Emmanule Ulubiyo Prof. MovsesianContracts I Fall 2009

Contract: is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty (Rest. 2d. of K §1)

I. Promise: is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promise in understanding that a commitment has been made (Rest. 2d. of K §2)Rules of Contract is found:

i. Case book (common law)→ law common to all realms→ case decisions from judgesa) Binding to all parties involvedb) Stare Decisis→ to future litigation

ii. UCC→ statutes adopted by state legislatorsa) Governs only certain categories of contract

i. Art. III of UCC––governs contract for sale of goods.a. Goods→ UCC 2-105 defines goods as moveable object at the

time of contract for sale (UCC does not provide all laws on sale of goods).

b) Binding on courts––interpreted by Cts but change or overruleiii. Restatement––Legal encyclopedia––restatement of the law as it exist

i. Persuasive authority but not bindingii. Can be adopted by Cts–– adopted portion becomes binding on that state

or jurisdiction Policy Reasons: Why do we have K? Or enforce legally in Courts system?

1. Facilitates exchange of goods and services2. Increase economic efficiency3. Facilitates private transactions of goods and services4. Avoid huge litigation costs––reduce thru predictability5. Moral value––right thing to do.

Tensions blw formalism & Pragmatism as mode of legal reasoning ––methods lawyer and judges use to resolve legal problems.

Formalism: →advocate resolving legal problems through logical application of axiomatic principles (rules)––apply rules to fact.

E.g. Syllogistic:Principle: Only Ks in Latin are enforceable Facts: This K is in EnglishConclusion: K is not enforceable

Pragmatism: “The life of the law has not been logic; it has been experienced” Oliver Wendell Holmes→ Court should consider which result makes more sense as a matter of social policy

E.g. Syllogistic:Principle: Only Ks in Latin are enforceable Facts: No one speak Latin todayConclusion: non-Ks are enforceable

→K oscillate b/w Formalism and Pragmatism Formalism dominate in the first part of the 20th century Realism dominated in the second part of the 20th century Today “The New Formalism”––guessing both

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The idea is Courts should not consider policy (aside from those contained in the rules) Judges should not look at real world consequences

The key difference is how much discretion is given to the judge

At all times, K law contains both elements1. Types of Promises:

A. Express Promise→ is one in which the promissory intention is manifested by words→Need not be writtenB. Implied Promise→ two types–– Implied-in- Fact & Implied-in-Law

1. Implied-in-Fact→ is one in which the promissory intention is manifested by conduct rather than words. e.g. raising hand in an auction

Objective Theory of K: K law look to Objective Intent→ it is not simply what “you” intent but what “others” understand you to mean. Objective: having an existence outside the mind of

subject (what I think you mean) Subjective: Having an existence inside the mind of

The subject (what you think)2. Implied-in-Law (Quasi) K→

a. No manifestation of intent either express of implied-in-factb. Imposes a promise on a party in the interest of justice

P did not intend to make a promise, but he should have Ct will infer a promise to promote a fair result

Elements of Quasi K:1. Π confers a benefit to Δ2. Appreciation by Δ

a. Δ knew about the benefit and did not decline itb. The unconscious Δ

3. Circs are such that it would be unjust for Δ to retain the benefit without reimbursing Π.

Reasons for having Implied-in-Lawo To promote fairness

Changed Circumstances: Unexpected/Anticipated The Traditional Rule: No excuse Pacta Sunt Servanta→ “agreement must be observed” Force Majeure Clause→ Irresistible Force→ In the event of something unexpected

Happen, the party need not perform. Impracticability and Frustration→ non occurrence of the event is the

basis assumption why the parties made the contract

2. Remedy: Three Measure of Damages:1. Expectation Measure: Using the expectation measure a

court will attempt to put the injured party in as good a position had the contract been performed as expected. Injured party is given the benefit of the bargain.

Expectation Damages: Ct are reluctant to give Ct suspicious of P’s claim Judged against indeterminable point

Jury sometimes are sympathetic to P and may award damages w/o solid grounds

2. Reliance Interest: The measure that tries to put the injured party in the position that the contract had never been made.

The test for K is an objective test→ that asks what a reasonable P would understand the promissory to intend

The Court will not protect parties that did not protect themselves. The availability of the clause made the court stricter about excuse b/c such clause could have been added.

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3. Restitution Interest: the measure of damages that will reimburse the injured party for whatever benefit he has conferred on the breaching party (defendant).

*None of these are punitive in nature. The court does not try to impose greater damage award greater than what the injured party lost. Want to deter future breaches not contracts. P is allow to elect which damages he/she seeks

II. Consideration: K Theories: Positive –– Normative–– Types of Promises:

1. Unilateral Contract : an exchange of a promise for performance (i.e. I promise to give you $50 if you give me your case book….when you give me the casebook, we have a legally enforceable contract--terms of which I now owe you $50).

K→ exists when you give him the cash and not before2. Bilateral Contract: a promise exchanged for a promise; a contract is formed the moment

both promises are exchanged (i.e. I promise to give you $50 if you promise to give me your casebook (and you promise)).

K→ exists the moment promise was exchanged→In both contracts there is an exchange. To have a bargain, you must have an exchange.

Why do contracts have to have Consideration? Cautionary: Serves as a formality that alerts people that they are doing

something with legal consequence. Evidentiary: Evidence for third parties that there is a legally binding

arrangement. Channeling: Screening mechanism; not every promise can be

enforced. Economic: Leads to efficiency in the market place.

What constitutes Consideration? Bargain + Legal DetrimentConsideration requires a bargained exchange in which each party incurs a legal detriment.

a. Bargained for Exchange→ Consideration is a bargained-for performance or return promise which is given by the promisee in exchange for the promisor's promise. Consideration need not be furnished by or to the parties themselves as long as it is part of the bargained exchange.

i. Even if the promissor's promise induced performance or a return promise by the promisee, if such inducement was not sought by the promisor, there is no bargained exchange. In such circumstances, the promise is merely an unenforceable gift. See Kirksey v. Kirksey

b. Legal Detriment→ The promisee must incur a legal detriment in exchange for the promise. Detriment can be an act or a promise. Legal detriment exists where:

i. promisee does or promises to do something he has no legal obligation to do; orii. refrains or promises to refrain from doing something he has a legal right to do.

Exceptions to Consideration: I-VII. Bargain/Conditional Gift Test:

i. If the detriment on the part of the promisee confers a benefit on the promisor then it is a bargain (mutually reciprocal).

ii. If what the promisee does, does not confer a benefit on the promisor then it is a conditional gift.

