A contract is a promise or set of promises for the breech of which the law gives remedy, or the performance of which the law in some way recognizes as a duty.
Enforceable Promises: An Introduction:
The law of contracts deals with interpretation and enforcement of promises. Much of the law is found in the restatement of contracts, the UCC, and case law. Restatement of contracts: is not statutory; it is an attempt to restate the essence of law after a thorough review of cases and careful analysis of relevant legal principles; it is very persuasive and highly regarded but not binding. Uniform Commercial Code: Article 2 (sales) which applies to transactions in “goods” has the most relevance in contracts. Certain parts of article 1 (general provisions) and Article 9 (secured transactions, sales of accounts) are also relevant. Promise: assurance or undertaking, however expressed, that something will or will not be done in the future. Promises enforceable by law are contracts. Hawkins v. McGee: “Hairy Hand” Expectation damages are awarded, meaning the difference in value between the hand promised and the hand actually received, due to the guarantee that the doctor made. The length of recovery is just an expression of opinion or prediction it doesn’t matter. A doctor's statements to a patient can be construed, as a contract to provide certain results, but only if the doctor is very clear about this. Difference between an opinion and an enforceable promise are the words used, the context, and the nature of the transaction.
Bayliner Marine Corp v. Crow P argument is D breached express warranties, and implied warranties of merchantability and fitness for a particular purpose. Warranty: seller's promise thing being sold is as represented or promised. (Warranty is type of promise) •UCC 2-313(1) (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. In the Pop matrix affirmation of the fact 313 (1)(A) Doesn’t apply: Prop matrixes weren’t related to the particular boat Crow purchased, different sized propellers heavier equipment. In the brochure the “description of goods” creating a warranty under UCC 2-313(1)(b) does not apply: “A statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.” statement in brochure = manufacturer's opinion, therefore did not create a warranty; because it does not describe a specific feature of boat. Hypo: Nike dealer sells me sneaker, saying “This is the greatest sneaker ever conceived by human ingenuity” Promise? No – commendation or opinion (UCC 2-313(2)). Nike dealer tells me that sneaker has a carbon sole; When I buy it, sneaker turns out to have concrete sole; Promise? Yes – affirmation of fact (UCC 2-313(1)(a)).
Consideration as a basis for enforcement:
Fundamentals of Consideration: (Typical categories of agreement) Family Contracts: Refraining from conduct: Hamer v. Sidway: Rejects requirement of benefit/detriment as consideration and requires bargained for exchange Ruling: The party who abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for a promise, gives sufficient consideration to create a legally binding contract. What matters is that something is promised, done, forborne, etc. by the promisee in consideration for the promise made to him; Restatement defines consideration: Restatement 71: (Definition of consideration: requirement for bargained for exchange) (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of (a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation. **(The definition of consideration now doesn’t mention benefit and detriment it focuses on requirement that consideration be bargained for.)** Restatement 79: Adequacy of consideration: (Benefit/detriment and value irrelevant) If requirement of consideration is met, there is no additional requirement of: (a) A gain, advantage, or benefit to the promisor or a loss, or detriment to the promisee; or (b) Equivalence in the values exchanged ***Under Restatement §71 & 79 - Court won‟t look into the value of the consideration – it will only ensures that the consideration was bargained for** Bargain theory of consideration is whether it was sought/given in exchange for the promise. The court won’t enquire into value/sufficiency of consideration, but mere pretense of consideration does not suffice. •Restatement § 71/ comments . “Bargained for.”. . . a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal as where there is a false recital of consideration or where the purported consideration is merely nominal. •Restatement § 79/comments Pretended exchange. Disparity in value, with or without other circumstances, sometimes indicates that the purported consideration was not in fact bargained for but was a mere formality or pretense. Such a sham or “nominal” consideration does not satisfy the requirement of § 71.
Gratuitous Promise: Contract not to sue
Majority rule is that forbearance not to sue is legally valid consideration whether or not the claim is doubtful, so long as the claim is reasonable and honestly asserted. Fiege v. Boehm: Forbearance to sue, based on an invalid claim, is sufficient consideration to make a promise binding as long as it is made in good faith and the P believes the claim is valid and is being honest. Restatement § 74 rule (1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless (a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or (b) the forbearing or surrendering party believes that claim or defense may be fairly determined to be valid. Hypo: •Ralston injured when slipped on church stairway, Church’s insurer promises to pay her expenses if she refrains from suing; she agrees; Insurer refuses to pay; she sues; Insurer’s arg: Church immune from liability, so Ralston would not have won if she sued: Was Ralston’s promise to refrain from suing consideration for insurer’s promise to pay expenses? Court found that the claim of plaintiff against the church was not obviously invalid or frivolous. Therefore, her forbearance to sue constituted a valid consideration for the contract made by defendants.
The Requirement of exchange: Action in the past:“No Past Consideration”
The cases are split as to whether a promise to pay a moral obligation is enforceable when it arises out of a benefit previously conferred upon the promisor. However, Today, such a promise is enforceable, at least up to the value of the benefit conferred. Feinberg v. Pfeiffer Co Rule: Past service is not consideration to support a promise. a. Past consideration does not make a promise binding- Fienberg’s past service did not constitute consideration for the promise. b. Nor was her continued employment after the offer consideration, b/c she could have retired at that moment- it was incidental.
A promise is said to be given for moral or past consideration when the promisor is motivated by some past event which inspires the promisor to make his promise. Mills v. Wyman Rule: Past expenses is not sufficient consideration to support a later promise to pay for the expenses. Traditional common-law rule: A promise made in recognition of a benefit previously received is not enforceable. –“Moral obligation” irrelevant to legal obligation. Traditional exceptions: Restatement § 82: Promise to pay debt not enforceable bc statute of limitations: Promise can be inferred Restatement § 83: Promise to pay debt discharged in bankruptcy Promise needs to be express Webb v. McGowin A moral obligation is sufficient consideration to support a subsequent promise to pay where promisor has received a material benefit. In this case the promisor receives a material benefit and the promisee suffers a material detriment so moral obligation is sufficient consideration to support a promise. Rule: Past act of saving a party from death or serious bodily injury, that results in injuries to the saving party, is sufficient consideration for the saved party’s subsequently induced promise to pay the saving party.- There was a material benefit and moral obligation so there was consideration. NY rule: Where promise in writing and signed –shall not be held unenforceable on ground that consideration for promise is past or executed, if consideration is expressed in the writing, was actually performed, and would have been valid consideration when performed. Restatement §86: (1) A promise made in recognition of a benefit previously received by the promisee is binding to the extent necessary to prevent injustice. (2) Not binding if (a) intended as gift, or (b) to extent that value disproportionate to benefit.
The requirement of Bargain:Conditional Gift vs. Bargained for Exchange
Even when a promise is unenforceable when made because the promisee is not bound, it may become binding when the promisee subsequently furnishes the consideration contemplated by doing what he was expected to do. Kirksey v. Kirksey: *No consideration if conditional gift, not bargained for exchange* Rule: A purely gratuitous promise shall not be enforced. The trial court read the words as a bargain for exchange; the supreme court saw them as a condition to a gratuitous promise. A promise bc he’s advising her that she’d be comfortable with him and offering her the opportunity to get rid of her land. A bargain as it first instructs her to sell the land and come down to him; had he have just said come live with me and never mentioned selling her own land there would have been no case. But that suggestion could also be seen as a bargaining tool. Majority: No – promise was a mere gratuity. Dissent: Yes – Loss and inconvenience of move consideration.
Conditional Gift vs. Bargained for Exchange Lunch at tiffany: Conditional Gratuitous Promise. Do something- get something; consideration. The million dollar swipe:Jdg for P. Sufficient consideration for being in game and club card. Jailhouse rock: The court held that the prisoner's listening to KSCS was sufficient consideration for the $25,000 award. But the Texas Supreme Court reversed on other grounds (based on the contest rules defining "commercial interruption")
Bargained for exchange between the employer and the employees, when the terms of the agreement are not entirely settled at a single moment. Determining these terms is crucial to deciding whether an employee has been wrongfully fired. Land Lake Employment Group of Akron v. Columber: ***This case is different in that the employer seeks to enforce the promise of an at-will employee. It concerns post-employment conduct, specifically not to compete with his former employer.*** It is on a case-by-case situation in deciding whether subsequent employment alone is sufficient consideration to support a covenant-not-to-compete agreement with an at-will employee entered into after his employment already begun. There are three approaches why it may be consideration: 1. Continued employment not consideration for non-compete agreement 2. Continued employment is consideration for non-compete agreement 3. Continued employment is consideration if employment continues for a long time after signing K This court took approach 3- D had worked there for long time after signing K. Employee Hand Books Pine River v. Mettille Is employer bound to follow the policy laid out in the Employee Handbook? Is there consideration for employer’s promise, via handbook, based on how it will discipline employees? Answer: Yes; Employee’s continued performance after reading handbook, despite freedom to quit = consideration. Gives employer a more stable workforce.
Rewards: No consideration if no knowledge of offer Broadnax case: Where Vann returned an escaped convict without knowing of a reward offer by sheriff, is he entitled to the reward? No: No consideration for sheriffs promise –No bargain here (R 71(1)) –Vann didn’t return convict for promised reward: definition of bargain – R(71)(2)– What if Vann knew of reward, but motive was to save convict from mob violence? Yes R 81(2) – motive not determinative Restatement 81: (1) The fact that what is bargained for does not of itself induce the making of a promise does not prevent it from being consideration for the promise. (2) The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise. Simmons v. United States – Knowledge of offer is enough: The one that didn’t get away: Man caught prize fish; knew about the prize, but wasn’t going out that day with the intent of catching that fish. Is he entitled to prize? Yes.
