Chapter One Formation of the Contract
To constitute a contract there must be a meeting of the minds of the parties:
· What is the meeting of the minds? – If his expressed 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.
Restatement §24 Offer Defined
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
· In determining whether an offer is made relevant factors include:
(i) the terms of any previous inquiry;
(ii) the completeness of the terms of the suggested bargain;
(iii) the number of persons to whom a communication is addressed.
Notes: an offer means that all that is required to complete a contract is a simple “yes” (assent) from the offeree.
Leonard v. Pepsico: An advertisement cannot be considered an offer, where a reasonable person would not take it seriously.
Restatement §26. Preliminary Negotiations
A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.
· “Reason to know” depends not only on the words or other conduct, but also on the circumstances, including previous communications of the parties and the usages of their community or line of business.
Restatement §33. Certainty
Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.
· The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.
· The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
Neb. Seed Co. v. Harsh: The letter was not an offer to sell, but a request for bids/invitation to bargain (preliminary negotiations), because (1) language is general– akin to advertisement, (2) lacked specifics – no time for delivery, precise amount.
Notes: where the letter lacks specifics, the recipient has reason to know it is not intended as an offer.
Lefkowitz v. Great Minn. Surplus Store, Inc.: 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.
Notes: Unilateral contracts mean that the method of acceptance is changed from promise to performance. [e.g. a reward for whoever finds my dog]
Restatement § 29. To Whom an Offer is Addressed
· The manifested intention of the offeror determines the person or persons in whom is created a power of acceptance.
· An offer may create a power of acceptance in a specified person or in one or more of a specified group or class of persons, acting separately or together, or in anyone or everyone who makes a specified promise or renders a specified performance.
UCC § 2-204 Formation in General
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
· Comment: The more terms the parties leave open the less likely it is that they have intended to conclude a binding agreement.
Notes: diversity suits are cases that Congress makes statute to give federal courts jurisdiction upon cases that are traditionally under state jurisdiction when there is complete diversity of citizenship, and the amount in dispute meets $75,000.
Restatement §27. Existence of contract where written memorial is contemplated
Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.
Letters of intent and agreements in principle often, and here, do no more than set the stage for negotiations on details.
To determine whether the letter of intent is binding:
(1) the language and terms of the letter of intent—“subject to” etc.,
(2) the conduct of the parties
Empro Manufacturing Co. V. Ball-Co Manufacturing, Inc., : If the letter of intent is a condition precedent for subsequent agreement, it will not be the final agreement. The letter of intent can be enforceable as final agreement, if it leaves the formalization or drafting of a formal agreement as truly a mere formality, and the material terms have been agreed in advance with no conditional component left.
Notes: Condition precedent is the occurrence of an event will give rise to the existence of rights and obligations. Condition subsequent is an event that will essentially discharge rights or obligations.
Note: If the parties want to clarify the enforceability of the letter of intent, they may add an integration clause to it.
Restatement §35.The offeree’s power of acceptance
(1) An offer gives to the offeree a continuing power to complete the manifestation of mutual assent by acceptance of the offer.
(2) A contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in §36.
Restatement §36. Methods of termination of the power of acceptance
(1) An offeree’s power of acceptance may be terminated by
(a) rejection or counter-offer by the offeree, o
(b) lapse of time, or
(c) revocation by the offeror, or
(d) death or incapacity of the offeror or offeree.
Restatement §42.Revocation by communication from offeror received by offeree
An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.
Restatement §43. Indirect communication of revocation
An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.
Notes: it doesn’t matter whether the offeree acquires the information from the offeror directly or from someone else, as long as he knows the inconsistency.
§25. Option Contracts
An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
§37.Termination of power of acceptance under an option contract
Notwithstanding §§38-49, the power of acceptance under an option contract is not terminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements are met for the discharge of a contractual duty.
Notes: Merely saying “This offer to be left over until Friday” does not create an option contract. Option contracts should be contracts which need mutual assent and consideration. Consideration needs each party has affirmative obligations. For example, if the offeree give $1 for the offer to last until Friday, this will become an option contract with consideration.
UCC §2-205. Firm Offers：
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
Notes: Sales of goods contract under UCC does not require consideration for formation of contract.
“Mirror Image Rule”: An offer of a bargain by one person to another imposes no obligation upon the former, unless it is accepted by the latter according to the terms on which the offer was made. Any qualification of or departure from those terms invalidates the offer, unless the same is agreed to by the party who made it. Where the negotiations are by letters, they will constitute no agreement unless the answer to the offer is a simple acceptance, without the introduction of any new term.
What happens when a purported “acceptance” differs from the offer in some way?
Before performance it is easier to contest the existence of mutual assent to contract by finding that a purported “acceptance” was really a counter-offer and therefore a rejection of the original offer.
After performance has begun, however, it is often clearer that there was mutual assent to enter into a contract—but because the terms of an “offer” differ from those of the “acceptance,” difficult to discern the terms to which both parties assented.
Ardente v. Horan: an acceptance must be definite and unequivocal. An acceptance which is equivocal or upon condition or with a limitation is a counteroffer and requires acceptance by the original offeror before a contractual relationship can exist. An acceptance may be valid despite conditional language if the acceptance is clearly independent of the condition.
Restatement § 32(a) says that “in case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.”
U.C.C. § 2-204(1)(a) says that “a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”
Notes: The offeror is the master of his offer. The offeror dictates all the terms in the offer for acceptance. If it’s not clear how the acceptance should be made, the offeree is free to choose how they want to accept.
1.32 How to accept and when acceptance takes effect
The general rule is that the offeror may specify the MANNER and MEDIUM by which an acceptance shall be communicated.
Restatement §65: Reasonableness of medium of acceptance
Unless circumstances known to the offeree indicate otherwise, a medium of acceptance is reasonable if it is the one used by the offeror or one customary in similar transactions at the time and place the offer is received.
The Mailbox Rule: the moment of acceptance is when the acceptance is put out of the offeree's possession, i.e., when it is mailed.
Restatement §63. Time when acceptance takes effect
Unless the offer provides otherwise, an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree's possession, without regard to whether it ever reaches the offeror; but an acceptance under an option contract is not operative until received by the offeror.
Notes: The rule is meant to protect the offeree, why?-- The offeror is the master of the offer and he can control the means of acceptance by requiring in the offer that the acceptance shall be effective only if he receives it. When there are no specific terms in the offer, the mailbox rule will fill the gap thus no need for more protection for offer.
Option contracts – acceptance is effective upon receipt
If there is a time limit attached to the offer, as is usually the case, the acceptance must be received within that time.
Offeree can revoke acceptance before receipt.
1.33 Acceptance by performance – Unilateral Contract
Carlill v. Carbolic: The offer can be made to the whole world. The promise shall be binding even though it’s extravagant, b/c the promisor benefits from doing so.
Restatement § 30. Form of Acceptance Invited
An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance.
Restatement § 32. Invitation of Promise or Performance
In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.
Restatement § 54. Acceptance by Performance; Necessity of Notification to Offeror
(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification.
(2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless
(a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or
(b) the offeror learns of the performance within a reasonable time, or
(c) the offer indicates that notification of acceptance is not required.
Promise v. Offer
Restatement §2 Promise
A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.
Restatement §24 Offer
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
What constitutes performance?
White v. Corlies & Tifft : a mental determination not indicated by speech, or put in course of indication by act to the other party, is not an acceptance which will bind the other.
Restatement §19. Conduct as manifestation of assent
(1) The manifestation of assent may be made wholly or partly by written or spoken
words or by other acts or by failure to act.
(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.
Petterson v. Pattberg: unilateral offer can be invoked before offeree promised; How to make a promise in this case: the offer ask the actual tender of payment
NOTE: Professor’s opinion: this rule was too hash and it did not apply now. Current rule is that the offeree shall show his willingness, ability and readiness to make the payment
Facts: Plaintiff is the executrix of the will and Defendant is the bond owner which executed by the dead. Defendant offered that if plaintiff can pay the mortgage by May 31, there will be some discount. Plaintiff before the date come to defendant with money, trying to pay the mortgage, but was informed that the mortgage was sold.
Issues: Can the offer be revoked before the tender when being approached by offeree?
Holding: Yes
Reasoning:
-the offer is proposing a unilateral contract.
-Before a tender of the necessary moneys had been made the defendant notice to Petterson that the defendant could not perform his offered promise.
-The defendant's offer was withdrawn before its acceptance had been rendered.
Comments:
-why the revocation before the promise? it seems the same time!
-why it is not an option contract? The tender is not enforceable unless there is some consideration.
1.34 Acceptance by Silence
Hobbs v. Massasoit Whio CO: prior deals make the silence reasonably regarded as acceptance.
NOTE: But for strangers, this rule is not applied
Facts: Plaintiff shipped eel skins to defendant. Defendant replied nothing and retain several months without notifying plaintiff whether they accepted it.
Issues: Does the plaintiff have an obligation to notify the refusal of the offer?
Holding: Yes
Reasoning:
(1)Prior deals suggest that if eel skins are over 22 inches and fit for business, it could be reasonably inferred that defendant has accepted them.
(2)the silence coupled with retention for a period also helped to infer the acceptance.
§69. Acceptance by Silence or Exercise of Dominion
(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:
(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.
(b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.
(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.
1.35 E-Commerce and Mutual Assent
Nguyen v. Barnes & Noble Inc.: in cases of “click wrap” agreements, courts routinely find there is acceptance of terms.
Facts: Nguyen ordered two Touch pads online from Barnes & Noble and received an email confirming his purchase. The next day Nguyen received a second email stating that because of high demand Barnes & Noble wouldn’t be selling him two Touch pads after all. The Barnes & Noble website contains a link at the bottom of each page to its “Terms of Service.” These “Terms of Service” declare that (a) by accessing the Barnes & Noble site you agree to the Terms of Service; and (b) any disputes with Barnes & Noble shall be sent to binding arbitration and any right to trial by jury is waived. Nguyen filed a putative class action in CA state court, which Barnes & Noble removed to federal court, and moved to compel arbitration.
Reason:
There are primarily two kinds of contracts on the internet:
(1) Click wrap: Users of the website are required to click “I agree” after being presented with terms.
(2) Browse wrap: Terms are available via a hyperlink, but users are not required to read them or click “I agree.”
