Chapter Five | Contracts Overview

Definition Of A Contract

A contract may best be defined as an enforceable promise. A contract may be oral or it may be in writing. Professor Williston, a remarkable teacher and legal scholar of contracts in the last century, noted: “A contract is a promise, or a set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” A promise is an undertaking that something either will or will not happen in the future. The term “contract” may also used by both laymen and lawyers to refer to a document in which the terms of a specific agreement are written.

Every contract involves at least two parties: the offeror (the party who makes an offer) and the offeree (the party to whom the offer is made). The offeror promises to do or to refrain from doing something.

Requirements of a Valid Contract

This discussion of contracts is not meant to be exhaustive. Rather, this text discusses contracts in the larger context of the legal, social, and regulatory environment of business from a managerial standpoint.

The following are the four basic elements of a valid contract:

  • An agreement, consisting of an offer and an accep­tance. Whether by words or actions, or a combination of both, the parties must form or come to an agreement. An essential prerequisite to the formation of a contract is the mutual manifestation of assent (agreement) to the same terms. This is sometimes called the “meeting of the minds” or “consensus ad idem” in Latin.
  • Consideration is defined as “something bar­gained for in return for a promise.” Today, courts focus especially on the concept of bargain in deciding if a particular promise should be enforced.
  • Legal capacity of the parties. Both the offeror and the offeree must have the contrac­tual capacity to enter into a contract. Contractual capacity may involve issues such as age (so called minors’ contracts) and mental state (e.g., persons suffering from senility or Alzheimer’s disease), and may involve issues such as fraud, undue influence, or duress.
  • Legal purpose. A contract cannot be formed for an illegal or immoral purpose, cannot violate a statute, or be in violation of “public policy.”

In addition, there are two “outside” factors that may make a contract unenforceable should one of the parties seek its enforcement in a court:

The Statute of Frauds requires that certain types of contracts must be in writing to be enforceable.

The Statute of Limitations prescribes the time period during which a party must sue for breach of contract or to enforce contractual rights.

Classifications of Contracts

Express Contract

An express contract is one in which all of the essential terms of the agreement are found in words, either orally or in writing. A brief word about oral contracts is appropriate. Strictly speaking, most contracts are not required to be in writing, unless the Statute of Frauds applies. However, attempting to enforce an oral contract may provide basic proof prob­lems for the litigants and for a court. Oral proof is valuable and probative, and in many cases, may be the only proof available. However, if parties’ oral testimony conflicts, in the absence of written proof, a court may be required to decide a dispute on the basis of credibility, or believability of witness­es. The words of humorist Will Rogers are quite appropriate: “An oral contract is not worth the paper it’s printed on!”

Implied Contract (Implied In Fact)

The following four steps generally establish an implied in fact contract:

  • Plaintiff furnished some service, goods, or property to the defendant;
  • Plaintiff expected to be paid for the service, goods, or property;
  • Defendant knew or should have known that payment was expected; and
  • Defendant had the opportunity to reject the service, property, or goods and did not do so.

An implied in fact contract is created by conduct, rather than words. An implied in fact contract exists where facts and circumstances indicate that a contract or an agreement has been entered into. Every morning for a month, Freddy Glotz opens his front door and notices that the Ace Milk Company has delivered four bottles of milk. Freddy brings the full bottles into the kitchen, uses their contents, and leaves the empty bottles at the door. At the end of a one-month period, Freddy receives a bill for $120, representing $1 for each bottle of milk. Freddy refus­es to pay the bill stating that “no contract was entered into because I had never promised to pay for the milk.” Evaluate. Was there an express contract? Was there an implied contract? What could Glotz have done so that no implied contract would be found by a court?

The following case discusses the creation of an implied in fact contract and the obligation of the defendant, Caton, to pay for a service, despite the fact that he claimed he had no intention to do so. Pay close attention why the court inferred Caton’s promise to pay for the wall. This is also an important case relating to silence as the basis of creating an obligation in the area of contract law.


Case Summary

Day v. Caton

119 Mass. 513 (1876)

Background and Facts

Plaintiff Day owned a vacant lot that was next to defendant Caton’s vacant lot. Day decided to build a brick wall between the adjoining lots. The evidence indicated that Caton knew the wall was being built. Caton claimed that there was no express agreement between him and Day to pay for a portion of the wall, and that his silence and subsequent “use” of the wall did not raise an implied promise to pay anything for it. In the trial court, the jury found for the plaintiff, Day. Caton appealed the decision of the trial court to the Supreme Judicial Court of Massachusetts in order to have the judgment overruled.


