Contracts

What is a contract?

1. A legally enforceable promise  

1. an exchange relationship created by an agreement, which can be either oral or written, between two or more parties, and involves at least one legally enforceable promise. 

Why aren't broken social engagements contracts?

Courts would be overwhelmed. E.g., a broken lunch or movie date is not enforceable.

Why is a mere promise (no consideration) not a contract? Example?

No bargained-for exchange. E.g., Grandma promises Grandson $1,000 for nothing in return.

Bilateral contract?

A promise for a promise. Offeror promises, offeree makes a return promise in the acceptance (e.g., buying a car). The most common type.

Unilateral contract?

A promise made in exchange for performance (an act). Accepted by performing. E.g., reward contracts: "I'll give you $500 if you find my lost cat."

Can an offer in a unilateral contract be revoked once performance has begun?

No. Once the offeree begins performance, the offer cannot be revoked. Notice of intent to perform isn't needed unless the offer says so.

Cook v. Coldwell Banker - facts and holding

Broker offered a bonus; Cook earned/surpassed it, then employer changed the terms and refused payment. Unilateral contract is accepted by performance; performance is consideration. Offer can't be revoked after substantial performance.

Sateriale v. R.J. Reynolds Tobacco - facts and holding

RJR's reward program let customers earn "cash" toward catalog swag; RJR ended it, giving "months to redeem" but stopped printing catalogs. Offer in a unilateral contract; where one party relied extensively/the other benefited, courts try to salvage the contract. Substantial reliance + benefit.

Executed vs. executory contract?

Executed = fully performed by both parties. Executory = not yet fully performed (in process).

Express vs. implied contract?

Express = important terms explicitly agreed (oral or written), e.g., home sale, lease. Implied = no formal agreement, but words/actions show intent to contract, e.g., going to the dentist, eating out.

Valid contract?

Satisfies all of the law's requirements for a contract.

Unenforceable contract?

A contract exists but the law won't enforce it. E.g., statute of limitations has run, or oral agreement for sale of land (no writing).

Void contract?

No contract exists; neither party can enforce it. E.g., contract for murder (illegal).

Voidable contract?

One party has the option to enforce or void it. E.g., contract with a minor.

Promissory estoppel - what to look for?

Defendant made a promise and plaintiff relied on it. Enforces a promise despite no valid contract. Look for promise + reliance.

Quasi-contract (unjust enrichment)?

No valid contract, but one party received a benefit at the expense of another who expected to be paid; law prevents unjust enrichment. Look for benefit conferred + expectation of payment.

Legal formalism?

Law is a set of universal principles from decided cases; mechanically apply rules to reach an objectively "correct" result. Apply the law exactly as written.

Legal realism?

Law is decisions of judges/legislatures influenced by social, political, personal factors; not purely objective. Law is a dynamic social process that should include knowledge of human affairs beyond the written word.

Rule for formation of a contract?

Formation requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration.

Mutual assent?

Both parties intend to contract and agree to the same terms. A manifestation of mutual assent is required.

How do we determine mutual assent - objective or subjective test?

OBJECTIVE test: what a reasonable person in the parties' position would have understood. "Meeting of the minds" (subjective) is NOT the rule.

Ray - facts and holding

Builders signed a house contract, then claimed they didn't agree to the specs. Mutual assent existed; absent a valid defense, parties are bound by what they signed regardless of subjective intent. Only the reasonable-person view matters.

Definition of an offer?

The manifestation of willingness to enter into a bargain, made so as to justify another person in understanding that his assent is invited and will conclude it.

How do you know an offer was made?

The communication expresses an intention to be bound without further assent from the offeror.

Elements of an offer?

1) Intent to make an offer; 2) reasonably definite terms (price, quantity, time for performance, subject matter); 3) communicated to the offeree. (Exception: UCC gap fillers.)

Lonergan - facts and holding

Farm advertised in newspaper; one buyer thought he had it, but the seller sold quickly to another. A real offer gives the offeree power of acceptance. An advertisement is a mere request for offers; there was only negotiation, no offer.

Common law mailbox rule?

Acceptance is valid when mailed (dispatched), not when received - unless the offeror stated (expressly or by implication) that acceptance must be received.

List the NON-OFFERS

1) Invitations to bargain ("Are you interested in selling?"); 2) Price quotes; 3) Letters of intent (generally not binding); 4) Advertisements (general rule).

When can an advertisement be an offer?

When it has words of promise and is very specific. See Carlill.

Carlill v. Carbolic Smoke Ball Co. - facts and holding

Ad promised a money award if you used the product as directed and still got the flu. The ad was an offer, accepted by performance. A clearly communicated promise leaving nothing more to do but accept is an offer.

Four ways an offer terminates?

1) Revocation; 2) Rejection (incl. counteroffer); 3) Expiration of time; 4) Operation of law.

Revocation - when is it effective, and when is it barred?

Offer may be revoked any time before acceptance; effective when RECEIVED. Exceptions: option contracts and merchant's firm offers (UCC).

Option contract?

Offeree pays to keep the offer open; it's a separate contract in itself, so the offer can't be revoked.

