Objective Theory of Contracts - "An Intention To Enter Into

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BUSINESS LAW I

OUTLINE – CHAPTER 10
NATURE AND TERMINOLOGY

Overview – Roscoe Pound, “[t] he social order rests upon the stability and
predictability of conduct, of which keeping promises is a large item.” A promise is an
assurance that one will or will not do something in the future. 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.” Contract law
reflects the expectations of our society in the manner in which parties are allowed to
make promises or commitments that are legally binding.

I. THE FUNCTION OF CONTRACT LAW


a. The law encourages competent parties to form contracts for
lawful objectives.
b. No modern life is entirely free of contractual relationships.
c. Contract law is designed to provide stability and predictability,
as well as certainty, for both buyers and sellers in the
marketplace.
d. Businesspersons rely on contracts for planning and ventures.
e. Without contract law, people would have to rely on the good
faith of other, hardly encouraging to induce business
ventures.
f. Contract law is necessary to ensure compliance with a
promise or to entitle the innocent party to some form of relief.
g. “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.”
h. Objective theory of contracts – “An intention to enter into
a legally binding agreement, or contract, is judged by
outward, objective facts as interpreted by a reasonable
person, rather than by the party’s own secret, subjective
intentions.”

II. ELEMENTS OF A CONTRACT


a. Below are the basic elements that will be discussed fully
during the course.
1. Agreement – requires offer and acceptance.
2. Consideration – promises to the contract must be
supported by legally sufficient and bargained-for
consideration (something of value to each party).
3. Contractual capacity – parties must possess
characteristics that qualify them as competent parties.
4. Legality – K’s purpose must be to accomplish some goal
that is legal and not against public policy.
b. Defenses to formation:
1. Genuineness of assent – consent of parties must be
genuine.
2. Form – K must be in whatever form the law requires;
some ks require writing.

III. THE OBJECTIVE THEORY OF CONTRACTS


a. Intent is determined by objective standards, not by the
personal or subjective intent, or belief, of a party.
b. Objective facts are determined by the reasonable person
standard, rather than individual’s own secret, subjective
intentions.
c. Objective facts include:
1. What the party said when entering the contract.
2. How the party acted or appeared
3. The circumstances surrounding the transaction (see the
example in the text concerning Jaffe’s car).

IV. TYPES OF CONTRACTS


A. Bilateral versus Unilateral Contracts
a. All ks have at least two parties.
b. The offeror makes the offer.
c. The offeree is the party to whom the offer is made.
d. A contract is classified as a unilateral or bilateral depending
on what the offeree must do to accept the offer and to bind
the offeror to the contract.
e. Bilateral contract (“promise for a promise”) – the offeree must
only promise to perform to accept the offer.
f. Unilateral contract (“promise for an act”) – the offeree can
only accept the contract by performing under terms of the
contract.
1. Problems arise under unilateral contracts concerning
revocation; the modern rule is that the offeror cannot
revoke the contract after the offeree has begun
performance.

B. Express versus Implied Contracts


a. Express contract – terms on the agreement are fully and
explicitly stated in words, oral or written.
b. Implied-in-fact contract – conduct of the parties, rather than
their words, creates and defines the terms of the contract.
c. Following conditions will create an implied-in-fact contract:
1. The Π furnished some service or property.
2. The Π expected to be paid for that service or property,
and the ∆ knew or should have known that payment
was expected.
3. The ∆ had a chance to reject the services or property
and did not.
4. Homer v. Burman (224A)
C. Quasi Contracts – Contracts Implied in Law
a. Quasi contracts (ks implied in law) – are fictional contracts
created by courts and imposed on parties in the interest of
fairness and justice.
b. Equitable, rather than contractual, in nature, imposed to avoid
the unjust enrichment of one party at the expense of another.
c. Note: as in implied contracts, parties cannot be forced to pay
for benefits “thrust” on them.

D. Formal Versus Informal Contracts


a. Formal contracts – requires special form or method of creation
(rarely used).
b. Informal contracts (simple contracts) – all non-formal
contracts (most common).

E. Executed Versus Executory Contracts


a. Executed contract – a contract that has been fully performed
by both parties.
b. Executory contract – the contract has not been fully
performed by either party.
c. A contract can be partially executed and executory by the
other party.

F. Valid, Void, Voidable, and Unenforceable Contracts


a. A valid contract has the elements necessary for at least one of
the parties to enforce it in a court of law.
1. Offer and acceptance of the that offer
2. Legally sufficient consideration
3. Parties have legal capacity
4. Legal purpose
b. A void contract is not a contract at all.
1. One of the afore-mentioned elements is missing.
c. A voidable contract is a valid contract that can be voided by
one or both parties to the agreement.
1. A voided contract is unenforceable.

V. INTERPRETATION OF CONTRACTS
a. One or both of the parties may disagree with the meaning or
legal effect of a contract.
b. The courts look to the “plain language” of a contract to
determine it’s meaning.

A. The Plain Meaning Rule


a. When a K’s writing is clear and unequivocal, a court will enforce it
according to its obvious terms (Plain meaning rule).
b. If the terms of the k are clear and unambiguous, the courts will not
entertain extrinsic evidence.

B. Interpretation of Ambiguous Terms (Page 219)


a. “When the writing contains ambiguous or unclear terms, a court
will interpret the language to give effect to the parties’ intent as
expressed in their contract.
b. The following are the rules used by the courts in interpreting
ambiguous contractual terms:
1.

2.

3.

4.

5.

6.
7.

8.

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