Contracts August 22, 2006 Introduction I. Contract Defined 1. Promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. 2. Unilateral Contract - Exchange of promise for performance 3. Bilateral Contract - Exchange of promises II. Principles of Enforcement 1. Law protects people’s reasonable expectations. 2. Enforcement does not seek to punish. a. Unless you find the acts of a breaching party tortious, damages will not be punitive b. Some states allow punitive damages for bad faith breach 3. Purpose is to compensate a. Restoring the aggrieved party’s position had the deal gone through b. Compensation for expectation. 4. Contracts are Commercial in nature – money a. When there is a breach, somebody didn’t get the money they were supposed to get. 5. Enforcement contract restores the position of the aggrieved party a. As if the contract was performed. A. Public Policy to protect private agreements a. Stability of market place b. Predictability 6. Breaches may be economically efficient – Efficient Breach a. What if the parties are better off by not abiding by contract. b. Hardcopy publisher – expected to make certain profits. Book became so successful, softcopy publisher made a ton of money – by breaching contract, one party made so much more money. c. From economic perspective, a contract is a bargain, as long as each party gets what they were promised, we’re okay – that is, expectancy damages are paid to give the other party their due. Sometimes bargain gets better. d. Perhaps this comes at the expense of a sustainable business relationship. Think about relationship with the publisher, financial position of the company (quarterly), etc. Contracts III. The meaning of “Enforce” 1. Damages a. Damages are measured by actual loss to the injured parties b. Disgorgement of profits is punitive, and often out of scope of contracts (Hunt for Red October case – Purpose of damages is to compensate injured party for loss caused by breach (generally the actual loss). c. Profits may be used when they define Π’s loss d. Doubts are generally resolved against the party in breach. i. Sullivan case - Clear proof of a doctor's promise of specific medical results may give rise to an enforceable contract.) 2. Types of Damages a. Restitution – put ∆ back where he was i. Benefit to ∆ ii. Benefit was at expense of Π iii. Would be unjust for defendant to retain benefit i. Why would you want restitution? When there is a breach of contract and the condition pursuant to the contract worsens – like land, when value depreciates. b. Reliance – put Π back where he was i. Promisee has changed position to his detriment in reliance on promise ii. Promisor knew that promise would induce promisee to act. iii. It would be unjust if no remedy (or insufficient remedy) was given. i. Example – case where it should have taken two surgeries to fix nose, and three were required where doctor screwed up. Cost of third surgery would be given back in reliance, because the first two surgeries were expected. c. Expectancy – put Π and ∆ where they would have been (no out of pocket expenses given) i. Restore injured party to the place where they would have been had the contract been performed. Promisee receives benefits of the bargain. ii. Calculated as benefit conferred, out of pocket expenses, and profits that would have been realized if promise had been kept. d. Punitive damages - Generally No i. generally only awarded when there is a tort or malicious behavior. ii. Insurance - when you need to claim insurance and you are in desperate need and insurance agency turns you down <vexatious>, there is the possibility of assessing punitive damages. iii. California’s bad faith tort – not the rule e. Specific Performance i. Requirements - Goods or object are unique; Not possible to cover with damages; too much uncertainty for damages; sale of real property. Contract must be clear enough for the court to decree specific performance. ii. Normally you get money to recompense for loss. iii. Generally no problem making hostile people work together – constitutional issue of involuntary servitude, but this is a personal matter, not commercial. 3. Economics of remedies – Normally – courts will not enforce parties to perform contract – they will award damages. 4. Negligence- you have to prove certain things – fault. - For contracts, you don’t need negligence. 5. Constructive trust – trust remedy requires breacher to disgorge the benefits of unfaithfulness. Constructive trust is relationship with respect to property subjecting the person by whom the title to the preoprty is held to an equitable duty to convey it to another on the ground that his acquisition or retention of the property is wrongful and that he would be unjustly enriched if Contracts I. Consideration 1. Consideration is a bargained for exchange in which each party receives either benefit to that party or detriment to the other. a. Right, benefit, profit, or interest OR Forbearance, detriment, loss, responsibility given, restriction of lawful freedom, suffered, or undertaken for other. b. Restatement - A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and given by the promise in exchange for that promise. c. Does not matter if consideration benefits promisor or promisee or third party – exchange of promises is enough. d. Does not have to be economic benefit, nor does it have to be sufficient. Courts may not allow token consideration. 2. YES - Legal Detriment a. Doing or promising to do something that you are not legally obligated to do is valid consideration. b. Refraining from doing something that you are legally privileged to do is valid consideration i. Hamer v. Sidway - Uncle leaves money to nephew if he refrained from various vices. Dies, estate didn’t want to give money on basis of no consideration. Forbearance is valid consideration. ii. Bastardy case – girl promises not to bring charges for bastardy as long as boy pays money. Forbearance is sufficient if there is a subjective belief in a bona fide claim and there is an objective reasonable basis to support that claim, which is not frivolous, vexatious, or unlawful. 3. NO - Past Performance- Not valid consideration because it cannot be bargained for at time of contract. a. Woman working for company for many years, company offers her pension, later revoked for lack of consideration – past actions not consideration (later reinstated for reliance). Valid contract requires mutuality of obligation bargained for and given in exchange for promise. b. Exception: Some state statutes say that past performance is valid consideration when i. Writing requirement is satisfied ii. Consideration was actually given iii. Consideration would have been valid if bargained for. 4. MAYBE - Moral Obligations - Generally not valid consideration a. Exception – when sacrifice is made for preservation of life or property and there is a subsequent promise to pay. i. Guy dropping logs off building, only way to prevent smushing other guy is to jump. He’s permanently injured. Other guy promises to pay him for his help bi-weekly. Consideration has been given. Life has material pecuniary value – concept of unjust enrichment of guy who was saved. Saving someone is a material benefit sufficient to uphold a subsequent promise. ii. However, it has to be you. Guy gets sick on boat and guy takes care of him until he dies. Father of guy (25 yrs old) promises to pay him for his help, doesn’t, no consideration – it wasn’t your life or care he contributed to. only when the party making the promise gains something (or he to whom promise is made loses something) that the law gives promise validity. P's kindness was not at D's requiest. D's promise to pay was made without legal consideration. Past expense is not sufficient consideration to support later promise to pay expenses. iii. Widow moves to estate of brother in law on his promise to provide a home for her. He kicks her out eventually. A bargained for exchange is required for all contracts, and merely changing position in reliance on a statement is insufficient to impose contractual liability in the absence of a bargain. 5. NO - Illusory Promises - Choice of whether to perform sits with the discretion of one person. Actual promise is an illusion. a. When discretion is limited, courts have established valid consideration i. Strong v. Sheffield – Wife signs promissory note for husband’s debt. Guy tries to collect. He argues he forbore collection, but it was not part of the contract. P attempts to obtain payment for a note from the guarantor, although P convinced guarantor to sign the note merely by promising not to demand payment until he felt like it. In order to be legally binding, a promise must be supported by consideration and cannot be illusory. Contracts b. Employment at Will – NOT ILLUSORY i. Generally, employment at will is sufficient consideration by company. ii. Both parties have unlimited discretion to terminate contract. iii. Once employee has worked for a while, a binding contract is formed out of a possibly illusory bilateral contract. iv. Bankey v. Storer - P was fired after employer changed its employee handbook deleting the “for cause” requirement. Statements of employment contained in employee handbooks do not create binding contracts. c. Termination Clauses – NOT ILLUSORY – not a binding contract i. Unilateral contract - In order to accept promise, one has to perform. ii. Employee handbook was changed from dismissal with cause to employment at will. When he was fired he said that employer could not unilaterally change handbook. Court said it was good public policy and handbook improved employee relationship. Employee handbook is generally not a binding contract. d. Covenants not to compete – NOT ILLUSORY i. As long as they are signed at or very near the time of employment, they are binding as if part of the bargain (essentially a bilateral contract) ii. If signed after employment begins, it was not part of the bargain, but performance may later be substantial enough to constitute consideration (unilateral contract – promise of employment for performance, becomes a bilateral contract in retrospect) iii. CAB v. Ingram – several employees left employment to start own company. Non-competitions that are not unreasonably broad are enforceable, when executed by an employee after becoming employed, when the employee continues to be employed by the company for a substantial period of time and receives benefits beyond continued employment. e. Satisfaction Clause – NOT ILLUSORY i. Contracts making duty of performance contingent upon satisfaction would seem to be too much latitude, but the clauses have been given effect for two reasons: ii. Test 1 - In contracts where condition calls for satisfaction as to commercial value or quality, operative fitness, or mechanical utility, dissatisfaction cannot be claimed arbitrarily. 1. the standard of a reasonable person is used in determining whether satisfaction has been received iii. Test 2 - If there is a question of judgment, promisor’s determination that he is not satisfied. - Duty is the exercise of judgment in good faith. 