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

Principles of Contract Law – Burton 2009
Chapter 1: Autonomy and Security Principles
v Autonomy: “The law empowers people to make and receive enforceable promises when they communicate decisions to act or refrain from acting in some definite way in the future, subject to other principles.”
v Security: “The law requires each party to a contract formation or performance to do its part to respect the other party’s reasonable expectations and reliance.”
Ø §1 – Promises
Ø Contract: An enforceable promise/set of promises remedied by law if breached; govern transactions in the unregulated sector of the economy (RSC §1)
§ “Enforceable” – most often compensatory damages (monetary compensation for harm done to P) for breach; sheriff may seize property to recover damage costs; no punitive damages in K
§ “Promise” – involves commitment to do something; manifestation of intent: what a reasonable person would understand from words/gestures expressed; can be done unintentionally (RSC §2)
§ “Agreement” – manifestation of mutual intent between 2+ persons (RSC §3)
·         Hawkins v. McGee (1929): Guaranteed good result from operation not performed as promised; damages = value of hand as promised – value of hand as given (RSC §§1-3)
§ “Freedom of Contract” – parties decide when/where to contract; court cannot make a contract – parties must
Ø K law applies only to the unregulated sector of the economy
Ø Look at ALL words of a K to determine the meaning of the terms therein
Ø Interests, rights and duties
§ Rights/duties may be predictions of what a court will do; only some interests are protected by law
·         K laws protect: expectation, reliance, and restitution; Expectation + reliance = possible harms of K
¨       RSC §344 – Purpose of Remedies: expectation, reliance, and restitution defined
Ø Expectation – put in position would have been in had K been performed
Ø Reliance – put in position would have been had K never been made
Ø Restitution – return of benefits conferred onto the other party
§ One person has a right when they have an interest strong enough to justify imposing a duty on another to act with respect for that right
Ø §2 – Promissory Agreements
Ø Party’s Intentions: Understood by distinguishing between intention of words and their practical meaning
§ Subjective intent – true “meeting of the minds”; actual assent
§ Objective intent – agreement ascertained from manifestations of assent; thoughts irrelevant
·         Conduct/words can show consent to contract (Lucy v. Zehmer – “joke” contract honored as reasonable man would take conduct as true consent) (RSC §201(1) – promise interpreted as decidedly understood by both parties)
 
·         Neither “contract” nor “promise” need be spoken to guarantee them (Embry v. Hargadine, McKittrick, 1907 – “Go and get your men” = contract) (RSC §201(2)(a) – meaning as one party understands and other party knows first party believes)
·         Ambivalent terms in a contract may preclude an agreement if parties do not agree on a meaning (Oswald v. Allen, 1969 – two meanings of “Swiss Coins” = no contract/not bound; no subjective intent) (RSC §201(3))
¨       Context/past meetings may signal what parties mutually understand words/actions to mean
§ To determine if a contract was made: 1) Offer? 2) PofA alive? 3) Acceptance?
Ø Offer: promise manifesting a commitment to some specified future action in return for promise/performance
§  Need 1) manifestation of willingness to bargain AND understanding of manifestation by offeree; 2) Reasonable certainty (RSC §33)
 
§ Creates a “power of acceptance”- legal power to conclude the deal; can accept (binding) or reject (terminates); RSC §41(3) – offer by mail = acceptance if sent before midnight on day of offer
§ Offer made in course of conversation terminated at its close unless offeree asks for extension (Akers v. Sedberry, 1955 – offer to resign terminated at close of meeting) (RSC §41, comment (d))
§ Proposal ≠ offer unless it specifies consideration to be given
§ Non-descript advertisement = invitation to offer, not offer itself (Mesaros v. United States, 1988 – ad from Mint ≠ offer) (RSC §26 – manifestation of willingness to enter bargain ≠ offer if offeree knows further assent is needed)
·         Multiple Acceptance Problem: amt. of acceptances > amt. of goods ≠ manifestation of intent
·         Specific ads may = offer where certainty of terms gives basis for remedy (Lefkowitz v. GMSS, 1957 – “first come, first served” = offer) (RSC §33(b))
§ Offeror is “master of the offer” – decides how acceptance is done (promise or performance)
Ø Power of Acceptance: given to offeree via offer (RSC §35); terminated by rejection (§38), counter-offer (§39), lapse of reas. time (§41), revocation (§43), death/incapacity; or by non-occurrence of any condition in terms of offer (RSC §36)
¨       Rationale: Protects rights of offeror; allows alternate plans – reliance interest protected
§ Counter-offer: terminates PofA, rejects contract, makes new offer (Ardente v. Horan – request for furniture in sale of real estate = counter-offer)
·         Request for a better offer ≠ counter-offer; first offer may stay “under advisement” while CO is considered
·         Reply to offer adding/changing conditions = CO (Ardente – request for furniture = CO) (RSC §59)
§ Revocation: may occur indirectly when offeror acts inconsistent with intention of contract (Petterson v. Pattberg, 1928 – revoke ok even w/offeree on doorstep, cash in hand) or if through reliable 3rd party (e.g. broker)
·         Can occur directly when offeror communicates manifestation of intent not to enter K (RSC §42)
·         Cannot revoke once performance has begun (in an option-contract – where acceptance by performance is not allowed) (Marchiondo v. Scheck) (RSC §45(1))
Ø Acceptance: Need: 1) Manifestation of assent to terms of offer; 2) Must conform to offer’s terms for acceptance or qualify for “silence as acceptance” rule; 3) Must conform to requiring notice/dispatch of acceptance
§ To have a contract, court musthave reason to accept agreement as contract
§ Agreement = fact; contract = matter of law
§ When in doubt, it is assumed an offer allows for acceptance by either promise or performance (Davis v. Jacoby, 1934 – letter asking for help = offer for bilateral contract; promise = acceptance) (RSC §32)
§  Silence can = acceptance if 1) Expectation of compensation; 2) Offeree knows silence = acceptance; 3) In previous dealings, silence = acceptance (Houston Dairy v. JHMLI Co. – no previous dealings, no reason for silence to = acceptance); (Cole-McIntyre v. Holloway, 1919 – as delay causes unmarketability of goods, previous dealings allow silence as acceptance)
 
