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Contracts
University of Florida School of Law
Davis, Jeffrey

Davis Contracts Fall 2011

The only two causes of action in this course breach and restitution (reliance is not a cause of action)

I. Bases for Enforcing Promises

a. Enforceable Promises: What is a promise?

i. The promisor must have control over the outcome

ii. A commitment to cause something to happen in the future

iii. Restatement definition:

1. A commitment must be made

2. Undertaking responsibility for the occurrence of the thing in the future that is spoken of

iv. A statement of opinion is not a promise

1. A reasonable person would have to believe a promise was made

2. The intent of the promisor does not matter

b. Remedying Breach

i. First thing to ask

1. UCC only applies to contracts for the sale of goods

2. Other issues follow the restatement

ii. The Purpose of Remedies: Three Protected Interests

1. The goal is to redress the breach, not punish

2. Loss expectation damages – The value of the benefit of the bargain (more easily used in business)

a. How much better off you would have been had the promise not been broken

3. Reliance – if party changed its position based on promise it is reimbursed for resulting loss

4. Restitution – restoring any benefit that has been given to the breeching party

5. Pain and suffering damages are available for breach of contract (if it is foreseeable)

iii. Punitive Damages – not in contracts

c. Consideration as a Basis for Enforcement §71

i. Fundamentals of Consideration

1. Consideration (professor) – a good enough thing (3 exceptions listed) + bargained for

a. Pre-existing duties §73

b. Illusory promises §77

c. Forbearance to assert an invalid claim, only if it is asserted in bad faith §74

2. Essential elements in enforcing a promise

a. Agreement in which there is a promise

b. Basis for enforcing the promise

c. Capacity to contract

3. Consideration can be either a benefit or a detriment

4. Bargained for §75

a. It is bargained for if it is sought and given in exchange for a promise

b. There has to be a motive to get something, not just to meet minimum consideration requirements

c. Relative value of things bargained for is irrelevant except that it can indicate motive

5. Gratuitous Promises – not enforced, must have consideration (3 exceptions)

a. Promise to pay a debt that is no longer enforceable because the statute of limitations has run out

b. Promise to fulfill a promise made when a minor

c. Promise to pay back a debt discharged in bankruptcy (requires a lot of paperwork now)

6. A promise made in recognition of a benefit previously received is binding to the extent necessary to prevent injustice §86

7. Moral Obligation – too imprecise for the courts to define

ii. The Requirement of Bargain (you must want something in order to have bargained for it)

1. Employment Agreements

a. Typically if there is a good reason for the noncompetition agreement then the court will find a way to uphold it, if not they will not uphold it

2. Employee Handbooks – typically considered binding (even if employee has not read it)

3. Rewards

a. It has to be sought in exchange for the promise

b. It has to be given in exchange for the promise

c. The receiver must be aware of the reward to get it

4. Consideration works best in the marketplace, the further away you get the less useful it is

iii. Promises as Consideration

1. What Constitutes a Promise?

a. Illusory promise – a promise that cannot be breached (promise not to call a debt until I want to)

b. The same promise with a definite period of time would have been

2. Contracts for the Sale of Real Estate

a. Satisfaction Clauses are recognized and have been divided into two groups

i. Satisfaction as to commercial quality: based on the reasonable man standard

ii. Satisfaction involving fancy, taste or judgment: dissatisfaction must be made in good faith to be valid

3. Contracts for the Sale of Goods

a. Requirements Contract: “a term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith.”

b. UCC 2-306 (2) – exclusive contracts require seller to use best efforts (unless otherwise specified)

c. Termination Clauses

i. Absolute right to terminate at any time is an illusory promise

ii. Good faith requires that notice be given

d. Bargained for Exchange requires:

i. Consideration, or

ii. Benefit previously received, or

iii. Reliance

d. Reliance as a Basis for Enforcement

i. Restatement, §90

1. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third party and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice required

