Contracts Class 5
January 25, 2018
pp. 69-81 (to C).
Drennan v. Star Paving Company
Facts: Plaintiff-contractor preparing to bid on Monte Vista School Job. Bids had to be submitted
before 8 pm. Plaintiff testified customary for general contractors to receive bids of
subcontractors by phone on day set for bidding and rely on them in computing their own bids.
That day, Plaintiff received call from 50-75 subcontractors for bids at various parts of school
job. As each bid came in, he wrote names and bids of all subcontractors. He also had to provide
a bidder’s bond of 10% of his total bid of $317,385 as a guarantee that he would enter contract
if awarded the work. Plaintiffs receptionist had conversation over phone with Defendant’s
estimator. Estimated paving work to be $7,131. 60. Plaintiff computed his own bid accordingly
and submitted it with name of defendant as paver. Plaintiff’s bid was lowest and was awarded
the contract. Next day, plaintiff drove to defendant’s office. Defendant’s construction engineer
said they had made a mistake and couldn’t perform job at original bid price. Plaintiff said he
would expect defendant to carry out work at original bid price because plaintiff had used that
bid in computing his own bid. Defendant refused to do paving work for less than $15,000.
Procedure: Plaintiff sued to recover damages from defendant for failing to perform paving work
according to bid it submitted to plaintiff. District Court found for plaintiff, finding “substantial
evidence that defendant made definite offer to do paving on Monte Vista job according to the
plans and specifications for $7131.60 and that plaintiff relied on defendant’s bid in computing
his own bid. Defendant appealed. Defendant contends no enforceable contract between
parties on the ground that it made a revocable offer and revoked it before plaintiff
communicated his acceptance to defendant,
Issue: Did plaintiff’s reliance make offer irrevocable?
Holding: Offer not revocable. Plaintiff can enforce Defendant’s bid based on promissory
estoppel. A general contractor cannot enforce a subcontractor’s bid as a bilateral contract or
option contract without consideration. A general contractor may enforce a subcontractor’s bid
where reasonable detrimental reliance makes the offer (bid) binding.
Rule: Promissory Estoppel exception to general rule that offer may be revoked at any time
before acceptance. To establish claim of promissory estoppel, plaintiff must prove that
defendant 1) made unambiguous promise to plaintiff 2) plaintiff relied on such promise 3)
plaintiff’s reliance was expected and foreseeable by defendants 4) plaintiff relied on promise to
their detriment
P-R-E-D!!!!!
Promise-relied on promise-expected and foreseeable-detriment
Reasoning: Absence of consideration is not fatal to enforcement of promise. Reasonably
foreseeable that general contractor would rely on subcontractor for the bid (in composing his
own bid).
Defendant’s offer constituted a promise to perform on such conditions as were stated expressly
or by implication. Defendant had reason to expect that if its bid proved the lowest it would be
used by plaintiff. It induced action of a definite and substantial character on the part of the
promisee.
Had defendant’s bid expressly stated or clearly implied that it was revocable at any time before
acceptance court would have treated it accordingly. No evidence that defendant offered to
make its bid irrevocable in exchange for plaintiff’s use of its figures in computing the bid.
Neither an option supported by consideration nor bilateral contract binding both parties.
Analyze this under UCC?
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Distinguishing this case from Krauss. In Krauss, no evidence that offeree relied on offer
being “irrevocable”
o Restatement section 87 “of a substantial character”
Predominant Aspect Test
o Contract predominately for goods-Article 2
o Contract predominately services-Article 2 does not apply
o Most courts will find that construction contracts-predominately for services.
Expertise of contractors and actually doing the work.
Hypotheticals
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If a “sale” of goods case (Article 2), offeree could not use UCC 2-205 because the offer
was not in writing, offer was oral.
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But say it was an article 2 sale of goods case. Can you use promissory estoppel (common
law) in a UCC case? Article 2 is mandatory authority if a UCC article 2 case. Judge has to
look for UCC rule.
o Drafters recognize could not completely preempt everything addressed in
common law
o Unless displaced by particular provisions in Uniform Commercial Code… Court
looks to common law to fill the gaps of the UCC. Did not intend to completely
preempt making an argument of estoppel in a case involving Article 2-205 Sale of
Goods.
o Common Law works together with UCC
Contracts “Big Picture”
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Has Contract (or quasi contract) been formed?
