Week 2
Contract Formation
May 19, 2018
Professor Johnny Griggs
Learning Goals
(1) What is the objective test for contractual assent?
(2) How does the objective test apply?
– What is the reasonable person standard?
– Is evidence of subjective intent admissible?
(3) What is the duty to read?
(4) How does deliberately undisclosed intent impact the
objective test?
(5) What are some limitations on the objective test?
2
Sources Of Contract Law
Common Law
Uniform Commercial Code
Restatement (Second) of
Contracts
3
Other Sources of Contract Law
 U.S Constitution
 Article I, section 10, clause 1. It states: No State shall enter into any . . .
Law impairing the Obligation of Contracts. . .
 State Statutes
California Civil Code
1619. A contract is either express or implied.
1620. An express contract is one, the terms of which are stated in
words.
1621. An implied contract is one, the existence and terms of
which are manifested by conduct.
1622. All contracts may be oral, except such as are specially
required by statute to be in writing.
 California Business & Professions Code
 California Public Contracts Code
4
What is a contract?
A promise or set of promises, for the breach of which
the law provides a remedy, or the performance of
which the law in some way recognizes as a duty.
Exchange relationship – assumes reciprocity
Between or among two or more parties
Containing at least one promise
Recognized as enforceable by law
Some must be in writing – not all
Relationship must be consensual
5
What is a Contract?
A contract may be defined as:
“[A]n exchange relationship created by oral or
written agreement between two or more
persons, containing at least one promise, and
recognized in law as enforceable.”
6
What is a Contract?
This definition reflects several essential
elements:
An oral or written agreement between
two or more persons
An exchange relationship
At least one promise
Enforceability
7
What is a Contract?
An oral or written agreement between two or
more persons
Voluntary, consensual relationship, objectively
determined
Law does not require a literal meeting of the mind –
agreements are determined by objective
manifestations
A contract is created only because the parties, acting
with free will and intent to be bound, reach
agreement on the essential terms of their relationship
Includes oral as well as written agreements
8
What is a Contract?
Exchange relationship
The essential purpose of a contract is exchange or
quid pro quo
Essence of a contract is a reciprocal relationship –
Each party gives up something to get something
Some contracts last for a short period of time –
some last for an extended period of time
Some involve tangible things, others intangible
rights
9
What is a Contract?
Promise
A contract is a relationship that can be enforced by legal
process
If the parties simply enter into an instantaneous exchange
(e.g., an exchange of goods for cash, without any warranty
relating to the goods) neither makes any commitment –
there is no role for contract law to play in enforcing the
exchange
A promise is an undertaking to act or refrain from acting in
a specified way at some future time
The definition of “contract” indicates that only one
promise needs to be made for an enforceable contract to
come into existence – e.g., a unilateral contract
10
What is a Contract?
Enforceability
 Legal enforceability distinguishes contracts from
other agreements
Parties commit themselves to perform the
promises that they have made in the contract
Contracting is often described as an act of private
lawmaking by which the parties create a kind of
personalized “statute” that governs their
transaction
This private law is binding on the parties
A contract is enforceable by a court of law –
usually by a judgment for damages
11
What is a Contract?
What is required to make an agreement legally
enforceable?
Offer
Acceptance
Consideration
No defenses to the formation of
the contract
12
What is a Contract?
Offer:
Restatement 2d,§ 24 – Offer
“An offer is the manifestation of willingness to
enter into a bargain, so made as to justify
another person in understanding that his assent
to that bargain is invited and will conclude it.”
13
What is a Contract?
Acceptance:
Restatement 2d§50 – ACCEPTANCE OF AN OFFER
DEFINED
“Acceptance of an offer is a manifestation of assent to
the terms thereof made by the offeree in a manner
invited or required by the offer.”
14
What is a Contract?
Consideration:
Restatement 2d – §71. REQUIREMENT OF EXCHANGE;
TYPES OF EXCHANGE
“(1)To constitute consideration, a performance or a
return promise must be bargained for.
(2) consideration is bargained for if it is given in
exchange for the consideration that is given in
exchange for it.”
15
What is a Contract?
