Contracts Note Summary
Fall 2011: Schooner
Chapter 1: Introduction
A. Contract Law
a. A contract is an agreement between two or more persons
b. Element of futurity- commitment to a course of action to be taken in the future
c. Exchange of promises, an agreement that has legal effect, bargain for exchange (quid pro quo “something for something else”) - enforceable bargains in future
d. Concept of futurity or promise of future expectations of performance Elements:
i. Agreement in fact between the parties
ii. The agreement as written (which may or may not correspond to above)
iii. The set of rights and duties created by 1 and 2
e. Contract is society’s legal way of protecting the expectations that arise from making arrangements about future exchange of performance
B. Sources of Contract Law
1. Judicial Opinions
a. (1) Precedent (Stare decisis- adherence to past precedents)
i. Sub Judice- under consideration by the court (under adjudication)
ii. Precedent is only binding if it was issued by that court or a higher court within that jurisdiction (other courts’ decisions are persuasive)
iii. Court can also ignore if the facts of the other case were materially different from the case under consideration
b. (2) Policy (any societal goal that will be furthered by a particular decision)
2. Statutory Law
a. Doesn’t cover all transactions
b. Statute of Frauds: Requires certain types of contracts to be evidenced by signature enforceable in court
i. Development of Uniform Commercial Code in 1940s, still evolving
c. Court looks at rules by statute differently than common law precedent
d. Legislature can change common law rules as long as they’re constitutional
3. The Restatements
a. ALI adopted the Rst. of Contracts in 1932- codified common law
b. None have the force of law, just opinions/commentary on advances to law
c. Second revision reflects the incorporation of the UCC into general contract law
i. Goods are moveable things (not money and other intangible rights (§1 – 105(1))
ii. Sale consists of passing of title from seller to buyer for a price (§2-106(1))
4. Legal Commentary
a. Commentary has been influential in shaping the course of common law
b. Certain professors think it’s their duty to help articulate and advocate change
5. International Commercial Law
a. Most countries after WWII signed onto General Agreement of Tariffs and Trade (GATT) to reduce trade barriers
b. Many international organizations to help fill in legal gaps of Agreement
C. Perspective of Contract Theory
a. Formalist- approach in the Willistonian period
i. Had universal rules, apply to each case- no moral or political influence on the outcome of a case
ii. Wrote casebook on Contracts, influenced Restatement of Contracts
b. Legal Realists- end result of case is the combination of rules, facts and personality of judges
i. In effect policymaking reflects a combination of economics, psychology, science, etc.
ii. Didn’t like the black letter law of the Restatements
iii. Criticized for not following the purposes and goals of legal process
c. Economic- court decisions should move toward efficient goals
i. Legal rules should reach efficient outcomes
ii. Inefficient rules should be modified toward greater efficiency
iii. Contracts should seek to preserve business relationships
d. Critical Legal Studies (“Crits”)
i. It is impossible to establish a rational system of decision-making as it now exists
ii. Goal is altruistic and communitarian society
iii. Law serves the goals of white males at the expense of minorities
D. The Lawyering Perspective
a. Attorneys are counselor to identify legal problems, choose between options
b. Negotiator to rep. your client, drafter to express their bargain (organize, articulate)
c. Advocate to present the most persuasive arguments possible for your client
d. History:
i. Debt- sell goods to a person (request)
ii. Assumpsit- action for recovery of damages caused by a breach in contract – ex: person promises to pay you if you sell them goods (contract)
iii. Executory contract- a contract which hasn’t been performed yet
Chapter 2: Basis of Contractual Obligation: Mutual Assent & Consideration
A. Mutual Assent
a. A contract requires a bargain in which there is a (1) manifestation of mutual assent to the exchange and (2) consideration
i. No coercion- people voluntarily entering into a bargaining situation
ii. Theoretically, if the parties don’t have a meeting of the minds, and they don’t agree, then they don’t have a contract
iii. But a contract can be formed even if parties don’t engage in bargaining
b. Subjective Theory of Contract:
i. It is the party’s intent, not their conduct that determines what they should be held accountable for (look for a “meeting of the minds”)
ii. Need to listen to witnesses, memories might change, people might lie
iii. Less incentive to read contract, less responsibility to follow through
iv. Lenient because people make mistakes, helps protect less educated consumers- no “meeting of the minds”/ mutual assent if people are thinking different things
v. If parties attach materially different meanings to K language, no K
c. Objective Theory of Contract
i. Look at the conduct of the parties from the perspective of a reasonable person instead of their subjective intentions
ii. Objective Intent to enter into a contract: would a reasonable person have construed the agreement to be a binding commitment
iii. Law of enforceability has nothing to do with party’s actual state of mind when entering the K; rather is based on outward manifestations of intent (conduct, language, etc.)