2. A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance

e. Restitution as an Alternative Basis for Recovery

i. Mechanic’s liens

1. Gives a lien to sub-contractors who make improvements on a property if they are not paid by the contractor (they can then get their money from the owner)

ii. Restitution

1. An action of restitution arises out of the contracting process, when a contract may not have been formed

2. Frequently parties can sue in either restitution or contract

3. Restitution is permitted when:

a. Benefit given by mistake

b. Benefit given through fraud (to person providing benefit)

c. Benefit given in expectation of compensation (assumed with professionals)

d. If the benefit was overly burdensome then gratuitous aid can be repaid

4. Assumption that professionals have not rendered services gratuitously is a public policy decision to encourage the use of the professional skills

5. Value of benefit conferred under restitution is the reasonable value of the benefit (in some courts)

II. Creating Contractual Obligations

a. The Nature of Assent

i. Intent to Be Bound

1. Secret unexpressed intentions are irrelevant

2. Intent to contract is determined by objective manifestations of intent

3. To determine if a contract was made the reasonable man standard is used

4. If Lucy knew that Zehmer was joking then the objective standard would not apply and he would not have a contract

5. If Zehmer was bluffing and Lucy knew it a contract would still have been formed, bluffing is not the same as joking in that it is a gamble

ii. “Gentleman’s Agreement”

1. The parties state that they do not intend to be legally bound – law generally allows

2. There are cases where a contract could be formed, however (Restatement §90, reliance, injustice prevented)

b. The Offer

i. The offeror confers on the offeree the power to close the deal

1. Power – the ability to change legal relationships

ii. The offeror retains the power to revoke the offer before it is accepted

iii. The key is a manifestation of intent to confer the power of acceptance (reasonable person standard)

iv. Fairmont v. Crunden-Martin

1. Why is the message an offer

a. A quantity had been specified (10 carloads)

b. Type, quality and other things specified

c. The use of the phrase ‘for immediate acceptance’

2. Price quotes are generally not offers because they are not specific

3. All of the important facts had been concluded in the messages

4. Specifying the quantity was the key

v. Advertisements as Offers

1. Generally advertisements are not offers, they are an invitation to bargain

2. Legislation is usually used to correct bait-and-switch tactics

vi. Construction Contracts – Mistaken Bids

Elsinore School District v. Kastorff

1. Rule that allows mistake to serve as a basis for getting out of a contract

a. Material to the contract

b. Not the result of a neglect of legal duty

c. Enforcement would be unconscionable

d. Other party can be restored to status quo

2. The underlying theme in the court’s conduct is fairness

3. A known mistaken offer cannot be ‘snapped up’ (well established principle)

a. The most common method to argue this would be objectively (the offer was so far off that the acceptor should have known it was wrong)

b. This argument does not work often because there is frequently a wide range in the various bids

c. The Acceptance

i. Defined

1. Assent to the offer and nothing more

2. The offeror has complete control on the manner in which acceptance is made

3. Can be a promise, or can be conduct

4. Words are not essential, conduct can also manifest the intent to make the promise

ii. Generally

1. International filter Co. v. Conroe Gin, Ice & Light – D ordered a filtration system from P, but reneged on contract claiming that their offer had not been accepted due to lack of notification. Held for P. Conroe relies on §56 indicating that reasonable diligence by the offeree to notify the offeror of acceptance is required. However, under §69, acceptance by silence is permissible for several reasons, of note here is that where the offeror has given the offeree reason to understand that assent may be manifested by silence or inaction

a. The offeror has the power to control how a contract is accepted, but can dispense with this right

b. International had its sales people seek, rather than making offers (home office approval clause)

i. To make sure the contract has not been changed

ii. Is a more cautious approach

iii. This gives the opportunity for the offeror (the buyer) to change their mind before the deal is approved by the home office

2. White v Corlies

a. The estimate was an offer, second note is not an acceptance because they add the 2 week term

b. An acceptance is assent to an offer with nothing additional added

c. This was a counteroffer

3. The requirement of notice: place notice in motion so that in a reasonable amount of time it will be received (whether it gets there or not)

4. There is no legal definition for commencement, so no precise definition of when it begins is available

iii. Notification of Acceptance in Unilateral Contracts

1. Notification of Acceptance in Unilateral Contracts

a. Can only be accepted by performance, not performance

b. Performance must be completed

c. Once performance has begun the promisor cannot revoke

d. Notice requirement: normally it is assumed that the offeror will find out in a reasonable period of time, there is no notification requirement (unless it is required)

e. UCC 52 (2) the person accepting the offer must inform the offeror within a reasonable period of time if the offeror is unlikely to find out that they are performing

