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Contracts
University of Iowa School of Law
Burton, Steven J.

Contracts – Professor Steven Burton

University of Iowa – Fall 2011

I. Reasons for Enforcing Contracts

a. The Autonomy Principle – The law empowers people to make and receive enforceable promises, subject to other principles

b. Security Principle – Each party of a contract is required by law to do their part to the other party’s reasonable expectations and reliance

c. Justification Principle – The law enforces promises when prima facie there are sufficient legal reasons for a court to enforce the promise

d. Justice Principle – The law refrains from enforcing promises mainly by compensating nonbreaching parties for unavoidable, foreseeable, and reasonably certain harms caused by a breach

II. Promises

a. Contract Defined: A promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some ways recognizes as a duty. (RSC Sec. 1)

i. EX: Hawkins v. McGee (1929) àWhen there is evidence that surgeon “guaranteed” a good result after repeatedly soliciting the opportunity to perform surgery, and that he failed to achieve a good result, a jury verdict finding that surgeon breached the contract was upheld.

ii. Burton saysàThe court’s reasoning in Hawkins is suspect because it compares the hand to a machine. A machine is a good, while a hand is irreplaceable

b. Promissory Agreements: Promise made on at least one side à “A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made (RSC Sec. 2). An agreement is a manifestation of mutual assent on part of two or more persons. (RSC Sec. 3)

i. Significance of a promise depends upon à1. The existence of another to whom the promisor is bound. 2. A social practice in which promises fit and signal an obiligation

ii. EX: Lucy v. Zehmer (1954) àWhen a landowner signed a written agreement to sell and later claimed he was joking, while the buyer proved that both parties were serious, then they made an agreement

1. Mutual Assent: In every contract, every party must agree to the same thing (Meeting of the Minds based on the intent of the parties)

2. Subjective vs. Objective Agreement

a. Based on Objective Agreement, once two parties agree, the contract is in full effect

b. Based on the Subjective Agreement, mutual assent/meeting of the minds is necessary (Lucy v. Zehmer)

c. SubjectiveàAutonomy Principle

d. ObjectiveàSecurity Principle

iii. Based on the Objective Theory of AgreementàTwo parties agree whenà1. One party manifests an intention to enter an agreement 2. A reasonable person would understand the manifestation as an agreement 3. The other party intends to agree.

1. EX: Embry v. Hargadineà Not all contracts require a meeting of the minds. The only thing necessary for a contract to be formed is that one of the parties (as a reasonable man) thought that a contract had been made

iv. Two parties do not agree to any contract when their understandings do not concur on the same terms and neither party’s manifestation of intention was reasonably understood by the other as assent to the other’s terms (OswaldàSwiss coin collection)

III. RSC Sec. 201: If two people attach the same meaning to a word, then that is the usage of the word for the purpose of the contract. If two parties attach a different meaning to a word, the party whose meaning prevails is the party whoà1. Did not know of any different meaning, and the other knew the meaning attached by him OR 2. Had no reason to know of any different meaning attached by the other, but the other party had reason to know the meaning attached by the first party

a. RSC Sec 201 is a synthesis of Lucy, Embry, and Oswald

IV. Interests, Rights, and Duties

a. Three Interests (RSC Sec. 344)

i. Expectation Interest – A party’s interest in having the benefit of the bargain by being put in as good a position as he would have been in had the contract been performed

1. In Hawkins, the court rewarded the difference between a 100% good hand and the “hairy hand” that Plaintiff received

2. Difference between Hawkins and RSC àIn Hawkins, the Court says losses should be measured by the difference between what the parties had in mind when the contract was made and the result. RSC says it is based on the circumstances at performance, not at the time of making the contract

ii. Reliance Interest – A party’s interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made

iii. Restitution Interest – His interest in having restored to him any benefit that he has conferred on the other party

I. Promissory Agreements

a. Offers

i. Offer Defined: The manifestation of a 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 (RSC Sec. 24)

1. Preliminary Negotiations are NOT offers if both parties understand that more is necessary for the bargain (RSC Sec. 26)

a. EX: MesarosàMaterials such as those mailed by the Mint as advertisements are NOT offers to contract.

2. An offer cannot be accepted unless the terms of the contract are reasonably certain (RSC Sec. 33)

a. Reasonable Certainty: If the terms provide a basis for determining the existence of a breach and for giving an appropriate remedy (RSC Sec. 33)

b. Chicago Publishers v. Cheever àThe essential terms of a publisher’s contract were so uncertain that there was no basis for deciding whether the agreement was kept or broken

3. Rule applied in MesarosàOffer = Reasonably certain terms + Manifestation of willingness to enter into bargain (RSC Sec. 24/33)

b. Powers of Acceptance

i. Acceptance Defined: An offer gives the offeree a continuing power to complete the manifestation of mutual assent by the acceptance of the offer (RSC Sec. 35/50). Acceptance must comply with the requirements of the offer (RSC Sec. 58). In cases of doubt, an offer is interpreted as inviting the offeree to accept by promise OR performance, as the offeree chooses (RSC Sec. 32)

1. EX: Davis v. Jacoby àOffer was interpreted as a bilateral contract because of doubt, therefore the niece could accept her uncle’s offer without performance. Thus, the estate went to the niece who the uncle treated like his daughter, rather than the nephews he wasn’t so close to. (Burton says the reasoning is skeptical)

2. Acceptance is operative as soon as it is put out of the offeree’s possession, without regard to whether it ever reaches the offeror (63)

