Contracts
- Nature & Terminology
excerpted from West.Bus.Law 8th
edition
The noted legal scholar Roscoe Pound once said that
[t]he social order rests upon the stability and predictability
of conduct, of which keeping promises is a large item.(1) 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.(2) Put simply, a contract
is an agreement (based on a promise or an exchange of promises)
that can be enforced in court.
Profile: Roscoe Pound
Profile: Arthur L. Corbin (1874-1967)
Like other types of law, contract law reflects our social values,
interests, and expectations at a given point in time. It shows,
for example, to what extent our society allows people to make
promises or commitments that are legally binding. It distinguishes
between promises that create only moral obligations (such as a
promise to take a friend to lunch) and promises that are legally
binding (such as a promise to pay for merchandise purchased).
Contract law also shows what excuses our society accepts for breaking
certain types of promises. In addition, it shows what promises
are considered to be contrary to public policyagainst the interests
of society as a wholeand therefore legally invalid. When a promise
is made by a child or a mentally incompetent person, or on the
basis of false information, a question will arise as to whether
the promise should be enforced. Resolving such questions is the
essence of contract law.
The common law governs all contracts except when it has been modified
or replaced by statutory law, such as the Uniform Commercial Code
(UCC),(3) or administrative agency regulations. Contracts relating
to services, real estate, employment, insurance, and so on generally
are governed by the common law of contracts. Contracts for the
sale of goods, however, are governed by the UCCto the extent that
the UCC has modified general contract law. The relationship between
general contract law and the law governing sales of goods will
be explored in detail in Chapter 21. In the discussion of general
contract law that follows, we indicate in footnotes the areas
in which the UCC has significantly altered common law contract
principles.
Profile: Restatement (Second) of Contracts
The law encourages competent parties to form contracts for lawful
objectives. Indeed, no aspect of modern life is entirely free
of contractual relationships. Even the ordinary consumer in his
or her daily activities acquires rights and obligations based
on contract law. You acquire rights and obligations, for example,
when you borrow money to make a purchase or when you buy a CD-ROM
or a house. Contract law is designed to provide stability and
predictability, as well as certainty, for both buyers and sellers
in the marketplace.
Contract law deals with, among other things, the formation and
enforcement of agreements between parties (in Latin, pacta sunt
servandaagreements shall be kept). By supplying procedures for
enforcing private contractual agreements, contract law provides
an essential condition for the existence of a market economy.
Without a legal framework of reasonably assured expectations within
which to plan and venture, businesspersons would be able to rely
only on the good faith of others. Duty and good faith are usually
sufficient, but when price changes or adverse economic factors
make it costly to comply with a promise, these elements may not
be enough. Contract law is necessary to ensure compliance with
a promise or to entitle the innocent party to some form of relief.
As a general rule, the law recognizes everyones ability to enter
freely into contractual arrangements. This recognition is called
freedom of contract, a freedom protected by the U.S. Constitution
in Article I, Section 10.
Business Law in Action: Freedom of Contract
Because freedom of contract is a strongly supported public policy,
courts rarely interfere with contracts that have been voluntarily
made. Of course, as in other areas of the law, there are many
exceptions to the general rule that contracts voluntarily negotiated
will be enforced. For example, illegal bargains, agreements unreasonably
in restraint of trade, and certain unfair contracts made between
one party with a great amount of bargaining power and another
with little power are generally not enforced. In addition, certain
contracts with consumers, as well as certain clauses within those
contracts, may not be enforceable if they are contrary to public
policy, fairness, and justice (see Chapter 17 for a discussion
of contracts contrary to public policy). These exceptions provide
freedom from contract for persons who may have been forced into
making contracts unfavorable to themselves.
Despite these and other exceptions, however, freedom of contract
is a highly valued principle in American law. In accordance with
this principle, the failure to read a contract is normally not
a defense to the contracts enforcement.
The many topics that will be discussed in the following chapters
on contract law require an understanding of the basic requirements
of a contract and the way in which a contract is created. The
following list briefly describes the basic requirements of a contract.
Each requirement will be explained more fully in subsequent chapters.
1. Agreement. An agreement to form a contract includes
an offer and an acceptance. One party must offer to
enter into a legal agreement, and another party must
accept the terms of the offer.
