CONTRACTS OUTLINE
I. General Contracts Introduction
A. Two types of Contracts:
i. Bilateral Contracts
1. Traditionally, an exchange of mutual promises, in which each party is both a promisor and a promisee.
2. Acceptance
a. Any objective manifestation of an offeree’s counterpromise, by words or acts, is usually sufficient for acceptance and formation.
i. Under modern statutes, a bilateral contract can be accepted by starting performance, unless clearly indicated otherwise by the language or circumstances.
b. Subjective reservations in the offeree’s mind are irrelevant.
3. Each party has a right and a duty.
4. Defenses for the Offeree
a. The offeree’s ignorance of certain contractual terms may be a defense to the formation of a bilateral K.
i. If she objectively manifests her assent, she is bound by all K terms that a reasonable person would have noted and understood.
b. If K includes oppressive terms, a court may find the K voidable, or it may “blue pencil” the agreement and enforce it without the offending provisions.
c. Blank Form Recitals – a standardized form stating that the offeree has read and understood all provisions and agrees to them, will not prevent the court form applying the objective standard.
d. Contrary to Public Policy – such provisions may be set aside, even if they could be understood by a reasonable person.
ii. Unilateral Contracts
1. Is advantageous for the offeror because the offer makes acceptance possible only by the contract performance he desires.
2. The offer requests performance or forbearance from acting rather than a promise.
a. The offeror-promisor promises to pay upon the completion of the requested act by the promisee; Once the act is completed, a contract is formed.
b. One promisor and one promisee.
c. In the UCC and the Restatement, there is a unilateral contract only in two situations:
i. where the offeror clearly and unambiguously indicates the completion of performance is the only manner of acceptance (the offeror is the master of the offer, and may specify the manner of acceptance); and
ii. where there is an offer to the public, such as a reward offer, which so clearly contemplates acceptance by performance rather than a promise that only the performance requested in the offer will manifest acceptance.
d. One party only has a right and the other party only has a duty.
3. Acceptance
a. The offeree must act with knowledge of the offer and be motivated by it.
b. Acceptance is generally accomplished by performance of the requested act without notice to the offeror.
i. Unless the offeror requests notice of the acceptance, in which case the offeree would be under a duty to notify, OR
ii. Where the requested performance would not normally come to the offeror’s attention w/in a reasonable time, the offeree has a duty to give notice w/in a reasonable time after performance.
1. Reasoning: To avoid possible duplicate offers to another party.
4. *Note: Modern courts only interpret a K as unilateral if its terms clearly warn the offeree that an act is required for acceptance.
a. Reasoning: Bilateral Ks are preferred, as they provide immediate rights and protections for both parties.
B. Two Ways to Establish a Contract:
i. Express Contract
1. The agreement between parties is shown by the direct words of the parties, written or verbal.
ii. Implied-in-Fact Contract
1. One that can be shown only by the acts and conduct of the parties, interpreted in the light of the subject matter and of the surrounding circumstances.
C. Agreements for the future
i. An “agreement to agree” in the future is not a valid K.
ii. A “Contract to negotiate the terms of the agreement” is an enforceable contract.
1. Elements of a Contract to negotiate:
a. Need be no ultimate agreement reached, only a good faith effort to reach an agreement.
b. A party is liable only if failure to reach an agreement resulted form one of the parties’ breach of their duty to negotiate.
2. Reliance damages are the only form of recovery available.
D. Three types of Validity in Contract:
i. Void Contract – One totally without legal effect from the beginning (e.g., agreement to commit a crime)
ii. Voidable Contract – One that one or both parties may elect to avoid or to ratify
iii. Unenforceable Contract – Otherwise valid, but that may not be enforceable due to various defenses extraneous to the contract formation, such as the statute of limitations or Statute of Frauds.
E. Determining whether there is a Contract:
i. Was there mutual assent?
ii. Was there consideration or some substitute?
iii. Are there any defenses to the creation of the contract?
II. Transactions in Goods
A. UCC provisions
i. § 2-105
1. The predominant purpose of the K must be sale of goods; This article does not apply to services
2. Includes “specially manufactured goods.”
3. Must be movable at the time of identification to the contract for sale.
Mutual Assent – Offer & Acceptance
III. Offer
A. Elements of an Offer
i. It must create in the offeree a reasonable expectation that the offeror is willing to enter into a K on the basis of the offered terms.
1. There must be:
a. An expression of a promise or commitment to enter into a K
b. Certainty and definiteness in the essential terms
c. A communication of the terms to the offeree
ii. The offeror is the master of his offer; If the offer unambiguously states the proper method of acceptance (e.g., by signature of offeree), no K exists until accepted in that manner.
1. If ambiguous, a K may be found to exist.
B. Promise
i. The language used may show an offer:
1. I offer; I promise
2. Can solicit preliminary negotiations, instead of being offers
a. I quote; I am asking; I would consider selling for
3. There may be an implied promise.
a. Fact Pattern: Although not expressly stated, when a person promises to provide money for the marketing of her goods by another, the other person, through the act of actually marketing the goods, impliedly promises to do so. (Wood v Lucy)
b. Fact Pattern: When a person promises to give a donation to a university for the purpose of creating a memorial fund, and the university accepts such donation, it impliedly promises to create the fund. (Allegheny College v National Bank)
ii. Surrounding Circumstances
1. Whether statement made in jest or anger, and interpreted as such – no legal effect
2. Whether a statement made in jest or anger, but understood by the hearer to have been made seriously – a valid offer (interpreted objectively, according to a reasonable person’s expectations).
a. See Leonard v Pepsico, below – court dismissed the claims of π’s subject belief of the intent of the advertisement. It was determined the award of a Harrier jet was meant to be in jest.
i. Court must look at whether the offeree intended to make an offer.
iii. Method of Communications
1. The broader the communicating media (i.e., publications, advertisements) the more likely the courts will view the communication as merely the solicitation of an offer.
a. Advertisements specifically are usually construed as invitations for offers (announcement of prices at which the seller is willing to receive offers)
i. BUT, if the wording of the ad indicates a promise to the buyer, where the terms are certain and definite, and where a particular action is sought, then courts may construe it as an offer.
