1

Contracts Outline – Swaine

  1. General Overview
  2. Contract: an agreement between two or more persons – not merely a shared belief, but a common understanding as to something that is to be done in the future by one or both of them (alt. a document detailing this agreement or a set of rights/duties created by the agreement)
  3. Sources of Contract Law
  4. Common Law: largest and most common source; includes case law and Restatements (which are not legally binding but are generally persuasive)
  5. Statute: most important statute for our purposes is the UCC (sale of goods); statutory law takes precedence over common law, but whatever is not covered by the statute is then left to common law to address (Ex. UCC doesn’t cover “offer,” so we look to § 24 of the 2nd Rest. for help there
  6. Treaty: most important treaty for our purposes is the CISG (international transaction of goods if countries are parties to treaty); as a treaty is a federal law so takes precedence over both the UCC and common law
  7. Mutual Assent
  8. When deciding whether a contract is enforceable, the most basic requirement is mutual assent to the terms
  9. But how do we decide if mutual assent exists? Esp. if one side claims misunderstanding?
  10. Subjective approach:looks to the intention of the parties when examining whether mutual assent was present (what were they thinking?)
  11. Raffles v. Wichelhaus:agreement about cotton to be shipped to England aboard the boat Peerless (with no date specified)
  12. But there were two boats called Peerless and when the goods arrived on the later boat, the buyer refused to accept them (saying he meant for the cotton to be shipped on the earlier boat)
  13. Seller sued for breach of contract claiming that “intention was of no avail”
  14. But the court held that there was no enforceable contract because there was no meeting of the minds since each party had a different subjective intent
  15. Objective approach:looks to how a reasonable person would construe the outward conduct of the party in determining that party’s intention to assent (no subjective part)
  16. Lucy v. Zehmer:Lucy offered to buy Zehmer’s land for $50K one night at a bar
  17. Z did not believe that L had the money, but he hastily drew up a rough contract on the back of a check and had L sign it (apparently in an effort to call L’s bluff and force him to admit that he didn’t have the money)
  18. L tried to execute the contract; Z responded that he never intended to actually sell the land
  19. HOLDING: Even if one party is secretly in jest at the time of the agreement, the K is still binding because given the evidence, a reasonable observer would be justified in believing that the contract represented a serious business matter
  20. SO all that matters is themanifestation of agreement; the secret intent of one party is immaterial
  21. § 201:
  22. Modified objective approach:in the American system, the objective approach is generally preferred over the subjective approach, but it is somewhat modified
  23. § 20 – Effect of Misunderstanding:What to do when the parties attach different meanings to their words?
  24. No contract formed when mistake is symmetrical: parties attach different meanings to their manifestations and (a) neither party is at fault OR (b) both parties are equally at fault
  25. Contract is formedwhen mistake is asymmetrical: and the meaning of one party prevails if (a) that party does not know of any different meaning of the other, and the other knows the meaning of the first party; OR (b) that party has no reason to know of any different meaning of the other, and the other has reason to know the different meaning of the first party

i.So if Lucy knows that Zehmer is joking and Zehmer doesn’t know that Lucy is serious, then Zehmer’s meaning prevails and, in this case, there’s no contract

  1. § 21 – Intention to be Legally Bound:Intentionthat a promise be binding is not essential for the enforcement of a K; the only time intention would prevent a contract is if there was a clear outward manifestation that a promise was not serious
  2. § 201 – Whose Meaning Prevails:If the parties have attached the same meaning to an agreement, even if that meaning would not be apparent to a reasonable onlooker, that meaning prevails
  3. So if Lucy and Zehmer were both joking, then the contract would not be enforceable even if a reasonable onlooker would have thought that they were serious
  4. Ray v. Eurice Bros:
  1. Policy rationale for the favoring the (modified) objective approach
  2. Protects the reasonable expectations of a party
  3. Relatively easy to police and enforce
  4. Protects against fraud and distortion

