OUTLINE FOR CONTRACTS II: Prepared by J. William Snyder, Jr. Term: Spring 1993 Text: Summers & Hillman, Contract and Related Obligation: Theory, Doctrine, and Practice (2d ed. 1992). Instructor: Professor Blakey NOTE: This outline was originally prepared for my own private study, and it is based primarily on my own class notes, handouts, and excerpts from the textbook, either in paraphrase or direct quote. When possible, I tried to indicate material that has been directly quoted, but it is possible that some material from the textbook has been directly quoted without indication. I. Remedies A. The "duty" to mitigate damages 1. The foreseeability and knowledge of damages (general vs. special damages) a. General damages are those that flow naturally and normally from breaches of that kind. These damages are a foreseeable consequence of a breach. b. Special damages are those damages that are not a foreseeable consequence of the breach. You must inform the other party of the possibility of these damages before entering the contract in order to recover them in the event of a breach. 2. Hadley v. Baxendale a. Plaintiff was a miller whose one and only crankshaft had broken. In order to have a replacement made, it was necessary for him to send the broken shaft to its original maker. One of the plaintiff's servants inquired of the defendant how long would it take for him to deliver the shaft to Greenwich, and the carrier replied that it could be done in a day. The next day, the miller contracted with the carrier to deliver the shaft to Greenwich. Though negligence on the part of the carrier, delivery was delayed, and so the replacement arrived much later than expected. The mill's downtime resulted in loss of profits to the plaintiff, for which he sues the defendant. b. The plaintiff seeks incidental and consequential damages occasioned by the breach. c. A major question of fact is what did the miller tell the carrier about possibility of lost profits for failure to deliver on time. The court reporter seems to indicate the carrier was informed that the mill was stopped, but the opinion states that all that the carrier was told was that the crankshaft was broken and the plaintiff was a miller. The judge believes that insufficient notice was given, and upon the facts as he stated them, that notice probably insufficient. But were those the true facts? The court reporter not only recorded the court's opinion, but also heard the arguments. The judge had no idea what set of facts the reporter would write. Now, judges give their own statement of the facts, and they try to make the facts statement and the facts they use in the opinion agree. d. Conclusion: No special notice was given of mill stoppage, and the mere fact that the shaft was broken did not entitle the carrier to infer that the mill was stopped (for all the carrier knew, the miller had a spare crankshaft). e. There is a problem of causation in consequential damages: CIF and proximate cause. The events, though they are the cause in fact of the damages, may not be the legal cause of the damages. Hadley establishes the damages must be foreseeable at the time the deal was made or the other party must be given notice of the potential for the consequential damages before the deal is made (in that way making the damages foreseeable), or the breaching party may not be held liable for them. This will depend largely upon what facts were knows to the parties at the time of the making of the deal. f. Letter problem: A letter informing the carrier of the possibility of consequential damages would have to have been tendered before the deal was made so the carrier could enter the deal knowing all the risks. The carrier could always upon learning of the possibility of such massive consequential damages refuse to carry the shaft, charge a higher rate, or require that the miller purchase insurance on the shaft. g. Two limiting theories on damages have been discussed in the case law (1) Hadley and the foreseeability of consequential damages (THE WINNER) (2) The "tacit agreement" test, which has been largely rejected. According to the test, even if notice is given, would a reasonable person have incurred the risk? In the Harvester case, the tractor company breached by not installing lights on the tractor. The farmer suffered lost profits from not being able to plant at night. The court refuses to grant consequential damages saying such damages were not reasonable. The tacit agreement test is a minority rule; statutes and the CL talk in terms of Hadley h. "In the business": a person who is in a particular business may be said to have foreseen certain types of damages. i. The Restatement 351(3) smacks of 90 (2d Restatement) in that it justifies the result of the tacit agreement test (avoiding disproportionate compensation). A feeling in conflict with Hadley is that breachers should not be made to pay disproportionate damages, and that moves some to apply the tacit agreement test. j. Problem on page 242: Contract between wholesaler and manufacturer for cartons of screws at $10 a carton. Manufacturer had originally planned to use the screws himself, but he later decides to make a contract to sell them for $20 a carton. Wholesaler breaches. Is Manufacture entitled to get damages of $10 a carton? Answer: It depends on if Wholesaler knew what Manufacturer's plans were a. Yes, then Manufacturer is entitled to $10 per box in damages (special damages) b. No, since there was no notice of resale contract, Manufacturer can get only market damages (general damages) 3. Upon a breach, you must do 2 things a. Cease performance b. Take steps to mitigate your damages 4. Cease performance upon breach of contract, for if you do not, the breaching party is not liable for damages proximate to your continued performance: Clark v. Marsiglia a. Defendant concedes that it made the contract and that he breached, but he does object to being held liable for plaintiff's continuing to work after the breach, thus running up more charges. He is willing to pay for the work done on the contract up until the breach plus lost profits on the deal, but not for work done after the breach. b. The court rules that plaintiff must eat the post-breach costs he incurred by failing to stop performing upon learning that the defendant had breached. (Recall the "useless bridge" case). c. EXCEPTION: UCC 2-704(2): A seller may complete manufacture or cease and scrap upon breach so long as it is (1) Commercially reasonable as of the time when the seller decides to continue manufacture, and (2) Intended to avoid loss and not to punish the breacher. d. CL rule: Innocent party must stop manufacture, for the breacher is not liable for damages accrued after the breach. If the seller completes performance after the breach, then he does so at his own peril. 5. Mitigating your damages a. Schiavi mobile home case (1) Plaintiff and defendant had a contract for the sale of a mobile home. Defendant's plans took a radical change for the worse, so he felt compelled to breach. Plaintiff contacted defendant's father about his son's breach, and the father offered to mortgage his house and buy the mobile home so his son could get his deposit back. Plaintiff tacitly declined. Defendant now charges that plaintiff is not entitled to full damages since he failed to follow up on an opportunity to mitigate its damages. (2) Was the father's promise "conditional & vague" making refusal of it reasonable? Was his promise not gratuitous? Why did the plaintiff not pursue the promise any further? Why should Schiavi continue to deal with this family after the son breached his contract? (3) The court finds that it does not matter if the offer was enforceable. Schiavi had a duty to take reasonable steps to mitigate its damages. Schiavi should have at least explored the possibility of making a legally enforceable deal with the father. b. Could there have been mitigation?: Parker (alias Shirley MacLaine v. 20th Century Fox (1) MacLaine and Fox entered a contract for her to appear in a musical dance film entitled "Bloomer Girl" in exchange for $750,000 and power over the script and choice of dance director. Fox later scrapped plans for the film, and by way of "compensation" offered MacLaine the lead female role in a western entitled "Big Country, Big Man", to be filmed in Australia. She would receive the same payment but lose the veto powers she would have over the production of "Bloomer Girl". MacLaine refused and filed suit to recover damages. Fox, of course, pleaded that by not accepting the role in BCBM she failed to mitigate her damages and therefore should recover nothing. She apparently felt that by taking BCBM role she would have lost fame and notoriety. (2) If MacLaine takes ANY job, even an inferior job, during the pendency of the "Bloomer Girl" contract, what she makes will be deducted from the damage award. Additionally, if a comparable role in another musical came up, she would not have to sign, but by not signing, what she would have made on the alternate contract would be deducted from her damage award. However, just because she could work at McDonalds for $4.25 an hour does not mean that what she could have made at McDonalds should be deducted. (3) Rule: You need not accept substitute employment of a "different and inferior kind" even though you may "have" to in order to eat, but if you do, whatever you make is deducted from your damage award. (4) Unique opportunities opened up by the breach are deductible. (5) Is the mere possibility of a substitute contract to be figured into mitigation? Both the majority and the dissent agree that not every opportunity for a substitute contract be considered. (6) This case came up on appeal from a grant of summary judgment for plaintiff. The judge found that there was no genuine issue of material fact for trial and that MacLaine was entitled to judgment as a matter of law. (7) Key question in this case: was Fox's offer for the female lead in BCBM an offer of employment of a different and inferior kind as a matter of law? (By letting this case go to trial, you take the chance that a jury could rule against her.) (8) The court agrees with the trial court that this is so obviously an offer of employment of a different and inferior kind that the case should not go to the jury. Plaintiff should win as a matter of law. All the facts point in one direction, and a jury should not be permitted to rule another way. (9) The dissent argues that the facts were insufficient to grant