I. MUTUAL ASSENT
The formation of a K (normally) requires a bargain. R2K § 17(1). A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances. R2K § 3.
A. The Objective Test. The courts apply an objective test (manifestation of
mutual assent) to determine whether there has been an offer or an acceptance. What the parties subjectively intended does not matter. Rather the courts consider "would a reasonable person, given the facts and circumstances, have understood a bargain was formed?"
1. Subjective, unstated intent is irrelevant. Embry "Neither the real nor the apparent intention that a promise be legally binding is essential to the formation of a contract." R2K § 21.
2. Contract enforceable notwithstanding: 1) party claims he is drunk, 2) thought it was a joke. Lucy v. Zehmer If a K has but one reasonable meaning, a court will enforce it despite the parties' hidden intentions. R2K § 71.
3. A court will not enforce an agreement where the P ought to have understood that the offerees did not realize they were entering into a legally enforceable deal. Cohen & "social dating case" Promissory Estoppel: promise made, I relied on it, it was reasonable, it would be unfair not to enforce the promise.
B. The Mechanics of Offer and Acceptance
1. Offer - creates the power in the offeree to make a contract between the parties by an appropriate acceptance.
To have a valid contract, ordinarily? one party must make an offer which is conditional on receipt by the offeror of some act or promise by the offeree, and the offer must be accepted as to all its terms by the offeree.
An offer is a 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. R2K § 24.
a. An invitation to negotiate does not constitute an offer. Fisher
b. If the other person has reason to know that the person making the "offer" does not intend it as an expression of his fixed purpose until he has given a further expression of his assent, no offer has been made. Lonergan, R2K § 26.
c. Whether an offer has been made is to be determined from the writings of the parties plus all of the surrounding circumstances. Southworth Surrounding circumstances may alter the normal meaning of words. For example, words may sound like an offer but clearly be made in jest. 999 bananas car purchase case.
A. Requirements: (1) manifestation of present contractual intent, (2) certainty and definiteness of terms, (3) communication to the offeree. R2K § 23. Thus, there is no valid offer where A prepares an offer to B, intending to mail it, but never does.
B. Some Guides.Southworth Would a reasonable person in the shoes of the offeree feel that if he accepted the proposal, a contract would be complete? This is the most important test of all.
(1) To whom made. Proposals made to the public or a large group of persons (such as in advertisements) are more likely to be construed as mere invitations to make an offer. Note: a letter sent to more than one person may constitute an offer. Jenkins Towel, Southworth
Multiple Acceptance Problem - reasonable person who receives offer form letter must realize D does not intend to sell his land dozens of times over. Lonergan A letter which refers to a potential sale to a third party may not be construed as a firm offer to the addressee.
(2) Definiteness and certainty of terms. The more definite the terms, the more likely an offer has been made. This is a separate requirement for finding a valid offer. An advertisement offered specific merchandise at a stated price to the first person to present himself. There was no room for negotiation as the offer was clear, explicit, and definite. "Fur for sale" case. Lefkowitz
(3) Language used. The words or conduct used in the proposal must be words of offer rather than preliminary negotiation. "I bid" suggests an offer. "Are you interested?" suggests preliminary negotiation. "I am offering" vs. "I am asking" Courteen Seed. Note: such words are not essential. Fairmount Glass, Southworth.
If you ask for a firm offer, and back comes a price, a reasonable person would understand that an offer has been made. (Fairmount Glass) Although, as a general rule, price quotations are not offers, each case must be assessed on its own particular facts.
Commit to memory: 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. R2K § 24.
a) The requirement of definiteness and certainty of terms. The terms of the offer must be sufficiently clear and complete so that the court can determine what the parties intended and can fix damages in case of nonperformance. [Restatement (Second) 32]
b) The essential terms. A contract must cover (expressly or impliedly) the following four essential terms: (1) parties to the contract; (2) the subject matter of the contract; (3) time for performance; and (4) price.
c) Implication of reasonable terms. The essential terms must either be expressly stated in the contract or be capable of reasonable implication from the agreement. The general trend of the courts is to adopt a policy of liberal construction so as to uphold the reasonable expectations of the parties; thus, the court will usually imply reasonable terms (i.e., implied-in-fact terms from the dealings and relationship of the parties) where none are expressly covered by the parties.
(1) Example - price.
(a) Where price is completely omitted. Where the parties have made no provision for price but a charge was intended, the court will normally imply a "reasonable price" (e.g., fair market value of goods).
(b) Where the price stated is indefinite. Often, however, where the parties have made some attempt to include terms on the price but it is stated in such a vague way as to unintelligible, the courts will often refuse to imply a reasonable price, and the contract will be unenforceable due to lack of certainty on an essential term. For example, A agrees to employ B "at not exceeding $300 per week."
d) THE Uniform Commercial Code. In contracts for the sale of goods, the omission of one or more essential terms does not render an offer invalid, as long as it appears the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. [UCC 2-204] In effect, the Restatement (2nd) 32 takes this same approach with respect to all contracts.
Generally. In order for a contract to exist, there must be an acceptance of the offer. The acceptance (assent to the offer) must be in the same manner requested or authorized by the offeror. The general rule (there are exceptions) is that the offer may be accepted only by the person to whom it is made. Unless stated otherwise, offeror expects offeree to communicate acceptance. (Acceptance only by invitation of the offeror, power of acceptance only resides with person to whom offeror intends it to reside, acceptance = consent to terms of offer).
A. Bilateral contracts. Here the mere giving of the counter-promise to the offeror is all that is required. The objective theory of contract prevails, and whether or not an acceptance has been given depends on how a reasonable person would interpret the words or conduct of the offeree. But the offeree must have knowledge of the offer, and notice of acceptance to the offeror is generally required (there are exceptions, such as where the offeror indicates that no notice is required).
B. Unilateral contracts. A unilateral contract may be accpeted only by doing the act requested by the offeror, with knowledge of the offer and intent to accept it. Normally notice to the offeror of acceptance is not required. There are exceptions, such as where the offeror requires that notice be given or where the offeror has no reasonable means of knowing that the requested performance has been rendered, in which case there is a requirement that notice be given within a reasonable time after performance.
C. The offeror has complete control over an offer. He sets the terms for acceptance, including the time, manner of communication, and method of acceptance. A contract where one of the required signatories never executes the document is not enforceable. LaSalle Offeror is the master of his offer; if he specifies exactly the mode that must be used for acceptance, that mode must be used (at least for Wirtz' class).
D. Time for acceptance -- The power to create a contract by acceptance terminates at the time specified in the offer, or, if no time is specified, at the end of a reasonable time. Ever-Tite Roofing
E. Partial shipment of a customer's order does not constitute acceptance of the order. Corinthian Pharmaceutical Systems "I hear you" I accept.
F. Where an offeree fails to comply with the suggested method of acceptance, but instead begins performance, a contract may be formed. In Allied Steel, the suggested method of acceptance was not the only method since the words of the purchase order said "should" (softer than shall). If the offeree failed to communicate its acceptance in the manner required by the offeror, then even though the offeree commenced performance, there may be no valid acceptance. But in this case, performance was commenced with the full knowledge, consent, and acquiescence of the offeror. Offeror thus waived his objection. Note also that UCC 2-206(1) provides that unless otherwise unambiguously indicated by the language of the offer or by the circumstances, an offer to make a contract is to be construed as inviting acceptance in any manner and by any medium reasonable under the circumstances. If the offeror prescribes an exclusive manner of acceptance, an attempt on the part of the offeree to accept the offer in a different manner does not bind the offeror.
G. Revocation prior to communication of acceptance. No contract arises if the offeror revokes the offer after the offeree manifests an intent to accept it but before the acceptance is communicated to the offeror. Hendricks v. Behee Notification to the other party's agent counts, not your own agent. No consideration to form an option. DISTINGUISH: "manifestation of intent to accept" with "acceptance-communicated"
H. Unilateral v. Bilateral contracts. The legal distinction between the two affects revocation (i.e., if all the offeror wants is a return promise, and such a promise is given, revocation becomes impossible; but if the offeror requests an act as an acceptance, then the act itself must be performed or the offeror can still revoke the offer).
(1) Policy. Where the offer is unclear as to whether a bilateral or unilateral contract is contemplated, it is the policy of the law to construe it as an offer for a bilateral contract. [Restatement 31]
(2) Rationale. A bilateral contract accords immediate rights and complete protection to both parties since a contract arises as soon as the offeree promises to perform; whereas an offer for a unilateral contract does not ripen into a binding contract until the performance is actually rendered.
