Contracts Outline Fall 2008-FitzGibbon I. FOUNDATIONAL ELEMENTS OF CONTRACTS & PROMISES Defining Contracts: Legally Enforceable Promises a.

Definition: A contract is an agreement that the law will enforce b. Written vs. Oral Contracts: Writing isnt always necessary to create a contract. An agreement may be binding on both parties even though it is oral. c. Manifest an intention to act in a certain way: Where the evidence is ambiguous, the court will generally treat a contract as existing as soon as the mutual assent is reached, even if no formal document is ever drawn up. d. Fit for the purpose intended e. Reasonable person justify that a commitment would be made?: The partys intent is deemed to be what a reasonable person in the position of the other party would think that the first partys objective manifestation of intent meant. f. Legally Enforceable: The parties intention regarding whether a contract is to be legally enforceable will normally be effective; same if both parties do not want agreement to be legally enforceable. g. A promise is legally enforceable where it: was made as part of a bargain for valid consideration; reasonably induced the promisee to rely on the promise to his detriment; or is deemed enforceable by a statute despite lack of consideration. h. Cases: i. Silverman v. Imperial London Hotels: Courts imply from the circumstances that the place would be reasonably fit for the purpose intended; therefore: it should have been bug-free. ii. Clarks Bar Example: Great Beer; No Flies slogan outside. Look at whether Clarks has manifested an intention to act in a particular way, ie: to serve beer with no flies. iii. Embry v. McKittrick: Meeting of the minds declares the formation of a contract. Secret intentions cannot override objective manifestations of consent. Secret intentions = not enforceable. DEFINING WHAT A PROMISE IS Promises that Lack Commitment a. Definition: A promise in a bilateral agreement is consideration only if the performance which is promised would be sufficient consideration. b. Mutuality of Obligation: Both parties must make promises that somehow bind them. c. Cases: i. Wood v. Lucy, Lady Duff-Gordon: P sues for breach of agreement. D asserts that the contract failed for lack of consideration on the grounds that P didnt bind himself to do anything. Held for P one can impliedly find P promised to use reasonable efforts; implied

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promise is sufficient detriment to constitute consideration ~~ contract is binding, and D breached it by putting label on stuff. ii. B. Lewis Productions v. Angelou: P claims D breached duty of good faith and fair dealing. D claims terms were insufficient to have a valid promise. Whats sufficient for an oral agreement to be sufficiently definite? (1) Price; (2) Duration; (3) Subject Matter/What the work is. 1. Implied Obligation of Good Faith: UCC 1-304: Every contract or duty within this act imposes an obligation of good faith in its performance or enforcement. UCC 1-201 defines good faith as: honesty in fact and the observance of reasonable commercial standards of fair dealings. iii. Keller v. Holderman: P & D enter in to a contract for a watch which was worth $15, but sold for $300. According to both parties, entire transaction was frolic and banter. P didnt expect to sell, and D didnt intend to buy. No contract was ever made by parties; no intention to be legally bound. iv. Brown v. Finney: Coal sale. Buyer believed seller was serious in entering business transaction. Buyer was justified in believing there was manifestation to sell was made. Seller says didnt agree on details, payment, etc. Interpretation of Vague & Indefinite Promises a. 2nd Res: Terms of a contract are sufficiently definite: if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. b. UCC Test: Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract, and there is reasonably certain basis for giving an appropriate remedy. UCC 2-204. c. Necessary Terms: Four essential elements which an agreement must cover (either explicitly or implicitly) in order for it to be enforceable: (1) Parties to the contract; (2) Subject Matter of the contract; (3) Time for performance; and (4) Price. i. Courts may supply missing terms. Types of situations: 1. Where parties intend to leave to reasonable implication 2. Agreement to agree 3. Indefiniteness cured by performance ii. Implication of reasonable terms, generally. Terms that may be filled in include: 1. Open Price Term 2. Absence of specified place for delivery 3. Time for shipment/delivery 4. Time for payment d. Case: i. Berg v. Hudesman: P landlord filed action against D tenant, alleging D incorrectly calculated rent due in lease. Issue is ambiguity in terms of contract should those be

