Commercial Novel Invader

Contracts-Mutual Assent

Commercial law is a general term used to cover the legal rules which relate most directly to everyday commercial transactions. It is a term of no exact boundary, but most commercial law is based in one way or another on the law of contracts, which is one of the largest subjects in the law. Bills and notes, for instance, are special forms of contracts. In order to understand business law at all, therefore, it is necessary at the outset to have some knowledge of the fundamental principles of the law of contracts.

DEFINITION OF CONTRACTS.-What is a contract? Simply a promise or set of promises which the law enforces as binding. Any promise, if it is binding, is a contract or part of a contract. So the law of contracts in their formation resolves itself into this: What promises are binding? A man may make all sorts of promises, but when has he a right legally to say "I have changed my mind, I am not going to do what I said I would," and when will he be liable in damages if he fails to do as he agreed?

CONTRACT TERMS EXPLAINED.-There are certain terms in contracts which the student will find repeatedly mentioned and with which he should be familiar at the outset. For example, contracts are spoken of as express contracts, and implied contracts. By an express contract we mean a contract the terms of which are fully set forth. Implied contracts are contracts the terms of which are not fully stated by the parties. There is a mutual agreement and promise, but the agreement and promise have not been expressly put in words. If I say to a man, "I will buy your horse, Dobbin, for $100" and he replies, "I will sell you the horse at that price," there is an express contract. I step into a taxi and simply say to the driver, "Take me to the Union Station." The driver says nothing, but takes me there. Here is an implied contract. By my conduct I impliedly agree to pay him the legal rate for the distance carried.

FORMAL AND INFORMAL CONTRACTS.-Contracts are sometimes also divided into formal contracts, and simple or parol contracts. There are three kinds of formal contracts recognized in our system of law: (1) Promises under seal. (2) Contracts of record, such as judgments and recognizances. (3) Negotiable instruments. Of the three, it may be most difficult to understand why a judgment is included as a form of contract, because a judgment is simply a judicial termination of a fact entered in the office of the county clerk, and generally a lien on the real property owned by the judgment debtor. The sole reason, apparently, for calling a judgment a contract, is that an action of debt may be brought in a court of law upon such a judgment. Sealed contracts and negotiable paper will be taken up in a later chapter. Simple, or parol contracts, are those not embraced in the three previous classifications which constitute the formal contracts. The term parol is a little ambiguous, as it is sometimes used as opposed to a written contract, meaning simply an oral one, and at other times it is used as opposed to the three previous formal contracts.

UNILATERAL AND BILATERAL CONTRACTS.-Contracts are also divided into unilateral and bilateral contracts. In a unilateral contract, the contract imposes obligations on one party only. A promissory note is an example of a unilateral contract. In a bilateral contract, obligation is imposed on both parties. John and Mary become engaged to each other. This is a bilateral contract, and either may sue the other for a breach. Most important results flow from the distinction between unilateral and bilateral contracts. This we shall consider later.

VOID, VOIDABLE AND UNENFORCEABLE CONTRACTS.-Contracts are also divided into void, voidable and unenforceable contracts. Strictly speaking, a void contract is no contract at all. Some statutes provide that no action shall be brought on certain contracts, and declare them absolutely void. A voidable contract is one which is good until the option of avoiding it is availed of by the party who has the option. For example, an infant with an income of $2000 a year contracts for the delivery of a Packard automobile on June 1. The car, being a luxury, makes the contract with the infant voidable on his part, and he may, before June 1, repudiate the contract and not be liable in a suit for breach of contract, or he may, if he choses, abide by the contract, take the car, and pay the purchase price when it is delivered. An unenforceable contract is one which in itself is perfectly good as a contract, but because of some rule of law cannot be enforced. For example, A agrees, orally, with the owner of 1 Broadway, to buy that property for $1,000,000. The terms of the contract are understood by both parties. This contract is not enforceable, because, as we shall see later, the Statute of Frauds requires every contract for the sale of real property to be in writing.