1. Mattei v. Hopper - Contractor building strip mall, buying property from woman who says promise is illusory b/c of 120 day period where contractor sees if he can get leases. He acted in good faith, and satisfaction depended on third party. Not illusory, yes good faith. A contract that is dependent on the party’s subjective satisfaction with related matters may nevertheless be enforceable. f. Requirements/Output contracts – NOT ILLUSORY - One party agrees to supply as much of a good as another party needs. i. At early law, requirements contracts were not found valid for lack of mutuality ii. UCC approves requirement contracts 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 stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. iii. Commercial good faith test – as long as neither party is abusing their position, contract is not illusory 1. Eastern Airlines – Gulf tries to raise the price of gas and says their contract is invalid for lack of consideration. Volumes were regularly reviewed, Expectations and agreement were made in good faith, no abuses, contract stands. Requirements contracts are neither indefinite, nor lacking mutuality. g. Performance contracts – NOT ILLUSORY - Unilateral contract – promise for performance – consideration when promise is performed. Contracts i. Lucy, lady duff Gordon. She appointed an agent to exclusively license her stuff. She broke promise by placing her own endorsements. She said he was not required to perform so there was no consideration. He gave consideration by his performance. Exclusive dealing arrangements impose an obligation by the seller to use his best efforts to distribute and market goods. h. Gratuity/Gift promises – ILLUSORY - Promises generally lack valid consideration (sometimes, reliance may be an exception) i. Guy promises place to live for deceased brother’s wife. She agrees, he kicks her out, it was a gratuity, not consideration (later resolved under reliance); Woman working for company for many years, company offers her pension, later revoked for lack of consideration – past actions not consideration (later reinstated for reliance) II. Reliance 1. Restatement Definitions a. Restatement 1 – A promise which the promisor should reasonably expect 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 enforcing the promise. b. Restatement 2 – 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. Promissory Estoppel – Substitute for Consideration a. Promisee has changed his position to his detriment IN RELIANCE on the promise. i. Feinberg v. Pfeiffer - Case where woman was promised pension but there was found to be no consideration – because she changed her position to her detriment, there was reliance, and it would be unjust to deny her the pension. (∆ argued payee didn’t become disqualified from working (illness) until after payor stopped paying (like in example from restatement) Court says this is immaterial b/c she’s in her sixties and injustice would occur regardless of when disability occurred. Retirement in reliance on pension benefits is sufficient reliance to estop the employer from ending payment of retirement benefits. b. It would be unfair to the promisee if the promise is not kept. i. Cohen v. Cowles Media - Campaign worker leaked opposing candidates indiscretions to reporter, based on promise not to be revealed. Newspaper revealed him as a source and was he was fired. Although they present “the whole truth” – but not necessary to reveal name. Not the newspaper’s policy to do this and court found that he relied on the promise. c. Promisor knew that promise would induce action on the part of the promisee i. DG Stout v. Bacardi - Liquor distributor – Bacardi promised to stay on as a client (although it was an at-will relationship), allowing distributor to remain in business or else he would have to sell (already had negotiated a sale). They knew that failure to stay on would drive distributor into liquidation. They dropped out as soon as distributor cancelled their negotiated sale, and distributor had to significantly reduce sale price because it was no longer a viable business. They were found liable for change in sale price. Promissory estoppel allows recovery of reliance damages and not expectancy damages. 3. Professor’s friend in Korea – two scenarios a. Come on over – I’ll get you a job! No consideration – could be enforced on Reliance. b. Sell your house, buy ticket on such date, enroll your kids in specific school, etc., etc. – specific elements could indicate consideration based on performance. 4. Family Promises a. Rickets v. Scothorn – Woman quits work in reliance on her grandfather’s promise to support her sues when the executor of her grandfather’s estate fails to pay. Where a person changes position in detrimental reliance on a promise, the promisor may be estopped from later denying the promise. 5. Some contracts are more likely than others to be enforced on the basis of reliance. a. Promises to Convey Land; Charitable subscriptions; Promises coupled with gratuitous bailments. b. A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance Contracts c. No matter what the classifications – you have to look at the facts and circumstances of each case. i. Reliance contract is no good if it is based on some violation of the law (racial covenant in housing development violated 14 th amendment) 6. Damages - Reliance and Restitution are equitable remedies. Consideration works every time. Reliance and Restitution are given at the court’s discretion. III. Restitution 1. Restitution is not based on a promise, but a policy to prevent unjust enrichment. (Quasi-Contract – implied by law) 2. Limited to the benefit which has been conferred 3. Emergency services are not gratuitous when the services rendered were of the kind that is usually paid for (expectation of the parties, special skills, expectation of payment). Depends on society’s expectations (professionals compensated – not laymen) 4. Reasonable person standard – if reasonable parties would have agreed to contract – then it might be unjust enrichment without paying victim. a. Cotnam v. Wisdom - A doctor gives medical services to save your life. You get your life – something valuable. Doctor gets nothing? That would be unjust. Doctors used to consider patients ability to pay in deciding what to charge, but that has been changed to figure the value of doctor’s services by his experience and services rendered, not the patient’s ability to pay. When physical renders emergency medical services to a person, who due to his medical or mental condition is not capable of agreeing to the treatment, the law will imply a contract for the reasonable value of the services. b. Pyeatte v. Pyeatte - Wife puts husband through law school; husband promised to put wife through her masters. He passed the bar and left her. Agreement had importance because it gives evidence of her expectation of compensation and circumstances which make it unjust to allow him to retain benefits from her efforts. No restitution for incidental activities of marriage, but if there are unilateral or extraordinary efforts – then there may be restitution. (could have been argued under reliance theory, but there it probably would have failed based on the fact that the promise is conditional on his passage) 5. Cannot be transferred between beneficiaries. a. Callano v. Oakwood Park - Housing development – house was contracted for and perspective owner contracted for landscaping. Owner died and contract for house was cancelled after landscaping was done but not yet paid for. Developer sold house, but was not found liable for restitution to landscaper. A plaintiff is not allowed to substitute one promisor of debt to another. Landscaper should have brought suit against estate of owner, even though developer may have benefited. Quasi-contractual recovery is not available when an alternative remedy based on actual contract exists. 6. Cannot have restitution when gifts are gratuitous. a. Guy was personal assistant to another guy, who promised to change his will to compensate him for all he had done. He died before changing his will – no consideration; no reliance; no unjust enrichment for past performance. If services are not rendered with the expectation of being compensated, a promise is not enforceable on reliance. b. Fraud changes the story – recovery on a quasi-contract may be permitted when there is fraud perpetrated by defendants (assuming a third party) c. Courts cannot consider things that are not under the control of the parties. 7. Restitution not awarded when services are performed in the line of official duty. Contracts OFFER AND ACCEPTANCE\ I. The Nature of Assent 1. Intention to be bound a. Subjective v. Objective Intentions i. Subjective Intent is not knowable, so courts have developed Objective Test. 1. Acts and words – external elements are recognizable. 2. Reasonable person standard – if you create the reasonable appearance of a contract and a reasonable person seeing this would believe there was a contract and believe the plaintiff, the court will protect them. 3. Lucy v. Zehmer - Two guys at a bar negotiating over the sale of one’s house. One offers 50G for the property, other accepts (what he says is in jest and just two drunk guys playing around) by writing out contract on the back of a receipt, having his wife sign it, although refusing consideration ($5) when extended. Contract is enforceable by objective standard. ii. Subjective exception –If neither intended to be bound, no contract - If transaction is merely frolic and banter – contract is not made 1. Pepsi points – 7 million points for a harrier jet (equivalent of 700G) – court acknowledged absurdity of the commercial in its finding that there was not a contract. 2. Statements between intimates or for social purposes provide second category in which promisor may not have intended to making a legally enforceable promise. iii. Medical Guarantees – not unless there is evidence of a signed written promise, contract, or warranty of cure. 1. Statutory authority – Michigan – Doctor says “after operation, you can throw your pillbox away” etc. Legislature enacted a statute providing that an “agreement promise, contract, or warranty of cure relating to medical care or treatment is void unless evidenced by a signed writing. iv. Meeting of the minds is not required – as long as there is an objective agreement. b. Gentlemen’s agreements – sometimes parties will enter into an agreement that is not a contract – essentially a letter of intent. i. In the securities act of 1933, before going to expense of preparing a printing a registration statement, the issuer wants some assurance of the availability of underwriters, who in turn, are not willing to make an enforceable promise to purchase the stock, since that would subject them to the risk of an adverse change in the market during the time before registration statement takes effect. Solution has been a letter of intent. ii. Certificate promising death benefits – court held that employer was liable for benefit. c. Formal Contract Contemplated – Complex negotiations, agree to terms of contract, leave details to be worked out by lawyers, and then one party backs out signing. - Absent expressed intent that no contract shall exist, mutual assent between parties to exchange acts or promise is binding even though oral or informal. i. Enforceability depends on whether the parties intended to conclude an agreement earlier. ii. Factors: 1. Express reservation of right not to be bound 2. partial performance 3. whether all of the terms have been agreed upon 4. whether agreement in issue is type of contract usually committed in writing. 2. Common Law Principles a. Mutual assent was sufficient to create a binding contract, even absent an expressed intent that no contract shall exist b. To avoid the obligation of a binding contract, at least one of the parties must express an intention not to be bound until a writing is executed. Contracts II. The OFFER 1. Exchange - Agreement is only made by exchanges – a. An offer is an act whereby one person confers upon another the power to create contractual relations between them. Act must lead offeree to reasonably believe that a power to create a contract is conferred upon him. (when in doubt, no offer) b. Requirements i. Offeree must be specified ii. Offer must be quantified. c. Price quotes – generally not an offer to sell at that price, but an invitation to make an offer. i. I’ll sell you my car. You say, okay. This is not an offer – there have to be terms discussed and negotiated. ii. Owen v. tunison - Π’s letter asked whether ∆ would sell store for price. ∆s letter said he’d accept no less than a higher price. Πs letter accepted. ∆ decided not to sell – was there a contract? No – No meeting of the minds between the parties. Π never offered a given price that ∆ accepted. An invitation to negotiate is not a binding offer to contract. iii. Harvey v. Facey - Jamaica case – Π asked ∆ whether he would sell him property and what was lowest price. ∆ alerted Π of lowest price, but never said he’d sell him the property. Π took this as an offer – Court said no because ∆ never agreed to sell it to him. Stating a possible sale price is not binding as an offer to sell at that price. iv. Fairmount Glass v. Grunden - Letters went back and forth on the purchase of jars – Π asked for lowest price, terms, and cash discount. ∆ replied with prices and quantities. Π wrote letter to enter contract. ∆ said they were sold out. Court said there was an offer in the letter because specific terms were set forth. ∆ tried to say that quality was not specified so there was no offer. Court said bullshit, quality is implied in offer. The court looks to determine the intentions of the parties. A price quote may give rise to an enforceable contract, depending on its language. d. Offer can be made without verbal exchange. Many contracts are made by acts. You go into stores, you make a contract. e. Offer can only be accepted by person it was made to. 2. Advertisements a. General rule – advertisement is not an offer, but an invitation by the seller to the buyer to make an offer to purchase b. Exception – if there is nothing left to be negotiated and very specific terms i. Lefkowitz - Ad in paper says there are three specific items for specific prices at first come first serve. Guy is first to show up, wants to buy item. Store said the ad was only for women. Court found that it was an offer because there was nothing left to negotiate and ad said nothing about men/women. - First come first serve suggests a unilateral contract and the court says you cant change the offer after it has been accepted. An advertisement which is definite, explicit, and which leaves nothing open to negotiation creates a binding contract upon the acceptance of a prospective purchaser. 