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CHAPTER 8

NATURE AND CLASSIFICATION

ANSWERS TO LEARNING OBJECTIVES/ FOR REVIEW QUESTIONS

AT THE BEGINNING AND THE END OF THE CHAPTER

Note that your students can find the answers to the even-numbered
For Review questions in Appendix F at the end of the text.
We repeat these questions and answers here as a convenience to you.

1A What is a contract? What is the objective theory of contracts? A contract is

an agreement that can be enforced in court. It is formed by two or more parties who
agree to perform or to refrain from performing some act now or in the future.
The objective theory of contracts is that a party’s intent to enter into a contract is
determined by objective facts, as interpreted by a reasonable person, rather than by
the party’s subjective thoughts.

1
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2 UNIT THREE: CONTRACTS

2A What are the four basic elements necessary to the formation of a valid
contract? The basic elements for the formation of a valid contract are (1) an agreement,
(2) consideration, (3) contractual capacity, and (4) legality.

3A What is the difference between express and implied contracts? An express

contract is one in which the terms are expressed in words, oral or written. A contract
that is implied from the conduct of the parties is an implied contract.

4A How does a void contract differ from a voidable contract? What is an

unenforceable contract? A void contract is not a valid contract—it is not a contract at
all. A voidable contract is a valid contract, but one that can be avoided at the option of
one or both of the parties.
An unenforceable contract is one that cannot be enforced because of certain
legal defenses against it.

5A What rules guide the courts in interpreting contracts? Under the plain-
meaning rule, when the words in a contract are clear and unequivocal, a court will
enforce the contract according to these terms without further interpretation or extrinsic
evidence. When the contract includes unclear terms, a court will interpret the language
to give effect to the parties’ intent as expressed in their contract under a number of
additional rules. The text lists the following eight rules:
1. A reasonable, lawful, and effective meaning is given to all terms.
2. A contract is interpreted as a whole; individual, specific clauses are considered
subordinate to the contract’s general intent; all writings that are a part of the
same transaction are interpreted together.
3. Terms that were the subject of separate negotiation are given greater
consideration than standardized terms and terms that were not negotiated
separately.
4. Generally a word is given its ordinary, commonly accepted meaning, and a
technical word or term is given its technical meaning.
5. Specific and exact wording is given greater consideration than general
language.
6. Written or typewritten terms prevail over preprinted terms.
7. Terms are interpreted against parties who draft them.
8. Evidence of trade usage, prior dealing, and course of performance can clarify
the meaning of ambiguous wording.

ANSWER TO CRITICAL THINKING QUESTION

AT THE END OF THE FEATURE

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 CHAPTER 8: NATURE AND CLASSIFICATION 3

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING

One commentator likened e-mail disclaimers to the tags on new mattresses that
forbid removal of the tags under penalty of law or to twenty-page booklets on
safety that accompany new products. No one reads the tags or the booklets, and
no one cares. Why do e-mail disclaimers continue to proliferate nonetheless and
become ever longer? The purposes of a disclaimer is to protect (1) the user to whom
it is directed and (2) the business that posts it. The business is protected from a legal
perspective if a dispute arises over the circumstance that the disclaimer covers.

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4 UNIT THREE: CONTRACTS

ANSWERS TO CRITICAL THINKING QUESTIONS

AT THE ENDS OF THE CASES

CASE 8.1—FOR CRITICAL ANALYSIS—LEGAL ENVIRONMENT CONSIDERATION

How did the objective theory of contracts affect the results in this case? In this
case, Olins (the defendant) claimed on appeal that the lower court improperly
determined he and Pan entered into a valid lease. Olins contended that “material terms
were still being negotiated and various issues were unresolved,” and thus there was no
meeting of the minds to form a contract. The appellate court applied the objective theory
of contracts. The court found no evidence in the record to support Olins’s contention
that he did not intend to be bound by the lease when he signed it or that the terms of
the lease were still being negotiated at that time.
“The defendant's apparent unilateral change of heart regarding the lease
agreement does not negate the parties’ prior meeting of the minds that occurred at the
time the lease was executed. There is ample evidence in the record evincing the intent
of the parties to be bound by the lease when they signed it and, thus, to support the
[lower] court's finding that ‘the lease agreement was a valid and binding contract which
the defendant * * * breached.’ ”

CASE 8.2—FOR CRITICAL ANALYSIS—ETHICAL CONSIDERATION

In recognizing quasi contracts, does the law try to correct for unethical behavior?
Discuss. Yes. Quasi contracts do often help to correct for unethical behavior. Unlike
express and implied contracts, quasi contracts do not require an agreement with
another party. Rather, quasi contracts are based on principles of justice, equity, and, in
some ways, ethics. Quasi contracts prevent unjust enrichment, which occurs when a
party enjoys a benefit it does not deserve. In Seawest Services, for example, the
Copenhavers arguably stole water services by refusing to pay for them. In enforcing a
quasi contract, the court corrected for the Copenhavers’ unethical behavior.