CONTRACTS UNDER SEAL.-There are two ways of making promises binding, and unless the promisor fulfils the requisites of one or the other of these two ways his promise will not be binding. The first of these ways relates to the form in which the promise is made; the second relates to the substance of the transaction, irrespective of the form. The way to make a promise binding by virtue of its form is to put it in writing and attach a seal to the writing. It is often thought that written promises are binding in any event, or that a promise that is not written is not binding in any event. Neither of these propositions, however, is true. A promise is not binding merely because it is in writing; it is necessary that something more shall be done. Not only must it be written, but a seal must be attached in order to make the promise binding by virtue of its form. Everyone is familiar with the common ending in written contracts-"witness my hand and seal," that is, my signature and seal.

WHAT IS A SEAL?-A seal may be-and was originally-made with sealing wax stamped with a crest, initial or what not. This is still a sufficient seal, but the common kind of seal is simply a wafer attached by mucilage to the writing. Another kind of seal, in use by corporations and notaries especially, consists simply of an impression made on paper without attaching any foreign substance whatever. Any of these methods of sealing a promise is good. In most States a written or printed scroll with the letters "L. S." written or printed within, or the word "Seal" written or printed may also be a seal if so intended. It may seem a ridiculous formality for the law to attach importance to this lapping a wafer and attaching it to the end of a writing. In a way it is ridiculous, but it is desirable to have some method by which a promise may be made binding. One method, as an original question, may be as good as another so long as it is an easy method, and attaching a seal is an easy method, and one which makes it possible to make a promise binding whenever you wish.

CHANGE BY STATUTE OF THE LAW AS TO SEALED CONTRACTS.-There has been in this country a certain hostility to the law of sealed instruments. It has been thought, with reason, that some of the rules governing contracts under seal have by their technicality promoted injustice. This has certainly been true of an old rule that contracts under seal could not be altered or discharged by any agreement not itself under seal. The rule, however, that a seal avoids the necessity of consideration is a desirable rule, since it is important to have some means by which those who so intend may make gratuitous promises binding. It would be better then to abolish undesirable incidents of sealed contracts by statute rather than to destroy totally the legal effect of a seal. However, in many States the distinction between sealed and unsealed contracts is totally abolished. In a number of other States the common-law rule has been changed by the enactment of statutory provisions to the effect that sealed contracts shall be presumed to have been made for a sufficient consideration, but this presumption is only prima facie, and lack of consideration may be affirmatively proved, even in the case of a sealed instrument. And under such statutes unsealed contracts remain as at common law, i. e., the burden of proving consideration rests upon the plaintiff who seeks to enforce such a contract.

REQUISITES OF SIMPLE CONTRACTS.-Sealed contracts are comparatively easy to understand. Simple contracts, which are promises made binding by virtue of their substance rather than their form, though called simple, are more difficult to understand, and more complex. They are also much more common than sealed contracts. A simple contract is a promise, or promises, to which the parties have assented, and for which a price called consideration has been paid. One may promise as much as he wishes, orally or in writing so long as he does not attach a seal to his signature, and then say he does not care to keep his promise, unless he has both been paid for the promise and there has been an assent by the promisor and promisee to the terms of the transaction. Mutual assent and consideration are, then, the requisites of simple contracts.

INTENT TO CONTRACT.-In the law of contracts, intention, as we ordinarily understand that term, plays little part. In fact, the Supreme Court of Connecticut, in the case of Davidson vs. Holden, 55 Conn. 103, said: "It is of no legal significance that the defendants did not intend to be individually liable, or that they did not know or believe that as a matter of law they would be."