The court suggests that in cases of “click wrap” agreements courts routinely find there is acceptance of terms. Barnes&Noble should have had its terms pop-up with a button saying “I agree.”
Historical meaning: whatever circumstances render a commitment legally binding
Current meaning(in the 20th century): consideration = the existence of a bargain (bargain: the exchange of promise, e.g., I will give ten dollars if you give me your book)
Restatement § 17:
The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
Restatement § 71(1):
To constitute consideration, a performance or a return promise must be bargained for.
Restatement § 71(2):
“A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.”
Summary of the Restatement’s approach to Enforceability:
Ø A contract is an enforceable promise (Restatement §§ 1 and 2);
Ø With some exceptions (§ 17(2)), to be enforceable a promise must be supported by "a consideration" (§ 17(1));
Ø A promise is supported by a consideration if it is "bargained for" (§ 71(1));
Ø A promise is bargained for "if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise." (§ 71(2))
Ø The alternative to a bargained-for exchange is a gratuitous (or purely social) promise.
2.11 Distinguishing bargains from gratuitous promises (bargains vs gifts)
Ø gratuitous contract: effective only upon actual delivery of the thing that was promised.
Ø why consideration is important: During business life promise is frequently made. Whether a promise is a moral one or a legal one depends on consideration. Only supported by consideration is enforceable.
Johnson v. Otterbein University: gratuitous contract is not enforceable unless there is consideration or until the performance.
Facts: Johnson wrote a note promising a donation to Otterbein University 100 dollars to be used to liquidate the university. Johnson didn't pay and the University sued to enforce the note.
Issues: Whether the contract is enforceable? Holding: no
Reasoning:
(1) The elementary principle is that a promise to pay money as a gift may be revoked at any time before payment.
(2) In the absence of special circumstance there is not difference between identify the purpose or not. the purpose whether or not specified in note is implied.
(3) We don't even know whether the debt is before or after the promise.
Comments: the purpose is not induced by Johnson, he didn't care.
Hamer v. Sidway: consideration doesn't have to be objectively valuable. As long as offer values it would be enough. Since the nephew lost something valuable(the right to drink), there is a consideration, even the uncle did not benefit from this consideration.
Facts: Defendant is the executor of the uncles's estate and Plaintiff is the nephew. At nephew’s age of 15, uncle promised nephew $5000 if nephew would refrain from drinking, using tobacco, swearing, and playing cards or billiards for money until the age of 21 Nephew abided by terms and at 21 wrote to uncle for the money. Uncle replied by letter, “you shall have five thousand dollars as I promised you,” w/interest Executor refused to pay it out to nephew.
Issues: Whether there is consideration?
Holding: yes
Reasoning:
(1)The court won't 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.
(2)It is sufficient that he restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncle's agreement, and now having fully performed the conditions imposed. It doesn't matter whether the consideration benefits the promisor.
Comments: if he is not entitled to drink under 21, there is no consideration because he gave up nothing.
Kirksey v. Kirksey [signed reading but not discussed in the class]
Facts: P was the widowed wife of D's brother. D advised P to sell her land and offered P a place to raise her family. P abandoned her land and moved into the D's nice house for 2 years. After 2 years, D made P leave his house and put her in an uncomfortable house in the woods, which he required her to leave some time late
Issues: Is a gratuitous promise enforceable if the promisee reasonably relies on the promise and incurs a detriment to do so?
Holding/Rule: A gratuitous promise is not enforceable even if the promisee reasonably relies on the promise and incurs a detriment to do so.
Reasoning: The promise was gratuitous and not enforceable.
Dissent: The loss and inconvenience that the P sustained in moving to live with the D was sufficient consideration to support the promise.
§71. Requirement of Exchange; Types of Exchange
(1) To constitute consideration, a performance or return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of :
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person
2.12 Past Consideration (no consideration)
Moore v. Elmer: Past consideration is not valid consideration to create an enforceable contract. Moore did not make the reading for any consideration promised by Elmer. There is no injustice for Moore (§86, see below).
Facts: Moore, clairvoyant, gave Elmer fortune telling services Moore told Elmer he would die before the last day of January 1900 Moore then wrote a “contract” that said that he would pay her mortgage if he died before 1900 Elmer died before 1900
Issues: Is past consideration valid consideration to create an enforceable contract?
Holding: no
Reasoning:
(1)what has been done can't be consideration.
(2)The prediction is bargained for pay not this writing.
Comments: time limitation of debt and wrote a note says he will pay, that will apply §86 injustice
2.13 Moral Consideration
Mills v. Wyman: moral consideration limited to cases where there was already good consideration that the moral consideration reinforced.
NOTE: other promises to fulfill moral obligations have been enforced, but only when there was some preexisting, otherwise enforceable obligation that “has become inoperative by positive law” - §86 (e.g., past loan, time barred breach of contract)
Facts: Mills put up and took care of the Wyman’s son, ostensibly as a good Samaritan, and without the expectation of being paid for his services Wyman wrote Mills a letter promising to pay the expenses, and then did not pay.
Issues: Does a moral obligation constitute consideration? Does past consideration constitute consideration so as to make a contract enforceable?
Holding:no
Reasoning:
(1)Mills acted as a good Samaritan, not at Wyman’s request – no consideration
(2)A moral obligation is only sufficient consideration when at some other time there was a good or valuable consideration, such as a legal obligation
Comments: Past consideration and moral considerations, unless supported by other valid consideration, are not consideration sufficient to make a contract enforceable. The Wyman’s letter was not consideration, because the promise itself did not induce the Mills to perform services as a promisee, nor did the Mill have a legal obligation to pay for the services rendered to his son.
Webb v. Mcgowin: Moral obligation recognized by subsequent promise + material benefit = enforceable (executory) promise binding contract
Facts: Webb saved Mcgowin from a falling block of lumber in a mill by jumping onto it himself; Webb was crippled for live Mcgowin agreed to pay Webb $15 every two weeks for care and maintenance in consideration of the rescue When Mcgowin died, his estate refused to continue the payments
Issues: Can moral consideration create an enforceable promise when the promisor has received a material benefit?
Holding: Yes
Reasoning:
(1) where the promisee “cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service, because of the material benefit received”
(2) a moral obligation is sufficient consideration to support a subsequent (executory) promise to pay where the promisor has received a material benefit
Comments:
(1) See §86 of the Restatement – “A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice”
(2) BUT, the Restatement does not make reference to past consideration or moral obligation; rather §86 is strictly restitutionary – compensation for a benefit previously received
(3)webb: p630 if you put life service and injury, the burden shifted to servicee to prove
§86. Promise for Benefit Received (The purpose of Section 86 is to avoid unjust enrichment)
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1):
a. if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
b. to the extent that its value is disproportionate to the benefit.
Comment d, illustration 7:
“A saves B's life in an emergency and is totally and permanently disabled in so doing. One month later B promises to pay A $15 for every two weeks for the rest of A's life, and B makes the payments for 8 years until he dies. The promise is binding.”
KIRKSEY v. KIRKSEY:
Facts: The plaintiff was the wife of defendant’s brother, In 1840, the plaintiff resided on public land, under a contract of lease. The defendant wrote plaintiff a letter saying that the defendant will let plaintiff have a place to raise her family. After the receipt of this letter, the plaintiff removed with her family, to the residence of the defendant. However, after several years the defendant notified the plaintiff to remove, the plaintiff sued
Issues: Whether there is consideration?
Holding: No
Reasoning: She did not give anything up, but retained the property she had before.
Note：The bargain theory of the consideration: the quid and quo both require somebody to give something up. You can enter into a contract where there is no benefit conferred upon either of the parties. (A can enter into contract with the B through giving up something in exchange for B giving something up (the benefit may be conferred upon a third party to the contract). And neither A and B receive the fruit of that contract.)
Harris v. Watson
Facts: The plaintiff was a seaman aboard the ship “Alexander,” sailing for Lisbon. A peril arose during the trip, and the captain (defendant) promised to pay the crew an additional five guineas to induce the crew to exert themselves. The plaintiff sued for the promised additional wages when the defendant refused to pay.
Holding: Court refused to enforce of grounds of public policy to protect maritime commerce, preventing potential extortion.
Note：The case has nothing to do with condiseration. The decision is based on public policy. Public policy: a manifestation of what the national or state interest is. The value that a particular nation or state holds dear. For instance: surrogacy contracts – will not be enforced based on public policy in particular states.
Stilk v. Myrick (Modification to the contract requires consideration)
Facts: Plaintiff agreed to be a member of the crew for £5. During the voyage, two crewmembers deserted, and the captain offered to divide their wages among the remaining crew if he could not find replacements – and he did not. Plaintiff demanded additional wages upon his return, which were denied. Defense’s argument was based on Harris v Watson – public policy.
Holding & Reasoning: The court found the agreement void for want (lack) of consideration: Before they sailed from London the crew had undertaken to do all that they could under all the emergencies of the voyage. the desertion of a part of the crew is to be considered an emergency of the voyage as much as their death. They had already sold all of their services in advance.
Note: when you agree to do all the work necessary, including in cases of emergency, in exchange for the payment of 5 pounds. And an emergency arises, you are getting paid for exactly what you are agreed to get. When you are providing nothing more than what you already sold for the price you originally agreed, you are not entitled to change the term and to additional compensation).
Rule: If you have a preexisting duty to do something, you cannot request greater compensation if you are not doing anything additional to what you originally committed to do.
Alaska Packers’ Association v. Domenico
Facts: Plaintiffs agreed to travel from San Francisco to Pyramid Harbor, Alaska, and back, and to work as fishermen to catch and can salmon. The plaintiffs were offered a fixed sum ($50/$60) in compensation, plus 2¢ for each red salmon they caught. Defendants had invested about $150,000 in a salmon cannery in Alaska. Shortly after arriving, the plaintiffs refused to work and threatened to return to San Francisco unless they were promised $100. Superintendent told them he lacked authority to approve, but he couldn’t get replacement workers, so he instructed his clerk to copy the contracts and replace the wages. Upon their return to San Francisco, the company refused to pay the $100.
Holding & Reasoning: Court concluded this was unlikely (i.e., not credible). Court found that plaintiffs had agreed to do their work for a certain compensation, and knew that they would be impossible to replace. Plaintiffs had no valid cause to refuse to do the work, and offered nothing additional of value to justify an increase in wages. “No astute reasoning can change the fact” that the party who refuses to perform and does so to coerce a promise for increased compensation for what he is already obligated to do takes an unjustifiable advantage of the necessities of the other party”
Note：in this case, there was no additional work that required or justified for an increased compensation by the workers. What they were required to do was exactly what they were already obligated to do.
