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 CHAPTER 7

NATURE AND CLASSIFICATION

For your convenience, page references for both the Summarized and Excerpted case
versions of Fundamentals of Business Law are included

SUMMARIZED PAGE: Fundamentals of Business Law: Summarized Cases,

Eighth Edition

EXCERPTED PAGE: Fundamentals of Business Law: Excerpted Cases, Second Edition

ANSWERS TO LEARNING OBJECTIVES/ FOR REVIEW QUESTIONS AT THE

BEGINNING AND
THE END OF THE CHAPTER

Note that your students can read the answers to the even-numbered Review Questions on
this text’s Web site at www.cengage.com/blaw/fbl. We repeat these answers here as a
convenience to you.

1A. Contracts and the objective theory of contracts

A contract is an agreement that can be enforced in court. It is formed by two or more parties
who agree to perform or to refrain from performing some act now or in the future. The
objective theory of contracts is that a party’s intent to enter into a contract is determined by
objective facts, as interpreted by a reasonable person, rather than by the party’s subjective
thoughts.

2A. Elements of a contract

65
66 UNIT THREE: CONTRACTS

The basic elements for the formation of a valid contract are an agreement, consideration,
contractual capacity, and legality. Defenses to the enforcement of an otherwise valid contract
include the lack of genuineness of assent and improper form.
 CHAPTER 7: NATURE AND CLASSIFICATION 67

3A. Implied-in-fact and implied-in-law contracts

A contract that is implied from the conduct of the parties is an implied-in-fact contract, or
simply an implied contract. Implied-in-law, or quasi, contracts do not arise from an
agreement between parties but are imposed on parties by courts, usually to avoid the unjust
enrichment of one party at the expense of another.

4A. Void, voidable, and unenforceable contracts

A void contract is not a valid contract; it is no contract. A voidable contract is a valid contract,
but one that can be avoided at the option of one or both of the parties. An unenforceable
contract is one that cannot be enforced because of certain legal defenses against it.

5A. Plain-language laws and rules for interpreting contracts

Plain-language laws have been enacted to make the law more comprehensible to laypersons.
Under the plain-meaning rule, when the words in a contract are clear and unequivocal, a
court will enforce the contract according to these terms without further interpretation or
extrinsic evidence. When the contract includes unclear terms, a court will interpret the
language to give effect to the parties’ intent as expressed in their contract under a number of
additional rules. The text lists eight: (1) a reasonable, lawful, and effective meaning is given to
all terms; (2) a contract is interpreted as a whole; individual, specific clauses are considered
subordinate to the contract’s general intent; all writings that are a part of the same
transaction are interpreted together; (3) terms that were the subject of separate negotiation
are given greater consideration than standardized terms and terms that were not negotiated
separately; (4) generally a word is given its ordinary, commonly accepted meaning, and a
technical word or term is given its technical meaning; (5) specific and exact wording is given
greater consideration than general language; (6) written or typewritten terms prevail over
preprinted terms; (7) terms are interpreted against parties who draft them; and (8) evidence
of trade usage, prior dealing, and course of performance can clarify the meaning of
ambiguous wording.

ANSWERS TO CRITICAL ANALYSIS

QUESTIONS IN THE CASES

CASE 7.1—WHAT IF THE FACTS WERE DIFFERENT?

SUMMARIZED PAGE 155
EXCERPTED PAGE 164
Suppose that the October 15 letter had used the phrase “potential offer of employment”
instead of using the word “conditional.” Would the court in this case still have considered the
letter to be a unilateral contract? This might have been acceptable, depending on each
party’s interpretation of the word “potential,” but it might have required splitting hairs
68 UNIT THREE: CONTRACTS

because of the words “offer of employment.” The city would have done better to phrase its
October 15 letter in the same terms as its other letters to the applicants to avoid the letter’s
being considered a contract. Specifically, the city should not have used the phrase
“conditional offer of employment.”

CASE 7.2—FOR CRITICAL ANALYSIS

SUMMARIZED PAGE 157
EXCERPTED PAGE 166
Technological Consideration Would the outcome of this case have been different if the
parties had communicated by e-mail for all details regarding changes in the work performed?
Why or why not? E-mail would most likely have constituted “written orders” within the term
of the parties’ contract, and thus the outcome would not have been different. The reasons for
that outcome might have been different, however, because the court might have then based
its decision on the existence of a writing.

