Your first contact with contracts will possibly be through some obtuse old English cases which essentially boil down to the proposition that a contract is a legally enforceable agreement between two persons. There are some agreements, generally arising from social interactions, which courts will not raise to the dignity of contractual obligations. Suits based on them will usually be summarily dismissed without subjecting them to the customary tests to see if they have ripened into contracts.
Boy meets girl in the local supermarket. Because of their expressed mutual interest in the various brands of anchovies on display, she invites him over for the following Saturday night so together they can discover what makes the water from the whirlpool jets spin counterclockwise. He agrees to be there at seven-thirty with the proper colored wine for the occasion. If he does not show, can she sue him for the cost of the new bikini she has purchased, or the spectacular crab-stuffed steak she has prepared?
Anybody can sue anybody. The lawyer asks the question another way. Does she have a cause of action against him? (If she does sue, will a court say there are legal grounds for recovery of damages?) The answer here is probably no. The agreement to meet on a date is not one which the parties or society intended to be legally enforceable. (I used to answer that question with a categorical "no." But in 1990, I read a newspaper story that said some small claims court gave judgment in favor of a young girl who sued her prom date for standing her up. Of course, since it was not an appellate case, no new law on the point was created.)
Change the facts a little. He is a professional photographer; she is a professional model. He asks her to meet him at a well-known spa so he can take some pictures for a fashion magazine. He has hired her before and knows what her customary fee is. It is mutually understood it will be paid. As an aside, both of them probably have visions of using the therapeutic watering facilities after the modeling session as the beginning of a very enjoyable evening (the "date" element.) In this case, however, if he does not show up, she has a valid cause of action against him for her fee. If she does not show up, he has a valid cause of action against her for his loss of time.
In the first example, the agreement to meet was just a social situation. In the second, there was a business agreement, which the law will enforce.
Factual Situation
In reality, she may never sue him, or he may never sue her. That is not the point. When you are studying law, you are given factual examples to illustrate principles of law. You must learn to accept what is presented, isolate it, and apply the rule. Then you mentally change facts, add something new, and test the rule under different circumstances. It is extremely important to be constantly aware of this approach all through law school. You will often have some outside knowledge that will make it difficult for you to accept the factual situation presented in a case, or else your own practicality will make you ask, "How could anybody prove that actually occurred?" or "How could anyone do anything that stupid?" The best way to handle this problem is to think: Assuming the people really did act that way, what principle or rule of law is applied under those particular circumstances?
Although you may sometimes believe that the law is applied illogically, you will gradually realize that there is logic to the way it has developed, and to the way in which the structure of each branch of law is built up, to make the totality viable and usable in everyday life. If you look a little closer at the elementary definition of a contract-"a legally enforceable agreement between two persons"- perhaps you will get a clearer idea of what I have in mind.
Focus on the word "persons". You normally would think it covers anybody, and not go any deeper than that. But the law says, "Wait a minute; there are different kinds of persons: men, married women, single women, senior citizens, children, idiots, the insane, prisoners, drunks, and so on. We are not going to let all these kinds of persons be bound by contracts. Public policy requires that we have special rules for special circumstances." All these persons can enter into agreements if they choose, but those agreements are legally enforceable only if they are contracts. Your contracts case book will have a section of cases setting forth the principle that, in order to have a contract, you must have parties capable of contracting.
At common law, married women could not enter into contracts; single adult women and widows could. A wife was considered one with her husband, and he was legally responsible for all the business activity of the marriage. Persons convicted of felonies lost all civil rights. Consequently, they too could not enter into contracts. People who were drunk, surprisingly, could, possibly because of the underlying community belief that they were personally responsible for getting into that state and therefore should suffer the consequences. Or perhaps it was because drunkenness was so prevalent that nobody thought of it as a legal disability.
The early common law recognized, however, that idiots did not have the mental capacity to enter into contracts. Senile people and insane people did not fare as well. Later on, however, the common law recognized that, if one of these individuals did enter into a contract which was grossly unfair, it could be set aside.
