Contracts II – Spring 2011
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I.
Nature of Assent
A. What’s necessary to form a contract?
1. Voluntary Exchange:
a) two private parties are entering into an agreement
(1) Embry v. Hardgadine: door-to-door salesman who continued on after contract expired.
Shows that contract is a voluntary exchange based upon objective intent.
(2) Hotchkiss v. National City Bank of New York: all that matters is what was said outwardly –
didn’t cover this case in class closely
2. Because two parties are entering, subjective intent doesn’t matter
a) Focus is upon what a reasonable person would take away from the external expressions
(1) Lucy v. Zehmer: sale of a farm, shows that objective notions of assent should be followed –
what’s reasonable for the parties to believe based upon what transpired
3. Assent – objective notions of intent, not subjective. (i.e. what’s reasonable for the parties to believe
under the circumstances?)
a) Does not indicate a meeting of the minds.
B. Policy
1. Consequences of reliance v. Unintentional Creation of contracts
a) Want to encourage reliance – knowing that once you enter into a contract it will be upheld by a
court of law
2. Objective standard
a) This is because it is difficult to prove intent factually
II. Mistake and Misunderstanding
A. A factual mistake can still create a contract
1. If the mistake is corrected before reliance, can be released.
(1) Cargill Commission Co. v. Mowery: wrong code word used to sell bushels of wheat. legally,
factual mistake can still create the contract
2. If reliance has already taken place, still held to the contract.
B. Rules for misunderstanding:
1. Both parties meant different things
(1) Raffles v. Wichelhaus: arrival of cotton on the Peerless, two ships sailing same route.
2. Neither party had reason to know what the other meant
C. If one party is ignorant and the other party is not, non-ignorant party is stuck with the contract
III. Offer
A. Offer – expression by one party of assent to certain to definite terms (Corbin)
1. Expression focuses on outward manifestations.
2.
B. Typically advertisements are invitations to make offers because they lack specificity
1. An uber-specific advertisement moves from an invitation to make an offer to an offer
(1) Lefkowitz v. Great Minneapolis Surplus Store: man goes to to purchase stole, coats, and
scarf. Ad specifies price, means of acceptance, and quantity.
2. Evaluate as the reasonable person – don’t look at any purported offer in a vacuum
(1) Ford Motor Credit Co. v. Russell – shows that definite terms are req’d. (didn’t cover in class
closely)
C. Certainty:
1. Courts search for explicit certainty when examining whether an offer was made.
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(1) Courteen Seed Co. v. Abraham: telegram asking 23 cents per pound for flower seed. court
focuses on terminology difference of ‘offer’ and ‘asking’
(2) Fairmount Glass Workd v. Grunden-Martin Woodenware: company buying glass jars from
one another. price quotes are dicey.
2. This means that terminology of ‘offer’, ‘I offer’ and so forth is very important
IV. Acceptance
A. A voluntarily act of the offeree whereby he exercises the powers conferred upon him by the offer, and
thereby creates the set of legal relations called a contract (Corbin)
(1) Ardente v. Horan: property up for sale, seller sends purchase & sale agreement unsigned,
then refuses to sign later.
2. Conditional Acceptance: requires an absolute acceptance, but may also make a mere inquiry on a
collateral matter
3. Goods Rule: Reasonable unless express.
(1) Eliason v. Henshaw – sending acceptance via wagon. Stands for proposition that
acceptances must be mirror images, absolute, and not qualified.
b) UCC §2-206(1)(a): can accept via reasonable manner unless unambiguously stated
4. Services Rules: Acceptance either by promising to perform or rending the performance.
(1) White v. Corlies: Builder receives letter, accepts by buying materials and starting work.
Failed to communicate to merchants.
b) Restatement §32: in case of doubt, his work could be acceptance, but it had been specified how to
accept
(1) Ducommun v. Johnson: Silence doesn’t operate as acceptance
V. Offer Killers – via restatement §36
A. Rejection / Counteroffer
1. Adding terms, changing terms, not accepting in the manner specified
B. Lapse of Time
1. General rule is that offer stays open for the time fixed, or if no fixed, then in a reasonable time.
(1) Akers v. JB Sedberry: Employees offer to resign, doesn’t accept during conversation,
attempts to redeem offer later. Face-to-Face convo:
b) Restatement §40: expected within time of conversation
c) Corbin: turn away in silence then no longer open
C. Revocation
1. Offeror can revoke before acceptance at any time, unless firm offer
(1) Marsh v. Lott: Sale of real estate, extended on 6/1, revoked on 6/2, attempted acceptance on
6/29
b) Option Contracts:
(1) Services (restatement):
(a) must be in writing
(b) recite consideration for the option
(c) main exchange must be on fair terms
(2) Goods (UCC §2-205)
(a) must be in writing
(b) must be a promise not to revoke in the writing
(c) must be open for four months or less
2. Firm Offers
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a) Paid Consideration – bilateral contracts
(1) Marsh rule.
b) Tender or Begin Performance – if the act is started, the option contract has been created, and
performance cannot be stopped, preventing the performance is a breach
(1) Brackenberry v. Hodgkin: daughter & son-in-law move to ME, ‘if you do it you get the
house’, once they move kick them out. Once performance has begun, cannot terminate
opportunity to complete performance.
