Contracts I - Wilmarth (2002) -modified Box outline
Is There A Contract?
I. Mutual Assent
A. Objective Theory – In evaluating whether a contract exists, the test is objective, NOT subjective.
1. Is There Mutual Assent? - A true interpretation of an offer or acceptance IS NOT what the party making it thought it meant or intended it to mean, but what a reasonable person in the parties’ position would have thought it meant.
a. Ray v. Eurice Bros. – A party is bound to a signed document which he has read with the capacity to understand it absent fraud, duress, and mutual mistake.
· Hand’s “20 Bishops” example
b. Park 100 v. Kartes – A contract is invalid if the acceptance was obtained by fraud.
Park 100 v, Kartes
Facts: Kartes signed a “lease agreement” w/ Park 100 after being assured by their attorney that the lease agreement had been approved. However, the “lease agreement” contained a personal guarantee that had never been discussed and Park 100 did not tell Kartes.
Rule: A contract of guaranty cannot be enforced by the guarantee where the guarantor has been induced to enter into the contract by fraudulent misrepresentations or concealment on the part of the guarantee.
c. Elements of Fraud (Fraud Makes Contract Voidable)
(1) Misrepresentation (False Statement)
(2) Knowledge of Falsity (Intent to Mislead)
(3) Reliance (Must be Reasonable Reliance)
(4) Causation (Fraud was the Direct Cause of Injury)
2. Meaning of Terms – The objective theory will be used not only to determine the mutual assent necessary to form a contract, but also to determine the meaning of particular terms in the contract.
3. Indefinite Offers – for a contract to be formed, the parties must reach mutual assent on all of the essential terms of the agreement:
a. Parties
b. Subject Matter
c. Time for Performance
d. Price
B. Offer and Acceptance (Common Law)
1. Bilateral Contracts – Bargain for PROMISE. Each side is making a promise to each other. (Promise in return for a Promise)
a. Offer – a valid offer is one that instills in the offeree the power to enter into a contract simply by making his acceptance.
(1) Definition (2nd Restatement §24) – an offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited a will conclude the bargain.
(2) Offers Made in Jest – An offer that the offeree knows or should know is made as a joke is not a valid offer. This is judged based on if a reasonable person in the parties’ situation would think the offeror was serious.
(3) Preliminary Negotiations (R2d §26) – A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.
(a) Solicitation for Bids – a solicitation for bids is NOT an offer, it is simply preliminary negotiations.
(b) Statement of Future Intent – an announcement by a person that he intends to contract in the future will not usually be considered an offer.
(4) Price Quotations – Look at the following factors to determine if a price quotation is an offer.
(a) Quantity – In order for a price quote to be an offer it MUST state a clear QUANTITY.
(b) Addressee – In order for a price quote to be an offer it MUST be addressed to a particular person.
(c) Terms – If the quote specifically states that it is ONLY a “quote” then it is unlikely to be considered an offer.
(d) Need for Further Expression of Assent – If the quote says that all sales need to be approved, or uses similar language indicating that the person does not have the power to close the deal, it is NOT an offer.
(5) Advertisements - In general, advertisements are not considered offers but there are some exceptions.
(a) Specific Terms or Promises – If the advertisement contains words expressing a commitment to sell a particular number of units or to sell them in a particular manner, there may be an offer.
(b) Conditional Offers – Some J/D consider “first come first served,” provisions in advertisements to constitute an offer.
(6) Example – Lonergan v. Scolnick
Lonergan v. Scolnick
Facts: D placed an ad advertising the sale of property, p inquired about the land and D sent p a form letter indicating the price and where the land could be found. p inquired again asking for a description of the land and about an escrow agent, and D replied that he had better act fast. (First come, first served implication)
Rule: Before a contract can be formed, there must be a meeting of the minds of the parties as to a definite offer and acceptance.
Comments: The court felt that the newspaper ad and the form letter were not offers b/c they were open to a number of people and weren’t specific to p. Also, they felt that even though the last letter could have been seen as a conditional offer (first come, first serve), since p wasn’t the first, he has no binding contract.
b. Acceptance – in order for an acceptance to be valid, it must be made to someone intended by the offeror to have the right to accept and it must become effective during the time in which the offeree still has the power to accept.
(1) Definition (R2d §50) – Acceptance of an offer is a manifestation of assent to the offer made by the offeree in a manner invited or required by the offer.
a. With Bilateral Contracts, the offeree must take every step required to MAKE THE PROMISE in order to accept the offer.
(2) Mailbox Rule (R2d §63) – The acceptance of an offer is made when it is placed in the mail, regardless of whether the offeror receives the acceptance or not.
a. Offeror can get around the mailbox rule by stating in the offer that an acceptance is not valid until they receive it.
(3) Qualified Acceptance/Counter Offers (R2d §59) – Any return of an offer where changes are made IS NOT an acceptance; it constitutes a counter offer that must then be accepted by the original offeror.