It is our overt acts that count in contracts. Or shall we put it this way: In the eyes of the law overt acts manifest legal intention. A says to B: "I will sell you my watch for $25, and you may have until 9 o'clock tomorrow morning to decide." A meets B the next noon and says to him: "I am sorry you did not take the watch. It was a bargain." B replies: "Here is the price, I will take it. I intended to call you this morning but have been so busy I did not have an opportunity to do so. I told my wife last night I was going to accept your offer and I can produce five witnesses who were in the room and heard me say so." It is, nevertheless, no contract, for, as has been said, quoting from an old English case, "It is trite learning, that the thought of man is not tryable, for the devil himself knows not the thought of man." Occasionally there may be the overt act and still no contract, although the mere formalities of contract may have taken place. The facts in the case of McClurg v. Terry, 21 New Jersey Equity 225, were as follows: The plaintiff was an infant nineteen years of age, and had returned late in the evening to Jersey City, from an excursion, with the defendant and a number of young friends, among whom was a justice of the peace, and all being in good spirits, excited by the excursion, the plaintiff in jest challenged the defendant to be married to her on the spot; he in the same spirit accepted the challenge, and the justice, at their request, performed the ceremony, they making the proper responses. The ceremony was in the usual and proper form, the justice doubting whether it was in earnest or not. The defendant escorted the plaintiff to her home, and left her there as usual on occasions of such excursions; both acted and treated the matter as if no ceremony had taken place. In deciding the case, the court said: "In this case the evidence is clear that no marriage was intended by either party; that it was a mere jest got up in the exuberance of spirits to amuse the company and themselves. If this is so, there was no marriage." The overt act of the parties manifested no legal intention to be married. Should we change the facts in the following way, the court undoubtedly would have held a valid marriage: If, after the parties had gone through the marriage ceremony, as recited, they went on a two weeks' honeymoon, and on their return lived together as man and wife for a month and then suddenly decided to call the marriage off, on the ground that it was a joke and they did not intend the ceremony to be binding, regardless of what they said as to the transaction, their overt acts would be taken by the court as showing their real legal intention at the time the ceremony was entered into. One more illustration: When leaving the class tonight, there is a sudden downpour of rain, and the instructor remarks: "I will give ten dollars for an umbrella." A student offers an umbrella and claims the money. Here is an overt act, but a reasonable person would not take the words used literally. Generally speaking, agreements made jokingly and social agreements confer no contractual rights.

OFFER AND ACCEPTANCE.-The usual way that mutual assent is manifested is by an offer and an acceptance of the offer. Two persons are not likely to express at the identical minute the same proposition. It is as a practical matter, then, essential that one should make a proposition, and if a contract is to be made, that the other should assent to it. An offer may be made to one or more specified persons, or to anyone whomsoever who will do what the offer requests, as in case of an offer of a reward. An offer is itself a promise, but is a promise conditional on the payment of a consideration or return for it either by some act or some promise from the other party. According as the offer asks for an act or a promise it will fall into one or the other of the two great divisions of simple contracts; one kind is called unilateral (meaning one-sided), that is, a promise only on one side; the other is bilateral, a promise on each side.

ILLUSTRATIONS.-Let us give illustrations of these contracts. We say to John: "We will promise to give you, John, $100 if you will do a specified piece of work." That is a proposal to make an exchange of the work for the money in a sense, but more exactly it is an offer to exchange an agreement to give the money in return for the work. We are not saying to John: "If you will agree or promise to do that work we will promise to give you the money." We are saying that we will give him the money if he actually does the work. That offer requires the actual doing of the work before it is binding. Until then the price requested for the promise has not been paid. It is an offer of a unilateral contract. Again, when we say to a man: "If you will spade up our garden we will pay you $2 a day," we are making an offer for a unilateral contract. We are asking him to spade up the garden; not to promise to spade it up, but to do it, and when he does it he can hold us liable on our promise to pay him $2 a day. The promise will have become binding because we have been given the payment that we asked for in our promise. But if we say to a man: "If you will agree to work for us the next month we will pay you $100," and the man says, "All right," then we have a bilateral contract. We are asking him, as the price of our promise, not to work but to agree to work, and he has promised to do so. To say "I accept" is always sufficient acceptance in the case of a bilateral contract where a promise is requested, but if I said to you, "I will give you $5 if you will bring me a book here," it would not make a contract to say "I accept." I said I would give you $5 if you brought the book here, and nothing but bringing it here will form a contract. The offeree must always do what the offerer asks him. If an offerer asks for a promise, any form of words indicating assent would be sufficient, because they would mean, in effect: "I consent to make the promise you specify in your offer." The form of wording in simple contracts is immaterial. Any plain language is sufficient for an offer, and as for acceptance, it does not matter whether the acceptor says "all right," or "I accept your offer," or in what form he expresses his assent. The question is, does he express assent? Now, the offerer is at liberty to name any consideration in his offer that he sees fit. He can name, in other words, whatever price for his promise he chooses to ask. If the person addressed does not choose to pay that price, all he has to do is to reject the offer, but he can bind the offerer only on the terms proposed. Therefore, if the offerer asks for an act in return for his promise, that is, asks for an immediate payment, or work, or the giving of property for his promise, no contract can be made by the person addressed saying, "All right, I will do it;" that is not giving the price the offerer asked. On the other hand, should the offerer ask for a promise and not for an act, the acceptor must give the promise asked for.