(2) Peterson v. Pattberg: Pattberg agrees to discount mortgage if payment received. Legal issue
is whether revocation occurred before performance was commenced (ultimately did not b/c
on-time payment part of original K, showing up to pay not beginning performance)
D. Reasonable Reliance – engaging in action based upon such reliance, there can no longer be a revocation
(1) Drennen v. Star Paving: Calculates and submits bid based on very low subcontractor bid,
subcontractor then revokes
2. Bilateral v. Unilateral
a) Bilateral: Accept by return promise – promise for a promise.
b) Unilateral: Promise for an act – i.e. walking across the bridge.
E. Death or Incapacity
VI. Battle of the Forms
A. UCC §2-207: Special rule for offer and acceptance – big company X and big company Y agreeing on the
purchase of supplies with forms
1. If it is bargained over, no longer a §2-207 problem.
a) only big companies (merchant – a company which is in this business)
b) only sale of goods
c) standard forms
B. Two factual scenarios in which forms are being exchanged/in question
1. Oral contract (over the phone) followed by one standard form/writing – one writing is req’d because
of statute of frauds. Terms:
a) Terms on which the parties agree
b) Additional terms supplied by the writing that don’t materially alter the contract (material
alteration will be defined as unreasonable surprise)
c) Terms supplied by law (‘gap fillers’)
2. Two competing standard forms/writings
a) One party sends a form, the other party sends a form back – this means that a contract has been
formed because both began performance
b) When there are terms in dispute, Two questions to ask about terms in the second writing:
(1) If they are additional terms, these become part of contract unless materially alter the contract
(2) If the additional terms are different terms than those in the original writing:
(a) Majority rule: “White Knockout Rule” – When there are conflicting terms, neither is
part of the contract and neither one of them controls; rule then becomes any term
provided by law because there is no agreement
(b) Minority rule: “Summers Drop-Out Rule” – The second terms (the term which comes
back) and is conflicting with the first, drops out; this means that the term in the first
writing controls
(3) Daitom v. Pennwalt: Offer to sell dryers, conflicting warranty terms in two agreements.
Court imposes knockout rule, using UCC standard 4-year warranty term.
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VII. Modifications
A. All modifications assume a valid K, so what makes a modification valid?
1. Pre-existing Duty Rule: There must be consideration for modifications because you cannot get paid
more to do something which you already had a preexisting duty to do – if you modify to get more for
the same amount of work, you have to give up something
(1) Alaska Packers Ass’n v. Domenico: Fishermen in AK seeking additional money while out
for doing the same amount of work.
2. Rescission Followed by New Contract: Parties mutually agree to cancel the contract, and then agree
to make a new contract with different terms
(1) Schwartzreich v. Bauman-Basch, Inc.: Designer who is offered a better salary elsewhere,
opts to stay at his job. Receives a larger salary in exchange for not breaching the contract.
3. Service Contract Modifications: Require both (1) unanticipated circumstances arriving after the time
of the original contract; and (2) a fair and equitable modification
(1) Angel v. Murray: Garbage man who strikes a bad deal, requests more money than he had
originally contracted for. New rule created via Restatement §89(a).
4. Goods Contract Modifications: Modifications are valid if made in good faith (i.e. the parties modify
for good faith reasons)
5. Accord and Satisfaction:
a) Amount in bona fide dispute
b) Check sent and marked “payment in full”
c) Cashing or retention of the check by the creditor
(1) Consolidated Edison Co. of New York, Inc. v. Arroll: Addressing dissatisfaction with
electric bills, modifies an amount which is supposed to be in dispute.
VIII. Parole Evidence Rule
A. “Prior or contemporaneous oral or written agreement cannot be introduced to contradict, add to, or
explain a final written contract”
1. Parole Evidence question comes up only when two things are present:
a) Final written contract
b) Prior or contemporaneous oral or written agreement
B. Exceptions to the rule:
1. Collateral Contract Exception
a) Collateral Contract – not part and parcel of the written contract, covers different subject matter.