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*The benefit can come from a third party. Thomas v. Thomas (Motive is irrelevant)

Consideration is independent of MotiveII. Adequacy of Exchange →Adequacy of consideration relates to whether the

bargain involves an exchange of equal value. Generally, however, courts do not concern themselves with whether consideration is adequate, honoring the concept of freedom of contract. Also known as the:

a. Peppercorn Theory of consideration: (sell your mansion for a peppercorn) → the adequacy of exchange is irrelevant to whether consideration exists. Formalist view →All that matters is form. It serves as evidentiary requirement. See Afpfel v. Prudential

Adequate of exchange is irrelevant EXCEPT Exceptions to the Peppercorn Theory

1. Doctrine of Sham (Nominal Consideration): A mere pretense of a bargain does not suffice, as where there is a false recital of consideration or the consideration is merely nominal. (If the formal bargain looks like a pretense, then the bargain is not enforceable).

To determine Bargain is sham→ have to look into exchange of value→ so substance may matter after all.

2. Unconscionability: The unconscionability concept is often applied to one-sided bargains where one of the parties to the contract has substantially superior bargaining power and can dictate the terms of the contract to the other party with inferior bargaining power.

a. Case law suggests the following elements of unconscionabilityA court may refuse to enforce a contract for the sale of goods on the ground that an excessive price (for example) term renders the contract unconscionable. unfair/unequal + difference in

bargain (substance) bargaining power (process)

Forbearance to Bring a Claim: Generally forbearance to bring forth a claim is a legal detriment. Forbearance to bring forth an invalid claim is:

View 1: not legal detriment (no consideration) →no legal right to redress. See In re Greene.View 2: can be legal detriment if the promisee honestly and reasonably belief the claim is valid

Honest (subjective to the promisee) & reasonable belief (objective to others) → sufficient consideration. See Fiege v. Boehm

View 3: can be legal detriment if p/ee honestly belief that claims is valid.

o Presumption & Exception Rule : Forbearance to assert an invalid claim may serve as consideration for a return promise if the parties at the time of the settlement honestly and reasonably believed in good

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faith that the claim was valid. Reasonable person must believe it is a valid claim.

Some courts say that a mere honest belief on the part of the claimant is sufficient.

III. The Pre-Existing Duty Rule → A legal detriment exists where the party:1. engages in an act that the party was not previously obligated – whether statutorily or

contractually – to perform; or2. refrains from exercising a legal right

**Under the pre-existing duty rule, a promise regarding a pre-existing obligation to the other party does not constitute a legal detriment.

General economic adversity, however disastrous it may be in its individual consequences, is never a warrant for judicial abrogation of this primary principle of the law of contracts. See Landlord case

Exception to the Pre-Existing Duty1. Modification: A promise modifying a K not fully performed on either side is

binding…if the modification is fair and equitable in view of circumstances not anticipated by the parties when the K was made (Rest. 2d (89)(a).

Modification of Contract is allowed only if it is Executors Contract—not fully performed on either side

i. Unforeseen Circumstances (distinguished from “hold-up”): courts enforce agreements modifying contracts when unforeseen difficulties arise during the course of the performance of a contract, even though there is no consideration for the modification (UCC § 2-209),

ii. as long as the parties agree voluntarily and the new terms are fair and equitable. See Angel v. Murray—distinguished from early case (Bolin farms), difficulties are unforeseeable.

UCC §2-103 (1)(b) → A modification must be made in “good-faith” (to avoid bullying—hold-up game/duress/coercion). All mercantile transactions are subject to the good faith requirement.

Good Faith (applicable to merchants) means (subjective) honesty in fact and the observance of (objective) reasonable commercial standards of fair dealing and trade. see Alaska Packers.Merchant means a person who deals in goods of all kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices of goods involved––UCC 2-104(1)→Between merchants means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants––UCC 2-104(3)

IV. Illusory Promises → Consideration must exist on both sides of the contract; that is, promises must be mutually obligatory. An agreement where one party has been bound but the other has not lacks mutuality, since at least one of the promises is “illusory.” Without mutuality of obligation there is no consideration because consideration is a promise bargained for and given in exchange for a promise. Statements that do not expressly commit the speaker to some course of action in the future).

When there is no commitment then there is no mutuality in obligation—either party can have a “free way out.”

Manifestation of commitment→ if not committing, then no Intent to make promise.

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Hypo 1: You promise to paint my house and I promise to pay you If I feel like it. →manifestation of intent is missing →promise suggest a way out.

Hypo 2: I promise to pay you if its above 85 degrees on Tuesday→ Commitment to go with it→ event beyond my control→ real promise→ consideration enforceable. **look in note for more examples.

Exceptions: Ct can infer commitment that P/or did not make:1. Implied Promise to perform in good faith → § 2-306. Output &

Requirements K (good faith): A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. *see McMichael v. Price –requirements contract

2. Implied Promise to use good effort : § 2-306(2). A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale *see Wood v. Lucy, Lady Duff-Gordon-common sense suggesting that seller would use best efforts

3. Satisfaction Clauses: The implied promise to judge satisfaction according to a subjective good faith standard is what saves it from being an illusory promise. Exercise of ‘honesty in fact’. What a reasonable person would be satisfied with (objective and subjective). *see Omni Group- good faith in satisfaction.

i. Good Faith is both subjective honesty and objective reasonableness

V. Moral Obligation (Past Consideration)Trad. Approach: A promise to pay for an act already performed is not enforceable because there is no consideration (because there is no bargain…recall consideration= bargain + detriment) See Mills v. Wyman- no bargained for exchange; no benefit conferred on Levy’s father

§ Restatement (second) § 86 (1) “(1) promise made for past benefit (CS) binding only to extent necessary to prevent injustice, (2) A promise is not binding if (a) intended to be a gift or promisor hasn’t been unjustly enriched, or (b) to extent that value is disproportionate to the benefit.”

Presumption: Exception:Promise to pay for a past benefit Promise made in recognition is unenforceable for lack of consideration. Previously received is the extent necessary to

prevent injustice. Rest. 2d §86(2)(a)(b)

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VI. Promissory Estoppel: Promise plus Unbargained-For Reliance – Promise w/ no CS, but reliance. The greater the strength of commitment by promisor, the greater the reliance of the promisee.

