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Contracts
University of Iowa School of Law
Estin, Ann Laquer

ESTIN – CONTRACTS – FALL 2017

Agreements that call for future performance (i.e. contracts) are often referred to as executory (i.e. still to be carried out)
Contract law exists to enforce obligations created by individuals (as opposed to torts in which the state creates and enforces obligations between people)
When precedent or statutory laws don’t provide a clear answer, courts may decide cases on policy goals – societal goals that will be furthered such as economic, political, social, moral, or some combination of these
Two theories different courts use

Meeting of the minds – subjective; parties’ intent matters
Mutual assent – objective; parties’ intent doesn’t matter per se, rather what would a reasonable person have thought/done (31 Ray v. Eurice Bros., where there was a 3, 5, and 7 page specification, and Eurice claimed that he thought he was initialing one of the previous versions and thus didn’t mean to agree to the final specs – too bad; he should’ve read it closer)

MUTUAL ASSENT AND CONSIDERATION

I. Mutual Assent

1. Offer and Acceptance

R2d 17 – “formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration”

Mode of Assent – R2d 22 – 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 – analyze for, but even if can’t perfectly identify, there can still be a contract

2-204 similar

Bilateral contracts (exchange of promises)

preliminary negotiations – R2d 26 – no 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 further manifestation of assent
offer R2d 24 – manifestation of willingness to enter into a bargain, which would justify another person in believing that his assent (i.e. acceptance) would conclude the bargain

would a reasonable person have believed that his agreement would solidify the bargain? (43 Lonergan v. Scolnick where D put ad in the paper for land, Lonergan answered the ad, there was some back-and-forth, and P claims that D offered to sell; court held D not offering, but was inviting P’s offer – in fact, P’s last letter said act fast ‘cuz I have other buyers, which a reasonable person would say implies he was not intending to be bound (i.e. offering)
Advertisements are generally not considered offers since further assent is usually needed

can be if they are objectively confusing enough, especially if intentional by advertiser (public policy considerations) (46 Izadi v. Machado where a car ad had $3000 push, pull, drag [in big font], but it was only for 2 specific vehicles [in fine print], and also went on to say $3000 off other vehicles for trade-in worth $3000)
can be if they are objectively specific enough (e.g. product, price, and “first-come first-served”)
can be if they are bait-and-switch (public policy considerations)

manifestation does not have to be in writing
offers create power of acceptance in offeree

after an offer is made

Acceptance – R2d 50 manifestation of assent to the terms by the offeree

R2d 50(1) must be in a manner invited or required by offer
R2d 50(2) acceptance by performance requires that at least part of what the offer requests be performed (see unilateral contracts later in notes)

includes acceptance by a performance which is a return promise

R2d 50(3) acceptance by a promise requires that the offeree complete every act essential to the making of the promise
R2d 58 must accept terms exactly as offered (otherwise, it’s counteroffer)
R2d 60 must comply with place/time/manner specified (if specified) by offer (otherwise contract not yet created)

if place/time/manner only suggested, does not necessarily require compliance

R2d69 silence is generally not acceptance, unless:

the offer states that it will be
offeree takes goods (i.e. other manifestation of assent)
based on previous dealings with parties, it likely is in a current situation

R2d 63 “Mailbox Rule” – if acceptance is made in manner and medium invited by offeror, once the acceptance leaves offeree’s hands it counts, even if offeror doesn’t receive it for a while (potentially even after offeror has sold to someone else)

does not work for an option contract – acceptance in this case is only operative once in offeror’s hands

Revoke – R2d 43 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 finds out

offeror can notify offeree of revocation
offeree can find out on his/her own (even accidentally, e.g. from third party) (51 Normile v. Miller, “you snooze, you lose”, where P thought D’s offer to sell house was still available, because she hadn’t revoked it – when real estate agent let P know, and P tried to hurry up and accept, it was too late)
if offeree does not become aware, and offeror sells to another, and then offeree accepts, the offeror can be found for breach to offeree (since offeree’s acceptance creates the contract)

if offeror leaves offer open, and sells to another, offeror may be liable for both contracts

Rejection – R2d 38(1) – offeree’s power of acceptance terminated by his rejection of offer, unless offeror has manifested contrary intention

R2d 38(2) – manifestation of intention not to accept an offer is a rejection, unless the offeree manifests an intention to take under further advisement (i.e. wants the offer to stay open while he “thinks it over”)

