CONTRACT FORMATION (NON UCC)
Offer
1)General rule: a clear and definite expression of an intent to confer power on a specific person/group to immediately create a contractual relationship without any other action.
2)Intent to K = objectively reasonable person standard (objective listener)
(a)Look to outward manifestation (not actual intention) to determine K formation
¤Lucy v Zehmerlosing the family farm 120
Although Zehmer was joking, Lucy actually believed and was warranted in believing the K represented a serious business transaction
(b)Consider the language, surrounding circumstances and prior practice/relationship of the parties.
(c)Exception: accepting party knows (or should know) the offer is a joke acceptance does not create a K
¤BUT a challenge or calling someone’s bluff is a valid offer
(d)Offer must be definite and certain to the extent that the K is capable of being enforced.
3)Vagueness in the offer is ok, the K can clarify it
4)Offers are generally not:
(a)Negotiations, price quotes, ads, jokes, medical opinions, soliciting bids, etc.
¤Ads are usually a “invitations to make an offer” BUT ads containing specific words of commitment (i.e. a particular # of units) may be an offer*
¤Items up for auctionare usually “solicitation for offers” BUT if the sale is “without reserve,” item cannot be w/drawn from the sale.
5)Examples:
(a)Owen v. Tunison 130
¤“Will you sell me property for $6k?”
¤“Impossible to sell unless I received $16k.”
Not an offer – open for negotiations
(b)Harvey v. Facey 133
¤“Will you sell us Greenacre? Telegraph lowest price.”
¤“Lowest price is £900”
Not an offer, only a statement of the lowest price – first question not answered.
(c)Lefkowitz v. Great Minneapolis Surplus Store* 138
¤Ad: “1 black lapin stole for $1…first come first served.”
Valid offer – although ads are not generally offers, this is clear, definite and explicit w/nothing open for negotiation.
Terminating an offer prior to acceptance
6)Lapse of time: Natural life span of the offer or a set time limit for acceptance
¤Offeror can specify when the offer will lapse or longest it will stay open
Not a guarantee that it will stay open the entire time (unless an option K)
¤Every offer will expire eventually, so if time is not specified = reasonable time
7)Death/incapacity [RS §48]
¤Power to accept terminates if either offeror or offeree dies or loses the legal capacity to enter into K.
Irrelevant if offeree does not learn of the offeror’s death or incapacity until after dispatch of acceptance
¤Exception: Option K
8)Revocation
¤Offer can be revoked any time prior to acceptance, effective upon receipt.
¤Effective upon receipt by the offeree [RS §42]
¤Conduct [RS §43]: power to accept is terminated when offeror takes definite action inconsistent w/intention to enter into K AND offeree acquires reliable information (even if indirectly)
Offer is considered revoked if the offeree has good reason to know it was revoked, even if offeror did not communicate directly with offeree.
Dickinson v Dodds chasing down at the railway station 176
(b)Rejection
¤Offeree does not accept the offer, effective upon receipt.
¤Power to accept is terminated by offeree’s counter-offer [RS §39]
Mirror image rule: trying to accept on terms different than the original offer is a counter-offer, not an acceptance.
Last shot rule: last form before performance prevails
Irrevocable offers: (Option K)
¤An option K is created when the offeror invites acceptance by performance only and the offeree begins actual performance [RS §45]
Offer remains irrevocable until offeree has finished performance. Offeree is not bound.
Preparing to perform does not qualify as performance enough to form the K.
¤An option K is created when the offeror reasonably expects to induce substantial action/forbearance on the part of the offereebefore acceptance. Enforceable to the extent necessary to avoid injustice. [RS §87(2)]
Irrevocability lasts only as long as is absolutely necessary.
Result= subcontractor bids are irrevocable (Those offers invite acceptance by performance and induce reliance on the offer.)
If the sub breaches, expectation recovery is allowed for the general to recoop costs of having to use a more expensive sub
¤Examples:
¤Drennan v. Star Paving; where general relied on the sub’s bid and won the job, sub tried to modify the amount before the general accepted because it made a mistake in figuring its bid. Sub was bound to do the job. General recovered the cost of having to hire the next cheapest sub.
Acceptance
9)Definition: manifestation/voluntary act to exercise power conferred by offeror to create a K
(a)Offer can generally only be accepted by person the offeror has invited to furnish the consideration.
