Contracts Note Summary

Fall 2011: Schooner

Chapter 1: Introduction

  1. Contract Law
  2. A contract is an agreement between two or more persons
  3. Element of futurity- commitment to a course of action to be taken in the future
  4. Exchange of promises, an agreement that has legal effect, bargain for exchange (quid pro quo “something for something else”) - enforceable bargains in future
  5. Concept of futurity or promise of future expectations of performance Elements:
  6. Agreement in fact between the parties
  7. The agreement as written (which may or may not correspond to above)
  8. The set of rights and duties created by 1 and 2
  9. Contract is society’s legal way of protecting the expectations that arise from making arrangements about future exchange of performance
  1. Sources of Contract Law
  1. Judicial Opinions
  2. (1) Precedent (Stare decisis- adherence to past precedents)
  3. Sub Judice- under consideration by the court (under adjudication)
  4. Precedent is only binding if it was issued by that court or a higher court within that jurisdiction (other courts’ decisions are persuasive)
  5. Court can also ignore if the facts of the other case were materially different from the case under consideration
  6. (2) Policy (any societal goal that will be furthered by a particular decision)
  7. Statutory Law
  8. Doesn’t cover all transactions
  9. Statute of Frauds: Requires certain types of contracts to be evidenced by signature enforceable in court
  10. Development of Uniform Commercial Code in 1940s, still evolving
  11. Court looks at rules by statute differently than common law precedent
  12. Legislature can change common law rules as long as they’re constitutional
  13. The Restatements
  14. ALI adopted the Rst. of Contracts in 1932- codified common law
  15. None have the force of law, just opinions/commentary on advances to law
  16. Second revision reflects the incorporation of the UCC into general contract law
  17. Goods are moveable things (not money and other intangible rights (§1 – 105(1))
  18. Sale consists of passing of title from seller to buyer for a price (§2-106(1))
  19. Legal Commentary
  20. Commentary has been influential in shaping the course of common law
  21. Certain professors think it’s their duty to help articulate and advocate change
  22. International Commercial Law
  23. Most countries after WWII signed onto General Agreement of Tariffs and Trade (GATT) to reduce trade barriers
  24. Many international organizations to help fill in legal gaps of Agreement
  1. Perspective of Contract Theory
  2. Formalist- approach in the Willistonian period
  3. Had universal rules, apply to each case- no moral or political influence on the outcome of a case
  4. Wrote casebook on Contracts, influenced Restatement of Contracts
  5. Legal Realists- end result of case is the combination of rules, facts and personality of judges
  6. In effect policymaking reflects a combination of economics, psychology, science, etc.
  7. Didn’t like the black letter law of the Restatements
  8. Criticized for not following the purposes and goals of legal process
  9. Economic- court decisions should move toward efficient goals
  10. Legal rules should reach efficient outcomes
  11. Inefficient rules should be modified toward greater efficiency
  12. Contracts should seek to preserve business relationships
  13. Critical Legal Studies (“Crits”)
  14. It is impossible to establish a rational system of decision-making as it now exists
  15. Goal is altruistic and communitarian society
  16. Law serves the goals of white males at the expense of minorities
  1. The Lawyering Perspective
  1. Attorneys are counselor to identify legal problems, choose between options
  2. Negotiator to rep. your client, drafter to express their bargain (organize, articulate)
  3. Advocate to present the most persuasive arguments possible for your client
  4. History:
  5. Debt- sell goods to a person (request)
  6. Assumpsit- action for recovery of damages caused by a breach in contract – ex: person promises to pay you if you sell them goods (contract)
  7. Executory contract- a contract which hasn’t been performed yet

