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Contracts - Outline

I. Contracts – General

Definition of a contract - § 1 Rest.2d: A promise or set of promises for the breach of which the law gives a remedy. - agreement between two or more people to do or refrain from doing something - Facilitates trade or exchange of goods or services or other types of property - Allows parties to specify obligations and expectations - Allows enforcement if violated, assures parties that promise will be kept

Express contracts = words of agreement (oral or written) Implied contracts

Implied-in-fact = promises are inferred from acts or conduct or from words that are not explicit words of agreement

Implied-in-law = court fictionally implies a promise to avoid inequities and unjust enrichment (also quasi-contracts)

Contract theory

a. classical theory - clear rules over general standards, indifferent towards policy

b. modern theory - more standards and policy, more flexible – several variations

II. Formation of a contract Bargain in which there is a manifestation of mutual asset to the exchange and a consideration = bargained for exchange

Achtung:

not always a bargain

inequality of bargaining power

not every bargain results in a contract

misconduct on bargain (fraud, duress, undue influence)

Elements:

- Mutual Assent (objective manifestation) o Offer o Acceptance

- Consideration

Mutual assent

a. Subjective theory: o meeting of the minds, focus on intention of the parties rather than conduct

b. Objective theory: o What a reasonable person would understand

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o “ … one having the capacity to understand a written document who reads and signs it, or, without reading it or having it read to him, signs it, is bound by his signature in law” – per court in Ray v. William G. Eurice & Bros.

o Exception for fraud, duress or mutual mistake o Party’s subjective intent is irrelevant

Rationale for objective theory

- protects other party’s reliance on manifestation to contract - reduces courts attempt to read minds, self-serving testimony about intent - parties’ incentive to be careful about their conduct - protects reasonable expectation

Offer and acceptance in bilateral contracts - Offeror makes offer that if valid creates “power of acceptance” in the offeree - Offeree creates contract by accepting offer, as long as acceptance is “mirror image” - If offeree varies the terms, it is a rejection of the original offer and a “counteroffer” - now the original

offeror has the “power of acceptance”

Promise binding, if - Bargained for exchange in mutual assent - Reliance in promissory Estoppel - Unjust enrichment/restitution

Offer

a. Offer creates power of acceptance in the offeree (i.e. the power to conclude a bargain and bind the offeror by giving assent)

b. Rest. 2d § 24 – “An offer is the manifestation of (present) 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.” = obj. manifestation of intent to be legally bound

- Rest. 2d § 26 – “A manifestation of willingness 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.”

o Intent to enter into bargain (must be distinguished from invitations to begin negotiations) – based on language and circumstances

o Offer to be valid must have definite essential terms which can be accepted to form a contract – no further negotiations required as to subject matter, quantity and price

- Offer must be distinguished from preliminary negotiations (e.g. recipient is aware that offer is sent to multiple parties and cannot be performed more than once)

- Subjective unexpressed intent irrelevant

c. Advertisement is usually no offer but an invitation ad offerendum, except where language shows commitment

- A particular ad may be construed as an offer if it is definite in terms and either (i) the circumstances clearly indicate an intention to make a bargain, (ii) the ad invites those to whom it is addressed to take specific action without further communication, or (iii) over-acceptance is unlikely

- Lonergan (Buyer) v. Scolnick (Seller) “Ad is not an offer” - Izadi (Buyer) v. Machado Ford “Ad was the offer. Offer must be viewed as a whole and objectively –

how would reasonable reader interpret offer; “bait and switch”; subjective intent of seller not relevant. Plaintiff must show that he believed in the offer – misled by genuine belief.

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d. Price quote may be offer if detailed enough and it must reasonably appear that it is all that’s needed

e. Joke offers: - Rest. 2d § 21 – “neither real nor apparent intention that a promise be legally binding is essential to the

formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.”

