Contracts II Outline
I. The Bargain Relationship
A. Insufficient Agreement: Indefinite, Incomplete, and Deferred Terms
a. If the withdrawing party had explicitly conditioned a willingness to deal upon the other
party’s clear agreement to material terms and the other has failed or refused to agree, no
liability should attach.
b. Strict view that no contract can be formed until clear and complete agreement is reached on material terms has been changed to a more flexible standard
a. Words or conduct that are addressed by one party to another can be called an
b. The general rule is to give the expression an objective interpretation, that is what a
reasonable person standing in the addressee’s shoes would mean it to be. This would
include usage of trade or any other special circumstances
c. Exceptions to the Objective Interpretation:
a. Peerless Rule – an expression is susceptible to two equally reasonable meanings, and each party understands the expression differently.
i. Raffles v Wichelhaus – D received cotton late due to a misunderstanding on the ship it was being sent on. “Peerless” was a material term in the bargain making the contract void.
b. If both parties subjectively attach the same meaning to a term, that meaning will govern even if it is not the reasonable meaning of the term.
c. If one party knows or has reason to know that another party attaches a certain meaning to an expression, and the other party does not know or have reason to know that the party attaches that meaning to the expression, the meaning that the innocent party attaches will prevail even if the other interpretation is more reasonable
i. Rest. 20: (standard analysis)
(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 (No Contract)
(2) Manifestations are operative in accordance with the meaning attached to them by one of the parties (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 (Buyer or Seller’s terms)
d. Materiality- courts will not avoid a contract if the term at issue is not material
ii. Knows – Subjective apprehension of a fact – how does buyer know the
terms of the seller? Buyer does not know the real price
iii. Has Reason to Know – Objective – would a reasonable person in the
seller’s position knows what was happening? Would a reasonable
person have drawn the correct conclusion?
iv. Neither – No Contract
Has Reason to Know
e. No contract if on both levels. Contract if on different levels. The person on a lower level wins since they are more innocent. Both would be considered on the bottom level, no contract
d. Extrinsic Evidence
a. Traditional rule is to use the ‘plain meaning’ of the expression.
b. Today other evidence is allowed such as course of performance, course of dealing, usage, and usage of trade
e. Konic International v Spokane Computer Services –
a. Misunderstood $5.620 as $56.20. Rest 20 comment: “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”.
b. Neither party knew of the other party’s interpretation on the price – no contract
c. Two Options:
i. Enforce Contract
1. Seller: $5,620
2. Buyer: $56.20
ii. Avoid the Contract (voidable).
1. The court will avoid the contract by rescinding it (remedy is rescission).
2. The court will be hesitant but will restore the status quo ante.
C. Defects in Bargaining Process – Invalidating Causes
a. A contract has been formed but the contract is unenforceable by reason of some defense related to the formation of the contract.
b. Focus on acts or omissions by one party which disrupt the bargaining process. This conduct varies in type and is placed under such labels as mistake, fraud, constructive fraud, misrepresentation, undue influence, duress, bad faith and unconscionability
c. Mistake (A promise that is made under some kind of false impression)
i. Mutual Mistake
1. Both parties shared a mistake concerning a basic assumption of fact on which the contract was made, the contract is voidable by the adversely affected party if the mistake has a material effect on the agreed exchange and the adversely affected party did not bear the risk that the assumption was mistaken.
2. Restatement 151: A mistake that is a belief not in accord with the facts by one (unilateral) or both (mutual) parties can provide a basis for rescinding a contract
3. Contract law is designed to protect the reasonable expectations of the parties. There can be no protection if a party can just yell ‘mistake’. Therefore courts rarely grant.
4. Sherwood v Walker – D thought the cow was barren but it was with calf.
a. A party may void a contract if it is found that the terms upon which the agreement was made were mistaken as to a material fact. If the thing being delivered or sold is different from what was intended then there is no contract. There was a mutual mistake as to the substance of the contract’s subject matter.