(3) UCC position. The UCC accepts this same policy. The UCC states that unless an offer to buy goods expressly limits acceptance to shipment of the goods, it is to be construed as inviting acceptance either by shipment or by a prompt promise to ship the goods. [UCC 2-206].
I. Commercial Advertisement of a reward constitutes a unilateral contract offer. P's buying and using the medicine was the act called for. Notification is not necessary in this situation, since D could hardly have expected all those using the product to give notification of acceptance. No multiple acceptance problem - Carbolic Smoke Ball could pay each 100 pounds.
J. Knowledge of offer. A person whose act constitutes the performance requested in an offer of which the person was unaware will not be given the benefits of that contract. Similarly, a person will not be held bound to accepting an offer he did not hear. Glover Partial reliance is sufficient - e.g. informant who gives info. to police to avoid arrest but aware of reward has a right to collect the reward money.
K. Acceptance by performance with knowledge. A person may accept an offer by performing, even without telling the offeror of the intent to accept, where offeror offers a unilateral contract and can see that performance has been made on the faith of his offer. Award of merger commission to agent. Industrial America
L. The emerging theory (see UCC 2-206(1)) is not to characterize contracts as bilateral or unilateral (for acceptance purposes) but to allow acceptance (unless otherwise specified) by any reasonable means under the circumstances.
M. An offer that invites acceptance by performance will be deemed accepted by such performance unless the offeree manifests his intent not to accept. No reliance on the terms of the contract is necessary. Industrial America, (Court disposes of issue as a matter of law, no remanding to determine if any reliance).
N. The Mailbox Rule: R2K § 63(a): Unless the offer provides otherwise, 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. For e-mail, offer is accepted when received, not transmitted.
O. The subjective intent of offeree is immaterial. If a reasonable offeror would be justified in relying upon the apparent intent of the offeree as manifested by his conduct, then "acceptance" will be deemed to have occurred. Further, if the offeree intends to accept the offer but fails to communicate such intent in a manner which a reasonable offeror would understand as acceptance, no contract is formed.
P. Where the offeree exercises dominion over things which are offered to him, such exercise of dominion in the absence of other circumstances showing a contrary intention is an acceptance. R2K § 72. Russell
Q. If circumstances indicate the exercise of dominion is tortious, the offeror may at his option treat it as an acceptance, regardless of offeree's stated intention not to accept.
R. R2K § 69: "An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him."
S. The offeror cannot force the offeree to reply by wording his offer: "Your silence will be an acceptance of my offer." R2K § 72. However, silence may constitute an acceptance if by previous dealings the parties have established a pattern of accepting by silence. R2K § 69.
T. Because the goods are specially made and not suitable for sale to others, they fall within an exception to the Statute of Frauds and no written contract is necessary. An implied contract may arise based on the course of dealings between two parties even though there is no written contract. Smith-Scharff Paper Co.
2B. THE NATURE AND EFFECT OF COUNTEROFFER. An offer may be terminated by act of the parties or by rejection by the offeree. A rejection by the offeree terminates the offeree's power of acceptance. If the offeree later attempts to accept the offer notwithstanding the prior rejection, his "acceptance" is a mere counteroffer.
1) How effected. A rejection may occur by either words or conduct, or by a qualified acceptance (which amounts to a counteroffer and therefore a rejection of the offer). Any rejection terminates the power to accept and the contractual dealings.
2) Equivocation. An acceptance by the offeree must be unequivocal and unqualified. If a purported acceptance is qualified, it is legally insufficient as an acceptance. Instead, a qualified acceptance will act as a counteroffer, which will operate as an implied rejection of the original offer. However, the line between a "qualified" and an "unqualified" acceptance is not always clear.
3) Conditional acceptance. An acceptance which includes any term or condition which was not part of the original offer is ordinarily considered a "qualified" acceptance and thus an implicit rejection of the offer. However, if the condition was implicit in the offer or the if the offeree had a legal right to insist upon the condition under the terms of the offer, the acceptance will be considered an "unqualified" acceptance. For example, X accepts Y's offer to sell land but includes a condition that Y give X good title (this is implied in Y's offer).
4) "Please enter an order for 2000 lbs iron rails plus splices for those rails at your current price" would be viewed as a counteroffer. Better to phrase as "I accept" and "Please advise..."
5) "Grumbling" acceptances. Acceptances which express dissatisfaction but place no condition on the acceptance generally are considered "unqualified." For example, "Ship the goods on the 10th, although I wish you could deliver sooner." When a change or modification suggested in the offeree's reply is a demand for more favorable terms, then it goes beyond the mere "grumbling" acceptance and operates as an implied rejection of the offer.
6) Inquiries and requests. Acceptances which include inquiries or requests by the offeree for a better deal generally do not impair the original offer.
7) In transactions outside UCC 2-207, an acceptance in which the terms are at variance with the offer constitutes a rejection, and puts an end to the negotiations unless the original offeror assents to the modifications.
ACCEPTANCE UNDER THE UCC.
Additional terms. Section 2-207 of the Code provides that an acceptance operates as such even if it contains additional terms different from those proposed by the offeror (unless the acceptance states that it is conditional on the assent to the additional terms, in which case the offeror would have to make a specific acceptance of the additional terms for a contract to exist). FIRST, go to 2-207-1. If no, go to 2-207-3. If yes, go to 2-207-2(a),(b).
2-207-2(a) The additional terms are to be construed as proposals for additions to the contract. (If as P claims the parties reached an oral agreement, their contract is governed by UCC 2-207(1), which means the additional terms contained in D's acknowledgement would be treated as proposals and would become part of the contract unless they materially altered it. Whether the terms materially altered the oral agreement is a question of fact to be determined at trial. Pevar)
2-207-2(b) Where the contract is between merchants, these additional terms are part of the contract, unless (1) the offer expressly limits acceptance to the terms of the offer, (2) the additional terms materially alter the agreement, or (3) the offeror gives notification of objection to the new terms within a reasonable time. (These items may be question for jury to decide.)
8. A clause that conditions acceptance on assent to additional or different terms leaves the parties without a contract as of the time the writings are changed. There must be express assent to the additional or new terms. Pevar v. Evans Product
9. Under UCC 2-207(3), the parties may yet have an agreement based on their conduct, even when there is no oral or written contract. In this case, the parties continued dealing, which means they recognized the existence of a contract. The contract would consist of the terms on which the writings agree, plus those terms supplied by the "gap filler" provisions of Article Two of the UCC. Pevar v. Evans Product Co., UCC §§ 2-314, 2-315. (Warranty disclaimer drops out because no agreement. Therefore, go to gap fillers by 2-315.)
10. When two parties rely on self-serving forms drafted by attorneys instead of actually working out a mutually satisfactory agreement, the UCC attempts to enforce an agreement in spite of conflicting forms probably implements the parties' true intentions, but a better, if unrealistically idealistic, approach would be for parties to commercial transactions to negotiate sufficient detail to come up with consistent terms.
11. UCC does not apply to problems dealing with securities, real estate.
12. If I tell you my purpose in using the materials I am buying, I may create additional responsibilities for you. UCC 2-315.
13. R2K § 40: Where buyer has a rejection followed by acceptance, the first one the offeror receives is binding. Farnsworth argues that the first manifestation should be binding, to prevent speculation that waits for events to change and then telegrams response.
3. TERMINATION OF THE OFFER. An offer may no longer be effectively accepted if the offeree's power of acceptance has been terminated by an act of the parties or by operation of law.
A. TERMINATION BY ACT OF THE PARTIES.
(1) Termination by non-acceptance in the allotted time period -- R2K § 36 provides that an offeree's power of acceptance may be terminated by (1) a rejection or counteroffer by the offeree, or (2) by lapse of time, or (3) revocation by the offeror prior to acceptance, or (4) death or incapacity of the offeror or offeree. In addition, an offeree's power of acceptance is terminated by the nonoccurrence of any condition of acceptance under the terms of the offer.
(2) Revocation of the offer by the offeror. Where the offeror communicates a revocation before an acceptance by the offeree, the offer is terminated.
(a) Requirements for effective revocation. Assuming the offer can be revoked, the following are required to make an effective revocation:
1) Words or conduct. The offeror's words or conduct must be sufficient for a reasonable person to interpret them as revocation. Neither the Statute of Frauds nor contract law requires the revocation of an offer be in writing.
2) Communicated to the offeree. The revocation must be communicated to the offeree (the offeror must at least make reasonable efforts to communicate the revocation).