BILATERAL CONTRACTS – Offer and Acceptance

  1. In order to reach “mutual assent” for a traditional contract, there generally is a bargain for exchange in which one party makes an offer and the other party returns an acceptance (see Rest. 2nd § 22 below)
  2. § 22 – Mode of Assent (Offer and Acceptance): Typically this manifestation of assent occurs through offer and acceptance
  3. BUT you can still have mutual assent even if you can’t identify a specific moment of offer and acceptance
  1. Offer (and requirements):
  2. Offer has 3 general requirements: PROMISE, CERTAINTY, & COMMUNICATION
  3. Promise or willingness to be bound to a contract, as opposed to an invitation to begin or continue preliminary negotiations
  4. Language: “I promise” or “I offer” instead of “I would consider selling for”
  5. Method of communication: the broader the communicating media, the more likely the courts will view the communication as merely the solicitation of an offer (for this reason, ads are usually NOT offers, but there are exceptions to this – see Izadi below)
  6. § 24 – Offer defined: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 and will conclude it.
  7. UCC does not define “offer,” so we rely on common law (§ 24 of 2nd Rest. above)
  8. § 26 – Preliminary Negotiations:“A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows/has reason to know that the person making it” intends it only to be preliminary negotiations
  9. Certainty and definiteness in both the essential terms and the specificofferee
  10. Basic test: are enough terms provided to make the contract capable of enforcement
  11. § 33 – Certainty:A manifestation of intention cannot be an actual “offer” unless its terms are reasonably certain enough to “provide a basis for determining the existence of a breach and for giving an appropriate remedy”
  12. Communication of the offer to the offeree: an offer is always effective upon its communication(see Mailbox Rule below)
  13. Lonergan v. Scolnick:Scolnick (S) needed cash in a hurry so he put an ad in the paper offering to sell a tract of land; Lonergan (L) responded to ad
  14. At L’s request, S provides directions to get to land but stipulates that “This is a FORM LETTER.”
  15. After seeing the land, L suggests a bank to serve as an escrow agent “should I desire to purchase” the land
  16. S writes back and tells L that the bank is ok, but that L will have to act fast because he wants to sell within the week
  17. Four days later, S sells to a third party; L sues S for breach of contract
  18. Court holds that there is no breach of contract because there was NO OFFER
  19. Newspaper ad wasn’t certain enoughto be an offerunder § 33
  20. S’ letter w/ directions is explicitly called a FORMLETTER so no offer there
  21. S’ letter telling L to hurry says that he is dealing with other potential buyers and undermines any willingness on the part of S to be bound to a contract with L; so just preliminary negotiations under § 26
  22. MAILBOX RULE:
  23. In common law, an offer is effective upon communication(i.e. it must be received by offeree)
  24. An acceptance is effective as soon as it is dispatched (i.e. out of the hands of the offeree or any of its agents)
  25. This is the “deposited acceptance” rule – § 63 of 2nd Rest.
  26. Even if acceptance is never received, it is still effective as long as:

i.the method of sending it was reasonable or comply with offeror’s stipulations (§ 65); and

ii.it was properly addressed and packaged (§ 66)

