The Elements of a Contract

Application: The Elements of a Contract

A contract has three key elements: offer, acceptance, and consideration. If these three elements are not present, a contract may not exist. Sometimes, the presence of these elements can be elusive. For example, the mental intent of the parties may determine the existence of a contract. How can you determine a person’s intent? Clearly, this is a complex area of law where litigation should be left to lawyers. A public administrator, however, may have to form contracts as part of his or her job responsibilities. As such, he or she must be aware of the elements of contracting so as to enter into the most advantageous agreement for his or her organization while avoiding illegal contracts.

To prepare for this assignment:

• Review Chapter 8 in The Study of Law: A Critical Thinking Approach (4th ed.). Reflect on how contracts are formed, destroyed, modified, and broken.

   

• Review the article “Contract Law: An Introduction.” Review the section “The Elements of a Contract” to refresh your recollection about the basic elements of contracts.

   

• Review the resource “Contract-Based Fact Pattern.” Read carefully for facts that will assist in arguments for and against the formation of a contract.

   

• Identify elements of a contract in the fact pattern.

   

• Think about whether a contract exists in the fact pattern.

   

• Consider possible defenses against the formation of a contract in the fact pattern.

The assignment (2–3 pages):

• Describe the elements of a contract in the fact pattern.

   

• Explain whether you think a contract exists. Use facts from the fact pattern to argue your opinion.

   

• Explain two possible defenses against the formation of a contract in the fact pattern.

   

  Support your Application Assignment with specific references to all resources used in its preparation. You are asked to provide a reference list for all resources, including those in the Learning Resources for this course.

   

  Submit your assignment by Sunday January 29, 2017

  The Study of Law

  Currier, K.A., Eimermann, T.E. (2016). The study of law: A critical thinking approach (4th ed.).

  New York: Wolters Kluwer

   

   

  Aspen College Series

  The Study of Law A Critical Thinking Approach

  Fourth Edition

  Katherine A. Currier • Thomas E. Eimermann

  ®Wolters Kluwer

   

   

  A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties . … If . .. it were proved by twenty bishops that either party, when he used the

  words, intended something else than the usual meaning which the law imposes upon them, he would still be held.

  Judge Learned Hand

  APTER OBJECTIVES

  reading this chapter, you should be able to:

  Explain the objective theory of contract law. Describe the purpose of the Uniform Commercial Code. Apply the basic requirements of a contract to a factual situation. List the most common defenses to a contract formation. Discuss possible remedies available in a breach of contract case.

  RODUCTION

  ::racts are involved in almost every aspect of our lives, from day-to-day com- ~·al transactions to corporate mergers-from purchasing and financing a ~e to insuring that home, automobile, life, or health. A contract is nothing -:”‘ than an agreement, oral or written, that can be enforced in court. Contract

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  law sets out the basic elements that must be present for an agreement to be con- sidered legally enforceable. It also spells out when the court will excuse one of the parties for not living up to that side of the agreement. In sum, contract law reflects society’s values regarding what promises we think should be kept and what excuses we will allow.

  You will discover that contract law is very rule bound. That is, to become an expert in contract law, you must master a vast array of technical rules. However; do not let yourself feel overwhelmed by the seemingly endless rules and excep- tions to those rules. What is most important is that you come to understand the basic concepts that lie behind contract law.

  Take a moment to consider the following dispute that arose among some friends.

  1· tiiml ‘illlllmmmwmllll!ll\lll!!il m l Sally, a paralegal student, had often told her

  friend Jill how much she admired Jill’s Mickey Mouse watch. Last Monday, as the two were walking to class, Sally noticed that Jill was wear- ing a different watch and asked Jill about it. Jill replied that at her birthday party yesterday her boyfriend gave her this new watch. “In that case,” Sally inquired, “would you be interested in selling your Mickey Mouse watch to me?” Jill replied, “I paid $200 for it, but because we are friends, I will sell it to you for $100 and will bring the watch with me tomorrow.” Sally said, “Great, it’s a deal.” Unnoticed by Sally and Jill, Mike had

  overheard the conversation. “Wait,” Mike said. “I have always wanted a Mickey Mouse watch. I will give you $150 for the watch.” Jill thought about it for a moment and then turned to Sally and said, “Gosh, I’m sorry, Sally, but I’m afraid that unless you can match Mike’s offer, I will have to sell the watch to him.” Sally replied that she could not raise her offer. Mike, feeling a bit guilty, told Sally that on Tuesday when he got the Mickey Mouse watch, he would no longer need his current watch and would give it to Sally. The next day Jill sold her watch to Mike. Mike, however, had a change of heart and refused to give his old watch to Sally.

  Uniform Commercial Code (UCC)

  Sally is understandably upset by the turn of events and wants to know =- she has any legal rights against either Jill or Mike. Keep Sally’s situation in min as you read through this chapter.

  Originally drafted by the National Conference of Commissioners on Uniform State Law, it governs commercial transactions and has been adopted by all states, entirely or in part.

  A. THE UNIFORM COMMERCIAl CODE (UCC)

  Contract law has strong common-law roots, and in areas that do not deal wi-~ the business world, the common-law rules still govern. However, if a contra ….. involves a business setting, then you may also have to consult legislation, in th:: form of the Uniform Commercial Code (UCC). The UCC is a series of mod statutory provisions drafted by prominent legal scholars. It was developed wic::. the intent that states would voluntarily incorporate these provisions into thei:”

   

   

  A. The Uniform Commercial Code (UCC) 285 .

  :. atutes, thus providing a uniform set of legal principles that would facili- : ;::ommercial transactions among persons in different states.

  _\11 states, as well as the District of Columbia, have adopted the UCC -“ly or in part; however, it is not a federal law. That would require its :::;nent by Congress. Although the UCC was created by a group of learned :ars in the hopes of establishing uniformity for businesses that deal across

  -: lines, the terms of the UCC are valid only if they have been adopted by :rate. In addition, while most states have adopted the UCC as it was origi-

  written, each state has the option of changing the terms. Therefore, when g with the UCC in a specific state be sure to check that state’s precise

  5ng. The UCC is divided into ten articles (Figure 8-1). The four articles that are

  _ relevant to contract law are Articles 1, 2, 2A, and 9. Article 1 sets forth =:al provisions, such as definitions that apply to the entire UCC. Article 2 – with the sale of goods, and Article 9 deals with secured transactions, a -od whereby a creditor can be assured that if the debtor fails to repay the _the creditor can obtain specific property as an alternative form of payment. ~efore, while the UCC applies to some contract situations, it does not apply

  For example, the UCC does not apply to real estate or service contracts. : · scussion in this chapter is based on the law of contracts as developed by .:ammon law. However, wherever Article 2 of the UCC has made a signifi- – .::hange to the common law, we will also discuss that change. Article 2A on

  is a new provision. To see whether it has been adopted in your state, you _- o check your state statutes. We will discuss Article 9 in Chapter 10, Laws

  .:ring Business. _\rticle 1 sets forth the basic principles that underlie the entire UCC.

  Article 1 states that the UCC is to be liberally construed in order to best fulfill its underlying purposes to “simplify, clarify and modernize the law governing commercial transactions,” to “permit the continued expan- sion of commercial practices through custom, usage and agreement of the parties,” and “to make uniform the law among the various jurisdic- tions.” UCC § 1-102(2). The parties are almost always free to set their own terms, even if they are at variance with the UCC’s requirements. UCC § 1-102(3). Unless displaced by a particular part of the UCC, the common-law rules of contract still apply. UCC § 1-103. Therefore, unless there is a conflict between the common law and the UCC, both apply, for example, to con- tracts for the sale of goods. Under the UCC everyone is under an obligation to act in good faith, defined as honesty in fact. UCC § 1-203.

  _\rticle 2 applies to sales of goods. A sale is defined as “the passing of title :he seller to the buyer for a price.” UCC § 2-106(1). Goods are “all things

  ~.-…..·.ug specially manufactured goods) which are movable … other than -oney in which the price is to be paid, investment securities (Article 8) and _ in action. ‘Goods’ also includes the unborn young of animals and growing

  Article 1

  Article 2 Article 2A

  Article 3

  Article 4

  Article 5

  Article 6

  Article 7

  Article 8

  Article 9

  Article 10

  General Provisions Sales Leases [New) Commercial Paper Bank Deposits and Co l- lections Letters of Credit Bulk Transfers Warehouse Receipts, Bills of Lad ing, & Other Documents ofTitle Investment Securities Secured Transactions Effective Date and Repealer

  Figure 8-1 The Uniform Commercial Code

   

   

  • 286 Chapter 8: Contract Law

  crops and other identified things attached to realty as described in the sectio goods to be severed from realty (Section 2-107).” UCC § 2-105(1).1

  If the situation does not involve a contract for the sale of goods, Arti of the UCC does not apply at all. Therefore, it does not apply, for example. – employment or service contracts. One area of confusion is the mixed sen · goods situation. For example, assume you go to a beauty parlor to have . hair dyed. Are you there to purchase the services of the beautician or to chase the dye? In those situations the court will try to determine which ele predominates-the service or the sale of the goods. Only if the court perce· the transaction as being principally for the sale of goods will it apply the ucr-

  As the UCC was specially developed to make the commercial world m uniform and efficient, there are special rules that apply only to merchants. F- example, a merchant’s obligation of good faith includes “honesty in fact — the observance of reasonable commercial standards of fair dealing in the trace UCC § 2-103(b). Therefore, merchants are expected not only to deal hones: but also to be aware of the normal business practices for their trade.

  A merchant is someone who 1. deals in the goods that are the subject of the contract, or 2. “holds himself out as having knowledge or skill peculiar to the practi

  or goods involved” in the contract, or 3. employs someone who has such knowledge and skill. Under this l

  standard the employee’s knowledge and skill are then attributed to — employer. UCC § 2-104(1).

  Notice how broad this definition is. Normally we would all think of :-..::.= person referred to in the first definition as a merchant. However, under the se.:– ond definition even someone with a great deal of knowledge in an area, such – a law professor who as a hobby also happens to be a knowledgeable collecro: of antiques, could be declared a merchant when dealing in the sale or purcb:->~= of antiques. Finally, notice under the third definition that a person will also ~­ considered a merchant if that person employs someone who meets the secor::.:. definition.

  Therefore, in summary, whenever you are faced with a contract situatio- first ask yourself, Does this contract deal with the sale of goods? If the answ is yes, then ask whether either or both of the parties c;m be classified as a me:- chant. If yes, then be sure to check the special provisions that apply only : merchants. Finally, keep in mind the UCC’s overall commitment to ensuring all parties act in good faith and in such a way as to promote the expansion ~ ­ commerce. See Figure 8-2.

  1When you run across terms such as “things in action,” first consult the definitions section to see whe:· the UCC has defined the term. If not, refer to a standard legal dictionary. In this case a thing in a also known as a chose in action, means a right to sue.

   

   

  Yes; the UCC applies.

  ‘es; check the specific provisions at apply only to merchants.

  8-2 Does Article 2 of the UCC Apply?

  B. Types of Contracts

  No; the common law applies.

  No; remember, however, that the obligation of good faith, “honesty in fact,” applies to everyone.

  – e Uniform Commercial Code as revised through 2012 can be found on the ternet at: www.law.cornell.edu!ucc.

  ~PES OF CONTRACTS

  • ou may recall from Chapter 3, for a contract to be valid there must be an an acceptance of the offer, and consideration; that is, something of value be exchanged. However, before proceeding with our discussion of the ele-

  :s of a binding contract, we need to mention the various ways in which ..oo.!.L.S classify contracts. Contracts can be either bilateral or unilateral, express

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  • 288 Chapter 8: Contract Law

  or implied in fact, formal or informal, executed or executory, and valid, voi voidable, or unenforceable. These are mutually exclusive terms. A contract ·~ always either bilateral or unilateral, and either express or implied in fact , an.: either formal or informal, and either executed or executory, and valid, voi voidable, or unenforceable.

  A bilateral contract is one where a promise is exchanged for a promise. In a unilateral contract a promise is exchanged for an act. For example, I say to yo “I promise to pay you $5 if you will promise to mow my lawn.” If you repl, “O.K., for $5 I promise to mow your lawn,” we have formed a bilateral contrac: However, if I say, “I promise to pay you $5 if you will mow my lawn,” I haP’ made an offer for a unilateral contract. I promise to pay in return for your a of mowing the lawn. This may seem like a lot of quibbling over a difference tha- should not matter, but it can matter if both parties do not fully perform. In the first case we have a completed contract: an offer, an acceptance, and somethin of value to be exchanged. Both parties are bound to perform. In the second situ~ ation, however, we only have an offer. Acceptance cannot come except by doin'”‘ the act of mowing. The question is, does simply starting the act of mowing ere~ ate an acceptance, or must the entire job be completed before the acceptance is finalized? For example, if you begin mowing my lawn, am I free to take back m. offer, or do we at that point have a binding contract? The traditional view is tha: we do not. I am free to withdraw my offer at any time up until the act is com~ pleted. Because of the obvious unfairness of that approach, the more moderr. view states that once substantial performance has begun, the contract is binding. The obvious question is, what constitutes substantial performance? That mus: be determined on a case~by~case basis.

  Contracts can also be express or implied in fact. Express contracts are formed through words, either oral or written. Implied~in-fact contracts are formed through conduct. For example, if you say to Susan, “I would like to sell you my watch for $10,” and Susan says, “I accept,” through your words you have formed an express contract. On the other hand, assume you go to the college bookstore. There is a long line at the cash register, and you are late for class. You grab a candy bar, wave it at the cash register clerk, and put 50 on the counter. The clerk nods and picks up the 50¢. No words were spoken. but by your acts and those of the clerk you have formed an implied-in-fact contract.

  Third, contracts can be either formal or informal. For most contracts today there are no special formalities that must be followed. Therefore, most contracts are classified as informal. There are a few exceptions, however. Certain contracts. such as those that transfer real estate, still require certain formalities. Other for- mal contracts include those under seal; a recognizance, which is an acknowledg- ment in court that a person will pay or act; negotiable instruments, such as a check; and letters of credit. All other contracts are classified as informal.

  Once the parties have exchanged binding promises, a contract has beer: thrmea~ Ontii’ 1hhfn1)rpen6rmelf, Ihs-cmrn~ rtJ r.h::t:x:et11ltJly: ~R”C” Jm’ sides have fully performed, it is said that the contract has been executed. Be care- ful here. Executed also has another meaning in contract law: that a contract has been signed.

   

   

  C. The Elements of a Binding Contract

  a~ral or Uni lateral and

  :: ess or Implied in fact and – – al or Informal and – =. ~ tory or Executed and

  =- d or Void or Voidable I or I Unenforceable 8-3 Contract Classifications

  Finally, most contracts are classified as valid, having all the essential de- needed for a binding agreement. If a court finds, however, that the con-

  – is for an illegal purpose, it will be declared void. In certain circumstances, -e of the parties was under a disability, such as being a minor, when he or ~gned it, the court will say that the contract is voidable at the option of that

  Finally, there are times when two parties have entered into a perfectly – ;::ontract, but because of a procedural error, such as the passage of the stat- : limitations or the failure to put the contract in writing, the court will say

  ;::ontract is unenforceable. Each of these possible contract classifications is arized in Figure 8-3.

  CUSSION QUESTION

  1. We all enter into contracts every day. Think back over the past week, – i st all the contracts that you have entered into.

  THE ELEMENTS OF A BINDING CONTRACT

  tract can be either oral or written, but in order to be considered valid, each – three key elements must be present:

  1. An offer must be made, 1. an acceptance must be given, and 3. something of value must be exchanged (consideration).

  e writers list only two elements: an agreement and consideration. In such ulations an agreement is defined as both an offer and an acceptance, and

  S”ideration is defined as the exchange of something of value. It is important to clearly distinguish a contract from a gift. A gift may also ve an offer (someone offers to give you something), an acceptance (you

  r nd that you would like the gift), and the passage of something of value ~gift itself). The difference is that in a gift situation the consideration is one-

  . Only one of the parties receives something of value. On the other hand, a. ontract situation each party gives up something of value. Because of this

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  difference, a contract is completed and binding on both parties once the parti have reached their agreement. However, a gift is not completed until the thing c~ value is actually delivered. This difference becomes important if one of the pa:- ties tries to take back a promise. In a contract situation the taking back of ci: promise creates a right in the other party to sue for breach of contract. In a ~ situation, prior to delivery of the gift, the giver is free to take back the pronlli~ with no legal consequences. Consider the situation we described at the begillili::..:, of the chapter.

  Sometimes in analyzing contract situations it is helpful to diagram th~ The arrow indicates something of value passing from one party to the other.

  Offers Made on Monday

  Mickey Mouse watch

  ~ 1. Ji l l (offeror) Sally (offeree) ~

  $100

  $150

  ~ 2. Mike (offeror) jill (offeree) ~

  Mickey Mouse watch

  Old watch

  ~ 3. Mike (donor) Sally (donee)

  Actions Taken on Tuesday

  Jill does not sell her watch to Sally.

  jill sells her watch to Mike.

  Mike does not give Sally his watch.

