CONTRACTS IProfessor Beh (Fall 2003)

I. BASES OF PROMISSORY LIABILITY(CONSIDERATION)

Introduction

Generally, a contract is an agreement that the law will enforce. Although the word "contract" often refers to a written document, a writing is not always necessary to create a contract. An agreement may be binding on both parties even though it is oral. Some contracts, however, must be in writing under the Statute of Frauds.

Sources of Contract Law:

A. The UCC: Contract law is essentially common law, i.e. judge-made, not statutory. However, in every state but Louisiana, sales of goods are governed by a statute, Article 2 of the Uniform Commercial Code.

B. Common-law: If the UCC is silent on a particular question, the common law of the state will control. See UCC § 1-103

Types of Contracts:

A. Bilateral—promise for a promise—K accepted by commencement ofperformance by offeree.

B. Unilateral—promise for performance—K not accepted until promisecompletes performance.

Types of Damages:1. Expectancy—Future Damages (speculative)2. Restitution—Takes back what ∆ gained (looks in ∆’s pocket)3. Reliance—puts the п back in position before contract.

I. CONSIDERATION DOCTRINE (Bargained-For Exchange)

Definition of consideration: Something of value (such as an act, a forbearance, or a return promise) received by a promisor from a promise. “Bargained-For exchange” As a general rule, a contract will not be enforceable unless it is supported by "consideration." (The few exceptions are treated in "Promises binding without consideration" below.) A promise is supported by consideration if:

1. Detriment: The promisee gives up something of value, or circumscribes his liberty in some way (i.e., he suffers a "legal detriment"); and

2. Exchange: The promise is given as part of a "bargain"; that is, the promisor makes his promise in exchange for the promisee’s giving of value or circumscription of liberty.

RESTATEMENT § 71: Consideration for a promise is…

1) To constitute consideration, performance or a return promise must be bargained for: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.

3) The performance may consist of:a. an act other than a promise, orb. a forbearance, orc. the creation, modification or destruction of a legal relation, ord. a return promise

Purpose of ConsiderationEnforcing Exchange Transactions: The Doctrine of ConsiderationThree reasons for importance of consideration.

1. Channeling –Only serious, important complaints get through.2. Evidentiary – because consideration has transactions on both sides, both sides do

something3. Cautionary – process of bargaining. Should be alerted that you’re entering into

something.

A. BARGAIN ELEMENT—GIFT PROMISESFor a promise to be supported by consideration, the promisee’s “detriment” must have been bargained for by the promisor.

Bargain: (Restatement § 71 (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 promise in exchange for that promise.”. i. Gratuitous Promises

In ordinary cases of a promise to make a gift, the promise fails to be enforceable for lack of consideration not only because the promise is not part of a bargain, but also because there is no detriment to the promise.

Dougherty v. SaltFacts: Promissory note from aunt to nephew for being a good boy. No consideration. UnenforceableRULE: A note must have the agreement from both parties. There must be offer and acceptance to have a contract. A promissory note is not sufficient to satisfy the consideration ground for a contract.

ii. Conditional Promises

In some cases where the promise must meet certain conditions in order to receive the gift, but the meeting of these conditions is not really “bargained-for” by the promisor (ie. Kirskey) the promise will be unenforceable.

Test: bargain v. pre-condition: Does the occurrence of the condition benefit the promisor? If so, the promisee’s action was probably “bargained for.” If not, the promisee’s action was merely a necessary pre-condition.

Kirksey v. Kirksey (1845)Facts: ∆ sent п a letter telling her that if you will come down and see me, I will let you have a place to raise your family.” п moves, and ∆ gives her a place to stay for 2 years but eventually asks her to leave that residence.RULE: Gratuity promises are not legally binding contracts. For an executory promise to be legally enforceable it must be supported by sufficient bargained for consideration.*in this case, the promise ∆ made was a conditional promise…meaning the п had to meet the condition in order to receive the promised “land” but the condition wasn’t something the ∆ bargained for, therefore it is not sufficient consideration.

*Executed gifts: It is only the promise to make a gift, not the actual making of a gift, that is unenforceable for lack of consideration. Once the promisor makes the gift, he cannot rescind it for lack of consideration

RESTATEMENT § 76: Conditional Promises“A conditional promise is not consideration if the promisor knows at the time of making the promise that the condition cannot occur.”

iii. Sham and Nominal Consideration

Although the law doesn’t usually concern itself with adequacy of consideration, nominal consideration is usually an indication that there was no bargain at all, but rather, a gift.

B. BARGAIN ELEMENT—PAST CONSIDERATION

There is no bargain if the promise was made in return for a detriment already suffered by the promise. Therefore, past consideration is Not consideration.