plaintiff a judgment as a matter of law, and therefore the case should go to trial. (10) Hyp: Suppose Fox had offered her $1M and the veto provisions? Would that have changed the result of the case? Probably. Now a jury question is raised: does her concern over her fame and notoriety override the extra payment? (11) Article on page 254: Statement that it is never reasonable to deal with a breacher is WRONG! Sometimes it can be. Hillman makes that statement in his examination of what the courts have been doing, not what they have been saying. Almost all of the cases have held that an employee need not take another job with the breaching employer. What is going on is that they find that the offered employment is of a different and inferior kind. c. Problem 3-9: Should the fired typewriter salesman take a job selling computers that pays $25 more a week but is 20 miles farther away? (1) This problem is too close for comfort. I would advise him to take it, but if he takes it his wages will be deducted from any damage award. (2) However, if he does not take it and the court later finds that the job was not of a different and inferior kind, then what he would have made would be deducted for his failure to mitigate. (3) Other factors: 20 miles through city traffic or on a highway? Benefits? Knowledge of computers. (4) In reality, most people have to take another job in order to live. B. The recoverability of lost profits 1. Olds v. Maps-Reeves: a. This case involved a contract for marblework. A dispute arose between the defendant main contractor and the owner of the building, resulting in the discharge of the plaintiff's firm from the job. Subsequently, The owner of the building rehired the plaintiff contractor to complete the very same job. However, the plaintiff then sued the defendant general contractor for lost profits and costs up until the date of the breach. The defendant argues that the profits made on the second contract should be deducted from the first contract. b. The court finds that plaintiff is a quasi-lost volume contractor who could have performed several jobs at the same time. Unlike personal service contracts where the contractor must personally perform the services contracted for, the plaintiff could hire anyone he wanted to perform the work since the other party was concerned only with the final product. c. [Despite what Blakey says, I still think the costs of the work performed up until the day of the breach should have been produced. Though costs for work performed are usually unavoidable, in this case, they were avoidable. Plaintiff could have simply charged the owner for the work done up until that date since he was effectively "transporting" the work to another job. I see no difference between the work performed in this case and the material bought but not used in the "$100,000 for a house" case.] 2. The "new business" rule a. Evergreen v. Mistead (1) Plaintiff was a landscaper, and the defendant was a movie theater operator. Plaintiff was awarded the contract price on the contract he breached minus the lost rental value of the property he was supposed to landscape. Defendant was after lost profits for his inability to operate a drive in theater. (2) Despite defendant's valiant effort to prove lost profits, the court thinks that what he would have made in profits would be too speculative to award him damages for lost profits since this was a "new business". b. The "new business" rule: The expected profits of new businesses with no track record are per se too speculative and to remote to be awarded. c. This rule has fallen out of favor with the courts, but even in its heyday, a plaintiff could recover lost profits for a hiatus after operating previously. d. Lakota Girl Scouty Council v. Havey (1) The council hired Havey's firm to manage a fundraising drive. Havey breached by failing to provide promised technical support and supervision, and as a consequence the funds raised fell well short of the anticipated goal. Plaintiff sues for $399K in lost profits. (Close to $400K, and the prayed for figure may have been cooked in order to make it look smaller.) (2) The App Ct overturns a jury verdict for $35K, arguing that the council was not engaged in a standard business venture. (3) Was the court just giving the Girl Scouts a break? [legal realism] e. The new business rule is on the wane (a) Grossly unfair (b) Encourages parties to breach contracts made with new businesses. 3. Lost profits are questions in court; must meet the test of certainty. The judge always gets to decide on whether or not the question of lost profits should be sent to the jury. 4. Usually, proving lost profits will come down to testimony by experts. Testimony by the proprietor is just too biased to be believed most of the time. C. The recoverability of other costs, like overhead 1. Autotrol v. Continental: A Judge Posner and law-in-economics special a. Plaintiff and defendant had a contract for a joint venture to develop water purification technology. The main controversy between the two turned out to be what was "large" and "small" as far as the size of the systems. A provision of the contract allowed the parties to terminate the agreement on after 30-JUN-86 if there was no agreement on specifications before that date. Both parties agreed to extend the date. After several more months and no agreement, defendant elected to terminate the contract. b. Judge Poser found a contract and a breach. The question was whether or not the plaintiff could recover overhead costs as part of his damages. c. Overhead costs are fixed costs, costs that remain the same no matter what level of output you produce. d. How to figure overhead costs into a damage figure. (1) Unavoidable overhead costs can be deducted (2) Avoidable overhead costs cannot be deducted. e. There are two ways to avoid overhead costs: (1) Reallocate the overhead (2) Terminate the overhead f. Now, its too late to avoid the overhead--- its already been paid for. g. Problem for the parties: market share between the large and small product. h. Posner thought that good faith on the part of the parties solved the problem concerning the specifications. D. Liquidated damages 1. Liquidated damages are a pre agreed amount of damages that will be paid in the event of a breach. 2. 2 part test for determining if the court should enforce a liquidated damages clause a. Damages must be reasonably related to the actual loss in light of the breach. b. It must be impossible or impractical to be able to forecast what the damages would be in the event of a breach. 3. Liquidated damages are measured at the time the parties enter into the contract. 4. McGrath v. Wisner a. Plaintiff had an agreement with the defendant to purchase crops being farmed on the defendant's land. The contract contained a clause calling for $300 in liquidated damages for any breach. Defendant breached by selling part of his crop on the open market. b. The company's president testified that based on past experience, the farmers who entered these agreements would sell their crop to the plaintiff while the market price was low but then breach and refuse to sell when the market price rose above the contract price. Based on this, they figured their damages at $50 per acre, or $300 for lost acreage. c. The court concluded that (1) $300 for any breach was too much (2) The liquidated damages must be reasonable in light of actual damages. Estimates of potential damages must be reasonable. 5. Reasonableness a. Difficulty in figuring damages when the time comes b. Relation to the actual damages At the time the parties enter the contract. 6. Why should the parties not be permitted to make whatever agreements they want for penalties or liquidated damages? (Well, public policy considerations advise against awarding punitive damages in contracts.) 7. Penalty clauses a. At CL, penalty bonds on contracts were permissible. Penal bonds between lords often included hostages (Recall William Marshall). Others included ruinous penalties (500 pound penalties). b. In modern times, English law has worked against punitive damages in contract, including damages in excess of those actually caused. c. American courts do not normally enforce penalty clauses in order to prevent terrorizing someone into performing a contract. d. However, the courts have not totally accepted the concept of the "efficient breach" either since they still will award specific performance in some instances. e. It is possible to recast a penalty clause as an alternative business opportunity and have it pass judicial muster. f. We trust people to make their own deals, but we do not trust them to make their own damages because people usually do not enter contracts with the intent to breach at some point. We simply do not trust their judgment regarding damages. The courts will interfere when the parties have been unreasonable, unlike other areas of contract law. 8. Liquidated: A sum certain or a formula by which a sum certain can be produced. 9. CL rule: The validity of a liquidated damage clause depends on whether or not it is a penalty clause or a damage clause. 10. Strictly speaking, a liquidated damage clause is a "penalty", but the law only refuses to enforce those clauses which impose "excessive, punitive penalties." 11. The CL standard continues in UCC  2-718(1) a. Can't have an LD clause if damages can easily be figured upon breach. b. The test is essentially "looking forward by looking back" (1) Was it reasonable to think at the time of the breach that it was reasonable to think at the time the contract was formed that calculating damages at the time of the breach would be difficult? (2) The liquidated damages must be a reasonable estimate of actual damages. c. These conditions must be satisfied in order for an LD clause to be valid under  2-718(1). The LD clause must be (1) Reasonable in light of actual or anticipated damages (2) Difficulties in proof of loss (3) Inconvenience or difficulty of otherwise obtaining an adequate remedy (4) Unreasonably large LD clauses are void as penalty clauses. COROLLARY: Unreasonably small LD clauses seem to be permissible. According to a comment to the section, the standard for unreasonably small liquidated damages is unconscionability. 