Contracts OutlineProfessor BishopFall 2012

Chapter 2Enforceability of Promises: Nature of Legal Duty and Obligation

1. Nature of Promise – A Commitment

King v. Trustees of Boston University Summary: Plaintiff, wife of the late Martin Luther King, Jr., initiated this action to

recover some of King’s papers from Defendant Boston University. King provided the papers and other items to Defendant along with a letter indicating that upon his death they would become the property of Defendant

Rule of Law: Where there is donative intent and evidence that could support a finding of a promise supported by consideration or reliance, the case is properly submitted to the jury.

Declined to follow R2K 90 by requiring that a charitable subscription be supported by consideration or reliance

R2K 90 – Promise Reasonably Inducing Action or Forbearance o 1. A promise which the promisor should reasonably expect to induce action

or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can only be avoided by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

o 2. A charitable subscription is binding under subsection 1 without proof that the promise induced action or forbearance.

Promise: R2K 2 defines promise by reference to a commitment “A promise is a manifestation of intention to act or refrain from acting in a specified

way, so as to justify a promisee in understanding that a commitment has been made”

Manifestation of Intent: Adopts an external or objective standard for interpreting conduct external

expression of intention as distinguished from undisclosed intention A promisor manifests an intention if he believes or has reason to believe that the

promisee will infer that intention from his words or conduct. Rules governing cases where the promisee could reasonably draw more than one

inference as to the promisor’s intention are stated in connection with the acceptance of offers [R2K 19, 20] and the scope of contractual obligations [R2K 201 219]

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Understanding Contractual Intent: Objective Theory of Contracts

Lucy v. Zehmer Summary: Plaintiffs, W.O. and J.C. Lucy, brought suit against Defendants, A.H. and

Ida Zehmer, for specific performance of a memorandum for the sale of the Defendants’ farm. Defendants argued that their offer to sell to the Plaintiffs was a joke, and that they never intended to sell their land. The Supreme Court of Virginia reversed the trial court’s ruling in favor of the Defendants, and ordered specific performance of the contract

Rule of Law: When a person’s words and actions, judged under a reasonable standard, demonstrate a intent to agree to a contract, his/her unexpressed subjective state of mind is irrelevant.

Since the plaintiff reasonably thought that the defendant was serious, and since the language of the contract was plain and unmistakable, the parties’ mutual promises were enforceable. Lucy spend time and money in reliance of the agreement, unknowing that Zehmer was not serious when the agreement was made and so the contract was enforced.

Objective Theory of Contracts A maker’s intent is determined not from the promisor’s actual, true, secret or

subjective intent, but rather from objective manifestations of the promisor’s intent Requires courts to examine the promisee’s discernable reasonable understanding of

the maker’s words or conduct objective reconstruction of the promissee’s understanding over the promisor’s actual subjective intent

The doctrine attempts to determine the promisor’s legal intent from words and conduct communicated to the promisee that the promisor knows or has reason to know will lead the promisor to infer intent the promisor is legally bound by the intent fairly communicated to the recipient even if the inferred intent was not actually, or subjectively, intended

Enforcing Promises: Legal Theories of Obligation

Obligation by Reason of an Agreement Supported by Consideration Consideration: Consideration helps ensure that the state will not be brought to bear

to enforce a promise that was never made, that the parties did not intend to be legally binding, that would produce unjust results, or that is contrary to public interest.

o Consideration is the dominant theory of obligationo A promise without consideration is unenforceable need a bargained for

exchange (something for something else, or something in exchange for a promise to do something else)

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o Fairness of exchange matter of judgment for contracting parties except in most extreme cases and so unenforceability by reason of lack of consideration was limited to only those cases where the return promise was truly valueless

o Detriment by promise, benefit to promissor

Donor-Promise Principle Role of doctrine of consideration: preserves the distinction between enforceable

promises and unenforceable promises to make a gift Unenforceable gratuitous promises not supported by consideration are referred to

as the donor-gift or donative-promise principle

Case Example: Dougherty v. Salt

Summary: Plaintiff Dougherty, at eight years old received a promissory note from his aunt for $3,000 payable at her death. Aunt then expressed a desire to take care of Plaintiff by issuing him a promissory note. When she handed the note to Plaintiff she said “[y]ou have always done for me, and I have signed this note for you.” The note was written on a form containing the words “value received”.

Rule of Law: Although a note states that value has been received, if value has not in fact been received, the note is unenforceable as a contract for lack of consideration.

Donative-Promise Principle: provides that an unrelied-upon promise is not enforceable – promissory note was for “value received” but there was no actual value because nothing was sought or given in return for the aunt’s promise to pay and therefore no consideration or reliance

R2K 71(comment b): in the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration

American contract law distinguishes between a donative promise to make a gift in the future (generally unenforceable) and the actual delivery of the gift (generally enforceable) promisors lack the ability to make enforceable gift promises despite that they may in some situations desire to provide their promisees with some evidence of their sincerity.

o DPP = either deliver the gift or make an unenforceable promise to deliver the gift in the future

Peppercorn Principle and the Equivalency Theory Under normal circumstances, the consideration doctrine only requires that the

promisor seek or bargain with the promisee for the return consideration in exchange for the promise

o R2K 71(1) and (2): To constitute consideration, a performance or a return promise must

be bargained for

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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

o Reflects the idea that court uses consideration doctrine to enforce the promise, not to police imbalances in the value of the exchange itself two inconsistencies

Inconsistencies: o Doctrine of consideration is confined to form, the fairness-blind search for a

mere peppercorno Doctrine of consideration might refuse legal enforcement to an unfair

exchange in extreme cases Ignoring the equitable limitations of consideration doctrine simply places greater

pressure on other contract doctrines to do the work left undone by consideration R2K 79: If the requirement of consideration is met, there is no additional

requirement of:o A gain, advantage, or benefit to the promisor or a loss, disadvantage, or

detriment to the promisee; oro Equivalence in the values exchanged; oro “Mutuality of obligation”

Cases in this section: try to determine if the doctrine of fair exchange has been fairly applied + try to assess the value of items involved

Case ExamplesHamer v. Sidway:

Summary: A young man’s uncle promised to pay him $5,000 if he abstained from drinking, smoking, swearing and gambling until the age of 21. The uncle’s executor refused to honor the promise, claiming that no consideration was given to the uncle in exchange for his promise.

Issue: Does voluntary forbearance of a legal right constitute consideration? Rule: Forbearance of a right is a sufficient legal detriment to satisfy the requirement

of consideration. Reasoning: Because Nephew refrained from behavior he had a legal right to engage

in, the Court found sufficient detriment to Nephew. In addition, the Court disagrees with Defendant’s assumption that Uncle in no way benefited from Nephew performing the conditions imposed by Uncle’s promise.

Peppercorn doctrine overlaps with R2K 71(comment b): A mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal”

Trust as an alternative to unenforceable donative promises: a simple declaration by a beneficiary creates an enforceable equitable obligation on the part of the donor-trustee to deal with that property for the benefit of the beneficiary under the terms of the trust. Creation of a trust does not require consideration - the trust obligation arises from the expressly declared intention of the trustee to create the trust.

Batsakis v. Demotsis

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Summary: Plaintiff, Batsakis, loaned Defendant, Demotsis, 500,000 drachmae. In exchange for the loan, Defendant signed an instrument promising to pay Plaintiff $2,000 in U.S. currency. The 500,000 drachmae were worth approximately $25.00 at the time.

Rule of Law: Inadequacy of consideration alone will not void a contract. The Court further noted that Defendant received exactly what was contracted for. In

this case, the Court expressed a reluctance to weigh the adequacy of consideration. Without evidence of fraud, duress, or misrepresentation, the Court is unwilling to void the contract merely because there may be insufficient consideration.

R2K 79 (a) + (b): if the bargain was sought, the consideration doctrine does not impose additional requirement of equivalence in values

Past Consideration Doctrine: Bargain requirement of consideration requires the maker of a promise to seek

something in return. When the promise trails the benefit, it is grounded in the past and thus does not seek anything in the future (trailing promise).

Trailing promises = unenforceable even if motivated by understandable gratitude Trailing promises likely to be commercial, donor-promise likely to be family In commercial context, the promisee’s expectation of performance is significantly

elevated.o In other circumstances, promissory estoppel serves as equitable back-up

where consideration has failed (especially commercial context particularly where elevated expectation of performance) but promissory estoppel (like consideration) is also forward looking.

o Promisor’s motivation for making a promise is irrelevant. As a result, trailing promises will both, by definition, failed consideration and the promissory estoppel requirements for the same reason

Consideration is lacking because the promisee’s promise or performance was not sought as it has already passed

The promisee’s detrimental reliance was not induced by the promisor’s promise because the promise occurs later.

In both cases, the promise or the conduct of the promisee precedes the promise and therefore cannot be based upon that promise

Case ExampleHayes v. Plantations Steel Company

Summary: Hayes (P) worked for Plantations Steel Co. (D) from 1947 until 1972. After announcing his retirement, Hayes discussed a pension plan with an officer and stockholder of Plantations Steel one week before his retirement date. The pension was based solely on the promise by an officer of the corporation that Hayes would be taken care of and no formal contract was executed.

o The defendant ceased paying the pension after three years and Hayes filed a complaint for breach of contract. At trial the judge entered judgment for the plaintiff and ruled that he was entitled to receive the payments. Plantations Steel appealed.

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Rule of Law: A promise must induce reasonable reliance upon it in order for promissory estoppel to apply.

The defendant’s promise was given as a token of appreciation and without consideration from the plaintiff. The promise did not induce reliance by Hayes because he had decided to retire from his employment before any promise that he would receive a pension was made. The promise did not induce his action or forbearance and Plantations Steel’s promise did not shape his thinking.

The past consideration doctrine precludes the application of promissory estoppel, at least in cases involving temporally immediate reliance.

Gratuitous Conditional Promises Distinguishing bargained-for consideration from conditional promises is difficult. An

offer is a conditional promise – a promise that will become enforceable only upon an acceptance of the terms of the offer that supplies the necessary bargained-for consideration.

A promise stated in the offer may also be subject to conditions other than that of acceptance which are events required to occur in order for that promise to become due (versus enforceable)

In the same way it is possible to make a “gratuitous absolute promise” it is also possible to make a “gratuitous conditional promise”. In both cases the promise is unenforceable because the promisor made the promise and did not seek anything in return.

It is possible to make an enforceable absolute promise and an enforceable conditional promise – difficulty is distinguishing the “gratuitous conditional promise” from its enforceable counterpart, the “enforceable conditional promise”

Doctrine of consideration helps to differentiate: court seeks to determine whether, by attaching a condition to the promise, the maker of the promise “seeks” performance of the condition or rather “intends” the condition as a mere necessary attachment to the enjoyment of the otherwise gift (gratuitous promise)

Interpretative difficulties are an expectable externality of the consideration doctrine, especially when it is interpreted through the lens of the objective theory of contracts the intent that controls is not the subjective intent of the maker but the objective understanding of the recipient.

Case ExampleKirksey v. Kirksey

Summary: Plaintiff Kirskey, was the sister-in law of Defendant Kirksey. After Plaintiff’s husband died, Defendant offered to put up Plaintiff on his land. Plaintiff gave up her land and moved to Defendant’s property, but approximately two years later Defendant made Plaintiff leave his property.

Rule of Law: A mere gratuitous promise is without the consideration necessary for enforcement as a contract.

