FALL 2013 CONTRACTS OUTLINE – SELMI

Roadmap:

  1. Read question and determine what it asks.
  2. Make sure you represent the side it asks you to.
  3. Use other information as counteroffers.
  4. What is the contract for?
  5. Sale of goods – UCC
  6. If UCC, does the merchant exception apply?
  7. Not sale of goods – Common Law
  8. Is a signed writing required?
  9. If so, does the Statute of Frauds apply?
  10. Sale of goods for over $500, sale of land or property, any contract that cannot be performed within one year.
  11. Is there an oral agreement?
  12. If yes, analyze issues under parol evidence rule.
  13. Find ambiguity in each party’s words. Are there problems of interpretation?
  14. Are there two forms?
  15. Find offer and acceptance.
  16. If UCC, does the knockout rule apply?
  17. Are the additional terms material? Look for hardships and surprises.
  18. Are there counteroffers?
  19. Is there a conflicting oral agreement and written agreement?
  20. If so, find offer and acceptance
  21. Is there an implied warranty of good faith and fair dealing? Express warranty of merchantability or fitness for a particular purpose?

Contracts Damages

  1. Actual Damages – must be proven.
  2. Party that is harmed has a duty to mitigate their damages before trying to recover.
  3. No punitive damages. Only make people pay for the damage they caused.
  4. No damages for pain and suffering.
  5. Duty of good faith is implied in all contractual relationships
  6. Possible but rare to get specific performance remedy – breaching party must still carry out duties specified in contract.

Important points from Panera case:

  1. Words in a written contract are given their usual and ordinary meaning, unless well-established ambiguities exist.
  2. Any ambiguities that are not clarified are construed against the drafter of the contract.
  3. Try to show that if the disputed term had been explicitly stated in the initial contract, the harmed party would not have entered into contract.
  4. Language is sometimes intentionally ambiguous.
  5. Drafter may want to incorporate possible future circumstances.
  6. Drafter may not want to pay for the benefits conferred by certain explicit language (In Panera’s case, higher rent for broader exclusion).

ELEMENTS OF CONTRACTS

Contract = Offer + Acceptance + Consideration

Types of contracts:

