cONTRACTS
DAVIK
FALL 2013
I. What is a contract?
1) Generally
· A set of promises that the law will enforce.
· Promises must be reciprocal: each party is motivated by the promise of the other.
· The goals are to provide certainty and predictability, central in facilitating commerce, and provide equity, though there is a degree of balance between these two goals. Also, to allow freedom of contract.
· Contract is composed of offer and acceptance.
2) Sources of law:
· Common Law (judge-made, J-specific caselaw)
· R. 2d. of Contracts (attempts to codify the CL)
o R. 2d. applies to the sale of: a business, securities, real estate, or services like rentals (car, boat, labor, etc.).
· UCC § 2 – Sales of goods for the price of $500 or more (but NOT in Louisiana!)
o UCC applies to the sale of goods that are moveable @ time sold: commodities, i.e., rice, cement, cars.
~ 1st ask if the either or both parties were a merchant
~ If UCC is silent, UCC § 1-103(b) says to use the CL
· What if the K mixes goods & services (i.e., construction K covers supplies + labor costs)?
o Predominant Purpose Test: relevant criteria for consideration include the K language, the nature of the seller's business, the reason for entering the contract, and the ratio of $ charged under the contract for goods vs. services.
II. HAS YOUR CLIENT MADE A DEAL?
A. Mutual Assent:
1) Generally
· Old: “meeting of the minds” (subjective)
· Modernly: principle of mutual assent reached through an offer + acceptance, by which parties express outward manifestation of mutual intent (objective standard with a subjective component)
o TEST: how would a reasonable person on one end of a deal interpret the words and actions of the party on the other end of the same deal?
~ Objective (reasonable belief): Protects a party in a contract who might be led astray by deceptive, but convincing conduct. Reduces business risk and enhances market predictability
~ Subjective (actual belief): If both parties know of each others’ subjective interpretation, binding K still formed.
2) Cases
· Lucy v. Zehmer (JOKE), [restaurant bill farm sale], ct. demonstrated this objective approach. It looked to the outward expression of Δ as manifesting his intention, rather than his secret and unexpressed intentions. Δ claimed deal was being made in jest. K formed regardless; specific performance granted. RULE: The law imputes to a person an intention corresponding to the reasonable meaning of his words + acts. If a reasonable person would understand from his words/acts an intention to agree, it is immaterial what may be the real but unexpressed state of his mind.
o R.2d. §17 (Requirement of a Bargain): (1) […]the formation of a K requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
· Leonard v. Pepsi Co. (REASONABLENESS OF “OFFER”), [Harrier jet for Pepsi points], ct. found no objective person could reasonably believe the commercial actually offered consumers a Harrier jet. The context of the commercial, plus the actual value and true purpose of a Harrier Jet implies that the ad was meant to be taken as a joke. Also, it was an advertisement and not a unilateral offer open for acceptance. No K formed. RULES: Commercials generally are NOT offers. Obvious jokes are NOT offers (but non-obvious joke might be if a reasonable person would believe it).
o R.2d. § 18 cmt. C (Manifestation of Mutual Assent – Sham / Joke): Where all the parties to what would otherwise be a bargain manifest an intention that the transaction is not to be taken seriously, there is no such manifestation of assent to the exchange as is required by this Section. […] If one party is deceived and has no reason to know of the joke the law takes the joker at his word.
· Gleason v. Freeman (USE OF AUCTION SITE), [Elvis house Ebay], ct. found for ∆ seller, who merely intended to elicit negotiations on the auction site, rather than contract for the sale of real estate. Looked to words of parties, Ebay’s terms & conditions, π’s lowball offer, + π’s continued negotiations after their bid was made to determine parties did not mutually assent to the deal. RULE: When words of a contract ambiguous as to intent of parties, cts. examine “situation, acts / conduct of parites, + attendant circumstances.”
· Smith v. Boyd (EFFECT OF TRADE USAGE), [two unsigned purchase & sales], ct. held no K was formed. Δ did not manifest objective intent to enter into a binding agreement before signing a purchase & sales agreement, as implied by “circumstances” of the common practice of real estate transactions. Under the Restatement RULE below, ∆’s lack of manifestation of objective assent = preliminary negotiation only. Protects parties’ bargaining room.
o R.2d. §27 (Existence of Contract Where Written Memorial is Contemplated): Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.
o If a party alleges a binding oral contract, that party has the BoP. Factors:
~ Trade habit
~ Prior practice b/t parties
~ Statements during negotiation
~ Written contract to be drawn up by 3rd party?
B. Offer:
1) Generally:
· Offer = offeror’s manifestation of assent to be bound by the terms set by the offeror
· To determine if an offer has been made, the court looks to the language of the offer, prior communications that transpired before the “offer,” and consider the circumstances of completeness (i.e. how many people was the offer sent to?)
o R.2d. § 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.
· Note the difference from UCC (conflates offer + acceptance into “agreement”):
o UCC §2-204 (Formations in General): (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract
o UCC §1-201(3) (Agreement Defined): (3) “Agreement”, as distinguished from “contract”, means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade[…].
~ Defines agreement very broadly. Policy = promoting commerce.
2) Cases:
· Lonergan v. Scolnick (PRELIM NEGOTIATIONS), [news ad back-n-forth
oposed contract (but NOT if it’s an option contract, or if acceptance already happened!)
~ R.2d. says notice to offeree of offeror’s death is not required; offer dies anyway.
~ Offeror’s established supervening incapacity (after offer made but before accepted) also kills an offer. Needs:
§ Adjudication of incompetence
§ Appointment of guardian
§ Finding by ct. of mental incapacity to contract
B-2.PRESERVING THE OFFER (like a pickle = option contracts):
1) Generally
· Restatement Provisions (Option Contracts)
o R.2d. §25 (Making of Offers – Option Contracts): An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer.
o R.2d. §37 (Termination of Power of Acceptance under an Option) [paraphrase]: option contracts remain open for the term described in the contract (despite rejection, counter-offer, revocation, death or incapacity of offeror).
o R.2d. §87(2) (Contracts w/o Consideration – Option Contracts in Equity): (2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
~ Protects offeree from revocation when he has made substantial preparations
· Necessary Elements for Option Contract under R.2d. § 87(1)(a):
o Requires consideration (at least recitation thereof)
~ Most cts. hold that if a K RECITES a purported consideration, this is sufficient; actual tender unnecessary
o In writing
o Proposes an exchange on fair terms and within a reasonable time
o Signed by offeror
· UCC Provisions (UCC term = “Firm Offer”):
o UCC §2-205 (Firm Offers): An offer by a merchant to buy or sell goodsin a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
· Necessary Elements for Option Contract under UCC:
o Does not require consideration! (Contrast w/ R.2d.)
o By a merchant (someone who regularly deals in those goods)
o In writing
o Expressly state that offer will be held open:
~ for a certain time, or
~ if no time specified, then a “reasonable” time, not to exceed 3 months
o Signed by offeror
o If on form supplied by the offeree, must be separately signed by the offeror