Exception To Past Consideration Rule: Promises to pay for benefits previously received are often justified on the grounds that “moral obligation” furnishes consideration.

i. Promises to pay for Past Services Received

RESTATEMENT § 86: Promise for Benefit Received“(1) A promise made in recognition of a benefit previously received by the promisor from the promise is binding to the extent necessary to prevent injustice.”“(2) A promise is not binding under section 1 if:

(a) the promise conferred the benefit as a gift.(b) the value is disproportionate to the benefit

A promise made in recognition of a benefit previously conferred upon promisor is binding to the extent needed to prevent injustice

Feinberg v. Pfeiffer Co.(1959)Facts: п quit her job after she was told she would receive retirement pay.RULE: Contract requires mutual obligation. (See promissory estoppel section) Also: Past consideration is not valid consideration for a promise

Mills v. Wyman (1825)Facts: Son gets sick while away from home, п takes care of the son and pays for expenses. After all the expenses were incurred, the ∆ promised to pay for the bills, but later doesn’t.RULE: No consideration if no bargain. Consideration if there is a pre-existing obligation.

ii. Moral obligation--usually not enforceable unless measurable material benefit.1. Traditional basis (Restatement 2d §82): promise + antecedent debt (if you have a

debt but you bring it up again past statute of limitations, you thus become bound again)

2. Modern? (Restatement 2d §86): promise + moral obligation (promise binding unless it's gift or not unjustly enriched or value disproportionate to the benefit)

Webb v. McGowin (1935)—Moral Obligation—material benefitFacts: п saves ∆ decedent from having 75lb dropped upon him from the second story. The decedent promised to pay п $15 everyday for life. Decedent’s estate doesn’t pay.RULE: Where the promise cares for, improves and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service because of material benefit received. (Therefore, a moral obligation is a sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit)

C. DETRIMENT ELEMENTPromisee must do something he does not have to do, or refrain from doing something that he had a right to do.

RESTATEMENT § 71(3)—Detriments3) The performance may consist of:

a. an act other than a promise, orb. a forbearance, orc. the creation, modification or destruction of a legal relation, or

a return promise

*Detriment can be either a promise or a performance.Promise= bilateral contractPerformance=unilateral contract

Hammer v. Sidway (1891)Facts: Uncle promises nephew $5,000 if nephew promises not to drink, smoke, swear or gamble until he turns 21.

RULE: Forbearance of a legal right is sufficient consideration.

Fiege v. Boehm (1956)Facts: п made a charge in good faith that she will not institute a bastardy proceeding against a man she dated, although she is not completely sure the man is the father.RULE: Forbearance to assert an invalid claim may serve as consideration for a return promise if the parties at the time of the settlement reasonably believed in good faith that the claim was valid.

RESTATEMENT § 74: Settlement of Claims“(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless

(a) the claim or defense is doubtful because of uncertainty as to the facts or law.(b) The forbearing or surrendering party believes that the claim or defense may be

fairly determined to be valid. (must be in good faith)

D.Pre-existing Duty Rule

i. Pre-existing duty RulePre-existing duty is not supported by consideration. If a party does or promises to do what she is already obligated to do, then there is no detriment and therefore no consideration.

RESTATEMENT § 73: Performance of Legal Duty“Performance of a legal duty owed to a promisor, which is neither doubtful nor the subject of honest dispute is not consideration…”

Traditional Rule: requires there to be new consideration, however insignificant, to support modification. (See Levine, Alaska Packers)

UCC 2-209(1): No consideration necessary if modification is in good faith (See Angel)

Restatement (Second): No consideration for modifications due to unanticipated circumstances and if modification is fair and equitable).

Alaska Packer’s Association v. DomenicoFacts: Workmen agreed to do work but at the scene refused to work unless given a pay increase. Managers promised to pay workers but at the end of the season doesn’t give workers the promised pay increase.RULE: If п cannot bargain with something they are already legally obligated to do.

Levine v. Blumenthal (1931)

Facts: п leased to ∆ for $175 a month for first year, and then $200 a month for second year. ∆ couldn’t pay so п orally agreed to reduce payments to $175 for second year. ∆ didn’t pay so п tries to enforce original contract for $200 for the second year.RULE: For a subsequent agreement to be enforced, to impose the obligation of a contract must rest upon a new and independent consideration.

ii. Additional Duties to Pre-existing dutyIf the party that promises what she is already bound to do assumes even the slightest additional duty, or a different/ new duty, then these duties constitute new consideration.

Angel et al v. Murray Facts: ∆ was contracted by city to remove waste. ∆ requested a change in pay after picking up more trash then what was agreed upon in the contract.RULE: RESTATEMENT § 89 (a) “A promise modifying a duty under a contract not fully performed on either side is binding….a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when contract was made.

E. Implied Terms/ Illusory Promise/ Output ContractIllusory Promise: “a statement which appears to be promising something, but which in fact does not commit the promisor to do anything at all.” If the “contract” gives one party total discretion on whether to perform, then it is illusory if that party hasn’t committed to anything.

RESTATEMENT § 77: Illusory and Alternative Promises“A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless:

(a) each of the alternative performances would have been consideration if it alone had been bargained for; or

(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

Mattei v. Hopper (1958)Facts: п agreed to purchase property from ∆ by signing an agreement that stated a condition upon which the ∆ would sell the property.RULE: A promise conditional upon the promisor’s satisfaction is not illusory promise as long as the dissatisfaction, is in good faith. Satisfaction Clause: (2 types)

1. Objective—judged by reasonable person standard2. Subjective—as long as person (in good faith) is satisfied.*Agreement based upon offeree’s satisfaction is still good consideration.

