Select Page

Contracts
University of Mississippi School of Law
Case, David W.

Contracts
Fall 2009
Professor Case
 
I.                    Introduction to Contract Law
–          Contract: a bargain in which there is a manifestation of mutual assent to the exchange and a consideration- Give and take of bargaining through a process of offer and acceptance (contract can be formed without parties entering into bargaining phase – noncommercial transactions) – one party can incur legal obligations to another person even though they haven’t entered into a contract(ex: restitution & promissory estoppel) – some argue that the “meeting of minds” must occur between parties for mutual assent
·         An agreement bw two or more people that has a legal effect– an exchange of promises – not necessarily in writing – but through words and sometimes through conduct (actions) – society’s way of protecting expectations in making agreements for future exchanges
 
A.      Contract Law in the First- Year Curriculum
·         3 elements in a transaction:
o   Agreements-in-fact bw parties
o   Agreement as written
o   Set of rights and duties created by 1 and 2
·         Offer: manifestation of a willingness to be bound §70
–          one who makes a written offer which is accepted, is bound, though ignorant of the terms – objective theory
o   Communication by offeror
o   Creating a reasonable expectation in the offeree
o   Offeror is willing to enter into a K
o   Specified terms
o   Offeree need only accept to form a K
·         Acceptance: of the offer –offeree has “power of acceptance” that is terminated at time specified in offer, or, if not time specified, at end of a reasonable time (depends on circumstances)
–          § 41 – Mailbox Rule – revocation is effective when received; acceptance when dispatched
–          Qualified acceptance = counter offer = rejection
–          Can revoke at any time prior to acceptance – effective when communicated (directly or indirectly)
 
B.      The Sources of Contract Law
1.       Judicial Opinions – judge-made law: precedent (stare decisis – adherence to prior cases) – source – judicial opinions (primary authority)
2.       Statutory Law – statutes enacted by legislatures (state or federal) – UCC (guidelines for commercial transactions)
3.       Restatements – not binding contract law – p. 171 – but influential and persuasive – can becoming binding if legislatures recognize it as new law
4.       Legal Commentary – (secondary authority)
5.       International Commercial Law – treatises (calamari treatise)
 
C.      Perspective of Contract Theory-
·         Two approaches
·         Classical – Objective Theory: doesn’t matter what parties thought or intended, but what a RPP in position of parties would have thought or intended – mutual assent not necessary. If parties’ actions manifest intent to agree – the state of mind is irrelevant – what would a reasonable person have thought? One who has the capacity to understand and signs, is bound by the signature – Looking from a reasonable person’s perspective rather than parties’ actual, subjective intentions  (Ray v. Eurice Bros. – duty to read rule;  Park 100 – fraud is valid defense)  
o   Showed preference for formalism – clear rules over general standards; indifferent to 0issues of morality or social policy; “laissez faire” economics and ltd. Govt. interference in private transactions
o   Looks at conduct of the parties from reasonable person’s perspective rather than their actual, subjective intentions.
·         Modern Approach: tries to be fair, looks at intent of parties
o   More attentive to needs of commercial marketplace; characterized less by rules than by standards; frequently more responsive to issues of social justice and economic power (ex. Good faith doctrine and unconscionability)
o   Defenses to contractual obligations:
§ Fraud
§ Failure
§ Unconscionability
§ Duress and undue influence
§ Mistake, both unilateral and mutual
 
D.     Lawyering Perspective
·         Always try to avoid the dispute if at all possible –
·         Be prepared to be a:
o   Counselor: help your client identify scope of legal problem; remain objective; identify options available; help client choose bw alternative and implement choice
o   Negotiator: perhaps mtg. w/other party in hopes of reaching an agreement – understand client’s needs and goals
o   Drafter: putting in writing, organizing
o   Advocate: presenting the most persuasive argument on your client’s behalf
·         Sand Castle Analogy: written opinions on the basis of common law is important to the life of our country like a sand castle is important not just to the beach, but the whole globe that the beach is a part of
 
II.                  Basis of Contractual Obligation: Mutual Assent & Consideration
A.      Mutual Assent –  (§ 17) offer + acceptance – basically, only those that agree to be in a contract are bound, voluntary expression of commitment, nature of assent determines liability – meeting of the minds
1.       Intention to be Bound: Objective Theory of Contracts
·      Ray v. Eurice Bros.  – written contract, signed by both parties – no mutual assent- breach by one party
–          When determining if there is mutal assent, use objective theory of Ks.
–          Would a reasonable person observing the events conclude that a K has been made? (how the actions and words of the parties would appear to an objective, reasonable observer)  
–          Rule: absent fraud, duress, or mutual mistake, one having the capacity to understand a written document who read it and signs it (or w/o reading it and then signs) is bound by his signature in law.
–          Note: Eurice Bros. held to higher standard in this case, bc they should’ve known
 
2.       Offer and Acceptance – Bilateral Contracts – both sides exchange promises – each party both promisor and promisee – both sides have rights and duties – promises of performances to take place in the future are exchanged – has to start w/offer, promise must be made – other party assents.
–          Offer Defined – § 24 – Manifestation of willingness to enter into a bargain;
§ offeree understands that only assent is needed to form a contract (if offeree knows offeror doesn’t intend to make it a bargain, not an offer – see preliminary negotiations § 26) – must be an expression of fixed service; contracts involve an exchange of reciprocal agreements – rights and duties on both sides  – creates power of acceptance – offeree can accept or reject
§ offeror – master of the offer – has power to revoke any time prior to accepance
–          Acceptance – § 50 – promise to perform in the future;
§ offer creates power of acceptance in offeree – can be limited by revocation, rejection, counter-offer, lapse of time, non occurrence of condition of acceptance (§ 36 – 43)
§ not operative until received by the offeror
§ must be made w/i time stated in offer or w/i reasonable time
§ § 63 – when acceptance takes effect: operative and completes manifestation of assent as soon as put out of offeree’s possession whether or not it ever reaches the offeror (when letter put in mailbox); under option contract – not operative until receive by offeror
–          Lapse of Time – § 41 – offeree’s power of acceptance terminated at time specified in offer, or at the end of a reasonable time (if not time specified); reasonable time depends on circumstances existing when offer is made
–          Mail Box Rule – if valid offer existed, acceptance by mail is generally valid.  
§ Generally, acceptance should be postmarked by midnight that day.
§ Acceptance should be sent the same way the offer was sent.
§ Not necessarily as big of a deal in today’s society w/technology
·      Lonergan v. Scolnick – D posts ad selling land in NY – correspondence back and forth w/P in LA. By the time P got letter in LA, D sold property. Issue over whether there was a contract.
–          Rule: ads of goods by display, sign, newspaper, radio, etc. aren’t ordinarily intended or understood as offers to sell but are merely invitations to enter into negotiations
–          No meeting of the minds – so no contract
–          § 26 – Preliminary Negotiations:  not an offer if person to whom it is address knows or has reason to know the person making it doesn’t intend to conclude a bargain until he has made further manifestation of intent
o   Objective test – as to whether person should’ve that assent would conclude bargain) – Classical Approach
o   Offer creates power of acceptance in offeree – offeror is marshal of the offer – can decide how it is to be accepted, time frame, method, etc.
·      Izadi v. Machado Ford – D places car ad in newspaper. P tries to sue for breach of contract, fraud. – bait and switch technique
–          The test for the true interpretation of an offer or acceptance is not what they party making it thought it meant or intended it to mean but what a reasonable person in the position of the parties would have thought it meant. (subjective intent like Eurice Bros.)
–          Must have offer, acceptance, consideration
·      Normile v. Miller – D selling house, P makes offer – want answer w/i certain time limit. D makes counteroffer – no time limit. P doesn’t respond to counteroffer – D revokes, sells to someone else.
–          Modern Approach:
–          Purchaser doesn’t have power to accept original offer after counteroffer bc counteroffer rejects initial terms
–          You snooze, you lose.
–          Signing of a 3rd party contract didn’t constitute revocation, but P’s learning of it did
–          Note: Normile thought he had “option” to buy – option contract – § 25– but no consideration
–          Like Lonergan – no meetings of the minds; no contract
–          Option Contract: § 25  – promise which meets requirements for formation of a contract, and limit’s promisor’s power to revoke an offer  – leaves contract open for a stated amount of time – irrevocable (requires separate consideration – some kind of payment or exchange of valuables)
–          Extinguishing an Offer – § 36 – power of acceptance can be terminated by:
§ Rejection or counter-offer by offeree:
o   Manifestation of intent not to accept an offer
§ Counter-Offer§ 39 – same as rejection of original offer
o   Counter offer made when offeree makes any change to the terms of the offer
o   Counter-offer treated as an offer made by offeree, rejecting terms of the original offer – creates new power of acceptance in original offeror
§ Revocation by the Offeror: § 43  – terminates the offer
o   Revocation is only effective if communicated to original offeree
o   Offeror takes definite action inconsistent w/an intention to enter into a contract and the offeree acquires reliable information to that effect
o   Exception to right of offeror to revoke: option contract
§ Lapse of Time
§ Death or incapacity of the offeror or offeree
§ By the non-occurrence of any condition of acceptance under the terms of the offer.
 
3.       Offer and Acceptance – Unilateral Contracts – one sided – only one promisor/promisee – one side is an act, other side is the promise; performance completion ­= acceptance; (ex. I’ll give you $100 if you walk across the bridge)
–          Offer:
§ only one promise – promissor doesn’t want a promise in exchange, but wants performance
§ Modern View of Unilateral Contracts: promisor bound upon substantial performance of contract
§ Classical View: promisor not bound until completion of performance  – offeror can revoke at any time until performance is rendered, as long as communicated effectively
–          Acceptance:
§ Manifested through performance of terms offered
o   Full performance
o   Offeror is master of the offer, and until performance is rendered, can revoke at any time
·      Petterson v. Pattberg – D offered to discount mortgage on P’s estate on the condition that it be paid on a certain date. D then sold mortgage to third party before P paid him.
–          Rule – Classical View: Promise revoked even though P heavily relied on promise and revocation was only communicated w/i minutes of full performance
–          If offeror can say “I revoke” before offeree accepts, however brief the period bw the 2 acts, offer is terminated.
–          Issue: determination of what promisor actually wanted – applying objective test
–          Dissent: act requested was simply an offer to pay
–          Note: if ambiguity were around when this case was decided – result could’ve been different; same w/option contract for part performance § 45
–          Ambiguity: § – 32- ambiguity in words may lead to a bilateral K.
§ In case of doubt, offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses
–          Option Contract Created by Part Performance or Tender: § 45 –
§ Where an offer invites an offeree to accept by rendering a performance and doesn’t invite a promissory acceptance, an option K is created when offeree tenders or begins the invited performance or tenders a beginning of it
§ Offeror’s duty of performance is conditional on completion or tender of the performance
·      Cook v. Coldwell Banker – P (Cook) worked for D (Coldwell Banker). Issues over bonus program, and whether or not P can receive promised bonus even after leaving the company.
–          Modern View: offeror may not revoke an offer where offeree has made substantial performance – § 45 – created by part performance or tender – makes contract irrevocable
–          Preacceptance Reliance: §87 (2) – an offer which the offeror should reasonably expect to induce action or forbearance