  1. Express contracts – offer and acceptance manifested by oral or written words.
  2. Implied contracts – mutual assent of parties is manifested by conduct
  3. Courts want to uphold agreements that seem illusory and avoid problems of mutuality of obligation.
  4. Technique: find an implied promise in order to find sufficient consideration to support an express promise.
  5. In UCC, agreement for exclusive dealing in goods imposes, unless otherwise agreed, an obligation to use best efforts by both parties.
  6. When party bases a contract condition upon his satisfaction with the performance of an act, he has the duty to exercise judgment in good faith.
  7. Use industry standards, reasonable and objective judgment. Any problems must be substantial and meaningful.
  8. A promise based on this satisfaction is not illusory and is sufficient condition. (Omni v. Seattle)
  9. In general, parties have a duty to fulfill the purpose of the contract; cannot purposefully frustrate it or try to get out of a bad deal.
  1. Implied-in-fact contract
  2. Circumstances imply that parties have reached an agreement even though they have not done so expressly. Usually:
  3. Must be mutual assent and consideration
  4. Essential terms of express contract must be present
  5. Wrench v. Taco Bell Court agreed with P that mutual understanding that D would pay for use of P’s concept is enough to support implied-in-fact contract. This exception supported by unjust enrichment.
  6. Parties receive the "benefit of the bargain"
  1. Wood v. Lucy, Lady Duff-Gordon
  2. Rule: If a promise may be implied form the writing even if it is imperfectly expressed, there is a valid contract.
  3. Wood’s promise to use reasonable efforts to market Lucy’s name is implied by circumstances.
  4. Wood accepted exclusive right, promised to do accounting and acquire patents, and agreed to give Lucy ½ of profit. Unless he gave his efforts, she could never receive anything.
  5. Wood’s promises of duties = promise to use reasonable efforts to bring profit into existence.
  6. Without implied contract, transaction could not have the business efficacy they both clearly intended.
  7. Facts:
  8. Lucy is fashion designer, contracted with Wood to give him exclusive right to endorse designs with her name and market/license all her designs. Split profit in half.
  9. Exclusive right for one year, renewable on year-to-year basis and terminable upon 90 days notice.
  10. Lucy endorsed products without Wood’s knowledge, but claimed that agreement was not contract because Wood allegedly was not bound to do anything.
  1. Omni Group, Inc. v. Seattle-First National Bank
  2. Same rationale as Duff-Gordon, different fact pattern.
  3. Rule: A contract is still enforceable when a condition calls for a party’s satisfaction with the performance of an act (does not make promise illusory).
  4. Omni was bound to act in good faith in deciding “satisfaction”. Clarks would have had better chance if they could show Omni rejected their land unreasonably, but they were just trying to get out of the deal because they changed their mind.
  5. Facts:
  6. Omni agreed to purchase Clarks’ land upon receiving satisfactory engineer’s and architect’s reports concerning land’s development potential, but decided to forgo studies.
  7. After further negotiations, Clarks refused to complete transaction and Omni sued for breach.
  8. Clarks say that Omni’s promise was illusory because it was based on satisfactory reports, therefore contract lacks consideration.
  1. Wrench, LLC v. Taco Bell Corp.
  2. Rule: An implied-in-fact contract is created where P discloses an idea to D at D’s request and the defendant understands that P expects compensation for use of the idea.
  3. Similar to Pop’s Cone’s case, but difference is that there were no obvious reliance costs for Wrench.
  4. This could be best construed as unjust enrichment/restitution case – Wrench gave something and got nothing in return.
  5. Negotiations show (and Taco concedes) the parties understood that if Taco accepted Wrench’s proposal to use dog, Taco would compensate appropriately.
  6. Even though there was no agreement on essential terms of licensing, the mutual understanding of just compensation is enough.
  7. Long facts, but most important: Taco Bell negotiated with Wrench for more than a year; the commercial their ad agency developed is an idea that Wrench had previously presented, but Taco claims they got it independently. Taco also claims Wrench’s ideas were not novel.
  1. Quasi-contract– (“implied at law”); not technically contracts, but devices created to avoid unjust enrichment
  2. Bailey v. West
  1. “Implied in fact” contract
  2. Requires intent to enter into contract.
  3. There was no mutual agreement or misleading conduct between parties that would suggest either intended to enter into contract.
  4. Bailey (P) never even spoke to West (D) or his agents; so cannot claim that his conduct implied intent.
  5. Quasi-contract
  6. An implied contract created by law to prevent unjust enrichment.
  7. Volunteer cannot recover under Quasi-K theory for value of services gratuitously rendered.
  8. It is inequitable for D to not pay for any benefits conferred upon him, only when he requested them.
  9. Facts that deny quasi-K liability for West:
  10. Bailey was never authorized to take care of horse.
  11. He and West had no prior dealings.
  12. Bailey was aware of disputed ownership of horse and that West was rejecting his bills.
  13. Bailey could not have reasonably believed West would enter into contract.
  14. Restitution Theory
  15. The return or restoration to rightful owner to prevent unjust enrichment.
  16. Wrench v. Taco Bell should not get something for nothing
  17. Volunteer will only get restitution when:
  18. Benefits conferred by mistake, and
  19. Defendant accepted them knowing the mistake (purposely took advantage of P)
  20. Ex: P paints D’s house by mistake and D allows him to finish, knowing about the mistake. D will be held liable for value of services.

UCC and Sale of Goods

  1. Article 2 governs all contracts for sale of goods.
  2. Sale = “passing of title from seller to buyer for a price.”
  3. Goods = “all things which are movable at time of identification to contract for sale other than money, investment securities, and things in action.”
  4. When contract involves both goods and services, UCC applies only if goods are “prominent factor”.
  5. Common law rules supplement UCC where they are not “Displaced by provisions of the code.
  6. Rules governing capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy.
  7. UCC Departures from Common Law:
  8. Separate rules for merchants and non-merchants.
  9. § 2-201: Contract must be in writing. Easier to enforce against merchant.
  10. § 2-205: Merchant’s written firm offer is enforceable without consideration.
  11. § 2-207: For contracts between merchants, one party can enter term when one side has not expressly agreed. Consumer contracts require assent to such terms.
  12. UCC tries to integrate business customs and standard practices into law.
  13. Lots of open-ended and broad terms invite judges to take common law approach in applying UCC.
  14. Even for case governed by UCC, look past judicial decisions to determine rule.