When Plaintiff moved to property, it was necessary for the enjoyment of the gift and not a sought condition

Motive for seeking of consideration isn’t legally relevant. Motive doctrine makes the evaluation of gratuitous conditional promises more difficult. There is usually

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considerable overlap between the reason the promisor seeks the consideration and that it was in fact sought.

Obligation by Reason of Reliance: The Promissory Estoppel Doctrine

Promissory Estoppel Doctrine Reliance damages = to return the injured party to a status equal to that prior to

entering the contract Doctrine of promissory estoppel makes a promise binding where the promisee has

detrimentally relied on a promise that otherwise lacks consideration Does promissory estoppel only apply to cases when consideration is absent? Early

cases suggested promissory estoppel should only apply under non-commercial situations. Is promissory estoppel successful in cases lacking reliance?

R2K 90 – Promise Reasonably Inducing Action or Forbearance o 1. A promise which the promisor should reasonably expect to induce action

or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can only be avoided by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

o 2. A charitable subscription is binding under subsection 1 without proof that the promise induced action or forbearance.

Non-Commercial Promises Courts first developed and applied promissory estoppel to cases involving promises

without consideration upon which the promisee reasonably and detrimentally relied.

Promises between family members are more likely to be gratuitous than those in a commercial context

R2K 90 determined whether to enforce the family gift promise, apparently directly contravening the donor-promise principle

Case ExamplesRicketts v. Scothorn

Summary: Before his death, the Plaintiff, Scothorn’s (Plaintiff), grandfather made a promissory note to pay Plaintiff a set sum per annum if she would give up her employment as a bookkeeper. At the time of his death, the grandfather paid one year interest on the note and stated his regret he was not able to pay the rest. The Defendant, Ricketts (Defendant), the executor of the estate, refused to pay the remaining balance.

Rule of Law: Equitable estoppel bars a party from asserting lack of consideration where reliance was induced by the party asserting there was no requisite consideration.

Since the grandfather, as maker of the note, intentionally influenced the granddaughter into changing her position on the belief that note would be paid when due it would be inequitable to permit him to escape payment of that note on

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the ground that there was no consideration. The evidence conclusively established equitable estoppel.

By its nature, equitable estoppel requires a representation of a past or existing fact. Representations of present or future interest are “promissory” and not enforceable. Historically, representations regarding intention were regarded as too uncertain and likely to change for the law to hold the maker accountable for the reliance of the recipient.

o Promissory estoppel fills that gap and extends the range of legally protected reliance from fact to promise

Promissory estoppel acts as a “sword” by which one who reasonably relies upon another’s promise may bring a cause of action to enforce that promise

Wright v. Newman Summary: Plaintiff Newman, is seeking child support from Defendant Wright.

Defendant is not the biological father of Plaintiff’s son. However, for ten years Defendant held himself out to be the child’s father. Defendant is listed on the birth certificate of Plaintiff’s son and Plaintiff’s son uses Defendant’s surname. In addition, Defendant established a parent-child relationship with Plaintiff’s son.

Rule of Law: Where a promise of parental support is made and detrimentally relied upon, it is enforceable under promissory estoppel.

o Although there is no written contract whereby Defendant agrees to pay child support for Plaintiff’s son, a promise for such support may be enforceable under promissory estoppel. The Court determined that Defendant knew Plaintiff’s son was not his, but still placed his name on the birth certificate, held Plaintiff’s son out as his child for ten years, and assumed the obligations of fatherhood. In addition, the Court notes that Plaintiff detrimentally relied on Defendant’s promise to support her son by not seeking child support from her son’s biological father.

Implied and express promises are both a basis for promissory estoppel. Implied in this case from the actions taken by the defendant.

Charitable Subscriptions Raise important public policy issues regarding charitable support which often

displaces otherwise necessary government support. Unfortunately, like promises in a family context, promises to make a gift to a charity are no more likely to be supported by a bargained-for consideration.

If consideration were the sole test, many if not most such promises would not be legally binding. Fortunately, most donors just keep their promises and legal enforcement isn’t necessary. In the rare case they don’t, promissory estoppel is the most likely candidate to enforce the promise.

Most common problem: unless the gift is of enormous size and importance, the charitable organization cannot prove reliance on any specific promise. In these circumstances, R2K 90 becomes very important because it doesn’t require any showing of reliance

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Most states don’t adopt that subsection charitable pledges usually stand on equal footing with unbargained-for gratuitous promises – not enforceable unless reliance can be established by the charity.

Case ExampleAllegheny College v. National Chautauqua County Bank

Summary: Mary Yates Johnston, now deceased, responded to a request from Plaintiff, Allegheny College, for contributions by promising to give $5,000 payable thirty days after her death. Johnston, while still living gave Plaintiff $1,000, but later gave notice to Plaintiff that she was repudiating her promise.

Rule of Law: A promise to contribute to a charity may be enforceable where there is consideration.

o A promised contribution to a charity is unenforceable without consideration; however, that consideration may be supplied by promissory estoppel. When Plaintiff received the $1,000, it was under a duty to use the money in accordance with the terms of the memorial fund. Plaintiff was not free to use the money for general purposes. This assumption of duty by Plaintiff constituted consideration and created an enforceable bilateral agreement.

o Although the Court mentions promissory estoppel, it indicates that in the present case the agreement can be enforced as a bilateral agreement so there is no need to address promissory estoppel.

Case touches on bilateral and unilateral contracts: accepting the offer in two different ways

o Full performance on the requested acts (unilateral)o Making a counter promise to perform those acts in the future (bilateral)o Acceptance makes the offer binding

Commercial Promises Early studies established promissory estoppel had a future for enforcement of

promises in the commercial context Those challenged by later studies suggesting the nature and context of the promise

determined the availability of promissory estoppel, not the presence or absence of reliance

After that, studies showed return to historical roots, concluding:o Bargain theory and not promissory estoppel was the primary basis of legal

obligationo Reliance and not the promise was the central tenet of promissory estoppelo Reliance damages as opposed to expectancy remedies were normative in

promissory estoppel cases Commercial promissory estoppel claims are frequent, success is rare

o Success only when articulating “enforcement promise” rather than traditional “performance reliance”, enforcement promise requiring a reasonable belief in legal enforceability of the promise and performance reliance requiring only a reasonable belief that the promise will be performed

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Case ExamplesBarker v. CTC Sales Corporation

Summary: Barker was hired in 1987 as VP production, company had net losses from 1987-89. In 1989, offered job at another company, informed Don Mahaffey (president of CTC), did not take job. Did relocate his family at CTC’s expense “in reliance” upon Mahaffey’s promise he would remain employed until CTC became insolvent. Barker was fired in November 1989. Wayne Barker brought suit against his former employer CTC Sales Corporation, etc. alleging a breach of employment contract. Employer moved to dismiss complain for failure to state a claim and the trail court granted the motion. Barker appealed.

Rule of Law: Reliance on a promise does not constitute consideration in addition to normal employment services and thus is insufficient to except a contract of employment with an indefinite term from the general rule of terminability. Cannot use promissory estoppel for at-will employment.

o Court found that while the principle of promissory estoppel “provides that in certain circumstances, the reliance by the promisee or a third party upon the promise of another is sufficient consideration in and of itself to render the executory promise enforceable against the promisor” it does not apply to Barker’s case because the term was indefinite and thus not an exception to the general rule.

At-will employment can be overcome by establishing a “promise” that the relationship may not be terminated at will by the employer but the heavy presumption against this makes it difficult.

At-will relationships similar because they can terminate agreement without cause: agency, distributorship, exclusive sales arrangements, franchises, and licenses. In each case termination without cause may significantly prejudice one party who has relied on the “stability” of the relationship in making expenditures or foregoing other significant opportunities.

UCC does not state a separate provision describing promissory estoppel but it is clear it is indoctrinated into the UCC through a provision incorporating supplemental principles of common law (UCC 1-103)

o UCC 1-103 Supplementary General Principles of Law Applicable Unless displaced by the particular provisions of the Act, the principles

of law and equity, including the law merchant and the law relative to capacity to contract, principle and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions

If nothing in article 2 specifically governs, then you can go to R2K to supplement for applicable law

The reasons for enforceability do not always yield the same result. This means that while a promise might not be enforceable under one theory (such as consideration), it may nonetheless be enforceable under an alternative theory (such as promissory estoppel or restitution)

o Like in Haynes v. Plantation Steel – court rejected consideration and applied promissory estoppel

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Cohen v. Cowles Media Company Summary: The Defendant, Cowles Media Company (Defendant), promised the

Plaintiff, Cohen (Plaintiff), confidentiality in order to receive certain information to be published. Defendant failed to adhere to the agreement and as a result the Plaintiff lost his employment and received a damage award by the trial court.

Rule of Law: Compensatory damages are a proper remedy to avoid the injustice under a promissory estoppel claim. When applying promissory estoppel, the enforcement of the promise to prevent an injustice must be held as a legal question for the Court and should be decided on to protect the promisee from an injustice and should not be decided to enforce the promise to do justice.

Remedy limited as justice requires: enforcement is not to achieve justice but to prevent injustice

Obligation by Reason of Unjust Enrichment: The Restitution Doctrine

Restitution Doctrine For purposes of contract law, obligation may arise ex delicto (from a tort), ex

contractu (from a contract), or from a body of common law known as “restitution” or alternatively as quasi ex contractu (quasi contract)

Restitution generally implies the restoration of something to its rightful owner. Obligation from restitution does not arise from tort or contract (despite the reference to quasi contract) but simply by virtue of the plaintiff’s unjust enrichment at the expense of the defendant.

In these cases, any person unjustly enriched at the expense of another must make restitution to the other person. Recovery under restitution is based on the defendant’s gain and not the plaintiff’s loss. Doesn’t depend on a breach of contract or an independent tort.

Restitution action exists regardless of and independent from any contractual relationship that may or may not exist between parties.

A contract may be formed either according to express statements of the parties or even implied from their course of conduct (implied-in-fact contract). Despite difference for determining formation assent, the distinction between express and implied in fact contracts has no legal consequences

Recovery in restitution requires the defendant to disgorge any gain received from the plaintiff, thus returning the defendant to the status quo that existed before the execution of the contract. The gain or benefit conferred may be in the form of property or services but most of the difficult common law cases consider under what circumstances the provider of services is entitled to restitution for the value of services conferred upon another person.

Cases considered requiring restitution for the value of services not requested by the benefitted party are even more difficult. In these situations the law of restitution attempts to balance the right of the provider of the services to restitution against the right of the enriched party to be free from unwarranted intervention (without request) in its affairs officious intermeddler or volunteer which connotes that the services provider will be denied restitution relief.

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What circumstances might a person confer a benefit upon a person without the request of the other party?

o Gratuitous interactions: gratuitous intermeddler confers benefit upon another but as a gift and without any expectation of repayment – cannot recover as gratuitous intermeddler because there is no injustice in making or receiving a gift.

o Emergency services: hinges on occupation – persons in the business of rendering the type of services involved generally are not presumed to have rendered the services altruistically. Recovery often based on the value of the professional services rendered. Others not in the business of rendering such services are mostly treated as good Samaritans and not entitled to restitution

o Self-interested transactions: persons who seek to promote their own self-interest through the rendition of services (expecting compensation) but who confer the unsolicited benefit on strangers. Enriched party argues benefit was forced on them without choice or request and the plaintiff will argue enrichment occurred nonetheless and equity should not allow retention without repayment.