(b)Acceptance valid only if offeree knows of the offer at the time of acceptance
¤Broadmax v. Ledbetter reward for escaped prisoner64
a person who acts w/o knowing about the reward cannot claim it
B)Method of acceptance offeror is the “master of the offer” and sets the terms of acceptance
(a)Mirror image rule: if the response is not the mirror image of the offer, the acceptance is a rejection and an counter-offer
2)Acceptance by return PROMISE – bilateral K (2 promises) [RS §56]
¤Notice of acceptance is required if return promise sought
Offeree must exercise reasonable diligence to notify offeror of acceptance or that offeror receives acceptance seasonably
3)Acceptance by PERFORMANCE – unilateral K [RS §54]
¤Notice not requiredunless requested/specified or offeree has reason to know that offeror has no adequate means of learning about the performance
¤Manifestation of acceptance must be communicated w/in a reasonable time (White v. Corlies156)
(b)If the offer invited either promise or performance → offeror is bound when performance begins and offeree is bound to complete performance. (His performance infers a promise to complete performance.) [RS § 62].
○Note: §62 does not apply where the only means of acceptance is performance.
(c)If the offer only invited performance, → offeror is bound when performance begins, offeree is not bound and can stop performing within a reasonable time. [RS §45].
4)Method not specified = choice [RS §32]
¤When in doubt, either promise or performance acceptance
If acceptance by performance is chosen, beginning performance is acceptance and a promise to complete performance [RS §62]
¤If the offer suggests a method, either is allowed (Allied Steel v. Ford Motors)
i.e. “Acceptance should be executed…”
5)Acceptance by silence or inaction [RS §69]
¤Failure to reply is not acceptance UNLESS:
Offeree took benefit of service or goods
Offer states silence is acceptance
Previous course of dealings make it reasonable for offeree’s silence to be construed as consent
C)Mailbox Rule (CL): when acceptance becomes effective. This rule usually does not apply to acceptance by performance unless expressed (i.e. making a payment by putting the check in the mail)
(a)acceptanceeffective upon the offeree mailing it (K formed)
¤Offeror cannot revoke while offer is en route
¤Offeror bears the risk of mistake in transmission
¤Exceptions:
option K = acceptance upon receipt before offer expires
offer provides otherwise
(b)Revocation effective upon receipt by the offeree
(c)Rejectioneffective upon receipt by the offeror
Sent first
/ Acceptance / Rejection acceptance / Rejection acceptanceRecvd first / N/A / Acceptance / Rejection
K formed? / Yes / Yes / No
Consideration: Is there mutual obligation?
D)Test: A promise has consideration and is therefore enforceable when the bargained-for return promise or performance causes reciprocal inducements.
1)Identify the promise to be enforced
¤Must not be illusory, gratuitous, or a sham
Illusory = promise that is entirely optional with the promisor (does not really commit the promisor to do anything)
○Strong v. Sheffieldendorse the ck for her husband to her uncle 69
Gratuitous = a gift
○Kirksey v. Kirksey brother-in-law give a place to raise the family 50
- “If you will come see me, I will give you a place to raise your family.”
○A promise to make a gift is unenforceable
Sham = attempt to make a gift promise into an enforceable promise by making it a “sham promise.” Consideration is so small that it’s nominal.
○i.e. X promises to pay a “peppercorn,” Y promises to mow the law
2)Identify potential consideration for the promise (mutual obligation)
¤Return promise or performance
RS §71: performance = action or forbearance
Implied return promise can be sufficient
○Wood v. Lucy Lady Duff Gordon
- Wood impliedly promised to use reasonable efforts to market the designs
¤Consideration must be of some value
3)Determine if there is bargained-for exchange: “quid pro quo”
¤Reciprocal inducements
Promise must induce consideration, consideration must induce the promise
¤Fairness/adequacy are irrelevant
Valid as long as promisee suffered some detriment – no matter how small
Sufficient consideration if honest subjective reasonable belief that return promise is valid (majority rule)
○i.e. Promise not to sue when s/l has run
¤Multiple motives are irrelevant
Exception: relevant only if both parties know the consideration is a sham
¤Past consideration/service consideration
Feinberg v. Pfeiffer lifetime payments at retirement 39
¤Pre-existing duty rule
If promisor/promisee is already legally obligated to act/forebear, he has not suffered any detriment no consideration
○§89 can be used to overcome this rule: modification would be fair and equitable in light of the unanticipated circumstances or justice requires based on reliance.