This says that it is something separate.
b) Courts inquire whether or not something is so far removed from the final agreement that it can be
considered a collateral contract – “Would you expect to find it in the final written agreement?”
(1) Mitchill v. Lath: Purchase of land with subsequent agreement to remove an icebox.
Evidence suggests that buyer was motivated to buy based on ancillary agreement.
c) Two factors to consider to determine whether something should be found in the final written
agreement:
(1) Is there separate written consideration? (Similar to the preexisting duty rule)
(2) Is it about separate subject matter? (Goods v. Services v. Land)
d) Traynor Exceptions
(1) If a promise would certainly or naturally be made, it should be included. (Traynor does not
like the parol evidence rule, and wants to say that all the evidence can go go the jury.)
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(2) Masterson v. Sine: A deed that reserves the right of the seller to buy it back for the same
consideration less any depreciation, plus value of any improvement.
2. Ambiguity Exception
a) If the language is ambiguous, can be introduced.
(1) This is the only way that one can introduce information to explain what language means.
(2) Gold Kist, Inc. v. Carr: Gold Kist was supposed to sell trucks and equipment, and Carr will
haul peanuts in TX, “may, under no obligation to” is on its face clear enough, plain, and
therefore cannot let people be testifying to what it was supposed to mean.
b) Traynor Exception
(1) Traynor’s application of Parole Evidence Rule favors the oral over the written – may lead to
more litigation
(2) Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging: contract here for ∆ to
service π’s steam turbine, during the service, cover falls and injures turbine. Contract says
that ∆ will indemnify π against all loss, damage, expense, and liability. Traynor allows
evidence in.
c) Four Corners Approach: Judge looks at the word and says that it is clear; equivalent of textualism
in con law
(1) Eskimo Pie Corp v. Whitelawn Dairies: Company is supposed to make and sell eskimo pies
in NYC, dispute arises over the term “non-exclusive," claim that trying to hide our deal
from the federal anti-trust authorities, gentleman’s agreement that word actually meant the
opposite
IX. Contract Interpretation
A. Arises when an issue comes up that the parties have never even addressed it at all
B. Services Rule
1. Inquire whether language is ambiguous
a) If no, plain meaning governs
(1) Turner Holdings, Inc. v. Howard Miller Clock Co.: Clock co. hired the iBank to pick
candidates for acquisition on success fee, terminates agreement, but if a company was under
consideration and if the clock company buys it, then iBank still gets the success fee for 2yrs.
Buys Furniture Co. less than 1yr after agreement. Claim that Furniture Co. was never under
consideration during the running of agreement
b) If yes, go to extrinsic evidence
c) If there are two reasonable interpretations, and one makes more fair contracts than the other, we
should look at what’s fair.
(1) Sutter Insurance v. Applies Systems, Inc.:
C. Goods Rule
1. Agreement of Parties
a) Start with express contract terms – If there is an express term, it controls and that is the agreement
(1) A term must be so express as to be clear as day, with nothing contradicting it, and
everything else points in favor of this
b) Admissible Parole Evidence
(1) If it’s not in the agreement, but there was a collateral contract on that/if the term is
ambiguous and there is evidence of prior agreement then it indicates an agreement and
should take precedence over other things
c) Course of performance – How these parties have behaved under this contract.
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(1) The way which the parties behave under this contract – extrinsic evidence is a broad heading
under goods contracts equivalent to course of performance overs services Ks
d) Course of dealing – How these parties have behaved under prior contract(s)/how they’ve behaved
in the past if they have worked together before
(1) Agreement loosely defined which looks to prior agreements between the two parties
(2) Nanakuli Paving and Rock Co. v. Shell Oil Co., Inc.: Contract between Shell Oil and
Nanakuli, sale of asphalt, does this contract include price protection?
(a) Court says no express term, even though the K provides for price to be Shell’s posted
price.
(b) Shell did price protect twice in the past under this contract; twice is enough for course
of performance.
(c) Nothing which helps under previous contracts.
(d) Wouldn’t have been acceptable in other Ks on Hawaii because of government
limitations
D. Gap Fillers
1. Applied only after valid formation is present – price and quantity cannot be gap filled.
(1) Haines v. City of New York: NYC puts in place and pays for treatment of water coming from
a sewage plant, no determination of length of obligation or scope of duty. A reasonable time
in this case is defined until NYC no longer needs the water
(a) ‘reasonable’ being an answer makes sense, but isn’t very helpful
1. Usage of trade – How other parties in the vocation/trade handle the issue
a) Looks to what other parties do, not the two parties in the contract
(1) Haslund v. Simon Property Group, Inc.: Haslund contracted to work at the dotcom, but her
K did not specify what type of equity or whether it was vested. Company should have put
forth evidence of usage of trade.