3. Mistaken bids a. Relief is allowed when accepting party knows or has reason to know of other party’s error and the other requirements for recission are fulfilled. b. Elsinore School v. Kastoff – contractor errs in a bid, tries to get released from the bid. A contractor’s error in calculating a bid can be grounds for rescission as long as: i. Soliciting entity knows or has reason to know that their is a mistake in the bid ii. Mistake was material and did not result from neglect of legal duty (has to be honest mistake) iii. Enforcement would be unconscionable iv. Soliciting entity can be returned to the position they were in prior to contract. v. Contractor notified soliciting entity of mistake promptly vi. Contractor restores or offers to restore soliciting entity everything of value they have received under the contract. Contracts c. Offer can be withdrawn, but for acceptance. Many times, when you make an offer to state or local government, you are not allowed to withdraw your bid. III. THE ACCEPTANCE 1. How can you accept an offer? a. Acceptance is a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer, and thereby creates a contract. b. There is an acceptance when proper manifestation is made. i. Offeror has full power to determine the acts that are to constitute acceptance. 1. Can dictate method of acceptance, or waive notification. 2. Suggested (or preferred) method of notification does not preclude other methods of notification. ii. Manifestation has to be accompanied by proper acceptance. 1. Mailbox rule – I sent offer by mail; he makes reply by mail. When is offer made? When he manifests his intention to accept by dropping his acceptance in the mail. Notification was not necessary. (no mailing, no manifestation, regardless of intent) 2. At some point I’ll need to know, but the contract exists at the time of mailing. 3. A reasonable time to accept must be given. 4. Also – revocation has to come by same means as offer. iii. Offeror must know that offer has been accepted to perform the contract. iv. Act of acceptance has to be reasonable. (but does not necessarily have to conform with suggested method of acceptance in offer) c. Beginning of invited performance i. Bilateral Contract - Beginning of performance can act as an acceptance (not preparation to perform). Such an acceptance operates as a promise to render complete performance. ii. Unilateral Contract – beginning performance creates an option contract for a reasonable amount of time to finish performance d. Silence – generally not an acceptance of an offer. i. Unsolicited merchandise – the maker of the offer cannot require the consumer to make affirmative act of refusal. ii. UCC - Exceptions: 1. Offeree takes benefit of offered services w/ reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation 2. Offeror has given 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. 3. Previous dealings – reasonable that offeree should notify offeror if he does not intend to accept. 4. 2201 – silence for 10 days following a written confirmation of a contract as acceptance. (merchants only) e. Acceptance on Unilateral Contract i. In general – if offeror can not readily learn of the offeree’s acceptance by performance, offeree has duty to notify offeror of acceptance. If offeree does not do so, offeror’s contractual obligations are discharged unless 1. Offeree uses reasonable diligence to notify the offeror of acceptance 2. Offeror has waived right of notification of acceptance 3. Offeror learns of performance within a reasonable time. ii. Allied steel v. Ford - Ford had contract with Allied steel including indemnity provision (allied would be responsible for damages caused by negligence of its own employes). Later, another contract was signed where indemnity provision was substantially broader. When employee was hurt b/c of ford’s negligence, Ford tried to implead allied. Contractual provisions were in effect – although formal manner of acceptance expressed by agreement was not met, Allied undertook performance of the work. Agreement stated “acceptance should be executed” not “acceptance must be executed.” Here – performance manifested a meeting of the minds. An offer which suggests a means of acceptance may become binding by performance by the offeree. Contracts f. Offeror is the master of the offer – and can control method of acceptance by language of offer. i. Ice and Gin case – Filter company made written offer to sell subject to certain conditions, and stated that it would become a contract upon acceptance by Gin company and approval by Filter co’s executive officer. It was “Okay’d” by exec. Filter co sent acknowledgment of order, Gin sent two letters to cancel offer. Offer explicitly stated that a contract was formed when ∆ accepted and when Πs exec approved – even if notice was required, Π acknowledged and that was sufficient. Offeror controls the method and means of acceptance by the language of the offer. ii. White v. Corlies & Tift - Client asked builder for estimate. Π gave estimate which he signed and returned. ∆ sent note saying to start and finish within two weeks. Π never responded, but bought materials and started to work. Offeree can accept by affirmative act – but, it must be a proper response. Subjective desire is not binding. Although he bought the materials, acceptance not binding because there was no manifestation by notification. (building supplies could have been used on any job – but that is immaterial because contractor never took any steps to notify) In absence of express provisions in the offer, an acceptance must be by reasonable means given the circumstances surrounding the offer. iii. Even Tite roofing - ∆ wanted roofer to work on house; ∆ and Πs agent signed document detailing work desired and price to be paid. Document said contract was binding upon acceptance by authorized agent or commencement of work. Never got authorized agent, but they started work 9 days later (∆ knew it would take time for credit approval, and in mean time, hired someone else and when Π showed up, asked them to leave). Loading of truck constituted binding manifestation and ∆s dissent was not manifested until after offer was accepted. In absence of specific language in an offer, the offeror must allow a reasonable amount of time for acceptance. g. What is sufficient for acceptance and what isn’t? i. Timing is an issue – 1987 – somebody walks to you and says have you ever heard of Microsoft – you want to buy stocks at $5 per share? You say “ill think about it.” Offer was made, but too much time has passed so that the offer is now absurd. Acceptance was not timely. Timing will be an issue. ii. Manner of Acceptance – same hypo – you didn’t say anything, but had the intention of doing so. This is not the same as manifestation of acceptance. Acceptance probably has to be communicated at some point so offeror knows that offer has been accepted. h. Language alone may not be only guideline – surrounding circumstances may affect contract. i. If Contract was being performed – existence of contract cannot be an issue. ii. When mode of acceptance is an issue, language may be a guideline, but full circumstances should be considered. iii. Acceptance of offer by part performance in accordance with the terms of the offer is sufficient to complete the contract. 2. Shipment in goods as acceptance (Check UCC 2-601) a. Under common law – shipment of non-conforming goods was a counteroffer. Under ucc – even if seller sends non-conforming goods, there is a contract. Non-conforming shipment is an acceptance of the offer and a breach. However, if seller seasonably notifies buyer that shipment is offered only as an accommodation to the buyer – there is no contract and shipment is a counter offer. b. Normally, in bilateral contract, where I want X goods at given price, UCC allows acceptance through shipment. i. UCC 2206b – 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 non-conforming goods, but such a shipment is offered only as an accommodation to the buyer. c. Exception: Under UCC – seller accepts offer by shipment of either conforming or non-conforming goods unless a letter is sent indicating accommodation. i. Lederle labs – raised price of vaccine substantially, pharma company made vast order before price increase because they received information before its release that price was raising. Lederle shipped small order at that price as a courtesy with letter saying that it was an accommodation and the price of the drugs had increased, and they would ship the rest at the increased price unless pharma company did not agree to it. Court held that shipment was not acceptance because it came with notification of accommodation. If Contracts 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 buyer’s offer. d. UCC 2206 – What Constitutes Acceptance of goods: Occurs when buyer i. After reasonable opportunity to inspect goods signifies to seller that goods are conforming or that he will take or retain them in spite of their non-conformity, or ii. Fails to make an effective rejection, but acceptance does not occur until buyer has had reasonable opportunity to inspect them. Or iii. Does nay act inconsistent with seller’s ownership, but if such wrongful act is against seller – it is acceptance only if ratified by them 1. Acceptance of any part of any commercial unit is acceptance of that entire unit. IV. Termination of the power of acceptance 1. Termination – once offeree receives offer, he has the power to accept, but it may be terminated. 2. Lapse of an offer a. Offeror does not have to wait; when offer is made, there may not be consideration for the period of time in which offeree is to wait. b. Offer lapses in a stipulated time OR a reasonable period of time, depending on i. Nature of the contract – if subject matter does not fluctuate with price, it will lengthen reasonable time. ii. If subject matter fluctuates frequently (stock), reasonable period is shorter. iii. If in a conversation an offer is made, it is probably only reasonable to accept it within the confines of the meeting 3. Revocation a. Offeror may revoke offer by doing something affirmative before acceptance i. Offer is revoked if offeror indicates that he is no longer willing to be bound, and this is either directly or indirectly learned by the offeree. ii. Notice of revocation has to be made in reasonable manner equal or similar to that used for making an offer. iii. Reliable information received by offeree that offeror changed his mind. 1. Dickenson v. Dodd – offeror gave offeree until Friday to accept an offer to sell property, but sold property to someone else on Thursday. Without separate consideration, offeror may revoke an offer anytime before the offeree’s deadline to accept offer. 2. Ragosta v. Wilder – shop owner and a prospective buyer dispute the meaning of a cash in hand offer that the owner made for the sale of the shop. Offeree looked to accept, but offeror said that he was not willing to contract. An offer is freely revocable until offeror is bound by a valid acceptance. (not just preparation for acceptance). b. Exception: Option Contract / Firm offer - Consideration or writing is given to keep an offer open and it becomes irrevocable i. Essentially, a small contract is made that the offeror cannot revoke ii. Many times used in real estate or rental contracts – deposit of some sort as consideration. 