y.S.2d 382 (N.Y. Co. Ct. 1991).

Specific performance is an equitable remedy that compels one party to perform, as nearly as practicable, his or her duties specified by the contract. Specific performance is available only when money damages are inadequate to compensate the plaintiff for the breach. This ruling often happens when the subject matter of a contract is in dispute.

Every parcel of land by definition is unique, if for no other reason than its location. However, rare articles that are not necessarily one of a kind are still treated by the law as unique if it would be impossible for a judge or jury to accurately calculate the appropriate amount of damages to award the plaintiff in lieu of awarding him or her the unique article contemplated by the contract. Heirlooms and antiques are examples of such rare items for which specific performance is usually available as a remedy. However, specific performance may never be invoked to compel the performance of a personal service, since doing so would constitute slavery in violation of the Thirteenth Amendment to the U.S. Constitution.

Additional Resources

American Jurisprudence. 2d Edition. Thomson/West, 2005.

Contracts. 4th Edition. Calamari, John D. and Joseph M. Perillo, Thomson/West, 2004.

Restatement (Second) of Contracts. American Law Institute, 1979.

West's Encyclopedia of American Law. 2d Edition. Thomson/West, 2004.

Organizations

Consumer Contact Services, Inc.

6125 Black Oak Blvd.
Fort Wayne, IN 46835-2654 USA
Phone: (219) 486-2453

National Organization of Bar Counsel

515 Fifth Street, NW
Washington, DC 64196 USA
Phone: (202) 638-1501
Fax: (202) 662-1777
URL: http://www.nobc.org

Office of Consumer Protection, Federal Trade Commission

600 Pennsylvania Ave NW
Washington, DC 20580 USA
Phone: (877) 382-4357
Fax: (202) 326-3529
URL: http://www.ftc.gov/ftc/consumer.htm

Contracts

A contract is a legally enforceable promise. Contracts are vital to society because they facilitate cooperation and trust. Rather than relying on fear of reprisal or the hope of reciprocity to get others to meet their obligations, people can enlist other people to pursue common purposes by submitting to contracts that are backed by impartial authority. Without contracts and their supporting institutions, promises would be much more vulnerable to ill will, misunderstanding, forgetfulness, and other human flaws. Indeed, contracts allow people who have never even met to reach agreements, such as lending/borrowing money to buy a house, that they would never consider making outside of a legal framework. Discussed below are characteristics and types of contracts.

CONTRACT ELEMENTS

As a legally enforceable promise, a contract differs from a simple verbal promise in that either party may ask the state to force the other party to honor its promise. To distinguish contracts from other types of promises and agreements, courts have established basic elements that are necessary for a contract to exist. A contract may be legally defined as a voluntary, legal, written agreement made by persons with the proper capacity. It should include: 1) an offer; 2) an acceptance; and 3) consideration, or an exchange of value. There are legal exceptions to most of these conditions, and all of them are subject to interpretation in the courts. Furthermore, some contracts do not meet these requirements, such as implied contracts and those created under promissory estoppel, both of which are discussed later.

Contracts not entered into voluntarily are voidable. For example, a company might tell a supplier that it was considering ending their business relationship if, within the next ten minutes, the supplier did not sign a contract to provide materials at a certain cost. If the supplier signed the agreement, it might be able to convince the courts that it did so under duress or undue influence, and therefore was not bound by its terms. In general, contracts created under duress, undue influence, fraud, and misrepresentation are voidable by the injured party.

Contracts are also void if they involve a promise that is illegal or violates public policy. For instance, a contract regarding the sale of illegal drugs is unenforceable. Likewise, contracts that are legal but are not in the public interest may be rendered null. For example, a contract in which a company requires a customer to pay an extremely high rate of interest on borrowed funds could be deemed invalid by the courts. Similarly, a retail company that required an employee to sign an agreement that he would never work for another retailer would likely not be able to enforce the contract because it had unreasonable restrictions or imposed undue hardship on the worker.