Promises as Consideration: (Need a bargained for exchange)
A contract may be formed by the exchange of promises or by the exchange of a promise for performance of a specific act. The first type of contract is called bilateral; the second type is unilateral. For a bilateral contract to be legally enforceable, each party’s bargained-for promise must be legally sufficient consideration for its counter-promise. The test is whether the performance promised would be sufficient consideration. A bargain must have mutuality of obligation; both parties must be bound or neither will be. In a unilateral contract there is a promise on one side only so there is a duty on one side, and a right on the other side. (a duty for promisor to fulfill promise, and a right for promisee to sue if they don’t). In a bilateral contract there is a promise on each side, so there is a right and duty on each side. Unilateral contract Promise in exchange for performance “I’ll give you $500 if you cross the Brooklyn bridge” “Reward of $500 if you catch Diamond Jim III”
Bilateral contract Promise in exchange for promise Employee agrees to come to work, in exchange for employer’s promise to pay, provide benefits, etc. Mother agrees to give up right to alimony in exchange for father’s agreement to give mother custody of the child
What constitutes a promise?
Conditional promises: A promise is conditional if its performance will become due only if a particular event, known as “condition” occurs. This does not mean that the promise is not binding until the event occurs, but only that the event must occur before the promisor must perform. Ex of express conditions: Insurance. Homeowner pays insurance company, and insurance company agrees that they will give the homeowner $ if they suffer serious fire damage. Promise binding, but the insurance won’t pay unless fire damage. Fire is the condition of the promise. When party makes promise in exchange for a return promise, it’s protected by making promise conditional on performance by other party.
A promise that pledges nothing, because it is vague or because the promisor can choose whether or not to honor it. Such promises are not legally binding. Strong v. Sheffield Strong’s 2-year forbearance was not consideration because it was not bargained for. Louisa promise to pay H’s debt and strong’s promise not to collect the debt “until I want my money” was not consideration strong’s promise was illusory, it did not have a set time as to when he would collect. Restatement 77: “ An Illusory promise: Words of a promise by which their terms make performance entirely optional with the promisor do not constitute a promise.” A promise or apparent promise is not consideration if by its terms the promisor reserves a choice of alternative performances unless: a. Each of the alternative performances would have been consideration if it alone had been bargained for. b. One of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice; events may eliminate the alternatives which would not have been consideration.
Contracts for real estate
Mattei v. Hopper: Satisfaction clause good faith/reasonableness Due to Good faith requirement Mattei’s promise is not illusory and Hopper is bound to her promise to sell. Case had significant impact in making agreements with satisfaction clauses enforceable. Ruling: “Satisfaction clauses” don’t necessarily render a promise illusorybecause promisor can’t be arbitrary in his dissatisfaction and court reads in requirement of either reasonableness or good faith. 2 types of satisfaction clauses: 1. Commercial value or quality, operative fitness, or mechanical utility need reasonable satisfaction (objective) 2. Fancy, taste, or judgment (used here) need honest/good faith satisfaction (subjective)
Contracts for the sale of Goods:
Eastern Airlines v. Gulf Oil: Requirements output contract: Good Faith Ruling: Eastern’s promise not illusory – requirements K is enforceable bc required to buy actual requirements in good faith (UCC 2-306(1)) UCC 2-306: Output, requirements, and exclusive dealings (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
Wood v. Lucy: Exclusive Dealings: Reasonable effort/ best effort Ruling: Promise for wood to place Lady endorsements and sell her design in exchange for exclusive rights is not illusory. Bc in accepting exclusive rights, Wood promised to use reasonable efforts to place Lady D-G’s endorsements and designs. It is an implied promise. UCC 2-306 (2) § 2-306. Output, Requirements and Exclusive Dealings. (2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. Common law rule (reasonable efforts) vs. UCC Rule (Best efforts) Requirements/output Ks Good faith (and not unreasonably disproportionate) requirement – UCC 2-306(1) Exclusive dealings: Best efforts requirement – UCC 2-306(2)
UCC Article 2; When does it apply?
Sale of Goods UCC 2-102: Article 2 scope - “transactions in goods”: it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this article impair or repeal any statute regulating sales to consumers, farmers, or other specified classes of buyers. UCC 2-105 (1): “Goods” = things which are moveable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action. Hypos: mowing lawn? No supplying school w/ food? Yes Wood v. Lucy? Yes Painting house? No Hybrid goods/services contract Predominant factor test: Contract for sale and installation of bowling alley Rule: In a contract for both goods and services – Article 2 applies if goods are the predominant factor, and service is merely incidental; even if the services are substantial.
Pre-existing Duty Rule:Consideration, Duress, Modification of exiting Contract.
When A and B have a contract under which A is contractually obliged to perform some act, neither A’s new promise to perform that same act nor his actual performance of that act constitutes consideration for a promise by B to pay a greater amount for the performance that that set by the original contract. This prevents A from taking advantage of B’s inability to contract with someone else to perform the consideration. Exceptions: 1.) A agrees to perform an act similar to, but different from, the action he was contractually obliged to perform. 2.) A owes the preexisting contractual duty to someone other than B. 3.) A has a valid defense under the contract 4.) Unanticipated circumstances arise that make modification of the terms of the first contract fair and equitable. If a contract results from unfairness in the bargaining process, it is generally voidable. Such circumstances as duress, fraud, and mistake are the usual things the court looks at to find unfairness. Alaskan Packers Ass v. Domenico Facts: Sailors and fishermen contract to sail from SF to Alaska to work for the salmon season. Once in Alaska, they demand that wages be doubled, or they will quit. Employer agrees to double wages because they are in remote waters, it is a short fishing season, it is impossible to get replacement workers, and there is a heavy investment. On return to SF, employer refuses to pay additional sum promised and the packers sue. Employer’s argue that they are Not obliged to pay additional wages Bc. promise to do so not supported by consideration bc workers were already obligated to perform the exact same work. Rule: Court agrees that contract was void because of the limited factors and states “Consent to such a demand, under such circumstances . . .was . . .without consideration,” bc based on plaintiffs’ agreement “to render the same services, and none other, that they were already under contract to render.”
PED rule “Consent to such a demand, under such circumstances . . . was . . . without consideration,” bc. based on plaintiffs‟ agreement “to render the same services, and none other, that they were already under contract to render.” Pre-existing Duty rule prevents coercion and taking advantage of other party. Restatement 73 Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain. (Rationale: Coercion; taking advantage of other party.) Borelliv. Brusseau: The contract was without consideration. Personal performance of a personal duty created by the contract of marriage does not constitute a new consideration in this case. It was a source of pre-existing duty. (Statute/common law) Some courts have rejected PED rule: Ex: Alabama: can modify K by mutual consent Some legislatures have modified PED rule: NY statute A written, signed agreement modifying an existing one shall not be invalid bc of absence of consideration. UCC 2-209 (1): Changes to Traditional Rule of Statement 73 An agreement modifying a contract needs no consideration to be binding. But see Comment 2: Modifications must meet duty of good faith, and the extortion of a “modification” without legitimate commercial reason is ineffective as a violation of the duty of good faith.
Avoiding the Pre-existing duty rule: Rescission and modification:
Applied by some courts: If contract is rescinded and then a new one is formed, PED rule arguably not applicable. Schwartzreich v. Bauman Basch Ruling: Where two parties modify an existing contract to reallocate the risk of default by one party, it becomes a new contract, with consideration, and is binding. Watkins and son v. Carrig (Watkins & Son v. Carrig: excavator found rock and entered oral agreement for higher price than original) Ruling: doesn’t matter if it’s a modification or a rescission and then a new K; modification involves a partial rescission. Policy: Rule conforms w/ standard business practice and w/ justice. The Restatement 2d of Contracts section 89 allows parties to modify a duty arising under an agreement when: that duty has not been fully performed and the modification is fair under circumstances not contemplated when the original agreement was made. R§89: modifications are valid if they are fair and equitable in light of new circumstances Restatement § 89 A promise modifying a contract not fully performed on either side is binding if (a) the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made (c) to the extent justice requires enforcement in view of material change of position in reliance on the promise
Avoiding the pre-existing duty rule:
1. Allows mutual action on k for business dealings, risk reallocation, good faith modifications 2. Use fundamental justice & reasonableness standard, UCC 2-209: no new consideration needed 3.) Must resist in duress unless it would overcome a “person of ordinary firmness” Avoiding the Pre-existing Duty Rule: New Consideration: What if Alaska Packers offered to work an additional ½ hour every day? Rule: If there is additional consideration, then PED rule not applicable. Restatement § 73 – additional consideration suffices, but must reflect more than a “pretense of a bargain”
Yielding to Threat
Denbow v. Tesch: Ruling: K was valid because the threat did not constitute duress and menace to get the contract signed, even though it may have been effective in coercing her to sign. Objective or subjective: (subjective) Any unlawful threats which overcome the will of the person threatened and induce him to do an act which he would not otherwise have done constitutes duress. The age, sex, capacity, relation of parties, and all attendant circumstances must be considered.
Foakes v. Beer rule (1884) Facts: Creditor yielded her full claim in exchange for debtor’s agreement to pay part of money owed Holding: Payment of part of a debt cannot be satisfaction for the whole Hypos: A merchant’s invoice, sent to a customer, includes this legend: “Put a smiley face on your check, and you can take 5% off the price.” Creditor’s e-mail, “Will accept 80% as full payment if payment made by wire transfer within three business days.” “By no possibility, a lesser sum can be satisfaction to the plaintiff for a greater sum; but the gift of a horse, hawk, or robe, ect. In satisfaction is good.” Pre-existing rule to third party A promise by A. to B. to induce him not to break his contract with C. is void. •Hypo – what if my mother promises to pay me $100 if I agree to pay my brother the $500 I owe him? Can I bring her to court to force her to pay the money? No
Reliance as a basis for enforcement
In certain situations detrimental action or forbearance by the promisee (A) in reliance on a promise by the promisor (B) will constitute a substitute for consideration and render the promise by B enforceable. Ricketts v. Scothorn Where a person changes position in detrimental reliance on a promise, the promisor may be estopped from later denying the promise. No stated consideration in this agreement, but Scothorn's reliance on promise of $ was so great that it created a promissory estoppel on any attempt to obviate payment. No consideration, bc. P didn’t promise to do, or refrain from doing anything in exchange for the gift and Grandfather didn’t request that she do anything in exchange for the gift.Here, the court weighed the strength of the P’s good faith reliance upon the promise, and her actions consistent with that reliance constituted a valuable and sufficient consideration. Reasoning: Promise is enforceable, despite lack of consideration; Under doctrine of promissory estoppel (reliance). P’s change in position was a reasonable and probable consequence of GF’s promise. GF’s promise is enforceable in the interest of fairness and justice even w/o consideration, bc GD relied in a manner that was reasonable and probable.