5. Beachcomber Coins v Boskett – P bought a coin with the assumption that it was real and with a “D”. Both parties believed the coin was genuine making the mistake mutual.
a. General Rule: A contract may be voidable by either party if enforcement of it would be materially more onerous to him than it would have been had the fact been as the parties believed it to be. Restore the “Status quo Ante”
b. The P did not bear the risk that the assumption might be mistaken
c. Rest 152: Mistake is made by both parties about a basic assumption which has a material effect on the agreed exchange the contract is voidable by the adversely affected party unless he bears the risk of the mistake
d. First Rest 502 (Second Rest 296): If there is doubt in regard to a certain matter and contract and that assumption, the contract is not rendered voidable because one is disappointed in the hope that the facts accord with his wishes. (For this rule to apply, both parties must understand that the fact may not be true and make their agreement at the risk of that possibility.)
6. Lenawee County Board of Health v Messerly – Concealment of the septic tank in the land with the apartment failure to notify of the sewage problem.
a. A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted with the discretion of the court.
b. Rest. 154: Risk is assumed by contract, proceeding in conscious ignorance of the risk, other equitable factors – open-ended
i. Determining when a party bears the risk of mistake.First look to whether the parties have agreed to the allocation of the risk between themselves. The Pickles agreed to the risk.
ii. Unilateral Mistake
1. A mistake made by one party. Usually refers to a mechanical error in computation, perception, or the like concerning a basic assumption on which the contract was made.
2. Rest 153: One party made a mistake on a basic assumption and it has a material effect on the agreed exchange is voidable is he does not bear the risk of the mistake. The effect of the mistake must be unconscionable or the other party has reason to know of the mistake or his fault caused the mistake
3. Boise Junior College v Mattefs Construction – Contractor placed the second lowest bid. Bid was accepted but contractor rejected. Contractor’s bid was off by $10,000 since the glass was omitted from the original bid. There was no Bid Bond (hav
iv. Modern View (Williston): Moral compulsion or psychological pressure may constitute duress if the subject of the pressure is overborne and he is deprived of the exercise of his free will (subjective analysis of the threats)
v. Rubenstein v Rubenstein – P conveyed his wholly-owned corporation, title and interest in a farm, and a plot of ground to his wife in exchange for her to take care of the kids which she does not do. If the conveyances were procured by means of duress they are considered inoperative and voidable.
vi. Austin Instrument v Loral Corp – P refused to accept an order for less than 40 or ship the parts for the current price. D tried to get other companies to send the parts but was unsuccessful and acceded to P’s demands. No other company would be able to do the job in time.
1. Economic Duress – a threat to withhold something another party badly needs or wants is not in itself duress, but it is valid if
a. One party commits or threatens to commit a wrongful act that would put the party in a position that would threaten his property or finances.
i. Rest 175 – If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim
b. There are no adequate means available to avoid or prevent the threatened loss other than entering the contract.
i. Rest 176: Where P is forced into a transaction as a result of unlawful threats or wrongful, oppressive, or unconscionable conduct on the part of the D which leaves the P no reasonable alternative but to acquiesce, the P may void the transaction and recover any economic loss
2. D agreed to the price terms because of economic duress.
vii. Machinery Hauling v Steel of West Virginia – D’s agent told P that if it did not pay $31,000 the price of the undelivered loads, it would cease doing business with P, with a potential loss of $1,000,000 per year
1. Instead of “free will,” “no reasonable alternative” is used. If a person’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim
2. Ending potential business prospects is not a legal reason to use duress
f. Undue Influence:
i. Unfair persuasion of a party who is under the domination of the person exercising the persuasion. Usually relationship of trust and confidence.
1. Discussion of transaction at an unusual or inappropriate time
2. Consummation of the transaction in an unusual place
3. Insistent demand that the business be finished at once
4. Extreme emphasis on untoward consequences of delay
5. The use of multiple persuaders by the dominant side against a single servient party
6. Absence of third-party advisers to the servient party
7. Statements there is no time to consult financial advisers or attorneys