3) Effective when received. The revocation is generally held to be effective when received. [Restatement (Second) 41] A few states hold that it is effective when dispatched.
(3) Communication from a third party. Dickinson v. Dodds Revocation can come indirectly (rather than directly from the offeror), such as by a third person, or simply from the circumstances that would put a reasonable person on notice that the offeror had revoked the offer. R2K § 42: where an offer is for the sale of land, if offeree acquires reliable information of sale or intention to sell to someone else, before he has accepted, the offer is revoked. R2K § 43: An offeree's power of acceptance is terminated when an offerer takes definite action inconsistent with sale to offeree and the offeree acquires reliable information to that effect.
B. TERMINATION BY OPERATION OF LAW.
(1) By the lapse of time. The offer lapses by operation of law after expiration (and before acceptance) of whatever period of time was specified in the offer.
(a) Computation of time. The period begins to run from the date of actual receipt by the offeree. [Restatement (Second) 51]
(b) Where no time period specified. Where no specific time period is specified, then the offer lapses after a reasonable period of time. Consideration is given the subject matter involved and all other relevant circumstances in determining what is a reasonable time.
(c) Offers revocable where specified to remain open. Note that just because the offer says it will remain open until some date does not mean that the offeror cannot validly revoke the offer before acceptance.
(2) By death or destruction of the subject matter of the offer.
(3) By death or insanity of the offeror or offeree.
(4) By the intervening illegality of the proposed contract. A offers to loan B $1,000 at 10%; state law is passed that 8% interest is the maximum rate that can be charged.
4. IRREVOCABLE OFFER: NONDESTRUCTIBLE POWER OF ACCEPTANCE
General Rule: An offer is revocable even if the offeror expressly promises not to revoke or gives a definite period during which the offer is to remain open. There are a number of exceptions to this rule, however.
1. Options to purchase, if based on valid consideration, are contracts which may be specifically enforced (they are in effect irrevocable offers). One dollar is valid consideration for an option, provided the dollar is paid or tendered. Board of Control Eastern Mich. Univ
2. A written acknowledgement of receipt (recital) of the consideration merely creates a rebuttable presumption that consideration has actually passed. Board of Control of Eastern Mich. Univ. v. Burgess Some courts would say a recital is enough, even if no consideration is paid. R2K § 89 takes the position that an option in writing states that consideration has been received is binding even if consideration has not actually been paid.
3. However, that which purports to be an option but fails for lack of valid consideration is still a simple offer to sell. An option is a contract collateral to the offer to sell, making the offer irrevocable for a specified time. A failure of consideration therefore affects only the collateral option contract, not the underlying offer. The question then becomes whether offeror revoked simple offer prior to acceptance.
A. EXCEPTIONS TO THE GENERAL RULE.
(1) Firm offers under the UCC. A signed, written offer to buy or sell goods, which states that it will be kept open for a definite time (or if no time is stated, for a reasonable period of time) may not be revoked for this period (so long as the period is no longer than three months). [UCC 2-205] - does not apply to REAL ESTATE.
(2) Offers for consideration. If the offeree has given any consideration (even nominal consideration) for the offer, the offer then becomes an option and is not revocable for the period stated therein. [Restatement (second) 24A]
Recitals of consideration. Where there is a recital that consideration has been received for the option, the general rule has been that this recital is not conclusive (the courts reserve the right to see if the consideration was actually paid). But R2K § 89 provides that an offer is binding as an option if it is in writing, signed by the offeror, and recites a purported consideration.
(3) A conditional exercise of an option does not preclude a later unconditional exercise of the option within the option period. Counteroffers do not terminate the power to accept within the option period. Humble Oil v. Westside Investment
(4) Rejection does not terminate the option power. R2K § 37.
(5) Revocation of offer for a unilateral contract after past partial performance. Ordinarily, a unilateral offer may be revoked at any time prior to the offeree's completing the act of acceptance called for in the offer. But a difficult problem is presented where the act requested will take some time to complete and the offeror attempts to revoke after the offeree has started performance. Under modern rules, where the offeree has rendered substantial part performance, courts will not permit revocation of the unilateral offer by the offeror.
a) An offer of a unilateral contract can be revoked at any time prior to performance, even if the offeror knows that the offeree intends to perform. Petterson v. Pattberg. (On exam, answer quoting arguments under both rules) Even under the modern rules disallowing revocation with substantial part performance rendered by the offeree, the result in this case would be the same since the act required for acceptance was payment, and revocation came before payment.
b) Part performance of the consideration may transform the unilateral contract into an option contract, and thus make it irrevocable during the time stated. Where an offer invites an offeree to accept by rendering a performance (unilateral) and not a promissory acceptance (bilateral), an option contract or contract with a condition is created when the offeree begins the invited performance or tenders part of it. The condition is full performance by the offeree. What constitutes part performance will vary from case to case. Thus, until there is action by the offeree - a partial performance pursuant to the offer - the offeror may revoke, even if his offer is an exclusive agency or an exclusive right-to-sell. Marchiondo v. Scheck
c) Thus, until there is action by the offeree - a partial performance pursuant to the offer - the offeror may revoke, even if his offer is an exclusive agency or an exclusive right-to-sell. Marchiondo
d) Implied promise not to revoke. The Restatement position (followed by most courts) is that where an act will take some time to complete, there is a promise implied in the offer that the offeror will not revoke once the offeree has made a substantial beginning of performance, provided that performance is actually completed within the time required by the offer. RATIONALE: real estate agents devoting much time.
C. INSUFFICIENT AGREEMENT: INCOMPLETE, INDEFINITE, AND DEFERRED TERMS
1. The requirement of definiteness and certainty of terms. The terms of the offer must be sufficiently clear and complete so that the court can determine what the parties intended and can fix damages in case of nonperformance. R2K § 32, 33.
2. The essential terms. A contract must cover (expressly or impliedly) the following four essential terms: (1) parties to the contract; (2) the subject matter of the contract; (3) time for performance; and (4) price.
3. Implication of reasonable terms. The essential terms must either be expressly stated in the contract or be capable of reasonable implication from the agreement. The general trend of the courts is to adopt a policy of liberal construction so as to uphold the reasonable expectations of the parties; thus, the court will usually imply reasonable terms (i.e., implied-in-fact terms from the dealings and relationship of the parties) where none are expressly covered by the parties.
Example - price. (i) Where price is completely omitted. Where the parties have made no provision for price but a charge was intended, the court will normally imply a "reasonable price" (e.g., fair market value of goods).
(ii) Where the price stated is indefinite. Often, however, where the parties have made some attempt to include terms on the price but it is stated in such a vague way as to unintelligible, the courts will often refuse to imply a reasonable price, and the contract will be unenforceable due to lack of certainty on an essential term. For example, A agrees to employ B "at not exceeding $300 per week."
4. The Uniform Commercial Code. In contracts for the sale of goods, the omission of one or more essential terms does not render an offer invalid, as long as it appears the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. [UCC 2-204] In effect, the Restatement (2nd) 32 takes this same approach with respect to all contracts.
5. The statement "fair share of the profits" is too vague, indefinite, and uncertain to form a binding contract. The intention of the parties is pure conjecture. A fair share may range from a nominal sum to a substantial amount. The courts cannot aid parties in such a case when they are unable or unwilling to agree upon the terms of their own proposed contract. Varney v. Ditmars Architect-draftsman case.
6. Implications of reasonable terms. The essential terms must either be expressly stated in the contract or be capable of reasonable implication from the agreement. The general trend of the courts is now to adopt a policy of liberal construction so as to uphold the reasonable expectation of the parties; thus, the court will usually imply reasonable terms (i.e., implied-in-fact terms from the dealings and relationship of the parties) where none are expressly stated by the parties.
7. Courts prefer to find contracts enforceable, even if uncertain in some respects, where the breaching party receives the benefit of the other's performance. The omission of one or more essential terms does not render an offer invalid, so long as it appears that the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. "The Christmastime completed drawings $20,000-$35,000 bonus case"
8. For a valid contract to exist, there must be an expression of present contractual intent which is accepted by the offeree (i.e., mutual assent). If the parties have simply negotiated, but have failed to agree in sufficient certainty about essential terms, there is no contract. Or if the parties have agreed to agree on some essential terms in the future, there is as yet no contract.
a) Omission of essential terms -- A contract may be enforced if it omits an essential term, so long as the term can be provided by objective custom and practice in the industry. The parties had begun performance on the good faith understanding that the unsettled matter would be resolved by agreement. In this situation, the courts may enforce the contract by supplying the omitted term, as long as there is an objective method by which to determine the term.