CASE 8.3—FOR CRITICAL ANALYSIS—LEGAL CONSIDERATION

How might the result in this case have been different if the court had allowed
Wagner’s extrinsic evidence of the prior contract regarding Love Song to be used
as evidence in this dispute? In this circumstances, the court might have construed
the language of the “Charlie’s Angels” contract to the same effect. But because
Columbia acquired the movie rights to the property independent of any right it might
have had in relation to the television series, the court might still have considered the
acquisition separate from the exploitation rights covered by the Wagner contract, and
the result would have been the same.

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 CHAPTER 8: NATURE AND CLASSIFICATION 5

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Requirements of a contract

The four requirements for any contract to be valid are agreement, consideration,
capacity, and legality.

2A. Type of contract

Yes. Duncan had a valid contract with Mitsui for employment as credit development
officer. The contract was bilateral because it was a promise for a promise—to work in
exchange for compensation. No performance was necessary. The contract existed as
soon as the promises were exchanged. The contract was valid because the parties had
an agreement, consideration (employment in exchange for payment), capacity
(presumed, especially with businesses and businesspersons), and the agreement was
legal.

3A. Implied contract

Implied contracts are contracts formed by the parties’ conduct rather than by their
words. For an implied contract to exist, the plaintiff must furnish some property or
service to the defendant expecting to be paid, the defendant must know or should know
that the plaintiff expects to be paid, and the defendant must have a chance to reject the
property or service and does not.

4A. Employment manual and written compensation plan

To establish an implied contract in these circumstances, the plaintiff must have
furnished a service to the defendant expecting to be paid, the defendant must have
known that the plaintiff expected to be paid, and the defendant must have had a chance
to reject the service.
Here, Duncan provided service as a credit development officer to Mitsui, who
hired and agreed to pay him for this service and accepted the service as it was
rendered. Presumably, the initial hiring and duties of the position were discussed
between the parties, if not put in writing, and were thus express, not implied. But the
terms set out in the employment manual and written compensation plan were clearly
express, not implied, as indicated by the quote from the plan.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

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6 UNIT THREE: CONTRACTS

AT THE END OF THE CHAPTER

Companies should be able to make or break employment contracts

whenever and however they wish. Companies, especially large corporations, hold all
of the cards with respect to their actual and future employees. Absent statutes and case
law that limits their abilities to break employment contracts on a whim, employees would
have no protections. Employees would face increased uncertainty about the longevity
of their jobs, which ultimately would reduce their productivity. There would be more
turnover in jobs, and more unemployment. Contracts are not made to be broken, but
rather upheld—and that is where the courts come in. The courts must be there to protect
the rights of aggrieved former employees.
Employers, even large corporations, do not “hold all of the cards,” contrary to
popular belief. All companies compete for workers. It would be foolish for companies to
break employment contracts on a whim. After all, it’s costly to train new workers. The
reality is that good workers are highly valued and companies must pay competitive
wages (or more) to keep workers. So, even if companies had no legal constraints about
how they honor their contracts with employees, they have a business reason to honor
those contracts—lower labor costs, greater employee productivity, and ultimately,
higher profits.

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Joli signs and returns a letter from Kerin, in which he said that he had a
book at a certain price. When Kerin delivers the book, Joli sends it back, claiming
that they do not have a contract. Kerin claims they do. What standard determines
whether these parties have a contract? Under the objective theory of contracts, if a
reasonable person would have thought that Joli had accepted Kerin’s offer when she
signed and returned the letter, then a contract was made, and Joli is obligated to buy
the book. This depends, in part, on what was said in the letter and what was said in
response. For instance, did the letter contain a valid offer, and did the response
constitute a valid acceptance? Under any circumstances, the issue is not whether either
party subjectively believed that they did, or did not, have a contract.

2A. Dyna tells Ed that she will pay him $1,000 to set fire to her store, so that
she can collect under a fire insurance policy. Ed sets fire to the store but Dyna
refuses to pay. Can Ed recover? Why or why not? No. This contract, although not
fully executed, is for an illegal purpose and therefore is void. A void contract gives rise

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accessible website, in whole or in part.
 CHAPTER 8: NATURE AND CLASSIFICATION 7

to no legal obligation on the part of any party. A contract that is void is no contract.
There is nothing to enforce.

