CONTRACTS
ZACKS
FALL 2012
Reaching an Enforceable Agreement
Mutual Assent to a Promise
· Objective Theory (Meeting of the Minds required for formation RS 18 but don’t use any more)
o Manifestation of intent to be bound
§ What was the conduct?
· Words, silence, acts, omissions
· Was conduct intentionally engaged in? (RS 19)
· Did conduct constitute promise or performance?
§ How would a reasonable person interpret such conduct?
o Requires promisee to actually believe that such conduct manifested consent and to act on that consent (Subjective reasonable belief/action of the promisee)
o Misunderstanding – what would a reasonable offeree believe the offeror to mean? If there is foreseeable misunderstanding, offeror bound to it. (RS 20)
Embry v. McKittrick (264) – Reasonable Interpretation of Manifestation to be Bound
o Rules: A contract is not made on the secret intentions of the parties, but is dependent on their express words and actions at the time of its creation.
§ The Embry Test: If a reasonable man would believe that another man’s actions constituted consent to terms of a contract and then acted upon those actions, then the parties are bound by their express actions to the terms of the contract.
o Holding: McKittrick’s actions and words in his conversation with Embry constituted consent to a contract despite his intention not to renew Embry’s employment, as a reasonable man would take his comments to mean he should continue working.
Lucy v. Zehmer (270) – Reasonable Reliance
o Rules: Outward expressions and actions as determinate of intent to be bound, not interior thoughts or secret intentions
o Holding: Contract for sale of land is legally binding on Zehmer since at no point in the lengthy conversation with Lucy prior to drafting the contract did he indicate expressly that he was acting only in jest, so Lucy reasonably relied on his signature as consent
Offer
· What constitutes an offer? (RS 24)
o Manifestation of PRESENT willingness to enter into the bargain, so that the other party understands that his assent to the bargain is invited and will conclude it (made in such a way so a reasonable person could justify their acceptance will conclude it)
o Specific, reasonable terms (definiteness)
§ Invites or specifies a mode of acceptance, communicates commitment to make a deal
§ Certainty (RS 33) – Terms of the contract are reasonably certain (so assent is understood to be binding) and concrete – provide a basis for determining a breach and for giving an appropriate remedy
o Communication of the Offer (so that offeree would be justified in believing that the offer was made to him and that his acceptance was sought)
Preliminary Negotiations
o RS 26 – Reasonable to know that bargain is not concluded yet, and further manifestations of assent are needed
§ Bargain cannot be binding until parties have made overt manifestation of assent to the offer (revocation allowed up to this point)
o UCC 2-204 Formation in General – Even if one or more terms are left open a contract does not fail for indefiniteness if the parties have intended to make the contract and a remedy method is reasonably certain. (SALE OF GOODS)
§ 2-206 – Offer has to invite acceptance by a reasonable manner or by a prompt promise to ship or the prompt or current shipment of goods
Nebraska Seed Co. v. Harsh (279) – Was there an offer?
§ Holding: Telegram was not an offer because of vagueness and status as invitation rather than an agreement that could be binding on acceptance
· No definite terms on delivery, Seed Co. had to ask for more details – shows vagueness and need to continue negotiating
· Reasonable interpretation was a preliminary negotiation, subject to further “hammering out” of the details
Leonard v. Pepsico (282) – Advertisements
§ Ads are not offers since there is no language of commitment, merely an invitation to make a deal.
· Offers require plain and clear language of commitment,
· Certain of enforcement because language indicates binding agreement once accepted
§ Holding: No reasonable person could interpret the tongue-in-cheek commercial as a serious offer that would be binding upon acceptance as the commercial was merely an invitation to drink Pepsi and participate in the program.
Written Memorial Contemplated
o Letter of intent or intermediate writings made during negotiations are not final or binding unless a final agreement is reached and signed to (would signify final acceptance and complete bargain)
Empro v. Ballco (293) – Offer may have been made, but conditions imposed do not indicate an acceptance to that offer as negotiations are continuing
Unilateral offer – only accepted by performance
o One party makes clear in the offer that acceptance is through performance only. No matter how trustworthy the other is, a promise to perform does not constitute acceptance of a unilateral offer.
o You are a painter. I give you a paint strip with a color, and tell you that I will give you $2,000 if you paint my house this month. Two weeks later, you come to my house and begin to paint it. I see you. Can I revoke my offer at that time? No. This is a type of option contract, similar to if you had paid me to keep the offer open. Your reliance on my promise should be protected, and you must have a reasonable time to complete performance by finishing painting
Revocation
· RS 36c – Power of acceptance terminated by revocation of the offeror (offeror master of offer)
o RS 42 – Acceptance power terminated when offeror communicates the manifestation of intention not to enter into the contract
o RS 43 – Indirect communication (from reliable source – why is it a reliable source) of revocation is evidence when the offeror takes a definite (explain why its definite action or not) action that would be inconsistent with intent to enter into a contract with offeree (i.e., selling the land that offered to offeree)
Dickinson v. Dodds (263) – Performance and Communication
o Holding: Dickinson’s acceptance doesn’t form a contract because Dodds obviously revoked by selling the property – Dickinson was too late in accepting and could see that the offer was gone.
