A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

Comment:

a. Other meanings. The word “contract” is often used with meanings different from that given here. It is sometimes used as a synonym for “agreement” or “bargain.” It may refer to legally ineffective agreements, or to wholly executed transactions such as conveyances; it may refer indifferently to the acts of the parties, to a document which evidences those acts, or to the resulting legal relations. In a statute the word may be given still other meanings by context or explicit definition. As is indicated in the Introductory Note to the Restatement of this Subject, definition in terms of “promise” excludes wholly executed transactions in which no promises are made; such a definition also excludes analogous obligations imposed by law rather than by virtue of a promise.

b. Act and resulting legal relations. As the term is used in the Restatement of this Subject, “contract,” like “promise,” denotes the act or acts of promising. But, unlike the term “promise,” “contract” applies only to those acts which have legal effect as stated in the definition given. Thus the word “contract” is commonly and quite properly also used to refer to the resulting legal obligation, or to the entire resulting complex of legal relations. Compare Uniform Commercial Code § 1-201(11), defining “contract” in terms of “the total legal obligation which results from the parties' agreement.”

c. Set of promises. A contract may consist of a single promise by one person to another, or of mutual promises by two persons to one another; or there may be, indeed, any number of persons or any number of promises. One person may make several promises to one person or to several persons, or several persons may join in making promises to one or more persons. To constitute a “set,” promises need not be made simultaneously; it is enough that several promises are regarded by the parties as constituting a single contract, or are so related in subject matter and performance that they may be considered and enforced together by a court.

d. Operative acts other than promise. The definition does not attempt to state what acts are essential to create a legal duty to perform a promise. In many situations other acts in addition to the making of a promise are essential, and the formation of the contract is not completed until those acts take place. For example, an act may be done as the consideration for a contract (see § 71), and may be essential to the creation of a legal duty to perform the promise (see § 17). Similarly, delivery is required for the formation of a contract under seal (see § 95). Such acts are not part of the promise, and are not specifically included in the brief definition of contract adopted here.

e. Remedies. The legal remedies available when a promise is broken are of various kinds. Direct remedies of damages, restitution and specific performance are the subject of Chapter 16. Whether or not such direct remedies are available, the law may recognize the existence of legal duty in some other way such as recognizing or denying a right, privilege or power created or terminated by the promise.

Illustration:

1. A orally agrees to sell land to B; B orally agrees to buy the land and pays $1000 to A. The agreement is unenforceable under the Statute of Frauds. B's right to restitution of the $1000, however, is governed by the same rules as if the agreement were enforceable. B has a right to recover the $1000 paid if A refuses to convey the land, but not if A is ready and willing to convey. See § 140 and the provisions on restitution in § 375. By virtue of this indirect recognition of the duty to convey, the agreement is a contract.

f. Varieties of contracts. The term contract is generic. As commonly used, and as here defined, it includes varieties described as voidable, unenforceable, formal, informal, express, implied (see Comment a to § 4), unilateral, bilateral. In these varieties neither the operative acts of the parties nor the resulting relations are identical.

g. “Binding promise.” A promise which is a contract is said to be “binding.” As the term “contract” is defined, a statement that a promise is binding does not necessarily mean that any particular remedy is available in the event of breach, or indeed that any remedy is available. Because of the limitations inherent in stating or illustrating rules for the legal relations resulting from promises, it frequently becomes necessary to indicate that a legal duty to perform arises from the facts stated, assuming the absence of other facts. In order to avoid the connotation that the duty stated exists under all circumstances, the word “binding” or a statement that the promisor is “bound” is used to indicate that the duty arises if the promisor has full capacity, if there is no illegality or fraud in the transaction, if the duty has not been discharged, and if there are no other similar facts which would defeat the prima facie duty which is stated.

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§ 2. Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee.