If so what are the terms?
Are there any defenses to enforcement?
Has the contract been properly performed, or is there an excuse for non-performance?
If not properly performed and no excuse, what are the available remedies for breach?
Manifestation of mutual assent (Offer and Acceptance)
The Bargaining Process-The Offer
Part of the manifestation of mutual assent generally required for a contract
If someone makes an offer, that person will be bound if the other party accepts
Definition of offer: Reasonable person would believe all that person must do is accept in
order for a contract to exist
If not an offer, may be considered simply “an invitation to bargain”
Newberger v Rifkind
Cal Ct Appeals, 1972
Facts: Plaintiffs (5) employees at Avnet Inc., an electronic corporation. In 1962, Charles Avnet
and his two sons, Lester and Robert, the decedent, were principal shareholders of Avnet Inc.
Charles, Lester and Robert agreed to grant stock options to five plaintiffs individually out of
their personal holdings of Avnet Stock. Written option agreements in favor of each plaintiff was
executed and accepted by each plaintiff. Lester Avnet had written authority to act as agent for
Robert Avnet in execution of the four of the options. Agreements provided optionees might
exercise their options up to 20 percent of the shares involved for each of the five years (20 %
year 1, 40% year 2, etc.) Plaintiffs were not obligated to exercise their options in this manner
and the entire option could be exercised as to the entire amount after the full five years.
Procedure: Plaintiffs sought a declaration as to enforceability of five stock options granted to
them by decedent, and Plaintiff sought damages caused by executors’ refusal to honor the
options. Clare Avnet, decedent’s widow filed complaints in intervention by way of answer and
denied plaintiff’s right to recover. Non-jury trial was bifurcated (divided into 2 parts) on court’s
own motion and consolidated judgment on issue of liability was entered in favor of defendant
executors and intervenor. Plaintiff appealed.
Lower court said option agreement not supported by consideration (therefore revocable)
Issue: Whether continued employment time and effort is consideration (binding)
Holding: Reverses, finding employees act of continuing employment was both acceptance and
consideration for the option, even in the absence of a formal bargain.
Consideration is inherent where stock options are granted to employees and employee
continues employment knowing of the options and no additional consideration in money or
property is required
Rule Continuing an employment which one is not bound by contract is as clearly consideration
as is entering the employment in the first place. Plaintiffs gave their time and effort in reliance
on the stock options and no other showing of consideration was necessary. Implied promises
from the circumstances have consideration
In California, contracts in writing there’s a presumption of consideration. Conclusive
presumption and rebuttable presumptions. Here, Defendant can still rebut.
Reasoning: Courts do not distinguish between inducement to continue employment and an
inducement to begin employment.
Additional advantages to employees as being in effect of offers of unilateral contract which
offer is accepted if the employee continues in employment and not as being mere offers of
gifts. They made employees more content and happier in their jobs, cause the employees to
forego their rights to seek other employment, assist in avoiding labor turnover and are
considered of advantage to both employer and employee.
Defendants argue that although continued employment by Plaintiffs might have been
consideration had it been bargained for, there is no showing in record that defendant’s ever
requested plaintiffs continue in employment in exchange for defendant’s promise to grant the
option. No express formal request for either a promise or for an act is required to find a
contract supported by consideration. Here, bargain implied from the circumstances. No formal
bargain was necessary.
Dicta: Court relies on theory of contract and consideration not promissory estoppel
Why not?
Re Business and Stock Options
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Option price stays same
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Market Price fluctuates
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Times where makes sense for optionee to exercise option (buy stock, make money) v.
not to exercise the option.
The Acceptance
If offeree says, “I accept” before the offer is revoked there is clearly a contract.
But what if the offeror says, “I revoke my offer”” at about the same time?