- Joke offer has to seem serious to victim

f. Putting contract out for bid - Usually no offer - Response to bid is offer

Termination of power of acceptance

a. Offer expires or lapses before acceptance

(1) Time for acceptance is fixed in the offer o Lapse of offer without further action o Time period usually starts upon receipt

(2) Time for acceptance is not fixed o Lapse after reasonable period of time, depending on the circumstances o Telephone negotiations – usually only during conversation o Mail – usually if mailed on day of receipt of offer

b. Offer is rejected by the offeree o Valid upon receipt by offeror o If mailed together with acceptance – contract because of mailbox rule, unless offeror

detrimentally relies on first received rejection o If rejected and then accepted = counteroffer o If rejection mailed before acceptance but received later = contract, but offeree is estopped

from enforcement if offeror treats rejection as repudiation of contract o Except for options (during the time of option offeree has a contractual right to have the offer

held open) o However exception does not apply if the offeror relies on rejection

c. Offeree makes a counteroffer o Offer by the offeree concerning the subject matter but containing different terms or late

acceptance o if the offeree modifies the terms of the offer he makes a counter-offer which must be

accepted or rejected by the offeror and rejects the original offer Normile (Buyer) v. Miller (Seller)

o Termination of power of acceptance of original offer o Creates power of acceptance in the offeror o Valid upon receipt by offeror o To be distinguished from Inquiries and requests o Except for options (see b.) o Rest. § 59: Counteroffer rule not applicable, if acceptance is made conditional on assent to

additional or different terms – new terms are merely proposal to modify contract which may be accepted in silence

d. Conditional or qualified acceptance o Acceptance with additional terms or changes to terms of the offer o Except for request, grumbling acceptance, implied terms of offer

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(1) Usually treated as counteroffer (see c.) o Common law mirror image rule (acceptance has to mirror the terms of the offer) o Last shot rule (applied in merchant’s transactions where the preprinted forms do not match

but the parties perform anyway – last form was counteroffer and performance is acceptance) Princess Cruises v. GE

o Rest.2d §19(1) “Manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.”

o “Last shot” rule generally favors sellers because buyer usually sends the first form (purchase order) and seller usually sends the last form (price quote).

Note: Predominant purpose test Applies to “mixed” transactions involving sale of both goods and services

Determination of predominant purpose is based on: Language of the K Nature of supplier’s business Intrinsic worth of the materials

(2) Except for UCC 2-207 sale of goods

i. 2-207(1) o Definite and seasonable expression of acceptance or a written confirmation o operates as an acceptance even though it has additional or different terms, o unless acceptance is expressly made conditional on assent to these new terms

narrow, must use these terms and not “subject to” (policy is to have contracts go forward)

ii. 2-207(3) o In case acceptance was made conditional – NO CONTRACT o However, if delivery or performance, then contract is established by conduct o Terms are the written ones that match plus supplemental terms of UCC

iii. 2-207(2) o If contract is formed in writing under 2-207(1) o Effect of additional terms

If not merchants: terms do not become part of contract, only proposal If merchant: terms become part of contract, unless

Offer expressly limited acceptance to terms of offer (broadly)

Material alteration

Rejection by offeror within reasonable time o Effect of different terms

Knock out rule (majority view) (agreed terms plus implied by law-UCC) Same as additional terms Do not become part of contract

e. Offer is revoked prior to acceptance o Offeror retracts the offer – termination of offer o Must be communicated to the offeree (direct or indirect, i.e. offeree obtains knowledge that

offer was revoked through other means) (§ 43 Rest.) o Valid upon receipt by offeror o offer can be revoked even if it says it is not (“firm offer”)

except for option contracts where offer is kept open for a specified period of time

An offer is binding as an option contract if it

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(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute. Unless (§ 90 Rest. OR § 87(2)) Promissory Estoppel - Foreseeable reliance by offeree

prior to acceptance

Drennan (General contractor) v. Star Paving Co. (Sub-contractor) – Promise to keep the offer open “absence of consideration is not fatal” and “reasonable reliance serves to hold the offeror in lieu of the consideration ordinarily required to make the offer binding.” Comment to § 45 Rest.2d, “merely acting in justifiable reliance on an offer may in some cases serve as sufficient reason for making a promise binding (see § 90)” – now in § 87(2).

Pop Cones v. Resorts – Promise can be implied

Limits: GC must not delay acceptance of sub’s offer after being awarded the general contract (no bid-shopping) GC must not reopen bargaining with the sub while still claiming right to accept original offer (no bid-chopping) GC can’t rely on offer if he has reason to believe it was a mistake GC can’t rely on mere estimate that is not an offer

Berryman v. Kmoch, o Offer which offeror should reasonably expect to induce action or

forbearance of a substantial character on the part of the offeree before acceptance

o And which does induce such action or forbearance o Is binding as an option contract to the extent necessary to avoid

injustice Unless UCC 2-205

Offer (§ 24 Rest.)