Wood v. Lucy (1917)

Facts: ∆ endorsed products that п was to sale. п was to have exclusive rights to sale products and ∆ would receive ½ of the profit made from sales. п did not sell products.RULE: an implied promise is a sufficient detriment to constitute consideration.

Output Contracts: one that calls on the seller to deliver and the buyer to take all of the goods that may be produced by the seller.

UCC § 2-306 (2): A lawful agreement by either the seller or the buyer for exclusive dealing in goods, unless otherwise agreed upon, imposes the seller to use best efforts to supply the goods and the buyer to use best efforts to promote their sale.

II. RELIANCE AS AN ALTERNATIVE BASIS OF LIABILITY (Promissory Estoppel)

A. ELEMENTS OF PROMISSORY ESTOPPEL: (Action induced, Injustice suffered) 1) A Promise2) Which Promisor reasonably expects to induce action, and (reliance is foreseeable)3) Does induce action (promisee actually relies on the promise)4) Binding Injustice (detriment of promisee)5) Limited as justice requires (court decides relief)

*No detrimental reliance provision in UCC but still applies through common law

RESTATEMENT § 90 (1): Promise Reasonably Inducing Action or Forbearance“A promise which the promisor should reasonably expect to induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”

Possible Applications:1. Promises to make a gift2. Charitable subscriptions3. Gratuitous bailments and agencies—if a person promises to take care of another’s

property or carry out another person’s act as an agent.4. Offers by sub-contractors5. Promises of a job6. Negotiations in good faith—if court finds negotiations were done in bad faith by

one party, promissory estoppel may apply.

Cohen v. Cowles Media Company Facts: п leaked information to a newspaper reporter that promised to keep п’s identity confidential. The newspaper published name anyways, and п lost his job, п sued for breach of contract.RULE: If п relied upon the assumed contract, and an injustice will occur if п is not remedied for ∆’s actions or inactions, then ∆ is bound by promise.

Feinberg v. Pfeiffer Co.Facts: п quit her job after the company guaranteed her retirement benefits for life.RULE: Restatement 90

Ravelo v. County of HawaiiFacts: п and his wife both quit their jobs in Honolulu, upon reception of a letter from the ∆ that the п had been accepted and would be sworn in as a police recruit. After quitting his present job, the ∆ informed the п that he could no longer be offered the position.RULE: If an employer promises an at-will-job to an employee, and then revokes the promise before the employee shows up for work, Promissory Estopple may apply. Restatement 90 applies even if the reliance was not bargained for.

D&G Stout, Inc. v. Bacardi Imports, Inc.Facts: п received assurances from ∆ that it intended to purchase the company from the п so п rejected (forgone) an offer from a different company to purchase the company at a similar price. ∆ in the end declined to purchase company, and п was forced to sell company at a reduced price to the other company b/c of ∆’s broken promise to purchase.RULE: An opportunity forgone based on a reliance upon a promise is enforceable through promissory estoppel.

Ricketts v. Scothorn (1898)Facts: п quit her job after her grandfather promised her money.RULE: The expenditure of money or assumption of liability by the donee on the faith of the promise constitutes a valuable and sufficient consideration. (Therefore, a promise may be legally binding without consideration if it reasonably induced action or forbearance, and if injustice will be avoided by its enforcement).

B. UNJUST ENRICHMENT & RESTITUTION (quasi-contract)(looks at the pockets of the person unjustly enriched)

Cotnam v. Wisdom (1907)Facts: person was thrown from a car. п was a doctor that performed a difficult operation at the scene in an attempt to save person’s life. Person dies. п tries to collect compensation for services rendered at the scene.RULE: Implied contracts can be applied to people incapable of contracting.

Callano v. Oakwood Park Homes Corp. (1966)Facts: ∆ built a home to sell to Pendergasts. п planted shrubbery pursuant to a contract with the Pendergasts. Pendergasts do not buy the home, but shrubbery is still planted on ∆’s property. ∆ sells property plus shrubbery to another buyer.RULE: To recover under the theory of Quasi-contract; the п must prove that ∆:

1. Was enriched (received a benefit)2. Enrichment was unjust.

Pyeatte v. Pyeatte (1982)Facts: husband and wife agree that wife will work to put husband through law school, and then afterwards husband will work to put wife through school. Husband divorces wife, and doesn’t pay to put her through school.

RULE: if there is unjust enrichment then restitution is appropriate.*Courts do not allow marital restitution unless definite enrichment + unilateral effort by one spouse

II. CONTRACT FORMATION(OFFER & ACCEPTANCE)

I. THEORY OF MUTUAL ASSENT

A. Mutual Assent (intent to contract)

Manifestation of Mutual Assent: For a contract to be formed, the parties must reach an agreement to which they “mutually assent”. This mutual assent is characterized by a bargaining process that includes the offer and the acceptance.

*Party’s intent to contract is judged from the standpoint of a reasonable man. No contract unless there was a meeting of minds and parties have mutually agreed on some specific terms.

