Contracts I- Professor MorrisUniversity of Dayton School of Law Fall 2008
OFFER AND ACCEPTANCE
I. INTENT TO CONTRACT
A. Objective theory of contracts: Contract law follows the objective theory of contracts. That is, a party’s intent is deemed to be what a reasonable person in the position of the other party would think that the first party’s objective manifestation of intent meant. For instance, in deciding whether A intended to make an offer to B, the issue is whether A’sconduct reasonably indicated to one in B’s position that A was making an offer.
Example: A says to B, “I’ll sell you my house for $1,000.” If one in B’s position would reasonably have believed that A was serious, A will be held to have made an enforceable offer, even if subjectively A was only joking.
B. Legal enforceability: The parties’ intention regarding whether a contract is to be legally enforceable will normally be effective. Thus if both parties intend and desire that their “agreement” not be legally enforceable, it will not be. Conversely, if both desire that it be legally enforceable, it will be even if the parties mistakenly believe that it is not.
i. The “intent of the parties” is seldom directly ascertainable, and must be deduced from circumstantial evidence, as to which reasonable people may differ.
Example: Both parties would like to be bound by their oral understanding, but mistakenly believe that an oral contract cannot be enforceable. This arrangement will be enforceable, assuming that it does not fall within the Statute of Frauds.
1. Presumptions: Where the evidence is ambiguous about whether the parties intended to be bound, the court will follow these rules: (1) In a “business” context, the court will presume that the parties intended their agreement to be legally enforceable; (2) but in a social or domestic situation, the presumption will be that legal relations were not intended.
Example: Husband promises to pay a monthly allowance to Wife, with whom he is living amicably. In the absence of evidence otherwise, this agreement will be presumed not to be intended as legally binding, since it arises in a domestic situation.
C. Intent to put in writing later: If two parties agree (either orally or in a brief writing) on all points, but decide that they will subsequently put their entire agreement into a more formal written document later, the preliminary agreement may or may not be binding. In general, the parties’ intention controls. Example: If the parties intend to be bound right away based on their oral agreement, they will be bound even though they expressly provide for a later formal written document.
1. Where no intent manifested: Where the evidence of intent is ambiguous, the court will generally treat a contract as existing as soon as the mutual assent is reached, even if no formal document is ever drawn up later. But for very large deals (e.g., billion dollar acquisitions), the court will probably find no intent to be bound until the formal document is signed.
Restatement of Contracts, Second
Section 20- Effect of Misunderstanding
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.
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.
Chapter 4: Identifying the Bargain
Sc 4: MISTAKE, MISREPRESENTATION, WARRANTY, AND NON DISCLOSURE
A. How used: If a party can show that the other made a misrepresentation to him prior to signing, he may be able to use this in either of two ways:
a. 1) he may use this as a defense in a breach of contract action brought by the other; or
b. 2) he may use it as the grounds for rescission or damages in a suit in which he is the plaintiff.
B. Elements of proof:
a. Other party’s state of mind: P does not generally have to prove that the misrepresentation was intentionally made. A negligent or even innocent misrepresentation will usually be sufficient to avoid the contract, if it is made as to a material fact.
b. Justifiable reliance: The party asserting misrepresentation must show that he justifiably relied on the misstatement.
c. Fact, not opinion: The misrepresentation must be one of fact, rather than of opinion.
C. Non-disclosure: only affirmative statements can serve as the basis for a misrepresentation action. A party’s failure to disclose will generally not justify the other party in obtaining rescission or damages for misrepresentation. [Laidlow v. Organ] But there are some exceptions, situations where non-disclosure will support an action:
a. Half truth: If part of the truth is told, but another part is not, so as to create an overall mislead
B. Special contexts:
1. Market conditions: Mistakes as to market conditions will generally not be “basic” ones, so the mistaken party will not be able to avoid the contract. Example: Seller agrees to sell Blackacre to Buyer. Both parties believe that comparable land is worth $5,000 per acre. Buyer can’t avoid the contract if comparable land is really worth $2,000 per acre.
2. Existence of subject matter: The existence of the subject matter of the contract is usually a “basic” assumption.
Example: Seller agrees to sell land containing timber to Buyer. Both parties believe that there are 100,000 board feet on the property. In fact, fire has destroyed much of the timber, so that only 20,000 feet remain. This will be a basic assumption, so Buyer can avoid the contract when the facts emerge, whether this is before or after closing.
3. Quality of subject matter: A major mistake as to the quality of the contract’s subject matter is often a “basic” assumption, so the disadvantaged party can avoid the contract. (Example: If both parties believe a violin is a Stradivarius when in fact it is an almost worthless imitation, this will be a mistake on a basic assumption, and Buyer can avoid the contract.)
4. Minerals in land: In land-sale contracts, the Seller will almost always bear the risk that valuable oil and gas deposits will be found on the land (i.e., Seller cannot avoid the contract when such a discovery is made).
5. Building conditions: When a builder contracts to construct a building on land owned by the other party, the builder will almost always be found to bear the risk of a mistake about soil or other unexpected conditions, so he cannot avoid the contract if construction proves much more difficult than expected.
A. Modern view: Where the mistake is unilateral, it is more difficult for the mistaken party to avoid the contract than in the mutual mistake situation. The mistaken party must make the same three showings as for mutual mistake (basic assumption, material effect, and risk on the other party), plus must show either that: