Problems in Contract Law: Knapp, Crystal, Prince 5th Edition
Professor Lisa Roy
University of Mississippi
1. Introduction to Contract Law
*Contract connotes an agreement between two or more persons – not merely a shared belief, but a complex understanding as to something that is to be done in the future by one of them.
*Contract can also be a document on which this agreement is set forth.
*Contract is an agreement that has legal effect.
3 elements in a transaction (each one can be considered a contract).
1. The agreement-in-fact between the parties
2. The agreement-as-written (which may or may not correspond accurately to the agreement-in-fact).
3. The set of rights and duties created by 1 and 2.**
Contracts DO NOT have to be in writing, although most do.
IS THERE A K?? (is there a set of rights and obligations created?)
How is a contract enforced??
Cannot call the police and have breacher arrested?? No.
K is a system of private law. Enforced as a civil matter in court.
WHAT’S NEEDED FOR A K??
*Is there mutual assent and consideration (is it an enforceable promise?) àclassical doctrine
*Alternative bases of obligation? à modern doctrine
2. The Basis of Contractual Obligation: Mutual Assent and Consideration
A. Mutual Assent
1. Intention to Be Bound: The Objective Theory of Contract
Objective theory of contract
One is bound by the reasonable interpretation of her words and actions.
a. Duty to read
Ray v. William G. Eurice: ∆ contracts to build ∏’s home. Contract clearly referred to ∏’s specifications. ∆ later withdraws under realization that ∏’s designations were too specific to be performed.
i. Court: ∆ had duty to read contract, and, absent fraud, ∆ is responsible for its commitment.
ii. Classical law: Looks at assent, not intent.
Under objective theory, duty to read is always present, unless contract is secured through fraud, duress, or mutual mistake.
The subjective approach involves “meeting of the minds” and looks at parties’ intent.
Courts tend to find that promisee should know if promisor was serious. Just because he was in a bar does not mean he wasn’t serious about selling the house (Lucy v. Zehman). A promisee should know they will not get a Harrier jet for 50,000 Pepsi points (Leonard v. Pepsico).
2. Offer and Acceptance in Bilateral Contracts
a. Bilateral contracts are typically the product of a negotiating process known as “offer and acceptance.” They entail the exchange of promises to be performed in the future. A promises and B promises; both perform. Each party is in essence an offeror and an offeree. We ask:
i. Is there a valid offer?
1. Would a reasonable person rely on the offer as final and exclusive?
2. Did offeror create for offeree the power of acceptance?
ii. Is there a valid acceptance?
b. Lonergran v. Scolnick : ∆ advertised to sell property. ∏ answered add; ∆ responded with form letter. ∏ replied and offered to establish escrow account. ∆ answered: “Hurry, there are other buyers.” In the interim ∆ sold property to a third party. ∏ sued.
i. Court: ∆’s negotiation with ∏ was an invitation to an offer, not an offer. An offer is an expression of fixed purpose.
1. An offer must be communicated between specific parties.
(1) A form letter is not a communication between specific parties.
(2) “Act fast” does not imply a fixed purpose between two parties.
(3) An offer is only valid when presented to specific offeree – no form letters or advertisements.
(4) If the offeree knows that the potential offeror is waiting for a further expression of intent, no offer has been made.
ii. R§26: An offer requires a further manifestation of assent. A manifestation of willingness does not make an offer.
1. Preliminary negotiations are merely an “invitation for an offer.” A true offer requires a “further manifestation of assent” or an expression of a “fixed purpose.”
iii. Mailbox rule: If a valid offer has been made, offeree has power of acceptance. Traditional contract law holds that an acceptance is effective at the moment it is dispatched (i.e., dropped in a mailbox). This doctrine protects an offeree’s fair expectations.
1. An offeree has a duty to accept within a reasonable amount of time.
2. Offeror is master of the offer. An offeror may revoke an offer at any time up to that moment an offeree dispatches an acceptance.
3. A revocation must be communicated to be effective. The Mailbox Rule does not apply to a revocation.
c. Izadi v. Machado Ford: ∏ misinterprets ∆’s “bait-and-switch” ad. Relying on the language of the ad, ∏ tried to trade-in his own vehicle for a new vehicle. When ∆ refused, ∏ sued.
i. Court: ∆’s ad baited ∏, who reasonably interpreted it to be an offer. In this case, an offer is not what the ∆ intended, but what a reasonable person would have thought the offer promised.
ii. An ad is generally not an offer; it is a solicitation for an offer. But where an ad employs “bait” tactics, public policy permits a court may hold it to standards of contract law.
iii. R§26: Advertisements of goods by display, sign, handbill, newspaper, radio, or television are not ordinarily intended or understood as offers to sell…To make an offer by an advertisement, there must ordinarily be some language of commitment or some invitation to take action without further communication. Public policy, however, puts the responsibility on the seller if they exercise dishonest tactics.
1. Offer is interpreted not by parties but by what a reasonable pruden
§ Consideration insures that the promise enforced is not accidental, casual, or gratuitous, but has been uttered intentionally as the result of some deliberation, manifested by reciprocal bargaining or negotiation.
§ Consideration is met through (1) The benefit/detriment test. The offeror receives a benefit and the offeree receives a detriment. (2) The bargain for exchange test.
R§71: Requirement of exchange
To constitute consideration, a promise must be bargained for.
A promise is bargained for if something is sought by the promisor in exchange for his promise, and something is given by the promisee in exchange for that promise.
The performance may consist of:
1. an act,
2. a forbearance, or
3. the creation or modification of a legal relation.
Waiver of legal right is a legal detriment.
Hamer v. Sidway: (BENEFIT/DETRIMENT) Uncle promised ∏ $5,000 should ∏ maintain certain clean habits through age 21. ∏ complied. Uncle promised payment but died before performance. ∏ sued the uncle’s estate.
∆ argues uncle received no benefit from promise and ∏ suffered no detriment in forgoing alcohol, tobacco, etc.
Court: Because ∏ waived his legal right to alcohol, tobacco, etc., he suffered a detriment. Detriment is more important than benefit. ∆ is bound by promise.
Consideration means not so much that one party profits as the other party abandons some legal right as an inducement for the promise.
Pennsy v. American Ash: (BARGAIN FOR EXCHANGE) Δ advertised free AggRite to those who will come pick it up. Π came and picked it up, used it in a paving project, and it cracked. Π had to dispose of it because it was a hazardous material. Π sued Δ for breach of warranty. Was there consideration that made a contract?
Δ argues that there was no consideration
Court holds that Δ’s promise to supply AggRite free of charge induced Π’s detriment of collecting it. Thus, there was bargain for exchange. Promises induced other promises, which is bargain for exchange, even though there was no actual negotiation.
R§2: A promise is a manifestation of intention to act.
R§71: Forbearance of suit may constitute consideration, but it must be an element in the bargain for exchange.