The ruling that a promise to pay for the wall would not be implied from the fact that the plaintiff, with the defendant’s knowledge, built the wall, and that the defendant used it, was substantially in accordance with the request of the defendant, is conceded to have been correct.
The defendant, however, contends that the presiding judge incorrectly ruled that such promise might be inferred from the fact that the plaintiff undertook and completed the building of the wall with the expectation that the defendant would pay him for it, the defendant having reason to know that the plaintiff was acting with that expectation, and allowed him thus to act without objection.

The fact that the plaintiff expected to be paid for the work would certainly not be sufficient of itself to establish the existence of a contract, when the question between the parties was whether one was made. It must be shown that in some manner the party sought to be charged assented to it. If a party, however, voluntarily accepts and avails himself of valuable services rendered for his benefit, when he has the option whether to accept or reject them, even if there is no distinct proof that they were rendered by his authority or request, a promise to pay for them may be inferred. His knowledge that they were valuable, and his exercise of the option to avail himself of them, justify this inference. And when one stands by in silence, and sees valuable services rendered upon his real estate by the erection of a structure (of which he must necessarily avail himself afterwards in his proper use thereof), such silence, accom­pa­nied with the knowledge on his part that the party rendering services expects payment therefore, may fairly be treated as evidence of an acceptance of it, and as tending to show an agreement to pay for it.

* * * * *

If silence may be interpreted as assent where a proposition is made to one which he is bound to deny or admit, so also it may be if he is silent in the face of facts which fairly call upon him to speak.

If a person sees a laborer day-after-day at work in his field doing services, which must of necessity insure to his benefit, knowing that the laborer expected pay for his work when it was perfectly easy to notify him if his services were not wanted, even if a request were not expressly proved, such a request, either previous to or contemporane­ous with the performance of the services, might fairly be inferred. But if the fact was merely brought to his attention upon a single occasion and casually, if he had little opportunity to notify the other that he did not desire the work and should not pay for it, or could only do so at the expense of much time and trouble, the same inference might not be made. The circumstances of each case would necessarily determine whether silence with knowledge that another was doing valuable work for his benefit and with the expectation of payment indicated that consent which would give rise to the inference of a contract. The question would be one for the jury, and to them it was properly submitted in the case before us by the presiding judge.

Implied In Law (Also Called Quasi-Contract)

An implied in law contract is not a true contract created by the parties, but is an obligation imposed on the parties in equity in order to “do justice” and to avoid unjust enrichment. A quasi-contract may be created where one person confers a benefit on another who retains the benefit, and where it would be unjust not to require that person to pay at least something for the benefit. Recovery is generally based on the reasonable value of the services received by the defendant – in some cases, not including the profit of the person conferring the benefit. This remedy is termed quantum meruit.


While Ma and Pa Ferg are on a week’s vacation in Hoboken, the EZ Roofing Company puts a new roof on the Ferg’s home. When the Ferg’s return home, they receive a bill for $2,500.0­0. When they refuse to pay the bill, the EZ Roofing Company brings suit against the Ferg’s based on a quasi-contract. Evaluate. Has there been unjust enrichment? What else would be required? 

Bilateral and Unilateral Contracts

A contract is unilateral if the offer can be accepted by the performance of an act. A contract is bilateral if both parties, the offeror and the offeree, have made mutual promises and are bound to fulfill obligations towards each other. For example, in a typical sales contract, the seller has promised to deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.


Heller says to Teston, “If you cut my lawn next Wednes­day, I promise to pay you $10.” Heller has made a promise but has not asked Teston for a return promise. Heller has requested Teston to perform an act, not to make a promise or commitment to do so. Heller has thus made an offer for a unilateral contract that arises when and if Teston performs the act called for. However, if Teston fails to cut the lawn, he is not in breach of contract since he made no promise to do so.

Suppose Heller had said to Teston, “I promise to pay you $10 if you promise to cut my lawn each week this summer.” In this case, Heller’s offer requests Teston to make a commitment or promise to cut the lawn. A bilateral contract arises when the requisite return promise is made by Teston. deliver and the buyer has promised to pay the price. In a bilateral contract, each party is both the promisor and promisee, having made mutual promises.

Executory Contracts

A contract that has been fully performed by both the promisor and promisee is termed an executed contract. A contract that has not yet been full performed by either party is said to be executory. A contract that has been partially performed by one of the parties is called a partially executed contract.

Void and Voidable Contracts

A void contract is one that has no legal significance and results in no legal obligation upon the part of either a promisor or promisee. A void contract generally cannot be enforced by a court. A contract to commit a crime or a tort or a contract that violates “public policy” is an example of a void contract. A voidable contract is a contract in which at least one of the parties has the power to avoid his or her legal duty established in the contract by disaffirming the contract. In essence, one of the parties has the option or right to remove him or herself from the agreement with no negative legal consequences. If a party decides not to elect to remove him or herself from the contract, the contract will continue in full force.