1. e.g., offer something at a particular price on a “first come first served” basis – likely valid offer.
ii. If there is a price tag on the item in the store, this may demonstrate a willingness of the store owner to enter into a bargain, and may communicate to a buyer that assent to a bargain as invited and would conclude the bargain.
iii. Note: Courts are not concerned with what the parties are thinking subjectively, but what messages would be reasonable for people to think the advertisement conveys (objective test).
1. Fact Pattern: A person sees a Pepsi ad and believes they can receive the Harrier jet advertised, but the court determines an objective reasonable person would not have concluded the commercial actually offered a jet (Leonard v Pepsico)
C. Definite and Certain Terms
i. Essential elements include:
1. The identity of the offeree and the subject matter
2. The price to be paid
3. The time of payment, delivery, or performance
4. The quantity involved
5. The nature of the work to be performed
a. NOTE: If some of these terms are missing, the court may in certain circumstances attempt to supply the missing terms.
i. The court will not supply a material term, and the offer would be too uncertain.
ii. A promise generally will be enforceable even if it does not spell out every material term, as long as it contains some objective standard to supply the missing terms.
iii. The court may not interpret a term that is expressly included in the K, but too vague to be enforced.
1. e.g., to divide profits “on a liberal basis,” or to purchase land for “$8,000 or less.”
b. “The parties if they intend can conclude a contract for sale even though the price is not settled.” (§2-305(1))
c. Often the price term and the specific time provision may be determined by court to be a reasonable price and a reasonable time.
ii. Common Intent of Parties
1. Rule: If the terms in the K are, on their face, agreed upon, but are actually determined differently by the parties, no K is formed.
a. Fact Pattern: There was a discrepancy as to the ship on which an order of cotton was to shipped. The misunderstanding led to a material change in the K, because would arrive on a different date and would be affected by fluctuations in market price. (Raffles v WIchelhaus)
iii. Specific to sale of goods
1. The quantity being offered must be certain or capable of being made certain.
2. Requirement and Output Contracts
a. Requirement Contract – A buyer promises to buy from a certain seller all the goods he requires, and the seller agrees to sell that amount to the buyer.
b. Output Contract – A seller promises to sell to a certain buyer all the goods the seller produces, and the buyer agrees to buy that amount from the seller.
c. Although no specific amount is given in these contracts, it is sufficiently definite because the quantity is capable of being ascertained.
i. The parties must act in good faith, i.e., may not tender or demand a quantity unreasonably disproportionate to a stated estimate or to prior output or requirements.
iv. Specific to Employment Contracts
1. The duration of the employment must be specified.
a. If not, and is accepted, it is construed as creating a contract terminable at will of either party.
D. Communication of Offer to Offeree
i. The offeree must have knowledge of the offer, hence it must be communicated.
IV. Termination of an Offer
A. Termination by Offeror (Revocation)
i. Terminates the offeree’s power of acceptance if it is communicated to her before she accepts.
1. Revocation by direct communication
2. Revocation by publication
a. Must be done in comparable means to the way the offer was given.
i. e.g., An offer published in the NY Times may be revoked by publication in the NY Times, not another publication.
3. Revocation by indirect communication
a. If the offeree indirectly receives:
i. Correct information
ii. From a reliable source
iii. Of facts of the offeror that would indicate to a reasonable person that the offeror no longer wishes to make the offer.
ii. A revocation is effective when received, or in the case of publication, effective when published.
iii. LIMITATIONS on power to revoke
1. Option Contracts
a. A distinct K in which the offeree gives consideration for a promise by the offeror not to revoke an outstanding offer.
i. An option is not enforceable unless purchased with money or other value.
ii. An offeree's power of acceptance is not terminated by rejection or revocation of the offer, by a counter-offer, or by death or incapacity of the offeror.
b. In a case of breach of an option K, the promisee may be entitled to a decree of specific performance.
c. Exceptions to Options Contract Enforceability:
i. Firm Offers under the UCC
1. An offer by a merchant to buy or sell goods in a signed writing that, by its terms, gives assurance that it will be held open – not revocable for lack of consideration during the time stated.
a. If no time stated, for a reasonable time (but in no event for a longer time than three months)
2. If the term assuring the offer will be held open is on a form supplied by the offeree, it must be separately signed by the offeror (§2-205).
ii. Promissory Estoppel
1. If the promisor could have reasonably expected that promisee would act as a result of the promise, and promisee actually does act in reliance of the promise, in a reasonable manner, to her detriment, the promisor would be estopped from revoking the option by denying consideration.
a. There needs to have been a promise made.
b. There need not necessarily have been a binding contract, as it could still be in the negotiation phase.
c. The reliance must be of a substantial character.
2. Possible recovery for promisee: Should at least be brought to her “reliance interest” – the economic circumstance she would have been in if the promise were not performed.
a. NOT the positions she would have been in if the K were actually formed.
2. Detrimental Reliance
a. Where the offeror could reasonably expect that the offeree would rely to her detriment on the offer, it will be held irrevocable as an option contract for a reasonable length of time.
i. At the very least, offeree would be entitled to relief measured by the extent of the detrimental reliance. (R.2d §87)