Contracts Law I Swaine Fall 2010

Contracts Law I – Swaine – Fall 2010

Basics of Contract Law

UCC
What is a contract?
UCC- §1-201(11): Contract means the total legal obligation which results from the parties’ Agreement as affected by this Act and any other applicable rules of law.
UCC § 2-102: K, as distinguished from agreement, = total legal obligation that results from the parties’ agreement as determined by the UCC as supplemented by other applicable laws.
What is agreement?
UCC- §1-201(3): Agreement means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance…
Contract Formation-
UCC- §2-204: (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
What constitutes a signature?
UCC- §1-201(39)- “signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing.

Common Law
What is a contract?
Restatement § 1: K is a promise or a set of promises for the breach of which law gives a remedy, or the performance of which the law in some way recognizes a duty.
How is a contract formed?
Restatement § 17: 1) formation of K requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration2) exceptions stated under § 82-94.
Three Basis’ for Contracts:A case can be argued on any combination of these principles. Often one principle is better supported by the facts. Also, each principle provides for different kinds of compensation.
1) Private autonomy – parties should be free to make bargains for their benefit and thus for the benefit of society
2) Reliance – people should be compensated for being unfairly surprised after having relied upon a promise
3) Unjust enrichment – someone shouldn’t benefit unjustly . . .
Unconscionable Contract or Term-
RS § 208- If a contract r term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
UCC § 2-302- *same as Restatement above
Express Contracts:
In an express contract, mutual assent is manifested in words of agreement, oral or written
Implied Contracts:
Implied-in-fact contracts:
If the promises of the parties are inferred from the reasonable interpretation of their acts or conduct, or from words that are not explicit words of agreement, the contract is implied in fact.
These are actual contracts
No difference in the legal nature or effect of an express contract and a contract implied in fact
Implied-in-law contracts:
These are cases where a court fictionally implies a promise to pay for benefits or services to avoid inequalities and unjust enrichment (aka quasi-contracts)
Not real contracts

What Law Applies?

UCC
Purpose:
UCC § 1-102/ 1-103: purpose: simplify, clarify, and modernize law governing commercial transactions; permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; make uniform the law among the various Js, and is to be supplemented by other applicable laws (e.g. If UCC applies to case, doesn’t have a section that applies to the particulars of the case, then we look to common law and the Restatement.)
Prevails over the common law (where it applies) because it’s a statute
Where the UCC and the Common Law conflict, the UCC prevails
Applies to:
The sale of goods- §2-102
Moveable things (including animals)
§2-105(1) defines goods: means all things (including specially manufactured goods) which are moveable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be served from realty (2-107)
2-105(2)- goods must be both existing and identified before any interest in them may pass; goods which are not both existing and identified are “future goods,” a purported present sale of “future goods” operates as a contract to sell.
Revised UCC 2-103(k)- Good defined
Amended to disallow the coverage of electronic transfers of information (like seen in Netscape)
Also include future goods
Both consumer and commercial sale of goods (unless specified that only applied between merchants)
Does NOT apply to:
NOT services, real property (land, house, buildings..),Contracts to provide services, contracts to lease goods, contracts involving patents, trademarks or other intellectual property.
employment contracts, investment securities, or “things in action” – copyrights, patents, etc.
CISG
Treaty that is federal law: binding under constitution
Article 1: This convention applies to contracts of the sale of goods between parties who’s principal place of business are in different states, when the states are contracting states.
Place of Business Defined:
Article 10- For the purposes of this Convention: a) if a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; b) If a party does not have a place of business, reference is to be made to his habitual residence.
Does NOT apply to: consumer transactions
Article 2: Does NOT apply to goods bought for personal, family or household use; to ships/vessels/aircraft; to investment securities…
Common Law
Most commonly used (even over UCC and CISG)
Applies when:the UCC and CISG fall short
Also may supplement the UCC and CISG (i.e. definition of an offer)
*Restatements are persuasive but not binding

Who are the Parties? Is this between two merchants; a merchant and a consumer; or two consumers?

