Part 1: Is There a Contract

Contracts

Part 1: Is There A Contract

VOID-an agreement that has no legal effect

VOIDABLE—one party may at his option either enforce or not enforce

UNENFORCEABLE—a contract that does not give an immediate right to judicial relief but which nonetheless has some legal status. (E.g. an oral contract where the statute of frauds requires a written one.) An enforceable contract may be converted into a fully binding contract by the act of one of the parties, whereas a void contract may not.

Mutual assent: both parties must intend to contract, and they must agree on at least the main terms of their deal. Usually takes place through offer and acceptance.

Assent is measured by objective manifestations from which a reasonable person would interpret the other party’s intention.
Subjective intent is irrelevant
Embry v. Hargadine (Mo. App. 1907): Appellant’s employment contract ran up. He saw the president and said he would quit if it was not renewed. President said, “Go ahead, you’re all right; get your men out there and don’t let that worry you.” A took this as an indication that his contract was renewed and did not look for another job. He was fired in March and sued for breach of contract. Respondent says that he did not intend to imply that the contract had been renewed. Ruling: have to look at actions, A understood R’s words reasonably to imply a renewal of the contract, so they constituted a valid contract.
Lucy v. Zehmer (Va 1954): D, Zehmer, sold farm to P for $50,000, but claims he was only joking and told P that as soon as he realized that P thought the transaction was serious. P continued to insist he had bought the farm and proceeded with getting money and having attorney verify the title. Ruling: The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.” Does not accept joke defense.
Lonergan v Scolnick (CofA CA 1954): D places ad in LA paper to sell some land. P writes him asking where land is. D sends a form letter back. P writes again saying he might be interested in the land. D writes saying he had better hurry because other people are interested. P gets D’s letter, sets up escrow account and writes saying he accepts that offer. D has in the meantime already sold the land. P sues for breach. Ruling: the correspondence does not indicate the D was making a specific offer to P, the acceptance of which would constitute a contract. P was plainly told that D intended to sell to the first comer. P’s interpretation was not reasonable.
Cobaugh v Klick-Lewis (1989): sign on golf course advertising low priced car for hole-in-one.
Parties do no have to agree on all points but only on major or essential ones, but must still intend to have a contract.
Essential points are: parties, subject matter, time for performance, price.
If there is objective mutual assent, but no subjective intent that the contract be legally enforceable?
Pre-1950s view: need a meeting of the minds
Modern view: importance of intent that K be legally enforceable depends on context of the agreement
Business agreements have presumption of legally enforceability
unless made in jest and offeree knows or should have known this
manifest intent not to have legal enforceability on part of both parties
Social and domestic agreements presumed not to be legally enforceable.
Cohen v Cowles Media (SC MN 1990) appeal. Court can’t enforce industry custom.
If mutual assent is reached orally and parties intend to memorialize agreement in writing, when is contract formed?
Courts will find enforceable K even if written document never drawn up, if parties manifest through words or actions their intent to be bound based upon oral agreement
Oral contract is not enforceable before written document is drawn up where parties manifest an intent NOT to be bound.
Where no intent manifested, courts usually hold that a K exists as soon as the mutual assent is reached even if no document is ever drawn up.
Letter of intent/agreement in principle: memorializes basic terms but anticipates further negotiations. When is it binding?
Intent as shown in document, terms of the agreement
“subject to” clauses indicate intention NOT to be bound
if issues subject to further negotiation are not trivial, suggests intention NOT to be bound
reference to procedural formalities one or both parties must go through first (e.g. shareholder approval) suggests intention NOT to be bound
the larger or more complex the agreement, the less likely courts will bind parties.
Empro Manufacturing v. Ball-Co (7th Cir. 1989): Ball-Co floated its assets; Empro showed interest. After preliminary negotiation, Empro sent Ball-Co a letter of intent which included release clauses. Parties signed letter of intent, but Ball-Co not satisfied on one issue. Negotiations continued. Empro found out Ball-Co was negotiating with another party and filed suit for TRO. Empro contentds that binding effect of a document depends on the parties’ intent. But, intent has to be measured by action. RULE: parties who make their pact “subject to” a later definitive agreement have manifested an (objective) intent not to be bound. The letter of intent was not written with such care that all the formal contract would be was a memorial of the agreement. The letter included several release clauses. If Empro was not going to be bound by it, can’t bind Ball-Co. Illinois law: agreements reached in stages so that parties can negotiate without fear that they are binding themselves before they have worked out the specifics.

