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Contracts
University of North Carolina School of Law
Hirsch, Jeffrey M.

Contracts Outline – Prof. Jeffrey Hirsch – Fall 2013

1) Introduction

a. Contract – (RESTATEMENT § 1) – a promise or set of promises for the breach of which the law provides a remedy, or the performance of which the law imposes a duty

i. Two key elements

1. Promise/promises – commitment to the happening or non-happenings of some future event

2. Enforceability – award of damages or some other order by a court of law

b. Two major authorities in contracts law

i. UCC – Article 2 (Sale of Goods) – basic premise is that legal rules should be crafted to conform to people’s expectations of how the law ought to work

1. UCC § 1-201(3) – defines term agreement broadly to include not only what was spoken between parties, but also inferences from other circumstances, including course of dealing or usage of trade or course of performance.

ii. Restatement (Second) – places a greater emphasis on protecting party’s detrimental reliance on promises – forsaking hard and fast rules for more flexible, open standards

c. 4 basic questions:

i. Was there a promise?

ii. What did the promise say?

iii. Is the promise enforceable (i.e. is it a “contract”)?

iv. If there was a contract and it was breached, what is the remedy?

2) Has a Deal Been Made? (Is there an Agreement?)

a. Restatement § 17 – GENERAL REQUIREMENTS FOR AN OFFER

i. Formation of a contract requires a bargain in which there is:

1. A manifestation of mutual assent to the exchange

2. AND a consideration

b. Mutual Assent (GENERALLY)à both parties must intend to enter the contract and must agree with the other to do so on mutually acceptable terms

i. OBJECTIVE THEORY (TEST USED TO DETERMINE IF THERE WAS MUTUAL ASSENT)à Courts examine and give legal effect to the outward manifestations of the parties USING THE “REASONABLE PERSON STANDARD” regardless of what either party may have privately or secretly intended. (Question is what would a reasonable person in the in the situation of the oferee understand by the words used and conduct engaged in by the offeror?)

1. Agreement must be apparent from the manifestation of assent, reasonably interpreted, a contract has been formed à doesn’t matter what parties “thought” or “believed”

ii. Lucy v. Zehmer

1. Rule: What the parties are thinking is of little importance, contract must be formed based what on expressed actions (Do a reasonable person’s actions show a good-faith agreement given the circumstances?)

a. Exception: If one party knows the other doesn’t intend a contract, there is no enforceable contract.

iii. Leonard v. Pepsico

1. Rule: Test for advertisements is whether an objective, reasonable person would think the ad was an offer.

iv. Factors that play into reasonable/objective person test:

1. Language of agreement – what does contract actually say (if say it’s not a contract until signed and it hasn’t been signed, it’s not a contract)

2. Statements during negotiations – does it sound like the parties actually came to an agreement

3. Conduct of parties – does the parties’ conduct indicate they came to an agreement

4. Equities – was the deal “fair”

5. Subjective views of:

a. Parties – if one didn’t actually think there was a contract à no contract

b. 3rd parties

c. Offer (PART 1 OF MUTUAL ASSENT) à must create an expression/will/intent to be bound or enter into a contract

i. Exceptions: natural offer made in jest (if clear that the offer is a joke), offer to negotiate but not to be bound

ii. Restatement § 24 – Offer is the manifestation to enter into a bargain, so made as to justify another person in understanding that his assent to bargain is invited and will conclude it. (Offer when only thing you need is acceptance by the offeree to make it a contract)

iii. Lonergan v. Scolnick – OFFEREE KNOWS OFFEROR DOESN’T INTEND TO MAKE AN OFFER = NO OFFER EXISTS

1. Rule: If offeree knows/should have known that oferror does not intend initial communication to be a valid offer, then no offer exists

iv. Maryland Supreme Corp. v. Blake Co. – OFFERS CONTINGENT ON CONDITIONS

1. Rule: An offer, agreed upon by both parties but contingent upon a condition, can become an enforceable contract if that condition is met

2. Industry custom can play a role in determining if there is a contract à though there was not written agreement on when, where, how much concrete, this is the norm in construction industry à was contract)

v. Leonard v. Pepsico – ADs AS POTENTIAL OFFERS

1. Rule: In general, ad does not constitute an offer (but rather an invitation to make an offer)

a. EXCEPTION: For ad to be an offer à terms must be clear, definit, explicit, and leave nothing for further communication

d. Terminating/Destroying an Offer

i. Rejection (termination by offeree)