Definition of a Consumer:
Revised UCC § 1-201 (11): consumer means a person who enters into a transaction primarily for personal, family, or household purposes.
Definition of a Merchant:
UCC §2-104(1): Means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
Broadly interpreted – generally includes Universities because they have purchasing dept, eg.
Definition of Between two Merchants:
UCC §2-104(3): means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

Enforcing Promises, Basis of Legal Obligation:

Mutual Assent- Offer and Acceptance

Intention to be Bound: The Objective Theory of Contracts

Intention to be legally bound
RS §21:Neither real nor apparent intention that promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.
Meaning you can be bound by a contract even if you definitely don’t want to be bound by a contract… Intention is not important. If a party acted as though he intended to be bound, he is bound.However, evidence of intention that an agreement not be legally binding may prevent the formation of a K.
Enemies of mutual assent: Duress, lack of clarity, fraud, no capacity, offer rejected, offeree changes terms, fraudulent misrepresentation.
Subjective Theory (Old theory)-What Parties Were Actually Thinking
The subjective approach to mutual assent: need to show that the parties agree. If no meeting of the minds than there is no contract.
The actual intentions of a party, rather than that party’s conduct, determines the party’s legal obligations.
Problem with subjective approach- it makes it too easy to get out of a contract.
Raffles v Wichelhaus:
Facts: Raffles (cotton seller) sued Wichelhaus (buyer) for non-performance of contract because buyer refused shipment of cotton when it arrived on the December ship Peerless. D though contract was for October ship; P thought conract was for December ship.
Holding: finding that there was no manifestation of mutual assent because there was no mutual understanding of the terms since they both had a different ship “peerless” in mind. No meeting of the minds. Neither party’s definition could prevail; therefore, no contract.
*American law rejects the subject approach in favor of the objective approach.
Nevertheless, a subjective state of mind can prevent the formation of a contract (as seen below)
Strictly Objective Theory-What a Reasonable Person Would Think
Under this theory, words and conduct should be interpreted in accordance with the standard of a reasonable person familiar with the circumstances, rather than in accordance with the subjective intention of either of the parties.
Lucy v Zehmer(Va. 1954):
Facts: Lucy, would-be purchaser of Ferguson farm, sued owner (Zehmer) for specific performance of contract in which Zehmer and his wife agreed to sell farm for $50,000, but on which Zehmer reneged, saying the K was a joke all along.
Holding: The subjective intentions of the parties do not matter, nor does it matter that a party did not intend for a promise to be legally binding. Rather, the law imputes to a person (factually attributes to them) the outward expression and intention corresponding to what a normal person/ “reasonable man” would interpret it.
Rationale:
Easier for a court to sort out, makes it more difficult to weasel out of contracts.
Under strictly objective theory it wouldn’t matter if P know D was joking.
The Modified Objective Theory
Rationale: protect parties expectations (Corbin- it is absurd to give a contract meaning that neither party intended)
Distilled into 4 Principles:
A parties words and conducts will be interpreted in the manner in which a reasonable person in the other parties shoes would understand them to mean
Subjective state of minds nevertheless can prevent the formation of a contract: no contract is formed if the parties attach materially different meanings to their manifestations. And neither party is at fault (neither knows), or they are equally at fault (each party knows or has reason to know the other parties material meaning).
Subjective states of mind, like objective states of affairs, can impose one parties meaning at the expense of the others… if the parties attach different meaning and they are not equally at fault you favor the party that is not at fault… one and only one party does not know or have reason to know the other parties meaning, you cut the ignorant one a break…in purpose of asymmetry, you prefer one parties meaning over the other.
Subjective states of mind can impose a mutual understand as well… if the parties actually meant the same thing yet everyone else around them thought something else, the parties mutual understanding trumps. (i.e. both parties were joking but everyone else around thought they were serious… their joking meaning trumps)

UCC

Effect of misunderstanding/ meaning of terms-
§2-204(2): An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

CISG

Effect of Misunderstanding:
Article 8 - Objective: reasonable person standard: look to negotiations, practices between parties, usage, and subsequent conduct of parties.
(1): Meaning of statements/conduct are interpreted by intent, where the other party knew or could not have been unaware what that intent was;
(2) Where (1) is not applicable, meaning of statements/ conduct are interpreted by reasonable person interpretation;
(3) To determine intent/ reasonable person understanding, consider all relevant circumstances: negotiations, practices between the parties, usage, subsequent conduct of parties

