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

General Introduction

5 General Principals
1. The Autonomy Principal – 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 principals.
2. The Security Principal – The law requires each party to a contract formation or performance to do its part to respect to the other party’s reasonable expectations and reliance.
3. The Justification Principal – The law enforces promises when prima facie there are sufficient legal reasons for a court to enforce the promise.
4. The Justice Principal – The law refrains from enforcing promises when the prima facie justification for enforcing the promise is over-ridden by considerations of justice.
5. The Compensation Principal – The law enforces promises mainly by compensating nonbreaching parties for unavoidable, foreseeable, and reasonably certain harms caused by a breach.

Contract = 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. R2K 1

Interests: RSC 344 demonstrates a remedy can be made
1. expectation interest = his interest in having the benefit of the bargain by being put in as good a position as he would have been had the contract been performed
2. reliance interest = his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as if the contract had not been made
3. restitution interest = his interest in having restored to him any benefit he has conferred on the other party

I. Promissory Agreements – “rules”

Promise = a manifestation of an intention to act or refrain from acting in a specified way, so made as to justify a person in understanding a commitment has been made.
(Both parties can agree when they promise and they communicate their intentions)

Synthesis of Promissory Agreement

When the parties intentions concur in mutual assent, they make an agreement

Lucy v. Zehmer (sell farm as joke; objective manifestation of mutual assent)
Rule: Where a party’s actions and statements could reasonably be seen as manifesting an intent to enter into a contract, the party will be bound to the contract, even if the party had no subjective intent to enter into the agreement.

When the parties’ intentions do not concur in mutual assent, they make an agreement if one party’s manifestation of intention is reasonably understood by the other as agreement and the other so understands the manifestation

Embry v. Hargadine, McKittrick Dry Goods Co (“go get your men out”)
Rule: Both parties need not subjectively intend to enter into a contract in order to find that a contract has been validly formed.

If there is no subjective or objective agreement, there is no agreement

Oswald v. Allen (Swiss Coins)
Rule: When a term or terms used to express an agreement is/are ambiguous and the parties understand it in different ways, a contract cannot exist unless one party is aware of the other party’s understanding.

R2 §201 is a synthesis of this

RSC § 201. Whose Meaning Prevails
1) When the parties have attached the same meaning to a promise or agreement or term thereof, it is interpreted in accordance with that meaning.
2) Where the parties have attached different meanings to a promise or agreement or term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made:
a) that party did not know of any different meanings attached by the other and the other knew the meaning attached by the first party; or
b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party
3) Except as stated in this section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

RSC § 20. Effect of Misunderstanding
1) no manifestation of mutual assent if the parties attach materially different meanings to their manifestations and
a) neither party knows or has reason to know the meaning attached by the other; or
b) each party knows or each party has reason to know the meaning attached by the other
2) Reiterates RSC 201 where not misunderstanding occurs

II. Bargain Contracts

Introduction/Overview

The First Question in Contract Analysis:

Does Article 2 Apply?
(UCC §2-102, et seq.)

Yes No
Agreement? Common Law – Offer, Power of Acceptance, &
(§§ 2-204, 2-206) Acceptance? [see other flow chart!]

Yes No

Formation of Bargain Contracts at Common Law [Use this for the exam!] (Did the person have the capacity to accept?)
Was there an offer?
No* Yes à
Was the power of acceptance alive?
No* Yes à
Was the offer accepted?
* see non-bargain bases of *No Yes à
contractual liability; may still be a contract Agreement

Making a Bargain Contract – 5 questions – If the answer to all five questions is “yes,” there is a bargain contract, enforceable at law upon breach by either party

OVERVIEW: Making a Bargain Contract
v Was there a legal offer? [chapter 1] v Was there a valid acceptance? [chapter 1] v Was the agreement in writing and signed, if required? [chapter 1] v Was there consideration?(is there a legal reason to enforce the promise?) [chapter 2] v Was there an absence of invalidating causes? [chapter 3] Ø If the answer to all five questions is “yes,” there is a bargain contract, enforceable at law upon breach by either party

I. Was there a legal offer? (common law) [chapter 1]

1. Elements of an Offer
v (1)Was there an intention to be bound (R2 § 24)
Ø (1) Was there manifestation of intention to enter into a bargain? AND
Ø (2) Was it so made as to justify another person in understanding that his/her assent to that bargain is (a) invited and (b) will conclude the deal?
v (2) Reasonable Certainty (R2 § 33)
Ø (1) Reasonably certain if there is a basis for determining a breach and fashioning a remedy (with respect for the autonomy and security principles)
Ø (2) One/more open terms may indicate not intended as offer/acceptance

2. Cases
Rule: Only if there was (1) a manifestation of intention to be bound . . .and (2) reasonable certainty, then there was an offer
Ø Mesaros v. United States – buy coins from mint
§ The US did not manifest an intention to be bound, therefore, there was no offer
§ Rule: A solicitation for an order or other expression of agreement to purchase, clearly exists until ratification or assent by the party soliciting the order, is not itself an offer; it is a request for an offer or an invitation to deal.
Ø Lefkowitz v. GMSS – first come first serve mink stole
§ Where an offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer

3. Restatement Provisions
RSC § 24. Offer Defined
An offer is a 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.

RSC § 33. Certainty
(1) even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as

ce of Offer Defined; Acceptance by Performance; Acceptance by Promise
1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.
2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance with operates as a return promise.
3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise.

§ 53. Acceptance by Performance; Manifestation of Intention Not to Accept
1) An offer can be accepted by the rendering of a performance only if the offer invites such an acceptance.
2) Except as stated in § 69, the rendering of a performance does not constitute an acceptance if within a reasonable time the offeree exercises reasonable diligence to notify the offeror of non-acceptance.
3) Where an offer of a promise invites acceptance by performance and does not invite a promissory acceptance, the rendering of the invited performance does not constitute an acceptance if before the offeror performs his promise the offeree manifests an intention not to accept.

§ 59. Purported Acceptance Which Adds Qualification A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

2. Death of the Power of Acceptance: A power of acceptance cannot be exercised due to §36(1)
v Rejection (R2 § 38) or counteroffer (R2 §39)
Ø Ardente v. Horan – “the furniture stays” (Mirror-Image Rule) (§38, §59)
§ Rule: When acceptance is accompanied by further demands, the offeree makes a counter-offer, terminating his power of acceptance.
Ø Akers v. Sedberry – “want us to retire?” (§38)
§ When Ms. Sedberry brushed the offer aside/ reasonable interpretation/silence by other party = rejection
v Lapse of time (R2 § 41); or
Ø Akers v. Sedberry – “want us to retire?”
§ Rule: An offer made during the course of a face-to-face conversation expires either by its terms or at the end of the conversation if no express expiration is provided.
v Revocation by the offeror (R2 §42 & §43)
Ø Petterson v. Pattberg – “I’m here to pay my mortgage”
§ Rule: An offer to enter into a unilateral contract may be withdrawn right up until the very moment performance is begun.
v Option contract (R2 § 25, 36, 45) – limits the offeror’s power to revoke
Ø Marchiando v. Scheck – “I want my broker’s commission!” (RSC §45)
§ Holds the offer open when there is partial performance (“option contract”), but offeror doesn’t have to complete his end of the contract until performance is complete (“basic contract”).
§ Rule: Partial performance of a unilateral contract creates a conditional contract that may not be revoked by the offeror before the allotted time for complete performance has run, or a reasonable time if the offer is silent as to the time allowed for complete performance.
Ø Petterson and Marchiando disagree: P = classic contract law, M = modern
v Death or incapacity of the offeror