upheld/admissible? Court looked to find intention of the parties. Difficulties came in unforeseen circumstances and ambiguous language. 1. Plain Meaning Rule: If the language of the agreement is clear, and unambiguous, you dont admit extrinsic evidence. If agreement is ambiguous, you can look to outside evidence to clear up ambiguities. 2. Context: Courts also look at the true intent of parties, and to guide this interpretation, they look at context to the making of the transaction. (ie: You invite Dean over to dinner, and dont think hell show, but he does. Is there a contract? No, because looking at the context of a social setting, its not really enforceable). WHICH PROMISES SHOULD BE KEPT AND ENFORCED I. RELATIONSHIPS OF PARTIES IN CONTRACT Relationships that Limit and Give Meaning to Promises a. Case: i. Woods v. Fifth-Third Union Trust: Heir was decedents son. Heir provided services like personal attention and assistance in managing property. Heir brought action against executor to recover for his personal services. Issue: Was there enough of an express promise to compensate the heir? The court held that no promise, implied or in fact arose from the performance of personal service by a son for the benefit of his mother. The relation of the parent and child are so close that the implication arose that whatever serve the one rendered to the other was performed without the expectation of compensation. 1. Courts might have seen that heir was acting out of love and affection; he had a moral obligation. 2. General presumption in families: Services rendered are wholly gratuitous. NOT legally bound. ii. Watts v. Watts: P and D were in a non-marital, co-habitation relationship. Issue is that courts refuse to enforce contracts for which the sole consideration is meretricious relationships. Ultimately the court concluded that although there is not a technical family relationship, the wife does have sufficient evidence that there was a promise or agreement (take care of kids) and maybe be implied. The courts saw it not just as a gratuitous relationship. In conclusion, the final basis the wife is entitled to is unjust enrichment, where there was no contract ever, but there was an injustice. 1. Elements in Unjust Enrichment: a. Show one received benefit b. Knowledge and appreciation of benefit c. Accepted or retained the benefit

iii. Hypo: Housepainters uncle asks nephew to paint the house. The professional painter nephew makes time to paint uncles house. Nephew painter presents uncle with a bill for the house. Is there a promise that the uncle was willing to pay nephew to paint the house? Nephew could say that he had lost opportunity in performing task without payment; supplies and materials were encumbered by him. He could also say that this is beyond what a family member would normally do as a favor. There was an express request for services with the presumption to be perhaps more legally bound. Support that would help the fact that payment was necessary was the performance. TEST WHETHER A PROMISE IS IMPORTANT ENOUGH TO BE ENFORCED IF SOMEONE HAS PAID FOR A PERFORMANCE IN THE PROMISE I. BARGAIN FOR EXCHANGE = CONSIDERATION Consideration: Bargains and Action in Reliance a. Consideration must have something that was bargained for 1. Idea of consideration demonstrates the economic underpinnings of contract enforcement. Its what a good economy does and promotes bargains and transactions, as well as security and reliability in those transactions. 2. Consideration is something bargained for, sought by promisor, given by promises, and has legal detriment. 3. Consideration can take the form of performance or a returned promise or a forbearing or refraining from doing something. 4. Consideration doesnt always have to benefit the promisor. b. Adequacy of Consideration 1. The law will not consideration the adequacy of consideration. 1. Restatement 79: If the requirement of consideration is met (that something is bargained for), there is no additional requirement of: (a) a gain, advantage or benefit to promisor or loss to the promisee or; (b) equivalence of the values exchanged; or (c) mutuality of obligation. 2. Peppercorn Theory: No matter how little is bargained for, it will bind the promisor who sought the return promise for exchange. c. Must be something that is not otherwise a legal duty. d. Bargain Promises vs. Gift Promises 1. Williston: Benevolent man says to tramp If you go around the corner, you can purchase a coat. Must be held that the walk was a condition of a gratuitous promise there was no consideration. Walking is not legal detriment, so no consideration. e. Restatement 90: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee and which does induce such an action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires.