The Development of Promissory estoppel
Estoppel: an affirmative defense alleging good-faith reliance on a misleading representation and an injury or detrimental change in position resulting from that reliance There are four categories where cases recognized reliance as a basis for enforcing of promises in early case law: (Judges like Holmes disagreed) Family Promises: By one family member to another, in which one relies on. Promises to Convey land: The recipient of a promise to convey land relied on it by moving onto the land and making improvements. Promises coupled with gratuitous bailment‟s: A person to whom the owner of something entrusts its possessions makes a promise to the owner respecting the property, on which the owner relies. Charitable subscriptions: A person promises to contribute to a not for profit organization. Restatement, first, section 90 Promise reasonably inducing definite and substantial action: A promise which the promisor reasonably expects to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by the enforcement of the promise. The original restatement section 90 indicates that a promisor will be estopped to deny the enforceability of his promise if the following elements appear: 1.) Although the promise is gratuitous (without consideration) it is of the type that might foreseeably induce the promisee to rely on it. 2.) The promisee did rely on the promise 3.) Reliance was reasonable under the circumstances 4.) As a result of reliance, the promisee suffered a substantial economic detriment 5.) Injustice can only be avoided by enforcing the promise
Fienberg v. Pfeiffer (Part 2) No consideration for Pfeiffer’s promise to give Feinberg a pension, but the promise is enforceable bc Feinberg’s retirement was sufficient reliance to bring her within the principle of Ricketts and Restatement § 90. Restatement, second, section 90 Restatement (2nd) 90 -- Promise Reasonably Inducing Action or Forbearance (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited, as justice requires. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance. D&G Stout v. Bacardi Imports Court applies restatement second, section 90 Ruling: P can recover on reliance theory. P’s reliance was reasonable bc Pl informed D about negotiations for sale; so D knew its assurances could encourage General to reject the offer of sale “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee and a third person and which does induce such action or forbearance is binding if injustice can be avoided only by the enforcement of the promise.” Review: Is the promise supported by consideration? Was there a bargained-for exchange? Will court look into value of bargain? What about peppercorns (bargain is a pretense) (low price is a sham, solely to make gift promise binding) Is the promise given in exchange for an action in the past? If so, was there a moral obligation to make that promise? Did the promisor seek to induce performance by the promisee? If not, maybe not an enforceable promise but a conditional gift Did the promisee render the performance in exchange for the promise? (rewards cases) If the alleged consideration is itself a promise – is that promise illusory? If the alleged consideration is a promise to perform - was there a pre-existing duty to perform? If the promise was not supported by consideration – was there reliance?
Creating Contractual Obligations:
Did both parties assent to be contractually bound? What terms did they assent to
The Nature of Assent
The most characteristic type of contract is the bargain, which is typically formed by the mutual assent of the parties, through an offer by one and acceptance by the other. Restatements 17, 19, 20 The formation of a contract requires “a manifestation of mutual assent.” (Section 17) In determining whether there has been assent, look at what each party “knows or has reason to know” about what the other intends. (Sections 19, 20) Formation of a contract requires mutual assent. Subjective theory – “Meeting of the minds” Objective theory – Look at external manifestations of parties’ intent. What would the “reasonable man” believe was intended: In determining whether there is mutual assent, the usual test to be applied is objective theory of contracts; i.e., what a reasonable person in the position of each of the respective parties would be led to believe by the words or conduct of the other party. This means that words or conduct are interpreted not according to what the speaker or actor subjectively meant to convey, nor what the person to whom the words or conduct were addressed subjectively understood them to mean (the subjective theory of contracts), but rather what a reasonable person, standing in the place of the respective parties, would understand them to mean. Courts today have rejected the requirement that there be an actual meeting of the minds. Demands for security and certainty in business transactions, and the fundamental objective of protecting a party’s reasonable expectations in relying on a promise, make it imperative that each contracting party be able to rely on the other party’s apparent intentions without regard to his secret thoughts or mental reservations.
Lucy v. Zehmer Rule: “In the field of contracts, as generally elsewhere, we must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.” It is immaterial that a party has an intention at odds with the reasonable meaning of his words and acts unless the other party knows of this.
Intent to be Bound
Expenses for wedding preparations Social engagements Letters of intent (“no liability or obligation is intended”) Agreement that says, “Formal contract contemplated” Enforceability depends on whether one of the parties expressed an intent not to be bound until the formal document signed. Evidence of intent to be bound by preliminary negotiations: (1) Express reservation of right not to be bound (2) Whether there has been partial performance of a contract (3) Whether all terms agreed on If there are open terms – how central are they to the contract? (4) If not in writing - whether this is the type of contract that is usually committed to writing.
Can the parties who have exchanged promises prevent courts from enforcing their agreements? “Letter of Intent” “Formal Contract Contemplated” That absent an expressed intent that no contract shall exist, mutual assent between the parties, even though oral or informal, to exchange acts or promises is sufficient to create a binding contract. That to avoid the obligation of a binding contract, at least one of the parties must express an intention not to be bound until writing is executed.
An offer is a proposal by one party to the other manifesting a willingness to enter into a bargain and made in such a way that the other person is justified in believing that her assent to that bargain is invited and, if given, will create a binding contract between the parties. The person making the offer is often called the “offeror” and the party to who the offer is made is called the “offeree.” An offer creates the power in the offeree to make a contract between the parties by an appropriate acceptance. Restatement 24 An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. “Corbin” An act whereby one person confers upon another the power to create contractual relations between them . . It must be an act that leads the offeree reasonably to believe that a power to create a contract is conferred upon him.
What constitutes an offer?
Must manifest intent to make an offer Look at both language and context Reasonable person standard Terms must be sufficiently definite If terms are left open – are they essential? Both intent and terms can be derived from larger context (e.g. preceding communications – Fairmont Glass) Is an advertisement an offer? General rule – no Exception – Lefkowitz – can be if terms are clear, definite, and explicit, and leave nothing open for negotiations (e.g. 1 mink stole for sale for $1.00, first come, first served) Mere price quotes alone are not a valid offer
Requirement for a valid offer:
1.) Manifestation of present contractual intent 2.) Certainty and definiteness of terms 3.) Communication to the offeree. The offer must be communicated to the offeree; in no other way will it create a power of acceptance in him. (Restatement 24). Thus there is no valid offer where A prepares an offer to B, intending to mail it, but never does. Requirement of manifestation of present contractual intent. The words or conduct used in the proposal must be words of offer rather then words of a preliminary negotiation.
The Test for an offer
The test is based on the objective theory of contracts. Would a reasonable person in the shoes of the offeree feel that if he accepted the proposal, a contract would be complete? Factors considered: A. The words Used: Some words strongly suggest that an offer has been made, while others suggest a mere invitation to make an offer. “I bid” : offer. “Are you interested?” : preliminary negotiation. B. Surrounding Circumstances: The surrounding circumstances may alter the normal meaning of the words. For example, words may sound like an offer but be made as a jest. C. To whom Made: A proposal made to the public or a large group of persons (such as advertisements) is more likely to be construed as a mere invitation to make an offer. D. Definiteness and Certainty of Terms: The more definite, the more likely an offer. This is a separate requirement for finding a valid offer. E. Written Contract Contemplated: Some Courts hold that where a proposal contemplates a subsequent written memorandum of the agreement, there is a presumption that there is no contract until the written instrument is signed. Other courts, however, resolve this issue based on the intent of the parties, which is determined from all of the surrounding circumstances. Owen v. Tunison Issue: Did Tunison make an offer to Owen when he wrote “it would not be possible for me to sell unless I was to receive $16,000 in cash.” Did Tunison thereby indicate an intention to empower Owen to close the contract? Precedents: “Would not consider less than half” is not an offer to sell for 1/2 Look at specificity of intent (“I will sell” v. “not possible to sell unless)&terms (name a specific price) Ruling: An invitation to negotiate is not binding as an offer to a contract. Harvey v. Facey Rationale: Harvey’s initial telegram posed two distinct questions: 1) Will You sell the property? 2)What is your lowest price? Facey only answered the second question. This is not tantamount to an offer to sell Harvey the property at this price. In fact, Facey’s telegram requires a response from Harvey, telling him whether he will pay $900 for the property. At this point Facey is free to accept or reject Harvey’s offer to buy at this price. Rule: There can be no contract without a valid acceptance, following a valid offer. Until a valid offer is made there is no possibility that the acceptance was valid. Note to look at importance of all communication to determine whether an offer.
General rule: 3rd Party
An offer cannot be accepted by someone other than the person invited to accept by the offeror. Fairmount Glass works v. Crunden Martin Woodenware Fairmount’s letter was an offer to sell: Quotations of prices is not an offer to sell but each case must turn on the context and on the language used. D’s April 23rd letter was more then a quotation or prices despite the word “quote”. True meaning of Fairmont’s April 23 letter must be determined by reading correspondence as a wholeRuling: A price quote may give rise to an enforceable contract, depending on the language.
Advertisements as Offers
Advertisements are generally deemed invitations to deal, rather than offers. There are three basic reasons for this rule: 1.) Advertisements are usually indefinite as to quantity and other terms; 2.) Sellers ought to be able to choose with whom they deal; and 3.) Advertisements are typically addressed to the general public; so that if they were considered to be offers, a seller might find her offer accepted; i.e. the number of people who “accept” might exceed the number of items that the advertiser has available for sale. Lefkowitz v. Great Minneapolis Surplus Stores: Exception to general rule of advertisements Rule: An advertisement which is definite, explicit, and which leaves nothing open to negotiation creates a binding contract upon the acceptance of a prospective purchaser. Analysis: The store correctly states the general rule that advertisements are merely offers to negotiate for the sale of an item at the advertised price. However, when an offer is clear, definite and explicit, and leaves nothing open to negotiation, then the advertiser can be bound by the acceptance of a prospective purchaser. In this case, the stores advertisement fits the description; Nor can they use their house rule to escape liability; They cannot modify the advertised offer after it has already been accepted.
