The Art of Creating the Modern Statutory Business Trust

Sec. 3.3. The Common Law Contract Principles

A. Intent to Contract – Mutual Assent – Privity of Contract

The law assumes that a contract is the result of a voluntary act by each party. For a contract to be formed and enforceable, the parties must intend to contract. The intent of the parties to contract is objectively manifested by mutual assent. This means that the parties have reached a “meeting of the minds” as to the rights and obligations of each party. The parties to the contract are in privity which means that only the parties bound by and benefit from the contract.
B. Offer – Acceptance

An “offer” is a proposal to enter into a contract which is communicated to another person in a manner that is calculated to elicit an “acceptance” leading to a legally binding contract. An acceptance occurs when the person to whom the offer is communicated acts in a manner which manifests acceptance of the offer.

C. Consideration – Promissory estoppel – Aleatory contracts

For a contract to be legally binding, it must be either supported by consideration or a party to the contract must have relied to its detriment on the promise of the other party.

  1. The consideration doctrine enforces promises for which there has been a “bargained for” exchange of an item of value between the parties. Consideration is an item of value but not services. The sale of goods or real property are contracts which are supported by consideration.
  2. The doctrine of promissory estoppel enforces a promise which the promissor-party communicates to the promissee-party which induces the promissee-party to rely on the promise to its legal or economic detriment. An employment agreement is a contract which is based on the doctrine of promissory estoppel.
  3. An aleatory contract is a contract in which each a party promises pay to the other party an item of value in exchange for a promise by the other party to perform but only if an agreed upon event occurs. Contracts for insurance are aleatory contracts.

D. Conditions

  1. A condition precedent is any event other than the lapse of time that must occur before performance is due.
  2. A condition subsequent (also referred to as an event in discharge) is an event, the occurrence of which causes the obligation to perform to be discharged.
  3. An express condition is a condition upon which the parties have affirmatively agreed. An express condition can also be implied from the conduct of the parties.
  4. A constructive condition is a condition to which the parties have not agreed but which the common law implies to assure fundamental fairness.
  5. The courts do not favor conditions in contracts especially when the occurrence or non-occurrence of a condition leads to a forfeiture. Wherever possible, courts will construe a condition as a promise which creates an obligation. If the parties intend that a condition be imposed, the words used to create the condition must clearly be the language of condition.

E. Expiration – Termination – Termination of Contracts Prior to Full Performance – Rescission

  1. A contract expires when each party has performed its obligations under the contract or an event occurs which is specified in the contract as an event which causes the contract to expire. The most common such event is the lapse of a specified period of time.
  2. A contract terminates if, prior to the expiration of the contract, an anticipatory breach or an actual breach occurs. An anticipatory breach occurs when a party manifests an intent not to perform before performance is due. An actual breach occurs when a party fails to perform when performance is due.
  3. A contract can also be terminated by rescission. Mutual rescission occurs when the parties agree to cancel or annul the contract and return any consideration. Unilateral rescission occurs where one party was subjected to fraud or duress and seeks to be put itself in the position it was in before the contract was concluded.

F. Definite Term – Indefinite Term – Perpetual

  1. A contract can be for a definite term which means that neither party has any further rights against nor any obligations to one another after an event designated by the parties has occurred. The most common event is the lapse of time.
  2. A contract can be for an indefinite term which means that the parties have not designated an event that ends the legal relationship created by the contract. Either party may, in its sole discretion and at any time, cause the legal relationship created by the contract to cease. The most common method is for one party to send a notice of termination to the other party.
  3. A perpetual contract has no designated time or event that causes the contractual relationship to expire or terminate. Neither party has either the right or power to cause the contractual relationship to end. Perpetual contracts are disfavored as against public policy in many jurisdictions.

G. Implied Covenant of Good Faith and Fair Dealing

The common law implies a covenant of good faith and fair dealing in every contract even if the contract does set forth any such covenant. Neither party shall act in any way which would have the effect of destroying or injuring the right of the other party to receive the benefits of the contract. A party breaches the implied covenant of good faith and fair dealing if that party evades the spirit of the contract, willfully renders imperfect performance, or interferes with performance by the other party.
H. Implied Terms

The common law recognizes that the express terms of a contract may not give full practical effect to the intent of the parties. A court is empowered to imply that a term exists in the contract if such an implied term is necessary to effect the intent of the parties or to avoid substantial injustice. Because the courts must not re-write the contract, the courts rarely use this power.

I. Mistake

A contract is without legal force or effect if the mutual assent of the parties was based on a mistake as to a fact which is fundamental to the contract. The parties may reform the contract by substituting a correct provision or term in place of the mistake.

J. Oral Agreements

An agreement, including a constituent agreement, which two or more parties conclude is a contract to the same extent as is a written agreement. The problem is that determining whether mutual assent occurred, resolving ambiguities as to the means and manner of performance and proving the contract terms are difficulties which the parties usually encounter.

K. The Statute of Frauds

The Statute of Frauds was enacted by the English Parliament in 1677 to prevent fraud or perjury. It mandated that certain contracts must be in writing to be enforceable in court. It entered US law during the colonial period and remains in US law. The United Kingdom repealed the Statute of Frauds in 1954. Most states maintain a form of the Statute of Frauds. A contract must be writing and signed at least by the party to be charged if it cannot be performed within one year from the date on which the contract is concluded. Certain contracts under the Uniform Commercial Code (UCC) must be in writing.

L. Duty to Read – Presumption of Knowing Assent

As long as a party knows that it is signing a contract, the party is presumed to know and understand the contents of the contract. Ignorance of the terms of the contract is not a defense. M. Breach of Contract – Legal Remedies and Equitable Remedies

A breach of contract occurs when a party fails to timely perform its obligations under the contract. Unless there exists a legally cognizable excuse of performance, the aggrieved party is entitled to a remedy. The two categories of remedies are legal remedies and equitable remedies.

  1. Legal remedies are available in the form of damages. Damages consist of a dollar amount which equals the dollar amount which the aggrieved party would have received if the breaching party had lawfully performed.
  2. Equitable remedies are available when damages are not adequate to compensate the aggrieved party. The three categories of equitable remedies are:


Specific performance – A court orders the breaching party to perform.


Restitution – A court orders the breaching party to restore to the aggrieved party any benefit which the breaching party unjustly gained as the result of the breach. The benefit can include damages.


Rescission – A court orders that the contract is annulled, meaning that the contract was never formed. The parties are placed as far as possible in the same position they would have been if the contract had not been concluded.