I. Offer and Acceptance

A. Is there a valid offer

Def.: A statement or act that creates a power of acceptance. When a person makes an offer, she is indicating that she is willing to be immediately bound by the other person’s acceptance without further negotiation. Restatement 2d §24.

Offeror is master of the contract.

Unilateral contract [Restatement 2d §45(1)]: A K in which one party promises to do something and the other party is free to act or not without making a promise in return. (A promises to pay B $1000 if B walks across bridge.)
Bilateral contract: An exchange of promises
OPTION: offeror is bound to keep offer open for a certain amount of time
Validity of offers
Made in jest: not valid if offeree knew or should have known it was a jest
Expression of opinion, not an offer.
Use reasonable person test
Solicitation of bids that cannot be accepted but serve as basis for preliminary negociations, not an offer (I would like to sell my house. I would sell it for $40,000. B cannot create a K by accepting.)
Reasonable person test
Subjective intent of offeror is irrelevant
Statement of future intention to contract, not an offer.
When is a price quote an offer? It is usually an offer if:
Quote makes quantity clear (not just a per unit price, unless quote is in response to a request for a per unit price for a particular quantity)
Quote is addressed to a specific person, not just a general mailing
If quote says “I offer you” rather than “I quote you”
NOT an offer if it reserves to proposer the power to close the deal (E.g. ‘no orders will be shipped until approved by home office’)
In ambiguous cases, courts are reluctant to find an offer
Advertisements as offers
Usually not an offer because do not contain sufficient words of commitment to sell
There may be an offer if
Advertisement contains words expressing the advertiser’s commitment or promise to sell a particular number of units, or to sell items in a particular manner.
Lefkowitz v.Great Minneapolis Surplus Store (MN 1957): D puts add in paper for furs available for $1 first come first served. P is the first person at the store, willing to pay the $1, but D will not sell, claiming house rule that only women can buy the furs. This happens twice. Ruling: this offer was clear, definite, explicit, not open to negociation, P met the criteria, so he was entitled to performance by D. The restrictions of D were after the fact of the acceptance. He can modify an offer until it has been accepted, but not afterward.
Lefkowitz RULE: “where the offer is clear, definite, and explicit, and leaves nothing open for negociation, it constitutes an offer, acceptance of which will complete the contract.”
Carlill v. Carbolic Smoke Ball (QB 1893): D placed an ad promising 100lb to anyone who caught the flu after having correctly used their smoke ball. P bought and used the ball until she caught the flu. Ruling: Ad was clear and explicit. It was an express promise. The reward was offered for performance of conditions, so performance of the conditions is acceptance. The inconvenience sustained by one party is sufficient consideration, as is the benefit to the other party from increased sales.
Invitations to bid
Usually not an offer, just a solicitation of offers, unless otherwise indicated
Lonergan v Scolnick
But see: Southworth v Oliver (OR 1978): D decided to sell land and grazing permits. He went to his neighbor P and asked if P would be interested in land. P said yes. They arranged to look into the sale further. P continued to express interest. D sent letter to 4 neighbors with sale offer. P responded that he accepted the offer. D refused to sell, saying that previous letter was just to open negociations and was not a contract offer. P sued. Ruling: P and D had an understanding that they would make arrangements regarding the sale, the proposal was definite, the addressee was definite, and the circumstances would have led a reasonable person to believe that there was an offer to sell on the stated terms.
Southworth test: 1) what would a reasonable man in the same situation understand. 2) language used: “If there are no words of promise, undertaking or commitment, the tendency is to construe the expression to be an invitation for an offer or mere preliminary negotiations in the absence of strong, countervailing circumstances. 3) determinateness of addressee—if the letter names a party or parties it is construed as an offer. If it is addressed to an indefinite group, it is construed as an invitation. (Except in a rewards case where the addressee is indefinite but the proposal is still considered an offer.)
If invitation to bid has language indicating a commitment by inviter to award contract or sale to highest bidder, invitation is an offer
Indefinite offers:
Must contain all essential elements, if not and if acceptance does not fill in missing terms, K is void for vagueness

B. Is there a valid acceptance

Def.: A statement or act that indicates the offeree’s immediate intent to enter into the deal proposed by the offer. As long as the acceptance takes place while the offer is still outstanding, a contract is formed as soon as the acceptance occurs.