f. Case: 1. Dyer v. National By-Products, Inc.: Employee P was injured at work. Employee filed an action against employer alleging breach of oral agreement. Employee claimed his forbearance on litigating a personal injury claim that he in good faith believed he exchanged a promise that he would have lifetime employment. Courts found that what P was alleging to do not go to court he had NO LEGAL DETRIMENT, therefore was not promising anything. g. Restatement 74: Settlement of Claims: Either the settled claim must be one whose validity is uncertain, OR the P must subjectively believe the claim has possible merit. This Res helps encourage settlements based on good faith. Must have good faith, and legal-duty for Res 74. h. UCC 2-306: Output, Requirements, and Exclusive Dealings: (1) A term which measures the quantity by output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered. (2) A lawful agreement by either the seller or the buyer for exclusive dealings in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and promote their sale. i. Cases: 1. Feld v. Henry S. Levy & Sons: P operated wholesale bakery. D agreed to sell P all breadcrumbs produced by D. There was a cancellation clause. D stopped its breadcrumb production because contract was unprofitable. P sued to have D complete contract. Example of an output contract. We do have definite enough terms. Case breaks good faith in taking on obligation, and Ds excuse of economic infeasibility is not a basis for production stoppage. 1. In Feld, UCC law applies because it was a transaction for the sale of goods. 2. Output contracts require persons must do best efforts, give good faith, and deliver the normal output under normal circumstances, to validate a sufficiently definite promise. 2. Technical Assistance International v. United States: Requirements contract between TAI and US government. P says did get as much maintenance work as expected because D replaced more cars instead of allowing them to stay in fleet for maintenance. Held for D because TAI couldnt demonstrate that D didnt act in good faith. 1. Requirements contracts are seen as valuable and flexible. 2. UCC doesnt apply to this because this was a for services 3. In looking a requirements contract, we ask questions like: Is there commitment? Mutuality? Is agreement definite

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enough? Is there something of a promise to use the services? Past Consideration and Moral Obligation a. Promise to pay for benefits received generally: The enforceability of a promise of payment for past services depends on several factors, including whether a recipient initially requested the services and whether the donor rendered them in expectation that he would receive payment. b. Benefits previously received but not requested 1. Promise to pay for past services received is usually held not to be supported by consideration 2. Split view: Older cases generally hold that Bs promise is unenforceable (Mills), but the current trend is clearly in favor of increased enforceability of such promises. c. Restatement 86: Receipt of an unrequested material benefit, followed by the receivers promise to pay for the benefit, is enforceable without consideration, but only to the extent necessary to prevent injustice. d. Cases: 1. Mills v. Wyman: Ds son, a 25 year-old, becomes ill while traveling, and is nursed by P. D writes to P, promising to pay Ps expenses. Held that Ds promise was not supported by consideration, since Ps services were not given at Ds request. (Also, the son had long since left home, his own request for should not be imputed to his father). 1. No consideration for Ds promise to pay Ps expenses. Kindness and services provided for Ds son were not bestowed upon Ds request. No consideration = Ds promise had no legally binding force. 2. No consideration = no basis for promise enforcement 3. Moral Obligation not sufficient; courts wont enforce that. 4. Res. 86 doesnt apply to Mills because we cannot demonstrate there was a benefit received. Father was not unjustly enriched; father did not receive benefit. 2. Webb v. McGowin: P was permanently injured while saving the promisors life. Promisor agreed to pay P a monetary amount every two weeks for rest of Ps life. D = executors of promisors estate. Payments quit after P died because estate wouldnt pay them. Court held for that contract was enforceable because the injury to the P in saving the promisors life was sufficient legal consideration to enforce the promise to pay. D incurred a substantial material benefit, even though he did not request it. 1. Dont see classic consideration in this case, but do have a material benefit received (his life). 2. Webbs motivation for falling with the block of wood was not to get money out of the deal; it was to save a life. CONSIDERATION SUBSTITUTE = PROMISSORY ESTOPPEL Preexisting Duty Modification of On-Going Contract

