Contracts-Outline
Analysis steps
1. Source of law?
2. Is it bargained for exchange or detrimental reliance?
3. Was an offer made?
4. Was there an acceptance?
5. If there was acceptance, Did offer terminate prior to acceptance?
If yes, offeree no longer has power to accept. To then make a contract, the offer
must be renewed.
6. Is there a defense to enforcement (statute of frauds; was agreement put in writing if necessary by law)?
Statute of Frauds steps:
i. does the subject matter of contract (bargained-for) fall within the Statute
of frauds?
ii. have the statute of frauds reqs been satisfied?
iii. if contract falls into statute of frauds and the reqs of statute of frauds
have not been satisfied, what are the consequences?
offer is made and it creates "power of acceptance" (use this term on exam)
Find the moment of contract formation:
1. bilateral: when there is an offer and then acceptance, promise now to be
performed
2. unilateral: offer, performance done, and therefore we have acceptance.
OFFER AND ACCEPTANCE
Both of these must "strike the ear", i.e., be effectively communicated to other party before they take effect AND before they can be considered rejected (only exception is mailbox rule)
Def. OFFER (offeror is "master of the bargain")
1. manifestation of intention (apparent intent-tested objectively)
2. to be presently bound
3. to a specific undertaking (note UCC variation; gap-fillers)
[specificity is very important so that court able to craft a remedy]
4. that is communicated to offeree
5. which creates the power of acceptance in offeree, unless or until offer
terminates (lapse, rejection, revocation, miscellaneous).
Def. ACCEPTANCE
1. manifestation of intention (apparent intent – tested objectively) in the
mode/manner [by letter, phone, etc; nothing to do with the terms of the offer] dictated by offeror
2. to be presently bound
3. to the terms[1] of the offer (and only those terms ("mirror image rule" in CL –
some UCC variation, §2-207)
4. that is communicated to the offeror (some exceptions)
5. which creates the bargained-for-exchange (assuming "consideration" is present)
thereby making promises enforceable
(NB: in a unilateral contract, the Acceptance is the performance of or
forebearance from an act that one was not legally obligated to perform or forebear from).
UCC tried to fine-tune the mirror image rule, but made it confusing (says RH)
See UCC §2-206 for its take on offer and acceptance
CL analysis: an offer "creates the power of acceptance" in the offeree; if the offeree includes new or different terms in a purported acceptance, they have actually rejected the offer and submitted a counteroffer to the original offeror. Thus, the offeree becomes the new offeror and the master of the bargain who creates the power of acceptance in the new offeree. If then performance between the two parties continued in a manner that indicated they had accepted the terms of the counteroffer, then there would be a contract, and the terms would be those in the counteroffer ("last shot").
Def. CONSIDERATION (which is the product of "offer" and "acceptance" is the . . . )
1. "legal value" the promisee must provide, that is, the "detriment" (i.e., alteration of promisee's legal rights) the promisee must suffer . . . [if no detriment, then promise is gratuitous]
which was . . .legal value = detriment (same thing)
detriment is a promise to do something
2. bargained for – sought – by the promisor (the detriment must have induced the promise and the promise must have induced the detriment)
[note below, that each party becomes promisor/promisee at different moments during the bargaining process, in a bilateral contract]
Promisor ------(offer)------ Promisee
(A)(B)
(legal value)
Promisee ------(acceptance)------Promisor
(A) (B)
(legal value)
Reduced to 3-prong test for consideration:
1. promisee suffers a detriment (legal value concept)
2. detriment must induce promise (bargaining component; Holmes idea)
3. promise must induce the detriment (bargaining component)
[do not make the mistake of separating consideration from offer and acceptance. They are intimately bound together]
RH says examples on p 261 are good examples of this.
detriment: "giving up something which immediately prior thereto the promisee was privileged to retain, or doing or refraining from doing something which he was then privileged not to do, or not to refrain from doing" i.e., detriment does not mean something that is necessarily BAD for someone, rather it refers to their legal rights
(cf. Davies v. Martel p. 34)
Elements of Detrimental Reliance
1. a promise
2. the promisor must know/reasonably should know that the promisee will rely on
promise (or third-party might rely)
3. promisee must reasonably rely on promise (or third party relied)
4. promisee must incur/suffer a "loss" (or third party suffered a "loss")
5. to avoid injustice, promise must be enforced
Enforcement: what should be the remedy? protect the reliance and/or expectation interest? specific performance? economic damages caused by the reliance? We will look at this in the class.
