OVERVIEW OF CONTRACT LAW
Contract law: Sarah Jessica Parker is the actress known for her starring role in one of the most beloved television series of all time, Sex and the City. On it, she played Carrie Bradshaw, a newspaper columnist who pontificated on life, relationships, shopping, and jewelry. Like the character she portrayed, Parker is also a jewelry fanatic and in 2015, she signed a five-year, $7.5 million contract with Kat Florence Design, to endorse and promote the jewelry brand.[1] Three years later, the company sued Parker for breach of contract, claiming that she didn’t hold up her end of the agreement by failing to endorse the brand and attend events promoting the products.
This was just one of the millions[2] of breach of contract lawsuits that are filed each year in the United States. In this course, we will look at the building blocks of enforceable contracts and the conditions under which contracts can be enforced. We will also look at parties’ obligations under binding contracts and available remedies.
In this first module, we will define the legally enforceable contract and explain why contracts are so integral to our society. We’ll also discuss the different classifications of types of contracts and look at the circumstances where a court will use principles of contract law to enforce promises between parties even if no binding contracts exist.
At its most basic level, a contract is a set of mutual promises or obligations that may be legally enforced against a party who breaches it, which means failing to perform obligations under it.[3] We see examples of contracts everywhere, every day. An enforceable contract can be a promise to pay a reward upon the return of a lost wallet, an agreement to provide consulting services or an agreement to purchase a product.
Contract law in the United States grew out of a system known as “Common Law,” which has its roots in English customs and court decisions. In fact, most contract law in the United States today is still developed through court decisions.
Contract law is integral to our legal system for a variety of reasons. First, without the system of contract law in place, many beneficial agreements would never be made because the parties would not have assurance that their agreements could be enforced.[4] Without the framework for enforceable contracts provided by contract law, a party seeking to enforce an agreement would have to rely solely on others’ reputations and stated promises. Entering into transactions would be very risky. Even if parties did enter into agreements, each might be hesitant to act on their promises before the other party acted, resulting in stalemate.[5] In this regard, contract law facilitates business by ensuring that promises will be enforced or, alternatively, that a party will have a legal remedy in the event of a breach.[6]
Second, the process of creating a contract requires, or at least encourages, parties to seriously consider all the agreement’s terms before entering into a final contract. By discussing, or even writing out the most important terms of the agreement, the parties to the contract can ensure that the parties agree on these terms and that these terms will be enforceable. If a disagreement arises down the road, the parties will be able to look to their contract to see what must be done in that situation.
Finally, contract law provides a remedy to an injured party in the event of a breach. A court may order a breaching party to pay damages or order specific performance to compensate the non-breaching party for its losses. Although parties may be forced to pay money or perform certain actions if they fail to honor their contractual obligations, contract law does not provide for criminal charges for breach of contract.[7]
Contract Classifications
A contract may be classified in a variety of ways and can take different forms. These classifications arise due to varied contract characteristics.
Contracts can be classified as either unilateral or bilateral contracts. A bilateral contract is the type of contract that most people typically imagine — they are the most common form of contractual agreements. In a bilateral contract, the parties exchange mutual promises.[8] The bilateral contract is formed at the point at which the promises are exchanged. Both parties are obligated to follow through with these promises.
Let’s return to the example we introduced at the start of this module involving Sarah Jessica Parker and the jewelry design company. The endorsement agreement the two signed in 2015 is an example of a bilateral contract: Kat Florence Design agreed to pay Parker $7.5 million over five years and in return, Parker agreed to make appearances on the company’s behalf and endorse its jewelry products.
On the other hand, in a unilateral contract, only one party is making a promise in exchange for performance.[9] When the promising party makes a promise, he is making an offer, which the other party can accept by performance, thereby forming a unilateral contract.[10] A unilateral contract is not formed until the point at which the second party performs the action requested.
Let’s consider an example:
Suppose that Max is at his company picnic and loses his wallet. Max then announces to the group that he promises to give fifty dollars to whoever returns his wallet. This is an offer to the group that can be accepted by anyone who does what Max has requested. Suppose Joe finds and returns Max’s wallet – at that point a unilateral contract is formed, and Max must pay Joe fifty dollars.
