Contract Law – Fall 2015
Prof. Emily Houh
Class Notes
CHAPTER 2 – The Basis of Contractual Obligation:
Mutual Assent and Consideration
Classical (or Traditional) Contract Law
Embodied in first Restatement of Contracts (1932)
Developed by Oliver Wendell Holmes, Cristopher Columbus Langdell, and Samuel Williston among others.
Notable Characteristics:
Preference for clear rules (“legal formalism”) over general standards (“reasonableness”)
Relatively indifferent to issues of morality or social policy presented by contract cases.
Reflected deeper notions of laissez faire economics and limited government interference in private transactions.
Modern Contract Law
Emerged over the middle part of the last century
Influenced y Professors Arthur Cobin and Karl Llewellyn, reflecting the influence of the Uniform Commercial Code (UCC) and case law.
Notable Characteristics:
More attentive to the needs of the commercial marketplace
Standards preferred over rules (doctrines such as good faith and unconscionability)
More responsive to issues of social justice and economic power
A. Mutual Assent
The Restatement (Second) states that the formation of a contract requires “a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.”
Concept of a bargain – engaging in a give-and-take through a process of offer and acceptance, ultimately either reaching a deal or breaking off negotiations
However:
A contract can be formed even when the parties do not engage in bargaining
Noncommercial transactions involving family members, friends, or charitable entities.
Commercial transactions with inequality of bargain powers between the parties.
One party can incur legal obligations without a contract (restitution and promissory estoppel).
A contract may become void if one party engages in bargaining misconduct.
2. Offer and Acceptance in Bilateral Contracts
We have already talked about the three principles of contracts. Bilateral Contracts are the most obvious expression of the bargain principle. Here, we must have an offer, an acceptance and consideration. There is also a reasonable person standard here that the contract must exhibit mutual assent.
Bilateral Contract – When a promise is being exchanged for a promise. Most contracts fall under this category.
LONERGAN v. SCOLNICK
129 Cal. App. 2d 179, 276 P.2d 8 (1954)
Case: An action for specific performance, or for damages in the event specific performance was impossible, concerning a contract for the sale of a 40-acre tract of property.
Procedural: In the lower court, the judge found that the two did not have a contract due to the time-sensitive nature of the sale and the plaintiff’s delay or over a week in responding. Plaintiff appealed on the grounds the judgment is contrary to the evidence.
Facts: In March, 1952, the defendant (who lived in NY) placed an ad in a Los Angeles paper offering to sell 40 acres of land in Joshua Tree for cash. Plaintiff responded to the ad on March 26, to which defendant responded with a form letter that gave a description of the land, directions to it, and his “rock-bottom” price of $2,500. The plaintiff responds on April 7 asking for further clarification on the land and suggesting an escrow agent. In a response letter on April 8, the defendant agreed to use a bank as an escrow agent, and urged the plaintiff to decide fast because he had another buyer interested (plaintiff received this latter on April 14). On April 12, the defendant sold the property to a third party for $2,500, before the plaintiff had received his previous letter. The plaintiff responded to that letter agreeing to the amount, and said he would deposit the $2,500 into escrow immediately, and opened this account with a $100 deposit on April 17. On April 28, the property was valued at $6,081, so the plaintiff is suing for damages for the difference ($3,581).
Issue: At issue here is whether the defendant had made a valid offer based on the language in his letters to the plaintiff, or whether the correspondence is to be considered preliminary negotiation. (R2d 24).
Holding: When one party makes real property available for purchase, an offer is only made when both parties have expressed fixed purpose to complete that sale. Prior to this, the intention of both parties is considered preliminary negotiation.
Ruling: The ruling is affirmed. The court ruled that at no point in their correspondence did either party express firm purpose of completing the sale for the property, and therefore no offer was made. With his final letter, the defendant expressed that he would be selling to the first-comer, so the plaintiff should have known that he may not secure the property.
Analysis:
The court drew a clear distinction between preliminary negotiation (R2d 26) and an offer (R2d 24). Because the correspondence between the parties was not decisive to the discussed terms, there was not considered to be an offer. A reasonable person would not have interpreted the letter of Apr. 8 as an offer, but rather an invitation to make an offer. As a result, plaintiff’s responding letter was an offer, and there was no acceptance on the part of the defendant.
The “mailbox rule” – the trial court ruled that the plaintiff could not recover based on his failure to timely accept the offer (trial court didn’t rule that there was no offer). Other cases have ruled that acceptance of an offer occurs as soon as written correspondence is dispatched (mailed, etc.). The mailbox rule is a default rule. This rule is disregarded when:
The offeror places conditions on the offer that negate the rule, or
When there is an acceptance under an option contract (not operative until received by the offeror (R2d 63).
IZADI v. MACHADO (GUS) FORD, INC.
550 So. 2d 1135 (1989)
Case: The plaintiff, Mr. Izadi, brought action of breach of contract, fraud, and a statutory violation for misleading advertising against Machado Ford for a newspaper ad, to which plaintiff tendered an offer that was refused by defendant.
Procedural: The trial court dismissed all three charges, to which plaintiff appealed. The appeals court again dismissed the claim for fraud.
Facts: An ad was published in the Miami Herald by Machado Ford in February, 1988 that offered a new 1988 Ford Ranger for $7,095, minus $500 factory rebate and less the value of any trade worth $3,000, for a final price of $3,595. The top line of the ad indicates $3,000 minimum trade-in allowance with the purchase of any new Ford, with “infinitesimally small print” that limited the offer to the purchase of certain vehicles (not Rangers). Mr. Izadi tendered a cash offer of $3,595 plus the necessary rebate amount and a trade-in vehicle to Machado Ford, but was turned down because his trade-in was valued below $3,000.