Any contract look for:1. contractual intent2. meeting of the minds (lucy v. Zehmer)3. mutually agreement

THE NATURE OF ASSENT: 2 approaches1. OBJECTIVE—contract has nothing to do with the personal or individuals intent

of the parties. Looks at actions, and sees if a reasonable person would have interpreted that there was a contract. (See Lucy v. Zehmer)

Implied by Fact—applicable standard now.2. SUUBJECTIVE—actual intent theory, looks at parties’ intentions.

Lucy v. Zehmer (1954)Facts: ∆ while drinking with п agreed to sell п his farm for $50,000. The ∆s signed a piece of paper stating agreement. ∆ argues that the offer was a joke, when п tries to enforce the deal.RULE: If actions appear to invoke a reasonable belief in п that a genuine agreement was made then it doesn’t matter what ∆’s intentions are.

*If both parties know it is a joke, then contract is not enforceable. “The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.”

B. Statutes Beh just mentioned for this section:

RESTATEMENTS 22, 24, 26, 29

§ 22: (Mode of Assent: Offer and Acceptance) Manifestation of mutual assent may be made even though the moment of formation cannot be determined.*§ 24: (Offer Defined) 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. (statement that creates a power of acceptance, no further negotiation required)§ 26: (Preliminary Negotiations) 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.*§ 29: (To whom an Offer is Addressed) The manifested intention of the offeror determines the person or persons in who is created a power of acceptance..

§ 16 Intoxicated Persons(1) A person incurs only voidable contractual duties by entering into a

transaction if the other party has reason to know that by reason of intoxication:

a. he is unable to understand in a reasonable manner the nature and consequences of his transaction, or

b. he is unable to react in a reasonable manner in relation to the transaction.

§ 18: Manifestation of Mutual Assent1. Manifestation of mutual assent to an exchange requires that

each party either make a promise or begin to render a performance.

§ 21: Intention to be Legally Bound1. 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. (basically if both parties think no contract, subjectively, then no contract – it’s a mutual opinion and doesn’t matter what you think subjectively)

UCC 2-204(a): A contract may be made in any manner sufficient to show agreement including by offer and acceptance and conduct of both parties which recognize the existence of a contract.

II. OFFER AND ACCEPTANCE

A. THE OFFER

“An offer is…an act whereby one person confers upon another the power to create contractual relations between them”

Elements of an Offer:1. Fixed Purpose (24)2. Invites Acceptance—offeror master of contract (24)3. Leaves no room for negotiations(24)4. Specificity (24)5. Gives power to offeree to accept Restatement 29

Offeror: is the master of the offer, can set terms and manner and mode of acceptanceOfferee: creates power of acceptance

i. Timing issue Offer is effective upon receipt Offer may be withdrawn before receipt Offer may be revoked after receipt but before acceptance

Termination of Offer: (Restatement § 36,42,43)

1) LAPSE of the Offer; after the stated date or a reasonable time2) REVOCATION of the offer3) Offeror’s DEATH or INCAPACITY4) Offeree’s REJECTION

1. Lapse—after the expiration the offer was stated it must be accepted by, or a reasonable time if no set date.

2. Revocation—offeror can terminate an ordinary offer any time before it has been accepted by revoking it. (exception: Option Contracts—for a specified time, offer is not revocable)

3. Death of an Offeror—§ 48: offeree’s power of acceptance is terminated by the offeror’s death or supervening incapacity. (exception: death does not terminate an option contract)

4. Rejection—rejection by offeree terminates power to accept later.

*Generally an offer in a face to face conversation ends when the conversation ends.

ii. Counter Offers

Generally counter offers are rejections of the original offer.

iii. Advertisements as offers/ specific terms

Most advertisements are not offers to sell, because they do no state specific terms.Offers from advertisements, solicitations, price quotes, preliminary negotiations, inquiries and invitations to make an offer are NOT offers

Exception: Rare occasions, advertisements can be offer if it is a reward or states a specific promise or commitment to sell a particular number of units or to sell items in a particular

manner, and who may accept. i.e. first-come, first-serve with $1 at this location, for one scarf, etc…

iv. Offers made in jest

An offer made in jest which the offeree knows or should know is a joke is not a valid offer, even if it is “accepted”. However, the subjective intent of the offeror is irrelevant. If the offeree genuinely believes it is an offer.(See Lucy)

Lucy v. Zehmer (1954)Facts: ∆ while drinking with п agreed to sell п his farm for $50,000. The ∆s signed a piece of paper stating agreement. ∆ argues that the offer was a joke, when п tries to enforce the deal.RULE: If actions appear to invoke a reasonable belief in п that a genuine agreement was made then it doesn’t matter what ∆’s intentions are.

v. Preliminary negotiations/ inquiries/ invitations

RESTATEMENT § 26: Preliminary Negotiations“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”

Test: whether a person in the offeree’s shoes would reasonably have understood that the offeror was merely seeking to invite preliminary negotiations.

Harvey v. Facey (1893)Facts: п (buyer) asks will you sell? What is your lowest cash price? ∆ (seller) answers lowest price is 900lbs. п took ∆’s answer as an offer and replies “I accept” (offer)RULE: Statements of price, alone, are not unconditional offers.

