The Bargaining ProcessPart I

Does the law of contracts need a ritual?

ProblemYou are responsible for ordering office supplies. The boss says

he needs 1000 sheets of stationery with his name on it. You go online to place an order with the usual supplier, and after selecting and designing the stationery you type “1000” in the “quantity” box, not noticing that the box is for quantity “in thousands.” You press the enter key just as you notice the price—not $100 as you expected, but $100,000.

You immediately pick up the phone to call the supplier, and as you are dialing you receive an email from the supplier stating:

Thank you for your order. Your order has been accepted and will be processed in the order received. Please expect at least 2 business days for preparation of your order, and 3 business days for delivery.

The supplier answers the phone, but when you try to cancel, he responds that you have a contract, and that the order is binding. Is he right?

Solving the Problem Of the Inconspicuous Zeroes

• Consideration by each side?• Is lack of reliance important?• An exchange of the sort

not expected to be binding?• To what terms did you intend

to be bound?

Careful!

Using what we already know:

Some Possible GoalsOf Rules of Contract Formation

• A party should be bound only if he intended.

• A party should know when he is bound and when the other party is bound.

• It should be possible to know the terms to which you will be bound.

• Would a ritual minimize disputes about intent?

Is a handshake a signal of intent to be bound?

Alternative PerspectivesFor Resolving Issues of Intent

• Subjective view: What was each party thinking when he appeared to make a contract?

• Objective view: How would disinterested observer interpret what he saw (the “fly on the wall”)?

Should we test a party’s honesty?

Or should we just ask the fly?

Restatement Section 20(1):If People Intend Differently

There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other (equally innocent); or (b) each party knows or each party has reason to know the meaning attached by the other (equally at fault).

Question: What if parties claim different meanings (e.g., “we are bound” v. “we are not yet bound”)?

Examples• Buyer denies it made contract. At trial, Buyer’s lawyer

asks Mr. Goofus, the clerk who placed the order, “Did you intend to order 1,000,000 sheets?” Seller’s lawyer exclaims “Objection! Relevance!”

• Buyer’s’s lawyer asks Boss, “What were your instructions to Mr. Goofus?” Seller’s lawyer exclaims “Objection! Relevance!”

• After each side has presented its case, the Seller says to judge: “Let the jury go home. There is no ‘issue of fact’ to decide because it is undisputed that the order was for 1 million.” Buyer responds: “I think we should let the jury decide what I really intended!”

Lucy v. Zehmer

Abbot & Costello Meet Lucy & Zehmer

Did Zehmer Intend to Make A Contract with Lucy?

• We hereby agree to sell to Lucy the Ferguson Farm complete for $50,000, title satisfactory to buyer.

• Breach: Zehmers renege: It was a “jest”, a “joke”, a “dare”, or a “bluff.”

• Result under objective theory? Subjective theory?

“Who’s on first?”

Facts Showing the Zehmers’ Lack Of Subjective Intent

• Zehmer’s testimony.

• “High as a Georgia Pine.”

• Setting (tavern).

• Mr. Z whispered to Mrs. Z, “it’s a joke.”

• Lucy didn’t have enough money to buy land.

• Nature of writing they signed (receipt).

Should we let a jury decide what he was thinking?

Facts Showing Zehmers’ Objective Intent

• Lucy’s testimony.• Zehmer offered to drive Lucy home.• They discussed contract for 40 min.• Lucy insisted both Zehmers sign,

and they did.• Writing contains essential terms.• It was a second draft.• Lucy took possession of the writing.• Lucy offered $5 to make the contract binding.• Zehmer didn’t object until a few days later.

Is this what a real estate contract looks like?

Problems• Price for the farm was $50, not $50,000?

• The Leonard v. Pepsico case, p. 124.

• Before Zehmers signed, Lucy whispered to a friend, “they think I’m bluffing.”