12. Better Foods v. American Dist. Telegraph a. Plaintiff is a grocery store owner who purchased a burglar alarm system from the defendant. The system was designed to relay a signal to the police in case of burglary. The contract of sale contained an LD clause limiting damages for failure of the device to $50. Plaintiff's store was burglarized, and the device failed to relay a signal to the police. Plaintiff's loss was about $35,000. b. The CA S.Ct rules that the $50 LD clause is valid because it satisfies both CL requirements for LD clause validity. c. However, the court may have misapplied the Cl test, especially the first prong regarding the relationship of actual damages to the liquidated damages. (1) The amount is fixed at $50 for ANY breach. (2) The liquidated damages do not seem to bear a relationship to the actual damages. (3) Is an LD clause needed at all? d. Nor would damages be difficult to figure upon a breach. After all, the store did keep money on the premises, and presumably all the merchandise in the store had prices. (Recall the "looking forward by looking back" rule of thumb. The CL rule requires that it must be foreseeable that there will be a problem figuring damages upon a breach.) e. There is also a causation problem in this case: would the burglary have been foiled even if the system had not failed? In that case, would it would not seem fair to make the company the grocery store's insurer. Even if you prove that the other party breached, you still must prove that the breach was the CIF of your damages (along with Hadley-brand proximate cause). f. Another problem: If there will be a problem figuring actual damages upon a breach, how do we come up with a reasonable figure representing actual damages? (1) A flat $50 LD figure is hard to justify given the potential losses as a result of a breach. (2) Courts prefer formulas to sums certain, but sums certain are not invalid per se. g. Did the plaintiff bargain to take this risk? Suppose the company offered two contracts of sale: one with the LD clause and one without. The contract without the LD clause was more expensive than the one with the LD clause. By purchasing the cheaper of the two contracts, could we not say that he effectively bargained to take the risk that his actual damages in the event of a breach might exceed $50? h. The law has tended to permit "freedom to breach and not pay very much" clauses. However, terms like this one are usually components of contracts of adhesion. i. The CA S.Ct. is pretty close to the CL in evaluating LD clauses on a case by case basis with a preference for small LD figures. j. [Take a look at Professor Dunbar's list on page 289 of factors to consider in evaluating the validity of an LD clause.] 13. The willingness of the courts to enforce form terms over which the parties do not bargain. a. Boiler plate provisions: Files of things that have worked in the past in generic terms-- standard terms no one really thinks about. b. It is not necessary to bargain over every term in a contract, but showing that the parties actually thought about an LD term can be used to argue that a given figure is reasonable. 14. IF A LIQUIDATED DAMAGES CLAUSE IF ADJUDGED INVALID, THE PLAINTIFF HAS THE FREEDOM TO SEEK, PROVE, AND RECOVER ACTUAL DAMAGES. 15. Suppose actual damages are ZERO. Should a party be required to pay liquidated damages? The courts have generally said yes. Under a strict theory of consideration, the party should have to pay. If actual damages are more, they still get only the LD figure, so why should they not get the LD figure if actual damages are zero? Under the logic of the rule, if the figure is reasonable at the time the contract is made, then the innocent party should be permitted to collect LD even if actual damages are zero. E. Specific performance 1. Specific performance is an equitable remedy that permits the court to require that the breaching party actually perform her contractual obligation instead of paying damages. 2. Since SP is a historically equitable remedy, the traditional limitations on the dispensation of equitable relief apply. a. *** In order to get SP, the remedy at law must be "inadequate". That is, money damages must not be able to accord the innocent party all the relief to which she is entitled. b. There is no remedy in equity for those with "unclean hands". c. Originally, the Chancellor made the breaching party sign the deed or the person went to jail. Eventually, the courts realized they could transfer title administratively, so there was no need to compel the breaching party to sign the deed. [The reason the Chancellor may have originally required action by the breaching party might be because before the Statute of Uses, the livery of seisin ceremony was required to transfer land. Thus, in order for title of the land to be formally transferred, it may have been necessary to compel the breaching party to perform the livery os seisin.] d. Other limitations on the granting of SP (1) Unfairness/Unclean hands (2) Lack of mutuality (a) Originally, in order to get SP, the plaintiff had to show that the defendant would also be entitled to SP if the plaintiff had breached. (b) This doctrine has been discredited. (3) Indefiniteness: The court cannot compel performance if it is not crystal clear what it is the breaching party was supposed to perform in the first place. (4) Impossibility/impractability (5) Personal services, unless the service is unique, but then the form of relief is usually an injunction against performing that service for anyone other than the innocent party. (6) Supervision problems: In the Dallas Cowboys case, the court was reluctant to require a player to play football because the court would have difficulty evaluating if the defendant was playing the best game he could play. (7) Equity could waive equitable relief when the hardship on the defendant would be too great. In the Lone Ranger case, where the judge required the defendant not to wear a mask, he failed to consider the hardship this would impose on the defendant. [This mistake is a symptom of the fact that it is increasingly difficult to distinguish between law and equity given their merger.] e. Equity had the power to compel performance. (1) Equity can punish for contempt (a crime) (2) Equity could also put someone in jail until they were persuaded to perform (the jailed person had the keys to his own release.) f. Law gave you your rights. Equity gave you what was fair, and then only if the Chancellor felt it was necessary to dispense equitable relief. 3. Kitchen v. Herring a. Defendant executed a written contract acknowledging receipt of money for the sale of a tract of land he owned. Plaintiff was put in possession in 1847. Pridgen, the plaintiff's surety agent, also followed him, along with Musgrove, who was under contract with Pridgen to cut timber. Plaintiff started cutting timber and selling it. Herring turned around and executed a deed transferring title to the land to Pridgen, and plaintiff was ousted. Plaintiff sues for SP, an accounting of the profits obtained from the timber, and an injunction. b. The defendant argues that the land is only valuable for its timber, so SP is not warranted. ["What ceases to have a reason shall also cease to be law."] c. The Ct. rejects this argument. *** SP is justified because the remedy at law for land is per se inadequate. Land in our society and political system is recognized as unique. (1) Historically, land has been the source of independence. (2) SOF for land sales (3) Land cannot be seized to settle personal debts until all personal property is exhausted. (4) Deeds must be in writing and recorded d. "The principle is, that land is assumed to have a peculiar value, so as to give an equity for specific performance, without reference to its quality or quantity." e. Rule: Vendee is entitled to SP absent some defense. 4. Equitable ownership: similar to a trust. The innocent party a. Can take the value of the defendant's assets itself, or b. Can recover what the trustee has received by breaching the fiduciary duty. c. Hyp: $20,000 is held in trust for X. Y, the trustee, takes the $20,000 and purchases stock in Ford motor company for himself. The value of the stock rises to $5 million. Upon reaching her majority, X may sue for either $20,000 or $5 million. d. The same can be done for land. The vendor is regarded as an equitable trustee for the vendee. (1) If someone knows you have a contract right to purchase land and they buy it first, an act of equity can make them disgorge the land. (2) Another right: You have the right to follow ownership of the land to the person who knew your rights to purchase it. (3) Innocent purchasers of land promised to another are not subject to the above rule. The innocent party would only be entitled to market damages. 5. Pratt Furniture v. McBee (A case fabricated by our editors) a. Defendant made a contract with the plaintiff to make him 90,000 chairs at $10 per chair. Shortly thereafter, defendant made a contract with another person to make 50,000 tables at $25 per table. In order to perform the second and more lucrative contract, defendant would have to breach the first contract. Defendant notifies plaintiff that he intends to breach, and plaintiff promptly sues him. b. Plaintiff asks the court for an injunction to prevent defendant from making the tables, SP on the contract to make the chairs, and general damages and restitution. *** An injunction against doing a particular service for anyone else is painless way for a court to effectively compel the defendant to render personal services for another without granting SP or a mandatory injunction, which courts are understandably reluctant to do for personal services. Adam Smith's "invisible hand" makes the breaching party perform. c. The trial court awards plaintiff $90,000 in damages, but no SP. The market price of chairs when the plaintiff learned of the breach (see UCC) was $11. So, plaintiff was damaged to the tune of $1 per chair, or $90,000. It was a smart move for the defendant to notify the plaintiff of the breach before the price went up. But, the plaintiff could have refused to accept the breach for a reasonable time and taken the higher price d. Plaintiff could have also made a cover contract provided it was commercially reasonable to do so and the plaintiff does so in good faith to minimize his losses. [Our editors don't discuss this possibility because if they did, they would have destroyed their platform for discussing SP and efficient breach. e. UCC  2-716(1) allows SP for goods that are "unique" or "in other proper circumstances". The correct standard is the difficulty of the replacement of the desired goods. - Unfortunately, these chairs are not unique. f. Though a traditionalist judge might have awarded SP in a case like this, the plaintiff wins a pyhrric victory by getting only $90,000 in damages. g. Judge Posiner (Posner) argues that SP should not be granted. He argues that contract law properly allows persons to breach contracts in order to pursue more economically efficient activities by making breachers pay only money damages. h. Judge Rawlz (John Rawls) argues that although the plaintiff should not get SP, he should get his lost profits on the table contract. He also argues that contract law provides incentives not to breach, but rather to perform contracts. i. Lord Coke: A contract means only that you must either perform or pay damages. [Oliver Wendell Holmes went further by saying that breaching a contract is only a prediction that you will be made to pay damages.] But this is not how contract law has developed. The awarded damages must put the innocent party in the position he would have occupied had the contract been performed. When that cannot be done, SP should be granted. 