Restitution: Value of benefit is difficult to measure – its not the market value of the services to the plaintiff that matters (the loss), but the market value of those services to the defendant that matter (the unjust gain)

Case in this section: a true contract did not exist because the benefit was not requested and the promisee did not actually – objectively or subjectively – assent.

Case ExampleBloomgarden v. Coyer

Summary: P met D while arranging to lease office space. D revealed to P that he and his partner planned to develop a waterfront complex but lacked the financial resources. P offered to put D in touch with a majority stockholder in this company. P put D in touch with Carley and arranged a meeting. At the meeting there was no mention of P being compensated. P arranged another meeting and at the end of the meeting was asked by D what P hoped to get out of this. P replied that he hoped his own company would garner some work. Several months later P asked for compensation for the first time, on behalf of his company, and was denied. He then asserted a claim for himself and was again denied. P then wrote directly to D claiming a fee and was again denied. At that point P commenced suit.

Rule of Law: To recover under a contract implied in fact, must show that he sought future payment and the circumstances would reasonably lead the defendants to understand that he expected payment

o An implied-in-fact contract is a true contract, containing all necessary elements of a binding agreement; it differs from other contracts only in that it has not been committed to writing or stated orally in express terms, but rather is inferred from the conduct of the parties in the milieu in which they dealt. Such a contract will not be implied unless the recipient knows or has reasonable grounds to believe that the beneficial acts were performed in anticipation of remuneration therefore.

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Intermeddler classification – Bloomgarten as a self-interested intermeddler or a gratuitous intermeddler? He doesn’t qualify as a professional rendering services intermeddler

Obligation by Reason of Promise for Benefit Received: The Promissory Restitution Doctrine

Three Categories of Cases Implicating the Term Restitution Category I – Non-Contractual Restitution (no promise)

o Discussed in prior section, a party uses this category of restitution to recover unjust enrichment of the other party in the absence of a promise to return that benefit. It is a doctrine of equity and not contract law.

Category II – Promissory Restitution (Promise But Trails Enrichment)o Unlike the unjust enrichment restitution theory of obligation, promissory

restitution always involves a promise. However the promise follows receipt of the benefit by the promisor and thus is not enforceable by traditional contractual obligation theories explored earlier.

o Since the promise was made after the promisor received the benefit, it neither “sought” the benefit (no consideration per R2K 71 sec. 1), nor expected it in the form of reasonable reliance (no promissory estoppel per R2K 90 sec. 1). Consideration and promissory estoppel do not support contractual recovery for promises made in connection with a benefit already received.

No consideration because the benefit was not given in exchange for a return promise or benefit

No promissory estoppel because the benefit was not given in reliance upon a promise because at the time the promisee conferred the benefit, no promise had been made

o Unlike pure gifts where the donor does not expect repayment, the party in these cases expects repayment. Unjust enrichment theory normally does not provide a remedy because the enrichment was “officious”

In some cases, the promisor follows receipt of the benefit with a promise of repayment for that benefit received in the past seizing the trailing promise as a theory of obligation to enforce the promise “where necessary to prevent injustice” (R2K 86).

Like promissory estoppel justice is used to determine whether the promise is biding but unlike promissory estoppel, the court must normally chose to either enforce the promise made or not.

Category III – Contractual Restitution (Contract Defense or Breach)o A promise is made and supported by a “peppercorn of apparent

consideration” and restitution will also be available in such cases. Unlike the previous two categories, an enforceable contract existed, supported by consideration or by promissory estoppel. The restitution remedy in these situations is truly contract-based because it emanates from a true contact. In most instances, a court may only choose how to measure the restitution

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remedy, not whether the remedy is otherwise available under a justice theory.

o Measurement is restricted to a choice between the marketplace replacement cost of the benefit received versus the increase in value of the promisor’s property interests (R2K 371)

o This restitution remedy may arise in several situations: Total breach of the contract (R2K 373) The party in breach confers a greater benefit than the non-breaching

party’s loss (R2K 374) Enforcement of the contract is barred because it is not in writing (R2K

375) The contract is voidable because of some formation deficiency (R2K

376) A supervening event after the contract is formed makes further

performance impracticable or the purpose of the contract is otherwise frustrated (R2K 377)

o Restitution in contract cases is limited by various equitable considerations such as election among remedies and delay.

o If restitution is sought where no promise was made at all Category Io If restitution is sought on the basis of a promise made after a benefit was

received and is therefore not supported by consideration or promissory estoppel Category II

o In most situations in the casebook, where restitution is sought on the basis of a failed promise supported by consideration Category III

A claim in restitution and a claim in promissory restitution are different; a pure restitution claim may be advanced even though a contract does not exist and a claim in promissory restitution advances even in the absence of an independent theory of obligation based on consideration or reliance. A claim in promissory restitution is an independent theory of obligation

Promissory Restitution Like consideration and reliance, promissory restitution seeks to enforce the promise

itself as opposed to a restitution remedy designed to force the enriched party to make restitution to the plaintiff based on the value of the unjust enrichment

R2K 86 – Promise for Benefit Receivedo A promise made in recognition of benefit previously received by the

promisor from the promisee is binding to the extent necessary to prevent injustice

o A promise is not binding under subsection 1 If the promisee conferred the benefit as a gift or for other reasons the

promisor has not been unjustly enriched; or To the extent that its value is disproportionate to the benefit

Case ExamplesMills v. Wyman

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Summary: Plaintiff Mills, cared for the son of Defendant Wyman when he was ill. After Son died, Defendant promised to compensate Plaintiff for the care Plaintiff provided his son. Plaintiff is bringing this action to recover the compensation promised by Defendant.

Rule of Law: Past consideration and moral obligation alone are insufficient consideration to make a promise enforceable.

o Defendant’s promise is not enforceable because it lacks consideration. Because the services had already been performed before Defendant made the promise, they do not constitute consideration to make the promise enforceable. The Court also addresses the moral obligation of Defendant to pay for the services provided to Son. While the promise would have been enforceable if Son had been an infant, without the additional legal obligation of infancy, the moral obligation is also insufficient consideration.

Antecedent Consideration Doctrine: Mills refers to three cases where a contract is not enforceable by law – infancy, statute of limitations, bankruptcy special form of past consideration, the existence of a true antecedent contract supported by legal consideration.

o Unlike normative past consideration cases where a true contract and consideration never existed, these cases utilize the fresh promise to “revive” the prior enforceable promise. This use of morality to effect a policy of enforcing promises to protect socially recognized moral duties traditionally absorbed in the so-called “moral obligation” exception to the past consideration doctrine.

Webb v. McGowin Summary: Plaintiff Webb was injured while trying to protect McGowin from injury.

McGowin made payments to Plaintiff following his injury. Plaintiff brings this action to compel Defendant, McGowin’s estate, to continue making payments.

Rule of Law: A subsequent promise is enforceable where the promisor has received a material benefit from the promisee.

o McGowin’s promise is enforceable because Plaintiff conferred a material benefit on McGowin. While generally a moral obligation will not make an agreement enforceable, where a material benefit has been conferred, the material benefit will provide consideration for the subsequent promise. When Plaintiff saved McGowin’s life, McGowin received a material benefit from Plaintiff which provided consideration to make his subsequent promise enforceable.

No valid argument for restitution because restitution is negated by the humanitarian gift – no agreement on the price attached to the value of his gift of lfe-saving effort

Chapter 3Reaching Agreement Through The Process of Offer and Acceptance

Consideration in the context of a bargain:

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Started as consideration from doctrine of assumpsit and required either the promisee to relinquish something in exchange for a promise that constituted a detriment to the promisee or a benefit to the promisor

o After Hamer v. Sidway, either promisee detriment or promisor benefit would do and only gratuitous promises not relied upon by promisees escape enforcement

Later “bargain theory” of consideration where detriment and benefit might provide some evidence of consideration but were no longer legally important – shifted focus from benefit-detriment analysis to the requirement that consideration be bargained for some promises that were unenforceable before become enforceable and visa versa, commercial promises remained largely unaffected (survive both tests)

Bargain theory rarely allows enforcement of gratuitous family promises because the promisor seeks little or nothing in exchange.

Bargain theory shifts court’s focus from the substance of the transaction to the process by which the parties arrived at the exchange new doctrines like promissory estoppel necessary to police the fairness of the non-bargain promise

Bargain theory creates problems with applying objective theory of contracts: the objective theory doesn’t take into account the consideration of the actual intention of the parties as distinguished from the outer manifestation of the intention

R2K is more bargain theory and R1K was more objective theory of contracts; only a mix of subjective and objective works, neither can carry the argument in every case

Mutual Misunderstanding and Objectification Mutual assent: assent to the same terms and bargain by both parties Different meanings to the same terms -Legal responses:

o Determine whose meaning prevails (Ch. 4 subject)o Determine that the parties failed to form an enforceable contract – mutual

misunderstanding

Case ExampleRaffles v. Wichelhaus

Plaintiff contracted to sell cotton arriving on a ship called the Peerless to the defendant. As it happened, there were two ships called the Peerless, and the contract did not specify which ship carried the cotton. Defendant refused to accept the cotton when it arrived, and Plaintiff sued.

Rule of Law: If a latent ambiguity arises that shows that there had been no meeting of the minds, there is no mutual assent to contract.

o A latent ambiguity appeared when the contract did not specify which ‘Peerless’ was intended. There is nothing on the face of the contract to show that any particular ship called Peerless was meant but the moment it appears that two ships called the Peerless were about to sail from Bombay, there is a latent ambiguity. Parol evidence will be admissible for determining the actual meaning that each party assigned to that ambiguity. From the evidence presented, each party attached a different meaning to that ambiguity. If

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different meanings were intended on a material term of a contract, there is no mutual assent and there is no contract.

R2K 20: Effect of Misunderstandingo No manifestation of mutual assent to an exchange if the parties attach

materially different meaning to their manifestations and Neither party knows or has reason to know the meaning attached by

the other; or Each party knows or each party has reason to know the meaning

attached by the othero The manifestations of the parties are operative in accordance with the

meaning attached to them by one of the parties if That party does not know of any different meaning attached by the

other, and the other knows the meaning attached by the first party; or That party has no reason to know of any different meaning attached

by the other, and the other has reason to know the meaning attached by the first party

Raffles would have to prove he reasonably believed and he actually believed (objective and subjective theories) that both parties meant December Peerless but objective theory destroyed by the fact that there were numerous Peerless ships out of Bombay

R2K 20 (1) = No contract R2K 20 (2) Contract on one of the parties’ terms In this case neither knew what the other meant and Raffles didn’t prove Wichelhaus

knew or should have known so there is mutual misunderstanding and no contract Doctrine of Contra Proferentum: the ambiguity is resolved against the part who

seeks to rely on it (the proferer) Under R2K 20, if one party were at fault then the contract is operative in the favor of

the innocent party’s understanding. Common Law and CISG agree: objective theory fails only when there is no

preponderance of the evidence favoring one interpretation over another

Theory of Offer and Acceptance Theory of mutual assent shifts analysis from the nature of the underlying

transaction to an expression of assent to the common terms of the deal and is designed to carry the burden of expression of the objective theory of contract formation.