ANSWERS TO BUSINESS SCENARIOS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

8–1A Unilateral contract

Yes. These parties had a contract. Contests, lotteries, and other competitions for prizes
are offers for contracts. Here, the offer is phrased so that each competitor can accept
only by completing the run. At that point, a contract is formed—a unilateral contract—
binding its sponsor to perform as promised. Rocky did not breach the contract when the
prize was changed. Under the rules, Rocky could change the terms at any time.

8–2A Implied contract

Janine was unconscious or otherwise unable to agree to a contract for the nursing
services she received while she was in the hospital. Under the doctrine of quasi
contract, however, the law will sometimes create a fictional contract in order to prevent
one party from unjustly receiving a benefit at the expense of another. Quasi contract
provides a basis for Nursing Services to recover the value of the services it provided
while Janine was in the hospital.
Nursing Services can recover for the at-home services under an implied
contract because Janine was aware that the services were being provided for her.
Under this type of contract, the conduct of the parties creates and defines the terms.
Janine’s acceptance of the services constitutes her agreement to form a contract, and
she will probably be required to pay Nursing Services in full.

8–3A Contract classification

Yes, Firestorm and Scott had a contract. The letter was a unilateral offer phrased so
that the offeree could accept only by completing the required performance. The contract
was formed when the performance was complete. This was a unilateral contract. Here,
Scott accepted the offer by passing the medical exam. Firestorm breached the contract
when the new crew chief rejected Scott, who had already received the offer and
accepted it. The appropriate remedy would be to allow Scott to attend Firestorm’s
training sessions.

8–4A SPOTLIGHT ON TACO BELL—Implied contract

The court held that Wrench submitted sufficient evidence of an implied contract to
survive Taco Bell’s motion for summary judgment on the issue. “Implied contracts often
arise where one accepts a benefit from another for which compensation is customarily
expected. Thus, where evidence shows that the parties understood that compensation

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accessible website, in whole or in part.
8 UNIT THREE: CONTRACTS

would be paid for services rendered, a promise to pay fair value may be implied, even
if no agreement was reached as to price, duration, or other terms of the contract.”
Here, “Taco Bell concedes that there is sufficient evidence in the record to
support Plaintiff’s allegation that the parties had a basic understanding that if Taco Bell
used the Psycho Chihuahua idea, concept, or image, that Taco Bell would compensate
Plaintiffs for the fair value of such use.” Furthermore, “The cases establish that a plaintiff
may support a claim of implied contract by showing that the plaintiff disclosed an idea
to the defendant at the defendant’s request and the defendant understood that the
plaintiff expected compensation for use of his ideas. Because Taco Bell concedes that
there is sufficient evidence to support such an understanding in this case, Taco Bell’s
assertion that Plaintiffs cannot establish an implied contract must be rejected.”
The court ruled against Wrench on other grounds. Wrench appealed to the U.S.
Court of Appeals for the Fifth Circuit, which agreed with the lower court’s holding on
Wrench’s implied contract claim (but reversed the ruling on the other grounds).

8–5A Quasi contract

The court in this case could impose a quasi contract to avoid the unjust enrichment of
Kim at Kris’s expense. To recover on this basis, one party must confer a benefit on
another party, the other party must appreciate or know of the benefit, and the other
party must retain the benefit under circumstances that would make it inequitable to do
this without paying for it.
Here, Kris asserted that she “loaned” Kim the money that her sister asked for.
The loan conferred a benefit on Kim, who clearly knew of it. Kris’s use of the word “loan”
implied that she gave her sister the money with the expectation of being repaid. These
circumstances met the test for an award to Kris of recovery in quasi contract.
In the actual case on which this problem is based, the court granted a judgment
in Kris’s favor for the repayment of the loans. The court stated, “All equities lie with the
plaintiff and whether or not there is a written contract to support the amount is not
necessarily required. It’s whether or not someone gives something over, pays
something for somebody and it’s inequitable for that person to retain the benefit of that
without returning the money.”

8–6A Interpretation of contracts

A court is bound to give effect to a contract according to the intent of the parties at the
time that they entered into it. This intent is determined by the parties’ expressions—the
words of the contract—and their plain, ordinary meaning. A contract is ambiguous if the
intent of the parties cannot be determined from its language, if it lacks a provision on a
disputed issue, if a term is susceptible to more than one interpretation, or if there is
uncertainty about a provision. If a contract is ambiguous, outside evidence may be
considered, or an ambiguity will be interpreted against the party who drafted it or who
asserts it. A divorce settlement is a contract.

