Contracts Outline
McWilliams
Fall 2013
1. Overview; Offer & Acceptance
a. Definition
i. Contract: A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Restatement §1.
ii. Promise: A manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. Restatement § 2(1).
2. Sources of Contract Law
a. Governed by two sources: state common law and state statutes.
i. Common Law: Services and Real Property
1. Contracts for services or real property
2. The Restatement
ii. Statute: Goods
1. Contracts for the sale/purchase of goods are governed by each state’s adaptation of the Uniform Commercial Code (“UCC”).
3. Theories of Contract Law
a. Classical Approach – Williston [Restatement (First) of Contracts]
i. Less sympathetic: looks at contracts and party conduct objectively.
ii. “Four Corners” Approach: only look at the words of the text.
iii. Applies hard, fast rules without regard to social justice.
b. Modern Approach – Corbin [Restatement (Second) of Contracts]
i. More sympathetic: subjectivity sometimes considered.
ii. More attentive to needs of the commercial marketplace
iii. Responsive to issues of social justice
iv. Includes fairness doctrines (equitable doctrines) and considers social norm policies.
c. Today contract law adheres to the objective theory of contracts: Courts determine what a reasonable person would objectively think, regardless of a party’s personal, subjective thoughts or intentions.
The Basis of Contractual Obligations:
Mutual Assent and Consideration.
1. Formation of a Contract – Mutual Assent
a. Requirement of a bargain: The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. Restatement § 17.
b. Mode of Assent:
i. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties.
ii. A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined. Restatement § 22.
iii. Takeaway: the manifestation of mutual assent to an exchange is typically an offer and acceptance. It may be written, oral, or implied (by conduct).
2. Intention to be Bound: The Objective Theory of Contract
a. Ray v. Eurice Brothers
i. Facts: Eurice Bros. signed a contract that they would build a house according to certain specifications. They claimed to have been mistaken as to the specifications later on and refused to build the house.
ii. Issue: Does a unilateral mistake make a bilateral contract void?
iii. Holding: No, a unilateral mistake does not make a bilateral contract unenforceable.
iv. Rule:
1. Court applies plain meaning rule:
a. Words are given the ordinary meaning assigned to them as understood by a reasonable person.
b. Despite the individual intent of a party, a reasonable person’s interpretation of the words is binding.
2. Important Take-Away:
a. An intention to be bound is required, not an intention to be bound by the contents of the agreement.
b. This is a fundamental point of the “Objective Theory of Contract”
v. Notes:
1. A unilateral mistake typically will not void a contract. A mutual mistake is more likely to make a contract unenforceable.
2. Remember: an official bid is considered an offer; an estimate is considered a request for an offer.
3. Offer and Acceptance in Bilateral Contracts
a. Offer
i. Defined:
1. Restatement § 24: 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.
2. Casebook, at p. 34: A direct, complete proposal that a contract be entered into, providing for an exchange of defined performances.
3. The UCC DOES NOT define offer.
ii. The offeror is the “master of the offer”
1. The offeror can prescribe the method of acceptance: if the offeree fails to accept the offer in a manner set out by the offeror, there is no binding agreement.
2. The moment the offeree accepts, the offeror loses the power of revocation, and private, enforceable law is created.
b. Acceptance
i. Defined: Restatement §50(1): An acceptance of an offer is a manifestion of assent (evidences itself) to the terms thereof made by the offeree in a manner invited or required by the offer.
ii. Modes of Acceptance
1. Acceptance by performance: requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.—Unilateral
2. Acceptance by a promise: requires that the offeree complete every act essential to the making of the promise.
iii. Lonergan v. Scolnick
1. Facts: ∆ wanted to sell land. Parties correspond and the ∆ says that the π must hurry b/c there are other potential buyers. Π gives money to an escrow agent, but ∆ sells to someone else.
2. Issue: Did the ∆ make an offer?
3. Holding: No, b/c π knew that ∆ needed to make some further expression of assent. The parties’ correspondence was merely preliminary negotiations.
4. Rule: Preliminary negotiations do not constitute valid offers.
5. Notes:
a. Mailbox Rule:
i. Acceptances are effective when sent.
ii. Offers and revocations are effective when received.
b. Specific Performance as a remedy:
i. Equitable Remedy, you get what was supposed to be done.
ii. Rarely granted (except in property cases): normally only granted when $ is not an adequate remedy.
c. Powers Created by an Offer
i. An offer creates the following powers in the offeree:
1. Power of acceptance: If an offeree manifests acceptance in a legally effective way, a contract is created.
2. Power of Rejection
3. Counter-offer: Rejects offer & puts new 1 on table
ii. An offer creates the power of revocation in the offeror.
d. Izado v. Machado (Gus) Ford, Inc.
i. Facts: ∆ placed a misleading ad to make the π think that he could trade in a beat-up car for $3000 and get a deal on a new car. This was clarified in the fine print.