Common Law

Whose Meaning Prevails: RS § 201-
(1) Where the parties attach the same meaning, it is interpreted in accordance of that meaning. (shared subjectivity)
(2) Where the parties have attached different meanings… it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made:
(a) That party did not know of any different meaning attached by the other and the other knew the meaning attached by the first party; or
(b) That party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
(3) Except as stated in this section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.
Effect of Misunderstanding: RS § 20-
20(1)- No mutual Assent when- No contract is formed if Parties attach materially (significant) different meanings and:
neither party knew/ had reason to know the meaning attached by the other; or
both partiesknew/had reason to know of other’s meaning
(all this requires is parallelism…they are either equally ignorant or both equally liable)
20(2)-If the situations aren’t parallel and the parties are not equally at fault, then there are Two ways of concluding that their intentions are legally fair. Law imposes the meaning of the innocent party when:
1) Subjective Asymmetry: if that party doesn’t know the different meaning attached by the other party, but the other knows the meaning attached by the first party; or
2) Objective Asymmetry: if that party doesn’t know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Duty to Read:
RS §70 of Contracts: One who manifests acceptance of the terms of a writing which he should reasonably understand to be an offer or proposed contract, is bound by the contract, though ignorant of the terms of the writing or its proper interpretation. (pg. 29 of CB)
Note tension between duty to read vs. “adhesion contract / reasonable expectations doctrine” – the latter applies to standard form contracts only, and generally where a non-sophisticated / inexperienced party is entering contract
Ray v. William G. Eurice & Bros, Inc. (Md. Ct App 1952) p.23:
Facts:Owner made alterations to contract in negotiations, contract referred to new specifications and D (Builder) signed contract but then later claims not to have known about the revised specifications, D refuses to execute contract, P sues.
Holding: Test of Contract is Objective: A reasonable person would have read and understood the terms of the contract that they were signing. Failure to read contract does not prevent it from being binding. *Establishes a Duty to Read
The law is clear, absent fraud, duress, or mutual mistake, that one having the capacity to understand a written document who reads and signs it, or, without reading it or having it read to him, signs it, is bound by his signature in law at least…
Policy Considerations for and against objective test:
Pro: protects people who engage in contracts from illegitimate excuses, encourages formal contracting, which is good for economy/ society
Con: some people end up being forced to honor contracts or terms they didn’t think they agreed to.

Bilateral Contracts-is when the offeror says they want a return promise from the offeree. “An exchange of promises”

General
General
An offer gives the other party a sense that they can conclude the deal by saying “yes” to make the agreement enforceable
Essential Elements:
Intent to enter into a bargain- Offers must be distinguished from mere invitations to begin negotiations.
Definiteness of terms- A statement usually will not be considered an offer unless it make clear the subject matter of the proposed bargain, the quantity involved and the price.

UCC

Offers
Defintion
Offer not defined, use common law definition
Mode of Assent
UCC 2-204: Formation in General:
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including offer and acceptance, conduct by both parties which recognizes the existence of a contract, the interaction of electronic agents, and the interaction of an electronic agent and an individual.
(2) An agreement sufficient to constitute a contract for sale may be found even it the moment of its making is undetermined
Certainty
UCC- § 2-204
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
Terminations of Power of Acceptance
§ 2-206 Offer and Acceptance in Formation of Contract
(1) Unless otherwise unambiguously indicated by the language or circumstance
an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstance
an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer
(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
Offer and Acceptance in Formation of Contract - § 2-206
(1)  Unless stated otherwise…
(a)  Offer can be made via any reasonable acceptance method.
Example –offeree can accept by calling, coming into the office, whatever is reasonable.
Abolished mirror-image rule
(b)  An order or offer to buy goods can be interpreted as inviting acceptance via shipment.
If offeror calls and leaves message saying “I’d like to buy 100 toys for $50”, offeree can accept offer by sending 100 toys promptly.
(2) If offeror does not have enough notice of acceptance that requested performance has begun, he may treat the offer as having been expired.
At the discretion of the offeror.
Harlow & Jones, Inc. v. Advance Steel Co.
Facts: P sues D for alleged breach of contract to purchase 1000 tons of imported steel. D claims the shipment was late and thus properly rejected under the contract.
Parties disagree as to what form constituted the contract. Court found neither form constituted the contract, instead the contract was formed during their phone conversation before either party started sending or receiving written contract forms (UCC 2-204).
Testified that much of the steel importing business is conducted by phone and oral contracts are often made this way and then later confirmed in writing.
Holding: A contract can be formed even if the parties are not sure of when the formation happened and even if they disagree about some of the terms. (*Both UCC and Common Law- you can form an agreement notwithstanding clearly spelled out terms)
Court cites UCC § 2-207 allowing an integration of the parties confirmations into the contract.
Court found there was a substantial agreement between the confirmation forms of the parties (same price terms, weight and grade specifications)
Note: the UCC SoF does not necessarily require a formal signed contract in order to satisfy the SoF, so even though there was no such document in the case, the requirements of the statute may still have been met.

CISG