iv. Whether there has been offer OR acceptance is based on what a reasonable person would have construed the situation to be
v. Under objective theory, if intent to enter into a K is ambiguous…
1. In business transactions à assume parties intended to be bound
2. In social and domestic à assume parties did NOT intend to be bound
1. Intention to be Bound: Objective Theory of Contract
RAY v. EURICE BROS. (contractors and engineer “agree” to build a house)
Issue: Is a person responsible for upholding a contract if they did not fully understand the requirements to which they were signing?
Rule: Yes. The Restatement dictates that you are bound by the contract though ignorant of the terms of the writing or its proper interpretation
§ Manifestation of mutual assent by the parties to an informal contract, but neither (1) mental assent to the promises in the contract nor real nor (2) apparent intent that the promises shall be legally binding are essential
§ Interpretation of an offer or acceptance isn’t what the party thought or intended it to mean, but what a reasonable person would have thought it meant.
§ Look at objective manifestation of intent- existence of the document, actions, manifestations of agreement (meetings, signatures, etc.), not about the intention of the parties
Why Use Objective Theory of Contracts?
1. Consistency, People can form reasonable expectations about K formation
2. Avoids litigation; more practical, more reliable for commerce
3. Imposes responsibility on people to be clear about their actual intent
4. Williston: true interpretation of offer based on what reasonable people in the place of the parties would interpret
Why Not Use It?
1. If applied too strictly could undermine fairness; no variance
2. Hard to interpret, intent still is important
3. Biased towards those who already have a great understanding of that realm of business (favors those with the best lawyers)
Why Enforce a Contract?
1. Respect private autonomy
a. Create a world where contracts are enforceable so individuals can voluntarily and privately affect their own legal relationships and affect their future reliably
b. Predictability and certainty of contracts helps society plan
2. Respect people’s reliance on promises and interests
a. Help prevent the injustices associated with making a promise, and then failing to fulfill expectations, detriment to other
3. Unjust enrichment
a. When a party makes a promise, fails to fulfill it, then benefits by taking advantage of someone else, don’t want benefit from a wrongdoing- Want them to give back any ill-gotten gains
2. Offer and Acceptance in Bilateral Contracts
a. Bilateral Contract- exchange of a promise for a promise
i. Both parties have actions to be performed in the future pursuant to the agreement
ii. The offeror has the power to determine WHAT constitutes acceptance as well as how it should be conveyed, when, where, etc.
iii. At the moment that the bilateral contract becomes enforceable, both parties are bound to fulfill their promises, not contingent upon another performance
iv. In Bi-lateral contracts: two promisors and two promisees
b. Offerer gives an offer to the offeree, who now has the “power of acceptance”
i. If the offeree accepts the offer in a legally accepted way, contract comes into being, OR offeree may respond with a counteroffer
ii. May accept then have a contract, or may expire, reject (revoke the offer)
LONERGAN v. SCOLNICK (debate over whether sale of 40 acres was legit)
Issue: Can a contract be entered into without signatures, a formal meeting, or a definitive exchange of information? Was the April 8th letter an offer?
Rule: If the person accepting the offer knows that the offerer isn’t making his final offer but a preliminary gesture to engage in further discussion, then an offer has not been made. Form letters are not offers.