2. Consideration. Any promises made by parties must be
supported by legally sufficient and bargained-for
consideration (something of value received or
promised, such as money, to convince a person to make
a deal).
3. Contractual capacity. Both parties entering into the
contract must have the contractual capacity to do so;
the law must recognize them as possessing
characteristics that qualify them as competent parties.
4. Legality. The contracts purpose must be to
accomplish some goal that is legal and not against
public policy.
These four requirements constitute what are normally known as
the elements of a valid contract. If any of these elements is
lacking, no contract will have been formed.
Even if all of these elements exist, however, a contract may be
unenforceable if the following requirements are not met. These
requirements typically are raised as defenses to the enforceability
of an otherwise valid contract.
1. Genuineness of assent. The apparent consent of both
parties must be genuine. For example, if a contract
was formed as a result of fraud, undue influence,
mistake, or duress, the contract may not be enforceable.
2. Form. The contract must be in whatever form the law
requires; for example, some contracts must be in writing
to be enforceable.
Sometimes, parties claim that they should not be bound in contract
because they did not intend to form an agreement that would be
legally binding. Although the element of intent is of prime importance
in determining whether a contract has been formed, it is not the
partys subjective intent that a court looks to in deciding the
issue. In contract law, intent is determined by what is called
the objective theory of contracts, not by the personal or subjective
intent, or belief, of a party. The theory is that 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 partys own secret, subjective intentions. Objective
facts include (1) what the party said when entering into the contract,
(2) how the party acted or appeared (intent may be manifested
by conduct as well as by oral or written words), and (3) the circumstances
surrounding the transaction.
Consider an example. Jaffe has just purchased a new car for $28,000.
A number of his neighbors are admiring his car, and one neighbor,
Logan, states that he would like to own a car exactly like Jaffes.
Jaffe, in front of all of his neighbors, says to Logan, Ill sell
you this car for $20,000 in cash. Logan agrees to buy the car,
and they put the agreement in writing and sign it. Jaffe immediately
tells everyone his agreement to sell the car to Logan was only
a joke. Is the agreement legally binding? In other words, do Jaffe
and Logan have a contract?
The answer depends on whether the circumstances (Jaffes just having
purchased a new car, the price of the new car, and the fact that
Jaffe agreed in writing to sell the car) and Jaffes words would,
to a reasonable person, manifest Jaffes intention to form a contract.
It is not Jaffes inner belief or intent to make a joke that determines
the answer. If a person in Logans position could reasonably believe
that Jaffe intended to form the contract with him, Jaffe would
be legally required to sell the car to Logan.
There are many types of contracts. The categories into which contracts
are placed involve legal distinctions as to formation, enforceability,
and performance.
BILATERAL VERSUS UNILATERAL CONTRACTS
Every contract involves at least two parties. The offeror is the
party making the offer. The offeree is the party to whom the offer
is made. Whether the contract is classified as unilateral or bilateral
depends on what the offeree must do to accept the offer and to
bind the offeror to a contract. If to accept the offer the offeree
must only promise to perform, the contract is a bilateral contract.
Hence, a bilateral contract is a promise for a promise. No performance,
such as payment of money or delivery of goods, need take place
for a bilateral contract to be formed. The contract comes into
existence at the moment the promises are exchanged.
In contrast, if the offer is phrased so that the offeree can accept
only by completing the contract performance, the contract is a
unilateral contract. Hence, a unilateral contract is a promise
for an act.(4) A classic example of a unilateral contract is as
follows: OMalley says to Parker, If you carry this package across
the Brooklyn Bridge, Ill give you $10. Only upon Parkers complete
crossing with the package does she fully accept OMalleys offer
to pay $10. If she chooses not to undertake the walk, there are
no legal consequences. Contests, lotteries, and other competitions
involving prizes are examples of offers for unilateral contracts.
If a person complies with the rules of the contestsuch as by submitting
the right lottery number at the right place and timea unilateral
contract is formed, binding the organization offering the prize
to a contract to perform as promised in the offer.