2. Allied Steel v. Ford

a. Acceptance of an offer by part performance in accordance with the terms of the offer is sufficient to complete the contract, except when a promise is expressly required

iv. Shipment of Goods as Acceptance

1. If offeror requests immediate shipment of goods:

a. Acceptance comes from shipment, or

b. Acceptance comes from promising to ship

2. Corinthian v. Lederle

a. UCC 2-206 (1): Shipping non-conforming goods is an acceptance

i. Still must ship conforming goods

ii. Doing this both accepts the offer and breaches at the same time

b. Shipping non-conforming goods with a letter explaining

id returning to the last-shot rule)

4. Conduct determined the contract (Mode C) so gap-fillers complete the contract

5. The only way to ensure that the terms are accepted (expressly) is by not shipping the goods until there is express assent

ix. Different Terms (2-207 only refers to additional, not different terms)

1. Knockout Doctrine (majority rule) – if there are conflicting terms are knocked out and replaced by gap-fillers

2. Dropout Rule (minority view) – conflicting term in the acceptance drops out and the conflicting term in the offer remains

x. Contract First, Terms Later: UCC 2-207 or a New Method of Contract Formation?

1. Step-Saver v. Wyse (both parties are merchants)

a. Box top warranty disclaimer is a material addition to a contract formed over the phone

i. It is a confirmation, material terms must be expressly accepted

b. TSL tried to fix the problem (they didn’t rely on the disclaimer)

c. TSL tried to get Step-Saver to sign an express disclaimer that Step-Saver refused to sign, but TSL continued to deal with them even after this

2. ProCD v. Zeidenberg

a. 2-207 does not apply well to purchases of over the phone/internet, etc.

i. It can work when there is only one set of forms

b. It is not practical to have all the terms on the outside of a box

c. A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance

d. A buyer may accept by performing the acts the vendor proposes to treat as acceptance

e. A buyer accepted goods under UCC 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection

3. Rolling Contracts – Hill v. Gateway 2000

a. Pragmatic – reading terms on the phones is impractical (creates more problems than it solves)

b. Information on terms is available

i. It is advertised that there are additional terms

ii. They legally have to be made available at request (easily found online also)

iii. It is common knowledge

c. Rolling contract formation depends on people knowing that terms are coming with the product

d. Gateway is the offeror, and as master of the offer they can determine how the offer is accepted

i. Gateway says that acceptance is through keeping the goods for 30 days (this is not silence as an acceptance)

ii. 2-204 and 2-206 are used to come to this conclusion

f. Precontractual Liability

i. Commencing performance creates an option contract that makes the offer irrevocable until performance can be completed (Restatement §45)

ii. Revocability and Reliance – Drennan v Star Paving

1. Implied promise not to revoke is found in a subcontractor bid because it is known that the contractor must rely on the bid to get the job

2. The contractor could not be returned to his status quo, where the school would be if the contractor made a mistake (the school would take the fair bid that they would have if there had been no mistake)

3. Restatement §87 (2) follows this case and makes it a rule (Offeratory Estoppel)

a. “An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice”

b. This does not come up very often (pretty much only in subcontractor situations)

g. The Requirement of Definiteness

i. Restatement §33 – two aspects required for definiteness (other aspects are not absolutely necessary)

1. Enough information to determine if there is a breach

2. Enough information to fashion a remedy

ii. Industry standards used to interpret vague terms

iii. Trade usage is only useful to people who can be expected to understand it, if one party had not been involved in the trade it may not have been used

iv. Flexible Pricing (frequently used for long-term contracts with gradual price change) – Oglebay v. Armco

1. Restatement §33: Where the parties intend to conclude a contract for the sale of goods and the price is not settled, the price is a reasonable price at the time of delivery if (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency

2. Courts use specific performance if there is intent to be bound, but damages would be too difficult to calculate (as in this case where contract covered another 25 years)

v. Restatement §362: Specific performance or an injunction will not be granted unless the terms of the contract are sufficiently certain to provide a basis for an appropriate order