(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

              
Comment:

a. Acts and resulting relations. “Promise” as used in the Restatement of this Subject denotes the act of the promisor. If by virtue of other operative facts there is a legal duty to perform, the promise is a contract; but the word “promise” is not limited to acts having legal effect. Like “contract,” however, the word “promise” is commonly and quite properly also used to refer to the complex of human relations which results from the promisor's words or acts of assurance, including the justified expectations of the promisee and any moral or legal duty which arises to make good the assurance by performance. The performance may be specified either in terms describing the action of the promisor or in terms of the result which that action or inaction is to bring about.

b. Manifestation of intention. Many contract disputes arise because different people attach different meanings to the same words and conduct. The phrase “manifestation of intention” adopts an external or objective standard for interpreting conduct; it means the external expression of intention as distinguished from undisclosed intention. A promisor manifests an intention if he believes or has reason to believe that the promisee will infer that intention from his words or conduct. Rules governing cases where the promisee could reasonably draw more than one inference as to the promisor's intention are stated in connection with the acceptance of offers (see §§ 19 and 20), and the scope of contractual obligations (see §§ 201, 219).

c. Promise of action by third person; guaranty. Words are often used which in terms promise action or inaction by a third person, or which promise a result obtainable only by such action. Such words are commonly understood as a promise of conduct by the promisor which will be sufficient to bring about the action or inaction or result, or to answer for harm caused by failure. An example is a guaranty that a third person will perform his promise. Such words constitute a promise as here defined only if they justify a promisee in an expectation of some action or inaction on the part of the promisor.

d. Promise of event beyond human control; warranty. Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain, and may be dealt with as if the warrantor could cause the fact to be as he asserted. It is then immaterial that the actual condition of affairs may be irrevocably fixed before the promise is made.

Words of warranty, like other conduct, must be interpreted in the light of the circumstances and the reasonable expectations of the parties. In an insurance contract, a “warranty” by the insured is usually not a promise at all; it may be merely a representation of fact, or, more commonly, the fact warranted is a condition of the insurer's duty to pay (see § 225(3)). In the sale of goods, on the other hand, a similar warranty normally also includes a promise to answer for damages (see Uniform Commercial Code § 2-715).

Illustrations:

1. A, the builder of a house, or the inventor of the material used in part of its construction, says to B, the owner of the house, “I warrant that this house will never burn down.” This includes a promise to pay for harm if the house should burn down.

2. A, by a charter-party, undertakes that the “good ship Dove,” having sailed from Marseilles a week ago for New York, shall take on a cargo for B on her arrival in New York. The statement of the quality of the ship and the statement of her time of sailing from Marseilles include promises to pay for harm if the statement is untrue.

e. Illusory promises; mere statements of intention. Words of promise which by their terms make performance entirely optional with the “promisor” whatever may happen, or whatever course of conduct in other respects he may pursue, do not constitute a promise. Although such words are often referred to as forming an illusory promise, they do not fall within the present definition of promise. They may not even manifest any intention on the part of the promisor. Even if a present intention is manifested, the reservation of an option to change that intention means that there can be no promisee who is justified in an expectation of performance.

On the other hand, a promise may be made even though no duty of performance can arise unless some event occurs (see §§ 224, 225(1)). Such a conditional promise is no less a promise because there is small likelihood that any duty of performance will arise, as in the case of a promise to insure against fire a thoroughly fireproof building. There may be a promise in such a case even though the duty to perform depends on a state of mind of the promisor other than his own unfettered wish (see § 228), or on an event within the promisor's control.

Illustration:

3. A says to B, “I will employ you for a year at a salary of $5,000 if I go into business.” This is a promise, even though it is wholly optional with A to go into business or not.

f. Opinions and predictions. A promise must be distinguished from a statement of opinion or a mere prediction of future events. The distinction is not usually difficult in the case of an informal gratuitous opinion, since there is often no manifestation of intention to act or refrain from acting or to bring about a result, no expectation of performance and no consideration. The problem is frequently presented, however, whether words of a seller of goods amount to a warranty. Under Uniform Commercial Code § 2-313(2) a statement purporting to be merely the seller's opinion does not create a warranty, but the buyer's reliance on the seller's skill and judgment may create an implied warranty that the goods are fit for a particular purpose under Uniform Commercial Code § 2-315. In any case where an expert opinion is paid for, there is likely to be an implied promise that the expert will act with reasonable care and skill.

A promise often refers to future events which are predicted or assumed rather than promised. Thus a promise to render personal service at a particular future time commonly rests on an assumption that the promisor will be alive and well at that time; a promise to paint a building may similarly rest on an assumption that the building will be in existence. Such cases are the subject of Chapter 11. The promisor may of course promise to answer for harm caused by the failure of the future event to occur; if he does not, such a failure may discharge any duty of performance.

