Contract Law Essay Series

CONTRACT LAW ESSAY SERIES

ESSAY QUESTION #8

MODEL ANSWER

GrainCo, a regional grain distributor, sent an offer to sell ten railroad cars of wheat to

Processor. The entire offer is contained on a signed form. The front side of the form

contains GrainCo’s name and address, along with blank spaces for the description of the

goods, quantity, price, and delivery date. The blanks were filled in with the desired

information. The following statement appears at the bottom of the front side of the form:

“Any contract resulting from acceptance of this offer shall consist only of

those terms appearing on the front and reverse sides of this document.”

The reverse side of GrainCo’s form has six paragraphs. Paragraph five reads as follows:

“Any disputes arising under this agreement shall be resolved through binding

arbitration under the rules of the Commercial Arbitration Association.”

Processor responded to GrainCo’s offer with its standard acceptance form. Processor’s

form contains its name, address, and company logo embossed at the top of the page with

the words “Purchase Order” just below. It has blank spaces for the description of the

goods, quantity, price, and delivery date, which Processor filled in with information

matching the information on GrainCo’s offer. Processor’s Purchase Order form has five

paragraphs on the back. Paragraph five states:

“The laws of the State of California shall govern this agreement and any

claims or controversies arising during performance shall be resolved through

proceedings in the courts of the State of California.”

Processor’s Purchase Order form has a signature line at the bottom of the front side, but

due to a clerical error the form sent to GrainCo was not signed. Soon after receiving

Processor’s Purchase Order form, GrainCo purchased ten railroad cars of wheat from local suppliers for shipment to Processor.

1. Assume that before any wheat is shipped to Processor, the price of wheat falls sharply.

If Processor informs GrainCo that it will not accept the ten railroad cars of wheat, will

Processor be liable to GrainCo for breach of contract? Discuss.

2. Assume instead that GrainCo delivers the ten railroad cars of wheat to Processor, and

Processor pays to GrainCo the full contract price. If Processor has a complaint about the

quality of the wheat it received, must Processor submit its claim to the Commercial

Arbitration Association? Discus

MODEL ANSWER

I. GrainCo v. Processor

CONTRACT DEFINITION. A contract is a set of promises between two or more people, the performance of which the law recognizes a viable duty, and for the breach of which the law provides a remedy. A valid contract contains offer, acceptance and consideration, with no applicable defenses to contract formation.

APPLICABLE LAW. The Uniform Commercial Code governs the sale of moveable goods which are properly identified at contract formation. The Common Law of contracts consists of all other contracts, generally contracts for services. Here, we have a contract for the sale of tons of grain. Harvested grain is a readily identifiable moveable good, and therefore the applicable law in this instance will consist of the Uniform Commercial Code.

UCC.

MERCHANTS. Under the UCC, a merchant is someone who trades or deals regularly with the goods involved in the contract, or who otherwise holds themselves out as an expert knowledgeable about the goods in the contract. Here, both parties are involved with the sale of tons of grain. An incidental consumer would only be involved in small amounts of grain, not with tons of grain. Therefore, both parties are merchants.

CONTRACT FORMATION. A valid contract must have appropriate offer, acceptance and consideration, with no viable defenses to contract formation.

OFFER. An offer is a communication from one person to another, of an intent to be bound to definite terms, which creates in the offeree the power of acceptance.

INTENT TO BE BOUND. The objective theory of contract law employs the use of a reasonably objective person in offeree’s position in order to determine if an offer to enter a contract has been extended. Here, GrainCo sent a signed order form to Processor, with appropriate blanks filled in for the shipment of ten railroad cars of grain. This is not an advertisement, because, only a few identifiable people would consider purchasing such large amounts of grain, and thus a reasonably objective person would conclude that GrainCo extended an offer to Processor.

DEFINITE TERMS. The terms of a contract must be definite enough so that a court may determine the duties of the parties and be able to fashion an appropriate remedy. The UCC employs a liberal approach to definite terms, and definite terms will be found where a the parties and the quantity are stated with sufficient certainty, and good faith and fair dealing between the parties will act to cure any other indefinite terms. Here, we are told that the parties had agreed to specific terms related to goods, quantity, price, and delivery date, and therefore, we have sufficient certain and definite terms.

ACCEPTANCE. Acceptance of an offer is an assent to the terms of the offer by the offeree in the manner invited by or required by the offer, or, through a reasonable means if no method is stated.