By a merchant (UCC 2-104)

To buy or sell goods (UCC 2-105)

In a signed writing (UCC 1-201(39) and (46))

Which by its terms gives assurance it will be held open

Is irrevocable during time stated or reasonable time but not to exceed 3 months

o Unilateral contracts Old rule: any time prior to full performance New rule: § 45 Rest. Only until performance has begun Look at intent of the parties

f. Termination by law

(1) Death or incapacity of offeror o Does not apply to options o Does not apply to unilateral contracts after performance has begun

(2) Changed circumstances

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Acceptance

a. Is offer for unilateral or bilateral contract?

(1) Bilateral contracts = exchange of promises

i. Promise not action, except where fully performed prior to expiration of offer o Except where offer is ambiguous Rest. and UCC allow promise or performance

ii. Verbal promise, implied in fact by conduct, sometimes silence o Not mere use of subcontractors bid in own bid

iii. Communication o Mailbox rule (Rest. 2d § 63) = as soon as acceptance is dispatched the contract is formed

unless otherwise specified in the offer (applies to all acceptances by way of mail, or where mail was reasonable, does not apply where offer states that he must receive the acceptance) (risk of receipt is on offeror)

Does not apply to options Dispatch must be timely and in proper manner If dispatched before revocation is received - contract

o Waiver of receipt by offeror

(2) Unilateral contracts o promise in exchange for performance (performance is based on wish, will or pleasure of one

of the parties) o Rationale: used in situations where it is unclear if other party is able to perform

i. Only Performance in accordance with terms of offer Petterson (Homeowner) v. Pattberg (Lender) - classical rule of full performance Today Rest. 2d § 45 “When an offeree tenders or begins the requested performance

under a unilateral contract, the offeror becomes bound to an implied option contract and cannot revoke his offer so long as the offeree completes performance in accordance with the terms of the offer.” Cook v. Coldwell Banker

ii. Notice may be after completion

iii. With knowledge of offer, but must not be principal motive

iv. Voluntary

v. Offeree not bound, because he never promised anything Except where offeror knows of performance and relies on it

b. Silence as acceptance

(1) Generally no acceptance

(2) Except o Offeree’s conduct or behavior gives reason to interpret as acceptance o Offeror has said that silence is acceptance and offeree intents to be silent o Offeree exercises dominion over shipped products, unless statutory exception o Offeree solicited offer and drafted its terms, offeror would deem it accepted unless rejected,

offeror relies on acceptance o Late acceptance = counteroffer, and offeror does not reject it

(3) Except for Unjust enrichment or quasi-contract (Restitution in absence of promise or with implied promise) o “Person unjustly enriched at expense of another is required to make restitution”

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o Examples – life or property protecting services when beneficiary unable to consent, benefit conferred but contract not formed

o Limits – no restitution for officious or gratuitous actions o Actor must not intend a gift o Promise to pay is implied o Liability is imposed on person who receives a benefit without the promise to pay for it

§ 116 Rest.2d Restitution: Person who has supplied … services… although acting w/o the other’s knowledge of

consent, is entitled to restitution therefor from the other if: he acted unofficiously and with intent to charge therefore, and the things or services were necessary to prevent the other from suffering serious

bodily harm or pain, and … consent would have been immaterial … because of … mental impairment.

o Plaintiff must show He has conferred a benefit on def. With the expectation that he would be paid its value Def. knew or had reason to know of plaintiff’s expectation Def. would be unjustly enriched if he were allowed to keep benefit w/o payment

Credit Bureau Enterprises, Inc. v. Pelo or Watts v. Watts o Modern § 20 Rest.3d - Protection Of Another's Life Or Health

(1) A person who performs, supplies, or obtains professional services required for the protection of another's life or health is entitled to restitution from the other as necessary to prevent unjust enrichment, if the circumstances justify the decision to intervene without request. (emergency situations)

(2) Unjust enrichment under this section is measured by a reasonable charge for the services in question.

o Modern § 21 Rest.3d Protection Of Another's Property (1) A person who takes effective action to protect another's property from

threatened harm is entitled to restitution from the other as necessary to prevent unjust enrichment, if the circumstances justify the decision to intervene without request. Unrequested intervention is justified only when it is reasonable to assume the owner would wish the action performed.