Offer and acceptance: starts with a bidding process in which general contractors bid against each other that are based on bids they received from subcontractors, who also compete with each other. : Often the situation on government buildings. Mistaken Bids Involve a contractor who makes an error on a bid submitted of a project; this can happen often. The time allotted for the bid process is short and pressure filled and the contractor must solicit, select, and coordinate all bids from subcontractors across the building trades in exact compliance with the owner’s specifications. And because subcontractors can often feel like their bid will be underbid they often wait till the last hour to get there bid into the general contractor. Elsinore Union Elementary School v. Kastorff Rule – Contractor can rescind K based on mistaken bid where 1.) That the soliciting entity knows or has reason to know that there is a mistake in the bid. (Kastorff told school board of the mistake before contract signed) 2.) That the mistake was material and did not result from the neglect of a legal duty (not all carelessness is a neglect of a legal duty) 3.) That enforcement of the contract would be unconscionable 4.) That the soliciting entity can be returned to the position they were in prior to contracting. (Court looks at percentage of error) 5.) That the contractor promptly notified the soliciting entity of the mistake. (board had prompt knowledge of mistake) 6.) The contractor restores or offers to restore to the soliciting entity everything of value they have received under the contract. (board gave contract to next lowest bidder, w/o re-advertising) Black letter rule: A contractor’s error in calculating a bid can be grounds for rescission. Restatement 153. When Mistake of One Party Makes a Contract Voidable Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in 154, and 1. The effect of the mistake is such that enforcement of the contract would be unconscionable, or 2. The other party had reason to know of the mistake or his fault caused the mistake Restatement 154. When a Party Bears the Risk of a Mistake A party bears the risk of mistake when 1. The risk is allocated to him by agreement of the parties, or 2. He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or 3. Risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
What if party knew or had reason to know that a bid was mistaken and accepted it anyway, but one of the other Kastorff factors was not in place? Most courts will hold that the offeror is not bound in this situation (Restatement §153) Standard for determining whether offeree “knew or had reason to know” of the mistake – Finding that contractor did not have reason to know of subcontractor’s mistake where subcontractor’s bid was 1/3 lower than next lowest, where No actual knowledge of mistake Lack of familiarity by contractor with subcontractor’s field Testimony that subcontractors often submitted unprofitable bids
In order for a common contract to exist, there must be an acceptance of the offer. The acceptance (assent to the offer) must be in the same manner requested or authorized by the offeror.
An acceptance is a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates the set of legal relations called a contract. The offeror has, in the beginning, full power to determine the acts that are to constitute acceptance.
Assuming that there has been an offer, the offeree by exercising the power of acceptance “thereby creates the set of legal relations called a contract.” One of the most important consequences of this “set of legal relations” is that the offeror is no longer free to change its mind and withdraw from the relationship without incurring liability.
Requirements for a Valid Acceptance:
a. b. c. Who may accept? The general rule (there are exceptions) is that the offer may be accepted only by the person to whom it is made. Acceptance must be unequivocal and unqualified. If it is qualified, then it is not an acceptance it is a counteroffer, which works as a rejection of the offer. Unilateral vs. Bilateral Contracts: The rules for acceptance differ depending on whether the offer is unilateral or bilateral contract. 1.) Bilateral contracts: The mere giving of the counter-promise to the offeror is all that is required. The objective theory of contract prevails, and whether or not an acceptance has been given depends on how a reasonable person would interpret the words or conduct of the offeree. But the offeree must have knowledge of the offer, and notice of acceptance to the offeror is generally required (there are exceptions, such as where the offeror indicated that no notice is required.) 2.) Unilateral Contract: A unilateral contract may be accepted only by doing the act requested by the offeror, with knowledge of the offer and with the intent to accept it. Normally, notice to the offeror of acceptance is not required. (There are exceptions, such as where the offeror requires that notice be given or where the offeror has no reasonable means of knowing that the requested performance has been rendered; in such a case there is a requirement that noticed that the requested performance has been rendered be given within a reasonable time after performance.)
Methods of acceptance
a. Unilateral v. bilateral contracts: Whether a contract is found to be unilateral or bilateral makes a big difference in the mode of acceptance, which is permissible. The distinction is also important in regard to revocation (i.e., if all the offeror wants is a return promise, then if such a promise is given, revocation becomes impossible; but if the offeror requests an act as acceptance, then the act itself must be performed of the offeror can still revoke the offer). 1.) The Policy: Where the offer is unclear as to whether a bilateral or unilateral contract is contemplated, it is the policy of the law to construe it as an offer for a bilateral contract rather than unilateral. (Res. 31) 2.) Rationale: A bilateral contract affords immediate rights and complete protection to both parties, since a contract arises as soon as the offeree promises to perform, whereas an offer for a unilateral contract does not ripen into a binding contract until the performance is actually rendered. 3.) U.C.C. position: The U.C.C. accepts this same policy. The U.C.C. states that unless an offer to buy goods expressly limits acceptance to shipment of the goods, it is to be construed as inviting acceptance either by shipment or by prompt promise to ship the goods. (UCC 2-206)
Restatement § 56 (notice of acceptance – bi K) AND Restatement § 54 (notice of acceptance – uni K) Statement 54 Acceptance by performance; Necessity of Notification to offeror 1. Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification. 2. If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless a. The offeree exercises reasonable diligence to notify the offeror of acceptance, or b. The offeror learns of the performance within a reasonable time, or c. The offer indicates that notification of acceptance is not required. Statement 56 Acceptance by promise: Necessity of notification to offeror: Except as stated in Section 69 or where the offer manifests a contrary intention, it is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably. International Filter co. v. Conroe Gin, Ice & Light co. ***Is notice of acceptance required? Default rule – reasonable diligence at giving notice of acceptance is required in a bilateral K; But the offeror can dispense with notice. *** Rationale: A contract was formed when the president indorsed the paper sent to him with the defendants’ signature on it. An offeror may include any terms or conditions in the offer, which he desires. Even though no notice was required, the letter of February 14th to defendant acknowledging the order fairly communicated plaintiff’s acceptance.. Restatement 54 and 56 requires that in bilateral contract where offeror requests a promise, that promise must be actually communicated or attempted to be communicated to the offeror. Rule: The offeror controls the method and means of acceptance by the language of the offer. White v. Corlies & Tift: Statement 56 Rationale: After an offer is made, the offeree can only accept by affirmative act. The act need not be immediately communicated. It must, be a proper response, and be communicated to the offeror with a reasonable amount of time. The importance lies in an affirmative act, which is recognizable as an acceptance of the offer. As a result, an offeree’s subjective desire to accept an offer will not be binding, In this case, White received a communication from Corlies which was an offer. This offer took the form of an acceptance of his bid and a request that the work start immediately and be completed in two weeks. White had to accept this offer in order to create a binding contract. He did accept offer in his mind and began working on job. But Corlies couldn’t distinguish P’s preparations for their job from any other job for which he might be getting ready. As a result, his acceptance was never communicated and they had a right to cancel the offer. Black letter rule: In the absence of express provisions in the offer, an acceptance must be reasonable means given the circumstances surrounding the offer. **Where a return promise is invited, acceptance can be manifested by either words or deeds: if by deeds: must be sufficiently unambiguous: must set in motion the communication of the acceptance to the offeror in some reasonable time: mental acceptance alone does not suffice** Ever-Tite Roofing Corporation v. Green: Statement 54 Rationale: An offeree has a reasonable amount of time to accept if the offer does not specify a time by which it must be accepted. A reasonable amount of time can be inferred from the circumstance surrounding the offer and the intent of the parties. In this case, the trial court found that Greens had given Ever-tite sufficient notice that they no longer wanted them to work on the house. However, this notice did not come until Ever-tite was actually at the house. This is not a reasonable amount of time based on the language if the contract and the knowledge of the parties. The contract stated that it would become binding upon acceptance of D’s authorized agent or by commencement of the work requested. In this case, the work began when Ever-tite loaded its trucks before driving to the site. Court held that the offeror must allow reasonable time for offeree to accept by commencing performance. Black letter rule: In the absence of specific language in an offer, the offeror must allow a reasonable amount of time for acceptance.
Dealing with Acceptance is notice required?
An offer invites acceptance in any manner & by any medium reasonable incircumstance, unless otherwise noted. Restatement 30:Form of acceptance Invited (1) An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower offeree to make a selection of terms in his acceptance. (2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances. General Rules: If offer demands acceptance by promise: Default rule: Yes If offer demands acceptance by performance: Default rule: No Carlill v. Carbolic Smoke Ball
$100 reward from Carbolic Smoke Ball Co. for any person who contracts flu after using the ball three times daily for two weeks, according to directions. Carlill uses smoke-ball as directed, but contracts the flu. Carbolic’s argument? No K, because Carlill didn’t notify Carbolic of acceptance of offer. - This is an example of a unilateral contract (bargains for performance, rather than a return promise)
The significance of Contract Formation
Allied Steel and Conveyors v. Ford Motor Co. Issue: Had Allied accepted Ford’s amended offer, such that the amended agreement was in effect at the time of the injury? Allied did not accept the offer in the manner laid out in the acceptance clause. So did Allied accept in some other way? Yes – Allied accepted by beginning performance, with Ford’s consent and acquiescence. Rule: If offeror requests return promise, and offeree without making promise tenders what was requested to promise to do, this operates as a promise to render complete performance, and thus as an acceptance of the offer. Why didn’t Allied need to accept as laid out in the acceptance clause?Court reads this as a suggestion
Shipments of goods as acceptance
UCC 2-206: (1) Unless otherwise unambiguously indicated by the language or circumstances, (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; (b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but a shipment of non-conforming goods doesn‟t constitute acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. Corinthian Pharmaceutical System v. Lederle Laboratories Facts: A drug distributors sought to force a manufacturer to sell it a vaccine at a certain prices. Black Letter Rule: If a seller ships to the buyer non-conforming goods and gives notice that the shipment is an accommodation, the seller is not in breach of contract and is not obligated to deliver goods that conform to the buyers order.