Seventeen-year-old Timothy Lithe, an energetic businessman, contracts with Robinson Broadbottom, an adult, to buy the peaches on Broadbottom's trees, payment to be made within ten days after the crop is picked. Tim and his crew do the picking, take the peaches to market and get the money. Tim pays off his crew and spends the rest of the money on the pleasures of life. Broadbottom sues for the contract price of the peaches. Tim pleads the defense of minority. Broadbottom loses the case and is left sitting on his name, lucky at least that he still has his trees.
Before the 1929 stock market crash, a minor who had started with a small amount of cash became a big operator almost overnight. He owed his broker a great deal of money. When the values plunged into the cellar, the stocks he held became practically worthless. When his broker sued him he alleged that he elected to rescind the contracts of purchase and offered to return all the stock certificates that were in his possession. The court decided it was time to modify the common-law rule. The minor lost the case. It was felt that the minor was an astute, knowledgeable investor, and that the basis of the old principle, the protection of minors from being taken advantage of by designing adults, was inappropriate under the circumstances of this particular case. Thus, a new rule was established: A minor may not disaffirm a stock purchase contract where he or she has essentially the same expertise as a seasoned trader in the market.
This is an example of how the law develops. A basic principle is established. From time to time exceptions are created. Sometimes the principle is totally changed by this erosive process.
Let us go back to our original definition of a contract: a legally enforceable agreement between two persons. We have looked at the "legally enforceable" and "persons" parts. Now we will zero in on "agreement."
Catch Words
The catchwords and phrases you will be immersed in are "offer," "acceptance," "consideration" and "public policy." This is one of the first places you will be exposed to the "or/ee" syndrome. Lawyers love to tack these syllables onto the ends of words just as the physicians toss out the "osises" and "itises." And so you will pick up new jargon like offeror/offeree, lienor/lienee, mortgagor/mortgagee, payor/payee, and donor/donee. The "or" ending indicates the actor or moving party in the situation: the one who initiates something causing someone else to react. The "ee" ending stands for the party on the other end, who gets whatever the "or" party is putting out. Thus, an offeror is a person making an offer; an offeree is the one to whom the offer is made. A purchaser of land gives a mortgage back to the seller for the balance of the purchase price. The purchaser is the mortgagor; the seller is the mortgagee.
You will probably have a lot of fun with give-and-take banter with other law students, bouncing this and other new language around and applying it to everyday situations as you try to make it a part of your thinking. Remember, though, that this activity is an "in joke" and, to the lay person, you may sound like a pompous idiot. Some lawyers never realize this. Even after law school they talk as if they have marbles in their mouths. Stuffy, boring, and pedantic, they put every social contact into some legal frame of reference, and have their listeners holding on to their wallets for fear of getting billed for the conversation.
You will learn that in every contract there is an offeror who makes an offer to an offeree. Before we can go any further, you will have to know what an offer is. You will run into a series of cases in your casebook giving various factual examples where courts found an offer either did or did not exist.
On April 16th, exhausted from the income tax rush, a tired accountant wails, "Oh, if somebody will just give me enough money to pay me what I paid for my office equipment, I'll sell out right now." Is this an offer to sell that a would-be buyer can hold him to?
An almost forgotten former movie star says, on meeting a group of her old fans, "My Oscar is for sale to the first person who gives me two hundred dollars." Is she making an offer to sell?
As you plow through the opinions, you will see a principle evolving to the end that an offer must directly or impliedly encompass an intended binding promise to do something if someone complies with the terms. The courts have to wrestle with factual interpretations revolving around the actual, implied or even apparent intent of the purported offeror. Historically, advertisements in newspapers describing merchandise and giving prices are not considered offers to sell, but are held to be in the nature of requests to the reading public to come into the store and make an offer to purchase at the price quoted. This common-law rule has been changed by statute in many states. You will learn that reward posters have been held to be offers; that there are all kind of rules for bidding at auctions; that there are numerous other situations where the existence of an offer is often arbitrarily determined by custom and usage in a particular area of commerce. Sometimes the conclusions seem strange; but when the rules of interpretation were first set down, the courts felt it necessary to have some certainty that people could rely on in their customary business dealings.