6. Curtice Brothers v. Catts a. Plaintiff was a tomato canner with a contract with a farmer to buy his crop of tomatoes. The farmer threatens to breach, and the plaintiff sues for SP. b. The court reasons that if everyone breaches, plaintiff would not be able to collect all the tomatoes he needed for his operations. The remedy at law is thus inadequate in this limited market, and SP is thus warranted. 7. Rule: SP can be had when the remedy at law is inadequate a. Land b. Personal services (maybe) c. Chattels (usually, no since substitutes are available. Most of the time it is difficult to show that the remedy at law is inadequate for chattels. The touchstone will be unavailability of substitutes.) (1) Stephan Machine Tool v. D&H and the "readily available" test. (a) Plaintiff wants a machine he contracted with the defendant to have built (SP). Defendant argues that the machine is chattel (no SP). Plaintiff had to take out a mortgage to pay for the machine, so to buy another, he would have to incur even more debt. (b) Ct: Economic reality prevents plaintiff from purchasing a substitute, so a substitute is not "readily available." (c) Could you not figure lost profits? (1) Do we care? SP is available since the RAL is inadequate. (2) Figuring lost profits may be problematic (A) Hard to figure out (B) If the loss disrupts the business and the operators because of financial constraints or other reasons, they can't figure out lost profits. (d) You must persuade the judge that the RAL is inadequate before you can get SP, but the judge has it within her equity power to find that the RAL is inadequate. (2) You might or might not get SP for goods, but the trend is to grant SP more and more. It is no longer extremely rare to get SP in cases involving goods. II. Offer and Acceptance A. O&A is one of the time honored ways in which people can make a contract. (Shootout at the O&A Coral). (The other way in which people make agreements is to make an agreement in principle, let the lawyers work out the details, and then simultaneously sign the drafted contract.) B. Moves and nonmoves 1. Moves a. Offer (1) An offer is a move which empowers another person to make a contract by accepting the offer. (2) The offeror is master of her offer. She may form the offer and include any terms she wants in the offer. She also has the power to dictate the manner and time period for acceptance. b. Revocation (1) A revocation of the offer by the offeror terminates the offeree's power to make a contract by accepting. (2) In order for a revocation to be effective, it must be exercised before any acceptance. c. Acceptance - Acceptance is the exercise of the power to make a contract bestowed by an offer. Upon valid acceptance, a contract is formed, and neither party can back out without breaching. Acceptance must occur before revocation of the offer in order to form a contract. d. Rejection - Rejection of the offer by the offeree terminates the offeree's power of acceptance. e. Counteroffer - A counteroffer is a combined rejection and offer. 2. Nonmoves: acts which purport to be a move but fall short of what is needed to make a legally effective move. a. Nonoffer b. Nonrevocation c. Nonacceptance d. Nonrejection C. In American contract law, there are 2 requirements for a valid agreement. 1. Consideration or some acceptable substitute 2. Some sort of agreement - These two overlap to some degree. If there is no valid contract, will some other theory of obligation kick in to give the innocent party some relief, like PE or UE? D. Key touchstone as to determining whether or not a move has been made: What is the objective intent of the parties as manifested in their statements and actions? 1. Underlying mental states and their influence on O&A a. Lucy v. Zehmer (1) On December 20, 1952, the plaintiff stopped by the defendant's restaurant to once again try to buy the defendant's farm. He had tried several times over the years to buy it from the defendant, but the defendant was unwilling to sell. While having a few drinks, the plaintiff bet the defendant that he would not take $50,000 for the farm, and the defendant replied that he would, but that the plaintiff couldn't give $50,000. Plaintiff told him that if he did not believe him to put it in writing. So, plaintiff wrote out a short memo on the back of a restaurant check, tore it up, and drew up another. He even had his wife sign it, telling her privately that it was all a joke. After defendant gave plaintiff the signed memo, plaintiff offered defendant $5 to "bind" the deal, to which the defendant responded that he considered the transaction to be completely in just and that he had no intention of selling the farm. After formal notice that the plaintiff's lawyer wrote the defendant saying that he was prepared to go through with the deal, defendant refused to convey the property, so plaintiff sued for SP. (2) The court rejects the claim that defendant was drunk. It decided that if a reasonable person examining the totality of the circumstances would interpret defendant's actions as intent to enter a contract, then a contract was formed. (The reasonable person is not drunk). b. Embry v Augendine (1) Plaintiff was under a one year employment contract with the defendant that expired on December 15, 1903. Plaintiff approached Mr. McKittrick, an official for the company, on December 23 and stated that if the company did not renew his contract for another year immediately he would cease work. McKittrick told him to "Go back upstairs and get your men out on the road" etc. The question is whether or not these statements created a contract for another year's employment. (2) The trial court instructed the jury that the subjective intent of the parties was relevant in the determination. The Appellate court reversed, holding that subjective intent is irrelevant. What matters is what would a reasonable person have inferred from the actions and statements by these two men. 2. Judge Learned Hand: Objective theory of contract law (pg 364): Would a reasonable person have interpreted that an offer was made? EXCEPTIONS: a. Mutual mistake b. Something else of the sort 3. The time-honored phrase "meeting of the minds" actually refers to the intent inferred by the parties' actions. 4. The penalty for negligently made offers is to find the existence of a contract. 5. Problems with the objective test: Eagle Lock a. Plaintiff is the survivor of an employee of Eagle Lock who had been given a "Certificate of Benefit" which promised $1,000 plus interest upon the employee's death to the employee's named recipient. The certificate was cleverly phrased to make it sound as if the company was not promising anything at all. On 22-AUG-31 the company decided to terminate all outstanding certificates of benefit as of 28-AUG-31 and to notify their employees in their pay statements. The plaintiff's deceased died at 2AM on 28-AUG-31. b. Defendant argues that the certificate conferred no legal rights on their employees, and the certificates so stated. (illusory promises) c. Plaintiff argued that the company bargained for and got as consideration for its certificates the good will and loyalty of their workforce. d. This case presents two big problems: (1) The certificate stated that it was revocable at any time (2) The certificate was effectively an unenforceable illusory promise e. Rule of construction: ambiguous language is interpreted against the party that drafted it, in this case Eagle Lock. Eagle used language that was meant to comfort their employees but not to bind the company to anything. Since they used language of cancellation, that implies that they had created a legal right. f. The court refuses to construe the promise as illusory, for that would mean that the lock company intended to mislead their employees. g. Reforming the document: how does the company keep the employees at their jobs without binding themselves to anything? (1) Revocable at any time without notice (2) "Award of benefits is at the discretion of the company." (3) Keep the PR man out of the process, or you may face a promissory estoppel action down the road. (4) Posture it as a gift. h. Other problems (1) How can both parts of the document be reconciled? (2) What was the manifested intent of the company? 6. Courteen Seed v. Abraham a. Plaintiffs wanted to buy clover seed, and the defendant had clover seed to sell. The question was whether the defendant's "price quote" was a bona fide offer. b. Plaintiff's request was for the defendant to "wire [its] firm offer.". Accordingly, the plaintiff could have interpreted the defendant's reply as a "firm offer". However, the court thinks otherwise and holds that this price quote was not an offer. The court holds that language stating that "I am asking" was a non-offer. You cannot make someone else make you an offer. But, if someone says, "Make me an offer", you had better be careful what you say. You must make it clear if you are offering or not, or you are likely to have any ambiguity resolved against you. c. Does the person appear to intend to empower the other party to make a valid contract? Evidently this court though no such appearance of intent existed. But, if someone. 