Examples of voidable contracts may include agreements entered into by a minor, or a contract entered into as a result of fraud, mutual mistake, duress, or undue influence.

Unenforceable Contracts

An unenforceable contract arises when a court is legally constrained from enforcing a contract because of some extrin­sic factor not connected with the elements of a valid con­tract discussed above. For example, an otherwise valid contract may not be enforced by the courts because of the operation of the Statute of Frauds or the Statute of Limitations. Whether or not a contract is unenforceable is usually determined at a very early stage of a case, as a “threshold question,” through a motion for a summary judgment, or through a motion to dismiss a lawsuit filed by one of the parties.

Unconscionable Contracts

Under the early common law, courts would regularly enforce contracts entered into by parties under a principle known as freedom of contract—even contracts that appeared to be onesided, unfair, oppressive, burdensome, or unconscionable. This principle was embodied in the concept of “caveat emptor,” translated as “let the buyer beware.”

The modern basis for unconscionability appears in the Uniform Commercial Code, Section 2302, which attempted to change the essential relationship between the parties from “caveat emp­tor” to “caveat venditor,” or “let the seller beware!” The purpose of the doctrine of unconscionability is twofold: “prevention of oppression (sometimes called substantive unconscionability) and unfair surprise (procedural unconscionability).” It should be noted that in fashioning Section 2302, the writers of the Uniform Commercial Code intentionally failed to provide a precise definition of the term “unconscionable” in the belief that to do so might be to limit and defeat the purposes of the rule.

Williams v. Walker-Thomas is one of the seminal cases in the area of unconscionability. Judge Skelly Wright added much to the understand­ing and development of this difficult concept and to interpreting the reaches of Section 2-302.

Read Williams v. Walker-Thomas carefully.


Case Summary

Williams v. Walker – Thomas Furniture Store

198 A. 2d 914 (D.C. App. 1964)

J. Skelly Wright, Circuit Judge:

Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item. 
The contract further provided that “the amount of each periodical installment payment to be made by [purchaser] to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by [purchaser] under such prior leases, bills or accounts; and all payments now and hereafter made by [purchaser] shall be credited pro rata on all outstanding leases, bills and accounts due the Company by [purchaser] at the time each such payment is made.” (Emphasis added.) The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings. 
On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95. She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants’ motion for leave to appeal to this court.

Appellants’ principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

“Appellant’s second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant’s financial position. The reverse side of the stereo contract listed the name of appellant’s social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.”
    “We cannot condemn too strongly appellee’s conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable. While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. In Scott v. United States, 79 U.S. (12 Wall.) 443, 445, 20 L. Ed. 438 (1870), the Supreme Court stated:

“* * * If a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. * * *”

Since we have never adopted or rejected such a rule, the question here presented is actually one of first impression. 
Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. 28 D.C.CODE § 2-302 (Supp. IV 1965). The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived. Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced. 
Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.  Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration.

Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld. 
In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered “in the light of the general commercial background and the commercial needs of the particular trade or case.” Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” 1 CORBIN. We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract. 
Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.
 So ordered.

Generally, four major factors appear in the cases that have dealt with the question of unconscionability. These factors originated in Williams v. Walker-Thomas.

They include:

  • The absence of meaningful choice (that is, a condition that may be found in a tradi­tional “take it or leave it” or “boilerplate” contract);
  • Great inequality of bargaining power (where there is only one or a very few sellers available in the market­place);
  • The inclusion of terms that would cause unfair surprise, hardship, or oppression (e.g., penalty clauses, clauses which severely limit remedies, a “confession of judgment” claus­e); or
  • Circumstances where race, literacy, language, ethnicity, economic circumstances, or education are significant factors in determining the nature of the bargain, and the relationship between the parties.

In the case of Jones v. Star Credit (Supreme Court of NY, 1969), the court extended the concept of unconscionability to the price term of the contract. Jones v. Star Credit involved welfare recipients who purchased a freezer for $900 from “Your Shop at Home Service.” The contract was later assigned to the Star Credit Corporation, the defendant in this action.

According to Judge Wachler, the freezer had a maximum value of $300, but it ended up costing $1,234.80 after interest and other “add on” charges such as interest, credit life insurance, and credit property insurance were included in the contract. The court analyzed the contract under Section 2-302 of the Uniform Commercial Code and found it to be unconscionable as a matter of law.