Offer may be accepted only by person in whom the offeror intended to create the power of acceptance
LaSalle National Bank v Vega (IL app 1988): D signed real estate contract and revoked it. According to the Rider the contract was only complete once it had been signed by purchaser, Vega, and by the trustee for the purchaser. It was never executed by the trustee. Since acceptance of the offer was conditioned upon the signings, the offer was never accepted and there was no contract.
Acceptance usually only valid if offeree knows of the offer when he allegedly accepts it
Each party manifests assent with reference to the manifestation of the other
REWARD: where reward is offered, and party acts without knowing about the reward, he cannot claim it.
Glover v. Jewish War Veterans (DC Mun Ct App 1949)
Cross offers do not create K (B sends letter to A offering to sell x for $100; at same time and without knowing of Bs letter, A sends letter to B offering to buy x for $100: no K because neither letter was in reference to the other, so neither could be an acceptance.)
UCC §2-207(3) will recognize K in this case if through subsequent conduct, both parties recognize the existence of K
If offeree’s objective manifestation could lead offeror to believe he intended an acceptance, offeree’s subjective intent does not matter. (E.g. is offeree was not aware of the offer, or offeree was ignorant of certain terms.)
Mode of acceptance
Offeror can prescribe method of acceptance
Where no mode prescribed in offer, offeree may accept by any reasonable manner
Acceptance of unilateral contract by full performance: Restatement 2d §45.
Part performance is treated as creating a temporarily irrevocable option K
Even offeree did not intend to fulfill K by performing, there is a K unless offeree makes clear by words or conduct that he did not intend his performance to constitute an acceptance.
Industrial America v Fulton Industries (Del 1971): In 1965 B-H hired P to find a company to merge with them. After some unsuccessful negotiation attempts, BH decided not to deal with P further, but never told him this. Later in 1965, P learned of a company that might want to buy/merge BH and on his own initiative communicated the BH info to D. D had taken out an ad stating it was looking to buy a company with phrase, “Brokers fully protected.” D was interested, P put BH in touch with D, then he found out that the two companies were negociating without him. In 1966 the companies merged without Ps help. P sues for broker’s commission. Ruling: ad created unilateral contract. Ds offer invited acceptance by performance. P knew of offer. P’s performance constituted and acceptance of the offer. Therefore when he performed, he fulfilled the contract.
Russel v Texas Co (9th Cir. 1956): P owns section 23, but when he bought it, seller reserved mineral rights. D was drilling on section 23 and neighboring sections under lease from seller. On October 30, 1952, P sent D letter giving revocable permit to use land in connection with operations on adjacent lands for a $150/day lease, offer by performance. D continued its operations until end of November, and in December rejected the offer. P sues that action in month after receipt of letter constituted acceptance for that time. D argues it had no intention of accepting and method of acceptance was ambiguous. Ruling: if offeree is exercising dominion over something offered to him, such dominion constitutes acceptance of the offer absent showing of contrary intention. Because D continued to use the land, it manifested intention to accept the contract.
Courts disagree whether offeree must notify offeror once he has completed the performance. UCC §2-206(2): offeree must give notice unless offeror has reason to know performance has been completed.
Failure to notify may discharge contractual duty of offeror
Acceptance of bilateral contract by promise (in words). Restatement 2d §50.
Offeree must attempt to communicate acceptance to offeror
Mailbox rule
Where offer indicates notification is unnecessary for acceptance, acceptance is effective as soon as it is made
Acceptance by actions if
Offeror can reasonably assume this was the intent of the offeree
(Account stated: creditor sends bill to debtor and defendant accepts it as accurate estimation of charges)
Hamer v. Sidway (NY 1891)
Acceptance by silence: Restatement 2d §69
where offeror has given offeree reason to understand that silence will constitute acceptance
Ammons v Wilson & Co. (MS 1936): P makes agreement with salesman of D for 60,000 lb shortening at 7.5 cents per pound. This agreement is not binding. P doesn’t have to buy, or can buy less, D doesn’t have to sell. On August 23, P orders through salesman 942 cases of shortening. On 4th of September he contacted D and was told they would not sell at the agreed upon price because price of shortening had gone up. In the past D had shipped Ps orders within a week. P sues. Ruling: Where an offeree fails to reply to an offer, his silence constitutes an acceptance if the offeror had reason through past dealings to believe that silence was intended as a manifestation of intent. Normally D shipped within a week and did not respond to the offers (orders) from P, so P had reason to expect assent and forbore from purchasing elsewhere.
offeree silently receives benefit of service (not goods) if he had a reasonable opportunity to reject them and if he knew or should have known that the provider of the service expected to be compensated.
Prior course of dealing makes acceptance by silence reasonable
Acceptance by dominion, even if unintended
Where offer invites acceptance by either promise or performance. Restatement 2d §62(1)
Part performance creates temporary option contract: Ever-Tite Roofing Corp v Green.
E.g. shipment of goods UCC §2-206(1)(b): “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a promise to ship or by the prompt or current shipment of conforming or nonconforming goods”
Shipment of non-conforming goods also constitute acceptance
Exception: Accommodation shipment. UCC §2-206(1)(b): “Such a shipment of nonconforming 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.”
Accommodation shipment usually treated as counter-offer
Buyer has option to accept or reject
Corinthian Pharmaceutical System v Lederle (USDC 1989): D is drug manufacturer, P is distributor. They have a history of doing business. On May 1986, D decided to significantly raise the price of the DTP vaccine effective May 20. P found out about this before it was public and placed larger than normal order on May 19 to get the lower price. D shipped only 50 of 1000 ordered vials at the lower price and said it would ship the rest at the higher price later. P sued. Ruling: Computerized receipt of tracking order by P does not constitute acceptance, so no acceptance prior to shipment of 50 vials. D’s shipment was non-conforming, because it wasn’t what P ordered. Thus it was an accommodation, not a contract because without consideration. The shipment of non-conforming goods is treated as a counter-offer which the buyer may accept or reject.