§ Acceptance must be made manifest to the offeror
§ Performance and communication from both parties is necessary to give notice to the offeror that the offer cannot be revoked
§ If offeree was not aware that the offeror had revoked – then there could be a breach. (No communication)
Option Contract
o RS 25 (p.307) – is a promise to which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
o RS 45 – Beginning performance as a method of acceptance ordinarily creates an option contract and makes the offer irrevocable unless acceptance by completing performance does not occur w/in a reasonable time
· “Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance of tenders a beginning of it.”
· But if performance is stopped – the option is no longer exercised and there is no contract
· Can’t revoke halfway through performance because contract is complete when performance is complete. Once performance is started power to revoke is gone.
Acceptance (before you can have acceptance you need to know if you can accept. Like if it was terminated or had lapsed or whatever)
What constitutes acceptance?
o RS 50 – Three requirements:
§ Manifestation of assent (commitment, not conditional, no variation)
§ Acceptance made in manner invited or required by the offer
§ Acceptance made while offer still “on the table” and not revoked
o Acceptance must be unequivocal (RS 61)
§ If adding more terms, limitations, or modifications, then acceptance isn’t valid (its conditional acceptance which ISNT acceptance) , merely “continuing the negotiations” if assent is now based on the modifications
Ardente v. Horan (310) – P’s letter of “acceptance” imposed additional conditions that needed to be addressed before contract could be considered binding, so is more a conditional acceptance
mon Law: Benefit – Detriment Theory (this test is used to indicate that inducement doesn’t exist. If no benefit/detriment to one side that indicates that you should look that their promise was not induced by the other promise. Because there is no inducement if there is no benefit/detriment usually.)
· If there is found to be a bargained for exchange then courts will not inquire into adequacy of consideration (if it was fair, good deal) exceptions: gross disparity in value. Gross disparity in value then courts will inquire if you were really induced to bargain. If not induced then not sufficient consideration.
Hamer v. Sidway (596)
§ Because the nephew gave up a legal right to do as he pleased (smoke, drink, curse, etc.), and performed exactly what the uncle induced him to do to receive the $5000, there was consideration and payment is due.
· But suffered no detriment as became a better person because of his restrictions – still sacrificed a right/freedom in an exchange for the payment
· Consideration viewed as a sacrifice or detriment meant to induce promise to be carried out (reciprocal inducement) or to exchange benefits/detriments for both parties (bargain theory)
Bargain Theory
§ Consideration as “exchanged for” promises – a type of bargain
§ The process of bargaining matters to determine enforceability
· RS 71(p.611) – bargained for exchange required for legally enforceable contract
· “Sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise”
· performance may consist of act other than promise, forbearance, creation, modification or destruction of legal right.
Dahl v. Hen Pharma (609)
§ Consideration? Yes – exchanged promises
· Agreed to experiments and detriment of subjecting to schedule of experiments, effects of experiments in exchange for the year supply (the degree of detriment they were willing to suffer shows how valuable they thought the others promise is)
· Pharmaceutical company agrees to provide year supply in exchange for the benefit of having test subjects and being able to carry out the experiments
Gratuitous Promises/Gifts – no promises truly exchanged, rather a conditional gift (when gratuitous promise consummated it is a gift – gifts can be enforced. But a promise for a gift is not.)
Johnson v. Otterbein University (594)
§ Holding: The school’s intent to establish a fund based on the donation is not consideration as not induced by Johnson’s note to donate upon death.
§ Donation will be given if set up memorial scholarship – conditional gift
Kirksey v. Kirksey (603) – She gave up her own land and moved because of his promise, but P did not exchange a reciprocal promise with D that would give him consideration to secure the land and let her live there for a long period of time?
· Gift that could be revoked – no consideration on D’s part, nothing from P to induce D to secure the land as hers
· May have suffered a detriment, but bargain is the decisive test. Her detriment/promise (moving) was made to induce his promise (to give her a house), but his promise was not made to offer her a place to live, not to induce her to move. So does not satisfy reciprocal inducement.
· Because its between family does that lend to the fact that there was less bargaining because related?