Image: Bilateral Contract
A problem arises in unilateral contracts when the promisor (the
one making the promise) attempts to revoke (cancel) the offer
after the promisee (the one to whom the promise was made) has
begun performance but before the act has been completed. The promisee
can accept the offer only upon full performance, and under traditional
contract principles, an offer may be revoked at any time before
the offer is accepted. The modern-day view, however, is that an
offer to form a unilateral contract becomes irrevocable once performance
has begun. Thus, even though the offer has not yet been accepted,
the offeror is prohibited from revoking it for a reasonable time
period. For example, in the Brooklyn Bridge example, suppose that
Parker is walking across the bridge and has only three yards to
go when OMalley calls out to her, I revoke my offer. Under traditional
contract law, OMalleys revocation would terminate the offer. Under
the modern view of unilateral contracts, however, OMalley will
not be able to revoke his offer because Parker has undertaken
performance and walked all but three yards of the bridge. In these
circumstances, Parker can finish crossing the bridge and bind
OMalley to the contract.
EXPRESS VERSUS IMPLIED CONTRACTS
An express contract is one in which the terms of the agreement
are fully and explicitly stated in words, oral or written. A signed
lease for an apartment or a house is an express written contract.
If a classmate calls you on the phone and agrees to buy your textbooks
from last semester for $50, an express oral contract has been
made. A contract that is implied from the conduct of the parties
is called an implied-in-fact contract or an implied contract.
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. (Note that a contract may be
a mixture of an express contract and an implied-in-fact contract.
In other words, a contract may contain some express terms, while
others are implied.) Normally, if the following conditions exist,
a court will hold that an implied contract was formed:
1. The plaintiff furnished some service or property.
2. The plaintiff expected to be paid for that service or
property, and the defendant knew or should have
known that payment was expected.
3. The defendant had a chance to reject the services or
property and did not.
For example, suppose that you need an accountant to fill out your
tax return this year. You look through the Yellow Pages and find
an accountant at an office in your neighborhood, so you drop by
to see her. You go into the accountants office and explain your
problem, and she tells you what her fees are. The next day you
return, giving her secretary all the necessary information and
documentscanceled checks, W-2 forms, and so on. You say nothing
expressly to the secretary; rather, you walk out the door. In
this situation, you have entered into an implied-in-fact contract
to pay the accountant the usual and reasonable fees for her services.
The contract is implied by your conduct and by her conduct. She
expects to be paid for completing your tax return, and by bringing
in the records she will need to do the work, you have implied
an intent to pay her.
QUASI CONTRACTSCONTRACTS IMPLIED IN LAW
Quasi contracts, or contracts implied in law, are wholly different
from actual contracts. Whereas express contracts and implied-in-fact
contracts are actual contracts formed by the words or conduct
of the parties, quasi contracts are fictional contracts created
by courts and imposed on parties in the interests of fairness
and justice. Quasi contracts are therefore equitable, rather than
contractual, in nature. Usually, quasi contracts are imposed to
avoid the unjust enrichment of one party at the expense of another.
Under the doctrine of quasi contract, a plaintiff may recover
in quantum meruit,(5) a Latin phrase meaning as much as he deserves.
Quantum meruit essentially describes the extent of compensation
owed under a contract implied in law.
For example, suppose that a vacationing doctor is driving down
the highway and comes upon Potter lying unconscious on the side
of the road. The doctor renders medical aid that saves Potters
life. Although the injured, unconscious Potter did not solicit
the medical aid and was not aware that the aid had been rendered,
Potter received a valuable benefit, and the requirements for a
quasi contract were fulfilled. In such a situation, the law will
impose a quasi contract, and Potter normally will have to pay
the doctor for the reasonable value of the medical services rendered.
The issue in the following case is whether the defendant was unjustly
enriched by the plaintiffs work.
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Case 12.1
SERVICEMASTER OF ST. CLOUD V.
GAB BUSINESS SERVICES, INC.
Court of Appeals of Minnesota, 1995.
530 N.W.2d 558.
HISTORICAL AND INTERNATIONAL SETTING The United States leads
the world in insurance coverage. For example, more than 3,500
American companies offer property insurance (coverage for cars
and homes, for instance, against fire, theft, and other catastrophes).
During the early 1990s, after a string of costly hurricanes, earthquakes,
and fires, insurance companies worldwide began to stop insuring
against certain risks and even began to stop insuring altogether
in geographical areas where, they complained, they could not charge
rates high enough to make a profit.