Silence not ordinarily Acceptance
The basic rule is that an offeror cannot force the offeree to reply by wording his offer “Your silence will be an acceptance of my offer.” (Restatement 2 nd 69). A person has no duty to pay for or return unsolicited merchandise in most situations. A course of dealing may modify this rule. §69. Acceptance by Silence (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. (2) An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. Hobbs v. Massasoit Facts: Hobbs sent eel skins to the Massasoit whip and Massasoit had not ordered the skins, but paid for them. The party followed this practice 4 or 5 times. The last time Massasoit retained the skins without communicating with Hobbs and eventually destroyed them. Hobbs sued. The court held that although Massasoit did not order the skins, its past dealings created a duty for Massasoit to act when it received them. By remaining silent and retaining the skins, Massasoit justified Hobbs in assuming that Massasoit had accepted the skins.
Termination of the power of acceptance
General rule of termination of power of acceptance: An offer is freely revocable
Restatement 36: (4 modes of termination) Methods of Termination of the Power of Acceptance (1) An offeree's power of acceptance may be terminated by (a) rejection or counter-offer by the offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree Lapse: the expiration of the period within which an offer can be accepted. Revocation: An offeror can terminate an ordinary offer, at anytime before it has been accepted, by revoking it. An exception to this rule is when the offeror makes a firm offer or option contract: these are offers not subject to revocation. An Option contract is irrevocable. The death or incapacity: The rule holds whether or not the offeree learns of the death Rejection: act by offeree
When are these acceptances and rejections effective?
When parties are not negotiating orally, it becomes important to determine when a communication (offer, acceptance, revocation, rejection) takes effect. The general rule is that an acceptance is effective on dispatch, but all other communications are effective on receipt. The reason is that at the moment of dispatch the offeree has done all that he reasonably can to manifest assent. Acceptance: To be effective, the dispatch must be timely and made in a proper manner. An offer is deemed to invite acceptance in a reasonable time frame. Revocation: A revocation by the offeror is effect only by receipt, although a few state statutes make dispatch effective. (Restatement 42)(Goes against mailbox rule) Rejection: A rejection by the offeree is effective only upon receipt. If an offeree sends a rejection then an acceptance, there is no contract even though the rejection arrives after the acceptance as dispatched. Withdrawing acceptance: The power to withdraw a letter of acceptance from the mail does not affect the formation of a contract when the letter is deposited in the mail, properly addressed with postage.
Revocation of an Offer by the offeror
Restatement 42:Revocation by communication from offeror received by offeree An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of intention not to enter into the proposed contract. What constitutes a revocation? “I sold the house to someone else.” “I don’t know if we are ready to go through with the deal.” Restatement 43: Indirect communication of revocation An offeree’s power of acceptance is terminated when the offeror takes a definite action inconsistent with the intention to enter into the proposed contract and the offeree acquires reliable information to that effect. Revocation of Offer Where the offeror communicates a revocation before an acceptance by the offeree, the offer is terminated Requirements of effective Revocation: Assuming the offer can be revoked the following are required: 1.) Words or conduct: Sufficient for a reasonable person to interpret as revocation 2.) Communicated to the offeree: Offeror must make reasonable effort to let offeree know about revocation 3.) When an offer is made to the public then it may be revoked by publicity equivalent to that given the offer
Revocation of an offer: Option contracts
An option contract is a promise that limits the offeror’s power to revoke an offer. The traditional common-law rule is that an option contract must be supported by consideration (See contractual- liability to see that option contract can also be supported by reliance.) Example: While talking to Homer at the bar one day, Moe offers to hire Homer as a bartender. Homer wants to think about the offer for a day and to talk it over with Marge, but doesn’t want Moe to give the job to someone else. Homer says to Moe, “I will give you a dozen doughnuts if you will agree to hold the job offer open for 24 hours.” Moe accepts. If no doughnuts no consideration Option Contracts An offer is revocable even if the offeror expressly promises not to revoke or gives a definite period when the offer is to remain open. Exceptions are: UCC 2-205: Firm Offers An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. (Signed written offer for definite time to buy or sell goods, not over three months, is not revocable during that period) Merchant: UCC 2-104: A person who deals in goods of the kind or otherwise holds himself out as having knowledge or skill peculiar to the goods involved. (Firm offer by merchant only) 2.) Offers for consideration: If the offeree has given any consideration (even nominal consideration) of the offer, it then becomes an option and is not revocable for the period stated therein. Restatement §25: Option Contract An option contract is a promise which meets the requirement for the formation of a contract and limits the Promisor’s power to revoke an offer. 3.) Recitals of Consideration (Reliance by the offeree): Where there is a recital that consideration has been received for the option, the general rule has been that this recital is not conclusive (the courts reserve the rights to see if the consideration was actually paid). But restatement 87 provides that an offer is binding as an option if it is in writing, signed by the offeror, and recites a purported consideration. Restatement §87: Option Contract (1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or (b) is made irrevocable by statute. (2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. Dickinson v. Dodds and Ragosta v. Wilder Offer is revocable where there is no consideration for promise to hold it open Was Dickinson empowered to accept the offer via his letter to Dodds on Thursday? Was Dickinson empowered to accept the offer via his agent on Friday morning? Holding: No, because Dickinson already knew at both points that Dodds had changed his mind. Even though he learned this indirectly - same outcome as if Dodds had told Dickinson directly, “I revoke.”
Lapse of an Offer
Restatement § 41 - Lapse of Time (1)Power of acceptance terminates at time specified or, if no time specified, at reasonable time (2)What is a reasonable time is a question of fact, depending on the circumstances “Ordinarily a offer made from one to another in a face to face conversation or on the phone is open only until the end of that conversation and cannot be accepted thereafter.” Turning in a convict for a crime he committed did not entitle her to an award. Even though 4 years prior it was advertised that anyone who turned in a criminal of this specific crime would receive a reward.
Common law: Dispatch of acceptance is when contract is formed Restatement §63: Time when acceptance takes effect Unless the offer provides otherwise, (a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree's possession, without regard to whether it ever reaches the offeror; but (b) an acceptance under an option contract is not operative until received by the offeror. (Summarized: Rule applies when acceptance is made in a manner invited by the offer; Once dispatched, an acceptance cannot be revoked: An overtaking rejection placed in mailbox by offeree after mailing the acceptance not effective)
Death of an offeror or Offeree:
Restatement 48: Death or incapacity of offeror or offeree An offeree’s power of acceptance is terminated when the offeree or offeror dies or s deprived of legal capacity to enter into the proposed contract. The death or incapacity of the offeror does not terminate the offeree’s power of acceptance under the option contract.
Rejection of an offer by the offeree
Revocation (by offeror) and rejection (by offeree) is generally held to be effective only on receipt (No Mailbox Rule) A rejection by the offeree terminates the power of the offeree to accept. If she later tries to accept the offer; her acceptance is then called a counter-offer How effected: A rejection may occur by words or conduct or qualified acceptance. Equivocation: Acceptance by an offer must be unequivocal and unqualified. If a purported acceptance is qualified, it is legally insufficient as an acceptance. Instead, a qualified acceptance will act as a counteroffer and as an implied rejection of the original offer. The line between a “qualified” and “unqualified” acceptance is not always clear. Four examples of this: Conditional acceptance: “X accepts y’s offer to sell land but includes a condition that Y gives X a good title.” – “Unqualified” Grumbling acceptance: “Ship goods on the 10th, but I wish you could ship them sooner.”“Unqualified” Inquiries and requests: Inquiries or requests by offeree for better deal generally do not impair original offer UCC 2-207 Mirror Image Rule: Rejection by offeree terminates power of acceptance Common Law - Mirror Image Rule: An acceptance that adds to or alters the terms of the offer is a rejection, and acts as a counter-offer Courts avoid rigors of this rule by finding that the seemingly additional terms in the acceptance were implied in the offer or finding that the seemingly additional or different term in the acceptance is merely suggestive/precatory. The result is the contract is in effect on offeror’s terms Where some performance has already taken place, and both parties believe there’s a contract, but there’s a dispute about whose terms control the last shot rule takes effect. Last shot rule: Rule tends to favor sellers over buyers, because sellers normally send the last form.
U.C.C. 2-207:Additional Terms in Acceptance or Confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation, which is sent within a reasonable time, operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. What happens when an acceptance contains terms different from the offer? Under UCC 2-207 (1), acontract is formed unless acceptance expressly conditioned on acceptance of additional terms UCC 2-207(2) determines whether the additional terms become part of the agreement. When do additional terms “materially alter” the contract under UCC 2-207(2)(b)? Lists terms that do materially alter because they will result in “surprise or hardship if incorporated without express awareness of other party” Lists terms that don’t materially alter because they “involve no element of unreasonable surprise” Do arbitration clauses materially alter the terms of a contract? Sometimes Does an indemnity provision (party secures another in possible loss) materially alter terms of a contract? Northrop v. Litronic Industries When does a change in a warranty constitute a material alteration? A limitation on an indefinite warranty, in the absence of an industry custom limiting warranties that don’t specify duration, would constitute a material alteration. Dorton v. Collins Aikman Because Collins acceptances were not expressly conditional on buyer’s assent to additional terms w/in provision of 2-207(1), a contract is recognized, and the additional terms are treated as proposals for additions to the contract under 2-207 (2). These proposals became part of contract because both parties are “merchants” under 2-104(1), the additional term (arbitration provision) is deemed accepted by the Carpet Mart unless it materially altered the terms of the Carpet Mart’s offer OR Carpet Mart objected to the term (both parties agree it did not). Did the arbitration provision materially alter the Carpet Mart’s offer? No – then Carpet Mart is bound by the arbitration term Itoh & Co. v. Jordan Int’l Co There is a contract under UCC 2-207(3); A contract is created where performance of the parties recognizes the existence of a contract. Under UCC 2-207(3) the terms on which the writings of the parties agree plus “supplementary terms” via other provisions of UCC.What are “supplementary terms”? Gap-fillers. Since arbitration is not the sort of term that would be supplied by the UCC’s gap-filling provisions, that term is not part of the contract. So – seller (Jordan) is stuck with a contract that doesn’t contain the arbitration provision, despite seller’s attempt to expressly condition its acceptance on acceptance of that provision. What happens if offeree‟s response contains different terms, rather than additional ones? 2-207(1) (contract can be formed despite “additional or different terms” in acceptance) 2-207(2) (tells us what happens to the “additional terms”)
Courts have taken 3 approaches 1. Majority view – “knockout rule” - all different terms drop out (filled, if necessary, by gap-fillers) 2. Leading minority view – dropout rule - offeree’s different terms drop out; offeror’s remain 3. Minority view (CA) - treat “different” terms the same as “additional” ones under UCC 2207(2)(offeree’s terms prevail unless they materially alter the K)
Recap: Is there a contract? 1. Did the parties agree to be contractually bound? Was an offer extended to form a contractual bargain? If so, was the offer accepted? If terms of acceptance differ from terms of offer – Under common law: Mirror image rule applies, and “acceptance” functions as a rejection and counter-offer Under UCC 2-207: The acceptance creates a contract If so – do the additional or different terms in the acceptance become part of the contract? See UCC 2-207 If so – then the parties agreed to form a contract. If not – is there an alternative basis for finding one of the parties liable (reliance)?