The basic principle of Promissory Estoppel is reasonable reliance. Even if a promise is not the product of a bargain it may be enforced if it has led a promisee to rely reasonably to his detriment. Here the party is prevented from making an assertion in court on the basis of his prior conduct. No expectation measure of damages available because there is no contract.

a. Restatement §90 – (1) a promise is enforceable to the extent necessary to prevent injustice if:

1. The promisor would reasonably expect to induce action or forbearance

2. the promisee reasonably relied on the promise; and3. the promise induced such action or forbearance

(2) A charitable subscription or a marriage settlement is binding without proof that the promise induced action or forbearance.

Applicability of Doctrine:Categories where Promissory Estoppel is recognized with no consideration includes:

1. promises between family members. See Rickett v. Scothorn→ granddaughter quit job b/c of grandpa’s promise to give her money→ there was no bargain→ therefore no consideration→ but there was reliance by granddaughter.

2. promises made to charities—reliance doesn’t even have to be shown by charities.

a. A charitable subscription…is bidding under §90 (1) w/o proof that the promise induce action or forbearance. Rest. 2d §90(2)

b. Still need to show that injustice can only be avoided by enforcing promise.

i. K is not enforceable if there is n o injustice to prevent see Congressional case

ii. Enforceable only to the extent to prevent injustice

The remedy granted for breach may be limited as justice requires.”* Under the doctrine of promissory estoppel, a court should consider all aspects of a transaction’s substance in determining whether enforcement is necessary to prevent an injustice. Cohen v. Cowles Media—court looks at the standards in the newspaper industry.

The reliance measure of damages is the basic measure of damages for promissory estoppel. Grouse v. Group Health Plan, Inc. (party was given damages for losing job in reliance of offer)

Presumption: Consideration: only Exception: P.E: Promises are enfor

Bargain promises are enforceable ceable on basis of p/ee’s reliance even if there is no bargain

PE is considered an exception to the consideration requirement. o Reasonable reliance.

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o To the extent necessary to prevent injustice. Consideration, there is no definite answer of what it is.

o It’s a series of doctrinal oppositeso Based on freedom of contract AND ideas about fairness (thing of a

scale)o Learn them in pairso

OUTLINE OF CONSIDERATION1. Adequacy of exchange is irrelevant

a. Exchange may be so lopsided so as to be unconscionable 2. No consideration for a promise to perform pre existing legal duty

a. Modification of a contract is enforceable in light of...unforeseen circumstances3. Illusory promises are NOT consideration

a. Implied promises of good faith or best efforts may render an illusory promise real 4. Promises based on past benefit are not enforceable.

a. Promises based on past benefit are enforceable in order to prevent injustice. b. Section 86 of restatement

5. Only promises that are the product of bargains are enforceable.a. Promises that induce reasonable reliance are enforceable in the absence of a

bargain. b. Section 90 of restatement

III. Statute of Frauds The Statute of Frauds, requires certain types of contracts to be memorialized in a writing signed

by “the party to be charged” (i.e., by the party against whom enforcement of the contract is sought). If an oral contract falls within one of the categories of contracts that must be memorialized in writing under the Statute of Frauds, the contract is said to be within the Statute.

Policies Supporting the Statute of Frauds Evidentiary Rationale: the frailty of the human memory, parties may lie Cautionary Principle: prevents people from making impulsive promises by creating a

formality. Channeling: screens cases Efficiency: reduces litigation costs and provides clarity.

Contracts Subject to the Statute→ Within the statute→ meaning must be writing1. K by Executors2. Contracts in consideration of marriage (prenuptial agreements)3. Sale of land4. Contracts that serve as a surety (person who agrees to pay the debts of someone else)5. Contracts that cannot be completed within the year of its making*6. Sale of goods for $500 or more

UCC 2-201(1): (1) Except as otherwise provided in this section a contract for the sale of goods for the

price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know

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its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

Exceptions to S.O.F: (3)  A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable without the writing.

(a) if the goods are to be specially manufactured for  the  buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is  received  and  under  circumstances  which reasonably  indicate  that  the  goods are for the buyer, has made either a substantial beginning of their  manufacture  or commitments for their procurement; or

(b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) with respect to goods for which payment has been made and accepted or which have been received  and  accepted (but not beyond the quantity stated in the writing).

UCC §2-105(1): “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid.

Mixed Contracts— contracts for the sale of goods and services. The “predominant factor test” provides for consideration of factors such as price in determining whether the service or the good is the predominant factor in the contract. It must be determined whether the contract is primarily for the sale of goods or primarily for the rendering of a service for Statute of Frauds purposes.

1) What sort of writing meets the requirement for the statue? “The memorandum may consist of several writings if one of the writings is signed and writings in the circumstances clearly indicate that they relate to the same transaction” Restatement 2nd section 132

B. Type of Document: can be an informal document can be multiple documents connected by cross references

C. Signature Requirement does not need to be a formal handwritten signature.

(can be letter heading, typed signature) must be signed by person against whom enforcement is sought (can

be signed by person’s agent) D. Contents

must reasonably identify the subject matter of the contract must reasonably establish a contract has been made contracts’ essential terms are reasonably certain (i.e. quantity)

E. Written confirmation between merchants U.C.C. 2-201 (2) Written confirmation serves as a substitute for signing only between

merchants. They have 10 days to object. If they do not object, it is a signature.

What if contract falls within statue of frauds but is not satisfied? There still may be a contract, but it is not enforceable. The contract may be enforced if an exception to the statue of frauds is found.

Party against whom enforcement is sought admits that a contract for sale was made in a pleading U.C.C. 2-201 (3b)

(DF Activities Corporation v. Brown)

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b) Promissory Estoppel: Restatement 2nd 139Hypo: There is an oral contract for employment for 3 years in Hawaii for $1,000 a month. Employee moves family to Hawaii. Although it is in the statue, he reasonably relied on the oral contract.

I. Does the contract fall within the statute of frauds? (not all contracts do) Ask on Exam:

a. If yes, then look at the requirements of the statute of frauds. Are these requirements satisfied?

i. Must be in writingii. Must be signed by party against whom enforcement is sought

(defendant)iii. Must indicate that a contract has been madeiv. For non-goods - Must say with reasonable certainty the essential

terms of unperformed promises v. For goods – specify the term of qty (see exceptions under UCC §2-

201)vi. Can also be satisfied by full performance

vii. The “One Year” Clause - There must not be the slightest possibility that the service can be fully performed within one year for Statute of Frauds to apply.

IV. The Agreement Process: Manifestation of Mutual AssentA) “A meeting of the minds”- Objective

“The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange” Restatement 2nd section 17

1. How is it determined if an agreement has been reached?Objective Intent : What would a reasonable person in same situation and position as the party understand?

