Contracts Outline
Fall 2012
Prof. Coenen
** For each case, note the page number in this outline.
General Theories:
Functions performed by Legal Formalities
Substantive Bases of Contract Liability
Reasons not to Enforce Gratuitous Promises
Social Utility
Fuller
Fuller
Fuller
Eisenberg
1. Evidentiary: The most obvious function of a legal formality is that of providing evidence of the existence and purport of a contract in cases where controversy arises.
2. Cautionary: A formality may also perform a cautionary or deterrent function by acting as a check against inconsiderate action.
3. Channeling: Contracts force objectives into recognizable and communicable forms.
1. Private Autonomy: Contracts allows people power to influence their legal relations with others making “private laws”
2. Reliance: Contracts recognize a breach of promise may injure one who has changed his position in reliance on the performance of the promise.
3. Unjust Enrichment: When one party confers a benefit to the other who breaches the K, the first party can recover b/c the second party has been unjustly enriched.
4. Form: formalities reinforce the making of a proper agreement
1. No consideration is given by one party (Sterile transmission, no exchange)
2. Such enforcement is not of sufficient importance to our social and economic order.
3. Hard to prove actual intent to give.
The contract price is generally the most efficient price b/c the commodity price is determined by the interaction of buyers and sellers. It will move commodities to their most valued uses.
Offer
I. Generally – the manifestation of willingness to enter into a bargain.
a. Objective theory: what a reasonable person in the position of the other party would think that the first party’s objective manifestation of intent meant.
II. Validity of offers
a. Offers made in jest – if offeree knows or should know an offer is made in jest, it is not a valid offer. Even if ‘accepted’, no contract is created.
i. Consider form of offer:
1. Was it written?
2. Signed?
3. Redrafted?
4. Reasonable price?
ii. See Lucy v. Zehmer (441), agreement to sell land in a bar.
b. Preliminary negotiations – soliciting bids is not an offer and cannot be accepted. It serves as an offer to enter into negotiations.
c. Advertisements – generally not offers because they don’t include sufficient specificity as to quantity and duration.
i. Specific terms: if ad contains specific commitments, such as promise to sell a specific number of units for a certain time, it is an offer. (Lefkowitz)
Acceptance
I. Generally
a. Offer may be accepted only by a person in whom the offeror intended to create a power of acceptance.
b. Must be in response to an offer, not in response to a solicitation of offers.
c. Offeree must know of offer – if reward is offered for an act, a person who does the act without knowing about the offer cannot claim the reward.
II. Methods of acceptance – offeror is master of the offer so may determine the method by which the offer must be accepted.
a. Offeror may suspend the mailbox rule
b. When method not specified, acceptance may be given in any reasonable method.
c. Acceptance of unilateral K – accepted by full performance of the requested act.
d. When unclear whether offer invites promise or performance – offeree may accept by either a promise or performance.
i. Shipment of goods: purchase order that does not state how acceptance should occur. Acceptance may be given by promising to ship the goods, or by actually shipping the goods. UCC §2-206(1)(b).
e. Acceptance by Silence – generally can’t accept offer by silence. Exceptions:
i. Reason to understand – if offeror has given offeree reason to think that silence will constitute acceptance, and offeree subjectively intends to be bound.
ii. Benefit of services – offeree who silently receives services (not goods) accepted contract if: (1) he had reasonable opportunity to reject them; and (2) knew or should have know that provider of the services expected to be compensated.
iii. Prior conduct – if prior dealing made it reasonable for offeree’s silence to be construed as acceptance.
iv. Implied-in-fact K – as above, each party knowingly leads the other to believe that they have an agreement.
1. Distinguished from situation in which at least one party fails to take any action that would justify the other in believing that a contract is intended.
2. Family transactions – in transaction between close relatives, if neither party expressly states that payment is expected, presumption of gift rather than commercial contract.
III. When acceptance becomes effective
a. Mailbox rule – acceptance is effective upon proper dispatch
i. Default rule, that can be changed by the content of the offer (“this offer is accepted when and if your acceptance is personally received by me”)
ii. Lost letters – if the letter was addressed properly, it is effective at the time of sending even if it is lost and never received by the offeror.
iii. Rejection and acceptance sent by offeree – if rejection sent first, acceptance is effective if the offeror receives it before the rejection. If acceptance is sent before the rejection, acceptance is effective when sent and rejection does not matter regardless of when the letters are received.
IV. Acceptance varying from offer
a. Mirror image rule – common law method of acceptance, where offeree’s response is an acceptance only if it is the precise mirror image of the offer.
V. Unilateral v. Bilateral Contracts
a. Bilateral – invites acceptance for returned promise
b. Unilateral – requires acceptance by rendered performance (I will give you $1k if you walk across the Brooklyn Bridge).
i. Wormser (unchanged) – offeror may revoke until performance completed
ii. Wormser (changed) / Rest. §45 – if part consideration requested in the offer is given or tendered by offeree in response thereto, the offeror is bound by a contract (essentially creates option K, which offeree may decide whether to complete).
c. Presumption, where there is doubt, in favor of bilateral contract.
