Model Answers:
Offer:
The foundation of a valid contract is an offer. An offer requires an offeror to make a promise to an offeree in
exchange for a performance. If there is no offeror, and no promise has been made to the offeree, generally, a contract
will not arise from mere “implied legal duty.” Bailey v. West. The offer must also be objectively manifested. If a
reasonable person would interpret words to be an offer, it is an offer, despite the offeror’s subjective intentions. Lucy v.
Zehmer. However, if a reasonable person would interpret the offeror’s words as a joke, there is no valid offer.
Leonard v. Pepsico. Finally, the offer must be clear, definite, and explicit. If the offeror’s words lack material terms,
and it cannot be said that a contract would arise from another’s acceptance, such as when a business provides an order
form that includes price “quotations,” or “estimates,” there is no offer. Dyno v. McWane. This is often the case for
advertisements, although an advertisement can be considered an offer if it is clear, definite, and explicit enough to form
a contract through acceptance: in other words, all of the essential terms, such as price, quantity, payment terms, etcetera
are included in the advertisement. Lefkowitz v. Great Minneapolis Surplus Store.
Acceptance:
A promise is accepted after the occurrence of a (1) voluntary act; (2) by the offeree; (3) in which he exercises
the power of acceptance conferred by the offeror; (4) prior to revocation. The offeree must accept in the manner the
offeror requires (§30), or if the manner is not specified, the offeree may accept by a reasonable act of promise or
performance (§32). To accept by performance, the offeree must do at least part of what the offeror requests, or to
accept by promise, the offeree must do every act essential to making the promise (§50).
If an offeree accepts by a promise, the offeror no longer has power to revoke. Once performance is completed
after accepting by promise, the offeree’s end of the bargain completed and the offeror must complete his end of the
bargain. (§50). Acceptance by promise, if dealing in person or with instantaneous communications, occurs when the
promisee manifests his intention to accept to the offeror. Acceptance by promise, if dealing through the mail, occurs
when the acceptance is mailed (Mailbox Rule). If an offeree accepts by performance, as soon as performance begins,
the offeror can no longer revoke. Ever-Tite Roofing Corp. v. Green. The offeree’s end of the bargain is completed
after the offeree completes performance. (§50).
Sometimes, an offer is irrevocable for a certain period of time in a bidder/sub-bidder scenario. Some courts
hold that when a sub-bidder makes a bid that will be used in an overall bid, that bid is irrevocable from the moment the
initial sub-bid is made. Drennan. Other courts hold that the sub-bid is an offer contingent upon the overall bid
winning, and thus the sub-bid can be revoked until the overall bid is named the winning bid. Pavel v. A.S. Johnson.
Sometimes, silence, rather than an act, can function as acceptance. Silence is considered acceptance, either
when the offeror explicitly states silence can be considered acceptance, previous dealings between the parties imply
that silence is acceptance, or when the offeree (1) takes the benefit of offered services; (2) with reasonable opportunity
to reject; and (3) knows they were offered with expectation of compensation. §69.
In some cases, the offeror may require that the acceptance be written. In other instances, it is not required. Yet
in some instances, even though the offeror does not explicitly require acceptance in writing, the courts will not allow a
non-written acceptance. The test to determine whether an acceptance must be in writing is as follows: (1) has there
been an express reservation of the right not to be bound in the absence of signed writing; (2) has there been partial
performance; (3) have parties agreed to all material terms; (4) is this the type of contract usually committed to writing?
Ciaramella v. Reader’s Digest.
Revocation:
Revocation results in a loss of the offeree’s power of acceptance. §42. Revocation occurs when one of the
following occurs: (1) a rejection or counter-offer; (2) too much time passes after the offer; (3) the offeror revokes an
offer; (4) the offeror or offeree dies or becomes incapacitated; (5) a necessary, specified condition does not occur. §36.