Brain construction and development co. v. Brighenti
Facts: Plaintiff is a contractor, defendant is a subcontractor promised to perform excavation work for the plaintiff. D discovered considerable rubble during the excavation then it stopped to excavate. The plaintiff and D orally agreed that the D would be paid his additional cost for removing the rubble. The D failed to perform, P sued for breach of contract (damage).Plaintiff sued for damages, and defendant argued that contract was unenforceable for lacking the requisite approvals.
Issue: Is there a valid agreement?
Holding & Reasoning: Yes. Defendant prevailed in the trial court. On appeal the decision was reversed and remanded with direction to render judgment for the plaintiff to recover such damages as he may prove on a new trial limited to the issue of damages. “Under these circumstances, the subsequent oral agreement, that the defendant would remove this rubble in return for additional compensation, was binding as a new, distinct contract, supported by valid consideration."
Rule：Where a subsequent agreement imposes upon the one seeking greater compensation an additional obligation or burden not previously assumed, the agreement, supported by consideration, is valid and binding upon the parties.
Note: Unforeseen, burdensome condition was discovered during the performance of the original contract. The promise of additional compensation in return for the promise of additional work (consideration here to the amendment) constitutes an agreement.
Exception to common law - U.C.C. § 2-209(1):
"An agreement modifying a contract within this Article needs no consideration to be binding."
Note: There is no requirement that amendment of contract of sale of goods be supported by consideration.
1. Difference between want/lack of consideration, failure of consideration, and inadequacy of consideration:
2. When a party gets all the consideration she honestly contracted for, she cannot say she gets no consideration, or that it has failed. Otherwise, there is no freedom to contract.
3. The purchaser gets a something is estopped by the exercise of his own judgment, uninfluenced by fraud, or warranty, or mistake of facts, at the time, to afterwards say it was not worth to him what he agreed to give.
4. What a purchaser was willing to pay ex ante reflects the idea of demonstrated preferences, which courts are reluctant to second-guess.
5. The judgment of the purchaser is the best arbiter of whether the thing is of any value, and how great, to him.
Newman & Snell’s state bank v. Hunter
Facts: The bank held a note signed by the widow's husband. Widow agreed to sign a note in exchange of her husband’s note (= agreed to pay her husband’s debt). Later she refused to pay. Bank sued. Bank argued the consideration is the husband-signed note and the share in the insolvent company.
Holding & Reasoning: Court found for widow, held that the consideration worth nothing. The court agreed with the widow, finding that the Plaintiff surrendered nothing of value, and the widow received nothing of value. Widow did not enter into the bargain to obtain a piece of paper with her husband’s signature on it, but ostensibly to cancel his debt. This may be a moral undertaking, but it is not enforceable because what she received in return (or, more importantly, what Plaintiff gave up) was worthless.
Note: The bank gave up nothing in value (merely a sham, no quid pro quo) in exchange for the widow’s note.
Restatement §79, comment d:
Dyer v. National by-products, Inc.
Facts: On October 29, 1981, Dale Dyer, an employee of National By-Products, lost his right foot in a job-related accident. The employer placed Dyer on a leave of absence at full pay from the date of his injury until August 16, 1982, when he returned to work after the employer allegedly offered him lifetime employment in exchange for forbearing a personal injury lawsuit. On March 11, 1983, the employer terminated Dyer, and denied any promise. Dyer sued for breach of contract. Defendant alleged lack of consideration, because Dyer’s personal injury lawsuit was barred by the Workers’ Compensation Act. Dyer alleged he had a good faith belief that his claim had value.
Holding & Reasoning: Defendant prevailed on summary judgment, which was reversed on appeal. Even if “Dyer's tort action is clearly invalid and he had no basis for a tort suit against either his employer or his fellow employees,” “the law favors the adjustment and settlement of controversies without resorting to court action. . . . Compromise is favored by law. . . . Compromise of a doubtful right asserted in good faith is sufficient consideration for a promise.”
Note:
o [workers compensation act]: if you are a lawyer injured in work, you should not believe you can have a tort claim against your employer. But a normal person may believe. Even if Mr Dyer’s claim is objectively worthless, he may legitimately believe that he was giving something up in exchange for that bargain.
o A legitimate believe as to the value of the cause of action is an adequate consideration. Even if it is objectively worthless, it could very well be that both the employee and employer believed they have a good case and believe they had given something up and actually reached an agreement. And in the view of the employer and employee, there is a quid pro quo.
o If later it turns out that actually a worthless case, that doesn’t mean the bargain struck initially assuming he can prove two things:
- They had a legitimate belief;
- There was an effective promise given by the employer.
Can the settlement of an unfounded claim asserted in good faith be consideration for a contract of settlement?
Restatement 74:
(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless
(a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or;
(b) the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.
Note: forbearance to assert an invalid claim is a consideration if (1) the claim is in fact doubtful; or (2) forbearing party believes that the claim is valid (plaintiff must prove that he had a good faith believe)
Comment b. Requirement of good faith.
The policy favoring compromise of disputed claims is clearest, perhaps, where a claim is surrendered at a time when it is uncertain whether it is valid or not. Even though the invalidity later becomes clear, the bargain is to be judged as it appeared to the parties at the time; if the claim was then doubtful, no inquiry is necessary as to their good faith. Even though the invalidity should have been clear at the time, the settlement of an honest dispute is upheld. But a mere assertion or denial of liability does not make a claim doubtful, and the fact that invalidity is obvious may indicate that it was known. In such cases Subsection (1)(b) requires a showing of good faith.
Note: If the employee truly believed (that is, can prove he in “good faith” believed) that he had a claim and that he was induced to give it up by the promise of continued employment, then there was a genuine bargain here.
Ricketts v. Scothorn
Facts: John Ricketts, the Plaintiff's grandfather, called on her at the store where she was working, and handed her a note that said "I promise to pay to Katie Scothorn on demand, $2,000,to be at 6 per cent. per annum.” According to a witness’ account, the grandfather told Plaintiff “I have fixed out something that you have not got to work anymore.“ He further said none of my grandchildren work, and you don't have to. Plaintiff took the paper, kissed her grandfather, and began to cry. Plaintiff quit her job, though later, with the consent of her grandfather, she took another. When grandfather passed away, having paid only one year of interest, Estate repudiated the debt. Plaintiff sued for breach of contract.
Issue: Was there consideration in the form of a bargain?
Holding & Reasoning: No.
Note:
Greiner v. Greiner: Promise that promisor should reasonably expect to induce action or forbearance by promisee and promisee relies on, to his detriment and enforced, if only way to avoid injustice.
Facts: Maggie Greiner, mother of Frank Greiner, one of offspring disinherited by the Maggies ’s late husband. In conversation, Maggie told Frank she would pay him; Maggie said he did not want money; Frank said he could have land for a home, the 80 acres and a quarter section; understood that they would assure title later. Maggie never fulfilled her intention of executing and delivering a deed to her son Frank.
Issues: Whether the future intention to give the land is enforceable?
Holding: Yes
Reasoning:
- Promise Reasonably Inducing Definite and Substantial Action is Binding. A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
- Frank moved, made improvements on the land, made other expenditures, all in reliance on his mother’s promise, which is a definite offer.
Restatement §54. Acceptance by performance; necessity of notification to offeror
(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification.
(2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless
(a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or
(b) the offeror learns of the performance within a reasonable time, or
(c) the offer indicates the notification of acceptance is not required.
Elements of Promissory Estoppel:
Feinberg v. Pfeiffer Co.: If there was a promise which intended to induce reliance and did induce reliance, enforcement was necessary to prevent an injustice.
Facts: Feinberg had worked for Pfeiffer company for many years, and the company’s board resolved to pay her $200/month upon her retirement. Feinberg retired about a year and a half later and began to receive these payments. After Pfeiffer’s President died, wife and son and law felt they should not have to pay, and eventually suspended the payments.
Issues: Is the promise enforceable?
Holding: Yes
Reasoning:
- A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
- promissory estoppel as distinct from equitable estoppel: there is no issue of representation or misrepresentation of fact – the promisee relies on the promise and not on a misstatement of fact
- the injustice would occur regardless of exactly when the Feinberg became disqualified for work; she relied upon the Pfeiffer’s promise to pay her pension in retiring from a lucrative position
Comments:
- Learned Hand in Porter v. Commissioner of Internal Revenue: “‘promissory estoppel’ is now a recognized species of consideration.”
Pitts v. McGraw- Edison Co. [signed reading but not discussed in the class]
Note: The doctrine of promissory estoppel, as explained by the authorities, is different from the well recognized principle of estoppel in pais, based on misrepresentation of fact.
Facts: Plaintiff, L. U. Pitts, brought this action in the District Court to recover damages in the amount of $ 15,000 for an alleged breach of a retirement contract by the defendant. Plaintiff contended that the negotiations between defendant leading to his retirement were in substance an offer on the part of defendant that if he would retire and turn over to his successor representative all of his customer account records containing valuable information on active and inactive accounts, defendant would pay him monthly thereafter a one percent overwrite commission. The court stated the parties' relationship was at will and could be terminated by either party at any time without notice and without liability.
Issue: Did the court err in holding that the parties' relationship was at will and could be terminated by either party at any time without notice and without liability?
Holding: No.
Reasoning:
-It must be kept in mind that the plaintiff was an independent business man, not an employee of the defendant. His relationship with the defendant could be terminated by either party at any time without notice and without liability therefor. The plaintiff in his testimony concedes this, and it was so found as a fact by the District Judge. Unless the plaintiff is able to establish a valid contract obligating the defendant to pay the 'retirement' benefits claimed, he has no cause of action. Thus, the District Judge ruled that the payments to the plaintiff over the period of July 1, 1955, to July 1, 1960, were without consideration, were the result of voluntary action on the part of the defendant, and were mere gratuities terminable by the defendant at will.
James Baird Co. v. Gimbel Bros., Inc.: the estimate put in bid isn't a promise therefore the estoppel doesn't apply.