R2K 17 Requirement of a Bargaino Except as stated in sub. 2 the formation of a contract requires a bargain in

which there is a manifestation of mutual assent to the exchange and a consideration

o Whether of not there is a bargain a contract may be enforced under special rules applicable to formal contracts or under the rules states in 82-94

R2K 18 Manifestation of Mutual Assento Manifestation of mutual assent to an exchange requires that each party either

make a promise or begin or render a performance R2K 19 Conduct as Manifestation of Assent

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o The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act

o The conduct of the part is not effective as a manifestation of his assent unless he intents to engage in the conduct and know or has reason to know that the other party may infer from his conduct that he assents

o The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistakes, or other invalidating cause

Mutual assent ordinarily takes the form of an offer and acceptance to the same terms or exchange – R2K 22. Both offer and acceptance are defined by reference to the objective theory of contracts (R2K 24, 50). Negotiations often make is difficult to ascertain exact offer and acceptance terms.

UCC specifically abandons offer and acceptance focus by stating that a contract for sale of goods may be made in any form sufficient to show agreement including conduct by both parties recognizing the existence of a contract (UCC 2-204, 2-206)

Offer creates power of acceptance (R2K 36). When an offer is extended, the offeror permits offeree to exercise a power of acceptance that subjects to offeror to the legal relation called a contract. The offeror is then under a correlative liability, because exercise of the power by the offeree creates a right-duty relationship. The offeror is the master of the offer by virtue of control over the conditions of acceptance.

R2K 24: Offer Definedo An offer is the manifestation of willingness to enter into a bargain, so made

as to justify another person in the understanding that his assent to that bargain is invited and will conclude it

R2K 224: Condition Definedo Condition is event that must occur before performance under a contract

occurs (unless excused) Offer is a special form of promise, not all promises are offers.

o A promise becomes an offer only when it effectively conditions the maker’s commitment on further action by the recipient.

o In addition to stating a promise, an offer requests the recipient to communicate or assent to the terms of the offer in the form of acceptance.

o The acceptance then operates as the “bargained for” consideration making the offer promise binding.

o The condition of acceptance both converts a mere promise into an offer and provides consideration to the promises stated in the offer and in the acceptance.

Objective theory of contracts applies: definitions of both promise and offer specifically state that definitional satisfaction is governed not by the maker’s subjective or secret intent but rom the recipient’s objective and reasonable understanding

Promissory Nature of an Offer

Case Example

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Owen v. Tunison Summary: Plaintiff sent a letter to Defendant asking to buy a certain property for

$6000. Defendant wrote a reply that described that “it would not be possible to sell unless I was to receive $16,000 cash.” Plaintiff then sent a message that he accepted the offer to buy for $16,000.

Rule of Law: An offer is an act that must express the will or intention to allow an offeree to reasonably believe that the power to create a contract. It excludes situations that evidence intent to deal or open negotiations.

o Defendant’s letter stating, “it would not be possible to sell unless I was to receive $16,000″ was found to show intent to open negotiations that might lead to a sale but that it was not a proposal to sell. Defendant did not write an offer to sell that would empower the plaintiff to bind a contract for sale by his acceptance.

Conversation or negotiation patterns can exist with the exchange of information to determine the beneficial nature of the potential transaction. At some point, someone has to make a promissory statement based on the negotiations offeror. The person to whom it is communicated is usually offeree (or its agent).

A statement of intention is not promissory because it fails to convey a commitment Difference between offers (manifestations of intent to conclude bargain upon

acceptance) and advertisements/preliminary negotiations (usually requests for offers or expressions of interest in beginning negotiations [R2K 26])

Condition of Acceptance Existence of offer creates power of acceptance in offeree. Power may be exercises by

acceptance provided that the offer has not been terminated prior to acceptance. R2K 36(2)

o An offeree’s power of acceptance under is terminated by the non-occurrence of any condition of acceptance under the terms of the offer

Case ExampleInternational Filter Co. v. Conroe Gin, Ice, & Light Co.

Summary: Plaintiff produced machinery for water purification and submitted a proposal to sell certain machinery to the defendant who manufactured Ice. The proposal stated that if accepted it would become a contract if approved by an executive officer of the plaintiff’s company.

Rule of Law: Form of the offer may require some final approval; however, it does not require notice to the other party of that approval unless the form expressly dictates that requirement. Court will construe meaning from the obvious meaning.

o The “OK” was an approval by the executive and that the paper then became a contract.The Court did not think it was essential that the approval by the executive be communicated to the defendant. The form of the offer did not show this was a requirement and to require it would be to change the obvious meaning of the language and change the “locus and time prescribed for meeting of the minds” contained in the offer. In any event, the subsequent

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confirmation letter would have sufficed as notice of the approval even though it was not expressly required.

Mailbox Rule R2K 63: Time When Acceptance Take Effect

o Unless the offeror 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

If offeror invites acceptance by mail (explicitly or implicitly), the offeree accepts the offer by putting the acceptance in the mail

The offeree is just as bound as the offeror by the acceptance; once in the mail, it is accepted regardless of a phone call or email of rejection or an attempt to get it out of the mail

A mailed rejection is only effective upon receipt and consequently does not terminate the offeree’s power of acceptance until it is actually accepted (R2K 40)

The offeror’s power of revocation is effective only upon receipt by the offeree (R2K 43) – a mailed acceptance immediately extinguishes the power of revocation, even if the acceptance is still in transit

CISG rejects mailbox rule (acceptance of offers effective upon receipt)

Acceptance by Silence: Works in three situations R2K 69: where an offeree fails to reply to an offer, his silence and inaction operate

as an acceptance in the following cases only:o Where an offeree takes the benefit of the offered services with reasonable

opportunity to reject them and reason to know that they were offered with the expectation of compensation

o Where offeror has states 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

o Here because of previous dealing or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept

Case ExampleDay v. Caton

Summary: Caton knew the wall was going up partially on his property and that Day would expect payment for half of the wall. Caton had the opportunity to stop Day but didn’t.

Rule of Law: Because there was reason to know that payment was expected and the opportunity to stop the action did not occur, there is an inferred promise to pay (R2K 69-1)

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Contracts of Adhesion Form contracts are sometimes referred to as contracts of adhesion Form contracts = accept terms as stated or don’t “take it or leave it” Standard contracts usually used by enterprises with strong bargaining power. The

weaker party, in need of the goods/services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly or because all competitors use the same terms

How should the law respond to questions of use and abuse? Problem is parties specifically and knowingly consent to some terms, while the non-drafting party doesn’t even read some of the terms and provisions some terms are specifically assenting to (making enforcement plausible) whereas others weren’t read (making enforcement problematic on assent grounds)

Do you reject the entire agreement as non-enforceable (all-or-nothing approach) or attack the objectionable terms while retaining the negotiated terms?

o Llewellyn (UCC writer): blanket assent (not specific assent) to anything not unreasonable/indecent in the terms the seller has on the form which do not alter the reasonable meaning of the terms specifically agreed to.

Because producers typically have much greater information regarding their products – including their contract terms – they can compete by offering efficient terms with respect to salient attributes such as price and warranty, while offering inferior non-salient terms such as choice of law and arbitration clauses

Problem is trying to balance benefits of contracts of adhesion while protecting the weaker party from abuse (role of assent of weaker party is important)

Courts will enforce the form terms unlesso The standard terms impair the fair meaning of the negotiated terms; oro The terms are unfair or manifestly unreasonable

Case ExampleCarnival Cruise Lines, Inc. v. Shute

Summary: Appellees Eulala and Russel Shute, purchased tickets to take a cruise on a vessel owned by Appellant Carnival Cruise Lines, Inc. The tickets contained language stating that the tickets were subject to the conditions of the contract, which contained a forum selection clause. When Eulala Shute was injured on the cruise ship, Appellees sued, and the forum selection clause was challenged.

Rule of Law: Forum selection clauses contained in form passage contracts are subject to judicial scrutiny for fundamental fairness.

o A forum selection clause is to be examined for fundamental fairness. Here, Appellant did not arbitrarily set Florida as a forum to discourage suits against it. Appellant has its principal place of business in Florida, and many of its cruises depart from and return to Florida ports. Further, there is no evidence that Appellant procured Appellees accession to the forum selection clause by fraud or overreaching. Appellees were made aware of the clause and accepted the contract. Hence, the forum selection clause is valid.

R2K 211 – Standardized Agreements

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o Except as in subsection 3, where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing

o Such a writing is interpreted whenever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding f the standard terms of the writing

o Where the other party has reason to believe that the party manifesting such assent would not do so f he knew that the writing contained a particular term, the term is not part of the agreement

Litigation clause is there to keep down costs. Arbitration keeps costs down. Small awards, more certainty.

Shute was overruled in 1992, then 1993 amendment overruled that and Shute stays good law.

Duty to Read Doctrine: product of objective contract theory suggesting that when a person signs a contract, a reasonable person is entitled to believe that the party read the contract and assented to all its terms. A contact no longer requires true assent but rather only what the person to whom a manifestation is made is justified as regarding as assent. (R2K 23)

Duty to read vs. R2K 211(3)

Termination of the Power of Acceptance

What occurred first, acceptance or termination of the offer? Notice and knowledge. Court determines if the affected party had a reasonable expectation that the power

if acceptance remained available for exercise Once power of acceptance is created, it must be exercised or terminated. If exercised

prior to termination, contract. If terminated before acceptance, no contract formed and conditional promises made by the offer are unenforceable.

R2K 36 Methods of Termination of the Power of Acceptanceo An offeree’s power of acceptance may be terminated by

A rejection or counter offer by the offeree; or Lapse of time; or Revocation by the offeror, or Death or incapacity of the offeror or offeree

o In addition an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer

Termination by Offeror Revocation Offeree power of acceptance terminates when offer is revoked before acceptance.

Terminates upon receipt by the offeree and may be communicated directly or indirectly. (R2K 42-43)

A promise to make the offer irrevocable is only a gratuitous promise by the offeror

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Consideration theory of obligation does not exist to enforce a promise of irrevocability unless and until the offeror receives supporting consideration

o A promise to keep an offer open for a period of time that is supported by consideration creates an enforceable “option” to exercise the power of acceptance with respect to the offer

Will theory to support revocability: there has been no subjective or objective meeting of the minds until mutual assent us expressed through acceptance

Theory of fairness: unless and until offeree exercises power of assent, it would be unfair to bind the offeror without also binding the offeree

Case ExampleDickinson v. Dodds

Defendant gave a written offer to Plaintiff to sell a certain property and that stated the offer was “to be left over until Friday 9 o’clock am.” Plaintiff left acceptance with Dodd’s mother-in-law at 7pm Thursday evening upon learning that Defendant had been offering the property to another. Plaintiff attempted to deliver the acceptance personally to Defendant on Friday morning who refused stating that he had already sold the property.

Rule of Law: Promises to keep an offer open until a certain time will be only a promise unless made by binding by consideration and acceptance necessary to form a binding agreement.

o The offer to be held open until Friday 9 o’clock was only an offer that was not supported by consideration or acceptance by Plaintiff. There was no binding agreement to keep the property unsold until 9 o’clock Friday morning.

