1. The Agreement Process
1. Parties attach different meanings to the same words or words
2. The meanings of the parties must be reasonable
3. Neither party knows or has reason to know of different meanings attached
4. Remedy: the contract is void (never came into existence)
1. Where one party knows of the other’s meaning, he is bound by that meaning
b. Rest. 2d § 20 – Effect of Misunderstanding
i. (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.
ii. (2) The manifestations of the parties are operative in accordance with 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 meaning attached by the first party; or (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.
i. Raffles – defendant ordered cotton from plaintiff to be delivered on the Peerless. Held, there was a mutual mistake of a material term in the agreement process, the meaning of “Peerless,” and thus the contract was void.
2. Special Problems in the Agreement Process
a. Indefinite Agreements and Gaps
a. A term is indefinite when there is no objective way to determine its meaning
b. Objective means the methods are both external and fair
c. An ambiguity over a material term prevents contract formation
d. Courts look for a reasonably objective external basis for coming up with a meaning that is fair
a. There is a difference between saying we will differ the meaning of a term and agreeing now to an ambiguous material term
i. Ex> Difference between “fair share of the profits” and “we will agree at the end of the year what your bonus will be”
a. Varney – defendant employed plaintiff to complete some unfinished jobs for a fair share of the profits but refused his offer when plaintiff was insubordinate. Held, the contract was too indefinite to enforce.
ii. Missing Terms
a. Some contracts require the input of certain terms
b. If those terms are missing, the contract is said to have not been formed
c. The UCC attempted to fix this problem of indefiniteness with gap fillers
i. The UCC can even fill critical material terms (i.e. price).
ii. The idea is to reduce transaction costs
a. There are some terms, certain gaps that the UCC cannot fill
i. Quantity (arguable)
1. The Statute of Frauds limits enforcement to the quantity of goods shown in the writing
2. Without the quantity term, the contract fails for indefiniteness
ii. Price for a unique good (arguable)
iii. Subject matter
iii. Agreements to Agree
a. Generally they are unenforceable; however, the court can enforce them if
i. The court must first determine if the parties intended to be bound by the agreement (on the exam)
ii. If so, the court must – secondly – decide whether there is a reasonably objective basis for proving a remedy
a. If the parties did not intend to be bound by the contract, the contract will fail for indefiniteness
3. Public policy rationale
dent of either party’s mere wish or desire.
a. MGM – defendant refused to act for a show after station accepted the pilot. Held, a court may fill in the gaps of an incomplete contract on which performance has begun, if an objective method is available. (Note the similarity to agreements to agree)
b. Joseph Martin – landlord gave tenant the option to renew a lease agreement. Tenant sues when landlord refuses to offer market rental value on renewal. Held, a material term left open for future negotiations does not make it an agreement to agree.
a. Henning: a belief not in accord with the facts
1. Material mistake – one of the basic assumptions inducing contract formation
2. No culpable negligence – carelessness or lack of good faith in calculation which violates a positive duty
3. Benefit of the bargain – The mistake puts an undue burden on the buyer
4. Unprofitable – prejudice to the seller
5. Prompt notice of the mistake
b. Treatise notes
i. Must have occurred at the time of contract formation
ii. It must be one of the basic assumptions on which the contract was made
1. Ask: whether it is part of the foundation of the contract and whether both parties understand it as such?
2. The mistake goes to the nature of the thing itself (i.e. a cow’s fertility)
3. Not necessarily a term of the contract (i.e. genuineness)
iii. It must have material effect on the agreed upon exchange of performance
iv. The mistaken party must not bear the risk of the mistake. (See Lenawee)
v. Remedy: rescission or reformation
1. The party adversely affected will have the right to avoid the contract