4. Death of an offeror – offer dies with him; contract does not. 5. Rejection – if offer is rejected – you can’t go back and accept. a. What constitutes rejection? i. Common Law - Mirror image rule 1. offer must be accepted in precisely the manner and terms specified. 2. Slight diversion from this destroys the offer. 3. Adjustments are counter-offers – original offer is destroyed and new offer is created. ii. Implied terms – sometimes, the court may decide that what seemed to be an additional or different term is an implied term in the offer. 1. This may be an innocuous term, industry standard (think about the quality of the mason jars from before) 2. Precatory acceptance (hopes of on party) may be implied but not destroy contract. Contracts iii. Acceptance on adjusted terms – 1. if terms are not just implied or precatory, you create a counter offer. 2. Forms are not catered for a specific offer – they have terms – there may be additional of divergent terms in forms going back and forth. The last form wins. 6. The Mailbox Rule - Acceptance is effective when dispatched unless an offer provides otherwise. a. Method of delivery must be at least as quick and reasonable as method of offer. i. Exception – options contracts – acceptance is upon receipt. ii. If acceptance sent first – mailbox rule applies except if rejection arrives first and is relied upon iii. If rejection is sent first, mailbox rule does not apply – whichever arrives first shall govern. b. Sometimes, provision in offer that contract may be conditioned upon receipt of acceptance c. Revocation is generally effective only upon receipt. d. Dispatch rule – if you make an offer via mail, offeree should understand that mail is appropriate manner of acceptance and that acceptance is valid upon dispatch. i. What if its in the mail and offeree calls to cancel before it’s arrival – is offeror bound by it? No – only fair that he should not be held in violation of contract if he relies on cancellation before he received acceptance. ii. If correspondence is lost – it’s on the offeror because he allowed acceptance by mail. V. Battle of the forms 1. Purchases of goods are generally done by standard forms, which are not negotiated between the parties. 2. Battle of the Forms Non Goods Transactions a. Service Contracts (Anything NOT involving a sale of goods, or where sale of goods is not central) i. Forget UCC and go back to common law – if you vary from original offer, you’ve destroyed it. 1. Discretionary – if terms are implied in the offer or precatory (expression of hope; nonbinding suggestion rather than hard and fast offer) the offer may be accepted without express acceptance. ii. Mirror image rule- If you accept with changed terms, you destroy the offer – you have to accept it as it is – it’s a package deal. 1. Additional terms - Common law – acceptance has to be exactly the same – but in real life, people always make changes w/o intending to destroy offer. UCC relaxes this for the sale of goods. iii. Last Shot Doctrine – when acceptance does not match the offer, but some performance has taken place and a dispute arises as to which terms control, the party that sent the last form usually prevails – advantageous to fire the last shot before performance. 1. Battle of forms – Modern transactions – parties often do not deal face to face and where offer and acceptance are made by preprinted forms – mirror image rule leads to unfairness: (1) one party does not perform – since forms are used to form contract – party that does not perform may claim that contract was not formed. (2) Parties perform but dispute arises as to the terms – last shot has an unfair advantage. b. 2-207 - UCC Applies for a sale of goods transaction where the parties have not expressly agreed to a particular written contract, and the writings do not agree. i. expression of acceptance sent within reasonable time operates as an acceptance unless acceptance is made conditional on assent to additional or different terms. a. A definite and seasonable expression of acceptance b. Or written confirmation (written is better, but it doesn’t have to be in writing). c. Which Is sent within a reasonable time operates as an acceptance UNLESS acceptance is expressly made conditional on assent to the additional or different terms. ii. Additional terms are to be construed as proposals for addition to the contract. (they do not destroy the original offer like in common law – fine print (save merchants and non merchants from technicalities), if accepted Contracts a. Except, for merchants – terms become part of contract (if there is something small, it is accepted. If it is something big, it might not be enforceable), unless: i. Offer expressly limits acceptance to the terms of the offer (section 1 is met) ii. They materially alter it 1. UCC suggests “surprise by hardship without express awareness” (Probably for the jury. Arbitration is debatable – in NY – burden is on party advocating on arbitration to establish arbitration is not material – other jurisdictions put burden on party opposing it; warranty limitations; what state’s laws govern; time for delivery; payment, etc). iii. Or notification of objection to them has already been given or is given within a reasonable time after notice of them is received. iii. Conduct recognizing existence of a contract is sufficient to establish contact, although writings do not otherwise establish a contract. Terms will consist of terms on which writings agree + supplementary UCC terms. (Performance) – a. Dorton v. Collins & Aikman - ∆ supplied carpets to Π, in purchase order, there was an arbitration agreement in the small print. Arbitration terms were additional, UCC would enforce terms (because between merchants) unless acceptance was expressly conditioned on assent to arbitration process. Forms contained wide methods of acceptance, but did not make clear whether acceptance was expressly conditioned on assent. Court found that Π would only be bound by the arbitration agreement if it was agreed upon orally because it was a material term in the contract. Under 2-207 – if an arbitration provision materially alters an existing agreement, it will not be incorporated into the contract unless expressly agreed to both parties. b. Step Saver Data - Π sold software to ∆ - terms on purchase order matched, but there was a box top licensing agreement including a licensing agreement and a disclaimer of warranties. On purchase order, it said contract was formed when product was shipped. Court found license would be binding if it was expressly conditioned on acceptance. Box top license did not fall under (1) because he would have had to expressly say “unless you expressly say that you have to accept these terms, or else it is not a contract” terms are not conditional. Move to (2) – were representations within the parties’ original agreement? If so, disclaimer would be material and terms did not become part of the agreement. UCC 2207 – govern contracts for the sale of goods where the parties have multiple agreements with different or additional terms. Parties may be bound by terms of differing agreements between them, depending on materiality. c. Π sent purchase order for steel coils, ∆ sent acknowledgement saying acceptance is conditional on buyer’s assent to additional or different terms. On reverse side of ∆’s form was an arbitration clause. Π sued ∆ saying steel was defective. Is arbitration term considered a supplementary term? (3) – conduct is recognized as a contract – but what kind? Contract is only what the parties agreed to in writing, plus supplementary terms. Under (1) - ∆s form was a counter offer because of the “expressly conditional” language in the form. Under (2) original offer has been destroyed by counter offer and 2 only applies to additional terms of original offer. (3) – where conduct consummates the terms of the contract – counter offer was not specifically accepted by return communication. If it was, then it would be part of the contract. Since goods were sent anyway, (3) says that the agreed upon writings are the terms. Arbitration was not just a supplementary term (ucc gap filler). Do parties to a contract have a binding agreement if the offeree’s acceptance is made expressly conditional on assent to specified terms? 2207-3 may imply a contract based on the conduct of the parties, even after the failure of a conditional term. iv. Different terms – Knockout Rule + UCC gap filler. 1. ∆ offered to sell product to Π. ∆s offer included 90 day warranty. Πs form stated unlimited warranty. Which holds? The terms directly mismatch – so they drop, and you use a UCC gap filler (in this case, a reasonable time) 2. Pro-CD inc. v. Zeidenberg - Shrinkwrap license – Πs made software (list service). Price was low for private users, high for business users. ∆ purchased private user software and sold it to businesses. Since shrinkwrap terms are secret at the time of purchase, are they binding? Court said yes – because you had to agree to terms before using the product, if you did not find them acceptable, you could have returned the product. A license enclosed in a software package forms a binding contract Contracts between the software seller and a buyer if the package provides notice that the purchase is subject to the license and the buyer can receive a refund if the buyer does not agree to the licenses terms. Here – they inspected the license and software and did not reject the goods. v. UCC 2606 – after an opportunity to inspect, if buyer fails to reject, he accepts. 1. Movie ticket – you don’t expressly go over terms contained about not video taping, or whatever, but you accept the terms by entering the theater. vi. UCC 2204-1 – a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. Scenario 1 – no sale of goods – common law acceptance with additional or different terms becomes a counter offer that needs to be accepted by another acceptance validity of additional or different terms – not valid unless accepted by offeror. Scenario 2 – sale of goods between non-merchants – UCC applies validity of acceptance o Valid IF: Definite and seasonable expression of acceptance OR written confirmation within reasonable time. o NOT Valid IF: acceptance is made conditional on assent to additional or different terms. Validity of additional terms o Terms are only a proposal – not valid unless specifically accepted. Scenario 3 – sale of goods between merchants - UCC Validity of Acceptance (same as 2) o Valid IF: Definite and seasonable expression of acceptance OR written confirmation within reasonable time. o NOT Valid IF: acceptance is made conditional on assent to additional or different terms. Validity of additional or different terms o Additional Terms - Valid UNLESS: Offer expressly limits acceptance to terms of the offer. They materially alter the contract Notification of objection to them has already been given or is given within a reasonable time after notice of them is received. o Different Terms – Majority – invalidate discrepant terms and fill in the gap with a UCC gap filler. Minority – treat different terms in the same way as additional terms. Contracts VI – Pre Contractual Liability 1. Option Contract - This forms a separate contract solely for the purpose of making it irrevocable a. Express promise to keep an offer open for consideration b. Consideration given. – (Could be “purported consideration” if written and signed (restatement 87)) i. When proposal for unilateral contract is made and the offeree starts performance, that binds the offeror and he cannot give up the contract. Offeror has to provide reasonable period of time to revoke the offer. ii. Power of acceptance is not terminated by rejection, counter-offer, revocation, or incapacity or death of offeror. iii. Giving an option to offeree to create a contract by acceptance – offeror limits his own power to revoke the offer – there must be actual receipt of acceptance. 2. 2205 – firm offers – by a merchant to buy or sell goods is irrevocable if a. It is signed in writing and b. Gives explicit assurance that it will be held open for the time stated, or if not stated, for the reasonable time but no longer than three months. c. No consideration is needed. 