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The Nature of Contracts
Page 9-4
LO9-1
Explain what a contract is and why contracts are useful.
The law of contracts deals with the enforcement of promises. It is important to
realize from the outset of your study of contracts that not every promise is legally
enforceable. (If every promise were enforceable, this chapter could end here!) We
have all made and broken promises without fear of being sued. If you promise to
take a friend out to dinner and then fail to do so, you would be shocked to be sued
for breach of contract. What separates such promises from legally enforceable
contracts? The law of contracts sorts out what promises are enforceable, to what
extent, and how they will be enforced.
A contract is a legally enforceable promise or set of promises. In other
words, when promises have the status of contract, the contracting party harmed by
a breach of the contract is entitled to obtain legal remedies against the breaching
party.
The Functions of Contracts
Contracts give us the ability to enter into agreements with others with confidence
that we may call on the law—not merely the good faith of the other party—to make
sure that those agreements will be honored. Within limitations that you will study
later, contracting lets us create a type of private law—the terms of the agreements we
make—that governs our dealings with others.
Contracts facilitate the planning that is necessary in a modern, industrialized society.
Who would invest in a business if she could not rely on the fact that the builders
and suppliers of the facilities and equipment, the suppliers of the raw materials
necessary to manufacture products, and the customers who agree to purchase those
products would all honor their commitments? How could we make loans, sell
goods on credit, or rent property unless loan agreements, conditional sales
agreements, and leases were backed by the force of the law? Contract, then, is
necessary to the world as we know it. Like that world, its particulars tend to change
over time, while its general characteristics remain largely stable.
The Evolution of Contract Law
The idea of contract is ancient. Thousands of years ago, Egyptians and
Mesopotamians recognized devices resembling contracts; by the 15th century, the
common law courts of England had developed a variety of theories to justify
enforcing certain promises. Contract law did not, however, assume major
importance in our legal system until the 19th century, when the Industrial
Revolution created the necessity for greater private planning and certainty in
commercial transactions.
The central principle of contract law that emerged from this period was freedom of
contract. Freedom of contract is the idea that contracts should be enforced because
they are the products of the free wills of their creators, who should, within broad
limits, be free to determine the extent of their obligations. The proper role of the
courts in such a system of contract was to enforce these freely made bargains but
otherwise to adopt a hands-off stance. The freedom to make good deals carried
with it the risk of making bad deals. As long as a person voluntarily entered a
contract, it would generally be enforced against him, even if the result was grossly
unfair. And because equal bargaining power tended to be assumed, the courts were
usually unwilling to hear defenses based on unequal bargaining power. This judicial
posture allowed the courts to create a pure contract law consisting of precise, clear,
and technical rules that were capable of general, almost mechanical, application.
Such a law of contract met the needs of the marketplace by affording the
predictable and consistent results necessary to facilitate private planning.
The emergence of large business organizations after the Civil War produced
obvious disparities of bargaining power in many contract situations, however. These
large organizations found it more efficient to standardize their numerous
transactions by employing standard form contracts, which also could be used to
exploit their greater bargaining power by dictating the terms of their agreements.
Contract law evolved to reflect these changes in social reality. During the 20th
century, there was a dramatic increase in government regulation of private
contractual relationships. Think of all the statutes governing the terms of what
were once purely private contractual relationships. Legislatures commonly dictate
many of the basic terms of insurance contracts. Employment contracts are
governed by a host of laws concerning maximum hours worked, minimum wages
paid, employer liability for on-the-job injuries, unemployment compensation, and
retirement benefits. The purpose of much of this regulation has been to protect
persons who lack sufficient bargaining power to protect themselves.
Courts also became increasingly concerned with creating contract rules that
produce fair results. The precise, technical rules that characterized traditional
common law gave way to permit some broader, imprecise standards such as good
faith, injustice, reasonableness, and unconscionability. Despite the increased
attention to fairness in contract law, the agreement between the parties is still the
heart of every contract.
Page 9-5
The Methods of Contracting
Many students reading about contract law for the first time may have the idea that
contracts must be in writing to be enforceable. Generally speaking, that is not true.
There are some situations in which the law requires certain kinds of contracts to be
evidenced by a writing to be enforced. The most common examples of those
situations are covered in Chapter 16. Unless the law specifically requires a
certain kind of contract to be in writing, an oral contract that can be proven is as
legally enforceable as a written one. (Of course, having a written contract may
often be desirable even when a writing is not mandatory.)