Fairmount Glass Works v. Crunden Martin Woodenware Co. (1899)Facts: Buyer writes to seller for the lowest price. Seller gives a quote of prices and details and states that the prices are for “immediate acceptance” and the letter also included terms (price, quantity, date K expires)

Buyer accepts.Seller sells out of product and cannot ship products as agreed upon. (Breach of K)

RULE: If terms of the Contract are definite, then contract is enforceable.

Essential Terms of an agreement:1. Parties2. Subject Matter3. Time for Performance4. Price

vi. Revocation of an Offer

Unilateral Contract—once performance has begun, the offeror cannot revoke the offer.Option Contract—irrevocable. The offeree buys the promise from the offeror not to revoke.

vii. Termination of Offer: (Restatement § 36)

5) LAPSE of the Offer; after the stated date or a reasonable time6) REVOCATION of the offer7) Offeror’s DEATH or INCAPACITY8) Offeree’s REJECTION

5. Lapse—after the expiration the offer was stated it must be accepted by, or a reasonable time if no set date.

6. Revocation—offeror can terminate an ordinary offer any time before it has been accepted by revoking it. (exception: Option Contracts—for a specified time, offer is not revocable)

7. Death of an Offeror—§ 48: offeree’s power of acceptance is terminated by the offeror’s death or supervening incapacity. (exception: death does not terminate an option contract)

8. Rejection—rejection by offeree terminates power to accept later.

*Generally an offer in a face to face conversation ends when the conversation ends.

B. Irrevocable Offers

Irrevocable offers: The ordinary offer is revocable at the will of the offeror. (This is true even if it states something like, "This offer will remain open for two weeks.")Exceptions:

1. Option contracts: First, the offeror may grant the offeree an "option" to enter into the contract. The offer itself is then referred to as an "option contract."

a. Common law requires consideration: The traditional common-law view is that an option contract can be formed only if the offeree gives the offeror consideration for the offer.

b. Modern (Restatement) approach: But the modern approach, as shown in the Restatement, is that a signed option contract that recites the payment of consideration will be irrevocable, even if the consideration was never paid.

*some option contracts can be assigned to someone else.

RESTATEMENT § 87(a): Option Contract : mailbox rule does not apply to option

(1) An offer is binding as an option contract if it

(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;

Buying an option Must be:

1. signed by offeror

2. in writing

3. exchanged on fair terms (contract itself)

4. nominal recitation is okay

* Usually only freezes the offeror

RESTATEMENT § 37: Termination of Power of Acceptance of an Option Contract

“The power of acceptance under an option contract is not terminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements are met for the discharge of a contractual duty.”

*But the Offeree can terminate the option

2. "Firm offers" under the UCC: The UCC is even more liberal in some cases: it allows formation of an irrevocable offer even if no recital of the payment of consideration is made. By § 2-205, an offer to buy or sell goods is irrevocable if it:

(1) is by a merchant; (2) is in a signed writing; and (3) gives explicit assurance that the offer will be held open. Such an offer is irrevocable even though it is without consideration or even a recital of consideration. (no consideration needed) (UCC only allows for 3 month options)

3. Part performance of a Unilateral Contract (Promissory Estoppel / Detrimental Reliance factor) RS § 87 (2)Part performance of a unilateral contract renders the contract temporarily irrevocable as long as the offeree continues to perform the contract diligently.

RESTATEMENT § 45: Option contract created by part performance or tender (when offeree has item in hand and is about to give it to the offeror)“(1) 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 or tenders a beginning of it.(2)The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.” (must be more than mere preparation—must be actual performance)

4. Offers plus reliance: Bids, General Contractors, Sub Contractors

Under Drennan v. Star Paving Co. – modern rule, favors General, says subs cannot pull back bids Facts: ∆ placed a bid on a project for $7,000 and was awarded the contract. He realized the bid was mistakenly low and refused to perform for less than $15,000. п hired another contractor for $10,000 (lost $3000 based on original bid).RULE: A promise that induces action or forbearance by the promise is binding if injustice can be avoided only by enforcement of the promise.

Under Baird:Past Rule: Subcontractor can revoke offer before General contractor accepts (prevents bid shopping)

C. The Acceptance (RESTATEMENTS: 36, 41, 42, 43, 46, 48, 63, 69)

Acceptance: “a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offeror.” (RESTATEMENT § 50)Acceptance can only be made by the person the offeror intended to give such power to.*Must be communicated

i. Accepting Unilateral and Bilateral Contracts1. By Return Promise—bilateral contract (Restatement 53)

In a bilateral contract, acceptance by commencement of performance binds both parties. (See Ever-Tite Roofing v. Green)

2. By Performance—unilateral contract (Restatement 30) (separates mere preparation from partial performance) In a unilateral contract, acceptance occurs by full performance, but beginning

performance creates an option contract and the offeror cannot withdraw the offer before the offeree has had a reasonable opportunity to complete performance

RESTATEMENT § 63: Time When Acceptance Takes EffectUnless the offer provides otherwise,

(a) It is an acceptance when accepted in the manner invited by the offer, without regard to whether it is received by offeror or not.