Contract law deals with those promises society deems worthy of enforcement.
I. Analyzing a Contracts Problem
A. Step one: Source of law – what law will govern it?
1. case/common law (Restatement of contracts)
a. -service contracts (employment/contracting, etc) not governed
by UCC, Art. 2, because they do not deal with goods
2. statutory law (UCC, Art. 2)
a. UCC, Art. 2: deals with goods
i. American Law Institute & National Conference of
Commissioners on Uniform State Laws (ALI; NCCUSL)
ii. §2-102 Transactions in goods
iii. §2-105(1) Good all things that are movable at the
time of identification
iv. §2-107 NOT real estate/property/securities But
goods (movable, tangible objects at time of identification of the contract)
1. §2-107(1): minerals are goods if severed from land by seller
2. §2-107(2): crops and timber readily severable by buyer or seller are goods
v. §2-104; -205; -207(2) some provisions only apply when
one or both parties are "merchants"
b. many states have enacted statutes that override common law in
certain situations
3. Caution: many contracts are hybrids, involving goods and non-goods, a court must decide which law to apply. There are two ways to determine this:
a. use a predominant factor test, using the appropriate law
b. use gravemen of the action (i.e., what is the major complaint of
the law suit)
B. What is the validation device? Ask all questions!!!
1. Bargained-for-exchange
Bargained-for-exchange
offer
termination of offer?
acceptance
consideration
defense to enforcement
contract
third parties
performance/breach
remedies
2. Detrimental reliance (aka: promissory estoppel)
Detrimental reliance (promissory estoppel){
promise
promisor reasonably should expect promisee will rely on promise
promisee reasonably relies on promise
promisee suffers a loss/detriment due to reliance
to avoid "injustice," promise must be enforced
remedies
II. Intro to Contract Law Remedial Principles
A. normally compensatory (rarely punitive)
1. "damages are not measured by what the defaulting party saved by the breach, but by the natural and probable consequences of the breach to the plaintiff."
B. substitutional damages granted rather than specific performance compelled
C. Purpose of remedial laws
1. protect expectation interest of aggr promisee (forward looking)
i. consequential damages awarded if reasonably foreseen and
incurred as a result of the breach.
2. reliance and
3. restitutionary interests are worthy but secondary
i. e.g., down payment
D. Limiting principles for recovery
foreseeability: if consequences of breach not foreseeable, then breacher
cannot be held liable for the unforeseeable damages
certainty: can amount of damages be determined w/reasonable certainty?
mitigation: if aggr promisee could have minimized harm to self from
breach through reasonable action, can't recover for portion of damages that he failed to prevent.
contract terms may specify the specific remedy, esp. with liquidated
damages clauses
E. Use of cover (protecting the expectation interest yourself)
UCC §2-172: "The test of proper cover is whether at the time and place
the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective."
III. Intro to Validation Process (i.e., which promises worthy of enforcement?)
1. Formal contract (historical only[MSOffice1], i.e., §2-203: seals inoperative)
2. Bargained-for-exchange (offer, acceptance, consideration)
a. rarely written
b. donatory promise not bargained for; therefore no contract
c. consideration is Detriment: "giving up something which immediately
prior thereto the promisee was privileged to retain, or doing or refraining from doing something which he was privileged not to do, or not to refrain from doing." legal rights
Davies v. Martel Laboratory Services, Inc. An oral contract that causes a
person to change their current course of action in an exchange for that changing (e.g., get an MBA and you'll become a permanent employee) is enough consideration to make the contract valid.
3. Detrimental reliance – see Rest of Contracts 2d, Sec. 90, pg. 37)
a. aka Promissory Estoppel
4. Exceptions – moral obligation based? Not upheld by courts.
IV. Agreement Process
A. Intention to be legally bound
1. The Objective Theory
a. Law looks at the reasonable meaning of words and acts in
determining contract validity (i.e., mens rea means nothing in contract law).
b. a promise made in jest is not a legally enforceable promise
c. mutual assent [whether subjective or simply objective] is necessary for formation of a contract
2. Interpreting Statements to Determine Legal Consequences
a. Objective test: what would reasonable and prudent person believe were the terms of the contract, not what this particular person subjectively believed.