7. Southworth v. Oliver a. This case involved dealings over some ranch land in Oregon. Defendant approached plaintiff and asked him if he would be interested in purchasing some of the plaintiff's ranch land, and plaintiff indicated that he was interested. Defendant sent plaintiff a letter on June 17 indicating that the land was for sale, and this letter included the terms of sale. Plaintiff sent a letter back on June 21 accepting the defendant's "offer." A conflict between Clyde and the plaintiff over the land in question. Defendant, not wanting to have any part of this altercation, informs the plaintiff by letter that the June 17 letter was informational only and not an offer. Plaintiff sues for SP. b. The June 17 letter contained detailed terms of sale. Spelling out the terms can be important in the determination if an offer was made. (1) If you leave out essential terms (like price), you don't make an offer. (2) A party who spells out the terms is more likely to be making an offer than not. (A prescription of the contract the offeror is willing to enter into) c. This list of terms was sent to more than one person (including Clyde). The court says you may do this and have both be offers, but common sense indicates that they may only be the tools for further negotiations. E. Offers 1. An "offer" is a common word that has a specific legal meaning (a term of art). 2. An "offer" is a legally significant act that confers upon another party the power to make a contract by accepting. Making an offer gives the other party control so long as the offer remains effective. - So, the price on a shelf in a grocery store is not an offer since there is not intent to bestow the power to make a contract. 3. The offeror is the master/mistress of his/her offer. The offeror may dictate the content of the offer, the terms, and even the manner and time period of acceptance. 4. However, the offeree is not bound by the offer unless and until the offeree accepts. 5. Fairmount Glass v. Grunden-Martin a. This case involved an exchange of communication over the potential purchase of some mason jars. Plaintiff wired defendant asking for a price quote. Defendant responded with a price quote and specific terms. Plaintiff wired back his acceptance, only to receive a reply that the defendant had disposed of his entire inventory and could not fill the plaintiff's order. The question in this case was whether or not a price quote & terms sent in a telegram was an offer. b. The critical statement in the plaintiff's telegram was "state lowest price," which tends to indicate that the plaintiff was fishing for an offer. c. The more terms that are stated in an ambiguous communication, the more likely a reasonable person is going to interpret the communication as an offer. 6. How complete must an offer be for it to be an offer? 2 tests a. Do we have enough of an agreement to be enforce if we find a contract exists? b. Even if there are minimum terms to find a contract, are certain terms absent that indicate that no offer was in fact made? - This is not an exact science. The above tests are rules of thumb (heuristic devices). 7. Some offers are made as negotiation ploys, so it really does not matter what you include in them. 8. Offers can be terminated by the following a. Rejection & counteroffer b. Lapse of time (express or implied "reasonable" time) c. Revocation d. Death or incapacity of either party (dead men have no will) e. Non-occurrence of condition in the offer. 9. Offers not received for consideration are nuda pacta, but offers given in exchange for consideration are not revocable at will (option contracts) F. Acceptances 1. An acceptance is an exercise of the power to make a contract granted by an offer. 2. Three key ideas to keep in mind when considering acceptances. a. An acceptance must be made in accordance with the offer, or the acceptance does not form a contract. (1) Terms (2) Manner of acceptance b. The offer can be accepted in a manner inconsistent with the offer so long as the offeror cooperates with the offeree. [A counteroffer is NOT an acceptance, but rather a rejection and an offer wrapped into one move. After a counteroffer, the original offeror now is the party empowered to make a contract by accepting. By rejecting the "counteroffer", the original offeror can refuse to cooperate, and thereby prevent the formation of a contract.] c. But, some things may not be considered acceptance despite cooperation. 3. Ardente v. Horan a. Plaintiffs entered a bid on a house of $250K, and the defendant's indicated that the bid was acceptable. Shortly after the defendant's attorney presented the pertinent documents to the plaintiffs for their signatures, the plaintiff's attorney wrote the defendants indicating that the plaintiffs expected that the deal would include certain furniture and fixtures. Defendants balked at the inclusion of the furniture and refused to go through with the deal. Plaintiffs sued for SP. The Superior Court ruled that plaintiff's letter concerning the furniture was a counteroffer/conditional acceptance of defendant's offer to sell, and since defendants did not accept the counteroffer, there was no contract. b. The RI S.Ct. affirmed, ruling that the defendant's tendering of the documents of sale was the offer, and the plaintiffs' actions constituted a counteroffer. Acceptances cannot alter of vary the terms of the offer. Despite minor conditions as to a collateral matter on an acceptance, the acceptance can be valid. The court rules that this was a qualified acceptance, so no contract was formed. The plaintiff surely could not have considered the furniture collateral to the bargain. c. Mirror image rule: An offer gives power to the offeree to make a contract by accepting, but the power is limited. In effect, the offer says, "Take it or leave it". An attempt to deviate from the offer is a failure to accept. 4. Eliason v. Henshaw a. Defendants sent an offer to the plaintiffs to buy flour, and they prescribed that acceptance should be made via the plaintiff's delivery wagon. However, since the wagoneer was not heading back toward's the defendant's neck of the woods, plaintiffs chose to send their acceptance via mail. Defendants received the acceptance long after they had expected to receive it via wagon, and consequently they had bought all the flour they wanted from another source. When the plaintiff tried to deliver the flour the defendants had requested, defendant's refused delivery. b. The offeror is master of her offer, and consequently, she can prescribe acceptance in any means she wishes. Failure to accept in the manner (or time period) prescribed by the offer fails to form a contract. If the offeror accepts an acceptance that is inconsistent with the offer, technically, the original offeror has accepted a counteroffer. c. Without the defendant's postscript that they expected acceptance via wagon, this would have been a different case. d. If the UCC had been in effect at the time of this case, Section 2-206 would have applied, but the result would have been the same. UCC  2-206(1)(a) (1) Unless otherwise unambiguously indicated by the language or circumstances (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable under the circumstances. e. Defendants essentially said, "Deliver an answer by wagon, or not at all." 5. Cooperation exception to the rule that acceptance must be made in accordance with the terms of the offer: Allied Steel v. Ford a. This case concerned the validity of certain indemnity provisions of a contract for injuries caused by the Ford's negligence. b. Alternate forms of acceptance are permitted under certain circumstances. This is the corollary to  2-206: The offeror cannot change the method of acceptance once he has made the offer, but if the offeree accepts in a different manner, that is ok so long as the offeror accepts the alternate form of acceptance. c. Last counteroffer analysis: who "blinked": Did Allied accept Ford's terms regarding indemnification? More precisely, though Ford required acceptance by signing and returning some printed forms, could Allied accept by showing up to perform the work and by having Ford let them in to do the work without objection? d. The court held that Ford's acceptance terms were only a suggested manner of acceptance, and that other forms of acceptance were not precluded. Accordingly, Ford was estopped from denying there was a contract. e. The UCC bails out on this question ( 2-207) f. Are new terms suggestions or alterations of the offer? 6. What do we do when there are no terms regarding manner of acceptance? a. Silence: White v. Corlies (1) Plaintiff attempted to accept an offer by buying material and starting work on a remodeling job the defendant had offered to have him do. Defendant revoked the offer prior to express acceptance on plaintiff's part, but plaintiff sued for breach of contract. (2) The court reasoned that the materials could be used on other jobs. The court wanted the plaintiff to communicate actual acceptance to the defendant, and so it ruled for the defendant (no contract to breach) (3) Is the acceptance consistent with the offer? if so, is there an overriding rule that says you are bound. (4) [Silence ban be the sign of agreement if that is so understood by all parties.] (5) CL rule: you cannot compel someone to speak up in order to avoid being bound. (6) The modern Restatement distinguishes between (a) People who intend to be bound by remaining silent, and (b) Those who do not. (7) Milepost: does industry practice take silence as acceptance? Maybe. (8) Restatement (Second) of Contracts 69 (page 406): When silence can be acceptance: Silence is not acceptance unless (a) Offeree takes benefits knowing that compensation is expected. (b) Offeror gives offeree reason to believe that silence can be acceptance, and the offeree intends to be bound (c) Previous dealings (9) Dominion and receiving unsolicited goods though the mail (a) "Record-of-the-month-club" hypothetical: Should you be bound to buy records if they send you unsolicited free records and requiring that you return them in order to avoid being bound? Well, there was a case where a man who was given an unsolicited subscription to a newspaper was required to pay for the newspapers he read under an unjust enrichment theory, even after he notified the newspaper company that he did not want the subscription. (b) Federal law states that unsolicited goods sent through the mail may be accepted as gifts (no UE) (39 U.S.C.  3009). North Carolina has a statute extending the federal rule to delivery of unsolicited goods by other means. (Like UPS). But UPS is not covered under the Federal statute. (c) Silence + exercise of dominion over goods can be interpreted as acceptance.  