Facts: Defendant is a merchant and plaintiff is a contractor. After knowing there will be a bid in PA and he estimates the amount of linoleum and sent it to all bidder, which is wrong. The offer includes "absolutely guaranteed". The substitute estimate arrived after plaintiff made a bid based on it.
Issues: Can defendant be liable based on promissory estoppel?
Holding: No
Reasoning:
- There is no contract: put the estimate in bid doesn't mean accept the offer. The wording in estimate also strengthens the point.
- the offer is not meant to become a promise until a consideration has been received.
- The defendant offered to deliver the linoleum in exchange for the plaintiff's acceptance not for its bid.
Comments:
- In contrast, in the Star Paving case, the court found that based on the custom and practice in that particular location a bid amounted to a promise.
- "absolutely guaranteed" could be read as option contracts but still requires consideration, which is none.
- Rosenberg thinks it is unfair because the bid rely on the assessment though the offeror entitled to revoke.
Drennan v. Star Paving Company: reversed Feinberg, due to business interest and custom, the subcontractor bid is a promise once the general contractor relied on it to bid therefore binding.
Facts: Drennan, general contractor, preparing to bid on a Lancaster county school job. Star Paving, subcontractor, put in a bid for paving for $7,131.60 to the Drennan. Drennan used this figure and reported the figure and Star Paving subcontractor in its own bid, and it won the contract.
Star Paving then refused to do the paving work for less than $15,000. Drennan found another company to do the work for $10,948.60 and sued for the difference of $3,817. It was customary in that area for contractor to receive the bids of subcontractors by telephone one the day set bidding and to rely on them in computing their own bid.
Issues: Whether reasonable, justifiable, and foreseeable reliance can render an offer without consideration binding? Did Drennan’s reliance make the Star Paving’s offer irrevocable?
Holding: Yes Reasoning:
- the Star Paving had reason to expect that if its bid were the lowest, it would be used by the Drennan; so it induced “action… of a definite and substantial character on the part of the promisee”
- Reasonable reliance serves to hold the offeror in lieu of the consideration ordinarily required to make the offer binding.
- The subtractor realized that his offer could be the lowest and he desired that offer to be relied on to bid.
Baird vs Drennan:
LON L. FULLER, BASIC CONTRACT LAW 346 (1947): A failure or want of consideration, in whole or in part, may be pleaded in any action, set-off or counter-claim upon or arising out of any specialty, bond or deed, except instruments negotiable by the law merchant and negotiated before falling due.
Restatement §90: A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
Restatement §71. Requirement of exchange: Types of exchange:
Restatement §87. OPTION CONTRACT:
Allegheny College v. National Chatauqua Co. Bank.: New York has adopted the doctrine of promissory estoppel as the equivalent of consideration in connection with its law of charitable subscriptions.
Facts: The decedent promised to give plaintiff college a charitable subscription 30 days after her death and with the condition that the scholarship established with the subscription be named in her honor. She donated $ 1,000 prior to her death. After her death, plaintiff filed suit against defendant executor for the unpaid balance of the subscription. Plaintiff's complaint was dismissed and judgment was entered in favor of defendant. The appellate division affirmed, but on further appeal, the court concluded that the duty assumed by plaintiff to perpetuate the name of decedent by naming the scholarship in her honor when it accepted part of the donation was sufficient consideration to make the charitable subscription promise legally enforceable.
Issue: Was there sufficient consideration to make the charitable subscription promise legally enforceable?
Holding: Yes.
Reasoning:
-Judgment was reversed because the duty assumed by plaintiff to perpetuate the name of decedent by naming the scholarship in her honor when it accepted part of the decedent's donation was sufficient consideration to make the charitable subscription promise legally enforceable.
Charitable subscription problems:
Restatement § 90(2): “A charitable subscription ... is binding ... without proof that the promise induced action or forbearance.”
Goodman v. Dicker: He who by his language or conduct leads another to do what he would not otherwise have done, shall be liable to that other person after disappointing the expectations upon which he acted. This remedy is always so applied as to promote the ends of justice.
Facts: Appellees sued appellants for breach of contract. The trial court found appellants, by their representations and conduct, induced appellees to incur expenses in preparing for business under a franchise that was never granted. The trial court held even though no contract had been proven, appellants were estopped from denying one existed, and judgment was entered for appellees for the amount covering their cash outlays and anticipated profits from the sale of radios. Appellants sought review of the decision.
Issue: Does a representation of a company to grant franchise, which it does not later grant after the franchisee assumed expenses, give rise to a claim for damages?
Holding: Yes.
Reasoning:
-Any misrepresentation by a party deceiving another causing detrimental reliance is liable for damages. Judgment that appellants wee estopped from denying that a contract existed was affirmed. However, the court modified damage judgment to include only the loss sustained by expenditures made in reliance on the assurance of the franchisor, not the anticipated loss of profits on the sale of the goods.
Restatement of Torts (Second) § 526 - CONDITIONS UNDER WHICH MISREPRESENTATION IS FRAUDULENT (SCIENTER): A misrepresentation is fraudulent if the maker
(a) knows or believes that the matter is not as he represents it to be,
(b) does not have the confidence in the accuracy of his representation that he
states or implies, or
(c) knows that he does not have the basis for his representation that he states or implies.
Note: The measure of damages is the loss sustained, not the gain prevented.
Hoffman v. Red Owl Stores, Inc. [signed reading but not discussed in the class]
Note: The conditions imposed for promissory estoppel are: (1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee? (2) Did the promise induce such action or forbearance? (3) Can injustice be avoided only by enforcement of the promise?
Facts: Red Owl promised a couple that if they invested a total sum of $ 18,000, Red Owl would establish a new grocery store for them. Upon reliance to the agreement and representations, the couple sold their bakery building and business and their grocery store and business, as well as bought a new lot, only to find Red Owl continuously increased the price the parties had originally agreed upon. Consequently, the couple were induced to sell the store's fixtures and inventory on the promise that they would be in their new store in a few months. The deal never went through and couple sued Red Owl. The circuit court ruled in favour of the couple. The case was appealed to the Supreme Court of Wisconsin.
Issue: Did the couple have a cause of action based on promissory estoppel?
Holding: Yes.
Reasoning: The Courts held that the development of the law of promissory estoppel is an attempt by the courts to keep remedies abreast of increased moral consciousness of honesty and fair representations in all business dealings. A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
3.1.2 The prevailing interpretive approach to reconciling ambiguity and vagueness is called the "objective theory.
According to Learned Hand: "A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, 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 on them, he would still be held, unless there were mutual mistake or something else of the sort. Of course, if it appear by other words, or acts, of the parties, that they attribute a peculiar meaning to such words as they use in the contract, that meaning will prevail, but only by virtue of the other words, and not because of their unexpressed intent.
3.2 Ambiguous Terms
Raffles v. Wichelhaus: No minds are met, no contract.
Facts: Contract between Raffles and Wichelhaus for delivery of 125 bales of cotton to arrive from Bombay “to arrive ex ‘Peerless’”, rate of 17 ¼ d. per pound. The problem is there are two ships called "peerless" shipping in October and December respectively. Plaintiff says ship is immaterial matter. Defense refused to accept the good.
Issues: Is there a contract?
Holding: No
Reasoning:
- there was no consensus ad idem, therefore no binding contract.
Comments:
- there is a mutual mistake and the term is material.
- The term "Peerless" in the contract is ambiguous from an "objective" point of view.
What should happen when the subjective understanding of both parties differs from the objective meaning? The subjective meaning should control.
Restatement 2d, § 201(1): Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
The normal case is one where a term is ambiguous and there is a genuine misunderstanding between the parties as to the meaning of the term. 👉Then, there is no contract.
What if there is an objectively ambiguous term, but One party (and only one party) actually knows that the other party attaches a different meaning to the term, and what that meaning is? 👉There is a contract based on the meaning attached by the party who is unaware of ambiguity.
A party is not justified in relying on the objective meaning when the other party's subjective meaning of a term is known to him, Because the reason why we have an objective theory (to recognize the unavoidable reliance people place on the “objective” meaning of terms) is inapplicable in the situation where one party knows that the objective term (while ambiguous) is not being given the same meaning by the other party.
Restatement 2d, § 201(2) : Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
So, when one party has reason to know the other attaches a different meaning to an ambiguous term, that meaning controls and there is a contract.
Trade custom or practice:
Restatement 2d, § 202(3)(a):
(3) Unless a different intention is manifested,
(a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;
(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
(5) Wherever reasonable, the manifestation of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.
Restatement 2d, § 201(3):
Oswald v. Allen: The note or memorandum must be such that, standing alone, it completely represents an acknowledgement or admission of the party of the existence of an agreement, promise or undertaking which obligated him to pay or perform as alleged.
Facts: A coin collection purchaser filed a complaint against a coin collection seller, alleging that a contract had been formed for the sale of a Swiss coin collection. Several letters were presented in court to rove the claim. The trial court found that the coin collection purchaser thought the offer was for all of the Swiss coins, while the coin collection seller thought she was selling only a specific coin collection and not the Swiss coins in another collection also. Thus, the court concluded that a no contract existed for the sale because the minds of the parties had not met. The case was appealed to the United States Court of Appeals.
Issue: Was there a valid contract?
Holding: No
Reasoning:
-The Court held that no contract existed for the sale of the coins was upheld because the letter from defendant to plaintiff failed to fulfill the first and third requirements for a valid contract, as set forth in the Uniform Commercial Code: to evidence the existence of a contract, and to specify a quantity.
-The Court also noted that letters or other writings could be used to check for the agreed-upon terms but these writings must be connected either expressly or by the internal evidence of subject-matter and occasion.
The problem of vagueness is whether a term includes a particular object. How to discern the vagueness in the contract?
A. Restatement 2d, § 202(3)(b): Rules in aid of interpretation
l (3) Unless a different intention is manifested,
(a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;
(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
(5) Wherever reasonable, the manifestation of intention of the parties to a promise or agreement are to be interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.
l Note: the distinctions between “course of performance” and “course of dealing”
– course of performance: refers to the particular contract. The court is gonna give a weight by interpreting the contract in the manner consistent with the way it is performed, which gives a clear indication what’s the party’s subjective intention meant.
Alert: Subjective understanding has critical meanings here for contract interpretation
– course of dealing: broader concept, refers to the commercial relationship in a long period. The court is trying to be consistent with the way the parties dealt with each other in the past.
