Contracts
(Leo Katz)
MUTUAL ASSENT
I. Reaching an Agreement
A. The Objective Theory of Assent
2 elements to forming a contract:
1) mutual asset of the parties; 2) some showing that this assent is the kind that the law will enforce…
Mutual assent: can be “subjective” and “objective” (commonly objective used, but within objective, there’s also subjective element too)
Existence of mutual assent by: 1. making of offers; 2. acceptances
Rule 1: If mutual assent, then that subjective value trumps objective view (RSC 201)
Rule 2: interpreted as one party that didn’t know and had no reason to know any other meaning, if the other party knew or had reason to know the meaning of the other RSC (201) à if not, no mutual assent à neither is bound
Cases:
Embry v, Har. Dry Goods & Lucy v. Zehmer: (RSC 17, 18, 19)
– Rule: outward expression counts, not secret intent counts inconsistent with acts/words. (objective standard) … Constructive assent or actual assent of promisor must’ve exist
– Rationale: don’t want to give room for manipulation, etc.
– Rationale2: P relied on promise and made other arrangements
– Held: no meeting of minds but contract formed
– BUT: if there was mutual assent, and 3rd party (objectively) would’ve thought otherwise, the intent of the parties prevails and is enforced. (RSC 201)
– tort liability standard, with contract damage measure usually has harsher consequences
No meeting of minds takes cares of the sinister motives hypo cases
Rules:
Restatement (Second) of Contracts
§17. (Requirement of a Bargain)
(contract requires “a bargain” and “a consideration” which could be either by promise or performance, except where special rules apply)
§18. (Manifestation of Mutual Assent)
§19. (Conduct as Manifestation of Assent)
(promise may be expressed “in act” that is w/o words. (commencement of performance may by itself constitute a return promise sufficient for bilateral contract))
§3. (Agreement Defined; Bargain Defined)
B. What is an Offer
RSC 24: offer is the display willingness to enter into bargain, so that other person would understand it as agreeing to the invited bargain would conclude it.
Rule: can revoke offer any time prior to acceptance (exception: promissory estoppel (RSC 90))
1. Preliminary Negotiations
Cases:
Nebrask Seed Co. v. Harsh: (RSC 24) + Leonard v. Pepsico:
– Rule: Advertisements/solicitations not legal offer, just an invitation to deal (Customer ß usually the “offeror”) (RSC 26)
– Exception: when invite particular performance or intentionally misleading (ß may be punishable or enjoinable)
– Held: The mere statement of the price at which property is held cannot be understood as an offer to sell
Rules:
Restatement (Sec(ond) of Contracts
§22. (Mode of Assent: Offer and Acceptance); §24. (Offer Denied); §26. (Preliminary Negotiations)
§29. (To Whom an Offer is Addressed); §33. (Certainty)
Sales Contract: The Uniform Commercial Code
§2-204. (Formation in General)
§2-206. (Offer and Acceptance in Formation of Contract)
(when sales of goods concerned: offer, usually a purchase order, can be accepted by any reasonable “medium”, e.g., commencement of performance)
§2-305. (Open Price Term); §2-308. (Absence of Specified Place for Delivery)
§2-309. (Absence of Specific Time Provisions; Notice of Termination)
§2-310. (Open Time for Payment or Running of Credit; Authority to Ship Under Reservation)
2. Revoking an Offer
Cases:
Dickison v. Dodds: (offer on fri morning revoked; sold to someone else) (similar to Petterson)
– Rule: Courts disfavor enforcing one sided offers to be valid (usually no irrevocable offers, unless offeror received premium or something in return ß “consideration”)
à Generally, open offers are revocable before acceptance by offeree.
Held: No formal revoke needed, if party learns on own à still revoked. (RSC 43)
– Concur: two minds must be in agreement at some one time (at time of acceptance); can’t accept offer after knowing that the offer doesn’t exist
– 2 possible interpretations: 1. UCC 2-205: firm offer can be made in writing: irrevocable offer (even w/o consideration) until specified time; 2. revocable with notice, subject to deadline (RSC 42) (crt chose 2)
Rules:
Restatement (Second) of Contracts
§17. (Requirement of a Bargain); §18. (Manifestation of Mutual Assent)
§22. (Mode of Assent: Offer and Acceptance)
§24. (Offer Defined); §25. (Option Contracts)
§35. (The Offeree’s Power of Acceptance)
§36. (Methods of Termination of the Power of Acceptance)
§37. (Termination of Power of Acceptance Under Option Contract)
§42. (Revocation by Communication From Offeror Received by Offeree)
§43. (Indirect Communication of Revocation)
Sales Contract: The Uniform Commercial Code
§2-205. (Firm Offers)
C. What is an Acceptance
Offer can be revoked until it is accepted (unless it’s an option)
1. Acceptance that varies the terms—The Mirror Image Rule
Mirror Image Doctrine: acceptance must mirror the offer to be considered valid/enforceable (RSC59)
General Rule: if the “acceptance” has added or different conditions, it’s construed as legal rejection of the offer and viewed as a counter offer à does not bind the offeror (RSC 59, 39)
RSC 39: Counteroffer is considered a legal rejection of original offer, unless offeree “manifests a contrary intent” (i.e., if “inquire” of possibility of different terms)
if mere inquiry: a) seller cannot bind buyer by simply saying yes; b) buyer’s power to accept original offer is not terminated; (counteroffer is opposite for both cases)
RSC 59 (MID) v. RSC 61 (acceptance, but requesting change of terms)
if performance, thus indicating existence of contract (can’t use MID); but what if both seem to assent to diff terms?