Counter-Offer WITHOUT acceptance or conditional acceptance:
A counter-offer occurs when (1) the offeree responds to the offer; (2) the response relates to the same matter as
the original offer; (3) the response proposes a substituted bargain that differs from the original offer. §39. Once a
counter-offer is made, it operates as a rejection, terminating the power of acceptance, and creates a new offer for the
original offeror to accept. In the case of Dataserv Equipment, Inc. v. Technology Finance Leasing Corp., the buyer
told the seller that it would buy as long as a particular clause was not in the deal. The seller counter-offered a number
of times, all of which were rejected by the buyer, and then the seller tried to accept the original offer. The court held
that a counter-offer terminated the offeree’s power of acceptance, and it could not accept after counter-offering.
Counter-Offer PLUS Acceptance or conditional acceptance:
Common Law:
If one party offers, and other party accepts, but adds conditions to its acceptance, and the transaction is not for
the sale of goods, the common law governs the transaction. Under the common law, if performance does not
commence, the transaction is governed by the mirror image rule. The mirror image rule says that no contract exists if
the terms do not mirror each other. If performance does commence, the contract is governed by the last shot doctrine.
The last doctrine says that a contract exists, and the terms are the those which the party who “accepted” sent to the
other party.
UCC:
If one party offers, and the other party accepts, but adds conditions to the acceptance, and the transaction is for
the sale of goods, the UCC governs the transaction. In particular, UCC 2-207 governs these types of transactions to
determine which terms are included, and 2-207 eliminates both the mirror image rule and the last shot doctrine.
If the offeree “definitely and seasonably accepts” but adds additional terms, the 2-207 asks if at least one of the
two parties to the transaction is not a merchant. A merchant is defined as “a person who deals in goods of the kind or
otherwise by his occupation or skill holds himself out as having knowledge or skill peculiar to the practices or goods
involved in the transaction.” UCC 2-104. If at least one party is not a merchant, the new terms are proposals to the
contract. If both parties are merchants, terms become part of the contract except when: (1) terms limit acceptance to
the terms of the offer; (2) terms materially alter contract; (3) notice of objection to them has already been given or is
within a reasonable amount of time after notice is given.
If the offeree expressly conditionally accepts, then 2-207 asks whether the parties’ conduct established the
existence of a contract. If the conduct does not establish the existence of a contract, there is no contract. If it does, a
contract is established, and the terms are those which the parties agree upon, along with any necessary supplementary
UCC terms. In the case of Ionics v. Elmwood Sensors, the offeree accepted an offer by sending an acknowledgement
form, but on the form it said it would only accept upon the terms of the acknowledgement letter, which did not exist in
the offer, but the offeror shipped goods to the offeree without reading the form. The court held that according to 2-207,
the contract would be on the terms the parties agreed to, and the rest would be filled in with UCC defaults.
If the offeree’s terms are conflicting, rather than additional, then it is uncertain what courts will do. Some
courts will “knock out” the conflicting terms and replace them with UCC defaults. Other courts will use the “best shot”
rule; leaving in the “best” terms proposed. The best shot rule, to me, seems kind of arbitrary, so I will assume the court
will knock out the conflicting terms.
If material terms are proposed when one party is a non-merchant, they are mere proposals to the contract. In
Step Saver v. Wyse, the court held that new terms materially altering the contract are not incorporated unless agreed to
by both parties.
Hill v. Gateway – just try not to use this case.
Indefinite Contracts
In general, contracts with indefinite terms are tolerated (1) under the UCC; (2) when they are long-term; (3)
behavior makes indefinite terms definite; (4) and the indefinite term is unimportant. Indefinite terms are typically not
tolerated (1) when seeking specific performance; (2) in open-term rental agreements; (3) if parties negotiated about the
term but did not come to an agreement; (4) if the contract gives one party the entire control; (5) the term is material; or
(6) the term cannot be resolved through interpretation.
Common Law:
If a contract is not for sale of goods, it is governed by the common law. The common law requires that, for an
indefinite contract to be enforceable, the contract must show intention to form a contract, and the court must be able to
establish when the contract was breached and what the remedy is. §33.
Intent is generally determined by whether the parties agreed to something specific, rather than a set of mutually
exclusive options. For instance, telling a party that it was the successful bidder, but not accepting any one of the
party’s four bids is an agreement that lacks intent. Koufman v. IBM.