Inner intent may be different from expressed intent, but court only considers objective intent, not subjective. (Embry v. Hargadine) (Lucy v. Zehmer)

2. Exception to Objective Theory: Both parties share the same subjective intent

Subjective Intent: If both parties share the same subjective intent that is different from what a reasonable person in their circumstances would have understood, then subjective intent governs. (Cohen v. Cowles Media Company)

V. Offer (Offer + Acceptance= Contract)1. What is an offer?

An offer creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror.

a. For a communication to be an offer, it must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms

b. An offer leads a reasonable person in the position of the offeree to understand he can enter a contract by accepting.

Restatement 2nd section 24

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“An offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his asset to that bargain is invited and will conclude it”

Restatement 2nd section 26“A manifestation of willingness to enter into a bargain is not an offer if the

person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent”

2) To determine if an offer has been made : a) Look at the language and the context of the offer

Example: “I plan on selling my land”- not an offer “X: Wire me your firm offer. Y: 23 cents”- offer because of context

→Public Policy: If it is a close call, courts will generally find there is not an offer. The courts want to be clear before imposing contract liability on someone since contracts are volitional.

b) Advertisments: Solicitations for offers, not offers Generally, they are not offers because they are open to everyone, indefinite,

vague, and lack commitment. Cannot use promissory estoppel because too vague to rely. Exception : Advertisements that are clear, definite, and explicit and leave

nothing open to negotiation can be seen as offers. Public Proposals for awards are offer because there is a limited audience.

c) Auctions:Auction with reserve: the auctioneer may withdraw the goods at any time until he announces completion of the sale. Auction without reserve: after the auctioneer calls for a bid, the goods cannot be withdrawn unless no bid is made within a reasonable time.

If it is not specified, then it is presumed the auction is with reserve to protect the seller.

VI. Counter-Offer1. What is a counter offer?

“An offeree’s power of acceptance is terminated by his making of counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifested a contrary intention of the offeree” Restatement 2nd section 39(2)

If a substitute bargain is made in response to an offer, it is viewed as a counter offer. Counter offers reject the original offer and the original offer can not be revived after

it has been rejected. Mirror Image Rule: If the offeree makes the slightest variation, it is viewed as a

counter offer and therefore rejects and terminates the original offer. 2. The U.C.C Solution to the Mirror Rule for Sales of Goods (U.C.C. 2-207)

U.C.C 2-207 applies in a “battle of the forms” situation, when the parties send different forms to each other with different or additional terms.

1) Is there a contract when an additional form changes or adds a term?i. Under the Mirror Image Rule, there would be no contract.

ii. For sale of goods, U.C.C 2-207 alters the mirror image rule. Look at U.C.C 2-207 (1) to determine if there is a contract when there is a different or additional term in a “battle of the forms” scenario.

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“A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms” UCC 2-207(1)

Hypo 1: Buyer places an order for plywood using a standard order form. The seller accepts, adding a delivery term to the contract. Under the mirror image rule, there would be no contract. Under UCC 2-207(1), there would be a contract.Hypo 2: Buyer places an order for plywood using a standard offer form. The seller accepts, adding a delivery term and stating the acceptance is conditional on all new terms. Under UCC 2-207 (1), there is no contract.

2) If there is a contract under U.C.C 2-207(1), what are the terms? U.C.C 2-207(2) determines what the terms of the contract now are.

“The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. UCC 2-207 (2)

i. If it is not between merchants, the additional term is viewed as a counter-offer or proposal. There is still a contract, but that specific term is not in the contract if it is not accepted. Falls under 1st sentence.

3) What if there is no contract under U.C.C 2-207(1), but the parties’ conduct manifests that there is a contract? Under UCC 2-207(3)

“Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.”

a) If the conduct of the parties recognize there is a contract, look at UCC 2-207 (3) to determine what to do with the different/additional terms.

If there are different or additional terms in one parties “contract”, the terms are either replaced by default terms in the UCC or they drop out if there are no default terms in the U.C.C.

Formalism v. Realism The theory is that formal rules provide business certainty. The

functional argument for formalism is that the arguments make sense and that people know the rules.

Formalist View----- a)The last shot doctrine: Buyer’s acceptance and/or payment for any

goods is acceptance of the terms of the counteroffer. It created problems

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because the person sending the last form could sneak terms in.Hypo: Buyer places an order for plywood using a

standard offer form. The seller accepts, adding an arbitration

clause and stating the acceptance is conditional on all new terms.

Under UCC 2-207 (1), there is no contract. When the shipment

comes, the buyer accepts and pays for the plywood. The seller

assumes the buyer accepted the terms. The different or additional

terms are either supplied by the default terms in the UCC or they

drop out if they are not supplied by the UCC.

FOR EXAM If K already determined under subsection (1) then move oN to section (2) -If no contract in (1) then you don’t have to look at (2) -if no contract under section (1) then we look to see if there is conduct present under section (3)

I. Shrinkwrap and Clickwrap Contracts:Mass consumer sales in which the consumer is not told everything about the contract until after the consumer has paid the price.

a. Policy and common sense holds that it would be impractical for a cashier to read the terms of an offer to a buyer. Generally if you don’t read a contract you have assumed the risk of assenting to the terms of the contract.

b. Judge Easterbrook: Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashier cannot be expected to read legal documents to customers before ringing up sales. Customers as a group are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device. Competent adults are bound by such documents, read or unread.

c. Klocek View (formalist): The Klocek case stands for the proposition that the vendor is not necessarily the master of the offer and that a consumer should not be held to a vendor's level of knowledge when entering into a contract. The District Court in this case attempts to overturn the decision in Hill v. Gateway. This is obviously a formalist point of view.

Basically…courts are split about whether these are valid contracts or not. Movsesian—Easterbrook has the better of the argument.

VII. Acceptance: The offer creates the power of acceptance in the offeree. If the offeree manifests acceptance, a contract is created.

1) What is acceptance?“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” Restatement section 50(1)2) What manner constitutes acceptance?

An offeror has complete control over an offer and may condition acceptance according to the terms of the offer (KeyPoint to remember). If the offer is not accepted in a manner invited or required by the offer, it is not acceptance. (La Salle National Bank v. Vega)

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U.C.C. 2-206- Offer and Acceptance in Formation of a Contract(1) Unless otherwise ambiguously indicated by the language or circumstances

a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstance

b) Unless otherwise ambiguously indicated by the language or circumstancesan order or other offer to buy goods for the prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or current shipment of conforming or nonconforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.1) Conforming and Non-conforming goods

a) Traditionally, the shipment of non-conforming goods is not acceptance but the UCC recognizes non-conforming goods as both an acceptance and a simultaneous breach of contract.

b) An offer may specify that acceptance may only be made through a promise to ship, not shipment itself.

c) A shipment of non-conforming goods is not an acceptance if it is stated that the shipment is only an accommodation.