OPTION WITHOUT CONSIDERATION.-A common business transaction that presents very well the principles governing the formation of simple contracts is what is called an option. Suppose the owner of a mine says: "I will sell you this mine for $50,000, and you may have thirty days to decide whether you choose to accept the offer or not." Now, it does not matter whether that statement is oral or in writing; it is merely an offer, and not binding as the matter stands as far as we have stated. However, if it were in writing and a seal attached (in a State where seals still have the force which the common law gave them) it would be a binding promise to sell the mine at that price at any time within thirty days. If there is no seal attached, as long as the offer is unaccepted and unpaid for, it is not binding. The man who makes it may say: "I withdraw my offer. It is true that I promised to keep the offer open thirty days, but you did not pay me for that promise and I am going to break the promise. I withdraw my offer." Any offer for the formation of a simple contract, while unaccepted, may be withdrawn. But, if before it was withdrawn and within the thirty days' limit, the person to whom the option was given says, "Here is the $50,000 which you said you would take for your mine," the offerer would then be bound, and would have to perform his part of the contract.

OPTION WITH CONSIDERATION.-Let us change the character of the option a little. Suppose in consideration of $1000 paid down the owner of a mine promises to sell the mine for $50,000 at any time within thirty days. Here the offer, or the contract-for it is now more than an offer-has been paid for, and it is therefore binding. The person to whom the offer was made paid $1000 for the promise, therefore the promisor is bound to keep it. It was not an absolute promise to give the mine to the buyer, but it was a promise to sell it to him for $50,000 if he chose to take it within thirty days; that is a conditional promise. A conditional promise may be binding and paid for just as well as an absolute promise.

INSURANCE POLICY.-Take the case of a fire insurance policy. That is a conditional promise, a promise to pay indemnity for the destruction of a house by fire. Therefore, the performance of the insurance company's promise is conditional on the suffering by the insured of loss by fire. An insurance policy is ordinarily a unilateral contract; the premium is the consideration or price paid for the promise, and the promise is binding on the insurance company from the time when the premium is thus paid. Of course, the promise is only binding according to its terms. The insured has bought a conditional promise, a promise to pay if the house burns down. He gets that promise, but he will not become entitled to any money or any damages unless the house burns down nor unless he complies with the other conditions of his policy.

GUARANTEE.-Another kind of a promise worth referring to is a guarantee. A question arises whether a business house will sell something to a buyer on credit, and it decides it will not without a guarantee. Accordingly, John agrees, in writing, that if the business house in question will sell James a bill of goods, John will guarantee the payment of the price. That means, if James does not pay for the goods, John will. That is a unilateral contract in which the promise is conditional, and the consideration for that promise is the selling of goods to James.