– The course of performance is often a subspecies of course of dealing. if the behavior in this particular contract (course of performance) deviates from the course of dealing, the court will follow the latter interpretation.
B. Case law
Weinberg v. Edelstein, 110 N.Y.Supp.2d 806 (1952)
l Case Synopsis
– Plaintiff dress retailer brought an action for an injunction to enforce a restrictive covenant in his lease against defendant skirt retailer. They discussed whether the “dress” includes “skirts and blouses”. Defendant’s goods are not dresses, and defendant wins.
l Rule of law
– What constitutes a "dress" depends upon "the practices and customs of the trade and requires some consideration of the background of the vast and changing ladies’ garment industry
Frigaliment Importing Co. v B.N.S. International Sales Corp., 190 F. Supp. 116 (1960)
l Case Synopsis
– The buyer, plaintiff, disagrees with the defendant on the definition of “Chicken” used in the purchase contract. The Plaintiff claims “chicken” only means a young chicken (narrower scope), suitable for broiling and frying while the defendant argues “Chicken” means any bird of that genus that meets contract specifications on weight and quality, including what it calls “stewing chicken”.
– The plaintiff sued for breach of contract
l Court’s view
– At trade usage, chicken means young chicken, but the defendant is new to this industry which both parties know, thus the trade usage is useless.
– We all think “chicken” has a vague meaning.
– Plaintiff’s subjective intent was irrelevant here because he bore the burden of showing that the parties meant the narrow definition, and did not meet it.
– The court dismissed it.
C. Summary of contract interpretation
l First, try to establish if both parties subjectively attach the same meaning to the term (i.e., the existence of subjective understanding)
– Start with the words of the contract “Definition” part of the contract to see if other provisions are a guide to the provisions whose meaning is in question.
– If no definition, may check out negotiations, performance, and/or dealing in prior transactions.
– If you can discern, there is no misunderstanding, and the enforceable term is the parties’ joint subjective meaning.
l Second, if no subjective agreement can be found, there is a misunderstanding. You must then look to see if one party knows or has reason to know what the other means from their correspondences. If so, that meaning controls.
l Third, if neither of the above, look to the objective meaning of the terms, as in Weinberg and Frigaliment. If found, that meaning controls even if one party is mistaken.
l Finally, if no unique or objective meaning is discernable, the term is objectively ambiguous. There is no shared understanding (meeting of the minds) and term or contract may fail for lack of mutual assent.-----the contract is unenforceable.
Gaps existing in every agreement
What do we do when there are gaps in the agreement?
Refuse to enforce? Fill the gaps? If the latter, how do we do it?
A. Agreements to agree
a) Sun Printing & Publishing Ass'n v. Remington Paper & Power Co., 235 N.Y. 338, 139 N.E. 470 (1923)
b) Case brief: the purchase contract between the plaintiff and defendant left two terms open/uncertain: the price and the duration.
c) Court’s view: this is an agreement to agree which is unenforceable, not an agreement subject to open terms. The parties only agreed to negotiate in the future, both of them have no obligation to perform under the contract after month four-which means no contract. The court are not at liberty to revise while professing to construe.
d) Dissenting: there is a binding contract and the court should spell it out if it be possible. 4 options to fill the gap:
1. As the Defendant has broken the contract it can be held to deliver the balance of the paper at the price set on December 15.
2. Or you could set the price according to the Canadian standard each month.
3. Or if the evidence shows that the Canadian "contract" price is for a certain period, you could hold the price for that period.
4. Or you can "apply the rule of reason and compel parties to contract in light of fair dealing." I.e., CPEC price for a reasonable time under circumstances and conditions in the trade.
e) Criticism for the dissenting: That’s not what the parties agreed to. It’s rewriting the contract.
1. The price to be applied to that transaction cannot be determined with reference to that agreement.
2. Though each of the dissent's suggestions would yield a different result, none are compelled by it;
3. And none can be excluded as inconsistent with the articulated terms of the writing.
4. Thus, the court would be inventing a term – revising "while professing to construe."
B. Different treatment from UCC 2-204
a) U.C.C. §2-204, which permits the enforcement of a contract even if “one or more terms are left open,” so long as the parties intended to make a contract, and there is a reasonable basis for giving a remedy.
1. U.C.C. §2-305 empowers a court to fix a “reasonable” price if the price is left to be agreed upon and the parties are unable to agree – unless it is the intention of the parties to not be bound except upon an agreement.
§ 2-309 Absence of Specific Time Provisions; Notice of Termination
§ 2-305 Open Price Term
§ 2-308 Absence of Specified Place for Delivery
§ 2-310 Open Time for Payment or Running of Credit; Authority to Ship Under Reservation.
2. Please note:
Ø Require very clear intention to be bound by the agreement (not in this case)
Ø Has to be in a reasonable basis to craft a remedy
b) On the contrary, Restatement 2d §204, which does not rest enforcement on the parties’ intention to make a contract, but on whether their bargain was “sufficiently defined to be a contract.”
a) Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1918)
1. Case brief: the plaintiff, Mr. Wood entered an agreement with the defendant, Lady Lucy, saying the plaintiff received the exclusive rights to place the defendant’s endorsement on products subject to her approval. And in return, plaintiff will give one-half of all the profits of the endorsed products to her. But the defendant placed her endorsement on other items without Plaintiff’s knowledge and withheld the profits, arguing it’s not a contract violation because the consideration is open thus there’s no obligation from contract.
2. Court’s view:
i. The price terms can be implied from the contract and facts, without which the promises to split the profit would be in vain.
ii. Agreement was for a year with Plaintiff being the exclusive representative of the Defendant. It is unreasonable to think that this right would have been given in exchange for nothing.
b) U.C.C. § 2-306 Output Requirements and Exclusive Dealings:
1. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
2. Whenever such an agreement is entered into such must be the intentions of the parties so, absent some indication to the contrary, this intention will be presumed.
3. U.C.C. turns Wood’s implied in fact term into a term implied in law, which can be rebutted by evidence to the contrary.
a) Carnival Cruise Lines v. Shute, 111 S.Ct. 1522 (1991)
1. Case brief: the plaintiff bought an international cruise ticket from the defendant. The plaintiff got injured during the trip and later sued in Washington State. But Defendant moved to dismiss the case based on the forum selection clause printed in the ticket face and the case should be filed to Florida.
2. Court’s view:
Rule:
3. This case is unusual. The general rules are that the adhesion contracts are still subject to the principle of freely and fully negotiated contracts between two parties.
b) U.C.C. § 2-207 Issues – Discerning the Terms
1. In MERCHANT INDUSTRY, accept the offer but add additional conditions may not constitute alternation of the contract but depending how its materiality. Court shall discern the meanings of terms from both parties’ communications to decide whether there is a contract or not.
Thompson v. Libby(real question: What are the parties’ obligations under the contract?) | |
Facts | Plaintiff owned logs marked "H.C.A." Agreement between Plaintiff and Defendant does not include warranty of the quality, which was only mentioned orally. Defendant refused to pay because of the warranty.Plaintiff sued, alleging oral testimony of warranty of quality "was incompetent to prove a verbal warranty, the contract of sale being in writing. |
Issues | Whether an oral message is admissible to contradict or vary the terms of a valid written agreement? |
Holding | No |
Reasoning | Parol [i.e., extrinsic] contemporaneous evidence is inadmissible to contradict or vary the terms of a valid written instrument.If the parties took the time to write out what their agreement was and didn't include other aspects, the court presumes that those were not actually part of the deal.This is a conclusive presumption, meaning a presumption that is not really a presumption at all, but a rule of law |
Masterson v. Sine | |
Facts | Plaintiff was the trustee in bankruptcy (in charge of managing a bankrupt to state for a person who declared bankruptcy mister masters)Masterson sold his house to Sine. Signed contract: the seller has the right to buy back the property within 10 years at the same price that he had been paid for the home.Plaintiff wants to rebuy 10 years later.Defendant: the option to rebuy was subject to some oral terms, which was only intended to be a personal option and expressible only by Masterson and no one else. |
Issues | Whether such an integration clause is helpful and determined?Could trustee in bankruptcy exercise bankrupt’s option to repurchase when defendants alleged an oral side agreement that the right was limited to members of the family? |
Holding | No |
Reasoning | First, using the document itself is the end as a be all and end all. It's usually a foolish endeavor because it's the product of man and stuff may be missing.Second, because this is a very unusual clause and circumstances. (brother selling a home to a sister)Therefore, even though this contract on its face would appear to be complete, I am going to allow the introduction of extrinsic evidence to prove the existence of additional terms to the contract. |
Importancy | Whether or not this is a completely integrated agreement or an integrated agreement or not an integrated agreement, the court is going to make that determination as a matter of law, not as a matter of fact.And that is not determinative of the rest of the case. |
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and
(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
What to be noted:
There is no presumption under the UCC that the writing was an integrated or fully integrated agreement, unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
Different to UCC:
Under the common law, it's presumed that the contract, if we're in writing is intended to be the whole agreement.
Under the UCC, not presumptive. The judgment has to make that call.
Integration or merger clauses do not foreclose extrinsic evidence of:
Fraud
Bad faith
Unconscionability
Mistake in the integration-the contract does not reflect the actual terms of the agreement
Conditions precedent
Subsequent agreements- The parole evidence rule cannot bar evidence of any subsequent agreements between the parties
Note: It’s a legal issue, judged by judge rather than jury.
Modern View: The parol evidence rule does not apply to questions of interpretation – e.g., ambiguity or vagueness. Thus, even if the contract is integrated or completely integrated, it may be “explained” by the parties’ course of dealing, usage of trade, or course of performance
Noted: When it comes to contract interpretation, the courts are looking to give effect to the subjective intention of the parties. Courts will allow extrinsic evidence to explain the contract and the courts will allow extrinsic evidence to understand the scope and meaning of its terms
Pac. Gas & E. Co. v. G. W. Thomas Drayage etc. Co.
Facts: A utility company hired a contractor to repair its steam turbine. Under the indemnity clause of the contract, the contractor promised to indemnify the utility company for all property damage. The turbine was damaged during repairs and a case was filed to collect damages. The utility company, however, argued that the intention was only to indemnify damages caused to property owned by third parties. Relying on the plain meaning of the contract language, the trial court found the contractor liable. The case was appealed to the Supreme Court of California.
Issues: Is parol evidence admissible to ascertain the true intent of contractual parties even where the writing seems clear and unambiguous?