Illustration:

4. A, on seeing a house of thoroughly fireproof construction, says to B, the owner, “This house will never burn down.” This is not a promise but merely an opinion or prediction. If A had been paid for his opinion as an expert, there might be an implied promise that he would employ reasonable care and skill in forming and giving his opinion.

g. Promisee and beneficiary. The word promisee is used repeatedly in discussion of the law of contracts, and it cannot be avoided here. In common usage the promisee is the person to whom the promise is made; as promise is defined here, the promisee might be the person to whom the manifestation of the promisor's intention is communicated. In many situations, however, a promise is complete and binding before the communication is received (see, for example, §§ 63 and 104(1)). To cover such cases, the promisee is defined here as the addressee. As to agents or purported agents of the addressee, see § 52 Comment c.

In the usual situation the promisee also bears other relations to the promisor, and the word promisee is sometimes used to refer to one or more of those relations. Thus, in the simple case of a loan of money, the lender is not only the addressee of the promise but also the person to whom performance is to be rendered, the person who will receive economic benefit, the person who furnished the consideration, and the person to whom the legal duty of the promisor runs. As the word promisee is here defined, none of these relations is essential.

Contractual rights of persons not parties to the contract are the subject of Chapter 14. The promisor and promisee are the “parties” to a promise; a third person who will benefit from performance is a “beneficiary.” A beneficiary may or may not have a legal right to performance; like “promisee”, the term is neutral with respect to rights and duties. A person who is entitled under the terms of a letter of credit to draw or demand payment is commonly called a beneficiary, but such a person is ordinarily a promisee under the present definition. See Uniform Commercial Code § 5-103.

§ 3. Agreement Defined; Bargain Defined


An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

Comment:

a. Agreement distinguished from bargain. Agreement has in some respects a wider meaning than contract, bargain or promise. On the other hand, there are contracts which do not require agreement. See, e.g., §§ 82-90, 94, 104. The word “agreement” contains no implication that legal consequences are or are not produced. It applies to transactions executed on one or both sides, and also to those that are wholly executory. The word contains no implication of mental agreement. Such agreement usually but not always exists where the parties manifest assent to a transaction.

b. Manifestation of assent. Manifestation of assent may be made by words or by any other conduct (see § 19). Even silence in some circumstances is such a manifestation (see § 69). Compare the definition of “agreement” in Uniform Commercial Code § 1-201(3).

c. Bargain distinguished from agreement. Bargain has a narrower meaning than agreement, since it is applicable only to a particular class of agreements. It includes agreements which are not contracts, such as transactions where one party makes a promise and the other gives something in exchange which is not consideration, or transactions where what would otherwise be a contract is invalidated by illegality. As here defined, it includes completely executed transactions, such as exchanges of goods (barters) or of services, or sales where goods have been transferred and the price paid for them, although such transactions are not within the scope of this Restatement unless a promise is made.

d. Offer. A bargain is ordinarily made by an offer by one party and an acceptance by the other party or parties, the offer specifying the two subjects of exchange to which the offeror is manifesting assent (see §§ 22 and 24).

e. Contract distinguished from bargain. A contract is not necessarily a bargain. Thus, a promise to make a gift, if made under seal, may be a contract (see § 95), but it is not a bargain. Other contracts which are not bargains are the subject of §§ 82-94. Such contracts do not require manifestations of mutual assent in the form of offer and acceptance.

§ 5. Terms Of Promise, Agreement, Or Contract

(1) A term of a promise or agreement is that portion of the intention or assent manifested which relates to a particular matter.

(2) A term of a contract is that portion of the legal relations resulting from the promise or set of promises which relates to a particular matter, whether or not the parties manifest an intention to create those relations.

