Contracts Frier Fall 2005

8/8/2019 Contracts Frier Fall 2005

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Contracts / Frier / Fall 2005

CH. 1: A ROADMAPFORCONTRACT LAW

Lucy v. Zehmer (1954)

o P asserts that D sold him a farm for $50K, which was written out on a restaurant bill, after both

had had a few drinks. Signed by D and wife. D claimed he was not serious, that it was a bluffto get P to admit that he couldnt pay the $$. No intention to sell. P thought he was serious andmade preparations for the sale. P sues for specific performance

o Issue: Does a valid K for sale exist?

o Holding: Event constituted a binding K of sale, whether offer was serious or not. Look to the

OBJECTIVE manifestations of the parties, not the private intent. P gets specific performance.

D said it was a bluff this is bad, joke wouldve been better. Bluff = intent to deceive.Also, D never made it clear that he was not serious.

D used incapacity must be unable to comprehend the nature and consequences of theinstrument executed (R2K 16)

Objective theory: look to outward expression of a person as manifesting intention, notsecret and unexpressed intent as a reasonable person would understand those actions

R2K 2 re: defn of promise objective manifestation of intention

Note that if P had only offered $10K for it, the offer would be viewed differently gross inequality of exchange

They also reduced this to writing, price was reasonable, signatures were there, and theyre-wrote it when D misspelled a word!

Contract/no-contract :

Expectation interest formation of K over (offer/acceptance made, execution).Legally sufficient to prevent Ds to avoid K no one has given/receivedanything, expectation of future state of performance only. Exchangingpromises (no need for $5)

Reliance interest P invested time/$$ - got an attorney. This is a change in

position, investment in K. Restitution interest transfer in value, the other side has benefited from its

promise at your expense

$$ value: expectation>reliance>restitution. This is the opposite whenconsidering the moral value

Specific performance equity (common w/ land transfers). Remedy judicial decreerequiring transfer of deed in exchange for purchase price. Cts prefer damages

Delchi Carrier Spa v. Rotorex Corp. (1995) US Ct of App 2nd Cir

o D sold P compressors for ACs, and sent a sample compressor for inspection and written specs.

After paying, P realizes that goods do not conform, and informs D, asking for new conforminggoods. P tries to cure. D refuses, so P cancels K. P was able to get substitute goods from othersuppliers, loss in sales though.

o Issue: Did D breach and if so, what damages are due?

o Holding: For P. D breached by delivering non-conforming goods, and this was fundamental

breach because D could foresee this result and it was what P was entitled to expect. Damagesfor lost profits, consequential damages, incidental damages, labor shutdown all because thesewere foreseeable

Using the CISG here international sale of goods

D is liable for the lack of conformity because of EXPRESS WARRANTY assumecompressors will conform not the same quality of goods. CISG art. 35

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This is a fundamental breach because it substantially deprives P of what it expected andit was foreseeable

Damages: should be equal to loss, including lost profit. CISG says that they cannotexceed what party in breach could foresee at the time of King. CISG art. 74

Give lost profits revenues minus the costs that wouldve been incurred butwere not.

Incidental damages (direct consequence of breach) storage of thenonconforming goods, shipping them back must be reasonable andforeseeable

Consequential damages (costs stemming from breach) unreimbursed toolingcosts and unusable stuff obtained for Ds goods

Court limits this at damages that are CAUSED by breach, CERTAIN (not projectedsales), and FORESEEABLE

NOTE: When UCC and/or CISG are applicable, they MUST be used

Why do we contract?

Invoke pwr of the state to get performance or damages legal deal, threat of suit changes

actions. Make sure we agree on terms of deal

Allocates and protects against known risks

CH. 2: THE BARGAIN THEORYOF CONTRACT

R2K 1: The definition of a contract: A promise or a set of promises for the breach of which the law gives aremedy, or the performance of which the law in some way recognizes a duty.

The law recognizes a promise as resulting in legal duties in 2 ways:1. A moral duty to fulfill it

2. No promise should be enforced unless there is a good reason for enforcing it (the Courts view)

2 Interpretive devices to see if a promise is enforceable:1. Form formal contract, one under seal, written down2. Consideration

A. CONSIDERATION

What each promisor seeks in return for their making a promise

R2K 71 The Bargain Theory of K (dominant modern view)o Promise is serious if there is some sort of exchange going on

o Performance or return performance must be BARGAINED for

o Performance is bargained for if it sought by the promisor in exchange for his promise, and given

by the promisee in exchange for the promisors promise.o Performance = a) an act other than a promise, b) forbearance, c) creation, modification,

destruction of legal relations

Party views what she gives as theprice of what she gets.

R2K 79 adds that if there is consideration, there is no need to show a) additional benefit to promisoror detriment to promisee, b) equivalence in values exchanged or c) mutuality of obligation [gets rid ofold notions of consideration]

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The value of consideration does not usually matter no need to look at adequacy of consideration just see fair exchange of values.

Inadequate consideration:

o Pretense of consideration: mere recital of consideration is not enough usually, unless option K

(R2K 87) Schnell v. Nello Promise to make a gift is not enforceable because there is no consideration (Aunt Tillie)

o Past consideration you cant bargain for something youve already received. Moral

consideration promisor acts from a strong sense of duty towards promisee. This might be anexception to the rule that w/out a bargain, there is no K. (Webb v. McGowan)

R2K 86: binding to the extent necessary to prevent injustice. Rigid rule, so moralconsideration isnt usually enough to enforce a promise.

o Pre-existing duty rule

o Illusory promises

Unilateral contract: promise is given in exchange for a future act (must fulfill an act, not justpromise). Offer of a reward the offeror wants the act (capture), not the promise. This is the caseabove.

Bilateral contract: exchange of a promise for a promise. The form of most Ks. Each promise is

consideration for the other.

Donative Promise: as long as this isnt too blatantly obvious, we dont care about it for considerationpurposes, unless the thing that is bargained for is of no real value or pretense. Look at motive,equivalence, genuine bargain. (This goes along w/ R2K 79)

Illusory Promiseo A promise that places no limit on the freedom of the alleged promisor but leaves his future

action subject only to his own will. Only if you want to.o Unenforceable due to lack of consideration

o If A and B arrange that A will work for B for 5 yrs, but B can terminate the agreement

whenever she wants, this is not a real promise. It is irrelevant that B hasnt terminated it

yet. She can get out whenever.o Exclusive dealing Ks no duty to sell the goods, so no consideration. However, there is an

implied duty to exercise best effort (Wood v. Lucy, Lady Duff-Gordon) UCC 2-306(2)

o R2K 77 if the alternatives would each be consideration alone, then illusory promise is

consideration.o This undermines mutuality of obligation unless both parties are bound, neither was.

UnderR2K 79, this is absorbed into the rest of consideration not necessary if there isalready consideration.

These days, youll see ouput Ks (seller agrees to sell goods manufactured during acertain time to buyer) and requirements Ks (buyer will buy everything it requiresfrom seller). These are enforced by courts because the seller or the buyer is

constrained in some way.

1. Hamer v. Sidway (1891)

o Uncle (promisor) agreed to give his nephew $5,000 on his 21st bday if the nephew refrained

from drinking/smoking until then. He performed this duty.o This is different from Dougherty v. Salt: there, Aunt Tillie promised Charley $3,000 and she

was not serious, this was not enforced. IT WAS A DONATIVE PROMISE. No considerationo Here, Uncle argues that even though nephew followed through, there was no consideration.

Nephew was benefited and unless Uncle was too, no consid.

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o Issue: Is a promise that doesnt provide a tangible benefit to promisee for actions of promisor

valid consideration?

o Holding: Courts wont ask whether consideration benefits promisee. Its enough that

something is promised, forborne, or done by party to whom promise is made as consideration.Its sufficient P restricted lawful freedom.

o If nephew had agreed not to shoot heroin, there would not be consideration because he hasnt

incurred a detriment (its not LEGAL).

2. Fiege v. Boehm (1956)

a. RULE: Forbearance to assert an ultimately invalid legal claim is sufficient consideration if thatperson acted in good faith at the time K was made

b. P alleges that D breached K D agreed to pay expenses for Ps baby in return for P notinstituting bastardy proceedings against him. D pays $480 but then finds out he is not the father

c. Issue: Is forbearance to assert a claim, even though it later turns out to be an invalid claim,sufficient to establish consideration?

d. Holding: For P As long as the mother acts in good faith at the time of the K (she believedthat it was her child), forbearance to assert a claim (even though it later turns out to be aninvalid claim) establishes consideration.

i. Note that there is NOT sufficient consideration when forbearance to assert a claim isdone in bad faith, fraud, without an honest and reasonable belief

ii. R2K 74: forbearance is consideration if surrendering party believes theclaim/defense may be fairly determined to be valid.

iii. R2K 175(1): K is voidable if the manifestation of assent is due to improper threat bythe other party. And underR2K 164(1), the recipient of fraudulent misrepresentationcan seek to void the K if he justifiably relies on the misrepresentation

3. Petroleum Refractionating Corp. v. Kendrick Oil Co. (1933)a. D contracted to buy a certain amount of oil from P unless P should stop making that grade of

oil. D states that the grade is not correct and will not accept further deliveries. P then sells the

rest of the oil elsewhere for much less and sues for the difference.b. Issue: Was there consideration for Ds promise to buy oil?c. Holding: For P Seller giving up legal right to sell is consideration even if seller has no

obligation to produce the goods whatsoever. Detriment does not have to be real and involveactual loss, it is a LEGAL detriment where the promisee gives up a legal right (right to continueto make oil).

i. The P had 2 options here: carry out the K or stop making the grade of oil.ii. D claimed the K was illusory perf was entirely optional. Ct disagrees

4. Harrington v. Taylor (1945)a. Wife knocks down D, who abused her, and is about to decapitate him when P intervenes and

stops the axe, sustaining damage to her own hand. D orally promises to pay P damages, but hefails to do so.

b. Issue: Is there consideration recognized by our law that supports Ds promise?c. Holding: Common gratitude aside, a humanitarian act like this, voluntarily performed, is not

consideration.