2- 206(1)(a) applies to delivery of unsolicited merchandise. 7. An offer must be accepted before its term expires a. Akers v. J.B. Sedberry (1) Plaintiffs were under a long term (5 years) employment contract with the defendant. During a meeting with the chief stockholder to discuss the company's troubles, plaintiff's offered to resign on 90 days notice. Defendant refused to accept their resignations, and they left the defendant's home without her having accepted their resignations. She later notified them that she was accepting their offers to resign, but the plaintiffs reminded her that no offer to resign was outstanding. They sued for breach of contract to collect the balance of their salaries due under the contract. (2) An offer is good for a reasonable time under the circumstances unless otherwise so stated in the offer. Since they specified no time for acceptance, the reasonable inference was that the offer remained open only for the duration of the conversation. Face to face offers usually require immediate acceptance, and the offer will lapse when the meeting breaks up. However, we cannot use this rule in non face to face encounters (except possibly telephone conversations). b. Vaskie v. West American Insurance (1) Plaintiff was involved in an auto accident. The insurance company offered to settle for $25,000 on December 1. Plaintiff accepted on January 9, but the SOL on her claim lapsed on January 1. The insurance company tried to back out of their offer by claiming that since the SOL had run, their offer was no longer valid, nor could a reasonable person infer that the offer was still valid. Plaintiff won SJ, but it was reversed on appeal. [The parties ended up settling for $15,000] c. Caldwell v. Cline a. Defendant sent an offer by mail to the plaintiff offering to sell him his land. The offer stated that it was good for 8 days. Plaintiff tendered acceptance within 8 days after receipt, but upon receiving the acceptance, defendant claimed his offer had expired; he expected a response within 8 days after he mailed the offer. Plaintiff sued for SP. b. Question: When did the clock start ticking? The court holds that since the start of the 8 day time period was ambiguous, that ambiguity should be resolved against the party who created it, the defendant. So, the clock started ticking when the offer was received. c. What if the letter was lost in the mail for a year? Would the time period start upon receipt in that case? d. Above all, the key consideration is how would a reasonable person understand the offer? e. "Dead men have no will": offers do not last past the death of the person who made them. 8. An offer may fall below the minimum number of critical terms for a complete contract, so even though there may have been acceptance, there might not be enough of a contract for the courts to enforce. 9. Suppose the offeree accepts the offer in accordance with the offer's terms, but the acceptance is not known to the offeror? a. Carbolic Smoke case (1) Defendants sold a smoke ball along with an offer to pay customers who get sick. However, the seller did not know who bought the product. (2) The court held that since the plaintiff had accepted according to the terms of the offer, defendant could not complain that they had no notice of the acceptance. (3) Some courts hold that you must still actually notify the offeror of acceptance notwithstanding manner of acceptance prescribed in the offer. Contra Carbolic Smokeball. (The nitpicking/Restatement rule) 10. Apparently, the Restatement has a nitpicking rule with regard to silence, dominion, and notice of acceptance. 11. Contra the Restatement, purchasing a product by itself does not require notice to the manufacturer. G. Implied revocation of offers 1. Ordinary offers: offeror can revoke at any time before acceptance. (Vaskie, Caldwell: offerees could have said "I revoke"). 2. Actions constitute a revocation if a reasonable person would interpret your actions as revocation. a. Explicit revocation b. Counteroffer c. Rejection d. Lapse of time 3. Some courts hold that offering to another with the knowledge of the original offeree can constitute revocation (Pickering v. Dodds). 4. When two offers are made to two different people and each of the offerees knows of the other offer, the reasonable interpretation is that the offers were made on a first come, first serve basis. H. Option contracts 1. An option contract is basically a "bought offer", that is, the offeree has paid the offeror to make an offer and to hold it open for a given period of time (a firm offer). See Restatement  87(1) and UCC  2-205 (Pg 423-424). 2. Marsh v. Lott a. Plaintiff bought an option to buy a piece of land. He paid 25 cents for the offer. Per the terms of the option contract, he elected to extend it for another months upon its scheduled expiration. He later exercised his option, and the defendant refused to convey. He sues for specific performance. b. The court ruled the option valid and ordered SP. (The defendant was to get $100K for the land, and that hardly seems unfair to her, especially in the early 1900's.) 3. Ryder v. Westcoat a. Plaintiff and defendant had an option contract for the sale of land upon which defendant held an option to buy Before the expiration of the option, plaintiff notified defendant that he was going to "pass" on the option. Defendant then started making arrangements to buy the land himself. Plaintiff then exercised his option. Defendant refused to honor the option, and this suit ensued. b. The court says that an option contract purchased for consideration remains open for the specified time period, even if the recipient indicates that he does not wish to exercise the option, unless the granting party has relied to his detriment on the other party's statements justifying estopping the offeree from saying the option remained open. No such reliance is evident from this case. 4. UCC "option" contracts: a way to protect persons who rely in offers outside the option contract arena. a. UCC  2-205: Firm offers An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration during the time stated or if no time is stated for a reasonable time, but in no event may such a period of irrevocability exceed 3 months.; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. b. Firm offers by a merchant c. To be held open for a given time d. In a signed writing e. Is not revocable for the time stated, not to exceed 3 months. f. Notwithstanding lack of consideration. g. If the provision is in a writing provided by the offeree, the offeror must sign separately the firm offer provision. h. Questions: is an advertisement a signed writing? g. Prior to 2-205, courts were very generous to option contracts because they though they were useful for conducting business. Just putting the offer in the form of a contract with nominal consideration was enough for many courts. 2-205 escapes the formality of a contract. 5. Restatement  87(1) An option contract exists if a. The option is in a writing signed by the offeror b. Recited a purported consideration c. Proposes an exchange on fair and reasonable terms. I. Bilateral and unilateral contracts: When can the offeror get out of his offer? 1. Unilateral contracts call for actual performance on the part of one party in exchange for a promise. a. Under an older view, acceptance was not complete until the performance was complete, and the offeror could revoke at anytime prior to full performance. b. Under the contemporary view, part performance is sufficient. 2. Bilateral contracts call for a return promise in exchange for a promise. 3. Making the call- bilateral or unilateral?: a. Davis v. Jacoby (1) Plaintiffs, niece of the decedents and her husband, entered a contract to make a will with her uncle. In exchange for coming to southern CA to take care of them in their dying days, the uncle offered to will his estate to them. They accepted the offer and relocated, but the uncle committed suicide before they arrived. The uncles will in fact left the estate to two nephews with whom the uncle had little contact. (2) Defendant's argued that the offer was for a unilateral contract and required complete performance in order to make a contract. Since the old man died before complete performance, the offer was revoked. (3) Plaintiff's argued that the offer was for a bilateral contract since the old man was bargaining for their promise to come to CA and not actual performance. (4) The court construes the contract as a bilateral contract, so a contract was formed upon delivery of the return promise. They decide Whitehead was indeed bargaining for his niece's assurance. (5) Professor Willeston argued in favor of a presumption in favor of bilateral contracts. b. Brackenbury v. Hodgkin (1) Mother offered to her daughter the use of her home and income from the property and the property itself upon her death if the daughter would come and take care of her mother. Plaintiff daughter agreed, came and began taking care of her mother. Their relationship went sour, and the mother conveyed the property to one of her sons, who then attempted to evict the daughter. (2) Though the court finds that the offer in this case was for a unilateral contract, since the plaintiff partly performed her end of the deal, defendant could not revoke her offer. [The court does seem to say that there was a completed contract in this case.] (3) Restatement (First)  45 Part performance on a unilateral contract (a) Suspends power to revoke, but (b) Does not form a contract (4) Restatement (Second) just adds the term "option". An option contract is created upon part performance of the consideration. 4. Modern legal history calls unilateral contracts stupid and prefers bilateral contracts to unilateral contracts. So much so, the Restatement 2d does not even use the terms "unilateral" and "bilateral" contracts. But, THEY LIVE!!!! Since the offer is master of the offer, the offeror can demand acceptance by performance. 5.  30 of the Restatement 1st has been replaced by  30 and 32 of the Restatement 2d: If a party who makes an offer does not say how the offer is to be accepted, then the offeree may accept in a reasonable manner under the circumstances. (This language moves away from the presumption of a bilateral contract.) J. How to bind another without making a contract, especially in the context of bidding on subcontracts by subcontractors 1. For a given project, "Generals" (general contractors) will invite bids from subcontractors, and on the basis of those bids they will form their bid for the entire project and submit it for consideration. Upon award of the general contract, the general will begin making contracts with the "subs". 