Precontractual Liability
Contracts – Prof. Merges
Feb. 24, 2011
Unconscionability
§ 1.11 Unconscionability
(a) If the court as a matter of law finds the
agreement or any term of the agreement
to have been unconscionable at the time it
was made, the court may refuse to enforce
the agreement, or it may enforce the
remainder of the agreement without the
unconscionable term, or it may so limit
the application of any unconscionable
term to avoid any unconscionable result.
(b) When it is claimed or appears to
the court that the agreement or
any term thereof may be
unconscionable, the parties shall
be afforded a reasonable
opportunity to present evidence as
to its commercial setting, purpose,
and effect to aid the court in
making the determination.
“Precontractual Liability”
• Mapping common law onto
commonplace business
transactions
Drennan v. Star Paving
Drennan v. Star Paving
Roger J. Traynor (1900-1983) served as an
Associate Justice of the California Supreme
Court from 1940 until 1964, and as the Chief
Justice of California from 1964 until his
retirement in 1970. He graduated from the
University of California, Berkeley, where, in
1927, he taught political science and served
as the Editor-in-Chief of the California Law
Review, while simultaneously earning his J.D.
degree and a Ph.D. in Political Science
“One hesitates to plead for reforms
in the name of common sense... for
we belong to a profession that
prides itself on not throwing chaos
lightly to the winds.”
-- Traynor, Comment on the Courts and Lawmaking, in
Legal Institutions Today and Tomorrow 48, 56 (M.
Paulsen ed. 1959), quoted in Armstrong, Family Law:
Order out of Chaos, Law: Order out of Chaos, Law:
Order out of Chaos, Law: Order out of Chaos, 53
CALIF. L. REV. 121 (1965).
Friendly, Henry J. "Ablest
judge of his generation."
California Law Review 71,
no. 4 (July 1983): 10391044
true strict liability in tort for defective products (see
product liability) in Greenman v. Yuba Power
Products, Inc., 59 Cal. 2d 57 (1963) [4], which a 1996
panel of tort law experts subsequently ranked as the
top development in tort law of the past 50 years [5];
the cause of action for negligent infliction of emotional
distress (NIED) in State Rubbish Collectors Ass'n v.
Siliznoff, 38 Cal. 2d 330 (1952) [6];
the "moderate and restrained interpretation" doctrine
for resolving conflict-of-laws problems, in Bernkrant
v. Fowler, 55 Cal. 2d 588 (1961) [7];
the rule that majority shareholders of closely held
corporations have a duty to not destroy the value of
the shares held by minority shareholders, in Jones v.
H. F. Ahmanson & Co., 1 Cal. 3d 93 (1969) [8];
the rule that extrinsic evidence of trade usage or
custom is admissible where relevant to prove a
meaning to which the language of a contract is
reasonably susceptible, in Pacific Gas & Elec. Co. v.
G. W. Thomas Drayage Co., 69 Cal. 2d 33 (1968)
Drennan v. Star Paving
• Facts
• History
Drennan
• What were the damages in the trial
judgment below?
• What does this represent?
Continuous review!
• Expectation measure of damages
Drennan
• What did Hoon (Sub) say to Drennan on
morning of July 29, 1955?
Drennan
• What did Hoon (Sub) say to Drennan on
morning of July 29, 1955?
• What if he had said “I revoke”?
Drennan
• What did Hoon (Sub) say to Drennan on
morning of July 29, 1955?
• What if he had said “I revoke”?
• What if π had said “I accept”?
What if defendant’s bid had
been revocable?
• P. 224
What if defendant’s bid had
been revocable?
• Clearly could have revoked it
• What might plaintiff do then?
What if there was
consideration for offer being
irrevocable?
• Is that permissible?
What if there was
consideration for offer being
irrevocable?
• Yes! An option K, as we have
seen
Traynor’s analysis
• What analogy does he use?
Traynor’s analysis
• What analogy does he use?
• Rest. 2d 45 – unilateral K offer, part
performance
Reliace on an offer instead of a
promise – R2 § 45
“Where an offer invites an offeree to
accept by rendering a performance and
does not invite a promissory
acceptance, an option K is created
when the offeree tenders or begins or
tenders a beginning of it . . .”
The role of reliance here
• What was the holding?
Drennan - holding
• GC could rely on sub’s bid, which was
therefore an irrevocable offer upon
which GC could rely in preparing its
general bid
Two issues
• Mistake – how to compare to Kastorff?
• Tort-like analysis
– Negligence; relative risk point
– P. 226
§ 87. Option Contract
(2) An offer which the offeror should
reasonably expect to induce action or
forbearance of a substantial character
on the part of the offeree before
acceptance and which does induce
such action or forbearance is binding
as an option contract to the extent
necessary to avoid injustice.
§ 87. Option Contract
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror,
recites a purported consideration for the
making of the offer, and proposes an
exchange on fair terms within a reasonable
time; or
(b) is made irrevocable by statute.
Precontractual Liability
Generally
• Why is this an issue?
Precontractual Liability
Generally
• What theories have
aggrieved negotiating
parties relied on?
Precontractual Liability
Generally
• What theories have aggrieved
negotiating parties relied on?
Reliance
 Restitution
• Merges, “A Transactional View of
Property Rights”
• 20 Berkeley Tech L J 1477 (2005)
A Contract Represents a Direct
“Node to Node” Connection
Between Seller (S) and Buyer
(B)
S
S
B
B
S
B
Proposals to resolve the problem
• Common law
• Novel pre-K liability schemes
Omri Ben-Shahar, Essay: Contracts Without
Consent: Exploring A New Basis For
Contractual Liability, 152 U. Pa. L. Rev. 1829
(2004). See also Symposium: Freedom from
Contract, 2004 Wis. L. Rev. 261 et seq. (2004)
Consider 2 sets of cases -• Negotiations to sell/acquire a business
• Negotiations in advance of a
technology license or joint venture
agreement
Examples
• International, Inc v. Clorox Co., .3d 1316
(5th Cir.), cert. denied, 115 S. Ct. 71
(1994).
• Online Technologies, Inc. v.
Bodenseewerk Perkin-Elmer GMBH,
386 F.3d at 1135, 1138 (Fed. Cir. 2004).
The caselaw shows that property
rights – again, primarily patents –
facilitate disclosure of three
primary types of information: (1)
information contained in patent
applications, which are kept secret
for a substantial time after filing;
(2) details beyond what is
disclosed in a patent or patent
application; and (3) valuable but
unpatented information beyond
the boundaries of the patent
Property Rights Create a Legal
“Field” Around an Information
Asset (i), Protecting Seller (S)
During Buyer’s (B)
Precontractual Evaluation
S
i
B
IPR:
patent,
©,TM
S
B
Contract
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