Contracts can be and are made in many ways. When most of us imagine a contract,
we envision two parties bargaining for a deal, drafting a contract on paper, and
signing it or shaking hands. Some contracts are negotiated and formed in that way.
Far more common today, both online and offline, is the use of standardized form
contracts. Such contracts are preprinted by one party and presented to the other
party for signing. In most situations, the party who drafts and presents the
standardized contract is the one with greater bargaining power and/or
sophistication in the transaction. Frequently, the terms of standardized contracts
are nonnegotiable. Such contracts have the advantage of providing an efficient
method of standardizing common transactions. On the other hand, they present
the dangers that the party who signs the contract will not know what he is agreeing
to and that the party who drafts and presents the contract will take advantage of
her bargaining power to include terms that are oppressive or abnormal in that kind
of transaction.
Basic Elements of a Contract
LO9-1
Explain what a contract is and why contracts are useful.
Over the years, the law has developed a number of requirements that a set of
promises must meet before they are treated as a contract. To qualify as a contract, a
set of promises must be based on a voluntary agreement, which is made up of an of
fer and an acceptance of that offer. In addition, there usually must be consideration
to support each party’s promise. The contract must be between parties who have ca
pacity to contract, and the objective and performance of the contract must be legal.
(See Figure 9.1.) Each of the elements of a contract will be discussed
individually in subsequent chapters.
Page 9-6
The elements of a contract can be found in all kinds of settings, from commercial
dealings between strangers to agreements between family members to repeated
interactions between businesses. In determining whether a contract exists, courts
Figure 9.1 Getting to Contract
scrutinize the parties’ communications and conduct in light of the context in which
the parties interacted and their prior dealings. This process is illustrated by Trapani
Construction Co. v. Elliot Group, Inc., which follows.
Trapani Construction Co. v. Elliot Group, Inc.
64 N.E.3d 132 (Ill. App. Ct. 2016)
Trapani Construction Co. is a general contractor that had worked with the
Elliot Group on a number of occasions. Over the years, Trapani had done
more than $18 million in business with Elliot. Typically, Trapani would
provide Elliot with a “contract” document, which called for signature but was
never signed.
In July 2007, Trapani and Elliot were engaged in planning for a project
known as the “Arlington Market Site Work.” It included the project at issue in
this case as well as a separate building project on the same site.
Consistent with their past practices, Trapani sent Elliot a draft contract
document describing the services it would perform on the Arlington Market
Site. It listed Elliot as the project owner. Through the first couple of weeks of
July 2007, the parties engaged in a back-and-forth discussion about the terms
of the project, both in person and by written correspondence. During that
process, Trapani actually began work on the project and requested the first
payment from Elliot.
Although Elliot never signed the draft contract document, it made payments
to Trapani in the amount of $2,042,846.50. Those payments were made in
response to requests prepared by a Trapani employee. The president of Elliot
would “meticulously review” the requests and often require changes to them
before paying. In addition, Trapani hired subcontractors for work on the
project, obtained insurance (which named Elliot as an additional insured
party), and sent to Elliot 16 change orders for the work. Elliot was aware of
each.
Upon completing the project, Trapani claimed that Elliot still owed Trapani a
balance of $257,764.70. Elliot refused to pay it.
Trapani sued Elliot claiming, among other things, a breach of contract. The
trial court found in favor of Trapani. Elliot appealed, claiming that it never
accepted Trapani’s offer to provide construction services and that the
unsigned draft contract document required signature to be enforceable.
Reyes, Justice
Defendant asserts there was no contract implied in fact between plaintiff
and defendant because (1) defendant never accepted plaintiff’s offer, (2) no
consideration was provided to defendant, and (3) there was no meeting of
the minds or mutual assent.
Even in the absence of an express contract, an implied contract can be
created as a result of the parties’ actions. In Illinois, two types of implied
contracts are recognized, those implied in fact and those implied in law.
Contracts implied in law are “equitable in nature, predicated on the
fundamental principle that no one should unjustly enrich himself at
another’s expense.” In re Estate of Milborn, 461 N.E.2d 1075 (Ill. App. Ct.