Shrink Wrap agreements:
ProCd v. Zeidenberg Box containing software says that it comes with restrictions stated in enclosed license inside the box; Zeidenberg buys software, but ignores restrictions. ProCd sues. Is purchaser bound by the terms contained within the box? And does UCC 2-207 apply? Court holds that it does not, because there are only one set of terms here (seller’s). Many other courts have disagreed with this ruling, and have treated terms inside the box as either an acceptance or a “written confirmation” under UCC 2-207(1). Z’s argument: seller placing item on shelf = offer and buyer’s purchase of item = acceptance Result: terms inside the box aren’t part of the K Court: Seller’s terms inside the box = offer and Z’s use of software = acceptance Because offeror is master of the offer, and according to this offer, buyer accepts when he uses the software after reading terms of offer
Traditionally neither party is bound until the contract is final, not anymore. An exception is the situation in which one part, in reliance on the expectation of a contract, confers a benefit on the other party and can seek restitution to prevent unjust enrichment, in some circumstances, however, a party who relies on an offer but does not confer a benefit on the other party may still have a claim Restatement §45: Option contract created by part performance or tender (1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror's duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. Restatement§ 90 – requires a promise that induces reliance What’s the usual way of creating an option contract? Implied subsidiary promise Drennan v. Star Paving Implied subsidiary promise Subcontractor’s offer constituted an implied promise to perform if certain conditions were met Is there consideration for this promise? No, because no bargain but its enforceable bc of reliance Star makes 3 claims: 1.) Their offer was freely revocable and was revoked by the time that Drennan communicated his acceptance. However according to section 90 star could not justifiably revoke their offer if the 3 requirements are satisfied. 1) A promise is made expecting to induce action 2) Such action is induced 3) Injustice can be avoided only by enforcing promise Restatement 87: part 2 (2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. Promissory Estoppel: During negotiations, one party may make representations that induce the other party to incur expenses. In such cases, the party making the representations may be estopped from disclaiming liability for the natural consequences of his conduct.
Hoffman v. Red Owl Here, the promise made by Red Owl, did not rise to the level of an offer. Promise = that $ 18,000 would suffice Promise was made in the context of negotiating a contract. No contract was ever formed. Even though Red Owl’s promise did not constitute an offer, Hoffman can nonetheless recover for his reliance on that promise (the promise comes within Restatement Section 90) Promissory estoppel was originally envisioned as a substitute for consideration. The offeree’s reliance on the offeror’s promise satisfies need for consideration.
Statute of Frauds
In most instances oral contracts are valid. However, by statute, a few types of contracts are required to be in writing, or at least evidenced by a signed written memorandum of the essential terms. What constitutes a writing?The purpose of the statute of frauds is to prevent fraud and perjury as to the actual terms of the contract and to provide better evidence of the contract terms if there’s a dispute. Failure to comply with the statute renders the contract voidable but not void. Thus, the statute relates only to the remedy and not to the substantive validity of the contract.
What constitutes a writing sufficient to satisfy the SOF?
Def. of writing - includes handwriting, printing, type, email or other electronic record (Uniform Electronic Transactions Act). What the writing must include (Restatement § 131): Subject matter of the K Indicates that a contract with respect to that subject matter has been made by the parties to the contract Essential terms of all unperformed promises in the contract Can consist of separate writings (see Restatement § 132) But at least one writing must establish a contractual relationship between the parties, and must bear the signature of the party to be charged, while the unsigned document must on its face refer to the same transaction set forth in the one that was signed. What constitutes a signature sufficient to satisfy the SOF? Ok if signed long after agreement was made Lenient definition of signature For individual – any scratch suffices For entity – stamped name or letterhead may suffice (ex: note written on law firm stationary) What matters is whether marking was made with an intent to thereby adopt or execute the writing. Under UETA – includes electronic signature
Agreements that are unenforceable, if oral, under most Statutes of Frauds:
1. An agreement for any performance that cannot be completed, on one side or the other, within one year from the making of the agreement. 2. An agreement for the transfer of an interest in real estate; for lease - if for one year or more 3. An agreement to serve as a “surety” for the debt, or other obligation, or another. 4. An agreement for the sale of goods for $500 or more. Other agreements commonly within SOF: Agreement the performance of which is not to be completed before the end of a lifetime. Not all states have such a provision An agreement to pay a commission for the services of a real-estate broker 1.) An agreement for any performance that cannot be completed, on one side or the other, within one year from the making of the agreement. Contracts that are incapable of being performed within one year. This refers only to contracts which, by their terms, cannot by any possibility be performed within one year of making the contract. This one-year periods begins from the date the contract is made, not when the performance is promised. Exception Rule: Full performance on one side takes an agreement out of the one-year clause of the SOF.
2.) An agreement for the transfer of an interest in real estate; A contract for the sale of land or any interest therein must be in writing. Exception Rule: An agreement for the sale of an interest in real property can be taken out of the SOF by part performance. Usually, performance consists of some combination of possession, improvements, and payments (by the purchaser). Rationale: (a) evidentiary (part performance shows existence of an oral agreement); (b) fairness (enforcing agreement will prevent hardship). Leases for less then one year do not necessarily have to be in writing 3.) Suretyship agreements Surety contracts; promises to answer for or discharge the debts of another must be in writing to be enforceable. This applies only to promises made (i) by one who is not presently liable for the debt (ii)to a creditor (iii) in order to discharge the present or future obligations of a third person. “Main Purpose Rule”: An agreement to stand as a surety is not within the SOF if the Suretyship is made primarily for the benefit of the promisor. Ex: Principal shareholder in small corporation guarantees loan by the corporation. Ex: Owner of a building under construction promises to pay the supplier if the contractor doesn’t, to prevent delay. 4. An agreement for the sale of goods for $500 or more. A contract for the sale of any goods for more then $500 must be in writing. (UCC 2-201) as well as the lease of goods exceeding $1000. (Some jurisdictions have it more then $500). Goods include all tangible movable property. It does not include intangibles, securities, or labor and services. (Contract must be primarily for sale of goods) Exceptions: oral contracts for the sale of goods of more then $500 will be enforced in the following situations (explained more thoroughly in UCC 2-201): 1.) Buyer receives & accepts all/part of goods (the contract is enforceable as to goods accepted) 2.) Buyer gives something in part payment for goods (contract is enforceable as to the goods paid for) 3.) The contract calls for the manufacture of special goods for the buyer and the seller has made a substantial beginning in the manufacture thereof 4.) The contract is between merchants and within a reasonable time a written confirmation is sent and the party receiving it does not send a written objection within ten days and 5.) The contract is admitted by the party against whom enforcement is sought (in court pleadings)
Statute of Frauds Sale of Goods exceptions:
UCC 2-201: § 2-201. Formal Requirements; Statute of Frauds. (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing. (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable * (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or * (b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or * (c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Sec. 2-606). What needs to be included in the writing?Common Law rule (all essential terms) vs. UCC 2-202 Recap: Did the agreement need to be in writing under the SOF, and, if so, was the writing requirement of the SOF satisfied?Are the promises made by each party enforceable?Is the promise supported by M,consideration?
If not – then that promise does not create a binding contract. Is there an alternative basis for enforcement of the promise (reliance)?
Determining the parties‟ obligations under the contract: Ascertaining, interpreting, and supplementing the agreement The Parol Evidence Rule
Where an agreement has been reduced to writing, which the parties intend as the final and complete expression of their agreement, evidence of any earlier oral or written expressions is not admissible to vary the terms of the writing if the Parol evidence rule applies. This is because the law favors written contracts (as more reliable). Note that the rule works as a law of evidence (indicating what evidence may be admitted) and as a rule of contract law (indicating what constitutes the contract between the parties). Parole evidence rule: triggered when there is writing Dictates what constitutes the agreement Limits what fact-finder can consider in determining what is and isn’t part of the agreement Pushes parties to reduce agreement to writing by establishing priority for it Enhances predictability: At price of accuracy Works to exclude, not to include
How does court assess whether the writing was completely integrated? Masterson Rule
Looks at writing itself Is there a clause “there are no previous understandings or agreements not contained in writing”? Looks at all other relevant evidence, too Including evidence of agreement (re additional term) Test: If it is of the sort that it would be natural to exclude from the writing, then it is itself evidence that the writing was not intended to be completely integrated. Other factors: sophistication of the parties (or lack thereof) If writing is completely integrated then it “is conclusively presumed” to contain “the whole engagement of parties.” Merger clauses and integration clauses are usually given effect because they are strong evidence that parties intended writing to be complete and exclusive agreement between them. Result: Parol evidence inadmissible to supplement or contradict it
Gianni v. Russell & Co: Prior Oral agreement excluded Gianni can make two possible arguments to get the court to enforce alleged agreement re exclusive rights: 1. Lease with Russell included grant to Gianni of exclusive right to sell soft drinks Written lease did not contain all of the agreed-upon terms 2. Lease with Russell was accompanied by a separate agreement in which Russell granted Gianni exclusive rights to sell soft drinks in exchange for Gianni’s agreement not to sell tobacco. How does court deal with arg. #2?When a writing is intended to be the complete and final agreement between the parties, it overrides any subsidiary prior agreements that are within its scope. Analysis: Here, it “would have been the most natural thing” for the parties to have included the grant of exclusive rights in the written lease (bc given in exchange for not sell tobaccowas in written lease). Not a matter of an attempt to reform a contract on the basis of fraud, accident, or mistake because then PE would be admissible How to determine whether the Parol evidence rule bars the admission of Parol evidence 1. Determine whether agreement is integrated. (R § 209) 2. If so, determine whether agreement is partial or complete. (R § 210) 3. If Partial: Cannot admit PE to contradict a term of the writing (R § 215) Can admit PE of a consistent additional term to supplement the agreement (R § 216(1)) 4. If Complete: Cannot admit PE to contradict a term of the writing (R § 215) Cannot admit PE of a consistent additional term to supplement the agreement (R § 216(1))
Restatement 209: Integrated Agreements 1. An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement. 2. Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule 3. Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression Restatement 210: Completely and partially integrated terms (1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement. (2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement. (3) Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence (Where an integrated agreement is adopted by the parties as a complete and exclusive statement of terms of agreement,it’s a “completely integrated agreement”; if not – it’s a “partially integrated agreement”) Masterson’s Proof of complete integration: That a writing was or was not adopted as a completely integrated agreement may be proved by any relevant evidence. . . Writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties. Restatement 213: Effect of integrated agreements on prior agreements (Parol evidence rule) (1) A binding integrated agreement discharges prior agreements to extent that it is inconsistent with them. (2) A binding completely integrated agreement discharges prior agreements to extent that they are within its scope. (The parol evidence rule precludes only evidence of prior agreements that are within the scope of a subsequent fully integrated agreement.) Restatement 214: Evidence of prior or contemporaneous agreements and negotiations Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish (a) that the writing is or is not an integrated agreement; (b) that the integrated agreement, if any, is completely or partially integrated; (c) the meaning of the writing, whether or not integrated; (d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (e) ground for granting or denying rescission, reformation, specific performance, or other remedy. Restatement 215: Contradiction of Integrated terms Except as stated in the preceding Section, where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing. Restatement 216: Consistent additional terms (1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated. (2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration, or (b) such a term as in the circumstances might naturally be omitted from the writing.