FORMATION

In general, parties must consent to same terms at same time.

Offer  Acceptance  Mutual Assent (a reasonable person’s interpretation of words and acts)

Offer

  1. (Offeror controls mode of acceptance)
  2. Manifestation of willingness to enter into a bargain
  3. Made so that a reasonable person in offeree’s position will understand that her assent is invited and will conclude it.
  4. Southworthconsider circumstances surrounding disputed “offer.”
  5. Was it an invitation to public or addressed to particular people? Did it leave any terms open to further negotiation? If not, then strong argument for being “offer.”

“Invitation to deal”

  1. Advertisements soliciting action – NOT an offer.
  2. Exception (Lefkowitz) – when there is nothing left to do but accept, usually with “first come, first serve” provision. Otherwise, ad would solicit acceptance from an indefinite amount of offerees.
  3. Would a reasonable person reading the ad objectively consider it an offer?
  4. “An ad that is clear, definite and explicit, and leaves nothing to negotiation is an offer, acceptance of which creates a binding contract.”
  5. “Performance” test “First come, first serve” (Restatement finds this language of promise basis of contract. Court also considers whether ad specifies terms like quantity and price.)
  6. UCC §2-204(3) CAVEAT: A contract may be valid and still contain terms open to negotiation if “parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy”.
  7. Ad is not necessarily enforceable simply because it may appear to be a so-called public offer of a reward for performance of a public act. (Leonard v. Pepsico)
  8. Court notes that at most, commercial was “an advertisement to receive offers rather than an offer of reward)
  9. Pepsi commercial did not constitute offer under Restatement second:
  10. Not sufficiently definite – reserved details of offer to catalog. Mentioned no steps an “offeree” would take to accept.
  11. Leonard claims ad was unilateral offer for reward upon performance, but ad did not say that anyone appearing with 7 million points on July 4 would receive a jet.
  12. No objectively reasonable person would consider the commercial an offer.
  13. No compelling reason here to construe the ad as an offer. Contrast to Lefkowitz in which the court wants to discourage merchants from false advertising and imposing terms after the customer performs the act of acceptance (“house rule”).
  14. Leonard raising money is not reliance because it was not reasonable.

Intent

  1. Court tries to determine what parties thought they were doing by using:
  2. General accepted meaning of the terms
  3. Meaning according to Industry standards
  4. Meaning used by parties in past dealings
  5. Must be manifested through such words or acts that a reasonable person would believe an offer is being made. (Lucy v. Zehmer)
  6. Manifestation of mutual assent:
  7. Secret intentions or beliefs don’t matter if party’s words and acts indicate that he intended to enter into binding agreement. (Embry v. Hargadine)
  1. Southworth v. Oliver
  2. Rule: Offer = under the circumstances, a reasonable person in alleged offeree’s position would have been led to believe that an offer being made.
  3. Normally a price quote is not enough, but must consider all surrounding circumstances.
  4. Oliver’s letter addressed to particular persons, was not a “first come first serve” ad, and each recipient would reasonably believe he was making an offer.
  5. Oliver’s letter left nothing else to be negotiated, so Southworth accepted.
  6. Facts:
  7. Southworth claims Oliver offered to sell land because he sent letters to Southworth and three other neighbors setting forth terms of sale and price. Southworth returned letter indicating his acceptance. Oliver refused, saying his earlier letter was not offer.
  1. Lucy v. Zehmer
  2. Rule: Assent necessary for a contract is imputed based on a reasonable meaning of person’s words and acts, rather than based on his unexpressed intentions.
  3. Mental assent NOT required for contract. Lucy reasonably interpreted action as offer.
  4. Unknown mental intention does not matter unless the other party knows/should know that action is in jest.
  5. Here, if Zehmer offered to sell farm for $50, court would agree that he was joking.
  6. Contract became binding when Lucy got the signed napkin.
  7. Facts:
  8. While drinking, Zehmer and wife offered to sell Lucy their farm for $50k. Later revoked and claimed they were bluffing go get Lucy to admit he did not have the money.
  9. Lucy appeared to take offer seriously by discussing terms with Zehmer, writing the terms on a napkin and having Mrs. Zehmer sign it, providing title examination and taking possession of agreement.
  10. Lucy offered $5 to bind deal and next day sold ½ interest to his brother to raise the $50k. Zehmers refused to sell land and Lucy sued for specific performance.
  1. Embry v. Hargadine, McKittrick Dry Goods Co.
  2. Rule: secret intentions or beliefs will not affect formation of contract if party’s words and acts indicate that he intended to entre into a binding agreement.
  3. Trial judge’s instructions were erroneous – intention does not matter if other party reasonably relied on promise.
  4. Doesn’t matter if Hargadine did not intend to rehire Embry; latter obviously believed contract was formed because he remained on job.
  5. Facts:
  6. Embry was working for Hargadine under written contract and demanded renewal when it expired. Embry claims Hargadine orally agreed to rehire him. Embry terminated a few months later.Hargadine denies conversation took place.
  7. Judge instructed jury that both parties must have intended to enter into binding agreement and jury found against Embry.
  1. Raffles v. Wichelhaus
  1. Rule: In the case of mutual mistake and neither has reason to know the meaning attached by the other, there is no mutual assent.
  2. Court tried to find reasonable interpretation but could not in this case  no binding contract.
  3. Factors that go against holding:
  4. The date of departure was not explicitly stated  shows it was not material term.
  5. Under UCC, it would make difference which ship carried the goods.
  6. Facts:
  7. Raffles contracted to sell W 125 bales of cotton to arrive on ship “Peerless,” W to pay within agreed-upon time after delivery.
  8. Unknown to both parties, there were two ships called “Peerless.” W expected delivery on the ship sailing in October, and Raffles expected cotton to ship in December.
  9. W refused to accept cotton when it was delivered in December.

