CONTRACT LAW (Kar) (Spring 2014)
I. Introduction to Contract Law
A. Contract Law: (1) Is exclusively a matter of state law. (2) There is no federal law of contracts.
1. The Five Sources of Contract Law: (1) International Commercial Law. (2) Judicial Opinions. (3) Statutory Law. (4) Legal
Commentary. (5) The Restatements: (i) The Restatement of Contracts. (ii) The Restatement (Second) of Contracts.
a. The Restatements of Contracts: (1) Created by the American Law Institute (ALI). (2) Not the law, but become part of the
common law when a court cites them with authority. (3) Influential.
i. The Restatement (Second) of Contracts is the one that matters at present
2. The Central Narrative of Contract Law (Handout #2): Involves and starts with parties and has five components.
a. Formation: The processes by which a contract (first beast) first comes into existence
i. Has a contract been formed? Mutual Assent and Consideration are the basic elements of a contract
b. Interpretation and Construction (Contract Formed): The methods that the courts use to identify the rights and obligations
that arise from a contract
i. Interpretation: What do the parties mean when…?
ii. Construction: The process by which rights and obligations arise as a matter of law in ways that are not attributable to
the intention of the parties
iii. EXAMPLE: A duty of good faith and fair dealing is contained in all contracts and cannot be contracted around
c. Performance and Breach: The standards courts use to determine whether a breach (or other problem with performance)
has occurred once a contract has been formed and given the rights and obligations that arise from a contract
i. These rules also allow courts to determine what reactions the victim of a breach (or other problem with performance)
is entitled to take given the magnitude of the breach (or other problem with performance)
d. Filing a lawsuit raises questions regarding defenses like mental incapacity and remedies
i. Defenses: The circumstances in which a defendant in a breach of contract claim can avoid contractual liability when
a breach has occurred
ii. Remedies: The standards courts use to determine what money damages or other forms of redress should be awarded
to a plaintiff in a successful breach of contract claim
(a) Some Possible Remedies:
(i) Specific Performance (“First Beast”): (1) A court order: (i) To do exactly what a person promised to do. (ii) To
actually perform the contract. (2) Sometimes the remedy in a breach of contract or “first beast” case.
(ii) Expectation Damages (“First Beast”): (1) The monetary amount that is needed to put a victim of a breach in the
position that he or she would have been in if both parties had fully performed as they ought to have performed.
(2) More empowering under the “first beast.” (3) Standard remedy in a breach of contract or “first beast” case.
(iii) Reliance Damages (“Second Beast”): (1) The monetary amount needed to compensate a victim of a breach for
harms that were caused by his reasonable reliance on a broken promise. (2) Not empowering. (3) The standard
remedy in a promissory estoppel or “second beast” case.
(iv) Punitive Damages: A larger amount – (1) To deter. (2) To engage in retribution. (3) To express disapprobation.
(v) Actual Punishment: Things like incarceration and shaming
3. It requires one to always consider policies and purposes
B. Historical Background and Other Information
1. Large-Scale Historical Trends
a. The Pre-Industrial Era à The Industrial Revolution (1800) à “Classical” Contract Law (~1820 to 1930): A set of rules
that forms the basis of what is done now. A claim for promissory estoppel, for example, does not yet exist. à Commercial
Realities + Form Contracts Expand (1900) à “Modern” Contract Law (~1930 to 1980) à Contemporary Contract Law
(~1980 to Present) à Age of Globalization (2000)
2. World Economic History
a. (Slide #5) A graph that shows world economic history in one picture
i. Incomes rose sharply in many countries after 1800 but declined in others
(a) There was some real stability in per capita income and population before the Industrial Revolution
(b) There was suddenly a confluence of factors that were fashioned to help markets work after the Great Divergence
b. Where is the U.S. on the graph in comparison to other countries? How important is contract law or market activity to get
there?
i. “Laissez-Faire Economics” is one common (but probably partly wrong) explanation
(a) The government steps away and lets markets do their own thing and the question has become highly politicized
(b) One is only able to adhere to the laissez-faire perspective if he does not know contract law
II. “Three Beasts of Contract Law” (The Three Central or Primary Causes of Action) (Handout #3): Each cause of action has its own:
(1) Elements. (2) Remedies. (3) Policies and Purposes.