5. EMU v. Burgess (1973)a. D signed doc that granted P a 60-day option to purchase Ds home, doc acknowledged receipt

by D of $1 and other valuable consideration, none of which was actually pd to D. Before

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option was up, P writes that they will exercise option, but D rejects, claiming no considerationand revocation prior to acceptance.

b. Issue: Does the acknowledgment of receipt of consideration suffice as consideration and thusan option for sale of land, if it was never pd?

c. Holding: For D consideration was a pretense, therefore there was not an enforceable option,but instead an offer that was revocable at will before acceptance by P.

i. RULE: Offer w/ consideration (any amount) is an OPTION K (keep offer open tilltime expires) and it is binding, but if there is no consideration, it is merely an offer.Mere recitation of a bargain is not enough, there is a nominal consideration needed

ii. This is strict; ct couldve used equitable estoppel (D signed acknowledgment that shereceived the $1, so this should estop her from asserting otherwise); implied a promise;used the Rest. (see below).

6. Fisher v. Jackson (1955)a. P applied for job at newspaper, for permanent position, which he acknowledges in letter of

interest. P left job at bakery for less pay as a reporter. Oral K for life of the P, but he is firedafter 5 years. Sues for breach.

b. Issue: Was there consideration or is this an employment K, terminable at will?c. Holding: There was no additional consideration for a promise that mightve been made by D.d. RULE: In employment Ks, rendering services that are incidental to employment does not make

consideration, it is an indef general hiring, terminable at will by either party. Would needadditional consideration to bind the bargain.

i. So, if the P had been very explicit that giving up his old job was a condition foraccepting employment, that it was a real detriment and that he was lured by the D thiswould be additional consideration.

B. RELIANCE These are situations where there is no consideration for a bargain, there may not be a K then, but thereliance of one of the parties changes things.

PROMISSORY ESTOPPELo Cts will sometimes enforce a promise when there is no consideration based on the reliance of

another upon that promise.o However, COURTS WILL PREFER USING CONSIDERATION

o R2K 90 promise that promisor should reasonably expect to induce action/forbearance that

does induce action is BINDING if injustice can only be avoided by enforcing the promiseo PrEst can be thought of as a) substitute for consideration (no bargain, but enforceable promises,

estopped from claiming no consideration) or b) an independent cause of action to enforcepromises

o OLD RULE: Initially, PrEs was not intended to be a rarely used equitable remedy that required

definite and substantial detrimental reliance, as well as extreme injustice absent enforcement.o MODERN TREND: PrEs simply requires reliance (not necessarily substantial) and remedies

are more often limited as justice requires, then only to avoid injustice.o There are 4 necessary steps, a chain of logic, each MUST be proven

1. Promise

2. Foreseeable Reliance (promisor expected to induce action on the part of thepromisee)

3. Reliance in FACT (it does induce ACTION of that type must be reliance onexpectation that promisor had, not something promisor did not foresee)

4. Injustice absent enforcement (promise must be enforced to prevent an injustice)5. Thendamages.

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1. Ricketts v. Scothorn (1898)a. This is one of the earliest promissory estoppel cases: shows how early courts used it to enforce

family gift promisesb. D grandfather promises P granddaughter $2K/year, she claims that it was to induce her to stop

working, she did but then got another job, but D then died and executor refuses to pay the

balance.c. Issue: Is there sufficient consideration for P to enforce Ds promise?d. Holding: Ds promise is a gratuity, a gift. However, the theory of promissory estoppel is used

b/c the gift was meant to influence P to change her position for the worse in reliance on the K;itd be grossly inequitable to allow D to resist payment b/c of no consideration.

i. So, even though Ps quitting job was voluntary (it was not a condition of the gift), thefact that donee has expended $$ or liability on the faith of the gift, there is someconsideration.

Not like Hamer then D did not give $$ in return for Ps quitting her job.ii. Equitable estoppel : D is precluded from asserting rights that might have existed against

person who in good faith relied on such conduct and changed position for the worse.Misrepresented the facts.

iii. D contemplated that P might quit her job reasonable consequence he intentionallyinfluenced P to alter position.

iv. However, this is not a misrepresentation of the facts, but PROMISSORY ESTOPPEL sue for damages based on the reliance of a promise. New idea.

2. Cohen v. Cowles Media Co. (1992)a. P gave info to reporter in return for promise that his identity would be kept confidential, editors

of newspps overrule these promises, ID is leaked and P loses his job.

b. Issue: Does promissory estoppel enforce the promise?c. Holding: Yes, the promise was clear, P relied on anonymity and so D induced reliance.

Promise must be enforced to avoid injustice

i. There was no K here, no consideration. They were not bargaining, offering oraccepting. There was also no intent to K. Moral obligation alone does not a K make!ii. Court allows promissory estoppel b/c it would be unfair not to even though it is a

newspp and they just published the whole truth, sense of fairness overrides. Each stepof promissory estoppel was proven.

iii. Damages use expectation damages formula, limited as perR2K 90.

3. Midwest Energy, Inc. v. Orion Food Systems, Inc. (2000)

a. The big issue here: there was definitely no K but liability for reliance? Broad interpretation ofPrEst.

b. P was building a service station and wanted to franchise Ds products. Ds rep deliveredpaperwork (containing caution not to take further action until P was notified in writing that app

was approved). D represents orally that they can go ahead, P changes store plans, etc. Ddecides not to award K. Only P signed the agreement.

c. Issue: Can promissory estoppel overcome the Statue of Frauds and make this promiseenforceable?

d. Holding: There are genuine issues of material fact re: promissory estoppel so it can be tried.For P.

i. There is no K here SOF means there clearly needed to be a writing, signed by bothparties.

ii. Promise? Yes, Ds agent made certain promissory statements that might lead P tobelieve that she could go ahead w/ the plans, and the K was as good as signed.

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[DISSENT: no promise, just a statement of intent to work together. Regular bizdealing!]

iii. Foreseeable reliance? Yes, D should believe that P would comply w/ directions for fearof losing the tender of franchise.

iv. Reliance in fact? P made changes to food area in its plans, didnt get other franchisors.[DISSENT: P could have gotten other products]

v. Just because D had a writing disclaiming any reliance, that is not enough for the court.

vi. Damages would be reliance damages, not expectation, b/c its a pre-K promise.

C. THE RESTITUTION INTEREST

Restitution can be a cause of action and a form of damages.

Cause of action used by P whose K was unenforceable, or even when there was no K-like exchange.Party wants to get back the thing or value that is (or was) in the Ds hands.

Damages Ps recovery is measured by the benefit that act conferred on the D

K IMPLIED-IN-FACT

o Ordinary K that is not express. Inferred. Suppose tacit agreement.o Parties intentions are the source of obligation here inferred on the basis of general

knowledge, even w/ no words exchanged. Ex: fill up car w/ gas on a credit card, there is a Kimplied-in-fact that you will pay.

QUASI-CONTRACT (restitution interest)

o K implied-in-law, this is a contractual creation of the court in the aftermath of something.

o Based on the restitution of a benefit conferred.

o Elements:

A benefit conferred upon D by P

Appreciation of this benefit by D

Acceptance/retention by D of this benefit under circumstances that would be

inequitable to keep it unless payment for the benefits value.o However, officious intermeddlers are not looked upon favorably, which is what P was in Bailey

above. Ex: neighbor is on vacation, you paint house to make it look better, and it does increasethe value. You cant expect to recover restitution for this.

o Based on notions of fairness: if doctor sees an accident, renders services to seriously injured

person, he can receive some restitution.o Damages

Goal is to prevent unjust enrichment

Typically it is the value of the benefit conferred

1. Bailey v. West (1969)

a. D buys a horse, discovers it is lame, sends back to seller who refuses it. Ds trainer gavethe horse to P where he took care of it for 3 yrs, P sends bills to D but D refuses to pay. Pknew there had been a dispute re: the horse.

b. Issue: Is there a K implied in fact or a quasi-K, and thus liability for breach?c. Holding: No K implied in fact for want of mutual agreement, no quasi-K either. No

intention of both parties to be bound, and D didnt agree to have benefit conferred uponhim, P volunteered.

i. Implied-in-fact K : P knew there was a dispute, D never dealt w/ P before. Nointent to agree and no mutual agreement.

