CONTRACTS- Professor Steve Schooner Fall 2004

I. ENFORCING PROMISES: BASIS OF LEGAL OBLIGATION

A.  INTENTION TO BE BOUND

Promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. §2

1. OBJECTIVE THEORY OF CONTRACTS

A. Mutual Assent: Voluntary agreement by both parties, usually reached through O and A; “meeting of the minds”

B. Objective Theory of Contracts

Intention to be Legally Bound (§21)

Neither real nor apparent intention that promise be legally binding is essential to the formation of a K, but a manifestation that a promise shall not affect legal relations may prevent the formation of a K.

·  TWENTY BISHOPS (Learned Hand): Even if a group of really honest people determine what A said when he signed agreement, it’s not relevant—only relevant what document says

·  Objective intent important → reasonable interpretation of words & actions (Eurice)

o  Lucy v. Zehmer→ despite setting, past dealings between parties made it reasonable for buyer to believe that the seller was serious and seller should have known this

o  Leonard v. Pepsico→ no reasonable viewer could have understood that jet plane shown in ad was seriously offered as a premium for purchase of ∆’s soft drink.

·  Exception→ don’t want to uphold Ks in certain situations (e.g., fraud, duress, mutual mistake) (Park 100)

·  Note→ may be heightened standard of self-protection if better bargaining power (Eurice)

·  ADVAN→ Formality encourages personal resp., easy to enforce, definite & reliable terms, prevent hindsight regret

·  DISADV→ Power to words so favors sophisticated client, not always consistent w/ meeting of mind so may compromise private autonomy

Ray v. William Eurice & Bros., Inc
Players / ∏: Engineer
∆: Builder
Facts / ∆,experienced builders, signed every page of K w/o reading (had they read there were clear references to different specifications); ∆ helped ∏ fill out form using the K
Court / Unilateral mistake of “easy going hatchet and saw manner” of ∆
∆ is bound to signed→ clearly expressed and unambiguous intent in writing
∆ must pay the excess cost to put ∏ in position had ∆ completed bargain (expectation damages)
Rule / ·  The test of a true interpretation of an offer or acceptance is not what the [arty making it though it meant or intended it to mean, but what a reasonable person in the positions of the parties would have though it meant.
·  A party is bound to a signed document absent fraud, duress, and mutual mistake.
Note / Had both made a mistake, there would have been mutual mistake and likely no K.
Here ∆ may be held to higher standard b/c they are experienced builders
Park 100 v. Kartes
Players / ∏: Lessor
∆: Lessee
Facts / ∆ signed personal guaranty agreement: ∏ rep. said they were “lease papers”, said they had to sign, they were on the way to daughter’s wedding (so had little time to read), PG had never been discussed before. ∏ did not read the papers, instead called their attorney in front of ∏ who said he had okayed the lease papers.
∏ argued not material rep. b/c PG are usually included and could say ∆ did not reasonably rely b/c should have read (lazy)
Court / PG papers were signed under fraudulent means b/c a (1) material representation, (2) which was false, (3) was made w/ knowledge, (4) was relied upon by complaining party and (5) was the proximate cause of injury.
Rule / If a K is entered into under fraud or misrepresentation there is no mutual assent.
Note / Rational exception to objective theory of K
An agent is a person who acts on behalf of 1 of the contracting parties; actions legally bind that party
Company agent vs. regular people (even though some mom and pop stores will be big business)
Fraud can be passive or affirmative behavior (affirmative here where he lied!)