Accommodations are not rejections of the offer, they are counter-offers. Accommodations can be accepted, rejected, or accepted partially. (Corinthian

Pharmaceutial Systems v. Lederle Labs)2) Notification of Acceptance in a Bi-lateral Contact

a) An offer can be withdrawn anytime before acceptance unless it is an irrevocable offer. The offeror may withdraw an offer if he has yet to hear notice of acceptance. (Hendricks v. Behee)

b) Default rule: Notification of acceptance in a bi-lateral contract is necessary unless the offeror specified otherwise. There is no contract if the offeror does not receive notice of acceptance.

i. The default rule is an offeree has a reasonable time under the circumstances for acceptance if a time limit is not specified. (Ever-Title Roofing Corp v. Green)

ii. When a contract calls for commencement of an act for acceptance, it is still a bi-lateral contract because there is an implied-in-fact promise that the act will be performed.

Commencement occurs when expenses specific to this job are made.

3) Notification of Acceptance of a Uni-lateral contract Notice of acceptance of a uni-lateral contract is not necessary. The performance of the act is acceptance. (Carlil Carbolic v. Smoke Bell Co.)a. Contracts with a condition

Example: Buy my product and use it. If you get sick, I’ll give you $100. Contract whether or not you get sick. Getting sick is the condition. Not definite to occur, but must occur to get the $100.4) Knowledge of Offer

a) Uni-lateral Contract: Performance of a required act is not acceptance if the offer is not known to the offeree.

(Glover v. Jewish War Veterans of the US)b) Bi-lateral Contract: A promise accepting an offer not known is still

acceptance.

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However, not likely to occur. If the offeror knows the offeree doesn’t know of the offer, it is not

acceptance.5) Motives for accepting an offer

a) Motives for accepting an offer are irrelevant. Must be voluntary acceptance and have knowledge of offer

(Industrial America Inc. v. Fulton Industries, Inc.) Motives only matter when manifest an intention not to

accept.6) Acceptance through conduct (implied-in-fact acceptance)

Acceptance of offer is created through conduct. i. Exercise of dominion

“An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if it is ratified by him” Restatement 2nd section 69( 2)

1. If the offeror exercises dominion over the offeror’s property and does not say otherwise, it is acceptance.

2. The reasonable offeror would be led to believe the offeree accepted by his actions.

3. If the act is wrongful against the offeror, it is acceptance if the offeror waives the criminal claim.

Hypo: I own a car. If you give me $5,000 and drive it home, it’s yours. He drives away with it. It is acceptance because the reasonable offeree would be led to believe you accepted. However, there can not be a stolen car claim if you are seeking the price of the offer.

Exception: Unordered merchandise sent is to be treated as a gift. Otherwise, the concept would be too dangerous because it would be deemed acceptance if the product was not returned.

7) Silence (Restatement 2nd 69 1a,b,c)“ Silence or inaction can operate as acceptance only if (1) offeree takes the benefit when he had a chance to reject them, and knew offeror expected compensation, or (2) offeror has stated or given offeree a reason to believe that silence can act as acceptance, or (3) because of previous dealings, it is reasonable for offeree to notify offeror if he intends not to accept”.

8) Agent Authority1) Actual Authority: Based on the principal’s representation to the agent

Expressed: spelled out in p’s directions to aImplied: implied from p’s directions to a

2) Apparent Authority: Based on the principal’s representations to 3rd parties.P has permitted A to do acts that would lead 3rd parties to reasonably think he has authority.

9) The Mailbox Rule (Only applies with acceptance)“Unless the offer provides otherwise:

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifetation of mutual assent as soon as put out of the offeree's possession, without regard to whether it ever reaches the offeror” Restatement 2nd 63a (default rule).

When the acceptance is placed in the mail, it becomes effective at that very moment.

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It only applies when it is reasonable to use mail or other delayed media. Unclear how the rule would apply to e-mail (would it be effective when sent or

opened) The offeror could place something in the offer changing the mailbox rule.

(Adams v. Lindsell)

VIII. Revocations of Offer: Unless the offer is supported by consideration, an offeror may withdraw his offer at any time “before acceptance and communication of that fact to him.” To be effective, revocation of an offer must be communicated to the offeree before he has accepted.

O/ee’s power of acceptance may be terminated by:1. Rejection of counter-offer by O/ee2. Lapse of time3. Revocation by O/or4. Death or incapacity of O/or or O/ee5. Non- occurrence of condition

I. Restament 2d. §43: An O/ee’s power of acceptance is terminated when the offeror takes definite action inconsistent with the intention to enter into the proposed contract and the offeree acquires reliable information to that effect.

a. Notice of Revocation: A revocation is not effective if the offeree does not have notice. Note: the mailbox rule does not apply to anything except the acceptance. The buyer appears to be at a disadvantage, but he really is not because he is the master of the offer. See Dickinson v. Dodds

b. This is consistent with the objective theory…The objective theory asks “what would a reasonable person in the place of the offeror understand?” If a reasonable person in the position of the offeree would think that the offeror is no longer interested in selling to him then that is a revocation of the offer.

c. Lapse of Offer: Recall: An offer lapses by its terms or in a reasonable period of time.

i. PUBLIC POLICY: Would courts lean to finding that there is a revocation or that there isn’t a revocation?In a close case courts would lean in favor of finding that something is a

revocation of an offer (recall courts leans towards that there is no offer). The policy is that the law does not want people to fall into contract accidentally. “Hard to get into… hard to get out of.”—Movsesian

The offer is not irrevocable unless the offeree has given something in return to make it irrevocable.

XI. Option Contracts: Sometimes a promise to keep an offer open, a promise NOT TO REVOKE, is supported by consideration. This is called an OPTION contract.

i. An independent promise supported by consideration, that limits O/or’s power to revoke the offer.

ii. O/ee has the power to accept w/n the stated timea. Even if o/ee rejects offer (Humble Oil—rejects the offer, then accept again)b. Unless O/or materially relied on o/ee’s rejection

Counter Offers: Recall the general rule states that a counter offer terminates the power of acceptance because it is not the mirror image of the offer. When the offeree has an option contract however the law states that the optionee has purchased the right to negotiate without destroying the offer. The optionee can negotiate the terms of the offer without application of the mirror image rule.