UCC merchant's firm offer?

A merchant's signed writing offering to buy/sell goods and stating it will be held open: irrevocable for the stated time (or reasonable time), not to exceed 3 months. No consideration needed.

Rejection - effective when?

When received, not when sent. Can be a clear rejection or a counteroffer.

Counteroffer?

Offeree responds with a new or different proposal. Any change to the original terms rejects the original offer and creates a new offer (roles switch). Fails the mirror image rule.

Expiration of offer - rules?

If a time limit is stated, offer ends when time is up. If none, it lasts a "reasonable time" (depends on circumstances).

Termination by operation of law?

Death or incapacity of either party, or destruction of the subject matter, automatically terminates the offer (if not yet accepted).

Acceptance?

Manifestation of assent to the terms of an offer, objectively determined. A voluntary act by the offeree (words or conduct). Must be clear, communicated to offeror, timely, and made in a proper manner.

Method vs. manner of acceptance?

Method = mail, phone, email, etc. Manner = return promise, performance, or beginning performance.

What if the offer specifies method/manner? If it doesn't?

If specified, acceptance must use it. If not specified, offeree may use any reasonable method/manner.

Mirror image rule?

Common law: acceptance must match the offer's terms exactly. Any change makes it a counteroffer.

Exceptions to the mailbox rule?

1) Offer specifies receipt; 2) option contract; 3) instantaneous communications (usually); 4) fickle offeree (mails rejection first, then acceptance).

Normile v. Miller - facts and holding

Seller listed home; Buyer 1 offered, seller counteroffered; Buyer 2 offered and seller accepted. Buyer 1 signed the counteroffer AFTER learning house was sold. No contract with Buyer 1: offer is freely revocable before acceptance; revocation removes the power to accept.

Normile rule on contract formation?

Valid contract only when parties assent to the same thing in the same sense and minds meet on all terms.

Why do parties postpone bargaining / leave terms open?

Innocent mistake; roll the dice (cost of more bargaining outweighs risk); want better position if dispute arises; further negotiations anticipated.

Walker v. Keith - facts and holding

Ten-year lease with renewal option at rent based on conditions of the time; parties couldn't agree. No contract: clause too indefinite, no fixed rent or method of calculation. An agreement to agree is NOT a contract.

Quake Construction v. American Airlines - facts and holding

Letter of Intent to Quake said a formal contract would follow and reserved right to cancel; American later terminated. Future formal agreement doesn't make prior agreements mere negotiation. Key is intent; LOIs may be binding if intended. Detailed terms, authorized work and quick start suggest intent; ambiguity, so trier of fact decides.

What does consideration do?

Separates an unenforceable promise from an enforceable contract.

Elements of consideration?

1) Value (act, forbearance, or promise - legal benefit to promisor OR legal detriment to promisee); 2) Bargained-for exchange (this for that).

Benefit/Detriment theory?

Needs a benefit to promisor OR detriment to promisee. Did the promisor get something? Did the other party give something up?

Hamer v. Sidway - facts and holding

Uncle promised nephew money if he abstained from drinking, smoking, gambling until 21. Consideration existed: waiver of any legal right at another's request is consideration.

Bargained-for exchange theory?

Something of legal value given in exchange for a reciprocal promise/performance, where each party views their consideration as the motivation or price for the other's. Must be sought by promisor in exchange for promise and given by promisee in exchange for it.

Forms of bargained-for performance (Restatement)?

An act other than a promise; a forbearance; or creation, modification, or destruction of a legal relation. Can be given to promisor or another, and by promisee or another.

Pennsy Supply v. American Ash Recycling - facts and holding

Pennsy took free AggRite (hazardous waste) for a school project; it failed and Pennsy incurred $252K remedial and $134K disposal costs. A contract existed: detriment, bargained for and given in exchange for the promise. If action benefits the promisor, it's consideration, not a condition on a gift.

Three functions of legal formalities?

Evidentiary (evidence of a contract); Cautionary (deters, induces deliberation); Channeling (signals intent to do something in future).

Dougherty v. Salt - facts and holding

Aunt gave nephew a promissory note as a gift and died. No consideration; a gift with no consideration is unenforceable.

Plowman v. Indian Refining - facts and holding

Company laid off tenured workers but kept paying them (no duties) for about a year, then stopped. No consideration: past performance (years of service) isn't consideration for a future promise, and moral obligation isn't consideration.

Promise to give a gift?

Not consideration. A mere condition on a gift is not consideration. Ask: was there a benefit to the promisor? If no, it's only a condition.

Moral obligation?

A promise only; not consideration. Some exception: charitable donations that are detrimentally relied upon.

Preexisting duty rule?

A promise to do what one is already legally obligated to do is not sufficient consideration (e.g., sheriff catching a criminal; raise with no added duties).

Exceptions to preexisting duty / modification rules?

Additional or extra work; common law requires new consideration for modifications; UCC permits modifications without added consideration; unforeseen circumstances on unfinished projects are usually enforceable.

Past consideration?

A promise for something already done is not consideration (e.g., promise of a bonus after work completed). Exceptions: parties agree in advance, or promissory estoppel.