4)Examples of consideration:
(a)Forbearing to engage in legal activities (Hamer v. Sidway)
(b)Forbearing to assert a valid claim (Fiege v. Boehm, where woman forbeared to assert bastardy charges which she thought were valid in exchange for money. When man found out he was not the father he tried to say she gave no consideration for the money. Court found for woman.)
Consideration substitutes: promises binding w/o consideration
5)Promissory estoppel [RS §90]: A promise which expectedly induces reliance on the part of the promisee can be enforced if enforcement is the only way to prevent injustice (promisor’s unjust enrichment)
¤Promissory estoppel does not apply to irrevocable offers – if you have an irrevocable offer, consider reliance/option K (below).
¤Elements:
A promise was made
Expected reliance
○Should this promise be expected to induce someone to act or not act?
○How reasonable would be reliance under the circumstances?
Actual reliance
○Did this promise induce action or forbearance?
○What was done? How substantial?
Injustice can be avoided only by enforcing this promise
○What was the setting/context under which the promise was made?
- Formal? Commercial context?
○Will someone be unjustly enriched if the promise is not enforced?
¤Recovery – reliance damages (as if the promise was never made)
¤Examples:
Sub-contractors bids are temporarily irrevocable b/c PE
Promise for at-will employment b/c employee may have quit his other job
Definite Terms
E)Terms of the K must be reasonably certain for K formation, even if the parties manifest an intention to be bound. If terms are left indefinite and uncertain, this may be proof that there was no intent to be bound.
1)[RS §33] Terms are reasonably certain if they
(a)provide a basis for determining when the K is breached
(b)and the appropriate remedy.
2)The courts find definiteness from external sources
(a)trade usage
(b)prior dealings between the parties
(c)course of performance
¤Part performance can resolve an unspecified element of the agreement
3)If the court believes the parties truly intended to be bound, it will supply a reasonable value for the missing term.
(a)“Agreement to agree” (intentionally leaving a term to be agreed upon later) was an unenforceable K under CL. Now the courts may supply the reasonable value.
F)A party who has performed under an agreement that is unenforceable because of definiteness is entitled to restitution recovery.
Alternatives: even if no K exists, there may be a method of recovery
1)Promissory estoppelapplies to all “promises”, not just “offers.”
(a)Even if no K is formed, a promise can be enforceable if it reasonably and expectedly induced the other party to rely to his detriment and injustice can only be avoided if the promise is enforced.
(b)Ex: (Hoffman v. Red Owl Stores p235 where the guy was trying to buy a franchise and the grocery store strung him along asking for more money and eventually he didn’t get a franchise. Court reimbursed his losses on reliance that a K was going to be formed.)
2)Restitution recovery allowed for
(a)“Implied in fact K” – a K that was never articulated into words but was implied by conduct.
¤implying a deal/assertion from the facts and circumstances
Example: Walk into a salon and allow a hairdresser to cut your hair
(b)“Quasi-K” – implied at law b/c of part performance. Not an actual K but a remedy to prevent unjust enrichment and recovery value of benefits conferred.
¤Might not be an actual K b/c an oral agreement that falls w/in S/F
i.e. Oral lease agreement for two years. T moves out after 2 months. L can still recovery for the two months.
¤Duty: in an actual K, the agreement defines the duty but in a quasi-K, duty defines the K
i.e. Medical professions who provide emergency services to those who are unconscious are entitled to restitution recovery (Cotnam v. Wisdom)
Note: a lay person performing as a Good Samaritan is considered a gratuitous volunteer
¤requires a direct relationship or a mistake on the part of the party conferring the benefit
(c)No recovery for the “Officious intermeddler” or “volunteer”
¤EX: While X is away, Y repaints his house increasing the value. X is not required to pay since the benefits were forced upon him.
ENFORCEABILITY
G)Statute of Frauds (S/F)
1)Does the K fall w/in the scope of s/f and if so is the writing requirement satisfied?
(a)Applies to contracts for sale of land or an interest in land
(b)Applies to any type of agreements not to be performed w/in 1 year: If any promise of either party cannot be performed w/in 1 yr of when K is formed, whole K is subject to s/f writing requirements.