3. Acceptance by Performance (Unilateral Contract): Requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise (RSC Sec. 50)

a. Only available if the offer invites such an acceptance (Sec. 53)

b. Performance does not constitute acceptance if within a reasonable time the offeree exercises reasonable diligence to notify the offeror of non-acceptance (Sec. 53)

c. Where an offer of a promise invites acceptance by performance and does not invite a promissory acceptance, performance does not constitute acceptance if before the offeror performs the promise the offeree manifests an intention not to accept (RSC Sec. 53)

d. EX: Petterson v. Pattberg

4. Acceptance by Promise: Requires that the offeree complete every act essential to the making of the promise (RSC Sec. 50)

a. Except as stated in RSC Sec. 69 or where the offer manifests a contrary intention, it is necessary for acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably (RSC Sec. 56)

ii. Termination of Power of Acceptance: Power of Acceptance can be terminated by Rejection or counter-offer by the offeree, or lapse of time, or revocation by the offeror, or death of the offeror or offeree (RSC Sec.36)

1. Lapse of Time: An offeree’s power of acceptance is terminated at the time specified in the offer, or if no time is specified, at the end of a reasonable time (RSC. Sec 41)

a. Akers: Offeree-Employer’s power of acceptance terminated after the conversation in which Offeror-Employee offered to resign. (Also, there was rejection)

2. Rejection: An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested the intent to leave power of acceptance open.

3. Counter-Offer: A counter-offer is made by the offeree to the offeror and proposes a substituted bargain differing from that of the original offer. An offeree’s power of acceptance terminates upon his making of a counter-offer, unless there are contrary intentions

a. A purported acceptance which is conditional on the offeror’s assent to additional/different terms is a counter-offer (RSC Sec. 59)

i. Ardente v. Horan àA letter sent by the buyer of an estate to the seller was a conditional acceptance or counter-offer conditioned on assent to additional terms

ii. Mirror Image Rule (Ardente): Offer and acceptance must establish both parties agreement to the same terms, in every respect

1. Autonomy principle justifies the Mirror Image RuleàOfferee should not be allowed to impose additional terms on the offeror

2. Creates a Last Shot Effect

b. When a party to a contract accepts the terms of the contract outside of the time period allotted, it is considered a counter offer (Houston Dairy)

4. Revocation by Communication from Offeror Received by OffereeàPower of Acceptance terminates when offeree receives manifestation of intention of the offeror not to enter the contract (RSC Sec. 42)

a. Can be indirectàDefinite action by the offeror inconsistent with an intention to enter into the contract, and the offeree acquires reliable information of such action (RSC Sec. 43)

i. Petterson v. PattbergàDefendant entered into contract for Plaintiff to pay off a mortgage. Stipulated

ft undetermined (2-204)

b. Even if one or more terms is left open, a contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy (2-204)

c. EX: ProCd àA shrinkwrap license is an enforceable contract when the buyer has the right to return for a refund if terms are unacceptable. By buying the product and not returning it, D showed conduct of agreement. In ProCd, D attempted to avoid the “Terms of Use” and use the Consumer version of the product for Commercial purposes. Court didn’t allow it.

d. EX: Empire MachineryàThe cashing of a check AND retention of its proceeds for several months, along with letters indicating assent to an offer, could be considered conduct to bind a party to an agreement (204 AND 206)

2. Unless otherwise indicated by the contract, an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances (2-206)

a. Where beginning performance is a reasonable mode of acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. (2-206)

b. Shipment or the prompt promise to ship is a proper means of acceptance of an offer looking to current shipment (2-206)

3. Acceptance can be made even though the acceptance states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. The additional terms are to be construed as proposals for addition to the contract (2-207)

a. Eliminates the “Mirror Image Rule” and “Last Shot Effect”

i. But, in Power Paragon, the court “resurrected” the mirror image rule by ruling that 2-207 did not apply. In Power Paragon, a Seller’s offer expired and a Buyer’s purchase order was construed as a counter offer. Court held 2-207 only applied where there were 2 competing valid contracts.

b. Between merchants, such terms become a part of the contract unless (2-207)

i. The offer expressly limits acceptance to the terms of the offer

ii. They materially alter it OR

iii. Notification of objection to them has already been given or is given within an reasonable time

4. Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings do not otherwise establish a contract. In such a case, the terms of the contract consist of those terms on which the parties agree. (2-207)

a. EX: In Ionics v. Elmwood Sensors, when the two parties exchange contracts with different terms (more favorable for themselves), the differing terms cancel each other out under the Knockout Rule (2-207), and the parties are held to terms that they agree upon, plus default terms (2-207).

d. Preliminary/Incomplete Agreements

i. Basics

1. Generally, preliminary agreements, Agreements to Agree, Letters of Intent, etc are not enforceable

a. EX: In Sun Printing, the court held that where the parties stipulated in the contract that “price and length of terms shall be agreed upon at a later date”, this was simply an agreement to agree and was therefore unenforceable. This is because the court will not fill in “essential terms” for the parties

i. Not governed by UCC Article 2, otherwise it would be a different result.

b. EX: In Arnold Palmer v. Fuqua, court held that a Memorandum of Intent which included all essential terms could be held as an enforceable contract, so long as the document as a whole indicates an intent to be bound to it.

c. A sales agreement leaving only technical terms to be negotiated is not enforceable, but it may manifest an implied agreement for the parties to negotiate the technical terms “in good faith”

d. EX: In Copeland v. Baskin Robins, Court held that where the parties agreement is subject to reaching a deal-breaking separate agreement, their agreement to negotiate in good faith is enforceable.