Henthorn v. Fraser
1892
Facts: 1891, Plaintiff wanted to purchase houses from Huskisson Benefit Building Society on
Flamank St., Birkenhead. On July 7th, he called at the office and the secretary of the Society
verbally offered to sell him for 750 pounds. This offer was reduced into writing and was as
follows: I hereby give you the refusal of the Flamank St. property at 750 pounds for fourteen
days. The secretary after signing this handed it to Plaintiff, who took it away to consider. On
morning of July 8, another person called and offered 750 pounds for property which was
accepted. Between 12-1 pm on that day secretary sent to Plaintiff the letter that said the option
of purchasing the property was withdrawn and offer canceled. The letter was delivered to
Plaintiff between 5-6 pm that evening. That same day, Plaintiff wrote secretary accepting the
property. Letter was addressed to the society’s office and posted at 3:50 pm and delivered at
8:50 pm. The secretary replied the next morning stating the offer had been withdrawn.
Procedure: Plaintiff brought action for specific performance. Complaint was dismissed. Plaintiff
appealed.
Issue: When revocation by offeror and acceptance by offeree are given at approximately the
same time, who wins?
Holding: Judgment reversed in favor of plaintiff.
Rule: Under the “mailbox rule”, acceptance is completed as soon as it is posted.
Reasoning: Where circumstances are such that it must have been within the contemplation of
the parties that according to the ordinary usages of mankind, the post might be used as a
means of communicating the acceptance of an offer, the acceptance is complete as soon as it is
posted.
Here, plaintiff posted before receiving revocation. Therefore, acceptance completed at 3:50
pm.
NOTES AND QUESTIONS
1. Restatement Section 42:
An offeree's power of acceptance is terminated when the offeree receives from the
offeror a manifestation of an intention not to enter into the proposed contract.
Restatement Section 63: Unless the offer provides otherwise,
(a) An acceptance made in a manner and by a medium invited by an offer
is operative and completes the manifestation of mutual assent as soon as put
out of the offeree's possession, without regard to whether it ever reaches the
offeror; but
(b) An acceptance under an option contract is not operative until received
by the offeror.
2. Does mailbox rule apply to rejections? If the offeree first mailed a rejection but had a
change or heart and subsequently mailed an acceptance before the offeror received the
rejection, would there be a contract? Restatement (second) of contracts section 40
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Rejection does not terminate the power of acceptance until received by offeror
o but limits the power so that letter or telegram of acceptance started after
sending an otherwise effective rejection or counter offer is only a counter
offer unless rejection is received after acceptance. (WHAT DOES THIS
MEAN? Does that make the contract revocable by offeror if receives
rejection and then later acceptance?)
3. Should mailbox rule apply to faxes or email?
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Restatement section 64: Acceptance given by telephone or other medium of
substantially instantaneous two-way communication is governed by the
principles applicable to acceptances where the parties are in the presence of
each other.
4. Was Allen Krauss Co v. Fox decided correctly under these rules.
No…acceptance sent after revocation
5. If between 3:50 pm and 8:30 pm the oferee in Henthorn v. Fraser had telephoned the offeror
and said, “I have decided not to buy the property,” would he be bound by his acceptance?
Morrison v. Thoelke the court said he was bound. Applied the mailbox rule even though this
hurt the oferee who was trying to get out of the contract rather than enforce it Why? ASK IN
CLASS*** The law of contracts protects persons who have acted in reliance on a promise. The
call occurred before receipt of acceptance and before reliance…
Worms v. Burgess
Oklahoma Ct. of Appeals, 1980
Facts: Plaintiff- appellants (optionee) are successors in interest to the holder of an option
contract with Defendant appellees (Optioner). Under terms of the option contract if the
optionee “elects to exercise the option to purchase the optioner shall be notified on or before
August 21, 1977 of the intention to so exercise said option. Optionee dispatched its notice on
August 20th but said notice was never received.
Procedure: Plaintiff optionee sued to enforce exercising option. Court found for defendant.
Issue: Where an option contract provides for notification on or before a fixed date and
notification is timely and properly mailed by optionee but not timely received by optioner, is
the option effectively exercised.
Holding: Reverses in favor of optionee appellants. Option is properly exercised.