Contracts do not have to be written to be enforceable in court. In fact, most oral contracts are legally enforceable. However, they are obviously much more difficult to prove. Furthermore, most states have adopted "statutes of frauds" which specify certain types of contracts that must be in writing. Examples of contracts that typically fall under the statues of frauds include agreements related to the sale of real estate, contracts for the sale of goods above $500, and contracts in which one person agrees to perform the obligation of another person. Such contracts need not be overly long or involved. In fact, a simple memo or receipt may satisfy all legal requirements. There are exceptions in this area, however. For instance, when one party will suffer serious losses as a result of reliance on an oral agreement, the statute of frauds may be waived (see promissory estoppel below).

An otherwise acceptable contract may also be voided if one (or both) of the parties making the agreement does not have the mental or legal capacity to do so. Obviously, a mentally retarded individual or a child could not be bound by a contract. But a contract signed by a person exceeding his authority to make an agreement may also be voided.

In addition to being voluntary, legal, written, and made by persons with proper capacity, contracts usually must possess three basic components: an offer, an acceptance, and consideration. An offer is a promise to perform an act conditioned on a return promise of performance by another party. It is recognized by a specific proposal communicated to another party. Once a legal offer has been made, the offering party is bound to its terms if the other party accepts. Therefore, the offering party must clearly indicate whether the proposal is an offer or some other communique, such as an invitation to negotiate. The offering party, however, may stipulate certain terms of acceptance, such as time limits, and even withdraw the offer before the other party accepts.

Acceptance, the second basic requirement for the existence of a contract, is legally defined as "a manifestation of assent to the terms [of the offer] made by the offeree in the manner invited or required by the offeror." As with offers and offerors, the courts look for an intent to contract on the part of the acceptor. The difference is that the offeror may stipulate terms of acceptance with which the other party must comply. If the offeree attempts to change the terms of the offer in any way, a rejection is implied and the response is considered a counteroffer, which the original offeror may reject or counter. As with most rules regarding contracts, exceptions exist. For example, the Uniform Commercial Code includes a "Battle of the Forms" provision whereby an offeree may imply acceptance under certain circumstances even if it changes or alters the offer.

Even if an offer is accepted, it must be consummated by consideration for a legally enforceable contract to exist. Consideration entails doing something that you were not previously bound to do outside of the agreement. In other words, promisees must pay the price (consideration) that they agreed to pay the promisor in order to gain the right to enforce the promisor's obligation.

The requirement of consideration serves an important purpose. It protects the promisor from being liable for granting, or relying on, gratuitous promises. For example, suppose that a person told her roommate that she would always pay the entire rent for their apartment. If she later changed her mind, she could not be held liable for the rent because she had neither asked for, nor received, anything in exchange for the promise. Had the other roommate promised to clean the apartment in exchange for the roommate's promise to pay the rent, an enforceable contract would exist (assuming other requirements were met).

CONTRACT TYPES

The two primary categories of contracts are "unilateral" and "bilateral." In a unilateral contract only one party promises something. For instance, if a car dealer tells a customer, "I will give you that car if you give me $15,000," he has made an offer for a unilateral contract—the contract will only be created if the customer accepts the offer by paying the $15,000. If the dealer says, "I will promise to give you the car if you promise to pay me $15,000," a bilateral contract has been proposed because both parties must make a promise. The concept of unilateral contracts is important because it has been used by courts to hold a party liable for a promise even when consideration was not given by the other party. For instance, an employer may be liable for providing pension benefits that it promised to an employee, even if the worker gave no promise and did nothing in return.

Contracts may also be classified as "express" or "implied." Express contracts are those in which both parties have explicitly stated the terms of their bargain, either orally or in writing, at the time that the contract was created. In contrast, implied contracts result from surrounding facts and circumstances that suggest an agreement. For instance, when a person takes a car to a repair shop he expects the shop to exercise reasonable care and good faith in fixing the car and charging for repairs. Likewise, the shop expects the customer to pay for its services. Although no formal agreement is created, an implied contract exists.

