Contract Law - Part 1: Formation and Performance

Two bodies of law, one first question

A man on television promises a million dollars to whoever pulls his wedding ring out of a shark. Someone does. A 1967 Mustang is advertised at a tenth of its intended price, and a buyer shows up with cash. A homeowner signs a builder’s proposal but writes in a request for a different wood. A contractor swaps in a nearly identical marble, and the client refuses to pay the balance. These are the four disputes in the activity, each a hypothetical built on a real case. Each one asks some mix of three questions: which law governs, whether a contract formed, and whether anyone performed it.

The first question goes first because its answer picks the rules. The common law versus UCC Article 2 split sorts contracts by what they are about. The common law, the body of rules courts have built case by case, governs services, real estate, and employment. Article 2 of the Uniform Commercial Code (opens in a new tab) governs sales of goods, meaning tangible things you can move. A restaurant that buys a commercial oven has made a sale of goods. A restaurant that hires a technician to repair the oven usually has a service contract, even if a new part goes in, because courts generally ask which half of a mixed contract predominates.

The label matters because Article 2 departs from the common law in both directions: it is looser about how a contract forms and stricter about what counts as performance. Name the governing law before you do anything else.

How a contract comes into being

No court can see inside a person’s head, so contract law does not try. It builds offer and acceptance from outward signs. An offer is a definite proposal made with the intent to be bound, and a court judges that intent by what a reasonable person would take the words and conduct to mean. A private reservation counts for nothing.

Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954) (opens in a new tab) shows how far that goes. On a December night in 1952, in his own Virginia restaurant, A. H. Zehmer wrote an agreement to sell W. O. Lucy the Ferguson farm for $50,000. He wrote it on the back of a guest check, and he and his wife signed it. Both men had been drinking. Zehmer later said the whole thing was a joke, and he had whispered as much to his wife so Lucy would not hear. Virginia’s highest court enforced the sale anyway. The two men had discussed the deal for forty minutes or more, and Zehmer had rewritten the draft when Lucy objected to it. Nothing Zehmer said or did in Lucy’s hearing before the signing signaled a joke. A person cannot claim to be jesting, the court held, when the words and conduct would lead a reasonable person to believe the agreement was real.

An acceptance has to meet the offer on its terms. Under the common law’s mirror image rule, a reply that changes a term is not an acceptance at all. It is a counteroffer, which rejects the original offer and leaves the first party free to take the new terms or walk away. Article 2 relaxes the rule for goods. A definite acceptance can form a contract even when it adds or changes terms, and the Code has its own rules for which terms end up in the deal.

Assent alone does not make a contract. The deal also needs consideration: each side gives up something in exchange for what it gets, whether money, a service, or a promise. Cornell’s Wex entry on consideration (opens in a new tab) works through the idea with a house painter hired to paint a house. A promise to give a friend your old car next month fails the test, because nothing comes back to you for it. And courts rarely ask whether the exchange was a good deal. They ask only whether there was one.

When has a party actually performed

Forming a contract is one question. Doing what it requires is another, and here the two bodies of law split hardest.

The common law asks for substantial performance. A party that delivers the contract’s main purpose, departing from it only in minor ways and in good faith, can recover the contract price, less the other side’s damages for the shortfall. The classic case is Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (N.Y. 1921) (opens in a new tab). A builder finished a country house costing more than $77,000, and the owner moved in. Nine months later, the owner learned that some of the pipe was not the Reading brand the specifications named, and the last $3,483.46 went unpaid. The pipe was sealed inside the walls, so replacing it meant tearing out finished parts of the house.

The mix-up came from a subcontractor’s oversight, and the builder offered to show that the pipe it used matched Reading pipe in quality and price. New York’s highest court held, 4 to 3, that the builder could recover. Judge Benjamin Cardozo wrote that the owner’s allowance was the difference in value, “either nominal or nothing,” and not the great cost of replacement. He added that a builder who departs from a contract on purpose gets no such mercy. The dissent answered that the owner had a right to the pipe he ordered, whatever his reason. Cornell’s Wex entry on substantial performance (opens in a new tab) teaches the doctrine through the same case.

Sales of goods run on the opposite rule. Under the perfect tender rule, UCC section 2-601 (opens in a new tab) lets a buyer reject goods that fail to match the contract “in any respect.” A restaurant that ordered forty oak tables can refuse a truckload of walnut ones, even if walnut costs more. The Code softens that edge with the seller’s right to cure under section 2-508 (opens in a new tab). A seller whose delivery is rejected can often fix the problem with a conforming delivery, usually within the time the contract allows. So the same kind of flaw can justify sending goods back and still leave a builder owed nearly the full price. Which result you get depends on the first question.

Who can enforce the contract

A contract binds the parties who made it, but it does not always stay with them. The rules on assignment and third-party beneficiaries decide who else can step in. A food supplier owed $20,000 by a restaurant can sell that right to payment to a finance company, which then collects from the restaurant. That is an assignment. The supplier can also delegate its duty to deliver, perhaps to another distributor, but if the substitute never shows up, the supplier still answers for it. Delegation hands off the work and keeps the responsibility.

Some contracts are made for an outsider from the start. A parent who buys life insurance and names a child as beneficiary has made a contract with the insurer, and the child signed nothing. The child is still an intended beneficiary who can enforce the policy. Compare the neighbor whose property value rises when a new store opens next door. The neighbor benefits from the builder’s contract, but it was not made for the neighbor, and the neighbor cannot sue on it.

Businesses buy, sell, and assign contracts all the time, so these rules come up constantly. They decide who can sue, and who can be sued, once a contract leaves the two parties who signed it.

Working the fact patterns

The four opinions linked in the activity did not decide these disputes. No shark appears in Kolodziej v. Mason, which began with a defense lawyer’s million-dollar challenge in a television interview. Pena v. Fox has no greenhouse either; it turned on the release in an insurance settlement. Each opinion supplies a rule, and the Contract Formation and Performance activity asks you to carry that rule to facts the court never saw. The AI can help you find the rule in the text you paste. Deciding what it means for Harry’s unpaid $10,000 is the part you post.