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Effect of Rejection by the Optionee: The offeree can reject the offer and then revive it as long as the offeror does not take material action on reliance of the rejection of the offeree. The offeree then would not be able to revive the offer. This is a matter of fairness.

II. UCC 2-205: Firm Offers“An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.”

a. An offer may be revocable even if there is no consideration for it where the contract is between two merchants. Instead of the bargain to serve as the cautionary function, this doctrine relies on the writing. The writing serves as a proxy for the consideration requirement.

Part Performance & Unilateral K:I. Traditional Rule: Where the offeror seeks a unilateral contract, part performance does

not get you anything. This is straight forward formalist logic.i. The reason given is that until there is performance, the offeror has not received that

contemplated by his offer, and there is no contract. Further, the offeror may never receive the requested performance because the offeree is not obligated to perform. Until the offeror receives the requested performance, no consideration has passed from the offeree to the offeror. Thus, until the performance is received, the offeror may withdraw his offer.

II. Modern Rule: Creation of Option Contract: Restatement (Second) Contracts § 45:(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.(2) The offeror's duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer

a. “Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance and option contract is created when the offeree begins the invited performances or tenders part of it.”

b. Recall an option contract is a promise supported by consideration to keep the underlying offer open. The idea of §45 is that part performance counts as consideration for the promise to keep the underlying offer open. Restatement 2nd 45 only applies to part performance and not preparation to perform.

Part Performance v. Preparation to Perform (unilateral contracts)Under § 45, part performance gets you an option contract, preparing to perform gets you nothing. You actually have to begin the act that is requested by the promissor so that it could constitute as an option contract (i.e. buying gear at a store to use in for walking across the Brooklyn Bridge constitutes as mere preparation to perform).

What constitutes partial performance will vary from case to case since what can be done toward performance is limited by what is authorized to be done.

Reliance & Option K on an offer makes the offer irrevocableAn offer is irrevocable if the offeror can reasonably foresee the offeree will rely on the offer and the offeree does rely on the offer. (Drennan v. Star Paving Co.)

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“An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character by 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” Restatement 2nd Section 87(2)

Hypo: General contractor uses an offer from a subcontractor when making his bid. The sub is bound to his offer because the general contractor relied on the offer and the sub was aware the general contractor would rely on it. This rule helps the government because the general contractors no longer have to inflate their bids to self-insure. However, it seems that the sub is bound to the general contractor while the general contractor can shop around for lower bids. The court says the general contractor can not do this.

Damages: a) Reliance on an offer (Restatement 2nd Section 87)

i. Can only recover reliance damages. b) Part performance (Restatement 2nd section 45)

ii. Can recover more than reliance damages, can recover expectation damages.

X. Insufficient AgreementA) The Effect of Misunderstanding Restatement 2nd section 20: The objective test fails when a reasonable person in the same circumstances as the parties can interpret the language in two equally reasonable, but different ways. In this case, there is no contract because there was no meeting of the minds.

Objective Theory of Ks: Three Prepositions: Look to the objective meaning of Parties’ language—What a RP would

understand---Unless Parties share subjective intent that differs from the objective meaning of their

language; Or Parties language bears more than one reasonable interpretation (and neither party

is at fault for the ambiguity ) (Peerless Principle). Example: We make an agreement for cotton that will ship on the Peerless. There are two Peerless ships, an October and a December one. We intend different ones, but neither of us knows. The contract fails because was no meeting of the minds. Example: We make an agreement for cotton that will ship on the Peerless. There are two Peerless ships, an October and a December one. We intend different ones, and I know that. The contract is on your terms because I am at fault for not clearing up the ambiguity. (Konic International Corporation v. Spokane Computer Services Inc.) ( Raffles v. Wichelhaus)

I. Rest. 2d & Indefinite Agreements: Indefinite terms may signify there was no commitment. If there was an agreement, there probably would have been a definite term.

1) Trad. Rule: There is no contract as long as an essential term is indefinite. The entire contract is void if there is an indefinite, essential term. (Varney v. Ditmars)

2) Contemporary Rule: “The terms of a contract are reasonably certain if the provide a basis for determining the existence of a breach and for giving an appropriate remedy” Restatement 2nd section 33

a. A court is now more willing to replace indefinite terms in a contract with reasonably certain terms by using some objective method. (MGM v. Scheider).

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b. However, if there is no objective method on how to decide the indefinite term the contract will still be void. (Joesph Martin Jr, Delicatessen Inc v. Schumacher).

Example: Rent value will be agreed upon. If there is no reference to how the rent will be agreed on or no past history determining what the rent should be, the court can not define a rent value.

An objective method of making an indefinite term definite may be found : In the agreement itself Commercial practice or an industry standard Past history between the parties Context and subject matter is extremely important

1) Relational Contract: A relational contract is a long term business relationship where both parties intended to be bound. (Some scholars do not think this exists because they believe one shot transactions are still relational)

In a long term relationship, not everything is foreseeable therefore both parties commit to work things out in good faith when problems arise. The rules with regard to indefiniteness should be more lenient with a relational contract. An agreement to agree can be enforceable in a relational contract. (Oglebay Norton Company v. Armco, Inc.)

2) Letters of Intent/ Agreements to Agree: are not enforceable They allow parties to reach agreement in stages. Generally, letters of intent are

unenforceable because parties show they are not bound until further agreements. In some cases, it may not be clear whether or not the parties committed themselves and meant to be bound. (168th and Dodge v. Rave Cinemas)3) Agreement to negotiate: There is generally no duty to negotiate, but if the parties make an

agreement to negotiate then some courts may enforce an agreement to negotiate. However, it is difficult to determine what constitutes a breach. Also, expectation damages could not be awarded because the party would not know what to expect.

4) Indefiniteness & the U.C.C (U.C.C. 2-204 [3]) Assuming the intention to reach agreement, the fact that certain terms are missing will

not make the contract unenforceable. The U.C.C. provides default terms (“off the rack” rules) for sale of good contracts. It is assumed these terms are what reasonable parties would want.

