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Contracts Outline

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Farnsworth, Young, Sanger, Contracts: Cases and Materials, 6th Ed.


II. A. Purpose

1. Common law from unrelated judicial opinions that govern how private parties enter into agreements i) Basic interaction - parties want to improve their position through trade ii) Small domain of cases: not face-to-face, long-distance, small transactions

2. Why do people enter contracts? When should they be enforced?

3. RSS1: "a contract is a promise...for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty" B. Goals

1. Determine a mechanism for identifying the kind of promises that ought to be enforced

2. Create default terms to define parties' obligations that allow for efficiency; disallow unsocial terms

3. Determine rules to provide damages or relief in the event of a breach ENFORCEMENT OF PROMISES A. Enforceable Contracts

1. Typical Categories i) Sale of goods, real estate, construction, employment, family (more so now, although informal) B. Consideration (RSS71)

1. Historical: necessary for action of assumpsit - needed bargain, benefit to promisor, detriment to promisee

2. Reasons to use consideration i) Illuminates value placed on promise by both sides ii) Encourage mutual gains and trade for people to get what they value iii) Easy tool for courts to use as a surrogate for underlying contract policies

3. Fundamentals i) Confers benefit on promisor OR imposes detriment on promise (Hamer v. Sidway: nephew's forbearing from legal rights sufficient) a) Promise for promise is bilateral; promise for performance is unilateral (only one right-duty) b) Gifts/peppercorns do not count: must have sufficient consideration where detriment ~ benefit (subjectively determined) 1) Personal choice, prohibitive cost of enforcing them efficiently, diminished social value ii) Even if the consideration given would be legally invalid, it would still work if it was offered in good faith (subjective test) and the parties had a reasonable basis to believe it was valid (objective test) (Fiege v. Boehm: forbearance from an invalid claim to start bastardy proceedings) a) Even if no real benefit/detriment: disvalue deception, value confidence and personal responsibility

4. Exchange i) Past or continual work not consideration (Feinberg v. Pfeiffer Co.: retirement pay was a gift) a) Must be given in exchange, so there must be a change in party's behavior; otherwise a gift ii) Moral obligation + material benefit is consideration to support a subsequent promise (Webb v. McGowin: worker crippled in saving boss's life) a) Compared to promisor must lose or promisee must gain (Mills v. Wyman: past Good Samaritan) 1) Although it might reduce desire to care, it also rewards pure altruism 2) Contracts are NOT based solely on moral obligation: too broad or too variable b) Material benefit is one that can measured monetarily c) Mimi theory: Enforce promises that the parties would have made if they had the chance 1) Split-second decisions don't depend as much on incentive effects d) RSS86: Binding to the extent necessary to prevent injustice, but not gifts or disproportionate values

5. Bargain (Kirksey v. Kirksey: brother-in-law gave widow house and land) i) Promisor must get something clearly stated, something that s/he was seeking and would bargain for ii) Bargained-for exchange in employment contracts not settled at a single moment (Central Adjustment Bureau, Inc. v. Ingram: signed non-competition covenants were valid) a) Binding unilateral contract can be made from invalid bilateral contract: performance of continued employment and promotions for at-will employees - covenants, employee handbooks iii) Promise does not have to induce the performance, but it must be known (Broadnax v. Ledbetter)

6. Promises (R2SS75)

i) Promise must be for a performance which itself would count as consideration (Strong v. Sheffield: empty promise to not ask for promissory note "until such time as I want") ii) Illusory promises (R2SS77): promisor has alternative performances that are not consideration a) Requirement K are allowed as long as parties are acting in good faith (Eastern Air Lines, Inc. v. Gulf Oil Corp.: oil requirements contract after OPEC embargo and price increases) 1) Lack of mutuality resolved since volume could be found objectively and not disproportionate (UCC 2-306 includes output contracts too) 2) Good faith: reputation in relational K; needed to avoid disadvantageous terms, joint-welfare maximization at the cost to individual parties b) Implied promises can be read in contracts (Wood v. Lucy, Lady Duff-Gordon: exclusivity K implied reasonable efforts) 1) Default rules w/implied terms leads to higher efficiency (I) Often look from a business context: contracts are entered in to maximize value (II) Reasonable efforts can be defined from party's standpoint or societal gain as a whole c) Termination clauses should be spelled out or allow for reasonable notification (UCC 2-309) C. Reliance / Promissory Estoppel

1. RSS90: promisor reasonably expects to/does induce action/forbearance, binding only to avoid injustice i) Enforcement not to do justice, but Protection against injustices in detrimental reliance

2. Equitable estoppel arising from acts that cause change of position in accordance w/real or apparent intent of promisor (Ricketts v. Scothorn: granddaughter quit job for gift) i) Used in promises between family, to convey land, coupled w/gratuitous bailments, charitable subscriptions, to insure, retirement pensions

3. A relaxation or backstop to principle of consideration (Feinberg v. Pfeiffer Co.) i) All promises will lead to some type of reliance - can courts recognize which are socially desirable w/o discouraging socially desirable promises?
ii) Consideration/bargain contexts generally proxy for value-maximizing K iii) Broken promises that were made altruistically have good reason to be broken, should not enforce

4. "Remedy granted for breach may be limited as justice requires" i) Lost profits may be construed as reliance damages (D & G Stout, Inc. v. Bacardi Imports, Inc.: P turned down offer to sell out after relying on D, but D bailed out) III. CONTRACT FORMATION A. Assent