B.  OFFER AND ACCEPTANCE

Evaluate when:

a. Contract formation is in dispute

b. When terms included in K are in dispute

Promise v. offer: Offeree has power to bind offeror; nothing binding in promise—need something exchanged

A. Bilateral Contracts

1.  Defined: Exchange of promises—each party makes promise of future commitment

2.  Offer:

a.  Offer (§ 24) Manifestation of willingness to enter into a bargain made so that the other person understands that his assent is invited & will conclude the bargain

·  REQUIREMENTS

1.  Communicated

2.  Contains all significant terms/details

3.  Indicates a desire to enter into a K

4.  Directed at some person or specific group of people

5.  Gives power of acceptance to offeree

6.  Clear that a K will arise w/o any further approval being required?

·  EVALUATION (with obj. std.): language of offer, relationship of parties, common practice/trade usage

b.  Preliminary negotiations (§ 26)

·  No offer if recipient knows or has reason to know that person making it does not intend to conclude bargain until he has made further manifestation of assent

·  Ex: Tentative expression of interest in transacting, an invitation to make an offer, or a request for information that may lead to an offer (i.e., form letter, purchase quotation)

·  Exception when deception (“bait and switch”); read offer in best light to offeree (Izadi)

c.  Option K: (§ 25)

·  In writing, signed by offeror, purported consideration, proposes an exchange of fair terms in reasonable time (§ 87(1))…. Nominal consideration is ok (don’t need added caution)

·  Offeror can not revoke w/in time frame

3.  Terminating Power of Acceptance (§ 36)

a.  Rejection or counter-offer by the offeree… Effective upon receipt

·  Rejection (§ 38)

·  Counter-Offer (§ 39, 59) (Normile)

b.  Lapse of Time (b/c so subjective, buyer may specify a time limit)

·  Nature of transaction

·  Relationship of parties

·  Course of dealings, custom, or trade usage

·  Means of communication

·  Stability of the market

c.  Revocation by Offeror → Effective upon receipt

·  Offer can be revoked at any time before it is accepted unless option K

·  Must be communicated (indirect revocation may be sufficient § 43) (Normile)

o  Offer terminated when offeror takes definite action inconsistent w/intention to enter into proposed K

o  Offeree must have acquired reliable information to that effect

d.  Death/Incapacity of Offeror/Offeree

4.  Acceptance

a.  Acceptance of Offer Defined (§ 50)

1.  Manifestation of assent to offer terms made by offeree in a manner invited or required by offer

3.  Acceptance by a promise requires that the offeree complete all acts essential to the promise (bilateral)

b.  Necessity of Acceptance Complying w/ Terms (§ 58)

c.  Time When Acceptance Take Effects (Mailbox Rule) (§ 63)

·  If made in reasonable and invited manner, effective ONCE DISPATCHED

·  Doesn’t matter if it ever reaches offeror

d.  Option K

·  Acceptance effective upon receipt (no need to protect against revocation)

e.  By Silence only when: (§ 69)

·  Offeree takes advantage of offered services w/reasonable opportunity to reject them & knows he must compensate for them

·  Offeror stated or gave offeree reason to understand that assent could = silence/inaction

·  Past dealings between parties made silence reasonable

Lonergan v. Scolnick
Players / ∏: Buyer
∆: Seller
Facts / ∏ read ad about property being sold and wrote letter requesting description; ∆ sent letter describing and said it was a form letter; ∏ wrote back asking if escrow company would be suitable; ∆’s second letter informed ∏ that if he wanted the property he had to act fast; ∏ received letter 1 week later and attempted to “accept” the offer; ∆ had already sold
Court / Ad = solicitation of offers for the property
∆’s 1st letter = form letter
∆’s 2nd letter = response to inquiry and clearly stated further assent necessary
∏ should have known that more negotiations were necessary to seal the deal and that he was not in a unique position (preliminary negotiation §26 not offer §24)
Rule / Before a K can be formed, there must be a meeting of the minds of the parties as to a definite offer and acceptance.
Izadi v. Machado (Gus) Ford, Inc.
Players / ∏: Buyer
∆: Seller
Facts / Δ placed a newspaper ad selling Fords, had microscopic print limiting to 2 specific types of car; Π was misled by ad and sued for a car under conditions of ad.
Court / Although ads are not usually considered offers, those that “bait and switch” may be considered offers. Binding offer may be implied from the very fact that a deliberately misleading ad intentionally leads reader to the conclusion that one exists.
Rule / If an offer is conveyed by the objective reading of an ad, it does not matter that the advertiser may subjectively have not intended for its chosen language to constitute a binding offer.
Note / Reasonable person test when looking at ad.
Normile v. Miller
Players / ∏: Buyer
∆: Seller
Facts / ∏ made offer to purchase property, ∆ replied w/ change (CO), ∏ neither accepted nor rejected, ∏ heard of sale to 3rd party; ∏ then attempted to accept.
Court / Original offer and its terms were rejected when CO made (§§ 39 and 59). CO was not an option K b/c it did not include any time restrictions like the original offer. ∏ failed to accept CO prior to revocation so later acts are irrelevant.
Rule / If a seller rejects an offer by making a CO, which is not accepted, the prospective purchaser does not have the power to accept the CO after receiving not ice of its revocation.

