- What is a Contract? Promise or set of promises for the breech of which the law gives a remedy or the performance of which the law in some way recognizes as a duty. An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable by law.
THE AGREEMENT PROCESS - Intent to Contract Objective theory of contracts – Look to the outward expression of a person as a manifestation of intent rather than his secret and unexpressed intent. o What an objective reasonable person, to whom an expression has been addressed would understand the expression to mean. Therefore we do not look towards a person’s subjective intent. – Lucy v. Zehmer o Exception to the objective theory – If both parties were joking but neither knew the other was joking, then there is no contract because neither party intended to be bound by law. There is no contract unless objective reasonable person would think that parties intent to be legally bound. Ex. Ask someone out to dinner, no contract; Balfour v. Balfour: husband and wife typically make promises but don’t intend to be bound, if the agreement is made based on separation then more likely intend to be bound. Contracts of adhesion are binding unless the terms are grossly unfair and unreasonable. K.D v. Education OLD THEORY – A meeting of the minds was required to establish mutual assent. - Offer The offer creates in the offeree a power to bind the offeror. The offeror is the master of his offer (he controls the terms) Restatement 1st – An offer is a conditional promise to do or refrain from doing some specific thing in the future. Restatement 2 nd – An offer is the manifestation of willingness to enter into a bargain so made as to justify another person understanding his assent to that bargain is invited an will conclude the bargain. - Factors to Consider 1) Offers v. Invitations to offer 2) Addressed to a specific person v. Form letters 3) Does the offeree know the seller is negotiating with others 4) Responding to an inquiry v. Seller initiating the correspondence 5) Is the “offer” specific as to quantity, price, terms of acceptance 6) Look for promissory language 7) What it calls itself, may or may not be a factor 8) Does this involve Real or Personal Property - Offers distinguished from expressions of opinions, advertisements
Expressions of opinion are generally not offers. Would an objective person think that it is part of the offer and reasonably rely on the info. Sullivan v. O’Connor (Doctor) o To be an offer person giving opinion/offer needs to assume personal liability in clear and definite terms. o Types of Damages Restitution – Out of pocket expenses Expectancy or Compensatory – Where you should have been now, and measure the difference Reliance – Putting the person back to where they were, measure of the detriment suffered as a result of her reliance on this contract (pain and suffering) Advertisements are generally not offers, they are invitations to negotiate. o Exception if the advertisement is clear, definite and explicit and leaves nothing open for negotiations, needs quantity, how to be sold and to whom, definite price. Estimates and price quotes are preliminary negotiations, they are inviting a person to make an offer, they are not promissory in nature. They are like ads or statements. o Lonegrin v. Scolnick – form letter is generally not binding because it is sent to many people. o Exception - Fairmont Glass. When an estimate or form letter has specific or promissory language then it can reasonably be considered a unilateral offer looking for acceptance. o Exception – when and estimate or price quote is in response to an invitation to submit offers, it is more likely to be an offer. o If from a promise, or manifestation of intention, or from the circumstances existing at the time, the person to whom the promise or manifestation is addressed knows or has reason to know that the person making it does not intend it as an expression of his purpose until he has given a further expression of assent, he has not made an offer. PROMISSORY ESTOPPEL – If a statement or promise that has foreseeable and substantial acts that the promissor knows will be relied on, he may be estopped form withdrawing the quote or promise. - Intent to Memorialize (Put on Paper) TRADITIONAL RULE – MUST BE ON PAPER, NO CONTRACT UNTIL IN WRITING Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations. If it is clear that there will be no binding contract until there is a written agreement then it is clear. If the parties indicate that the written part is just tangential, where the parties have agreed to be bound and the writing part is not instrumental, then it is clear they are bound. Where the parties have not clearly indicated that they do or do not have a deal until the written part, that is where we have all the cases.