  1. Policy rationale: provides the offeree with a firm basis for action
  2. EXCEPTION: Acceptance of an optioncontractis effective upon receipt
  1. Like an offer, a revocation is effective upon communication or receipt
  2. Similarly, a rejectionor counterofferis also effective upon receipt
  3. Receipt means that the acceptance is in the hands of the person to whom it is addressed or to one of his agents authorized to receive it (§ 68)
  4. BUT if a person sends a rejection/counteroffer by mail and then changes their mind and also sends an acceptance, that acceptance is not effective on dispatch and must be receivedbefore the counteroffer/rejection in order to be effective (so whatever one arrives first is effective)(§ 40)
  5. CISG has a similar rule:
  6. Art 16(1):Until a contract is concluded an offer may be revoked if the offeree receives the revocation before he has dispatched the acceptance and cannot be revoked if acceptance has already been dispatched
  7. BUT unlike common law Mailbox rule Art. 18(2)places the risk of non-arrival of acceptance on the offeree (i.e. if the acceptance does not arrive in a timely manner than it is not effective)
  1. Izadi v. Machado:Car ad strongly implied that any trade-in would have a value of $3K, although tiny small print showed that this offer only applied to certain makes of cars
  2. When plaintiff didn’t get trade-in value because of the small print, he sued for breach of contract (and fraud and false advertising)
  3. Court grants the breach of contract claim
  4. OFFER: although an ad usually is not an offer (because there is no specific offeree), the court holds that Machado’s ad was an offer in this case
  5. ACCEPTANCE: can be inferred from Izadi’s attempt to take advantage of the offer
  6. MUTUAL ASSENT: Machado says it did not intend to say that all trade-ins were worth $3K, but that is what Izadi understood. So whose interpretation prevails?
  7. TEST: What a reasonable person in the position of the parties would have interpreted (objective approach discussed above)
  8. Based on this, court says that Izadi’s interpretation prevails and Machado’s refusal to grant the trade-in was a BREACH OF CONTRACT
  9. Brown Machine:this is a battle of the forms case (see below), but it remember that a price quote is generally NOT an offer
  10. Even when prices are quoted in response to a specific inquire, in commercial usage the word “quotation” implies the reservation of a right on the supplier’s part to accept or reject customer’s orders
  11. So usually, the offer comes from thebuyer’s order form, not from the seller’s price quote
  1. Revocation, Rejection and Acceptance
  2. An offer may be terminated either by the offeror (REVOCATION) or by the offeree (REJECTION/COUNTEROFFER or LAPSE OF TIME)[§ 36]
  3. Revocation:terminates the offeree’s power of acceptance and obviously precludes the formation of mutual assent and obviously must be done before the offer is accepted (offers are freely revocable until accepted)
  4. As per the mailbox rule, a revocation is effective upon receipt
  5. Obviously revocation can be done directly (by the offeror to the offeree)
  6. Can also be done indirectly provided that certain requirements are met
  7. § 43 of 2nd Rest – Indirect Communication of Revocation:ends the offer “when the offeror takes action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect”
  8. See also Normile v. Miller below: “You snooze, you lose.”
  9. Rejection:clearly terminates the power of acceptance and kills the offer
  10. Again, effective on receipt
  11. Usually done directly
  12. Can also be done by a lapse of time if the offeree doesn’t return a response in the time specified OR if no time period is specified, if the response is not within a reasonable time
  13. Counteroffer:offer made by an offeree to the offeror relating to the same subject matter as the original offer and proposing a substituted bargain with different terms
  14. generally this will also terminate the offeree’s power of acceptance AND serve as a new offer(§ 39)
  15. Again, effective on receipt
  16. Acceptance:manifestation of assent to the terms of the offer in a manner invited or required by the offer; can be done either by a return promise or by performance(§ 50)
  17. Mirror Image Rule – (§ 59) – if the offeree returns an offer with some change in terms and assent is conditioned upon that change, then even if it purports to be an acceptance, it is no longer a mirror image of the original and should be regarded not as an acceptance but rather as a counteroffer
  18. EX: So if Swaine offers to sell me a book for $50 and I say, “I’ll gladly take it as long as it only costs 50 cents,” then it is understood that I have rejected Swaine’s original offer by making a new counteroffer; I have become the offeror and Swaine (the original offeror) is now the offeree
  19. Acceptance by Silence or Inaction - § 69 of 2nd Rest: generally some positive assent need be given in order to constitute acceptance, but there are some exceptions to this rule in which silence is acceptance:
  20. Where an offeree accepts offered benefits and has reason to know they were offered with an expectation of compensation (see Princess Cruises);
  21. Where the offeror makes it explicitly clear that assent may be manifested by silence and by remaining silent, the offeree intends to accept the offer
  22. More likely to happen in commercial dealings where there is a previous history of doing business
  23. Normile v. Miller:Miller (M) listed a property for sale and Normile (N) provided him with an offer and said it had to be accepted/rejected by 5 pm the next day; M made several changes to the offer and returned it as a counteroffer to N without any deadline or cut-off
  24. N neither accepted or rejected the offer – just sat on it
  25. Real estate broker presented M’s offer to a third party purchaser who accepted it immediately w/o change
  26. Broker then informed N that the property had been sold to someone else and so M’s counteroffer was revoked: “You snooze, you lose.”
  27. Hoping to still have a claim, N accepted M’s counteroffer by 5 pm anyway
  28. Court holds that the fact that N signed the counteroffer by 5 pm is immaterial because the c.o. was actually a rejection of the original offer and its 5 pm deadline (because of the mirror image rule) and a proposal of a new offer without such a deadline
  29. Court also says that broker’s comment to N constituted a valid indirect revocation of the offer under § 43