Defenses to Formation:
Statute of Frauds
Misrepresentation
Indefiniteness
Unconscionability
Incapacity
Illegality
Fraud
Duress
Undue Influence
Mistake
16
Agreements Not Fully Enforceable
Void Contracts- agreements with no legal effect (e.g.,
gambling contracts)
Voidable Contracts- one party has the option to
enforce or not enforce (e.g., minors)
Unenforceable Contracts- agreement that has some
legal status but is not immediately enforceable (e.g.,
oral agreement where Statute of Frauds requires a
writing)
17
Mutual Assent
When two or more parties discuss terms for the
purpose of entering into a contract together, the act of
agreeing to the terms is considered “mutual assent.”
While this meeting of the minds does not in itself
create a binding agreement, it is a necessary factor in
any legally binding contract. This concept applies to
both written and oral agreements, and while
enforcement of a written contract is generally easier,
courts consider whether there was mutual assent in
determining the validity of an oral contract.
18
Elements Of Mutual Assent
Mutual assent consists of two main elements,
an offer and acceptance. An offer is a promise
to do something, or to refrain from doing
something, in return for something of value.
Acceptance takes place when the other party
agrees to the conditions made in the offer. Both
the offer and acceptance must be stated in a
way that makes it clear to another reasonable
person that the parties have reached an
understanding as to the terms of the agreement.
19
MUTUAL ASSENT
Offer
+
Acceptance
=
Mutual Assent
20
Mutual Assent
 For a contract to be formed, the parties must intend to enter
a contractual relationship – terms of the contract are those on
which they have mutually agreed
 Complicated by the fact that the parties must communicate their
intentions to each other, and this communication could be poorly
expressed or incorrectly understood
 Where there is a dispute over terms or whether there is a contract –
communications must be interpreted to resolve this dispute
 Interpretation of the words and actions of the parties is a pervasive
theme in the law of contracts
 Fundamental principle of modern contract law
 To ascertain intent of the parties – court does not look to subjective
intent
 Instead courts look to the reasonable perception of intent as conveyed
by words and actions (objective intent)
21
Mutual Assent
 Agreement requires communication
 Intent must be signaled through the words and actions of each party
 These words and actions must be observed and given meaning by the other
party
 The action can lead to assent on a subjective level – true meeting of the minds
 However, not always true – communication can go amiss for a variety of reasons
– different meanings attributed to words – poor choice of words or actions –
different perceptions or experiences
 Standard terms
 Parties often assent to standard terms
 Often assented to without reading or understanding the terms
 While in some contracts there is an authentic meeting of the minds –
some transactions end up in litigation because there was no meeting of
minds – even though manifestations of assent appear congruent
22
Mutual Assent
 When imperfect communication leads to a dispute, two
fundamental contract policies must reconciled
 Assent policy – dictates that contractual obligation should not be imposed
where one did not in fact agree to be bound
 Reliance – If no one could rely on the objective manifestations – the
words or conduct that signal assent – there would be no confidence in our
system of commercial exchange
 Therefore – we hold people accountable for the words and conduct that
signal assent
 There is a role for subjective intent
 Evidence of a party’s state of mind may sometimes be helpful in
interpreting or giving a context to words or conduct
 Provided that the subjective evidence is credible and compatible with the overt
behavior
 However – the objective test is the standard – no subjective meeting of
the minds is required
 The contemporary approach represents a middle ground between the classicists
(subjective meeting of the minds) and
 The objectivists (objective manifestations)
23
Mutual Assent
Contemporary approach is reflected in the
Restatement
Restatement, Second §2
Promise; Promisor; Promisee; Beneficiary
(1) A promise is a manifestation of intention to act or refrain
from acting in a specified way, so made as to justify a promisee
in understanding that a commitment has been made. (2) The
person manifesting the intention is the promisor. (3) The person
to whom the manifestation is addressed is the promisee. (4)
Where performance will benefit a person other than the
promisee, that person is a beneficiary.
24
Mutual Assent
Contemporary approach is reflected in the
Restatement
Restatement, Second §3
Agreement Defined; Bargain Defined
An agreement is a manifestation of mutual assent on the part of
two or more persons. A bargain is an agreement to exchange
promises or to exchange a promise for a performance or to
exchange performances.
25
Mutual Assent
Contemporary approach is reflected in the
Restatement
Restatement, Second §19
Conduct As Manifestation Of Assent
(1) The manifestation of assent may be made wholly or partly by
written or spoken words or by other acts or by failure to act. (2)
The conduct of a party is not effective as a manifestation of his
assent unless he intends to engage in the conduct and knows or
has reason to know that the other party may infer from his
conduct that he assents. (3) The conduct of a party may manifest
assent even though he does not in fact assent. In such cases a
resulting contract may be voidable because of fraud, duress,
mistake, or other invalidating cause.