Because the parties were both familiar with the established custom and practice in the industry, the court could properly supply the time for beginning the television series. Scheider was unreasonable to undertake pilot, get paid, go to Europe, and then try to back out. Both parties showed intent to be bound.
MGM v. Scheider
b) Limitation on courts' supplying terms -- A court may not supply the monthly rent term to a contract if the parties have not indicated their intent as to that term. Landlord never gave any indication he intended to be bound for the next five years. His response was equivocal. New York Deli rent case If deli owner had put "fair market value" into lease, this case would have been decided the other way.
c) Omission of specific price term in long-term contract -- A party may enforce a long-term service contract when the price is not specified and the parties must periodically resort to the court to determine a reasonable price. Evidence of a long-standing and close business relationship, including D's participation on P's board and ownership of P's stock, supports the court's finding that the parties intended to be bound, even in the event the pricing mechanisms failed.
In this case, the trial court properly determined that specific performance was necessary due to the speculative nature of any award of damages based on the length of the contract and the economic uncertainties of this type of shipping. Court will oversee yearly shipping price/ton through year 2010. Oglebay v. Armco
d) D did not manifest an intention that the exceptions to be conditions precedent to the formation of a contract, but was merely asking that P, by a general acceptance, gives assurance as to the content of the exceptions. There is still no contract unless the party is reasonable in that belief and the other party ought to have known that the first party would so believe. P was reasonable in its belief and D should have known by P's expenditures of large sums of money and surveys that P would so believe that its acceptance of D's terms would create a contract. Borg-Warner v. Anchor, "Conroy's Case"
9. MISUNDERSTANDING AND MISTAKE - these problems will often justify rescission of the contract, even though (at least on the objective theory of contracts) it appears that a valid contract has been formed.
A. AMBIGUITY. Terms in the proposed contract may be ambiguous, preventing a meeting of the minds by the parties on essential terms. Obviously this subject is related to that of definiteness of terms and mistake, and the rules are similar to mistake with respect to unilateral misunderstanding or mutual misunderstanding.
1. Latent ambiguity. "The Peerless Case" 159 Eng. Rep. 375 (1864). Where a contract is subject to two equally possible interpretations and the parties contracted with different interpretations in mind (neither knowing of the other's interpretation, nor having reason to know thereof), there is no mutual assent. Had both parties given the same meaning to an ambiguous term, there would have been a contract; or had either party known of the ambiguity or should reasonably have known of it, the contract would have been construed against that party.
2. Different understandings of same price term -- "Fifty-six twenty-five surge protector case" The Peerless case set forth the principle, now included in R2K § 20, that no contract exists when (i) each party attaches a materially different meaning to the parties' manifestations of mutual assent and (ii) neither knows or has reason to know the meaning attached by the other. The Peerless rule should be applied in limited circumstances. It should not apply where one party's understanding, because of that party's fault, is less reasonable than the other party's understanding. In this case, both P's and D's understandings were equally reasonable. Each gave a different meaning to the phrase "fifty-six twenty." Price was a material term. Hence, there was no manif. of mutual assent.
B. MISTAKE. Mistake occurs where one or both parties state clearly what they mean in the contract, but they make a mistake concerning one of the essential terms of the contract. For example, A offers to build B a house for $25,000; but A added up the subcontractors' bids incorrectly (the offer should have been $30,000 instead of $25,000). Typical: errors in computation, mistake in use of words or symbols.
1) Unilateral mistake. One party may use words which are clear but make some unilateral mistake of fact, so that, had he known this mistake, he would not have expressed himself in the same way.
a) A bidder is entitled to equitable rescission of the contract because it submitted a bid containing a material clerical mistake. One who errs in preparing a bid for a public works contract is entitled to the equitable relief of rescissino if he can establish the following conditions: (i) the mistake is material; (ii) enforcement of a contract pursuant to the terms of the erroneous bid would be unconscionable; (iii) the mistake did not result from violation of a positive legal duty or culpable negligence; (iv) the party to whom the bid is submitted will not be prejudiced except by the loss of his bargain with the party that made the mistake; and (v) prompt notice of the error is given. (material 14% of bid, not grossly negligent, using standard business bid practices, prompt notice of error) Boise Junior College
b) One way to get out of unilateral mistake is to claim offeree should have known it was "too good to be true." - other guy should have realized mistake.
2) Mutual mistake. The general rule is that where both parties make a mistake concerning a material fact which is the subject of the K, then the K may be rescinded if neither party knew (or should have known) of the mistake. The R2K § 294 provides: "Where a mistake of both parties at the time a K was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the K is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 296. Section 296 provides that a party bears the risk of a mistake when:
(1) it is allocated to him by agreement of the parties; or
(2) he is aware, at the time of K, that he had only limited knowledge with respect to the facts to which the mistake relates, but treats his limited knowledge as sufficient; or
(3) it is allocated to him by a term supplied by the court on the ground that it is reasonable in the circumstances to do so.
a) Cow thought to be barren but with calf. A contract may be rescinded if the mistake goes to the very essence of the contractual consideration. (That case involved the sale of a cow thought to be barren and worth $80, which was later discovered to be with calf, and worth $750.) The distinction between mistakes of value and mistakes of substance is unnecessarily confusing. Sewage seeping at rental property case
b) Denver dime case. One party does not assume the risk that the item transferred is of greater or lesser value than the amount paid when neither party has doubt about the true value. Mutual mistake of fact - both parties were under a mistake regarding a fact assumed by them as the basis for the transaction. In such a case, either party may rescind the K if the mistake materially alters his position. One party may assume the risk of a different value than that supposed by the parties at the time of the sale. For this assumption to be enforceable, however, the parties must know there is doubt and contract on that assumption; the risk becomes one of the elements of the bargain. P and D did not entertain such doubt, however.
c) "As Is" Clause. The better rule is to permit rescission when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties. Of course, a party may voluntarily assume the risk of the loss in connection with the case. Here, rescission would normally have been the proper remedy. However, in the contract, the Pickles assumed the risk of loss by accepting the "as is" clause. Seeping sewage at rental property case R2K § 154 - risk allocated to one of the parties. IT HAS TO BE A MISTAKE OF FACT AT TIME TRANSACTION OCCURRED - don't let you off for failure to predict future, but do let you off if septic tank problem not discovered until 3 months later - still a fact at time of K.
II. CONSIDERATION AND ITS SUBSTITUTES
A. THE REQUIREMENT OF A BARGAIN: consideration or some substitute.
1) Sufficient consideration: each party to the contract must have intended to secure something from the other party that he was otherwise not legally entitled to--that is, each must be bargaining for something from the other party (an act, a promise to act, etc.). The second requirement for valid consideration is that the bargain-for element be legally sufficient. (Does it constitute a new obligation that did not exist prior to the execution of the agreement?).
1) An executory promise--The law will not enforce a promise to make a gift, it will enforce a promise only if it is supported by bargained for consideration. Kirksey v. Kirksey, Alabama widow case. COMMENT: This action came before adoption of the estoppel doctrine. It illustrates that, although there was no consideration given by P, injustice results unless P's action in reliance is treated as consideration (i.e., a substitute for bargained-for consideration). The result in this decision would have been reversed under modern courts. But it illustrates the basic concept that there is no contract where there is no bargained-for consideration (i.e., D was making a gift, not bargaining to get some act or promise from P). Thus, there was no consideration for D's executory promise.
2) Forbearance from acting -- LANGER v. SUPERIOR STEEL CORP. An employee's restraint from seeking alternate employment, which was beneficial to D, constitutes consideration for the employer's promise to pay a pension.
Tests of good consideration ask: whether the promisee, at the insistence of the promisor, has done, forborne, or undertaken to do anything real; whether he has suffered any detriment; or whether in return for the promise he has done something he was not bound to do or has promised to perform some act or has abstained from doing something. Also Sidway v. Hamer (uncle-nephew).
COMMENT: The difference between this case and Kirksey is that here the court felt that D really wanted what it got from P (i.e., it was valuable to D to have P not seek competitive employment). Thus, there was tangible benefit to D, or something bargained for, not just a gift. MOTIVATION IS KEY. To determine whether a promise merely contains a condition or actually is supported by consideration one must look to the motives of promisor. Was she really trying to get girl to stand at the bottom of the stairs? If no, then no consideration. If motives were mixed between gift and bargain, then still enforceable with respect to bargain part.
Hypothetical: If Co. offered a pension to Langer but said he has to collect it in person, is that sufficient consideration? No. Gratuitous Promise with a condition. Not a contract.