R2K 42: the power of acceptance is terminated when the offeree receives a manifestation of intent t not longer enter into a contract

R2K 43: power of acceptance is also terminated when the offeror takes “definite action” inconsistent with a continuing interest to enter into a contract and the offeree acquires “reliable information” to that effect

R2K 25: Option Contractso 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 offero An option is simple an enforceable contract to keep the offer open. The

promise is not revocable for the period of the option and if the power of acceptance is not exercised prior to the termination of the stated time period, the consideration is forfeited to the offeror as compensation for keeping the contract off the market for that period of time

R2K 87: Option Contract (not widely adopted)o An offer is binding as an option contract if it

Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

Is made irrevocable by statuteo An offer which the offeror should reasonably expect to induce action or

forbearance of a substantial character on the part of the offeree before

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acceptance and which does not induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice

Lapse of time and late acceptance: power to accept terminates after the expiration of time expressed in the offer or after a reasonable time. What is reasonable is a question of fact. Factors affecting the determination of a reasonable time include the subject matter of the contract and the method of communication of the offer.

o A late acceptance will generally be treated as a counter-offer that may be accepted by the original offeror

Termination by Offeree Rejection or Counter-offer Under objective theory, a communication operates as a rejection when the offeror

has reasonable grounds for understanding that the offeree does not intend to accept the offer, even if communicated prior to the time the offer was to lapse. (R2K 38)

o An offeree may avoid the rejection classification by “manifesting an intent to take the offer under advisement”.

o Protects the likely reliance of the offeror following receipt of the rejection.o In such cases offeror is likely to engage is a substitute transaction on the

theory that the prior transaction did not occur. Actual reliance not necessary. Counter-offer is a rejection of the old offer and the making of a new offer. After a

counter-offer, the old offer cannot be accepted. Mirror Image Rule (common law): to be effective acceptance must be

unconditional and on the precise terms of the offer – the acceptance must be a “mirror image” if the offer and must not vary the terms of the offer in any manner.

o Applied strictly, mirror image rule blocks any acceptance other than the one effectively understood by the offeror as “I accept on your terms”

o The effect of any additional or different terms would constitute varying terms, a qualified acceptance, and normally not a valid acceptance.

Counter-offer commonly is the qualified or conditional acceptance, which purports to accept the original offer but makes the acceptance expressly conditional on assent to additional or different terms.

o A counter-offer must be promissory and is subject to the objective theory of contracts

Common Law: An offeror who proceeds under a contract after receiving a counter-offer accepts the terms of the counter-offer by performance without objection because the maker of the counter-offer is entitled under the objective theory of contract to assume that its terms were accepted or performance would not have moved forward.

UCC 2-207 Terms of Contract; Effect of Confirmationo A definite and seasonable expression of acceptance or a written confirmation

which is sent within a reasonable time operates as an acceptance even though it states additional or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms

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

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The offer expressly limits acceptance to the terms of the offer; They materially alter the offer; or Notification of objection to them has already been given within a

reasonable time after notice of them is receivedo Conduct by both parties which recognizes the existence of a contract is

sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case, the terms of the particular contract consists of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.

Difference between common law and UCC: o Common law: under MIR its only accepted if its exactly the same

Counter-offer if additional, conditional terms added Counter-offer accepted if performance without objection to added

termso 2-207: offer is accepted by definite and timely expression of acceptance even

when including additional or different terms UNLESS the acceptance is made conditional on the assent to the

additional or different terms, then it’s a counter-offer IF counter-offer:

Clear assent to additional/different terms Contract + Counteroffer is accepted Offeree’s Terms Only (including additional and different)

No clear assent to additional/different terms No contracto If performance anyway Agreed Terms Only (from the

writings of the parties where there is agreement on terms)

IF NO counter-offer (after no requirement of conditional acceptance): Valid acceptance of common terms

o If Additional Terms Are they material? Material Drop Additional Terms Offeror’s

Terms Apply (no different terms) Not Material Include terms but irrelevant

o If Different Terms Knock out rule If Knockout Rule Drop both offeror/offeree’s

provision Offeror’s Terms Apply (no different terms)

o Under 2-207 the only way an offeror is bound to an offeree’s additional/different terms is by manifesting assent to a conditional counter-offer

o Critical for offeror to make the offer conditional upon acceptance and not to preform without the offeree’s assent

o If either party is not a merchant, any additional terms are proposals and can be accepted or rejected by receiving party. If both merchants, additional terms apply except under certain circumstances above.

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UCC governs “sales of goods”. If UCC would apply to the contract, it trumps any contrary common law rules.

Case ExamplesStep-Saver Data Systems, Inc. v. WYSE Technology

Summary: Defendant sold computer programs to Plaintiff and all the programs had box top license terms which stated that opening the package was acceptance of certain terms, including a disclaimer of warranties. Plaintiff would resell the software to various customers. Plaintiff started getting sued because of problems with the software and sought to get indemnity from Defendant and enforce breach of warranties against Defendant.

Rule of Law: Under 2-207, an additional term detailed in a box top license will not become incorporated into the parties agreement if the term would materially alter the agreement.

o The box-top license would not be considered a conditional acceptance because the software producer did not clearly express an unwillingness to proceed unless the additional terms were incorporated into the agreement. The actions of the software producer in repeatedly sending the writing of terms that could be otherwise excluded did not result in a course of conduct that adopted the terms of the writing.As a matter of law, if the original contract included warranty, the addition of the disclaimer of the warranties by the box-top license would substantially alter the distribution of risk relating to the product between the two parties. Therefore, under 2-207 the disclaimer would materially alter the agreement between the parties and could not become a part of the agreement.

Last Shot Rule: common law doctrine allowing for exchange of forms, each being a counter-offer, and the last document presented before someone preforms is binding because the performance was deemed acceptance – nullified by UCC 2-207

Filanto, S.P.A. v. Chilewich International Corp. Summary: Plaintiff Italian corporation entered into an agreement with defendant

New York corporation where it would provide boots to satisfy an agreement between defendant and a Russian company. After a disagreement between the parties, plaintiff brought this action seeking to enjoin the arbitration required by the contract between defendant and the Russian company (the Russian contract) or to order arbitration in New York. Defendant moved the court to stay the present action pending arbitration in Moscow. The court issued a final judgment, including a mandatory injunction requiring the parties to arbitrate in Moscow as provided in the arbitration clause. The court found that there were a series of exchanges between the parties concerning the incorporation of the Russian contract into their agreement. But the court determined that a memorandum agreement signed by the parties that specifically incorporated by reference the arbitration provision in the Russian contract was the binding written contract. The court held that plaintiff should be bound because it attempted to utilize to its benefit another provision of the Russian contract and because it signed the memorandum.

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Rule of Law: An offeree who, knowing that the offeror has commenced performance, fails to notify the offeror of its objection to the terms of the contract within a reasonable time will, under certain circumstances, be deemed to have assented to those terms.

o CISG governs international trade so the mirror image rule of common law governs, not 2-207. Failure to object to counter-offer and acceptance of performance.

UCC 1-103: go to R2K if nothing in Article 2 governso Specific provision is different between UCC and R2K (not many exist)o Specific provision is the sameo Silence in UCC

Which Applies? UCC or R2K?o Sale of Goods UCCo Other R2K

Effect of Pre-Acceptance Reliance

Unprotected offeree reliance (all externalities of bargain theory of consideration) Unilateral contract: Accepting an offer to form a unilateral contract – the offer seeks

acceptance only by completion of the performance requested. Acceptance therefore only occurs when the performance is completed and not before.

o The offeror is free to revoke anytime prior to the completion of the performance – can waste partial performance by revoking before completion

Bilateral contract: Involves promises on both sides of the transaction.o In some situations the offeree relies on the offer to some extent before

acceptance. This commonly occurs where a general contractor relies on bids from potential subcontractors in submitting its own bid for general contract.

Negotiations: pre-acceptance reliance arises from negotiations where a party detrimentally relies on the non-contractual promises or representations by the other party to the transaction.

o Negotiations do not form a contact until the parties manifest the necessary intent to form a contract.

Unilateral Contracts Only the offeror makes a promise in the form of an offer. The terms of the offer

provide that it can only be accepted by completing the requested performance.o A promise to perform, a beginning of performance, or even near completion

doesn’t work. Power of acceptance remains throughout the duration of the requested

performance. Becomes option contract in R2K 45, helps to limit revocability by offeror R2K 45 Option Contract Created by Part Performance or Tender

o Where an offer invited an offeree to accept by rendering a performance and don’t not invite a promissory acceptance [unilateral contract], an option

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contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it

o The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer

Case ExamplesPetterson v. Pattburg (pre-R2K)

Summary: Plaintiff, the executrix of Petterson’s estate, is seeking $780 in damages from Defendant, Pattberg. Petterson came to Defendant’s home, having met the other conditions, to pay off the remaining principal minus $780 pursuant to the Defendant’s offer. Defendant refused to accept the money and informed Petterson that the bond and mortgage had been sold to a third party.

Rule of Law: A unilateral contract may be revoked at any time prior to the performance of the requested action.

o Defendant revoked the offer to enter into a unilateral contract prior to Petterson’s acceptance.A unilateral contract involves one party making a promise in exchange for performance of an act by the other party. In a unilateral contract, the party making the promise is not seeking a promise in return, but the performance of the requested action. An offer to enter into a unilateral contract is not accepted until the requested action is performed. In the present case, the Court determined that Defendant’s letter constituted an offer to enter into a unilateral contract.An offer to enter into a unilateral contract may be revoked at any time prior to acceptance. Under these facts, the Court found that Defendant revoked the offer prior to Petterson’s acceptance when Defendant informed Petterson that the bond and mortgage had been sold before accepting the payment of the principal from Petterson.

R2K provides that making an offer to enter into a unilateral contract (main promise) creates an “implied in law” option contract and the beginning of performance “completes the manifestation of mutual assent and furnishes consideration for an option contract”

Doctrine of mutuality of obligation has no application to unilateral contracts

Davis v. Jacoby Summary: Blanche Whitehead and her husband Rupert enjoyed a close relationship

with their niece Caro Davis (P). The Whitehead’s suffered health and financial difficulties and Rupert asked Davis to come to California to help take care of Blanche and assist Rupert with his business affairs. She was promised an inheritance in return for her assistance. One week after Davis agreed Rupert committed suicide. Davis moved to California to care for Blanche. Upon Blanche’s death Davis learned that Rupert had left his entire estate to two nephews. Davis sued Rupert’s estate (Jacoby, D), asserting that her agreement with Rupert had created a contractual obligation for him to make a will and bequest his estate to her and that she was entitled to quasi-specific performance. Davis appealed the trial court’s ruling in

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favor of the estate that no contract had been formed because Rupert had made a unilateral offer that could only have been accepted via performance.

Rule of Law: An offer is presumed to be bilateral if it is ambiguous with regard to whether it is unilateral or bilateral.

o The court pointed to Rupert’s statement “Will you let me hear from you as soon as possible…” as a request for an immediate reply so that he could make arrangements and rely on Davis’s promise to come to California. Furthermore, since Rupert asked her to take care of them until both of them had died, it was apparent that he had to rely on Davis’s promise to continue to care for Blanche if she survived him

R2K 32 Invitation of a Promise or Performanceo In case of doubt an offer is interpreted as inviting the offeree to accept either

by promising to perform what the offeror requests or by rendering performance as the offeree chooses

All ambiguous offers are assumed to be bilateral to protect the reliance of the offeree

Bilateral Contracts An offer to enter into a bilateral contract is revocable by the offeror at anytime prior

to offeree’s acceptance. An offer to enter into a bilateral contract can be accepted immediately by communicating acceptance.