Cases:
Ardent v. Horan: (P “accepted” with conditions) (look at Step-Saver case as well)
– Rule: need absolute acceptance; Qualified acceptance (acceptance w/ conditions) is not a valid contract (it’s considered a counter offer à legal rejection of original offer) (RSC 59)
– Note: UCC adopted acceptance w/ condition is valid acceptance w/ the conditions part of new contract… how is that possible? UCC qualifies it by other side being able to reject it… but the burden is on the other side to reject it
– Seller is using this pretext to get out (loop hole); but buyer is also using a pretext by making it unclear; mirror image rule generate a desirable outcome here? Yes w/ arg’s.
Rules:
Restatement (Second) of Contracts (Also see UCC 2-207: Stepsaver)
§59 (acceptance effective only if it is the mirror image of the offer and expresses unconditional assent to all of the terms and conditions imposed by the offeror)
§61. (Acceptance which Requests Change of Terms)
2. Acceptance by Performance
“unilateral” contracts: RSC §30 permits offerors to specify that acceptance may take form of “performing or refraining from performing a specified act.”; if not specified, offeree can accept in any matter reasonable in the circumstances.
Statute of Frauds: prevents certain types of contracts unless evidenced by “written memorandum” UCC 2-201 similar restriction to like of “goods” for a price of $500 or more… not that oral is illegal, but might not be enforceable
RSC 62: performance by offeree is regarded as promise à legally bound at commencement of performance (when offeror asked for acceptance as either promise or pef.)
Unilateral v. Bilateral Contract:
Bilateral: bound when both commit the action/promise; (offeror asks for promise or rendering of performance)
Unilateral contracts: offeror asks acceptance by performance (usually not enforceable until performance starts)
When is it bound? 1. when you start performance, offeror is locked while the offeree could stop whenever he choose (option contract); 2. binding (if offeree relied on it (w/ good reason) à enforce to ext. to no injustice; RSC 87)
Cases:
Petterson v. Pattberg: (RSC 45, 62) (mortgage by certain date; unilateral offer)
– RSC 45: if offeree is given an option contract (invites performance rather than promise); prevents offeror from revoking once commencement of performance, but does not bind offeree to complete performance
– RSC 62: if offer invites offeree to choose between acceptance by performance and by promise, then commencement of performance acts as a promise to render complete performance.
– Option contract: promisor binds himself, but the other doesn’t
– possibilities: 1. (when promise and performance both accepted) commence performance à committed (RSC 62); 2. perform à other side committed, but you’re not (ß option contract) (RSC 45)
– General Rule: If offeror revokes before offeree accepts, offer terminated; (RSC 42)
sufficient for person to have knowledge that seller did something inconsistent with the offer to make it void (even w/o formal notice) (RSC 43)
– Dissent: if promisor’s actions caused the failure of performance, then can’t take advantage of his own actions to cause the failure.
Leonard v. Pepsico: (RSC30; unilateral contracts)
– Rule: court must not consider D’s subjective intent in making the commercial, or P’s subjective view of what the commercial offered, but what an objective, reasonable person would have understood the commercial to convey.
– Note: Difficult to use standard from another part of law (tort’s “reasonable man” standard) in contracts case; reliance damage would’ve been modest; the only way to say there was no contract, was to use other standards because contract law seem to go the other way
– General rule (RSC): advertisement is not an offer; RSC §26 (preliminary negotiations): presumption of advertisements/catalogs/etc as not an offer (if reason “offeror” not intending to conclude bargain by other’s acceptance), unless exceptional cases; invitation to bargain, not an offer; recipient has no power of acceptance
Rules:
Restatement (Second) of Contracts
§30. (Form of Acceptance Invited)
§32. (Invitation of Promise or Performance)
When doubt in what type of acceptance wanted, offeree can accept either by promise or by rendering performance.
§§ 42 & 43; §45. (Option Contract Created by Part Performance or Tender)
§87. (Option Contract) (a) binding if in writing; (b) if offeree relies (with good reason, before formal acceptance) à binding to the extent to prevent injustice.
§62. (Effect of Performance by Offeree where Offer Invites either Performance or Promise)
3. Acceptance by Silence
Cases:
Hobbs v. Massosoit Whip Co. (item shipped à No reply by D) Held: for P, counted as an acceptance
– General Rule: Usually, no burden on D to return item (unless offeree took benefits or intends to accept or from previous dealings indicate that silence = acceptance) (RSC 69)
– Rationale: in this case, P had reason to believe that he will accept from previous dealings with each other.
– Problem: when silent regarding acceptance, yet actions indicate acceptance.
