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TEACHER
Professor Bruce Price
University of San Francisco Law School

CLASS
Contracts Fall 07 Semester
USF Law School

TEXTBOOK
Making and Doing Deals: Contracts in Context
Second Edition 2006
David Epstein, Bruce Markell, and Lawrence Ponoroff
Lexis Nexis
ISBN 0-8205-7044-3 (hardbound)

5 things to think about throughout a deal:

1.    Is there a deal? i.e., mutual assent
2.    Is it enforceable though the law e.g., agreeing to rob a bank
3.    What are the terms?
4.    Did the parties perform?
5.    If not, what should we do about it?

Hill v. Gateway (1997): when purchasing goods, the included terms are applicable, regardless of whether they were read by the offeree/buyer/consumer. (Computer buyer subject to unread contract terms [arbitration] that were included in box).

Lucy v. Zehmer (1954): bluffing can have legal consequences, even when a little buzzed because the other side subjectively believes offer was serious (land deal made over drinks). Intoxication doesn’t matter unless it was extreme.

OFFER

The Effect of Subjective and Objective Intent in K formation
Modern Objective Theory (MOT)

In all cases Lucy (Buyer) wants K.

Zehmer (seller): Subjective (to jest) Objective (to jest)
Lucy: Subjective (Zehmer is serious)

Outcome: no K
Leonard v. Pepsico: Ads are not offers, they are invitations for offers. The buyer’s response is an offer (harrier jet was to jest—objective and seller subjective standard). Unlike Lucy, this was not a dare.

Zehmer: Subjective (to jest) Objective (sell farm)
Lucy: Subjective (Zehmer is serious)

Outcome: K

Zehmer: Subjective (sell farm) Objective (sell farm)
Lucy: Subjective (Zehmer is joking)

Outcome: K

Zehmer: Subjective (to jest) Objective (sell farm)
Lucy: Subjective (Zehmer is joking)

Outcome: no K (subjective truth trumps objective manifestation if we know it)
Lefkowitz: Stating first come first served and quantity available can make it an offer; elements satisfied—subjective truth trumps objective manifestation. (term just for women was not included in ad).

All joking → no K

Four Conditions When an Ad Can Be an Offer:
1)    Definite intention by the offeror to make an offer
2)    Explicit as to the terms
3)    Leave nothing open for negotiation
4)    Over-acceptance problem was accounted for

Price quotes/negotiations are generally not offers, because there is still room for negotiation. Like ads, they are generally invitations for offers.

Longergan v. Scolnick:  reasonable person standard determines an offer had not been made. Further definite assent was required (AD to buy land in Joshua tree).

Carlill v. Carbolic Smoke Ball p.135: Ad satisfied elements of offer (they put money in the bank). Consideration was inducing consumers to purchase product. Must know about offer before purchasing to collect money. Unilateral contract: performance is acceptance. Both sides can quit anytime without cause for action. Reward scenario: notice of acceptance waived by custom

Fairmount Glass Works: This case is an exception because it had the necessary elements. The fact that additional terms were included in the acceptance (and therefore a rejection and counter offer) was not a defense because first quality glass is a custom of the trade.

UCC:
-    approved in 1932.

4 Scenarios of What Can Happen to an Offer:

1. Lapse over time. Reasonable time if not specified (objective: context trumps time).

Minnesota Linseed (predates UCC): Lesson on context. If market price fluctuates dramatically, a party can argue that the life of the offer is almost immediate—custom of the trade in the industry (lapsed: telegram delay unreasonable time based on subjective intentions of parties).
General Rule: offer lapses after it says it lapses or after reasonable time

2. Rejection by offeree. Saying no kills the offer forever (accounts for over acceptance problem). A counteroffer is a rejection and new offer.

3. Revocation by offeror. General rule is that offer is freely revocable until accepted.

Direct (notice given by offeror) or indirect (alternate source) revocation. Indirect revocation can be dangerous (2 acceptances)

Dickinson v. Dodds: promise to hold offer open until Friday can be revoked if no consideration = unenforceable (it was nudum pactum–gratuitous). Dickinson was informed by indirect revocation, which hinges on the credibility of the informer and the strength of the message.
Consideration can also limit offeror’s power to revoke (option K—mini-K to keep K open).

Merchant’s Firm Offer Rule: a firm offer allows merchants to make offers to buy or sell goods irrevocable without consideration:
- for a reasonable time, but no more than three months
- provided that the offer be put down in writing or otherwise authenticated.
- Terms must imply that the offer will be held open: language of firmness (buybacks will continue until…).
- must be goods
- If state adopted revised 2-205, writing is replaced by record (for e-mails).
- Merchant: someone who deals in good of the kind, or has specialized knowledge.

4. Death or incapacity of the offeror immediately destroys offer. Only applies before K is formed. Estate representative cannot accept after the offeror dies.