Counteroffer – R2d 39 – offer made by offeree back to offeror relating to the same matter as the original offer, but proposing changes to the original offer

counts as a rejection
does not automatically incorporate terms from original offer (51 Normile v. Miller, where P offered and set acceptance deadline, and tried to say that D’s counteroffer (which did not mention deadline) included the deadline – court held that was not the case)
R2d 59 if an acceptance purports to accept, but actually changes terms, it is a conditional acceptance which means it is a counteroffer

Lapse of time, or death of the offeror can also eliminate power of acceptance

2. Unilateral Contracts – offer of something if and only if the other party first performs (which would be accepting)

a. generally if performance is begun (Rstmt 2nd.) or as in 60 Cook v. Caldwell substantial

performance has been made (Rstmt 1st), the offeror cannot revoke (last minute

“pulling the rug out”)

in some cases, starting performance can obligate the offeree (comments in Rstmt 2nd 45) (some courts say there must be mutual obligation i.e. consideration on both sides)

b. again, ads are generally not offers, but they can be (66 Sateriale v. R.J.Reynolds Tobacco, Inc.), potentially if:

it is a rewards program
co. controls number of items to be sold, and thus acceptances (not just a blast-out to the public where “who knows how many acceptances there might be”)
the word offer is used in marketing (repeatedly was used on the C-notes)
if there is remedy for breach (a dollar amount can be reasonable figured)
ultimately, if they request specific performance and nothing is left for negotiations (i.e. purchase the cigarettes/c-notes and send them in for prizes)

R2d 45 If someone extends an offer based on performance, and does NOT ask for a promissory acceptance, an option contract is formed as soon as another starts the performance. The offeror’s duty of performance is conditional on the offeree completing his performance (obv)

3. Postponed Bargaining– contract is formed without all the details being worked out

agreement to agree – parties have agreed on a number of important matters, but have left some negotiation for the future (76 Walker v. Keith)

formal contract contemplated – parties agree on principle and some major provisions, but

contemplate later execution of a formal written contract (83 Quake Construction v. American Airlines, Inc.)

a. classical theory says an agreement to agree is no agreement at all

this has been modified by UCC which although statutory for sale of goods, has influenced other contracts, and echoes in Rstmt 2nd

in an option contract, if terms, or formula for establishing terms, is defined, the court can enforce or set terms. If terms/formula is ambiguous, contract may be seen as unenforceable (76 Walker v. Keith), since if it’s an option, either party can bow out and courts should not make them agree. This would take away from the freedom of individuals to make their own contracts (policy). It also allows for more lawsuits (policy). Courts seem divided on this – other courts have enforced, and just set the amount.
UCC 2-305 allows “open price terms” (think commodities such as corn where prices fluctuate depending on crop that year), where the contract is still enforceable – this has bled over to other contracts in some cases (Rstmt 2nd 33)

b. In formal contract contemplated

establishing intent to be bound can determine contract/offer– if ambiguous manifestation (letter of intent in Quake v. AA), look to other factors
Quake Test Factors to Consider in Determining Intent

whether the type of agreement is one usually put into writing
whether the agreement contains many or few details
whether the agreement involves a large or small amount of money
whether the agreement requires a formal writing for the full expression of the covenants
whether the negotiations indicated that a formal written document was contemplated at the completion of the negotiations
Other factors which may be considered

where in the negotiating process that process was abandoned
the reasons it is abandoned
the extent of the assurances previously given by the party which now disclaims any contract
the other party’s reliance upon the anticipated completed transaction

“cancellation clause” does not necessarily mean you can cancel at-will

c. Dissent in Quake said there could be a middle-ground between intent to be bound and no intent,which would consist of being bound (and a court could enforce) to negotiate in good faith

II. Consideration

1. Promise is not enforceable unless there is consideration (promise itself can be consideration)

2. Historically, and still in many courts today it was/is defined in terms of benefit to the promisor OR detriment to the promisee

3. It has also been common (and probably more appropriate these days) to define consideration in terms of bargained-for-exchange (Rstmt 2nd 71).

a. there is consideration for a promise if its performance would be part of a “bargained-for exchange” – i.e. one party’s performance is the “price” of the other’s and vice-versa (inducing each other based on the promises), AND performance was sought

4. In family and close-friend relationships, it can be hard to identify consideration, cuz they

make all kinds of “promises” out of emotion

a. In 113 Dougherty v. Salt, an aunt promised $3K to her nephew of 8 years old and gave him a promissory note (under seal) for it, which said the payment was for value received, YET this was still not enough to enforce payment because there was no consideration on the nephew’s side

b. this is not always the case though. In 99 Hamer v. Sidway the court ruled that an uncle who promised his nephew money in exchange for refraining from bad behavior until a certain age had a contract with his nephew.

consideration can be someone giving up a right (the nephew gave up his legal right to smoke, drink, etc.)