(b) Acceptance under an option contract is not an acceptance until received by the offeror.

*Acceptance must be made in a manner and by a medium invited by the offeror.

ii. Power of AcceptanceAn offer may be accepted only by a person in whom the offeror intended to create a power of acceptance.

iii. Accepting By Silence (exception: if similar offers are commonly accepted in this manner)General Rule: no acceptance by silence unless…See Restatement § 69

RESTATEMENT § 69: Acceptance by Silence(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an

acceptance in the following cases only:(a) when an offeree takes the benefit offered with reasonable opportunity to

reject them, and with reasonable reason to know that it was offered with the expectation of compensation.

(b) If the offeror has stated or given the offeree reason to believe that acceptance may be made by silence or inaction, and offeree intends to accept the offer in such manner.

(c) If there were previous dealings, and it is reasonable that the offeree should notify the offeror if he does not intend to accept.

iv. Timing Issue (Mail Box Rule)As soon as acceptance is placed in the mailbox, or dispatched in a reasonably expected manner, it is communicated and is therefore an acceptance even if it isn’t received.

Common law: revocation of an offer is ineffective if received after an acceptance has been properly dispatched.

Overtaking rejection: allows offeree to reject the offer as long as the offeror receives the rejection before receiving the acceptance.

Ardente v. HoranFacts: п received an offer from ∆ to buy property. п signed agreement and requested that items be left with the property. ∆ refused to sell.RULE: an acceptance must be definite and unequivocal.

v. Mirror Image RuleCommon law "mirror image" rule: Under the common law, the offeree’s response operates as an acceptance only if it is the precise mirror image of the offer. If the response conflicts at all with the terms of the offer, or adds new terms, the purported acceptance is in fact a rejection and counter offer, not an acceptance.

“Last shot” – last offer established when performance has begun is held enforceable

UCC view: The UCC rejects the "mirror image" rule, and will often lead to a contract being formed even though the acceptance diverges from the offer.

UCC § 2-207: Additional Terms in Acceptance or Confirmation“(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.”

Results: Acceptance need not be a mirror image (1) Removes the “last shot” advantage(1) Contracts formed by conduct governed by UCC Gap Fillers (3) (quantity not

fillable) Applies only to the sale of goods

Between merchants, additional terms in the acceptance are proposals which are in the contract unless objected to, material, or forbidden by the terms of the offer. (2)

D. Battle of Forms under the UCC

A contract for the sale of goods is often the result of an exchange of several documents. Ex. 1. Purchase Order--offer

2.Sales Acknowledgement--acceptance

Fairmount Glass Works v. Crunden Martin Woodenware Co.Facts: Buyer: “advise lowest price”

Seller: Quotes prices and details “for immediate acceptance”--offerBuyer: “Accept”Seller: “sold out, no sale”—breach of contract

RULE: specific terms “for immediate acceptance” constituted an offer not merely a quotation of price.

E. Meeting of the Minds

In order for a binding contract to be formed, there needs to be a meeting of the minds by both offeror and offeree. If one party knows that the other has changed his mind about the offer before acceptance is made, he may no longer accept on those terms.

Dickinson v. DoddsFacts: ∆ offered п to purchase property and gave him until a certain time to accept. Before п accepted he received news that ∆ was planning to sell to someone else. П then tried to present his acceptance to ∆ before the specified time, but ∆ told him “you’re too late” and refused to accept п’s acceptance. Court found no binding contract.RULE: for a contract to be formed there needs to be a meeting of the minds

III. STATUTE OF FRAUDS

I. STATUTE OF FRAUDSStatute that declares certain contracts judicially unenforceable if not committed to writing and signed by the party to be charged.

A. PurposeThe Statute seeks to prevent fraud and perjury by requiring written evidence of certain contracts before judicial enforcement of the agreement.(Criticism: promotes fraud because it sometimes leads to unenforceability of otherwise honestly made contractual promises)

RESTATEMENT § 110 and UCC § 2-201

§ 110: Classes of Contracts Covered

(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception

(a) a contract of an executor to answer for a duty of his decedent [Executor](b) a contract to answer for the duty of another [Suretyship](c) a contract made upon consideration of marriage[Marriage](d) a contract for the sale of an interest in land [Land contract](e) a contract that is not to be performed within one year from the making thereof.

[One Year]

UCC § 2-201: Formal Requirements; Statute of FraudsGeneral Rule: Contracts for the sale of goods > $500 must be evidenced by a signed writing.Exceptions: specially manufactured goods, judicially admitted agreements, performed or partially performed contracts (to the extent performed)

B. Writing RequirementMust:

1. Reasonably identify the subject matter2. Indicate that a contract has been made between the parties3. State with reasonable certainty the essential terms of the contract4. Be signed by or on behalf of the party to be charged.

*In Hawaii, once there is reliance, then the Statute of Frauds is no longer significant.

Contracts that fall under SOF:i. Suretyship: A promise to pay the debt or duty of another

Main Purpose Rule: if the promisor’s chief purpose in making his promise of suretyship is to further his own interest, his promise does not fall within the SOF.

ii. Marriage: A promise for which the consideration is marriage or a promise of marriage, is within the SOF.

