I. Introduction to Study of Contract Law

Contracts I Outline

I. Introduction to Study of Contract Law

Sources of Contract Law

Cases (Common Law) – Developed by judges in the form of opinions from cases

Restatement is another tool we use. A collection of rules from the American Law Institute.

Statutory Law – From Congress. Legislatures typically leave courts alone, except in UCC –

Uniform Commercial Code–SALE OF GOODS (anything moveable). Includes unborn young, crops, does not apply to real estate, employment. In all states except Louisiana
CISG – Convention on the Contracts for the International Sale of Goods – INTERNATIONAL SALE OF GOODS if its between parties who have principle bases of business in different states. Both states must be party to the treaty. Usually for deals by businesses

The Statutes and the Common Law are NOT mutually exclusive and frequently borrow from each other. For example, anything not covered by the UCC is governed by Common Law. For example, what constitutes an OFFER

When approaching a question, first identify which source of law applies!!!

What is a contract?

Restatement §1: Contract – promise or set of promises where law gives remedy for breach or the performance of which the law recognizes as a duty.

Restatement §17: Bargain – Contracts require a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

UCC 1-201(3)  Agreement means bargain as found in language of parties or by implications of other circumstances including course of dealing or usage of trade or course for performance.

UCC 1-201 (11)  Contract is legal obligation which results from parties’ agreement.

II. Enforcing Promises: Bases of Legal Obligation

Mutual Assent

1. Intention to be Bound: The Objective Theory of Contract

Raffles v. Wichelhaus – Two ships names Peerless

Wichelhaus (buyer) prevails because he refuses to take the cotton. It would be like wanting wine from France and getting it from Spain if both vineyards had the same name.
It would be imposing on the defendant a contract different from that which he entered into.
Where there is no consensus, there is no binding contract
Restatement §20 – There is no manifestation of mutual assent to an exchange if the parties attach materially different meaning to their manifestation and neither party knows or has reason to know the meaning attached by the other
Buyer has a subjective intention – meeting of the minds, someone’s understanding
Seller has a more objective view, understanding doesn’t matter except if its mentioned at the time of the contract
Raffles suggests that we should have a subjective approach. If they do not subjectively agree, then there is no contract. That was then…this is NOW

Lucy v. Zehmer

Lucy (buyer) sues Zehmer (seller) for alleged breach of contract because he wants to buy their farm. Zehmer says he was drunk but there was a contract written up by Zehmer and there were previous attempts from Lucy to buy the farm
This looked like a serious business transaction because of previous business dealings AND the contract was written
You have to look towards outward manifestation, the law imputes the outward meaning and legal intention is ONLY what is outward

Objective Intent – The actual mental agreement is NOT required to form a contract; you don’t need to know that you are entering into a contract in order to actually be in one

Under a strictly objective theory, it only matters what a reasonable person would think, not what Lucy actually knew. Hidden intention is relevant only when that hidden intention is KNOWN by the other party
Courts have rejected subjective approach as to whether there is a “meeting of the minds”. We’ve rejected a purely subjective approach but we are still concerned with what goes on in a party’s mind when it corresponds with something external

Restatement

§21 – Neither real nor apparent intention that a 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 formation of a contract
§20 – (1) No contract is formed if the parties attach significantly different meanings and neither party is at fault for the difference or both parties are equally at fault
(2)If parties NOT equally ignorant, the law imposes meaning. (a) Knowledge Asymmetry - One parties doesn’t know the meaning of the other and NOT vice-versa, we impose more ignorant meaning OR (b) Reason to know Asymmetry – Party has no reason to know of any different meaning attached by the other and the other has reason to know the meaning attached by the first party
Here, Lucy (buyer) has no reason to know Zehmer is joking. Zehmer has reason to believe Lucy is not joking because he’s wanted to buy property before
§201 – When parties attach the same meaning, it’s interpreted in accordance with that meaning – this is consistent with §20
If both Lucy and Zehmer were joking, then the joke is what prevails and there’s no contract

CISG Article 8

(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.