Holding: Yes
Reasoning/Rules:
- The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.
Supplement:
- If you did not know or have a reason to know what the other side meant (no subjective) , then the court will resort to the objective interpretation of the term
5.1. 6 kinds of pacts Require for a written agreement under Statute of Fraud
Contracts under the common law do not generally need to be in writing, but certain formal contracts still have their place.
The Statute of Frauds specifies when you MUST HAVE a written agreement to obtain judicial enforcement.
Even though all the elements of the prima facie case of contract may be present, certain kinds of agreements will not be enforceable unless they are in writing.
The Statute of Frauds applies to those contracts that are costly, whether in time or money, to perform.
An Oral contract is allowed, except for 6 kinds of pacts, the Statute of Frauds requires a written contract
Marriage
Year from contract
Land (sale or lease for more than 12 months)
Indemnity for another
Five hundred dollars
Executor’s/administrator of the estate’s personal liability
Tips: Remember – MY LIFE
Restatement 2d, § 110: CLASSES OF CONTRACTS COVERED
(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception:
(a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision);
(b) a contract to answer for the duty of another (the suretyship provision);
(c) a contract made upon consideration of marriage (the marriage provision);
(d) a contract for the sale of an interest in land (the land contract provision);
(e) a contract that is not to be performed within one year from the making thereof (the one-year provision).
5.2. Exceptions in the Statute of Fraud
Boone v. Coe:
Facts: The parties' agreement provided that if the lessees would leave their homes and businesses in Kentucky, the lessor would furnish them with a house and the necessary materials to live on and cultivate the lessor's farm in Texas for the period of one year, commencing from the date the lessees arrived in Texas. The lessees agreed, but when they arrived in Texas, the lessor failed to have the house and materials ready and refused to grant the lessees access to the farm. The lessees brought an action for damages, and the circuit court entered judgment in favor of the lessor. The court determined that the lessees merely sustained a loss and that as the lessor received no benefit, there was no implied obligation on the lessor's part to pay for such loss.
Issues: Can plaintiffs recover for the lost time and incurred expenses based on their reliance on a contract that is unenforceable under the statute of frauds?
Holding: No
Rule:
The general rule is that damages cannot be recovered for violation of a contract within the statute of frauds.
Is the plaintiff seeking to“enforce” the contract? Arguably not – reliance damages (promissory estoppel)
But (a) the Statute says that the contract is unenforceable; (b) Defendant had the right to not perform; and (c) to require payment would be to “in effect, uphold a contract upon which the statute expressly declares no action shall be brought.”
Exceptions: (a) services rendered during the life of a person for which a legacy is to be received (reasonable value); (b) vendee of land may recover payments of purchase money and for improvements; and (c) personal services (quantum meruit – unjust enrichment). All imply (in law) a benefit to the defaulting party.
3.29 (Guqiao/Xuefei)
Riley v. Capital Airlines, Inc., 185 F. Supp. 165 (1960)
Facts: This case concerns a methanol supply agreement between Plaintiff Riley and Defendant Capital Airlines that involves a master purchase order where the Defendant had been purchasing methanol from Plaintiff but did not have an exclusivity agreement with Plaintiff. Eventually, Defendant advised Plaintiff that it intended to limit the number of their suppliers and had made some recommendations based on which Plaintiff made investments. Plaintiff ultimately was not awarded the exclusive/limited supplier agreement. Plaintiff sued the defendant Capital Airlines for breach of an alleged oral agreement. Plaintiff contended that he was given a five-year contract to supply water methanol to the defendant for use in turbo-prop jet aircraft. Defendant denied that it entered into a five-year contract and argued that, if there were a contract, Plaintiff’s claim would have been barred by the statute of frauds because the contract would have been over one year and was not put in writing.
Issues: Can Plaintiff recover for breach of the alleged oral contract?
Holding: The court held that each delivery under the oral contract fell outside the statute of frauds and was enforceable, but the executory portion of the five-year contract fell within the statute of frauds and was unenforceable. The court held that Plaintiff was not entitled to recover for breach of the executory portion of the contract, but was entitled to compensation for losses incurred in purchasing equipment to perform the contract in reliance on the contract.
Exceptions under the Statute of Frauds:
Specially manufactured goods require a good deal of consultation between parties.
Part performance also helps evidence the existence of a contract to the extent that performance has been accepted by the other party.
Generally, however, part performance is used to gain enforcement only of the part performed.
The court in this case found, however, that there were no specially manufactured goods even though no one else was buying methanol from Plaintiff. Part performance was insufficient here because it was not an ongoing engagement. Rather, each order was delivered, invoiced, and paid for separately and each delivery was a separate contract which fell outside the Statute of Frauds and was thus enforceable to the extent that it was executed.
UCC §2-201(3): A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable
(a) if the goods are to be specially manufactured[1] for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement;
(b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted;[2]
(c) with respect to goods for which payment has been made and accepted or which have been received and accepted.
Q&A
It is a contract for services, not for sale of goods. Even though it were a contract for the sale of goods, usually the painter would be paid in advance and consequently it falls into the part performance department.
Schwedes v. Romain, 179 Mont. 466, 587 P.2d 388 (1978)
Facts: Plaintiff Schwedes received an offer by letter from Defendant Romain to purchase certain land in Montana for $60,000, subject to a mortgage. Plaintiff accepted by telephone, and several actions ensured, including obtaining tiles and multiple telephone calls with counsel employed by sellers. Defendants then sold the property to third parties before closing. Plaintiff sued for specific performance or damages for the expenditures incurred.
Issues:
Holding:
Comments:
(a) reasonably identifies the subject matter of the contract,
(b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and
(c) states with reasonable certainty the essential terms of the unperformed promises in the contract.
Comment to Restatement §131:
a. A memorandum may consist of an entry in a diary or in the minutes of a meeting, of a communication to or from an agent of the party, of a public record, or of an informal letter to a third person.
b. Where a written offer serves as a memorandum to charge the offeror, however,
(1) communication of the offer is essential;
(2) written instructions to an agent to make an offer do not suffice. (For example in this case, a letter from Romains to their real estate agents is not sufficient. It needs to be sent to the offeree.)
Q&A
It depends. For example, earnest money may not be construed as part performance.
5.1 Absence of Mutual Assent
5.1.1 Mutual Mistake – When both parties to the contract are mistaken about facts relating to the agreement, if:
5.1.2 Unilateral Mistake – When only one of the parties is mistaken, no defense unless the other party knew or should have known of the mistake.
5.1.3 Latent Ambiguities:
5.1.4 Misrepresentation
5.2 Lack of Consideration
5.3 Public Policy/Illegality – Generally, contracts whose subject violates public policy or the law are void:
BUT
5.4 Incapacity – Individuals in certain protected classes are legally incapable of incurring binding contractual obligations, rendering contracts executed by them voidable:
Infants cannot avoid contracts for necessities (food, shelter) or others excepted by statute.
4.5 (Ziguo Yang)
Defenses based on lack of capacity to contract:
Incapacity - Individuals in certain protected classes are legally incapable of incurring binding contractual obligations, rendering contracts executed by them voidable:
Driving, banking and lending contracts are exemptions to infancy (statutory exemptions);
Necessity (common law exemptions): if the party does not have alternatives but entering into the contract. This is a very narrow exemption.
Note: In all cases, contracts may be affirmed upon extinction of incapacity, but contracts are only enforceable to the extent of the affirmance.
Defenses based on lack of volitional consents:
Even if a party is not incapacitated, morally offensive pressure or artifice by one party against the other may make the “consent” ineffective:
Defenses based on failure to satisfy formalities:
The Statute of Frauds: In common law countries, only contracts falling within the Statute of Frauds are subject to formalities.
Defenses based on unconscionability:
This defense is very specific: Where persons of less sophistication are essentially forced to sign something that they do not understand by someone who has greater bargaining power and put them in an unfortunate situation that shocks the conscience of the court.
Williams v. Walker-Thomas Furniture Co.:
Elements of unconscionability:
Defenses based on changed circumstances:
eg: A agreed to paint B’s house, but the house collapsed two weeks ago. (objectively impossible)
eg: A sold Coca Cola, which contained coca leaves, but coca leaves were prohibited by the government. (legally impossible)
eg: I wanted Picasso to paint me, but I did not want Picasso to paint me after his stroke. Although it was not impossible for him to paint me, the purpose of the contract could not be realized.
All contracts contain an implied covenant of good faith and fair dealing: Once you enter into a contract, you are obligated not to do anything that will frustrate the purpose of the contract. I am forbidden from doing anything that will prevent the other party from getting the benefit.
Goldberg 168-05 Corp. v. Levy:
Fact: The plaintiff’s assignor agreed to rent certain premises to defendant Joseph Levy for a minimum rental of $13,800 per year and in ten percent of the gross receipts of the business conducted by the tenant on the leased premises. Defendant Levy took possession of the premises under the lease, and thereafter, with the knowledge and consent of the plaintiff’s assignor, permitted the defendant Crawford Clothes, Inc. to occupy the premises as though the same were occupied by the defendant Levy, and to conduct therein a retail men’s clothing business. The assignee alleged that defendants although obligated to do so, had failed and refused to act in a fair and proper manner with relation to their obligations under the terms of the lease. It was further alleged that defendants had negligently or willfully permitted the business to become mismanaged and negligently or willfully diverted the proper channels of trade from the business to another store. Thereafter, defendant Levy gave notice of his intention to terminate the lease; the defendants then refused to pay any further rentals. Consequently, the plaintiff instituted an action for breach of contract to recover damages in the alleged sum of $25,000, sustained as a result of the cancellation of the lease in violation of the duties created therein. Defendants filed a motion to dismiss.
Holding: Even though the contract did not have a provision prohibiting directing customers to different stores, the whole writing was "instinct with an obligation" that the tenant had promised to use reasonable efforts to bring profits into existence, and it could not avoid liability under the lease by abandoning the premises or by the diversion of business to another store that he operated in the same vicinity. Such conduct would be in direct violation of the covenant of good faith and fair dealing which exists in every contract.
Mutual Life Insurance Co. of New York v. Tailored Women Inc.:
Fact: The lessee, which operated a women's retail clothing store, entered into an agreement to lease the first three floors of the lessor's building for a flat rent plus a percentage of sales. The parties later agreed to lease a portion of the fifth floor under a flat rate rent. The lessee subsequently moved its fur department to the fifth floor and reconstructed the interior elevators to operate on the first through third and fifth floors. The lessor argued that it was owed additional rent in the form of the sales percentage from the fur sales.