A. Basic Question: What classes of promises are legally enforceable (or binding) in a court of law? THREE ANSWERS
1. The “First Beast”: A Claim for Breach of Contract (Has a contract been formed?) – PROMISE + “CONSIDERATION”
a. SUMMARY: ELEMENTS + POLICIES AND PURPOSES + BASIC REMEDY
i. Elements: (1) Mutual Assent (CREATES PROMISES) + (2) Consideration
ii. Policies and Purposes: EMPOWERMENT
(a) Empower the promisor to use the promise as a tool to induce others to make a return promise or perform a return
action by making it so that the promise is legally enforceable
iii. Basic Remedy: Expectation Damages
b. Manifestation of Mutual Assent and the Creation of Binding Contractual Promises
i. Subjective v. Objective Theories
(a) Formation (Rule): The Restatement (Second) of Contracts § 17
(i) Formation of a contract requires “a bargain in which there is a manifestation of ‘mutual assent’ to an exchange
and a ‘consideration’”
[a] TWO ELEMENTS are necessary to form a contract that can be breached: (1) Mutual Assent à Promises.
(2) Consideration.
[i] Mutual Assent: “Assent”: (1) IS a kind of joint commitment. (2) IS NOT a shared desire or belief.
{a} It essentially generates reciprocal promises and has an element of commitment relating to the notion
that mutual assent ripens into a promise
{i} Search for some sort of expression of a commitment that seems like a promise
{b} There are a number of different ways to establish it
{i} TWO PEOPLE SIGN A CONTRACT (EASY CASE)
{ii} CONDUCT OR BEHAVIOR THAT SHOWS MUTUAL ASSENT
((a)) In some cases words or actions may be interpreted as suggesting a promise
{iii} THE RULES OF OFFER AND ACCEPTANCE
((a)) One may engage in an offer or an acceptance without using words
((b)) It is not the only way of establishing mutual assent
{c} An objective person standard is used
(b) Ray v. William G. Eurice & Bros., Inc.
(i) Parties: (1) Calvin and Katherine Ray (Π): A couple who wants to build a house on an unimproved lot and is
very into and focused on details. (2) John and Henry Eurice (Δ): Own a construction company that is a family
business and are relaxed and not as focused on details.
(ii) Facts: Π submits a stock plan and asks for an estimate and not a bid. No offer. à Δ estimates $16,000.00. No
offer. à Π has an architect draw up a plan that is based on the stock plan and adds to it a seven-page draft of
detailed specifications à Π and Δ meet in January. They go over the specifications and make edits. Π asks Δ
for a bid. No offer. à Δ submits a proposed contract (February 14): $16,300 and three pages of specifications.
An offer. Not an offer for the same thing that the parties discussed when they met. à Π says that he will have
his lawyer draft the specifications and essentially rejects the three pages of specifications. à Π creates a new
proposed contract with full specifications that states that deviation from the specifications is not permitted. It
is given to Δ. Δ and Π both sign it. à There was a loan on the project. Important because, for example, banks
want to know whether there is a commitment. à Π and Δ cannot deal with each other as performance occurs.
It is not up to the specifications. à Δ refuses to continue. à Π claims that a breach of contract occurred.
(iii) Issue: Was there Mutual Assent? Whether there was Mutual Assent is part of whether a contract was formed.
[a] District Court: No
[i] A meeting of the minds is required (subjective agreement)
{a} Π and Δ had slightly different things in mind and needed to have had the same thing in mind
[b] Court of Appeals: Yes
[i] (1) It does not believe that there was no subjective agreement. (2) A subjective meeting of the minds is
not necessary. (3) It is crazy to think that Δ thought that the signed contract was a different agreement.
