Contracts, Fall 2012
Professor Mark Drumbl
The Offer
1. Objective Theory of Assent (Formation of K requires 1. mutual assent, 2. Showing that assent is the kind the law will enforce)
A. Rest. 17, 18, 19, CISG 8
B. Definition: Whether parties have reached mutual assent is determined by examination of objective, external manifestation of intent
i. Test: what a reasonable person in the position of the other party would conclude that the other party’s objective manifestations of intent meant
1. The assent must be the kind the law will enforce (no coercion, fraud, etc.)
2. To determine whether offer has been made, look to:
a. Generality/Specificity
b. Details
3. The law enforces apparent, not actual assent
a. Exception to exclusion of subjective intent:
i. If manifestation is posted in a public venue (e.g. SEC filing), such manifestation may be used as outward evidence of inward, subjective intent – see Texaco v. Pennzoil
ii. Objective Intent Standard
1. Embry v. Hargadine, McKittrick Dry Goods Co.: Employer’s firing breached contract where employee notified employer he would seek work elsewhere unless contract renewed, and employer said: “Go ahead, you’re all right. Get your men out and don’t let that worry you.” Court found a reasonable person in the employee’s position could conclude that his employment contract had been extended, despite testimony by employer that that was not his intent.
C. Secret Intent:
i. Secret intentions are irrelevant when determining whether a contract exists
1. Texaco v. Pennzoil: Secret meeting between Texaco and Getty Oil not relevant when determining whether contract had been formed between Pennzoil and Getty b/c no outwardly manifest intent.
D. Contract Made in Jest:
i. If one party makes an offer in jest and the other party reasonably believes that the offer is serious and accepts it, the contract is binding.
1. Lucy v. Zehmer: Contract for sale of land for $50,000, written on back of receipt, was valid despite D’s argument that he was drunk at the time, and offer was made in jest. There was no fraud, misrepresentation, or inequality between parties, and price was reasonable.
E. Requirement of Mutual Assent:
i. The offeror is the master of the offer, and may set terms upon which acceptance occurs (acceptance must be timely)
1. Newman v. Schiff: D promised $100,000 to anyone who called CBS’s “Nightwatch” and named any section of the tax code that said individuals were required to file a tax return. P saw only the rebroadcast of the show, but sent a letter to CBS naming the requested sections and claiming the $100,000. Court ruled there was no mutual assent b/c offer was not accepted under the original terms – i.e. during the show. The rebroadcast was not a renewal of the offer.
F. CISG Article 8:
i. Combined Objective/Subjective test: if one party knows or has reason to know of the other’s subjective intent not to contract, CISG less likely to find valid K
2. Preliminary Negotiations
A. Invitations to Trade ≠ Offers
i. Mere proposals to begin negotiations (statements of price at which goods are held) do not create a power of acceptance
1. Nebraska Seed Co. v. Harsh: No offer where D sent letter offering seed and indicating price at which he was willing to sell, and P responded with “acceptance” requesting immediate delivery.
B. Advertisements ≠ Offers
i. For ad to constitute offer, must show language of commitment, or invitation to take action w/o further communication
ii. Ads not enforceable as offers when a reasonable person would perceive it only as an invitation to negotiate
1. Leonard v. Pepsico: Ad “offering” Harrier Jet for Pepsi points clearly made in jest, no power of acceptance
iii. Exception: if ad leaves nothing open for negotiation, and is clear, direct and explicit, may constitute an offer
1. “First come, first served” sale for 10 customers, naming price, time and location
3. Written Memorial and Revocation
A. Restatement 22: May still have manifestation of mutual assent even if offer/acceptance can’t be identified and moment of formation undetermined
B. Restatement 26: If the offeree knows that the offeror does not intend to be bound until after further manifestation of intent, there is no offer
C. Restatement 27: Manifestations of mutual assent may be enough by themselves to conclude contract even if parties intend to draft written memorial.