Enforceability is generally determined by whether the court can tell if there is breach, and what the remedy is
for breach. Parties’ good faith is assumed in negotiations, so a contract in which one party promises to pay “a fair
price” to the other for their performance is not unenforceable for indefiniteness: there is breach if it is obvious that the
price is not in good faith. Corthell v. Summit. An indefinite contract fails for unenforceability when the parties “agree
to agree” about a future condition. For instance, a contract involving a lessor and lessee agreeing to agree about a lease
in the future is unenforceable for indefiniteness: it is impossible to tell who breached. Martin v. Schumacher. An
agreement to agree can only be enforceable if the parties specify an alternative action that will occur if they do not
come to an agreement.
However, if a contract is uncertain, there are two defenses that will sometimes allow it to be enforced: part
performance and action in reliance on the agreement. §34.
UCC:
If a contract is for the sale of goods, it is governed by the UCC. Under the UCC, to form a contract, the contract
must show intention to form a contract and a “reasonably certain basis for giving remedy.” If intention can be shown,
often courts will supply missing terms to the contract to create that “reasonably certain basis” for remedy. Because the
courts are more willing to gap-fill, uncertain contracts are more likely to be enforced under the UCC than the common
law.
For instance, the court held that a contract to purchase a truck did not fail for indefiniteness even though the
parties did not specify the color or engine size. Paloukos v. Intermountain Chevy Co. The court found there was still
intention to form a contract, as the missing terms were not material to either party, so the court filled gaps using the
UCC to establish the basis for remedy.
Requirements & Output Contracts:
Requirements Contract:
In a requirements contract, a buyer agrees to fulfill all of its needs through the seller, not someone else, where
the seller agrees to fulfill all of the buyer’s needs, or at least give the buyer first priority to the buyer, although the seller
can sell to others after fulfilling the buyer’s needs. UCC 2-306(1).
Output Contract:
In an output contract, the buyer agrees to buy the seller’s output, but can still buy from others, whereas the
seller promises to sell everything it produces to the buyer. UCC 2-306(1).
Rules for Both:
The requirement of good faith is implied in ALL requirements and output contracts. Good faith between
merchants generally means observing reasonable commercial standards relating to that trade. In other words, a party is
not in breach if it is acting according to reasonable commercial practices. Eastern Air Lines v. Gulf Oil Corp. A party
can be in breach of good faith if it does not carry out its part of the bargain to avoid a small loss, however, a party is not
in breach if it does not carry out its part of the bargain to avoid a catastrophic loss. UCC 2-306 (comments).
The “no unreasonably disproportionate quantity” requirement is also implied in all requirements and output
contracts. In other words, one can be in breach if he buys or sells much more or much less than they approximately
agreed to do in the contract, even if they did so in good faith. In the case of Empire Gas Corp. v. American Bakeries
Co, the buyer agreed to a requirements contract with the seller, but ordered nothing, even though it did so in good faith.
Judge Posner found breach here, and although his opinion is generally not respected because he conflated the idea of
bad faith and disproportionate quantity, this can be seen as a case where although there was good faith, there was
breach because the quantity ordered was disproportionately small [Judge Posner probably erred in his opinion, because
UCC 2-306(1) separates the ideas of good faith and disproportionate quantity into two separate ways to find breach].
Exclusive Dealings Contract:
In an exclusive dealings contract, both the buyer and seller agree to exclusively deal with one another. In all
exclusive dealings contracts cases, “best efforts” of both parties are implied. Wood v. Lucy, Lady Duff-Gordon. In
other words, unless otherwise agreed upon, the seller must use his best efforts to supply goods to the buyer, and the
buyer must use his best efforts to promote their sale. UCC 2-306(2). “Best efforts” is a higher standard than the “good
efforts” standard in requirements and output contracts. For instance, in the case of Bloor v. Falstaff Brewing Co., the
purchaser of a brewery agreed to pay royalties to the seller, yet stopped promoting the beer as much as its other beers
for financial reasons. The court held the purchaser was in breach, because it could not prove there was nothing
significant it could have done to promote the beer sales that was not financially disastrous.