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ii. Quasi-K : P was a volunteer, so he took the risk himself. Benefit conferred was allPs doing.

CH. 3: NEGOTIATIONAND FORMATIONOFTHE CONTRACT

Objective theory: the ritual of K formation is what counts, the actions of the parties not ideas ormanifested intentions

Mutual assent parties agree to same essential terms

Keep an eye out for problems that arise by offer/acceptance w/ new mediums (e-mail, etc.)

A. THE ROLEOF THE COURTS

1. Sun Printing v. Remington Paper & Power Co. (1923) CARDOZOa. P agreed to buy from D 1,000 tons of paper/month with the price and the length of the time that

price would be valid left unsettled. Ceiling on price is the standard set by Canadian Export

price. D gives notice that K was imperfect and disclaimed obligation to deliver pp in the future,P thinks it would resort to the Canadian Export price, but no deliveries made. P claimsdamages.

b. Issue: Does P have a cause of action, even though the K doesnt explicitly set out the price andterm?

c. Holding: P cannot recover damages b/c there was no obligation for D to sell under the K whena term for pricing and length of time isnt stated.

i. This was only an Agreement to Agree. P argues that the Canadian price would be thedefault price, but ct disagrees D would never know where it stood.

ii. Dissent argues that price could be imputed, this would be FAIR.

iii. The real issue here: The role of the courts in interpreting Ks.1. Cardozo: Cts are held to the strict contents of the K, they will not make an

agreement for the parties.2. Crane (dissent): Cts should hold parties to their Ks even when parts are

missing, they clearly intended to make a binding K. This lets D out of the K,unfair.

iv. There is a need of certainty in commercial Ks, and the court cant revise a K, onlyinterpret.

v. Cardozo believes that it is ok to ignore this inequity in order to send a msg: If you wantsomething that is binding, you must NEGOTIATE it and be explicit. Dont leave termsup for grabs. This will impute efficiency and better biz practices.

B. OFFERAND ACCEPTANCE

OFFERis defined in R2K 24o The objective manifestation of a willingness to enter into a bargain, which justifies

anothers understanding that his assent to that bargain is invited, and will conclude it.o OFFEROR IS THE MASTER OF THE OFFER

Offeree has the power of acceptance (R2K 35)

However see R2K 22(2) Manifestation of mutual assent can be made even though you dont havean offer/acceptance and moment of formation cant be determined.

Beware of mere invitations to bargain

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o Price quote generally not an offer , but will be an offer if it covers 1) parties, 2) subject matter,

3) time for performance, 4) price, 5) quantity (especially if it is sufficiently definite on quantity)

o Advertisements are not offers unless they contain specific words of commitment (especially a

promise to sell a specific number)

Can be when they promise to sell a particular number of units, or to sell the units in aparticular mannerR2K 26

Did communications b/t parties form a reasonable basis to conclude that they were willing to enter intoa binding agreement?

When looking at an offer BE SURE TO LOOK TO SEE IFo Is it an offer?

o Is it an advertisement?

o Is it an offer for bids?

o Is it an offer to negotiate?

This type of language or document BE CAREFULo No definite quantity

o Form letters

o Sent to multiple people

What types of offers are irrevocable?

o Contracts made irrevocable through the commencement of performance (see below)o Option contracts

o Firm Offers 2-205

An offer by a merchant to buy or sell goods in a signed writing; under certainconditions, it is valid for a reasonable time not to exceed three months. 2-205

o Sub-contractor bids

Cts consider the oral bid by the sub to be a temporarily IRREVOCABLE offer untilprime K is awarded. Then the contractor can accept the bid, which creates a bilateral K.

If P has justifiably relied on the bid, then ct will use PROMISSORY ESTOPPEL toprevent raising the bid.

However, after the prime bid is awarded, the contractor is not bound to accept. Seems

unfair to bind the little guy.- Hand: Traditional offer/acceptance sub can withdraw offer before it is accepted.

- Traynor: The little guy is protected if contractor starts to bid shop or bid chop, thenthey can consider themselves cut free good faith transaction. If contractor reopensnegotiations, then the offer is rejected (counteroffer). The contractor cannot delayacceptance after the prime bid is awarded to find a better deal.

Is it an offer?? Consider:

Subject Matter, definite price, specific quantity, time of performance, context, partiesexpectations/intent, are most (if not all) terms included?

TERMINATION of the power to ACCEPT: (R2K 36) (the offeree has power of acceptance)

o 5 possibilities :

o Rejection or counter-offer by offeree (R2K 68)o Lapse of time specified in K or a reasonable time (R2K 41)

o If offeror revokes the offer (R2K 42)

Even if offeror says hell keep it open, no consideration means he can changehis mind

Can withdraw before acceptance, but this must be directly communicated toofferee, or can be indirect. If offeree acquires reliable information thatofferor has taken an action showing he changed his mind, pwr of acceptanceterminated (R2K 43)

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o If either party dies or becomes incapacitated

o If terms for the offer have a condition for acceptance and condition doesnt occur

ACCEPTANCE is defined in R2K 50

o Manifestation of assent to the terms thereof made by the offeree in a manner invited or required

by the offero Offeree must know of offer (e.g. reward for criminal)

o Mode of acceptance:

Must accept by offerors chosen mode, and if not specified, by any reasonable method

UCC 2-206, but see R2K 30: Language referring to a particular mode of acceptanceis often intended and understood as suggestion rather than limitation; the suggestedmode is then authorized, but other modes are not precluded.

Ks accepted by offerees performance

o Bilateral K: acceptance by a return promise

o Unilateral K: acceptance by performance

What is bargained for is a specific act recipient of offer may or may not choose to

carry out (R2K 30) see Hamer v. Sidway

So long as the offer remains open and until it is accepted, offeror is bound to it, butofferee is not obligated

Acceptance by Part Performance

o Offer invites acceptance by performance only offeree who starts has the option not to

continueo R2K 45(1): when offer clearly envisages a unilateral K, OPTION K is created when

offeree begins performance or tenders a beginning of it. Option lies w/ the offeree who cancomplete performance, but it will not be enforceable until performance IS complete.(45(2))

o By beginning to perform, you have accepted the offer

o Preparation for performance does not count ACTUAL perf

Offers ambiguous as to manner of acceptance

o If offer doesnt specify acceptance by performance or a promise to perform, offeree can

chose (R2K 30 and 32)

o If ambiguous, and if offeree chooses to start performance, he is legally obligated to

complete it (R2K 62)o Therefore, there is a preference for the offeree to accept by promising otherwise, he must

complete performance.

o UCC 2-206(1) offer to make a K can be accepted in any manner and by any medium

reasonable, and an offer to buy goods, if ambiguous, can be accepted by prompt promise toship or by prompt shipment

Acceptance by silenceo Generally silence is not an acceptable form of acceptance to an agreement

o Silence will bind if prior dealings make it reasonable for the offeror to expect the offeree to give

notice of objection

When is a contract formed?

o Can be made in any manner consistent showing an agreement, or conduct which

recognizes the existence of such a contract (UCC 2-204)

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o Dont need to know exact moment of contract formation for a contract to be found to exist.

Terms can be left open and still a contract can be formed

Option Ks are different

o This is an offer accompanied by an independent promise to keep offer open where promise

is supported by consideration.o R2K 87: Offer is binding as an option K if 1) it is in writing and signed by offeror, 2)

recites a purported consideration for the making of the offer, and 3) proposes an exchangeon fair terms w/in reasonable time.

o NO ACTUAL PAYMENT OF CONSIDERATION IS REQUIRED, just acknowledgment

of consideration. However, many courts will require some consideration (see EMU v.Burgess)

o Offeror cannot revoke during the time set forth, and offeree is entitled to accept during the

time set forth.o Most courts have held that an option K is not automatically terminated by rejection or a

counteroffer, unless the offeror then justifiably relies on it.o Mailbox rule does not apply here acceptance upon receipt (R2K 63)

Firm offers under UCC 2-205

o Applies to a merchant who in a signed writing makes an offer and assures that it will be held

open.o Such offer is not revocable, for lack of consideration, during the time stated for a reasonable

time, but no period of irrevocability can exceed 3 moso No consideration needed in order to bind merely characterize them as such and express this in

a signed writing.o If offeree has a firm offer on its own form, it must be separately signed by the offeror

o If offeree has pd for the promise to keep the offer open, there is an enforceable option K and it

will remain open for the specified period of time. That is not a firm offer b/c of theconsideration.

What if there is a misunderstanding?

o Possible barrier to K formation

o Meeting of the minds: when any terms used to express the agreement are ambivalent or

parties understand them differently, no K unless one party SHOULD have been aware ofthe others understanding (Raffles v. Wichelhaus, re: the ship Peerless)

o R2K 20 (Effect of Misunderstanding)

This is modified to reflect OBJECTIVE theory of K

No mutual asset if parties attach materially difft meanings to manifestations, andthey dont have reason to know that the other party had a different view.

If A knows or has reason to know of Bs meaning, then Bs meaning willcontrol

This is objective not what A actually knew

o What is chicken?