In cases of bidding, a subcontractor can revoke its bid before acceptance by general contractor. Problem is when general contractor has already included it as part of the general bid. By contract or statute, most general contract sealed government contract bids are binding unless revoked in writing prior to the bid opening date.

o If the subcontractor revokes before the general accepts its bid and the opening bid date has passed and the general contractor’s bid has been accepted, the general contractor is responsible for the mistake.

One Party Bound Model: Use of promissory estoppel to shift risk of mistake back to subcontractor by making the subcontractor bid irrevocable after its use by the general contractor. Like option contract solution to unilateral contracts, this is a one sided bargain.

Both Parties Bound Model: Parties could make a firm contract at the time of bid submission by the general contractor subject to the condition that the general contractor bid is accepted.

No Party Bound Model: Parties could be free to negotiate a contract after the genera contractor bid is accepted.

Application of Law Common law applies only to services UCC applies only to the sale of goods Subcontract bids are usually “hybrids” having both goods and services courts go

all-or-nothing common law approach and select either UCC or common law depending on whether goods or services are dominant

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Case ExamplesJames Baird Co. v. Gimbel Bros., Inc.

Summary: Plaintiff received a bid from Defendant for supplying linoleum needed in the construction of a public building. Plaintiff used Defendant’s bid in computing the bid submitted to the public authorities. Defendant realized that a mistake had been made in computing the amount of linoleum needed and that the job would require a greater amount. The public authorities accepted Plaintiff’s bid. Plaintiff received Defendant’s written confirmation of withdrawal the day after the public authorities accepted Plaintiff’s bid.

Rule of Law: A general contractor cannot enforce a bid made by a subcontractor as a bilateral contract when the general contractor is under no obligation to use the subcontractor’s bid if awarded the job and the general contractor did not accept the subcontractor’s bid before it was revoked. A general contractor is also unable to enforce the subcontractor’s bid based on promissory estoppel when there is no consideration.

o No. Plaintiff cannot enforce Defendant’s bid under either theory.A contract is not automatically formed when a general contractor uses the bid of a subcontractor in creating a bid, even if that bid results in the general contractor being awarded the job. A bilateral contract is not formed because the general contractor is not required to use the subcontractor if awarded the job.In addition, a contract was not formed between the general contractor and the subcontractor under these facts because the general contractor did not accept the subcontractors bid before it was revoked.The Court rejects Plaintiff’s promissory estoppel claim based on a lack of consideration.The Court also reasons that this is not an option contract because enforcing the subcontractor’s bid as an option contract would require the subcontractor to keep the offer open, but the general contractor would not be required to purchase from the subcontractor. Although not mentioned by the Court, another reason this is not an option contract is lack of consideration.

Drennan v. Star Paving Company Summary: Plaintiff received a bid from Defendant for paving. Based on Defendant’s

bid for the paving work, Plaintiff compiled and submitted a bid for the job. Plaintiff was awarded the job. The day after Plaintiff was awarded the job, Plaintiff stopped by the Defendant’s office. Defendant told Plaintiff that a mistake had been made and the paving could not be done for the price indicated in Defendant’s bid.

Rule of Law: A general contractor may enforce a subcontractor’s bid where there is reasonable detrimental reliance under a theory of promissory estoppel.

o Plaintiff can enforce Defendant’s bid based on promissory estoppel, but not as a contract.A general contractor cannot enforce a subcontractor’s bid as a bilateral contract or an option contract when there is no consideration.A general contractor may enforce a subcontractor’s bid where reasonable detrimental reliance makes the offer (bid) binding. In this case, Plaintiff did not bargain for the use of Defendant’s bid. However, it was reasonable for

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Plaintiff to rely on Defendant’s bid in creating the bid Plaintiff submitted. In addition, Defendant’s submission of a bid was motivated by furthering its own business and Defendant’s business would only be furthered if the general contractor were awarded the job and gave the paving work to Defendant. In other words, Defendant submitted the bid to Plaintiff because Defendant wanted Plaintiff to use the bid in compiling a bid for the job.The Court notes that had Defendant’s mistake been so obvious as to be known to Plaintiff, Plaintiff’s reliance would not have been reasonable and the bid would not be enforceable under promissory estoppel. However, under these facts, the Court does not find Plaintiff’s reliance unreasonable.The Court also rejects Defendant’s contention that Plaintiff failed to mitigate damages. Plaintiff reasonably mitigated damages by seeking other bids from subcontractors for the paving work and accepting the lowest bid.

Implication of irrevocability created with limitations. Subcontractor bid will not be irrevocable where there is bid shopping or bid chopping.

o Bid shopping: GC tries to find better deal, using the bound SC as a ceilingo Bid chopping: GC tries to get SC to lower the bid by renegotiation of the bid

State and federal statutes often provide that submitted bids are not revocable after the bid-opening date

Berryman v. Kmoch Summary: Plaintiff signed a written option agreement drawn up by Defendant. The

agreement stated that “[f]or $10.00 and other valuable consideration” an option would be granted for 120 days. However, the $10.00 was not paid. Prior to the duration of the 120 days, Plaintiff contacted Defendant and asked to be released from his obligation under the option agreement. The parties were unable to work out anything definite. Plaintiff then sold the land to another person. After Plaintiff sold the land, Defendant attempted to exercise the option. Defendant was informed that the land had already been sold. Defendant continued in his attempts to exercise the option.

Rule of Law: An option contract without consideration is an offer to sell which may be withdrawn at any time before acceptance.

o To have a valid option contract there must be consideration. Without consideration, the option agreement is merely an offer to sell. An offer to sell may be withdrawn at any time before it is accepted. In the present case, no consideration was given; therefore, Plaintiff could revoke the offer at any time prior to Defendant’s acceptance.For promissory estoppel to substitute for consideration there must be (1) a promise made under circumstances where the promisor reasonably expects the promisee to act in reliance on the promise, (2) the promisee acts reasonably in reliance on the promise, and (3) refusing to enforce the promise would result in fraud or injustice. In the present case, Defendant drew up the option agreement and knew that no consideration had been given. Defendant was familiar with real estate contracts and knew the option agreement was not a contract for sale of the land. Therefore, Defendant is unable to show he acted reasonably in reliance

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on a promise by Plaintiff.The Court also notes that the promise is not made enforceable by performance of certain acts. An option promise may be conditioned on performance of certain acts, the performance of which would substitute for consideration. However, in this case, the acts of Defendant in attempting to find a buyer for the land do not make the promise enforceable because Defendant was under no obligation to find a buyer and had made no promise to purchase the land.

Express Option Contract: R2K 25, unlike Drennan (Implied) R2K 87(2) adopts Drennan rule: An offer which the offeror should reasonably

expect to induce action or forbearance of a substantial character on the part of an offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice

Pre-Offer Reliance on Negotiations No mutual assent to terms of contract in negotiations Nonetheless because of assurances or statements made during the course of

negotiations, one or both parties might well expect the negotiations to conclude favorably or at the very least to continue in good faith until and unless reasonable disagreement about a specific term requires the negotiations to terminate.

Absent an express contract to negotiate, contract law generally doesn’t favor contractual liability based on negotiations.

Promissory estoppel as a theory of obligation

Case ExamplesPop’s Cones, Inc. v. Resorts International Hotel, Inc.

Summary: Plaintiff, Pop’s Cones, Inc., is seeking damages from the Defendant, Resorts International Hotel, Inc., for losses they claim resulted from reliance on promises made by Defendant during lease negotiations.

Rule of Law: A plaintiff may survive a motion for summary judgment on a promissory estoppel claim by presenting evidence allowing a reasonable jury to find that a defendant made a promise with the expectation that a plaintiff would rely on that promise and that a plaintiff did reasonably and detrimentally rely on a defendant’s promise.

o Promissory estoppel requires (1) a clear and definite promise (2) made with the expectation that the promisee will rely on the promisee, (3) reasonable reliance on the promise by the promisee, and (4) definite and substantial detriment resulting from the reliance.The Court discusses the strict clear and definite promise requirement in Malaker and how later courts have relaxed that requirement. In Malaker, the court held that an implied promise to lend money, but not a specified amount, was not a clear and definite promise. The Malaker court looked for an express promise and suggested that proof of most of the legal elements of a promise must be provided for the promise to be clear and definite. In this case, the court relaxes the clear and definite promise requirement in Malaker.The Court goes on to note that in the present case Plaintiff seeks damages resulting from reliance on promises made during negotiations and not enforcement of a contract making this case

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a better candidate for relaxation of the requirement. The Restatement also supports the Court’s relaxation of the clear and definite requirement to a more “equitable analysis designed to avoid injustice.”

Promise is adequate for the application of promissory estoppel in the context of failed contract negotiations – promise need not be clear and definite

Pre-contractual Agreements To grant comfort for one or both parties to incur at least preliminary reliance

expenses, the parties often reach intermediate agreement on most or all of the general terms which justifies them in executing an intermediate agreement stating the settled terms while at the same time acknowledging the need for further negotiation to reach the final agreement.

Normally in writing, executed by one or both parties, expressly states further bargaining must occur before formal or final contractual agreement is reached.

AKA: letter of intent, memorandum of understanding, agreement in principle, memorandum of intent, agreement to agree

If the pre-contractual agreement does not evidence objective contractual intent, the parties are legally free to withdraw from negotiations and refuse to complete the transaction without contractual consequences

More likely to create reliance but it expressly says its not a contract yet R2K 27: manifestations of assent that are in themselves sufficient to conclude a

contract will not be prevented from becoming a contract merely because the parties also manifest an intent to prepare and adopt a written memorial thereof.

o Exception: Where the circumstance show the agreements are merely preliminary negotiations, a contract will not be formed unless the parties execute a future complete writing

o Proper referent in these cases is the objective intent of the parties. If a party plaintiff makes out a prima facie case that the preliminary negotiations constituted an agreement, the defendant must establish that the plaintiff knew or should have known that the defendant regarded the agreement as incomplete and intended no obligation until there was assent to further terms or the agreed to terms were reduced to writing

Case Example:Empro Mfg. Co., Inc. v. Ball-Co Mfg., Inc.

Summary: Both parties exchanged letters of intent, regarding the sale of Defendant’s assets to Plaintiff, both also acknowledging that security for Plaintiff’s note would need to be agreed upon. The parties failed to agree upon security and suit followed.

Rule of Law: This case stands for the proposition that mutual letters of intent do not bind the parties to an agreement when integral terms are undecided.

o The court found that letters of intent were not a binding agreement, but rather an agreement to agree. As such, they were unenforceable when their purpose (i.e. the future agreement) did not come to fruition.Additionally, the Court found that Plaintiff could not claim reliance expenditures, when it could not prove prejudice. Reliance damages are rewarded when a party has

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been prejudiced to its detriment and estoppel is allowed only to the extent of placing that party in the position it would have been in, had it not relied. In this case, Plaintiff could not recover reliance damages because its only identifiable expenditures are associated with pre-contractual dealings.

