Contracts – Fall 2010 – Dean Ronald Chen
1. Mutual Assent – The first requirement of a K is that the parties manifest to each other their mutual assent to the same bargain-usually in the form of an offer and acceptance.
1. Offer: proposal by one party to the other; elements of offer-(1) manifestation of present contractual intent; (2) certainty and definiteness of terms (parties, subject matter, time for performance and price); (3) communication to the offeree; (4) gives the offeree the power of acceptance
– If the intent is not clearly expressed, the communication must be interpreted objectively.
2. Objective theory of contracts: would a reasonable person in the shoes of the offeree feel that if he accepted the proposal a K would be complete, not an inquiry as to whether a “meeting of the minds” took place
i. Some factors considered in application of objective theory:
(1) words used.
(2) Surrounding circumstances
(3) Advertisements-(by catalogs, etc.) will likely be construed as an invitation to make an offer (Usually viewed as solicitation) – – – >
(4) Definiteness and certainty of terms Rest 33
(5) Written contract contemplated-where the proposal contemplates or provides for a subsequent written instrument to memorialize the agreement, the question arises whether an offeree who accepts is bound immediately or only upon subsequent execution of the writing (Texaco)
Mechanics of Bargaining: Offer & Acceptance
Three questions that the court will ask to see if the requirements of a contact are met:
(2) Was there mutual assent?
(3) Was there consideration?
(4) Are there any defenses to the creation of the contract
In order to have a bargain it is not necessary to always go through the process of offer and acceptance…
A. Two Tests of Mutual Assent
1) Subjective: actual intent theory – if no “meeting of the minds” between parties then contract is not legally binding
2) Objective: outward manifestations of intent theory; expression v. mental intent; acts manifesting assent must be done intentionally. Obligation based on “reasonable person” standard
Raffles v. Wichelhaus (Peerless case) (No Mutual Assent Where Latent Ambiguity Exists)
FACTS: P contracted to sell cotton to D to be delivered from Bombay at Liverpool on the ship “Peerless.” Unknown to the parties was the existence of two different ships carrying cotton, each named “Peerless” arriving at Liverpool from Bombay, but at different times.
Ø Where neither party knows or has reason to know of the ambiguity, the ambiguity is given the meaning that each party intended it to have and there is no mutual assent and no K.
Ø There must be a latent ambiguity that materially effects the nature of the K.
Ø Misunderstanding, if related to a material term, prevents a contract from being formed at all thus, it is a void contract (No K remedy). There’s no meeting of the minds -> NO CONTRACT!
Effect of Misunderstanding § 20:
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance w/ the meaning attached to them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other knows the other meaning attached by the first party; or
(b) that party has reason to know of any different meaning attached by the other , and the other has no reason to know the meaning attached by the first party
Plain meaning of Restatement 20 (MISUNDERSTANDING):
1(a) No contract formed b/c not manifestation of mutual assent over a material element of the contract b/c neither party has reason to know the meaning of a certain term. (Example: Current Pierless Case – one Pierless but actually mean the other Pierless)
Material Element: i.e., ∆ and ∏ specified Peerless b/c of the risk of the ship making it to land, therefore, a material element. (i.e., actual Peerless)
1 (b) No contract, i.e, 2 ships called Peerless and each party finds out about the fact that there are 2 ships and neither party bothers to ask the next question to clarify, but both now know.
Courts answer to this is: No K b/c you both fucked up!
2 (a &b): Contract The party that was in the position of superior knowledge bears the burden to clarify, and if not, then bears the risk of the K being formed on the term as understood by the other (unknowing) party. (difference btw. (a) and (b) is that (a) uses the word knows and (b) uses the word has reason to know.
When the knowledge btwn the parties is not in balance then the party that does not know and has no reason to know is protected- 2(a&b)
1(b) coke and ore example
Element is dispute must be material for the misunderstanding to eliminate the mutual assent
Konic Int’l Corp v. Spokane Computer Services p. 294- Court found mistake on both sides and decided that no contract existed because there was no meeting of the minds.
Flower City v. Gumina (p. 360)
FACTS: P subcontracted to paint for D, P only painted inside walls and demanded more money to paint outside, and D fired him.
RULE: No K because each party held a reasonable and different view of what was meant. No K ever came into existence for lack of a “meeting of the minds” in the first instance.
CLASS NOTE: one argument: Ct. overlooked the fact that perhaps the general contractor should have been on notice when bid was so much lower then everyone else’s. May have had greater knowledge and then it should have been enforced to P’s advantage. Another argument: The ambiguity in the K may in favor of D b/c it was customary practice to paint both sides of the wall.
