Filling in Terms (gap filling)
It’s not which terms that are uncertain that determine whether or not a contract will be enforced, but how many terms that are uncertain that may determine whether or not a contract will be enforced.
· Implied-in-fact= terms that parties actually, albeit implicitly, have agreed to
· Implied-in-law= terms that are thought to be imposed on parties w/o their consent (supplied terms)
· Default rules= legal rules that parties can avoid or vary by means of an express clause that differs from the term a court will otherwise supply by default
· Immutable rules= may not be varied by consent and will override any express clause to the contrary
Why we gap-fill
· In the traditional method whenever there is a default rule that has to be filled. Try to look to what the parties themselves would have done ex ante.
· Try to shift the risk to the party who can best bear the risk.
· Try to force the party with the most knowledge to divulge.
· Shift the burden onto the willful breecher
· Law and economics- shirt to least cost avoider.
· If there isn’t’ a rule covering the dispute between your client and another party- usually argue that what the parties themselves would have agreed to had they considered the event at the time of contract
Agreements to Agree (=implied terms of mutuality and agreement)
Sun Printing & Publishing Assn. v. Remington Paper & Power Co (1923) pg 422
F: Sun brought action against Remington to collect damages resulting from Remington’s refusal to deliver rolls of paper given that the contract only specified terms for 4 months and didn’t specify an end date.
R: When a K leaves space for an agreement to agree, both parties are free not to agree w/o being liable for breach of contract.
R: Common Law will only fill one gap
Rsn: Court didn’t enforce b/c both price and length of time were open. If it was only price, court could have enforced the contract because it would have been able to discover a breach. Time element is essential to the formation of the contract, inability to agree upon this element causes the failure of the contract and neither party is bound.
Texaco v. Pennzoil (1987)
R: Court will fill indefinite terms but these were not
Reasoning: The terms of the agreement are not too vague for the court to find both the basis for a breach and to determine the appropriate remedy. [See (3) of UCC § 2-204 below.
Restatement 2nd of Contract 33: Certainty
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of the contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
Restatement 2nd of Contract § 204: Supplying an Omitted Essential Term
When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.
UCC § 2-204: Formation in General
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
UCC §2-305: Open Price Term
(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable to do so must pay the reasonable value at the time of delivery and the seller must return any portion of the price paid on account.
Illusory Promises (=leaves complete discretion to the promisor to perform)
Requirements Contract- When a promisor agrees to fulfill all of the needs required by another promisee
Output contract- When a promisee promises to take everything the promisor can put out
You can define for yourself what is going to be considered good faith and reasonable efforts.
New York Central Iron Works Co. v. United Stated Radiator Co. (1903) pg 429
F: K to fulfill radiator needs for one year for one set fee. Needs were double previous years needs. D filled needs up to normal year requirement then refused to deliver.
R: If a party contract for goods upon a rising market he is ordinarily entitled to such profits as may accrue to him by reason of a prudent or favorable contract.
Rsn: Parties left the contract open and indefinite as to the quantity of goods the P might order and therefore P is not limited by previous years needs, but P is still bound to act in good faith.
Eastern Air Lines, Inc. v. Gulf Oil Corp. (1975) pg 431
F: Parties had contracts w/ each other for years. In a 5 year renewal, Gulf agreed to furnish all of Eastern’s fuel needs. 2 years later oil embargo makes price of fuel jump. Gulf tries to get out of K claiming lack of specific requirement lead to it being void.
R: A requirements contract made in good faith is binding where the purchaser has an operating business.
Rsn: Real issue is to look at the intent of the parties and to see if there is good faith. At all times, Eastern acted with the good faith of a merchant. Lack of mutuality and indefiniteness of contract resolved by court with reference to objective evidence of volume of goods required to run business.
Wood v. Lucy, Lady Duff-Gordon (1917) pg 434
F: Wood given exclusive rights to use D’s name, which helps sell clothes. D gives own endorsement and P brings suit for share of the profits.
R: An agreement signed by both parties is a binding contract regardless of market fluctuations.
Rsn: D gave exclusive privilege to P, including giving up her own privilege. She had no right to place her own endorsements except through P. P is bound by duty to split the profits. D also has implied duty to go out use reasonable efforts to bring profits back to both of them
UCC § 2-306(2)
UCC §2-306: Output requirements and exclusive dealings “REQUIREMENT CONTRACTS”
(1) The term which measures the quantity by the output of the seller or the requirement of the buyer means such an actual output or requirement as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise, comparable prior output or requirements may be tendered or demanded.
*This is a default rule that can be contracted around by specifying the amount of effort that would suffice, i.e.: “reasonable,” “some,” and “moderate.”
Unreasonably Disproportionate Test is like Unjust Enrichment Test:
Unreasonable? Yes/No Disproportionate? Yes/No
Form Contracts or Contracts of Adhesion?
· Contract of adhesion is a contract that does not allow for negotiation. Often entered into by uneven bargaining partners. Consumer is in no position to negotiation and the companies rep often does not have authority to do so. If the form is not in bad faith, then it has to be reasonable.
· Can tie in forms of technology (shrink wrap) b/c there’s no opportunity for (pro-cd)
· Largest public policy argument is economics- The aggregate cost can be prohibitive (ie. if cell phone company had to negotiate with everyone) So, as long as it’s a reasonable term, the court will try and find consideration.
· Form Contract is the same thing as Contract
· Ie. offer to byy 100 for $1. Instead of accepting, you just ship. We now have a contract on the original terms that were sent plus any terms from the UCC that need to be gap filled.
UCC § 2-207. Additional Terms in Acceptance or Confirmation
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 agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
The additional terms are to be construed as proposals for addition to the contract.Between merchants such terms become part of the contract unless:
the offer expressly limits acceptance to the terms of the offer;
they materially alter it; or
notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
Step-Saver Data Systems, Inc v. Wyse Technology
F: Step-Saver bought software for 142 computer systems from Wyse that immediately have problems.
R: Box-top is not equal to a last shot b/c it materially altered the terms
Rsn: Seller did not know buyer’s particular purpose, buyer didn’t rely on seller’s expected knowledge of buyer’s purpose, buyer performed their own bench test. Product exceeded ordinary standards of the trade usage of product.
Test: Would the offeree be willing to go thought with the contract, had the term not been added?
Additional v. Different terms
· Different is when a discussed term is changed.
· Addition is when there is discussion, the term just gets added
Mirror Image and Last Shot rule are for land and services, but not goods.
UCC 2-207 applies to goods.
Union Carbide Corp v. Oscar Mayer Foods Corp. (1991) pg 471
F: UCCorp moves operations outside of city limit in attempt to avoid city taxes and k’s with OM minus taxes. Gets $130k back tax bill from city and brings suit against OM.
R: To assume taxes on an invoice is quite different from assuming an open-ended, indeed incalculable, liability for back taxes.
Rsn: Additional of terms (i.e. paying of back taxes) would materially alter existing contract, since consent cannot be presumed.
Looking at UCC §2-207 (2), these additional terms would materially alter the contract.
These materially alter because Oscar Mayer probably would not have consented to such an indemnity clause knowing that the tax rate may increase. Therefore, the old contract is valid and those terms, which do not include back taxes, are enforceable.
· Test to define something as material
Hardship- unbargained for burden on the other party of