BACKGROUND AND FACTS Nancy Mollinedos house was damaged in
a fire. Her insurance company, Sentry Insurance, hired GAB Business
Services, Inc., an independent insurance claims adjuster, to investigate
the claim. GAB hired ServiceMaster of St. Cloud to repair the
damage. While ServiceMaster was working on the house, Sentry decided
to deny Mollinedos claim on the ground that she had deliberately
set the fire. Sentry allowed the repairs to be continued, however,
without informing either ServiceMaster or GAB that it would deny
the claim. When the work was done, Sentry sent a check for the
amount ServiceMaster charged for the work (a little more than
$30,000) to the Federal Housing Administration (FHA), Mollinedos
mortgagee,(a) as required under the insurance policys mortgagee
clause. Sentry received in return a partial mortgage on the house.
ServiceMaster received nothing. ServiceMaster filed a suit in
a Minnesota state court against Sentry and GAB for, among other
things, unjust enrichment. The court awarded damages to ServiceMaster.
Sentry appealed.
IN THE LANGUAGE OF THE COURT
HARTEN, Judge.
* * * *
To establish its unjust enrichment claim, ServiceMaster had to
show that Sentry knowingly received something of value, while
not being entitled to the benefit, and under circumstances that
would make it unjust to permit its retention. * * *
* * * Sentry * * * contends that it did not receive a benefit
here; rather, it suffered a loss because it had to pay out on
the claim. * * *
ServiceMaster responds that Sentry did benefit from the repairs.
In return for its payment to FHA, Sentry received a partial mortgage.
ServiceMaster claims that the value of this property interest
held by Sentry was increased by the repairs, which point [was]
conceded. ServiceMaster also argues that Sentrys receipt of this
benefit was unjust in light of the evidence that Sentry allowed
ServiceMaster to continue the repairs long after Sentry suspected
that Mollinedos claim would be denied. ServiceMaster notes that
the [trial court] * * * found that Sentrys actions were unlawful
and, thus, unjust.
* * * *
* * * We conclude that the trial courts findings with respect
to the unjust enrichment claim are not clearly erroneous.
DECISION AND REMEDY The Court of Appeals of Minnesota, concluding
that Sentry had been unjustly enriched by the work performed by
ServiceMaster, affirmed the award of the trial court.
Full text of case
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A LIMITATION ON QUASI CONTRACTS Although quasi contracts exist
to prevent unjust enrichment, the party obtaining the unjust enrichment
is not liable in some situations. Basically, the quasi-contractual
principle cannot be invoked by a party who has conferred a benefit
on someone else unnecessarily or as a result of misconduct or
negligence.
Consider the following example. You take your car to the local
car wash and ask to have it run through the washer and to have
the gas tank filled. While it is being washed, you go to a nearby
shopping center for two hours. In the meantime, one of the workers
at the car wash has mistakenly believed that your car is the one
that he is supposed to hand wax. When you come back, you are presented
with a bill for a full tank of gas, a wash job, and a hand wax.
Clearly, a benefit has been conferred on you. But this benefit
has been conferred because of a mistake by the car-wash employee.
You have not been unjustly enriched under these circumstances.
People cannot normally be forced to pay for benefits thrust upon
them.
WHEN AN ACTUAL CONTRACT EXISTS The doctrine of quasi contract
generally cannot be used when there is an actual contract that
covers the area in controversy. For example, Bateman contracts
with Camodeca to deliver a furnace to a building owned by Jones.
Bateman delivers the furnace, but Camodeca never pays Bateman.
Jones has been unjustly enriched in this situation, to be sure.
Bateman, however, cannot recover from Jones in quasi contract,
because Bateman had an actual contract with Camodeca. Bateman
already has a remedyhe can sue for breach of contract to recover
the price of the furnace from Camodeca. No quasi contract need
be imposed by the court in this instance to achieve justice. In
the following classic case, the court had to decide whether recovery
in quasi contract should be allowed in view of the fact that an
express contract covered the area in controversy.
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Case 12.2
INDUSTRIAL LIFT TRUCK SERVICE CORP. v. MITSUBISHI INTERNATIONAL
CORP.
Appellate Court of Illinois,
First District, Fourth Division, 1982.