i. Exception if circumstances show parties were only in preliminary negotiations
1. Empro v. Ball-Co: Mutual “letters of intent” exchanged by companies contemplating Empro’s purchase of Ball-Co did not establish contract. Mutual letters of intent not binding where integral terms are left undecided. Courts look to:
a. Express reservations
b. Partial performance
c. Agreement to essential terms
d. Magnitude/complexity of the contemplated agreement
2. Texaco v. Pennzoil: Texaco argued agreement btw Pennzoil/Getty was only a preliminary negotiation. Court disagreed:
a. Press release worded in indicative, not hypothetical terms
b. Pennzoil partially performed by freeing up cash reserves
c. Jury concluded essential terms agreed upon
d. Complexity would usually dictate formal writing, but not dispositive here (test is illustrative, not conjunctive or disjunctive)
D. Restatement 36: 4 Methods of termination of power of acceptance
i. Revocation (offeror takes definite action inconsistent with intent to be bound – direct or indirect)
ii. Death
iii. Lapse of Time
iv. Counter-Offer (Purported acceptance adds new terms – changes original offeror into offeree)
1. Dickinson v. Dodds: Promise to hold open an offer for sale of land not binding where the offeree did not accept until after learning offeror had sold land to third party. Power of acceptance was terminated by revocation when the offeree received notice of sale to third party. Dodds’ offer was nudum pactum-made w/o consideration.
E. CISG Art 16/UNIDROIT 2.1.4 (identical):
i. Offer may be revoked prior to acceptance, except if:
1. Offer indicates fixed time of acceptance
2. Offeree acted in reasonable reliance on the offer
F. Option Contracts:
i. Restatement 37: Under option contract, power of acceptance not terminated by rejection, counter-offer, revocation or death. Option contracts valid only if offeree supplies additional consideration.
ii. U.C.C. 2-205: option contracts do not require additional consideration to be binding if offeror is a merchant. (must be in writing)
Acceptance
1. Acceptance by Promise
A. Mirror Image Rule (no longer as important):
i. Acceptance must be the “mirror image” of the offer
ii. If purported acceptance materially differs from the offer, it is a counter-offer which creates a new power of acceptance in the original offeror
database resulted in receiving notice of terms (only after download complete), clicking “I agree” icon was not a required element of contract formation. Where a benefit is offered subject to stated conditions, and D takes benefit with knowledge of the terms, the taking constitutes a binding acceptance. Court validated Verio’s acceptance by silence (never rejected P’s terms) Uses apple-stand example.
1. Ruling problematic b/c relies on Verio’s subjective vs. objective knowledge of the terms of contract prior to agreement. Court’s reasoning is one step removed from claiming subjective knowledge of terms may be used to invalidate K
Consideration
1. Consideration Generally:
a. Something sought by promisor in exchange for a promise and given by promisee in exchange for the promise (Value bargained for and exchanged)
b. Restatement 71: Types of Consideration:
i. Return promise
ii. Performance
iii. Forbearance
iv. Creation, modification, or destruction of legal relationship
c. Restatement 79: Courts do not assess adequacy of consideration, only existence
i. Exception: Nominal Consideration
1. Sham Contracts ($5 for a house)
2. Gift disguised as a contract
2. Consideration by Forbearance
a. Waiver of a legal right may serve as adequate consideration for a promise
i. Hamer v. Sidway: Nephew could recover from estate where nephew’s forbearance from alcohol, gambling, etc. was a willful restriction on his lawful freedom of action and thus provided valid consideration for the uncle’s promise to pay $5k for nephew’s restraint. Valid consideration even though nephew arguably benefitted from forbearance.
b. A promise that is a gift or “mere gratuity” cannot create a binding contract
i. Kirksey v. Kirksey: The loss and inconvenience that “Sister Antillico” sustained in moving her family to live with brother-in-law was not sufficient consideration to support the promise to provide a house and land on which to farm and raise a family.
c. The requirement of consideration may be met by rendering a performance
i. Dahl v. HEM Pharmaceuticals: Patients’ submission to double blind testing in drug experiment was valid consideration (forcing company to provide free supply of experimental drug for 1 year) despite fact that P’s could withdraw at any time.
d. Good faith forbearance to litigate a claim that later proves to be invalid may be sufficient consideration to uphold a contract.
i. Dyer v. National By-Products: Worker’s agreement (after loosing foot in job-related accident) not to litigate in return for continued employment was sufficient consideration despite lack of valid claim. Evidence of invalidity of claim was relevant, however, to show lack of honest belief in existence of claim allegedly forborne.