Law School Problems
How long does an offer stay open? If you have what is known as an option, you actually have a contract to keep an offer open for a specific period of time. But suppose there is no option and the offeror or the offeree dies? Suppose the offer is revoked before acceptance? Suppose the offeree rejects the offer and then changes his or her mind? These are the kinds of problems you will run into in law school.
In order to effectively solve the problems you will be faced with in actual practice, you should start trying to think creatively early in your law school career. Once you are actually out handling matters for real clients, you should be able to apply old rules and adapt existing principles to new situations. The development of the law can be compared to crossing a river that does not have a bridge you can walk over. If it is too wide to jump, then look for stepping stones.
One of the interesting things you will observe as you take additional courses and learn new principles is that the theories of one course can often be carried over into another. Thus, for example, in torts you learn about the concept of the reasonable man, and in contracts you apply that idea to determine whether a reasonable man would really think certain language or conduct constituted an offer. This taking of ideas from other areas of the law greatly expands the analytical possibilities for solving problems. The greater variety of legal matters you are exposed to, the better lawyer you will become.
The law student learns to define, redefine, analyze into smaller pieces, split hairs, and imagine eyelets on the ballet shoes worn by angels dancing on the heads of pins. And after all that, the student then has to apply principles and rules, either directly or by analogy, to the tiny part distilled out to see if an answer can be found to the problem presented. After several years of law school and practice, this intensive approach should become an almost mechanical thought process. While you will look at problems in much the same way after graduation, you will not realize you are doing so, and your solutions to new situations will start flowing more readily.
Another subject you will be exposed to in your contracts course, acceptance, reemphasizes the active analysis necessary to solve a legal problem. Look for different ways to consider whether a legally valid acceptance occurs. Are the parties talking about the same thing? In a very famous old English case, somebody insures a cargo on a ship: "ex Peerless, Bombay." During the journey, a violent storm destroys the vessel. It then develops that, outside the knowledge of either the insurance agent or the person insuring the cargo, there were two ships named Peerless sailing out of Bombay at about the same time. The insurance agent was thinking of one, the customer the other. The court held there was no valid acceptance, and consequently no contract, because there was no "meeting of the minds."
The offeree has to know of the existence of the offer before it can be accepted. Bleepo sends Curley a letter offering to sell Bleepo's prize bull for fifteen thousand dollars. Curley simultaneously sends Bleepo a letter offering to buy Bleepo's bull for fifteen thousand dollars. Held: There is no contract. Cross offers do not constitute an acceptance.
You probably are wondering what kind of crazy ruling is this. The parties have agreed on a price; they are talking about the same bull; and one wants to buy and one wants to sell. How come there is no contract? In the Bleepo bull case, several things might have happened to bring the matter to a lawsuit. Before Bleepo got Curley's letter, somebody may have offered Bleepo eighteen thousand dollars for the bull, and he sold it to that individual. When the third party found out Curley wanted it, that person offered to sell it to Curley for two thousand dollars more. Curley bought it and then felt that he was out of five thousand dollars. On the other hand, maybe when Bleepo got Curley's letter, he thought that if Curley wanted to pay fifteen thousand dollars, not knowing that Bleepo would sell for that amount, why, perhaps he would just raise the price a bit. Or maybe by the time Curley received Bleepo's letter he had already purchased a bull somewhere else.
You will run into a group of cases discussing the time an acceptance is made. Is it when the accepting answer is deposited in the mail box, or when it is actually received by the offeror? Suppose an offer is made by fax? What rules are applied when the acceptance is by fax, telephone, telegram, and letter or in person?
Meaning of Consideration
Another major aspect of contracts is consideration. Every contract has to have consideration. The only exceptions at common law were contracts "under seal." That meant a written agreement was drawn up and signed by the parties, who also added the impression in wax made by their personal seal.