Conflicts of Interest Reduction:
Termination Clauses for At-Will Employment:
An at-will employee can be terminated for good cause or no cause, but not bad cause. Bad cause can be one of
three things: (1) a violation of public policy; (2) violation of an obligation implied-in-fact (based on the policies and
procedures manual that may become part of the contract); (3) violation of an obligation implied in law (based on good
faith and fair dealing). Wagenseller v. Scottsdale Memorial Hospital.
Covenant Not to Compete:
Generally, courts do not look favorably upon restrictive covenants. Courts require four requirements to enforce
a restrictive covenant: (1) it must relate to an employment contract/sale of goodwill/other subject property; (2) adequate
consideration; (3) reasonably limited in scope; (4) and it is necessary to protect the employer. Gagliardi Bros. Inc. v.
Caputo. In Gagliardi, the restrictive covenant was deemed unenforceable because not allowing an employer to work
within a 100 mile radius in the same industry was considered unreasonably limited in scope, and the 100 mile radius
did not appear to protect the employer. Additionally, the contract did not have adequate consideration: the employee
received an increase similar to one of the increases he received regularly in the past.
Modification of Existing Agreements: Pre-Existing Duty Rule
Common Law:
Under the common law, a promise to pay a man more for what he is already doing under contract is without
consideration and thus unenforceable. In Alaska Packers’ Assn. v. Domenico, fishermen who were already under
contract held out for additional pay and refused to do the same work they were under contract to do. Their employer
agreed to pay them more initially, but when they returned to port, the employer refused the additional rate. The court
held the new rate was unenforceable, because of the common law pre-existing duty rule. The only way the fishermen
could have held out for more pay is if they agreed to do additional work, or if they found out the job was different from
what they signed up for.
UCC:
Under the UCC, modification of a pre-existing duty is enforceable without consideration, as long as the
modifications are made in good faith. UCC 2-209. In Ralston Purina v. McNabb, a buyer continually extended the
deadline of a soybean seller’s contract when he knew the soybean seller would be unable to perform the entire contract
due to bad weather. The court held this was unenforceable, because the buyer acted in bad faith by trying to wait for a
higher market price for soybeans, which was rising at the time of the deal.
Regulation of Bargaining
Misrepresentation
A misrepresentation is an assertion not in accord with the facts. §159. A misrepresentation is fraudulent if the
maker intends the assertion to induce a party to manifest his assent and the maker (1) knows or believes that the
assertion is not in accord with the facts; or (2) does not have the confidence he states or implies in the assertion; or (3)
knows that he does not have the basis he states or implies in the assertion. §162. A misrepresentation is material if it
would be likely to induce a reasonable person to manifest his assent, or if the maker knows it would be likely to induce
the recipient to do so. §162.
A contract is generally voidable when misrepresentation or fraud induces the formation of the contract. A
contract is voidable if: (1) there is a false representation; (2) of a past or existing material fact; (3) that is susceptible to
knowledge; (4) known to be false or not known to be true; (5) with intent to induce reliance; (6) such that reliance is
justified; and (7) the receiving party relies on the representation. Spiess v. Brandt. In Spiess, the court held this test
was passed when the seller of a wilderness resort claimed he was “making good money,” but in fact was not.
A contract is generally void if misrepresentation or fraud exists in the basic nature of the contract. In Danann v.
Harris, a purchaser of property signed he did not rely on representations, which he did not realize were
misrepresentations. Although the court held that a party cannot justifiably rely on representations if he signed a
statement saying he would not rely, the dissent, and most courts, argue that this is fraud in the factum – fraud in the
basic nature of the contract – which makes the contract void.
Nondisclosure and Concealment
One’s nondisclosure is equivalent to an assertion that the fact does not exist when: (1) he knows the disclosure
of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or
material; (2) he knows the disclosure of the fact would correct a mistake of the other party as to a basic assumption on
the contract, and not disclosing would be a failure to act in good faith; (3) where he knows the disclosure of the fact
would correct a mistake of the other party in terms of the agreement; and (4) the other person is entitled to know of the
fact because a relationship of trust and confidence between them. §161.
In more simplistic terms, a duty to disclose plus silence equals fraud. If the fraud exists in the factum, the
contract is void; if contract exists in the inducement, the contract is voidable.