·         Mirror-Image Rule: acceptance of offer must directly match offer made; difference = counter-offer
¨       Rationale: Protects offeror from assenting to terms involuntarily
Ø Kinds of Contracts
§ “Expressed” – made by words leading to agreement/promise
§ “Implied-in-fact” – made by conduct leading to an agreement/promise
§ “Implied-in-law” (quasi-Ks) – conduct leading to unjust enrichment; may be no manifestation of intent
·         Occurs when 1) benefit conferred by one party on another; 2) occurs at first party’s expense; and 3) benefit of second party unjustly obtained/retained
·         Fair play: obliges parties to cooperate to keep benefits coming; consent based on parties’ knowing and intentional undertakings (Seaview v. Williams, 1987 – implied K to pay for services w/purchasing of property)
§ Battle of the Forms – essential terms must be identical, rest left to trust between parties; “last shot” effect allows final form sent to be terms used for contract
Ø UCC Article 2
§ Supersedes common law; to make commercial laws uniform; applies only to transactions of “goods” – “All things moveable at time of identification to the contract in which price is to be paid”
·         If mixed goods + services           look to primary purpose
§ §1-201: Contract = legal relations to parties; Agreement = bargains of parties in fact
§ UCC §2-207(1) abolishes “mirror-image rule” and “last shot” effect; §1-102(2)(b) finds agreement w/o identical terms
·         Additional terms in acceptance ≠ CO; become part of K unless acceptance made conditional on new terms or notification o

nd look to the purpose – was the agreement intended?
Chapter Two: Justification Principle
v Justification Principle: “The law enforces promises when prima facie there are sufficient legal reasons for a court to enforce this promise.”
Ø §1 – Bargained-For Exchange: requires consideration in exchange of promises, promise for performance, etc.
§ Within contracts, there are four main reasons for enforcing a bargain:
·         1) Formality of some kind (RSC §90(2) – charitable subscription/marriage settlement) (Congregation Kadimah-Tores v. DeLeo – no writing, no consideration = no K)
·         2) Consideration – a bargained-for exchange needs to be in place (RSC §§17, 71)
¨       Must have relationship of inducement; must be understood; must be “more than a pretense” of K – must be what is sought by the promisor and exchanged (§71(2))
¨       Promise = consideration IF performance of would also be (RSC §75) (Hamer v. Sidway – nephew promised to refrain from activities; valid consideration – actual refraining would be valid too)
Ø ANY performance bargained for is consideration (RSC §72)
¨       “Benefit/Detriment” test – either benefit to promisor or detriment to promisee is sufficient, so long as it is bargained for – an inducement for the promise of the first (Newman & Snell’s State Bank v. Hunter – note/stock worthless – no loss, no benefit = no consideration)
¨       May have value not determinable by traditional/nominal means (Batsakis v. Demotsis – money amt. was nominal, but higher value in D having the money made consideration valid)
Ø Courts do not determine adequacy or fairness of consideration
¨       Formal/Peppercorn Theory – only need form of an exchange; Substantial Theory – need more than nominal consideration (Schnell v. Nell – 1¢ for $600 nominal – formalities/past consideration also insufficient)
Ø  Unlike Batsakis, no indeterminable value in bargain – only monetary exchange
 
Ø Hypo: $200 paid for rotten casebook worth $2 – form alone is not good enough; unenforceable
§ Public should be served by the exchange – should benefit society
¨       Forbearance to bring a claim, so long as done so in good faith, even if the claim is invalid, is valid consideration (Dyer v. Nat’l By-Products) (RSC §74(1)(b))
Ø Like Batsakis, nominal consideration but has indeterminable value = sufficient consideration
¨       At-will employment Ks ≠ consideration; forbearance to discharge at-will employee = consideration (Lake Land v. Columber)
 
¨       Consideration can come via a promise implied in the K (Wood v. Lucy, Lady Duff-Gordon – implied promise to promote products was sufficient consideration to leave K enforceable)
 
·         3) Reasonable reliance by promisee or promisor (RSC §§87, 90); looked to if no exchange exists
¨       Reliance must induce P’s actions, must be detrimental (Devocmon v. Shaw – nephew relied on uncle’s promise to pay for his expenses during trip – would not have spent $ w/o reliance)
Ø Neither theory of BF-exchange exists; inducement of promise caused reliance = enforceable
§2 – Reliance on a Promise
Amicable working environment is desired – forbearance to fire = consideration
Favoring settlements allows this policy; little to do w/K law
RSC §69
RSC §24
These cases together make RSC §201