(4) Option Contracts – When Bilateral Offers have a stated time period (e.g. “Offer open until Friday at 5pm”), they create a revocable option where the offeror can still revoke the offer at any time before the offer is accepted. (The mailbox rule applies to acceptance). However, after Friday at 5pm, the offeree no longer has the power to accept the offer. If the offeree provides consideration to the offeror to ensure that the contract is open until Friday at 5pm, the offer becomes irrevocable until Friday at 5pm, AND, the mailbox rule no longer applies to acceptance, the offer is only accepted when the offeror RECIEVES the acceptance (R2d §63(b))
(5) Terminating Power of Acceptance (R2d §36) – the offeror’s power of acceptance can be terminated by:
(a) Rejection (§38) or Counter Offer (§39) - if offeree rejects an offer or makes a counter offer (see above), he can no longer accept once the rejection or counter offer is received by the offeror (§40).
(b) Lapse of Time – If the offeror did not set a time limit, a “reasonable” time limit will be implied.
(c) Revocation – Offeree loses the power of acceptance if the offer is revoked before it is accepted. (Offer is not revoked until offeree receives the revocation)
(d) Death or Incapacity – The power to accept is ended upon the death or incapacity of the offeror or offeree
c. Revocation – An offer can only be revoked if the revocation is communicated to the offeree before the offer is accepted. A revocation is only considered valid when it is received by the offeree.
d. Example – Normile v. Miller
Normile v. Miller
Facts: p made an offer to D and D responded w/ changed terms. The offer was revoked before p had accepted, but the time period stated on the original offer had not run yet.
Rule: If a seller rejects a purchase offer by making a counteroffer, which is not accepted, the prospective purchaser does not have the power to accept the counteroffer after receiving notice of the counteroffer’s revocation.
Comments: This case illustrates that a conditional acceptance = a counteroffer which can be revoked by the offeror at any time before it is accepted by the offeree.
2. Unilateral Contracts – Bargain for PERFORMANCE. Not a mutual promise, a promise of a reward is offered in exchange for performance.
a. Offer – An offer to enter into a unilateral contract is made when one party makes a promise to do something if the other party performs a certain act, however the offeree is under no duty to perform that act and they may decide whether or not to do so.
b. Acceptance – A unilateral contract offer is accepted only by full performance by the offeree.
c. Revocation
(1) Classical Theory – under the classical theory of contract law, an offer for a unilateral contract could be revoked at any point prior to full performance. (Brooklyn Bridge Example)
Petterson v. Patberg
Facts: D made a unilateral offer to p that if a mortgage was paid by a certain time then there would be a discount on the mortgage. p made the first required payment and made arrangements to acquire the rest of the $. When p went to D to pay D the $, D revoked the offer before p could pay.
Rule: An offer to enter into a unilateral contract may be withdrawn at any time prior to the full performance of the act requested to be done.
Comments: In the Restatement 2d, part performance makes the offer irrevocable, but actual performance is required, preparation to perform is not enough although this may constitute detrimental reliance for a PE claim.
(2) Restatement 2d §45 – Part Performance – According to the Restatement, once the offeree begins the invited performance, the offer becomes a binding option contract, which makes the offer temporarily irrevocable.
a. Actual performance is required; preparation to perform isn’t enough, although this may be enough for a PE claim (detrimental reliance).
b. The completion of the performance still must be made w/in the terms of the contract for the offeree to have officially accepted the contract.
3. Silence as Acceptance (R2d §69) – Silence can be an acceptance when:
a. Offeree takes the benefit of services w/ reasonable opportunity to reject them and w/ reason to know that they were offered in the expectation of compensation. (1-sided modifications don’t count)
b. Offeror has stated or given reason that silence will constitute assent.
c. Offeree should know that silence means acceptance due to prior dealings.
Cook v. Coldwell Banker
Facts: CB made a bonus offer to employees that was accepted by performance (unilateral offer). They later changed the period of the bonus and then said that p was not entitled to the bonus b/c she quit before the end of the new bonus period (but before the end of the old bonus period).
Rule: In the context of an offer for a unilateral contract, the offer may not be revoked when the offeree has accepted the offer by substantial performance.
Comments: The second bonus offer was a revocation of the first bonus offer and the court ruled that the first bonus offer could not have been revoked w/o express assent b/c p had made substantial performance, which made the first offer a binding option contract. Her silence did not indicate an acceptance to the second offer (above factors were not met).
4. Employee Handbooks as Contracts – Employee handbooks are generally considered to be unilateral offers, which are accepted when the employee works knowing about the handbook.
a. Best Offer – in general, the employees are entitled to the best offer from a handbook while they were working unless they expressly consented to any changes in the handbook.
Duldalo v. St. Mary of Nazareth Hospital
Facts: p alleged that St. Mary’s breached the promises set out in the employee handbook barring termination of permanent employees w/o progressive disciplinary procedures.
Rule: And employee handbook or other policy statement creates enforceable contractual rights if the traditional requirements for contract formation are present.
Comments: Employee handbooks are now considered to be binding statement of the rights and duties of both the employees and the employer.
5. Authority – in order for an offer to be valid and enforceable upon acceptance, the offeror must have the authority to make the offer.
a. Three Types of Authority
(1) Actual – there is a written document giving the offeror authority to make the offer.
(2) Actual Implied – If something has become a custom or a form of conduct that shows that a person usually has authority, you can assume that the person has authority in that situation.
(3) Apparent – If someone makes it apparent to others that someone has authority, they can reasonably assume that the person has the authority, even if they don’t.