3) Gratuitous promise, no consideration -- STONESTREET. TIMING is important. A promise to pay half the costs of drilling a well, unsupported by consideration, is not enforceable. FIRST, there was a valid contract, supported by consideration, between P and D for the drilling of the well. SECOND, there was no additional benefit to D from his promise to THEN pay one-half of the drilling expenses incurred by P, and P did not incur any detriment as a result thereof.
4) Adequacy vs. Sufficiency of Consideration. As the court points out in Thomas, motive 2 consideration, and motive or intention alone will not support enforcement of a promise. Here, Court stretches obligation to pay 1 pound and keep the premises in good and tenantable repair as both a benefit to the promisee (D) and a detriment to the promisor (P). While it might be argued to be inadequate, the courts may not inquire into the amount or adequacy of the consideration, only its sufficiency (i.e., does it constitute a new obligation that did not exist prior to the execution of the agreement). (WIRTZ would argue this was no new obligation - no one wants to live in disrepair.) Note, however, that R2K § 71 argues that nominal consideration is not bargained-for consideration and is therefore insufficient to sustain a contract; e.g., A states that he will give B $5,000 for a worthless book. In most instances the apparent bargain is really a gift from A in the form of a contract. The Thomas case illustrates the RK (first) position that nominal consideration may be sufficient.
Normally a court will not inquire into the adequacy of consideration in terms of commercial value since it wants the parties to make their own contract, each party determining what is valuable to him. EXCEPTION FOR EQUITABLE RELIEF. Where P seeks specific performance, then equity requires a showing of fairness of the consideration given for the promise before a court will enforce the contract.
Nominal consideration: stuck in to make a gift look official. Nominal consideration does not become consideration just because it has economic value. (?)
6) $1 adequate consideration: OPTION CONTRACT. An exception to this exception is generally made for options. Here the smallness of consideration for an option will usually not make it insufficient if it was what the party actually bargained for.
Also, business transactions in general. But the business transaction involves a "bargain," other consideration than the dollar, and a necessary reliance on the promise in a fast-moving commercial world. Thus the business transaction is very easily distinguished from the conveyance of Blackacre for $1, which is merely a formal expression for an essentially gratuitous transfer.
7) Recall difference between a "fully executed gift" and a "promise to give a gift". If someone puts funds in a trustee's care, we have an executed gift. Why would you ever want to make a legally binding gift: wills, trusts, tax write-offs. General rule: even if you intended to make a gift fully intentional, you still have the right to change your mind.
8) IN RE GREEN: Effectively overrules Thomas. The $1 will not support an executory promise to pay thousands of dollars.
a) "Other goods and valuable consideration" will not serve as consideration when nothing good or valuable was actually given.
b) As to the release of claims by claimant, release from imaginary claims is not consideration for a promise. The bankrupt's immunity from payment of taxes on the house cannot be consideration because he was never chargeable for them.
c) The fact that the parties intended to make a valid agreement means nothing. "The parties may shout consideration to the housetops, yet unless consideration is actually present, there is not a legally enforceable contract."
9) CASE OF THE WRONG PATERNITY SUIT
a) It is not sufficient consideration to forbear to bring an action which the party knows or reasonably should know is not a valid claim. "A release from mere annoyance and unfounded litigation does not furnish valuable consideration."
b) Here P believed in good faith (key) that the claim against D was valid. Although bastardy prosecutions are treated as criminal, they are civil in nature; thus, the parties did not contract to avoid a criminal prosecution, which would violate public policy. Forebearance to sue for a lawful claim or demand is sufficient consideration.
c) The rationale for this decision, where nothing of value is really given up as consideration for D's promise, is public policy. The policy is to encourage settlement of lawsuits on an amicable basis; this promotes agreement between the parties and saves the public the time and expense of lawsuits.
d) Why doesn't mutual mistake work as Fiege's defense: Fiege assumed the risk. He wanted to be spared public humiliation and would have got it if he kept paying her. (She knew it was possibly someone else's child; perhaps court would consider this unfair knowledge)
B. TWO DEFENSES TO CONTRACT FORMATION
1) Fraud, mistake, duress. It may be a defense to a contract that the contract was induced by one of these three. In the case of fraud or duress (which might result in one party taking grossly disproportionate consideration from the other party), the courts will look into the contract and the adequacy of consideration. Unconscionable contracts. In addition, an "adhesion contract" (one that is handed out "take it or leave it" or maybe one that is unconscionable?) will not be enforced. This is typically a situation where the consideration given by one party is grossly disproportionate to what is given by the other party.
Courts must balance two competing interests: "preserving the integrity of contracts" and "concern for the uneducated and illiterate." Indeed, the price term, like no other term, touches the issue of unconscionability. Jones v. Star Credit. BARGAINING PROCESS ABUSED.
2) Inadequate consideration. Another exception is where the consideration is totally devoid of value, or nearly so (i.e., nominal). In this regard, a majority of the courts allow a party to prove that in fact no consideration was ever actually received.
C. PREEXISTING DUTY RULE: MODIFICATION AND DISCHARGE. Where A offers B $500 to perform some act, and B is already under a preexisting duty to perform that act for the benefit of A, B's performance is not sufficient consideration to support A's promise. This is true since B's performance imposed no new legal detriment on B -- he is already under the duty to perform the act. No additional or new consideration. Therefore, policeman cannot collect a reward just for doing his duty. "Economic duress" now covers the pre-existing duty rule.
If original contract is rescinded, then new K is formed. If new consideration is given, then new K is formed.
D. MUTUALITY OF OBLIGATION - REQUIRED FOR A CONTRACT. Acid test: can party A breach the contract? Can party B breach the contract?
1) Both parties to a contract must give legally sufficient consideration (so that both parties are bound; if both are not bound, neither is bound).
a) Unilateral contracts. Offeree's act be sufficient consideration, i.e., a legal detriment to offeree. Offeror's promise must impose a legal detriment on offeror.
b) Bilateral contracts: promise for a return promise. Both binding.
Sometimes B can promise something without sustaining a legal detriment, e.g., A promises a gift to B and B promises to accept it. Courts look to whether the performance promised by B is sufficient consideration.
c) ILLUSORY promises: promises reserving to the promisor the power to determine performance. If the promisor reserves "absolute discretion" and always has a "free way out" - then no mutual obligation. If K allows party to take only so much as he desires, there is no mutuality. In Whiskey Case, P's obligation to purchase qualified for any "unforeseen reason," effectively a free way out. (Price rise is unforeseen). "I will buy all that I want to buy." UNFETTERED DISCRETION.
"multiplicity of considerations" reserves enough discretion to render promise illusory.
d) Requirements contracts. A promise by A to "buy all that I require" from B is good consideration, since A has incurred some detriment (a limitation on his freedom of action; if he has requirements, he must but them from B). P gave up right to sell someone else's sand. Therefore, mutuality. The SAND CASE.
e) Implied promises. Even where a bilateral contract apparently contains no promise at all on one side (i.e., there is a complete lack of mutuality), the contract may still be upheld if the surrounding facts and the nature of the agreement fairly imply a promise of performance by that party. Lady Duff-Gordon. On the page, P is promising nothing. Cardozo uses judicial creativity to infer P would use "reasonable efforts" to market Lady's fashions. Seems to come out right.
(1) Uniform Commercial Code. UCC 2-306(2) indicates that in an exclusive sales contract, the manufacturer impliedly agrees to use his best efforts to supply the goods and the distributor impliedly agrees to use his best efforts to promote their sale.
(2) "Satisfactory feasibility study" as a condition precedent. A promise given in exchange for a promise is not illusory merely because it depends on a condition precedent. The language in the condition precedent here required P to obtain a feasibility report, and then to be satisfied by it before acceptance was required. This condition is governed by a duty of good faith; it is not illusory.
Reasonable person standard not practical here, because so many subjective factors relevant to purchase. And every buyer is different. On the paper, seemed to reserve right to be satisfied with feasibility report, but court interpolates enforceable terms via "good faith" argument.
(3) You can only make a "good faith" or "best effort" defense to keep promise enforceable for exclusive dealer arrangement. Watch out for peppercorn theory - easy enough to locate peppercorn if one is intent on doing so.
f. ILLUSORY promise - company promises to pay bonus as "a voluntary contribution by the company which may be discontinued at any time without notice."
E. FORMALITIES -- A Promise Plus a Seal or Other Form; one substitute for consideration.
At common law, a promise under seal was enforceable at law without further consideration (in an action for damages); however, equity courts would not grant specific performance unless there was sufficient consideration in addition to the seal. Most states today have statutes which abolish the effect of a seal due to contract theory arguments and fraud.