Comment:

a. Agreed terms. The terms of a promise or agreement are those expressed in the language of the parties or implied in fact from other conduct. Both language and conduct are to be understood in the light of the circumstances, including course of dealing or usage of trade or course of performance. See Comment a to § 4. If a promise is binding, a term of the promise becomes a term of the contract unless it is rendered inoperative by some rule of law.

b. Contract terms supplied by law. Much contract law consists of rules which may be varied by agreement of the parties. Such rules are sometimes stated in terms of presumed intention, and they may be thought of as implied terms of an agreement. They often rest, however, on considerations of public policy rather than on manifestation of the intention of the parties. In the Restatement of this Subject, such rules are stated in terms of the operative facts which make them applicable.

c. Statutory contract terms. Statutes providing for contract terms vary in the extent to which they follow the terminology used here, and in the extent to which they permit variation by agreement. Under Uniform Commercial Code § 1-102(3), for example, the effect of provisions of the Code may be freely varied by agreement, with limited exceptions; at the other extreme are statutes or administrative regulations prescribing standard forms of such documents as insurance policies or bills of lading. Transactions entered into under statutes providing either optional or required terms commonly contain promises within the present definition, but they may also produce obligations which do not rest upon any manifestation of the intention of the obligor.

Such statutory obligations are beyond the scope of the Restatement of this Subject. The statutes are sometimes written in terms of presumed intention, and they are sometimes properly interpreted as imposing the same legal consequences as if one of the parties to a contract had made a promise in the prescribed terms. If so, rules stated here may be applicable.

Illustration:

1. A contracts to sell B a described automobile. Both parties sign a printed contract form on which the description is typed and which contains the printed words, “Seller hereby excludes all warranties, express or implied.” Under Uniform Commercial Code § 2-316 the quoted words do not exclude an implied warranty of merchantability, and under § 2-314 A warrants that the automobile is fit to drive. Under § 2-714 the warranty has the effect of a promise to pay for harm if the warranty is broken.

§ 6. Formal Contracts

The following types of contracts are subject in some respects to special rules that depend on their formal characteristics and differ from those governing contracts in general:

(a) Contracts under seal,

(b) Recognizances,

(c) Negotiable instruments and documents,

(d) Letters of credit.

Comment:

a. “Formal contracts.” The contracts referred to in this Section are sometimes referred to as “formal contracts,” and other contracts may then be called “informal” or “simple” contracts. This usage is avoided in this Restatement because contracts other than those enumerated are also subject to formal requirements. Thus statutes modeled on the English Statute of Frauds make certain classes of contracts unenforceable unless evidenced by a writing; rules developed under such statutes are stated in Chapter 5. Similarly, Uniform Commercial Code § 9-201 gives effect to a “security agreement” according to its terms, with exceptions which include the specification of formal requisites in § 9-203. Except for contracts under seal, the special rules governing the contracts enumerated in this Section are not stated in the Restatement of this Subject. Many of the rules here stated as applicable to contracts in general also have application to these special types of contract. See, for example, Uniform Commercial Code § 1-103.

b. Contracts under seal. The rules governing the formation of sealed contracts are stated in Chapter 4, and peculiar incidents attached to such contracts after formation are referred to where appropriate. In many States the legal effect of seals has been modified or abolished by statute. Under Uniform Commercial Code § 2-203, contracts or offers to buy or sell goods are not contracts under seal even though a seal is affixed. Under Uniform Commercial Code § 3-113, a negotiable instrument under seal is nevertheless subject to Article 3 of the Code, including the rule of § 3-408 that want or failure of consideration is a defense.

c. Recognizances. A recognizance is an acknowledgment in court by the recognizor that he is bound to make a certain payment unless a specified condition is performed. They are in use chiefly to secure, first, the attendance in court at a future day of the recognizor, or, second, the prosecution of an action, or, third, the payment of bail.

d. Negotiable instruments. Negotiable instruments are such drafts, certificates of deposit, and promissory notes as are payable to bearer or to the order of a specified person, and such bonds, certificates of shares of stock, and other investment securities as are in bearer or registered form. In every State they are subject either to Article 3 or Article 8 of the Uniform Commercial Code or to the older statutes, the Uniform Negotiable Instruments Law and the Uniform Stock Transfer Act.

e. Negotiable documents. Negotiable documents are such warehouse receipts, bills of lading, and other documents of title as run to bearer or to the order of a named person, or, where recognized in overseas trade, to a named person or assigns. Warehouse receipts are subject in every State either to Article 7 of the Uniform Commercial Code or to the Uniform Warehouse Receipts Act. Interstate and export bills of lading are subject to the Federal Bills of Lading Act; import and local bills are subject in most States to Article 7 of the Uniform Commercial Code or to the Uniform Bills of Lading Act.

f. Letters of credit. A letter of credit is a promise to honor drafts or other demands for payment which is within the scope of Article 5 of the Uniform Commercial Code. The Code defines that scope, prescribes formal requirements, provides that no consideration is necessary to establish a letter of credit, and partially codifies the governing law. The governing law is closely related to the law of negotiable instruments; it has been developed from the law merchant and influenced by Section 135 of the Uniform Negotiable Instruments Law and by statutes and usages relating to banking. The Uniform Commercial Code makes no radical change in the law developed by judicial decision.