In addition to express and implied contracts are "quasi-contracts," which arise from unique circumstances. Quasi-contracts are obligations imposed by law to avoid injustice. For instance, suppose that a man hires a woman to paint his house. By accident, she paints the wrong house. The owner of the house knows that she is painting it by mistake but, happy to have a free paint job, says nothing. The painter would likely be able to collect something from the homeowner because he knowingly was "unjustly enriched" at her expense. Had she painted his house while he was on vacation, he would be under no obligation to her.

Contracts may also be categorized as valid, unenforceable, voidable, and void. Valid contracts are simply those that meet all legal requirements. Unenforceable contracts are those that meet the basic requirements but fail to fulfill some other law. For instance, if a state has special requirements for contracts related to lending money, failure to comply could make the contract unenforceable. Voidable contracts occur when one or both parties have a legal right to cancel their obligations. A contract entered into under duress, for example, would be voidable at the request of the injured party. Void contracts are those that fail to meet basic criteria, and are therefore not contracts at all. An illegal contract, for example, is void.

A separate type of contract, and one which overtly exemplifies the trend away from strict interpretation and toward fairness, is created by promissory estoppel. Under the theory of promissory estoppel, a party can rely on a promise made by another party despite the nonexistence of a formal, or even implied, contract. Promissory estoppel can be evoked if allowing a promisor to claim freedom from liability because of a lack of consideration (or some other contractual element) would result in injustice. Suppose that a business owner promised an employee that he would eventually give her the business if she worked there until he (the owner) retired. Then, after 20 years of faithful service by the employee, the owner decides to give the business to his son-in-law. The owner could be "estopped" from claiming in court that a true contract did not exist, because the worker relied on the owner's promise.

CONTRACTS AND SMALL BUSINESSES

Contracts are a necessary part of all sorts of small business transactions—office and equipment leases, bank loan agreements, employment contracts, independent contractor agreements, supplier and customer contracts, agreements for professional services, and product warranties, to name a few. Even the process of writing a contract can be helpful, because it forces the parties to think through contingencies and decide in advance how to handle them. Small business owners should thus be careful of the standard legal terminology that appears in some types of contracts. It is important to understand and agree with all aspects of a contract before signing it. A good rule to apply is that contracts above a certain amount—that amount to be set by the business owner—should be reviewed by the business owner's own law firm. The cost may well be worth it.

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"Perspectives on Contract Law. 3d ed." Reference & Research Book News. August 2005.

Petrillo, Joseph J. "New Buying Regulations: The Never-Ending Story." Government Computer News. 19 September 2005.

"Remoteness of Damages." Contract Journal. 16 February 2005.

"Rochester Legal Briefs: October 6, 2005." Daily Record. 6 October 2005.

                                 Hillstrom, Northern Lights

                                updated by Magee, ECDI

CONTRACTS

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

The freedom to contract has not existed throughout history. In medieval England, the courts did not engage in the enforcement of agreements between individuals. Rather, the feudal society that ruled personal interaction was relied upon for all forms of trade. As society evolved to emphasize individual freedoms over social caste, the ability to contract was viewed as a fundamental tenet of individual liberty. Writers and economic theorists such as Adam Smith, David Ricardo, Jeremy Bentham, and John Stuart Mill "successively insisted on freedom of bargaining as the fundamental and indispensable requisite of progress; and imposed their theories on the educated thought of their times."

Article I, Section 10 of the U.S. Constitution protects the individual right to contract by stating that, "No State shall … pass any … law impairing the obligations of Contracts." Many state constitutions contain similar provisions.