Rules:
Restatement (Second) of Contracts
§69. (Acceptance by Silence or Exercise of Dominion)
III. Interpretation (Discerning the Agreement)
1. Interpreting meaning of words;
2. gap-filling not explicitly handled by terms;
3. identifying which term is adopted
A. Interpreting the Meaning of the Terms
American law adopted objective theory of assent; interpreting same objective theory but with subjective twist
Courts may supply terms omitted (missing elements) by resorting to trade usage or any prior course of dealings btwn the parties. (UCC 2-202)
Cases:
Raffles v. Wichelhause (RSC 201; ambiguous terms; 2 different boats named Peerless) (See page 1 for more on RSC 201)
– Rule: Clearly ambiguous à no meeting of the minds à not binding/enforceable contract
– AGAINST: immaterial what ship, not true condition of contract à should be binding.
Frigaliment Importing v. BNS Int’l Sales Corp. (vague term; meaning of “chicken”) (RSC 201)
– Held: “trade usage” still could have two meanings à P didn’t sustain burden of persuasion
– Rationale: P buyer had reason to know ambiguous meaning, but didn’t clarify (RSC 201)
– Argumen
but treated as “proposals” for addition to the contract. For merchants, those proposals are adopted unless a) the offer expressly limits acceptance to its own terms; b) the additional terms “materially alter” the contract; or c) additional terms are objected to by the offeror
(3) when the writing is not sufficient for contract but both know that there is one à the contract shall consist of those terms on which parties’ writings do agree plus supplemental terms supplied by the UCC
(Rationale: impart controlling status to the form submitted by the buyer/offeror)
§2-316. (Exclusion or Modification of Warranties) (implied warranties)
E. The Parol Evidence Rule
Parole Evidence Rule: (RSC 213): not allowing extrinsic evidence that is inconsistent with the existing written contract to be presented to trier of fact, if written agreement is completely integrated.
Rationale: danger of fraud. Don’t want tentative negotiations included as evidence, etc.
Exceptions (RSC 214): Admits evidence of oral agreements made prior to written contract only if: 1) such oral agreement is capable of being expressed in a separate agreement and does not contradict the terms of the written contract; and 2) the written contract fails to fully integrate and embody the parties’ understanding; e.g., Cases where oral agreements add to obligations … i.e., à If contract completely integrated then no evidence… but if question of whether contract IS completely integrated, and depends on prior oral agreement à admissible
(UCC 2-202): Parole evidence rule shall not be applied to exclude evidence of “usage of trade” or prior “course of dealing” if both may be drawn upon to “explain or supplement” the written contract (Rationale: since they would most likely help courts determine the true intent of the parties when contracting.) (à consider those things before applying the parole evidence rule)
* Apply: 1st: Trade usage? Prior dealing? if yes à allow; If no à completely integrated contract? If yes à no evidence admissible; if no à allow evidence to clarify, but still can’t contradict original written contract…
Cases:
Thompson v. Libbey (Four Corner Rule)
– Held: erred in allowing parole evidence
– Four Corner Rule: do not allow evidence to clarify/interpret the agreement/contract, if it was fully integrated on the face of the contract (only few states use this)
Brown v. Oliver (RSC 214): need to establish contract not fully integrated? Not complete, etc.? à allow evidence)
– Held: (RSC 214): when not integrated contract or when ambiguous, can use extrinsic evidence of interaction during the bargaining process (this is prior to parole evid. question ß RSC 209); (diff view from Thompson)
– Rationale: don’t know what the contract is meant to cover, until you know more about it, especially when nothing in the contract that makes mention of it (no intention)
– indemnity clause meant to cover 3rd party? Ambiguous
Pacific Gas v. GW Thomas Drayage (possibility of different interpretations à allow extrinsic evidence) (RSC 214)
– General Rule: try to interpret the meaning intended by the parties à rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties
– Rule: If contract susceptible to two diff interpretations, extrinsic evidence relevant to prove such meaning admissible (before deciding if the parole evidence rule applies)
* Trident Center v. CN GL Insurance (goes with Pacific rule, but suggests otherwise)
– Notes that: pacific standard made it easier to bring in evidence
– Suggested Rule: (Traditional mix): when document is compelling as an integrated contact (i.e., merger clause, etc.) à no extrinsic evidence; * Rationale: (if more evidence is allowed, seems like it would be better or at the very least have the same outcome), BUT: suggested rule promotes more accuracy because it 1. discourages producing frivolous evidence and 2. lead to less litigation (thus, cheaper and economically efficient); and 3. less burden on courts. (again econ eff.); Against: in some (rare) cases might not produce the most accurate result … BUT cost >> benefits
Rules:
Restatement (Second) of Contracts
§209. (Integrated Agreements): prelim quest before deciding if parol evid rule applies
(2): need to determine the question of integration prior to the question of interpreting or applying parole evidence rule;
(3): if reasonably appears to be complete agreement, taken to be integrated agreement unless other evidence establishes otherwise.
§210. (Completely and Partially Integrated Agreements) (distinction btwn the two)
§213. (Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule))
(completely integrated written agreement discharges any prior agreement that falls w/in its scope
