Contracts II—Henning—Spring 2012
1. MUTUAL MISUNDERSTANDING
a. Result is that no contract is formed
b. Caused by ambiguity in the contract
i. Ambiguity: Language that is reasonably susceptible to having more than one meaning
1. Latent Ambiguity: a hidden ambiguity (Ex: Two ships named “Peerless”à Raffles)
ii. In Order for Ambiguity to Make an Agreement Unenforceable
1. There has to be a term in the contract that has more than one reasonable meaning
2. Each person actually has a different meaning in mind
3. Neither person knew or had reason to know about the other person’s interpretation of the term
c. Effect of Misunderstanding (Restatement § 20):
i. 1.) There is no contract if the parties attach materially different meanings to their manifestations AND
1. (a) neither party knows or has reason to know the meaning attached by the other (both parties are ‘innocent’, neither had knowledge nor were careless); or
2. (b) each party knows or has reason to know the meaning attached by the other (both parties were careless)
3. If misunderstanding is over non-material or trivial term, there is still a contract, the misunderstood term is just removed
ii. 2.) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if:
1. (a.) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or
2. (b.) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
3. Contract on the terms of the of the party that is not careless or knowledgeable
a. “More innocent” party prevails
i. Innocent > Careless > Knowledgeable
iii. Even though the parties manifest mutual assent to the same words of agreement, there may be no contract because of a material difference of understanding as to the terms of the exchange
d. Three Principles of Peerless Doctrine (Raffles)
i. The doctrine only applies when the parties have different understandings of their expression of the agreement
ii. The doctrine does not apply when one party’s understanding, because of that party’s fault, is less reasonable than the other party’s understanding; and
iii. Parol evidence is admissible to establish the facts necessary to apply the rule
2. INDEFINITE AGREEMENTS
a. Distinguished from ‘mutual misunderstanding’: In ‘mutual misunderstanding’, both parties ascribed different meanings to terms in a contract. In an ‘indefinite agreement’ a term suffers from vagueness as opposed to ambiguity
b. There must be a reasonably objective basis to prove what the vague term(s) mean
i. Easier to decide in cases for sales of goods, etc., where there is a more definite industry standard
ii. UCC § 2-204(3): “A contract for sale does not fail for indefiniteness if the parties have intended to make a contract, and there is a reasonable basis for giving an appropriate remedy”
c. This fatal ambiguity prevents a contract from forming in the first place. Remedies would be analyzed under quasi-contract for benefit received.
d. Mere disagreement among the parties as to the meaning of a term is not enough to invalidate a contract
i. Applicable Standard: Reasonable certainty as to the material terms of a contract
ii. A contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonable basis for giving an appropriate remedy
e. For the validity of a contract, the promise, or the agreement of the parties to it must be
ii. Explicit, AND
iii. Their full intention may be ascertained to a reasonable degree of certainty
3. INCOMPLETE AND DEFERRED AGREEMENT
a. Parties have reached agreement on some terms of the exchange, but have deliberately left other terms open or for future agreement
b. Court must decide: Do these two parties currently intend to contract with each other, or are they still negotiating? If yes, is there a reasonable means to fill the gap?
i. Scheider: When the parties have completed their negotiations on what they regard as “essential elements”, and performance has begun on the good faith understanding that agreement on the unsettled matters will follow, the court will find and enforce a contract even though the parties have expressly left these other elements for future negotiation and agreement
1. Objective criteria may be found in agreement itself, commercial practice, or other usage and custom
a. If the contract can be rendered certain and complete by reference to something certain, the court will fill in the gaps
2. A mere agreement to agree, in which a material term is left for future negotiations is unenforceable.
a. Real Estate Leases: Amount to be paid is always a material term?? (Ask Henning to distinguish b/w Schieder and J.Martin Deli)
1. Quantity: Lack of agreement on quantity term should support a conclusion that the contract failed for indefiniteness.
a. No “reasonably certain basis for giving an appropriate remedy”
b. Difficult to determine a reasonable quantity term in the absence of some agreement
2. Price: If requisite intent is present and price is left to open, the price is “a reasonable price at the time for delivery”
a. Not concerned with why the parties failed to agree, or whether they negotiated in good faith. Simple fact of a failure to agree coupled with intent justifies court intervention with gap fillers
1. Covers all transactionsà not just sale of goods in UCC
a. Does not explicitly provide different rules for different transactions
2. If parties intended to be bound and failed to agree, the court should enforce the contract if the terms are “reasonably certain”
a. Provide a basis for determining the existence of a breach and for giving an appropriate remedy.
1. If they failed to agree on this term, would the parties have wanted to go on with the contract?
2. If they did want to continue with the contract, was there a reasonable means to fill the gap left by the undefined term?
4. UNILATERAL AND MUTUAL MISTAKE
a. Mistake: A belief that is not in accord with the facts
i. If the ‘mistake’ is related to another person’s interpretation of a term, it is analyzed as a “misunderstanding”
b. Restatement § 152. When Mistake of Both Parties Makes a Contract Voidable: Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made (something at the core of the transaction, not terms of the contract) has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of mistake
i. Ex: A contracts to sell and B to buy a tract of land, the value of which depends mainly on the timber on it. Both A and B believe the timber is still there, but in fact, it has been destroyed by a fire. The contract is voidable by B.
c. Restatement § 153. When Mistake of One Party Makes a Contract Voidable: Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake, and
i. (a) the effect of the mistake is
1. Seller of a car says nothing is wrong with the car when they know it has a bad engine
ii. A statement that conceals the facts
1. Usually takes the form of a half-truth.
2. Ex: Home seller tells a buyer that there was recent litigation over the title to the house, but the court ruled in favor of the seller. However, the seller fails to reveal the judgment is being appealed
iii. Conduct that conceals the facts
1. Car dealer runs the odometer backwards
iv. A failure to disclose facts
1. Seller of a home doesn’t tell buyer about previous termite damage
c. Ordinarily, a statement of opinion doesn’t constitute misrepresentation
d. State of Mind:
i. Fraudulent: Maker knows that the assertion is not in accord with the facts, has no confidence in the statement, or has no basis for making the statement
ii. Negligent: Maker has confidence in the assertion and honestly believes she has a basis for making it, but has been careless in determining the facts underlying it.
iii. Innocent: Maker of an assertion is honest and not negligent, but the assertion turns out to be untrue
e. Materiality: A misrepresentation is material if:
i. It would be likely to induce a reasonable person to attach significance to when deciding whether or not to enter a contract
ii. The maker knows that it would likely be a significant factor to the person with whom the maker is dealing to enter the contract
i. Monetary Damages: Compensatory damages are available if there is fraudulent misrepresentation that has been reasonably relied on by the innocent party
1. Some states allow damages for negligent misrepresentation
ii. Contract Avoidance: If misrepresentation is either fraudulent or material and it is reasonably relied on, the contract is voidable
iii. Common law requires the injured party to choose one remedy or the other
1. UCC §2-271 allows for both
8. DURESS AND UNDUE INFLUENCE
a. Duress is like mistake and misrepresentation in that it is an invalidating cause for the contract. They involve getting out of a previously valid contract.
b. Economic Duress: Look for an improper threat by the person who is trying to enforce the agreement
c. A contract is voidable on the grounds of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of free will
i. However, a mere threat to breach does not constitute duress. It must also appear that the threatened party could not obtain the goods from another source, and that the ordinary remedy of an action for breach of contract would not be adequate (Austin)
1. Party claiming duress has a duty to mitigate their loss
2. Threat to breach unless modification not duress unless the modification is not made in good faith and fair dealing