¤[RS 131] The writing must:
Identify parties
nature and subject matter of deal
essential terms of the promises to be performed (dependent on the nature of the K).
Signed by the party being sued
¤Writing can be done before or after K formation
Multiple writings – Court might consider these other writings along w/the core signed writing if they are sufficiently connected (i.e. stapled together or incorporated by express references)
(c)Applies to contracts forthe sale of goods over $500 [§2-201]
2)Circumstances when agreement should be enforced when there is no writing
(a)Full performance = reliable evidence that agreement is real (what was promised)
¤Agreements not to be performed w/in 1 yr: Full performance on one side
(b)Restitution
¤Oral K where X conferred some benefit to Y and Y would be unjustly enriched if K not enforced.
(c)Estoppel (reliance)
¤Equitable estoppel (rare): Y represented/told X he will put the agreement in writing (or would never assert s/f against him), Y repudiates and uses s/f defense. X relied on Y = Y is estopped from asserting s/f.
¤Promissory estoppel [RS §139]: Y makes no representation about writing or s/f but nevertheless X expectedly relied on the oral promises in a way that has been detrimental (unconscionable injury – more substantial than just reliance) (Manarco v. Lo Greco291 – Christie gets screwed by his step-dad).
Test:is there a compelling basis for relief or do the circumstances satisfy the evidentiary purpose?
○Is there a promise
○Offeror should reasonably expect to induce offeree’s action/forebearance?
○Offer does in fact act/forebear
○Enforcing the promise is the only way to avoid injustice considering:
- Other possible remedies like cancellation and restitiution
- Definite and substantial reliance
- Extent to which the reliance or other evidence corroborates the promise
- Reasonable for offeree to rely?
- Extent to which offeror should have forseen the offeree’s action/forbearance.
¤Using estoppel to get around a lack of writing should be harder than using it to get around lack of consideration.
H)Unconscionability – tool to undue a clause or K (usually adhesion K)
1)Applicability
(a)Matter of law (not a jury question)
¤Policy driven, no set definition of unconscionability. Rarely applied to merchantsB
(b)Flexible doctrine
¤Court will look at this K in this time and place (not a binding public policy decision for all time)
(c)Considered at the time of K formation
2)ProceduralUnconscionability – unfairness in bargaining process
¤Element of surprise
Fine print boilerplate
Technical language an average person cannot understand
○High pressure sales
¤Element of oppression (unequal bargaining power)
All providers have the same clause on Ks (no options)
Necessity v discretionary purchase
Lack of meaningful choice
○Williams v Walker-Thomas Furniture Co welfare mother purchasing a stereo repo
- Absence of a meaningful choice for one party and K terms that unreasonably favor the other party (procedural unconscionability)
- To determine a meaningful choice, look to manner in which the K was entered and all the circumstances surrounding the transaction
- Meaningful choice often negated by gross inequality of bargaining power
- Lack of reasonable opportunity to understand the terms or “hidden terms”
- Terms are to be considered in light of the general commercial background and commercial needs of the trade
3)Substantiveunconscionability – unfairness in content of agreement or in the K itself (outcome/terms)
¤exculpatory clauses
¤limiting remedies
¤excessive high prices
Jones v Star Credit door-to-door freezer salesman
○Disparity in value motivates the court to find substantive unconscionability
○Crt reforms the K so that amount paid meets amount owed
¤Overly harsh or one-sided results
Armendariz v Foundation Health sexual harassment/discrimination termination
○Arbitration clauses can be substantively unconscionable when a stronger party, through a K of adhesion, imposes the arbitration forum on a weaker party w/o accepting that forum for itself.
- Unilateral arbitration clauses can be enforceable – when justification grounded in something other than employer’s desire to maximize advantage based on perceived superiority of judicial forum
- Generally, states have strong public policy of favoring arbitration as a method of dispute resolution
○Does not permit full recovery of damages for employees but no restrictions on employers
○Lacks mutuality
(b)NOTE: Both categories must be present but not to the same degree
¤Analyze it on a sliding scale
the more substantively oppressive a term is, less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable and vice versa
Note: the lower the procedural unconscionability, the less likely the court will find the clause/K unconscionable since more likely there was equal bargaining power.
4)Court remedies
(a)Invalidate K as a whole (if entire K permiated)