New Headley Tobacco: Offer terminates/revokes with offeror’s death, even if offeree unaware. The lessee did not act to bind through assent or performance. This rule can also be applied when the offeror’s mental capacity is damaged. Reasonable time (MOT) to accept is irrelevant.

ACCEPTANCE- K is formed

Note the difference between acceptance and an offer for additional terms (I accept, will you take a check?) and a rejection and counter offer (I accept provided I can pay by check).

4 Ways of Acceptance:

1.    Agreement or a promise
2.    Beginning performance
3.    Silence can be a form of acceptance, although courts are reluctant to find that the case
4.    Any way the offer insists upon
An offer must be made before there is an acceptance. New terms, unless implied, require a new offer.

La Salle National Bank: Reserving the last word is an offer in itself. General rule: where an offer specifies the time, place, or manner of acceptance, the acceptance must comply without variation to these terms.

Evert-tite: If within a reasonable time, commencing work is acceptance (esp. if stated in the K). There is ambiguity as to what defines work commencement. General Rule: courts construe ambiguity against the drafter of the offer.

Davis v. Jacoby p. 118: Death of the offeror revokes unilateral contracts (formed upon performance), but not bilateral contracts (formed at moment of promise). Court will look to circumstances to determine whether bi or uni.

Restatement: in cases of doubt (meaning if offeror specified it a different way, we wouldn’t have doubt), the offeree gets to choose whether the K is made by performance or promise to perform.

Hendricks v. Behee p.126: General Rule: An uncommunicated intention to accept is not an acceptance. Informing a real estate agent does not communicate an offer. This was a bilateral contract because it was a promise, making it irrevocable.

Unilateral Contracts

Marchiondo v. Scheck: Commission for real estate broker is a unilateral contract (performance of getting sale completed) Issue of partial performance is decided by the fact finder. Restatement: In options, contracts begins when performance has begun, preparation is not enough. Test–was it a benefit to the offeror? After partial performance, complete performance must be within a reasonable time.

Option Contracts
-    Offeree’s power of acceptance is not affected if she counter offers during option period. She paid for it.
-    Offeror’s power to revoke is unavailable during option period.
-    MR does not apply to acceptances of option contracts (those that involve consideration)—meaning acceptance must have arrived before time period ends.

Mailbox Rule—RST 63: Only applies to acceptances. Second exception to MOT.
Adams v. Lindsell p. 129: Contract is formed once acceptance is put in mail. Does not apply to revocations, they have to be received by offeree. General Rule: Unless specified otherwise, the offeror impliedly allows acceptance by the same medium as the offer.
If S receives rejection by phone before receiving mail acceptance, there is no K. But if S doesn’t sell to another, there is still a K.
If B mails acceptance before offeror dies, the contract is enforceable.
MR does not apply to acceptances of option contracts (those that involve consideration)—meaning acceptance must have arrived before time period ends.

Egger v. Nesbit: Mailing letter and it is lost still constitutes an acceptance.
Mirror Image Rule: the acceptance has to be the mirror image of the offer; unconditional (paperwork requirement was a condition). MIR is common law standard. Exception: custom of the trade. UCC has gap fillers (reasonable standard).

UCC 2-207 negates last shot rule: contract is valid if the alterations are immaterial. See 2 flow charts.

UCC 2-207—War of the Terms (see two flow charts)

Where parties agree terms are part of K, but disagree on meaning. If either party is not a merchant, additional terms do not become part of the K unless accepted by the offeror.

Definite and Seasonable expression of acceptance: an acceptance without changing of dickered terms (price, quantity, delivery).

New terms material?: Is this a surprise or hardship?

Conditioned on offeror’s assent: express approval by offeror?

Example hypothetical: B, non-merchant, offers to buy widgets. S accepts all dickered terms. S adds “All goods sold as is.” S ships and B pays.
Under 2-207, there is a K, but “as is” is not part of the terms because B never expressly accept it.
Under common law, “as is” is part of the terms because S’s acceptance is actually a reject and counter offer. B is accepting through performance. Last shot rule.
If parties were both merchants, “as is” is not material (no surprise or hardship) so it is included in K under 2-207.

Vagueness and Ambiguity: parties agree that terms are part of the contract, but disagree as to meaning of those terms (e.g., Shake well before opening).
1)    Identify the language that is questionable,
2)    Give possible interpretations of what it could mean, then
3)    Redraft it twice to avoid vagueness or ambiguity.

Raffles v. Wichelhaus: different “peerless” ship. No K, predates UCC. General rule is we construe ambiguity against the drafter.

Varney v. Ditmars p.188: promise of “fair share” of profits was too vague to enforce. Controlling factors: parties’ intent and ability to calculate.