Now, read Wille v. Southwestern Bell. Pay special attention to the expanded list of “unconscionable factors” noted by the court. Can you suggest any others for consideration? Do you agree with the inclusion of all of these factors? What is the most important factor? Consider this question: Why were Mrs. Williams and Mr. and Mrs. Jones successful in claiming unconscionability and Mr. Wille was not?

Case Summary

Wille v. Southwestern Bell Telephone Company

219 Kas. 755 (1976)

Background and Facts

The plaintiff, an operator of a heating and air conditioning business, sued the telephone company to recover damages caused by the omission of his ad from the yellow pages of the telephone directory. The contract for the ad contained a provision limiting the liability of the telephone company to the cost of the ad. The plaintiff contended that this provision was unconscionable. The lower court found for the defendant the plaintiff appealed.


Appellant asserts unconscionability of contract in two respects: the party’s unequal bargaining power and the form of the contract and the circumstances of its execution.

American Courts have traditionally taken the view that competent adults may make contracts on their own terms, provided they are neither illegal nor contrary to public policy, and that in the absence of fraud, mistake, or duress, a party who has fairly and voluntarily entered into such a contract is bound thereby, notwithstanding it was unwise or disadvantageous to him. Gradually, however, this principle of “freedom of contract” has been qualified by the Courts as they were confronted by contracts so one-sided that no fair-minded person would view them as tolerable. An early definition of uncon­scionability was provided by Lord Chancellor Hardwicke, in the case of Chesterfield v. Jensen (1750).

* * * “A contract that such as no man in his senses and not under delusion would make on one hand, and as no honest and fair man would accept on the other; which are unequitable and unconscientious bargains; and of such even the Common Law has taken notice.”

* * * This doctrine received its greatest impetus when it was enacted as a part of the Uniform Commercial Code but the writers did not define the limits or parameters of the doctrine. Perhaps this was the real intent of the drafters of the code. To define is to limit its applica­tion and to limit its application is to defeat its purpose.

* * * The basic test is whether in the light of general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. The principle is one of the prevention of oppression and unfair surprise, and not of disturbance of allocation of risks because of superior bargaining power.

* * * One type of situation is that involving unfair surprise: where there has naturally actually been no assent to the terms of the contract. Contracts involving unfair surprise are similar to contracts of adhesion. Most often these contracts involve a party whose circumstances, perhaps his inexperience or igno­rance, when compared with the circumstances of the other party, make his knowing assent to the fine print terms fictional. Courts have often found an absence of a meaningful bargain. The other situation is that involv­ing oppression: where, although there has been actual assent, the agreement, surrounding facts, and the relative bargaining positions of the parties indicate the possibility of gross overreaching on the part of the person with the superior bargaining power. The economic position of the parties is such that one becomes vulnera­ble to a grossly unequal bargain.

* * * These factors include: 1) the use of printed form or boilerplate contracts drawn skillfully by the party in the strongest economic position, which establish industry-wide standards offered on a take-it-or-leave-it basis to the party in a weaker economic position, 2) a significant cost-price disparity or excessive price, 3) a denial of basic rights and remedies to a buyer of consumer goods, 4) the inclusion of penalty clauses, 5) the circumstances surrounding the execution of the contract, including its commercial setting, its purposes and actual effect, 6) the hiding of clauses which are disadvantageous to one party in a mass of fine print trivia or in places which are incon­spicuous to the party signing the contract, 7) phrasing clauses in language that is incomprehensible to a layman or that divert his attention from the problems raised by them or the rights given up through them, 8) an overall imbalance in the obligations and rights imposed by the bargain, 9) exploitation of the underprivi­leged, unsophisticated, uneducated and the illiterate, and 10) inequality of bargaining or economic power.

Important in this case is the concept of inequality of bargaining power. The UCC does not require that there be complete inequality of bargaining power or that the agreement be equally beneficial to both parties.

* * * At least some element of deception or substantive unfairness must presumably be shown.

The cases seem to support the view that there must be additional factors such as deceptive bargaining conduct as well as unequal bargaining power to render the contract unconscionable. In summary, the doctrine of unconscionability is used by the courts to police the excesses of certain parties who abuse their right to contract freely. It is directed against one-sided, oppressive and unfairly surprising contracts, and not against the consequences per se of uneven bargaining power or even a simple old-fashioned bad bargain.
Williston on Contracts states: “Parties should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side. It is only where it turns out that one side or the other is to be penalized by the enforce­ment of the contract so unconscionable that no decent, fair-minded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability.”