Issue: At issue here is whether the defendant was in breach of contract for making an offer and not completing the sale when the offer was accepted (despite the apparent conditions contained within the ad).
Holding: When an offer is accepted by a buyer but then denied by the seller based on misleading language in the offer, the seller will be liable for breach of contract if it is determined that a reasonable person would have interpreted the language incorrectly.
Ruling: The court determined that the misleading language in the ad was not a coincidence, but rather an attempt at “bait and switch” to draw buyers to their dealership and then convince them to buy something other than the advertised deal. Taken in its entirety, the ad would mislead a reasonable reader. Decision affirmed in part (for fraud) and reversed in part (for breach of contract and statutory violation).
Analysis:
Although the detailed language in the ad—the “fine print”—supported the dealership’s claims that it did not fail to uphold its offer, the court decided that a reasonable interpretation of the ad would mislead customers into thinking (as Mr. Izadi did) that the offer was for any vehicle and not just the two specified in fine print.
The court holds that the published advertisement constituted an offer, but acknowledges that this may not always be the case. In most cases, an ad is not considered an offer (although recent decisions have shown a change in this attitude) (R2d 26 comment b). Here, the ad leads the customer to believe that if they come in with a vehicle and cash, they can buy a new vehicle with no negotiation; therefore, it constitutes an offer because a reasonable person would understand it as an offer.
NORMILE v. MILLER
313 N.C. 98, 326 S.E. 2d 11 (1985)
Case: Action for specific performance on plaintiff-appellant’s acceptance of defendant’s counteroffer for the purchase of real estate.
Procedural: Case was consolidated with that of plaintiff Segal, who accepted defendant’s counteroffer before Normile, because defendant was unable to transfer title to Segal while the action for specific performance was in place. Both plaintiffs requested summary judgment, and it was granted to Segal. Normile appealed, but the trial court’s decision was affirmed. NC Supreme Court allowed discretionary review.
Facts: On August 4, 1980, Hazel Miller listed real estate for sale. An offer was made by Normile, stating that the offer was only in place until 5:00pm the next day. The seller changed several terms and made a counteroffer the same day. Normile did not like some of the terms presented in the counteroffer, but did not accept
2d 45 now provides that when an offeree tenders or begins the requested performance under a unilateral contract, the offeror becomes bound and cannot revoke his offer so long as the offeree completes performance in accordance with the terms of the offer.
COOK v. COLDWELL BANKER/FRANK LAIBEN REALTY CO.
Missouri Court of Appeals 967 S.W. 2d 654 (1998)
Case: Defendant/appellant appealing a jury verdict awarding a former salesperson $24,748.89 as damages for breach of a bonus agreement.
Procedural: Jury found for plaintiff, defendant appealed, claiming that the plaintiff failed to accept the bonus offer before it was revoked, and errors relating to instructions, evidence, and closing arguments.
Facts: At a sales meeting in March 1991, defendant announced a bonus program that was tiered based on earned commission [> $15k earned = $500 bonus, $15k-$25k = 22%, >$25k = 30%]. The first $500 would be paid when achieved, and the remainder would be paid at the end of the year. By September, 1991, plaintiff had surpassed $32,400 in commissions and she had been paid the $500 bonus. At another sales meeting in September, defendant announced the bonuses would not be paid until a banquet to be held in March 1992. Responding to a question by plaintiff, defendant said that employees would have to “be here” to receive it. Plaintiff denied that she had any intent of leaving the defendant at that point, and stayed until the end of 1991 in reliance on the promise of a bonus. In January 1992, plaintiff accepted a position with Remax. Defendant informed her she would not be receiving her bonus. In March 1992, she sent a letter to defendant demanding the $18,404.31 in bonus pay she had earned. Defendant did not pay. She later amended the petition for damages to include prejudgment interest, for a total of $24,748.89.
Issue: At issue here is whether the plaintiff has given sufficient evidence that 1) she tendered consideration to support defendant’s offer of a bonus, and 2) she accepted defendant’s offer to give a bonus.
Holding: When a person shows evidence of substantial performance in response to a promissory offer, the offeror becomes bound by the contract because part performance of the offer furnishes consideration.
Ruling: Because the plaintiff had already earned a substantial commission by the time the terms of the promise were changed in September, and because she stayed with the defendant until the end of the year, she has shown consideration to support the offer, and thereby showed intent to accept the offer. Therefore, the contract becomes irrevocable.
Analysis:
Unilateral contracts continued to evolve to a point where the R2d suggested that the terms bilateral and unilateral be avoided altogether. We see in this case why this is so; if substantial performance by the offeree is enough to make the contract irrevocable, this limits the period when revocation is possible.
The court here admittedly viewed evidence in light that was very favorable to the plaintiff. Because of the employer/employee relationship, this must be done in order to prevent abuses on the part of employers incentivizing employees and then revoking the offer.
R2d 45 only requires the beginning of performance to make a unilateral contract an option contract.
The September changes in this case can also be framed as a modification, because the terms of the contract were not changed, only the payout was.
4. Postponed Bargaining: The “Agreement to Agree”
This kind of agreement are considered incomplete, but they are very common. Typically, the agreement precedes a contract, but this is not considered a formal contract contemplated. Frequently called Letters of Intent or Agreements in Principle. Walker is a classical example of this, while Quake is a more modern example.