Holding: It was the landlord’s fault not to include the same provision in the second lease. The defendant was merely exercising its rights under the leases.
Discussion: It is the “intent” of the defendant that distinguishes this case from Goldberg. Considering the fact that the previous business on the fifth floor was poor, the defendant improved the fifth floor in order to fully utilize the space instead of avoiding the rent or voiding the lease. If, however, the defendant was forced to pay the rent for the fifth floor but prevented from effectively using it, the situation would become unfair.
Therefore,
eg: § 2-314: Merchantability; § 2-315: Fitness for Particular Purpose
eg: If I sold someone a hubcap, there is an implied warranty of merchantability. However, if a company bought hubcaps from me and then used such hubcaps as bowls for salad, I would not be responsible if the customers sued the company for getting lead poisoning due to eating from those “bowls”. According to § 2-315, if I knew or had reason to know the particular purpose for which the hubcaps were required, and the company relied upon my skills to select the goods, there would be an implied warranty that the goods should be suitable for such purpose. Nevertheless, in this case, I am not responsible under any implied warranty of fitness for particular purpose because I had no reason to know the purpose of the buyer, which was not an ordinary use of such goods. I only need to show that those hubcaps are perfectly good hubcaps.
Vlases v. Montgomer Ward & Co.:
Fact: Plaintiff Paul Vlases purchased one-day old chicks from defendant Montgomery Ward. Plaintiff then placed the chicks in a newly constructed coop with new equipment. The chickens all died from disease. Plaintiff then charged the defendant with breaching the implied warranties of merchantability and fitness for a particular purpose under §§ 2-314 and 2-315. A verdict was returned in favor of the plaintiff in the amount of $23,028.77. Defendant appealed, arguing that an action for breach of implied warranties will not lie for the sale of one-day-old chicks were there was no human skill, knowledge or foresight that would enable the producer or supplier to prevent the occurrence of the disease, to detect its presence or to care for the sickness if it was present.
Holding: Lack of skill or foresight on the part of the seller in discovering the product's flaw was never meant to bar liability. When those chicken were sold with the implied warranty of merchantability, the seller was on the hook if those chicken all turned out to be defective, regardless of the seller’s fault.
Note: Without specific terms modifying the implied warranty, sellers of goods are required to provide goods that are good enough to be traded in the market. If the seller sells goods inferior to the standard, the seller will be liable regardless of whether or not the seller is at fault for passing goods that do not meet that warranty.
§ 2-714 Buyer’s Damages for Breach in Regard to Accepted Goods: The buyer can claim for the entire value of those chicken.
UCC § 2-313: The parties can add any warranties they want about the products. No limitations on the contents of warranties.
§ 2-316: The parties can exclude or modify warranties.
Language to disclaim all implied warranties: “as is”, “with all faults”
Morris v. Mack’s Used Cars:
Fact: The defendant sold a second-hand vehicle to the plaintiff. It was contained in the bill of sale: “This unit sold as is. No warranties have been expressed or implied.” The defendant knew, but did not disclose, that the vehicle was a “reconstructed” vehicle. Three years later, when the plaintiff eventually knew that the vehicle was a reconstructed one, the plaintiff sued the defendant.
Holding: Such disclaimers do not separate causes of actions for unfair or deceptive acts or practice under the Consumer Protection Act. Although the Consumer Protection Act recognizes the rights to exclude or modify warranties, it also specifically precludes disclaimer of liability under the Consumer Protection Act.
Conditions are events, the occurrence of which creates obligations or discharges obligations of parties.
Inman v. Clyde Hall Drilling Co.:
Fact: The plaintiff sued for damages resulting from a breach of an employment contract. The parties entered into an employment agreement where the plaintiff agreed to provide written notice of a claim prior to commencing the suit. The plaintiff failed to provide notice.
Holding: There is no right to damages without a written notice, no matter how harsh the term may be.
The difference can be hard to identify.
eg: It is stated in an insurance contract that the insurance company will indemnify you in the event of a fire. The fire is the condition preceding the obligation of the insurance company to indemnify you.
eg: It is stated in an insurance contract that any actions brought on this contract must be filed within a year of the claim. If you did not file a suit within a year, then the obligation of the insurance company would be discharged upon the occurrence of the condition: you did not file the suit within a year.
Restatement § 227. Standards Of Preference With Regard To Conditions
(1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk.
(2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether
(a) a duty is imposed on an obligee that an event occur, or
(b) the event is made a condition of the obligor's duty, or
(c) the event is made a condition of the obligor's duty and a duty is imposed on the obligee that the event occurs, the first interpretation is preferred if the event is within the obligee's control.
Three scenarios that courts would ignore the non-occurrence of condition
Restatement § 229. Excuse Of A Condition To Avoid Forfeiture
To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange.
Elements: (1) the condition is not the heart of the contract; (2) the failure of the contract would be manifestly unfair
e.g., You leased an office for 5 years and made substantial improvements to the premises. You orally told the landlord that you intended to renew the contract. The contract provides that in order to renew, you must give written notice by Apr. 14th. But you forgot that and gave the written notice in Apr. 19th. The landlord leases the office to others at a higher price.
The substantial improvement is the evidence that implies that you want to renew the contract. The written notice is just technicality. You have noticed orally and you have made substantial improvements. The contract is not about the timely notice of renewal, but the lease itself. It would be unfair to let the contract fall apart just because the written notice is technically late. So the court would excuse the condition.
Note: the possibility of excuse is low. You have to provide compelling evidence. For example, the oral notice in this case, or other witnesses when you said you wanted to renew.
Courts will also resort to waiver and estoppel to avoid the harsh consequences of conditions:
Waiver - the intentional relinquishment of a known right.
Clark v. West, 193 N.Y. 349, 86 N.E. 1 (1908)
Fact: Clark agreed to write for West a book on corporations for $2 per page, plus an additional $4 per page if Clark totally abstained from liquor. Clark delivered, but did not abstain from drinking, but alleged that West knew of this and nevertheless said that he would be paid the additional $4. West never paid more than $2.
Holding: Court of Appeals found that, based on the allegations of the complaint, West had waived the condition.
Reasoning: Unlike an amendment to a contract (outside the UCC), no consideration is required for waiver – the “obvious import of the contract ... Is to write satisfactory books.” “It is not a contract to write books so that plaintiff hall keep sober, but a contract containing a stipulation that he shall keep sober so that he may write satisfactory books.” West was getting what it bargained for.
Estoppel - prevents a party from adopting a position, action or attitude inconsistent with an earlier position if (a) the other party had reasonably relied, and (b) it would result in an injury to the other party.
e.g., You have a fire insurance contact with the insurance company. The contract provides: until you house catches on fire, the company has no obligation; any lawsuit should be filed in 1 year. The fire happened on Apr. 12, 2020. The company told you that it would take a longer time to process and you would get the result before May, 2021, so you waited until May 1st, 2021 to sue the insurance company.
The company says that the “condition subsequent” is not satisfied because you filed the suit not within a year.
You tell the court that the company is estopped from asserting this condition subsequent because it was the company that told you that you would get the result before May, 2021 and the company carried the process to May, 2021. You relied on their statement and did not file the suit. If the contract is enforced, you would be prejudiced just because you trust the company.
Restatement § 84 - Promise To Perform A Duty In Spite Of Non-Occurrence Of A Condition
(1) Except as stated in Subsection (2), a promise to perform all or part of a conditional duty under an
antecedent contract in spite of the non-occurrence of the condition is binding, whether the promise is
made before or after the time for the condition to occur, unless
(a) occurrence of the condition was a material part of the agreed exchange for the performance of the
duty and the promisee was under no duty that it occur; or
(b) uncertainty of the occurrence of the condition was an element of the risk assumed by the promisor.
(2) If such a promise is made before the time for the occurrence of the condition has expired and the
condition is within the control of the promisee or a beneficiary, the promisor can make his duty again subject to the condition by notifying the promisee or beneficiary of his intention to do so if
(a) the notification is received while there is still a reasonable time to cause the condition to occur under the antecedent terms or an extension given by the promisor; and
(b) reinstatement of the requirement of the condition is not unjust because of a material change of
position by the promisee or beneficiary; and
(c) the promise is not binding apart from the rule stated in Subsection (1).
Kingston v. Preston, 98 Eng.Rep. 606, 608 (1773)
Jacob & Youngs v. Kent, 230 N.Y. 239, 129 N.E. 889 (1921)
Albert Hochster v. Edgar De La Tour, 2 E. & B. 678, 118 Eng.Rep. 922 (1853)
UCC § 2-611. Retraction of Anticipatory Repudiation
(1) Until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.
(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609).
(3) Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.
Scott v. Crown, 765 P.2d 1043 (1988)
B & B Equipment Co., Inc. v. Bowen, 581 S.W.2d 80 (1979)
Ramirez v. Autosport, 88 N.J. 277, 440 A.2d 1345 (1982)
4.19 Damages and other Remedies
1. General Considerations
-Absent unique circumstances, courts will not compel a breaching party to perform under a contract.
Note: because after the breach of contract, the relationship is broken, the trust is gone, therefore court is inclined not to compel performance.
-Instead, the traditional remedy for breach of contract is the payment of damages. And the Damages must be proven with certainty.
Note: the party who brings the action is required to prove the damages with some level of certainty. There has to be some solid evidence of damages.
-Punitive damages are intended to deter socially reprehensible conduct.
Because contracts are private transactions, punitive damages are usually unavailable in private breach of contract disputes.
Note: Only in circumstances, when the breach of contract causes some societal harm, eg. fraud.
2. Damages Interests
Three measures of damages: expectation, reliance, restitution.
2.1 Expectation (compensatory damages---default rule)
-Restatement § 347:Subject to the limitations stated in §§350-53, the injured party has a right to damages based on his expectation interest as measured by: (a)+(b)-(c)
(a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, minus
(c) any cost or other loss that he has avoided by not having to perform.
Note: examples for (c): the goods no longer have to deliver; the money no longer have to pay. These will constitute the savings for the innocent party.
- This measure seeks to put innocent party in the position in which they would have been had the breaching party performed their end of the bargain – i.e., where the plaintiff expected to be.