ii. Issue: Did the misleading ad constitute an offer?
iii. Holding: Despite ∆’s intent, misleading ad constituted an offer, but this is not usually the case. Here, the court held the ad was an offer because a reasonable person would interpret it as one. The court wanted to hold ∆ liable for ∆’s “bad faith”.
iv. Rulding: 1. Ads typically are not considered offers b/c they aren’t sufficiently direct. 2. Usually, ads are considered solicitations for offers (like in Lonergan).
e. Normile v. Miller
i. Facts: ∆ is selling real estate. π makes an offer to ∆ with a specified time for acceptance by “August 5 at 5:00.” ∆ makes changes and sends it back. ∆ subsequently sells property to 3rd party. π is told by a reliable third party about the selling, but tries to accept anyway.
ii. Issue: Did the π have the power to accept the offer?
iii. Holding and Ruling:
1. No, the π did not have the power to accept the offer b/c the ∆’s changes to the offer constituted a counter offer.
a. When an offeree makes a “qualified acceptance” or a “conditioned acceptance,” it acts as a counter offer. NEW OFFER
b. In effect, a counter offer rejects the original offer, and substitutes a new offer.
2. If an offeree receives reliable communication of revocation (or in this case, reliable communication of the offeror acting inconsistently w/ the offer), the offeree’s power of acceptance is lost.
f. Methods to Terminate the Power of Acceptance
i. Rejection of Offer (offeree)
ii. Counter Offer (offeree)
iii. Revocation (offeror)
iv. Lapse of Time
v. Death or Incapacity of Either Party
g. Option Contracts
i. 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. Restatement § 25.
ii. Function:
1. A “mini contract” that holds an offer open for a specified amount of time. (Limits offeror’s power of revocation).
2. “Mini Contract”: the option contract must be contracted for, just like any other contract (requires all of the components, including consideration)
Unilateral Contracts
1.
deration is the most important quality a private undertaking must have to merit enforcement by public institutions.
1. Types of Consideration:
a. Benefit-Detriment Test—Hamer v. Sidway
i. Facts: Uncle promised nephew money to refrain from certain vices (using tobacco, swearing and gambling). Nephew refrained from those vices. Uncle dies before paying; executor refuses to pay.
ii. Rule: Benefit Detriment Test: Consideration may consist of either, some right, interest, profit or benefit accruing to the promisor, OR some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the promisee.
iii. Analysis: B/c nephew Story had a legal right to perform the vices, his forbearance of that right in exchange for $5,000 was a detriment.
iv. Takeaways: B-D Test
1. Benefit to the promisor, or
2. Detriment to the promisee.
3. Both are not necessary.
b. Bargained-For Exchange
i. Restatement § 71: to constitute consideration, a performance or a return promise must be bargained for.
ii. Restatement § 72: A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
iii. Restatement § 79: If the requirement of consideration is met, there is no additional requirement of (a) a…benefit to the promisor or a…detriment to the promisee.
iv. Reciprocal Inducement—Pennsy Supply, Inc. v. American Ash Recycling Corp of Pa.
1. Facts: π was paving driveway for school. ∆ supplied a certain waste material as an aggregate for free. ∆ gave aggregate for free to avoid disposal costs. Paving starts to crack and π has to fix it and dispose of the aggregate. π sues ∆ to recover cost.
2. Rule: “the promise must induce the detriment and the detriment must induce the promise.” (p. 80)
3. Notes:
a. Consideration is a matter of law decided by judges; not a matter of fact.
b. The “Tramp” Example: consideration v. conditioned gift
i. Setup
1. A philanthropist promises a homeless person “if you go around the corner to the clothing shop there, you may purchase an overcoat on my credit.”
2. In order to obtain the coat, the person must walk around the corner.
ii. However, under all three tests of consideration, this probably does not constitute consideration
1. The promise of the coat is not made b/c the philanthropist wants the tramp to walk around the corner.
2. This is known as a condition to a gift: walking around the corner is necessary before the promise can be received.
v. Negotiation—Baehr v. Pen-o-Tex Oil Corp.
1. Rule: Consideration consists of deliberation. Analysis turns on whether promises/performances are bargained for (negotiated).
c. NOTE: Newman & Snell’s Bank v. Hunter
i. Usually difference in consideration used is not outcome determineless. (When result determines outcome): Newman & Snell’s is the classic exception to this rule.
ii. Facts: π bank sued ∆ widow to enforce ∆’s promise to pay ∆’s dead husband’s debt; in exchange, π gave ∆ the promissory note of her late husband. ∆ was only liable if she voluntarily obligated herself to pay the debt.
iii. Holding: The ∆ was not obligated b/c the note was worthless, and therefore, the bargain lacked consideration.
iv. Analysis: B/c the promissory note was a virtually valueless piece of paper,
1. The ∆ did not suffer a detriment by surrendering it, and
2. The π was not benefited by receiving it.