26
Mutual Assent
Contemporary approach is reflected in the Restatement
Restatement, Second §20
Effect Of Misunderstanding
(1) There is no manifestation of mutual assent to an exchange if the
parties attach materially different meanings to their manifestations
and (a) neither party knows or has reason to know the meaning
attached by the other; or (b) each party knows or each party has
reason to know the meaning attached by the other. (2) The
manifestations of the parties are operative in accordance with the
meaning attached to them by one of the parties if (a) that party does
not know of any different meaning attached by the other, and the
other knows the meaning attached by the first party; or (b) that party
has no reason to know of any different meaning attached by the other,
and the other has reason to know the meaning attached by the first
party.
27
The Objective Test
 Famous expressions of the objective approach by Judge Learned Hand in
Hotchkiss v. National City Bank of New York, 200 F. 287, 293 (S.D.N.Y. 1911):
“A contract has, strictly speaking, nothing to do with the personal, or individual,
intent of the parties. A contract is an obligation attached by the mere force of
law to certain acts of the parties, usually words, which ordinarily accompany
and represent a known intent. If, however, it were proved by twenty bishops
that either party, when he used the words, intended something else than the
usual meaning which the law imposes upon them, he would still be held, unless
there were some mutual mistake, or something else of the sort.”
 Justice Oliver Wendell Holmes:
“The law has nothing to do with the actual state of the parties’ minds. In
contract, as elsewhere, it must go by externals, and judge parties by their
conduct.”
28
28
Objective Test
Contracts are formed by MUTUAL ASSENT
Legal assent is determined by OBJECTIVE
manifestations of assent [Communications and actions ]
Focus is on the REASONABLE PERCEPTION of intent by
a person in the position of the party to whom
manifestation was made
Evidence of subjective intent may be admissible if
probative, but not dispositive
29
Objective Test
Where a dispute concerns an unwritten
agreement, the parties’ manifested mutual
assent must be constructed from:
Evidence of negotiations or other past conduct
Evidence of communications and overt acts
The parties’ manifestations are judged by the standard
of the reasonable person
30
The Reasonable Person Standard
Objective manifestations of assent–
interpreted from perspective of a party in the
position of the observer, taking into account
the person’s attributes, background
information, the relationship between the
parties, and the context of the transaction
The law protects the reasonable expectations
of the party to the transaction
31
The Reasonable Person Standard
 Manifestations of assent are not interpreted in light of
what the utterer actually meant or the other party
actually understood
 But from the standpoint of what that utterance reasonably
meant in the entire context of the transaction
 I.e., it is not what the words or actions actually meant to
either party
But how they should have been meant and understood if
interpreted reasonably under the circumstances of the transaction
Objective test is meant to balance the requirement of assent with
the protection of reasonable reliance
Not based on any actual perception of meaning – but on rational
meaning that should have been placed on it by the parties
The reasonable person is a construct meant to represent the
community standard, as identified by the trier of fact
32
The Reasonable Person Standard
Example:
Lender lent Borrower $10,000. Under the loan agreement, Borrower promised to
repay the loan “with interest at the market rate within one year of the date of
receiving the advance.” At the time that the contract was executed, the market
interest rate was 4 percent. At the time of the repayment date, the market interest
rate was 5 percent. This led to a dispute between Lender and Borrower about the
meaning of “interest at the market rate.” Lender contends that the market rate must
be measured at the time of repayment of the loan and interest, while Borrower
contends that it is fixed at the rate prevailing at the time the loan was made. To
establish the meaning of “market rate,” the factfinder is not so much concerned
about what either Lender or Borrower thought it meant. Rather, he or she will seek
to determine what reasonable people in their position would have understood the
term to mean under all the circumstances of the transaction. To make this
determination the factfinder must focus on objective evidence—that is, observable
significations of intent—to establish contractual intent. This evidence consists of the
language used by the parties in the agreement, as well as any other communications
between them or any other overt behavior. It also covers any custom or usage in the
marketplace, as well as any generally accepted meaning of the language used in the
parties’ communications.