• Surgeon promised Patient, “Everything will turn out fine.” See also Hawkins v. McGee, p. 127, and reconsider Sullivan v. O’Connor.

• Promise of a “date,” or to love someone “to the end of time.”

“Gentlemen’s Agreements:”Politically Incorrect Contracts?

• Can parties intend agreement not enforceable by judicial process? What’s the point?

• Firm-commitment underwriting: with proviso: “no liability or obligation of any nature whatsoever is intended….”

• Promise of discretionary bonus. Gentlemen only?

Nonbinding Agreements?Other Possible Examples

• Agreement not to raise prices or wages.

• An agreement to beginemployment at will.

• Agreement to exclusivedating relationship.

• Neighbors’ agreement to use matching Christmas decorations.

The Godfather makes a “gentlemen’s agreement.”

Agreement Subject To Memorialization

Are they bound, if they’re waiting on the secretary to type the agreement?

Formal Writing Contemplated: Restatement Section 27

• “Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof.”

• “Circumstances may show that the agreements are preliminary negotiations.”

Formal Contract ContemplatedAgreeing Before We’ve Agreed?

• Complex contract requiring lengthy, costly negotiation.

• The need for sense of commitment before invest-ment in negotiation.

• Agreement in stages? Essential terms, then details?

• The “letter of intent.”“Have your attorney

call my attorney.”

Agreements to Agree:Are They Binding?

• The engagement analogy.

• Evidence parties intended to be bound?

• What if parties fail to agree about the details?

• The Getty, Pennzoil and Texaco story.

A “letter of intent?”

The Offer

Is he talking to you?

The Offer: Will We Know It When We See It?

• Offer: “A 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.” Section 24.

• Preliminary Negotiations: “A manifestation of willin-gness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” Section 26 Whose

perspective matters most?

Owen v. Tunison

Courting? Or Contracting?

p. 130

Offer to Be Bound? Or Preliminary Negotiation?

• Owen: “Will you sell me your store ... For the sum of $6,000?”

• Tunison: “[I]t would not be possible for me to sell it unless I was to receive $16,000.00 cash.”

• Owen: “Accept your offer for ... sixteen thousand cash send deed ... [to my agent].”

Whose perspective matters?

Owen v. Tunison: Reasons for Caution

• Is lack of reliance important?• A simple “yes” test.• Seller not actively marketing.• Willingness to discuss not

commitment to sell. • Liability imposed too readily

inhibits discussions.• Price not the only term.• Possible concurrent dealings?

Not ready to commit?

Problem p. 132

Letter to 4 possible buyers:

“Selling [described ranch] at the assessed value of …. $324,419. Terms available--- 29% down---balance over 5 years at 8% interest. Negotiate sale date for December 1, 1976 or January 1, 1977….”

Offer? Or invitation to negotiate?

Southworth v. Oliver587 P.2d 994 (Or. 1978)

• Letter was not “out of the blue.” It was invited by buyer, who wanted to know the price at which seller would sell.

• Lists essential terms.

• Although seller sent letter to others, it would have appeared to buyer that the letter was specifically addressed to him.

• Seller’s subjective intent relevant, not controlling.

Harvey v. FaceyThe Fight for Bumper Hall Pen

• Harvey: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price—answer paid.”

• Facey: “Lowest price for Bumper Hall Pen £900.”

• Harvey: “We agree….”

Offer? Or invitation to negotiate?

Problem p. 134

“I am willing to release you from the non-competition agreement in return for a cash buy-out. I have … decided that a reasonable figure would be $40,000….

“If you are willing to approach the problem in the way I suggest, please let me know and I will have the appropriate paperwork taken care of.”

Offer? Or invitation to negotiate?

Fairmont Glass Works v. Crunden-Martin

Buyer: Please advise us the lowest price … on our order for ten car loads of Mason green jars…. State terms and cash discount.