Open price term (UCC 2-305)If the parties intend a contract of sale even though the price is not settled, the,

the price is a reasonable price at the time for delivery if: a) nothing is said as to the price or b) the price is left to be agreed upon and they fail to agree, or c) an external mechanism fails

No default term for quantity5) Liability (Remedies) for indefinite and incomplete agreements:

What if agreement was not reached but the parties put lots of resources into negotiating? Trad. Rule: There is no such thing as pre-contractual liability. Both parties assume

the risk because they know the negotiations may not work out. Contemporary Approach:

o Expectation damages not available b/c there was no Ko Restitution: quantum merit (as much as deserve) damages are possible (to

the extent that one party has conferred benefits on another party during negotiations, he get that back)

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o Reliance may be allowed if a party reasonably relies on negotiations. Courts will be more inclined to allow this if the non-relying party did not attempt to shave out the optimism bias. Damages will be limited as justice requires. Probably will only recover the money they put out, but not lost profits. However, most courts will probably stick to no pre-contractual liability. (Hoffman v. Red Owl Stores).

XI. Avoidance of Contracts: Cancellation of a contract is rescission(Rescinding).

A. Defect in the Bargaining Process: Defends to Valid K1. Lack of capacity2. Undue influences3. Duress4. Fraud/Misrepresentation5. Mistake6. Unconsciousbility

Void vs. Voidable1. Void: a void contract cannot be enforced by either party.2. Voidable: One of the parties has the power to avoid the obligations the contract creates; or to ratify those obligations. The contract is enforceable against the other party.

1. Lack of Capacity to Consent: Law presumes a person is capable of making a contract. A high degree of proof is needed to show you were not capable of making a contract.

a. Minors (infancy): A natural person below the age of 18. Contract is voidable at the election of the minor, but not by the adult. The contract is still voidable even if the adult fully performs. Restoration : minor only has to restore what they have from the contract. If

they have nothing left, they do not have to restore. There is no quasi-contract recovery.

If minor is silent about age, the adult has a duty to find out the age of the person because the risk of mistake falls on the adult.

If minor lies about age, the contract is probably still voidable but the adult can bring a tort suit against the minor for misrepresentation.

If minor makes a contract for a necessary, the contract is not voidable. It is an implied in law contract. A necessaries are something vital to the minor’s existence and can be decided on a case by case basis.

Ratification : When the minor comes of age, he is allowed to ratify or affirm contract. Minor has a duty to disaffirm a contract within a reasonable time of turning 18, otherwise silence can be taken as ratification. (maybe)

b. Mental incompetence: A contract by a mentally affirmed person is voidable by the person with the illness if:

a. person is unable to understand in a reasonable manner the nature and consequences of the transaction. ( It is irrelevant whether the other party knows).

b. person is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition. (e.g.Compulsive behavior, bi-polar)

“Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of

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avoidance terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.” Restatement 2nd 15(2)

2. Fraud (Misrepresentation) A misrepresentation is “an assertion that is not in accord with the

facts.” In certain circumstances a misrepresentation that induces a party to make a contract will render that contract voidable by that party (it will allow that party to rescind). A person who has been induced to make a contract because of fraud can avoid or rescind the contract. The contract is voidable by the party who was induced.

Two types of Fraud:1. Fraud in the inducement is the basis for avoidance (rescission) of the K.

a. What is misrepresentation? There is an assertion not in accord with the facts.

An affirmative statement can be a misrepresentation. Example: “My house has a basement”, but it doesn’t.

Half Truth: the statement is true but a very important fact is left out. It gives a misleading impression. Example: “Is the title valid?” “It has been validated by the district court.” Doesn’t mention there is an appeal.

Concealment: Concealed the facts that would lead to a true understanding of the situation. Example: When selling the house, I do not mention structural damage and I paint over all the cracks to hide it.

2. Fraud in Factum (Execution) –– a. Misrepresentation about the Contract itself.

i. E.g., one party is tricked into signing a k –– Contract is void.

Facts v. OpinionsAs a general matter, expressions of opinion (i.e. puffing by a seller) are

not misrepresentations. Expressions of opinion are merely an analysis of the facts rather than expression of facts. In these situations the law says caveat emptor.

Exception—but where one party has superior knowledge statements made within the area of such knowledge may be treated as a misrepresentation.

i. A misrepresentation of an opinion is not fraud. However, an opinion of an expert becomes a fact. (Vokes v. Arthur Murray Inc)

Example: A doctor tells a patient a certain fruit is good for them. It may be an opinion but since the doctor said it, it becomes a fact.

ii. An opinion of a fiduciary becomes fact because a fiduciary is defined as a relationship of trust.

Example: A lawyer gives their client advice. A lawyer must look out for his client’s interests. It becomes fact.

Fraudulent MisrepresentationMisrepresentation can be grounds for rescission, where the

misrepresentation is consciously false and made to induce the person make a contract. Innocent misrepresentation

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is grounds for rescission if it is a material misrepresentation. Want people to avoid making representations unless they are true.

3. Duty to Disclose –– a) There is no duty to disclose in contract negotiation as long as the information is equally

accessible to both parties There is no duty of good faith in negotiations (only performance).

b) Exception to traditional view-1. There is a fiduciary or close relationship in which one party puts trust in

the other to look out for their best interest. It is not an arm’s length relationship because the first party thinks

2nd party is working for him. 2. There is a need to correct a previous statement or false impression.

Example: Has the blockade ended? Buyer says no but finds out later. He needs to correct his false statement.

3. There is a need to correct a mistake of another party as to a basic assumption

Example: “Isn’t it a shame that blockade is on?” But you know it is off.When the seller of a home knows of facts materially affecting the value of the

property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer. (Hill v. Jones)

When the other party asks a question? (Hill v Jones)a) There is no general duty to disclose when a party asks a question.

4. Promissory Fraud –– a) The promisor makes a promise without intending to complete the promise. Since

a promise necessarily carries with it the implied assertion of an intention to perform, it follows that a promise made without such an intention is fraudulent.

i. It is a misrepresentation of the promisor’s state of mind. ii. How do we prove what the promisor’s state of mind was?

Maybe, there is some objective evidence.

5. Duress and Undue Influence make contracts voidable.a) Duress : a party was coerced into agreeing. There was an improper threat that allowed no reasonable alternative. There was no choice but to go along with the agreement.