5. Aside from the family/friends issue, contracts are generally concerned with exchange transactions, so consideration is rarely an issue

6. Common Law Forms of Action (old English law)

a. Covenant – written agreement (e.g. deed), i.e. “under seal”

b. Debt – used to enforce formal and informal promises; plaintiff

ly a goods contract

2. Typically, a price quotation from one merchant to another is an invitation for an offer (common law)

a. purchase order responding to a price quotation is usually the offer

3. Battle Of The Forms (Qualified Acceptance) – boilerplate forms with little variation (think a standard “Terms & Conditions”) that companies exchange – boilerplate is efficient and cheaper, but since they are often not read by the other party, the UCC is not going to necessarily enforce them when it isn’t clear they were agreed to

a. common law deals with it in one way (“mirror image” and “last shot”)

Restatement (2nd) 59: (mirror-image) – “reply to an offer which purports to accept BUT is conditional on the offeror’s assent to terms additional to or different from those offered is NOT an acceptance, but is a counteroffer”

160 Princess Cruises v. GE (back and forth on repairs to the cruise ship) applied this BUT did not note Comment a to Rstmt (2nd) 59: “definite and seasonable expression of acceptance is operative despite the statement of additional or different terms if the acceptance is not made to depend on assent to the additional or different terms” – seems very close to UCC 207

under common law, if offeror receives counteroffer, his performance can mean acceptance (not as much under UCC) (Princess Cruises v. GE)

this is because the other party could reasonably think the original offeror agreed when the original offeror rendered performance

last shot was also found in Princess Cruises v. GE – despite all the back and forth forms, GE submitted the last one; Princess Cruises said go ahead and do the work (and also paid the price stated in GE’s counter offer), so they essentially accepted GE’s terms by conduct, despite the fact that the forms Princess Cruises was sending were different

b. UCC deals with it a different way

generally price quotes are not offers, but they can be if they are specific enough and make clear that “acceptance” of the specifics will ripen them into a contract
generally purchase orders are offers
when there is a lot of back and forth, UCC 207 says when the seemingly final accept happens but with new terms, the new terms could be an “acceptance with additional terms” OR a “counter-offer” depending

207(1) if the acceptance clearly expresses, in a manner that is sure to notify the offeror, that acceptance is only conditional on the additional/different terms, it’s a counter-offer

language that says an acceptance is “subject to” or “conditioned” on is not clearly expresses – needs to be very obvious to offeror or else it’s likely acceptance with additional terms

207(2) additional terms become a part of the contract between merchants unless

the offeror expressly limited acceptance to the terms of the offer OR
the terms materially alter the contract (in which the other party has to agree) OR
notification of objection to them has already been given or is given within a reasonable time after they are received

207(3) if parties move forward to performance before/without acceptance of terms which created a counter-offer (and thus were not incorporated), then the contract will be built on the terms to which both parties had already agreed

even if the offeror responds to part of the additional/different terms, it does not imply that he agrees to the others in the same document (169 Brown v. Hercules, machine press indemnity clause, where Hercules responded to a clause about the press design, but not about the indemnity clause)
if there is an acceptance with additional terms – i.e. 207(1) and 207(3) are not at play – 207(2) says we must see if they materially alter the contract; if so, they cannot be included

burden of proof is on the party trying to exclude the term(s)
Comment 4 of 207(2) lists some clauses that materially alter
Comment 5 of 207(2) states unreasonable surprise = materially altered

not reading the contract is no excuse – if it was in there (esp. in multiple forms on multiple exchanges), you should not be surprised (178 Gottlieb v. Alps fabric limitation of liability clause, numerous forms exchanged – Gottlieb’s LoL was in every shipment of finished goods)

this is in opposition to Brown v. Hercules, where the courts said “ah, no one really reads all those forms” – which is it?

hardship as a result of surprise = materially altered

if a party has no way to know the hardship their clause(s) will cause (e.g. the other party withholds information), it can’t be held liable for the other’s hardship as a result of the surprise of the clause (Gottlieb v. Alps)

Knockout Rule – if there is potential for opposing terms to be in the contract (e.g. upon acceptance with additional terms and the additional terms directly oppose the offeror’s terms), both are disposed of – rather than determining which made it in, and thus favoring P or D