(2) Unjust enrichment under this section is measured by the loss avoided or by a reasonable charge for the services provided, whichever is less.

c. Other methods of reaching mutual assent

(1) Application of UCC 2-204 o Contract was made orally over phone, disagreement only over some terms Harlow & Jones,

Inc. v. Advance Steel Co. (1) A K for sale of goods may be made in any manner sufficient to show agreement,

including conduct …. (2) K may be found even though the moment of its making is undetermined (3) Open terms in a K does not make it fail for indefiniteness

(2) Rest. 2d § 22 o “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.” o Differences:

- oral communication - some terms may be open - parties exchange forms - court goes by conduct - UCC more practical, less formal

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Consideration - Glue that binds parties to a contract - Makes promises enforceable - Distinguishes contract promises from donator promises - General theories: Bargained for exchange / benefit & detriment

a. General rule - Rest. 2d § 71 Bargain for Exchange theory - “(1) To constitute consideration, a performance or a return promise must be bargained for. - (2) 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.” Pennsy Supply Inc. v. American Ash Recycling Corp.

o Condition of receiving gift is not a bargain, e.g., benevolent man to tramp – “if you walk to shop, I’ll give you an overcoat”

o Am Jur – if occurrence of condition would benefit the promisor, consideration, if it merely enables promisee to receive a gift, no consideration but condition for gift

o Holmes “The promise must induce the detriment and the detriment must induce the promise” and Promise and consideration must be in “relation of reciprocal conventional inducement, each for the other.”

o Bargain theory of consideration does not actually require that the parties bargain over the terms of the agreement

- Rest. 2d § 79 “if requirement for consideration is met no additional requirement for equivalence of values exchanged”

- Old way: detriment and benefit Hamer (Nephew) v. Sidway (Uncle) “a waiver of any legal right at the request of another party is a sufficient consideration for a promise”

o “Courts will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or is of any substantial value to anyone.”

o A valuable consideration may consist either in some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party.

- May be overcome by Promissory Estoppel (substitute for consideration) - “Mere inadequacy of consideration will not void a contract”

o “Peppercorn” theory – even a peppercorn will be adequate consideration if bargained for o Rationale: Bargain may be unfair on free market, Batsakis v. Demotsis

b. Postponed bargaining – Agreement to agree - Parties negotiate but agreement is incomplete because parties leave matters for agreement in future - OR Parties agree in principle but want to execute written formal contract

(1) Common law rule o Intention of the parties matters o If they intent to be bound – contract, Quake v. American Airlines, Jones o Factors:

Usually in writing Amount of details Amount of money Statute of frauds Reasons for abandoned negotiations

o § 27 Rest.2d “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; but the circumstances may show that the agreements are preliminary negotiations.”

o Rest. 2d § 33(3) –Fact that one or more terms of proposed bargain are left open or uncertain may show that manifestation of intention is not intended to be understood as offer or acceptance

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o But Comment (e) to Rest. 2d § 33 – summarizes UCC § 2-305 for sale of goods and says “similar principles apply to contracts for the rendition of service.”

o Other approach: Contract to negotiate in good faith Applied by some courts Reliance damages

(2) UCC 2-204(3) o "Even though one or more terms are left open a contract for sale does not fail for

indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy."

(3) UCC 2-305 o court will enforce an agreement with an open price term if parties intended to be bound o a contract can be formed even if they leave the price for mutual determination or give one

party the power to fix the price o if parties fail to agree the court may fix a "reasonable price.“ o if one party has the power to fix the price, he must do so "in good faith.“ o No K if parties intend not to be bound unless price is fixed or agreed and it is not so fixed or

agreed

c. Exceptions – Bargains that are not consideration

(1) Nominal consideration o It lacks the substance of a bargain o Could be a donative promise o Except for options if in writing and proposes fair terms

(2) Illusory promises – Statement that appears to be promise but lacks commitment

i. General rule – Mutuality Bilateral contract – promise for a promise and mutuality of obligations But illusory promise (fake) lacks mutuality and neither party is bound

ii. Exceptions to Mutuality rule o Unilateral contracts o Limited promises o Voidable promises (e.g. minor) o Conditional promises o Alternative promises o Agreement allowing one party to supply a material term (UCC 1-203)

(3) Implied promises make illusory promise definite Implied in fact = conduct of parties, parties meant to say Implied in law = legal duty implied by statute or precedent Common type: promise to use reasonable efforts or best efforts Common law: Wood v. Lucy, Lady Duff-Gordon held that such promise was implied

in exclusive dealings contracts

“A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed.”

