Basic Contract Law Principles – Gulisano on Contracts
This article provides a basic overview of contract law. Quite simply, a contract is a promise, or set of promises, which the law will enforce. See Pollock, Pollock’s Principles of Contract, xliv, 610 (13th ed. 1950). A binding contract is formed when there is (a) an offer; (b) the offer is accepted; and (c) there is consideration to support the promise or promises made.
Types of Contracts
Before addressing these elements, it is important to note that contracts can come in different forms. A contract can be express, implied-in-fact, or implied-in-law.
- Express Contract – an agreement manifested by words
- Contract Implied-in-Fact – an agreement manifested by conduct
- Contract Implied-in-law (“quasi-contract”) – not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid an injustice
Offer
The first element of a valid contract requires an “offer.” An offer is a manifestation of an intent to be contractually bound upon acceptance by another party. An offer creates in the offeree the power to form a contract by an appropriate acceptance. Restatement (Second) of Contracts, § 24 (1981) (hereafter referred to as “Restatement”). An offer is not valid until received by the offeree or his agent. Restatement § 68.
With limited exceptions, an offer is generally revocable at any time prior to acceptance. An offer may be revoked by any words that communicate to the offeree that the offeror no longer intends to be bound. Restatement § 42. An offer is also revoked by action that is inconsistent with the intent to be bound once the offeree learns of such inconsistent action.
Acceptance
The second element of a valid contract requires an “acceptance” of the offer. Restatement § 50. Traditionally, the nature of the contract dictated whether the offer could be accepted by a return promise or by actual performance of the promised act. In this way, the law distinguishes between unilateral contracts and bilateral contracts.
Unilateral Contracts – In a unilateral contract, the offer empowers the offeree to only accept by complete performance of the promise. The offeree’s failure to perform does not constitute a breach since no contract is formed until the offeree renders full performance.
Bilateral Contracts – In a bilateral contract, the offers empower the offeree to only accept by return promise. Bilateral contracts are formed upon the giving of the promise to perform an obligation in the future, and failure to fulfill such promise results in breach.
However, under the modern approach, an offer invites acceptance by any means reasonable under the circumstances, unless otherwise indicated by language or circumstances. Restatement § 30(2). This approach reflects the fact that many offers do not specify whether acceptance is to be by full performance or promise.
A contract may be formed even if an offer clearly indicates that acceptance is to be by promise if: the offeree begins to perform, in lieu of making the required promise; and the offeror learns of the commencement of performance and acquiesces to such manner of acceptance. Restatement § 32.
Manner and Notice of Acceptance
Unless the offer indicates otherwise, to accept an offer, the offeree may use any medium that is reasonable under the circumstances or, in non-goods contracts, the same medium as was used to communicate the offer or any other medium “customary in similar transactions at the time and place the offer is received.” Restatement § 65.
The offeror is entitled to notice of the acceptance. Thus, even if the offeree effectively accepts an offer and a contract is formed, failure by the offeree to notify the offeror of the acceptance within a reasonable time may preclude the offerer from enforcing the contract. Restatement § 54 and § 56.
When an Acceptance Becomes Effective
The offeror may specify when an acceptance becomes effective. Restatement § 63. Absent such specification, an acceptance is effective when sent, if sent by reasonable means, e.g., by an authorized medium and with proper postage and correct address. Id.
If an acceptance is sent by means that are not appropriate or reasonable under the circumstances or if it is improperly dispatched, the acceptance will be effective upon receipt. Restatement § 66. However, if the acceptance is seasonably but improperly dispatched, it will still be deemed effective when sent if it is received within the time in which a properly dispatched acceptance would have been received. Restatement § 67.
Consideration
The third element of a valid contract requires “consideration” to support the promises made by the parties. See Pick Kwik Food Stores, Inc. v. Tenser, 407 So. 2d 216, 218 (Fla. 2d DCA 1981) (“A binding contract requires consideration.”). Consideration requires a bargained exchange in which each party incurs a legal detriment. Restatement § 71. Conversely, “[a] mere gratuitous promise of a future gift, lacking consideration, is unenforceable.” Kaufman v. Harder, 354 So. 2d 109, 109 (Fla. 3d DCA 1978).
Bargained Exchange
Consideration is a bargained-for performance or return promise which is given by the promisee in exchange for the promisor’s promise. Consideration need not be furnished by or to the parties themselves as long as it is part of the bargained exchange. Even if the promisor’s promise induced performance or a return promise by the promisee, if such inducement was not sought by the promisor, there is no bargained exchange. In such circumstances, the promise is merely an unenforceable gift.
Legal Detriment
A legal detriment exists where the party engages in an act that the party was not previously obligated – whether statutorily or contractually – to perform; or refrains from exercising a legal right. Under the pre-existing duty rule, a promise regarding a pre-existing obligation to the other party does not constitute a legal detriment.
Illusory Promises
An illusory promise cannot serve as consideration. Restatement § 77. An illusory promise may exist where a promise is subject to a condition which is within the control of the promisor, especially where such condition is related to the contract performance, or when the promisor, at the time of the promise is made, knows that such condition cannot occur.
Promises Enforceable Without Consideration
In very limited circumstances, some types of promises are enforceable without consideration. For example, promises that induce a foreseeable and detrimental change of position by the promisee may be enforceable under the theory of promissory estoppel.
Approaches to Contract Interpretation
“The interpretation of a contract is generally a question of law for the court.” Barone v. Rogers, 930 So. 2d 761, 764 (Fla. 4th DCA 2006) (citation omitted). “However, where the wording of an agreement is ambiguous, its interpretation involves questions of fact, precluding summary disposition.” Id. (citations omitted). “Contracts are to be construed in accordance with the intentions of the parties.” Id. (citation omitted). “The determination of whether there is a meeting of the minds as to essential elements of an ambiguous contract requires a consideration of all of the surrounding circumstances.” Id.
The following rules have developed to aid courts in interpretation:
- Words and conduct of the parties are to be interpreted in light of all circumstances, giving weight to the principal purpose of the parties in making the contract, if such purpose is ascertainable.
- A writing is to be interpreted as a whole, and if multiple writings pertain to the same transaction, all are to be interpreted together.
- Language is to be interpreted in accordance with its general prevailing meaning, if any.
- Technical terms and terms of art are to be given effect when used in relevant transactions.
- Wherever possible, the manifestations of the parties’ intentions are to be interpreted as consistent with each other and with any relevant course of performance, course of dealing or trade usage.
Restatement § 203.