Generally, the law of contracts does not come from statutes passed by Congress or by state legislatures, but rather is a product of the common law, the continuing line of court decisions dating back to pre-colonial English courts. The common law is living and constantly evolving, as modern courts continue to analyze, revise and even disagree on its application. The American Law Institute, a collection of legal scholars and practitioners, attempted to catalogue the common law of contracts in its Restatements of the Law of Contracts in 1932. The Restatement, Second, of the Law of Contracts was published in 1979. The Restatement, although it does not have the force of law itself, is generally regarded as an excellent source. The law of contracts is also significantly influenced by the Uniform Commercial Code (UCC), which has been adopted in forty-nine states. The UCC is an attempt to standardize laws dealing with contracts and commerce. The UCC is beyond the scope of this article.

FORMATION OF A CONTRACT

A contract consists of one individual making an offer, another accepting the offer, and the existence of consideration between the contracting parties.

OFFER

An offer is the expression of a willingness to enter into a bargain. An offer must be directed to a particular offeree and be sufficiently clear so as to justify another individual in the belief that acceptance of the offer would constitute an agreement. Although an offer need not set forth all terms of the potential bargain (even the price may be left to be later determined), a valid offer must identify the fundamental elements of the proposed agreement. An offer may be revoked at any time before it is accepted or before it is reasonably relied upon by another individual.

ACCEPTANCE

Acceptance of an offer is the communication by the offeree of mutual assent, that is, the agreement to be bound by the terms of an offer. An offer may be accepted only by a person to whom the offer was directed and only before the offer terminates or is revoked. A valid acceptance must be communicated to the offeror by the same or similar means under which the offer was communicated, and must be unequivocal to make the agreement binding. At common law, it is generally held that any deviation from the terms of the offer is not an acceptance, but rather a rejection and a counteroffer. If the offer identifies a specific mode of acceptance, such as form, date, time, or place, that mode must be followed for an acceptance to be valid. Generally, an acceptance is not effective until it comes into the possession of the offeror, although some states employ the mailbox rule, which makes acceptance sent by U.S. mail effective upon its deposit in the mail. If an offer specifically invites acceptance by performance of a specified act, performance of that act by the offeree constitutes acceptance without notification of the offeror. Except in very limited circumstances, such as where the parties have a pattern of previous dealings or where it would be inequitable to find otherwise, silence does not constitute acceptance.

CONSIDERATION

An offer and acceptance alone do not create a valid and binding contract. A third element, consideration, must exist. Consideration is a bargained-for exchange, that is, the existence of mutuality of obligation. Both parties must derive some benefit—or, alternatively, both parties must experience some detriment or forbearance—for a contract to exist. Without consideration, an offer and acceptance represent merely a naked, unenforceable promise.

While the existence of consideration is critical to the enforceability of a contract, the quantity or quality of consideration is immaterial. Generally, courts are not concerned with the value or adequacy of consideration and will not interfere with a bargain entered into between the parties because of insufficient consideration. Certain acts or forbearance cannot constitute consideration. A preexisting duty to perform or refrain from performing may not be consideration for a contract. Therefore, fulfilling an existing contractual obligation or refraining from an unlawful act cannot constitute consideration. An exception to this rule is that the agreement to pay a preexisting debt may be consideration. A promise to make a gift is not consideration, nor is a moral obligation. A promise not to sue, so long as the right to sue actually exists, may be consideration.

DEFENSES

In its most basic form, a contract exists where there is an offer, an acceptance of the offer, and consideration to support the contract. Despite the existence of these three elements, enforcement of a contract may be denied if a sufficient defense to the formation of a contracts is present.

In order for an individual to enter into a contract, that person must have the legal capacity to do so. At common law, minors, individuals who are mentally ill, persons under the influence of alcohol or drugs, and those under a legal guardianship lack legal capacity to contract. The rule as to minors is that a contract of a minor is voidable, not void. That is, a minor has the option to make a contract valid or not. However, if a minor enjoys the benefit of a contract, the minor is obligated either to repay the other party or to fulfill the minor's obligations under the contract. In addition to capacity, an individual must have the legal competency to enter a contract. Competency is generally defined as the mental ability of a party to contract. In other words, a legally competent person is one who possesses the ability to recognize and understand the contractual obligations that will result. Courts will assume that capacity and competency exist until it is proved otherwise.