o Texaco v. Penzoil, essential terms had been met and it seemed like both indicated that a contract had formed. o Factors in murky cases Did a party reserve the right to only be bound when contract is written Was there partial performance that the other party knew about Were all essential terms agreed upon or are there open terms Is it the type of contract where a written contract would normally be expected Are there many details How large of a deal is it - Indefiniteness An apparent agreement will not be enforced if (1) the court finds the incomplete terms indicate that the parties did not regard the contract as being complete (look at intent of parties) or (2) court can not determine the terms with reasonable certainty or fashion an appropriate remedy for a breach. – INTENT OF PARTIES AND MATERIALNESS OF TERMS INTENT OF PARTIES o Duration-- Haines v. N.Y. – In the absence of an expressed term fixing the duration of the contract, the court may inquire into the intent of the parties and supply the missing term if a duration may be fairly and reasonably fixed. o Duration with At-Will employment contract Traditionally can be fired for any reason Public Policy Exception – Against public policy to fire someone for a morally wrong cause. Personnel Manual Exception – May be a part of the employee contract unless expressed clearly it is not. Good Faith Fair Dealing Exception – Each party to a contract has an implied good faith obligation in dealings, you are entitled to the benefits of the contract. o Payment – Southwest Engineering, if there is intent to be bound the terms of payment can be filled in using the appropriate remedy. Payment is due at the time and place buyer receives goods. Agree to Agree o Agreement to agree where material terms are left for future negotiations, are unenforceable. Again look at the materialness of terms and intent of party. o The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. Severability Clause o Severability clause will aid in construction. It will be looked at as helping to determine intent but is not an absolute factor. Sale of goods o Look at UCC o Will gap fill for almost everything except quantity. Certainty or Vagueness of terms
o Courts look to the essence of the contract. I want you to build a nice looking railroad station. Can’t say, well there was never a deal because what is a nice looking station? Look at materialness of missing terms. IV. Acceptance – when will a contract be formed A. General information about unilateral and bilateral contracts 1. Unilateral Contracts – a promise for an act – acceptance is usually performance of the act. 2. Bilateral Contracts – a promise for a promise – acceptance is by promise (performance is usually later) and promise must usually be communicated to the offeror 3. For exam, probably important to identify which type of K’s we have at issue B. Preliminary problems with acceptance 1. Knowledge of offer and intent to accept a) Unilateral K’s (1) Knowledge of offer – The person performing acceptance of a unilateral offer, only completes the contract if he acts in knowledge of his acceptance before acceptance is complete. One minority view is that person must have knowledge before starting to perform. Another minority view is that you do not need knowledge at all. (2) Intent to accept offer – The act of performance is considered to be the manifestation of intent. Court will assume intent to accept offer unless proven otherwise. Minority view is that you need to prove your intent. b) Bilateral K’s (1) Generally knowledge is not an issue because both parties are making promises. (2) Intent is also not important because we use objective standard. 2. Who may accept an offer? a) Only the person to whom the offer is made can accept. Offers can be made to the general public. For a unilateral contract it is not necessary to give notice that oferee is starting to perform. 3. Necessity for notice to offeror of acceptance a) Unilateral K’s – notice usually need not be given unless reason to believe offeror will not know of acceptance or if required by offeror (“offeror is the master of his/her offer”) – 4 views (1) Small Minority – No requirement for the offeree to give notice to the offeror. (2) Majority – If the offeree reasonably knows that offeror does not know about performance, then he has to exercise reasonable diligence to give notice. The contract is formed when the acceptance is complete not when the notice is given. (3) Minority -- If the offeree reasonably knows that offeror does not know about performance, then he has to exercise reasonable diligence to give notice. The contract is formed when notice is sent. (4) Small Minority – Always required to give notice and contract is formed when notice is given.
b) Bilateral K’s – return promise must usually be communicated to the offeror (1) Remember that offeror is the master of his/her offer (2) Exception – If the performance is done in the presence of offeror and the offeror does not stop him. (3) Exception 2 – If it is an open contract, and the oferee performs and gives notice within the time period. C. Acceptance by Silence and Conduct (this is the material beginning at page 100) a) Unilateral K’s – Can be accepted by conduct alone b) Bilateral K’s – Typically not by silence, but if there is performance in the presence of offeror and the offeror does not stop him then we can assume acceptance. RULE – If the oferee voluntarily accepts or avails himself of services rendered on his behalf where he has a reasonable chance to reject and where a reasonable person should understand the expectation of payment, and where the performer did intend to be paid, then silence will be acceptance. (1) Exceptions – When there is a history or standing offer; or when you exercise dominion over goods. Some states have statutes that overrule the dominion rule and say instead that any goods sent by mail are considered a gift. c) Forcible Acceptance – When the offer says if you remain silent then I assume you accept (1) Majority view – If the offeree is silent and intending to accept then it is a contract. If the offeree is silent and does not intend to accept then there is no contract. We look at the subjective intent of the offeree. (2) Minority view – No contract unless acceptance is communicated. (3) Exceptions i) When because of previous dealings or otherwise it is reasonable for the offeree to notify the offeror that they do not accept the offer, we will assume silence is acceptance. ii) If you receive property unsolicited, and you exercise dominion over it, then you are deemed to have accepted. iii) If you buy something and there are terms inside you may be held to accept those terms if there is are reasonable terms on the outside of the box alerting to terms inside and if you are allowed to return the item if you don’t accept. d) Reverse Unilateral K’s – When Act is performed looking to a promise to pay. We can infer a promise and an acceptance with silence if done with knowledge. e) General Rules (1) Dead Man’s Statute – When dealing with a dead person, others who are adverse to the dead’s estate can not testify as to what was said by the dead person. (2) With “Family” (a collection of persons who form one household, under one head, and one domestic government, and who have reciprocal, natural or moral duties to support and care for each other)