33
The Reasonable Person Standard
 The modern objective test is not rigid in its application
 A rigid application of the objective test would confine the evidence to
objective sources – would make evidence of what the parties thought it
meant irrelevant
 The modern approach balances the policies of assent and reliance –
courts rely heavily on the objective test – but subjective intent is taken
into account
 Courts are usually willing to admit subjective evidence of what a party thought or
intended to the extent that this evidence is congruent with the objective
manifestations of intent
 It must be relevant to provide insight into those manifestations, and it must be
credible
 In our example, evidence of each of the parties’ actual understanding of “interest at
the market rate” should be admissible, merely as pieces of relevant evidence
 If the subjective understanding is plausible and consistent with the objective
evidence, it may reinforce the court’s determination of the reasonable meaning of
the language
 A court is not likely to admit evidence of a party’s intent that is implausible and not
reconcilable with the objective indicia of assent
34
Objective Assent In Contracts:
Sr Intl Bus Ins Co., Ltd. V. World Trade Ctr Props, LLC
SR International Business Insurance Co., Ltd. v. World Trade
Center Properties illustrates a modern court’s approach:
SR International Business Insurance Co., Ltd. v. World Trade Center
Properties, LLC, 467 F.3d 107 (2d Cir. 2006):
In SR International, various insurance companies had issued binders
(commitments to insure pending the execution of a final insurance
policy) on the World Trade Center. The binders provided for coverage
of $3.5 billion “per occurrence.” The question of interpretation in
dispute was whether the terrorist attack on the twin towers on
September 11, 2001, in which two planes were crashed into the
towers, constituted a single occurrence, for which total
indemnification under the policies would be $3.5 billion, or two
occurrences, which would increase the maximum coverage amount
to $7 billion.
35
Objective Assent In Contracts:
Sr Intl Bus Ins Co., Ltd. V. World Trade Ctr Props, LLC
SR International Business Insurance Co., Ltd. v. World Trade
Center Properties illustrates a modern court’s approach:
SR International Business Insurance Co., Ltd. v. World Trade Center
Properties, LLC, 467 F.3d 107 (2d Cir. 2006):
The trial court admitted testimony of the insurers’ witnesses about what
they thought the policies meant. On appeal, the insured parties argued
that the trial court should have excluded this subjective evidence. The
court of appeals found no error in the admission of the evidence. It
expressed the established principle that a contract must be interpreted
objectively, based on the parties’ manifested intent, rather than their
actual intent. Therefore, although uncommunicated subjective intent
cannot supply the meaning of a contract, it could be relevant and
admissible to cast light on the meaning of the objective manifestations.
This is particularly true where there is some ambiguity or lack of clarity
in the objective manifestations.
36
Objective Assent In Contracts:
Sr Intl Bus Ins Co., Ltd. v. World Trade Ctr Props, LLC
 The parties’ ‘reasonable expectations’ in entering into a
contract are determined based on an objective
understanding of the:
1. Attendant circumstances in which the agreement
was made
2. The situation of the parties
3. The objectives that the parties were striving to
attain
 In a negotiated agreement, a party’s subjective
understanding, while not controlling, may be admissible
 E.g., where the meaning is ambiguous
37
The Objective Test: Duty to Read
 The objective test binds a party to his manifestation
of assent
 Therefore, she is accountable for reading the terms of a
contract before signifying assent
 Failure to read or understand – is generally not grounds for a
party to argue she is not bound
 Under the objective test – a party is bound by her objective
indication of assent to a contract despite a lack of subjective
agreement caused by his failure to read and understand its terms
 Courts often express this approach by saying that a party has a duty to
read a document before signifying assent to it
 The failure to read and understand most often occurs with standard
contracts
 Or, sometimes on websites people click “I agree” without reading the
contract
 Unless the terms are unconscionable or inconspicuous, failure to read
and understand is no excuse
38
The Objective Test: Duty to Read
Morales v. Sun Constructors, Inc., 541 F.3d 218 (3d Cir. 2008):
In Morales, the court held that an employee was bound to his manifested
assent to a standard arbitration agreement even though it was clear that he
did not read or understand what he was signing. At the time that he was
hired Morales, a Spanish-speaking employee, was required to attend an
employee orientation, during which he signed a standard employment
agreement containing an arbitration provision. The orientation was
conducted in English and the agreement was written in English, which
Morales did not understand. The employer knew this and asked another
new employee, who was bilingual, to translate what was said at the
orientation and to help Morales with the agreement form. However, this
employee did not explain the agreement form, and Morales did not ask
about it.
