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Contracts
University of California, Hastings School of Law
Knapp, Charles Lincoln

CONTRACTS
KNAPP
SPRING 2012
 
1.      Covers only certain specific types of commercial transactions
a.       Sales of goods, governed by UCC Article 2
2.      Article 2
a.       Applies to “transactions in goods”
                                                              i.      If the contract is a sale of goods, Article 2 governs and must be applied
                                                            ii.      If not, apply common law
                                                          iii.      When issues that arise that are not covered by article 2, common law principles complement the Code provisions and are used in conjunction with the code to cover areas not provided in the Code. 
b.      What is a sale?
                                                              i.      UCC § 2.106(1):  a sales consists in the passing of title from the seller to the buyer for a price
1.      2 Essential characteristics
a.       A title (ownership) must pass form the seller to the buyer; and
b.      The buyer must pay for them (usually money but may not be…UCC § 2.304 says money or otherwise)
2.      Does not apply for a lease or if the owner of property donates it to another person, the gift is not a sale of goods and is governed by common law
c.       What are goods?
                                                              i.      UCC §2.105(1):  moveable things, including manufactured goods, livestock and growing crops
1.      Expressly includes money and various intangible rights
2.      Purchase of a house:  real property, not goods
3.      Purchase of stocks:  intangible rights, not goods
4.      Where software has been incorporated into a physical medium that is sold as a tangible object some court treat the sale as one of goods
d.      Hybrid Transactions
                                                              i.      It’s common to have a transaction that includes both a sale of goods and a component that is not a sale of goods
1.      (car repair:  labor and parts)
                                                            ii.      Most courts use a “predominate purpose” or “predominate factor” to decide whether to apply Article 2.
1.      If the sale of the goods is a more significant aspect of the transaction, and the nonsale component is incidental to the sale, Article 2 applies
2.      If the sale of goods is ancillary, and the other component is predominate, Article 2 does not apply and the transaction is governed by common law. 
                                                          iii.      Some courts favor a “gravamen” test under which the court does not attempt to classify the contract as a whole one way or the other, but applies Article 2 if the controversy in question relates to the sales component and applies common law if the issues arises out of the services component
e.       Do not make the mistake of thinking Article 2 only applies if the parties are merchants:  It is the nature of the transaction, not the attributes or occupation of the parties that is determinative
 
THE RESTATEMENT (SECOND) OF CONTRACTS
1.      The Restatement Second is not a statute.  It is a secondary authority created by the American Law Institute
2.      Recognize that it is a very important and influential account of the law, frequently relied on by courts, but not binding on courts, and not necessarily a reflection of what courts in a particular jxd may have decided.   
 