A duty to disclose can exist because one party knows of an unsafe condition. For example, there is a duty
disclose when one party knows of something that is (1) dangerous to property or purchaser; (2) known to the seller but
unknown to buyer; and (3) a careful examination would not reveal. Obde v. Schlemeyer. In Obde, the court held that
nondisclosure of non-visible termites in the seller’s house violated a duty to disclose.
There is also a duty to disclose “material information,” where the definition of material is determined by: (1) the
gravity of harm from nondisclosure; (2) fairness of compelling disclosure; (3) impact on stability of contracts if
rescission is permitted. Reed v. King. In Reed, the court held that a seller’s nondisclosure of the fact that a murder
occurred in the seller’s house was violation of a duty to disclose.
There is no duty to disclose speculative or future information. In L&N Grove v. Chapman, the court held a
property buyer’s failure to disclose his opinion that the land would be purchased by Disney World in the future did not
violate a duty to disclose because it was speculative information.
Duress:
Duress asks if both parties to a contract voluntarily entered into it. If a party is physically compelled to assent,
the contract is void. §174. If a party’s manifestation of assent is (1) induced; (2) by an improper threat; and (3) they
have no reasonable alternative, the contract is voidable. §175. An improper threat is defined as an act that would harm
the recipient of the threat but not benefit the threatening party. §176.
In Wolf v. Marlton Corp., the buyers of a house decides that they do not want to purchase anymore, so they
threaten to resell the house to an “undesirable person” if their down payment is not returned. The seller refused to
return the money, and the buyer sued. The court held that duress existed because of the buyer’s “improper threat,”
which would hurt the seller but not benefit the buyer.
In Austin v. Loral, a sub-bidder refused to finish the work on contracts it had with the bidder if the bidder did
not award the sub-bidder additional contracts for high prices. The court found duress, because the bidder was under a
deadline and thus had no reasonable alternative, and the threat would not benefit the sub-bidder but would hurt the
bidder.
In Post v. Jones, a boat carrying oil was stranded and rescued by salvors. These salvors agreed to pick up the
crew, and auctioned off the oil to one another in an attempt to avoid receiving only salvage damages. The owner of the
stranded boat sued to recover the proceeds from the sale of oil, and the court held in his favor. The court held that
salvors may recover an adequate reward for salvage, but not a very high reward they extract because of the unfortunate
situation of those they save. This opinion seems questionable, however, because the stranded boat owner enters into
the auction knowing that later he will sue the salvors for the proceeds.
Capacity to Contract:
Infancy:
In general, anyone under 18, you can incur only voidable contractual duties (§14) except for contracts of
necessity (such as food or clothing). Generally, when a minor disaffirms a contract, the minor must return the
consideration he received from the deal in whatever condition it may be in when he disaffirms, and the other party must
give the minor back the consideration he received from the minor. Generally, a minor does not need to make restitution
on services received, because after the service is rendered, the consideration can no longer be returned. If the contract
is for a necessity, the minor must make a full restitution, rather than just giving back the remainder of the consideration.
In some jurisdictions, if a minor lies about his age, the courts may require the minor to make full restitution even for
non-necessities.
A minor cannot ratify a contract until reaching the age of majority. When the minor ratifies the contract he or
she must ratify the entire contract or nothing at all.
In Keifer v. Fred Howe Motors, a minor purchased a car and signed a form stating he was 21, even though he
was not. The court held a contract with a minor for non-necessities is voidable at the minor’s option, whether or not he
lied about his age. The dissent argued that a car can be considered a necessity, and that the 21-year-old rule has no
basis in fact or public policy.
In Halbman v. Lemke, a minor purchased a car from his employer, and began paying his employer in
installments. When the car broke shortly after purchase, the minor left it at a repair shop and did not pay for repairs,
disaffirming his purchase. The court held that the minor may recover the purchase price even though the car had
depreciated in value.
In Shields v. Gross, a photographer took pornographic pictures of 10-year-old Brooke Shields after her mother
gave consent. When Shields was 17, she attempted to disaffirm the contract, but the court held that a parent’s consent
is binding on an infant, although there was a strong dissent in this case.