104 Ill.App.3d 357, 432 N.E.2d 999, 60 Ill.Dec. 100.
COMPANY PROFILE The Mitsubishi Group is one of Japans leading
industrial groups and the fourth largest diversified service company
in the world, with sales of nearly $150 billion. Founded in 1870
by Yataro Iwasaki, Mitsubishi diversified over the next thirty
years into mining, banking, shipbuilding, railroads, and Japanese
real estate. In 1918, the Mitsubishi conglomerate set up Mitsubishi
Trading Corporation as the purchasing, sales, and management arm
of the group. Thirty-six years later, Mitsubishi Trading established
Mitsubishi International Corporation, which has become the leading
exporter of U.S. goods into Japan. Mitsubishi Trading was renamed
Mitsubishi Corporation in 1971.
BACKGROUND AND FACTS In 1973 and again in 1976, an agreement
was executed between Industrial Lift Truck Service Corporation
(IL) and Mitsubishi International Corporation calling for IL to
purchase forklift trucks from Mitsubishi and to use its best efforts
to service and sell the trucks. The agreement also allowed Mitsubishi
to terminate the agreement without just cause by giving ninety
days notice. From 1973 to 1977, IL allegedly became the nations
largest dealer of Mitsubishi forklift trucks. During this period,
IL made design changes in the trucks to better suit the American
market, design changes that Mitsubishi did not request but later
incorporated into the trucks it sold to other dealers. In 1978,
Mitsubishi terminated the agreement. IL sued under quasi-contractual
principles to recover the benefits conferred on Mitsubishi by
the design changes. The suit was dismissed, and IL appealed.
IN THE LANGUAGE OF THE COURT
LINN, Justice.
* * * *
In the present case, plaintiff obviously made the design changes
with a view to being compensated pursuant to the contract terms.
By its own admission, the design changes allowed plaintiff to
become one of the nations largest dealers in defendants product.
When the changes were made, plaintiff knew the risk involved.
It knew the contract could be terminated as it was terminated,
and thus knew when it made the changes that it might not be compensated
under the contract to the extent it hoped to be compensated. Now
that a situation plaintiff knew could occur has occurred, plaintiff
seeks to shift a risk it assumed in light of the contract to defendant.
In essence, plaintiff is seeking to use
quasi-contract as a means to circumvent the realities of a contract
freely entered into.
* * * *
The contract defined the entire relationship of the parties with
respect to its general subject matterthe sale and servicing of
defendants products. Plaintiffs attempt here to bring a quasi-contract
action is nothing more than an attempt to unilaterally amend the
agreement in a manner prohibited by the agreement. In such circumstances,
the benefit received by defendant can hardly be considered unjust.
* * * Defendant had a right to assume that the contract defined
the entire relationship of the parties with respect to all matters
related to defendants product. Defendant had a right to assume,
absent a valid amendment to the agreement, that it should not
have to compensate plaintiff for any acts done in relation to
the subject matter of the contract except pursuant to the contract
terms.
DECISION AND REMEDY The existence of the specific contract
barred the plaintiffs action in quasi contract, and the reviewing
court held that the plaintiffs action in quasi contract was properly
dismissed.
Full text of case
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FORMAL VERSUS INFORMAL CONTRACTS
Formal contracts are contracts that require a special form or
method of creation (formation) to be enforceable. One type of
formal contract is the contract under seal, a formalized writing
with a special seal attached. The seal may be actual (made of
wax or some other durable substance) or impressed on the paper
or indicated simply by the word seal or the letters L.S. at the
end of the document. L.S. stands for locus sigilli and means the
place for the seal.(6)
A written contract may be considered sealed if the promisor adopts
a seal already on it. A standard form contract purchased at the
local office supply store, for example, may have the word seal
(or something else that qualifies as a seal) printed next to the
blanks intended for the signatures. Unless the parties who sign
the form indicate a contrary intention, when they sign the form,
they adopt the seal.
Informal contracts include all other contracts. Such contracts
are also called simple contracts. No special form is required
(except for certain types of contracts that must be in writing),
as the contracts are usually based on their substance rather than
their form.