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a. Preexisting Duty Rule, generally: If a party does or promises to do what she is already legally obligated to do, or if she forbears or promises to forbear from doing something which she is not legally entitled to do, she has not incurred the kind of detriment necessary for her performance or forbearance to constitute consideration. b. The preexisting duty rule is trying to alleviate duress or coercion. c. Restatement 89: Modifications of Executory Contracts. Makes a modification binding if it is fair and equitable in view of circumstances not anticipated by the parties when the contract was made. Res. 89 serves as a method for finding a consideration substitute. d. UCC 2-209: Modifications, Rescissions, and Wavier. (1) An agreement modifying a contract within this Article needs no consideration to be binding. (2) A signed agreement which excludes modification except by a signed writing cannot otherwise be modified, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. i. UCC changes the rule: In the cases to sell goods, the UCC has in effect abolished the pre-existing duty rule, providing in 2-209 that a contract modification needs no consideration. ii. Essentially, under UCC 2-209, contract modifications require no consideration, but DO require good faith (a substitute for consideration). e. Cases: i. Schwartzreich v. Bauman-Basch, Inc.: P entered in to employment agreement with D. When P was offered more money from another employer, P discussed this with D. First contract was destroyed and a second contract was drawn up indicating an increase in the Ps salary. P sought enforcement of 2nd contract. Judge ruled that the both parties did not mutually agree to revoke 1st contract; therefore 2nd contact was unenforceable for lack of consideration because P was already obligated to work for D. 1. Consideration is lacking because D is not getting an extra benefit. Should have added 1 extra thing for P to do under contract, and it would have been adequate and enforceable. But P was set to get paid an extra $10 a week in the 2nd contract, but he didnt have to do anything else. Therefore, no extra benefit for D. a. Where extra duties assumed: In all courts, if the party who promises to do what she is already bound to do assumes the slightest additional duties or even different duties, her undertaking of these new duties does constitute the required detriment. 2. Promise was not enforceable for lack of consideration, and the promise was based on duress/coercion, because D couldnt find any other salesmen on such short notice.

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3. The modification would apply, if voluntary and both parties agree, i.e.: concept of freedom to modify agreements. 4. In order to enforce the promise by the employer, three things need to happen, aka: Schwartzreich 3-steps: a. Avoid preexisting duty rule by entering in to a new contract with neutral promises, and promises to rescind original agreement or refrain b. No problem any longer with preexisting duty rule because contract in (a) wipes out other contract. c. Entering into new agreement d. Idea behind this: Must be a moment when both parties could walk away and they were both free from each other (no coercion, no duress). Once mutual agreement to rescind happens, free to enter in to a brand new agreement. ii. Autotrol Corp. v. Continental Water Systems Corp: D and P signed a joint venture to create systems for water purification and there was ambiguity within the contract. Modification of the contract to waive Ds right to terminate was supported by consideration, and both parties benefited from a relaxed deadline. Ambiguities existed in some oral modifications and duration of Ds commitment; modification was deemed enforceable. 1. Oral modification clauses are generally ineffective 2. Continental lost right to terminate contract because they essentially waived their right to contract termination. a. Wavier is an intentional relinquishment of a known right. 3. Facts support Autotrol can show that Continental didnt terminate this contract by encouraging them to work past termination deadline, and Autotrol gave consideration to enforce the promise, by relinquishing its rights not to terminate. f. HYPO: Cleaning services company promises to clean an entire building over 5 yr. period and promised to accept 5k/yr. for services. At end of 3rd year, the building was added on to by 20%, so more cleaning was necessary. The cleaning company went to the building owner and said you must pay us 6k/yr now to compensate for the building addition. If the building owner agrees to the 6k, is this a contract? Use 3-step process. Cant find where they mutually rescinded and had time to walk away and come back on new terms. Cant use UCC in this hypo because its for services, not goods. From Res. 89, both sides havent completed the agreement (not end of 5 yrs, and not paid 25k). Preexisting Duty Debt Settlement and Check Cashing Rules a. Agreements to accept part payment of debt in satisfaction of whole: Creditors agreement to accept a payment by his debtor for a lesser sum in satisfaction of the full debt. Since the debtor owes the full amount, he is not, by paying a partial amount, doing