39
The Objective Test: Duty to Read
Morales v. Sun Constructors, Inc., 541 F.3d 218 (3d Cir. 2008)
(cont.):
Morales later sought to sue the employer for wrongful
termination and claimed that he was not bound to the
arbitration clause because he did not actually agree to it. The
court of appeals rejected that argument and found that
Morales had bound himself to arbitrate the dispute. It held that
under the objective test, Morales had the obligation to ensure
that he read and understood what he was signing. If he could
not understand English, he should have made sure that
someone translated the agreement form for him. This result
may seem harsh, but the case does show just how difficult it
can be for a person to overcome the duty to read.
40
Morales v. Sun Constructors, Inc.
How did Morales pass a test in English?
Why is Morales attempting to avoid the
arbitration provision?
Is Morales attempting to have it both
was here, vis-à-vis enforcement of the
contract?
Is the court’s decision fair?
41
Morales v. Sun Constructors, Inc.
When determining whether parties have agreed to
arbitrate a certain matter, courts generally apply
state law principles that govern contract formation
Failure to read or understand an arbitration
agreement, in general, will not relieve an
individual’s compliance with the terms of the
arbitration agreement
Overwhelmingly Courts favor and generally uphold,
arbitration agreements
42
The Objective Test: Duty to Read
Morales involved a standard agreement on paper – same
concept applies with a standard contract on the Internet
Example:
Don Loader visits the website of SoftWary.com and decides to buy a video
game, to be downloaded onto his computer. He places the game in his
virtual shopping cart and proceeds to order it. Just before he submits his
order, a box appears on his computer screen headed “Terms and Conditions
of Sale.” The box contains several pages of standard terms that can be read
by scrolling down the text in the box. Don cannot be bothered to read all
that stuff, so he just clicks the “I accept” button at the bottom of the box.
Even though Don has no idea what he agreed to, the objective test binds
him to his signification of assent.
43
Problem 3.1
Nadia Borrower owns a small business, which was in financial
difficulty and could not pay its operating expenses. She
approached Nora Lender for a loan of $100,000. Nora agreed to
lend Nadia the money provided that Nadia’s husband, Ray,
signed a suretyship agreement, under which he guaranteed
payment of the debt and committed to pay it if she defaulted.
Nora prepared and gave Nadia the suretyship agreement, to be
signed and returned before the loan was advanced. Nadia took
it home that night and gave it to Ray, saying, “I need you to sign
this.” Ray was engrossed in playing a game on his iPad.
44
Problem 3.1
Without taking his eyes off the screen, he distractedly asked
Nadia, “What’s this?” She replied, “It’s some paperwork for my
business loan.” “Oh, whatever,” said Ray as he took the paper
and, glancing momentarily from the screen, scribbled his
signature on it without reading it. Nadia took the signed form
back to Nora the next day and received the loan. Despite the
new funds, Nadia could not turn her business around, and it
failed a few weeks later, causing her to default on the loan.
Nora demanded payment from Ray under the suretyship
agreement. Ray argued that he never agreed to guarantee
Nadia’s debt. When he signed the paper, he was distracted and
did not really know what he was signing. Had he realized what
it was, he would have refused to sign it.
45
Problem 3.1
In SR International the court indicates that even under the
objective test, evidence of subjective state of mind can have
probative value. Do you think that Ray’s testimony of his state
of mind is entitled to any probative weight in determining
whether he intended to enter the contract?
46
Problem 3.2
One of the provisions in the loan agreement between Nora and Nadia
stated “The funds lent under this agreement may be used solely for the
payment of the operating expenses of Nadia’s business, and may not be
used for Nadia’s personal expenses.” Nadia used $10,000 to pay for a
business trip to Asia, during which she attempted to negotiate sales of her
product with several potential customers. (Nadia worked hard on the trip
and spent no time on recreational activities.) Nora claims that this was a
breach of the contract. She meant the term “operating expenses” to cover
only the routine expenses of keeping the business in operation, such as
salaries, purchases of inventory, and payments to the lessor for rent. Nadia
denies having breached the contract. In her understanding, the expenses of
travel for the purpose of attracting business are “operating expenses.” How
is this dispute to be resolved? What role does the evidence of subjective
understanding play in its resolution? What contextual facts would you look
for to assist in resolving the meaning of “operating expenses”?
