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Contracts
University of California, Hastings School of Law
Lefstin, Jeffrey A.

CONTRACTS

LEFSTIN

FALL 2012

[MUTUAL ASSENT]

REACHING AN AGREEMENT

The formation of a contract requires TWO basic elements

1. The mutual assent of the parties ‘meeting of the minds’

2. Some showing that assent was the kind the law will enforce

RS 17 – Contract Formation

The formation of a contract requires a bargain in which there is a manifestation of mutual assent (a meeting of the minds) to exchange and a consideration.

RS 18 – Manifestation of Mutual Assent

A manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance

RS 19 – Conduct as Manifestation of Assent

The manifestation of assent may be made wholly or party by written or spoken words or by other acts or by a failure to act

The conduct of a party is not effective as a manifestation of his assent UNLESS he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he asserts that he intended to form a contract

The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating clauses.

THE OBJECTIVE THEORY

The objective theory focuses on whether a bargain has been formed through the mutual assent of the parties (meeting of the minds) and is determined by examining what a reasonable person in the position of each party would be led to believe by the words and/or conduct of the other party in the particular circumstances.

YES à Objective Intentions (outward manifested intentions)

NO à Subjective Intentions (inner thoughts)

Objective Theory of Assent

SUBJECTIVE OBJECTIVE

Intent à Inner thoughts of the parties Intent à External manifestations

Reaction à Of individual in question Reaction à RPP in same circumstances

Subjective twist:

The party claiming assent or lack of assent must reasonably believe there is assent or lack of assent. Otherwise, there is no reliance on the K

RULE: Subjective theory is far too difficult for the court to determine

Embry v. McKittrick [P’s contract with D expired/ P asked supervisor to extend contract/ disagreement as to whether contract was extended or not]

The meeting of the minds that is essential to the formation of a contract is not determined by the secret intentions of the parties but of their outward expressed intentions.

RULE: Secret intentions will not destroy an otherwise valid contract / only look to outward intent

Lucy v. Zhemer [P believed D sold him farm while two were drinking in tavern. D wrote contract on napkin/ D claimed it was a joke/ court upheld contract]

If a party’s outward manifestations lead a RPP to believe a contract is formed, the claim that the assentor was not serious or was joking is not a valid claim that the contract should be terminated. Secret intentions will not destroy an otherwise valid contract/agreement. (ex of subjective twist)

OFFERS

An offer is the manifestation of a willingness to enter into a bargain made in such a way that a reasonable person would believe they could conclude the bargain by accepting it. A valid offer creates the power of acceptance.

RS 24 – Offer Defined

Is a manifestation of willingness to enter into a bargain that justifies another person’s understanding that his assent to the bargain is invited and will conclude it.

General Elements

– Communicated between parties

– Indicates a desire to enter into a contract

– Directed at a person or group of persons

– Provides an invitation for acceptance

– Possible a contract will arise without further negotiations

Terms of Certainty

– Established Parties

– Identified Price

– Subject Matter

– Time of Performance

Naked Offer

Nudem Practicum – where there is no promise for performance or promise for promise then it is not the type of offer the court will enforce

RS 29 – To Whom an Offer is Addressed

The offeror determines the person in whom is created the power of acceptance

UCC 2-204 – Gap Items

Offers do not have to be complete so long as there is sufficient INTENT present. The offer creates the power of acceptance even though some terms may be undefined or subject to further negotiation

Terms that the UCC will Fill-in

– Open price term

– Absence of specified place of delivery

– Absence of specific time provisions

– Notice of termination

– Open time for payment or running credit; authority to ship under reservation

* Note: court will NOT fill ‘quality’ under gap 2-204

Preliminary Negotiations

RS 26 – Preliminary Negotiation Defined

A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

UCC 2-206 – Offer & Acceptance in the Formation of a Contract

UCC 2-206: Offer and Acceptance in the Formation of a Contract

i. An offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances

ii. An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller reasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer

iii. If offeror is not notified of acceptance within a reasonable time, it may treat the offer as having lapsed.

Counter Offer

A counter offer is an offer made by an offeree to an offeror that concerns the same subject matter as the original offer, but differs in its terms. A counteroffer terminates the offeree’s power of acceptance, on the same rationale that applies to rejections

RULE: Additional terms must be independent of the original offer, otherwise it is a does not mirror and is a COUNTEROFFER

Ardnete [D agreed to sell property to P for specified price. D sent offer letter to P. P signed offer and sent back a letter stating additional requests. D rejects request]

An acceptance may not impose additional conditions on the offer nor may it add limitations UNLESS the additional conditions are independent of the original offer. A counter offer kills the original offer.

Inquiries and Requests

The offeree’s power of acceptance is not terminated by an inquiry concerning the offer or by a request for different terms. EX: “would you consider adding…?”

Advertisements

The general rule is that advertisements are normally deemed to be invitations to deal rather than offers. The rule is typically based on one of the following basis:

1. Advertisements are usually indefinite as to quantity and other terms

2. Sellers ought to be able to choose with whom they will deal

3. Advertisements are typically addressed to the general public

Rewards Contracts

Rewards contracts are the EXCEPTION to the general rule that advertisements are not offers. The offeror implies that he does not need notification of acceptance as is evidenced by nature of

Offer vs. Proposal

1. Words used in communication (usually more vague, more preliminary)

2. Omits significant terms

3. Not specifically directed at a particular group

4. Relationship of parties

5. Common practices of industry

Written Memorial Contemplated

RS 27 – Existence of Contract Where Written Memorial is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a K will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof, but the circumstances may show that the agreements are preliminary negotiations.

RULE: A party will not be forced to be bound if that party does not manifest an intent to do so

Embro v. Ball Co. [P and D drafted and signed letter of intent for transaction/ D backed out and P argues letter of intent had the effect of binding D into a contract]

Parties who have made their pact ‘subject to’ a later definitive agreement have manifested an intent NOT to be bound. The purpose of a letter of intent is to set out preliminary terms and list others that need to be finalized (usually at a later point in time)

Revoking An Offer

A revocation may be given at any time prior to acceptance. The offeror has the power to revoke his offer anytime BEFORE the offeree accepts.

RULE: An offeror may revoke his offer at any time prior to the offeree’s acceptance where an option does not exist

Dickinson v. Dodds [Letter, agreed to sell house/ had until Friday at 9am/ heard offeror agreed to sell to someone else/ attempted to accept offer even though he knew offeror intended to sell to someone else]

An offeree may not bind an offeror by accepting a revoked offer even if the revocation had not been communicated prior to acceptance. General rule is that the offeror can revoke the offer at ANY TIME prior to acceptance by the offeree.

RS 35 – Offeree’s Power of Acceptance

An offer gives to the offeree a continued power of acceptance. A contract cannot be created by acceptance after the acceptance has been revoked (see RS 36)

RS 36 – Methods of Termination of Power of Acceptance

1. Rejection

2. Counter Offer

3. Lapse of Time

4. Revocation by offeror

5. Death or Incapacity of either party

6. Non-Occurrence of any condition of acceptance under the terms of the offer

Option Contracts

An option is a promise to keep an offer open for a stated period of time. The offeree must give something to the offeror (money or something else) to satisfy the requisite consideration to validate the option. In effect, the offeree ‘purchases’ the option for a price.

Option contracts are the exception to the rules of revocation

Public Policy Argument

Court will enforce it if the option contract 1) seems genuine and fairly bargained and the 2) term period of the option is not unreasonably long. Even a $1 consideration may be ok as it demonstrates an official intent to be bound.