2. Common law/UCC
a) Base line of what the law implies; asking the court to put in a term based upon what the law
says/exists in statute
(1) Southwest Engineering Co. v. Martin Tractor Co.: Martin will supply southwest with a
generator for $21,500, but not clear when Southwest is supposed to pay for the generator.
Attempting to apply each step takes us to UCC, it says that payment is due on delivery.
3. Good Faith
a) This is a gap filler in every contract – there is a requirement to act in good faith in keeping with
the terms of the contract
(1) Fortune v. National Cash Register Co.: In order to get a bonus when he sells registers has to
make a sale within his territory, sells a $5m order to 1d Nat'l, Nat'l Cash fires him the next
day to avoid paying commission. (Majority Rule)
(2) City of Midland v. O’Bryant: Police officers in oil country are ‘reassigned’ after blowing the
whistle on an ADA claim . Conservative opinion imposing good faith only when there is a
special relationship, such as insurance, or when the employee refuses to perform an illegal
act. (Minority rule)
(3) Tymshare, Inc. v. Covell: Company may increase quota at their sole discretion, getting
closer to disclaiming good faith. Scalia claims that sole discretion is ambiguous, suggesting
that it means reasonable discretion, a.k.a. requiring a reasonable business reason.
b) Cannot figure out what Good Faith is, can only define what it is not (Restatement §205):
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(1)
(2)
(3)
(4)
(5)
X.
Evasion of the spirit of the bargain (notable)
Lack of diligence
Willful rendering of imperfect performance
Abuse of power to specify terms (notable)
Interference with or failure to cooperate in the other party’s performance
Conditions
D. “...On Condition You...” is an express condition/condition precedent
1. This means than an secondary obligation matures only upon the completion of the primary obligation
(i.e. pay your $1k on condition you paint my house)
E. Express Condition v. Promise
1. Contractual Language
a) Language in the contract, it tells specifically whether it is a condition or a promise – if it is
completely unambiguous
(1) condition: “to” “warranted”
(2) promise: “agreed” shall”
2. Willfull Breach
a) Was there willful non-compliance with this clause?
(1) if unintentional, may lean toward promise because less harsh
(2) if intentional, may lean toward condition
3. Harshness of Perfect Compliance
a) “Forfeiture if express condition” – does the other side get nothing if it is an express condition?
4. If Express Condition, perfect compliance is required.
(1) Merritt Hill Vineyards Inc. v. Windy Heights Vineyard, Inc.: Buyer was going to buy stock
in a winery, seller was supposed to bring two things to the closing: supply the title insurance
policy, confirmations that mortgages are in effect. Buyer wants to claim on these are
promises (to seek damages), Seller wants these to be conditions (to nullify condition). Court
finds express condition because clear in the contract.
(2) Brown-Marx Associates, Ltd. v. Emigrant Savings Bank: Bank is going to give loan to
purchase/renovate building in AL dev. comp. seeking money to finance this project, did not
secure the proper amount to secure the ceiling loan. Without perfect compliance have not
fulfilled an express condition. Also consider loan commitments, limitation of substantial
performance to construction context.
(3) Jacobs & Youngs, Inc. v. Kent: Contract for the building of a house, alleged installation of
the wrong pipe. Question ofwhether the language is a promise to use reading pipe or an
express condition about the use of reading pipe. Cardozo finds as a promise because not
willful, not harsh to perfectly comply.
(4) Glahom v. Hays: Ship to sail from England on or before 2/4. Court says that if you use
different expressions in different places, not going to just look at the language, but how it is
juxtaposed together switching up the language means that there must be a reason that the
language is being switched. court also highlights that the date goes to the root of the
contract – if something goes to the root of the contract, it is likely to be a condition.
(5) Howard v. Federal Crop Ins. Corp: Heavy rains came to NC, washed away. howard had
insurance, but now insurers don’t want to pay. Analysis shows sounds like a promise, unsure
if willful, would be a forfeiture if express condition, language is juxtaposed, not sure if this
goes to the root of the promise. Therefore, must be a promise.
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5. If Promise, what is the implied condition?
a) Implied condition is substantial performance – party must substantially perform in order to meet
your implied condition, even in the case of promises. Substantial performance is not a perfect
performance, and therefore would deduct the difference.
(1) Stewart v. Newbury: If contract doesn’t say anything about an order of performance, who
has to go first?