MUTUAL ASSENT. The UCC rejects the common law mirror image rule. Under the UCC, the conduct and performance of both parties which evinces an agreement, will be sufficient to establish an acceptance. While Processor did not return the order form it received from GrainCo, and instead used its own purchase order form, Processor transcribed the same information onto their order form that had originally been included on Grainco’s order form, and sent the order form to GrainCo. Therefore, we have valid acceptance, here.

ADDITIONAL TERMS IN THE ACCEPTANCE. Minor additional terms will become part of a merchant-to-merchant contract, unless the offer expressly precludes adding any additional terms, or the additional terms materially alter the contract. If additional terms materially alter the contract, the offeror must notify offeree of objection within ten days of notice of the new terms.

Here, Processor returned its own order form, but all of the materials terms related to price and quantity were the same. However, the choice of law clause was changed from the Commercial Arbitration Association, to the laws of the State of California. The original document from GrainCo included an integration clause, which would constitute an express provision that no additional terms may be added. However, Processor, in using their own form, did not agree with the express provision in GrainCo form. We have no facts indicating that GrainCo objected to the new form, and to the additional term to abide by the laws of the State of California. Therefore, the new additional terms will be included in the contract, and we have a valid acceptance.

CONSIDERATION. Consideration is a bargained for exchange of acts or promises, with either detriment to the promisee or benefit to the promisor, or both.

BARGAINED FOR EXCHANGE. We have no facts indicating that the parties did not engage in a sufficient bargaining process.

LEGAL DETRIMENT. GrainCo was under no pre-existing duty to supply Processor with ten cars of grain, and Processor was under no pre-existing duty to pay GrainCo for grain, therefore, we have legal detriment in this situation.

STATUTE OF FRAUDS. Some contracts are unenforceable unless they are accompanied by a written agreement. These contracts include land contracts, marriage contracts, goods for the sale of $500 or more, suretyship contracts, executor or administrator, and contracts lasting a year or more. The writing must be signed by the party to be charged, which is the defendant or their authorized agent, and must contain all material terms including quantity. Here, we have a contract for the sale of goods of $500 or more, and thus we need a sufficient writing.

A clerical error prevented Processor, the party to be charged, from signing the order form. However, the order form contained Processor’s name, address and company logo embossed at the top of the page. Further, Processor filled in the relevant parts of their order form with specific amounts. Therefore, it is likely that we have a valid written contract, indicating that Processor is the party to be charged.

SATISFACTION BETWEEN MERCHANTS THROUGH SUFFICIENT MEMORANDUM. Even without a signed contract, a signed memorandum which summarizes the agreement and includes the quantity, will be enforceable if the memorandum reasonably identifies the subject matter of the contract, there is a solid indication that a contract was formed between the parties, the essential terms of the contract are stated with reasonable certainty, the memorandum is signed by or on behalf of the party to be charged and there is no objection within ten days. Supra. Processor did not object to the memorandum in this situation, and both parties are merchants. Therefore, SOF may be satisfied through sufficient memorandum.

DEFENSES.

MISTAKE IN TRANSCRIPTION. Where there is an error in transcription of a written contract, which is sometimes called a scrivener’s error, such that the contract does not reflect the actual agreement of the parties, the court will normally order reformation / rewriting of the original contract. Reformation is the common remedy. Here, Processor did not sign the contract due to a clerical error. However, the terms of the contract reflect the parties’ agreement. Processor has the right to sign, or not sign, an agreement. Therefore, it is unlikely that GrainCo will be allowed to reform the contract to include Processor’s signature.

CONDITIONS AND PERFORMANCE.

IMPLIED GOOD FAITH. After a valid contract is formed, there are conditions that each party needs to meet, which relate to full performance under the contractual conditions. Every contract, and especially contracts between merchants under the UCC, will operate under an implied covenant of good faith and fair dealing. Therefore, both parties will be required to proceed under the dictates of good faith, fair dealing, and commercial reasonableness.

DISCHARGE OF PERFORMANCE.