Fair and Reasonable value can be calculated: Fair market value and Quantum Meruit: “as much as he deserves,” reasonable value of services rendered.

CONSIDERATION- Was it a gift?

General Rule: Consideration serves an important function in distinguishing between gratuitous and enforceable promises.

Did the parties intend for there to be a legal consequence? (Family cases)

Two aspects:
1.    An exchange element: a bargain for benefit or detriment for each party
2.    Sufficiency requirement: benefit or detriment must be at least part of what parties negotiated for. Incidental duties are insufficient consideration (if you walk to store, individual offering vs. restaurant owner offering).

Option Contracts; The offeree has bought and paid for the option period. Counteroffers do not terminate the option.

Kirksey v. Kirksey p. 242: Feeling like a good person is not consideration. Brother in law offering home to sister is purely gratuitous. Weak definition of what was promised hurts consideration argument.

Hamer v. Sidway p.246: Consideration is bargain for benefit or detriment. Forbearance can be consideration: avoid doing something you have a legal right to do (smoking pot would not be a legal right). One legal right forebeared is sufficient.

General Rule: the court will not look into the adequacy of consideration, unless it could be a joke. A peppercorn will do.
Restatement: Reciprocal promises that are bargained for constitute consideration.

Schnell v. Nell p. 251: 1 of 3 exceptions to peppercorn rule: like for like. 1 cent in exchange for 600 dollars. Wife’s desire before promise is not consideration because it is a past event.

2nd exception: release of a totally invalid claim is not consideration. Had the faulty nets been a legitimate claim to sue, releasing it would be valid consideration.

3rd exception to peppercorn rule: illusory promises: a promise in which the promissory reserves the right to release herself from her obligations i.e., change her mind. I will agree to perform at your party unless we decide not to. Look to see if there is any obligation on the parties.

§74 Benefit or detriment should pass the giggle test to be consideration.

Past Consideration: does not constitute consideration

Harrington v. Taylor p.278: Saving a life was past event and did not constitute consideration.

Mills v. Wyman p. 279: no pre-existing obligation to take care of son. D’s promise to pay received after P voluntarily cared for son—no enforceable K. Public policy: judicial tyranny: judges should not be choosing which gratuitous promises to enforce.

Webb v. McGowin p. 284: Material Benefit rule: a moral obligation is sufficient consideration if the promisor received a material benefit, there is an injustice, and remedy can be limited.  Ruling contradicts general rule of past events.

Unique in that payments had been regular, reasonable, and formerly made; commercial setting; time for cool reflection; and terms were explicit. This ruling causes problems.

Webb shows how judges can use precedent to find alternative outcomes.

Material benefit rule rarely succeeds. It would not apply to Mills because material benefit must be received by promisor.

Modification of Ks

Alaska Packer Assn v. Domenico: Pre-existing legal duty rule [PELDR]–if you already have a K, parties will need new consideration to modify it. Asking for money to do exactly what you were obligated to do lacks consideration. New consideration must be more than a peppercorn (offer to spread the good word in SF is not enough). If employer had obligation that was not fulfilled (faulty nets), there may be consideration.

Angel v. Murray p.269: City’s growth more than predicted could be unanticipated circumstance. Restatement elements of modification. The fact  that city was not coerced lend credence.

Restatement: modification requires:
- voluntary agreement to modify,
- before K completely performed by either party
- circumstances not reasonably anticipated by parties at inception, and
- modification must be fair and equitable.

Promisory Estoppel (PE)- Always do K analysis first

These are cases when we have no consideration and therefore no K, but courts enforce a remedy anyways to prevent injustice. Quasi contracts.

1.    Damages

Expectation v. Reliance Damages: what was expected (when we have a K) v. damages to extent P relied upon K (when we have PE)

An example of inducing reliance is putting a down payment on a car when grandpa gratuitously promises him $2k. Reliance damages = down payment and taxes. The full $2k would be expectation damages.

Rickets v. Scothorn (1898) p. 293: No K because he didn’t ask her to quit, his offer was gratuitous, although it was reasonable to expect her to quit her job. First use of PE.

2.    Elements

Restatement on PE
1.    need promise
2.    which the promisor reasonably expects will induce reliance
3.    we need actual reliance by the promisee
4.    we need injustice that requires some remedy
5.    the remedy can be limited. If limit is always expectations damages, the remedy cannot be limited.

Reliance need not be proven for promise to be enforceable in cases where the promise was to charities.

3.   PE in Commercial Setting

Katz v. Danny Dare p.299: PE in a commercial setting. Promise of pension cut after P goes back to work. 13 months negotiation for pension show that D did not have option to fire him. P received only reliance damages because it was not a K.

PE as pre-K liability: Look for reasons why it is reasonable to rely despite the fact that P knows no K yet.