Embry v. Hargadine-Mckittrick Dry Goods Co. (Mutual Assent) (Subjective Intent Irrelevant)
Rule: The secret feelings, intentions or beliefs of a party will not affect the formation of a contract in which their words and acts indicate that they intended to enter into a binding agreement.
Embry, P, was allegedly rehired by Hargadine-McKittrick, D, after his employment contract had expired. D denied the rehiring. “Go ahead, you’re all right. Get your men out, and don’t let that worry you.” It is obvious that P believed a valid contract had been formed because he remained on the job. His reliance was reasonable since D was the president of the company and had the authority to rehire him. The fact that D did not intend to rehire P is immaterial if the natural interpretation of the conversation is that he was being rehired. Again, D, undisclosed intent is immaterial.
Kabil Developments Corp. v. Mignot (Mutual Assent – Testimony of Belief Permitted if Objective Standard is incomplete)
FACTS: The jury awarded P, damages arising out of D breach of a contract to provide helicopter service, although D argued that there had never been a contract in the first place. D contended that trial judge erred in allowing subjective testimony.
RULE: Subjective opinions not misleading to the jury may be admissible when it is illustrative of the behavior and perceptions of the parties and whether such behavior gave reasonable notice of intent to the other party.
CHEN NOTE: Subjective intention cannot be used directly to show contract. Only whenever it helps to clarify ambiguous objective evidence as to whether a contract was formed. It would have been better for the ct. to say that the trial ct. made a mistake, but a small mistake that would not have affected the outcome of the case. Don’t like inquiry into subjective intentions.
Lucy v. Zehmer Handout (Mutual Assent—WHEN WASTED)
FACTS: P, buyer, and D, seller, while drunk enter into a written agreement to exchange farm for $50,000. P accepted the written offer seconds before D said it was a joke.
RULE: The written agreement was an outward manifestation of intent. (Objective) Therefore the ct. refused to look into the unexpressed or subjective intent of either party. Law imputes intent from reasonable meaning of words and acts; unexpressed state of mind is immaterial.
HELD: P wins!!! When the contract was formed is important. When did D say it was a joke- Revocation of the offer. D passed the offer and P picked it up- Acceptance. This happened a few seconds before D said it was a joke. Intent was manifested when he signed the paper. Lucy made the offer by handing the paper over and zehmer accepted
g definitive contract do not use (or limit the use) of the word, “should.” You may want to use may instead…
Offers can be extinguished by 1 ) by its terms itself; 2) rejection – counter offer; 3) can lapse at its own time; 4) Death or incapacity of offeror or offeree;
Restatement §36 Methods of termination of power of acceptance:
1. An offeree’s power of acceptance may be terminated by:
a. Rejection or counteroffer by offeree, or
b. Lapse of time (reasonable), or
c. Revocation by the offeror, or
d. Death or incapacity by the offeror or offeree.
2. In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.
Note: C/L is more strict on formation of K than UCC
Rule: Offer and Acceptance in Formation of Contract – UCC 2-206
(1) unless otherwise unambiguously indicated by the language or circumstances
i. an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;
ii. an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller reasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
(2) where the beginning of a requested performance is a reasonable mode of acceptance and offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
Note: when drafting definitive contract do not use (or limit the use) of the word, “should.” You may want to use may instead…
UCC Gap Fillers – §1-302 – UCC prefers to fill in gaps rather than strike down Ks
§ If Price Is Not Provided – 2-305(1)(b) – price is a reasonable price at the time for delivery
§ Quantity – Statute of Frauds – 2-201(1) limits enforcement to the quantity of goods shown in the writing
§ Delivery – All goods are be delivered at one time, not in several lots – 2-311(2)
§ Goods Assortment/Shipment – Buyer has the option of selecting the assortment of goods; the seller has the option of determining the specifications or arrangements relating to shipment 2-311(2)
§ Time – The time for shipment or delivery or any other action under a contract… shall be a reasonable time 2-309(1)
§ Place of Delivery – The place for delivery of goods is the seller’s place of business or residence 2-308
§ Authorization to Ship – If the agreement authorizes the seller to send the goods to the buyer (and the location of buyer and seller in distant cities could amount to this authorization) the seller may used documents of title and ship under reservation 2-310(b)
§ Payment – Payment of the price is due on receipt of the goods 2-301, 2-310(a), 2-507
§ Title – The seller warrants that the title conveyed shall be good 2-312
§ Warranty of Merchantability – A merchant seller warrants that the goods are merchantable 2-314
§ Third Parties – With certain qualifications, duties may be delegated and rights may be assigned to third parties 2-210
§ Good Faith Requirement – may not be disclaimed, even by express agreement §1-302(b) – but the parties are allowed to determine the standards by which good faith is measured if no manifestly unreasonable