If the parties to a contract make a mutual mistake with regard to that contract, such as a mutual misunderstanding, there is no mutual assent and therefore no contract. Clerical errors, known as scrivener's errors, will generally be corrected by a court. That is, rather than finding the contract invalid, the court will merely correct the error.

A contract that is based on a fraudulent misrepresentation of a material term is unenforceable. A fraudulent misrepresentation is material if the maker intended for the misrepresentation to induce the other party to enter the contract and if the misrepresentation would likely induce a reasonable person to so enter the contract.

Duress may make a contract unenforceable. Physical duress, or forcing a person to accept an offer, invalidates the contract, while the threat of physical harm makes the contract voidable at the election of the victim. Courts are divided on whether economic duress is sufficient to deny the enforceability of a contract.

A contract that is entered into under undue influence is also voidable at the election of the victim. Undue influence exists where one improperly takes advantage of one's relationship with another to coerce the other person to enter a contract. Examples are the influence that an adult child may have over an elderly parent who is dependent on the child for care, or the reliance of an unsophisticated individual on a sophisticated adviser, where the adviser is aware of the reliance.

As a general rule, an illegal bargain is void as a matter of law and may not be enforced. Therefore, a contract to commit murder, to rob a bank, or to steal a car is void as a matter of law.

A contract may be void because enforcement of the contract would be unconscionable. It is important to understand that mere disproportionality of the benefits of a contract, no matter how great, does not make the contract void as unconscionable. Unconscionability may be found only where there is grossly disproportionate bargaining power to the extent that one of the parties had virtually no choice in accepting the terms of the contract. Contracts are rarely found to be unconscionable unless a significant public policy issue is involved.

CONTRACT INTERPRETATION

An offer, acceptance, and consideration must be present to form a contract. The defenses to contract formation, as discussed above, may be used to show that no contract exists. However, even if it is shown that a contract does exist, questions may arise as to the content and meaning of that contract.

RULES OF CONSTRUCTION

In interpreting contracts, courts generally follow certain fundamental rules of construction. Under the four corners rule, courts will restrict their analyses to the written terms of the agreement itself, wherever possible. Ambiguities will be construed against the drafter. Courts will generally seek to harmonize the terms of a contract in a manner that makes those terms consistent. Courts will generally find that specifics in a contract will control over generalities. Words and phrases used in a contract are given their plain meaning absent evidence to the contrary.

PAROL EVIDENCE RULE

The parol evidence rule provides that if the parties to a contract intended for their contract to be a complete integration, that is, if the parties intended that the written agreement be the full extent of the understanding between them, then evidence other than the contract itself may not be admitted to contradict the written terms. Therefore, in interpreting a contract, the court should generally not look beyond the contract itself for interpretation. The parol evidence rule permits evidence intended to prove or disprove the legitimacy of contract formation, such as evidence showing a party's capacity or showing fraud or mutual mistake, but prohibits evidence intended to vary, contradict, or change the terms of the written agreement. Of course, if a contract refers to another document, that other document may be admitted to explain the terms of the contract at issue.

STATUTE OF FRAUDS

A common mistake is the belief that oral contracts are not enforceable. In fact, most oral contracts, if they fulfill all of the requirements of a contract, are indeed enforceable. However, the statute of frauds requires that in certain specific circumstances, contracts must be in writing. While the requirements vary from state to state, generally the statute of frauds requires the following contracts to be in writing: contracts by executors, administrators, or other personal representatives; contracts in consideration of marriage; contracts for the sale of real estate; contracts for the sale of goods exceeding $500; and contracts that will not be performed within one year of the making of the contract. The statute of frauds generally does not require any particular written form, and generally a contract will suffice so long as it identifies the parties, describes the subject matter, states the essential and material terms, states that consideration exists, and is signed by the party against whom enforcement is sought.