THE OBJECTIVE TEST AND BASIC PRINCIPLES OF OFFER AND ACCEPTANCE
1.      Where a court seeks to ascertain the intent of the parties, it does not focus on what each party may have thought or believed he was agreeing to but on the reasonable perception of that intent, as conveyed by his words or actions
2.      Mutual Assent
a.       Each party must intent to enter the contract and must agree with the other to do so on mutually acceptable terms
b.      “meeting of the minds”
c.       Agreement requires communication—the intent to enter into the contract must be signaled by each of the parties through words and actions that are observed and given meaning
3.      Assent and Accountability
a.       The assent policy dictates that contractual obligation should not be imposed on a person who did not in fact agree to be bound. 
                                                              i.      However, if the need for true assent is too heavily stressed, the policy of protecting reliance is undermined
                                                            ii.      The assent policy must be tempered by the goal of protecting the expectations of one who reasonably relied on the appearance of assent
b.      It is now accepted that evidence of a party’s state of mind may sometimes be helpful in interpreting or giving a context to words or conduct, provided that the subjective evidence is credible and compatible with the overt behavior
4.      The subjective aspect:  The legal standard for determining Assent is objective and external
a.       Manifestations of assent are interpreted not in the light of what the utterer actually meant or the other party actually understood, but from the standpoint of a reasonable person in the position of the party to whom the manifestation was made
5.      Objective Standard
a.       Evidence of observable signs of agreement to establish contractual intent
                                                              i.      A signature on a writing, spoken words, or behavior pertinent to the transaction. 
                                                            ii.      When parties disagree on the meaning of their words and actions, their intent must be decided by the factfinder. 
1.      If the dispute centers on whether a contract was formed at all, this inquiry is directed to the fundamental question of whether they manifested intent to enter into the relationship.  If it is clear that they did make a contract, the focus of the inquiry is on what terms were agreed upon
6.      The duty to read
a.       A party signifying asset cannot usually claim that he did not really agree to the terms because he did not read them
OFFER AND ACCEPTANCE
1.      The rules of offer and acceptance tend to be relevant in three types of disputes
a.       To deterimine if a contract came into existence where the parties dispute whether their communications resulted in the formation of a contract
b.      Even it is settled that a contract was formed, a determination of which communication constituted the offer, and which was the acceptance, can resolve a dispute about the content of the contract
c.       The rules of offer and acceptance can be relevant to the determination of which state’s law governs the contract or which state’s courts have jurisdiction to hear a dispute over the contract
2.      Basis Offer and Acceptance Model at Common Law
a.       One person (offeror) makes an offer to another person (offeree) to enter into a contract on specified terms
                                                              i.      The offer creates a power of acceptance in the offeree so that she can bring the contract into existence by signifying acceptance of the transaction on the proposed terms. 
3.      THE RULES OF OFFER AND ACCEPTANCE APPLICABLE IN SALES OF GOODS UNDER UCC ARTICLE 2
a.       Most issues of offer and acceptance are covered by common law
b.      §2.204:  the court should focus on the existence of agreement between the parties, whether shown by words or conduct, and if agreement is apparent, the court should not be concerned about technicalities but should od what it can to uphold and enforce the contract
c.       §2.206 emphasizes that an offer should be interpreted as inviting acceptance by any reasonable mode unless the offer or circumstances make it clear that the mode is restricted
4.      The nature of an offer, as distinct from a preliminary proposal
a.       Restatement, Second, § 24 defines offer:  “a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it .  Must contain these elements either expressly or by implication:
                                                              i.      Because an offer must be manifested, it must necessarily be communicated to the person to whom it is addressed.  An offer cannot take effect until the offeree knows it. 
                                                            ii.      The offer must indicate a desire to enter into a contract.
1.      It has to specify the performances to be exchanged and the terms that will govern the relationship
                                                          iii.      The offer must be directed at some person or group of persons
                                                          iv.      The offer must invite acceptance
1.      It may or may not indicate how and by what time this acceptance is to be communicated.  If a mode and time for acceptance are prescribed, they must be followed.  If these are not set out in the offer, the court must decide whether the acceptance was reasonable and timely
2.      The offer must engender the reasonable understanding that acceptance will create the contract
                                                            v.      The offeror thus confers on the offeree the power to decide whether or not a contract will come into being (power of acceptance)
5.      Offer v. Preliminary Proposal
a.       The words used in the communication are always the primary indicators or what was intended.  The use of terms of art, such as “offer,” “quote,” or “proposal” may be helpful but are not conclusive if the context indicates that they were not used in their legal sense
b.      Because an offer is intended to form a contract upon acceptance, a communication that omits significant terms is less likely to be an offer.  The comprehensiveness and specificity of the terms in the communication are an important clue as to its intent. 
c.       The relationship of the parties, any previous dealings with them, and any prior communications in this transaction may cast light on how the recipient reasonably should have understood the communication
d.      Where parties are members of the same community or trade, they are or should be aware of any common practices or trade usages, so these are taken into account in determining reasonable understanding of communication
e.       If it is an offer, the advertiser is bound to a recipient of the communication as soon as that recipient signifies his assent to the terms
                                                              i.      If not, but merely a solicitation, a recipient makes an offer by responding and the advertiser has the discretion to accept or reject that offer
6.      The Expiry of the offer by passage of time
a.       An offer has a limited duration and lapses if not accepted in time.  As the creator of the offer, the offeror is entitled to specify the time within which the acceptance must be made.  If the offeror does not state the duration of the offer, it must be accepted within a reasonable amount of time. 
                                                              i.      The offer takes a risk by not specifying a time for acceptance because the question of what period is reasonable for acceptance may be unclear until settled by litigation
1.      The factfinder must ask what amount of time would be needed to receive, consider, and reply to the offer under all the circumstances of the transaction. 
2.      Factors relevant include:  the relationship of the parties, any course of dealing, custom or trade usage; the means of communication used; and the stability of the market
                                                            ii.      An acceptance required “within five days” is ambiguous because it does not indicate if the five-day period runs form the date of the writing or receipt of the offer, or whether the offer can be acceptance after busi