CASE 7.3—FOR CRITICAL ANALYSIS

SUMMARIZED PAGE 161
EXCERPTED PAGE 170
Legal Consideration How might the result in this case have been different if the court had
allowed Wagner’s extrinsic evidence of a prior contract regarding “Love Song” to be used an
evidence in this dispute? In this circumstances, the court might have construed the language
of the “Charlie’s Angels” contract to the same effect. But because Columbia acquired the
movie rights to the property independent of any right it might have had in relation to the
television series, the court might still have considered the acquisition separate from the
exploitation rights covered by the Wagner contract, and the result would have been the
same.

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Requirements of a contract

The four requirements for any contract to be valid are agreement, consideration, capacity,
and legality.

2A. Type of contract

Yes, Crosstown had a valid contract with Borman to pick up a crane from Allied and deliver it
to the construction site. The contract was unilateral because it was a promise for an act. The
contract was valid because the parties had an agreement, consideration (delivery of the crane
in exchange for payment), capacity (presumed, especially with businesspersons), and the
 CHAPTER 7: NATURE AND CLASSIFICATION 69

agreement was legal. It was a unilateral contract because Borman promised to pay when
Crosstown delivered the crane, so it was a promise for an act.

3A. Implied-in-fact contract

The plaintiff must furnish property or service to a defendant, expecting to be paid, and the
defendant must have had a chance to reject the property for an implied-in-fact contract to
arise. Allied cannot recover damages based on this theory because it did not furnish property
or services to Crosstown expecting to be paid. For an implied-in-fact contract to arise, the
plaintiff must have furnished some property or service to a defendant, expecting to be paid,
and the defendant must have had a chance to reject the property or service. Implied
contracts are contracts formed by the parties conduct rather than by their words. Here,
Allied did provide the crane to Crosstown, but only for the purpose of delivering it to Borman,
who hired and paid Crosstown for its services. Because Allied did not know that Crosstown
was going to use the crane elsewhere and did not expect that Crosstown was going to pay
Allied, Allied cannot obtain damages from Crosstown on this theory.

4A. Quasi contract

Quasi contracts, or contracts implied in law, are imposed by courts to avoid unjust
enrichment. On that basis, a quasi contract might be imposed to allow Allied to recover fro
the reasonable rental value for Crosstown’s use of the crane. A quasi contract will not be
imposed if here is a contract that covers the subject, but there was no express contract
between Allied and Crosstown here.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

HYPOTHETICAL SCENARIOS AND CASE PROBLEMS

7.1A. Express v. implied contracts
SUMMARIZED PAGES 156–157
EXCERPTED PAGES 164–166
The facts presented here indicate the presence of all the elements necessary for a valid
contract. There are a serious offer and acceptance, consideration is exchanged (a candy bar
for $1), both parties have capacity, the selling of the candy is legal, and there is no particular
form required for this type of contract. Thus, a contract exists and for the reasons given here
it is classified as valid, enforceable, and informal. In addition, this is a classic case of an im-
plied-in-fact contract. There is no explicit agreement between the parties. Rather, an agree-
ment is implied by McDougal’s action of waving the candy bar and by his past conduct. By his
conduct McDougal is telling Krunch that because the store is crowded, he will pay for the
70 UNIT THREE: CONTRACTS

candy bar later. The contract is also bilateral (as opposed to unilateral), because Krunch
impliedly promises to sell the candy bar to McDougal in exchange for McDougal’s implied
promise to pay. The contract is partially executory, as McDougal has engaged to pay for the
candy bar in the future. Because the contract is for a legal purpose, both parties have
capacity, and reality of consent is not an issue, the contract is neither voidable nor void.

7.2A. HYPOTHETICAL QUESTION WITH SAMPLE ANSWER

According to the question, Janine was apparently unconscious or otherwise unable to agree
to a contract for the nursing services she received while she was in the hospital. As you read
in the chapter, however, sometimes the law will create a fictional contract in order to prevent
one party from unjustly receiving a benefit at the expense of another. This is known as a
quasi contract and provides a basis for Nursing Services to recover the value of the services it
provided while Janine was in the hospital. As for the at-home services that were provided to
Janine, because Janine was aware that those services were being provided for her, Nursing
Services can recover for those services under an implied-in-fact contract. Under this type of
contract, the conduct of the parties creates and defines the terms. Janine’s acceptance of the
services constitutes her agreement to form a contract, and she will probably be required to
pay Nursing Services in full.