1984). Contracts implied in fact, as aforementioned, arise from a
promissory expression that may be inferred from the facts and
circumstances that demonstrate the parties’ intent to be bound. Thus, “[t]he
only difference between an express contract and an implied contract in the
proper sense is, that in the former the parties arrive at an agreement by
words, either verbal or written, while in the latter the agreement is arrived at
by a consideration of their acts and conduct.” Litow v. Aurora Beacon News,
209 N.E.2d 668 (Ill. App. Ct. 1965).
A contract implied in fact, which applies here, is a true contract. The
elements of a contract are an offer, acceptance, and consideration. Thus, a
contract implied in fact contains all of the elements of a contract, including
a meeting of the minds.
Generally, for a contract to be valid, an acceptance must be objectively
manifested; if it is not, there is no meeting of the minds. Acceptance of a
contract implied in fact, however, can be proven by circumstances
demonstrating that the parties intended to contract and by the general
course of dealing between the parties. Similarly, mutual intent to contract
can be established by the ordinary course of dealing and the common
understanding of persons.
Based on our review of the record, we conclude the trial court’s finding that
a contract implied in fact existed between the parties was not against the
manifest weight of the evidence for the following reasons.
In the instant case, plaintiff was paid in excess of $18 million by defendant
for its work on other construction projects that was performed under similar
circumstances, i.e., under unsigned draft contracts. Plaintiff was also paid in
full by defendant for its work on another building that was part of this
particular project, also under an unsigned draft contract. For the work at
issue, plaintiff submitted a proposal to defendant and performed pursuant to
the terms and specifications in the draft contract dated July 5, 2007. To
obtain payment for the work at issue, plaintiff submitted payment requests
to defendant which defendant “meticulously review[ed]” before paying
$2,041,846.50 to plaintiff in accordance with the draft contract. Further,
defendant approved 16 written contract change orders that allowed plaintiff
to continue to work on the project. In addition to these facts, defendant
never corrected the subcontracts, certificates of insurance, change orders,
weekly construction progress reports, contract activity reports, and
documents for payment requests sent by plaintiff that identified defendant as
the project owner. Moreover, defendant did not reject plaintiff’s work or
instruct plaintiff to cease work at any time. In light of this evidence, we find
the circumstances and behaviors of the parties demonstrated a general
course of dealing and a mutual intent to contract. Accordingly, we find there
is ample evidence to support the trial court’s ruling that a contract implied
in fact existed between the parties.
* * *
Defendant [also] contends the draft contract dated July 5, 2007, “required
acceptance by signature.” Plaintiff . . . argues the draft contract did not
require a signature to establish defendant’s acceptance. Plaintiff also claims
plaintiff’s performance pursuant to the requirements of the draft contract,
the progress payments made to plaintiff, and defendant’s “conduct and
silence” established that defendant had properly accepted plaintiff’s offer. . .
.
[T]he circumstances and behaviors of the parties demonstrated a general
course of dealing and a mutual intent to contract. We thus conclude the trial
court’s finding that a contract implied in fact existed between the parties
was not against the manifest weight of the evidence.
* * *
For the reasons stated above, we affirm the judgment of the circuit court of
Cook County.
Affirmed.
CYBERLAW IN ACTION
Standardized contracts are common online as well as in the physical
world. You have probably entered into online standardized contracts
when you downloaded software from the Internet, joined an online
service, initialized an e-mail account, or purchased goods online. The
terms of standardized contracts online are sometimes presented in a
manner that requires the viewer to click on an icon indicating agreement
before he can proceed in the program. Standardized online contracts
presented in this way are often called clickwrap contracts. Sometimes the
terms of such contracts are included as a hyperlink on a page, and rather
than requiring the user to click an icon, the indication of agreement is
purportedly the use of the product or service. These types of
standardized agreements are called browse-wrap contracts. In the past,
though, consumers often purchased mass-marketed software in the form
of a package of CD-ROM discs, which were typically bundled in a sealed
package with a notice that stated that the consumer was agreeing to the
terms of a proposed standardized license agreement when he or she
broke the seal on the packaging. These are called shrinkwrap contracts
or shrinkwrap licenses, a name that refers to that practice of using
shrinkwrapped packaging. The enforceability of clickwraps, browse-
wraps, and shrinkwraps, which has been a controversial topic, depends in
large part on concepts addressed in Chapters 10 and 11.