Seller: [W]e quote you Mason fruit jars, complete, in one-dozen boxes, delivered in East St. Louis, Ill.: Pints, $4.50, quarts, $5.00, half gallons, $6.50 per gross, for immediate acceptance …; sixty days acceptance or 2 off, cash in ten days…. We make all quotations and contracts subject to the contingencies of agencies or transportation … beyond our control.

Buyer: Enter our order for ten car loads as per your quotation.

p. 134

Offers v. AdvertisementsLimited Quantity, Unlimited Audience

• Presumption: Advertisement is invitation to “treat” or bargain.

• Rationale: Limited supply, unlimited audience.

• Why not first come first served?

• Risk of bait and switch?

Our operators are standing by to accept your offer!

Offers and Rewards:Dead or Alive?

• City offers $2,000 for information leading to arrest of notorious outlaw. Will Hunter realizes that fugitive livesin apartment across the hall. He calls police, and they arrest fugitive. Has Will accepted an offer of reward ?

• The Lefkowitz case: “Saturday 9 a.m., 1 Black Lapin Stole …Beautiful! Worth $139.50, yours for $1.00, first come, first served.”

PROBLEM, p. 141Mesaros v. United States

U.S. Mint to produce and sell a limited run of 500,000 gold five dollar commemorative coins: “If the Mint receives your reservation by December 31, 1985, you will enjoy a favorable Pre-Issue Discount saving you up to 16% on your coins.”

TO PLACE YOUR ORDER TODAY!

Is Uncle Sam Off the Hook? Key Facts in Mesaros

• 500,000 coins, 756,000 orders.

• At signature line: “YES, please accept my order…. Verification of my order will be made by the Department of Treasury.”

• No provision for selection of offerees by “first come, first served” or any other basis.

• Mint favored orders which, by information, means of purchase and credit were absolutely clear.

Recall Our HypotheticalRemember your purchase of stationery?

You placed the order over the internet after accessing a webpage created by the office supply store. Do the materials on advertisements help your analysis of the problem?

Who made the offer?

Who made the acceptance?

When did the contract form?

Elsinore Union Elementary S.D. v. Kastorff

When a Contractor Miscalculatesp. 143

Public Works Bidding And the Source of Error

• The risk of bid shopping.

• Last minute bid calculating by subcontractors and contractors.

• Public authority invites bids;contractor bids are offers.

• By operation of public authority’s rule, bids (offers) are irrevocable once opened.

Restatement of Contracts:Contract Based on Mistake

• Mistake: Belief not in accord w/ existing facts. §151.

• Mutual mistake, §152.

• Unilateral mistake, §153.

• Reason for caution?

• When is court most likely to grant avoidance?

Unilateral Mistake of FactRestatement of Contracts §153

• Mistake involved basic assumption on which he made the contract.

• It has material, adverse effect on the exchange.

• He does not bear risk of mistake under §154, and (a) enforcement unconscionable, or (b) other party had reason to know or his fault caused mistake.

When Do You Bear Risk Of Your Own Mistake?

• The risk is allocated to you by agreement; or• You were aware, when contract was made, that

you had limited knowledge of facts about which your mistake relates, but you treated your limited knowledge as sufficient.

• Court allocates risk is allocated to you because it is reasonable in the circumstances to do so.

Is Kastorff Entitled To Forgiveness For Mistake?

• Was there a mistake of fact?

• Material, adverse effect?

• Enforcement unconscionable? Or did district know of, or bear responsibility for mistake?

• Does he bear risk because of agreement, for treating limited knowledge as sufficient; or for other reasons?

Variations on Elsinore: Mistake v. Error in Judgment

• Kastorff predicted he could find a subcontractor for a certain price.

• He believed union would not strike.

• He made a rough “guesstimate” without calling subcontractors.

• He believed subcontractor would stick to estimate.

• He believed he could withdraw bid after opening.

I see oil at $40 a barrel by September 2007!