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 CHAPTER 8: NATURE AND CLASSIFICATION 9

In this problem, the type of college expenses that the Millers anticipated are
specified in the JCIP, as is the length of the obligation. But there is ambiguity in the
phrasing. When was Darrell to begin setting funds aside? How much was he to set
aside? Where was he to deposit or invest the funds? Was he to be responsible for the
entire cost of the children’s post-secondary education? In other words, what exactly did
the parties intend? The provision is ambiguous. Lisa, however, did not offer any
evidence to support her asserted interpretation of the provision. Without such evidence,
the ambiguity should be interpreted in favor of Darrell.
In this case, the court ordered Darrell to pay, but on appeal, a state intermediate
appellate court reversed the order.

8–7A CASE PROBLEM WITH SAMPLE ANSWER—Quasi contract

Gutkowski does not have a valid claim for payment, nor should he recover on the basis
of a quasi contract. Quasi contracts are imposed by courts on parties in the interest of
fairness and justice. Usually, a quasi contract is imposed to avoid the unjust enrichment
of one party at the expense of another. Gutkowski was compensated as a consultant.
For him to establish a claim that he is due more compensation based on unjust
enrichment, he must have proof. As it is, he has only his claim that there were
discussions about him being a part owner of YES. Discussions and negotiations are not
a basis for recovery on a quasi contract.
In the actual case on which this problem is based, the court dismissed
Gutkowski’s claim for payment.

8–8A Implied contracts

Yes. Allstate was liable under the homeowner’s policy. A contract that is implied from
the conduct of the parties. This type of contract differs from an express contract in that
the conduct of the parties, rather than their words, creates and defines the terms of the
contract. For an implied contract to exist, a party must furnish a service or property
(which includes money), the party must expect to receive something in return for that
property or service, and the other party must know or should know of that expectation
and had a chance to reject the property or service but did not. Of course, a contract
may be a mix of express and implied terms.
In this problem, the homeowner’s policy was a mix of express and implied terms.
As for the elements showing the existence of the implied terms, the payments for the
premiums on the policy continued after Ralph’s death, but the amounts were paid from
Douglas’s account. Undoubtedly, Douglas expected to receive coverage under the
policy in return for his payments. The insurer Allstate must have known that Douglas
expected the coverage—insurance has long been Allstate’s business, and the company
obviously understands the relationship between the payments of premiums and the
expectation of insurance coverage. And Allstate had the opportunity to cancel the
homeowner’s policy—as it had with Ralph’s auto insurance, which was canceled—but

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10 UNIT THREE: CONTRACTS

did not terminate it.

In the actual case on which this problem is based, the court issued a judgment
in Allstate’s favor on the implied contract issue. The U.S. Court of Appeals for the Sixth
Circuit reversed this judgment—“A reasonable fact-finder could determine that
[Allstate’s] continuation of the premium payments constituted a contract implied with
Douglas.”

8–9A A QUESTION OF ETHICS—Unilateral contracts

1. The court issued a summary judgment in favor of IBM, holding that there
was no contract between the parties because they had not agreed on the commission
arrangement. Jensen appealed to the U.S. Court of Appeals for the Fourth Circuit,
which affirmed the judgment of the lower court. The appellate court acknowledged that
“[a]n employer can make a unilateral offer to its employees, and the offer becomes a
contract when its conditions are fulfilled.” Jensen failed to show that IBM made an offer
here, however, “because the documents on which he relies do not manifest IBM's
willingness to extend any offer to enter into a contract. The terms of IBM's Sales
Incentive Plan make clear that they are not to be construed as an offer that can be
accepted to form a contract. . . .
“[W]e view this case as an effort by Jensen to create an enforceable contract out
of a policy that expressed IBM's contrary intentions. We see IBM's Sales Incentive Plan
as no more than an announcement of a policy expressing its intent to pay incentives in
specified amounts but retaining full discretion to determine amounts until the time that
they are actually paid. Seen in this light, descriptions of the plan did not amount to an
offer to enter into a contract, but the announcement of a nonbinding intention, much like
that in which an employee is told that he will be paid a bonus if the company does well,
without being promised specific amounts.”
2. Citing the quota letter, the court concluded that “IBM did not invite a
bargain or manifest a willingness to enter into a bargain. To the contrary, it manifested
its clear intent to preclude the formation of a contract.” Under the terms displayed on
the intranet and stated in the letter, IBM indicated that Jensen could not rely on the
description of potential commissions in the SIP brochure because “IBM could modify or
cancel the Sales Incentive Plan at any time. . . . Thus, IBM made clear that there were
no conditions that Jensen could satisfy to create a binding contract before IBM decided
to pay him. IBM unambiguously characterized sales commissions as a form of incentive
pay that it intended to make but which it reserved the right to calculate or even not
make, even after sales were closed.” The brochure's reference to the intranet “amounts
to an incorporation by reference to intranet materials that establish a special rate of
commissions in ‘large opportunity’ transactions . . . . These are all terms of the ‘offer’
on which Jensen relies.”

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