3. Reliance – elements of equitable estoppel – substitute for consideration. a. Offeror must know intention and Offeree must be ignorant.. b. Offeror must reasonably foresee that offer will induce party to act. c. Party asserting estoppel must rely on the conduct of the party to be estopped to his detriment. i. Guy offers to sell another guy land and that offer was good until Friday morning. Thursday, he decides to accept, but in the mean time finds out seller is contracting to sell with someone else. He delivers message on Thursday night that he intends to buy, tracks the guy down Friday morning trying to bind him in the offer by accepting. A promise without consideration is not binding – any moment before a complete acceptance of the offer, offeror may do what he pleases. ii. Drennan - A general contractor wants to enforce a subcontractor’s bid on a construction job. Subcontractor wanted out on terms of a mistaken bid. An offer may not be freely revocable if the offeree has substantially relied on the offer. iii. Holman Erection – A general contractor accepts bids from several subcontractors. GC used one SC’s bid to make the offer, then awarded subcontract to another subcontractor. Low bidder sued on reliance – but there was no reliance. A general contractor is not bound to hire a subcontractor whose bid was listed under a general contractor’s bid. 4. Liability for failed negotiation a. Each party assumes risk of loss if negotiations break down b. No requirement to negotiate in good faith. – (Letter of Intent exception) c. Promissory estoppel may be a remedy. i. If parties begin performance in good faith – we want to protect the social interest in making contracts. 1. Mid negotiation – if party received a benefit from the other party, the benefit has to be returned to the other party. 2. Hoffman v. Red owl – P entered into agreement to open franchise of Red owl. He was promised that $18g was sufficient. Negotiations continued, he had various out of pocket expenses, then ∆ told him that more money would be required and that P’s father in law would have to consider his loan a gift or have it the last to be paid off. P told ∆ that he could not go forward with the $34g financing. Sued D for out of pocket costs based on their initial understanding. ∆ said promise was not definite enough to call it promissory estoppel. Restatement - a promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action of forbearance is binding if injustice can be avoided only by enforcement of that promise. It is not necessary for an offer to address every detail of an agreement in order to support a promissory estoppel claim. ii. Damages only based on that which would be unjust (grocery store – purchased to gain experience – justice does not require damages – selling the assets should exceed any actual losses) Contracts 1. Cyberchron - P customized computer hardware. D was a military contractor. Parties negotiated for P to provide equipment to D. D specified weight, P never agreed to it, and D told them to go forward. Agreement was never reached, no product was delivered, no money exchanged. D cancelled the order, ended up ordering from a third party, and the product was heavier and inferior to P’s product. Was promissory estoppel applicable? Yes – injury inflicted on P was unconscionable. Although there was no contract (because there was no agreement), P relied on the contract to their detriment. A party who relies on a promise that a contract is forthcoming may recover under a promissory estoppel theory. a. Administrative and overhead costs – could be assessed as damages as long as they are normally allocated between the parties on an accrual basis. d. General Contractor i. Makes bids and its accepted – then there’s a contract. In traditional consideration theory – there’s no way to create a contract. SCs do not provide consideration – and they do not get consideration from the general contractor. ii. If GC uses their bid and wins a general contract, he is not required to use the lowest bid. 1. Promissory estoppel - P was GC, prepping bids. ∆ was Subcontractor, submitting bids to various GCs. ∆ came in lower than anyone else, P was chosen, and informed ∆ that he would be using his bid. ∆ said he’d made a mistake. P got another contractor for a few thousand more. Sued ∆ for the difference. Although neither bilateral or option contract was created, Plaintiff bound himself to ∆s terms – created a reliance. 2. Promise to perform was implied (offer was not revocable); ∆ knew P would rely on offer, creating a promise that the offer would not be revoked (creating an option contract, although not in a traditional sense)Court implied that there was some obligation – that they could not delay acceptance; Detriment. a. Normally – mistakes are permitted, but that is when the other party has a reason to know that a clear mistake has occurred and goes forward anyway. Here, P has no reason to believe offer was a mistake. There was detriment in this case on the basis of the mistake, and the remedy is necessary to avoid injustice. Social costs – you have misled plaintiff into doing a deal you know he cannot do – you should have to pay for that. iii. SC makes bid – GC uses that bid to win contract, but chooses other SC – was SC’s bid binding? No – SC did not rely on GC’s use of his bid. The nature of the GC and the SC is different – here, GC needed to use a minority business. Many times, GCs negotiate after the bid is awarded, and the lowest bid is not necessarily the best. For SCs – bidding process is a cost of doing business – generally not revocable. There is also no detriment. e. Definiteness i. In order to determine if contract has been broken – courts must know with sufficient specificity what the terms of the contract are. 1. Channel Home Centers – A mall developer abruptly cancels lease negotiations with a prospective tenant. Parties entered into negotiations, P drafted letter and D (big retail) signed it – letter would hold store for P, and help D obtain financing and credibility. Both parties benefited from agreement (as far as consideration is concerned). Another retail chain contacts D, and D cancels lease agreement with P. An agreement to negotiate in good faith may be binding toward a prospective contract may be binding if it satisfies the conditions to a binding contract. Here – both parties had intention to be bound, terms of contract were sufficiently definite, and contract must be supported by consideration. 2. Toys Inc. v. FM Burlington – Toys leased a space in a shopping mall from D, 5 year lease with option to renew for another 5 years. If they chose to exercise option, toys had to give D one year notice. Option stated that rental price would be renegotiated at prevailing rate. P notified that they wanted to renew; D acknowledged and quoted price. D sent toys letter inviting them to renegotiate even though prevailing rate was binding. They agreed on a rate and D sent P a letter describing terms and giving them two weeks to accept. From that point, parties failed to agree on anything, including whether option agreement was sufficiently definite to be enforceable. Can an option agreement be sufficiently definite as to bind the parties to its terms? Yes- An option provision my be sufficiently definite to be binding if it contains terms which enable parties to satisfy their subsequent agreement. Contracts ii. Parties’ expectation interests have to be protected. Definiteness can help determine what the reasonable expectations of the parties should be. 1. Restatement §33(2) – Terms of a contract are reasonably certain if they provide a basis for determining the existence of the breach and for giving an appropriate remedy 2. UCC§2204(3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy iii. Factors on definiteness 1. Partial performance 2. Reasons for language not being more specific a. Parties did not want to take time to make terms more specific b. Reluctance to raise difficult issues for fear that deal would fall through. c. Parties did not foresee problem d. Parties incapable of reducing terms of agreement to well defined obligations. 3. Relationship between the parties – closer relationship suggests intent to be bound 4. Custom and usage in an industry 5. External circumstances (if court can determine enough terms from extrinsic sources (preliminary negotiations to satisfy the requirement of definiteness iv. Performance cures indefiniteness. Party who has performed under an agreement that is unenforceable for indefiniteness is entitled restitution. 1. Oglebay Norton – After about 25 years of doing business pursuant to a contract, the parties could no longer agree on a price to be used. If parties to a contract have not agreed on the price, the court can set the price so long as the parties intend to be bound. Statute of Frauds 1. Evidentiary elements of contracts: Each state has its own statute with its own elements. a. Statute of Frauds is an affirmative defense – only matters in front of the courts. 2. Rule: Several types of contracts have to be in writing in order for them to be enforceable. a. Surety –Parties agree – if original debtor does not pay, then the second party assumes responsibility as collateral. Benefit does not come directly out of the deal – in consideration analysis, you can find some benefit. Suretyship does not necessarily get a benefit. i. If there is a material benefit to the surety – writing may not be required. ii. If someone takes over a debt for consideration and become the principal debtor– it’s not collateral and not surety. 1. NFL Case – Π takes over debt of 3d party who went bankrupt. Main purpose doctrine – if the promise is for the promisor’s benefit – you don’t need writing for an agreement to be enforceable. Three main factors: a. Whether promisor intended to become primarily liable for the debt, in effect making it his original obligation, rather than to become a surety for another b. Whether there was consideration for the promise; and c. Whether receipt of the consideration was the promisor’s main purpose or leading object in making the promise; that it, the consideration is given for the promise was primarily for the promisor’s use and benefit. Contracts 2. When taking over someone else’s property in mortgage, it’s original, not collateral. You become the principal debtor – because many times people do take out loans. A relevant consideration when parties negotiate on the price. Buyer becomes principal debtor; not just a collateral surety. a. Langman v. Alumni Association – Langman and Stowe gave some land to the Alumni association through a deed that provided for the association to assume any debts on the property. A grantee of a deed who assumes an existing mortgage is not a surety because he or she does not make a promise to the mortgagee to pay the debt of another, but instead promises the grantor to pay to the mortgagee the debt the grantee owes a grantor. b. Interest in Land - sales of homes, land, leases, mortgages i. Exception: two of the following three must be satisfied: 1. Paying the contract price 2. Taking possession of the property 3. making improvements a. Johnson farms v. Mcenroe - Like kind exchange of property – found part, began improvements, created an option contract and extended it orally. When ∆ tried to pull out, Π said they had a contract. Π claimed partial performance took transaction out of SOF, and that ∆ should return part of the purchase price of first parcel. Problem – sale of land has to be in writing. Cases normally required definite permanent improvements. Partial payment is not necessarily partial performance – but it could be in connection with other factors, the most important of which is the existence of an oral contract. In this case, the existence of an oral contract was a genuine issue of fact because there was partial performance.Yes – statute of frauds is inapplicable when one party partly performs on an oral real estate contract. c. Performance longer than one year. i. Sometimes there may be subsidiary agreements or agreements to pay over time. You can’t enforce unless the contract is in writing. ii. Application of clause is narrowed by the principal that it does not apply to an agreement that is capable of performance within a year – even if a longer period of performance is probable. iii. If one dies – performance ends. lifetime employment can be completed by death; 5 year contract cannot be completed in one year. d. Marriage e. Sale of goods exceeding $500. i. UCC 2201(1) Requirements (relaxes strictness of common law terms) 1. Contract for the sale of goods for $500 or more is not enforceable by way of action or defense unless: a. Some writing sufficient to indicate that a contract for sale has been made between the parties b. Signed by the party against whom enforcement is sought or by his authorized agent or broker. c. Writing is not insufficient because it omits or incorrectly states a term agreed upon by the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing. 2. Contracts – enforceable as long as not enforceable beyond quantity of goods shown in the writing. ii. UCC 2201 (2) – Confirmation - Sale of goods Between Merchants – Contract still enforceable if: 1. deal is between merchants 2. non-resisting party sends signed confirmation. 