  Looking at the first situation between Sally and Jill we see there was — agreement to exchange something of value. Recall that to form a binding tract, there must be an agreement to sell. Jill said she would sell the watch : $100 (an offer) and Sally said, “I agree” (an acceptance); also, somethin. value must be exchanged: Sally was going to give $100 in return for the Mi- ·- Mouse watch. Therefore, Sally and Jill had a binding contract. By selling watch to someone else Jill is in breach of contract. Sally is entitled to the beG- of her bargain. However, it is unlikely that the court would order Jill to set.: watch to Sally. Such an order for specific performance occurs only when the i- is unique. Instead Sally would be entitled to money damages. In this case she – purchase a similar watch, and if it costs more than the $100 she had agreoc – spend, she can recover that difference.

  The second situation illustrates a fully executed contract. Mike made – offer, Jill accepted, and they agreed to exchange something of value. A bin..: – contract was formed. Then when they fulfilled their promises, the contract fully executed.

   

   

  C. The Elements of a Binding Contract

  – rhe third situation, involving Sally and Mike, there was no contract. _.: not agree to exchange anything with Mike. Mike simply offered to

  y his old watch. For a gift to be complete, however, delivery must occur. ~~;e :’viike never handed Sally the watch, there was no completed gift, and

  no rights to Mike’s watch. ~ e courts treat these situations so differently because in a contract nego- – oth parties give up something of value. In the second situation, however,

  -.msaction is one-sided. Because gift givers receive nothing in return, they .: be allowed time to reconsider up until actual delivery. The delivery then -es proof that there was intent for a gift to occur .

  .. er and Acceptance

  -.:.er for a valid contract to be formed, there must be mutual agreement to ere- – egally binding relationship. Whether there is a valid offer and acceptance is ~ed by the objective theory of contract. An objective theory means that ~arries’ intent is determined by whether an outside observer could discern a

  :::.s intent to be bound. A subjective theory would ask what the parties actu- -=:-ended. Therefore, the objective theory calls for a review of what was said, :he offeror acted, and the circumstances rather than of what the parties

  – they were thinking at the time.

  a. Offer

  .\n offer is a promise to do something-for example, to sell a product :-::-ovide a service-that is conditioned on the other party’s promising to do ~.hing in return-for example, to pay money or provide some other type of …;_ or services. The offer sets the parameters of the agreement and gives the ~~ party the power to bind them to a contract.

  ometimes it rna y be difficult, however, to determine whether a statement :- was an offer. For example, it could merely have been an expression of

  -=:tention to enter into further negotiations. In other circumstances a person · g the statement might argue that the alleged offer was intended as a joke

  -er than as a serious offer. In all situations, for an offer to be valid, it must be ous to an outside observer that the offeror meant to be bound. In addition, the terms of the offer must be sufficiently definite so that a

  _ can fashion a remedy. To be definite, the offer must contain at least the wing four items:

  1. the parties, 2. the subject matter of the contract, 3. the price, and 4. the time for performance.

  When the time for performance is very important to the parties, as in the ~of the sale of perishable fruit, then the time for performance may be stated g with the phrase “time is of the essence.”

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  Finally, and perhaps obviously, the offer must be communicated to c~ offeree. Usually, this last requirement does not present any problems except ·- the case of rewards. Some courts have held that if a person fulfills the terms c- a reward-for example, returning a lost dog to its owner-without knowi:.= beforehand of the reward, that person cannot claim the reward, as it was ne\-.~ communicated to him or her.

  (1) Statements of intent and preliminary negotiations

  Problems can arise if the offeror uses words that indicate an intention :: begin negotiations but no intention to be bound. For example, assume Sam says. “I am thinking of selling my car. What would you give me for it?” If John replies “I will give you $750 for it,” Sam has made only a statement of intent, not ~­ offer. John’s reply is the offer, and it is up to Sam whether he wants to acce;- or not. When an offeror asks, “Will you buy?” or says, “I plan to sell,” this als gives rise to the inference that the offeror was only beginning the process negotiation but was not yet ready to be bound by the statements.

  (2) Terms definite

  The courts require that the basic contract terms be definite not only as ::: basis on which they can fashion a remedy but also as evidence that a bargain “z…. truly struck. For example, assume Sam says, “I want to sell my car,” and ]o::. replies, “Done!” There is no contract. How can either Sam or John be bounc – neither knows the price? Similarly, ads are usually not viewed as offers becau_•c.: their terms are too indefinite to constitute an offer. The following case, howe’:’~ presents an interesting exception to that rule. As you read the case, look for wL- differentiated this ad from the usual ad.

  This case grows out of the alleged refusal of the defendant to sell to the plaintiff.a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April6, 1956, the defendant published the follow- ing advertisement in a Minneapolis newspaper:

  On April 13, the defendant again publishee an advertisement in the same newspaper as follows:

  “Saturday 9 A.M. 2 Brand New Pastel Mink 3-Skin Scarfs Selling for $89.50

  Out they go Saturday. Each $1.00 1 Black Lapin Stole

  Beautiful, worth $139.50 $1.00

  First Come

  “Saturday 9 A.M. sharp 3 Brand New

  Fur Coats Worth to $100.00

  First Come First Served

  $1 Each” First Served”

   

   

  C. The Elements of a Binding Contract 293 •

  The record supports the findings of the court – on each of the Saturdays following the pub-

  on of the above-described ads the plaintiff e first to present himself at the appropriate

  –er in the defendant’s store and on each occa- – emanded the coat and the stole so advertised – · dicated his readiness to pay the sale price of

  On both occasions, the defendant refused to e merchandise to the plaintiff, stating on the

  • occasion that by a “house rule” the offer was – ded for women only and sales would not be -..:e to men, and on the second visit that plaintiff =w defendant’s house rules.

  The trial court properly disallowed plain- -~s claim for the value of the fur coats since the – e of these articles was speculative and uncer-

  – The only evidence of value was the adver- ent itself to the effect that the coats were

  orth to $100.00,” how much less being specu- ·.-e especially in view of the price for which

  – ey were offered for sale. With reference to the -=er of the defendant on April 13, 1956, to sell

  – e “1 Black Lapin Stole … worth $139.50 … ” – e trial court held that the value of this article

  as established and granted judgment in favor of -e plaintiff for that amount less the $1 quoted

  7:;.rchase price. 1. The defendant contends that a newspa-

  advertisement offering items of merchan- – e for sale at a named price is a “unilateral .:.er” which may be withdrawn without notice.

  -e relies upon authorities which hold that . . such advertisements are not offers which

  ~ orne contracts as soon as any person to hose notice they may come signifies his accep-

  :ance …. Such advertisements have been con- ued as an invitation for an offer of sale on

  — e terms stated, which offer, when received, ::tay be accepted or rejected and which there- : re does not become a contract of sale until a. ·cepted by the seller; and until a contract has

  SE DISCUSSION QUESTIONS

  been so made, the seller may modify or revoke such prices or terms.

  The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in posi- tive terms in return for something requested.” 1 Williston, Contracts (Rev. ed.) § 27 .

  The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract … .

  Whether in any individual instance a newspa- per advertisement is an offer rather than an invita- tion to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff having success- fully managed to be the first one to appear at the seller’s place of business to be served, as requested by the advertisement, and having offered the stated purchase price of the article, he was entitled to per- formance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

  2. The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bar- gains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after accep- tance, to impose new or arbitrary conditions not contained in the published offer.

  Affirmed.

  1. Why did the court hold that in this case there was a binding contract for ~ black lapin stole?

  2. Why was there no binding contract for the fur coats? 3. On the plaintiff’s first visit the store informed him of its “house rule” limiting

  ~offer to women. Why didn’t the court find that term to be part of the second offer?

   

   

  • 294 Chapter 8: Contract Law

  • By offeror’s revocation Unless option con- tract or merchant’s firm offer

  • By offeree’s rejection or counteroffer

  • By operation of law

  Figure 8-4 Termination of an Offer

  Requirements contract A contract in which one party agrees to buy all its requirements for a particular product from the other party.

  Output contract A contract in which one party agrees to deliver its entire output of a particular product to the other party.

  Option contract A contract in which the buyer gives the seller consideration to keep the offer open for a stated period of time.

  Merchant’s firm offer An offer made by a merchant in a signed writing that assures the buyer the offer will remain open for a specific period of time. It does not require consideration to be binding.

  The Lefkowitz case is an example of an ad that fulfilled all the require- ments for a valid contract by including the four basic terms: (1) the parties: (2) the subject matter of the contract, especially quantity; (3) the price; and (4 the time for performance. Traditionally, when any of these terms is missing, the courts have refused to find a binding contract. For example, assume Sara states to Judy, “I would like to purchase some TVs from you,” and Judy says, “Agreed.” If Judy then sells Sara only two TVs, a court would have no basis for deciding if Judy has breached their agreement. “Some TVs” is simply too indefinite.

  The UCC has made some major changes in this area of the law. Under the UCC a contract can be formed even if there are missing terms. The missing terms are supplied by the UCC itself. For example, a missing price term becomes a reasonable price. UCC § 2-305(1). If time and place of payment are left out, payment is due at the time and place where the buyer is to receive the goods. UCC § 2-310(a). If the delivery term is left open, it is to be the seller’s place of business. UCC § 2-308(a). However, if too many terms are missing, this may show that the parties were still only in the preliminary negotiation stage. In that situation the court will not force a contract on the parties. In addition, quantity must always be included in the contract. Therefore, in the example given above even the UCC could not help Sara. With the quantity term missing there is no way of knowing whether Judy was in breach.

  There is one exception when a missing quantity term is not fatal: require- ments and output contracts. When a buyer agrees to buy all of a commodity that he requires from a specific seller or a seller agrees to sell all of her output to a particu- lar buyer, a requirements or an output contract has been created. UCC § 2-306(1). Even though the quantity is not stated in the contract, it can be determined by the court. A requirements contract means the buyer’s actual requirements, not just what it ordered, and an output contract means the seller’s actual output. Therefore, the quantity is based on an objective standard, enforceable by the court.

  (3) Termination of an offer

  An offer can be terminated in one of three ways: by the offeror’s actions, by the offeree’s actions, or by operation of law. See Figure 8-4. First, normally the offeror can revoke the offer by words or acts if done before acceptance. In some cases this notice of revocation can be indirect, such as by selling the item to a third party. A revocation terminates the offer as soon as the offeree learns of it.

  An exception is the option contract. In an option contract the potential buyer give.s the seller consideration, usually money, to keep the offer open for a stated time period. This creates a separate contract between the potential buyer and seller. The buyer gives the seller consideration for keeping the offer open. If during that time period the seller sells the product to someone else, the seller is in breach of contract.

  In addition to the option contract, the UCC provides for a merchant’s firm offer. A merchant can make an offer that is irrevocable for a reasonable time, even without the requirement of additional consideration. For such a firm offer to occur, the following requirements have to be met:

  1. The offer has to be made by a merchant 2. in a signed writing

   

   

  C. The Elements of a Binding Contract 295 .

  ~ :hat assures the buyer that the offer will remain open for a specific period of time or, if no time is stated, for a reasonable time.

  requirements are met, then the merchant must keep the offer open even _ – e buyer has not paid any consideration for the arrangement. UCC § 2-205. – ond, the offeree can terminate the offer by rejecting it or by changing

  of the bargain by attempting to add new or different terms. Instead of –.. ~ tance, such an attempt to vary the terms is seen as a rejection of the offer – ·ounteroffer. This allows the original offeror the chance to accept or reject

  – requirement that the acceptance completely agree with the terms of the – known as the mirror image role. That rule and its exceptions under the are discussed more fully in the next section on acceptance. -:lllrd, offers can be terminated by operation of law. By operation of law we

  :: ~ mean that certain events will make it impossible for the offeree to accept ..:;er. These include lapse of time, destruction of the subject matter, death of ; the parties, and supervening illegality. As to lapse of time, frequently the dlcludes a specific time frame within which the other party must reach a on about accepting or rejecting the offer. If the other party has not accepted ~at date, it is automatically withdrawn. If no specific time limit is estab- ·_ it is assumed to be valid for a reasonable period of time. As you would

  : . that phrase is open to interpretation and will vary depending on the cir- -:ances. For example, if Sam offers to sell John his car in a face-to-face meet-

  – a reasonable time might last only until the end of that meeting. However, if and John live in different states and Sam makes his offer by mailing John a

  _a reasonable time might be at least as long as it would take John to receive errer and mail his reply.

  b. Acceptance

  Once an offer is made, it is up to the other party to accept, reject, or pro- -.. a counteroffer. Earlier we saw that in a bilateral contract situation the offer

  es acceptance by the offeree giving a return promise and that in a unilateral act the offer invites acceptance only by the offeree doing the act itself. In ercial dealings, however, if the offeror indicates that either a promise to act

  e action itself will suffice, then when either the promise is made or a substan- STart is made on the act, the contract is formed. The UCC explicitly states that

  offer can be accepted either by sending notification of such acceptance or by ~ rming the act requested. If Alice offers to pay Bruce $10 for Bruce’s bicycle, ·e’s acceptance can take the form of making a telephone call stating that he sell her the bicycle or by delivering the bicycle to her. UCC § 2-206(b). If the offeree decides to accept, then the mirror image rule requires that

  acceptance exactly mirror the offer. The offeree cannot add new terms or _,. the original terms. If he or she attempts to do so, the acceptance becomes a :!:lteroffer. A counteroffer takes away the power of the offeree to then accept

  original offer. For example, if Johns states, “I accept; please send a written ~:::ract,” then there is an acceptance. However, if John says, “I accept if you

  …. a written contract,” then there is no acceptance because John has added an · – ·rional term to the contract. A mere inquiry as to the possibility of changing

  Mirror image rule The requirement that the acceptance exactly mirror the offer or the acceptance will be viewed as a counteroffer.

   

   

  • 296 Chapter 8: Contract Law

  the terms usually will not be seen as a counteroffer. Here again the exact lan- guage used can be determinative of whether there was a counteroffer. If San: offers to sell John his guitar for $200 and John replies, “I will give you $150 fo: the guitar,” that is a counteroffer. If, however, John replies, “Would you conside: $150?” that will probably not be seen as a counteroffer, and if Sam says no,Johr. still has the power to accept the original offer.

  The UCC has made some major changes to this mirror image rule. Basically. the UCC states that if the parties intend to make a contract, then the use of addi- tional or different terms in the acceptance will not prevent the contract from being formed. This provision recognizes that often the parties will assume they have made a contract and will act on that assumption even if the offer and accep- tance do not match in every detail. It was also included in response to what i known as the “battle of the forms.”

  In commercial dealings it is usual for both buyers and sellers to use their own preprinted forms, with blanks left to fill in the essential terms, such as quantity and price. These forms also often include a great deal of boilerplate language regarding other terms, such as whether in the case of a dispute the matter is to be sent to arbitration. Generally, the court will find that a contract exists even though the parties disagree as to some of the terms. Initially, the new terms are viewed as suggestions for addition to the contract. Between merchants they become a part of a contract unless the original offer limited acceptance to its terms, the new terms “materially alter” the contract, or the offeror objects to the terms. However, there will be no contract if the acceptance states that the offeror must agree to the new terms. UCC § 2-207. Figure 8-5 presents a flow chart showing how a court would analyze the effect of new or different terms.

  Materially alters

  Between merchants?

  Other party objects

  Figure 8-5 The UCC and Additional Terms

  Contract

   

   

  C. The Elements of a Binding Contract 297 •

  In the following case, the defendant learned the hard way that under the – on law changes in the terms of the offer revoke the original offer.

  The Melvins own real property in Mcintosh :=ounty ….

  On February 16, 2011, Ehlen sent — e Melvins a document entitled “Purchase _-…greement,” offering the Melvins $850,000 for -· e property. The agreement provided the clos-

  g of the sale of the property would occur on r before March 1, 2011, and the total amount

  ;or the purchase would be paid on or before – e closing date. Ehlen also attached a one-page .::ocument entitled “Amendment to Purchase _.greement,” which itemized a list of additional -“‘rms. Ehlen had signed the documents.

  On February 18, 2011, the Melvins ::-eviewed Ehlen’s offer with their attorney. The _.1elvins modified some of the terms on the 2.greement, including the correct spelling of _ynnDee Melvin’s name and the legal descrip- ~on of the property. The Melvins also added

  ultiple terms to the purchase agreement and -· e amendment, including that the property was _eing sold “as is,” that the mineral rights con- eyed by them were limited to only those rights

  -· ey owned, and that the land was subject to a :ederal wetland easement and an agricultural _ease. The parties had not previously negotiated – e added terms. The Melvins hand-wrote all i the changes on the documents they received

  ::om Ehlen and they initialed each change. The _ 1elvins signed the documents and sent them _ ck to Ehlen.

  Ehlen did not contact the Melvins after they sent the documents back to him …. The Melvins .:ontacted the title company on March 1, 2011, 2:ld learned Ehlen had not paid the money for the .,.:operty or initialed the amendments the Melvins

  de. The Melvins’ attorney sent Ehlen a letter

  dated March 2, 2011, to confirm that the “trans- action started and contemplated between [Ehlen] and [the Melvins] is hereby terminated.”

  Ehlen sued the Melvins to enforce the “Purchase Agreement,” alleging it was a binding and enforceable contract.

  A party suing for breach of contract has the burden of proving the existence of a contract, breach of the contract, and damages ….