When a party makes a unilateral promise conditional on some sort of performance, the promising party is simply making an offer. Therefore, the party to whom the promise is made is not obligated to act. Max’s announcement that he will pay fifty dollars to whoever returns his wallet is an offer to the group that can be accepted by the return of the wallet. However, no one at the picnic is obligated to return – or even look for – Max’s wallet. If Max’s coworker Gina sees his wallet in the bushes but is in a hurry to get home, she has no obligation to pick up and return the wallet, or even to tell Max where she saw it. This is because, in a unilateral contract, only one party has made a legally enforceable promise.[11]
At the same time, the party making the offer can revoke that offer at any time before anyone begins performance. However, once someone begins performance, the party making the offer must hold that offer open to the person who began performance for a reasonable amount of time to give that person the chance to complete the task. For example, Max may change his mind about offering the reward and announce to the group at the picnic that he will no longer provide the reward to the person who returns his wallet. However, suppose that Joe finds the wallet before Max makes his announcement. As Joe begins to walk over to Max, Max announces that he will no longer provide the reward. Joe returns the wallet to Max within a few minutes after Max’s announcement. In this case, Max must still pay Joe the reward.
Although a “reward” situation is a common example of a unilateral contract, unilateral contracts can exist for other situations as well. For example, many websites have low-price guarantees. A customer who purchases a product on a website with such a guarantee may later submit proof that she found a lower price elsewhere and receive a reimbursement of the difference, a refund or some other incentive. Some of these low-price guarantees are structured as unilateral contracts.
For example, a federal court in Texas recently decided that United Airlines’ “Low Fare Guarantee” was a unilateral contract.[12] There, a customer purchased three airline tickets from United Airlines.[13] He claimed that lower prices were available had the tickets been purchased separately, rather than together, and sued for breach of contract. Specifically, the customer argued that United Airlines’ “Low Fare Guarantee” promised to refund the difference between purchased tickets and tickets advertised online at a lower price. He claimed the Guarantee became a part of the bilateral contract formed by purchasing a plane ticket through United Airlines.
The court disagreed. Rather than treating the low fare guarantee as a part of a bilateral contract between United Airlines and its customers, the court treated the guarantee as a unilateral contract that could be accepted by a customer who followed the instructions outlined in the guarantee. This required (1) purchasing a ticket, (2) finding a fare available online at a cheaper price, and (3) contacting their customer center.[14] Only once that performance was complete would a unilateral contract be formed that would require United to refund the fare difference and offer the voucher.
Express vs. Implied Contracts
The second classification of contracts is express versus implied contracts. Parties form an express contract when they clearly set forth the terms of their agreement verbally or in a written document. This is more common than the case of an implied contract, wherein a court finds that the parties have formed an implied contract based on the conduct of the parties or the facts of a situation, even if the parties did not enter into a clear verbal agreement or written document on the subject.
Typically, courts find implied contracts in situations where both parties’ actions demonstrate that they intended to enter into an agreement. For example, in a 2004 case, Universal Acupuncture Pain Services hired the law firm Quadrino & Schwartz to represent it in a lawsuit on a contingency fee basis under a retainer agreement.[15] In a contingency fee arrangement, lawyers are paid a percentage of the amount won in the lawsuit or paid out through a settlement agreement. The agreement did not have a term or provision on what would happen in case Universal fired the law firm before the lawsuit concluded.
A year later, Universal discharged the law firm before the end of the litigation. The law firm then requested that Universal pay all outstanding fees and other monetary payment.[16] Although not explicitly stated in the retainer agreement, the court found the attorneys were entitled to recovery under quantum meruit (the Latin term for payments for services rendered even in the absence of a binding agreement).[17]
While that case turned on the interpretation of a New York statute, it also represents an example of an implied contract, since the implication of hiring a law firm is that the client will pay reasonable value of the work provided by the attorneys. Although the contractual fee was limited to a contingency (a percentage of the amount recovered), it was reasonable for the law firm to expect to be compensated for the labor it provided.[18] This responsibility to pay for services rendered if the firm did not complete the process was implied.
Contract-Like Enforcement Mechanisms
In certain circumstances, a court may also use principles of contract law to enforce contract-like obligations on parties, even though a true contract doesn’t exist.