§ 7. Voidable Contracts

A voidable contract is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance.

Comment:

a. “Void contracts.” A promise for breach of which the law neither gives a remedy nor otherwise recognizes a duty of performance by the promisor is often called a void contract. Under § 1, however, such a promise is not a contract at all; it is the “promise” or “agreement” that is void of legal effect. If the term “contract” were defined to refer to the acts of the parties without regard to their legal effect, a contract could without inconsistency be referred to as “void.”

b. Grounds of avoidance. Typical instances of voidable contracts are those where one party was an infant, or where the contract was induced by fraud, mistake, or duress, or where breach of a warranty or other promise justifies the aggrieved party in putting an end to the contract. Usually the power to avoid is confined to one party to the contract, but where, for instance, both parties are infants, or where both parties enter into a contract under a mutual mistake, the contract may be voidable by either one of the parties. Avoidance is often referred to as “disaffirmance.”

c. Consequences of avoidance. The legal relations that exist after avoidance vary with the circumstances. In some cases the party who avoids the contract is entitled to be restored to a position as good as that which he occupied immediately before the formation of the contract; in other cases the parties may be left in the same condition as at the time of the avoidance. In many cases the power of avoidance exists only if the original situation of the parties can be and is restored at least substantially; but this is not necessarily the case. An infant, for instance, in many jurisdictions is allowed to avoid his contract without this qualification, so that when the infant exercises his power the parties frequently are left in a very different situation from that which existed when the contract was made. See § 14; Restatement of Restitution § 62. As to breach of contract, see Chapters 10 and 16 of this Restatement; as to mistake, misrepresentation, duress and undue influence, see Chapters 6 and 7.

Illustration:

1. A, an infant, sells and delivers his watch to B, an adult, in return for B's promise to pay $20. There is a contract whereby B becomes owner of the watch and is under an enforceable duty to pay $20 to A. But A has the power to extinguish his own right to the money and B's duty to pay it and, as against B, to revest in himself the ownership of the watch.

d. Promptness of election. Voidable contracts differ with respect to the requirement that the avoiding party manifest his election promptly. In some cases the power of avoidance may be lost by unreasonable delay in returning benefits received or in manifesting the election to avoid. In other cases, particularly where the contract is entirely executory on both sides, no manifestation of intention is necessary until an action is brought against the party having the power of avoidance.

Illustrations:

2. A, by fraud, induces B to make a promise to pay A money in consideration of goods delivered by A to B. There is a contract, but the fraudulent representations of A give B a power to avoid by tendering back to A within a reasonable time the goods received from him.

3. A, an infant, makes an agreement with B, an adult, the infant promising to pay money and the adult promising to deliver a chattel. This is enforceable against B, but not against A. If A has not previously avoided, he will have the power of ratification upon attaining his majority.

e. Power of ratification. The propriety of calling a transaction a voidable contract rests primarily on the traditional view that the transaction is valid and has its usual legal consequences until the power of avoidance is exercised. Where each party has a power of avoidance, there is no legal duty of performance; but the term voidable contract is appropriate if ratification by one of the parties would terminate his power of avoidance and make the contract enforceable against him. See § 85. Moreover, action may be necessary in order to prevent the contract from producing the ordinary legal consequences of a contract; often such action in order to be effectual must be taken promptly.

Illustration:

4. A, by fraud, induces B to promise to pay for certain advice which A gives. This promise creates no duty in B, but is not wholly void, because it can be validated by B after he learns the facts.

§ 8. Unenforceable Contracts

An unenforceable contract is one for the breach of which neither the remedy of damages nor the remedy of specific performance is available, but which is recognized in some other way as creating a duty of performance, though there has been no ratification.