The easiest way to understand the meaning of consideration is not to think of it as money or something of value. Rather, think in terms of a unilateral (one-sided) or a bilateral (two-sided) contract.
In a unilateral contract, only one party is bound to do something. And that obligation arises only if the other party acts first in response to some offer. Boring says to Fitch, "Mow my lawn and I'll give you ten dollars." This is an offer to enter into a unilateral contract. At this point nobody is bound. Fitch is under no duty to mow; he can do so or not at his pleasure. If Boring revokes his offer before Fitch starts to mow, no contract arises. But if there is no revocation, and within a reasonable time Fitch does mow the lawn, Boring owes him ten dollars. Fitch's act of mowing in response to Boring's promise to pay creates a unilateral contract; the act is consideration for the promise.
In a bilateral contract, both parties are bound. A promise is given in exchange for a promise. Boring says to Fitch, "If you agree to mow my lawn by Tuesday, I'll give you ten dollars." Fitch says, "I'll be there no later than Tuesday, for sure." Here, there is a promise given in response to a promise: Boring promises to pay ten dollars in exchange for Fitch's promise to mow the lawn by Tuesday. Boring is bound to pay ten dollars when Fitch does the job. If Tuesday comes, and Fitch does not appear, there is a breach of contract. Boring can get someone else to do the job. If he has to pay more than ten dollars, Fitch is liable to Boring for the difference.
It is not enough, however, just to perform an act or make a promise in order to have valid consideration for a contract. You have to agree to do something, or to refrain from doing something that you do or do not legally have to do, and this doing or not doing must be the reason you give the promise. In a unilateral contract, the act performed in acceptance of the offer must meet the same criterion.
A busload of school children is hijacked and the governor of the state offers a $10,000 reward for information leading to the criminal's arrest and conviction. Carl Kopp, a detective in the county where the offense occurred, is assigned to the investigation. He finds the key clue that solves the case. Even though he knows about the reward and works extra hard hoping to collect it, he is not legally entitled to the money. He is just doing his regular job. He is under a legal duty to catch criminals. The reward is an offer to enter into a unilateral contract. The act which is performed in acceptance of the offer must be one which the acceptor is not legally required to do. Otherwise there is no consideration.
One of the things you have to look out for in consideration problems is whether the giving of the consideration itself is against public policy. Suppose A, a quiz-show contestant, promises to pay B, a television announcer, a sum of money if B will promise to give A the answer to the Magic Question on next week's show. B promises to do so, and actually gives A the correct answer. A wins but does not pay B. B has no cause of action against A. The consideration is tainted by illegality (the bribe) and fails. It is against public policy to use the law to perpetrate a fraud or enforce the commission of a crime.
In a state where betting is against public policy A promises to pay B $50 if the Rams win by ten points next Sunday. B promises to pay A $50 if they don't. No enforceable contract. The consideration is illegal. Neither has a cause of action against the other.
This is the first time I have used "A" and "B" to distinguish the people involved. These appellations are helpful when you are trying to solidify your learning. Get used to them. Lawyers and judges use them all the time. They make it easier to apply abstract principles to different factual situations.
You will become familiar with a number of other rules relating to consideration. After you learn enough examples, you will be able to sense whether the consideration is valid or not. But for now, just be aware that, without it, you cannot have a binding contract.
Other aspects of the study of contracts include the Statute of Frauds (when a contract must be in writing); third-party beneficiary contracts (whether third persons, not parties to a contract but who stand to benefit from it, have any cause of action if one of the original parties does not perform as promised); what happens if one side fails to perform; when rights under a contract may be transferred or assigned; what is the legal status of the parties when they agree to cancel the contract and make a new one.
In recent years, almost all of the states have adopted the Uniform Commercial Code, a series of laws relating to commercial transactions such as contracts, sales of goods, bank checks, and other "negotiable instruments." These laws have taken many of the common-law rules which you will study in the cases and have put them together in a logical fashion, standardizing former majority and minority positions into one rule and making it easier for business people to deal with each other.