  The acceptance of a contract must comply with the terms of the offer. The acceptance of a contract must be absolute and unqualified, and a qualified acceptance is a counter proposal. This Court has said:

  It is also equally well established that any counter proposition or any deviation from the terms of the offer contained in the acceptance is deemed to be in effect a rejection, and not binding as an acceptance on the person making the offer, and no contract is made by such qualified acceptance alone. In other words the minds of the parties must meet as to all the terms of the offer and of the acceptance before a valid contract is entered into. It is not enough that there is a concurrence of minds of the price of the real estate offered to be sold.

  Greenberg v. Stewart, 236 N.W.2d 862, 868 (N.D. 1975).

  Here, the “Purchase Agreement” and “Amendment to the Purchase Agreement” the Melvins received was an offer from Ehlen to purchase the property. Although the Melvins signed the agreement . . . the Melvins made substantive changes and additions to the agree- ment and the parties did not agree upon the essential terms …. To form a contract, the offer and acceptance must express assent to the same

   

   

  • 298 Chapter 8: Contract Law

  thing …. We conclude the evidence supports the … finding that the parties did not agree to the essential terms of the agreement and the Melvins’ modifications to the agreement consti- tuted a counteroffer.

  Ehlen contends the Melvins accepted the agreement and it is a binding contract because the agreement stated, “THIS IS A LEGALLY BINDING CONTRACT BETWEEN BUYERS AND SELL- ERS.” However, the Melvins made material changes and added new terms to the agreement and the par- ties did not sign the same agreement. [T]he use of the words that a document is “a legally binding con- tract” does not mean that a contract exists.

  Ehlen also argues he accepted any counter- n offer the Melvins made …. “It is a general rule

  of law that silence and inaction, or mere silence or failure to reject an offer when it is made, do not constitute an acceptance of the offer.” Ehlen did not sign the modified agreement or initial the changes. There was no evidence he complied with the terms of the agreement …. The evidence sup- ports the … finding that Ehlen did not accept the Melvins’ counteroffer.

  We conclude the evidence supports the … finding that a contract between Ehlen and the Melvins to purchase the Melvins’ real property did not exist.

  CASE DISCUSSION QUESTIONS

  Quasi-contract Although no contract was formed, the courts will fashion an equitable remedy to avoid unjust enrichment.

  1. What were Ehlen’s arguments for why he thought a contract had been formed?

  2. Why did the court reject those arguments? 3. Do you think if this case had been governed by the UCC instead of

  common law that the result would have been different?

  c. Quasi-Contract

  Quasi means “as if.” Therefore, a quasi-contract is not a real contract, but the situation is treated “as if” there was one. Usually, a quasi-contract situation arises when there is no agreement, but in order to avoid unjust enrichment, the court orders the party that benefited to pay. For example, in an emergency an injured party might not be able to ask for assistance. Therefore, there could be no agreement between the injured person and the doctor. However, once the doctor gives medical aid, it would be unjust to let the patient benefit without compen- sating the doctor. This is an example of a court using its equitable powers to do what it views as fair in order to avoid allowing one side to be unjustly enriched.

  Opionion of DEL SoLE, P.J. This lawsuit involves a commission sought by AmeriPro from Fleming. AmeriPro is an employment referral firm that places professional employees with interested employers. Fleming is a steel fabricator. In May of 1993, Elaine

  Fleming Steel Company (“Fleming”) appeals from the judgment entered against it, and in favor of AmeriPro Search, Inc. (“AmeriPro”). Upon review, we reverse.

   

   

  C. The Elements of a Binding Contract 299 •

  — :minger, an agent of AmeriPro, contacted ~ · g and inquired about Fleming’s need for

  — :essional employees …. Fleming was seeking – employee with an engineering background ….

  .\1s. Brauninger then contacted Mr. Kahn ~esident of Fleming]. . . . Mr. Kahn told Ms. .::.aninger that the fee would be as determined :.lin and AmeriPro only after an agreement to

  -e a candidate was made. Ms. Brauninger agreed old Mr. Kahn that she would work with him

  – – e amount of the fee. Ms. Brauninger thereaf- : -ent Mr. Kahn resumes of potential candidates – a copy of AmeriPro’s Fee Agreement.

  One of the candidates referred to Fleming ~- Dominic Barracchini …. Mr. Kahn inter-

  ed Mr. Barracchini on April 8, 1994. eming did not hire Mr. Barracchini because Mr. rracchini’s salary request was too high.

  In February of 1995, Mr. Barracchini was off and was again in the market for a job.

  ~ Barracchini called Ms. Brauninger to inquire ether Fleming was still trying to fill the posi-

  for which he had previously interviewed. Ms. = -auninger never got back to Mr. Barracchini _garding his inquiry. Mr. Barracchini then con- ~ed Fleming on his own. Mr. Kahn interviewed

  _ – Barracchini in June of 1995. Fleming hired -~ Barracchini as an engineer on June 19, 1995.

  On September 6, 1995, AmeriPro sent invoice to Fleming claiming entitlement to

  · 4,400.00 for placement of Mr. Barracchini with : “ming. Fleming refused to pay the demanded

  . AmeriPro then filed the instant action, claim- (1 entitlement to the commission fee.

  The trial court determined that there was no ::xpress contract. . . . The trial court did, how- – er, find that there was a contract implied in law, – a quasi-contract, in this case. It was on this

  is that the trial court ordered Fleming to pay _-.;neriPro the fee for placement of Barracchini.

  … We agree with the trial court that there as no express contract in this case because the

  .;arties never agreed to the terms of the fee. . . . e disagree, however, with the trial court’s deter-

  ~ · ation that there was a contract implied in law, -a quasi-contract.

  A quasi-contract imposes a duty, not as a result of any agreement, whether express or implied, but in spite of the absence of an agree- ment, when one party receives unjust enrichment at the expense of another. In determining if the doctrine applies, we focus not on the intention of the parties, but rather on whether the defendant has been unjustly enriched. The elements of unjust enrichment are “benefits conferred on defendant by plaintiff, appreciation of such benefits by defendant, and acceptance and retention of such benefits under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.” The most significant element of the doctrine is whether the enrich- ment of the defendant is unjust …. Where unjust enrichment is found, the law implies a quasi- contract which requires the defendant to pay to plaintiff the value of the benefit conferred ….

  We cannot find that Fleming was unjustly enriched in this case …. While it is true that AmeriPro and Brauninger first introduced Barracchini to Fleming and the available position, that connec- tion was broken when Fleming refused to hire Barracchini after the interview in April of 1994 ….

  Regardless of any benefit Fleming received by AmeriPro’s action of first introducing Mr. Barracchini to Fleming, the enrichment of Fleming was not unjust. Mr. Barracchini approached Fleming the second time on his own and the two parties came to an agreement regarding Mr. Barracchini’s employment without any involve- ment by AmeriPro. . . . Because Fleming was not unjustly enriched, we find that there was no quasi-contract, or contract implied in law. Thus, Fleming owes AmeriPro nothing in restitution.

  Judgment reversed. Dissent by TAMILIA, J. I would find that a quasi-contract to locate

  a suitable employee for Fleming existed and that despite the elapsed time and breakdown of nego- tiations in the intervening period, the contract was breached when the parties, introduced by AmeriPro, entered into an employment contract .

  Because Barracchini and Fleming did not meet by happenstance but as a result of the efforts of AmeriPro, I would affirm the judgment of the trial court.

   

   

  • 300 Chapter 8: Contract Law

  Consideration Anything of value; it must be present for a valid contract to exist, and each side must give consideration.

  CASE DISCUSSION QUESTIONS

  1. Why do you think the court found that there was no express con between AmeriPro and Fleming?

  2. What was the basis for the majority also finding that no quasi-con existed?

  3. Why did the dissent disagree?

  DISCUSSION QUESTION

  2. Much of contract law is based on the theory of freedom of contr that is, the parties are free to create their own contract terms as they, and :: the court, choose. How can you reconcile the courts’ equitable power to fin quasi-contract when no contract exists with the notion of freedom of contra ·

  2. Consideration

  Consideration must be present for a valid contract to exist. Each party must gi~e something of value as part of the bargain. It can be money, services, goods, r. – anything else that is a benefit to one party or a detriment to the other. The key — that something of real value has to be exchanged by both parties. In other wordS a contract must be distinguished from a gift. When a person promises to gi>: something without expecting to receive anything in return, that promise does not constitute an enforceable contract.

  At times it may appear as though something of value has been exchangec when in actuality it has not. For example, if someone promises to hire you an pay you “what you are worth,” the phrase is so vague as to make the promis”‘ illusory. In addition, if someone makes a promise because he or she feels morall. obligated to do so but receives nothing else in return, there is no consideratio11.. For example, assume Julie is friends with Martha. Martha feels ill but does no: have a doctor. Julie takes Martha to her doctor. Once Martha is cured, she refuses to pay the doctor bill. Julie may feel morally obligated to pay the bill because she took Martha to the doctor, but she is under no contractual obligation to do so.

  Also, past consideration will not support a contract. Assume I volunteer to take care of your cat while you are away on vacation. When you return, if you are very pleased with the job I have done and offer to pay me for my services, no contract has been formed. I have already done my job, and there is no new con- sideration for me to give in return for your promise. Finally, if someone is under a preexisting duty to act, performing that duty cannot serve as the consideration for a new contract. If your house is on fire and you offer a fire fighter $2,000 to put out the fire, you will be under no obligation to pay the money. The fire fighter is already under a preexisting duty to put out the fire.

  a. Detriment to Promisee or Benefit to Promisor

  Both parties must exchange something of value to ensure that the promise is not illusory and that it was bargained for. Whatever is exchanged has to be detrimental to the party giving it up or beneficial to the party receiving it. It need not be both. In the following classic case ask yourself whether the uncle meant to give his nephew a gift or to be bound to a contractual arrangement.

   

   

  C. The Elements of a Binding Contract 301 •

  Hamer v. Sidway 124 N.Y. 538, 27 N.E. 256 (1891)

  l\BUS:

  The plaintiff presented a claim to the execu- – of William E. Story, Sr., for $5,000 and inter-

  ::Tom the 6th day of February, 1875 …. The being rejected by the executor, this action

  :.s brought. It appears that William E. Story, :-. was the uncle of William E. Story, 2d; that at — ~ celebration of the golden wedding of Samuel : -ory and wife, father and mother of William ~ Story, Sr., on the 20th day of March, 1869, – rhe presence of the family and invited guests e promised his nephew that if he would refrain

  -om drinking, using tobacco, swearing and play- ..=g cards or billiards for money until he became _ enty-one years of age he would pay him a sum : 5,000. The nephew assented thereto and fully rformed the conditions inducing the promise.

  en the nephew arrived at the age of twenty- e years and on the 31st day of January, 1875,

  ~e wrote to his uncle informing him that he had ?Crformed his part of the agreement and had -· ereby become entitled to the sum of $5,000. -:-he uncle received the letter and a few days later = d on the sixth of February, he wrote and mailed 😮 his nephew the following letter:

  “Buffalo, Feb. 6, 1875.” W.E. Story, Jr.: “Dear Nephew-Your letter of the 31st ult. came to hand all right, saying that you had lived up to the promise made to me several years ago. I have no doubt but you have, for which you shall have five thousand dollars as I promised you. I had the money in the bank the day you was 21 years old that I intend for you, and you shall have the money certain. Now, Willie I do not intend to interfere with this money in any way till I think you are capable of taking care of it and the sooner that time comes the better it will please me. I would hate very much to have you start out in some adventure that you thought all right and lose this money in one year. The first five thousand dollars that I got together cost me a heap of hard work …. This money you have earned much easier than I did besides acquir- ing good habits at the same time and you are quite

  welcome to the money; hope you will make good use of it …. To-day is the seventeenth day that I have not been out of my room, and have had the doctor as many days. Am a little better today; think I will get out next week. You need not mention to father, as he always worries about small matters.

  Truly Yours,

  “W.E. STORY.

  “P.S.-You can consider this money on interest.”

  The nephew received the letter and thereaf- ter consented that the money should remain with his uncle in accordance with the terms and con- ditions of the letters. The uncle died on the 29th day of January, 1887, without having paid over to his nephew any portion of the said $5,000 and interest. OPINION:

  The question which provoked the most discussion by counsel on this appeal, and which lies at the foundation of plaintiff’s asserted right of recovery, is whether by virtue of a contract defendant’s testator William E. Story became indebted to his nephew William E. Story, 2d, on his twenty-first birthday in the sum of five thou- sand dollars ….

  The defendant contends that the contract was without consideration to support it, and, therefore, invalid. He asserts that the promise by refraining from the use of liquor and tobacco was not harmed but benefited; that that which he did was best for him to do independently of his uncle’s promise, and insists that it follows that unless the promisor was benefited, the contract was without consideration. A contention, which if well founded, would seem to leave open for controversy in many cases whether that which the promisee did or omitted to do was, in fact, of such benefit to him as to leave no consideration to support the enforcement of the promisor’s agree- ment. Such a rule could not be tolerated, and is

   

   

  • 302 Chapter 8: Contract law

  without foundation in the law. The Exchequer Chamber, in 1875, defined consideration as fol- lows: “A valuable consideration in the sense of the law may consist either in some right, inter- est, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibil- ity given, suffered or undertaken by the other.” Courts “will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or is of any substantial value to anyone. It is enough that something is promised, done, forborne or suffered by the party to whom the promise is made as consideration for the promise made to him.” (Anon’s Prin. of Con. 63.) …

  Pollock, in his work on contracts, page 166, after citing the definition given by the Exchequer Chamber already quoted, says: “The second branch of this judicial description is really the most important one. Consideration means not so much that one party is profiting as that the other abandons some legal right in the present or lim- its his legal freedom of action in the future as an inducement for the promise of the first.”

  Now, applying this rule to the facts befo:-:: us, the promisee used tobacco, occasiona:… drank liquor, and he had a legal right to do ~ That right he abandoned for a period of year~ upon the strength of the promise of the testc:.- tor that for such forbearance he would gi—= him $5,000. We need not speculate on tL effort which may have been required to gi~ up the use of those stimulants. It is sufficien- that he restricted his lawful freedom of actio:: within certain prescribed limits upon the fait~ of his uncle’s agreement, and now having ful: performed the conditions imposed, it is of moment whether such performance actua proved a benefit to the promisor, and the cour: will not inquire into it, but were it a proper su ject of inquiry, we see nothing in this record tha: would permit a determination that the uncle was not benefited in a legal sense.

  The order appealed from should be reversec and the judgment of the Special Term affirmed.. with costs payable out of the estate.

  CASE DISCUSSION QUESTIONS

  1. Why didn’t the court simply view the uncle’s offer to pay his neph $5,000 as a gift?

  2. If the court had decided it was a gift instead of a contract situation, ho would that have changed the result?

  b. Problems with Consideration

  Generally, the court will not look into the adequacy of the consideratio- Simply put, the court does not care if you made a poor bargain. The philosop~ behind freedom of contract is that you are free to niake any bargain you like even a bad one. In addition, if people could sue to get out of their contractu.::… obligations every time it turned out they had made a poor bargain, the co~ would be flooded with lawsuits. Finally, the security of being able to rely a- contractual performance would be gone.

  Traditionally, courts would look at the adequacy of the consideration oni. if it was so inadequate as to raise a question, first, as to whether some facto: such as undue influence or duress was affecting one of the parties or, second, as to whether the situation was actually one of a gift masquerading as a contract. I:: recent years the courts have also questioned the adequacy of the consideration i;:. those situations where the parties are of very uneven bargaining power, and th::

   

   

  C. The Elements of a Binding Contract

  is so unfair as to “shock the conscience.” For example, if a poor, illiterate -were to purchase a $300 freezer, agreeing to pay 24 monthly installments

  : each, the seller would net a $900 profit (24 x $50 = $1,200 – $300 = . The court might declare this an unconscionable contract and refuse to Unconscionable

  :::-e it. contract

  303 •

  The normal rule, however, is that a court will not invalidate a contract A contract formed : :15e one party turns out to have made a bad bargain. Nor will the court between parties of very

  the parties to renegotiate the terms of the contract, unless there is new con- unequal bargaining arion given on both sides, because of the preexisting duty rule mentioned power where the terms

  – er. Parties typically want to renegotiate the terms of their contract when are so unfair as to – -eseen difficulties arise before the contract is completed. The first hurdle “shock the conscience.”

  onvince the court that the unforeseen difficulties were truly unforeseen :.::er than the normal types of risks that should have been part of the original ~act negotiations. Even if the other party agrees to a change in the terms

  – e contract, it is often unclear why that party agreed. It is possible that that . also thought the changes in circumstances were unforeseeable and justi-

  .:: :he change. However, it is also possible that that party had no choice and .:..: effectively being “held up” by the party wanting the change. For example, :::ne Harry hired William to build his house. Halfway through shingling the ;William refused to continue work unless Harry agreed to increase the price -5,000. A major storm was approaching, and if the roof was not finished – day, the house would be severely damaged. Assume Harry agreed to the ~ease but then later refused to pay it. The court would have to determine -ether the storm was an unforeseen circumstance necessitating extra work on ~am’s part and thereby justifying the increase or whether it was just the sort

  – ::ircumstance that William should have foreseen. If the latter is true, then he .z.s already under a duty to finish the house at the agreed-on price, and the

  eowner would not be required to pay the additional $5,000. In the follow- – case, the court took the very firm position that there can be no change in a =c:ract without new consideration.