Comment:

a. Distinction between “voidable” and “unenforceable.” Just as a contract may be voidable by one party or by either party, so it may be enforceable by one and not by the other or it may be unenforceable by either. Similarly, one party to an unenforceable contract may have a power to make the contract enforceable by all the usual remedies, and both voidable and unenforceable contracts may have collateral consequences. Voidable contracts might be defined as one type of unenforceable contract. As defined here, however, the term unenforceable contract refers to rules under which the duty of performance does not depend solely on the election of one party. In the transactions here classified as unenforceable, some legal consequences other than the creation of a power of ratification follow without further action by either party.

Illustrations:

1. A, an infant, orally accepts a written offer signed by B, an adult, to sell a tract of land. A's promise is voidable by him because of his infancy and unenforceable under the Statute of Frauds. Upon attaining his majority, A delivers to B a signed writing stating the terms of the contract and manifesting an election to avoid it. Under § 133, the Statute of Frauds no longer prevents enforcement; but the contract is avoided.

2. A is indebted to B, but the statute of limitations has barred a direct remedy. A has the power to make direct remedies available or to make a new contract without consideration by making a new promise or part payment of the debt (see § 82). Even without such further acts, legal consequences may flow from the barred debt. If the creditor has security, he may have a right to apply it towards payment of the debt.

b. Types of unenforceable contracts. Some contracts are unenforceable because they arise out of illegal bargains which are neither wholly void nor voidable. See Comments b-d to § 178; §§ 183-84; Comment b to § 197. Others are unenforceable because of laws relating primarily to remedies, such as the Statute of Frauds (see Chapter 5) or Statute of Limitations.

Illustrations:

3. A agrees to sell specific goods to B, and B agrees to buy them. A has previously contracted to sell the same goods to C, as B knows. The bargain between A and B is unenforceable on grounds of public policy (§ 194), and neither party can enforce it while executory. But if either party performs his promise, he can recover what he has transferred or its value. The return promise, though unenforceable, is given legal effect as showing that the performance was not gratuitous, and is therefore a contract.

4. A makes an oral purchase of goods from B for an agreed price of $500. There is no delivery or part payment, and the bargain is unenforceable under the Statute of Frauds. A insures the goods as owner. The insurer cannot defeat a claim under the policy on the ground that A did not own the goods, although A would have had no direct remedy against B for failure to deliver.

c. Government contracts. Contracts with a government or governmental agency are sometimes unenforceable under remnants of the historic English tradition that the sovereign is immune from suit. Yet the legal consequences of such a contract show that what is promised by the government is due as of right and not as a favor. Thus, a claim against the government arising out of the contract may pass to the executor or trustee in bankruptcy of the claimant. Sometimes such a claim, though not enforceable by action, may be asserted defensively in an action by the government.

Increasingly, governments have enacted statutes giving general consent to actions on contracts. Contracts enforceable by judicial proceedings under such statutes fall outside the present definition of unenforceable contracts, even though the action may be brought only in a special court, or relief may be limited to money damages, or execution cannot be levied on a money judgment. The critical element is not compulsion by physical force, but the availability of judicial machinery to make a final determination of legal obligation. Thus, where the only direct remedy is by legislative approval of a private bill or by unreviewable administrative action, the contract is within the present definition of unenforceable contracts.

The question whether a contract is enforceable by direct legal proceedings is quite different from the question whether the legal right will be converted into money or its equivalent. The latter question may depend on whether there is a regular practice of making appropriations to pay judgments, or, as in cases of private obligors, on the solvency of the government against whom the judgment is rendered. There is sometimes more assurance of payment under an unenforceable contract than under a judgment.

Illustrations:

5. A, an American citizen, holds notes issued by B, a foreign government. Because of the sovereign immunity of B, the notes are not enforceable against B in the courts of the United States. In an action by B against A on an unrelated claim, however, A may use the notes as an offset to reduce the amount of B's recovery.

6. A, an American citizen, has a contract with the United States government, and after a breach by the government obtains a judgment for damages in the United States Court of Claims. Under the tax laws, money receivable under the contract is taxable as accrued income when there is a reasonable expectancy that the right will be converted into money. The income accrues in the year in which the time for appellate review of the judgment expires, even though Congress does not appropriate money to pay the judgment until the following year.