(a) If performance can be had simultaneously, the parties will go at the same time
(b) If the performances take different amount of time, the side who’s performance takes
longer must begin
(c) They must substantially perform, at least do most of the job, before they can get paid
(2) Plante v. Jacobs: Building a house, and doing it incorrectly. Test for substantial
performance, as a broad test, is whether or not the performance meets the essential purpose
of the contract:
(a) Were the details specifically bargained for?
(b) Is the contract personal or for business?
(c) Bad faith?
(d) How harsh is it?
(e) How wrong/bad was the mistake?
(3) O.W. Grun Roofing and Construction Co. v. Cope: There is a clause in the contract that says
a roof must be of uniform color. Fails to meet the essential purpose of the contract.
(4)
XI. Excuse
D. Mutual Mistake
1. This is mutual mistake as both parties think something that is untrue
2. Time: at or before K formation.
3. Elements of mutual mistake
a) Mistake
b) Mutual - shared by both parties
c) Goes to substance of whole contract
(1) Sherwood v. Walker: Banker, buyer, wants to purchase rose 2d the cow. seller agrees to sell,
noting that she is probably barren, she is not barren. Dissent says that this is the same cow:
rose 2d. Barren v. fertile is totally different.
(2) Wood v. Boynton: Small stone sold for $1, turned out to be a diamond worth $700; seller
seeks to rescind. If neither party knew what the rock was, the jeweler shared in the mistake,
and outcome was correct.
(3) Lenawee County Board of Health v. Messerly: Seller sold buyer property w/3-family apt
complex on it, both parties assumed it could be used as an income-producing property;
cannot be used as such because of raw sewage. Substance is that this was intended to be
income-producing property and now it is property which is condemned. that is a very
different thing: income producing / sewage are so different in character under the sherwood
test. didn’t have enough land, and therefore ‘affected the character for all time’.
E. Impossibility
1. Both parties are ready to perform, and something happens making it impossible for the parties to
perform the contract as written.
2. Time: after K formation.
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3. Elements of impossibility
a) Contract is impossible to perform
b) No fault of either party
(1) Taylor v. Caldwell: Rentee was not able to hold these concerts because a fire came and
destroyed the building. The court holds that the fire excused the parties, noting that neither
party was at fault for the fire.
(2) Bell v. Carver: Fire today, a builder was putting new heating/AC and a beginning to
performance. Is it less impossible to perform here because there isn’t a time limit as in the
concert situation, if rebuild the building, could seek performance.
(3) David v. Skinner: (land contract) Seller had insurance, buyer didn’t seller was supposed to
collect, and act as a trustee for the buyer. Basic fallback rules are:
i) if title and possession are both with the seller, then the seller still bears risk
ii) if either of those things transfer, the buyer bears risk
(b) Think of this as telling us who should have insurance rules just track common sense
(4) Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.: (goods rule) Was supposed to
ship, but didn’t – buyer claims owes cost of cover, seller claims impossibility. When you
make a contract to sell X quantity, had better make sure that you can get it.
F. Impracticability
1. Similar to impossibility, but different because it is not impossible to perform, but is much more
expensive.
2. Time: after K formation.
(1) Marcovich Land Corp v. J.J. Newberry Co.: 25y lease for rental space owned by landlord,
building burns down at year 19, tenant wants it rebuilt, landlord doesn’t want to rebuild.
Landlord had $200k of $450k it would have taken to rebuild; that’s not enough of a hardship
to let you out on impracticability.
(2) Mineral Park Land Co. v. Howard: Contractor supposed to remove earth/gravel from π’s
site, was supposed to take 100% of needs, but only takes about 50%. The gravel taken was
above ground, other half is sunken under water and don’t want to take this because it would
cost a lot more and be much more difficult to do so. Establishes general rule that if it is 10x12x more costly, that is enough to establish impracticability.
(3) Transatlantic Financing Corp. v. United States: Ship going to complete voyage, going to go
through suez canal, shut down because of war, would have to go around continent. Would
have cost $300k, now going to cost $350k; by Ibrahim’s 10-12x rule of thumb this is not
impracticable.
G. Frustration of Purpose
1. The reason the contract was wanted to begin has gone away, “while performance remains possible,
the value to the parties has been destroyed”
a) Elements:
(1) Total (or close to total) frustration of purpose
(2) Purpose must be known to both parties
(3) Has to be an unforeseeable event that causes the frustration
2. Time: after K formation.
(1) Krell v. Henry: Henry was to rent a flat a pall mall to watch the king’s coronation – was to
pay 75 pounds to watch. coronation cancelled, Henry doesn’t want to pay, Krell still wants
him to pay. If the parties could/should anticipate that this would happen cannot be excuse.
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H. All excuses are default rules and can be contracted around –
1. Excuse address assumption of the risk.