An ordinary oral engagement is an enforceable contract.

iii. Land Contract: A promise to transfer or buy any interest in land. Ex. Leases (1 yr. or less), Mortgages. Contracts only incidentally relating to land do not fall under SOF Vendee’s part performance (ie. Possession, and improvements to land) may

render a oral land contract valid.

iv. One year provision: If a promise contained in a contract is incapable of being fully performed within one year after the making of the contract, the contract must be in writing.

Time begins from the time of execution of the contract, not the time it takes the parties to perform.

Only applies if performance is impossible within one year after the making of the contract.

v. Sale of Goods > $500: UCC § 2-201 says “a contract for the sale of goods for the price of $500 or more is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made.”

Exceptions: Specially manufactured goods, not suitable for sale to others, and the seller has made a substantial beginning of their manufacture.

Also, goods already received and accepted.

Note: A memorandum summarizing the agreements may be sufficient evidence under the SOF if it : 1) reasonably identifies the subject matter, 2) indicates that a contract has been made between the parties, 3) states with reasonable certainty the essential terms, and 4) is signed by the party to be charged. Crabtree v. Elizabeth Arden

IV. SCOPE AND MEANING OF THE CONTRACT

I. PAROL EVIDENCE: (determines Terms of the contract)

Purpose: “The purpose of the rule is grounded in a desire to give heightened significance to the written agreement of the parties over their oral representations and agreements, as well as their last agreement over their earlier writings and negotiations.”

A. Substantive not Evidentiary RuleThe parol evidence rule is a substantive rule of contracts more than a rule of evidence because it actually determines the terms of the contract, not merely what evidence will be considered or admissible.

B. The Rule: UCC § 2-202; Restatement § 209-2221) If a writing is a final expression of an agreement between the parties, then the

parol evidence rule applies.2) Where a court finds that the parties have expressed their contract in a completely

integrated written agreement, then the court will not consider extrinsic evidence of prior or contemporaneous oral or written exchanges

3) If the writing is found to be a final but not a complete statement [partially integrated] of the parties agreement, then a party may introduce evidence of additional, consistent terms.

C. Definitions

Partial Integration: final and complete as to certain terms but not as to all terms or details of the agreement. (Can add additional terms but can’t change any of the already set terms)

Complete Integration: Final and complete as to the terms of the entire agreement. (No evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or add to the writing.

Independent agreement: an independent agreement supported by separate consideration is always admissible without regard to the rule.

*Parol evidence rule provides that evidence of a prior agreement may never be admitted to contradict an integrated writing, and may furthermore not even supplement an integration which is intended to be complete. (applies to agreements prior to a signing of an integration).

D. Concepts/ Roles of Judge and Jury

Preliminary determinations made by judge: most courts hold that the judge decides1. whether the writing was intended as an integration;2. if so, whether the integration is “partial” or “total”; and3. whether particular evidence would supplement the terms of a complete integration

Corbin (Liberal view) Masterson v. SineAdditional terms or side agreements will be considered unless they are of the type that would certainly have been included in the agreement. (allows in more parol evidence)

Judge’s role Corbin Rule: Judge looks at all available evidence, including testimony, to

determine the actual intention of the parties.Williston (Conservative view) Mitchell v. LathWhen there is a partially integrated writing, additional terms or side agreements can only be considered if they are of a type which would naturally/ordinarily have been excluded from the agreement. (allows less parol evidence)

Judge’s role 4 Corners Rule: judge decides whether there is an integration, and whether it is

total or partial by looking solely at the document

Merger Clause: a clause that recites that the agreement is complete, that it represents the entire agreement between the parties and that this agreement supersedes any other prior written or oral agreements or representations. (proves most likely parties intended a total integration)

E. Partially or Totally Integrated

Contemporaneous writings: if an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the writing, and will not be subject to the parol evidence rule.

Liberal view—the clause is merely evidence of the intent of the parties to integrate the document

Masterson v. Sine (1968)

Facts: ∆ (Dallas and Rebecca Masterson) owned a ranch as tenants in common and conveyed it to п (Medora and Lu Sine) by grant deed reserving an option to purchase the ranch back within 10 years—by February 25, 1968—for the same consideration as was paid for the ranch plus the depreciation value of any improvements the п might have added. When ∆ (Dallas) went bankrupt, ∆ (Rebecca) sought to establish her right to enforce the option.

RULE: Evidence of oral collateral agreements should be excluded only when the fact finder (the court) is likely to be misled.

When a written contract is a complete and full embodiment of the agreement’s terms, parol evidence cannot be used to add to or vary the terms.

When only part of the agreement is complete the same applies to the completed part, but parol evidence can be shown to prove elements as to the remainder not reduced to writing.

It must be determined whether the parties intended the written agreement to be the complete and full embodiment of the terms.

Conservative view—the parties intended to have an integrated document.