Orion Food Systems p.306: Stipulations in K cannot insulate from PE liability, although they may be persuasive. Promissory statements made by rep can induce reliance and PE. Expanding store still has value; reliance damages should take this into account. Also, delay in getting franchise open may also be damages.

Economic Duress, Undue Influence Defense

Where claimant is forced to agree by means of a “wrongful threat precluding the exercise of free will.” Restatement: generally D must show breach of K damages inadequate, time was of the essence, and there were no reasonable alternatives.

When there is a threat, always analyze it for undue influence and duress.

Odorizzi p. 396: Court found undue influence, not duress, because threat by principal was not unlawful or improper.

Objective and Subjective element of undue influence
Objective: inappropriate manner of gaining assent
Subjective: whether it overcame the will of the weaker party

7 factors in determining undue influence:
1. discussion of the transaction at an unusual or inappropriate time
2. consummation of the transaction in an unusual place
3. insistent demand that the business be finished at once
4. extreme emphasis on untoward consequences of delay
5. multiple persuaders by the dominant side against a single serviant party
6. absence of third party advisors to serviant party
7. statements that there is no time to consult financial advisors or attorneys
Circumstance driven: the more evidence/factors, the stronger the case for undue influence. Analyze the circumstances.

Misrepresentation, Non-Disclosure, and Concealment

This involves D using false or misleading information during K bargaining process that reasonably induced P to enter in K. K is voidable if victim desires. Be wary that actions may be considered bargaining (saying you have less funds) rather than misrep.

Restatement: 3 requirements in addition to showing misrep.
1.    misrep. must be material
2.    fraudulent  or material misrep. must have induced the recipient to assent to K
3.    the recipient must have been justified in relying on misrep.

Halpert p.363: D said no termites on 3 different occasions. Intent to deceive is not necessary in the misrepresentation. Remedy is rescission: putting parties back to position they were before.

Swinton p.368: When no misrep. was made, and termites were found post-sale, D is not liable. Court sees finding D liable for intentional non-disclosure as going too far, they do not want reciprocal obligations (slippery slope).

3 exceptions from Swinton case for D to be liable:
1. if there is a fiduciary relationship between the parties (duty, special relationship), which courts feel require more candor
2. state laws mandate disclosure
3. D takes steps to prevent other party from finding out the information.

Weintraub p. 371: Issue of concealment, not misrep. Court declines to follow Swinton for concealment cases. 4 standards to justify rescission in concealment cases:
1.    concealment has to be deliberate/purposeful
2.    they must be a significant/material nature
3.    problem has to be non-observable, and
4.    damages are insufficient to justice

Public Policy

R.R. v. M.H. p.404: Public policy interest voids an ostensibly valid K: fear of reach people using the bodies of poor people. One cannot pay for babies. Court looked to adoption statutes and was persuaded by 4-day contemplation period for the surrogate mother.

Criticism: Court unclear on the issue, intruded on intimate issue, biological father now shares custody with a stranger.

Power Ridge p.414: General Rule: companies should not be able to exempt themselves from their own negligence, especially when: (a) they are opening their land to the public, (b) consent is obtained through exculpatory adhesion Ks, and (c) they did not offer an insurance option. Court does not want snowtube co to become more lax with their regulations (slippery slope). Adhesion gives grossly unequal bargaining power to D.

Standard: in determining whether public policy issue, look to totality of circumstances against the backdrop of current societal expectations

K Enforcement – Unconscionability

Williams: Court rules pro rata K invalid.
Aggravating factors
o    suspect terms in small print on note cards
o    seller was aware of buyer’s financial and living situation.
o    Power disparity
o    Historical, social, and racial context.

K  Enforcement – Mistake of Fact and Law

Sherwood: Rosie the Cow. Rule: Rescission available for mutual mistake of material fact. Dissent emphasize there were no warranties with the sale of Rosie.

Who bears risk?

A party bears a risk of a mistake when:
- allocated by agreement, or
- party is aware at time K is made, that she has limited knowledge but treats here limited knowledge as sufficient, or
- risk is allocated by court

If there is a material mistake of fact as to a basic assumption on which the K is made and the party seeking relief does not bear the risk, the K is voidable by the adversely affected party. Did the mistake make the K based on fundamentally different things?
* General Rule: Mistake of fact as to the quality or value are not grounds for rescission for mutual mistake.

Burgraff: Lesson on mistake of law. Mutually mistaken belief that shorefront property was zoned to allow development does not justify rescission. Parties could have consulted an attorney.

Donovan: General Rule: Just as mutual mistakes, unilateral mistakes as to price/value do not justify rescission. If P knows ad was mistake, then no unilateral mistake

Unilateral mistake?
-    mistake as to basic assumption
-    material affect on performance
-    P does not bear the risk, AND

-    Enforcement would be unconscionable, or
-    Other party has reason to know of mistake or his fault caused the mistake.

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