The inequality of bargaining power between the parties here is more apparent than real. There are many other modes of advertising to which the businessman may turn if the contract offered him by the telephone company is not attractive. We find in the record no basis for a conclusion that the application of the Limitation of Liability Clause could lead to a result so unreasonable as to shock the conscience. The language of the chal­lenged paragraph is not couched in confusing terms designed to capitalize on carelessness but is clear and concise. Appellant was an experienced businessman and for at least thirteen years had used the yellow pages. In his business, it is reasonable to assume he as a seller and serviceman had become familiar with printed form contracts that are frequently used in connection with the sale and servicing of heating and air condition­ing equipment and their attendant warranties and limita­tions of liability. Each case of this type must necessarily rest upon its own facts but after examining the terms of the contract, the manner of its execution and the knowledge and experience of the appellant, we think the contract was neither unconscionable or inequi­table so as to deny its enforcement.


A final note on remedies for unconscionability. Should a court conclude that a contract is unconscionable (note that unconscionability is a matter of law to be decided by the judge), it may:

  • Refuse to enforce the contract;
  • Enforce the contract without the unconscionable clause; or
  • Limit the operation of the unconscionable clause.


Ethical Considerations

Private Contract Rights

Is it fair for the courts to interfere with the private contract rights of individuals?



  • What is the definition of a “merchant” under the Uniform Commercial Code?
  • What is the definition of “good faith” under the Uniform Commercial Code?
  • What is the definition of a “good” under the Uniform Commercial Code?

Day v. Caton

  • What does it mean to have a judgment overruled?
  • Why was the defendant’s silence construed as an agreement to pay?
  • Who normally decides questions of fact in contract cases? Who decides questions of law?

Williams v. Walker-Thomas

  • What is an installment note? A revolving charge? A pro rata payment?
  • What particular characteristics of Mrs. Williams were important to the court in determining if the contract was unconscionable?
  • What remedies are available to a court in a case where it finds a contract to have been unconscionable?

Wille v. Southwestern Bell

  • What early view of unconscionability was cited by Judge Harman?
  • What test did the court apply?
  • Of the circumstances cited in the case, which was most important to the court in arriving at its decision?
  • Why did Mr. Wille lose and Mrs. Williams and Mr. and Mrs. Jones win?
  • What is a “limitation of liability” clause?

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Chapter Six | The Agreement

A contract is an agreement that consists of an offer and acceptance.

The Offer

An offer will be judged on the basis of three criteria:

  1. There must be serious intent on the part of the offeror to be bound by the terms of the offer;
  2. The terms of the offer must be definite or reasonably certain; and
  3. The offer must be communicated to the offeree.

Intention is measured by what is termed the “objective” or “reasonable man” test, which is exemplified in the classic English common law case, Carlill v. Carbolic Smoke Ball (holding that
an advertisement was considered as an offer for a unilateral contract that could be accepted by anyone who performed its terms). The objective test states that an offer will be judged by the objective or reasonable meaning of the words used—whether a “reasonable man would conclude that an offer had been made.” Under this criteria, the subjective intention of the parties is ordinarily irrelevant. However, an offer that is made in obvious anger, jest, or as the result of excitement will not generally meet the requirement of a serious offer. Likewise, an offer must be distinguished from mere statements of intention to be bound at a later date, preliminary negotiations or discussions, inquiries, or invitations (solicitations) to make an offer.
Let us consider a classic case that deals with the application of the “objective test.”


Case Summary

Lucy v. Zehmer

196 Va. 493 (1954)

BUCHANAN, Justice.

* * * The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

A. H. Zehmer admitted that * * * W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.
The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three beefers.

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.
The defendants insist that * * * the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

It is an unusual, if not bizarre, defense. * * *

In his testimony, Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. * * * The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. * * *

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’sobjectiontothefirstdraftbecauseit was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the complete- ness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and good faith sale and purchase of the farm.

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. (Emphasis added.) The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.


The Supreme Court of Virginia determined that the writing was an enforceable contract and reversed the decision of the lower court.

Mr. and Mrs. Zehmer were required by court order to carry through with the sale of the Ferguson Farm to W.O. Lucy. What remedy do you think would be appropriate in this case? Why?

Definiteness requires that the terms of an offer must be clear enough so that the offeree is able to make a decision whether to accept or reject the offer. In addition, if the terms of an agreement are indefinite, a court will not be able to enforce the contract or to determine what would be an appropriate remedy for its breach.

Generally, the common law required that an agreement should contain the following terms: (1) identification of the parties; (2) identification of the subject matter of the contract; (3) a quantity; (4) the consideration to be paid; and (5) the time for performance.