7.3A. Contract classification

SUMMARIZED PAGES 155–157
EXCERPTED PAGES 162–166
In the modern view, most courts would hold that there was a contract between McElfresh
and Big Burger, and that Big Burger could not revoke once McElfresh started to perform. This
case is an example of a unilateral contract. Big Burger promised to pay $5,000 as a unilateral
promise under which it would not be bound unless an individual completely performed the
act that Big Burger requested. McElfresh could not accept Big Burger’s offer merely by
promising to swim across Long Island Sound; Big Burger’s offer could be accepted only by full
performance. The contract between McElfresh and Big Burger was an express contract,
because the terms of the agreement were fully and explicitly stated in the banner that High-
Flying Advertising flew over the beach. The contract was also executory, because it called for
future performance; it would be considered executed only when McElfresh had fully per-
formed. The contract could also be classified as valid, enforceable, and informal.

7.4A. Implied contract

SUMMARIZED PAGES 156–157
EXCERPTED PAGES 164–166
The court held that Wrench submitted sufficient evidence of an implied contract to survive
Taco Bell’s motion for summary judgment on the issue. “Implied in fact contracts often arise
where one accepts a benefit from another for which compensation is customarily expected.
Thus, where evidence shows that the parties understood that compensation would be paid
 CHAPTER 7: NATURE AND CLASSIFICATION 71

for services rendered, a promise to pay fair value may be implied, even if no agreement was
reached as to price, duration, or other terms of the contract.” Here, “Taco Bell concedes that
there is sufficient evidence in the record to support Plaintiff’s allegation that the parties had a
basic understanding that if Taco Bell used the Psycho Chihuahua idea, concept, or image, that
Taco Bell would compensate Plaintiffs for the fair value of such use.” Furthermore, “[t] he
cases establish that a plaintiff may support a claim of implied in fact contract by showing that
the plaintiff disclosed an idea to the defendant at the defendant’s request and the defendant
understood that the plaintiff expected compensation for use of his ideas. Because Taco Bell
concedes that there is sufficient evidence to support such an understanding in this case, Taco
Bell’s assertion that Plaintiffs cannot establish an implied in fact contract must be rejected.”
The court ruled against Wrench on other grounds. Wrench appealed to the U.S. Court of
Appeals for the Fifth Circuit, which agreed with the lower court’s holding on Wrench’s
implied-in-fact contract claim (but reversed the ruling on the other grounds).

7.5A. Interpretation of contracts

SUMMARIZED PAGE 161
EXCERPTED PAGES 169–170
The court held that East Mill Associates (EMA) should not have to pay the costs associated
with unforeseen events, reallocated the amount between the parties, and ordered EMA to
pay $213,884.47. East Brunswick Sewage Authority (EBSA) appealed to a state intermediate
appellate court, which reversed the lower court’s order and directed an entry of judgment in
EBSA’s favor for the full amount of its claim. The appellate court explained, “Generally,
contracts are given their plain and ordinary meaning. When the terms of a contract are clear,
the court must enforce them as written. A court has no power to rewrite the contract of the
parties by substituting a new or different provision from what is clearly expressed in the
instrument. It has been decided many times and in many cases that the court will not make a
different or a better contract than the parties themselves have seen fit to enter into.* * * In
this case, the terms of the contract are clear; the judge must enforce them as written. The
contract bound EMA to pay 55% of the total costs associated with the upgrade. * * *The
additional costs relating to the road-widening project and [other things] are part of the total
costs.* * * We must assume that the parties were satisfied with the cost allocation expressed
in the agreement.* * * Experienced parties to these types of agreements, developers and
public authorities, are well equipped to express their intentions in clear contractual terms.
We find that they did so here.”