- It is determined by establishing the position in which the Plaintiff would have been had the contract been fulfilled, not where the Plaintiff believed or “expected” he would be at the time the contract was made.
Note: pure speculation will not count towards the expectation damages.
2.2 Reliance (aka: reliance interest damage)
-Intended to put innocent party in the same position they would have had if the contract had never occurred – puts the plaintiff back in the status quo ante.
-Restatement §349. DAMAGES BASED ON RELIANCE INTEREST
As an alternative to the measure of damages stated in §347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.
Note: Profit is not included.
- Applicable when profits are too uncertain to determine, but plaintiff can show expenses made in contemplation of the contract – but they must be directly attributable to the transaction.
Note: Eg. you enter into a contract that you build a home for another party. And you purchase materials for build the home or hire someone. Then the counterparty breaches the contract. If it is difficult to ascertain the value of that the contract would benefit for you, you are entitled to recover the money spent for the performance of the contract.
- Alternatively, available when there is no enforceable contract, but the plaintiff is entitled to compensation under a theory of promissory estoppel.
2.3 Restitution
-Require the breaching party to return the benefits obtained from the bargain –unjust enrichment.
Note: The measure of damage here, is either the reasonable value that the breaching party has received, or the extent to the breaching party has been benefited by the work performed. And which one is the court going to reward, it depends on the circumstances. See Restatement 371.
-Not available when the innocent party has performed in full.
Note: Because when you perform in full, you will entitle to 100% of the value of the contract price, regardless of other party’s breach.
-Restatement §371 – If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either (a) the reasonable value of what the breaching party has received, or (b) the extent to which the breaching party’s property has been increased in value or his other interests advanced.
Note: As the alternative to contract, even when there is no contract, the restitution damage is also available-- unjust enrichment.
3. Incidental and Consequential Damages
-UCC § 2-715. Buyer's Incidental and Consequential Damages.
(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
Note: Incidental damages that costs and expenses that arise directly from the breach. Eg.in the contract, you sold pineapples to A and then A refused to accept. The cost you spend on the additional refrigerator space is the incidental damage. This damage is tied directly and arises exclusively because of the breach. There is no independent source other than the breach.
(2) Consequential damages resulting from the seller's breach include
(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of warranty.
Note: Consequential damages are consequence of the breach, but not necessarily tied to the breach itself. For example, the lost profits are usually the consequential damage, but your entitlement is independent of the breach.
- Outside of the context of the UCC, incidental damages are costs and expenses incurred by the non-breaching party to avoid other direct and consequential lossescaused by the breach, and consequential damages are damages that (i) are neither incidental nor direct damages and (ii) normally and necessarily arise from the specific nature of either the particular breach or the buyer’s circumstances.
4. Limitations on Damages
4.1 Remoteness/Foreseeability– To be recoverable, damages must have been foreseen or foreseeable at the time of contracting.
- Losses are foreseeable if:
(a) They follow in the ordinary cause of events; or
(b) The party in breach knows of special circumstances.
Note:
1. The example of special circumstances: A ordered products from B and the products should be delivered before Friday. Besides, A told B that A would deliver the products to another customer on Friday, otherwise A will suffer a loss of $10 million; However, B fails to deliver on time. This situation may not be foreseeable; but since A alerts that to B, this constitutes a special circumstance.
2. The point of time to measure the consequential damage is the time of contracting, not the time of breach.
Consequential damages are not recoverable in reliance/restitution settings, or when awarding them would result in a windfall (i.e., overcompensation) to the plaintiff.
Note: If you cannot prove your expectation or reliance damage, it will be hard to prove your consequential damages. And if you cannot prove your compensatory expectation damages, you are not able to prove your consequential damages.
Case: Hadley v. Baxendale, 9 Ex. 341. 156 Eng. Rep. 145 (1854)– delay in shipment of crankshaft.
Facts: Hadley, a miller, contracted with Baxendale, a common carrier, to deliver a new crankshaft by noon the next day. Baxendale is several days late. Mill could not operate in interim. Then Hadley sues for damages of the additional days that he cannot grain in his mill.
Holding: Baxendale is only liable for expectation damages if they are foreseeable. No reason to foresee that delay would cause mill to be inoperable. Because there is no reason for Baxendale to foresee that Hadley cannot use the mill during the additional days.
Note: Damages that do not occur normally are consequential damages.
§351. UNFORESEEABILITY AND RELATED LIMITATIONS ON DAMAGES
(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach
(a) in the ordinary course of events, or
(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.
4.2 Certainty of harm – damages can only be recovered to the extent that evidence permits them to be established with a reasonable degree of certainty.
Case: Chicago Coliseum Club v. Dempsey
Facts: CCC made contracts with Dempsey in anticipation of fight with other boxers. Then, made contract with Dempsey, who later breached.
Holding: damages for breach of contract to participate in boxing match could not include lost profits based on speculative gross receipts from box office. Reliance damages for expenditures incurred after agreement awarded because lost profits are too uncertain to be calculated with certainty.
Disallowed Damages: Expenses before contract made and after breach (since no contract then) and lost profits (since completely speculative).
Allowed Damages: Expenses between when contract signed and breach (reliance).
Case: Anglia Television Ltd. v. Reed
Facts:Reed breached contract to appear in TV show (liability undisputed). Anglia spent £850 after contract and £2750 total.
Holding: breach of contract to perform in film allowed for expenses incurred (reliance) before agreement because defendant “must have known perfectly well that much expenditure had already been incurred on director's fees and the like,” and should have contemplated them.
4.3 Avoidability of harm/mitigation of damages – damages should not be awarded to compensate for a loss that the injured party could have avoided without undue risk, burden or humiliation except when the injured party has made reasonable but unsuccessful efforts to avoid that loss.
Note: the non-breaching party has a duty to take reasonable steps to mitigate your damage.
Case: Rockingham County v. Luten Bridge Co., 35 F.2d 301 (1929)
Facts:RC awarded contract to LB in January, cancelled in February, and told LB to stop working. LB finally stopped in November and sued for breach.
Holding:party cannot recover for work performed after cancellation (breach). “[A]fter plaintiff had received notice of the breach, it was its duty to do nothing to increase the damages flowing therefrom.”
5. UCC Rules
5.1 Buyer’s Breach / Seller’s Remedies – UCC §2-706
- Seller’s Resale damages = contract price - resale price + incidental /consequential damages – expenses saved in breach
- All aspects of resale should be reasonable.
Note: cannot resale at an unreasonably lower price
- But remember to check if the innocent seller is a commercial seller of goods (Note: a professional seller, then the resale price is irrelevant)
Case: Neri v. Retail Marine Corp., 334 N.Y.S.2d 165, 30 N.Y.2d 393, 285 N.E.2d 311 (1972)
Facts:Neri contracted with RMC to buy boat. Neri reneges after boat complete after which RMC sells to someone else at contract price with Neri.
- Should boat seller be awarded full loss of profits and incidental damages from a breach by a buyer even if it eventually the sold said boat to another?
- Yes, since Plaintiff is a boat dealer it is assumed that breach by buyer prevented the sale of two boats instead of one (though defendant may be entitled to restitution of down payment).
5.2 Seller’s Breach/Buyer’s Remedies–UCC§2-712:
-Substitute goods in good faith without unreasonable delay damages = cost of substitute cover – contract price + incidental/consequential damages – expenses saved in breach.
5.3 Unjustified non-delivery or repudiation by seller – §2-713:
-Damages = market price at the time of breach – contract price +
incidental/consequential damages – expenses saved in breach.
Note: may be the market price is lower than the contract price. In that case, you are only entitled to incidental damages.
5.4 Unjustified non-acceptance or repudiation by buyer – §2-708:
-damages = market price at the time of breach and place for tender – unpaid
contract price + incidental damages – expenses saved in breach;
or
-profit of seller at full performance + incidental damages + costs incurred – proceeds for resale.
Note: These are two alternatives measures of the damages, they are left to the seller to choose.
6. Contractual Stipulations on Damages
-Parties can contract around the default rules for damages by inserting express clauses to the contrary, unless that clause is found to be unconscionable.
-Liquidated damages clauses can expand or limit damages, expressed explicitly in contract only if they are reasonable and do not exceed the loss foreseeable by a breach. (Restatement §356: contractual liquidated damages clauses are valid only when actual damages cannot be or are difficult to ascertain, and must be proportional to actual damages that could be foreseen).
Note: (1) whether the damages hard to calculate; (2) is it a penalty or a reasonable amount with some rational connection to the contract?) The rationale here: this is not intended to be punishment. It is intended to compensate you in the event of breach when it is difficult to calculate the damage.Therefore, the compensation should be reasonable, but no formula to distinguish reasonable compensation from punishment.
-Considerations concerning Reasonableness: -Are damages difficult to calculate?
-Is it a penalty (excessive)?
-Are the stipulated damages a reasonable forecast of the harm caused by a breach at the time of contracting?
7. Equitable Remedies – Specific Performance
-Specific performance is an exceptional remedy available when money damages are not adequate to compensate for the loss.
-UCC §2-716 entitles the buyer to specific performance when the goods are unique. An award of specific performance may include terms and conditions imposed on the buyer (e.g., payment of purchase price).
Note: the example of unique: you sell me a Picasso. Then you changed your mind. And there is no other Picasso—specific performance rule applied.
-Specific performance is not available when adequate damage compensation is available, the contract terms are too indefinite, or the court will encounter difficulty in the enforcement and supervision of performance.
- Specific performance is presumptively available in transactions involving the sale of land, items with emotional value or unique (non-fungible) goods. The key element is the uniqueness of the item that is the subject of the contract.
Note: each of the land is unique.
Case: Loveless v. Diehl, 235 Ark. 805, 236 Ark. 129, 364 S.W.2d 317 (1963)
Holding: specific performance ordered on purchase of land.
Case: Sedmak v. Charlie's Chevrolet, 622 S.W.2d 694 (1981)
Facts: Sedmak contracted with CC to buy specialized Chevrolet for $15,000. Then the car price skyrocketed. So CC changed his mind. Sedmak wants replevin.
Holding: specific performance ordered on contract for purchase of unique vehicle – Corvette pace car.
[1] Instructor’s example: components specially made for iPads.
[2] The rationale is that the Statute of Frauds is designed to prevent fraud where there is no contract made.