Mental Illness:
According to the RSC, a person with a mental illness or defect’s contractual duties are voidable if he is unable
to understand in a reasonable manner the nature and consequences of his transaction unless the contract is on fair terms,
the other party does not know of the mental issue, and avoidance is unjust. §15. However, the restatement is not the
case law in all jurisdictions.
In Faber v. Sweet Style Manufacturing Corp., a manic-depressed man entered the manic stage, purchased land,
and then tried to void the contract. The court held that a contract is voidable by a mentally infirm if the other party can
be restored to the status quo and incompetence is proven. If the other party cannot be restored to the status quo, the
mentally inform must prove his incompetence, that the other party was aware of the incompetence, and that the
transaction was unfair. In Faber, the court defined incompetence as the fact that the incompetent party would not have
entered into the contract but for the incompetence. Because the status quo could be restored in Faber, and the manicdepressed man would not have entered into the contract but for his illness, the court held that the contract as voidable.
In Uribe v. Olson, incompetence was defined as the inability to bargain at the time of negotiations. In Uribe,
although a property seller was having physical and mental issues, the fact that she offered and counter-offered,
answered questions about the property, and had a family member with her convinced the court that she was able to
bargain, and the court held she was not incompetent.
Drunk:
According to the RSC, an intoxicant’s contractual duties are voidable if the other party has reason to know that
because of intoxication he is unable to understand in a reasonable manner the nature and consequences of the
transaction. §16. The restatement is not the law in all jurisdictions.
In Williamson v. Matthews, a woman with a drinking problem allegedly accidentally sold a house for $1,700
instead of $17,000. The court held a contract created while drunk is voidable when: (1) inadequate consideration; (2)
incapable of exercising judgment; and (3) incapable of understanding the proposed engagement. Based on the test, and
the fact that the woman tried to void the contract immediately after forming it led the court to make this contract
voidable.
Public Policy Limitations:
Illegality:
If a contract breaks the law, it is not enforced. If one party to a contract is doing something unlawful, but the
other is doing something criminal, the court will sometimes allow the party who is acting merely unlawfully to escape
his contractual obligations, but not the party who is acting criminally. Watts v. Maltesta. However, some judges
believe that the entire contract should be rescinded as long as both parties are acting unlawfully or worse. Dissent in
Watts.
Immorality:
If a contract is against public policy, the court will balance the interests of public policy against the interests of
enforcement. The court will enforce the contract if the benefits of enforcement exceed the costs to public policy.
In Rody-Eden v. Berle, a ghost writer agreed to write a book for a comedian in the comedian’s name. After he
wrote the book, the comedian refused to publish the book, and the ghost-writer sued. The court held that agreements
designed to defraud the public are not enforceable.
In In Re: Baby M, the court refused to enforce a surrogacy contract, because it was against public policy, in that
the parents who wanted to enforce the contract were not thinking in the best interests of the child.
Unconscionability:
Generally, to declare a contract unconscionable, the court must find both procedural and substantive
unconscionability. Williams v. Walker-Thomas II. However, some courts require only procedural or substantive
unconscionability. Seabrook v. Commuter Housing Co.
In the common law, if the court finds that a contract is unconscionable, it may not enforce the contract, or may
enforce the contract but not the unconscionable term, or may limit the unconscionable term to avoid an unconscionable
result. §208. In the UCC, the rules are the same, except parties may present evidence regarding the commercial
setting, purpose, and effect for or against enforcement. UCC 2-302.
Procedural unconscionability is when there is a disparity of bargaining power, consumer ignorance, a confusing
contract, or a lack of a meaningful choice. For instance, a long, complex lease, with 54 clauses, small print, and
technical terms was considered unconscionable in the case of Seabrook v. Commuter Housing Co. Lack of meaningful
choice depends on the situation – the court is more likely to find unconscionability if the lack of meaningful choice
stems from collusive business practices involving one of the parties than simply the party with less bargaining power
being poor and having no where else to turn. Henningsen v. Bloomfield Motors.
Substantive unconscionability means that the terms of the contract are unfair, surprising, or shocking to the
conscience, based on commercial needs and the general commercial background. Substantive unconscionability was
found in Henningsen v. Bloomfield Motors when a “warranty clause” on a pre-printed purchase order form actually
disavowed most warranties a consumer would expect.