we presume that services rendered are gratuitous. This presumption can be overcome with evidence. (3) RULE – If the oferee voluntarily accepts or avails himself of services rendered on his behalf where he has a reasonable chance to reject and where a reasonable person should understand the expectation of payment, and where the performer did intend to be paid, then silence will be acceptance. V. When may an offer looking to a unilateral contract be revoked? A. General Rule – Offers which are not stated irrevocable can be revoked. B. Traditional Rule (minority) – The offeree is not bound to perform and the offeror can revoke offer at any point prior to acceptance. Remember that acceptance is the completion of the act. C. Another Minority -- Once the offeree, in an offer looking to a unilateral contract, starts to perform, that creates a bilateral contract. Once performance starts both parties become bound. D. Majority – In an offer looking to a unilateral contract, once the offeree begins performance the offer becomes irrevocable. The offeree is not bound and can still back out but the offeror can not. Va. Can the offeree continue to perform if it is clear the offeror wants out? A. Both parties have an obligation to minimize damages. VI. When may an offer looking to a bilateral contract be revoked? A. First look at when the acceptance is effective. a) When an offer is vague as to whether it is looking for a promise of an act, the traditional rule is that it defaults to bilateral and it is looking for a promise. The modern trend, and slight majority and UCC, says the offeree has the choice of accepting by either a promise or act. b) Overtaking rejection rule – Once rejection is valid, the offer is off the table and can no longer be accepted. c) Mailbox Rule (only applies to acceptance, rejections are official upon receipt) – Acceptance immediately forms the contract upon dispatch, not receipt. This applies when the acceptance is sent in a reasonable manner. If it is sent in a unreasonable fashion, the mail box rule still applies if it gets there in a reasonable time, if not then it is effective when it arrives. The contract then forms upon receipt. i) Exception – If the offeror receives a rejection first and detrimentally relies upon it, he can repudiate the contract. ii) The mail box rule only applies when the acceptance is sent first, when the rejection is sent first you go by what is received first. If the rejection is received first then the offer is gone and the subsequent acceptance becomes a counter-offer. When the acceptance is received first it becomes effective in this situation because we go by when things are received. VII. How can you accept? A. Offeror can prescribe an exclusive method. Some courts consider the term shall to mean “must,” others consider it to mean “may.” B. When there is no prescribed method then “the mode adopted shall be in accord with the usage and custom of men in similar cases.” The main idea is that the offeror knows the offer has been accepted.
C. If the parties are face to face we do not use the mail box rule. The normal rule is, when it should have been heard the acceptance is complete, meaning that they either heard it or did not hear because of their own fault. D. When there is a dispute about acceptance, simple testimony of your standard mailing procedure will suffice to prove you mailed something. E. Your employee is considered your agent is considered an extension of you. Not considered dispatched until out of your hands. VIII. Errors in Transmission A. Generally the offeror is bound by errors in transmission. May have a cause of action against the transmitter. If the offeree knew their was a mistake then no. B. If there is an error in addressing an acceptance the traditional rule is that the offeree can not take advantage of the mailbox rule, the contract is formed upon receipt. The modern trend is that if the misaddressed acceptance gets to the offeror in a reasonable time, the mail box rule can be used. IX. Termination of a Revokable offer A. Insanity 1. Majority – When someone is adjudicated insane, any revocable offers outstanding are terminated immediately and automatically, with or without notice. 2. Minority – In adjudication of incompetency the offer does not terminate automatically, but instead terminates when the offeree knows or should know. 3. When there is no adjudication the rule is similar in all jurisdictions – the offers are terminated only when the offeree knows or should know of the incompetency. B. Death 1. Majority Rule – Majority rule says the offer is terminated upon death of offeror with or without notice to the offeree. 2. Very small minority – Says the offer is not terminated until the offeree knows or should know of the death of the offeror. C. Face to Face – In a face to face situation (tv broadcast included) an offer is good until the face to face meeting or conversation is terminated. D. When to start counting (offer is good for 5 days) 1. Traditional (minority) – Start counting from the date of the letter. 2. Majority – Start counting from the day the offer is received. 3. Generally the day after the first day is considered the first day, some jurisdictions count the day of as the first day. 4. If there was a delay and the offeree knew about the delay (from postmark, etc.) then start counting from when the offer should have arrived. X. Counter Offers A. Mirror Image Rule (Common Law) -- Give an offer to the mirror, if something comes back that looks different then it is not an acceptance, that is a rejection of the offer and a counter-offer. The first offer is gone and off the table and can never be accepted again. B. UCC came along and changed things but the mirror image rule still applies in non UCC situations. 1. 2-207(1) – If the terms are different there will still be acceptance, unless the acceptance is made expressly conditional upon the assent to the new terms. i) If there is a contract proceed and the additional or different terms do not become part of the agreement unless accepted by both parties.