Balfour v. Balfour: A husband and wife can enter into agreements
involving consideration, but they do not intend there to be legal consequences if there is a breach. If they do not intend legal consequences from the outset, the arrangement cannot be considered a contract.
3. Express Statements Concerning Legal Consequences
a. many contracts contain statements that prohibit legal
consequence (i.e., "not legally binding"); courts will uphold
b. letters of intent normally are not legally binding final agreements
i. letter of intent may, however, evidence a contract to
negotiate in good faith
c. CL Rule: if offeror requires a specific manifestation for agreement, and offeree does not do this, then there is no agreement.] master of the bargain
4. Contemplation of Final Writing
a. Courts generally agree that if parties are to be bound or not to
previous negotiations is a question of intention.
b. An enforceable contract created if:
1) both parties have clear understanding of terms and
2) both have an intention to be bound by its terms. [i.e., it is a question of intention.]
c. court must examine the "totality of circumstances."
5. "Agreements to Agree" – Missing Terms
a. vague agreements were deemed legally useless by CL
b. now, can have force if covered by UCC
i. §2-204: contract does not fail for indefiniteness if:
a. parties intended to be bound and
b. court has a reasonably certain basis to affect
remedy
ii. specific provisions in UCC are called "gap fillers"
(§2-305-310)
a. missing price filled in with a reasonable price at
time of delivery
iii. the more important the term left vague, the less likely it
is that an agreement has been reached
[MSOffice2]
B. Anatomy of Agreements – Offer and Acceptance
1. Preliminary Negotiations vs. Offers
a. important to distinguish the two
i. offer creates a legal power of acceptance in offeree
b. for example:
i. aderts normally not considered an offer because typically
sent to numerous people offering a limited number of goods which can be negotiated for.
1. however, if only sent to a few selected customers, then might be seen as an offer
ii. use a totality of circumstances analysis to determine
1. e.g., a letter itself not an offer, but including prior conversations, the letter set out specifics of offer.
c. interpreting the offeror's expressions (based on Southworth)
1. what would a reasonable man in offeree's position think?
2. does language show promise, commitment, undertaking?
3. directed at specific party or world at large?
4. is proposal vague or definite?
d. Request for Proposal (invitation to enter negotiations)
i. not an offer, but an announcement to potential customers that "these goods are available at these prices, let's talk"
ii. a purchase order, on the other hand, is nearly always considered an offer (boilerplate language aside)
[NB: Nowhere does the UCC define "offer," so it must always be determined by common law. UCC does, however, permit the filling in of absent terms once court determines that an offer exists.]
C. Termination of Power of Acceptance
1. Lapse (two kinds)
a. Offeror does not indicate time duration for acceptance
i. offer, therefore, lasts a "reasonable time"
1. e.g., cannot expire due to statute of limitations unless it coincides with a "reasonable time"
ii. reasonable measured from perspective of offeree
iii. still, concern for welfare of offeror when thing offered
is volatile in price (e.g., stocks)
b. Offeror does not indicate an exact time for acceptance
Caldwell v. Cline: a vague "8-day limit" for acceptance
mentioned in letter; debate over when offer valid; determined by mailbox rule (infra)
Scenarios
1: "I must receive your acceptance in writing by 10am on Sept 30, 2003 at my place of
business." – Best way for offeror to be "master of the bargain."
2: "I must receive your acceptance within 10 days from the date of this letter." – Only
real guesswork for a court is to count dates.
3: "I must receive your acceptance within 10 days." – No specification of the date from
which the time of expiration is supposed to run.
4: "You must accept within 10 days." – Worst, no requirement of receipt of acceptance.
2. Rejection
a. a manifestation of intention by offeree not to be bound to terms
of offer.
b. Upon communication of rejection to offeror, it terminates the
power of acceptance of the offer.
c. a common way offer is rejected is through counter offer (CL)
Chaplin v. ConEd: once offer of settlement was rejected, it
could not then be accepted after "a change of heart." Rejection is final.