FINANCIAL IMPRACTICABILITY. Where there is extreme financial impracticability due to changed circumstances, such changed conditions may discharge performance. However, parties who initiate fixed price contracts, are generally seen to have assumed the risk of cost increases, and financial impracticability will not normally discharge their performance, especially where a cost increase was foreseeable in nature. Here, shortly after completion of contract formation, Processor denied GrainCo the power to deliver the grain, because the price of grain had decreased. In other words, Processor does not want to pay the original contract price for the grain, it wants to pay the new lower price. However, Processor assumed the risk of price fluctuations when it entered the contract with GrainCo, and it was prepared and willing to pay the contract price when it entered the contract with GrainCo. Since this situation does not entail an increase in price that would lead to extreme forfeiture, Processor will not be able to discharge their performance.

BREACH OF CONTRACT.

ANTICIPATORY REPUDIATION. Anticipatory repudiation occurs where a party indicates that they will be unable or unwilling to perform. When this occurs, the other party then has a right to suspend their performance and sue for breach of contract. Here, we have a clear statement by defendant that they will not perform, and allow the grain to be delivered. Therefore, GrainCo may immediately cancel the contract and sue for breach of contract.

PERFECT TENDER RULE. Under the perfect tender rule, unlike common law substantial performance, buyers do not have to settle for a faulty or an only substantial performance from the sellers. Here, Processor is under a duty to accept the grain, if the grain constitutes conforming goods, and then pay for conforming goods. They must do this in a timely manner. Their refusal to accept conforming goods from GrainCo constitutes a material breach of contract.

REMEDIES.

Seller is entitled to be put in the same position as if full performance would have been enacted, under the benefit of the bargain as the usual measure of damages. Where buyer wrongfully refuses to accept goods, or where buyer repudiates a contact before shipment of the goods, the seller can sell the goods to another, cease production, or do any other reasonable thing to mitigate their damages. Seller is not normally entitled to consequential damages.

CONTRACT / RESALE DIFFERENTIAL. Where the seller resells the goods to a third party in a commercially reasonable manner and with good faith. The seller may recover the difference between the resale price and the original contract price. In other words, GrainCo may resell the grain it was prepared to sell to Processor, and recover the difference in price.

LOST VOLUME SELLER. Where the seller has an unlimited supply of goods, they may get the lost profit on the contract. This is a more likely remedy, especially since the price of grain has decreased. GrainCo may recover the contract price, minus the original cost of production of the grain, as a lost volume seller.

INCIDENTAL DAMAGES. GrainCo will be entitled to incidental damages including transportation expenses, storage expenses, and other small yet direct expenses which are related to the breach and to covering for it.

QUASI-CONTRACT. A quasi-contract is a suit which is brought off the contract, and which does not ask for actual enforcement of the contract. Rather, a quasi-contract claim seeks to recover some value for goods or services performed, on an equity theory. Quantum meruit is a doctrine which asserts that unjust enrichment should be prevented when there is no enforceable contract at law. Amount of recovery is value of benefit that unjustly enriched the other party. If GrainCo fails in their breach of contract claim, they will endeavor to recover reliance or restitution damages.

II. COMMERCIAL ARBITRATION ASSOCIATION.

CONFLICTING TERMS / KNOCKOUT RULE. Where both parties object to the other’s treatment of a term, the conflicting terms in both the offer and the acceptance are knocked out of the contract. The resultant contract includes non-conflicting terms. Missing terms will be filled through gap fillers by a court. Here, GrainCo wants to use the Commercial Arbitration Association to resolve conflicts, while Processor wants to use the laws of the State of California to resolve conflicts. The above terms directly conflict with each other, and will be knocked out and filled in by the court with gap fillers.

APPLY STATUTORY REPLACEMENT. Initially, and where applicable, a court will fill in the missing terms with a statutory replacement. However, parties are free to choose an appropriate legal body to resolve conflicts. Here, the parties are free to decide on how they would like to resolve future conflicts, and there is not a specific statutory replacement.

UCC MISSING TERMS OF IMPLIED GOOD FAITH. Since there is not a specific statutory replacement, the court will look to fill in the missing terms by using the UCC customs of interpretation.

Course of Performance. First, the manner in which the parties conducted themselves in the current contract will be considered, in order to clarify uncertainty.
Course of Dealing. If the court is not able to resolve the conflict through course of performance, it next would consider how the parties conducted themselves in previous contracts.
Usage of Trade. Finally, the court will consider the practices and methods which occur will regularity in a trade / profession, if needed.

If the court cannot find enough information to determine which modality should be used to resolve conflicts by looking at the course of performance, and the course of dealing, it will look at the usage of the grain trade to determine how to fill in the missing terms.