Recall Our Hypothetical

Remember your error in ordering 1,000,000 sheets of stationery instead of the 1,000 sheets you intended? You tried to cancel by phone, but before you reached the seller, you received the seller’s email message accepting your order. Does the rule for unilateral mistake allow you to void the contract?

Your special order is on the way!

The Acceptance

Restatement of Contracts §30Acceptance: By What Manifestation?

(1) An offer may invite or require acceptance … by an affirmative answer in words, or by performing or refraining from performing a specified act….

(2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable under the circumstances.

Could a tap dance be an acceptance?

Acceptance of OfferForming a Bilateral Contract

International Filter Co. v. Conroe Gin, Ice & Light Co.

Is it an acceptance, if no one is there to read it?

Exchange of Communications In International Filter Co.

• Seller’s proposal “becomes a contract when accepted by [buyer] and approved by an executive officer of [seller] at its office in Chicago…. This proposal is submitted for prompt acceptance….”

• Buyer writes on the proposal, “Accepted,” sends proposal to Seller’s Chicago office.

• Seller’s president writes “OK” on proposal, mails acknowledgement of “order,” request for sample.

• Buyer sends written cancellation of order.

International Filter v. Conroe And Communication Delays

• Seller’s form made buyer the offeror, and dictated rules for seller’s acceptance.

• Offer made acceptance validlong before buyer knew.

• It is irrelevant that seller has not relied and has not yet begun to perform.

Contract formation in the fog of communications

Implications of Int’l Filter:Acceptance without Notice?

• Acceptance can be any objective manifestation of assent consistent with offer’s requirements.

• Manifestation might not be by communication.

• Even communication could be very be slow.

• Risks to the offeror?

Can acceptance be a secret?

White v. Corlies & Tift

Could shopping be a form of acceptance?

p. 156

What Manner of AcceptanceDid Customer’s Offer Require?

• Background: Contractor had “assented” to customer’s new specifications, at same estimated price. Offer?

• Customer: “Upon an agreement to finish the fitting up of [our offices] in two weeks from date, you can begin at once. The writer will call again, probably between 5 and 6 this p.m.” Acceptance or new offer?

• Contractor buys lumber, begins “work thereon.”

Could Shopping Be Acceptance?Restatement of Contracts §32

Offer may invite acceptance by beginning performance. In case of doubt, offer is interpreted as inviting offeree to accept either by promising to perform what offer requests or by rendering the performance the offeree chooses.

If a tap dance could be an acceptance, why not shopping?

Acceptance by Performance: When Does Acceptance Occur?

Restatement §62(1): Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance, the tender or beginning of the invited performance or a tender of a beginning of it is an acceptance by performance.

Restatement §62(2): Such an acceptance operates as a promise to render complete performance.

White: Why Wasn’t Beginning Performance an Acceptance?

• How does customer’s message indicate need for further communication?

• Contractor’s performance: “There was nothing in his acts that indicated or set in motion an indication to the defendants of his acceptance.”

• Compare Ever-Tite.

Would arriving for work have manifested assent?

ProblemSuppose in White, the contractor received the

customer’s note and was deciding whether he would do that job, or perhaps another. He took his time deciding. In the meantime, contractor’s arch-rival Busy Bee Contracting visited the customer, and made a better offer, and customer accepted. When contractor discovered that Busy Bee had the job, he sued and alleged that he manifested his acceptance by shopping at the lumber supply store. A clerk at the lumber supply store will testify that he say the contractor shopping there.

Post-White Summary Of the Problem of Acceptance.

• Acceptance must be consistent with rules of offer (but offer often lacks clear rules).

• Acceptance must be an objective manifestation (mere thought is insufficient).

• Self-serving, after-the-fact allegation of acceptance may still be troubling to a court.

• Problem of unfair surprise to offeror may be troubling to a court.

RS § 56: Bilateral Contract And Offeree’s Duty of Notice

Except where offer manifests contrary intention, it is essential to acceptance by promise that offeree use reasonable diligence to notify offeror of acceptance or that offeror receive the acceptance seasonably.