Chapter 2: Basis of Contractual Obligation: Mutual Assent & Consideration

  1. Mutual Assent
  2. A contract requires a bargain in which there is a (1) manifestation of mutual assent to the exchange and (2) consideration
  3. No coercion- people voluntarily entering into a bargaining situation
  4. Theoretically, if the parties don’t have a meeting of the minds, and they don’t agree, then they don’t have a contract
  5. But a contract can be formed even if parties don’t engage in bargaining
  6. Subjective Theory of Contract:
  7. It is the party’s intent, not their conduct that determines what they should be held accountable for (look for a “meeting of the minds”)
  8. Need to listen to witnesses, memories might change, people might lie
  9. Less incentive to read contract, less responsibility to follow through
  10. Lenient because people make mistakes, helps protect less educated consumers- no “meeting of the minds”/ mutual assent if people are thinking different things
  11. If parties attach materially different meanings to K language, no K
  12. Objective Theory of Contract
  13. Look at the conduct of the parties from the perspective of a reasonable person instead of their subjective intentions
  14. Objective Intent to enter into a contract: would a reasonable person have construed the agreement to be a binding commitment
  15. Law of enforceability has nothing to do with party’s actual state of mind when entering the K; rather is based on outward manifestations of intent (conduct, language, etc.)
  16. Whether there has been offer OR acceptance is based on what a reasonable person would have construed the situation to be
  17. Under objective theory, if intent to enter into a K is ambiguous…
  18. In business transactions  assume parties intended to be bound
  19. In social and domestic  assume parties did NOT intend to be bound
  1. Intention to be Bound: Objective Theory of Contract

RAY v. EURICE BROS. (contractors and engineer “agree” to build a house)

Issue: Is a person responsible for upholding a contract if they did not fully understand the requirements to which they were signing?

Rule: Yes. The Restatement dictates that you are bound by the contract though ignorant of the terms of the writing or its proper interpretation

  • Manifestation of mutual assent by the parties to an informal contract, but neither (1) mental assent to the promises in the contract nor real nor (2) apparent intent that the promises shall be legally binding are essential
  • Interpretation of an offer or acceptance isn’t what the party thought or intended it to mean, but what a reasonable person would have thought it meant.
  • Look at objective manifestation of intent- existence of the document, actions, manifestations of agreement (meetings, signatures, etc.), not about the intention of the parties

Why Use Objective Theory of Contracts?

  1. Consistency, People can form reasonable expectations about K formation
  2. Avoids litigation; more practical, more reliable for commerce
  3. Imposes responsibility on people to be clear about their actual intent
  4. Williston: true interpretation of offer based on what reasonable people in the place of the parties would interpret

Why Not Use It?

  1. If applied too strictly could undermine fairness; no variance
  2. Hard to interpret, intent still is important
  3. Biased towards those who already have a great understanding of that realm of business (favors those with the best lawyers)

Why Enforce a Contract?

  1. Respect private autonomy
  2. Create a world where contracts are enforceable so individuals can voluntarily and privately affect their own legal relationships and affect their future reliably
  3. Predictability and certainty of contracts helps society plan
  4. Respect people’s reliance on promises and interests
  5. Help prevent the injustices associated with making a promise, and then failing to fulfill expectations, detriment to other
  6. Unjust enrichment
  7. When a party makes a promise, fails to fulfill it, then benefits by taking advantage of someone else, don’t want benefit from a wrongdoing- Want them to give back any ill-gotten gains
  1. Offer and Acceptance in Bilateral Contracts
  2. Bilateral Contract- exchange of a promise for a promise
  3. Both parties have actions to be performed in the future pursuant to the agreement
  4. The offeror has the power to determine WHAT constitutes acceptance as well as how it should be conveyed, when, where, etc.
  5. At the moment that the bilateral contract becomes enforceable, both parties are bound to fulfill their promises, not contingent upon another performance
  6. In Bi-lateral contracts: two promisors and two promisees
  7. Offerer gives an offer to the offeree, who now has the “power of acceptance”
  8. If the offeree accepts the offer in a legally accepted way, contract comes into being, OR offeree may respond with a counteroffer
  9. May accept then have a contract, or may expire, reject (revoke the offer)

LONERGAN v. SCOLNICK (debate over whether sale of 40 acres was legit)

Issue: Can a contract be entered into without signatures, a formal meeting, or a definitive exchange of information? Was the April 8th letter an offer?

Rule: If the person accepting the offer knows that the offerer isn’t making his final offer but a preliminary gesture to engage in further discussion, then an offer has not been made. Form letters are not offers.