2. James Baird v. Gimbel Brothers a. Subs submitted bids which they had underestimated by 1/2 the actual cost of doing the job called for. However, the general had already used the sub's bid in formulating and submitting its own bid. The general sued the sub. b. Judge Learned Hand ruled that there was no contract since the offer was not an option and it was revocable at will. 3. Drennan v. Star Paving a. This case involved the same basic problem, but the general contract had already been awarded. b. The court applied promissory estoppel (justified reliance to one's detriment/ sub knew and expected plaintiff would rely on the bid.) c. Justice Traynor thinks it matters if you say you will keep the offer open (This defendant evidently did). There is an implied subsidiary promise to hold the offer open because offers in this context must be kept open (the generals are really between a rock and a hard place during this time period). Injustice can be avoided only by giving the general some protection. (but, this PE theory is not a two way street: the courts that have applied it have refused to extend it to subs seeking protection.) 4. Holman v. Orville a. Defendant general used the subs bid in its own bid, but it later turned around and awarded the subcontract to a minority business in order to comply with Federal law. The subcontractor sued. b. The court ruled that basically subcontractors have no rights. 5. There are ways to get out of a contract for mistake a. Mistake obvious to a general ($70 bid on a $7000 job). b. Mutual mistake c. But it is hard to get relief on grounds of mistake since it is hard for generals to get out of bids they have made. 6. Credit card case a. Question: Can a credit card company change the terms at will? The court says yes. Issuing a credit card is an offer to extend credit which the consumer accepts by using the card. Each separate use of the card constitutes a contract, and there is no obligation to issue credit. 7. Peterson v. Pattsberg a. Defendant offered to plaintiff to let him pay off an outstanding mortgage at cut rate. When Plaintiff showed up and attempted to pay off the mortgage, defendant revoked. The question was whether or not the defendant could revoke upon attempted performance/preventing the other party from performing. b. The court held that defendant permissibly withdrew before the plaintiff could tender performance. K. The Mailbox rule 1. The mailbox rule states that an acceptance forms a contract as soon as the offeree put his acceptance in the mail. The rule is a default rule, and it can be overridden by the offeror by requiring that the acceptance be received before a contract is formed. The rule is useful when parties are dealing at a distance. 2. Adams v. Lindsell a. Defendants offered to sell wool to plaintiff manufacturer. Defendants asked for a response "in course of post", but they misdirected the letter. When Defendants did not receive an answer when they had expected one, they sold the wool to another. Meanwhile, the letter finally made it to Plaintiffs, and they accepted the offer by sending notice of acceptance via the mail. b. The question in this case was when was the contract made, if ever? Did selling the wool to another constitute revocation of the offer? c. The court is trying to figure out how a party at a distance can be bound. We have resolved it under the objective manifestation of intent test., but this English court does not seem to be using the objective test. According to this court, two willing parties are needed to make a contract. d. The court holds that an offeror can revoke at any time until the offeree puts his acceptance into the mail. e. The rule of this case applies not only to written offers where response by mail is specified, but also to cases where the offeror can reasonably expect a reply via the mail. (in other words, when the offeror can expect that the offeree will put some distance between him and the offeror before accepting.) f. However, you cannot just go around mailing acceptances and expect to invoke Adams. If it is not reasonable to expect a response via the mail, the mailbox rule does not apply. g. This case moves up the effective time of acceptance to when the letter was dropped in the mail. 3. Morrison v. Thoelke a. This case involved a land deal that went sour. Defendants accepted an offer to sell land by signing the contract for sale and sending it to the purchaser's attorney. Defendants called the purchaser's attorney and attempted to revoke before the signed contract arrived. b. The court applied Adams and concluded that the telephone attempt to rescind was ineffective under the mailbox rule. c. The courts have gotten used to this rule, and they still apply it even though it no longer comports with modern practice. d. Adams does not preclude overtaking the offer and revoking it before the receiver accepts it, but it does preclude both parties from overtaking an acceptance once it has been mailed. 4. Lewis v. Browning a. The MA S.J.Ct. rejects the mailbox rule and holds that an acceptance is not valid until actually received. But even if it did apply, the court holds that this offeror required actual notice of the acceptance before a contract would be formed. b. You can avoid Adams by expressly making actual notice required to form the contract. 5. Worms v. Burgess a. The court in this case held that the mailbox rule applied in the context of option contracts. So, once an optionee places notice that he is exercising his option to make a contract, that contract is deemed formed (ceteris paribus). 6. Pushing Adams to the limits: suppose the acceptance ends up in the dead letter office. Does a contract exist? The mailbox rule places the risk on the offeror that a contract might exist though he does not know about it. The harshness of this rule is diminished when you consider that the offeror can avoid it by requiring actual notice of acceptance by a certain date. 7. The mailbox rule is an exception to 2 general rules regarding the temporal effectiveness of a move. a. The offeror can provide in the offer as to when as to when an acceptance, rejection, and revocation is effective as master of the offer. b. Absent a specific provision in the offer regarding the effective time, the general rule is that the moves are effective when received. The exception is, of course, the mailbox rule with regard to acceptances. 8. The mailbox rule is a bit of a heuristic device (ROT, rule of construction, fishing out intent of a person from ambiguous language. L. Agreements to agree 1. Two basic truths about agreements that do not contain all material terms a. They are not enforceable despite the desire of the parties because not enough of a deal has been stated to make enforcement feasible. The court cannot enforce an agreement if it cannot figure out what the parties agreed to. Gap filler terms can help, but they have a limited usefulness. b. The court might find that there was enough of an agreement to enforce, but it may decide that the parties intended to be bound at that point. 2. Dohrman v. Sullivan a. This was the Ohio land deal case. The owners of the land were in FL, and they dealt with the prospective purchaser through the mail. b. The question was whether the defendant's letter of April 17 was sufficient to make a contract. The court holds that it was. The letter was sufficient to satisfy the statute of frauds even the defendant had never signed the sales agreement. c. [UNDER MOST CIRCUMSTANCES, PRICE CANNOT BE INFERRED. THAT TERM IS NOT AMENABLE TO A DEFAULT MEASURE.] d. A key question to ask is whether the parties intended to be bound before they signed the written memorial. 3. Joseph Martin v. Schumaker a. Plaintiff and defendant had a 5 year TFY lease with an option to renew upon written notice 30 days before the end of the lease at a rent to be agreed upon at a later date. Defendant LL wanted $900/mo in rent (at that time, plaintiff had been paying $650/mo pursuant to a sliding scale previously agreed to by the parties. Plaintiff's expert testified that the FMV of the land was $545.41 per mo. b. The court refuses to grant SP, deeming this clause an agreement to agree. c. Did defendant have an obligation to negotiate in good faith? If so, did he? Would the obligation mean he had to (1) Bargain in good faith, or (2) Agree to FMV rent? d. There are also some reliance problems in this case, since the plaintiff relied on this clause and it turned out to be an effective illusory promise. However, PE is not especially helpful. M. UCC  2-207 and the "battle of the forms" 1. At CL, the mirror image rule applies to O&A. No contract is formed unless the offeree accepts in exact accordance with the offer. 2. This rule is not particularly useful in modern transactions where parties use form contracts filled with boilerplate terms in their deals to buy and sell good. Last counteroffer analysis could be used to determine what the terms of the actual contract are, but parties usually do not deal in those terms either. 3. The drafters of the UCC recognized this problems and drafter  2-207 to deal with the "battle of the forms" 4. UCC  2-204(2): If the parties intend to be bound, the court may find the existence of a contract. The exact terms of that contract are to be found by application of  2-207 5. UCC  2-207 (1) a. A definite and seasonable expression of acceptance, or b. 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 and agreed upon - Unless acceptance is expressly made conditional on assent to the additional or different terms. [The "Weasel Words"] (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless (a) the offer expressly limits acceptance to the terms of the offer (b) they materially alter it, or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them has been received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. [This section applies if the weasel words kick in.] 6. 2-207 has its own system for figuring out what the agreement is, but unfortunately, you cannot start the analysis with 2- 207(3). That section is the last resort, and it is to be used when all else fails. It results in a compromise. 7. 2-207(1) & (2) were intended to avoid the problem of the "battle of the forms". The section allows the court to find the existence of a contract by the manner in which the parties have acted. 