EXECUTED VERSUS EXECUTORY CONTRACTS
Contracts are also classified according to the degree to which
they have been performed. A contract that has been fully performed
on both sides is called an executed contract. A contract that
has not been fully performed on either side is called an executory
contract. If one party has fully performed but the other has not,
the contract is said to be executed on the one side and executory
on the other, but the contract is still classified as executory.
For example, assume you agree to buy ten tons of coal from the
Northern Coal Company. Further assume that Northern has delivered
the coal to your steel mill, where it is now being burned. At
this point, the contract is executed on the part of Northern and
executory on your part. After you pay Northern for the coal, the
contract will be executed on both sides.
VALID, VOID, VOIDABLE, AND UNENFORCEABLE CONTRACTS
A valid contract has the elements necessary to entitle at least
one of the parties to enforce it in court. Those elements, as
mentioned earlier, consist of (1) an agreement, consisting of
an offer and an acceptance of that offer, (2) supported by legally
sufficient consideration, (3) made by parties who have the legal
capacity to enter
into the contract, and (4) made for a legal purpose.
A void contract is no contract at all. The terms void and contract
are contradictory. A void contract produces no legal obligations
on the part of any of the parties. For example, a contract can
be void because the purpose of the contract was illegal.
A voidable contract is a valid contract but one that can be avoided
at the option of one or both of the parties. The party having
the option can elect either to avoid any duty to perform or to
ratify (make valid) the contract. If the contract is avoided,
both parties are released from it. If it is ratified, both parties
must fully perform their respective legal obligations.
As a general rule, but subject to exceptions, contracts made by
minors are voidable at the option of the minor (see Chapter 15).
Contracts entered into under fraudulent conditions are voidable
at the option of the defrauded party. In addition, contracts entered
into under duress or undue influence are voidable (see Chapter
16).
An unenforceable contract is one that cannot be enforced because
of certain legal defenses against it. It is not unenforceable
because a party failed to satisfy a legal requirement of the contract;
rather, it is a valid contract rendered unenforceable by some
statute or law. For example, certain contracts must be in writing
(see Chapter 17), and if they are not, they will not be enforceable
except in certain exceptional circumstances.
Concept Summary 12-1
Sometimes parties agree that a contract has been formed but disagree
on the meaning or the legal effect of the contract. Common law
rules of contract interpretation have evolved over time to provide
the courts with guidelines for deciding such disputes..
THE PLAIN MEANING RULE
When the writing is clear and unequivocal, a court will enforce
it according to its plain terms. This is sometimes referred to
as the plain meaning rule. Under this rule, if a contracts words
appear to be clear and unambiguous, a court cannot consider extrinsic
evidence, which is any evidence not contained in the document
itself. If a contracts terms are unclear or ambiguous, however,
extrinsic evidence may be admissible to clarify the meaning of
the contract. The admissibility of such evidence can significantly
affect the courts interpretation of ambiguous contractual provisions
and thus the outcome of litigation.
Ethical Perspective: The Equitable Remedy of Quasi Contract
INTERPRETATION OF AMBIGUOUS TERMS
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. This is the primary purpose of
the rules of interpretationto determine the parties intent from
the language used in their agreement and to give effect to that
intent. Usually, a court will not make or remake a contract, nor
will it interpret the language according to what the parties claim
their intent was when they made it. The following rules are used
by the courts in interpreting ambiguous contractual terms:
1. Insofar as possible, a reasonable, lawful, and effective
meaning will be given to all of a contracts terms.
2. A contract will be interpreted as a whole; individual,
specific clauses will be considered subordinate to the
contracts general intent. All writings that are a part of
the same transaction will be interpreted together.
3. Terms that were the subject of separate negotiation will
be given greater consideration than standardized terms
and terms that were not negotiated separately.
4. A word will be given its ordinary, commonly accepted
meaning, and a technical word or term will be given its
technical meaning, unless the parties clearly intended
something else.
5. Specific and exact wording will be given greater
consideration than general language.
6. Written or typewritten terms prevail over preprinted
ones.
7. Because a contract should be drafted in clear and
unambiguous language, a party who uses ambiguous
expressions is held to be responsible for the
ambiguities. Thus, when the language has more than
one meaning, it will be interpreted against the party
who drafted the contract.