7.6A. CASE PROBLEM WITH SAMPLE ANSWER

As you learned from the text, a quasi contract is a fictional contract created by a court and
imposed on parties solely in the interest of fairness. A quasi contract is formed when a court
seeks to avoid the unjust enrichment of one party at the expense of another. If the court
imposes a quasi contract, the defendant will be ordered to pay the reasonable value of the
services provided. To decide in this case whether Clark’s claim against Nextel will be
successful, first it must be shown that there was no actual contract and then that there is a
72 UNIT THREE: CONTRACTS

basis for the court to impose a quasi contract. Here, the facts specify that the parties had not
signed a contract. (Note that there is an argument that the parties’ conduct had resulted in
an implied-in fact contract, which is an actual contract. They apparently did not pursue that
theory of the case.) Without an actual contract, in order for Clark to prevail, the court would
have to determine that there was enough evidence to find an implied-in-law contract, or
quasi-contract. The essential element that Clark would have to prove was that Nextel had
been unjustly enriched by Clark’s performance of services. Here, Clark spent over six months
interviewing and screening candidates for Nextel. Nextel accepted these services without
paying and was therefore unjustly enriched. If you reached the conclusion that Clark was
able to prove its case, you agree with the state appellate court. The court found an implied-
in-law contract because Clark spent months evaluating candidates at Nextel’s request, and
Nextel hired a candidate specifically placed by Clark. Clark then worked for six weeks to find a
replacement, stopping only when Nextel terminated their relationship. Under the doctrine of
quasi contract, the court entered a judgment in favor of Clark for the amount that Nextel
would have paid under its typical agreement.

7.7A. Contract enforceability

SUMMARIZED PAGE 158
EXCERPTED PAGES 166–167
The court granted a summary judgment in favor of Black Hills. Albertson's appealed to a state
intermediate appellate court, which affirmed the lower court’s judgment. The appellate court
concluded in part that “the contracts violated the prohibition codified in [the SMA] because
they were contracts to sell unsubdivided parcels of real property before the seller,
Albertson's, recorded a parcel map in compliance with the SMA . . . and were therefore
void.” The court pointed out that “the [SMA] generally prohibits the sale, lease, or financing
of any parcel of a subdivision until the recordation of an approved map in full compliance
with the law.” In this case, “it is undisputed that in late November 2004, about three weeks
before it recorded the parcel map . . . , Albertson's entered into the contracts to sell the two
parcels of then-unsubdivided real property to Black Hills. Thus, Albertson's agreement to sell
the parcels was in violation of the SMA.” Also, the contracts were void under the SMA
because they expressly permitted Albertson’s to waive the conditional filing of a subdivision
plan. Because the SMA required this filing, it would have been illegal to waive this condition.

7.8A. A QUESTION OF ETHICS

1. The court issued a summary judgment in favor of IBM, holding that there was
no contract between the parties because they had not agreed on the commission
arrangement. Jensen appealed to the U.S. Court of Appeals for the Fourth Circuit, which
affirmed the judgment of the lower court. The appellate court acknowledged that “[a]n
employer can make a unilateral offer to its employees, and the offer becomes a contract
when its conditions are fulfilled.” Jensen failed to show that IBM made an offer here,
however, “because the documents on which he relies do not manifest IBM's willingness to
 CHAPTER 7: NATURE AND CLASSIFICATION 73

extend any offer to enter into a contract. The terms of IBM's Sales Incentive Plan make clear
that they are not to be construed as an offer that can be accepted to form a contract. . . .
“[W]e view this case as an effort by Jensen to create an enforceable contract out of a
policy that expressed IBM's contrary intentions. We see IBM's Sales Incentive Plan as no more
than an announcement of a policy expressing its intent to pay incentives in specified amounts
but retaining full discretion to determine amounts until the time that they are actually paid.
Seen in this light, descriptions of the plan did not amount to an offer to enter into a contract,
but the announcement of a nonbinding intention, much like that in which an employee is told
that he will be paid a bonus if the company does well, without being promised specific
amounts.”
2. Citing the quota letter, the court concluded that “IBM did not invite a bargain
or manifest a willingness to enter into a bargain. To the contrary, it manifested its clear intent
to preclude the formation of a contract.” Under the terms displayed on the intranet and
stated in the letter, IBM indicated that Jensen could not rely on the description of potential
commissions in the SIP brochure because “IBM could modify or cancel the Sales Incentive
Plan at any time. . . . Thus, IBM made clear that there were no conditions that Jensen could
satisfy to create a binding contract before IBM decided to pay him. IBM unambiguously
characterized sales commissions as a form of incentive pay that it intended to make but
which it reserved the right to calculate or even not make, even after sales were closed.” The
brochure's reference to the intranet “amounts to an incorporation by reference to intranet
materials that establish a special rate of commissions in ‘large opportunity’ transactions . . . .
These are all terms of the ‘offer’ on which Jensen relies.”