Jackson wins the Battle of New Orleans, unaware that Britain accepted peace 2 weeks earlier.

Can offeror be bound long before he knows? Yes, but… Famous delays

in communication.

Bound Before You Know It• A mails a letter to B, accepting B’s offer. B is bound

even though he doesn’t receive the letter until after he has sold the property to someone else.

• A’s letter is lost in the mail. Two years later, a mail carrier discovers the letter under a desk. The contract formed when A placed letter in mail, but B has defense that he never received notice.

• A discovers B hasn’t received his letter. If A does not notify B of acceptance, B will have a defense.

Delays in communication are not limited to snail mail

Problems 1. Seller provides salespersons form stating: “All orders are subject to acceptance by Seller. Seller may accept by shipping the product ordered.” Buyer mailed his order and waited 2 weeks, hearing nothing. After 2 weeks, he placed an order for the same goods with another seller. Minutes later the first seller’s delivery arrived. Is there a contract with first Seller? Does Buyer have a defense?

2. Assume in White that beginning work constituted acceptance. Contractor began to assemble cabinets at his shop before installing them at Owner’s premises. He completed the cabinets and arrived at Owner’s premises two weeks later, only to find another contractor at work. Is there a contract? Does Owner have a defense?

RS § 54: Unilateral ContractIs There a Duty of Notice?

No! Where offer invites acceptance by performance, no notice is necessary unless offer requests notice.

But: If offeree has reason to know offeror has no adequate means of learning of performance with reasonable promptness and certainty, the contractual duty of offeror is discharged unless (a) offeree uses reasonable diligence to notify offeror; (b) offeror learns of performance within reasonable time; or (c) the offer indicates notice is not required.

If offer invites acceptance by performance, is notice to offeror necessary?

Acceptance of Offers Of Unilateral Contracts

How Do You Accept? Must You Give Notice?

Carlill v. Carbolic Smoke

Ball Co.

Must Buyer Give Notice Of

intention to Become Sick with

Flu?

Acceptance, Notice And Unilateral Contracts

• Nephew received Uncle’s promise by mail. He made a mental commitment to refrain from smoking and did refrain. When Nephew mentioned this to Uncle a month later, Uncle said he had changed his mind.

• Hilda left message for Louis: “If you don’t promise to pay $500 a month, I’ll tell your mother!” Louis did not return the call but sent Hilda $500 a month for the next 6 mos. Then he stopped making payments.

Allied Steel and Conveyors, Inc. v. Ford Motor Co.

Did Allied “accept” Ford’s fineprint?

p. 162

Allied Steel and Conveyors, Inc. Why an Indemnity Agreement?

• What is indemnity agreement?

• What risk does it address?

• Is it outlandish for Allied to indemnify Ford against negligence of Ford’s workers?

• Workers’ compensation angle.Indemnification protects

against accidents

Allied Steel & Conveyors, Inc. If Acceptance Breaks the Rules

• First invoice: Indemnity clause marked VOID.

• Second invoice: Indemnity clause not voided. Oversight?

• Manner prescribed for acceptance?

• Can performance still constitute acceptance?

Allied forgets, then sends the acknowledgement

Problem Two days after Allied began work, Ford noted that Allied had not returned a signed acknowledgement. Ford worried about work proceeding without indemnity. When Allied’s crew arrived on the third day, Ford barred Allied’s entry, insisting there was no contract. Allied’s manager eventually signed and delivered the form, but the delay at the gate cost $1,000 for idle labor time. Can Allied bill this cost to Ford, for breach, by interference? As the crew waits, the time clock ticks.

Offer and AcceptanceIn Contracts for Sale of Goods

A delivery of goods in New York’s Garment District

Nat’l Conf. of Commissioners On Uniform State Laws

• Diversity of state contract law.

• Importance of uniformity for modern commerce.