8. Evidence of trade usage, prior dealing, and course of
performance may be admitted to clarify the meaning of
an ambiguously worded contract. (These terms are
defined and discussed in Chapter 21.) When
considering custom and usage, a court will look at what
is common to the particular business or industry and to
the locale in which the contract was made or is to be
performed.
In the following case, the court applies a principle in harmony
with the rule that when a contract is interpreted, doubts about
the meaning of any of the terms are resolved against the party
who drafted the contract.
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Case 12.3
JONES, WALDO, HOLBROOK & McDONOUGH v. DAWSON
Supreme Court of Utah, 1996.
923 P.2d 1366
BACKGROUND AND FACTS Jerilyn Dawson hired Michael Shaw of the
law firm of Jones, Waldo, Holbrook, and McDonough to represent
her in her divorce. Dawson signed an agreement to pay the attorneys
fees. The agreement did not include an estimate of how much the
divorce would cost. When Dawson failed to pay, the firm filed
a suit in a Utah state court to collect, asking for an award of
more than $43,000. During the trial, Shaw testified that he had
told Dawson the divorce would cost something in the nature of
$15,000 to $18,000. The court awarded the firm mostbut not allof
what it sought. Both parties appealed: Dawson contended that the
award was too high, and the firm complained that it was too low.
IN THE LANGUAGE OF THE COURT
HOWE, Justice:
* * * *
* * * It is the general rule that in construing [interpreting
the meaning of] a contract between attorney and client, doubts
are resolved against the attorney and the construction adopted
which is favorable to the client. * * * The rule that doubts are
to be resolved against the attorney comports with the general
rule of contract interpretation that ambiguous language is to
be construed against the drafter * * * .
[In this] case, the written * * * agreement was silent as to whether
the parties intended that fees be capped. If a cap was agreed
to, it was by virtue of a subsequent oral agreement. * * * We
are persuaded that the foregoing rules of interpretation should
apply even though the agreement, if any, was orally made. Therefore,
* * * Shaws statement to his client that she could count on not
more than $18,000 must be construed against him and held binding.
DECISION AND REMEDY The Utah Supreme Court held in part that
the attorneys oral statement capped the amount of the fees to
which the firm was entitled and reduced the award to $18,000.
Full text of case
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teaching of contract law, you can peruse a news group about contracts
provided you subscribe to it. To subscribe by e-mail, contact:
listserv@austin.onu.edu
Subject <anything>
Message: Subscribe Contracts <Your Name>
The Lectric Law Library provides information on contract law,
including a definition of a contract, the elements required for
a contract, and so on. Go to
http://www.lectlaw.com
Then go to the Laypeoples Law Lounge, and scroll down to Contracts.
Findlaws directory of law-related Web sites offers numerous
links to aspects of contract law. Findlaws URL is
http://findlaw.com/
Look in their index of legal subjects for Contracts, and you will
find information ranging from a Laymans Guide to Drafting and
Signing Contracts to contract law in cyberspace to sample contract
forms.
The Law Offices URL is
http://www.thelawoffice.com/
Select the topic of Business Law from the USA Legal Topics list
in the left-hand column. Go to Guide to Business Law and then
to Contracts.
Law Guru, which allows you to access more than 160 legal search
engines and indexes from a single location, can lead you to other
sources on contract law. Go to
http://lawguru.com/lawlinks.html
Cornell Universitys School of Law provides links to online
sources of law, including contract law, at
http://www.law.cornell.edu/topics/contracts.html
If you want to do further searching, try the Internet addresses
privided in Chapter 1s Accessing the Internet feature for general
sources of American law. Many of them include links to contract
law sources. As mentioned in the Accessing the Internet section
at the end of Chapter 3, decisions of the courts in several states
are now online. Refer to that section for the URLs to use to access
relevant site
Terms and Concepts to Review
( To review the Glossary definition of a term, select that term.)
bilateral contract
contract
contract under seal
executed contract
executory contract
express contract
formal contract
implied-in-fact contract
informal contract
objective theory of contracts
offeree
offeror
promise
promisee
promisor
quantum meruit
quasi contract
unenforceable contract
unilateral contract
valid contract
void contract
voidable contract
Questions and Case Problems
A Question of Ethics
Contracts: Interactive Learning Lab
Interactive Study Guide