47
Problem 3.2
 Interpretation is fact-based, and involves a consideration not only
of the actual language of the provision at issue (here, too
ambiguous), but also:
 The broad context– including an examination of the writing as a whole
 Any contextual evidence, e.g., any generally understood meaning of the
phrase in the trade, market, or more general business usage, any
discussions that the parties may have had on the point during
negotiations, and any post-formation conduct of the parties (course of
performance) that may cast light on what they intended
 Conduct in any prior transactions between them may constitute a course
of dealing which could illuminate their intentions in this contract
 Evidence of the parties’ subjective understanding, while not dispositive,
may be of some relevance if probative
48
James v. McDonald's Corp.
417 F. 3d 672 (7th Cir. 2005)
 P buys fries, wins $1 million prize, mails in ticket. FBI
discovers fraud. P sues D for failure to honor her game
card.
 D moves to compel arbitration under the official rules,
which P never read.
 Court grants motion, but P fails to arbitrate – court
dismisses her case. P appeals.
 What is the key issue in the case?
 What is the holding?
49
James v. McDonald’s Corporation
The Duty to Read:
A party who has an opportunity to read the
contract, but does not, is bound by the
contract terms under the objective test.
A contract need not be read to be effective.
Applies to negotiated terms or standard,
preprinted form contracts.
50
Question 5 On Page 77
The term at issue in James was an arbitration
clause. What if it was not an arbitration
provision but rather a clause that read, “By
participating in this game, the participant
undertakes to buy two McDonald’s hamburgers
every day for a month.” Do you think that the
court would have found that provision binding
on Ms. James?
51
Question 5 On Page 77
Answer:
Courts take into account whether it would be
reasonable for a non-drafting party to expect terms of
that kind in the contract. Although a court may find that
adequate notice and the duty to read bound Ms. James
to a term requiring her to buy hamburgers every day for
a month, the fact that this is an unusual term would
likely call for a more stringent evaluation of whether the
term was sufficiently conspicuous and brought to the
non-drafter’s attention.
52
Duty To Read: Standard
Terms On Packaging
Boxtop – contract terms printed on the exterior of
the packaging and discernable before opening the
packaging
Shrinkwrap- contract terms included inside the
package or in electronic form on software
included inside the package that are only visible
once the package is opened
Enforceable as long as terms presented to buyer
at the time of contracting
53
Duty To Read: Standard
Terms On Packaging
“Clickwrap terms”- where a buyer must indicate
acceptance of standard terms before placing an
on-line order.
“Browsewrap terms”- where standard terms are
available to a buyer through a link, but the
buyer is not required to take affirmative steps to
indicate acceptance of the terms before placing
an on-line order.
54
Duty To Read: Standard
Terms On Packaging
 Courts stress the importance of setting out standard terms in a
clear, conspicuous, and intelligible form
 Whether the terms are contained in a written paper contract or in
electronic form, such as a website or software
 In the absence of actual notice of a term, the court will not deem a
person to have notice of it, and therefore to have assented to it
 If the term is not apparent to a reasonable person (for example, it is
buried in fine-print boilerplate) or is written in language that is
difficult for a lay person to understand
 This is particularly true where the term is not one that would
obviously be found in such a contract (and therefore not reasonably
expected)
 Where the non-drafting party is a consumer or is commercially
unsophisticated, courts are especially solicitous of protecting him
from the imposition of terms that are unfair, unexpected, or
insufficiently clear and obvious from the writing
55
Duty To Read: Standard
Terms On Packaging
Rules relating to browsewrap terms:
Where standard terms are set out as browsewrap terms on a
website— that is, there is a link to the terms that the customer can
click to read the terms—courts focus on whether the link was
properly placed so that it would be readily noticed and accessible
and whether the context and setout of the link made it clear to a
reasonable customer that the transaction is subject to standard
terms that can be found by following the link. In addition, the terms
must be clearly drafted and comprehensible. This approach is in
accord with well-recognized general principles relating to standard
terms in paper contracts: Where a party has reasonable notice of
intelligible terms, she has a duty to read the terms, and her
manifestation of assent binds her, even if she failed to read them.