ii) If there is a contract and the two parties are merchants, then proceed to 2207(2) to find out what to do with the terms. a) Additional terms become part of the contract unless: i) the offer expressly limits acceptance to the terms of the offer; or ii) the additional terms materially alter the offer; or iii) notification of the objection to them has already been given or is given within a reasonable time after notice of them is received. b) Different terms follow one of the three approaches: i) The different terms do not become part of the contract unless the different terms are accepted by the offeror; ii) The different terms are treated the same as additional terms (see above); iii) The different terms from the offer and acceptance are knocked out entirely and they are gap filled by the UCC provisions. 2. 2-207(3) – If contract not formed under 2-207(1) then look at conduct of both parties. If the conduct of both parties gives rise to a contract (ie. acceptance of goods) then one is formed on the basis of the terms which both parties have agreed. C. Modern Trend UCC Approach (not adopted yet) 1. If there is a contract we look at both forms and all different terms fall out. Those terms are then gap filled. Treat merchants and non-merchants the same. XI. Consideration – In general means something of value that the parties are exchanging. Some value being exchanged in a “bargain for” transaction. A. Elements 1. The promisee (typically the offeree or the obligee) must suffer a legal detriment (or someone suffers detriment on behalf of the promise) ; 2. The detriment must induce the promise; 3. The promise must induce the detriment. i. Legal Detriment – Where the promisee is doing something that they are not legally required to do, or refrain from doing something that they are legally privileged to do. Detriment can be from 3 rd party. B. Quantum Meriut – Even if you do not have a contract with someone you can still get what you deserve. C. Gift v. Contract 1. Pure gift is not enforceable 2. When what seems like a gift is validated by small detriment, $1 for instance, the second element comes into question. Up to jury to decide if there was valid consideration. D. Surrender of valid claim as detriment 1. Majority and modern view – Need (1) a good faith belief, subjectively, that this was a valid claim and (2) a reasonable basis for support at the time. 2. Traditional minority -- The surrender of a claim that ends up being invalid could never be consideration in the first place.
3. Another modern view – Either a subjective good faith belief; OR a reasonable basis for support 4. Small minority – Only that the claimant had a good faith belief E. Option Contracts 1. Typically offers looking toward a bilateral contract are revocable unless they are supported by consideration. “I will give you $10 now and that will hold for me the option of buying your computer for $500 for one week.” F. General Rules 1. Past consideration is no consideration at all. 2. If something (consideration) was recited as being paid but was not i. Majority says this is a sham, no detriment was paid so there is not detriment. ii. Minority view is that a liability is created or there is a good faith promise to pay so it will be valid. G. Pre-Existing Duty Rule 1. Traditional View – (Prevent Shake Down) The pre-existing duty rule will prevent modifications of an existing contract if there is no new consideration. i. Pre-existing duty can also be a legal duty, like police officer and reward for capture of felon. ii. Some jurisdictions say you can simultaneously rescind a contract and create a new one, while other jurisdictions say you have to have some gap between rescinding a contract and creating a new one. 2. Modern Restatement View – A contract can be modified under the following conditions: i. The modification took place before the original contract was fully performed ii. The underlying circumstances were unanticipated by both parties iii. The modifications were fair and equitable iv. The modifications were voluntarily agreed to 2a. UCC – You can modify as long as you meet the test of good faith. 3. 3rd Party – When C pays for A and B to follow through on contract i. If C pays to both then it is ok because A and B can mutually agree to rescind the contract so there is detriment and valid consideration. ii. If C pays to one, then courts don’t view this as the classic shake down scenario and sometimes say while A or B may not be suffering new detriment, C is gaining some benefit (piece of mind or security). 4. Forging a good unilateral contract out of a bad bilateral contract i. a bad bilateral contract due to lack of mutuality of obligation or preexisting duty; and ii. the promisee must suffer a detriment at the hands of a unilateral contract. H. Accord and Satisfaction – Pre-existing duty to pay money. If the person who owes money offers less it is called an accord and if the other person accepts it is called satisfaction. 1. Liquidated Debts (Amount is not in controversy) – The old pre-existing duty rule applies here. An offer to pay less and an acceptance by the other party is not valid because there is no consideration.