Pretense of bargain (nominal consideration)?

A fake or token exchange used to disguise a gift as a binding contract.

Adequacy of consideration - general rule?

Courts do not inquire into adequacy of consideration.

Harris v. Time, Inc. - facts and holding

Junk mail: open by a date and get a calculator watch; after opening, recipient learned a subscription purchase was involved. Technically a contract, but dismissed as de minimis - no real damages, only seconds to open an envelope.

Illusory promise?

Words in promissory form that promise nothing, or leave performance entirely optional to the promisor. Looks like a commitment but the promisor chooses whether to perform.

Marshall Durbin Food v. Baker - facts and holding

Struggling business agreed to pay Baker 5 years after a triggering event (the boss's death). There was consideration: employer said that if he stayed, they would pay him.

Agency?

Consensual relationship where an agent agrees to act on behalf of a principal. Principal is bound by agent's contracts and liable for agent's torts.

Fiduciary relationship?

Relationship of trust and confidence requiring one to act in the other's best interest; imposes duties of loyalty, care, etc.

How is an agency relationship created?

Principal consents that agent act on their behalf and subject to their control; agent consents to so act.

Five types of agent authority?

1) Express actual; 2) Implied actual; 3) Apparent; 4) Ratification; 5) Estoppel.

Express actual authority?

Agent may take actions designated by principal.

Implied actual authority?

Agent may take actions fairly implied by principal's general directions.

Apparent authority?

Principal said/did something leading a third party to believe the agent has authority.

Ratification?

Agent had no authority, but principal approves the act after the fact.

Agency by estoppel?

Principal is estopped from denying the relationship where principal caused a third person to detrimentally rely on agent's "authority."

Goal of the UCC?

Effectuate the legitimate expectations of those engaged in business dealings.

UCC approach to formation?

Liberal policy for formation: intent to contract trumps formalities and technicalities.

What does Article 2 cover and who does it apply to?

Sale of goods. Applies to everyone: consumer-merchant, merchant-merchant, consumer-consumer.

UCC writing requirement for goods?

Statute of frauds (2-201): writing generally required for goods priced at $500 or more. Oral contracts for goods under $500 are enforceable.

Relationship between UCC and common law?

UCC doesn't replace all common law. If Article 2 addresses an issue, it controls; if not, common law fills the gaps.

Jannusch v. Naffziger - facts and holding

Oral deal to sell Festival Foods business for $150,000; buyers later backed out. Predominantly a sale of goods (predominant purpose test). UCC 2-204: agreement can be shown by conduct, even if exact moment unknown, and with open terms if intent to contract exists.

UCC 2-204 key points?

Agreement by mere conduct OK; unknown timing OK; open terms OK. UCC asks: did parties intend to contract?

Styberg v. Eaton - facts and holding

Styberg negotiated with Eaton about 13,000 I-Brakes; Eaton only ordered small quantities. No contract: UCC is liberal, but essential terms must be specific. Missing price may be OK; missing QUANTITY is fatal.

Why do businesses use standardized forms, and what's the common-law problem?

Too many repetitive transactions to negotiate each one. Under common law, any difference between forms fails (mirror image), so no agreement. UCC 2-207 fixes this.

What does 2-207 eliminate?

The mirror image rule and the last shot rule.

Last shot rule?

Any change is a counteroffer, so the last document sent controls. Unfair because it typically favors sellers, who usually send the last form.

2-207(1) - what does it answer?

Is there an acceptance? A purported acceptance is an acceptance even with additional or different terms, UNLESS it is expressly conditioned on the offeror's assent to the new terms (then it's a counteroffer).

2-207(2) - what does it answer?

What happens to additional terms? Non-merchants: additional terms are proposals and excluded by default. Merchants: terms become part of the contract unless an exception applies.

Three exceptions that keep additional terms out between merchants?

1) Offer expressly limits acceptance to its terms; 2) the additional terms materially alter the contract; 3) offeror objects (or has already objected) to the additional terms.

Additional vs. different terms - and the knockout rule?

2-207(2) addresses additional terms. For directly contradictory (different) terms, many courts apply the knockout rule: conflicting terms cancel each other out, and UCC gap fillers apply.

2-207(3) - what does it answer?

What if the forms don't match but the parties act as though there's a deal (performance)? Contract by conduct: terms on which the writings agree, plus UCC gap fillers.

Shrinkwrap agreement?

Buyer accepts terms by buying/opening the product unless it is returned within a set time.

Clickwrap agreement?

Before completing an online purchase, buyer must click a button agreeing to additional terms.

Browsewrap agreement?

Terms are made available on a website; by using the site you agree. No click or explicit agreement required.

Assent analysis for electronic contracts?

Was there adequate notice? Opportunity to review? Consent before becoming bound? Reasonable notice of terms + manifestation of consent.

Three questions after assessing electronic assent?

Was a contract formed? If so, when? What terms are part of the agreement?

Promissory estoppel test from outline?

"Benefit of the promisor" test.

Bargained-for exchange in plain English?

Something of value given in exchange for a promise: you do something for me, I do something for you.