  • Seller didn’t intend to have the buyer say “I agree” so wasn’t an offer because offeror needed to give further details of offer before could give to offeree to accept
  • Buyer must have understood that something else was required of the seller
  • An offer needs to express a fixed purpose and contain an expression of assent to be valid
  • Restatement 26- manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the offeror does not intend to conclude a bargain until he has made a further manifestation of assent

The Mailbox Rule

-An exception to the general rule of contract law in common law areas that acceptance takes place when communicated. The posting rule states, by contrast, that acceptance takes effect when a letter is posted, if reply by post is reasonable

-Revocation of the offer doesn’t have an applicable mailbox rule

Ways to Terminate Bilateral Offer

-The offeree rejects, offeree counteroffers, a significant lapse of time, offeror revokes the offer, death of either party, the non-occurrence of a condition of acceptance under the terms of the offer

IZADI v. MACHADO (GUS) FORD (sneaky advertisement selling cars)

Issue: Does the advertisements’ interpretation by a reasonable man constitute a contract, or does the fine print dictate the terms?

Rule: Business should adhere to the contract that a reasonable person would deduce from seeing the advertisement.

  • Advertisements can be offers (especially “first come first served”)
  • Precedent holds businesses accountable for telling the truth and observing the law of common honesty and fair dealing

NORMILE v. MILLER (buying and selling a house with time limits)

Issue:Does the prospective purchaser have the power to accept the counteroffer after he receives notice that the counteroffer has been revoked?

Rule: No. The original offer is valid only until the offeree accepts, rejects or makes a counteroffer. The counteroffer is only valid until the original offeror accepts or rejects, or the offeree withdraws the counteroffer.

  • The offeree, or creator of the counter-offer, negates the provisions of the original offer, and has the right to revoke the counteroffer up until it has been agreed to by the original offerors.
  • By signing contract with Segal, seller manifested her intent to revoke counteroffer which Miller could do any time before the counteroffer was accepted (Restatement)
  • Normally buyer has to be told of revocation of offer, counts if they hear indirectly
  • Courts aren’t lenient of unilateral mistakes- punishes party who did it right
  1. Offer and Acceptance in Unilateral Contracts
  2. Unilateral contract- exchange of promise for performance where offeree does not make a promise but instead completes an act (I promise to give you $10 if you walk across the bridge)
  3. Offeree’s performance constitutes acceptance of the offer AND complete consideration and then they have no further obligation under the contract
  4. When an act is wanted in return for a promise, a unilateral contract is created when the performance is completed by the offeree
  5. In Unilateral contracts: one promisor and one promisee
  6. Maximum protection to the offeror since he isn’t bound unless and until he had received the performance he sought from the offeree
  7. Higher risk for the offeree since contract doesn’t come into being until he does all the requested performance, so could do some work, and get no remedy if revoked
  8. Classical contract theory- revocable at any time until performance is completed

PETTERSON v. PATTBERG (buying up bond left on house’s mortgage, tried to pay)

Issue:Is a contract binding if the offeror revokes the offer while the offeree is attempting to fulfill the performance of the unilateral contract?

Rule: The contract is not binding if at any point before the act is completed, the offer is revoked. It’s ok to withdraw the offer any time prior to acceptance. (Classical Interpretation of Unilateral Contract)

  • The offeror has the right to revoke the offer at any point up until the moment that the offeree completes the act required by the unilateral contract.
  • Dissenting- thought that the offer was unilateral, but the act that was being sought by the offeror (payment) was impossible unless the offeror allowed it.
  • Williston- If a promisor is the cause of the failure of performance of an obligation due him or of a condition upon which his own liability depends, he cannot take advantage of the failure
  • Implied consideration was the defendant’s acceptance of the payment if the plaintiff tried to fulfill the unilateral contract
  • Policy Reasoning: wanted a bright line rule to prevent floodgate claims

Beginning Performance

-Restatement 32- In cases of doubt, courts conclude that the offeror intended to allow the offeree to accept, either by making a return promise or by rendering the performance requested. Unless the language expressly states otherwise, assume that an offer may be accepted either by promise of performance or by actual performance of the offeree

-Restatement 45- option contract created by part performance or tender

  • (1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins to tender the invited performance or tenders a beginning of it
  • (2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. (Modern Unilateral Contract Rule)

COOK v. COLDWELL BANKER/FRANK LAIBEN REALTY (agent/relator)

Issue:Can the offeror revoke the unilateral contract if the offeree has already made substantial performance toward the desired performance?

