Law 3000 Test #3: Contracts

Contracts

• A promise or set of promises that the law will enforce

  • These exist all around us (i.e., leases, user agreements)

  • The economy is predicated on contracts

• Require mutual assent and consideration

  • Mutual assent means the presence of an offer and acceptance

Specific performance

• Grants the plaintiffs what they bargained for in the contract rather than monetary damages for not receiving it

• May be ordered in cases where money damages are inadequate and specific performance is equitable under the circumstances

• Not frequently granted

Lucy v. Zahmer

PH:

• Ps are suing the Ds for breach of contract

  • Demanding specific performance of a land sale contract

• The trial court granted a verdict for the Ds

Facts:

• P and D discuss/negotiate the terms for 40 minutes

  • Have previous negotiations (P tried to buy the farm several times)

  • Have known each other for 15-20 years

• P offers D $50,000 for the land, which P accepts

  • Signs a piece of paper stating “we” agree to sell the land to the Ps

    • Amends the piece of paper to say “we” to include wife

    • Includes all essential terms

• P and D were drunk when the deal was made

  • Setting was casual/festive (Christmas Eve; Bar)

• Negotiations were playful

  • P claims that D cannot field $50,000

• D had repeatedly told P he was not interested in selling the farm

  • Including when P follows up later on

Issue: Are parties contractually bound when one party reasonably believes that they reached an agreement but the other party did not subjectively intend to agree?

H:

• Yes, a reasonable offeree would believe a contract was offered based on D’s actions

R:

• The words or actions of D would lead a reasonable person, standing in the position of the parties, to believe they reached an agreement

  • Both signed a document in writing that confirmed the contract

  • Discussed beforehand for 40 minutes

  • Previous serious dealings about the party

Rules from Lucy v. Zahmer

• A contract is formed if a reasonable person, standing in the position of the parties, would have believed that the parties reached an agreement

  • Subjective intentions do not matter

  • Establishes the objective test for contract law

• Subjective mutual assent is not required to form a contract

• Objective test for determining mutual assent looks at the reasonable meaning of the parties’ words and conduct

  • As opposed to subjective state of mind

Offer

• One of two requirements for mutual assent

Restatement of Contracts, Section 24

• An offer is the expression of willingness to enter into a bargain that causes another person to reasonably understand that their assent is invited and will conclude it

Acceptance

• The other requirement for mutual assent

Restatement of Contracts, Section 50

• Acceptance of an offer is an expression of assent to the terms of the made made by the offeree in a manner invited or required by the offer

Leonard v. Pepsico

Facts:

• Pepsi is running a promotional campaign that offers merchandise in exchange for Pepsi points (accumulated by buying Pepsi)

• One commercial contains a Harrier jet, allegedly redeemable for 7,000,000 Pepsi points

• P sees this and is determined to obtain a fighter jet

  • Sends in a check for $700k along with a catalog order form asking to redeem the jet

  • Jet not included in the catalog, but P explained what he was doing

• Pepsi writes back and says the jet is unavailable

  • Not in catalogue; ad was humorous/entertaining

PH:

• P seeks specific performance; D successfully moves for summary judgment

H:

• Commercial did not constitute a serious offer

Reasoning

• A reasonable person would not have considered the commercial a serious offer of a fighter jet

  • Clearly a joke or jest

    • Kids cannot fly fighter jets, let alone to school

    • Implies that drinking Pepsi makes one stylish/desirable/attractive

  • The jet is not in the catalog, and the deal offered is too good to be true

  • Impossible to drink enough Pepsi to get the required points

Rules from Leonard v. PepsiCo

• An offer must be viewed from the perspective of a reasonable person (objective test)

  • Would an objective, reasonable person understand from what the offeror did/said that the offeror intended to make an offer and be bound by it?

• Reasonable person standard

  • Judges are capable of deciding what is objectively reasonable under the circumstances

    • Does not matter if they are not a part of the “Pepsi” generation

    • Keeps things predictable, which is a core goal of contract law

Memorandum of Understanding (MOU)

• Written document laying out the terms of the agreement

  • More formal than email exchanges, but less formal than a contract itself

• Usually anticipates a formal contract will follow memorializing the terms

• Can constitute an offer depending on whether there is offer and acceptance under the objective test

ABCP v. ABOP

Facts:

• Both sides are considering a merger

• ABCP accepts a proposal of merger provided to it by ABOP

  • Claims this constitutes an acceptance of a contract

  • However, also admits that an MOU is needed to consummate the merger

• ABOP says it will begin working on an MOU; asks ABCP for various information

  • Upon receiving this information, ABOP realizes it cannot enter into the contract, and discontinues the merger

PH:

• ABCP sues ABOP for breach of contract (contract to merge)

  • ABOP breached it by not moving forward with the merger

• ABOP claims that there was no offer in the proposed merger

  • Parties always agreed an MOU was needed to cement the merger

    • Merger proposal was not definitive enough to be an offer (just an email)

• They also claim that the email “acceptance” was not definitive enough to be an acceptance

  • ABCP recognized that an MOU needed to be signed before there was a binding agreement

H:

• No offer or acceptance

Reasoning

• Using the objective test, no reasonable person could find that there was an offer and an acceptance

• Both agreed that an MOU was needed to form a contract (objectively)

  • Thus, the email did not constitute an offer

  • Consequently, there could be no acceptance, since there is no offer

• Furthermore, the merger proposal did not address all essential terms

  • Assets/liabilities were not resolved

    • More evidence that there was never an offer

Rule from ABOP v. ABCP

• Use objective tests to determine whether there was an offer or acceptance

  • Would an objective, reasonable person understand from what the offeror did/said that the offeror intended to make an offer and be bound by it?

  • Would an objective, reasonable person understand from what the offeree did/said that the offeree intended to accept the offer and be bound by it?

• For contracts to be binding, parties must agree on all essential terms to be included in the writing

  • If they do not, a reasonable person could not find that there was an offer, and thus there can be no acceptance

• Furthermore, it must be understood by both sides that any reduction of the contract to another written form is a mere memorialization

  • A reasonable person could not find that there was an offer if both sides did not agree on this

• The offeror is the master of the offer

  • They choose the terms by which the offer will be accepted (“in a manner invited or required by the offer”)

    • ABOP required the offer to be accepted in an MOU with all essential terms agreed to, not in an email with only some terms settled

Objective Tests

For Offers

• Would an objective, reasonable person understand from what the offeror did/said that the offeror intended to make an offer and be bound by it?

For Acceptance

• Would an objective, reasonable person understand from what the offeree did/said that the offeree intended to accept the offer and be bound by it?

Benefits

• Promotes trust, predictability, and certainty

• Parties cannot just back out if they change their mind

• Hard to read minds (which is what a subjective test requires)

  • Words and conduct tend to be a reliable indicator of what is going on in a party’s mind