Gianni v. Russel & Co., Inc. (1924)

Facts: ∆ (Russel) acquired the office building in which п (Gianni) leased space for selling tobacco, soft drinks, and candy. ∆ negotiated a new lease for a three-year period with п on the condition he not sell tobacco. п alleged he only accepted this because orally ∆ gave him the exclusive right to sell soft drinks which was violated when another tenant sold soft drinks, cutting into п’s profits.

RULE: All preliminary negotiations conversations, and verbal agreements are merged in and superseded by the subsequent written contract, and unless fraud, accident or mistake is alleged, the writing constitutes the agreement between the parties, and its terms cannot be added to or subtracted from by parol evidence.

F. Interpretation/ Omitted Terms supplied by the court

Interpretation:Most courts allow parties to introduce extrinsic evidence to aid in the interpretation of a contract, even if the writing is an integration.

Negotiated terms control standard terms: a term that has been negotiated between the parties will control over one that is part of a standardized portion of the agreement.

Omitted Terms:Courts will generally supply a missing term if it is apparent that the parties wanted to bind themselves, and there is a reasonable way for the court to go about formulating the missing term.

G. Analysis1. Is the contract integrated? (did the parties intend this writing as a final expression of their agreement?)

2. Is the agreement partially or totally integrated? (did the parties intend this to be a complete and final expression of their agreement?)

3. What is contradictory/ inconsistent?

4. May extrinsic evidence prove whether the agreement is integrated?

III. MISUNDERSTANDING & MISTAKE

A. Misunderstanding General Rule: if the parties have a misunderstanding about what they are agreeing to, this may prevent them from having the required “meeting of the minds.” No contract will be formed if:

1. the parties each have a different subjective belief about a term of the contract;2. that term is a material one;3. neither party knows or has reason to know of the misunderstanding.

Restatement § 20(1)(a)

(1) 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; or

(b) each party knows or has reason to know the meaning attached by the other.

Raffles v. Wichelhaus (1864)—Action for damages for breach of a contract for the sale of goods.

Facts: п (Raffles) contracted to sell cotton to ∆ (Wichelhaus) to be delivered from Bombay at Liverpool on the ship “Peerless.” Unknown to the parties was the existence of two different ships carrying cotton, each named “Peerless” arriving at Liverpool from Bombay but at different times.RULE: Where neither party knows or has reason to know of the ambiguity or where both know or have reason to know, the ambiguity is given the meaning that each party intended it to have.

*Because both disagree on the meaning of a material term, and neither has reason to know of the disagreement, there is no contract.

Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. (1968)

Facts: ∆ (Thomas) contracted to repair п (Pacific)’s steam turbine and to perform work at its own risk and expense and to indemnify п against all loss and damage. ∆ also agreed not to procure less than $50,000 insurance to cover liability for injury to property. But when the turbine rotor was damaged, п claimed it was covered under that policy while ∆ said it was only to cover injury to third persons.

RULE: The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.

B. Mistake

A mistake is a “belief that is not in accord with the facts.”

1. Mutual Mistake: if both parties have the same mistaken belief2. Unilateral: if only one party has the mistaken belief

*The doctrines applicable to mistake apply only to a mistaken belief about an existing fact, not an erroneous belief about what will happen in the future.

Ex. If Buyer and Seller both think that a stone is an emerald when it is in fact a topaz, this is a mistake. But if Buyer and Seller both think that the price of oil will remain relatively stable over the next five years, and in fact it goes up by 50% per year, this is not a mistake, since it does not relate to existing fact.

1. Mutual Mistake (Bi-lateral)Must prove:

a) that the mistake was a basic assumption upon which thecontract was formed.

b) that the mistake has a material effect upon the contractc) that the adversely affected party is not one which the

contract implicitly imposes the risk of mistake.

2. Unilateral MistakeMust prove either:

a) it would be unconscionable to enforce the contract; orb) that the party charged knew or had reason to know of the

mistake, or the party’s fault caused the mistake

C. Admitting Extrinsic Evidence

Courts will not disturb complete and unambiguous contracts for parol evidence

WWW. Associates, Inc. v. Giancontieri Facts: An integrated real estate contract gave either party the option to cancel. When the seller unexpectedly cancels, the buyer demands specific performance, contending the option was intended for his benefit alone.RULE: An unambiguous and final contract may not be reformed based on parol evidence. .Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.Facts: The parties to a turbine repair contract dispute the interpretation of an indemnification clause in the agreement.RULE: Extrinsic evidence of a party’s intent is admissible to assist in the interpretation of a disputed contract term.

D. Part Performance & Trade Usage of Terms for Interpretation

The UCC looks at the actual performance of a contract in order to determine the parties’ interpretation of the terms of the contract.

Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc. (1981)

Facts: ∆ (Shell) contended it was not obligated to price protect п (Nanakuli), and its conduct in the past did not constitute a course of conduct governing the contract.

RULE: A court may use evidence of standard industry practices and prior performance of parties to the contract to interpret the contract, if such evidence is not inconsistent with the terms of the contract.

Hierarchy of what the courts look at to determine contract terms1. Contract Provisions2. Course of Performance3. Course of Dealings4. Trade Usage

UCC § 1-205(1) (p. 155) Course of Dealing and Usage of Trade

(1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.