Rule: Dispatch or mailbox rule: Acceptance of an offer in which an acceptable mode of
acceptance is effective when deposited in the mail properly addressed and with sufficient
postage affixed.
(Mailbox rule applies to option contract-acceptance when posting-sending in post.)
Reasoning: The fact that someone will not know of contract for a while after option is exercised
is a risk attendant in the parties’ willingness to deal by mail. If parties wanted to require receipt
of the notice of intent to exercise option they could have done so. Where risk has not been
expressly dealt with. Attributing risk of the optionor best comports with the intent of the
parties/
If Court applies Restatement Rule Section 63: Not operative until received by optionor.
Would it have come to different conclusion? Yes. When there is an option contract, offer
effective upon receipt not dispatch.
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Why does restatement view option contracts differently from revocable offers
which are effective upon dispatch? Protects the offeror. Binding. Offeror is
bound for the option but offeree is not, can accept option as it chooses. Offeror
is exposing itself to risk in not knowing for the period between offer and
acceptance. Effective upon receipt provides protection to offeror.
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Applying standard mailbox rule could expose offeror to speculation for longer
than intended period (i.e. Does not actually get delivered to offeror,
nevertheless is effective because was sent)
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Restatement provides an end date (NO Mailbox rule). Person giving option
(optionor) must know and receive receipt of the acceptance before it is effective.
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Silence as acceptance
Offeror cannot compel offeree to speak
Acceptance may be implied under circumstances (2nd restatement section 69 and UCC
2-209)
Curtis Co. v. Mason
Ct. of Appeals Idaho, 1982
Facts: Wheat crop planter- Defendant Mason called Curtis Co asking about ad promoting
soybean production. Mason spoke with Bob Mai, grain broker employed with Curtis Co-Plaintiff.
Two talked about soybean market and then Mason’s spring wheat crop.
Plaintiff-Curtis Co argues that by remaining silent, Mason Offerree defendant was accepting.
Not using UCC even though UCC (sale of goods) case. Gaps in the UCC, court will use common
law.
Procedure: Curtis Co sued Mason to recover $4140 for breach of alleged oral agreement to sell
$9,000 bushels of wheat. Court ruled no oral agreement for sale of wheat (sided with
defendant).
Issue: Whether offerees (Curtis) silence is acceptance to contract and is bound by offeror’s
offer.
Holding: Affirmed lower court finding.
Rule: Generally, offeror cannot say there’s a contract in silence.
Exceptions under Restatement Section 69
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Here, no services offered that were accepted and benefitted oferee.
Reasoning:
1. History of deals between parties? Course of dealing between parties overtime?
a. No. Here, this is the first conversation between the parties. If there had been
previous dealings, it would be reasonable for Curtis to think silence constitutes
acceptance.
Note 3. If form had stated “to accept this offer, please sign at the bottom and return” but the
seller promptly shipped goods without signing the form, was a contract form? No because
offeror said explicitly sign form and send.
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Seasonably notifies buyer that shipment is offered only as an accommodation to the
buyer.
Acceptance by performance, must inform offeree.
What if form was purchase for immediate shipment rather than future shipment?
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Shipment constitutes acceptance for immediate shipment. (Unless really clear that
buyer wants a promissory acceptance, normally okay for seller to just ship the goods)
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What if seller ships 7,000 bushels instead of 9,000 (nonconforming goods because not
aligned with requested shipment). Started shipment, must complete it and owe buyer
remaining 2,000 bushels. Accepted offer and breached the contract at the same time.
IF seller (farmer) only had 7,000 and needed to send 9,000, could have done counter
offer. Other option is sending it as an accommodation to you. If you want it, fine, if not
send it back.
Acceptance Summary
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Unless offer is unambiguous ( i.e. complete the Boston Marathon) offeree can accept in
any manner that is reasonable (2nd restatement section 32 and 62; UCC 2-206
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Unless offer is unambiguous, can generally accept by starting performance, which acts
as a return promise to complete the performance (House painting hypo) but notify
offeror that accepting by performance.
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Once there is an acceptance, there is a binding contract between the parties (subject to
excuses and defenses we will study later)