“Without an implied promise, the transaction cannot have such business efficacy as both parties must have intended”

UCC 2-306(2): codifies common law principle of best efforts (same as reasonable efforts)

Gap fillers – may be preempted by parties

UCC 2-309(3) “Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party … agreement dispensing with notification is

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invalid if its operation would be unconscionable (sittenwidrig)” Leibel v. Raynor Manufacturing Co.

Comment 8 - “the application of principles of good faith and sound commercial practice normally call for such notification of the termination of a going contract relationship as will give the other party reasonable time to seek a substitute arrangement.”

§ 228 Rest. “if it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition [that the obligor be satisfied with the obligee’s performance] occurs if such a reasonable person in the position of the obligor would be satisfied.” Standard for satisfaction clauses

Objective standard: whether a reasonable person would be satisfied o Applied to contracts involving commercial quality, operative

fitness or mechanical utility, Morin Building Products Co. v. Baystone Construction, Inc.

o Not reasonable to reject mill finish siding for factory based on non-uniform appearance

Subjective standard: whether person was honestly dissatisfied even if unreasonable (good faith)

o Applied to contracts with aesthetic or artistic elements, Locke v. Warner Bros., Inc.

o Limited by good faith, honest dissatisfaction required o Requirement or output contracts

(4) Legal duty rule – promise of action that promisor is already obliged to perform

d. Moral or past consideration

(1) NOT sufficient o Dougherty v. Salt o Plowman v. Indian Refining Co.

(2) Except for Promissory Restitution o Where promise is made after service or benefit is received o promise (implied or express) to pay debt barred by Statute of limitations (§ 82 Rest.2d) o promise (implied or express) to pay debt incurred when one was minor (§ 85 Rest.2d)

applies to voidable promises (e.g. minors, fraud) o express promise to pay debt discharged in bankruptcy (§ 83 Rest.2d)

higher burden because process initiated by debtor o material benefit received and necessary to prevent injustice (§ 86 Rest.2d) Webb v. McGowin

unless, promise not binding if

Benefit was conferred as a gift

Promisor not unjustly enriched

To extent value is disproportionate to benefit

e. Donative / gratuitous promises and offers o Unenforceable for lack of consideration

f. Unless relied upon (promissory estoppel) (§ 90 Rest.2d OR § 87(2) Rest) Offer/Promise

Express OR

Implied by conduct which offeror /promisor should reasonably expect to induce action or forbearance

of a substantial character on the part of the offeree before acceptance And which does induce such action or forbearance (87(2) – substantial!)

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Is binding as an option contract to the extent necessary to avoid injustice Remedy may be limited as justice requires. Reliance = consideration

o Usually in family situations, Greiner v. Greiner, Wright v. Newman charitable subscriptions, King v. Trustees of Boston University

“Charitable subscription …binding … without proof that the promise induced action or forbearance” (§ 90(2) Rest.) - Rejected in Massachusetts and several other courts

Only adopted in one case!

In General there has to be consideration to make charitable promise binding

also in commercial context, Katz v. Danny Dare, Inc., Shoemaker v. Commonwealth Bank

o Even if it contains condition (if you come to my house, I will give you my coat) - It depends on parties view – either necessary part for making a gift or price of promise

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Section 87(2) Rest. 2nd was adopted after the Drennan case and reflects the holding of that case. It applies to "offers" (defined in Sec. 24) to protect reliance of offerees. Note that in 87(2) the reliance has to be "of a substantial character" and the remedy is that the offer is binding as an option contract to the extent necessary to avoid injustice. Section 90 is broader and applies to "promises" (defined Sec. 2) to protect reliance on the promise by the promisee or third person. Sec. 90 does not have a requirement that the reliance be "substantial." So there are some differences between the two sections. Section 87(2) could be thought of as a special case of promissory estoppel. 87(2) says sometimes reliance on an offer can create an option contract (irrevocable offer).