REMEDIES AND DAMAGES

Throughout this article, reference has been made to the court's enforcement of a contract. This, of course, begs the question of what course of action may be taken to enforce a contract, to repay the victim of a breach of contract, or to punish those who breach.

Generally, the victim of a breached contract is entitled to be made whole, or put in the same position as that party would have been in had the contract been fulfilled. Commonly, this is done by forcing the breaching party to pay the aggrieved party compensatory damages. Compensatory damages are intended to compensate the nonbreaching party for the actual damages suffered. Normally, compensatory damages are measured by the party's expectancy, or what the parties should have reasonably foreseen as flowing from the breach. Expectancy damages are often described as conferring the benefit of the bargain upon the nonbreaching party. Where expectancy damages are difficult to determine or otherwise impractical, a party may receive reliance damages, which are intended to compensate for the losses incurred in relying on the breaching party's fulfillment of the contract. A third alternative for compensation is restitution, where the breaching party must compensate the victim for the benefit conferred upon the breaching party.

Liquidated damages are a method used by contracting parties to estimate the damages that will result in the event of a breach. Liquidated damages may not serve as a penalty against the breaching party, but so long as they are a reasonable estimate of the damages that would be suffered by the nonbreaching party, they will be enforced. A clause in an apartment rental contract that requires a breaching party to pay two months rent is a common form of liquidated damages.

Punitive damages are those intended to punish the breaching party. Punitive damages are available only in very rare cases; they generally are not awarded in contract disputes.

Finally, equitable relief is available to nonbreaching parties where none of the above remedies would be sufficient. Under the concept of equity, a court may take corrective action other than by awarding money. In rare circumstances where none of the above described compensatory damages would be sufficient, a court may order specific performance. That is, the court will order the parties to fulfill their obligations under the contract. This method is not favored because of the practical difficulty of enforcement, but in some cases, such as the purchase of real estate, art, and the like, it is the only remedy that is sufficient. Also available is an injunction, which is a court order preventing a party from taking further action, such as a continued breach of a contract.

see also Law in Business

Keith A. Bice

CONTRACTS

Contracts are legally enforceable agreements between persons that specify transactions or define relations between them. Either informal or written, they may concern any lawful human transaction, from purchases and loans to hiring and marriage. In engineering and science, contracts play important roles because, in both domains, practitioners do a great deal of work under some form of contract. Defining what the parties are obligated or permitted to do, contracts establish an ethical framework for engineering and scientific work, and they present ethical problems. The ethical framework has at its core one or more promises. Because the promises are legally enforceable, they involve a third actor in addition to the promisor and the promisee, government.

Contracts in Engineering

For most engineers and many scientists, the employment contract frames their professional activities. American courts apply the common law doctrine of "employment at will" when interpreting employment contracts for engineers and scientists. Under this doctrine, the employer is free to hire and fire at will, and the employee is free to take up employment and resign at will. This means that an employer may dismiss an "at will" employee, in the words of the court in an often cited case, "for good cause, no cause, or even cause morally wrong, without thereby being guilty of moral wrong" (Payne v. Western and Atlantic RR, 81 Tenn. 507, 519–20 [1884]). As a consequence, for example, engineers have reason to fear that by asking challenging questions about the safety of a project, they risk being fired. The "employment at will" doctrine is subject to limitations expressly indicated in federal and state statutes (for example, civil rights laws), to public policy exceptions courts have worked out, and to express provisions in the employment contract, such as provision for a term of one year.

The contract includes the usual terms of employment: salary, compensation, health and pension benefits, etc., but in addition may include "employment agreements" concerning intellectual property, confidentiality, and restrictions on future employment. At the time of taking employment, engineers and scientists often enter these agreements with insufficient appreciation of the implications. Sometimes, in this way, engineers or scientists unwittingly enter agreements that are so restrictive they could not be enforced. An example is an agreement that excludes future employment with a competitor to the extent of putting the engineer's future livelihood at risk.