1. Direct rejection – simply says no, does not accept the proposed offer

2. Indirect rejection – makes a counter-offer = previous offer was rejected (forfeits power to accept it) and new offer has been made

ii. Revocation (termination by offeror)

1. Direct revocation – offeror simply takes offer of the table before offeree accepts

a. Restatement § 42 – DIRECT REVOCATION

i. Offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract

2. Indirect revocation – 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 acquires reliable information to that effect

a. Restatement § 43 – INDIRECT REVOCATION

i. 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 requires reliable information to that effect

3. Dickinson v. Dodds

a. Rule: Offeror has power to amend or revoke an offer up until the point at which the offeree accepts it and it becomes a binding contract

iii. Lapse à occurs when an unreasonable amount of time goes by between the time the offer is made and the potential acceptance by the offeree (up to court to make this determination)

1. Restatement § 41 – LAPSE

a. Offeree’s power of acceptance is terminated at the time specified in the offer, or if no time is specified, at the end of a reasonable time

b. “Reasonable time” is a question of fact that depends on all the circumstances existing when the offer and attempted acceptance are made

2. Minnesota Linseed Oil Co. v. Collier White Lead Co.

a. Rule: Offeree must accept an offer in a timely manner that does not offer them an unfair advantage over the offeror, and a failure to do so results in a termination of the contract by lapse

b. Mailbox rule – Contract is formed when offeree transmits (mails) an acceptance IF they have not yet received a revocation from the offeror

3. Adams v. Lindsell

a. Rule: No lapse if offeror’s own negligence prevents offeree from responding in due time and they would have otherwise met the terms of the offer à offeror is still responsible for upholding K

e. Accepting the Offer (PART 2 OF MUTUAL ASSENT)

i. Restatement § 50 – ACCEPTANCE (GENERALLY)

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 requ

AL TERM IS NOT MATERIAL

b. Gresser v. Hotzler

i. General Rule: any proposed change to the contract is construed as an imperfect acceptance – thus a rejection

1. Exception – MIR exception – changes do not alter terms

2. Restatement § 60 – ACCEPTANCE NOT IN COMPLIANCE WITH OFFER’S SPECIFICATIONS FOR ACCEPTANCE = NOT A VALID ACCEPTANCE

a. If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded.

3. Restatement § 61 – ACCEPTANCE REQUESTING CHANGE/ADDITION

a. An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms

4. UCC § 2-207 (UCC EXCEPTION TO THE MIRROR IMAGE RULE) à except for contract between two merchants, if offeree accepts, but with additional terms, the acceptance is still considered valid and the additional terms are to be viewed as proposals for addition to the contract (offeror is not bound by them because they are mere proposals, but rather able to either accept or reject them)

a. If between two merchants, the additional terms become part of the contract unless:

i. The initial offer expressly limits the acceptance to the original terms

ii. The additional terms materially alter the contract (Rule = material if would have changed the other party’s mind about whether or not to enter into the agreement)

iii. Notification of objection to the new terms has already been given or is given within a reasonable time after notice of them is received. (Still have K àterm go away)

b. Klocek v. Gateway, Inc. – SHRINK WRAP LICENSE RULE

i. Rule: Under UCC § 2-207 – seller must prove sufficient evidence of notice and assent to the terms at the time of purchase in order for shrink-wrap license to be binding (must prove that customer understand the terms of sale)

c. Hill v. Gateway 2000, Inc. – WEIRD SHRINK WRAP RULE

i. ***IN 7TH CIRCUIT, VENDOR IS THE OFFEROR AND CUSTOMER IS THE OFFEREE (OPPOSITE IN EVERY OTHER JURISDICTION)***

ii. Rule: In order for arbitration clause to be valid, purchaser need not receive notice of the clause apart from the terms and conditions of sale included in the box (Customer responsible for knowing what terms of sale/contract are by reading the agreement provided)

f. Deficient Agreements (Insufficient, Inadequate, and Postponed Terms)

i. Misunderstandings – parties have different understanding of the same material term – results in conclusion that there was no meeting of the minds

1. Restatement § 20(1) – MATERIAL MISUNDERSTANDING = NO K

a. If the misunderstanding concerns a material term and neither party knows or has reason to know of the misunderstanding, there is no contract. Parol evidence is admissible to determine the meanings of terms when a latent ambiguity arises later.