3. Revocations, Acceptances, and the "Mailbox" Rule
a. Manifestation by offeror to no longer be bound to terms of his
offer, thus terminating offer and power of acceptance
b. Revocation at any time before offeree accepts
c. revocation only valid once it is received by offeree (i.e.,
communicated to him)
i. Revocation supercedes lapse. A promise to keep an offer
open until a certain day is "gratuitous," i.e., it can be revoked at any time unless it is somehow made irrevocable).
d. mailbox rule
i. unless acceptance terms are specified, then once acceptance is put in mailbox or otherwise dispatched en route to offeror, the acceptance has become valid
1. time limit for accepting offer begins the day AFTER letter received by offeree
2. acceptance valid from moment reply deposited in mailbox
ii. exception: mailbox rule inapplicable in option contract setting; acceptance must be communicated to be effective
4. Indirect Revocation (implied conduct)
a. An offer can be revoked at any time until acceptance is made, so
long as offeree knows[2] of the revocation
Dickinson v. Dodds: offeree discovered through a friend
that offeror intended to sell property to someone else. Court held this was a revocation.
5. Counter Offers
a. By changing terms of offer, a counter offer implicitly rejects the offer. (CL: mirror-image rule)
Ardente v. Horan: an equivocal acceptance is a counter
offer, but an absolute acceptance may include an inquiry into a collateral matter
b. However, as a counter offer is an offer, it creates power of acceptance in original offeror who is now an offeree.
c. Common Law
i. a response containing varied terms cannot be an
acceptance because of the "mirror image" rule
6. Miscellaneous
i. Death
a. Death, in effect, causes a lapse or revocation of offer as it terminates the power of the offeror to act or to express mutual consent to an agreement.
ii. rule considered a relic, in that it may harm offeree who may have begun performance of contract without knowledge of death as death revokes without requirement of effectively communicating death to offeree.
ii. Incapacity
iii. Destruction of subject matter of offer
iv. illegality
D. Making offers irrevocable
1. Option Contracts
a. separate contract with single purpose: make offer irrevocable
b. right of first refusal (acts as an option contract that goes into
effect when another condition is manifest, e.g., buyer for property)
c. remove power of offeror to revoke original offer
d. rejection or counter offer of original offer will not, except in
limited circumstances, void original offer
2. Irrevocability Through Detrimental Reliance – Firm Offers
a. Prior to UCC, consideration validating an option contract was
required to make an offer irrevocable
b. UCC §2-205: Firm offer changed that: "written offers giving
assurance that they will be held open" are irrevocable
Pavel Enterprises v. A.S. Johnson Co
c. "you have eight days to accept" is not a firm offer as there is no
assurance that it will not be revoked if offeror has a change of heart (p. 143)
3. Irrevocability Through part Performance – R2dC §45
a. Unilateral vs. Bilateral Contracts (CL concepts)
i. Concepts not retained in UCC or R2dC; however, terminology remains in use
ii. bilateral – bargained-for exchange
iii. unilateral – offer to enter into a contract upon the performance of a bargained-for act by the offeree
b. The Part Performance Problem
i. Theories needed to make unilateral contract irrevocable once performance has begun
a. R1stC – main offer includes a subsidiary promise that if performance starts or is partially tendered it becomes and acceptance and therefore offeror won't revoke promise if it is completed within the time stated or in a reasonable time
b. R2dC – once performance begins or a portion of it is tendered, it creates an option contract for the original promise, i.e., it is now irrevocable
c. Part performance is, in effect, a "promise" to compete performance and so the unilateral contract suddenly become bilateral
ii. if offeror reserves right to revoke promise at any time, then he has not really made a promise and therefore has created no power of acceptance and thus no offer
4. Statutory Irrevocability: rare
a. UCC §2-205
E. The Nature of Acceptance
1. Knowledge and Motivation
a. one cannot accept an offer without knowledge[3] of that offer
(mainly important with unilateral contracts)
i. exception: a gov't standing offer designed to motivate public to do certain actions may be payable to one who performs the action without knowledge of the offer
b. knowledge of offer comes after beginning performance
i. no recovery
c. Motivation to accept
i. unless there is a clear indication of offeree not to accept, then offer can be accepted upon performance