1. No need for meeting of the minds (subjective), but relevance of actual intent is debatable: not just outward manifestations (objective) i) Contracts require bargain on manifestation of mutual assent

2. Intent must match reasonable meaning of the words used (Lucy v. Zehmer: contract on napkin was called a joke) i) Burden on D to manifest intentions, otherwise P will reasonably, but detrimentally rely on expectations ii) Not binding on doctors, intimates or for jokes, mistakes; protect freedom from unwanted contracts

3. Anna theory: Place burden of avoiding value loss on party in best position to avoid value loss B. Offer (RSS24)

1. Act (expression of will or intention) that creates power to create an obligation (acceptance)

2. Ambiguous phrasing can be read as an invitation to open negotiations rather than an offer (Owen v. Tunison: "would not be possible for me to sell it unless I was to receive $" is price listing, not offer) i) Technique of redrafting 2x: I will sell for $ v. I will not entertain an offer for less than $. ii) Offers are not general, but must be directed at an specific individual: see ads/circulars a) If nothing is left to be negotiated, then definite and explicit wording means offer (Lefkowitz v. Great Minneapolis Surplus Store: mink coats for $1, first come, first served) 1) House rules cannot be added in after acceptance of offer 2) Is there a supply/demand problem? Are the means of acceptance clear?
iii) Can be a statement of lowest price, look at circumstances behind offer (Harvey v. Facey: unclear reply)

3. Ambiguous phrasing w/sufficient details could be seen as an offer (Fairmount Glass Works v. CrundenMartin Woodenware Co.: terms "for immediate acceptance") i) Default rule is to construe ambiguity against offeror: reduces strategic behavior, gives clarity to offeree ii) Look at degree of certainty (possible risk outweighed by possible gain), change in opportunities, language, context

C. Acceptance (RSS50)

1. Voluntary act (promise or performance) of offeree to exercise power given by offer & create set of legal relations i) RSS30: Offeror is master of the offer and determines method of manifestation of assent (acceptance) ii) Acceptance should not depend on implied methods not expressly listed by offeror (International Filter Co. v. Conroe Gin, Ice & Light Co.: approval, but not notification of approval required for salesman's contract) a) RSS54: Acceptance by performance does not require notification, unless offeror has no adequate means of knowing of it, but offeree can exercise reasonable diligence to notify b) RSS56: Acceptance by promise requires reasonable diligence to notify

2. Performance to accept must be clearly and only applicable to this contract (White v. Corlies & Tift: builder buying lumber could be for any job, should have waited for "agreement")

3. Reasonable time must be allowed for acceptance, depending on circumstances and intention of parties (EverTite Roofing Corp. v. Green: roofers had to get credit check first, and performance began by loading trucks) i) RSS62: beginning of performance is acceptance if offer invites either method - P's form contract gave it both status as offeror and offeree a) Beginning of performance v. preparation to perform: any default rule is better than none, can be bargained around

4. RSS32: if method of acceptance unclear, offeree can choose, evidenced by the party's actions (Allied Steel and Conveyors, Inc. v. Ford Motor Co.: acceptance "should be" by acknowledgment copy only for convenience's sake, and D continued performance showed acceptance)

5. UCC 2-206 allows for acceptance by prompt shipment of goods unless it is offered only as an accommodation to the buyer (Corinthian Pharmaceutical Systems, Inc. v. Lederle Laboratories: price list had to increase drastically, so D notified buyers of accommodation) i) Allows for shipment of nonconforming goods, but allows buyer to sue over them ii) Tracking number assumed not to count as acceptance

6. RSS69: silence usually not acceptance, unless in accordance w/parties' intent or reasonable expectations i) Sometimes cost-minimizing to use negative option offer: music clubs, rate increases in bills a) Look at expected probability of wanting the item to determine efficiency value D. Termination of Offer (RSS36)

1. Lapse - depends on circumstances, price of offer, a reasonable man in the position of the offeree (RSS41)

2. Revocation - freely revocable under common law, but option contracts can be created i) Consideration needed for a firm offer, but RSS43 allows for termination for indirect but reliable information about offeror's revocation (Dickinson v. Dodds: offer revoked by entering another contract before receiving P's acceptance) ii) Firm offer (UCC 2-205): for merchants to use signed writing iii) RSS45: beginning of performance creates an option contract for acceptance by performance a) Binds offeror and allows offeree to get out if needed; minimize reliance losses b) Beginning of performance must be bargained for (Ragosta v. Wilder: getting loan financing not sought by seller, so not consideration or reliance): risk was assumed by buyer

3. Termination by death or incapacity of offeror (RSS48)

4. Rejection - acceptance must be mirror image: dispute over "last shot", all else counter-offers or rejections

5. Timing - mailbox rule in RSS63 applies once acceptance is out of offeree's possession i) Revocation by offeror in RSS42 on receipt by offeree; Default rule of dispatch v. receipt equally unfair ii) Not for option contracts or performance by mail E. Battle of the Forms

1. Breakdown when boilerplate provisions of the different parties disagree in the small print i) Buyers are usually the offerors, sellers are usually the offerees

2. UCC 2-207: definite, seasonable acceptance can contain additional or different terms i) Additional terms are counter-offers and included in unless they materially alter it or are objected to (Doron v. Collins & Aikman Corp.: arbitration clause not accepted just by delivery, but must use 2-207 analysis) a) Comment 3 allows for use of (2) for any additional or different terms b) "Subject to" is not clear enough, especially when many different invalid ways of assent are given c) Materially alters: causes unreasonable surprise or hardship ii) Acceptance can be made expressly conditional to assent on new terms

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