Classification of Contracts

A number of terms are used to help classify contracts. Mastery of

the terms provides an important basis for further understanding of the

topic.

Many contracts arise from discussions in which parties actually dis-

cuss the promised terms of their agreement. These are called express

contracts. Express contracts are those in which the agreement is mani-

fested by words, either spoken or in writing. A negotiated purchase of

land for construction of a manufacturing plant is an example of an ex-

press contract.

If words are not the vehicle for expressing agreement, the contract

is implied. There are two types of implied contracts: implied in fact and

implied in law. A contract implied in fact arises from the conduct of the

parties rather than from words. For instance, seeking professional ser-

vices at a doctor’s office implies a contractual agreement to pay the go-

ing rate for services even though no express promise to pay is made.

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The second type of implied contract consists of contracts implied in

law, referred to as quasi-contracts. Under this theory, the court will con-

struct a contract (even though one did not exist) to avoid unjust enrich-

ment—an unfair windfall to a party. Generally, three elements must exist

before the court will construct a contract without contractual assent:

· A benefit conferred on the defendant.

· Knowledge or appreciation of the benefit.

· Circumstances where it would be inequitable to permit the defen-

dant to retain the benefit without paying for it.

If a debtor overpays a creditor $5,000, the debtor can force the credi-

tor to return that amount by suing under quasi-contract. It would be an

unjust enrichment to allow the creditor to keep the $5,000. Note that

quasi-contract is not an answer to every situation in which no contract

exists. Over the years, courts have come to apply quasi-contract in a fair-

ly limited number of cases based on unjust enrichment.

Another classification of contracts concerns those that are unilateral

and those that are bilateral. A unilateral contract involves a present act

given return for a promise of future performance. Promise to pay $50 for

ride to Florida during spring break illustrates the unilateral contract. An

example is catching a bank robber in return for the promise of reward.

In bilateral contracts, each party makes a promise to perform the other:

Smith promises to deliver a deed to the land on October 31. Jones prom-

ises to pay Smith $50,000 for the land on that date. When it is unclear

whether the parties to an agreement intend a unilateral or bilateral con-

tract, courts usually presume that the contract is bilateral.

An executory contract is one the contracting parties have not yet per-

formed. An executed contract is one the parties have performed.

Void contracts are really not contracts at all. They are agreements

that lack an essential contractual element. Often this element is legality

of purpose. For example, in states where gambling is illegal, a bet on a

football, game is void. This usually means that a court will not enforce

the betting agreement. The opposite of a void contract is a valid one,

which contains all the proper elements of a contract.

A voidable contract binds one of the parties to an agreement but gives

the other party the option of withdrawing from it. Contracts based on

fraud or misrepresentation are two important examples of voidable con-

tracts. Fraud involves an intentional misstatement of a material (impor-

tant) fact that induces one to rely justifiably to his or her injury. Inten-

tionally calling a zircon a diamond and persuading someone to purchase

it on that basis is a fraud. Sometimes failures to disclose a material fact

can also be a fraud, as when a landowner sells a buyer land knowing

that the buyer wishes to build a home on it and does not disclose that

the land is underwater during the rainy season. The defrauded party can

withdraw from the contract. Misrepresentation is simply a misstatemet

without intent to mislead. However, a contract entered into through

misrepresentation is still voidable by the innocent party.

Other examples of voidable contracts are those induced by duress or

undue influence. Duress means force or threat of force. The force may

be physical or, in some instances, economic. Undue influence occurs

when one is taken advantage of unfairly through a contract by a party

who misuses a position of relationship or legal confidence. Contracts

voidable because of undue influence often arise when persons weakened

by age or illness are persuaded to enter into a disadvantageous contract

by a family member or other person.

Another way of classifying contracts is to distinguish between formal

and informal ones. This distinction is largely a matter of historical im-

portance. There are three types of formal contracts. The contract under

seal is the least significant today. When parties entered into a solemn

contract for which they expected performance, they would seal the con-

tract with a signet of heated wax. Courts were prone to enforce contracts

entered into with such formality. Today, contracts under seal are little

more than an historical note. A second type of formal contract is the

recognizance, a bond binding a person to do an act. An example of a re-

cognizance would be an agreement before a court to pay a sum of money

unless the recognizor, the person signing the recognizance, appeared in

court on a fixed date. Finally, negotiable instruments are considered for-

mal contracts. The most common form of negotiable instrument is a

draft drawn on a bank, commonly known as a check. All contracts other

than those under seal, recognizances, and negotiable instruments are in-

formal contracts. Today, informal contracts are as enforceable as formal

contracts if they meet the requirements.

1. Where do many contracts arise from?

2. What classifications of contracts can you name?

3. What contracts are called express contracts?

4. Differentiate between implied in fact and implied in law contracts.

5. Explain why void contracts are not contracts at all?

6. What contract is the opposite of a void contract?

7. What does duress mean?

8. When does undue influence occur?

9. What is specific about a voidable contract?

10. What three types of formal contracts can you name?

Text 7

Read the text. Draw the tree-diagram of the text. Retell the text according to your tree-

diagram.