(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

Summary

(1) Objective approach over subjective approach

(2) Subjective approach can still blow up a contract. No contract if parties attach materially different meanings and no party is at fault or both is at fault

(3) Subjective states can impose one party’s terms over another. Law sides with ignorant party in cases of knowledge asymmetry

(4) Subjective mutual understanding trumps objective (if both are joking and each knows this, no contract)

Ray v. Eurice & Bros., Inc.

Back and forth between Ray and Eurice Brothers, contractors, over design for a house. There’s disagreement whether or not they went over the plans in detail before signing but Eurice later signed the documents on the back of each page
Issue is if you can enforce the terms of a contract against someone who claims they misunderstood them
Trial court said no meeting of the minds (subjective) Appeals court overrules this and says OBJECTIVE over subjective.
Builders should have known because they’ve been doing this for years
Where there’s a unilateral mistake, there’s still a contract unless there’s fraud or duress. Here, no evidence that Ray was purposely misleading Eurice
Objective approach encourages people to be careful about their actions and read contracts before signing – a duty to read

Mutual Assent is the objective view (meeting of minds is subjective)

2. Offer and Acceptance: Bilateral Contracts

Bilateral contracts are exchanges of promises on both sides; an exchange of reciprocal commitments
Offeror makes an offer which creates a “power of acceptance” to the offeree who can accept it, make a counteroffer, or power of acceptance can be terminated by time limit or revocation by the offeror

Offer

Lonergan v. Scolnick

Issue of what constitutes an offer. There’s a back and forth between Scolnick, seller who puts an ad in the paper, and Lonergan, a perspective buyer
The advertisement is NOT an offer because it lacks certain terms (i.e., price) and is not directed towards a specific offeree, it’s an invitation to an offer to anyone who reads it
Lack of terms indicates a lack of intent to be bound
Lonergan wrote back expressing interest and Scolnick responded giving directions, price, and stating it was a form letter
Stating it was a form letter is showing reluctance to be bound
A letter by Scolnick that says if you’re really interested, decide fast as I have another buyer interested
This constitutes preliminary negotiations because it’s only by giving an offer that you give the power of acceptance
Appeals court says this is NOT an offer, trial court says it is an offer but it was accepted too late

ASSUMING the letter was an offer, UNDER COMMON LAW –

Offers are effective when received
Acceptance is effective when dispatched, regardless of whether or not it’s received. This puts risk of acceptance on offeror as they have other ways of protecting themselves (counterargument is to put it on offeree so they ensure it gets there)
(1) Seller mails revocation letter, (2) Buyer mails acceptance, (3) Buyer receives revocation letter, (4) seller receives acceptance
§42 – Revocations, like offer, are only effective when received
Thus, here we have acceptance before revocation under MAILBOX RULE
Contract under Common Law; Revocation under CISG since Revocation happened before acceptance was mailed
Offeror is the master of the offer. He can protect himself by saying acceptance has to be received to be effective or buyer can accept only by certain means

Mailbox Rule

Restatement / CISG
Offer / §35 – Effective when RECEIVED / 15 – Effective when RECEIVED
Acceptance / §63 – Effective when SENT
*If it’s lost, acceptance is still effective
*Acceptance under an option contract is effective when received / 16(1) – Offer cannot be revoked once acceptance has been dispatched, BUT
18(2) – Acceptance effective when RECEIVED (onus on offeree to make sure acceptance gets to offeror)
If it’s lost, there’s no acceptance. BUT, as long as it’s sent before revocation, offeror can’t revoke
Rejection / §40 Rejection effective when it REACHES offeror; Acceptance sent after rejection is sent is effective as acceptance if it reaches offeror before rejection does. It’s a race to the bag!
*If rejection gets there first, the acceptance serves as a counter-offer / 17 – Offer terminated when rejection REACHES offeror
Revocation/Rejection/
Counteroffer / §42 – Revocation Effective when RECEIVED
§43 – Communication of offeror’s revocation received by offeree from a third party IS effective revocation
Mailing of rejection/counteroffer suspends mailbox rule, so what matters is what gets there first (rejection-counteroffer or acceptance) / 16(1) – Offer cannot be revoked once acceptance has been dispatched
-Revocation if it reaches offeree before he sends acceptance