Parties K for sale of frozen chickens, B claims that he only intended to K foryoung chickens, K says frozen chickens this is merely a matter ofinterpretation, and there is a K.

MIRROR-IMAGE RULE

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o Unless an acceptance mirrors the offerors terms, neither omitting or adding terms, it has no

legal effect as an acceptance and operates as a rejection and a counteroffer.

o R2K 59: reply to an offer that purports to accept it, but is conditional on offerors assent

to additional or different terms is not acceptance

o R2K 61: an acceptance that requests change/addition to terms of offer is not invalid

unless the acceptance depends on assenting to those new terms.

Ks Concluded by Exchange of Letters (or other communications)

o This is a common law rule

o The offeror is the master of the offer (R2K 30): offeror controls the form in which

acceptance occurs.

If there is no express requirement re: acceptance, then an offer to make a K shouldbe construed as inviting acceptance in any manner and via any medium reasonablein the circumstances. (UCC 2-206(1) and R2K 30(2))

Offeror cannot turn some normal act into an acceptance, however must beintentional

o The Mailbox Rule

Offers, rejections, revocations take effect at the time of receipt

ACCEPTANCES ARE DIFFERENT they take effect where and when they areDISPATCHED, and it is immediate, even if offeror never gets it (R2K 63)[However, as master of the offer, the offeror can require receipt before acceptanceis valid]

Issues

Mailing is sent w/ beyond the offerees possession

As long as ACCEPTANCE is dispatched before REJECTION received, Kis good

Exception: reliance. If one party has relied upon the rejection, for ex.

1. Ford Motor Credit Co. v. Russell (1994)a. Ad offers car for sale price w/ set APR, D goes in to buy car and gets financing after some

trouble, but b/c of limited credit history, gets higher APR, she signs K. D then defaults onpayments and P will repossess and sell, D does nothing to redeem. D counters w/ breach ofK.

b. Issue: Was the ad an offer to the general public that binds the advertiser to its terms?c. Holding: An ad is merely an invitation to bargain, it was not an offer b/c the APR

advertised was only for those qualified, and there were not an unlimited # of cars to sell.Unreasonable to believe ad binds P.

i. Test of whether binding obligation is present in ad to general public, under caselawhere: Do facts show that some perf was promised in positive terms for somethingrequested?

ii. Ad may be offer when clear, definite, explicit, nothing left open since the APRwas only for those that qualified, and cars were limited that is not the case here.

iii. Lefkowitz case: shows that a binding obligation can originate in an ad where thefacts show perf was promised in return for something requested first come, firstserved.

2. Davis v. Satrom (1986)a. P sends LOI to D to purchase mobile home park (offer), and P changes the terms and sends

back (counteroffer). P then sends purchase agreement to D w/ new terms (counteroffer),and D changes terms again, sending it back WITH A CONDITION OF ATTNY

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APPROVAL (counteroffer). D then tells P that they will pass, P sends letter saying he isready to complete w/ $$, check returned. P sues for specific performance.

b. Issue: Was the purchase agreement a valid K to sell?c. Holding: There was no enforceable K b/c there was not an unqualified acceptance of an

offer w/ out introduction of new terms, and even if he did accept the new conditions, theattny reasonably didnt approve.

i. There was no meeting of the minds the modifications were counteroffers

ii. Changing terms of the offer terminates the pwr of acceptance. Offer would onlystay open if offeror (P) had expressly stated it would be open despite a counteroffer.Still can be withdrawn though

iii. Conditional/qualified acceptance is a counteroffer.iv. Adding the condition, however, still allowed P to accept, and if the attny accepted,

then a K. But still subject to condition.v. Note: reasons for attnys not approving are important he must disapprove

REASONABLY.

3. Oswald v. Allen (1969)a. P wants to buy coins from D, all Swiss coins. To P, this means every Swiss coin D has. To

D this means the Swiss Coin Collection. D did not want to proceed and called it off.b. Issue: If there was a misunderstanding b/t the parties, can there still be an enforceable K?c. Holding: No K b/c there was a misunderstanding.

i. Formation of a K presupposes MUTUAL ASSENT, so if each party assents to

a different proposition, there is nothing to enforce and the K is void

4. Ardente v. Horan (1976)a. P made a bid for Ds property, D said it was acceptable and sent purchase/sale agreement to

P (OFFER). P executes, sends this w/ check for $20K and ltr to D, with a condition in theletter. D did not execute and refused to sell to P.

b. Issue: What is the line b/t a conditional acceptance (counteroffer) and an acceptance(contract)?

c. Holding: Ps letter of acceptance was conditional so it was a rejection of Ds offer and noK was created.

i. If P had clearly said that he was accepting IN SPITE OF his question/conditionabout the furniture, then this might be a valid acceptance. It would be an absoluteacceptance w/ a mere inquiry.

ii. Acceptance must be explicit and overt, unequivocal. Ps was not, the ltr neversaid that he would complete the K even w/out the items in the house

5. Mid-South Packers, Inc. v. Shoneys, Inc.

a. P submits ltr proposal for sale to D of pork at certain prices and terms, and D would beinformed of any changes in price 45 days prior. No quantity or duration in the ltr, D began

purchasing over phone/ltrs and P sent invoices. Then P raised prices 3+ mos after the dateof the ltr and informed D objected, but continued to purchase at the new price. In last order,offset the amount charged over the original price since P changed it.

b. Issue: Is Letter Proposal a binding K or an offer?c. Holding: The ltr was not a requirements K and binding, it was at most a firm offer that P

could revoke after 3 mos, setting each purchase order as its own K at a new price.i. NO requirements K, because D did not promise to purchase exclusively from seller,

so no consideration.

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ii. After 3 mos from date of Ltr, P could raise price b/c D had not accepted andtherefore the 45-day notice no longer applied. D shouldve accepted the 1st

proposal.

iii. D accepted the price increase by performance manifested assent was the higher price. UnderUCC 1-207, D could have reserved right to old price with an explicitreservation, or D could have found another supplier.

iv. At best a firm offer b/c it was revocable w/ a 45 day notice, they did not do so, and

at the end of 3 mos the offer expired.

6. Arango Construction Co. v. Success Roofing, Inc. (1986)a. D (sub-contractor) submits bid to P (contractor) for project, it is prepared by 3rd party.

Included in prime bid to customer, it was lowest. P gets K, notifies D who gives themsubcontract form for signing, but D refuses b/c they realize the bid was in error and too low,they would not perform at that price.

b. Issue: Is this oral bid enforceable, and if so, should Ps SJ motion for PrEst damages beawarded?

c. Holding: Yes, K terms were not in dispute b/t the parties at the time, and so bid is anirrevocable offer until prime K is awarded. Since P relied on Ds bid and D could expectthat they would do so, damages for PrEst are in order

i. This is governed by COMMON LAW, not UCCii. The bid submitted by D is an irrevocable offer until the prime K is awarded, and

then the court uses promissory estoppel theory to prevent raising of the bid. WhenP accepts the bid BILATERAL K, and if sub raises the price, must pay damagesfor price difference.

iii. P did justifiably rely on Ds bid, no reason they should not have no evidence thatP shouldve known about the mistake. This satisfies PrEst.

C. NEGOTIATIONAND CLOSURE

Even if parties intend final agreement to be a written K, sometimes a ct will find a K existsw/out the writing issue is whether parties view it as a mere formality, or a final chance tosettle the terms.

Intermediate docs: LOI, Memo of Agreement, etc consensus on certain aspects. Cts will useobjective theory to ascertain what the parties intent is does it appear as if there is a final K?

Parties may sometimes leave certain matters unsettled agreements to agree, etc. Cts mayimply that there is a duty to negotiate in good faith on remaining differences.

1. SMS v. Malouf, Inc. (2000)

a. P and D had a long-term relationship w/ 3 Ks in which D purchased training materials from P.Another purchaser of Ps products (Kasten) is for sale, and P encourages D to buy it. P assuresD of a 5-yr commitment so that D can buy Kasten, and P orally agreed to this new 5-yr K. Drelies and buys. P proposes K w/ significantly difft terms, negotiations break down, Ds profitsplummets and they sue.

b. Issue: Is the oral agreement an enforceable K that P breached?c. Holding: Even though there were terms to be negotiated, a jury could reasonably infer that Ps

assurance of the 5-yr. K in return for Ds promise to buy Kasten was an enforceable K.i. Ct infers that parties intended to be bound and THERE IS A K. Why? 1)15 years in

biz together, 2) material terms were the same as previous Ks, 3) principles of companies

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had personal relationship, 4) previous negotiations were perfunctory, 5) had done biztogether w/out K once before, 6) P KNEW that D was buying Kasten in reliance.

ii. RULE: If there is agreement on all material terms of the K, an intention for awritten K is a mere memorial of the contract, especially when considering

relationship b/t parties.iii. Reliance is unnecessary here b/c that is only when there is no K. So Ps view that

reliance was unnecessary is n/a.

iv. IMPORTANT: P encouraged D to buy Kasten, they were interested in it. Therefore, ctdoesnt consider D to be jumping the gun

R2K 27 - lists circumstances to determine if there is actually a K or not

o the extent to which express agreement has been reached on all the terms to be included

o Is contract of a type usually put in writing?

o Does it need formal writing for its full expression?

o Does it have few or many details?

o Is amount involved large or small?

o Is it a common or unusual contract?

o Is a standard form of contract widely used in similar transactions

o

Did either party take any action in preparation for performance during negotiations?

2. Arnold Palmer Golf Co. v. Fuqua Industries, Inc. (1976)a. NOTE: this is difft from SMS b/c negotiations are further along signed MOIb. P wants to start making golf products, meets w/ D and at BofD mtg, propose a corporation that

combines part of the 2 companies, sign a Memo of Intent (MOI). Set forth all detailed terms,and 1) proceed promptly to prep agreement and 2) condition that it must be satisfactory to bothand approved by Ds BofD. D sends press release, but then withdraws.

c. Issue: Is the MOI sufficient to show that the parties intended to enter into a binding agreement?d. Holding: Facts and inferences indicate the parties intended to be bound, even w/out a formal

doc, b/c circumstances show that the final agreement was a formality.i. If all terms are set out, and the parties would move forward w/ those terms and no

others, they probably have a formal K. Look at essential terms agreed upon?Binding.

ii. This is a subjective reading of the intent and circumstances

3. Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc. (1989)a. Here, the LOI is not enough to be binding. Difft from Arnold Palmer. Judge Easterbrook

is also a Chicago economist not judicial activism. Let parties be.b. D floats assets on market, P sends Letter of Intent (LOI) to purchase, still had to prepare a

formal, definitive Asset Purchase Agreement. P had conditions in the LOI subject tosatisfaction of shareholders and BofD. D balks, disagreement over security for the note, Dnegotiates w/ another and P files for TRO.

c. Issue: Does the condition in the LOI show the parties intended to be bound?d. Holding: Neither the text/structure of the LOI suggests enforceability parties still had things

to decide.

i. This is an objective way of looking at parties intent subject to means that theydid not intend this to be a K. Look at language on its face.

ii. Give effect to parties wishes but not from a subjective pov, because K law would be amess if cts did that. Must express intent openly, and w/ subject to clause, thatobjectively means that parties didnt meant to be bound. Just sets the state fornegotiations.

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How do you distinguish Arnold Palmer and Empro?

o There was no express language like subject to in APs situation

o There is a different theory of looking at these, the cts became more conservative wanted to

force parties to be more explicit.

o Some terms of Empro still had to be discussed not as final.

o To make these letters binding, put agreement to agree in very certain terms.

o To make these letters non-binding, put header at top of each pg: This ltr is not intended to be

binding

o Also, in AP, Fuqua sent out a press release.

R2K 27 commentso K before the agreement : if parties definitely agree to writing, but it will contain agreed-upon

provisions and no others. K concluded.

o No K before the agreement : if either party knows or has reason to know that the other regards

the agreement as incomplete, and terms still need to be assented to, then no K.

4. City of Kenai v. Ferguson (1987)a. RULE: A ct will be willing to supply terms where a long-term K is formed w/ clear terms

except for price, well after substantial reliance on that K. An agreement to agree re: particularterms doesnt void the lease.

b. D and P sign lease for land for 55-yr term, price of rent is an AGREEMENT TO AGREE, every5 yrs they can re-negotiate. 10 yrs in, P wants to raise Ds rent by 500%, and they cannot agreeon this. D pd rent based on old rate, P filed suit seeking forfeiture, rents due, etc. D neverconducted his own appraisal so the parties could re-negotiate.

c. Issue: Is the agreement to agree enforceable, and if so, should ct imply a reasonable rate forfair mkt rent when parties cant agree?

d. Holding: Yes, agreement is enforceable and ct is fair to step in and set termsi. Both parties knew the land would be used for a gas station, so city could not set rate at

the best-use rental amount. Instead, FMV for similar properties (gas stations).ii. When city signs the long-term lease, they accept the risk that the land might not be used

for best use, they sign away ability to control. D can keep station running at thefavorable rate.

iii. City could have set more explicit terms a formula, or something giving 3rd party rightto set rate in case of disagreement. Or they could have provision to buy D out for a fairprice.

iv. This is difft from Sun Printing: long-term K, substantial reliance already, and onlyquibbling over small terms

v. Note: in agreements to agree, the length of the term is significant, because the lesseesreliance is high, so the court will hold these agreements to be valid.

UCC on Open terms: 2-204(3): even though one or more terms is left open, the K doesnt fail for

indefiniteness if parties intended to make a K and there is a reasonably certain basis for giving a remedyo However, if parties intend not to be bound unless price is fixed, and it is not, then there is not a

K. 2-305

D. GOOD FAITHIN CONTRACT FORMATION

Duty of good faith arises ONLY after the contract is concluded. There is no pre-contractualobligation of good faith.

o Our system stresses parties looking out for themselves during K formation

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o UCC 1-203: Every K or duty w/in this Act imposes an obligation of good faith in its

performance or enforcement.

o Similar approach in R2K 205

o In an Agreement to Agree, there is an implied covenant of good faith

o Good faith rests on some sort of contractual obligation to prevent party from conduct that

frustrates the other partys rights to benefits.o Negotiating in good faith could just mean not negotiating in bad faith!

When there might be a duty of good faith in pre-K circumstances:

o During negotiation, parties can agree to do so in good faith via some K (LOI, etc.) Absent this

agreement, the parties can be unreasonable and break off as they wish

o Preexisting agreement may impose an obligation of good faith bargaining w/r/t the modification

of some term of that agreement. If it gives discretionary pwr of alteration, then this implies areqt to do so in good faith.

o Sometimes, if during negotiations a party so misleads another by promises or representations,

and the 2nd party detrimentally relies on this justifiably, then PrEst!

1. Racine and Laramie v. Dept. of Parks and Rec (1992)

a. P, concessionaire, was in lease w/ D for 40 yrs. Clause says parties may negotiate to modify atany time. They negotiated to expand operations, parties cant agree, P argues that D retreatedfrom positions arbitrarily and that existing K reqd parties to negotiate in good faith.

b. Issue: Is there a breach of covenant of good faith by refusing to enter into a new K?c. Holding: The existing K created no obligation of negotiating in good faith, and D could break

off negotiations or be unreasonable for any reason or no reason at all.i. Since the parties were negotiating for so long, P claimed that D had to negotiate in good

faith and couldnt cut them off arbitrarily. However, the existing K just provided fornegotiations if D wanted to do so, and it did not say anything about good faith.

ii. Culpa in contrahendo damages can be awarded if negotiations are in bad faith thisis in Civil Law, not common law

iii. Implied covenant of good faith was only w/r/t the existing K

Distinguishing Racine from Kenai here, the K only said parties may assent to negotiation. In Kenai,provided that parties shall reach some sort of agreement to agree re: rent. Here, neither party had tonegotiate anything.

2. N.E. Insulation Co. v. General Dynamics Corp. (1988)a. D invited P to bid in auction, and as a condition, stated that bids would be confidential (they

contain trade secrets), and so P made bids relying on this statement. D showed Ps bid to a 3rd

party, P alleges sham bidding procedure.

b. Issue: Is there an implied K theory here, where bids solicited during bidding are binding w/r/tconditions set?

c. Holding: For P, remanded for further proceedings. Even though in the private sector, theimplied K to perform in good faith stands and D did not have the right to make representationsto bidders that they then rely upon. Condition is binding.

i. Requests for bids are usually non-binding invitations for offers.

ii. However, invitation to bid on certain conditions, followed by a bid, forms an IMPLIEDK obligating solicitor to those conditions. Must realize that terms they set will be reliedupon by bidders and they are bound to them. Must give fair and impartial considerationto bid.

iii. Public auctions always impose a duty of good faith

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iv. Court is looking to find some sort of liability here, they try tort dont want to imply aK, this is a pre-K context. There is a sense, however, that there is something wrong w/influencing party to bid and then not dealing fairly.

v. This case couldve been decided on RELIANCE theory

E. PROBLEMSWITH STANDARD FORM CONTRACTS

These are everywhere; gas station credit card receipts, credit card agreements, theater tickets, etc. Noone even sees ituntil a controversy arises

Pros: reduce transaction costs, legal risks are more manageable (uniformity) benefits consumers whopay less

Cons: one party constructs the K according to its own wishes, often construed in favor of sellers whoknow of potential probs w/ goods, damages can be limited, and they accentuate inequalities ofbargaining pwr.

So, in Ardente v. Horan, we had the MIRROR IMAGE RULE where quibbling response was acounteroffer.

What happens if a buyer sends an order, specifying only model and price. Seller responds w/acceptance form that also lists lots of terms favorable to it.o Under traditional K theory this is a counteroffer, no K

o BUT ---- what if parties continue as if there is a K? Shipping, delivery, and then there is a

problem 6 mos down the lineo LAST-SHOT RULE

If performance occurs as though a contract has been formed, this rule provides that theterms of the last offer exchanged will govern the contract.