  The classic case illustrating this point is Alaska Packers’ Association v. _ cmzinico.2 A group of fishermen signed a written contract agreeing to work

  :::the season for $60. Once out to sea, they demanded that their wages be -eased to $100 or they would stop working. At that point in the season, it =- impossible for the fishing company to find other fishermen and so it agreed :he new terms. Once they returned to shore, the company refused to pay the ~eased amount and the court for the Ninth Circuit agreed that they did not e the additional money. The fishermen were already under contract and could

  – :force increased payment through such an act of coercion. Note: Once again the UCC has changed one of the common-law rules.

  ·=der the UCC, merchants can modify a contract with no new consideration g given. UCC § 2-209(1) .

  • – E 99 (9th Cir. 1902).

   

   

  • 304 Chapter 8: Contract law

  Promissory estoppel Occurs when the courts allow detrimental reliance to substitute for consideration.

  c. Promissory Estoppel

  Sometimes people rely on promises to their detriment, but they cannot sue for breach of contract because while promises were made, they were not definite enough to amount to consideration. Nonetheless, some courts think it would be unfair not to compensate the person who relied on the promise. In that situa- tion the promisor is estopped, or prevented, from revoking his promise. This is known as promissory estoppel or detrimental reliance. For the courts to find a case of promissory estoppel:

  1. a promise must be made with the intent to induce action, 2. it must do so, and 3. the court must believe that it would be unjust not to enforce the promise.

  Assume an elderly relative induces you to give up your job in order to care for her with the promise of being remembered in her will. Her promise would no- fulfill the requirements of valid consideration, as her promise of remembering you in her will is too indefinite to be enforceable. If, however, you give up your job and care for your relative for a number of years, the court might view your detrimental reliance on her promise as a substitute for consideration and enforce her promise to pay.

  The Wisconsin Supreme Court was one of the first to adopt the theory of promissory estoppel as an alternative to a breach of contract action. In the case of Hoffman v. Red Owl Stores, Inc.,3 Mr. Hoffman and his wife engagec in extensive negotiations with agents of the Red Owl grocery store chain in an attempt to obtain a Red Owl franchise, only to “have the rug pulled out from under them.” The agents had originally promised the Hoffmans that for $18,00C they could establish a store. The figure was then changed to $24,100. Relying oc further promises that the deal was about to go through and at the urging of the Red Owl representatives, Mr. Hoffman sold his own grocery store to raise the necessary money. While waiting to be placed in his new store, he began work- ing the night shift at a local bakery. Finally, the Red Owl representatives said · would take $34,000 to close the deal. At that point Mr. Hoffman informed theiL that he could not afford to go through with the proposal. Mr. Hoffman the sued Red Owl for the damages he had incurred in relying on the promises of i representatives.

  Because the negotiations had never gotten far enough for the parties rc establish the precise terms of the contract, such as the size, layout, and desi~ of the store, Mr. Hoffman was not able to sue on a breach of contract theory. He also could not sue for fraud. There was no evidence that the Red Owl repre- sentatives intended to misrepresent the facts. Relying instead on the doctrine o: promissory estoppel, the court stated that each of the following questions musr be answered in the affirmative:

  3133 N.W.2d 267 (Wis. 1965).

   

   

  E. Defenses to a Valid Contract

  _ …..-as the promise one which the promisor should reasonably expect to induce action -bearance of a definite and substantial character on the part of the promisee?

  _ :::>id the promise induce such action or forbearance? – Can injustice be avoided only by enforcement of the promise?4

  The court noted that the first two questions are issues of fact for the jury – :ide. The third question, however, involves a policy decision that must be -.,. y the court. In the Hoffmans’ case the court concluded that “injustice

  result here if plaintiffs were not granted some relief because of the failure – :endants to keep their promises which induced plaintiffs to act to their

  ent.”5

  CONTRACT INTERPRETATION

  -:!rimes, even though it is clear that there is an offer, acceptance, and consid- :an, thus creating a valid contract, the parties disagree about the legal effect

  – e contract’s terms. This is often due to the innate ambiguity of the English = age. When such differences in interpretation arise, the parties may turn to .:ourts for assistance.

  When asked to interpret ambiguous language, the courts generally follow – _ of the same guidelines that they use to interpret statutory language. A -r usually begins by trying to give the words their plain or common-sense

  · g. When that is not possible, the court will try to see if the meaning of -.:-ords can be deciphered from the parties’ intent as expressed in the con-

  – The court may also apply commonly accepted definitions from the relevant -:!Stry or business. Finally, the court may interpret the language so as to favor

  ~ arty who did not draft the contract.

  DEFENSES TO A VAll D CONTRACT

  ~ clition to offer, acceptance, and consideration, you will sometimes hear that – actual capacity, legality, and genuineness of assent are necessary elements

  a valid contract to be formed. While this is true, in this text we will treat last three elements as defenses. Generally, it is assumed that those ele-

  ts are present so the plaintiff has no obligation to allege their existence in omplaint. Rather it is incumbent on the defendant to raise their absence in

  = answer. First, the defendant can argue that one or both of the parties lacked -=:ractual capacity. Second, the defendant can contend that the contract should : be enforced because it is illegal or because it violates public policy. Third, :: defendant can assert that there was no true genuineness of assent because

  – :…aud, mistake, or undue influence. Fourth, the defendant may argue that he

  =::275.

  305 •

   

   

  • 306 Chapter 8: Contract Law

  Voidable A valid contract that can be set aside at the option of one of the parties.

  Disaffirm The ability to take back one’s contractual obligations.

  Necessaries Normally food, clothing, shelter, and medical treatment.

  or she owes nothing on a contract for sale because the product was defective ·- violation of the seller’s warranties. Finally, at times the defendant may be a to show that the proper format was not followed, as, for example, with some contracts that must be in writing.

  1 . lack of Contractual Capacity

  The parties to a contract can be either people or corporations. However, a:: individual may be considered incapable of contracting if that person is a chil is developmentally disabled or mentally ill, or is under the influence of drugs 07″ alcohol.

  a. Minors

  If one of the parties is a minor, the contract may be voidable. Therefore. the terms of the contract are enforceable against the adult party to the contract but not against the minor party. Under the common law one had to be at leas 21 years old in order to enter into binding contracts, but today many states have established a lower age limit.

  Minors can disaffirm a contract and thereby avoid any contractual liabil- ity at any time during their minority or for a reasonable time thereafter. If the contract involves the sale of goods, in a majority of states the minor must return the goods, but the minor does not have to fulfill the terms of the contract, even if the goods are damaged. In a minority of states the minor must act so as to return the other party to his or her position prior to the contract. Even if a minor misrepresents his or her age, in a majority of states the minor can still dis- affirm the contract. The one exception is that minors are liable for necessaries. Although they can disaffirm the contract, they must pay the reasonable value of the goods or services they received. Housing, food, and clothing are commonly classified as necessaries. However, what is “necessary” can vary with the cir- cumstances. For example, in one case a court held that a lease for an apartment was not necessary because the minor tenants were able to return home to their parents at any time.6

  Once minors reach the age of majority, they can ratify the contract, thereby binding themselves to the terms of the contract. This can occur by the minor expressly stating that he or she wishes to be bound, by the minor’s conduct, or by operation of law after a reasonable time has passed once the minor is of age.

  This. next case graphically illustrates how dangerous it can be for an adult to deal with minors.

  6Webster Street Partnership, Ltd. v. Sheridan, 368 N.W.2d 439 (Neb. 1985).

   

   

  – – ~- ~AY, J. Johnny M. Hays, by his next friend, Dr. D. J.

  – :.. brought this suit to disaffirm his purchase _Pontiac automobile and recover the purchase -,of $1,750 from defendant Quality Motors,

  On January 21, 1949,Johnny Hays, a minor n years old, went to the Quality Motors,

  – • to inspect and test a Pontiac car. When . Buttry, salesman for Quality Motors, raised uestion of Johnny’s age, he was told that

  — y’s father in New York had sent him the -ey to buy the car. The salesman then refused :”11 unless the purchase was made by an adult.

  y left the salesman and returned shortly Harry R. Williams, a young man twenty-

  -ee years of age, whom he met that day for the _ time. Johnny then gave to Quality Motors, – . a cashier’s check on the Citizens Bank of esboro, in the sum of $1,800 which was made able to him, in payment for the car. A bill of was made to Harry Williams. The salesman recommended a Notary Public who could

  ~. are the necessary papers for transferring title – e car to Johnny, and drove the two boys to

  for this purpose. Williams did transfer title, the Pontiac was delivered by the salesman

  ohnny at Arkansas State College, where Dr. – – ~s, Johnny’s father, was a teacher.

  When Dr. Hays learned of his son’s pur- e he called E. C. Perkins, one of the owners

  – uality Motors, Inc., on the night of January -. 1949. Perkins knew nothing of the transac-

  and suggested that Dr. Hays call the motor _ ~pany the next morning. On the morning : anuary 26, Dr. Hays talked to the salesman

  o had handled the transaction, and asked that :.:endant company take the car back. This the – · endant refused to do. No physical tender of

  E. Defenses to a Valid Contract 307 •

  the car was made; Johnny had it out of town. The car was returned to Jonesboro on January 26, when Dr. Hays had his son arrested; it was then stored in a hangar at Arkansas State College. On January 27 Dr. Hays again called Quality Motors, Inc., and was informed the car would not be taken back. He then went to the office of his attorney where he once more called Quality Motors, Inc., and was told by W. E. Ebbert, one of the owners, that they would not accept the car and return the consideration for its purchase, but would try to sell it for him if they could.

  On February 12, 1949, while Dr. Hays was out of town, Johnny found the car keys and bill of sale and took the car to Kentucky where his grandmother lived. On March 21, he returned to Jonesboro and asked Quality Motors for an esti- mate on repairs to the car which had been in a wreck. On this occasion he had an extended con- versation with Buttry and Ebbert, who tried to persuade him to leave the car there and not go back to Kentucky as he told them he planned to do at once. At this time Quality Motors was still refusing to accept the car and return the purchase price. The suggestion was that the car be left with them for repairs “until this thing is settled.” Johnny made a telephone call to his mother and immediately departed for Kentucky where the car was in a second and more serious wreck. At the time of trial the car was in Kentucky, subject to a repair bill for $557, and an attachment for $125, and not in running condition.

  The special chancellor ordered the plaintiff to return the car within seven days and with- held final decree until this was done. When the wrecked car was returned, recovery of $1,750 from defendant was decreed.

   

   

  • 308 Chapter 8: Contract law

  The law is well settled in Arkansas that an infant may disaffirm his contracts, except those made for necessaries, without being required to return the consideration received, except such part as may remain in specie in his hands.

  We do not find any merit in appellant’s contention that no proper tender of the car was made when appellee sought to disaffirm his purchase. The undisputed testimony shows that Dr. Hays and his attorney offered to return the car on several occasions, but were informed that appellant would not accept it. That it was not actually delivered to Quality Motors when the suit was filed is appellant’s own fault . The law does not require that a tender be made under circumstances where it would be vain and useless.

  Appellant’s most serious contention is that the plaintiff is liable for damages to the car which occurred while he was driving over the country, after he had slipped the car from its storage place

  and while the suit to disaffirm was pending. In order to obtain any relief on this score, it must be shown that plaintiff was guilty of conversion in taking the automobile. Conversion is the exer- cise of dominion over property in violation of the rights of the owner or person entitled to posses- sion. In advancing this argument appellant is in an inconsistent position. Until the court decreed return of the car and recovery of the consider- ation paid, plaintiff still had title to the car. One cannot be liable for conversion in taking his own property.

  Appellant knowingly and through a planned subterfuge sold an automobile to a minor. It then refused to take the car back. Even after the car was wrecked once, it was in appellant’s place of business, and appellant was still resisting disaffir- mance of the contract. The loss which appellant has suffered is the direct result of its own acts.

  The decree is affirmed.

  CASE DISCUSSION QUESTIONS

  1. What does the court say is the general rule about the right of minors to disaffirm contracts?

  2. What should this dealer have done differently in this case? 3. In general, how can merchants protect themselves in dealings with

  minors? 4. Some states simply require the return of the goods, no matter their

  condition. Others require that the adult be placed in the same position that he or she was in prior to the contract. Which approach do you think is better?

  b. ltJtoxication

  Intoxication is rarely used successfully to void a contract. The courts look with disfavor on this defense because the condition is self-inflicted. However, if the defendant can show the intoxication prevented him from understanding the import of his actions, a court might find that there was no meeting of the minds. In the next case notice how the defendant tried to raise two defenses: that he was intoxicated and that he was only playing a joke on his friend.

   

   

  _QL-\NAN, J., delivered the opinion of the court. This suit was instituted by W.O. Lucy and Lucy, complainants, against A.H. Zehmer

  – Ida S. Zehmer, his wife, defendants, to have .:ific performance of a contract by which as alleged the Zehmers had sold to W.O.

  —:- a tract of land owned by A.H. Zehmer in _ -widdie county containing 471.6 acres, more

  _ s, known as the Ferguson farm, for $50,000. . Lucy, the other complainant, is a brother of 0 . Lucy, to whom W.O. Lucy transferred a half

  -crest in his alleged purchase.

  W.O. Lucy, a lumberman and farmer, thus srified in substance: He had known Zehmer ~ fifteen or twenty years and had been familiar

  the Ferguson farm for ten years. Seven or _ ~ t years ago he had offered Zehmer $20,000

  ~ the farm which Zehmer had accepted, but – e agreement was verbal and Zehmer backed

  ·.On the night of December 20, 1952, around ~ t o’clock, he took an employee to McKenney,

  ere Zehmer lived and operated a restaurant, · · g station and motor court. While there he

  – ided to see Zehmer and again try to buy the “:”~ guson farm. He entered the restaurant and — ‘ed to Mrs. Zehmer until Zehmer came in. He

  — ed Zehmer if he had sold the Ferguson farm. =ehmer replied that he had not. Lucy said, “I bet

  u wouldn’t take $50,000.00 for that place.” =ehmer replied, “Yes, I would too; you wouldn’t _ ·e fifty.” Lucy said he would and told Zehmer : write up an agreement to that effect. Zehmer :nok a restaurant check and wrote on the back ~it, “I do hereby agree to sell to W.O. Lucy the

  “:”erguson Farm for $50,000 complete.” Lucy told · he had better change it to “We” because Mrs.

  =ehmer would have to sign it too. Zehmer then – re up what he had written, wrote the agreement .:.1oted above and asked Mrs. Zehmer, who was _. the other end of the counter ten or twelve feet

  E. Defenses to a Valid Contract 309 •

  away, to sign it. Mrs. Zehmer said she would for $50,000 and signed it. Zehmer brought it back and gave it to Lucy, who offered him $5 which Zehmer refused, saying, “You don’t need to give me any money, you got the agreement there signed by both of us.”

  The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three heifers.

  Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.

  Mr. and Mrs. Zehmer were called by the complainants as adverse witnesses. Zehmer testi- fied in substance as follows: . . .

  On this Saturday night before Christmas it looked like everybody and his brother came by there to have a drink. He took a good many drinks during the afternoon and had a pint of his own. When he entered the restaurant around eight-thirty Lucy was there and he could see that he was “pretty high.” He said to Lucy, “Boy, you got some good liquor, drinking, ain’t you?” Lucy then offered him a drink. “I was already high as a Georgia pine, and didn’t have any more better sense than to pour another great big slug out and gulp it down, and he took one too.”

  After they had talked a while Lucy asked whether he still had the Ferguson farm. He replied that he had not sold it and Lucy said, “I bet you

   

   

  • 310 Chapter 8: Contract Law

  wouldn’t take $50,000.00 for it.” Zehmer asked him if he would give $50,000 and Lucy said yes. Zehmer replied, “You haven’t got $50,000 in cash.” Lucy said he did and Zehmer replied that he did not believe it. They argued “pro and con for a long time,” mainly about “whether he had $50,000 in cash that he could put up right then and buy that farm.”

  Finally, said Zehmer, Lucy told him if he didn’t believe he had $50,000, “you sign that piece of paper here and say you will take $50,000.00 for the farm.” He, Zehmer, “just grabbed the back off of a guest check there” and wrote on the back of it. At that point in his testimony Zehmer asked to see what he had written to “see if I rec- ognize my own handwriting.” He examined the paper and exclaimed, “Great balls of fire, I got ‘Firgerson’ for Ferguson. I have got satisfactory spelled wrong. I don’t recognize that writing if I would see it, wouldn’t know it was mine.”

  After Zehmer had, as he described it, “scrib- bled this thing off,” Lucy said, “Get your wife to sign it.” Zehmer walked over to where she was and she at first refused to sign but did so after he told her that he “was just needling him [Lucy], and didn’t mean a thing in the world, that I was not selling the farm.” Zehmer then “took it back over there … and I was still looking at the dern thing. I had the drink right there by my hand, and I reached over to get a drink, and he said, ‘Let me see it.’ He reached and picked it up, and when I looked back again he had it in his pocket and he dropped a five dollar bill over there, and he said, ‘Here is five dollars payment on it.’ … I said, ‘Hell no, that is beer and liquor talking. I am not going to sell you the farm. I haye told you that too many times before.'”

  The defendants insist that the evidence was ample to support their contention that the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no bind- ing contract was ever made between the parties.

  It is an unusual, if not bizarre, defense. When made to the writing admittedly prepared by one

  of the defendants and signed by both, clear evi- dence is required to sustain it.