reats the beginning or tender of performance as creating an option in favor of the offeree, so that the offeror loses the right to revoke once performance has been tendered or begun
6.      Notice when an offer is accepted by performance
a.       If an offer is accepted by performance, the acceptance normally comes to the offeror’s attention as a matter of course because the offeror receives the performance
b.      Unless the offer requires notice of performance, the offeree ordinarily has no duty to take action to notify the offeror of acceptance
                                                              i.      The offeree does have a duty of notification if the performance in the question is not rendered directly or in the presence of the offeror and the offeror has not reasonably prompt and reliable means of learning it
7.      A person could make an offer in a way that permits multiple acceptances and thus many contracts.  However, where it is clear from the offer that a single performance is all that the offeror needs, the more reasonable inference is that the offer is open to the first person who accepts by rendering the performance requested
8.      The usual assumption is that advertisements including competitions designed to promote products are not offers but merely solicitations for offers from the public
a.       Advertisements can qualify as an offer it if is clear, definite, and explicit; leaves nothing open for negotiation, and makes it apparent to a reaosmable person that a commitment is intended without further action by the advertiser (Restatement, Second, § 26, Comment, b)
IRREVOCABLE OFFERS:  OPTIONS AND FIRM OFFERS
1.      Options and Consideration
a.       Option is a promise to keep an offer open for a stated period of time. 
                                                              i.      By granting a valid option, the offeror makes a binding commitment not to revoke the offer for a specified period, so that the offeree is assured of a set time to consider and respond to the proposal without risk of its being withdrawn before the expiry date
1.      Under common law, a promise to keep an offer open for a stated time is not binding on the offeror unless the offeree has given consideration for that promise
                                                            ii.      Consideration – Options
1.      In exchange for a grant of an option, the offeree has to give something to the offeror
a.       Cash payment or a promise to pay a specific sum of money for the option
b.      Whatever form the consideration takes, the basic legal requirement is that the grantee must “pay” for the option by transferring or promising property or sacrificing a legal right in exchange for the promise to keep the option open
2.      Consideration exchanged under the contract proposed in the offer is distinct and does not support the option itself
a.       To be valid, the option must have its own separate consideration—the offeree must, in effect, purchase the option by providing an additional consideration, tied to the promise not to revoke
b.      Only applies in formation of a new contract
3.      Options are not usually motivated by gratuitous intent
a.       By committing to give the offeree an irrevocable opportunity to accept, the offeror hopes to facilitate a desired economic exchange
b.      Courts often accept nominal consideration or even sham consideration
                                                                                                                                      i.      Restatement, Second, § 87(1)(a): the grant of an option is valid if it is writing, is signed by the grantor, recites a purported consideration for the offer, and proposed an exchange on fair terms within a reasonable time
b.      Restatement, Second, § 63 (b):  the mailbox rule does not apply to acceptance of a valid option, so the acceptance is only effective on receipt
2.      Firm Offers Under UCC 2.205
a.       In a sale of goods, 2.205 dispenses with the need for consideration to to validate an option under defined circumstances
                                                              i.      The offer to buy or sell goods must be made by a merchant
                                                            ii.      The offer must be in a signed writing  (not confined to a hard copy but also electronic)
                                                          iii.      It must give an assurance to the offeree that it will be held open
                                                          iv.      If the assurance is contained on a form supplied by the offeree, the offeror must sign the assurance separately
1.      Section 2.205 limits period of irrevocability to max of three months
a.       Need to indicate if needed more than that