Essential terms of an offer:

  1. Common Law:
  2. Identification of the parties
  3. Description of the subject matter
  4. Time for performance
  5. Price
  6. [Silence on some of above terms = reasonable terms to be determined at later date.]
  7. UCC Article 2
  8. Governs sale of goods
  9. Requires that quantity been an essential term – all other terms will be filled in appropriately.

Duration of the offer

  1. Merchant’s Firm Offer (UCC § 2-205): Usually irrevocable.
  2. Options contract.
  3. Money paid to keep the offer open for a certain period of time
  4. Counteroffer does not terminate the power to accept, unless buyer detrimentally relies on it.

Offer Termination

  1. Offeree’s power of acceptance may be terminated by:
  2. Rejection or counter-offer
  3. Lapse of time
  4. Revocation by offeror
  5. Death or incapacity of the offeror or offeree
  6. Non-occurrence of nay condition of acceptance under the terms of the offer.
  7. Modern View: Detrimental reliance makes an offer irrevocable for a reasonable time.
  8. Common Law: no such thing  go to the UCC (merchant firm offer)
  9. Termination by operation of law:
  10. Incapacitation of the offeror.
  11. Destruction of the subject matter prior to an effective acceptance.

Consideration

  1. Contract is enforceable only if it supported by consideration>
  2. Consideration = bargained-for exchange and of legal value.
  3. Bargained-for exchange:only use this theory on exam.
  4. Parties must exchange something, even if it is nominal (a peppercorn).
  5. Any right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.
  6. Maj“legal detriment” – one party’s act conferring legal benefit on the other is not, by itself, sufficient to establish consideration.
  7. Min/Rsteither legal detriment or legal benefit by itself is sufficient.
  8. Gifts are not “bargained for” and thus do not qualify as consideration.
  9. Promise to make gift is generally not legally binding until executed (Kirksey v. Kirksey)
  10. Holmesian formula for consideration: detriment incurred by promisee must be of some benefit to the promisor. If it occurs merely to enable the promisee to receive a gift, it is only a condition to a gift. Pennsy (promise induces detriment = consideration)
  11. Charitable Gifts:
  12. Courts very liberal with finding consideration in charity gifts.
  13. Allegheny Collegedonee complies with conditions of charitable gift = sufficient consideration.
  14. Consider mutuality – when both parties can sue each other, supports consideration.
  15. Congregation KadimahOral promise unenforceable in absence of reliance or detriment for promise.
  16. Forbearance sufficient if it benefits the promisor.
  17. Unilateral contract = promise given in exchange for act of forbearance.
  18. Sufficient consideration = promisee incurred detriment OR promisor received benefit at promisor’s request.
  19. Hamer v.