87(1) is not a majority rule, but 87(2) is widely accepted. 87(1) is an attempt by the framers of the REstatement to have something like the UCC "firm offer" 2-205 concept in common law.

, 610 S.W.2d 121 (1980) Facts: Katz injured on the job and promised a pension Rule: § 90 Rest. yes Feinberg case Katz

o Rec’d promise of pension = o At-will employee - Could have been fired o Voluntarily retired in reliance = o Injustice – once retired, couldn’t work full time = o Co. liable under promissory estoppel =

, 700 A.2d 1003 (1997) Facts/Rule: promise to obtain property insurance on home enforceable Ways to find whether offer is irrevocable!

- Option Contract? - Firm Offer under 2-205? - Irrevocable offer under Rest. 87(1)? - Part performance of unilateral contract under Rest. 45? - Promissory estoppel under Rest. 90 or 87(2)?

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III. Warranties - Caveat emptor: Buyer beware, duty to inspect of buyer, no reliance of buyer unless seller expressly

stated a warranty - Common law now has warranty

o Implied warranty of habitability o Implied warranty of workmanlike quality

a. UCC 2-313 Express warranties o Express warranty by seller o Any affirmation of fact, promise, description or model that becomes part of basis of bargain o But not puffery (statements of opinion, recommendations) o No reliance necessary – buyer reliance can be assumed o Most courts have abolished the privity requirement (i.e. direct connection between

advertiser and buyer) for actions based on breach of express warranty if the mass media ad is intended to reach remote purchasers and if purchaser saw or heard of ad

o Revised UCC 2-313B codifies this rule by clearly stating that remote sellers are liable for express warranties in nonprivity situations

b. UCC 2-314 Implied warranty of merchantability o If seller is a merchant o then goods should be merchantable (fit for ordinary purpose or pass without objection in

trade) o Disclaimer possible

c. UCC 2-315 Implied warranty of fitness for a particular purpose o If buyer relies on seller to select goods fit for a particular purpose o Seller knows of buyer’s purpose and reliance o Must be more than an ordinary purpose, Bayliner Marine Corp. v. Crow o Disclaimer possible

d. Implied warranty of Quality in home sale by builder/vendor o Recognized in most jurisdictions, either by court decision or legislation, Caceci v.Di Canio

Construction Corp. o Warranty is termed warranty of habitability and/or skillful or sound construction

Involves habitability and skillful construction o Can be modified or disclaimed, but possibly only if conspicuous, specific and mutually agreed,

or if warranty meets certain min. standards o Recognized only against builder/vendor, not private sellers of used homes o Courts are divided whether warranty applies to subsequent buyers o Rationale:

Harmonization with warranties for sale of goods Unequal bargaining power If not yet built, no inspection possible

e. Disclaimers UCC 2-316

(1) Express Warranties UCC 2-316(1) o difficult to disclaim – “negation or limitation is inoperative to the extent that [consistent]

construction is unreasonable.” o contradictory o But parol evidence of express warranty could be excluded if there is fully integrated written

agreement

(2) Implied Warranty of merchantability UCC 2-316(2) o merchant must follow proper wording and disclosure requirements. o language must mention that word and

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o if in writing be conspicuous – “magic word” approach

(3) Implied Warranty of fitness for particular purpose UCC 2-316(2) o must be in conspicuous writing, and o can say something general like “there are no warranties which extend beyond the description

on the face hereof.”

(4) Alternative ways to disclaim implied warranties UCC 2-316(3) o Expression like “as is,” “with all faults” or “other language which in common understanding

calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.”

f. Excerpt: Consumer transactions - Magnuson-Moss Warranty Act governs written warranties on consumer products

o [products normally used for personal, family or household purposes], o NO disclaimer of implied warranty of merchantability in transactions that offer express

written warranty. 15 U.S.C. § 2301(1) and 2308. o But MMWA allows warrantor to limit duration of implied warranty, to same duration as

express written warranty. § 2308(b) - FTC rule requires disclosures of either the warranty if one is offered,

o or if it’s “as is” there must be disclosure that AS IS – NO WARRANTY means “You will pay all costs for any repairs. The dealer assumes no responsibility for any repairs regardless of any oral statements about the vehicle.”