Media Offers And Advertisements

At common law, an advertisement, a circular or flier, or a radio or TV spot were not considered as offers; rather, these forms of communications were considered as statements of an intention to sell or a preliminary proposal inviting an offer to buy. Although most advertisements and the like were treated as invitations to negotiate and not offers, this does not mean that an advertisement could never be considered as an offer, binding a seller to a contract.

In the following case, the court had to decide whether a newspaper advertisement announcing a “special sale” in a department store should be construed as an offer, the acceptance of
which would complete a contract. Take special note of the test enunciated in Lefkowitz v. Great Minneapolis Surplus Store, Inc. It can be applied more broadly to decide if a party has truly made an offer to sell or buy. This test is also used to determine if a party has made an acceptance of an offer. It is an important formulation of the objective test.


Case Summary

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

251 Minn. 188, 86 N.W. 2d 689 (1957)

Background and Facts

Plaintiff Lefkowitz read a newspaper advertisement offering certain items of merchandise for sale on a first come first served basis. Plaintiff went to the store twice and was the first person to demand the merchandise and indicate a readiness to pay the sale price. On both occasions, the defendant department store refused to sell the merchandise to the plaintiff, saying that the offer was intended for women only, even though the advertisement was directed to the general public. The plaintiff sued the store for breach of contract, and the trial court awarded him damages.

MURPHY, Justice

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

On April 13, the defendant again published an advertisement in the same newspaper as follows:

The record supports the findings of the court that on each of the Saturdays following the publication of the above described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

* * * The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms.

*** [However] *** there are numerous authorities which hold that a particular advertisementinanewspaperorcircularletter relating to a sale of articles may be construed by the court as constituting an offer, accep- tance of which would complete a contract.

The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.”

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. * * *

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by thebadvertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.


The Supreme Court affirmed the trial court’s judgment, awarding the plaintiff the sum of $138.50 ($139.50 for the Lapin stole less the $1 purchase price) in damages for breach of contract against the defendant department store.

Even under the common law, courts began to relax rigid standards relating to indefiniteness and would imply or insert reasonable terms in a contract wherever possible, especially where both parties had manifested a clear intention to enter into a contract.

Uniform Commercial Code

Under UCC §2-204, for example, a contract will not fail for indefiniteness if the parties clearly intend to enter into a contract and if a “reasonably certain basis” exists for granting an appropriate remedy by a court. What are some of the terms a court will imply in a contract?

Open price: If nothing is said as to price, or the price is left to be agreed by the parties and they fail to agree, or the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded, “the price is a reasonable price at the time for delivery” [§2-305].
If no place of delivery is specified, then delivery is to occur at the seller’s place of business [§2- 308(a)], thus obligating the buyer to pay for freight, insurance, and delivery charges.
If the time for shipment or delivery is not stated, then the time shall be a reasonable time after the contract is formed [§2-309].
If the time for payment is not specified, then payment is due at the time and place of delivery [§2-310 (a)] and no credit arrangements are implied. Payment of a reasonable charge for interest may be implied.

While these terms may be found in the UCC, and thus apply to contracts involving the sale of goods (“movable and tangible” items), their application is equally important in many other types of contracts.

In addition, terms that are omitted or unclear may be supplied by custom and usage of trade or by prior or contemporaneous dealings between the parties, subject to the parol evidence which will be discussed in the materials on the “writing and form” of contracts.

Under the third criteria, the offer must be communicated to the offeree so that the offeree knows of the terms of the offer. An offer cannot be accepted by an offeree who is unaware of the offer or who has not become apprised of it.

Termination Of An Offer

It should be recognized that an offer creates a power or right in the offeree to transform the offer into a binding contract through an acceptance. However, an offer will not remain in existence indefinitely. The offer can be terminated through the operation of law, actions of the parties, the occurrence of a stated condition, or by its own terms, normally through the lapse of a period of time stipulated in the contract.

Lapse Of Time

Where the time specified in the contract for an acceptance to be made has passed or an event or condition stipulated in the contract which would terminate an offer has occurred, the offer is terminated. For example, Freddy agrees to sell his stamp collection to Franky if Franky accepts by a certain date. Franky must accept this offer within the period stated. If he does not do so, the offer will have lapsed.

Should no time be specified in the offer itself, the offer will terminate at the end of a reasonable time, determined by such factors as the subject matter of the contract (an offer to buy or sell perishable goods would involve a relatively short period of time) and other relevant market and business conditions and circumstances.

Operation Of Law

An offer may also be terminated through operation of law. For example, the destruction of the subject matter of the contract through no fault of the party will terminate an offer.

The death or incompetency of the offeror or offeree in a personal service contract also terminates an offer. Since an offer is considered personal to both the offeror and the offeree, an offer will be automatically terminated if the offeror or offeree dies, becomes incapacitated, or is ruled incompetent by a court of law.