Hypo: Coach Rodriquez – If the employment agreement was final as to some terms of the agreement, can Coach Rodriquez introduce evidence of the conversation in which the University president told him that the buyout clause would not be enforced?It is a partially integrated agreement and evidence would contradict a term of the writing; therefore – it is inadmissible under PE rule.
Masterson v. Sine: Partially integrated agreement Rejects four corners approach; new list of factors on whether agreement is completely integrated Can Sines present parol evidence to establish option in the written deed was not intended to be assignable? “When the parties to a written contract have agreed to it as an “integration” – a complete and final embodiment of the terms of an agreement – parol evidence cannot be used to add to or vary its terms. . . . When only part of the agreement is integrated, the same rule applies to that part, but parol evidence may be used to prove elements of the agreement not reduced to writing.” For Sines to present parol evidence to establish that the option provided for in the written deed was not intended to be assignable the writing must not be completely integrated; which it wasn’t. Masterson differs from Gianni? 1. Different conclusions re integration Agreement in Masterson = partially integrated Agreement in Gianni = fully integrated 2. Different approach to determining whether agreement is integrated Gianni – four corners approach Masterson – look at all relevant evidence Including the additional agreement at issue If it would be natural to omit that agreement from the writing, then the agreement itself is evidence that the writing wasn’t intended to be completely integrated. (R §216) Bollinger v. Central Pennsylvania construction Co.: Fraud, duress or Mistake Bollinger’s claim they had a mutual understanding that D would hide the waste with topsoil Restatement 214 states that agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish(e) ground for granting or denying rescission, reformation, specific performance, or other remedy.
Parol Evidence rule: UCC 2-202
UCC 2-202. Final Written Expression: Parol or Extrinsic Evidence. Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented * (a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); * (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement . UCC 2-202 v. Restatements •Terms set forth in a writingintended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented: •(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement. •Comment 3: . . . If the additional terms are such that, if agreed upon, they would certainly have been included in the document in view of the court, then evidence of their alleged making must be kept from the trier of fact. VS: 1. Is agreement integrated (final as to one or more terms)? (R § 209) 2. If so, is agreement PI or CI (complete and exclusive)? (R § 210) 3. If PI: cannot contradict (R § 215) but can supplement (R §216(1)) 4. If CI:cannot contradict (R § 215) and cannot supplement (R §216(1)) * That a writing was or was not adopted as a completely integrated agreement may be proved by any relevant evidence (R 210 (b)) * An agreement is not completely integrated if the writing omits a consistent additional agreed term which is(b) such a term as in the circumstances might naturally be omitted from the writing. (R 216(2))
No Oral Modification Clauses
“The terms herein may not be modified orally, but only by an instrument in writing signed by the party against which enforcement of the modification is sought.” •Majority view - NOM clauses not enforced •Minority view – NOM enforced – but can be overcome by reliance on the modification UCC 2-209 No-Oral-Modification Clauses – UCC § 2-209: Modification, Rescission and Waiver. (1) An agreement modifying a contract within this Article needs no consideration to be binding. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions. (4) Although an attempt at modification or rescission doesn’t satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.
The use of extrinsic evidence of the parties‟ intent
Parole evidence rule vs. Interpretation
Parol Evidence Rule: Governs admissibility of extrinsic evidence to add to the terms of a written agreement. Interpretation – Use of Extrinsic Evidence of Parties’ Intent Plain Meaning Rule Governs admissibility of extrinsic evidence to interpret the terms of a written agreement. •PE rule – Which communications between the parties are part of the contract? •Interpretation – When can courts consider extrinsic evidence (including parties’ preliminary negotiations and other communications) in interpreting the meaning of a written agreement? Determining whether a written contract is a final and complete expression, because if it is, parol evidence is not admissible: Test Used: The parole evidence rule applies only where the parties intended the writings as a final expression of their agreement; there are two test used. 1.) Four Corners test: The old view was that the parties’ intent must be determined from the face of the agreement itself. Thus, if the written agreement appeared to be complete and final, no parole evidence could be admitted. 2.) Modern Approach: any relevant evidence: Many courts now hold that any evidence may be admitted to determine whether the parties intended the contract as a final and complete expression of the agreement.
When can a court use extrinsic evidence of the intent of the parties in interpreting their agreement?
Plain Meaning Rule: If a contract term is ambiguous, then extrinsic evidence of the parties’ intent is admissible to help interpret the term. How does a court determine whether a term is ambiguous? What can courts consider in making this assessment? Traditional Plain Meaning Rule: “4 corners” rule - Greenfield, W.W.W. Associates (NY) Liberal approach: Pacific Gas & Electric (CA) Two stages: Plain meaning rule (Courts differ on what constitutes ambiguous) 1st : Whether the language in the written agreement, with respect to the dispute in question, admits of only one plausible meaning, or, rather is ambiguous. If the language is not ambiguous, extrinsic evidence as to its meaning will be excluded. 2nd : The court determines the meaning of the contract language. If, in the 1 st stage, the language was found to be “ambiguous,” extrinsic evidence as to its meaning will be admitted to inform the court’s determination of the meaning of the contract language. Plain Meaning Rule: 2-step process 1. Determine whether term is „ambiguous‟ Is it reasonably susceptible to more than one interpretation? 2. If term is ambiguous, extrinsic evidence is admissible on the question of what the parties intended the term to mean. New York and California disagree on evidence considered in first stage to determine if there’s ambiguity. NY- 4 Corners Cal- Liberal Approach- admits parole evidence more frequently, such as evidence of prior negotiations to show that the contract language is ambiguous. Summary: Is contract language ambiguous: yes or no If yes- extrinsic evidence may be used to show meaning If no- extrinsic evidence may not be introduced When is extrinsic evidence of parties‟ intent admissible to show the meaning of a written agreement? NY rule – 4 corners rule Written agreement that’s clear on its face must be enforced according to plain meaning of its terms Extrinsic evidence not admissible to establish ambiguity. If the writing is ambiguous on its face – then extrinsic evidence of parties’ intent admissible to interpret the agreement CA rule – Extrinsic evidence of parties’ intent is admissible to determine whether a written agreement is ambiguous. If the writing is ambiguous in light of all the evidence – then extrinsic evidence of parties’ intent is admissible to interpret the agreement. In both states - 2-step process: 1. Is contract ambiguous? 2. If so, extrinsic evidence of intent admissible to interpret.