3. written notice of objection is not given within ten days after receiving confirmation. iii. UCC 2201 (2) Statutory Exceptions: Three qualifying circumstances in both common law and the UCC that bar the defense of the statute of frauds. 1. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable a. Specifically manufactured goods – not suitable for the sale of others. b. (b) if the party against whom enforcement is sought admits contract for sale was made Contracts c. Goods accepted and paid for. 3. What constitutes recording or writing? a. Must be signed i. What is a signing – essentially any mark. Logo, letterhead, anything that manifests conducting business on the piece of paper. b. Must contain substantial terms and conditions material to the agreement i. Price/quality/delivery/things that make the deal ii. This may come from a variety of different writings (but you have to prove that scattered writings were the material elements of a contract. Writings have to be related – external sources should be consistent c. It’s not so much formality of writing – but the fact or writing itself – there has to be some clarity. 4. Exceptions – Oral Rescission and modification. a. An oral extension of a written contract is acceptable. - In a deal allowing people to make oral agreements, they seldom only send back and forth just writings and do not talk about the contract. Much of the deal is agreed upon orally. i. In Re Arbitration between acadia company and Irving Edlitz - Agreement with arbitration clause – Prior to expiration of the contract was orally renewed and respondent’s employment extended; subsequently, employment was terminated and dispute arose over whether contract had been breached as to the wages due. Denied motion on theory that no binding agreement to arbitrate was created because renewal was not reduced to writing. But, by orally renewing, the parties adopted it as an integral part of the new arrangement, modified only by an extension of the time of employment. There was sufficient compliance with civil practice act that requires a contract to arbitrate must be in writing – it was not necessary for parties to prepare a new written agreement since they bound themselves to the old one, nor was it necessary for them to sign a new agreement. The oral renewal of a written contract does not necessarily cause the agreement to fall within the statute of frauds. b. Reliance i. Normal elements of promissory estoppel available here. (promise inducing reliance; change of position to detriment; injustice) 1. Monarco v. LoGreco - Dad was going to leave son his land if son stayed on at the family business. Everything had been oral. When dad died and left land to other party – son had relied on his promise and was entitled to relief. Doctrine of estoppel can be applied to keep a party from relying on the statute of frauds to block an oral contract when refusal to enforce a given oral contract will result in fraud, as demonstrated by either unconscionable injury after one party has been induced by the other to seriously change his or her position in reliance on the contract, or by one party receiving unjust enrichment out for reliance on the statute. ii. Restitution 5. Miscellaneous a. Halstead v. Murray – Murray’s lawyer gave Halstead’s lawyer a purchase and sale agreement which Halstead executed but Murray had not signed before hand. Settlements made between councils of the parties are enforceable, even if not in writing. Settlements made on behalf of clients should be enforceable. This is another exception: if you authorize your lawyers to make a settlement in a land transaction – enforceable because of the unique relationship between attorneys and clients – and the unique relationship of the attorneys and the courts. Statute of frauds does not require a client to authorize his or her attorney in writing to settle an action. Contracts Policing the Bargain Certain elements make a presumably valid contract void or voidable. 1. Status of parties – certain status might invalidate contracts a. Minors i. The contract made by person prior to the age of maturity is voidable ii. Contract cannot be disaffirmed up until the reasonable time after reaching majority iii. Other party (not minor) cannot disaffirm contract. iv. Minor can Ratify contract after reaching agreement by abiding by its terms. v. If minor disaffirms – minor must return fruits of contract. 1. Kiefer v. Fred Howe – 20 year old father and husband (represented he was 21) – buys car. Car falls apart, he sues dealer to get out of the contract. Car may not have been a necessary – even though he was married with kids. Contract was voided. Think about: Misrepresentation; would have been simple to check his id or affirm his age somehow. Contract of a minor, whether emancipated or unemancipated, is either void or voidable at the option of the minor, unless it is a contract for necessaries. vi. Exceptions: Three possible statutory exceptions (marriage, agreement to support illegitimate child). a. NY/CA rule – go to the court, get approval of contract. b. Establish rebuttable presumption of incapacity to replace strict rule (would openly invite litigation). c. Allow minor to petition a court for the removal of disabilities (minor would have to go to court once). 2. Necessities: Minor cannot cancel the contract – but the responsibility may be limited to the reasonable value, which could be a question of fact. b. Mental infirmary i. Includes not only insane – but mentally ill, senile, retarded, or under some influence. ii. Contract is voidable. (not void, but voidable by deficient party) 1. Cognitive Rule – person is unable to understand the nature and consequences of the transaction. Unable to act in a reasonable manner in relation to the transaction even if the cognitive ability is unimpaired. (cannot control conduct because of mental incapacity) and the other party has reason to know the condition. 2. Modern Modification - mentally ill person could be competent at certain times. a. Ortelere case – school teacher had a pension fund. Had a mental breakdown and then changed her pension option for her monthly benefits to be increased, but then her husband would not get any benefits after her death. She died two months later, and husband sued because she was crazy at the time. Psychiatrist testified that she had been diagnosed, and school new about it. Voidable contractual duty. A person’s contractual duties will be voidable if, by reason of mental illness or defect, he or she is unable to act in a reasonable manner in relation to the transaction, and the other party has reason to know of his or her condition. Tomasino – put a default choice instead of accepting affirmative action from mentally deficient person. In Orterlere, mentally deficient person made the affirmative choice. Lack of choice would not be undone. Affirmative choice v. Default choice b. Cundick case – Π was a sheep ranger who entered into a contract to sell land and interest in development company. Lawyers prepped documents, and as they were about to execute, Π tried to rescind. Price was substantially less than the worth of the property. Wife said that her husband was mentally incompetent. Π said ∆ had overreached him. It was impossible that Π could have been utterly incapable of transacting business affairs, yet of such condition to be unknown to family and friends. Furthermore, medical diagnosis is not the same as mental capacity as a contract. Mental capacity to contract depends upon whether the allegedly disabled person possessed sufficient reason at the time of entering the contract to enable hi or her to understand the nature and effect of the act in issue. Contracts c. Unfairness i. If requirement of consideration is met – there is no additional requirement of equivalence in the values exchanged. However, courts have manipulated doctrine to serve ideal of fairness and equity. 1. Courts may find that consideration is not valid and therefore contract is void. 2. Court may find that even if contract is valid and enforceable by law, equitable remedies may be denied because of harshness and oppression a. Mckinnon – owner of home promised loan to his neighbors to help buy land. Gave help by $5G loan, in exchange for ∆s not developing the area adjacent to Πs land. Loan was repaid in 7 months. Restrictions on land are usually not favored; was the consideration sufficient bind contract? Contracts that are oppressive will not be enforced in equity – principle of public policy. Here – exchange of value isn’t reasonable - $5G loan – in exchange for too much – not developing on the most desirable part of the property. A contract which is harsh, oppressive, and unconscionable may still be enforceable at law, but it is within a court’s discretion to not enforce equitable remedies against a party who suffers from such harshness and oppression under the contract. 3. Greater judicial acceptance of inequitable bargains when parties are not dealing at arm’s length, but have some kind of special relationship (clergy, doctors, etc.). The more specialized the relationship, the greater need for judicial scruitnay against overreaching. ii. Inadequacy – if it comes to the point where even existence of consideration is an issue. The court will consider sufficiency of consideration ( relative values of the consideration will not affect validity of the contract between businessmen dealing at arm’s length without fraud. 1. Court will consider sufficiency of consideration not adequacy. iii. Tuckwiller – Tuckwillers lived on land owned by aunt, 70, parkinsons. She gave up her NY residence and returned to the farm. She entered into a contract with Mrs. T where she’d give up her job and take care of her – she would change her will to bequeath property. She died without having chance to change her will. Terms of the contract were to take care of her for the rest of her life – but didn’t specify how long life was going to be. You have to look at the contract prospectively, not retrospectively. Court should look at a transaction prospectively, from the viewpoint of the parties at the time of the agreement, to determine the fairness of the transaction and the sufficiency of its consideration; once the essential fairness of a contract for real property and the adequacy of its consideration are found, a court of equity can decree specific performance. iv. Black – Π was a manufacturer of drills, machine parts, and components. And purchased subcontract work from suppliers. Π bid on contract from the Hoover company, where it assumed the task of obtaining a supplier for parts. ∆ was the supplier, they agreed to terms. Π then sold on the parts to Hoover, who, in turn, used them to fulfill government contracts. After undertaking performance, ∆ failed to complete order, causing a loss. Letter stating terms of contract – supplier would ship products to hoover but bill black. ∆ alleges that Π was a middle man and this was improper as a government supplier and void against public policy because it was an illegal contract ( 1. pay Π to induce public official to act in certain manner; illegal act; contemplates collusive bidding). Here, the only effect on the government was that ultimately, they were to buy product of which ∆’s goods were to be a component. Calling this statute into effect would not have enough proximity. It is not the function of the court to interfere in the contractual relationship of two ordinary businessmen dealing at arm’s length by trying to determine the validity of the contract on the basis of the adequacy of consideration d. Duress i. Contract is voidable when advantage was gained through gross unfairness in the process of bargaining 1. Duress – pressure in bargaining – Undermines free will of the other party a. Traditionally – Duress was physical. Now, it may be economic. ii. Austin Instrument v. Loral – Loral was awarded navy contract. They entered into a subcontracting agreement with Austin for parts. There was a second contract, where Loral said Austin would only win bids if they were the lowest bidder. Austin said – no. give me Contracts all of them, and give me more money on the first contract. Loral accepted this because they could not find another supplier. Loral met burden of proving that they could not get parts elsewhere in time. Austin said – they lost their rights by waiting til after the contract was performed to sue. Loral said – if they had sued earlier, they were afraid of stoppage. iii. Pawn shop – ∆, pawnbroker, argued Π borrower might have gone to law to regain property being wrongfully withheld from him instead of overpaying debt to get it. Court held – Π might have had immediate want of goods and action of trover would not do. If threat is one to sue for money judgment, one obvious mode of resistance is to make a defense. Debtor may have recourse to injunctive relief, or to damages for abuse of legal process. 