PRELIMINARY NEGOTIATIONS-ADVERTISEMENTS.-An offer is sometimes difficult to distinguish from other things. Suppose the case of an advertisement. A business house advertises that it will sell goods for a certain price. Take the case of a bond list issued by a banking house. The list states that the banking house will sell specified kinds of bonds at quoted prices. John receives one of those lists, looks it over, sees something that looks good to him, and goes into the banking house and says: "I will take five of those bonds at the price named here." The banking house says: "We have sold all the bonds of that kind that we had;" or it says, "The market has changed on those bonds and there has been some advance in the price." Has John a cause of action against the banking house? He has if that bond list amounts to an offer-that is, if the list means that the banking house offers to enter into a contract with anyone receiving the list. But it has been held that that sort of advertisement does not prima facie amount to an offer, although it might be put in such clear words of agreement to sell on the part of the banking house that it would amount to an offer. Generally an advertisement of this sort, or anything that can fairly be called an advertisement of goods for sale, is held to mean simply that the advertiser has these goods for sale and names a price he is putting upon them; he invites customers to come in and deal with him in regard to them. It is an invitation to come and make a trade rather than a direct offer of a trade.

ILLUSTRATION.-Again to illustrate: You are looking at a new model of an automobile in a show-room window. You like it, enter the salesroom, and say you will take the car, tendering the price. The manager tells you that it is simply their demonstration car, that he will be glad to book your order for a car of the same model, and can make delivery in a month. You are not satisfied, and wish to sue, claiming that your tender of the price constituted an acceptance of the dealer's offer. Your position would be unsound and there would be no recovery in such a case. The placing of the demonstration car in the window is simply an invitation to the public to come in and deal with the seller. On the other hand, suppose you go into a second-hand automobile salesroom. There are fifty cars of various makes and models on the floor and each one is labeled with a different price. You pick out a 1918 Packard which is marked $1500. You tender the price to the salesman and say you will take the car. He refuses to sell. In this case your tender is an acceptance of his offer to sell. In the former instance, placing a price on the demonstration car was not a statement to the public generally that that particular car was for sale at that price, but in this case, where the cars are all second-hand cars, the reasonable interpretation of placing the price on the 1918 Packard is that that particular car is for sale. Quite likely, the dealer did not have any other Packard car in stock and would have no way of securing any of that model at that price.

ORAL AGREEMENT PRELIMINARY TO WRITTEN CONTRACT.-Another case of the same nature that comes up not infrequently is this: Parties talk over a business arrangement and then they say, "As this is an important matter let us put it down in writing; let us have a written contract containing what has been agreed upon." When it comes to drawing up the contract, however, they cannot agree. One party then says, "Well, we made a definite oral agreement any way; let us carry that out." The other replies, "Why, no, all that was dependent on our making a written agreement." The settlement of their dispute depends on how definite and absolute the oral agreement was. It is possible to make an oral agreement binding, although the parties do agree and do contemplate that it shall subsequently be reduced to writing, but generally the inference is that the oral agreement was merely a preliminary chaffering to fix the terms of the writing, and that everything is tentative until the writing is made and signed.

AUCTION SALES.-Another state of affairs involving preliminary invitations is presented by auction sales. The auctioneer puts goods up for sale, a bid is made, the auctioneer gets no other bid, and then says, "I will withdraw this from sale." Is the auctioneer liable? Has he made a contract to sell that article to the highest bidder? When the transaction is analyzed, is this what the auctioneer says in effect: "I offer to sell these goods to the highest bidder?" If this is the correct interpretation, then when the highest bidder says, in effect, "I agree to buy them," there would be a contract. On the other hand, if what the auctioneer says is in effect like what the advertiser says: "Here are some goods for sale, what do you bid, gentlemen," then the auctioneer is not making an offer himself. He is inviting offers from the people before him, and until he accepts one of those offers from the bidders before him there would be no contract; and until then the auctioneer could withdraw the goods. And that is the construction put upon the auction sale-that the auctioneer is not making an offer, but is simply inviting offers. Even if the auctioneer promises that he will accept the highest offer, that is, that he will sell to the highest bidder, his promise to accept the highest bid, not being paid for, would not be binding upon him were it not for a statute in some States which, in the sale of goods, would make an auctioneer bound to keep a promise to sell without reserve, that is, to the highest bidder, if he made such a promise.