F. MORAL OBLIGATION -- A Promise Plus Previous Conferral of a Benefit; another substitute for consideration.
Classical rule of Moral Obligation - not legally enforceable.
General Principle: past consideration 3 consideration.
Exceptions: (1) "moral obligation" - debtor's promise to pay a debt barred by the statute of limitations; (2) promise to pay any antecedent contractual or quasi-contractual debt; (3) debt discharged in bankruptcy proceedings; (4) voidable promises (minor's promise). Can sue on a fresh promise.
Mills v. Wyman. Someone takes care of ill adult child. Father in gratitude says he will pay the bills, then he reneges on offer. Ct. held legally unenforceable. TIMING IS IMPORTANT. There must be a bargain with consideration. If Mills had first contacted Wyman Sr., then enforceable contract.
Decision today: split of opinions. Under the New York statute, the father's promise in Mills v. Wyman would be enforceable because it was made in a letter which presumably mentioned (in writing) past services. (Adopted only in Penn.) In the notes to R2K § the promise would be unenforceable because "the enrichment of one party as a result of an unequal exchange is not regarded as unjust"
R2K § 86: (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice; (2) A promise is not binding under Subsection (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or (b) to the extent that its value is disproportionate to the benefit.
Webb v. McGowan, Case of the falling block/ Webb saved McGowin's life. MATERIAL BENEFIT RULE. Moral obligation arises out of fact that promisee has conferred a big fat benefit on promisor, and therefore we will enforce.
McGowin offered to pay $15/2 weeks. Continued payment for 8 years until his death. His executors refused to continue. Alabama Ct. of Appeals enforced saying McGowin "having received a material benefit from the promisee, [was] morally bound to compensate him for the services rendered."
Case of the kindly neighbor eventually promised $ 25K for past courtesies. Was this done as gift-giving or under expectation of getting paid? If gift-giving, promise to pay is not enforceable. Under R2K § 86, looks like she will have trouble recovering. Under the NY General Obligation Law, she can recover since problem is in writing and mentions "services rendered." Chintzy exception. Struggle: something for promisee but law will only enforce a bargained-for contract. R2K § - enforce to less than full amount to avoid unjust enrichment. If instead we try to restore her to position if promise is performed - she would get full $ 25K.
G. PROMISSORY ESTOPPEL: promise made, I relied on it, it was reasonable, it would be unfair not to enforce the promise. A promise may be enforceable even if not supported by consideration when it is made to induce action on the part of the promisee.
(1) (Gratuitous) promise which promisor should reasonably expect to induce action or forebearance of a definite and substantial character on the part of the promisee and (2) which does induce such action or forebearance is binding if injustice can be avoided only be enforcement of the promise. Promissory estoppel differs from equitable estoppel, as it rests upon a promise to do something in the future, while the latter rests upon a statement of present fact.
Estate of grandfather who promised granddaughter to pay her $2000/year so she would not have to work for a living, is estopped from pleading a lack of consideration. (1) induce action by promisee; (2) promisor knew or should have known it would; (3) injustice can only be avoided by enforcing promise. Ricketts v. Scothorn
Gratuitous pension plans -- Lady offered pension of $200 per month whenever she desired to retire (she was then 56). A year later P retired and received the money until she was 63, when the new management of D stopped payment. P is unemployable now (she has cancer). Why did she retire? What went through her mind? Did it induce action? P showed sufficient reliance, D should have known reliance, and unjust otherwise. D's promise enforceable.
Quasi-contract 4 implied in law 5 quantum meruit 6 unjust enrichment
1. A "quasi-contract" = no contract (no bargain consciously made between A and B). Rather, the law creates or implies a contract. NORMALLY P confers benefit on D for which D ought to compensate the P. The law IMPLIES a promise by D to pay the reasonable value of the benefit and avoid unjust enrichment of D at the P's expense.
2. Elements of quasi-contract recovery: 1) P has rendered services or expended property which confers a benefit on the D. 2) P rendered such performance with the expectation of being paid. 3) P was not acting as an intermeddler or "volunteer." 4) to allow the D to retain the benefits without paying the P would result in the unjust enrichment of the D at the P's expense.
"Equity will not aid a volunteer."
3. Alternative to contract remedy. Quasi-contract is often available as an alternative to enforcement of the express contract. For example, where P has built a house for D and D refuses to pay, P may sue for the reasonable value of the benefits conferred on D, or P may sue for damages under the contract between P and D.
4. Measure of recovery.
1) Unjust enrichment. Normally the recovery is measured by the reasonable value of the benefit conferred on D.
2) Detriment to P. Modern courts measured recovery as detriment to P, especially where D has really received no benefit, although the P has suffered a loss. CASES where recovery limited to contract price: 1. P is in default under a contract, or
2. Statute of Frauds bars suit and P is suing for the benefits conferred under such an enforceable contract.
Traditional measures: expectancy - benefit of the bargain; reliance - costs of reliance; restitution - value of the benefit conferred. Can't speak about "benefit of bargain" - no bargain. Can't speak about "costs of reliance" - no promise.
5. EXAMPLE: Ds' contractor mistakenly builds on Ps' lot. Ds' entitled to equitable lien for the innocent improvements to another's land. Duncan v. Akers
6. BAILEY V. WEST Race horse, Bascom's Folly, cared for by Bailey after being injured. Sent bills to West-purchaser, and Strauss-seller. Bailey sent bills to both West and Strauss. West's strongest argument: he rejected benefit when given the opportunity by returning Bailey's bills. Unless West had a duty imposed by law (criminal liability for mistreating a horse), he could have claim horse was abandoned. Court held for West on these grounds:
1. There was no "implied in fact" contract between the parties; there was no mutual agreement and "intent to promise" between P and D so as to establish such a contract. (No promissory estoppel)
2. There was no quasi-contract between the parties. In quasi-contracts, the obligation arises not from consent of the parties (as in the case of contracts express or implied in fact) but from the law of justice in preventing unjust enrichment. If P renders performance without request by D, then D likely faces no obligation to compensate. Indeed, D upon receipt of P's first bill, immediately notified P that D was not the owner of the horse and would not be responsible for its keep.
COMMENT: Express contract - oral or written and consists of an offer, acceptance, and bargained-for consideration.
Implied-in-fact contract - inferred as a matter of reason and justice from the acts, conduct, or circumstances surrounding a transaction, rather than one formality or explicitly stated in words.
Quasi-contract - implied in law -- an obligation imposed on a person not because of his intention to contract, but because the circumstances between the parties are such as to justify in one party a right and in the other a duty.
III. THE REQUIREMENT OF A WRITING - THE STATUTE OF FRAUDS
Unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be (1) in writing and (2) signed by the party to be charged.
Rationale: prevent perjury and fraud. Objections: perfectly good oral contract invalid, quasi-contracts do not apply, arbitrary categories.
A. Types of contracts which must be in writing.
1. Suretyships. Promises to answer for or discharge the debts, default, or obligations of another by (a) one who is not presently liable, (b) to a creditor, and (c) in order to discharge the present or future obligations of the present debtor.
a) Promises to debtor. Promise made to a debtor ("I'll pay your obligation to X") and is supported by consideration, is enforceable even though it is oral. R2K § 191.
b) Primary debt by promisor. Oral promises enforceable for "primary promises." Example: A orally tells C to send $100 of goods to B and "send the bill for $100 to me," the primary contract is between A and C and not between A and B. B is merely a third party beneficiary; oral contract is enforceable.
c) Exception -- where the guarantor's MAIN PURPOSE is to benefit himself. Even if the promise is "collateral," if the promisor's MAIN PURPOSE in guaranteeing a debt was to secure a pecuniary benefit for herself, her ORAL promise is enforceable.
d) Example of MAIN PURPOSE doctrine. STATE AUTOMOBILE INSUR. CO. v. WILSON. Where insurance co. sought to guaranty hospital payment so as to get immediate medical attention and thereby limit its own potential liability, the MAIN PURPOSE doctrine applies and the oral promise is enforceable.
(1) A promises B that it will lend him $10K. B promises A that he will repay the $10K. C promises B that she will repay the $10K if B does not. SURETYSHIP. C's promise must be in writing. B must go to A first, then to C.
(2) B promises to lend A $10K. C promises B to repay the $10K. A promises nothing. NO suretyship.
(3) B promises A that it will lend him $10K; A promises B that he will repay the $10K. C then promises A that she will repay B. Promise to debtor. Therefore, oral promise is enforceable.