anything he wasnt already legally obligated to do. Therefore, some courts hold that the creditors promise not to require payment of the full amount is not binding because it lacks consideration, as well as allowing extra time for payment lacks consideration. i. Most courts feel that this serves no useful function, since it discourages what is frequently a useful commercial transaction and breeds litigation. Basically this rule only now applies when a debtor makes a part payment of an amount that is indisputably due, and due on the date that the part payment is made. ii. Liquidated amount = Fixed sum/amount iii. Undisputed = Debt owed iv. Matured = Debt is due/owing b. Restatement 74: Settlement of Claims: Either the settled claim must be one whose validity is uncertain, OR the P must subjectively believe the claim has possible merit. This Res helps encourage settlements based on good faith. Must have good faith, and legal-duty for Res 74. c. UCC 3-311: Provides that a claim will be discharged by the cashing of the check (ie: the debtor will win) if these three conditions are met: (1) the check contained a conspicuous statement to the effect the check was tendered as full satisfaction of the claim (i.e.: Payment in Full written on check); (2) The claim was either unliquidated or was subjected to a bona fide dispute; (3) The debtor acted in good faith. i. Most of the time, the creditor who cashes a check marked in full settlement will lose under UCC 3311. d. Cases: i. Johnson v. Utile: Agreement to sell property, and in the agreement, sellers are to provide an existing and new well that they would be drilling. Argument that there was a substituted contract. Utiles would want an accord because when their was failure to deliver well #2, the would have the opportunity to enforce their rights under the original obligation. 1. Courts look to Corbin to determine parties intentions, and there is an assumption in favoring an accord because thats more useful for the person who isnt getting what they originally bargained for. 2. When language is not clear, the court looks at extrinsic evidence to find the intention of an accord between both parties. ii. IFC Credit Corp. v. Bulk Petroleum Corp.: P sued D for breached lease, under which D leased gas tanks from P with option to purchase. Court ruled that valid accord and satisfaction had taken place. P sent in check and letter claiming full satisfaction of lease and purchase of tanks. Follow UCC 3-311 on this:

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1. Offered as an accord. Situation where there is an unliquidated amount no clear fixed sum. 2. Promise to pay = Accept as payment in full. I promise to pay you only on the condition its payment in full. Gave conspicuous language. 3. Options: Cash check = implied promise, and accept as payment in full (no longer have opportunity to go back to what they think theyre entitled to). Consideration is the disputed amount. 4. Elements to consider: a. Bulk submitted check in good faith? Yes b. Bona fide dispute over amount owed? Yes c. Bulk needs to demonstrate they received payment d. Bulk must prove that the check had conspicuous language. And it did. iii. HYPO: Agreement to paint house for 10k, and you agree 10k is due in 30 days after completion. Painter did a fine job, and no dispute over quality of work. Its now 30 days after completion of painting house, and you promise to give 9k as promised payment in full. Would you be able to accept 9k for house painters promise to discharge debt in full, and painter says hell accept this promise? 3. Difficulty with consideration, where fixed sum is undisputed you owe 10k, and its after debt matured, and you have a preexisting duty to pay, and you give less than whats promised, you are ONLY doing whats already legally obligated of you to do. 4. Updated hypo: Not obligated to pay for another 29 days, and you offer to pay 9k as payment in full, and painter promises to take 9k as payment in full, we HAVE given consideration for payment in promise of full payment because you still have fixed sum and its not owed yet, and the fact that youre paying early shows youre doing something different, so you can avoid the preexisting duty rule. Labeling Promises to Discharge and Resolve Debts a. Two instruments used to help parties resolve claims (DIFF = Remedies): i. Substituted Contract: Agreement by parties to a contract by which one promises to render an substituted performance, and the previous contract is immediately discharged. 1. Because a substituted contract immediately discharges the original contract, the creditor has no option as to remedies. He most sue for breach of the new agreement, and cannot recover for breach of original one. 2. A substituted contract is a promise to discharge an existing duty immediately for a substituted performance. ii. Accord and Satisfaction: An executory accord is an agreement by the parties to a contract by which one promises to render a