Parol Evidence Rule: applies when the writing itself is intended to be the final and complete expression of their agreement (agreement is more likely to contain merger or integration clause)

Chapter 4The Scope of Contractual Obligations

Scope of Contractual Obligations Assuming the contract has been made, what are its terms and what is the meaning

of those terms? Controversies cluster around a few central themes

o Whether parties intended a writing to preclude prior representations understandings from adding to or varying the terms of the writing (parol evidence rule)

o The unprovided case (an omitted term to be supplied by law or implied through intent)

o The problem of the meaning of ambiguous terms selected by the parties (an interpretation issue resolved by choosing between the two meanings)

o The problem of bad faith (good faith implied by law to attach to all contractual rights and obligations)

o Independent obligations implied by law (implied warranties) Determining intent of parties not the simple solution for scope and meaning

o The mutual intent of the parties to limit the scope of their contractual rights and obligations to the terms contained in a written memorial may not be clear

Parol evidence rule purposes to define and limit the universe of terms and meaning that are the subject of the court’s determination of the parties’ intentions where the parties have reduced at least some part of their agreement to writing. The writing itself may not expressly consider the effect of the writing regarding prior negotiations, understandings, and agreements. It is often not obvious that the parties intended the writing to discharge other, collateral oral agreements regarding additional arrangements between the parties that supplement the written contract

o The parties may fail to consider or agree as to which party should bear the risk of certain future contingencies (omitted term)

o The parties may not share the same intentions. While the objective theory of assent reduces the risks of

unenforceability because of a lack of actual agreement as to the parties’ respective intentions, in some cases even an objective

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assessment of their intent will not produce a single, reasonable meaning. Ambiguous terms which meaning prevails?

o The public in some situations may have a legitimate interest in regulating some aspects of the parties’ agreement, even if that agreement expressly considers those matters.

The public interest in ensuring that the regime of contract itself remains a trustworthy, coherent, and useful tool for the private organization of legal relationships may require courts to impose constraints upon the parties’ actions

Contract law may provide parties with a pre-established set of default terms that are not immutable and that the parties may vary by explicit contract

Identifying the Terms of a Written Agreement: The Parol Evidence Rule

R2K 213: Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)1. A binding integrated agreement discharges prior agreements to the extent that it is

inconsistent with them2. A binding completely integrated agreement discharges prior agreements to the

extend they are within its scope3. An integrated agreement that is not binding or that is voidable and avoided does not

discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement had it not be integrated

If completely integrated, PER bars admission. If partial, PER bars inconsistent terms but permits consistent.

Parol Evidence Rule Rule excludes truthful evidence of earlier agreements on the theory that the later

writing was intended to discharge all prior agreements In practice, PER is less concerned with the truth of the agreement or testimony than

the theoretical higher dignity of a later written contract constituting the final and exclusive statement of all matters previously discussed or promised relating to the same subject matter.

PER inconsistently applied at various levels in different states Early PER: plain meaning rule – only information within the writing itself, nothing

for the intent of parties to make the agreement and nothing else Modern PER: everything is relevant

o R2K 214(a) “Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish that the writing is or is not an integrated agreement”

Parol Evidence Rule Does Not Apply:o To subsequent agreements: agreements made subsequent to the execution of

the written document, such agreements would be admissible

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Although parol evidence does not apply, evidence of such agreements may be barred by the inclusion of “no oral modification” clauses in the original agreement

Common Law: originally doesn’t enforce the “no oral modification” clauses where a party has reasonably relied on the oral agreement as issue but enforcement is becoming more likely in modern cases especially in the construction context

o Collateral agreements: parol evidence will not affect agreements between the parties that are entirely distinct from the written agreement of the contract at issue. Evidence offered to prove or enforce such “collateral agreements” is admissible

R2K 216(2)(b): An agreement is not completely integrated if the writing omits a consistent additional term which is such a term as in the circumstances might naturally be omitted from the writing

Collateral agreement ruleo Absence of a Valid Written Agreement

Parol evidence will rule will not bar efforts to prove the absence of such an agreement. The absence of an agreement may be proved by parol evidence or any other extrinsic evidence.

A party can assert such a claim in several ways: Failure of a oral condition precedent to the agreement

o Both evidence that the parties orally agreed to a condition precedent to the contract taking effect, and further evidence that the condition failed would not be barred by the parol evidence rule, where both parties’ obligations would be discharged by that failure of that condition

Absence of considerationo Evidence that a written agreement lacks consideration

or that there was a false recital of consideration is not barred by the parol evidence rule

Mistake or Duresso Evidence that the written agreement was formed from

mistake or duress may be admissible to prove that there was never a contract

Fraudo A majority rule is that the parol evidence rule will not

bar the extrinsic evidence of fraudo Minority rule is that the extrinsic evidence is

inadmissible to prove fraud where the written contract expressly eliminates an element of the claim (“the parties agree that neither party relied in any way on representations made outside the four corners of the agreement”)

Reformation

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The effect of the rule depends on the purpose for which the parol evidence is giveno To explain or interpret the terms of the written contract

Almost always admissible for this purpose (majority of jurisdictions) Common law minority requires showing that the term in question is

ambiguous on its face before admitting parol evidenceo To supplement the terms of the written contract

Parol evidence is admissible unless the contract is completely integrated

A completely integrated contract is intended by the parties to represent an exhaustive as well as final account on the parties’ obligations

UCC distinction: usage of trade, course of dealing, and course of performance evidence are admissible in sale of goods cases to supplement the terms of a written agreement

o To contradict terms in the written contract Parol evidence is admissible for this purpose unless the terms in

question are integrated Integrated terms are intended by the parties to represent their final

agreement on the subject in question UCC distinction: course of dealing or course or performance

evidence may be admissible in sales of goods cases to “qualify” the meaning of an integrated term

Determining Integration and Complete Integrationo The question of whether the terms are integrated (i.e. final) and whether an

integration is complete (i.e. exhaustive) is for the judge, not the jury, to decide

o In reaching decisions regarding integration and complete integration, the judge will rely on the evidence:

Integration: The thoroughness and specificity of the written instrument in

connection with the terms at issue are strong indicators that the parties intended the writing to represent their final agreement

Parol and other extrinsic evidence are admissible. The determination is not made on the basis on an examination of the writing alone; “all the circumstances” – including the proffered parol evidence and other evidence extrinsic to the written contract – must be considered

Complete Integration: Merger clause: most important evidence that the parties

intended their written agreement to represent an exhaustive account of their contractual obligations, reciting that the writing “contains the complete and entire agreement of the parties” or other words to the same effect. Authorities divided

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on whether a merger clause is conclusive or persuasive evidence.

Other evidence: length of the agreement and the detail with which its provisions are set forth are important factors

R2K 209 Integrated Agreements An integrated agreement is a wring or writings constituting a

final expression of one or more terms of an agreement Whether there is an integrated agreement to be determined by

the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule

Where parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression

R2K 210 Completely and Partially Integrated Agreements A completely integrated agreement is an integrated agreement

adopted by the parties as a complete and exclusive statement of the terms of the agreement

A partially integrated agreement is an integrated agreement other that a completely integrated agreement

Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule

Case Examples:Thompson v. Libby

Summary: Defendant Libby entered into a written contract to purchase logs from Plaintiff Thompson. Defendant claims that Plaintiff breached an oral warranty as to the quality of the logs. Plaintiff entered into a contract with Defendant to sell Defendant logs. The parties put the contract in writing. Defendant alleges that Plaintiff made an oral warranty as to the quality of the logs.

Rule of Law: The parol evidence rule prevents extrinsic evidence from being used to contradict or vary the terms of a written contract that is intended as the full expression of the parties’ agreement.

o Evidence of the warranty is inadmissible under the parol evidence rule. The parol evidence rule prevents the use of extrinsic evidence to speak where the writing is silent or vary where the writing speaks. The parol evidence rule applies when the written document is a complete integration. A complete integration is a written document intended to be the full expression of the agreement between the parties.The Court determined that the written contract for the sale of the logs was a complete integration. Because the oral warranty would add or vary terms in the written contract, evidence of the warranty is inadmissible under the parol evidence rule.

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Collateral test: Warranty v. Subject Matter of Contract are these two things distinct and different?

Mitchill v. Lath Summary: The Laths orally promised to remove an icehouse in exchange for

Mitchill’s written agreement to buy land. The written agreement excluded the Laths’ earlier promise. Mitchill sought to introduce evidence of the promise for its enforcement.

Rule of Law: An oral agreement is allowed to be in variance of the written contract if the agreement is collateral, it does not contradict express or implied provisions of the written contract, and the parties would not ordinarily be expected to embody it in the writing.

PER expanded by fraud: used to admit evidence to determine truth, tries to admit evidence to prove the other party committed fraud by lying

Distinctive subject matter test for collateral Natural inclusion so not collateral agreement

MCC Marble Ceramic Center, Inc. v. Ceramic Nuova D’Agostino S.p.A. Summary: MCC-Marble Ceramic Center, Inc. (MCC) (plaintiff) was a Florida

corporation engaged in the retail sale of tiles, and Ceramica Nuova d'Agostino, S.P.A. (D’Agostino) (defendant) was an Italian corporation engaged in the manufacture of ceramic tiles. In 1990 MCC's president Monzon examined samples of D'Agostino’s tiles at a trade fair and agreed to purchase a certain quantity. Monzon spoke no Italian and communicated through a translator, an agent of D'Agostino. The parties stated that they had orally agreed on the price, quality, quantity, delivery, and payment and recorded the terms on one of D'Agostino's standard order forms, which Monzon signed. In 1991, according to MCC, they also entered into a requirements contract in which D'Agostino agreed to supply MCC with tile at a discount if MCC agreed to purchase a certain quantity, and MCC completed several order forms requesting tile deliveries pursuant to that agreement. When D'Agostino failed to deliver, MCC brought suit for breach of the 1991 contract. D'Agostino responded that it was under no obligation to fill MCC's orders because MCC had defaulted on payment for previous shipments, citing a provision in Italian on the back of the order form that “default or delay in payment within the time agreed upon gives D'Agostino the right to . . . suspend or cancel the contract itself and to cancel possible other pending contracts.” MCC appealed the grant of summary judgment to D’Agostino.

Rule of Law: Under CISG allows for intent of the parties and not PER because evidence of comfort with oral contracts

o In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances including negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties”

Effect of a Merger Clause

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Where parties share a common interest in making certain their written agreement is completely integrated and therefore cannot be supplemented by prior or contemporaneous extrinsic terms, it may be wise to include a merger clause

Merges prior negotiations into the final written contract, making it the final expression of the terms stated therein but also of the entire agreement

Merger clause expressly states there are no other terms, express or implied, and the entire agreement of the parties is limited to the terms expressed in the document

Lee v. Joseph E. Seagram & Sons, Inc. Summary: The Lees owned a 50% interest in Capitol City and agreed to sell their

interest to Seagram on the oral agreement that Seagram would relocate the Lees in a new distributorship of their own in a different city.  This was never put into writing and it never happened.  The court ruled in favor of the Ps.  Ds argue on appeal that 1) P’s proof of the alleged oral agreement is barred by the parol evidence rule; and 2) the oral agreement is too vague and indefinite to be enforceable.

Rule of Law: Certain oral collateral agreements are not within the prohibition of the parol evidence rule because if they are separate, independent, and complete contracts, although relating to the same subject, they are allowed to be proved by parol, because they were made parol, and no part thereof committed to writing.

Lee had no merger clause or integration clause Presence of merger clause does not automatically mean there was intention to

exclude collateral agreements Court finds on PER: no complete integration admit oral agreement

Parol Evidence Rule and the Valid Contract Requirement Parol evidence rule has never applied when the evidence is not offered simply to

prove an additional term but rather to prove some defect in the formation of the agreement itself.