Where a statute or court decision makes an offer illegal, the offer will be terminated. These circumstances—destruction of the subject matter of the contract, death or incompetency of a contracting party, or the operation of a statute—are sometimes viewed under the doctrine of “objective impossibility” and may also be used as a defense to a claim of breach of contract or as an excuse for non-performance on the part of a party.

Action Of The Parties

An offer may also be terminated by actions of the parties.

Revocation of the offer by the offeror is a withdrawal of the offer by the offeror before the offeree accepts the offer. A revocation is not generally effective until it is actually received by the offeree or by the offeree’s agent. Generally speaking, an offer made to the general public or to a number of persons whose specific identity is unknown to the offeror (for example, an offer made in newspaper advertisement or in a TV or radio ad), may be revoked only by using the same medium or at least by using “the best means of notice reasonably available under the circumstances” that would give equal publicity to the communication of the revocation as the communication of the original offer. Certain types of offers, called “firm offers,” may not be revoked by the offeror under certain circumstances – one of these circumstances being where the offeree has paid consideration for an option or where the promise has been made in a “signed writing” under UCC §2-204 (the “Firm Offer Rule”).

An offer is terminated if the offeree rejects it or if the offeree makes a counter offer.


Suppose that Berra offers to sell his new speedboat to Rizzuto for $10,000. Rizzuto responds, “$10,000 is too high; I’ll give you $8,500.” What is the legal effect of Rizzuto’s com- munication? First, it is clearly not an acceptance. Secondly, it is a rejec- tion of Berra’s offer to sell the boat for $10,000 and a counteroffer by Rizzu- to to buy the boat for $8,500. Now, if Berra agrees on $8,500, a contract will be formed based on this agreement. However, what happens if Berra re- jects the offer to purchase the boat at $8,500 and the price of such speed- boats skyrockets to $15,000? Can Rizzuto compel Berra to sell the boat to him at the original $10,000 price?

The answer is “no” because Rizzuto’s counteroffer legally termi- nated the original offer. Berra’s offer is no longer “on the table.”

Rejection by the offeree terminates an offer. There may be a very fine line between a rejection of an offer and an inquiry about trading on different terms than those contained in the original offer. Suppose that Freddy were to respond to a friend’s offer to buy his antique car: “That seems a bit low; I’ll just bet that you can do a lot better than that.” Is this communication a rejection of his friend’s offer or a mere inquiry which will not terminate (destroy) his friend’s offer?

A counteroffer by the offeree also terminates the original offer. Generally, a counteroffer is a rejection of the original offer and the making of a new offer by the offeree.

The Acceptance

An acceptance is an unconditional assent by either words or conduct by an offeree that manifests agreement to the terms of the offer. The acceptance is usually made in the manner requested in the offer where the offeror has stipulated an express, authorized means of acceptance. The acceptance must be unequivocal—that is, it may not impose or add new terms or conditions or tamper with the terms of the offer or (as we have seen) a court might conclude that a rejection and a counter offer has taken place. A unilateral contract can only be accepted by the offeree’s performance of the required act. A bilateral contract can be accepted by an offeree who promises to perform the act or the actual performance of the requested act.


Igor Wells joins the “fruit of the month club.” Because he is on vacation during the month of May, Igor neglects to return the card for May’s fruit—the guava. Igor must now pay for the (spoiled) guava because his failure to return the card (silence) amounted to an acceptance of the offer to ship based on the express terms of the membership agreement.

A second circumstance where silence may amount to an acceptance occurs where prior dealings between the parties give the reasonable expectation of a reply.

Generally speaking, silence is not considered as acceptance of an offer even if the offeror has stated “your silence indicates your acceptance of this offer.” There are, however, circumstances where an offeree’s silence may constitute acceptance of an offer. Such situations arise where there is an affirmative “duty to speak” on the part of the offeree. A court might impose a duty to speak where a duty arises out of a contract itself (i.e., record or book club contracts frequently require that a member send back a card with a rejection of the month’s selection or the selection will be automatically shipped and an obligation to pay will arise).


Berman, a retailer, has ordered snowshoes from Trotsky, the manufacturer, on numerous occasions and paid for them when they arrived. Out of convenience, Trotsky then began to ship snowshoes on a recurring basis, simply sending Berman a “confirmatory invoice,” noting that the snowshoes would be shipped on the eighth of each month. Whenever Berman received a shipment of the goods from Trotsky, he would simply sell them at retail and send a check to Trotsky for the amount due. Trotsky would only hear from Berman if Berman did not wish to place an order for that month. The last shipment of snowshoes (of course) is the subject of controversy as Berman now refuses to pay for them, claiming that his “silence” on the matter cannot create a contract. Because of the prior dealings between the parties, Berman’s silence (failure to notify Trotsky) will be construed as an acceptance of Trotsky’s offer to ship. Berman will be bound by contract and must pay for the last shipment of snowshoes.