NOTE: Emails are like oral communications, effective when received (hits the server, not when read)

Izadi v. Machado (Gus) Ford

Ford dealership put an ad in the paper offering a $3000 trade in value for a car but limited it in small print
Usually, ads are invitations to offers and not offers themselves
Test for offer and acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person would have thought it meant – objective theory
Ad was intentionally misleading in that a buyer would be lured by trade in value and then bait and switched on
Takeaway – sometimes ads can constitute offers

Restatement and CISG

§22 – Mode of Assent: Offer and Acceptance

(1) The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party/parties

(2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined

You don’t need a “formal” offer and acceptance for there to be a contract

§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

§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 or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent

This is usually the case in advertisements. A consumer has reason to know that the store making an offer may make a further manifestation of assent

§33 – Certainty

(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain

(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy

(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or acceptance

§40 – Time When Rejection or Counter-Offer Terminates the Power of Acceptance

Rejection or counter-offer by mail or telegram does NOT terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-offer

Unless acceptance is received by the person making the offer before they receive a rejection/counter-offer, an acceptance started after a rejection or counter-offer is only a counter-offer in and of itself

§42 – Revocation by Communication From Offeror Received by Offeree

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract

§63 – Time When Acceptance Takes Effect

Unless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but
(b) an acceptance under an option contract is not operative until received by the offeror

§65 – Reasonableness of Medium of Acceptance

Unless circumstances known to the offeree indicate otherwise, a medium of acceptance is reasonable if it is the one used by the offeror or one customary in similar transactions at the time and place the offer is received.

§66 - Acceptance Must Be Properly Dispatched

An acceptance sent by mail or otherwise from a distance is not operative when dispatched, unless it is properly addressed and such other precautions taken as are ordinarily observed to insure safe transmission of similar messages.

§68 - What Constitutes Receipt of Revocation, Rejection, or Acceptance

A written revocation, rejection, or acceptance is received when the writing comes into the possession of the person addressed, or of some person authorized by him to receive it for him, or when it is deposited in some place which he has authorized as the place for this or similar communications to be deposited for him.

CISG Article 16 (1)

Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance

CISG Article 18 (2)

An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed, or if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise

Revocation and Acceptance

Normile v. Miller

Miller (seller) lists property and Normile, through a real estate agent, makes an offer, saying it needs to be accepted a day later at 5pm. Miller returns a signed by changed document, making it a counteroffer under the Mirror Image Rule. Normile thinks he has an exclusive option to buy, but that time limit of 5pm a day later does not get included with the contract. Miller winds up selling to a third party and Normile is told “you snooze you lose” by his agent. He then tries to reach out to the seller.
5pm deadline in the original offer was for seller to accept – language was particular to that offer. It never promises to keep the offer open until 5pm, it’s not an option contract
Even if seller had promised to keep counteroffer open, it’s freely revocable if communicated but it CANNOT be revoked if offeree has paid consideration to keep it opened (option contract)

Selling to the third party did NOT by itself revoke the counteroffer. Revocation goes into effect when offeree is told of revocation

§43 – Power of acceptance is terminated when offeror takes definite action inconsistent with intention to enter into the proposed contract AND the offeree acquires reliable information to that effect

Keeping offers open – Offers remain open for a reasonable period of time. Power to accept can be terminated by a lapse of time §36(1)(b)

Mirror Image Rule (§59) – Acceptance has to mirror the offer exactly. Changing/adding terms makes it a counteroffer.

When is silence acceptance?

Ninja rule – you can’t make it incumbent upon the other party to be a party in the contract (you can’t say if I don’t hear from you, I’ll assume acceptance)
§69 – Exceptions–When offeree takes services in which they know there’s expectation of compensation; offeror gives offeree reason to believe silence can be acceptance and offeree intends their silence as acceptance; due to previous dealings its reasonable that offeree should notify offeror if he does NOT intent to accept

Restatement Topic 4: Duration of the Offeree’s Power of Acceptance

§36 – Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by

(a) rejection of counter-offer by the offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree

(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer

§38 – Rejection

(1) An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention

(2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement

§39 – Counter-Offers

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer