Contract Law

Almost every contract question starts with these three ingredients:

• Offer. A clear proposal showing a willingness to be bound on specific terms. Advertisements are usually treated as invitations to shop, not offers, unless the ad is so clear, definite, and limited that nothing is left to negotiate.
• Acceptance. Agreeing to those exact terms. Changing the terms is normally a counteroffer, which rejects the original.
• Consideration. Each side gives up something of value. A pure gift promise, "I'll give you my old laptop next week", generally is not enforceable, because the other person gave nothing in exchange.

Courts also use an objective test: what would a reasonable person think the words and conduct meant? Your secret intentions do not control.

• Express contract: the terms are actually stated, in writing or out loud, your signed lease.
• Implied contract: created by conduct. Sitting in a barber's chair for a haircut creates an obligation to pay even if price was never discussed out loud.
• Bilateral contract: a promise exchanged for a promise. You promise to pay tuition; the school promises to enroll you.
• Unilateral contract: a promise exchanged for a completed act. A "$100 reward for my lost dog" flyer is accepted by actually returning the dog, not by promising to look.

Some contracts must be in writing to be enforced under a rule called the statute of frauds. Typical examples include contracts for the sale of land, agreements that cannot be performed within one year, and, under the UCC, sales of goods for $500 or more.

Even a well-formed agreement can fail. Capacity means the legal ability to contract. Minors can usually cancel (disaffirm) most contracts, although they remain responsible for the reasonable value of necessities like food, shelter, and medical care. People who cannot understand the transaction may also lack capacity.

Legality means the subject matter itself must be lawful; a court will not enforce an agreement to do something illegal. Courts may also refuse to enforce an unconscionableterm, one so one-sided and unfairly presented that enforcing it would be shocking.

A mutual mistake about a basic fact both sides assumed can void a contract. A one-sided mistake usually does not, unless the other party knew about it and took advantage. Misrepresentation, a false statement of fact that induces the deal, lets the misled party cancel, and fraud can also support damages. Extreme pressure (duress) or abuse of a trusted relationship (undue influence) can also undo a contract.

The Uniform Commercial Code is a model set of commercial rules that every state has adopted in some form. Article 2 governs the sale of goods, movable, tangible items like a phone, a car, or furniture. Services and real estate stay under regular common-law contract rules. Article 2 is more flexible than the common law: a contract can be formed even if some terms are left open, and an acceptance with additional terms does not automatically kill the deal between merchants.

Article 2 also supplies warranties, which are enforceable promises about goods:

• Express warranty: created by a seller's statement of fact, description, or sample, "this battery lasts eight hours."
• Implied warranty of merchantability: from a merchant seller, that the goods are fit for their ordinary purpose. A new toaster should toast.
• Implied warranty of fitness for a particular purpose: when the seller knows you need goods for a specific use and you rely on their advice to choose.

Sellers can limit or disclaim implied warranties, which is why you see "sold as is" on used items, but the disclaimer has to be clear and conspicuous.

Contract remedies try to put the injured party where they would have been if the promise had been kept , not to punish the breaching party. Punitive damages are rarely available for a simple breach.

• Compensatory damages: the difference between what was promised and what was delivered, including reasonably foreseeable extra costs.
• Consequential damages: further losses the breaching party had reason to know about.
• Reliance damages: money spent in reasonable reliance on the promise.
• Restitution: giving back a benefit so the breaching party is not unjustly enriched.
• Specific performance: an order to actually go through with the deal. Used only when money is inadequate, typically for land or genuinely unique items.
• Rescission: canceling the contract and returning both sides to where they started.

The injured party also has a duty to mitigate: you must take reasonable steps to limit your own losses instead of letting them pile up.