§ Seller didn’t intend to have the buyer say “I agree” so wasn’t an offer because offeror needed to give further details of offer before could give to offeree to accept
§ Buyer must have understood that something else was required of the seller
§ An offer needs to express a fixed purpose and contain an expression of assent to be valid
§ Restatement 26- 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 offeror does not intend to conclude a bargain until he has made a further manifestation of assent
The Mailbox Rule
- An exception to the general rule of contract law in common law areas that acceptance takes place when communicated. The posting rule states, by contrast, that acceptance takes effect when a letter is posted, if reply by post is reasonable
- Revocation of the offer doesn’t have an applicable mailbox rule
Ways to Terminate Bilateral Offer
- The offeree rejects, offeree counteroffers, a significant lapse of time, offeror revokes the offer, death of either party, the non-occurrence of a condition of acceptance under the terms of the offer
IZADI v. MACHADO (GUS) FORD (sneaky advertisement selling cars)
Issue: Does the advertisements’ interpretation by a reasonable man constitute a contract, or does the fine print dictate the terms?
Rule: Business should adhere to the contract that a reasonable person would deduce from seeing the advertisement.
§ Advertisements can be offers (especially “first come first served”)
§ Precedent holds businesses accountable for telling the truth and observing the law of common honesty and fair dealing
NORMILE v. MILLER (buying and selling a house with time limits)
Issue: Does the prospective purchaser have the power to accept the counteroffer after he receives notice that the counteroffer has been revoked?
Rule: No. The original offer is valid only until the offeree accepts, rejects or makes a counteroffer. The counteroffer is only valid until the original offeror accepts or rejects, or the offeree withdraws the counteroffer.
§ The offeree, or creator of the counter-offer, negates the provisions of the original offer, and has the right to revoke the counteroffer up until it has been agreed to by the original offerors.
§ By signing contract with Segal, seller manifested her intent to revoke counteroffer which Miller could do any time before the counteroffer was accepted (Restatement)
§ Normally buyer has to be told of revocation of offer, counts if they hear indirectly
§ Courts aren’t lenient of unilateral mistakes- punishes party who did it right
4. Offer and Acceptance in Unilateral Contracts
a. Unilateral contract- exchange of promise for performance where offeree does not make a promise but instead completes an act (I promise to give you $10 if you walk across the bridge)
b. Offeree’s performance constitutes acceptance of the offer AND complete consideration and then they have no further obligation under the contract
c. When an act is wanted in return for a promise, a unilateral contract is created when the performance is completed by the offeree
i. In Unilateral contracts: one promisor and one promisee
d. Maximum protection to the offeror since he isn’t bound unless and until he had received the performance he sought from the offeree
e. Higher risk for the offeree since contract doesn’t come into being until he does all the requested performance, so could do some work, and get no remedy if revoked
f. Classical contract theory- revocable at any time until performance is completed
PETTERSON v. PATTBERG (buying up bond left on house’s mortgage, tried to pay)
Issue: Is a contract binding if the offeror revokes the offer while the offeree is attempting to fulfill the performance of the unilateral contract?
Rule: The contract is not binding if at any point before the act is completed, the offer is revoked. It’s ok to withdraw the offer any time prior to acceptance. (Classical Interpretation of Unilateral Contract)
§ The offeror has the right to revoke the offer at any point up until the moment that the offeree completes the act required by the unilateral contract.
§ Dissenting- thought that the offer was unilateral, but the act that was being sought by the offeror (payment) was impossible unless the offeror allowed it.
§ Williston- If a promisor is the cause of the failure of performance of an obligation due him or of a condition upon which his own liability depends, he cannot take advantage of the failure
§ Implied consideration was the defendant’s acceptance of the payment if the plaintiff tried to fulfill the unilateral contract
§ Policy Reasoning: wanted a bright line rule to prevent floodgate claims
Beginning Performance
- Restatement 32- In cases of doubt, courts conclude that the offeror intended to allow the offeree to accept, either by making a return promise or by rendering the performance requested. Unless the language expressly states otherwise, assume that an offer may be accepted either by promise of performance or by actual performance of the offeree