[ii] (1) Mutual Assent applies an objective standard. (2) Objective Test is what matters.
{a} A reasonable person could figure out and understand what was meant by the contract
{b} “The law is clear, absent fraud, duress, mutual mistake, and other standard defenses, that one [who
has] the capacity to understand a written document who reads and signs it, or, without reading it or
having it read to him, signs it, is bound by his signature in law, at least….”
{i} Π and Δ both signed
(c) Objective Test: Courts use it instead of a subjective test to figure out whether the parties have formed a contract.
(i) Rule: (1) DO NOT ASK (when determining their legal relev
to the escrow “in conformity with your offer.” Π tries to accept.
(ii) Issue: Has a contract been formed? Sample Exam Answer:
[a] Contractual formation requires Mutual Assent and Consideration
[i] The rules of offer and acceptance are one way by which Mutual Assent can be obtained
{a} (1) Check if there is an offer. (2) If so, then check if it has been accepted. (3) If so, then check if it has
been accepted prior to the termination of the power to accept.
{i} Offer: The “manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.”
{b} Objective Test: What would a reasonable person think it means?
{c} Courts look at five factors: (1) Language. (2) Specificity. (3) The Type of Transaction or Contract. (4)
Directedness. (5) History of Communications.
(iii) District Court: (1) The letter of April 8 constituted an offer. (2) Acceptance happened. (3) It did not happen
prior to the termination of the power to accept.
[a] Court: Waiting to decide from April 8 to April 15 is too long. LAPSE OF TIME
[b] Professor Kar: Offer would have arisen on April 14 (upon receipt) if the letter of April 8 had been an offer
(iv) Appellate Court: No acceptance. No contract.
[a] (1) The letter of April 8 was not an offer. (2) An acceptance happened. (3) Not an acceptance of something
that was on the table.
(v) Takeaway Points: (1) “Offer” and “Acceptance” are defined very precisely. (2) Have to look at all five factors
carefully. (3) Mailbox Rule: Acceptance is effective upon dispatch (when it is put into the mailbox). Things
like revocation and an offer are effective upon receipt.
(f) Normile v. Miller: (1) Normile and Miller are the parties. (2) Byer is the real estate agent.
(i) Facts: Δ owns property and lists it for sale with a local realtor. It is a public listing. No offer. à Π creates and
signs an “Offer to Purchase.” It: (1) Has a place for the signature of Δ. (2) ¶ 9: “Offer and Closing Date”: (i)
Time is of the essence. (ii) Has to be accepted before 5:00 PM on August 5. (3) Signed copy will be returned.
An offer. à Δ signs and makes some pretty substantial changes, such as: (1) Mortgage: 20 years (not 25). (2)
Earnest $: $100 à $500. No acceptance: (1) “the terms thereof” (2) Terms are different and were changed. A
qualified acceptance. A reasonable person should interpret it as a rejection and counteroffer. à Confusion: (1)
Π thinks it is an option to buy, that he has some time, and that it is a firm offer. He does not say “yes.” (2) The
Δ thinks it has been rejected because it was not accepted right away. à Δ sells to a third party. Contract with
the third party. Not a revocation yet: Needs to be communicated to Π. à August 5: (1) 2:00 PM: Byer tells Π:
“You snooze, you lose. The property has been sold.” (2) Π initials the offer to purchase form that contains the
counteroffer and delivers it and the earnest $$$ deposit to the office of the realtor before 5:00 PM.
(ii) Issue: Whether: (1) A contract was formed. (2) There was Mutual Assent of the relevant kind.
(iii) Holding: Acceptance did not occur prior to the termination of the power to accept. REVOCATION
[a] A revocation normally must consist of a speech act
[i] Alternative Rule (Applied to Normile v. Miller): (1) A definite action was taken that was inconsistent with
keeping the offer open. (2) A third party communicated to Π reliable information about the occurrence of
the revocation.
{a} This can be enough to kill the offer