- Amended UCC 2-316 o for consumer contracts, the wording of a disclaimer of the implied warranty of

merchantability has to be in the words used in the statute : “the seller undertakes no responsibility for the quality of the goods, except as otherwise provided in this contract.”

o alternative wording is also still allowed under 2-316(3) provided it is conspicuous if written o Some states have non-uniform version of 2-316 making all disclaimers of implied warranty of

merchantability ineffective in consumer transactions

IV. Interpretation of a contract

General Rule for interpreting the intent of the parties

a. Old view: subjective approach (Peerless rule) - Meeting of the minds - No contract if the parties’ view differs on a term - Contract should be based on individual exercise of free will - Con: no proof

b. Objective approach - Attributed to Holmes & Williston - Words & conduct of parties should be interpreted under standard of what reasonable person would

have meant - People should be held to reasonable meaning of their own words and conduct - Con: Could result in Contract based on neither party’s intended meaning! - Con: freedom of contract

c. Modern Modified objective approach - § 201 Rest.2d - (1) where parties attach same meaning, K interpreted according to that meaning (even if not the

objectively reasonable meaning) - (2) If parties attach different meanings to same term, and one knew or had reason to know of

meaning attached by other, and the other party doesn’t know or have reason to know the other

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party’s meaning, party having knowledge or reason to know is bound by meaning of the other, Joyner v. Adams

- (3) If parties had different meanings and neither one knew or had reason to know of other’s meaning, then no contract.

d. Principles of Interpretation - Most courts require ambiguity of a term - If plain language is clear, most courts do not allow extrinsic evidence - Modern approach is to allow extrinsic evidence to figure out intent - Use all relevant circumstances

(1) Prefer an interpretation that makes the K valid, enforceable and reasonable over an interpretation that makes the K invalid, unenforceable or unreasonable. § 203(a)

(2) Contra Proferentem § 206 Rest.2d o construe ambiguous provisions against party who drafted the contract, particularly where

there is unequal bargaining power and a contract of adhesion (contract with large amount of boilerplate terms and one party with more bargaining power – “take it or leave it” ) is imposed on the weaker party

o § 211(3): where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

Terms giving reason to believe

Bizzare or oppressive

Eviscerates bargained-for terms

Eliminates the dominant purpose of the transaction

(3) Contract as a whole, § 202(2) Rest.2d o look at context and how the different provisions fit together o Specific clauses will be subordinate to the K's general intent

(4) Intent or purpose of the parties, § 202(1) Rest.2d o Determine the common purpose and use that as a guide in interpretation

(5) Specific provision is construed as an exception to the general one, § 203(c) Rest.2d o Specific provision controls if inconsistent with the general o Handwritten or typed provisions control over printed provisions.

(6) Ordinary meaning of words prevails unless clearly shown that they were meant to be used in a technical sense, 202(3) Rest.2d

(7) Ejusdem generis o General term joined with specific one will include only things like the specific one

(8) Expressio unius exclusio alterius o List of specific terms without a general or inclusive term meant only specific items are

included

e. Course of performance, course of dealing, trade usage and usage - May be helpful for interpretation Frigaliment Importing Co. v. B.N.S. International Sales Corp. - Course of performance: parties’ repeated, unobjected performance, § 202(4) Rest. - Course of dealing: conduct prior to contract, § 223 Rest. - Usage: habitual or customary practice - Usage of trade: usage regularly observed in trade, § 222 Rest.

f. Doctrine of reasonable expectation - For adhesion contracts - assent to boilerplate only if reasonably expected - Only applied in ½ of the states, C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. - § 211 Rest. weaker form

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Parol Evidence Rule, §§ 209-218 Rest., UCC 2-202 - Inadmissibility of extrinsic evidence for written agreements if it contradicts or supplements the

contract - Usually applies to oral statements, but means any evidence outside the written agreement

a. What is it the party is trying to prove?

b. For what purpose is the evidence offered?