Economic duress- There is no commercially reasonable alternative. If there is an alternative, then it is not duress. (Austin v. Loral)

a) An improper threat verse a hard bargain –– duress is not the same thing as drawing a hard bargain

b) Threat to stop performance under an existing K verse threat not to deal with promisor in future

b) Undue influence: A party was unfairly persuaded at a moment of weakness. There was pressure at a time of emotional or physical distress.

a) There can be a fiduciary relationship that one party took advantage of. In these relationships, we do not bargain at arm’s length. (Rubenstein v. Rubenstein)

6. Mistakesa) Belief not in accord with the fact as they exist when the parties make the contract

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Vs. “Misunderstanding” –– goes into the interpretation of the K –– parties attached different meaning to the language used–– Q– whose interpretation controls?Vs. “Mistake in Expression” –– language incorrectly reflect parties agreementVs. “Bad Prediction” –– change in circumstances

Legal Consequences of Mistakes Mistakes like misunderstanding prevents the making of a contract –

renders an offer that appears valid invalid –– BUT has been formed but the contract is voidable by one of the parties –– parties who made the mistake

Unilateral vs. Mutual Mistakes a) Unilateral Mistake: done by one partyb) Mutual Mistake: both parties made the mistakes

1. Voidable for Unilateral Mistakes. Rest. 2d. §153. Requirements:

1. Basic assumption on which the K was made2. Material adverse (mistaken party) effect on agreed

exchange3. Mistaken party doesn’t bear the risk of mistake

a. Other party has reason to know or know of the mistake or other party’s fault caused the mistake

b. Culpable or bad faith mistakei. Negligence is not enough to avoid

the K.Why does the non-mistaken party have to bear the risk for my mistake?

Key Question –– Did the non-mistaken party has reason to know or knows of the mistaken?

a) If Yes, mistaken party can avoid the contractb) If No, mistaken party cannot avoid the contract

Mutual Mistake Rest. 2d. § 152 (1)Requirements:

1. Basic assumption on which the contract was made2. Material effect on agreed exchange3. Adversely (mistaken party) affected party does not bear the risk of the mistake

a. Allocation of risk in the contract –– one party accepted all the risk known and unknown

b. Conscious Ignorance/willful –– party knew of risk but failed to examined and proceeded with the contract –– assumption of risk –– no rescission

Qualitative or Quantitative:1. Qualitative is a change in kind (of subject matter)2. Quantitative is a change in degree

a. Only qualitative changes support rescissionb. But large quantitative changes can be evidence of qualitative

changei. Red vs. Green

Mutual Mistake in Expression: REFORMATION

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––Party reached an agreement and reduced it into writing but the writing does not express/reflect party agreement –– party seeking reformation will ask the court to amend the writing reflect the true intention of the partiesParty requesting reformation must show:

– Clear and convincing evidence that b/c of a mutual mistake in expression, the writing does not correctly state the parties’ agreement

o Which is an exception to the objective theory of contract (theory of K is what would a reasonable person read the language to mean)

Subjective intent of both parties is an exception to the objective intent of K

Mistake in Transmission Offeree cannot snap up an offer he/she knows it is a

mistake K will be formed on the basis of communication

unless the receiver knew the transmission is a mistake

o The sender bears the risk of the mistake b/c he chose the method of communication.

7. Unconscionability: contracts are voidable. UCC Section 2-302(1): It only applies to sales of goods, but courts apply it to other contracts by analogy.

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid an unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause 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.

Two factors in determining if a contract is unconsciousable:1. Procedural unconscionability- concerns the manner in which the contract was

negotiated and the circumstances of the parties at the time ––Absence of meaningful choice of one party

i. unfair surprise Ex. was the print illegible?

ii. gross inequality of bargaining power Ex. was the contract created in a home?

iii. Adhesion contract? “Take it or leave it” contracts. Not always sinister.

+

2. Substantive unconscionability – focuses on the terms of the agreement and whether those terms are one-sided ––Terms unreasonably favorable to the other party.

i. Based on commercial standards of time and place where K was made (what did the K say).

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The terms must significantly depart from the custom and what is usually done.

(Williams v. Walker) ––Generally, both factors are necessary to prove unconscionability. The two however need not be present in the same degree.

Procedural tends to dominate and some Courts can rule just on that Substantive on the other is problematic false assertions can be made claiming

unfairness Unconscionability are typically reserve for non-commercial setting

o In commercial setting there is usually no disparity of bargaining power b/w business parties

o Non-commercial –– you have corporation against individual (usually adhesion K)

Arbitration: advantages over litigation1. Speed2. Efficient3. Less costly ––– Because arbitration does not abide by the rules of Civil Procedure

1. Much more informal than litigation (but also less protective of the parties)

2. Supports judicial economya. Few cases go to courtb. And court still have not review arbitration decision b/c

the purpose is to expedient cases.

8. Illegality:A. Court will refuse to enforce contracts that are illegal or against public policy. These contracts are

Void because they are:a. Violation of positive law (statute or constitution)b. Violation of judicially recognized public policy (overrides freedom of contracts)

i. The issue of illegality can be raise by the court Sua PonteB. Rationale for refusing to enforce such contracts:

a. Courts wants to promote Opportunismi. The law wants to encourage people from making this kind of contract

Illegality: the Consequences: In pari delicto potior est condicto defendentis ––

o As a practical matter when both parties are equally guilty the defendant is in a better position because the law leaves the parties as it finds them.

The plaintiff seeking to enforce an illegal contract is not entitled to quasi-contract or restitution interest to redeem the benefit conferred on the defendant.

o Exceptions:

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The denial of restitution causes “disproportionate forfeiture” The plaintiff was excusably ignorant of facts or of legislation of a

minor character, in the absence of which the promise would be enforceable

The plaintiff was not equally in the wrong with the promisor The plaintiff did not engage in serious misconduct and he

withdraws from the transaction before the improper purpose has been achieved.

9. Exculpatory Clauses: 1. Agreement to waive clause for negligence are generally enforceable

a. Cf. (can be void based on) unconscionability 2. Agreement to waive clause for “gross negligence” are generally not enforceable b/c it’s

against public policya. Claims for gross negligence, recklessness, intentional wrongdoing

KEYPOINT –– Exculpatory clauses in a K are unenforceable if the violate a judicially recognized policy

Covenant not to Compete:a) An agreement not to compete in business with the named party

a. General Rule: It is unenforceable if “unreasonable in scope (too broad in its scope)”

i. Judge reasonable in terms of time and geographyEx. Six month of no compete is reasonable while 7 yrs is unreasonable in scopeEx. Not to compete in same block is reasonable while not compete in same state is unreasonable in scope

ii. Reasonableness depends on the particular business context

Severability: (to cut) What if the contract partly violates public policy?Three Approaches:

1. Decline to enforce the whole K (or clause)2. Rewrite the clause (or part) to make it enforceable

a. Not widely accepted b/c it messes with the whole concept of freedom of K –– judges are not suppose to be rewriting K but rather enforces them or not.

3. Sever the unenforceable clause (or part) and enforce the remainder of the K

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a. Only if the court concludes the parties would wanted thisa. Go back to the beginning –– look at the objective intent of

the party before the lawsuit came into the picture.

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