First, a court may rely on principles of contract law to prevent one party from being unjustly enriched to the detriment of the other party. This occurs when one party gives the other party valuable goods or services, the receiving party knowingly accepts those goods or services and a reasonable person in the shoes of that receiving person would have expected to have to pay for them.[19]
In a 1990 case in Texas, two companies, Vortt Exploration Co. and Chevron, held mineral rights on various tracts of land. The parties failed to reach an agreement regarding certain portions of the land, but continued to negotiate its terms over time. During those negotiations, Vortt provided confidential seismic analysis to Chevron to convince Chevron to agree to a joint operating agreement.[20] Chevron used this information to drill a well at the location Vortt suggested. Although Vortt and Chevron never entered into a contract covering the services Vortt provided to Chevron, the Supreme Court of Texas held that principles of contract law still applied under the circumstances. The court reasoned that Chevron knew that Vortt provided the services to Chevron with the expectation of receiving something in return – Chevron’s agreement to the joint operating contract – and that Vortt’s expectation of receiving something of value in return for the services was reasonable.
A second situation where a court will rely on contract principles is to enforce an agreement lacking consideration. In a future module, we will delve into the legal concept of “consideration,” or mutual promises, as being necessary to the formation of an enforceable contract. For our purposes, however, just know that even when no consideration – and, therefore, no contract – exists, a court may still draw upon contract law to enforce an agreement. It will typically do so when one party relies on the agreement to its detriment under a concept known as promissory estoppel. Typically, a court will enforce a promise if the promising party knows that the other party will rely on the promise, the other party does rely on the promise and the only way to avoid injustice is to enforce the promise.[21]
In a recent case involving Yahoo!, a young woman learned that her ex-boyfriend posted nude photos of her on the website.[22] The young woman contacted Yahoo! requesting that Yahoo remove the photos, and Yahoo! agreed to do so. However, Yahoo! did not immediately take down the photos, even after the young woman repeated her request multiple times. Yahoo! failed to respond for over two months. Even though the young woman had not given anything in return for Yahoo!’s promise to remove the photos, the federal court held that contract law must be applied to this situation if the young woman could prove that she reasonably relied on Yahoo’s promise to her detriment.
In our next module, we’ll discuss the necessary elements to the building of a contract. We’ll specifically look at what constitutes a valid offer and a valid acceptance. The third element, consideration, is the subject of Module 3.
[1]https://theblast.com/sarah-jessica-parker-jewelry-lawsuit/.
[2]http://ogdenpage.com/frivolous_lawsuits.htm
[3] Restatement (Second) of Contracts § 1.
[4] Morris R.Cohen, The Basis of Contract, 46 Harv. L. Rev. 553, 591 (1933).
[5] Sean Hanlonand Ray Yasser, “J.J. Morrison and HisRight of Publicity Lawsuit Against the NCAA,” 15 Vill. Sports & Ent.L.J. 241, (2008).
[6] 1 Corbin on Contracts §1.1.
[7] See, generally, Howard O. Hunter, Modern Law of Contracts § 1:4.
[8] 17A Am. Jur. 2d Contracts § 8 (“Construction of a contract as bilateral, rather than unilateral, is favored because this construction gives protection to both parties.”).
[9] 1 Corbin on Contracts § 1.23.
[10] Kologziej V. Mason, 774 F.3d 736 at n.3 (11th Cir. 2014) (“While most contracts are bilateral, with promises exchanged between two parties, a unilateral contract is, as the name implies, one-sided—one party promises to do something (for example, pay money) in exchange for performance (an act, forbearance, or conduct producing a certain result.”) (citations omitted).
[11] Id.
[12] Coulier v. United Airlines, Inc., 110F.Supp.3d 730 (S.D. Tex. 2015).
[13] Id. at 732-33.
[14] Id. at 736.
[15] Universal Acupuncture Pain Servs., P.C. v.Quadrino & Schwartz, P.C., 370 F.3d 259, 261 (2d Cir. 2004).
[16] Id. at 262.
[17] Quantum meruit is defined as “the fair and reasonable value of the services rendered.” Id. at 262-63.
[18] See also Perry v. Sindermann, 408 U.S. 593 (1972) (Professor may have implied contractual right to tenure based on years of service and other circumstances despite lack of express written agreement).
[19] Vortt Expl. Co. v. Chevron U.S.A., Inc.,787 S.W.2d 942, 944 (Tex. 1990).
[20] Id. at 943-44.
[21] Bixler v. First Nat’l Bank, 49 Ore. App.195, 199-200 (Ct. App. 1980) (citing Restatement of Contracts § 90).
[22] Barnes v. Yahoo!, Inc., 570 F.3d 1096,1098 (9th Cir. 2009).