Engineers or scientists may be surprised to discover that they are legally and ethically obligated by the employment agreement to maintain the secrecy of certain information even after changing employers. At the next job, an engineer or scientist may have to decide whether particular indirect uses of information gained from a former employer are permissible. Engineers or scientists may also have to decide whether to maintain the confidentiality of information that they believe a client or customer needs to avoid certain harms.

Some have argued that the code of ethics does or should rank as an implied element of the engineer's or scientist's employment contract. Viewed this way, the code would provide a barrier protecting engineers or scientists from being required by their employers to engage in behavior that violates the code. One way to interpret this claim is by invoking the status of an engineer as a professional: An employee trained and hired as an engineer is bound by all the standards of engineering, including ethical standards. The employment contract cannot require engineers to violate their ethical standards. Courts, however, have not been receptive to this interpretation.

Contracts bear on engineers' and scientists' work in another important way—through the contractual agreements that their employers (or they themselves) make with other business organizations, non-profit organizations, interest groups, and government agencies at every level of government. Engineers' functions—design, testing, maintenance, and operations—and their project-related dealings with purchasing agents, marketing specialists, customers, vendors, and construction contractors, as well as with other engineers, are usually associated with such contracts. The same is true of scientists when they function similarly.

Some common ethical problems for engineers typically arise from contracts of this sort. An example is the "deadline problem" that occurs, for example, when engineers discover in the course of their work that they cannot meet both the specifications for the product and the delivery date to which they originally agreed. They may have to develop options, such as working overtime or negotiating a compromise.

Yet engineers contribute to devising these sorts of contracts as well as to implementing them. They participate in defining projects and determining specifications for products even when they do not directly take part in contract negotiations. Their judgments about the time and resources needed to complete projects (a new chemical plant, for example) often help to decide the terms of contracts by which they and other engineers are bound. Strategies of preventive ethics may help engineers avoid ethical problems associated with devising contracts.

So far, this entry has focused on ethical problems and strategies from the perspective of engineers and scientists as promisors. In most cases when engineers and scientists are promisors, the promissee is a large company or firm. The company's perspective brings to the fore other ethical problems and needs for preventive ethics. For example, employers cannot easily determine whether engineers are faithfully abiding by their promise to maintain the secrecy of information at a new place of employment. Companies cannot pursue former employees by legal means if they do not have tangible evidence of, for example, the transfer of confidential information to the new employer. From this perspective, strategies of preventive ethics, such as rewards for creativity to valuable employees, may be useful. Companies can also use contracts to provide incentives to valued employees to stay with the company and to departing employees to maintain desired confidentiality, in this way protecting engineers and scientists from temptations to which they are subject.

In consulting firms (for example, environmental consulting firms) that require or permit the firm's engineers and scientists to obtain and implement contracts on their own, other problems arise. Scientists or engineers may unwittingly enter contracts with clients whose interests collide with those of other clients of the firm. Problems about the treatment of their reports may arise for engineers and scientists in these firms, and also in other contexts. The firm may object to the engineer's client using a report in a press conference or require the engineer to suppress a report altogether. An academic engineer who does independent consulting under contract may have to decide how to handle a client's decision to bury a report revealing the client's responsibility for some harm.

Contracts in Science

In scientific research and in academic engineering, contracts are pervasive in defining conditions attaching to awards of funding necessary for conducting research. In universities, investigators, students, and postdoctoral scholars have a contractual duty to abide by the institution's rules. Informal agreements in research groups under these rules are similarly binding. Graduate students are often surprised to learn that they do not own data they themselves collect. They may perceive this rule or agreement in research groups as an unfair hindrance to advancing their careers. Nevertheless, they are ethically bound to abide by these agreements unless they can negotiate other terms with the principal investigator.