  In his testimony Zehmer claimed that he “was high as a Georgia pine,” and that the trans- action “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. It is contradicted by other evidence as to the condition of both parties, and rendered of no weight by the testimony of his wife that when Lucy left the restaurant she sug- gested that Zehmer drive him home. The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. It was in fact con- ceded by defendants’ counsel in oral argument that under the evidence Zehmer was not too drunk to make a valid contract.

  The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’s objection to the first draft because it was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the exami- nation of the title, the completeness of the instru- ment that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

  If it be assumed, contrary to what we think the evidence shows, that Zehmer was jesting about selling his farm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows that Lucy did not so under- stand it but considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as on himself. The very next day

   

   

  -: arranged with his brother to put up half the – oney and take a half interest in the land. The -=:- after that he employed an attorney to exam- -e the title. The next night, Tuesday, he was back – Zehmer’s place and there Zehmer told him for

  – e first time, Lucy said, that he wasn’t going to ~ and he told Zehmer, “You know you sold that

  ; ce fair and square.” After receiving the report .=u rn his attorney that the title was good he wrote

  Zehmer that he was ready to close the deal. Not only did Lucy actually believe, but also the

  _ “dence shows he was warranted in believing, that -e contract represented a serious business transac-

  and a good faith sale and purchase of the farm. In the field of contracts, as generally else-

  ere, “We must look to the outward expression : a person as manifesting his intention rather

  :::r:lall to his secret and unexpressed intention. ‘The -w imputes to a person an intention correspond-

  to the reasonable meaning of his words and :..::ts.’ ”

  SE DISCUSSION QUESTIONS

  E. Defenses to a Valid Contract 311 •

  An agreement or mutual assent is of course essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind .

  So a person cannot set up that he was merely jesting when his conduct and words would war- rant a reasonable person in believing that he intended a real agreement.

  Whether the writing signed by the defen- dants and now sought to be enforced by the com- plainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.

  Reversed and remanded.

  1. What did the court think was the appropriate test for determining -ether there was a serious intent to be bound?

  2. Specific performance is not an absolute right but rather a question of _ ·ry. Do you think it was “fair” to enforce this contract?

  3. The court stated: “Seven or eight years ago [Lucy] had offered Zehmer – 000 for the farm which Zehmer had accepted, but the agreement was verbal – Zehmer backed out.” Why was Zehmer able to back out of that agreement __ not this one?

  c. Menta/Incompetence

  Mental incompetence can cause a contract to be voidable, a situation analo- – :IS to that of minors. Also as is true with minors, the incompetent person none- ·-: ess remains responsible for the reasonable value of necessaries. However, if

  eone has been adjudged mentally incompetent and the court has appointed a _:::.ardian to handle the incompetent’s affairs, then that individual is without the

  7c1city to make contracts. Instead of being merely voidable, any contract the -ompetent individual tries to make is void. Only the guardian can enter into . “d contracts.

  Void contract A contract that is invalid even if it is not repudiated by either party.

   

   

  • 312 Chapter 8: Contract Law

  Covenant not to compete A promise not to compete within a given geographic area for a specific time period.

  Adhesion contract A contract formed where the weaker party has no realistic bargaining power. Typically a form contract is offered on a “take it or leave it” basis.

  2. Illegal Contracts and Those That Violate Public Policy

  Contracts can be declared unenforceable if they are found to be either illegal or against public policy. A contract involves illegality if it calls for behavior tha violates the criminal law, such as robbery, gambling, or prostitution. In addition, a contract will be seen as involving illegality if it violates a licensing statute that explicitly states that it is for the protection of the public, antitrust laws, or state usury laws. Contracts for an illegal purpose are void and cannot be enforced by either party. For example, usury laws regulate interest rates. A loan that imposes an interest charge that exceeds the legal limit is said to be usurious and therefore illegal.

  In addition, the courts hold that some contracts are unenforceable because they are contrary to public policy. For example, covenants not to compete by their very nature are against public policy in that they restrict the right of an individual to earn a living or they tend to decrease competition. However, they can also be a form of necessary business protection. For example, if a pharma- ceutical company expends a great deal of time and money training a chemist, the company will want the chemist to sign a noncompetition clause, promising not to work for another pharmaceutical plant for a certain amount of time after leaving employment with the first company. The courts are generally willing to enforce that type of covenant so long as

  1. it is tied to employment or to the sale of a business and 2. its terms call for a reasonable time and 3. a reasonable geographic area.

  A second type of contract that the courts may refuse to enforce as being against public policy is an adhesion contract. As you will recall from our dis- cussion of inadequate consideration, normally courts will adhere to the theory of freedom of contract and will not inquire into the fairness of the bargain. However, when a contract is formed between two parties of very unequal bar- gaining power and the contract is drafted by the party with the greater power and then presented to the other party, who has no opportunity to negotiate the terms, the court may view this as a contract of adhesion. The court may then hold that such a contract is unconscionable and refuse to enforce it. Generally, a contract is considered unconscionable if, in the context of general commercial practices and under the specific circumstances in which the contract was made, it is so one-sided as to be oppressive and grossly unfair. An example would be a sale to a low-income family who speaks little English where the contract is drawn up by the seller and includes a clause that disclaims all warranties that traditionally go with such a transaction.

  While the UCC holds that the terms of a contract that are unconsciona- ble cannot be enforced, it does not attempt to define unconscionability. UCC § 2-302. One must rely on court cases for specific application of the doctrine. The courts are more responsive to low-income consumers who raise this defense than they are to merchants who deal with other merchants.

   

   

  E. Defenses to a Valid Contract 313 •

  Third, some contracts contain provisions that purport to release parties · om all liability for their own negligence. These are known as exculpatory clauses. These clauses were discussed in Chapter 7, as they are frequently raised

  a defense in negligence actions. As we discussed there, the courts generally · favor such clauses and frequently refuse to enforce them.

  Finally, society’s changing mores, as well as advances in medical science, ave presented some interesting dilemmas to the courts. For example, courts have ~ently been confronted with the issue of whether to enforce a surrogacy con-

  act. They have also been asked to decide whether a contract regarding the “own- ership” of frozen embryos should be enforced. The argument against enforcement – that such contracts are against public policy. We will discuss these and similar

  _ roblems more fully in Chapter 11, which covers laws affecting the fami~y.

  3. Lack of Genuineness of Assent

  -~ we have seen, normally the courts apply an objective reasonable person stan- .iard in interpreting whether an agreement was reached between the parties. ;-Iowever, a court will not enforce a contract if one of the parties can convince – e court that there was no true “meeting of the minds” because of fraud, mis- :ake, undue influence, or duress.

  a. Fraud

  In order to prove fraud, it must be demonstrated that the other party made -rentional misrepresentations or intentional nondisclosures of material facts .::uring the course of the negotiations. Therefore, the four requirements for a .:efense based on fraud are as follows:

  1. an intent to deceive 2. regarding material facts and 3. justifiable reliance on the deception 4. that causes harm.

  A successful defendant can recover damages or ask that the contract be cinded. In addition, fraud can be brought under a tort theory, thereby creating

  –e possibility of also receiving a punitive damage award. For the reliance to be justified, it must be shown that the defendant did not

  ow of the fraud and had no way to find out. Note that the misrepresentations – t be material and that they must be made regarding a factual statement, not – rely opinion or sales puffery. It is expected that the reasonable person engaged – ontract negotiations will realize that she or he should not rely on opinions : on overblown sales statements that are obviously made simply as part of the ;..es pitch. However, in certain circumstances the opinion of an expert can be ewed as a fact when it is reasonable to rely on the opinion of an expert and e other party has no independent means of testing the statement’s validity. The ue of whether a dance student was justified in relying on the statements of a

  :…;.nee instructor is presented in the following case.

  Exculpatory clause A provision that purports to waive liability.

  Rescission The act of canceling the contract and returning the parties to the positions they were in prior to the contract having been formed.

   

   

  • 314 Chapter 8: Contract Law

  ,_ –·-__ ·_-_-._~_-__ -_—-__ · — __ — —·· __ ——–_- –_··–___ ._ .. ,_ …. “‘¥ ·-f;l:,~·~r-· ~-!l!; …. ‘-~~”‘~ ~”~-;t]’,£i!”,~~ ~~,”‘~i ,._, … , . ~~?l~~~t_r: \~;-· r{~?~W- –_ -~ ¥ ___ ,_-~-: ~~-;~_. f;-~~:Yt~:ri·fi\~il~~,~~;r~~~~~~!3!~l¥r ~~~;~~~jj~~~~r ··””‘\.•·” –·~-.-, ..•. · .•. -_. _ _…_. •·> ….. 212 s· … 2d .906″(ff:'”‘i;~ o· t ‘ Cf~ A*···-“‘• 1968)~’>!’ ,,,.. ··~”·” • ff_ … ;~4;~:t~£~’y:.”J~~·~j.;.J}!\.~\·;.;. :,;,: :~~~~~-~,~~;, <~~<-< ~-\ ‘” ;~- :,a,:~ … J~l,:.¥· ·· ,;,_,~p. P.· •l .:. ”.{!;i~1\~ :t-#~ii,· · · 4i:”~ ;tt~~i~-“‘·’·”‘·”-“‘”···”·:-c<1l:.:.7″””‘·’:’ • · <‘•’ ~-t.; “-‘<J·’!l·~fl£..~~-‘1>.~~'”‘- ~·}~fiiJ -~-A~. -~”•-·~7.”'”” , · ,.

  PIERCE, Judge. LILES, C.J., and MANN, J., concur. Defendant Arthur Murray, Inc., a corpo-

  ration, authorizes the operation throughout the nation of dancing schools under the name of “Arthur Murray School of Dancing” through local franchised operators, one of whom was defendant J.P. Davenport whose dancing estab- lishment was in Clearwater.

  Plaintiff Mrs. Audrey E. Vokes, a widow of 51 years and without family, had a yen to be “an accomplished dancer” with the hopes of finding “new interest in life.” So, on February 10, 1961, a dubious fate, with the assist of a motivated acquain- tance, procured her to attend a “dance party” at Davenport’s “School of Dancing” where she whiled away the pleasant hours, sometimes in a private room, absorbing his accomplished sales technique, during which her grace and poise were elaborated upon and her rosy future as “an excellent dancer” was painted for her in vivid and glowing colors. As an incident to this interlude, he sold her eight- hour dance lessons to be utilized within one calen- dar month therefrom, for the sum of $14.50 cash in hand paid, obviously a baited “come-on.”

  Thus she embarked upon an almost endless pursuit of the terpsichorean art during which, over a period of less than sixteen months, she was sold fourteen “dance courses” totalling in the aggregate 2302 hours of dancing lessons for a total cash outlay of $31,090.45, all at Davenport’s dance emporium ….

  These dance lesson contracts and the mon- etary consideration therefore of over $31,000 were procured from her by means and methods of Davenport and his associates which went beyond the unsavory, yet legally permissible, perimeter of “sales puffing” and intruded well into the forbid- den area of undue influence, the suggestion of falsehood, the suppression of truth, and the free exercise of rational judgment, if what plaintiff alleged in her complaint was true.

  All the . . . sales promotions, illustrative of the entire fourteen separate contracts, were procured by defendant Davenport and Arthur Murray, Inc., by false representations to her thar she was improving in her dancing ability, that she had excellent potential, that she was responding to instructions in dancing grace, and that they were developing her into a beautiful dancer, whereas in truth and in fact she did not develop in her danc- ing ability, she had no “dance aptitude,” and in fact had difficulty in “hearing the musical beat.” The complaint alleged that such representations to her “were in fact false and known by the defen- dant to be false and contrary to the plaintiff’s true ability, the truth of plaintiff’s ability being fully known to the defendants, but withheld from the plaintiff for the sole and specific intent to deceive and defraud the plaintiff and to induce her in the purchasing of additional hours of dance lessons.” It was averred that the lessons were sold to her “in total disregard to the true physical, rhythm, and mental ability of the plaintiff.” In other words, while she first exulted that she was entering the “spring of her life,” she finally was awakened to the fact there was “spring” neither in her life nor in her feet.

  The complaint prayed that the Court decree the dance contracts to be null and void and to be cancelled, that an accounting be had .. . . The Court held the complaint not to state a cause of action and dismissed it with prejudice. We dis- agree and reverse.

  The material allegations of the complaint must, of course, be accepted as true for the pur- pose of testing its legal sufficiency. Defendants contend that contracts can only be rescinded for fraud or misrepresentation when the alleged mis- representation is as to a material fact, rather than an opinion, prediction or expectation, and that the statements and representations set forth at length in the complaint were in the category of “trade puffing,” within its legal orbit.

   

   

  E. Defenses to a Valid Contract 315 •

  It is true that “generally a misrepresentation, ~ actionable, must be one of fact rather than

  inion.” But this rule has significant qualifi- ns, applicable here. It does not apply where

  respecting such facts, the law is if he undertakes to do so he must disclose the whole truth .. ..

  e is a fiduciary relationship between the par- – or where there has been some artifice or trick )oyed by the representor, or where the par-

  – do not in general deal at “arm’s length” as =understand the phrase, or where the represen-

  does not have equal opportunity to become 7 rrised of the truth or falsity of the fact repre-

  ecl. “A statement of a party having . . . supe- ~ knowledge may be regarded as a statement of

  – although it would be considered as opinion if -~parties were dealing on equal terms.”

  Even in contractual situations where a party – a transaction owes no duty to disclose facts

  in his knowledge or to answer inquiries

  E DISCUSSION QUESTIONS

  We repeat that where parties are dealing on a contractual basis at arm’s length with no ineq- uities or inherently unfair practices employed, the Courts will in general “leave the parties where they find themselves.” But in the case sub judice, from the allegations of the unanswered complaint, we cannot say that enough of the accompanying ingredients, as mentioned in the foregoing authorities, were not present which otherwise would· have barred the equitable arm of the Court to her. In our view, from the showing made in her complaint, plaintiff is entitled to her day in Court.

  It accordingly follows that the order dis- missing plaintiff’s last amended complaint with prejudice should be and is reversed.

  Reversed.

  1. Why did the court categorize the dance studio’s statements as “fact” –“r than “opinion”?

  2. Which facts do you think the court found particularly relevant in – · g that decision?

  3. What do you think would have kept the statements of the dance studio – e realm of mere “sales puffing”?

  b. Mistake

  Mistakes about facts can sometimes form the basis for rescinding a con- -:. If the mistake is bilateral, then both parties had a different concept of -:was to be included in the contract. Therefore, there never was a meeting

  – – e minds, and the failed contract can be rescinded by either. The classic case :illustrates this principle took place in England in 1864. A buyer purchased

  _ ‘pment of cotton from a seller, the cotton to be shipped on the Peerless. – – own to either party there were two ships named the Peerless, one to depart October and one in December. The buyer was thinking of the ship destined to _~e in October and the seller the other in December. Consequently, the seller – ot ship the cotton until December. By that time the buyer no longer needed – .::otton. The court held that because there never was a “meeting of the minds” 😮 which ship was intended, no contract had been formed and the buyer was :obligated to pay for the cotton/

  .:es v. Wichelhaus, 159 Eng. Rep. 375 (1864).

   

   

  • 316 Chapter 8: Contract law

  Warranty A guarantee, ma<le by the seller or implied by law, regarding the character, quality, or title of the goods being sold.

  Implied warranty of merchantability An implied promise that the goods being sold will be usable for the purpose for which they were sold.

  Usually, however, if the mistake is unilateral and only one party is mis- taken, both parties are bound. The only exceptions are if the other party knew or should have known of the mistake and if the mistake was the result of a mathematical error.

  Keep in mind that we are talking only about factual mistakes. Mistakes as to the value of the subject matter can never be the basis for rescission. For exam- ple, assume Joan contracts to sell her diamond ring to Bertha. Both think the ring is worth about $500, and they set $500 as the contract price. Later Bertha has the ring appraised and is delighted to learn that it is actually worth $5,000. Joan cannot ask to have the contract rescinded on the ground that she was mistaken as to the value of the diamond. On the other hand, if Joan had contracted to sell what she thought was a zirconium ring to Bertha and upon appraisal it turned out to be a diamond ring, some courts could see that as a mutual mistake as to a fact and allow the contract to be rescinded.

  c. Undue Influence

  Sometimes a party will try to avoid contractual obligations by arguing that undue influence was exerted by the other party. Generally, for a court to find undue influence there must first be a showing that a special relationship existed between the parties. Then, because of the special relationship, one party is in a position of trust and misuses that trust to influence the actions of another. Situations alleging undue influence are frequently brought by family members against caretakers of the elderly or ill.

  d. Duress

  A contract is also not valid if it was agreed to under duress rather than as a result of a truly voluntary action. The actions of the second party must be suf- ficient for the court to find that the first party was forced into the agreement. Duress is difficult to prove because the defendant must show that the pressure exerted was so great as to overwhelm his or her ability to make a free choice.

  4. Breach of Warranty

  Among the most frequently contested issues is the nature of the warranties involved in commercial transactions. In this context a warranty is a statement or representation, made by the seller as part of the contract of sale or implied in law, rega~ding the character, quality, or title of the goods being sold. If such war- ranted facts later prove to be untrue, the seller has an obligation to compensate the buyer for any losses incurred as a result of the misrepresentation.