So, in example above, K is in sellers terms which is the usual situation

CISG uses the mirror-image rule

Non-UCC contracts use the mirror-image rule too, see R2K 58, 59, 61

UCC 2-207 tries to avoid this situation, looking for a better outcome

UCC 2-204 and 206 accept the ordinary rules for K formationo 2-204: K for sale of goods may be made in any manner sufficient to show agreement

including parties conduct.

2-207 says that a purported acceptance will be treated as such even if it containsadditional/different terms. Many common law counteroffers are thus acceptances.

o Avoids the Ardente problem: party cant get out of K b/c of nonconforming terms

The status of these difft terms are treated under subsection (2)

If docs indicate there ISNT a K, but parties acted as if there was, then conduct governs viasubsection (3)

1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable

time operates as an acceptance even though it states terms additional to or different from those offered or agreedupon, unless acceptance is expressly made conditional on assent to the additional or different terms.(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants suchterms become part of the contract unless:(a) the offer expressly limits acceptance to the terms of the offer;(b) they materially alter it; or(c) notification of objection to them has already been given or is given within a reasonable time after notice ofthem is received.(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for salealthough the writings of the parties do not otherwise establish a contract. In such case the terms of the particular

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contract consist of those terms on which the writings of the parties agree, together with any supplementary termsincorporated under any other provisions of this Act.

A Guide to using 2-207: THE BATTLE OF THE FORMS

1. Has a contract (K) been formed under 2-207(1)?

a. Outside of normal K rules, a K can be formed in 2 ways:

i. Exchange of writings1. Offer made?

2. If yes, and offeree manifests assent (definite and seasonable expression ofacceptance) then a K is formed even if there are additional/difft terms. Go to2-207(2) to determine how these terms affect the K.

3. If offer made, response will not be an acceptance if: 1) buyer sends purchaseorder for 100 widgets at $5 and seller confirms purchase at $6. THIS IS ACOUNTEROFFER. 2) if an offeree expressly conditions its acceptance onthe offerors assent to the additional/difft terms, THIS IS ACOUNTEROFFER. In order for this to be construed as a conditionalacceptance, it has to have CLEAR and EXPLICIT language stating it is such.(Roto-Lith is turned over)

ii. Oral agreement followed by a written confirmation

1. If this happens, K is formed. (did they enter into an oral agreement? Its aquestion of fact)

2. Terms contained in the written confirmation are part of the K if they reflect theoral agreement. If not, go to 2-207(2) to determine how these terms affect theK.

3. Once an oral agreement is made, there is no way you can have a conditionalacceptance (= counteroffer).

2. If a K is formed in either of 2 ways above (i and ii), do any additional or difft terms in theacceptance or confirmation become part of agreement under 2-207(2)?

a. ADDITIONAL TERM: just added on

i. Not between merchants: additional terms not part of agreementii. BETWEEN MERCHANTS: additional terms part of agreement UNLESS 2(a)(b)(c)apply

1. (a): offer contained express language limiting acceptance to terms of the offer terms NOT part of agreement (i.e. this order is conditional on sellersacceptance of the terms hereof)

2. (b): if terms materially alter the offer, NOT part of agreement.a. What constitutes terms that materially alter?? Comment 4 will show

what does alter the offer (disclaimer of warranties). Comment 5 willshow those that do NOT alter. Surprise or hardship if incorporatedw/out express awareness by other party would also materially alter theterms.

3. (c): if offeror notifies offeree that he objects to his additional terms, before orafter receiving the acceptance, the terms do NOT become part of the agreement.

b. DIFFERENT TERM: contradicts/qualifies an express termi. This is uncertain, cts treat it in various ways.

ii. KNOCK-OUT RULE: most generally accepted rule.1. If offer and acceptance have difft terms, they knock each other out of the

agreement, and the K then consists of the terms that the offer and acceptanceagreed upon, plus any DEFAULT TERMS that would be implied as a matter oflaw

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3. NO CONTRACT WAS FORMED, but parties behaved as if there was one.a. This could happen when a buyers offer contains a clause limiting acceptance to terms of the

offer, and then the seller accepts with a CONDITIONAL acceptance. These forms conflict, butthen the parties behave like they had a contract

b. 2-207(3) then deals with this.i. Parties actions speak louder than words there is a K.

ii. Terms are those that the documents AGREE upon, plus other implied-in-law terms like

UCC provisions on implied warranties and remedies.

1. Gardner Zemke v. Dunham Bush, Inc. (1993) SC of NM

a. P(GZ) orders chillers; order (offer) has warranty provision/specs. DB responds w/preprintedacknowledgement w/ warranty terms, statement its terms controlled, provision thatsilence=acceptance. Parties dont address discrepancies and sale takes place. Dispute ariseswhen P requests warranty repairs.

b. Issue: Is the Acknowledgement, as a standard form K, a counteroffer or an acceptance?c. Holding: For P(GZ). The Acknowledgment does not constitute a counteroffer and the trial

court must interpret commercial understanding of the parties to determine if it is an acceptance.If it is, knock out rule should apply.

i. Was DBs acknowledgment a counteroffer that GZ accepted when it paid for chillersand DB delivered? [Is there a K?]

1. Common law mirror image rule applies, it would be a counteroffer2. Under 2-207(1), doc responding to offer is an acceptance, only a counteroffer

when terms differ radically or it is expressly conditional on assent to the difftor additional terms

3. It is not enough to make it expressly conditional, DB (the offeree) would haveto clearly and unequivocally state that they will not enter into the bargain unlessthe offeror assents to the new terms introduced. Make it a deal-breaker. DBdid not do this. It is not a counteroffer, it was only conflicting boilerplates

4. Dependant upon the commercial context of the transaction parties intent did they mean to be bound? Obj judgment done by the lower ct

ii. Which terms control if DBs Acknowledgment was an acceptance? [Terms ofK?]1. How should terms be dealt w/ under 2-207(2) if the terms are different?

They decide on the KNOCK-OUT RULE, difft terms cancel each other out,Art. 2 warranties control (this allows DB to have some effect on the warranty they dont get what they want, but neither does GZ!)

iii. Note: if the clause WAS expressly conditional and they still went through w/ thetransaction, what would happen? DB warranties would be in the K valid counterofferthat GZ assented to and accepted. Not 2-207 land anymore.

2. Step-Saver Data Systems, Inc. v. Wyse Technology (1991) US Ct of App 3d Cir

a. Things to note here: this is the 2nd track of 2-207 an oral K followed by a writtenmodification; the terms are additional here (added on after the telephone K), NOT difft

b. P would call D and place order for software over the phone, D would accept order and promiseprompt shipment. P would send purchase order detailing agreed-upon terms and D would shipthe order w/ an invoice including the same terms. Each box had a box-top license that hadwarranty disclaimers, remedy limitations, integration clause (BTL is the final and completeexpression of terms), and opening package was acceptance of these terms. P has a warrantyissue

c. Issue: Whether BTL that buyer (offeror) didnt expressly agree to becomes binding part of theK b/t parties when repeated purchases are made?

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d. Holding: Contract was sufficiently definite w/out box-top terms. D didnt expressunwillingness to proceed w/out these terms. Repeatedly sending terms(in each order) isnt acourse of dealing to be incorporated into contract under2-207.

i. Performance demonstrates a K, so 2-207 applies. K was sufficiently definite here w/necessary terms, BTL was additional.

ii. BTL was not a conditional acceptance under 2-207(1) b/c D wasnt clear andunequivocal

iii. Repeated sending of writing, whose terms would be excluded under 2-207 (theymaterially alter) cant establish a course of conduct that adopts those terms. Therewas never a negotiated agreement based on these terms

3. Hill v. Gateway 2000, Inc. (1997) US Ct of App 7th Cir [J Easterbrook(mkt will take care of things)]

a. Rolling contracts: buyer orders, pays before seeing most terms, enjoys right to return forlimited time period. What controls are there for these consumers? Problem law hasnt found asolution to yet

b. P ordered computer over phone, paid via credit card, D ships, box has a shrink-wrap K 30days to return if unsatisfied, compulsory arbitration clause. P keeps the computer for 30 daysand then become dissatisfied

c. Issue: Are the terms effective in the shrink-wrap K if payment precedes revelation of the termsof the K?

d. Holding: The terms are effective as part of the K b/c P kept computer for 30+ days andaccepted Ds offer, including arb clause

i. K need not be read to be effective; terms must be enforced

ii. ProCD controls here: terms inside of a box of software bind consumers who usesoftware after an opportunity to read and reject

iii. Cannot read terms over the phone at time of K (saves confusion and $$$)

iv. This is a bad reading of 2-207, says CB arb clause shouldnt be included under Step-Saver

v. Why doesnt 2-207 apply here? Judge says it is only one form, not a battle. Also,could say that the arb clause would be part of the K b/c they accepted the K when they

kept it past 30 days, so 2-207 is n/avi. What options are available?