CRITICAL THINKING AND WRITING ASSIGNMENTS

7.9A. CRITICAL LEGAL THINKING
The relationship between a university and its students is contractual but, in the words of at
least one court, “distinctive,” and “a strict doctrinal approach is inappropriate.” In a case
involving a mid-year tuition increase that caught most students by surprise, students
challenging the increase pointed out that the university catalog “quoted a specific price for
tuition and the language that all bills must be paid ‘in full’ prior to the end of registration.”
The students’ argument was that “[t]herefore, upon paying their tuition prior to the start of
the semester and receiving a receipt marked with a zero balance, their obligation under the
contract was completed.” This constituted a unilateral contract “in that they have fully
performed, but the other party has yet to fulfill its promise.” Under a unilateral contract,
once performance has occurred, the contract is formed and may not be unilaterally altered
by either party. Following this line of reasoning, the students concluded that “because the
[university] could not raise the tuition without the students’ consent, it was reasonable for
them to expect that there would be no increase in the tuition for the spring semester.” The
court disagreed, explaining that the students’ obligations were not fulfilled simply by paying
their tuition. “The relationship between the University and the student is ongoing
74 UNIT THREE: CONTRACTS

throughout the semester: the University must provide the student with a worthwhile
education and the student must perform ‘financially, academically, and behaviorally in
accordance with the college rules and regulations.’ Therefore, because the plaintiffs had not,
and could not have, fully performed prior to the end of the semester, the contract is not a
unilateral one.” [Gamble v. University System of New Hampshire, 136 N.H. 9, 610 A.2d 357
(1992)]

ANSWER TO VIDEO QUESTION NO. 7.10

Bowfinger
1. In the video, Renfro (Robert Downey, Jr.) says to Bowfinger (Steve Martin),
“You bring me this script and Kit Ramsey and you’ve got yourself a ‘go’ picture.”
Assume that their agreement is a contract. Is the contract bilateral or unilateral? Is it
express or implied? Is it formal or informal? Is it executed or executory? Explain. The
contract between Bowfinger and Renfro is unilateral, as Renfro’s offer is phrased so
that Bowfinger can only accept by completing the contract performance (giving Renfro
the script and arranging for Kit Ramsey to act in the movie). The contract is express
because its terms were fully and explicitly stated in words. The contract required no
special form or method of creation, so it is informal. Because the contract has not yet
been fully performed on both sides, it is executory.

2. What criteria would a court rely on to interpret the terms of the contract?
When the terms of a contract are clear, a court enforces it according to its plain terms.
If the terms are not clear, a court will give a reasonable, lawful, and effective meaning
to all terms. The court interprets the contract as a whole, with specific clauses
considered subordinate to the contract’s general intent. Words are given their
commonly accepted meanings, and technical words are given their technical meanings
unless the parties clearly intend otherwise. The court gives greater consideration to
specific wording over general language and considers written or typewritten terms over
preprinted terms. The court also interprets any ambiguous terms against the party
who uses them and considers evidence of prior dealing, course of performance, or
usage of trade to further clarify any ambiguous wording. Express terms are given the
greatest weight, followed by course of performance, course of dealing, and custom and
usage of trade—in that order.

3. Recall from the video that the contract between Bowfinger and the
producer was oral. Suppose that a statute requires contracts of this type to be in
writing. In that situation, would the contract be void, voidable, or unenforceable?
Explain. A valid contract that is rendered unenforceable by some statute or law and
cannot be enforced because of legal defenses is considered unenforceable. In this
 CHAPTER 7: NATURE AND CLASSIFICATION 75

situation, Renfro has a legal defense because the contract was not in writing although a
statute required it to be. Thus, the contract between Bowfinger and Renfro would be
unenforceable rather than void (as when one party is legally insane) or voidable (as
when one party has the option to avoid the contract).
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