(4) B promises to lend A $10K; A promises to repay the $10K. C then promises to pay B $8K in exchange for B's release of A for all claims. A NOVATION. New whole contract, new parties. Therefore, oral promise is enforceable.
(5) Insuror guarantees hospital payment for treating S if S does not pay. This is suretyship. Must be in writing to be enforceable. In State Automobile Insur., MAIN PURPOSE doctrine applied and therefore held oral promise enforeceable.
2. The Executor-Administrator Clause
An executor or administrator's promise "to answer for damages out of his own estate" or out of the decedent's estate must be in WRITING to be enforced.
3. Contracts which are incapable of being performed within ONE YEAR must be in writing. Any possible performance in less than a year = oral promise is suffficient. The one-year period begins from the date the contract is made, not when performance is promised.
A) Termination provisions. Beer Distributor case. "P became the exclusive wholesale distributor in certain county for D's beer ... for as long as D sold beer" in that county. Since D could discontinue selling in county within a year, possible performance => ORAL PROMISE ENFORCEABLE.
B) Exception for fully executed contract/ONE SIDE RULE. A party who has fully performed his obligations under an oral agreement that could not be completed by the other party within a year can enforce an ORAL PROMISE. Most courts look to see if performed within one year. Otherwise, may require a writing.
PAROL EVIDENCE RULE: where parties reduce their agreement to writing and intend it as the final and complete expression of their agreement, evidence of an earlier oral or written expressions is not admissible to vary the terms of the writing. Collateral oral agreements which do not conflict with written terms or cover subjects outside the written agreement may be admitted. (Old fashioned, just easy application)
C) Insurance Company contracts with owner to insure a warehouse for two years against damage or destruction by fire. The premises are destroyed by fire in 1 1/2 years. ORAL PROMISE ENFORCEABLE - possible contingency to perform in less than one year, e.g., warehouse burned down after 6 months.
4. The Marriage Clause. Prenuptual agreements must be in writing.
5. The Sale-of-Goods Clause. A contract for the sale of goods for with price > or = $500 must be in writing.
a) Goods defined. "Goods" include all tangible movable property. It does not include intangibles, securities, or contracts for labor and/or other services.
(1) For mixed goods/services contract, issue is whether the contract is primarily for the sale of goods or for the rendering of services.
(2) Thus, an oral contract for the service of constructing a building might be one primarily for services, and even though material worth more than $500 are supplied as part of the job, an ORAL CONTRACT would be ENFORCEABLE.
b) Exceptions. Oral contracts for the sale of goods of more than $500 will be enforced in the following situations:
(1) Where the buyer receives and accepts all or part of the goods (the contract is enforceable as to the goods accepted).
(2) The buyer gives something in partial payment for the goods (the contract is enforceable as to the goods paid for).
(3) The contract calls for the manufacture of special goods for the buyer and the seller has made a substantial beginning in the manufacture thereof. The shopping bag case.
(4) The contract is between merchants, and within a reasonable time a written confirmation of the oral contract is sent by one of the parties and the party receiving it does not send a written objection within 10 days.
(5) The contract is admitted in court pleadings or testimony by the party against whom enforcement is sought.
c) THE SALVIDOR DALI CASE.
d) Aluminum Siding hypothetical. She is party charged, she did not sign estimate, she did not initial. Is this K for sale of goods? How much charge for siding and how much for services? Where are they making their profit? Estimate may not contain other elements necessary for a writing.
Suppose K deemed to be for sale of goods > $500. If siding co. tries to back out of it, question about whether (UCC reqired) quantity term specified in the estimate. UCC permits price to be inferred. Ordinarily, states area of house to be covered - infer quantity.
Same facts, but driver never wrote his name on the form. Any chance of enforcement? Letterhead enough with handwriting - for authenticity.
6. Contracts for the sale of an interest in land must be in writing.
a) Leases are normally covered by the Statute of Frauds; however, many states provide by statute that leases for one year or less do not have to be in writing.
b) An "interest" in land. It is often difficult to determine what is included under the term "interest in land." Fixtures, liens, growing timber, etc. have all been held to be an "interest" in land.
c) Part performance doctrine. Where the P brings an action for specific performance (and not an action at law for damages), PART PERFORMANCE of the land sale contract may take it out of the Statute of Frauds => ORAL K ENFORCEABLE. Generally applied in favor of PURCHASERS and not vendors.
Example: Suppose Lucy had persuaded his brother to put $25K and paid to have the Zehmer's land title examined. Part performance doctrine. But generally applied in favor of purchaser (Lucy) not vendor (Zehmer).
If Lucy, who only made an oral promise, writes a note saying "The deal is off, the farm isn't worth $50K," then his oral promise is not enforceable against Lucy. However, if Lucy signed the note, then the note would have acknowledged the existence of a K and bound him - had precisely the opposite effect he intended.
C. COMPLIANCE WITH THE STATUTE OF FRAUDS
1) Memorandum of essential terms.
a) Requirements. A memorandum of the essential terms of the agreement (e.g., letters, telegrams, or even mere notations in the private books of one of the parties which were never communicated to the other) will satisfy the Statute, if the memorandum contains the following: parties, subject matter, terms and conditions, recital of consideration, and signature of the party sought to be charged. A party's initials, seal, LETTERHEAD, etc., may be sufficient - authenticity.
It is immaterial where the signature occurs. The name can be printed. A check, telex, receipt, invoice, letter, telegram may qualify for the above rule. The signature requirement has not been applied with rigor.
b) Integration of documents. The requisite writing may be composed of several documents, provided each document refers to or incorporates the others, or they are otherwise integrated (i.e., physically attached). R2K § indicates it is sufficient if the documents involved simply refer to the same subject matter, same transaction.
c) The UCC position. Under the UCC even less completeness is required in contracts for the sale of goods. There need only be some writing sufficient to indicate that a contract for sale has been made and which specifies the quantity terms, even though it omits or incorrectly states other terms agreed upon. However, the contract is only enforceable as to the quantity of goods specified in the writing. [UCC 2-201] Note also that if one "merchant" sends a written confirmation of a contract to another (in a form sufficient to bind the sender), the requirement of a writing is thereby satisfied and the other merchant is bound thereby unless she objects within ten days following receipt, even though she never signed anything. ** Only EXCEPTION where UNSIGNED memo is binding.
d) Effect of noncompliance with the Statute of Frauds. In most states, failure to comply renders the contract voidable (i.e., unenforceable at law), but not void. The statute many only be asserted by a party to the contract, never by a third party. If one party has signed a memo that satisfies the statute, the contract is enforceable against her even if it is unenforceable against the other party.
e) Estoppel to plead the Statute. If either party, by words or conduct, directly or indirectly represents that she has (or will) put the agreement in writing, or that she will waive the Statute of Frauds as a defense, and the other party relies on such representation to his substantial detriment, the first party may be estopped to use the Statute as a defense.
f) Part Performance, as a general rule, does not make a contract enforceable within the statute.
IV. CAPACITY TO CONTRACT
A. MINORS. Minor Dodson can turn over wrecked car and get back all he paid for it - contract rescinded. If he disaffirmed the contract, the amount he would get back would have the damage to car subtracted. He could disaffirm the contract while still a minor or shortly after reaching the age of majority. Except in the case of necessity, a minor can disaffirm. Court will look to whether 1) overreached; 2) no undue influence; 3) K fair and reasonable. Here, purchasing car from his coach.
B. MENTALLY INCOMPETENT. Court will ask two questions: 1) Was the party suffering from mental defect or illness at time K formed? 2) Did that defect interfere with his ability to understand and his ability to act? Example of Understand but Can't Act: Manic-Depressive addicted to contracting.
If guardian appointed, guardian can void K formed when incompetent. If drifts in and out of lucidity, can affirm/disaffirm during lucid interval a K formed when incompetent.
P's attny crafted contract to say "unable to occupy his suite as a result of disability or any other reason." That phrase did not just happen to turn up. UNFAIR. Krasner knows something is wrong with his partner and his growing disability.
HEIGHTS REALTY v. GHOLSON Law presumes everyone is competent. Burden of proof rests with person asserting incapacity. If incompetency shown to exist prior to execution of instrument under attack, presumed to continue until showing of a lucid interval. Factors: 1) mental and physical condition prior to and at time of K; 2) whether transaction is beneficial; 3) relation of trust and confidence. TEST: would a reasonable person regard the K as a fair deal? Inadequate consideration not enough, there must be fraud, undue influence, violation of a duty, or taking unfair advantage.