  Under the terms of the UCC any contract of sale automatically includes a warranty of title, an implied promise that the seller owns the goods being offered for sale and that they will be delivered free from any security interest, lien, or encumbrance. UCC § 2-312. If the seller is a merchant, there is also an implied warranty of merchantability, an implied promise that the goods being sold will be usable for the purpose for which they were sold.

   

   

  E. Defenses to a Valid Contract

  1) Unless excluded or modified by section 2-316, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink ro be consumed either on the premises or elsewhere is a sale. (2) Goods to be merchant- able must at least be such as … (c) are fit for the ordinary purposes for which such goods are used.

  TC § 2-314. This is a warranty regarding the fitness of the goods for the ordi- ::..rry purpose for which these types of goods are used.

  When a more specialized use of the goods is communicated to the seller

  317 •

  .::~g the course of negotiations, an implied warranty of fitness is also created. Implied warranty of -cc § 2-315. This is a warranty regarding the fitness of the goods for that spe- fitness

  purpose. For example, if you go to a hardware store and ask the clerk for An implied promise that ~ ect:rical wiring and say nothing more, the wire will be warranted for its usual the goods being sold _ :rrpose of carrying household current. If instead you want the wire for outside will satisfy a special – , you tell the clerk your special purpose, and you rely on the clerk’s expertise purpose.

  – picking out the wire, then there will be an implied warranty of fitness for that -articular purpose.

  In addition to these implied warranties, a contract can create express war- ties. UCC § 2-313. The term warranty or guarantee does not have to be used

  – order for a warranty to be created. However, the seller’s conduct or statements -ust have been communicated to the buyer so that the warranty becomes part :the “basis of the bargain.” UCC § 2-313(1). Express warranties can be created

  _ an affirmation of fact or a promise made by the seller; a description of the = ds being sold, including technical specifications and blueprints; or a sample

  – a model provided. A mere expression of opinion as to the value of an item is sidered “puffing” and does not constitute a warranty.

  As you can imagine, two of the most common issues that arise in trying resolve whether an express warranty exists are (1) whether the statement or

  :tions were part of the “basis of the bargain” and (2) whether a statement is affirmation of fact or merely the seller’s opinion. There is no clear definition

  ; either. The UCC does not define “basis of the bargain,” and the courts have :-=ached differing conclusions. Some have held that it means the warranty terms

  ust have been bargained for; others hold that the buyer must have relied on – e warranties in deciding to make the purchase; still others state that the buyer -eed not show any reliance but must have been aware of the warranty at the

  e the sale was made.

  SCUSSION QUESTION

  3. In a highly publicized case in the District of Columbia, a patron of a -;-cleaning establishment sued the mom-and-pop owners for $54 million for ~ ing allegedly lost his pair of pants. The owners claimed they had performed :erations to expand the waist of the pants to the customer’s specifications,

  the customer claimed the pants they altered were not the ones that he had -ought in. While the amount of damages being claimed was clearly outrageous,

  — case does raise an interesting legal question. What are the legal implications

   

   

  • 318 Chapter 8: Contract law

  Type of Warranty

  Implied warranty of merchantabi I ity

  Implied warranty of fitness

  Express warranty

  Created by

  the sale of goods by a merchant. The goods must be fit for their ordinary purpose.

  Excluded by

  language that includes the word merchantability or a disclaimer that includes the word merchantability or phrases such as “as is” or 11With all faults.” If in writing, it must be con- spicuous.

  a seller a writing that is conspicuous. • knowing the

  particular purpose the buyer has in mind and

  • being aware that the buyer is relying on the seller’s expertise.

  • an affirmation of fact or a promise made by the seller1 or a description of the goods being sold1 including technical specifications and blueprints, or a sample or model and

  • that becomes a basis of the bargain.

  words or conduct tending to limit or negate the warranty so long as such interpreta- tion is reasonable.

  Figure 8-6 Warranties Summarized

  of posting a sign that reads “Satisfaction Guaranteed”? Does the posting of this type of sign create some sort of express warranty as to the service being offered? What standards should be used in determining what “satisfaction” means in this context?

  Warranties may be excluded or modified by disclaimers. UCC § 2-316. In many states, however, merchants are limited in their ability to exclude or modify the implied warranty of merchantability when the sale is to a consumer. For each type of warranty, Figure 8-6 summarizes how it is created and what actions a seller must take to exclude the warranty.

  An interesting example of when implied warranties can be applied to food occurred in the following classic case.

   

   

  I

  E. Defenses to a Valid Contract 319 •

  Webster v. Blue Ship Tea Room, Inc. 347 Mass. 421, 198 N.E.2d 309 (1964)

  REARDON, JJ. This is a case which by its nature ;;-:-okes earnest study not only of the law but also

  : the culinary traditions of the Commonwealth hich bear so heavily upon its outcome. It is

  an action to recover damages for personal inju- ·es sustained by reason of a breach of implied arranty of food served by the defendant in its

  :-estaurant …. On Saturday, April 15, 1959, about 1 P.M.,

  -· e plaintiff, accompanied by her sister and her aunt, entered the Blue Ship Tea Room operated

  y the defendant. The group was seated at a table and supplied with menus.

  Thisrestaurant, which the plaintiff charac- :erized as “quaint,” was located in Boston “on the ::bird floor of an old building on T Wharf which overlooks the ocean.”

  The plaintiff, who had been born and rought up in New England (a fact of some con-

  sequence), ordered clam chowder and crabmeat salad. Within a few minutes she received tid- ings to the effect that “there was no more clam chowder,” whereupon she ordered a cup of fish chowder. Presently, there was set before her “a small bowl of fish chowder …. The chowder was milky in color and not clear. The haddock and potatoes were in chunks” (also a fact of conse-

  uence) …. She ate about 3 or 4 spoonfuls then sropped. She looked at the spoonfuls as she was eating. She saw equal parts of liquid, potato and fish as she spooned it into her mouth. She did not see anything unusual about it. After 3 or 4 spoon- fuls she was aware that something had lodged in her throat because she couldn’t swallow and couldn’t clear her throat by gulping and she could ieel it. This misadventure led to two esophagos- opies at the Massachusetts General Hospital, in

  the second of which, on April 27, 1959, a fish bone was found and removed. The sequence of events produced injury to the plaintiff which was :tot insubstantial.

  We must decide whether a fish bone lurking in a fish chowder, about the ingredients of which there is no other complaint, constitutes a breach of implied warranty under applicable provisions of the Uniform Commercial Code, the annota- tions to which are not helpful on this point. As the judge put it in his charge, “Was the fish chowder fit to be eaten and wholesome? … [N]obody is claiming that the fish itself wasn’t wholesome …. But the bone of contention here-1 don’t mean that for a pun-but was this fish bone a foreign suostance that made the fish chowder unwhole- some or not fit to be eaten?”

  The defendant asserts … “[f]ish chowder, as it is served and enjoyed by New Englanders, is a hearty dish, originally designed to satisfy the appetites of our seamen and fishermen”; that “[t]his court knows well that we are not talking of some insipid broth as is customarily served to convalescents.” We are asked to rule in such fash- ion that no chef is forced “to reduce the pieces of fish in the chowder to miniscule size in an effort to ascertain if they contained any pieces of bone.”

  It is not too much to say that a person sit- ting down in New England to consume a good New England fish chowder embarks on a gusta- tory adventure which may entail the removal of some fish bones from his bowl as he proceeds. We are not inclined to tamper with age old recipes by any amendment reflecting the plaintiff’s view of the effect of the Uniform Commercial Code upon them. We are aware of the heavy body of case law involving foreign substances in food, but we sense a strong distinction between them and those rela- tive to unwholesomeness of the food itself …. In any event, we consider that the joys of life in New England include the ready availability of fresh fish chowder. We should be prepared to cope with the hazards of fish bones, the occasional

   

   

  • 320 Chapter 8: Contract Law

  presence of which in chowders is, it seems to us, to be anticipated, and which, in the light of a hal- lowed tradition, do not impair their fitness or merchantability. While we are buoyed up in this conclusion by Shapiro v. Hotel Statler Corp., 132 F. Supp. 891 (S.D. Cal.), in which the bone which afflicted the plaintiff appeared in “Hot Barquette of Seafood Mornay,” we know that the United States District Court of Southern California, situ- ated as are we upon a coast, might be expected to share our views. We are most impressed, however, by Allen v. Grafton, 170 Ohio St. 249, where in Ohio, the Midwest, in a case where the

  plaintiff was injured by a piece of oyster shell in an order of fried oysters, Mr. Justice Taft (now Chief Justice) in a majority opinion held that ” the possible presence of a piece of oyster shell in or attached to an oyster is so well known to any- one who eats oysters that we can say as a matter of law that one who eats oysters can reasonably anticipate and guard against eating such a piece of shell. … ” (P. 259.)

  Thus, while we sympathize with the plain- tiff who has suffered a peculiarly New England injury, the order must be …. Exceptions sustained. Judgment for the defendant.

  CASE DISCUSSION QUESTIONS

  1. Why did the court think Ms. Webster failed in her claim for breach of an implied warranty?

  2 . Why did it matter that the plaintiff was brought up in New England? Would the result have been different if she lived in the Midwest and this was her first trip to the East Coast?

  3. Do you agree with the court that this is a different case from one in which the food is contaminated? Why?

  5. Lack of Proper Format-Writing

  A commonly held misunderstanding is that all contracts must be in writing to be enforceable. That is not so. In many situations an oral contract is perfectly valid. However, contractual disputes arise not just about whether a valid contract exists but also about what the terms of the contract actually require. Deciding these dis- putes is particularly difficult when the agreement was oral rather than set down in writing. When the dispute is reduced to one person’s word against the other’s, the courts find it difficult to determine who is telling the truth. Even though many oral contracts are legally enforceable, it is always wiser to put them in writing .

  . In addition to the fact that it simply makes sense to reduce any important contract to writing, all states have a statute known as the statute of frauds, which lists those contracts that must be in writing in order to be enforceable. The purpose of such statutes is to ensure that there will be reliable evidence of important or complex matters. The required writing does not have to be a formal contract, however. It can take the form of any writing-for example, a check or a memo-so long as it fully expresses the terms of the agreement. The writing can also be in multiple pieces, so long as it is clear the pieces were intended to constitute one agreement. A common example is a written offer and a separate written acceptance. Finally, the signature can be any authentication, even initials. Generally, the types of contracts that must be in writing fall into one of the following categories:

   

   

  F. Termination of Contractual Duties 321 •

  contracts involving land, including fixtures, and documents dealing with land, such as mortgages and leases;

  ., contracts that cannot be performed in one year; 3. collateral contracts, those that involve a secondary as opposed to a pri-

  mary obligation, unless the main purpose is to secure a personal benefit; promises made in consideration of marriage, such as prenuptial agree- ments; and

  – contracts for the sale of goods valued at $500 or more.

  the exact wording regarding the second type of contract-those that can- performed in one year. If it is possible, even though unlikely, that it can be

  : rmed in one year, then a writing is not necessary. For example, a contract …3e could be performed in one year and so need not be in writing.

  ~\rticle 2 of the UCC contains its own statute of frauds that applies to the = af goods. UCC § 2-201. It requires something in writing if the price of the

  …: is $500 or more. (Note: A proposed revision to the UCC would increase ~amount to $5,000, but to date, no state has made this change.) The writing – – to be signed only by “the party to be charged.” For example, Tom calls

  – offering to buy his television for $600, and Jim mails back his signed reply _ =eing to the arrangement. If Jim fails to perform his end of the bargain, Tom – ue Jim, the party to be charged, because Jim signed the letter agreeing to ; arrangement. However, Jim would not be allowed to sue Tom, as there is no

  · g containing Tom’s signature. The statute of frauds does allow for some exceptions. The first is part per-

  :::rrance. For example, if John made a partial payment for some land, took –ession of the land, and made improvements, then the court might see this enough evidence of an intended contract to enforce it. Also, under the UCC

  :ontract will be enforced to the extent payment or delivery was accepted. — ·ssions in pleadings or testimony will also bind the party as to the quan-

  admitted. Finally, the court may invoke the doctrine of promissory estoppel ~ there is justifiable reliance.

  A written agreement usually contains an integration clause that merges • revious oral agreements into the new written document. Under the parole

  · ence rule a written contract cannot be modified or changed by prior oral

  . TERMINATION OF CONTRACTUAL DUTIES

  ontract is typically discharged by performance. However, there are times en the parties may agree to end their agreement prior to complete perfor-

  ce. Also, at times a court may declare a party’s obligations over when per- :mance is impossible or commercially impracticable.

  Parole evidence rule An evidentiary rule that a written contract cannot be modified or changed by prior verbal agreements .

  Substantial performance Although a breach of contract, performance of all the essential terms of the contract will entitle the breaching party to the contractual By Performance price minus any

  omplete performance ends both parties’ obligations. At times, however, a party damages caused by the · perform most but not all of the required duties. If the party substantially breach.

   

   

  • 322 Chapter 8: Contract Law

  Material breach Such a grave failure to fulfill the contractual terms that the other party is relieved of all contractual obligations.

  performs, that party is in breach of contract and is liable for damages caus by the breach. However, the other party is not relieved of his or her obligatio- – If, however, the failure to perform is seen as a material breach, it is a breach – – contract that excuses the other party from any obligations. Whether the pe:– formance is so complete as to amount to only a minor breach or so insufficierr: as to constitute a material breach is often a difficult question. In the next case the court grapples with what to do when a construction contract is not ful.:. performed.

  i~”’~}~ill.:~~{;j;”;j~~f-l’i .•• }~~{it’~\· ·~lii.,;~,~~~-“‘.V!’-fi:il,~'””i!l;”‘\t: … ~t~,t:~-. ·· .. ·., …. ~. _, .,_,.tfJltiMf~·. . ~~~~~~~18ti~,~~%~~;tir–···’··· >· ·_ .. t1!k~~;·r!~<-.r;\.~.,;,·<.j;:;;~·~. _,;~ \, .

  CARDOZO,}.

  The plaintiff built a country residence for the defendant at a cost of upwards of $77,000, and now sues to recover a balance of $3,483.46, remaining unpaid. The work of construction ceased in June, 1914, and the defendant then began to occupy the dwelling. There was no complaint of defective performance until March, 1915. One of the specifications for the plumbing work provides that “all wrought iron pipe must be well galvanized, lap welded pipe of the grade known as ‘standard pipe’ of Reading manufac- ture.” The defendant learned in March, 1915, that some of the pipe, instead of being made in Reading, was the product of other factories. The plaintiff was accordingly directed by the architect to do the work anew. The plumbing was then encased within the walls except in a few places where it had to be exposed. Obedience to the order meant more than the substitution of other pipe. It meant the demolition at great expense of substantial parts of the completed structure. The plaintiff left the work untouched, and asked for a certificate that the final payment was due. Refusal of the certificate was followed by this suit.

  The evidence sustains a finding that the omission of the prescribed brand of pipe was neither fraudulent nor willful. It was the result of the oversight and inattention of the plaintiff’s

  subcontractor. Reading pipe is distinguished from Cohoes pipe and other brands only by the name of the manufacturer stamped upon it at intervals of between six and seven feet. Even the defen- dant’s architect, though he inspected the pipe upon arrival, failed to notice the discrepancy. The plain- tiff tried to show that the brands installed, though made by other manufacturers, were the same in quality, in appearance, in market value and in cost as the brand stated in the contract-that they were, indeed, the same thing, though manufactured in another place. The evidence was excluded, and a verdict directed for the defendant. The Appellate Division reversed, and granted a new trial.

  We think the evidence, if admitted, would have supplied some basis for the inference that the defect was insignificant in its relation to the project. The courts never say that one who makes a contract fills the measure of his duty by less than full performance. They do say, however, that an omission, both trivial and innocent, will some- times be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by a forfeiture . …

  Those who think more of symmetry and logic in the development of legal rules than of practical adaptation to the attainment of a just result will be troubled by a classification where the lines of division are so wavering and blurred.

   

   

  ……… _.._,-Lling, doubtless, may be said on the score – -onsistency and certainty in favor of a stricter

  ard. The courts have balanced such consid- ·ons against those of equity and fairness, and d the latter to be the weightier. The decisions

  – · state commit us to the liberal view, which aking its way, nowadays, in jurisdictions to welcome it. Where the line is to be drawn een the important and the trivial cannot be

  ed by a formula. “In the nature of the case cise boundaries are impossible” (2 Williston Contracts, sec. 841). The same omission may e on one aspect or another according to its set- – · Substitution of equivalents may not have the -e significance in fields of art on the one side

  – in those of mere utility on the other. Nowhere change be tolerated, however, if it is so dom- t or pervasive as in any real or substantial

  – sure to frustrate the purpose of the contract. – ere is no general license to install whatever, in

  builder’s judgment, may be regarded as “just – good.” The question is one of degree, to be -;;wered, if there is doubt, by the triers of the

  ·-.:r:s, and, if the inferences are certain, by the _ ges of the law. We must weigh the purpose to – served, the desire to be gratified, the excuse for -~ ·iation from the letter, the cruelty of enforced – erence. Then only can we tell whether literal

  .:r:fillment is to be implied by law as a condition. – · is not to say that the parties are not free by

  and certain words to effectuate a purpose at performance of every term shall be a condi- n of recovery. That question is not here. This is

  -erely to say that the law will be slow to impute –e purpose, in the silence of the parties, where – e significance of the default is grievously out

  : proportion to the oppression of the forfeiture. e willful transgressor must accept the penalty

  :his transgression. For him there is no occasion : mitigate the rigor of implied conditions. The -ansgressor whose default is unintentional and _ ·vial may hope for mercy if he will offer atone- -ent for his wrong.