(1) Generally, no evidence of a term or obligation that is allegedly part of the agreement

(2) Exceptions

i. Meaning of a term – interpretation § 210 Plain meaning rule

Bars evidence if no ambiguity and no special meaning Modern

No ambiguity necessary

ii. Separate enforceable agreement (collateral agreement) supported by separate consideration § 216(2)

iii. Modification after the formation of the contract

iv. Formation issue (fraud, duress, mistake, incapacity, illegality etc.) § 214(d) only so-called fraud in the factum, fraud that tricks someone into signing a contract

when they think it's just a receipt, memo or a different type of document is covered. As opposed to fraud in the inducement, where someone misrepresents something about the deal to induce someone to enter the K (narrow view) Sherrod, Inc. v. Morrion-Knudsen Co.

v. Agreement was subject to Condition precedent § 217

vi. To establish an equitable remedy, such as reformation of the contract § 214(e)

c. Did the parties intend their written agreement to be the final and complete statement of their agreement?

- Integration: agreement is final - Complete integration: complete and exclusive expression of the terms - Partial integration: writing intended to be final but not complete; deals with some but not all aspects

of transaction - How to determine?

o Traditional objective approach Intent of parties determined from the face of the writing 4 corners Merger clause decisive (i.e. entire agreement clause) Williston method Pro: distrust of parties, certainty, finality, careful drafting

o Subjective actual intent approach Actual intend of parties Any evidence to prove intent allowed Corbin view Good indicator: form contract, amount of negotiation § 209(3) Rest., § 210 Taylor v. State Farm Mutual Automobile Insurance Co.

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d. Does the evidence contradict or supplement the agreement?

(1) Completely integrated o No contradictory OR o No Supplemental terms

(2) Partially integrated o No contradictory terms

e. Promissory estoppel? - Rejected by most courts to overcome parol evidence rule

f. UCC-approach 2-202 - Courts more likely to look beyond the writing

(1) Express terms of agreement govern, but

(2) Explained or supplemented by, unless unreasonable

i. Course of performance, UCC 2-208 o conduct of parties after the agreement and in the course of performing it o more than once

ii. Course of dealing, UCC 1-205 o conduct of the parties prior to the contract

iii. Usage of trade, UCC 1-205 o practice or method of dealing in a place, vocation or trade, the context of the agreement o Must show regularity of observance of usage in a place, vocation or trade and Must be

binding on the party against whom it is offered. Nanakuli Paving & Rock Co. v. Shell Oil Co o unless totally negating express terms

V. Defenses

Statute of Frauds – Defense to an oral contract (§ 110 Rest.2d ff.) - Failure to comply with SoF will make promise unenforceable but not void - Purpose is to prevent fraud (courts narrow interpretation, are hostile to defense) - Defense may only be raised by party to the contract

a. Is this the type of oral contract that is within the S/F (i.e., is a writing required)? o Contracts for the sale of an interest in land

Leases Real estate

o Contract for sale of goods of more than USD 500 (UCC 2-201) o Contracts in consideration of marriage o Contracts that cannot be performed within 1 year of making

Usually employment contracts Courts ask whether it is possible to perform within 1 year from formation (e.g.

lifetime contract) o Suretyship contracts (guarantees)

b. If so, is there a sufficient memorandum to meet the statutory requirement? o § 131 Rest.2d

Any written document – may be by way of linked documents Signed by or on behalf of the party to be charged, which Reasonably identifies the subject matter of the K (parties, subject matter, terms and

conditions)

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Is sufficient to indicate that a contract has been made, and States w/ reasonable certainty the essential terms

o UCC 2-201 Requirement is less demanding than common law Signed writing sufficient to indicate a contract has been made Must state a quantity, but other terms can be omitted or even misstated “Signature” can be any authentication

c. If a writing is required, but there is not a sufficient memorandum, is there an exception? o Rest. 2d 129 – land contract – may be specifically enforced if party seeking enforcement

changed position in reasonable reliance o Rest. 2d 139 – promissory estoppel principle - other remedies insufficient, definite &

substantial, reasonable & foreseeable reliance, clear & convincing evidence of terms o UCC-2-201

specially manufactured goods where seller has made a substantial beginning of manufacture;

if party to be charged admits in pleading, testimony or otherwise in court that K for sale was made (judicial admission),

if goods have already been shipped and payment made (part performance) K is enforceable with respect to those goods.

under 2-201(2), between merchants, if one side sends a written confirmation within a reasonable time after oral K and the other fails to respond within 10 days of receipt, then that's sufficient writing to charge both parties, at least for S/F purposes

promissory estoppel by UCC 1-103

d. Party may recover by way of promissory restitution (§ 82 Rest.2d) or promissory estoppel reliance (§ 139 Rest.2d)