UNILATERAL CONTRACTS – Offer and Acceptance

  1. Because the offeror is the “Master of the Offer,” she can specify any means of acceptance
  2. A unilateral contract arises when an offeror says to the offeree, “You can only accept by doing what I ask, NOT by promising to do what I ask”
  3. Ex. 1: “I promise to pay you $10 if you promise to pet my goat” – this is a BILATERAL CONTRACT
  4. Ex. 2: “I promise to pay you $10 if you actuallypet my goat” – this is a UNILATERAL CONTRACT
  5. So a bilateral contract is sometimes preferable for an offeror because when the offeree makes their promise they are then bound to perform
  6. But a unilateral contract may be preferable in cases where the performance sought is not guaranteed to happen (“the speculative nature of the performance”)
  7. Classical (hard) view of a Unilateral Contract in the Brooklyn Bridge example:
  8. A tells B he will give him $100 if B walks across the Brooklyn Bridge
  9. A can revoke the offer up until the time that B accepts, and under the traditional view, acceptance can only be given by full performance
  10. So even if B has already walked halfway across the bridge, A can revoke and pay him nothing
  11. This seems harsh to B, but then you also have to remember that B was never bound to do anything, so A shouldn’t be bound either until B completes performance
  12. Petterson v. Pattberg: Plaintiff (P) owed Defendant (D) money on a mortgage; D said that P could pay off mortgage at a reduced rate if all payments were made by May 31
  13. P went to pay off mortgage but when he arrived and announced his intention to pay, D immediately informed him that he would not accept the offer and had in fact sold the mortgage to a third party
  14. Citing Williston, the court says that if an offeror can say “I revoke” before the offeree accepts, then the contract cannot be enforced
  15. So in this case, there was a unilateral agreement that only became enforceable upon payment; since P never in fact paid (only announced intention to pay) before D revoked, then the contract cannot be enforced and P is S.O.L.
  16. Dissent: agrees that this is a unilateral contract, but strongly urges that the result here is unfair the plaintiff
  17. The performance sought is payment, but this inherently requires some cooperation from the offeror (i.e. accepting the money)
  18. The offeree should not be penalized if the only reason he was unable to complete performance was because of an obstruction by the offeror
  19. Case may have turned out differently if modern view (§ 32 and § 45 were applied)
  20. Modern View of Unilateral Contracts has softened considerably:
  21. § 32 – Invitation of Promise of Performance:If the offer is unclear about the mode of acceptance, it is assumed that acceptance can be given thru promise or performance
  22. § 45 – Option Contract created by Part Performance or Tender: In a unilateral contract framework, when the offeree tenders or begins the invited performance then an option contract is created; so offeror cannot revoke the contract, only the offeree can by deciding not to finish performance
  23. Tender = showing that you have the ability & willingness to complete the requested performance; as opposed to mere preparation
  24. Cook v. Coldwell Banker: Coldwell Banker (CB) orally instituted a policy with bonuses to real estate agents who sold $15K and $25K worth of property and stayed until year’s end
  25. Cook sold $32K of stuff; CB gave her reward for hitting $15K but not for hitting $25K; said it would be paid the following March and that brokers had to be with CB in March in order to receive the bonus payment
  26. Cook switched to Remax in Jan. but still wanted the bonus; CB refused to pay the bonus since it said that Cook had not completed performance by remaining with CB through March
  27. Court rejects CB’s argument that it was not bound to pay since the performance had not been completed; instead court says that since Cook had already made a substantial part of performance, an option contract was created and so CB couldn’t revoke the first policy and institute the new one(§ 45 of 2nd Rest.)
  28. This approach is typical of the modern view
  1. Reaching Mutual Assent with UCC & CISG
  2. UCC applies to the sale of goods(§ 2-102)
  3. DEFINITIONS:
  4. Goods: all things which are movable at the time of their addition to the contract (NOT money, investment securities, or real estate) (§2-105)
  5. In a mixed contract when you can’t tell whether something is for goods, services, or real estate determine whether the contract’s “predominant factor, their thrust, their purpose” is for service, goods, or property
  6. Coakley gives three criteria for testing this:

i.Language: language here clearly points to service (p. 148)