The integration standard is not applicable to a written contract not otherwise validly created

R2K 214 gives five major categories of exception where an objection based on the parol evidence rule is simply made irrelevant by the purpose of the admission of the evidence to establish

o That the writing is or is not an integrated agreemento That the integrated agreement if there is one is completely or partially

integratedo The meaning of the writing, whether or not integratedo Illegality, fraud, duress, mistake, lack of consideration, or other invalidating

causeo Ground for granting or deny recission, reformation, specific performance, or

other remedy Term 3 is regardless of integration and permits the introduction of agreement and

negotiations prior to and contemporaneous with the adoption of a writing to establish the meaning of the writing

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Term 4: fraud is special. Tension between merger clauses (and thus the parol evidence rule) purporting to negate any reliance on misrepresentations made during negotiations

o Fraud in the execution (rare): refers to misrepresentation concerning what the defrauded party is signing (ex. Thinks it’s a lease, it’s a promissory note)

Assent normally represented by the signature is not meaningful and thus no contract is formed – void contract

o Fraud in the inducement (common): Doesn’t relate to the document signed but some character of the subject matter of the contract (ex. “This house doesn’t have termites” when the maker of the statement knew it did”)

Does not negate the formation of a contract but the deception utilized by the maker does allow the victim to assert fraud in order to rescind the contract

Voidable: affirm or ratify contract, sue for damages based on fraud or elect to rescind the contract and sue on the tort of fraud (restitution)

Case ExampleDannan Realty Corp. v. Harris

Summary: Defendant falsely made oral representations that induced Plaintiffs into the contract of a sale of lease of a building. Oral representations concerned the operating expenses of the building and the profits to be derived from the investment. Plaintiff affirms the contract and seeks damages for fraud.

Rule of Law: Where a person has read and understood the disclaimer of representation clause, he is bound by it

o NY majority (minority in general) freedom of contract o Majority of states – freedom from contract: one thing to put it in the contract,

enforcement goes to freedom of contract view (social contract – most courts enforce what they think is fair)

Interpreting Terms of the Agreement Interpretation refers to the process by which the courts determine the “legal

meaning” of contract language chosen by the parties. Purpose of interpretation is to ascertain the meaning of a term and in all cases, the effort is to ascertain the principle purpose of the parties (R2K 202). Generally interpretation is a question of law decided by judge not jury.

R2K 202 Rules of Aid of Interpretationo Words and other conduct are interpreted in the light of all circumstances,

and if the principal purpose of the parties is ascertainable it is given great weight

o A writing is interpreted as a whole, and all writing that are a part of the same transaction are interpreted together.

o Unless a different intention is manifested, (a) where language generally has a prevailing meaning, it is

interpreted in accordance with that meaning

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(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field

o Where an agreement involves repeated occasions for performance either party with knowledge of the nature of the performance and opportunity of objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement

o Whenever reasonable, the manifestations 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.

Contract language can be vague or ambiguous:o Vague if it has an unclear contextual meaning (a range of meanings on both

sides of a core objective meaning)o Ambiguous of it is subject to a double meaning (not with a range but two

separate meanings) Where misunderstanding relates to a core or essential term, either vagueness or

ambiguity might prevent the formation of a contract itself. Notwithstanding apparent assent, if the vagueness or ambiguity masks hidden dissent or material misunderstanding, a contract simply may not exist.

In all other cases, contract survives whose meaning prevails?Interpretation

Judge:o Evidence:

Four corners – only the document plain meaning rule Or

R2K 214 – anything relevant Jury: determines which meaning should prevail from evidence judge allows

o R2K 201 – Whose Meaning Prevails 201(2) Parties attach different meanings to a term

(a) Party that did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party

(b) Party had no reason to know of ay different meaning attached by the other, and the other had reason to know the meaning attached by the first party

o Party asserting a particular meaning will be the plaintiff who must carry the burden or proving its particular meaning prevails. Many reasonable interpretation cases fail solely because the plaintiff cannot carry the burden.

Particularly likely in a vagueness case where the subject term embraces both meaning and the plaintiff seeks a narrower meaning than the objective meaning implies the other party will almost always be able to rely on a broader objective meaning unless in the unlikely event the plaintiff can prove the defendant knew or should have known the plaintiff’s narrower subjective meaning

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Ambiguity display similar characteristic – while a subject term might be reasonably susceptible of both meaning, the plaintiff will have the burden to prove the defendant knew or should have known the meaning attached by the plaintiff

Objective/Subjective Theoryo Strict adherence to objective theory inevitably leads to an application of the

plain meaning rule, which remains the dominant theory of contract interpretation

o Objective theory: a term is only ambiguous if a court cannot ascertain a reasonably objective meaning within the four corners of the document itself

o Subjective: requires the court to consider all evidence to determine the actual intent of the parties and then determine whose meaning should control or whether the misunderstanding constitutes a failure of assent blocking the formation of the contract itself

R2K 215-216(1): if an agreement is completely integrated, parol evidence or prior or contemporaneous agreements may not be introduced for the purpose of contradicting a term in the writing or even for the purpose of supplementing the agreement with a consistent additional term

o Older/Restrictive View: except where it produces an ambiguous result, the standard of interpretation is the meaning that would be attached by a reasonably intelligent person acquainted with all operative usages and knowing all the circumstances other than oral statements by the parties of what they intended it to mean (R1K 230)

o Newer/Liberal View: parol evidence rule is inapplicable to all matters of interpretation without regard to whether the agreement is partially or completely integrated and without reference to a first determination of ambiguity.

Also adopted by UCC – does not require threshold determination that a term is ambiguous in order to authorize interpretation.

o Principle difference between the two is when the parties state a term in writing then orally agree the term means something subjectively peculiar.

o Under subjective meaning a litigant party who wishes to establish a subjective meaning must prove that its meaning does not violate the PER itself. The evidence may only be offered for the limited purposed of resolving ambiguity or vagueness.

If the party offers the evidence to interpret a term rather than addition or variation of the agreement, it is admissible.

o Where a special meaning is shared by both parties, it will become the legal meaning.

If no special meaning shared, the party seeking advantage of a special meaning must prove the other party knew or should have known of this special meaning and it did not know and did not have reason to know of the other party’s objective reasoning

Case Examples

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Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. Summary: Defendant contracted with Plaintiff to remove and replace the upper

metal cover of Plaintiff’s steam turbine. Defendant agreed to indemnify Plaintiff against all loss resulting from injury to property. After the cover fell and injured Plaintiff’s turbine, Plaintiff sued to recover damages, and Defendant sought to offer evidence that the indemnity clause was only to cover damages to third parties.

Rule of Law: Extrinsic evidence is admissible to explain the meaning of a written agreement if the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.

o “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.” Further, excluding parol evidence merely because the words do not appear ambiguous may lead to an interpretation of a written contract that was never intended. Extrinsic evidence may not add to, detract from, or vary the terms of a written contract, but it may be used to interpret the terms of the contract. In the present case, since the contract clause was reasonably susceptible of the meaning Defendant attaches to it, the evidence offered by Defendant is admissible.

Frigaliment Importing Co. v. B.N.S. International Sales Corp. Summary: Defendant B.N.S. International Sales Corp. contracted to sell chicken to

Plaintiff, Frigaliment Importing Co. Defendant sent chicken complying with the weight requirements of the contract. Plaintiff argues that the chicken sent did not comply with the terms of the contract because the term “chicken” means young chicken. The parties disagree as to what the term “chicken” in the contract means.

Rule of Law: To interpret a disputed term in a contract, the court will consider (in order of importance): (1) the language of the contract, (2) the preliminary negotiations, (3) trade usage, (4) legal standard, (5) course of performance, and (6) maxims.

o • In determining what a term means the court will consider (in order of importance): (1) the language of the contract, (2) the preliminary negotiations, (3) trade usage, (4) legal standard, (5) course of performance, and (6) maxims.• The smaller chickens had to be younger chickens, because older chickens do not come in that size. Because the smaller chickens had to be younger chickens, Plaintiff argues that the larger chickens also had to be young.• Plaintiff also argues that trade usage of the term “chicken” is to indicate a young chicken. However, there was conflicting evidence as to whether “chicken” only means a young chicken in the trade.• One maxim is that a reasonable construction is preferred over an unreasonable construction. Defendant alleges that to sell younger chicken to Plaintiff at the contract price would result in a loss to the Defendant. Because under the Plaintiff’s construction the contract would result in Defendant selling chicken at a loss, Defendant argues that Plaintiff’s definition of “chicken” is

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unreasonable.• The Court holds that the because Defendant’s definition coincides with the objective meaning, one of the dictionary definitions, the Department of Agriculture’s regulations referenced in the contract, some trade usage, the realities of the market, and statements by Plaintiff’s spokesperson, Plaintiff has not met its burden of showing that the narrower definition of the term applies.

R2K 201(2) appears to treat vagueness and ambiguity the same, resolving the matter against the party most at fault for the misunderstanding upon proper proof and upon lack of proof against the plaintiff who carries the burden of proof

Supplementing the Agreement with Implied Terms Interpretation and construction are different; interpretation searches for the

meaning attached by the parties to terms provided in their agreement and construction supplies terms where the parties omitted them search for intent is meaningless because the term doesn’t exist

R2K 204 Supplying an Omitted Essential Termo When the parties to a bargain sufficiently defined to be a contract have not

agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court

Case ExamplesWood v. Lucy

Summary: Defendant Lucy, Lady Duff-Gordon, entered into a contract with Plaintiff Wood. The contract gave Plaintiff the exclusive right to use Defendant’s endorsement and to sell and license Defendant’s designs.

Rule of Law: An obligation to make reasonable efforts may be impliedo The Court implies an obligation to make reasonable efforts. The Court finds

that without an implication to make reasonable efforts, the contract would be worthless to Defendant. Further, the Court seems to question why such a contract would ever be entered into without some expectation that reasonable efforts would be made. Without an obligation to make reasonable efforts to bring in profits and revenues, the contract would be without value.

Implied Terms Categories:o Terms that the parties intended search for parties’ intentionso Terms that the parties would have intended had they thought about it:

search for the parties’ hypothetical intentionso Terms that are fair: nothing to do with the parties’ intentions except that the

court will generally not imply a term in the face of the parties’ expressed intent to the contrary

Wood’s implied promise fits all three categories: fair, objective, and its what people would have done if they thought of it

City of Yonkers v. Otis Elevator Company

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Summary: City and city development agency brought suit against manufacturer, alleging that manufacturer was obligated to continue to operate its plant in city for next 60 years. The United States District Court for the Southern District of New York, John E. Sprizzo, J., found for manufacturer. On appeal, the Court of Appeals, Mahoney, Circuit Judge, held that: (1) manufacturer made no express or implied promise to remain in operation, and (2) sanctions imposed on attorney were proper.

Caveat Emptor & Warranties

Warranty – Modification/Elimination 2-316 Express 2-313

o 1(a) Seller’s statements are “affirmation of fact or promise” or “description of the goods”

o 1(b) Whether the statement is “merely the seller’s opinion or commendation of the goods”

Merchantability 2-314 (almost always triggered in any sale of goods) (implied) Fitness 2-315 (almost never triggered in any sale of goods)

o Reason to know the goods are required for a particular purpose, the goods must be fit for that purpose reliance on the seller’s expertise for the goods to be suitable for the purpose (problem is defective advice not defective goods)

Disclaimers often added to specify no warranty – location matters for 2-316o If express warranty is in the literature with the disclaimer it is preservedo If express warranty is not in the literature its gone (orally made or otherwise

under parol evidence rule unless fraud claim)

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