C. Does Acceptance vary from Offer

Common law standard: Mirror Image Rule.
Acceptance only if terms are exactly the same as in offer
If acceptance varies from offer, it is treated as a counter-offer
Minneapolis & St Louis RR v Columbus Rolling-Mill (US 1886): P inquired of D about cost of RR ties. D answered based on amount 2000-5000. P ordered 1200. D refused to fill the order at the stated price. P reordered for 2000. D never answered. P sues. Ruling: an offer has to be accepted exactly as it was made. If offeree changes the conditions, he has made a counteroffer which the offeror can reject.
Battle of the Forms: party sending the last document has the advantage since it is deemed to have formed a contract if the other party accepted the goods and paid for them.
UCC Rule §2-207 applies in situations where buyer and seller use forms with boiler plate terms that differ. It is designed: 1) to determine whether a contract has been formed, 2) if so, to determine the terms of the contract
§2-207 (1): a document can constitute acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly conditional on assent to the additional/different terms.
Knock out rule: the conflicting clauses cancel each other out and UCC gap-filler is used if relevant, otherwise common law controls.
Can apply to major terms, therefore disadvantageous to offeror
§2-207 (2): Additional terms become part of the contract [if both parties are ‘merchants’] unless, the offer expressly limits acceptance to the terms of the offer, the terms materially alter the offer, offeree objects to terms within reasonable time.
Terms that materially alter the deal include bargained for factors like price, quality, quantity, & delivery terms.
§2-207 (3): Conduct which recognizes existence of contract is sufficient to establish a contract for sale. [Contract by conduct.]
Contract consists in those terms about which the writings of each party agree.
Contract exists even if the offer and acceptance materially differ.
Leonard Pevar Co. v Evans Products Co. (USDC Del 1981): P sent D a written purchase order stating lumber, price, quantity and shipping instructions. D sent acknowledgment with boiler plate terms including that acceptance of contract was expressly contingent on acceptance of all terms, among terms was disclaimer of warranty and that goods sold as is. Wood is defective. Ruling: Follow UCC, determine whether there was an oral contract. If so, forms cannot introduce new terms.§2-207(1).
Contracts not for sale of goods, where UCC does not apply, may follow common law or Restatement 2d §61: an acceptance that changes terms of offer is not invalidated unless the acceptance is made to depend on the new terms. §59: where a purported reply is conditional on offeror’s assent to new terms, it is not an acceptance but a counter-offer.

D. Duration of the power of acceptance