Pacific Gas & Electric Co. v. G.W. Thomas(California) Can Thomas use extrinsic evidence to show what parties intended the indemnity provision to mean? No •Language of K has a “plain meaning”therefore extrinsic evidence not admissible to help interpret it •Trial Court used Traditional rule – If contract is unambiguous on its face, cannot admit extrinsic evidence about intent. (4 corners rule) New rule:(By Traynor): “The test of admissibility of extrinsic evidence to explain the meaning of a writing is not whether it appears to the court to be plain and ambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which language of the instrument is reasonably susceptible.” Court will look to extrinsic evidence in determining whether a K is ambiguous Rationale for rejecting 4-corners rule: Denies relevance of intention of the parties “Presupposes a degree of verbal precision and stability our language has not attained.” 2-step process: (California) (Liberal Approach) 1. “Interpretation requires at least a preliminary consideration of all credible evidence offered to prove intention of the parties.” 2. “If court decides, after considering all the evidence, that the language of the K is susceptible of either of the two meanings contended for, then extrinsic evidence is admissible to prove either such meaning.” Delta Dynamics v. Arioto (Pixey)(California) Pixey offers extrinsic evidence to show that termination was intended as the exclusive remedy.Is the evidence admissible for this purpose?Under CA approach – yes, because the clause is reasonably susceptible to both contended-for meanings.There is nothing in the rest of the K to preclude Pixey’s interpretation because this interpretation does not render meaningless the provision for attorney’s fees. Greenfield v. Phillies Records, Inc(New York)(California) NY Rule: Extrinsic evidence only admissible on question of parties’ intent about meaning of terms if contract is ambiguous.No ambiguity if contract is clear on its face; 4 corners rule. In interpreting the scope of the release claim in divorce agreement can the court consider extrinsic evidence of the parties’ intent?CA law applies and under CA law: To determine whether extrinsic evidence is admissible to explain the meaning of a written contract: 1. Look at all credible evidence of parties’ intent, and language of the K. If the evidence is relevant to prove a meaning of which language of K is susceptible? 2. If so – the evidence is admissible. (Lower court found that extrinsic evidence supported Greenfield’s claim (that scope of divorce K not extend to rights against Phillies)). Rationale for 4-corners rule: Imparts stability to commercial transactions Safeguards against fraudulent claims, infirmity of memory, fear that jury will improperly evaluate the extrinsic evidence. Looking to extrinsic evidence where agreement is clear “denigrates the contract” and “unsettles the law.” Posner on rationale of 4 corners rule: (WWW v. Giancontieri) Cuts down on litigation – in part by reducing role of jury Cuts down on discovery costs Reduces expense and uncertainty of having jury resolve disputes Parties may prefer this ex ante At cost of some inflexibility in interpretation Trident Center v. Connecticut General Life Insurance Under PG&E, a contract cannot be rendered resistant to attack by parol evidence. This rule is problematic, because: Arguably less likely to get at the intentions of the parties Makes transactions uncertain Even if sophisticated parties and careful negotiation and drafting, costly litigation cannot be avoided if one party has motive to challenge the contract. Undermines principle that language can constrain
Interpretation: Judge vs. Jury
Is interpretation a question of law (for the court), or a question of fact (for the jury)? Traynor: interpretation is for the judge unless it hinges on credibility of extrinsic evidence Policy reasons for keeping questions of interpretation away from juries: Uniformity (especially re standard Ks) and Unsophisticated jurors
Rules in aid of interpretation:
Purpose Interpretation: Recitals in the K Public Policy:Provisions in violation of public interest may be strictly construed (Example: provisions in restraint of trade (such as non-compete clauses)) Maxims: Contra proferentum (contract interpreted against its author/offeror) Ejusdem generis (of the same kind) Expressio unius est exclusio alterius (the expression of one thing is the exclusion of the other) Noscitur a sociis (it is known from its associates) Problems: (a) a lease provides that a tenant can keep “sheep, cows, pigs and other animals.” Tiger? no, bc. ejusdem generis (b) A lease provides tenant can keep “sheep, cows and pigs.” Wild boar? no, bc. noscitur a sociis (c) A lease provides tenant can keep “cats and dogs.” gerbil? no, bc. expressio unius
The Use of Extrinsic Evidence from Commercial Context: How interpretation actually works.
Frigaliment Importing v. BNS Int’l Sales Is a stewing chicken a “chicken” within the meaning of the contract. FI: chicken = young bird for broiling / frying BNS: chicken = any bird meeting weight / quality requirements What sources does the court use for interpretation? 1. Dictionary (helps determine initial ambiguity) 2. Language of the contract 3. Preliminary negotiations (cablegrams) 4. Trade usage 5. Department of Agriculture regulations Arg. – incorporated by reference (“Grade A”) 6. Reasonableness Trade pricing makes FI’s interpretation unreasonable 7. Parties’ Conduct (Course of Performance) FI accepted the chickens, and allowed second shipment But FI protests (see UCC 2-208(1)-( now UCC 1-303). Interpretive approach:Making of a K depends not on the parties having meant the same thing, but on having said the same thing Modified objective approach: Look at what parties knew or had reason to know the other party meant Restatement 201: Whose meaning prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent. (If parties agree on the meaning, that meaning controls; Even if it’s not the meaning that a reasonable person would attach to the agreement. If not, each party bound by other’s meaning only if he knew or had reason to know of that meaning.)
Hurst v. W.J. Lake & Co Under common law, custom/trade usage often admissible to interpret agreement when clear on its face. In dealings between tradesmen, the meaning of the terms of the trade should take precedence. Parole evidence is admissible in order to explain the trade meanings. It was established in the pleadings that 49.5% was used in the trade as the lowest percentage included within the 50% protein term. UCC § 2-202: Terms may be explained or supplemented (a) by course of dealing or usage of trade or by course of performance (Section 1-303).
UCC 1-303. Course of Performance, Course of Dealing, and Usage of Trade.
[Formerly §1-205, 2-208] (a) A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if: (1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection. (b) A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (c) A "usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law. (d) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties' agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance. (e) Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.
(Applies if can’t interpret 4 as consistent: Express terms>course performance>course dealing>trade usage)
(f) Subject to Section 2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance. (g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party. Williams v. Curtin Georgia slaw trade – “slaw cabbage” = large cabbage Interstate cole slaw trade – “slaw cabbage” = all cabbage suitable for making cole slaw. If both usages are established – which applies? How analyze under UCC 1-303? “Since the transaction is an interstate transaction, it cannot fairly be expected that the parties contracted only with reference to the Georgia market.”
The Use of Extrinsic Evidence to Supplement or Qualify the Agreement- Course of Dealing, Usage of Trade, and Course of Performance.
How usage and course of dealings may supplement or qualify contract: as per UCC 1-303 and how courts have interpreted UCC’s rules regarding intro of commercial context to supplement or qualify terms of a K. When is evidence of course of performance, course of dealing, and trade usage admissible under the UCC (§§ 1-303, 2-202)? Admissible to interpret/give meaning to terms of K Admissible to supplement or qualify terms of K o So - usage can become part of K even if not mentioned in K itself Not admissible to contradict terms of K o But – ct should try to interpret express terms as consistent with course of performance, course of dealing, and trade usage Nanakuli Paving & Rock v. Shell Oil Is price protection part of contract? N relies on trade usage and course of performance Shell relies on express terms Under UCC § 1-303 (e), what is order of preference? Express terms>course performance>course dealing>trade usage Given express price term, how does court award N requested relief? Course of performance, trade usage effectively rewrite / qualify provision Asphaltic paving is the trade in this case and shell is bound by the trade usage even though they complain that they are not a member or this trade. The court finds that they may be a non-trade party but they are subject to trade usage terms because of sufficient dealings with trade members. If N can‟t establish that price protection is practiced by aggregate suppliers or by Chevron, can N get evidence in? In this case, price protection would not be trade usage. But N could argue prior price protection by Shell is course of performance (§ 1-303 (a)) What is trade usage? Definition: 1-303 (c): “regularity of observance in a place, vocation or trade” so “as to justify expectation that will be observed in transaction in question.” Requirements to admit trade usage are? Usage must exist (expert witnesses) Usage must be binding on party against whom it is offered 1-303 (d): Usage binding on members of trade If not a member of trade – usage binding only if should have been aware of it Nanakuli: Includes those who regularly deal with members of trade What is course of performance? Definition: § 1-303 (a) conduct between parties in carrying out the contract Need repeated occasions for performance Need knowledge and acquiescence in performance Courseof performance or a waiver? 1-303(f) – course of performance can show waiver of term inconsistent w/ course of performance Where ambiguous, preference for finding waiver (flexibility) Are the express terms reasonably consistent with trade usage and course of performance? UCC 1-303(d): Usage and performance can give meaning to, qualify, or supplement an agreement. UCC 1-303(e): Express terms of an agreement and course of performance, course of dealing, and usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable, then hierarchy prevails (express terms > course of performance > course of dealing > usage of trade). Can parties contract out of trade usage /course of dealing / etc.?Yes Alternative theory – good faith – how is usage relevant here? (Under UCC – commercial standards of fair dealing)
Columbia Nitrogen v. Royster What course of dealing evidence does Columbia propose? During 6-year period of nitrogen sales to Royster – parties deviated from contractual amount & price What trade does Columbia propose? Mixed fertilizer industry; What trade usage does Columbia propose? Express price, quantity terms in written contract are only estimates and adjustment based on market conditions. Rule that course of dealing/trade usage is consistent with express terms because of: Lack of express override/waiver of this evidence Lack of provisions about adjustment in declining market Description of quantity as “Products Supplied” (Not “Products Purchased”) Clause regarding default describes failure to pay, not failure to accept Negotiations So: Contractual silence here can be supplemented by other evidence; Merger clause refers only to “verbal understandings” UCC: Relationship of express terms, course of performance, course of dealing, trade usage? Express terms control – if other sources are inconsistent, they are excluded. But course of performance, course of dealing, trade usage can explain/interpret, or supplement, express terms (§ 2-202/1-303). Why might course of dealing, trade usage be inconsistent with express terms? Express minimum sales Express price per ton (with adjustment factor) Merger clause Extrinsic Evidence of Commercial Context to Supplement/Qualify UCC 2-202, 1-303 Trade usage, course of dealing, and course of performance can come in to interpret, supplement, or qualify terms of agreement Express terms prevail But court must interpret express terms as consistent with trade usage, etc. if reasonable to do so Assumption: Course of dealing and trade usage were taken for granted when contract drafted Course of performance is best indication of what parties’ intended writing to mean
Objective Interpretation and Its Limits
Raffles v. Wichelhaus When a terms used to express an agreement is ambivalent and te parties understand it differently, and neither of them is aware of the others understanding, there can be no contract. No contract because there was no meeting of the minds. Oswald v. Allen Not an enforceable agreement, following Raffles, because there was no sensible basis for choosing between the conflicting understandings of the parties. In this case they note that meeting of the minds not essential but where parties had different meanings, and neither had reason to know of other’s meaning, then there is no contract. Objective v. Subjective approaches: Subjective: require “meeting of the minds” Objective: look at external referents, not parties‟ intent Common usage Reduce difficulties of interpretation; consistency; predictability “Reasonable person” standard Modified Objective (Restatement 201): If agreement – that meaning controls If disagreement – where one party’s meaning wins: A wins if B knew of, or had reason to know of, A’s meaning as long as A didn’t know, or have reason to know, B’s meaning. Neither party knows or had reason to know? No contract due to lack of mutual assent
Restatement 201:Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent. Restatement 20: Effect Of Misunderstanding (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party. Interpretation Restatement: Restatement 202: Rules In Aid Of Interpretation (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested, (a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field. (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant
Supplementing the Agreement with Terms Supplied by Law: Gap fillers, Warranties, and Mandatory Terms:
Filling Contractual Gaps: “implied terms” Restatement 204:Supplying an Omitted Essential Term When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.