1. Definition: restraint or danger, either actually inflicted or impending, which is sufficient in severity or apprehension to overcome the mind of a person of ordinary fitness. (some courts require credible, immediate, potential harm) a. If assent to contract is obtained through duress, it cannot be enforced against victim. b. In order to make duress claim, person has to make reasonable resistance to duress. c. Threat of a lawful action can cause duress. 2. Three issues to consider in evaluating duress in attempted contract modification a. Improper threat, capitulation to the threat, lack of reasonable alternative. iv. Pre-Existing duty –promise or doing something that the party is already legally obligated to do is not the detriment necessary to constitute consideration. Modification without consideration is generally not valid. 1. Alaska Packers - bunch of workmen signed contract for $50 for the season to go to Alaska and fish. When they arrived in Alaska – they, as a group, demanded $100 for the season. Superintendent agreed, not that he had power to, but because they were in a dire situation since the salmon season is short and there would be no way to hire replacement workers. There was no consideration for modifying the contract. They were already bound to the contract, and without consideration, they could not compel the packing company to pay up. Modification without consideration 2. Someone is building a house for you – it’s going to be completed except for roof. Roofer comes in and says – unless you pay me more, you’re not getting a roof – this is economic duress. Additional consideration may not be provided. . v. Contract Modification - Changing a contract midway when there is a pre-existing duty. 1. When underlying presumption for original contract fails, how do we save the parties from the contract? a. Parties can modify the contract if they agree to cancel the contract and make a new one. (I have a Mercedes to sell - $5G. Mercedes actually worth $20G. I realize my mistake. Can we raise it to a reasonable value? Buyer says sure.) i. Freely Rescind and Renew contract – new bargain. (little difference between partial rescission where terms change w/o further bargaining, and whole rescission) ii. Pre-Existing Duty - there is no additional bargain, so pre-existing duty rule will come in. (closely related to one party pressuring the other party without further bargain). iii. Practical Point of Distinction – exertion of pressure, unfairness, freedom of choice. b. Watkins and Son v. Carrig – SC of NJ, 1941 – Π agreed to excavate ∆s cellar. They hit solid rock. They negotiated to remove the rock at a unit price 9 times greater than the original contract price. Oral agreement to do so. Referee found that oral agreement “superseded” the written contract and found for Π. There was no presumption of what type of rock was under there – there was no mutual mistake. Π said ∆ consented to new price and Π proceeded on the strength of the promise. Original contract would have been burdensome on Π had they not made the modification. ∆ calling it a pre-existing duty case, but in the view of modification – claim of promise is unsupported by consideration. Changes to meet changes in circumstances should be valid if the law is to carry out its function and service by rules comfortable with reasonable practices and understanding in matters of business and commerce. 2. Whether its whole or partial rescission/modification - In the view of modification – claim of promise unsupported by consideration is as tenable as under the view of a rescission – a modification involves partial rescission. Contracts a. Partial Rescission - calling an agreement an agreement for rescission does not do away with the necessity of consideration – and when agreement for rescission is coupled with a further agreement that the work provided for in the earlier agreement shall be completed and the other party shall give more than he originally promised, the total effect of the second agreement is that one party promises to do exactly what he had previously bound himself to do, and the other party promises to give an additional compensation therefore. 3. Foakes v. Beer – Π agreed to forego interest on her judgment for the principal debt. Old preexisting duty rule – partial payment of debt is not valid because you’re responsible for full amount. (subject to criticism – sometimes its better to have partial payment on the day). 4. DeCicco v. Schweizer – Consideration in exchange for marriage - before wedding of daughter to Italian nobleman. Agreement should fail because they are getting married anyway. You can’t ask someone to do something that they are supposed to do under obligation. In principle – you cannot pay someone to do what they are already planning to do – but they could rescind their engagement – they have a right to break up. If both parties mutually agree – Cardozo says that this is to induce the parties not to break up. e. Duress in business i. Immediate possession of needful goods is threatened ii. Threatened party could not obtain the goods from another source. f. Undue Influence i. Persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment. High pressure, pressure working on mental, moral, or emotional weakness to such extent that it approaches boundaries of coercion. 1. Usually involves a dominating person, or a confidential relation. Taking unfair advantage of another’s weakness of mind, or taking grossly oppressive and unfair advantage of another’s necessities or distress. a. Might be someone with subnormal capacity and ordinary force, or b. normal capacity and extraordinary force ii. Elements to Undue Influence 1. Discussion of transaction at an unusual or inappropriate time 2. consummation of the transaction in an unusual place 3. insistent demand that the business be finished at once 4. Extreme emphasis on untoward consequences of delay 5. use of multiple persuaders by the dominant side against a single servient party 6. absence of third-party advisers to the servient party 7. statements that there is no time to consult financial advisers or attorneys. iii. Odrozzi – teacher arrested for homosexual activities. He resigned after school officials said if he did not, he’d be dismissed and the charges brought public. After the charges were dismissed, he looked to rescind on the basis of duress and undue influence. School board took to achieve objective by over persuasion and imposition to secure Π’s signature but not his consent to resignation through high pressure technique. If he didn’t resign, his chances to obtain a position elsewhere would have been jeopardized. Π pleaded both subjective and objective elements entering the undue influence equation and stated sufficient facts to put in issue the question whether his free will had been overborne by ∆s agents at a time when he was unable to function in a normal manner. Contracts secured by excessively coercive persuasion are voidable at the victim’s option, even if the victim was sane and independent, and even if the threat was legal. g. Failure to disclose information i. What information is a party required to disclose. Contracts 1. Party not required to disclose information voluntarily. Nondisclosure will not render the party liable if: a. No false statement uttered b. No attempt by seller to prevent buyer from acquiring true facts c. No particular duty to speak. 2. Nondisclosure is different from providing false or misleading information. a. There was a house, ∆ sold house to Π, there was significant termite infestation that caused substantial damage. Π knew that there was an infestation. It would be an idealistic standard to hold all sellers responsible for giving all information. There is a question of what is reasonable in a given location when it comes to selling a house. Here – court does not require disclosure. This is a bargain at arm’s length, and every participant is required to act in a diligent manner. 3. On the other hand – if information is disclosed – it must be fully disclosed. a. ∆ bought a house and converted it into 8 apartments without any permit in known violation of zoning. ∆ looked to sell it and put out some advertisements. Buyer made no inquiry. General policy – if no words, no misrepresentation. But, two differences from termite case: affirmative actions – conduct, advertising, statements –There was enough done affirmatively to make disclosure inadequate, intentionally deceptive, and fraudulent. there was something more than “bare nondisclosure” - Character of defect was different – matter of public regulation. Πs Reliance should not be precluded by mere failure to be diligent. Because the vendors did as much as they did do, they were responsible for the misrepresentation. h. Misrepresentation i. Contract: party may avoid even based on assent made by an innocent misrepresentation. 1. In business – there can be innocuous mistakes which may be remedied. ii. Requirements of Misrepresentations: 1. Must be Material – (Misleading information about facts (not law)) 2. Reliance has to be justifiable (Diligence on the reliant party) a. Arthur Murray case – Π was 51 year old widower, decided to take dance lessons. Dance company made representations to her to entice her to take over $30 G worth of dance lessons because she had “aptitude” which she did not have. She relied on their misrepresentations. False statements of opinions by experts with superior knowledge are actionable as misrepresentations. Equities of the case are going to weigh on fairness and whether misrepresentations were relied upon. In this case – extent of representation is going to be an issue. In this case – there may be a reasonable extent to which the court will still accept it. If standard was less specific (beauty) – there would be less room to find misrepresentation. Here – there are more specific areas. i. Unconscionability i. Generally evidenced by imbalance in economic strength and position leading to unconscionability in bargain process. 