8. 2-207(2) does not apply unless your contract falls under 2- 207(1) 9. Hypothetical on the handout: Acceptor has accepted but stated additional and different terms. a. CL: The acceptance is partially invalid under the mirror image rule (Why not completely invalid?) b. UCC 2-207 (1) Payment must be made in cash when you pick up. This term is a default term if the manner of payment is not specified, so there is no problem with this term. (2) We hope you will pick up all units by May 1, 1993. This term does not directly change the deal, so there in no problem with it. (3) We only have 1,800 units left, so this contract is for 1,800 units. This term materially alters the quantity of goods. This was not the terms that was altered. 10. 2-207 meatgrinder grinds up non-conforming acceptances. But, you can avoid the meatgrinder by specifying conditional acceptance on additional terms ("Weasel words" at the end of 2-207(1). The Weasel words tend to destroy the entire project of 2-207). 11. The tendency on the part of the courts has been to avoid applying the weasel words unless the parties clearly say something to the effect of "My way or the highway." 12. Af CL, a purported acceptance which is inconsistent with the offer in any respect is invalid and does not form a contract. But, 2-207 says it is effective. 2-207 "tears out" the "acceptance" and gives effect to it. In effect, 2-207 says "You have a contract, now we must decide what the terms of that contract are. All the language of the acceptance goes into the meatgrinder unless the weasel words operate to keep them out of the meatgrinder. 13. Every state that had adopted the UCC has adopted 2-207. Legislators had faith in the drafters. 14. Other provisions get chewed up in 2-207(2). Problem: 2-207(2) refers only to "additional" terms. What becomes of different terms? Whether or not "different" terms are included by implication is the source of much debate. 15. The process of applying 2-207(2) (1) Are the two parties merchants? If so, you get the second sentence referring to merchants. If not, the new terms are treated as proposals. If they are ignored, they do not become part of the contract. (2) But if the parties are merchants, the seconds sentence does apply. The terms become part of the contract unless a. Offer is restricted to its terms b. Material alteration of the terms c. Notification of objection is tendered within a reasonable time or if it has already been given. (3) Additional terms are shooting ducks even though the court can find the existence of a contract. 16. Daitom v. Pennwalt a. The plaintiff was engaged in a joint venture to produce Vitamin B-5. It purchased some vacuum drying equipment from the defendant on the advise of the designer of the plant. The Defendant delivered the equipment by dumping it at the plant site where it remained for over a year. In their printed form, the defendants had disclaimed all other UCC warranties and placed a 1 year limitation on exercise of any express warranties. (The UCC SOL for warranty claims is 4 years unless disclaimed). When the Plaintiff finally installed the equipment after 1 year, the equipment would not function. Defendant refused to repair or replace the equipment. This lawsuit then ensued. b. At CL, the court would have had to use last counteroffer analysis (part performance) c. Under the UCC, 2-207 applies (1) The weasel words do not apply because the seller does not make acceptance of the contract conditional on acceptance of the additional or different terms. (2) We want to avoid intent analysis, so we construe 2-207(1) narrowly. A lesser standard would make 2-207 ineffective and impotent. (3) [In practice, language of insistence on additional terms can be boilerplate which no one reads.] (4) Yes, they have a 2-207 contract. Now, we apply the 2-207(2) meatgrinder to figure out what the terms of the contract are. (5) This term is a different term. 2-207 makes no express reference to "different" terms. Comment 3 refers to both additional and different terms. Was "different" drafted out? Most courts hold that "different" is not included within the meaning of "additional", and this court follows suit. (6) Last counteroffer analysis is replaced with 1st offer analysis. (7) Knockout rule (Professor White): Conflicting terms cancel out and you get the UCC "default" gap-filler terms. This court adopts the "knockout rule," even though such a rule is easier to apply under 2-207(3). 17. The goal of the UCC was to make contract law conform to business practice, but was that really possible given the freedom that business people usually want in making deals? The opposite has happened. (Lawyers as "deal busters".) III. Parol Evidence Rules and contract interpretation. *** KEEP IN MIND AT ALL TIMES THAT BLAKEY IS NOT A FAN OF THE PAROL EVIDENCE RULES!!!!!! A. The Parol Evidence Rules 1. Questions that must be asked a. What is the relationship of the writing to the contract? b. Can collateral agreements be proven? c. How can we get out of this mess? (This is the function of interpretation: figuring out what the contract means.) - Courts seldom ask these questions in the right order. - This is an area of the law in which there is a lot of illogic in the cases depending upon the premises invoked by the court. 2. 2 logical rules that are completely incompatible. a. If any part of the contract is put into writing, the contract consists of only the part in writing. b. A contract consists of everything to which the parties agreed- written, oral, or merely understood. 3. Hypothetical: 2 businesses who have done business in the past decide to do another deal. Although they "put it in writing", the writing is not consistent with what the parties have been doing over the years. The writing contains boilerplate terms with an exclusionary clause. A dispute arises, and the parties go to court. The judge says, "Show me your writing." To the judge, the writing is the controlling element in the dispute, not the way the parties have acted over the years. 4. Any collateral term is literally inconsistent with the writing, but by the PER, we mean that the terms must be grossly inconsistent to be deemed "inconsistent" with the writing. 5. Can the PER be evaded to prove a collateral oral agreement? a. Mitchell v. Lathe (1) This case involved a contract for the sale of land. Plaintiffs agreed to buy the land from the defendants on the orally stated condition that the defendants remove an old ice house from property across the street. The written contract for sale mentioned nothing about the condition. Defendants later refused to remove the icehouse, and the plaintiff sued for SP. (2) The court articulated a three part test for deciding whether a given case can be excepted from the PER. (a) The agreement must be collateral in nature (b) It must not contradict the provisions of the writing (c) It is not the sort of agreement that would be part of the writing. (3) The court finds that (c) was not satisfied in this case. (a) This term was a condition precedent to the land deal (b) All the material terms of the deal were included in the writing in detail, but not this term. (4) The dissenter Lehman articulates the same test, but he finds that the deal satisfied all three requirements. Indeed, this was a contract for the sale of land, not for the removal of an icehouse. 6. PER articulation on page 641: When the parties have adopted a writing as a statement of the deal, they may not refer to parol evidence to alter (or impeach) the terms stated in the writing they have adopted. 7. Between the two extremes of the "logically inconsistent statements" given above, there is a middle position: The Parol evidence rule a. Does not automatically forbid evidence of oral terms, but b. Slaps strict restrictions on their admission. 8. The key touchstone for application of the PER: INTEGRATION- did the parties intend the writing to be the integration of their agreement by the inclusion of all relevant terms and the exclusion of all other terms, oral or otherwise? Did the parties agree that the writing was the complete embodiment of the deal? 9. [Uses of writings: evidentiary, cautionary, channeling (sound familiar?)] 10. There is a presumption that a writing is the extent of the deal. 11. The PER says you dropped out the absent terms because you acted in a way that an objective observer would have interpreted your actions as having dropped those terms. 12. When there is a writing, the court will usually drop all previous oral terms & negotiations. The court is likely to hold that the writing is the extent of the contract. Such a holding has the effect of cutting off terms that the parties didn't think they were cutting off. 13. Masterson v. Sine a. Defendant sold his land to his sister with an option to buy it back at the same price. Defendant fell into bankruptcy, and the bankruptcy trustee attempted to exercise the option, arguing that it had been assigned to him. Defendant and his sister argued that the defendant had intended that the land stay in the family, so the option was not assignable. However, no such intent is apparent from the writing. Defendant wishes to have evidence of an orally stated intent that the land stay in the family admitted. b. The trial court held that evidence that the option was not assignable was barred by the PER, but the CA S.Ct. reverses. c. The writing relied upon by the plaintiff is the deed, but strictly speaking the deed is not a specifically prepared contract for sale. It is not a physically large instrument, nor did this deed contain any sort of merger clause. d. The court thinks it was error to exclude the evidence. It announces the rule that parol evidence should be excluded only when the finder of fact is likely to be misled by the evidence. Additionally, the court thinks this is the sort of agreement the parties would have made collateral to the contract for sale. e. The dissenter, obviously a true believer in the PER, blasts the court for undermining the PER by admitting this parol evidence. 14. PER checklist a. Is this an integration? b. Is it a complete or partial integration? c. Is there any of the following: (1) Ambiguity (2) Fraud/Misrepresentation (3) Conditional agreement (4) Promissory Estoppel (5) Mistake 15. Judge Kozinski argues on page 664 that if you agree to a written contract, that is the contract to which you will be bound (favors Logical Rule #1). 16. Baker v. Bailey a. The Bakers bought a large chunk of land from minus a