1. Magnuson-Moss Warranty Act: vendor must send copy of terms on request2. Consult public sources mags, websites3. The right of return w/in 30 days (if not, K would be invalid)

4. C&J Fertilizer, Inc. v. Allied Mutual Ins. Co. (1975) SupCt Iowaa. D insures P w/ burglary coverage that required visible marks. Definition in fine print to

prevent inside job. P broken into w/out visible marks and D refuses to provide coverage

b. Issue: Do reasonable expectations of policy holder negate the plain terms of the insurance K?c. Holding: P had reasonable expectation to believe the loss was covered under burglary at the

time he purchased policyi. The insurance agent did not expressly bring attention to this term, and youd think that

most burglaries would be covered under a burglary policy. Insurance companies hope(many times) that insured wont notice such terms

ii. Reasonable Expectations DoctrineR2K 211(3): where the other party has reason tobelieve that the party manifesting assent would not do so if he knew that the writingcontained a particular term, the term is not part of the agreement.

iii. So the ct reads a term out of the K b/c it is unfair boilerplate is suspect, especiallywith insurance Ks P has not assented to the fine print

iv. Dissent: P has duty to read, language is obvious

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v. Chipokas v. Travelers 3 yrs later reasonable expect doctrine n/a no fraud, laymancould understand the exclusion clause if he only read the policy. This is a controversialdoctrine, rarely used

F. THE STATUTEOF FRAUDS

Usually, oral Ks are enforceable. For some Ks, there is a REQUIREMENT OF A WRITINGo Because some promises are so impt that they should be evidenced in writing. Also, some

promises can be dangerous for promisors b/c they are unilateral and may be entered into w/outmuch thought

o Something in writing must contain K terms, but a full-fledged K isnt necessary!

So, you must ask 1) is there a K at all? (use the rules weve learned) and then 2) is the potential Kenforceable against X?

The answer to the 2nd question must first consider if a K is within the SOF (writing is reqd). If YES then make sure the SOF requirements are met

o If a K is within the SOF it means that the SOF is a defense to the enforcement of a K unless

there is an exception. K is unenforceable against a party who has not signed a written Ko If a K is out of the SOF then an exception applies or a writing has been made and SOF is not

a defense to enforcement of the K

R2K 131: the only party that needs to sign is the party that will be charged. Also, in addition toevidencing a K, it must also evidence the main promises (content) w/in the K itself

UCC 2-201(1): Not necessary for all K terms to be in the writing, just proof that a K has been made not even the price.

What Ks must be in writing?o Ks for the sale of interest in land

o Suretyship Ks

o Ks for the sale of goods ABOVE $500 under UCC 2-201

Exceptions (oral K is sufficient):

Receipt and acceptance of goods, (3)(c)

Part payment, (3)(c)

Special manufacture, (3)(a)

Merchant exception: Confirmation sent w/in a reasonable time, signed bysender, and no objection to w/ in 10 days (2) (see ConAgra below)

Admission in court of a K, (3)(b)o Ks that are not to be performed w/in 1 calendar year from their making

Note: a K that is capable of being performed w/in 1 year, that will probably take morethan one year to perform is NOT within the SOF and it is enforceable even though oral

only

See Klewin v. Flagship (1991)

D and P enter into oral K for Ps construction of a development, no specificterms established, hold a press conference and sign ceremonial written doc. Dis unsatisfied w/ P and replaces him after 1st phase

Issue: If the oral K is of indefinite duration, is it outside of the SOF? Is an oralK unenforceable when the performance will be more than 1 year but the Kdoesnt expressly negate the possibility of 1 yr completion?

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Holding: unless the agreement expressly and overtly says that the K will NOTbe performed in 1 yr, assume that it can be and therefore, no need for SOF toapply and require a writing, K is not unenforceable

Note a difference in philosophy b/t common law and UCC:2-201 presumes that if there was an oralagreement b/t the parties, we want to preserve that agreement as a K, so we will provide lots ofexceptions. Under common law, if you can invoke the technicality of SOF, you win, no K.

Promissory Estoppel Related to Statute of Frauds

Promise enforceable notwithstanding SOF if:1.promisor is fraudulently invoking the statute (i.e. knew at time of oral agreement that he wouldnot fulfill its terms)2.promise induced action or forbearance and justice demands enforcement

Note that the issue here is that if one party fails to reduce the agreement w/ P towriting, he cannot assert an SOF defense if P relied on that promise (equitableestoppel)

R2K 139(1) Authorizes the enforcement of a promise which induced action or forbearance by apromisee notwithstanding the SOF by allowing reliance to substitute for a writing. The remedy grantedfor breach is to be limited as justice requires.

Debate over whether a party can make a contract enforceable via reliance even when thecontract does not satisfy the statute of frauds.

1. Migerobe v. Certina USA, Inc. (1991) US Ct of App 5th Cir

a. P sells jewelry and D sells watches via traveling salesman. P agrees to buy 2,000 watches at $45each. D records on order form. A week later, D calls P to reject order.

b. Issue: Are there writings sufficient to satisfy the SOF?c. Holding: A memo shows that salesman was authorized to offer the discounted price to P, and

the order form and other memorandum show Ps acceptance of that offer taken together, thesedocs provide sufficient evidence to satisfy SOF

i. Writing must show K of sale is made, must be signed by party against whomenforcement is sought, and must specify quantityii. Integration of several docs meets SOF: writing is separate docs incorporated by

reference to each other (even implied reference is okay)

iii. UCC 2-201(2): an exception that satisfies the writing requirement: b/t merchants, ifconfirmation is sent in a reasonable time, it satisfies the requirements of the SOF unlesswritten notice of objection to its contents is given w/in 10 days of receiving

iv. Note: no K b/t parties here, no agreement only order form was prepared, essentialterms uncertain

2. ConAgra v. Nierenberg (2000) SupCt of Montana

a. D calls P; P says they agreed on sale; D says he was checking prices. P filled out order sheet

and contends oral agreement by phone is routine. P held for 2 days, D didnt show, so he mailedit. D received w/in 10 days and it provided terms discussed. D sold wheat to another elevatorand didnt notify P. D denied contract; asserted SOF

b. Issue: Is there an enforceable oral K here?c. Holding: (1) An admission that a K for sale was made, as exception to UCC SOF, must be

deliberate, clear, unequivocal; (2) sellers trial testimony was not such an admission, but (3) b/cPs confirmation was received in a reasonable amt of time and D did not object, the SOFdefense is NOT available to D, within the merchant exception to the SOF

i. Case is talking about UCC 2-201(2) and (3)(b)

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ii. Look at merchants and usual practices was the confirmation sent in a reasonable amtof time, and did D follow ordinary course of biz?

iii. Could still go back and admit that no enforceable K was made hereiv. This also fits under 2-207 ADDITIONAL TERMS in the confirmationv. Note that under 2-201(3)(b), you might want to submit an affidavit asserting no oral K

has been made. Could be sufficient no matter what is said in court

VI. FARMERSAREMERCHANTSHERE

3. Lige Dickson Co. v. Union Oil Co. of CA (1981) SupCt of WA

a. P buys asphalt from D via phone orders, never written K. Prices rising, P requested D provideoral guarantee against further increases affecting Ps existing contracts(w/its clients). Dpromised but then said prices would be subject to change w/out notice, so P lost $39k.

b. Issue: Can an oral K otherwise within the SOF be enforceable on the basis of promissoryestoppel?

c. Holding: Promissory estoppel cannot be used to overcome the SOF in a case involving the saleof goods

i. P wants ct to adopt R2K 139 which allows enforcement of a promise based onreliance theory in spite of SOF. Justified reliance is a common law principle avoiding

injustice only by enforcing promiseii. The precedent is not w/r/t the sale of goods, if it was, then it would circumvent the

UCC. Want to encourage writings, from a policy standpoint cts want regularityiii. Ps only remedy is breach of the oral K equitable estoppel isnt availableiv. Promise here: to price protect encouraged reliance

CH. 4: THE CONTENTSOFTHE CONTRACT

A. THE PAROL EVIDENCE RULE First, a K must be in WRITING for this to be considered (exam tip) When this rule is used, it prevents the introduction at trial of any evidence that would contradict

or, in many cases, add to the terms of the K in the writing

Rationale: want a written K to create a sense of finality

1. Is the written K an integrated document? *Judge decides this (R2K 209/210)

a. Completely integrated document: did parties intend their writing to be the completeand final expression of their agreement?

b. Partially integrated document: did parties intend record to be a final statement of theK in certain respects?

c. If YES then parol evidence rule applies, and blocks external parol evidenced. This allows for some flexibility

2. Then the admissibility of evidence is determined

UCC 2-202: Stops you from adding a clause to the contract, but never prevents you from offering oraltestimony to aid in interpreting or explaining and supplementing words of the contract with

(a) course of performance, course of dealing, or usage of trade; and(b) evidence of consistent additional terms unless the court finds the writing to have been intendedas a complete and exclusive statement of the terms of the agreement.

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UCC 2-202, comment (3): excludes only evidence of additional terms that are such that ifagreed upon, they would certainly have been included in the document in the view of the ct.

Note that inconsistent terms have been held to be only those that basically negate a term in theK otherwise, they can be consistent (see Hunt Foods on p. 251)

See R2K 214: when prior agreements or negotiations are admissible!