construction bid, planning on D’s estimate. D noticed mistake and withdrew bid same did P made the offer (so P didn’t know that D withdrew). P sued D for breach of contract (failure to deliver linoleum)
–          P argued that he relied on sub’s quote to make the bid.
–          § 35 – since offer was withdrawn before it was accepted, acceptance was too late
–          Established old rule in contractor-subcontractor bid cases – reliance didn’t service as a substitute for consideration
–          Note: Hand doesn’t like PE
·      Drennan v. Star Paving Co. – D submitted a subcontractor bid to P, a general contractor, for a public school construction project. D used P’s bid to prepare final bid and was awarded the contract. The next day, P informed D that it had underestimated the cost of the project. D hired another subcontractor to do the work.
–          Majority Approach – § 87 (2) – if reliance was reasonable and foreseeable and if the reliance produced the detriment, then subcontractor will be bound to his bid.
–          When a general contractor relies on a sub’s bid to get the general contract, there is reliance.
–          Sub should bear the burden of his own mistake.
–          On the grounds of Promissory Estoppel, if a contractor knows, or should’ve known that there was a mistake bc the bid is too low, then he can’t claim PE or Pre-Acceptance Reliance.
–          Mere estimate can’t be relied on-must be a price quote.
–          Overruled Baird  – established Modern Approach to apply PE
·      Berryman v. Kmoch – P gave D a 120 day option to purchase certain real estate in exchange for “$10 and other valuable consideration”. The $10 was never paid. P asked to be released from the option agreement and later sold the land to another party. D discovered that P had sold the land when he made arrangements to exercise his option to purchase the land – sued for breach of contract. ———-
–          An option contract not supported by consideration is merely an offer to sell which may be withdrawn any time before acceptance. 
–          D never paid $10 – no consideration
–          Elements of an Option Contract: offer, acceptance, and consideration. If no consideration – just an open offer and can be revoked.
–          Note- mailbox rule doesn’t apply in option K – acceptance upon receipt.
·      Pop’s Cones v. Resorts International – P negotiated to lease space for a frozen yogurt shop in a casino hotel owned by D. D gave assurances to P that an agreement had been reached, and Pop’s terminated its lease in another location and placed its equipment in temporary storage in reliance. D later withdrew its offer. P could not return to its former location and was unable to resume operation in a new location for one year.
–          This decision relaxed the strict requirement that there had to be a “clear and definite promise” in order to establish a case of PE – not as necessary when other factors of PE are strong.
–          Some exceptions to Pre-Acceptance Reliance: injustice that can only be avoided by fulfillment of the promise; offeror
–          Elements of PE:
o   Clear and definite promise by promisor
o   Promise must be made w/expectation that the promisee will rely thereon
o   The promisee must in fact reasonably rely on the promise
o   Detriment of a definite and substantial nature must be incurred in reliance on the promise
–          Note: Pop’s can’t sue under contract theory bc letter said “not intended to be binding” – have to sue under PE
·      Negotiations that a K is forthcoming amount to a promise sufficient to invoke PE.
·      Problem 2-1
·      On test, approach in this way:
–          Fact scenario (then decide legal status), read a couple of times, bullet outline – identify issues in order you plan to address them, set out and apply rules to client’s facts, analyze both sides of the argument, conclude
 
d.      Irrevocability by statute – “The Firm Offer”
·      § 2-205 – signed, written offer by a merchant to buy or sell goods which gives assurance that it will be held open isn’t revocable for lack of consideration during the time stated (or if not time stated for a reasonable time) – provided that such a period of irrevocability can’ t exceed 3 months.
·      UCC §2-205: elements of a firm offer:
–          an offer, as defined by common law principles (§24)
–          made by a merchant (UCC definition at §2-204)
–          in signed writing (see §1-201(39) and comment 2 to §2-205)
–          giving assurance that it will be held open (3 months max, if less than 3 months, court will enforce it, after 30 days – regular offer)
·      Irrevocable by statute: (like an option K w/o consideration)
–          §2-102 – is it a contract for the sale of goods? If yes, UCC applies
–          §2-103 (1)(a) – buyer is a person who buys or contracts to buy goods
–          §2-103 (d) – seller is a person who sells or contracts to sell goods
–          §2-205 – by a merchant to buy or sell goods in signed writing isn’t revocable for lack of consideration.
·      Modern Exception to the Classical Rule of K.
·      Note: if you don’t have goods, UCC Art. 2 doesn’t apply.
·      Problem 2-2
e.      Battle of the Forms
–          Classical View: Mirror Image Rule – unless acceptance of an offer matches the original offer (mirror image), it is NOT an acceptance, but a counteroffer. Any change by offeree is a rejection and counter-offer (§39)