• NCCUSL: Drafts laws for adoption by states.

• UCC: Adopted with variations in every state.

Uniform Commercial Code:A Few Observations

• Art. 1 (General) and Art. 2 (Sale of “Goods”).

• 2003 Revisions: Mixedreaction in state legislatures.

• Applies to merchants and non-merchants, but rules for each sometimes differ.

Would the UCC apply to your garage sale?

Important General Provisions “Goods” and the Common Law

• Sec. 1-103: Unless displaced by particular provisions of UCC, principles of law and equity supplement UCC. If UCC doesn’t contradict common law, common law lives!

• Sec. 2-103 [rev.]: “Goods” means things movable at time of identification to contract, including unborn animals and things attached to, but to be severed from realty. Excluded: money, securities, and “things in action.”

A good? Or a thing in action?

Goods? Or Something Else?Illustrative Problems

• Was contract between Uncle and Nephew in Hamer v. Sidway subject to Article 2?

• Was contract in Allied Steel subject to Article 2?

• Was Pete Casso’s contract subject to Article 2?

• Seller makes contract with Buyer for sale of farm, including all crops, cattle and minerals on or below farm. Iscontract subject to Article 2?

Do Contracts for Sale of Goods Need a Different Set of Rules?

• Rescission usually easy: Buyer can return goods.

• Disappointed seller can usually resell rejected goods, reducing his loss.

• Time often of the essence.

• Daily market changes affect gains, losses.

A commodities market: Does it matter what day the goods are delivered?

Orders for Prompt or Current Shipment of Goods

• Seller of goods accepts orders according to standard terms.

• Buyer wants goods ASAP, is willing to dispense with communicative acceptance.

• Can seller ship order beforecommunicating acceptance?

• Common law answer?

Offers for Prompt or Current Shipment: Section 2-206

• Unless otherwise unambiguously indicated … an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by prompt promise to ship or by prompt or current shipment of conforming or nonconforming goods.

• Shipment of nonconforming goods does not constitute acceptance if seller seasonably notifies buyer that the shipment is offered only as an accommodation.

Problem A factory needing blue wheels for a toy it manufactured placed an order with usual supplier for 20,000 blue wheels for “prompt” shipment.

(a) Supplier had loaded 1,000 wheels on its truck when Factory called to “cancel” the order. Was there a contract?

(b) Assume Factory did not cancel. Two days after the order, Supplier delivered 20,000 red wheels. Is there a contract?

Corinthian Pharm.v.

Lederle Laboratories

Can the wrong thing still make a deal?

Acceptance or

Accommodation?

Corinthian v. LederleAcceptance or Accommodation?

• C regularly buys < 100 vials at a time from L.

• L plans future price increase.

• C quickly orders 1000 vials at old price. Offer?

• L ships 50 vials at old price; states intent to ship balance at new price, subject to C’s right to cancel. Acceptance?Or Offer?

Manifestation of Assent By Silence or Inaction

• Rule: Neither silence nor inaction are acceptance.They manifest no particular intention.

• Offeror cannot change this rule unilaterally

• Reasons offeree might agree to change the rules?

Manifesting assent? To what?

Problem Cheese of the Month Club delivers delivers half pound of cheddar to your door with note: “We hope you will enjoy this cheese. If you wish to accept this offer, you needn’t do any-thing at all,and we will bill you at the end of this month. If you wish to cancel this order, please call us at the following number within three days.” You bringthe cheese into the house and put it in your refrigerator. Eventuallyyou become hungry and taste the cheese. It is good. Contract? The unsolicited delivery

See Restatement §69

Ways You Might Be BoundBy Silent or Passive Acceptance

• Offeree took benefit of offered service with reasonable chanceto reject it, knowing ofexpectation of compensation.

• Offeree intended to accept.

• Previous dealings.

• Action inconsistent with offeror’s ownership.

Couldn’t stop yourself?