B. UNILATERAL CONTRACTS

1.  DEFINed

·  Promise in exchange for actual performance

·  Ask if 2nd party bound at beginning (i.e., Would uncle sue nephew for breach in Hamer?)

2.  Unilateral v. bilaterAL

·  1st Restatement provided that when doubt between 2, the law concluded that it was bilateral → wanted to add certainty when ambiguous. Thought they were doing offerees a favor, but, then the offeree is stuck (if can’t complete performance, he is liable for damages).

·  §32 → protects offerees by giving them the option

3.  OFFER

·  §26 Illustration 1→ clothing merchant advertising overcoats is an invitation not an offer. If add words “out they go Saturday; First Come First Served” might make the advertisement an offer. First people who are there can make the argument that there was an offer. Otherwise, you have no power.

·  §26 Illustration 2 → Advertises that will pay $5 for every copy of a certain book; offer until revoked

4.  Acceptance of Unilateral Offer

a. Classical View: Unilateral offer can be revoked any time before complete performance (Peterson)

b. Modern View

·  Acceptance by Performance § 50(2): Acceptance by performance requires that at least part of what offeror requests be performed or tendered & includes acceptance by a performance which operates as a return promise

·  Option K Arising on Part Performance (§ 45) (Cook)

(1)  When an offer invites an offeree to accept by rendering performance and does not invite a promissory acceptance, an option K is created when offeree tenders or begins the invited performance. By commencing, offeree holds option open but not bound.

(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. We are paying for results not effort.

**Note: Preliminary preparations don’t count

Peterson v. Pattberg
Players / ∏: Executor
∆: Holder of Mortgage
Facts / Π has a $5450 mortgage. Δ made offer for ∏ to pay mortgage by 5/31 & save $780. Π showed up at Δ’s house. Π said he was there to pay off mortgage. W/o opening door, Δ said he sold. Δ opened door. Π tried to give $ but Δ refused to accept.
Court / Court adhered to the classical perspective, where acceptance of a unilateral K can only be accepted by complete performance. Gathering up $ is only a preparation, not performance.
Dissent: if D made performance impossible by interfering with it, he cannot take advantage of the failure (should count as an acceptance). P did everything necessary to accept, D was only interfering with performance.
Rule / An offer to enter into a unilateral K can be withdrawn at any time prior to performance of the act requested.
Cook v. Coldwell Banker
Players / ∏: Former salesperson
∆: Employer
Facts / First offer to ∏ real estate agent for a bonus conditioned on her sales; later second offer saying employees could not recover bonus until March of the following year; she terminated employment w/ ∆ real estate agency before ∆’s amended award date.
Court / ∏ accepted the 1st offer w/ substantial performance (actions before 2nd offer) of what was invited (sales) by ∆ in its original offer
Rule / In a unilateral K, an offer may not be revoked when the offeree has accepted the offer by substantial performance.
Note / Substantial performance not required under § 45 only beginning of performance

C.  ENFORCING EXCHANGE TRANSACTION: DOCTRINE OF CONSIDERATION