  F. Termination of Contractual Duties 323 •

  In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the dif- ference in value, which would be either nominal or nothing. . . . It is true that in most cases the cost of replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the dif- ference in value .. .. The rule that gives a remedy in cases of substantial performance with com- pensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.

  The order should be affirmed, and judgment absolute directed in favor of the plaintiff upon the stipulation, with costs in all courts.

  McLAUGHLIN, J. (dissenting). I dissent. The plaintiff did not perform its contract.

  The defendant had a right to contract for what he wanted. He had a right before making payment to get what the contract called for. It is no answer to this suggestion to say that the pipe put in was just as good as that made by the Reading Manufacturing Company, or that the difference in value between such pipe and the pipe made by the Reading Manufacturing Company would be either “nominal or nothing.” Defendant contracted for pipe made by the Reading Manufacturing Company. What his reason was for requiring this kind of pipe is of no importance. He wanted that and was entitled to it. It may have been a mere whim on his part, but even so, he had a right to this kind of pipe, regardless of whether some other kind, according to the opinion of the contractor or experts, would have been “just as good, better, or done just as well.” He agreed to pay only upon condition that the pipe installed were made by that company and he ought not to be compelled to pay unless that condition be performed.

   

   

  • 324 Chapter 8: Contract Law

  Perfect tender rule The requirement that the goods delivered exactly meet the contractual specifications.

  Rescission The act of canceling the contract and returning the parties to the positions they were in prior to the contract having been formed.

  Novation When a third party is substituted for one of the original parties.

  Accord and satisfaction The agreement and then the performance of something different than originally promised.

  CASE DISCUSSION QUESTIONS

  1. Why did the court find for the plaintiff contractor? 2. The dissent essentially states that people have a right to get what the;

  contract for. The majority does not see things in such black-and-white terms. saying, “We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence.” Which view do you think best serves the needs of the contracting parties?

  3. What could the owner have done to ensure that there would be no deviations from his specifications?

  4. Would this case have had a different outcome if the contractor had deliberately substituted the pipe in order to save money? Why?

  The issue of not performing to the letter of the contract is one area where the UCC, instead of liberalizing the rules, has tightened them. Under Section 2-601, the UCC states that failure in any respect to supply conforming goods means that the buyer is free to accept the goods, reject them, or accept part and reject part. This is known as the perfect tender rule. The only relief from this rule involves the following exceptions: (1) if the parties agree to overlook the lack of conformity; (2) if “cure” is possible-that is, if the time for performance has not yet expired, the seller notifies the buyer of his intent to rectify the matter, and he then does so; and (3) in some cases of commercial impracticability.

  If the goods cannot be returned without their perishing, they must be sold in order to minimize the seller’s losses. UCC § 2-603. If substandard goods are accepted and retained, the buyer can seek damages that amount to the difference between the value of the goods promised and the value of the goods received. ucc § 2-714.

  2. By Agreement

  Contractual obligations can be ended by agreement through rescission, nova- tion, or accord and satisfaction. Rescission involves an agreement by both par- ties to cancel the contract. Rescission is generally viewed as appropriate if the contract is still completely executory. If one side has performed, a rescission will not be enforced unless the other side gives consideration for the rescission.

  In a novation a third party is substituted for one of the original parties. This creates a new contract and as such differs from assignments or delegations. Because it is a new contract, it must be supported by new consideration.

  Finally, the parties may enter into an accord and satisfaction. An accord is an agreement to do something different than originally promised. The satisfac- tion is the performance of the accord. For example, if John owes Sally $4,000 and they agree that Sally will accept John’s Rolex watch in payment instead, their agreement is the accord. If John gives Sally his watch, there is a satisfaction. If he does not, then Sally can still sue John for the $4,000.

  In some states an accord and satisfaction is only effective in cases of an unliquidated debt. A debt is liquidated if the amount owed is undisputed. It is unliquidated if there is a good-faith dispute as to the amount owed. For example, if Sam agreed to paint Jill’s living room a brilliant yellow “to her satisfaction”

   

   

  F. Termination of Contractual Duties

  thought the living room ended up a limpid yellow, Jill might argue she – • owe Sam anything as the final paint color did not match her expecta- – Sam, of course, would argue he should be paid the full contract price.

  ·ore, the amount owed would be in dispute. If they were able to reach a ?romise somewhere between the full contract price and nothing, then that

  be an accord, and the lesser payment made would be the satisfaction.

  hen Performance Is Impossible

  ::3….-ry can assert the defense of impossibility of contractual performance. This -.c”‘S when one party either dies or becomes too sick to carry through with -ontractual responsibilities. It also could occur when the object to be sold

  oyed or stolen before the agreed-on transfer takes place or when there – – ange in the law that makes the contract illegal. A party that hopes to

  under the defense of impossibility must show that the contract cannot be : rmed, not simply that the party cannot perform it. For example, assume

  -::iann, who lives in Hampshire County, Massachusetts, agrees to sell 200 —els of the apples she grows that year to William for $10 a bushel. But a week – re the harvest, a tornado destroys her entire crop. It is now impossible for

  -o complete the contract and she is discharged from her contractual obliga- — and William is simply out of luck (and apples). However, assume instead . – :’vfariann had agreed to sell 200 bushels of apples harvested that year from

  – – pshire County, Massachusetts, to William for $10 a bushel. Mariann had planning on buying the apples from local farms for $8 a bushel, thereby

  :.Iring a profit for herself of $2 a bushel. However, that same tornado destroys of her apples and the majority of the apples grown that year in Hampshire

  – :mty, forcing up the price of apples to $40 a bushel. If she has to buy 200 – els of apples at $40 a bushel and then resell them to William for $10, not

  – ; will she not make a profit, she will incur a huge loss. Mariann may want to that it is now impossible for her to perform the contract, but she will not

  -~eed. It has become difficult, and expensive, but not impossible.

  Due to Commercial Impracticability

  -.::: we saw from our discussion of consideration, freedom of contract allows par- – to make and be held to a bad bargain. When circumstances change, leaving

  -~ party at a disadvantage, that party may ask to be excused from the contract er the doctrine of commercial impracticability. The argument is not that the tract is impossible to perform but rather that it has become too costly for one he parties. If the change of circumstances should have been foreseen, then

  _=nerally the courts will not supply any relief. For example, in one case a farm 5=eed to sell to a school district all the milk it required. During the course of the

  tract the price of raw milk increased by 23 percent. If the farm was required to ‘de by the terms of the contract, it would lose a substantial amount of money.

  -:-~e court held the farm to its contract, refusing to allow it to pass the increase -to the school district, because the rise in price was a foreseeable occurrence.8

  -Z!Jle Farms, Inc. v. City Sch. Dist. of Elmira, 352 N.Y.S.2d 784 (Sup. Ct. 1974).

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  • 326 Chapter 8: Contract Law

  Assignment The transfer by one of the original parties to the contract of part or all of his or her interest to a third party.

  Delegation The transfer by one of the original parties to the contract of his or her obligations to a third party.

  C. THIRD-PARTY RIGHTS

  There are three ways in which a person or corporation not a party to the cm:- tract can have a legal interest in enforcing part of the terms of that agreeme– The most common of these is through the process of assignment. Third-par– rights also arise through delegation and the creation of third-party beneficiari~

  1. Assignment

  An assignment occurs when one of the original parties to a contract transfe._ part or all of his or her interest to a third party. See Figure 8-7. For example. assume a consumer signs a sales contract with a furniture store. In the contracr the consumer agrees to make certain monthly payments. The furniture store ther. assigns the right to receive those payments to a finance company, and in retun: the finance company gives the furniture store ready cash. The finance compan. now has a legal interest in receiving the monthly payments that the consumer agreed to pay to the store.

  An assignment involves an assignor, an assignee, and an obligor. The assignee gets the same rights that the assignor had, but no more. The assignee is also subject to the same defenses as could have been raised against the assignor. Assignment is usually possible unless

  1. the contract itself prohibits it, 2. the contract involves personal services, or 3. the assignment will materially alter the duties of the obligor.

  Assignor

  Assigns rights to

  Original Contract

  Obligor (person under a contractual obligation)

  Assignee

  Figure 8-7 Assignment of a Contract

  2. Delegation

  Most duties can be delegated unless the contract prohibits it or the duty requires personal skill or special trust. The primary duty is not extinguished if the delega- tee fails to perform. The original party remains obligated to fulfill the terms of the contract. See Figure 8-8.

   

   

  Obligee (person owed a

  contractua I benefit)

  Original Contract

  8-8 Delegation of Duties under a Contract

  ird-Party Beneficiaries

  G. Third-Party Rights

  Delegator

  1 Delegatee (person who now owes an obligation to the obligee)

  ~ent and delegation happen after the contract is formed. However, if at arne the contract is formed one or both of the parties want to benefit a third

  ::y a third-party beneficiary relationship is created. There are two types of eficiaries: intended (creditor or donee) and incidental. See Figure 8-9.

  a. Intended Beneficiaries

  Contracts often contain provisions in which one of the parties agrees to ide some direct benefit to a third party, or beneficiary. For example, in pur-

  ·-ing a house the buyer might agree to assume the seller’s current mortgage. In : ase the mortgage lender is a third party that has been given a specific ben-

  : under the terms of the contract; it is considered to be a creditor beneficiary . .; situation in which a father contracts with a bank to administer a trust fund – his children, those children would be considered donee beneficiaries.

  If it is clear from the contract that the parties intended a third party to efit, that party is an intended beneficiary. Consider two further examples: If

  -erurn for Sam’s watch John promises Sam to pay the $500 debt Sam owes to Jill becomes a creditor beneficiary. If in return for Sam’s car John promises

  Watch

  Sam John

  John promises Sam to pay Jill $500.

  Jil l is a creditor beneficiary if Sam owed Jill the $500.

  Jill (third-party beneficiary)

  Uill’s husband is an incidental beneficiary.]

  Jill is a donee beneficiary if Sam wants Jill to have the $500 as a gift.

  8-9 Third-Party Beneficiaries

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  • 328 Chapter 8: Contract Law

  Specific performance When money damages are inadequate, a court may use this equitable remedy and order the breaching party to perform his or her contractual obligations.

  Mitigation of damages The requirement that the nonbreaching party take reasonable steps to limit his or her damages.

  Sam to give a $4,000 gift to Joan, then Joan is a donee beneficiary. In both c the third party has a right to see that the contract terms are fulfilled, includir.= the right to sue.

  b. Incidental Beneficiaries

  An incidental beneficiary is someone whom the original parties did noc explicitly intend to benefit from the contract. An incidental beneficiary cann enforce rights under the contract. For example, in the last example assume Bill · Joan’s husband. If Joan plans on taking the two of them on a vacation with the $4,000, Bill will benefit, but if John fails to deliver the money, Bill has no righ: to enforce the contract.

  H. DAMAGES

  When one party fails to live up to the terms of a contract, a variety of remedies may be available to the other party. We have already discussed several actions that the parties can take on their own without court intervention: rescission, novation, and accord and satisfaction.

  Alternatively, the nonbreaching party can go to court to seek monetary damages or specific performance. Specific performance is used in situations where there is no alternative comparable product available, such as a particular parcel of land or a rare piece of art. Under this remedy the injured party obtains a court order requiring the breaching party to fulfill the terms of the agreement. Specific performance is a wonderful remedy because the contracting party gets exactly what was contracted for. Also, there is no need to worry about collect- ing a judgment, the nonbreaching party need not expend time and effort to find another deal, and the actual performance may be more valuable than dollars. However, keep in mind that specific performance is possible only if dollars are inadequate. In addition, specific performance cannot be used to enforce personal service contracts. Not only would that constitute involuntary servitude, but it would impose an impossible task for the court due to the difficulty of monitor- ing the party’s performance.

  The purpose of monetary damages is to give the injured party the benefit of the bargain. Monetary damages can be classified as compensatory, conse- quential, incidental, nominal, or-punitive. In addition, the injured party may be required to take steps to lessen his or her loss. This is known as mitigation of damages.

  Compensatory damages are awarded to compensate for the loss of the bar- gain. Their purpose is to place the injured party in the same position that party would have been in had the contract been performed. The classic case describing this form of damages is a 1929 New Hampshire case, known by law students everywhere as the “hairy hand” case.9 In that case a father took his son to a doctor. The boy had burned his hand, leaving it scarred. The doctor promised to

  9Hawkins v. McGee, 146 A. 641 (N.H. 1929).

   

   

  H. Damages

  – e boy a “hundred percent perfect hand” by grafting a piece of skin taken – the boy’s chest. Everything went well until a few years passed, and the boy -;-ed puberty. When he did so, his hand began sprouting hair, leaving him — a hand uglier than when he had started. The court calculated the damages ::::e difference between a “perfect hand” and what the boy received, a hairy -~ Not included in the damage award was any pain the boy suffered from ; peration or the cost of the operation. The boy would have had to undergo ~ _ ain and cost of the operation even if the operation had been successful.

  — ~efore, to compensate the plaintiff for the pain and the cost of the operation, … ..:clition to the difference in the hand, would give the plaintiff more than what — necessary to put him in the position he would have been in had the opera-

  been successful. In calculating compensatory damages, courts frequently use the following ula:

  Promised performance -actual performance -mitigation +expenses (incidental damages)

  For example, if John agrees with Bill to sell Bill his watch for $500, but Bill pays $300, John can sue Bill for $200. If Bill had paid nothing and simply

  eoed on the deal, John could have sold the watch to someone else and could e recovered the difference between that price and the contract price, along

  any expenses incurred in finding the new buyer (incidental damages). On the other hand, if John refuses to sell the watch, then Bill has two

  …:ons. First, he can try to find another watch. The UCC calls this finding of illtute goods cover. Then his damages are the cost of the substitute watch Cover

  – -us the contract price. For example, if Bill finds a similar watch but has to pay Finding substitute –o, his damages are $200. Alternatively, he can decide to forgo a new watch. goods.

  – at case his damages would be the difference between the market price and ; .::ontract price.

  329 •

  Consequential damages arise out of special circumstances that must be Consequential damages e:seeable to the other party. Typically this is handled by notifying the other Indirect damages that ~ of any such circumstances. The classic case setting forth this rule is an must be foreseeable to

  -: · h case from 1854.10 The Hadley family ran a flour mill. Their crankshaft be recovered. _-e, and they gave it to Baxendale to deliver to a foundry for repair. Baxendale

  – mised to deliver the shaft the next day. However, it was not delivered for eral days. As a result, the mill was closed for those days. Despite the common

  ~;:rice, the Hadleys did not have an extra crankshaft. Because the Hadleys had : notified Baxendale of that special circumstance, he could not be held liable

  – – eir lost profits. Sometimes, however, lost profits can be recovered, especially if an estab-

  -ed business suffers a loss and the breaching party could have anticipated – loss. In the following case Sargon, a small dental implant company, with net

  – ual profits of $101,000, sued a university for breach of contract and sought _ profits of over $1 billion, claiming that but for the breach of contract, the

  =y v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 14 (1854).

   

   

  • 330 Chapter 8: Contract law

  company would have become a world leader in the dental implant ind Sargon had contracted with the university to conduct a five-year study, whi..__ failed to complete.

  Opinion Lost profits may be recoverable as damages

  for breach of a contract. “[T]he general princi- ple [is] that damages for the loss of prospective profits are recoverable where the evidence makes reasonably certain their occurrence and extent.” Such damages must “be proven to be certain both as to their occurrence and their extent, albeit not with ‘mathematical precision.’ ” …

  Regarding lost business profits, the cases have generally distinguished between established and unestablished businesses. “[W]here the oper- ation of an established business is prevented or interrupted, as by a … breach of contract … , damages for the loss of prospective profits that otherwise might have been made from its opera- tion are generally recoverable for the reason that their occurrence and extent may be ascertained with reasonable certainty from the past volume of business and other provable data relevant to the probable future sales.” … In some instances [involving unestablished businesses], lost prof- its may be recovered where plaintiff introduces evidence of the profits lost by similar businesses operating under similar conditions.

  We now apply these principles to this case.

  An expert might be able to make reason- ably certain lost profit estimates based on a com- pany’s share of the overall market. But Skorheim [plaintiff’s expert] did not base his lost profit esti- mates on a market share Sargon had ever actu- ally achieved. Instead, he opined that Sargon’s market share would have increased spectacularly over time to levels far above anything it had ever

  reached. He based his lost profit estimates on tha- hypothetical increased share.

  Skorheim considered Sargon to be compa- rable to the “Big Six” dental implant companies rather than the smaller ones that appear to ha>e far more closely resembled it. He admitted that b; no objective business metric, such as sales or num- ber of employees, was Sargon in fact comparable to the “Big Six.” Instead, he based his comparisor: solely on his belief that Sargon, like the “Big Six,- and unlike the rest, was innovative, and that inno- vation was the prime market driver .. . . But, as the trial court noted, Skorheim’s reasoning was circu- lar. He concluded that the “Big Six” were inno- vative because they were successful, and that the smaller companies (excluding Sargon) were not innovative because they were less successful. 1:: essence, he said that the smaller companies were smaller because they were not innovative. The trial court properly considered this circularity i.e. the reasoning as a basis to exclude the testimony.