UNDUE INFLUENCE: No threat, trust relationship - abuse it, unfair persuasion. No time to consult with advisors or attorneys, unusual or inappropriate time, emphasis on untoward consequences of delay.
V. ABUSE OF THE BARGAINING PROCESS - FRAUD, DURESS, AND UNCONSCIONABILITY. The fact that one or both parties' consent to the contract was induced by fraud, mistake, or duress is a defense to formation of the contract. The innocent party may seek affirmative relief in equity by rescinding the contract.
As a general rule, when mutual assent, consideration and its substitutes, requirement of writing, and capacity to contract are present, courts will enforce contract. Exceptions: mutual mistake, misunderstanding, unilateral mistake, vague, and misrepresentation.
1. Bad result alone does not prove fraud -- MORTA V. KOREA INSURANCE CORP.
The case shows no evidence of misrepresentation. The fact that D's agent told P that he could only give P $900 is a negotiating tactic, not fraud or misrepresentation. Nor did D owe a duty to P based on a confidential or trust relationship, the violation of which would constitute constructive fraud. No undue influence - Morta sees a lawyer and 2 doctors. Possible atty malpractice cause of action.
Although P claims he did not read the release and was mistaken about its contents, a party may not rescind a contract based on his own neglect of his legal duty. Characterize: unless in fine print and ordinary person would not think part of K.
An express release may cover unknown claims arising from a particular accident. P freely entered his contract with D, releasing any unknown claims for latent or progressive presonal injuries in return for the prompt payment. There are no legal grounds for invalidating this release, despite the unfortunate factual situation. Dissent: Casey does not prevent all settlements for unknown claims; it merely requires a showing of a conscious understanding that the release would discharge injuries suffered but not yet manifest.
2. ARTHUR MURRAY dance classes case. Can't defend when opinions are not honestly held. Misrepresenting own opinion that lady has great dance potential, possibly even taught to say that in training. Counterargument: she was getting attention and companionship she wanted, but at $31,000?
A statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms. D had superior knowledge as to whether P had dance potential and as to whether she was noticeably improving. P should be allowed to attempt to prove that D procured its contracts with P through intentional misrepresentations as to P's progress.
3. Real Estate Sale -- M-1 Zoning restrictions case. A less common ground for rescission of a real estate contract is innocent material misrepresentation by the seller.
A misrepresentation is an assertion contrary to the facts, even if not written or spoken in words. A true statement may be a misrepresentation if it leaves a false impression, i.e., a half-truth. The advertisement of P's land as zoned M-1 is this type of misrepresentation because in reality the special restrictions prohibited what was otherwise in an M-1 zone.
For D to recover, he must prove that (1) a misrepresentation existed, (2) that it was material, (3) that it induced him to execute the contract, and (4) that his reliance on the misrepresentation was justified. WIRTZ adds (5) as businessman, did he check out restrictions (discoverable).
Merger clause excluding any representations not expressly written into the contract does not preclude a claim for misrepresentation (fraudulent or innocent). In contrast, court upheld MERGER CLAUSE in seeping sewer case due to mistake. Misrepresentation implies WRONG even if innocent.
One must come to equity with clean hands.
4. Duty to disclose; NEW DOCTRINE; ON THE FRONTIER -- Termite infested house case. MERGER CLAUSE again inapplicable due to fraud or misrepresentation. Contrary to the common law caveat emptor principle, under modern law a vendor has an affirmative duty to disclose material facts: (i) to prevent a previous assertion from being fraudulent or a material misrepresentation; (ii) correct other party's mistake to basic assumption, failure violates good faith and fair dealing; (iii) to correct the other party's mistake as to the contents or effect of the writing; and (iv) the other person is entitled to know the fact because of a relationship of trust and confidence between them.
Suppression of a material fact is equivalent to a false representation when a party has a good faith duty to disclose. Under some circumstances, nondisclosure of a fact may be equivalent to an assertion that the fact does not exist. Particularly as to material facts regarding the sale of a home, some courts have required sellers to disclose facts that are not readily observable and are not known to the buyer. Termite infestation, including past termite infestation and damage, has generally been deemed material. The materiality issue should be left to a jury to decide.
COMMENT: In ordinary business contexts, a party rarely has a duty to speak, and silence even as to a material fact is not, by itself, fraud or misrepresentation. A duty may arise from a fiduciary or confidential relationship, or from the need to correct a previous statement or false impression. In this respect, the HILL case is not typical but may represent a trend.
5. AUSTIN v. LORAL. Subcontractor blackmails contractor into giving it higher price or won't ship goods on first subcontract with the Navy. Loral does not want to be on the Navy's shit-list. HALLMARK of DURESS: 1) threat, 2) wrongful or improper, 3) induces the assent of party threatened, 4) and puts threated party in position of having no reasonable alternative. Threat to do something you don't have a right to do.
6. Where D threatens not to enter into future contracts with P, but does not threaten to terminate an existing K, there is no duress. Such a future expectancy is not a legal right upon which P can base a claim of economic duress. Also, fails on the "no reasonable alternative" criterion. In this case, the parties had no continuing contract.
COMMENT: Duress is normally used as a defense to a suit for breach of K or as a basis for recovering restitutionary relief. The court in this case stated that threats to do what the threatening person had a legal right to do 7 duress. This is not always correct. Counterexamples: threaten criminal prosecution or report to tax authorities if someone does not meet your demands.
At common law, unconscionability referred to contracts that were manifestly unfair or oppresive (i.e., contracts which no one in his right senses and not under a delusion would make.) UCC section 2-302 applies to clauses or contracts for the sale of goods: 1) refuse to enforce the K, 2) enforce the remainder of the K without the unconscionable clause; 3) limit the application of the unconscionable clause so as to avoid any unconscionable result.
Most cases involving unconscionability deal with "unfair surprise"; i.e., unreasonable terms contained in contracts where a reasonable person would not find them, or even if found, where the party has no bargaining power to exclude them.
PROCEDURE: (1) ask about unfairness of clause (not the sort of provision you wold expect to see in this type of K, hidden away, take it or leave it get additional scrutiny, add these together), (2) party seeking relief, (3) party seeking enforcement. (4) Argue both sides. (5) If we had this info, it would turn out this way.
1. A homeowner should not be bound by the confessed judgment found in the small print of a building contractor's multi-page K. For such a drastic agreement, the law jealously requires explicit voluntary acceptance. Fine print may not function as an "ambush to conceal legalistic spears."
2. The cases since Williams require both the absence of meaningful choice and a commercially unreasonable term in a contract in order to find unconscionability.
3. Burden of proof on the one asserting unconscionability to stop enforcement.
4. In Jones v. Star Credit Corp, the court has simply rewritten the price term of the contract and substituted its judgment of how the transaction would be conducted for that of the parties.
5. Oil Co. not shielded from negligent act of spraying gasoline on P's filling station and person that caused burns due to a lease stating that operator would indemnify (hold harmless) oil co. for any negligence occuring on leased premises. A party with disproportionate bargaining power cannot limit its liability for its own negligent acts. Oil co. has the burden of showing that these provisions were explained to the operator and that there was a real and voluntary mutual assent. This oil co. failed to show.
Court specifically rejects parol evidence rule: an agreement or contract signed by the parties is conclusively presumed to represent an integration or meeeting of the minds. Unconscionability can destroy that presumption.
6. A franchise agreement may provide for termination without cause by either party. The basis test for unconscionability is whether the clause is so one-sided that it could result in unfair surprise or oppression to the disadvantaged party, but it does not involve the allocation of risks. In the Dairy Mart case, P did not have to invest in anything but the inventory; D was required to repurchase P's inventory upon termination.
7. HALLMARK of Unconscionability: unfair. No one would expect to see.
Illegal contracts refer to subject matter that was illegal at all relevant times. If the subject matter was legal at the time the offer made, but became illegal before acceptance, the intervening illegality terminates the offer as a matter of law. If the subject matter was legal at the time the contract was formed but subsequently became illegal, the contract is discharged under the doctrine of impossibility of performance.
1. Sinnar v. LeRoy - give money to third party so he can bribe official for liquor license. Defense of illegality may be raised at any time based on public policy, even on appeal. The defense cannot be waived, and the court may examine witnesses and develop facts not introduced by the parties. The court in instances of serious illegality will leave the parties where it finds them.
P's payment to D did not constitute a crime. However, the fact that it violated public policy was sufficient to bring the defense of illegality into play.
2. Sometimes a case can be made for restitution. Distinguish between enforcing a contract and getting money back.
Dr. MICHAEL A. S. GUTH