i. Exception – Rental or Installment payments, if the landlord gives a receipt saying payment in full then it is view as a gift. 2. Unliquidated Debts (Amount is disputed) – Here is where the rules of accord and satisfaction come in to play. Each is giving up detriment because they are getting less than what they thought they should get, or paying more than what they thought they should pay. i. Accord – It must be clear to a reasonable person that the obligee is making a payment as “payment in full.” ii. Satisfaction – A cashing of the check is considered acceptance of the accord. Even if the person cashing writes “rights reserved, etc.” it doesn’t matter. Actions speak louder than words. 3. UCC § 1-207(1) – Consistent with above view with some exceptions. i. Do creditors reserve rights even if the check says payment in full? - Only if creditor is dealing with high volume of sales and receive a form check saying payment in full. I. Duress and statutory changes 1. U.C.C. § 2-209(1) – an agreement to modify a contract within this article needs no consideration as long as it is in good faith. Elements of good faith are: i. Whether the parties conduct is consistent with reasonable commercial standards of fair dealing in the trade. ii. Whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies. 2. When there is a threat in an attempt to modify, the threat leads to the presumption of bad faith. This presumption can be overcome with evidence. 3. Economic Duress – If you make a contract under duress, you can void the contract later on. To claim duress in a contract modification situation, the defendant must threaten to breach the original contract and: i. P must show there is no alternative ii. The ordinary remedy for a breach of contract is not adequate. J. Mutuality of Obligation 1. Traditionally this means that both parties must be bound or neither parties must be bound. A better term is mutuality of consideration. In a strictly bi-lateral contract situation each party must furnish some type of consideration to the other or the contract is void. i. Void – Not valid ii. Voidable – Can be voided by the party being harmed (Fraud, Duress, Person lacking capacity) iii. Unenforceable – SOL has passed, Statute of Frauds violated. 2. Currently courts do not like to find a lack of mutuality of obligation. Courts will find that where a party may seem like they are not obligated they will actually have to make a good-faith effort. 3. Conditional Promise – Courts find that the promise is illusory only if the condition is in the total control of the party. 4. Right to Terminate i. Explicitly without notice: a. If a party has a right to terminate without notice then the promise is illusory and the contract is not valid.
ii. With a set period of notice: b. If a party must give notice then the contract is valid because the party is promising to do something at least for the notice period. ii. “With Notice” but no time set: a. Common Law says this is invalid b. Modern Trend says must use a reasonable amount of time for notice and contract is valid. iii. UCC a. termination by one party requires a reasonable time. An agreement dispensing with the notification requirement is invalid. 5. Output or Requirement Contract (all the output of a seller, or all the requirements of a buyer) i. Historically (not the case anymore) these contracts were void because they lack mutuality of obligation (consideration) because seller is not required to have any output and vice versa for the buyer’s situation. ii. Modern Trend and UCC 2-306(1) – Governed by good faith unless the actual output or requirement is unreasonably HIGH as compared to estimates or reasonable expectations. 6. Exclusive deal i. UCC 2-306(2) says a lawful agreement for an exclusive deal says that both parties must use their best effort to either supply the goods or promote the goods. XII. Moral Obligation and Consideration A. Services not requested, then promise made in response for the act performed. 1. Normally this promise is not supported by consideration because the actions were not induced by the promise or the detriment. 2. Restatement view (minority view and modern trend) – A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the effect it is necessary to prevent injustice. The promise it not binding if the promisor is making the promise as a gift. It will also not be enforceable to the extent that its value is not proportional to the benefit. 3. Courts do this more often when the person gets hurt. B. Services requested but the amount not clear. Then promise is made in excess of what the market value of the services are. 1. Usually (now minority) you get Quantum Meruit – The amount you deserve. 2. The majority says that those people are the best to value it so we will just take their valuation.