Acceptance-Upon-Dispatch Rule

Read Morrison v. Thoelke and notice the application of the deposited acceptance or “mail box” rule which states that an acceptance is effective when it is dispatched (mailed) even if it is lost in transmission.

The problem of a “lost transmission” can be minimized by the parties by expressly altering the mailbox rule by stating that an acceptance is effective only upon actual receipt of the acceptance.


Case Summary

Morrison v. Thoelke

155 So. 2d 889 (Fla. 1963)


Defendants (Morrison) made an offer to buy real property owned by the plaintiffs, Thoelkes. They executed a contract for sale and purchase and mailed it to the plaintiffs for their acceptance and signature. The latter signed the contract and mailed it to the defendants. Before it was received by the defendants, the plaintiffs repudiated the contract by telephone. Nonetheless, when defendants received the contract they recorded it, thereby establishing their interest in the property as a matter of public record. Claiming that no contract existed, plaintiffs brought this suit to “quiet title” to the property – to remove the defendants’ claim of an interest in it from the record. Defendants counterclaimed, seeking specific performance of the contract. The lower court entered a summary decree for the plaintiffs and defendants appealed.

Allen, J.

* * * The question is whether the contract is complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror, or when the letter of acceptance is received, thus permitting repudiation prior to receipt. Appellants argue that posting the acceptance creates the contract; appellees contend that only receipt of the acceptance bars repudiation.

* * * In short, both advocates and critics muster persuasive arguments. As indicated, there must be a choice made (by the legal system) and such choice may, by the nature of things, seem unjust in some cases. Weighing arguments with reference not to specific cases but toward a rule of general application and recognizing the general and traditional acceptance of the rule as well as the modern changes in effective long- distance communication, it would seem that the balance tips towards accepting the notion that this case is controlled by the general rule that insofar as the mail is an acceptable medium of communication, a contract is complete and binding upon posting of the letter of acceptance.

The rule that a contract is complete upon mailing or the deposit of the acceptance in the mails, hereinbefore referred to as the “deposited acceptance rule.” * * * This rule, although not entirely compatible with ordered, consistent and sometime artificial principles of contract advanced by some theorists, is in our view, in accord with the practical considerations and essential concepts of contract law. Outmoded precedents may on occasion be discarded and the function of law should not be the perpetuation of error, but by the same token, traditional rules and concepts should not be abandoned save on compelling ground.

* * * We are constrained by factors hereinbefore discussed to hold that an acceptance is effective upon mailing and not upon receipt. Necessarily, this decision
is limited to circumstances involving the mails and does not purport to determine the rule possibly applicable to cases involving other modern means of communication.

* * * However, adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails, the repudiation was equally invalid…

Summary decree is reversed and the case remanded for further proceedings.


Ethical Considerations

Warren Boat Works v. Weaver

Fritz Weaver entered into a verbal contract with the Warren Boat Works whereby Fritz would assume the payments on a boat lease that had originally been entered into by Fritz’s neighbor, Jackson Limus with Warren. Unfortunately, the Boat Works burns down and Fritz’s boat is destroyed. To his surprise, Fritz is now being sued because he has now refused to continue to make the monthly payment on the boat which had been destroyed. Should Fritz be required to continue to make the payments under these circumstances?



Lucy v. Zehmer

  1. What remedy was Lucy seeking? Why?
  2. What was the defense raised by the defendants? Was it credible?
  3. When might the defense of intoxication be valid?
  4. What test did the court apply? Why couldn’t this court, or for that matter any court, apply the subjective test to contracts?
  5. Explain the objective test. Which test do you support? Why?

Lefkowitz v. Great Minneapolis Surplus Store

  1. What test did the court apply here to this “media offer?”
  2. How did the facts fit this test?
  3. What about the defendant’s “house rule?” What was the legal effect of the “house rule?”

Morrison v. Thoelke

  1. What is recording? What is the effect of recording?
  2. What is the purpose of a suit to “quiet title?”
  3. What remedy did the plaintiffs seek? Why?
  4. What rule did the court cite?
  5. According to the court, what is the role of precedents? When can or should a prece- dent be changed?
  6. What is a summary decree?
  7. What case did the court cite in support of its decision?
  8. What is the basis for holding that an acceptance is valid once it has been posted even if it has been lost in the mail?


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