Merger clause: this written agreement is the final expression of the intent of the parties

EXCEPTIONS: Evidence of oral agreement made prior to adoption of written K admitted if:

A. Collateral Agreement + Additional Consideration -

1. oral agreement is collateral (capable of being expressed in separate agreement), wouldnot have certainly been included in the disputed contract, and it does not contradict the terms ofthe written contract and2. the written contract fails to fully integrate and embody the parties understanding

Problem comes when prior oral agreements add to the obligations of one of the parties(price higher) rather than contradicting a written term, but at the same time plainly fall w/in thescope of the written contract b/c relates to same subject-matter. As in the Ice-house case! Ct

usually wont allow this oral agreement in.

B. Subsequent Transactions Evidence of oral agreements after the signing of the writing permissible

C. Fraud a party may always introduce evidence of oral agreements showing fraud, duress, mistake,lack of consideration

D. The written instrument was not effective until a priorcondition has occurred (R2K 217)

E. To explain or interpret, modification of the agreement, or a naturally omitted term

No

Integration

Partial Integration Full Integration

R2d

210

UCC

too!

Oral Deals,no writtenterms

Something written down, but not everything,i.e. form Ks (even with merger clauses)May be shown by:

1. other writings

2. relevant evidence, oral or written, thatan apparently complete writing

a. never became fully effective

b. was modified after initialadoption.

Contract adopted by theparties as a complete andexclusive statement of theterms of the agreement

presence of a mergerclause persuasive, but notdispositive [R2d 209],especially if the terms areambiguous.

R2d

213

Always supersedes inconsistent terms of priororal agreements BUT proof of consistentadditional terms can be shown

Supersedes inconsistent ANDadditional consistent terms ofprior oral agreements

** Restatement less likely than UCC to allow parol evidence. **

R2d 204, comment e: The fact that an essential term is omitted may indicate that the agreement isnot integrated or that there is partial rather than complete integration, but omission of a term does notshow conclusively that integration was not complete and a completely integrated agreement, if binding,discharges prior agreements within its scope.

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Parol Evidence Rule like the Statute of Frauds b/c offers illusory refuge of mechanical simplicity

Differing opinions as to what extent courts should insist on particular forms of contract:

1. Formalist Position insists on particular methods for particular outcomes, i.e. everythingshould be written down (this may be on the rise in practice)

2. Anti-formalist position judges should be actively involved in interpreting contract andprotecting people. Find exceptions in law. (Judge Traynor)

Formalist Analysis of Parol Evidence Anti-Formalist Analysis

Document Integrated Evidence Inadmissible(Regardless of credible proof of prior oralagreement)

Credible Evidence of Prior Oral Agreement

Document not integrated Evidenceadmissible to add to contract.

Classic Parol Evidence Case (Formalist Four Corners Approach):

1. Baker v. Bailey

a. D and P have a lease on land that includes Water Well Use Agreement, which only provideswater to D. D thought the right to H2O would be extended to a reasonable party (b/c P fearedhippies) but the terms do not say this, no obligation to give new purchasers H2O. When Ddecides to move, P wont share H2O, property worthless, sold for $8K, worth $45K.

b. Issue: Is there a breach of K by P?c. Holding: PER bars the Ds contention that terms not in K could be relied upon, thus no breach

of Ki. This is case where P and the ct didnt care what understanding was the agreement

clearly wasnt in express terms of the K. The ct will look at the language nothing forthe ct to construe, just apply language to facts and decide

ii. Even though Ds understanding is consistent with the express terms, it is still notapplied b/c there is complete integration, so terms do not matter. (R2K 210)

BUT: Traynor and Anti-Formalist Application (Intent Oriented):

2. Masterson v. Sine

a. Significance: Evidence of oral collateral agreements should be excluded only when the factfinder is likely to be misled. (Credible Evidence of Side Oral Agreements Partial Integration

Admissibility of additional terms)b. P(M) conveys ranch to D (sister-in-law) reserving option to purchase w/in 10 years for same

consideration plus depreciation value of improvements. P goes bankrupt. Ps trustee tries toenforce the option.

c. Holding: For D parol evidence must be admitted to determine what is meant by unclearterms in K, collateral agreements show what parties INTENT was in negotiation, to see whatshould be included or excluded, in order to determine integration

i. Ds claim that oral understanding was that it was non-transferrable outside the familyii. Traynor says that the instrument itself can help determine integration goes to step 2

before step 1 is completed. The credibility of the proffered evidence is the basis for thedecision. If circumstances deem that the oral agreement couldve been enteredinto separately from the written one, no need to frustrate parties intent! Goodpolicy

iii. Rest 240(1)(b): permits proof of a collateral agreement if it might naturally be madeas a separate agreement by parties but they didnt include it. (So, ct would have toreally be convinced that the parties could NOT have left this out of their agreement, inorder to use the PER)

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iv. UCC 2-202: permits proof if additional terms would certainly be included in the docin the view of the ct

v. No merger clause here, standardized form, signs of incompleteness.

B. INTERPRETINGTHE TERMSOFTHE CONTRACT

Interpretation get at what the parties meant, right? But this goes against the objective theoryof K.

Language can be hazy, some parties will leave broad terms to protect the deal and lowertransaction costs, and unexpected events do occur

Parties may claim terms have special meanings does this prevail over judges determinationabout the meaning of the terms (plain-meaning)?

General trend propelled by the UCC is the 2nd one, which has broadened concept of contract in veryimportant ways. See UCC 2-202! (Nanakuli below outlines this)

Fundamental difference of above opinions as to how integration and interpretation should beapproached:

Williston: Writing has a unique andcompelling force - Formalist

Corbin: Writing has NO unique andcompelling force (TRAYNOR)

Writing supersedes all previous undertakingswhen taken as a whole appears to be completeand alleged additional terms ordinarily andnaturally would have been included in thewriting by reasonable parties situated as theparties were to the writing

Writing is integrated when the parties intend itto be integrated

Writing which is integrated means what areasonably intelligent person would understandit to mean

Integrated writing means what parties intend itto mean. As such, an integrated meaning couldhave a meaning to which a reasonablyintelligent person could not subscribe

Thus, the judge can fix the legal relations of theparties w/o aid of a jury

Accords the jury a larger role in process offixing contractual relations

This provides a measure of security Provides less security to written agreements** Some cases have held that parties cannot insert a clause into their contract in order to prevent courtsfrom considering extrinsic evidence when interpreting it as void as against public policy.

Principals of Construction:Phila v Phila Transportation:

1. entire K should be read as a whole and every part interpreted w/ reference to the whole, so as togive effect to its true purpose

2. the K itself must be read in the light of the circumstances under which it was made3. where a public interest is affected, an read it to favor the public4. specific provisions ordinarily will be regarded as qualifying the meaning of broad general words

in relation to a particular subject5. unless contrary to the plain meaning of the K, an interpretation given by the parties themselveswill be favored.

Maxims of interpretation:

a. Primary purpose rule: If the primary purpose of the parties in making the K can be ascertained,that purpose is given great weight. [R2K 202(1)]

Courts will try to interpret terms as consistent with each other [R2K 202(5)]

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b. All terms made reasonable, lawful and effective: An interpretation which gives a reasonable,lawful, and effective meaning to all terms is preferred to an interpretation which leave a partunreasonable, unlawful, or of no effect. [R2K 203(a)]

c. Construction against draftsman: An ambiguous term will be construed against the drafter.[R2d. 206]

d. Dickered terms control boiler-plate terms: Where it is possible, separately negotiated or addedterms are given greater weight than standardized terms. [R2d 203(d)]

e. Noscitur a sociis: a word is known by the company it keepsf. Expressio unius if you put it one place and not the other, you meant to do that

1. WWW Associates, Inc. v. Giancontieri (1990) Ct of App of NY

a. This is the 4-CORNERS, PLAIN-MEANING APPROACHb. Ds K for sale of property to P, they sign a K of Sale which includes a reciprocal

cancellation provision (dependant upon the outcome of a litigation if not over by acertain date, either party can cancel the K). Ds wait until that date passes and then theycancel the K, drag their feet in the litigation so they can get out of this K. P claims thatthe cancellation provision was intended for their benefit only. D is silent about this.

c. Issue: Should an unambiguous term in the K (reciprocal cancellation provision) beread in light of extrinsic evidence and only allow P to cancel the K?d. Holding: Parties set their agreement in a clear, complete doc and that writing must be

enforced according to its terms; intent is inadmissible to change the writing.

i. Expressio unius argument: other parts of the K gave rights to P alone, and thisone did not. Therefore, the fact that it doesnt MEANS SOMETHING.

ii. D relies on the language, and the ct agrees. P could have said that the mergerclause was NOT dickered, that it wouldve been there no matter what they did.Only dickered terms represent real intentions.

iii. Court wants stability in Ks dont to create ambiguity in K w/ this extrinsicevidence. Only look to this evidence if there is an ambiguity. See R2K 203(d)

iv. Also, parties were sophisticated bizppl.

2. Pacific Gas & Electric Co. v. GW Thomas Drayage & Rigging (1968) SupCt of CAa. This is the MODERN APPROACH (allow more evidence re: intent). Traynor.

b. D enters into K w/ P to perform work on steam engine, K includes an indemnity c

Contracts Frier Fall 2005

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