56
Duty To Read: Standard
Terms On Packaging
Rules relating to Browsewrap terms:
In Specht v. Netscape Communications Corporation, 306 F.3d 17 (2d Cir. 2002), the
court refused to uphold a browsewrap arbitration provision on the grounds that it
was not sufficiently brought by Netscape, the offeror, to the notice of users of the
website, the offerees. The website allowed users to download free software, subject
to standard license terms that included the arbitration provision. To access these
browsewrap license terms, the user had to scroll down beyond the button that
downloaded the software to find a link to a separate web page that had the license
terms. The court recognized a general duty to read standard terms and applied a test
of reasonable notice that is well established in the context of paper contracts: A
reasonably prudent person would have been alerted to the terms. On the basis of
this test, it rejected Netscape’s argument that a reasonably prudent person should
have known to scroll down beyond the “Download” button to find the terms and
had both the time and the opportunity to discover the terms. The court held that
because the offer was for free software, offerees may not have realized that they
were making a contract at all, and there was just not enough warning to offerees to
look for the terms.
57
Duty To Read: Standard
Terms On Packaging
Rules relating to Browsewrap terms:
In Savetsky v. Pre-Paid Legal Services, Inc., 2015 WL 604767 (N.D.
Cal. 2015), the court held that a browsewrap arbitration provision
on Pre-Paid’s website did not provide sufficient notice to
customers because the link to the terms, headed “More Plan
Details,” was displayed only after the customer clicked the “Buy
Now” button to join up for the services. In addition, even if the
customer followed the “More Plan Details” link, the terms were
not immediately displayed but could be read only after following
an additional link to the “member contract.” The court concluded
that the placement of the links and general setout of the site
failed to put a reasonable customer on inquiry notice to look into
the terms of the purchase.
58
Browsewrap Agreements
Nguyen v. Barnes & Noble Inc.
th
763 F.3d 1171 (9 Cir. 2014)
59
Nguyen v. Barnes & Noble Inc.
763 F.3d 1171 (9th Cir. 2014)
 Court held that without more, a conspicuous hyperlink that
otherwise provides no notice nor prompts users to take
affirmative action to assent is insufficient to give rise to
constructive notice.
 Judge Sotomayor in Specht v. Netscape Commc’ns Corp., 306
F3d 17 (2nd Cir 2002)
 “Reasonably conspicuous notice of the existence of contract terms
and unambiguous manifestations of assent to those terms by
consumers are essential if electronic bargaining is to have integrity
and credibility”
60
Nguyen v. Barnes & Noble Inc.
763 F.3D 1171 (9TH Cir. 2014)
The Nguyen court cited PDC Labs., Inc. v. Hach Co., an unpublished
district court order No. 09–1110, 2009 WL 2605270 (C.D.Ill. Aug. 25,
2009). There, the “Terms [and Conditions of Sale] were hyperlinked
on three separate pages of the online…order process in underlined,
blue, contrasting text”. The court held that “[t]his contrasting text is
sufficient to be considered conspicuous,” thereby placing a
reasonable user on notice that the terms applied. Id. It also
observed, however, that the terms’ conspicuousness was reinforced
by the language of the final checkout screen, which read, “‘STEP 4 of
4: Review terms, add any comments, and submit order,’” and was
followed by a hyperlink to the Terms.
61
Clickwrap Agreements
Feldman v. Google, Inc., 513 F. Supp. 2d 229 (E.D. Pa. 2007):
In Feldman, Google sold advertising on its site, subject to standard terms,
including a forum selection clause. The person purchasing the advertising
online was presented with Google’s standard terms in a prominent
scrollable window, headed by language in boldface type, that stated,
“Carefully read the following terms and conditions. If you agree with these
terms, indicate your assent below.” The window also contained a printerfriendly version of the terms, and the advertiser could not complete his
order for the advertising without clicking an “I agree” button at the bottom
of the web page. The court held that the terms were clear and conspicuous
and presented in a way that would alert a reasonably prudent Internet user
to the existence of the terms before manifesting assent by clicking the “I
agree” button. They therefore bound the advertiser. To be effective, the
clickwrap device must be set up in a way that makes it clear that when the
customer clicks the “I agree” button, he is in fact clearly manifesting assent
to the terms.
62
Clickwrap Agreements
Example:
Sgouros v. TransUnion Corp., 2015 WL 507584 (N.D. Ill. 2015):
In Sgouros, TransUnion operated a website on which customers
could buy a credit report. To complete the purchase, a
customer was required to click an “I accept” button after being
presented with a scrollable window setting out the terms of
the transaction. The problem was that the language
immediately before the “I accept” button was confusing. It did
not specifically state that the customer accepted the terms but
seemed merely to authorize TransUnion to access the
customer’s credit information. The court held that the
customer’s click could not operate as a manifestation of assent
to the terms.