Rule: No. The firm does not have the power to revoke where the offeree (of a unilateral contract) has accepted the offer by substantial performance.

  • Consideration is given when the offeree completes a “substantial part” of performance
  • Unilateral contract because company wants performance, not a promise
  1. Other Methods of Reaching Mutual Assent
  2. Code wants to make commercial law reflect the actual agreement between the parties rather than applying formalistic principles- reflect current business practices
  3. Wanted law to mandate that parties of commercial transactions operate in good faith
  4. Avoid legal approach where the smartest contract drafter wins
  5. UCC: Only look at article 2- sale of goods
  6. Article 2 applies to the sale of GOODS not services or construction
  7. Not intended to be comprehensive, doesn’t address all issues
  8. Ifmovable, a good, not $$, improvements to land/ services/ human capital

HARLOW & JONES v. ADVANCE STEEL (steel sellers & buyers- delivery time)

Issue:Has a contract been established if all of the details were not finalized and agreed upon by both parties at the time of the contract’s establishment?

Rule: Yes. A contract may be entered into orally, with the particulars to be finished later, if there is agreement on the terms, and all terms are met by the performance. Neither of dated forms matter- contract was formed over phone.

  • UCC 2-204(1): Contract may be made in any manner sufficient to show agreement including conduct by both parties which recognizes the existence of such a contract
  • The UCC allows 1+ terms to be left open after the contract has been established, without negating the contract. Actions show that the parties agreed upon the detail, there was no material delay in the delivery time.
  • What actions suggested a contract? Seller shipped product, buyer paid.

UCC to Use

-§2-305: K for sale can still be enforceable w/out agreement on a price term IF the parties intended to be bound by their agreement

-§2-204 : (3) even though one or more terms is left open the K does NOT fail for indefiniteness if the parties intended to be bound and there is a reasonable basis for remedy

  1. Consideration
  1. Defining Consideration
  2. Anything of value promised to another when making a contract.
  3. Can take the form of money, physical objects, services, promised actions, abstinence from a future action, and more.
  4. International Contract Law: a contract can be formed simply by agreement without the additional requirement of consideration
  5. “Contract may be concluded either by acceptance of an offer or by conduct of the parties that is sufficient to show agreement”
  6. A gratuitous promise cant be enforced (all promises must be “paid for”)
  7. Consideration can be a promise (bilateral) or performance (unilateral)
  8. Promising to do something which is a legal obligation is NOT consideration
  9. Tests:
  10. (1) Benefit-Detriment Test (RST 79)
  11. Benefit for promisor, or detriment to promisee
  12. Consideration occurs if compliance w/ the promise benefits the promisor or is a detriment to the promisee
  13. Is there substantial detriment to promisee?
  14. Can give up legal right to do something, but doesn’t count if you promise not to do something that’s illegal anyway
  15. (2) Bargaining for Exchange Test(RST 71)
  16. I promise x in consideration for you doing y. “I promise to give you my car in consideration for you giving me money”
  17. Return promise MUST be bargained for; must be sought by the promisor and given by the promisee in exchange for the promise
  18. Was the return promise made in order to secure or induce the initial promise?
  19. Restatements
  20. Rst. 71- Performance or a return promise must be bargained for to constitute consideration
  21. Rst. 79- New Test- If requirement of consideration is met NO further need for benefit/detriment, equivalency of exchange, or mutuality of obligation
  22. If consideration is met then equivalence of values exchanged doesn’t matter
  23. But 79(e) says that judge may say there is fraud or misrepresentation, contract under duress?

HAMER v. SIDWAY (uncle promises $5k for nephew not to drink/smoke until 21)