1. Adhesion Contracts – standard form contract, imposed and drafted by the party of superior bargaining strength, relegates to subscribing party only the opportunity to adhere to the contract or reject it. (not negotiated). a. Graham v. Scissors tail – Π is a promoter, made several contracts with ∆. Dispute is about the arbitration subject in the contract. After mixed results in several concerts, Π tried to sue defendant for breach of contract. ∆ moved to compel arbitration and won. Π appealed on the basis that he entire contract was unenforceable as a contract of adhesion. Court says – because of his ongoing relationship and signing this contract many times – it is not contrary to his reasonable expectations, but because the arbitrator would be biased in favor of ∆, contract was unconscionable. Adhesion contracts are enforceable, except for provisions which contradict adherents’ reasonable expectations, or are unconscionable. b. Adhesion contracts are fully enforceable, unless other factors operate to render it otherwise Contracts i. Contract or provision which does not fall within the reasonable expectations of the weaker or adhereing party will not be enforced against him ii. Contract or provision, even if consistent with reasonable expectations, will be denied enforcement if it is unduly oppressive or “unconscionable” 2. Standard Form Contracts a. Advantages of standard form contracts – standardized risk; facilitating business b. Risks of a standard form contract – unconscionability of exculpatory clauses c. OCallaghan v. Waller & Beckwith – alleged imbalance between tenants and property owners. Action to recover injuries caused by ∆ (property owner’s) negligence. Exculpatory clause in lease releasing lessor from liability. Argument – against public policy – no bargaining, and, we don’t like to relieve a party from their liability – generally. Contract shifting risk may benefit both parties – keep costs low. Π said – housing shortage - ∆ had unconscionable advantage. Court said – government created the situation that did not allow tenants to negotiate to have disclaimer removed. Not so much disparity – subject should be handled by legislature. Contracts by which one tries to relieve himself of liability for negligence are generally enforced unless it would be against the settled public policy of the state to do so, or there is something in the social relationship of the parties militating against upholding an agreement. (Dissent – clause was universally imposed at a time when there was a drastic housing shortage; social issue we are looking to protect.) d. Exculpatory contracts relieving oneself of one’s own negligence are enforced unless i. They are against public policy of the state to do so ii. There is something in the social relationship of the parties militating against upholding the agreement. ii. Boiler Plate – parking lots, coat checks – creative owners put some stuff on there, but we are not bound by it. 1. In order for there to be a contract a. Offer has to be expressly communicated – something scribbled on the ticket is not enforceable. b. Small print – people may or may not see it – therefore, not enforceable. But, should people have read it? Majority says that it is unreasonable. Unless clear attention is given to the customers. i. Generally – without fraud, if you do not choose to read the contract, you cannot be relieved from the burden. ii. However, if it is not called specifically to the attention of the patron – it is not binding. It must be shown that the agreement was understandingly made. c. Henningsen v. Bloomfield motors - Π was hurt when steering wheel failed ten days after delivery of the car. Π sued ∆ for breach of implied warranty. ∆ provided provision on the back of purchase contract limiting liability. Here – no bargaining, dealer had no ability to change contract. Gross inequality of bargaining position for consumer is thus apparent. Practice is hostile to public welfare and customers should be protected. ∆ did not specifically call attention. The words “warranty” or “limited warranty” did not even appear - and a jury might find that the type of print was such as to promote lack of attention rather than sharp certainty. Disclaimers and attempted limitations of warranties or liability, whether in a public, quasi-public, or private contract, are not enforceable unless the limitation is fairly and honestly made and understandingly entered into. iii. UCC 2-302 – appears to be sweeping authorization of limiting contract under unconscionability – but it can’t limit all that. 1. (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. Contracts 2. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. a. No details – difficult to apply. i. process of unconscionability – striking a balance in the bargaining process – distinction between the outcome and the process. iv. Williams v. walker - ∆ operates furniture store – sold furniture with installments. Form contracts list that any balance due on any item is a balance due on all items purchased by that person, and that defaulting on one payment = repossession. Unsconscionability is within the courts power to decide, but we do not have enough facts here. v. Carnival cruise line v. Shute – After Π was injured during a cruise, cruise line claimed Π could only file suit in Florida because of terms on her ticket. Injury near mexico, cruise line from florida, sued in Washington. Bremen case – two merchants – contract was freely negotiated, private, international, unaffected by fraud, undue influence, or overweening bargaining power should be given full effect. Forum clause would be part of agreement because it would be unrealistic to conduct business without it. Here – parties were not merchants and did not bargain, but Forum selection clause should be enforced unless the party claiming unfairness or inconvenience can bear a heavy burden of proof. Court rejected fairness argument. Florida was not alien, Washington had no interest in adjudicating. j. Unconscionability based on price. i. Courts are reluctant to invalidate solely on the basis of price. Generally, price alone will not be the determining factor. 1. Relative standing of the parties – one may have substantially better bargaining power. 2. Market realities – depending on the fluctuations in the market – economics may lead to price disparity. 3. Freedom of choice – something that does not go along with the market operation. Market suggests that players know what’s going on. Circumstances of disparity, lack of understanding – may result in a drastic or unusual deal. a. Jones v. Star Credit – Welfare recipients were sold a freezer for $900 plus taxes and fees that totaled over $1200. They paid $600 towards the total cost of the freezer. Court discussed concern for customer protection. Because there was a difference in bargaining power – there was a danger of inequality of bargaining power. The salesman took advantage of the party’s ignorance. Law is changing and both buyer and seller must beware. Seller cannot take advantage. ∆ knew Π had limited resources and took advantage. ii. Procedural Unconscionability- There has to be some unfairness in the process and the outcome. Unfairness in bargaining process leads to an unfair outcome. iii. Substantive Unconscionability – unfairness in bargaining outcome – unfairness of terms. 1. Prevailing view – Unconscionability – procedural (oppression and surprise) and Substantive (overly harsh and one sided). Sliding scale – the more oppressive the contract, the less procedural unfairness is required. k. Unconscionability in commercial contracts i. Usually there is bargaining – but there can be a disparity in bargaining power. Perhaps franchisors and franchisees. Franchisor is in much better bargaining position. ii. In the business setting – unconscionability is more difficult to argue. iii. Armendariz v .Foundation health - application and employment agreement included an arbitration provision. They were terminated on the basis of their sexuality (supposedly). When Π sued, ∆ looked to compel arbitration. Π – arbitration terms were unconscionable. TC – invalidated agreement; CApp said damages were unconscionable but agreement should be enforced. Employee can be compelled to an arbitration agreement as long as they can vindicate their statutory right. Contract requires employees to arbitrate, but not employers. Lack of mutuality does not render contract illusory – but a one sided term may be unconscionable. If employer has reasonable justification grounded in something other than desire to maximize its advantage – it may not be unconscionable. Here – it is one sided Contracts with respect to the same transaction. Further – this contract limits the damages to the employee without similarly restricting the employer. iv. Other case- employee was executive, and clause was for protection of intellectual property. Limited damages. There was adhesion even though he was a high level executive because the lack of negotiation was unconscionable. Employer was not subject to the same damages as the employee. Did not hold that the lack of mutuality of bargaining made it invalid; but that there has to be a modicum of bilaterality. 2. Public Policy - limitations to private contracts are for the protection of the public at large against imposition by both parties. a. Illegal Contracts i. Contracts that violate specific laws 1. Violation of licensing statutes that are enacted to protect public will void a contract 2. Violation of licensing statutes that were enacted to merely raise revenue do not void a contract. ii. Contracts that substantially violate public policy, but not a particular statue. 1. XLO Concrete Corp v. Rivergate – NY Criminal operation – the club – bid fixing for construction jobs in the city. ∆ refused to pay XLO an outstanding balance for work XLO had done, claiming that contract was part of an organized crime racket. Generally – antitrust defenses allow one party to escape burdens while reaping benefits. Contract illegal on its face and does not call for unlawful conduct in performance is not voidable simply because it resulted from antitrust conspiracy. Key Issue: whether given contract is so integrally related to agreement in restraint of competition that its enforcement would result in compelling performance of precise conduct made unlawful by antitrust laws. If so – unenforceable. Parties were in pari delicto. ∆ was fully aware of Πs illegal involvement. Considerations: equities, relative culpability, and the knowledge of the parties in entering into the contract. b. Covenant not to compete i. Hopper v. All Pet – Hopper signed covenant not to compete providing that she would not practice in small animal practice within 5 miles of city limits for three years. She opened her own clinic after she had left All Pet, and they claimed she violated agreement. Common law policy against contracts of restraint. Covenant not to compete is valid only if: In writing, part of contract of employment, based on reasonable consideration, no greater than for protection of employer, does not impose undue hardship, not against public policy. Reasonableness of covenant has to be determined to all facts of the case. In working for all pet – she gained experience, client list, etc. In starting new practice, she took clients from all pet. This was an actual loss, and enforcement would not be an unreasonable restraint of trade. Three year limit was too broad, however, so that part will not be enforced (one year limit would be enforceable). ii. Covenant is valid if: 1. Restraint is no greater than is required for the protection of the employer 2. Does not impose due hardship on the employee 3. Is not injurious to the public. iii. Overbroad agreement may be modified by courts to become acceptable. 1. Courts may enforce parts of the agreement. a. CAB, Inc. v. Ingram – Ingram and others signed covenants not to compete with the collection agency that hired them, but they opened their own agency anyway after leaving. Unless the particular circumstances of the case indicate bad faith on the part of the employer, a court will enforce covenants not to compete to the extent that they are necessary to protect the employer’s interest without imposing undue hardship on the employee when the public interest is not adversely effective. b. Simeone v. Simeone – ex wife sued to void her prenup, contending husband presented it right before the wedding and forced her to sign it without the opportunity to consult a lawyer. Is prenup void if signer did not understand Contracts terms or have opportunity to consult an attorney? No – prenups are enforceable as written if they were made after fair financial disclosures. c. General rule – illegality precludes not only enforcement of contract, but also any restitution claims. i. Exception: remedies may not be provided when: 1. Parties are equally at fault (Majority view – refuse to enforce contract, but give restitution to party with lesser fault; Minority view – enforce contract and give normal contractual remedies) ii. One party repents before the illegal purpose of the contract is achieved. In this case – court may give restitution to repenting party. d. Clean Hands – “he who comes into equity must come with clean hands. i. Applies only to equitable remedies. Courts look if both parties have acted ethically – higher standard than illegality.
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