The power disparity among senior investigators, graduate students, postdoctoral scholars, and junior investigators complicates the ethical situation in research groups. Their leaders have the power to make the ground rules for conducting research in their groups. Those subject to this power and dependent on their leaders for research support and recommendations for future employment are not in a position to contest rules. Because of the power disparity, safeguards should be built into the ground rules to protect the vulnerable, less powerful members of groups. Senior investigators can begin by making informal understandings explicit and open to discussion and revision.

In conducting research for commercial sector firms, scientists and engineering researchers are required to sign contracts that allow firms proprietary control not only over copyrights and patents, but usually also over data, tools, resources, and techniques. As a consequence, "virtually any piece of information or equipment used in industry-sponsored research can become company property" (Resnick 1988, p. 31). By these agreements, even chemical formulas and DNA sequences can become company property.

These contracts also commonly require scientists and engineers in the commercial sector to submit their publications or public presentations for company review and to accept delays beyond the limit acceptable in academe. In some cases, companies suppress publication altogether, in this way requiring engineers or scientists to violate professional standards. In light of the central value of open publication in science, a value that serves science and the public welfare, these requirements present ethical conflicts for scientists.

As encompassing as these agreements are, courts have upheld them. In doing so, they represent the public's interest in ongoing scientific research and development. The underlying assumption is that such proprietary control is essential for companies to gain a return on the heavy investment required for scientific research and product development. Without the assurance of a return, they will not take the risk of investing. However, some companies may suppress results and refuse to share useful tools and resources beyond the need to realize the return on their investment. Consequently, scientists and the public may fail to receive the benefits of the propagation of new knowledge and inventions.

In the interests of the promisor, the promisee, and the public, companies should allow their scientists and engineers to publish results and share resources and tools in a timely fashion. Industry-sponsored research contracts should not require scientists or engineering researchers to violate professional standards. Rather, contracts between companies and researchers should be written to strike an appropriate balance between proprietary control over information and scientists' responsibilities to publish results and share resources to the benefit of science and the public.

This overview of ethical obligations, responsibilities, and ethical problems associated with contracts in science and engineering points to the need for practitioners in these domains to be taught to pay close attention to contracts. In many circumstances, engineers and scientists can influence the terms of contracts in such a way as to reduce the likelihood of their facing ethical problems later. Promisors and promisees can become oriented to devising and using strategies of preventive ethics to avoid violating professional ethical standards.

VIVIAN WEIL

SEE ALSO Conflict of Interest;Engineering Ethics.

BIBLIOGRAPHY

Bennett, F. Lawrence. (1996). The Management of Engineering: Human, Quality, Organizational, Legal, and Ethical Aspects of Professional Practice. New York: Wiley. A reference volume as well as a textbook that considers contracting and ethical issues for engineers from the perspective of managers of engineers.

Campbell, Sally A. (1997). "Balancing the Responsibilities of the Environmental Consultant to Create a Personal Ethical System." In Proceedings of the Air & Waste Management Association's 90th Annual Meeting & Exhibition, June 8–13, 1997. Toronto: Air & Waste Management Association. An environmental consultant's perspective on engineers' and scientists' ethical responsibilities to the public and the scientific community when they provide estimates of environmental impacts and contribute to environmental decision making, under contract to management.

Orlans, Harold. (1973). Contracting for Knowledge. San Francisco: Jossey-Bass. A broad consideration of problems inherent in contracting for knowledge, including social scientists' research.

Resnick, David B. (1998). "Industry-Sponsored Research: Secrecy Versus Corporate Responsibility." Business and Society Review 99(1): 31–35. A philosopher's analysis of contractual constraints on industrial scientists and engineers that documents cases of excessive control and indicates how business organizations can manage such contracts to the benefit of the public and the scientific community as well as their own benefit.

Watson, Alan. (1991). Roman Law and Comparative Law. Athens: University of Georgia Press. A solid scholarly volume that explains contracts in the law, with an account of the origins of contracts in Roman Law.