  Sargon argues that the cases concerning ar: unestablished company do not apply here because it was an established company with a track recor · of having made a profit. It had, for example, net profit of $101,000 in 1998. But Sargon ha no track record of being a global leader, one oi the “Big Six.” An established company may base its claim to future profits on evidence of its pas: profits, but Skorheim did not do so. He tried to compare Sargon to the “Big Six,” but the compa- nies were not comparable . . . .

  As the trial court noted, “Sargon is not simi- lar to the industry leaders by any relevant, objec- tive business measure.” Skorheim did not base his

   

   

  ost profits estimates on any objective evidence i “past volume of business” or any “other prov-

  .: le data relevant to the probable future sales.” ~tead, as the trial court further noted, Skorheim’s

  st profit projections were “wildly beyond, by cegrees of magnitude, anything Sargon had ever =..xperienced in the past.”

  . . . If lost profits can be estimated with rea- :onable certainty, a court may not deny recovery

  erely because one cannot determine precisely hat they would have been. But exactitude is

  :lOt the problem here. Whether the actual prof- :s could logically be estimated in the manner -.·orheim claimed is the problem. As the trial -ourt noted, a lost profit award of up to $1 bil- ·on may not be based on pure speculation.

  World history is replete with fascinating -what ifs.” What if Alexander the Great had

  ~E DISCUSSION QUESTIONS

  H. Damages 331 •

  been killed early in his career at the Battle of the Granicus River, as he nearly was? What if the Saxon King Harold had prevailed at Hastings, and William, later called the Conqueror, had died in that battle rather than Harold? . . . Many serious, and not-so-serious, historians have enjoyed speculating about these what ifs . But few, if any, claim they are considering what would have happened rather than what might have happened. Because it is inherently difficult to accurately predict the future or to accurately reconstruct a counterfactual past, it is appro- priate that trial courts vigilantly exercise their gatekeeping function when deciding whether to admit testimony that purports to prove such claims.

  The trial court properly acted as a gate- keeper to exclude speculative expert testimony.

  L On what basis did the expert witness argue that Sargon would have – -de up to a billion dollars but for the university breaching the contract?

  2. Why did the court not accept that argument? 3. When are damages for lost profits likely to be awarded?

  Punitive damages are not allowed in contract actions. However, if the tiff can also bring a tort action-for example, for fraud-then punitives

  -~ possible. Finally, nominal damages are possible when there has been a breach -· no provable damages.

  In order to avoid having to litigate damages issues, some contracting par- – put liquidated damages clauses in their contracts. Such clauses specify what Liquidated damages

  happen in case of breach. Such clauses are valid if two requirements are clause . First, the amount of damages must be difficult or impossible to calculate. A contract provision

  – -ond, the amount must bear a reasonable relationship to the true loss and not that specifies what seen as a penalty clause. Liquidated damages clauses are frequently found in will happen in case of

  – versity and major league coaching contracts. Should a coach leave before the breach. of the contract term, the damage to the school or team could go far beyond

  ” costs of finding a replacement coach. For example, incalculable damages d include harm to alumni relations, loss of players who came to play for a

  . ~cular coach, and a reduction in ticket sales. Finally, when the parties imperfectly express themselves, sometimes the Contract reformation will reform the contract. For example, assume a covenant not to com- An equitable remedy

  is included in a sale of a business. While it is limited geographically to one that allows the courts ty, its duration is for ten years. The court might reform the contract so that to “rewrite” contract

  ~ duration is for a shorter period of time. provisions.

   

   

  • 332 Chapter 8: Contract law

  A contract is an agreement that can be enforced in court. The basic elements ::-· a contract are offer, acceptance, and consideration. Contracts can be classiE.=– as bilateral or unilateral; express or implied in fact; formal or informal; exoc:..- tory or executed; and valid, void, voidable, or unenforceable. The most comm– defenses are lack of contractual capacity, illegality, violation of public poli~ lack of genuineness of assent, breach of warranty, and the statute of fra .. Third parties can attain contractual rights either through assignment or delep- tion or through being an intended beneficiary. A plaintiff bringing a comra–:- action may be under a duty to mitigate damages and is usually seeking spec=.:.: performance or compensatory or consequential damages.

  While many contracts are still controlled by the common law, contracts :~ the sale of goods are generally governed by Article 2 of the Uniform Commer~­ Code (UCC). The UCC was drafted by a group of legal scholars with the he?= of making commercial law more unified among the states. Most of the UCC _ provisions apply to everyone, but some sections contain specific rules that ap;c. to merchants only. Under the UCC everyone is under the obligation to acr – good faith.

  1. DotTY posted the Internet domain name golf. tv on its website to be so-.:. to the highest bidder. Je Ho Lim submitted the highest bid: $1,010. DotTY s an e-mail to Mr. Lim congratulating him on winning the bid and concluded wi the statement: “See ya on the new frontier of the Internet!” Shortly thereaf: DotTY sent a second e-mail stating that they were releasing Lim from his and that the prior e-mail had been sent in error. DotTY then publicly offered–~ domain name with an opening bid of $1 million. Was Lim’s bid an invitation an offer? Why does it matter? Do you think Lim or DotTY won the lawsuit?

  2. Pepsi ran a national television promotion for its Pepsi Points progr– Consumers could purchase Pepsi products and then redeem points for ite~ shown ·in a catalog. The TV ads featured such items as t-shirts and sunglas along with their point values. One ad ended by showing a teenager arriving =– school in a fighter jet, with the subtitle: “Harrier Jet 7,000,000 Pepsi poin– Not surprisingly, the catalog did not include a listing for the jet. Nonethel– Leonard filled out an order form, wrote in the jet as the item to be purch~-­ and sent a check for $700,000. (The catalog noted that if a consumer lack::· enough Pepsi Points, additional points could be purchased for 10 cents ea Pepsi refused to sell the $23 million jet to Leonard. Leonard sued for breach — contract. If you were the judge, how would you decide and why?

  3. Jeffrey and Kathryn Dow owned a 125-acre plot of land. They ~­ two children, and when they were teenagers, Kathryn frequently told them

   

   

  H. Damages

  ~y they would be given parcels of land as their own. As an adult, their _….,_ .-.._~er, Teresa, lived in a house trailer on the land. When she decided that she

  – like to build a house, she talked it over with her parents. They agreed to .:onstruction, and Teresa acquired a $200,000 mortgage. Her father did a _:.antial part of the building work himself, but did not give her title to the – on which the house was built. Several years later, Teresa and her parents

  – a ailing out. She sued, asking the court to force the Dows to transfer title to = – d on which her house was built or, in the alternative, to reimburse her for .,. -_00,000 she expended in building the house. On what theory do you think

  – – – ‘s attorney relied? How do you think the court ruled? 4. The 2005 hurricane season spawned a number of high-profile lawsuits

  =~the interpretation of standard homeowners’ insurance policies. Such policies _ .:ontracts between the insured homeowner and the insurance company to ~r damage to the insured’s house, home furnishings, and other types of listed _?erty. These policies typically cover damage from high winds but exclude

  -“‘r damage. However, when hurricanes hit shore they usually combine high – , heavy rain, and sometimes even tidal waves. Which of the following types .:..amage do you think should be considered wind damage?

  a. During the hurricane, a limb breaks off a tree and damages the roof of an insured’s house.

  b. During the hurricane, water came into an insured’s house through windows that had been blown out by the hurricane’s winds.

  c. Rain from the hurricane caused a nearby river to overflow its banks, and flood waters covered the first-floor carpet.

  d. Rain from the hurricane overwhelmed the local sewer system and caused water to back up into the insured’s basement.

  e. A beach house was knocked off its foundation by the tidal wave that accompanied the hurricane.

  Now assume that a homeowner’s policy explicitly excluded “water dam- -_e., and defined that term as ” ( 1) flood, surface water, tsunami, seiche, overflow -=a body of water, or spray from any of these, whether driven by wind or not;

  .:_ water or sewage from outside the residence premises’ plumbing system that -ers through sewers or drains, or water which enters into and overflows from ~ a sump pump, sump pump well, or any other system designed to remove

  surface water which is drained from the foundation.” Which, if any, of the _ s of damage listed above would be excluded from coverage under the terms : the policy?

  5. Rogers Communications, a cable company, and Aliant Inc., a – ecommunications company, signed a contract whereby Aliant agreed to let – ogers Communications string its cables on Aliant’s poles for $9.60 a pole. The _ ntract contained the following provision:

  This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice by either party.

  333 •

   

   

  • 334 Chapter 8: Contract Law

  Rogers thought it had a solid deal for at least five years unless Aliant ga _ notice at least one year before the end of the five-year term that it wanted to te:’- minate the contract. However, Aliant sent a termination notice just one year in_ the contract, offering to lease its poles for $28 a pole. The difference between ci:~ original $9.60 a pole and the $28 a pole came to $2.13 million over the cour:.= of the five years. Rogers sued. Who do you think won and why?

  6. When the Panera Bread Co. bakery-cafe chain moved into the Whi::”” City Shopping Center, it signed a lease containing a clause that prevents center from renting to another “sandwich” shop. When the shopping cent management later rented space to Jack in the Box, Inc. to open a Qdoba·~ Mexican Grill, Panera took the matter to court claiming that Qdoba’s burritos. tacos, and quesadillas were sandwiches.

  a. The key issue in this case involved interpretation of the terr;:; “sandwich,” but that term was not defined in the lease. How do yo- think the judge should go about determining whether burritos, tacos. and quesadillas were sandwiches?

  b. Based on your own common understanding of the term, how woul …. you define a “sandwich”?

  c. In what ways are burritos, tacos, and quesadillas like sandwiches? k what ways are they different?

  d. How would you rule if you were the judge? 7. Janice Jones, along with her family, visited a Big Bill’s Family Restauran-

  a national chain. She was eating a piece of fried chicken when she bit inm something that she thought was a worm. Naturally she became quite upse: and has been unable to eat chicken since. Expert witnesses are likely to state that, instead of a worm, the object was actually either the chicken’s aorta o: its trachea, both of which would appear wormlike. Ms. Jones wants to kno whether she can successfully sue the restaurant for breach of warranty. Please evaluate her claim based on Webster v. Blue Ship Tea Room, Inc. (page 319).

  8. United Airlines posted on its website a fare of $49 round trip from Ne~ York City to Hong Kong. On the strength of that quote, 143 people purchasec. tickets. They were quite surprised when their credit cards were charged for the “real” fare, about 20 times what they had thought they had paid. It seems tha:: for about an hour there was a bug in one of United’s reservation computers tha- caused the low prices to be quoted on some flights to Asia. The customers want to know if they can force United to honor the quoted fare. Do you think a binding contract was formed, and if so, on what terms? Second, do you think United has any defense that it could raise? Finally, think about the ethical implications. Nm that the customers know the posting was a mistake, should they voluntarily agree to pay the higher price?

  9. Jonathan Shattuck thought he had a deal to buy a house for $1.825 million. Using e-mail, Shattuck and the seller had settled on the price. The last e-mail from the seller stated:

  Once we sign the P&S (purchase and sale agreement) we’d like to close ASAP. You may have your attorney send the P&S and deposit check for 10% of purchase price ( $182,5 00) to my attorney. I’m looking forward to closing and seeing you as the owner of 5 Main Street, the prettiest spot in Marion village.

   

   

  H. Damages

  Before the buyer’s attorney had a chance to draw up the purchase and sale .:_:eement, the seller informed Shattuck that he was not going to follow through

  the deal as he had another buyer who was willing to pay $1.96 million. His -;gument was that there was no signed writing binding him to the deal. How do

  u think the court decided? Why? 10. Sara Smith is a struggling young artist. Recently, however, she was

  · covered” when an art dealer saw one of her paintings hanging in a local -gallery. The art dealer contracted with Sara to hold a major showing of her ork in six months, on November 1. Under the contract Sara was to show no – than ten original paintings. In preparation for the show Sara contracted ·th Paint Masters, Inc., for four cases of her favorite oil paints to be shipped

  later than July 1. Sara heard nothing more from Paint Masters, Inc., until 5eptember 1 when one case arrived. Sara attempted to find the same paint from

  er sources but was able to procure only one more case at $200 more than she d contracted to pay Paint Masters. Because of the delay in shipment, Sara was

  -· le to complete only six paintings and the show was canceled. Sara would like : sue Paint Masters, Inc., for the lost profits she would have received from her – .. igbtened recognition had the show gone as planned, for the money she had – spend on alternate paints, and for punitive damages to teach Paint Masters a

  on. Please evaluate Sara’s situation. 11. Kate contracts with Bennett to buy 100 guitars at $300 each. Kate

  :.opes to resell the guitars for $400 each. When the time for delivery arrives, ..::.ennett refuses to deliver the guitars. Kate then spends $100 in phone calls :::ying to obtain an alternate supplier. Finally, she finds substitute guitars, but .::as to pay $350 each for them. She saved $50, however, because in her contract

  ·th Bennett she was going to have to pay the shipping. In her new contract, the er paid the shipping. How much is Kate owed in compensatory damages?

  1. Team up with a classmate and decide on the terms for a basic contractual arrangement. For example, assume your classmate wants to go into the used textbook business. Agree to sell your used law textbooks at the end of the semester. Be sure to decide on all of the basic terms such as price, condition of the books, time of delivery, etc. Then go to www.legaldocs.com, or a similar site, and click on FREE DOCS. Select “General Contract” and complete the contract using the terms of your agreement.

  2. Take advantage of the wealth of material on the Internet placed there by those who want to make learning about contracts fun. One professor has even cre- ated songs to help you remember basic contract principles. Go to www.you- tube.com and search for songs by “Profblaw,” such as the “statute of limitations song.” On YouTube you will also find video and cartoon clips demonstrating various contract principles. Find the clip where Lucy convinces Charlie Brown to try to kick the football she is holding by giving him a “signed document.” When she fails to live up to the terms of the “signed document,” is she in breach of contract? Why or why not?

  Ill

  335 •

   

   

  • 336 Chapter 8: Contract law

  II REVIEW QUESTIONS Pages 283 through 289

  1. How do the courts determine if the UCC governs a contract situation? 2. Why does it matter under the UCC whether one or both of the parties are mer-

  chants? Give at least two examples. 3. Describe each of the following contracts according to the categories listed in

  Figure 8-3. a. Carlos says to Mary, “Will you paint my house for $2,000?” Mary replies,

  “Yes, I would be happy to.” b. Carlos says to Mary, “I will pay you $2,000 if you paint my house next

  week.” The next week Mary begins to paint the house and gets about half- way done when severe weather forces her to wait until the next week to finish the job.

  c. Carlos says to Mary, “Will you paint my house for $2,000?” Mary replies, “Yes, I would be happy to.” Mary never paints the house. Carlos waits ten years to sue Mary for breach of contract.

  d. Janet says to Jim, “I will sell you my car for $600.” Later that day Jim sends Janet an e-mail saying, “I accept.”

  e. Joan says to Bill, “I will give you $5,000 if you kill Robert.” Bill kills Robert, but Joan refuses to give him the $5,000.

  f. Every Saturday Jimmy came to the Booths’ home and mowed their lawn for $15 . One Saturday Jimmy arrived while Mr. Booth was on the phone. Mr. Booth simply waved at Jimmy, who then mowed the lawn.

  Pages 289 through 300 4. What are the three basic elements of a valid contract claim? 5. What is the objective view of contract law? 6. What are the four basic elements that every offer should contain? 7. Juan says to Jim, “I would like to sell my watch to you.” Jim replies, “Great. I

  will be happy to give you a fair price for it.” Has a contract been formed? Why? 8. Sally offers Tom a job as a paralegal, saying she will pay him “what he is

  worth.” Tom accepts. Has a contract been formed? Why? 9. Janet says to Joan, “I am eager to sell my antique vase to you.” Joan says,

  “Would you consider $400 for it?” Has a contract been formed? Why? 10. We Growum, a garden center, places the following advertisement in the Sunday

  paper:

  Spring Planting Sale Lilac bushes $20

  Tuesday John goes to the garden center. All the lilac bushes have been sold. He sues for breach of contract. Will he succeed? Why?

  11. Acme Lawn Care receives a call asking them to mow a lawn at 423 Main Street. Unfortunately the mowers misread the address as 432 Main Street. They arrive at that address, unload their mowers, and begin their work. Mr. Adams, the owner, is home and sees what they are doing. He says nothing and lets them complete the job. When they finish and ask to be paid, he refuses. Would a court require Mr. Adams to pay and, if so, under what theory?

  12. What are the three ways an offer can be terminated?

   

   

  H. Damages

  3. When may an offeror not revoke an offer? _4. What is the difference between an option contract and a merchant’s firm offer? _5. What is the name of the rule that states that the acceptance must completely

  agree with the terms of the offer? _ 6. How has the UCC changed the mirror image rule?

  Pages 300 through 305 17. An uncle offers his nephew $5,000 if the nephew promises not to smoke mari-

  juana or use other illegal drugs during the next four years while he is away at college. Has a binding contract been formed? Why?

  18. John volunteers to take care of Sam’s pet rabbit while he is away on vacation. When Sam returns, he is very pleased with the good care John gave his rabbit and tells him that he is going to pay him $50. When John arrives the next day to receive his money, Sam said that he has changed his mind. Is Sam under a contractual obligation to pay John for the care of his rabbit? Why?