VI. Duration of power of acceptance
a. Methods of terminating power of acceptance:
i. Rejection by offeree – except if (a) offeror indicates the offer still stands despite rejections; or (b) the offeree states that although they are not now accepting, they wish to consider the offer further later.
b. Face-to-Face Rule – unless otherwise stated, an offer in a meeting/conversation will only be valid until the end of the meeting/conversation.
c. Counter-offer – if offeree makes counter-offer, power to accept the original offer is terminated
i. Distinguish counter-offer from exploration – a response from the offeree that is too equivocal or uncertain to be a counter-offer and instead merely explores the possibility of some other arrangement while keeping the original offer alive. “Would you consider…,” or “I might be interested instead in…”.
d. Lapse of time – offeror may set time limit.
i. If not time limit set, the offer terminates at the end of a reasonable time period.
e. Revocation – offeror may revoke at any time before offer is accepted, except in case of option contract.
i. Revocation is not effective until it is received by the offeree.
ii. If revocation is lost through misdelivery of letter or telegram, revocation never becomes effective.
iii. Indirect communication of revocation – If offeror intends to revoke and the offeree learns of this (even indirectly), there is a revocation. Revocation is valid regardless of whether the offeror intended to notify offeree or not.
1. Negotiations or offer is not enough – negotiations with a third party or an offer to a third party is not sufficient to constitute revocation.
f. Irrevocable offers – exception to the rule of generally revocable offers:
i. Standard option contract
1. Common law requires consideration for option
2. Restatement 2d §87(1)(a) – Option contract need not be supported by actual consideration.
a. A written and signed option contract can be formed without actual giving of consideration as long as it recites a purported consideration for the making of the irrevocable offer.
b. Does not matter if nominal sum is never actually paid.
c. NB: Contract is revocable unless there is a written recitation to the effect that consideration has been paid or if consideration has been paid.
ii. Firm offers (UCC §2-205) – offer to buy or sell goods where neither consideration or recital of consideration has been made.
1. Irrevocable if:
a. It is by a merchant (person who deals in goods of the kind or other wise by his occupation holds himself out as havin
argain element is lacking – A not promising B a place to live because he wanted to see her, but was imposing a pre-condition for her to get the gift.
c. Consideration where occurrence of condition is of benefit to promisor
i. Hamer v. Sidway (64) – Bargain element is present where uncle promised to pay nephew $5k if nephew refrains from smoking drinking and gambling until 21, and nephew complies. Promise was bargained for and supported by consideration because uncle was attempting to obtain something he regarded as desirable.
ii. Altruistic pleasure is not sufficient – the fact that one who makes a promise for a gift expects to derive love and affection from making the gift is not sufficient.
d. Once a gift is given, the gift cannot be rescinded for lack of consideration.
Contracts
Conditional Gifts
Enforceable
Not enforceable
Consideration must be given IN EXCHANGE for the promise. Nothing is consideration for a promise that is not regarded by both parties as such.
Dougherty v. Salt. (52) A promised gift based on past performance (nephew’s good will) and not on a direct/present exchange is not likely to be enforced.
To strengthen the tramp’s case:
– The promissor should receive benefit in order for there to be consideration (although not necessary). Promissee incurring some benefits also will help.
Tramp hypo- A man promises tramp new coat if she walks around the corner to the store to get it. The walk was not consideration, since it was condition of receiving a gift. It would be a weak argument that the Tramp’s walk was sought by the promissor in exchange for the promise (in contrast to the Brooklyn Bridge hypo). Therefore, not enforceable because it is a conditional gift.
Key question: Did the promisor benefit from the acts of the promissee? If so, it is more likely that the promisee’s act was consideration. However, lack of benefit will not preclude act from being consideration.
Key question: Was the promissees act a condition to the promise or the cost of the promise? If the act is only to enable the promissor to receive the gift it is merely a condition.
VII. Illusory promises
a. A statement which appears to be promising something but which in fact does not commit the promisor to do anything at all is not supported by consideration.
b. Conditional Contracts – Consideration is present.
i. Mattei v. Hopper (84) – land sale contract was conditional on buyer’s satisfaction with the leases. Consideration was buyer’s promise to buy the land conditioned on his genuine satisfaction with the leases, in exchange for the seller’s unconditional promise to sell.
1. Court does not read satisfaction clauses as Buyer may do whatever he wants.
2. Implied duty is one of two types:
a. Commercial values or quality of a product – reasonable person standard
b. Matters of taste or judgment – subjective ‘good faith’ standard
ii. De Los Santos Great Western Sugar (77) – P hauler agrees to haul as many beets as D loads. D terminates service before loading any beets. Court found no mutuality of obligation (illusory) so no contract.
c. Implied promises can be consideration
i. Wood v. Lucy, Lady Duff Gordon (79) – P’s implicit promise to use reasonable efforts to market D’s designs was consideration for D’s counter-promise.
d. Requirements Contract (Cola Coal hypo exam question = Conditional K)
i. UCC §2-306 – Valid consideration because UCC imposes obligation of good faith for “requirements” contracts.