63
Bad Jokes:
Deliberately Undisclosed Intent
Lucy v. Zehmer
196 Va. 493 (1954)
Leonard v. Pepsico, Inc.
88 F.Supp. 2d 116 (S.D.N.Y. 1999), aff’d.
210 F.3d 88 (2d Cir. 2000)
64
Bad Jokes:
Deliberately Undisclosed Intent
Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954):
Zehmer, the owner of property, contended that his offer to sell it to Lucy
was a bluff. The alleged contract was made under most unbusinesslike
circumstances while the parties sat drinking one evening in a restaurant
operated by Zehmer. The memorial of the alleged contract was written in
very sketchy terms on the reverse side of a restaurant guest check. When
Lucy sought to enforce the sale, Zehmer claimed that it was not intended
seriously. He testified that he and Lucy had been drinking too much, and he
was just calling Lucy’s bluff because he did not believe that Lucy had the
money to buy the property. Whatever Zehmer’s actual intent may have
been, the court found that Lucy was in earnest and under the objective test,
had no reason to believe that Zehmer was not. (The court also declined to
allow Zehmer to avoid the contract on grounds of mental disability caused
by intoxication because it did not believe that Zehmer was drunk enough.)
65
Deliberately
Undisclosed Intent
Lucy v. Zehmer:
Objective manifestations:
Buyer offers $50k - Parties haggle & drink
Seller writes contract, revises, gets wife to sign,
signs himself
Parties add term re title
Post-deal conduct
Subjective intent – it was a joke…
66
Lucy v. Zehmer
What is the issue?
What is the holding?
What are the key rules in the case?
67
Lucy v. Zehmer
Look at the outward expression of intent,
not secret, unexpressed intentions
Mental assent is not required
Undisclosed intentions are immaterial
If words and acts judged by a reasonable
standard, manifest intent to agree, it is
immaterial what may be the real by
unexpressed state of mind
68
Leonard v. Pepsico
Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999) aff’d
210 F.3d 88 (2d Cir. 2000):
The court found that an alleged offer really should have been reasonably
understood as a joke. Pepsi conducted a promotional campaign in which
buyers of Pepsi products could earn “Pepsi points” that could be redeemed
for prizes listed in a catalog. The points did not all have to be earned by
consuming soft drinks. As long as 15 actual points were submitted with the
redemption form, the remaining points required for the prize could be
purchased for ten cents a point. Pepsi aired a television commercial to
promote the campaign. The commercial centered on a teenager flying to
school in a Harrier Jet. Although the commercial showed various prizes that
could be won (such as T-shirts and sunglasses) and the number of points
needed to win them, it also suggested that the jet might be a prize. This is
because as the commercial ended with the teenager landing the jet on the
grounds of his high school, the words “Harrier fighter, 7,000,000 points”
appeared on the screen.
69
Leonard v. Pepsico
Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999) aff’d
210 F.3d 88 (2d Cir. 2000):
Leonard submitted a redemption form claiming the jet. He included
the 15 original Pepsi points and a check for just under $700,000 to
buy the balance of the 7 million points needed. Pepsi refused to
award the jet to him on a number of theories. One of them was that
the jet was used in the commercial merely for humor and
entertainment, and could not reasonably have been understood as a
real prize. The court agreed. It found that no reasonable person
could have understood the commercial to be a serious offer of a jet,
but would have realized that the use of the jet was just to add an
absurd comic touch and to exaggerate the excitement of the drink.
Furthermore, the fact that a Harrier is a fierce war machine
unsuitable for consumer use and costing some $23 million would
alert the reasonable viewer that it could not possibly be offered in
exchange for about $700,000.
70
Leonard v. Pepsico
What is the issue?
What are the legally relevant facts?
What is the holding?
What is the rationale?
71
Formation Of A Contract:
UCC 2-204
“(1) A contract for sale of goods may be made in any manner
sufficient to show agreement, including conduct by both
parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may
be found even though the moment of its making is
undetermined.
(3) Even though one or more terms are left open a contract for
sale does not fail for indefiniteness if the parties have intended
to make a contract and there is a reasonably certain basis for
giving an appropriate remedy.”
72
Next Session: Offer
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