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Contracts
University of Iowa School of Law
Estin, Ann Laquer

Contract Law
Professor Ann Estin
University of Iowa College of Law

CHAPTER 2: Mutual Assent & Consideration
Objective: looking at the conduct of what a reasonable person
– First restatement is more of an objective standard.
Subjective: looking at the intention rather than the conduct.
Contract: a promise for the breach of which a law gives a remedy.
Promise: a manifestation of intention to act or restrain from act in a specified way, so made as to justify a promise in understanding that a commitment has been made.
A.Mutual Assent
INTENTION TO BE BOUND –
R.2d S. 17 – Requirement of a Bargain:
1. Except as stated in Subsection 2, the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration
2. Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in S. 82-94.
R.2d S. 20 – Effect of Misunderstanding:
1. There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
– Neither party knows or has reason to know the meaning attached by the other; or
– Each party knows or each party has reason to know the meaning attached by the other.
2. The manifestation of the parties are operative in accordance with the meaning attached to them by one of the parties if
– 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
– 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.
R.2d S. 21 – Intention to be Legally Bound:
Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.
R.2d S. 22 – Mode of Assent: Offer and Acceptance:
1. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties.
2. A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined.
Ray v. Eurice & Bros, Inc.: a party is bound by a contract regardless of their intent.
– Restatement, Contracts, Section 70 – “One who makes a written offer which is accepted of the terms of a writing which he should reasonably understand to be an offer or proposed contract, is bound by the contract, though ignorant of the terms of the writing or of its proper interpretation.
– Objective standard – trial court’s decision was wrong because they said there was no meeting of the minds.
– Meeting of the minds is not needed – it is implied by the signing of it.
– RULE: A party is bound to a signed document which he has read with the capacity to understand it, absent fraud, duress, and mutual mistake.
Lucy v. Zehmer: it was enforceable even though they were drunk because they had talked about it beforehand, so a reasonable person would have taken the intent seriously.
– A contract is enforced even when your drunk in a casual setting because it was previously discussed so a reasonable person (from Williston) would have taken it seriously.

Leonard v. Pepsico, Inc.: Pepsi points and an ad with a harrier jet.
– Pepsi has no intention to be bound because no reasonable person would think that Pepsi was in the business of selling harrier jets.
Restatement 2d Section 2 – Mere expressions of present intention (as opposed to a manifestation of actual intention) predictions, or opinions do not constitute promises.
OFFER – Restatement and Definition
R.2d S. 24 – Offer Defined:
An offer is 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.
R.2d S. 26 – Preliminary Negotiations:
A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

Offer made in jest: an offer which the offeree knows or should know is made in jest is not a valid offer – even if it is accepted.
Preliminary Negotiations: If a party who desires to contract solicits bids, this solicitation is not an offer, and cannot be accepted. Instead, it merely serves as a basis for preliminary negotiations.
Advertisements: Most appearing in newspapers, store windows, etc. are NOT offers to sell. This is b/c they do not contain sufficient words of commitment to sell.
– If it contains specific words of commitment (ex. A promise to sell a particular number of units), then it may be an offer.
– Words of commitment – “Send three box tops plus a $1.95 for your free cotton T-shirt,” is an offer b/c it’s committing itself to take certain action in response to the consumer’s action.

DURATION OF POWER OF ACCEPTANCE – Restatement
R.2d S. 36 – Methods of Termination of the Power of Acceptance:
1. An offeree’s power of acceptance may be terminated by
a. Rejection or counter-offer by the offeree, or
b. Lapse of time, or
c. Revocation by the offeror, or
d. Death or incapacity of the offeror or offeree
2. In addition, an offerree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.
R.2d S. 38 – Rejection:
1. An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention.
2. A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.
R.2d S. 39 – Counter-Offers:
1. A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.
2. An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.
R.2d S. 40 – Time when Rejection or Counter-Offer Terminates the Power of Acceptance:
Rejection or conter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-of

anifestation of intention, or from the circumstances existing at the time, the person to whom the promise or manifestation is addressed knows or has reason to know that the person making it does not intend it as an expression of his fixed purpose until he has given further expression of assent, he has not made an offer.
– Restatement 2d Section 26: Preliminary Negotiations: A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.
– Preliminary negotiations do not constitute an offer. What’s necessary is the exclusivity of the offer.

Offeror is the master of the offer.
Mailbox rule – acceptance of offeree is valid when it is slipped into the mailbox, not when it gets there. This doesn’t apply if it’s not within the reasonable method of communication. (If the offer says you must accept through telephone, the mailbox rule doesn’t apply.)
Izadi v. Machado (Gus) Ford, Inc.: misleading advertisements
– Rule: If an offer is conveyed by the objective reading of an advertisement, it does not matter that the advertiser may subjectively have not intended for its chosen language to constitute a binding offer.
– General rule – advertisements are not offers
– Exception to the rule: “The test of the true interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have through it meant.” Williston
– This ad is an offer because a reasonable person would have thought it was.
Normile v. Miller: There was a counteroffer and the offeree did not accept or reject.
– Rule: A prospective purchaser does not have the power to accept a counteroffer after receiving notice of its revocation by accepting the counteroffer within the time period specified in the prospective purchaser’s original offer.
– The counteroffer amounts to a rejection of the original offer – Williston.
– Restatement 2d Section 36: Methods of Termination of the Power of Acceptance – An offeree’s power of acceptance may be
– Restatement 2d Section 39 – counteroffer
– Section 43 – indirect communication of revocation – An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.
UNILATERAL CONTRACTS –
Unilateral Contract: A contract which involves an exchange of the offeror’s promise for the offeree’s act. That is, in a unilateral contract the offeree does not make a promise, but instead simply acts.