substitute performance in the future and the other promises to accept that substitute performance in discharge of the existing duty. 1. Does not discharge the debtor until he has performed according to its terms. If she breaches the accord, the creditor has the option to sue for breach of original contract or breach of accord. 2. In an accord, a party is promising to discharge existing duty, but only promising to discharge when the get performance of a substituted duty. 3. Suspends original obligation. 4. Uses language like: if you will accept this as my prior obligation I. RELIANCE Promissory Estoppel: Promises binding without consideration a. Consideration doctrine designed to enforce promises which are bargained for. There are some promises, which, although the promisor makes them without bargaining for anything in return, nonetheless, induce the promise to rely to his detriment. i. Promissory estoppel is an exception to the general rules in contract. ii. Promissory estoppel arises in many situations that involve family promises or charitable subscriptions. The promissory estoppel doctrine fills an important function in the intra-family promise situation since it at least allows the promisee some legal remedy if he relies on the promise to his detriment. b. Restatement 90: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee and which does induce such an action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires. c. Under Res. 90 Analysis for Promissory Estoppel (as seen in Ricketts): Step 1: See if there was a promise. Identify promise. Step 2: Based on that promise, could the other reasonably expect this action in reliance? Step 3: That it induced the action in reliance. Step 4: What enforcement/remedy is necessary to prevent injustice. Assess the extent of reliance (how definite, and substantial was the reliance) Step 5: Was the action in reliance reasonable? d. Case: i. Ricketts v. Scothorn: Grandfather, distressed because granddaughter has to work in a store, gives her a promissory note, telling her that he has done this so that she will not have to work anymore. She quits her job. He then dies, and his estate refuses to pay the note. The court held for the granddaughter, as

she justifiably and foreseeably relied on grandfathers promise of payment by giving up her job. This reliance made the note enforceable and operated to estop the executor from denying that the note was given for valid consideration. ii. Clausen & Sons, Inc., v. Theo Hamm Brewing Co.: Clausen promised to be the exclusive distributor of Hamms beer. The promise were seeking to enforce is: Is the promise made by Hamms to continue the exclusive representative relationship to Clausen. In reliance, P discontinued all competitor products and became Ds exclusive distributor. Clausen incurred legal detriment. I. OFFER & ACCEPTANCE Operative Offer or Invitation to Negotiate 1. Restatement 24: The manifestation of willingness to enter in to a bargain, so made as to justify another person understanding that his assent to that bargain is invited and will conclude that bargain. 2. UCC 2-204: Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is reasonably certain basis for an appropriate remedy. i. Where there are a variety of open terms, you will more than likely find that thats a demonstration of preliminary negotiations. 3. UCC 3-305: As long as the parties intend to make a binding contract, their agreement to agree does not make the contract fatally indefinite, at least if is the price term that is left open. The court can supply a reasonable price term if the price is left to be agreed by the parties, and they fail to agree. 4. Mutual assent: For a contract to be formed, the parties much reach mutual assent, that is to say they must both intend to contract, and they must agree on at least one of their main terms of their deal. 5. Offer: A manifestation of willingness to enter in to a bargain 1. Offeror is master of offer. Has power to decide the terms of the offer, list those terms, and determine who may accept the offer. 2. Until acceptance of offer, offeror has right to revoke. Promises are binding upon receipt of consideration. 6. Unilateral Agreement: Offer containing promise to do something in exchange for a performance. Youd have an offer seeking a performance. (i.e.: Not a promise to pay right now). 7. Case: i. Lefkowitz v. Great Minneapolis Surplus Store, Inc.: Store says they were entitled to revoke offer at any time and didnt have consideration for it. Store advertised sale at store, and store says theyre making an invitation to make an offer, and are not fully

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making an offer. First ad did not have sufficiently definite terms; 2nd ad did because it had a price. We did have offer and acceptance in the 2nd ad. I.e.-First person to come in store, gets coat for $1. P was in store first. a. In general, advertisements are deemed to be preliminary negotiations and are not viewed as offers. These are some situations where ads are viewed as offers. b. What necessary to transfer a preliminary negotiation into an offer: Clear, definite and specific terms, leaving nothing open for consideration. Duration of Offers and the Use of Options a. In finding out whether a valid offer and acceptance occurred, one key is to find out whether the offer ended before the acceptance occurred (in which case, theres no contract). Main ways an offer ends: (1) offer is rejected by offeree; (2) the offeree makes a counteroffer; (3) the offeror revokes the offer; (4) the offer lapses by passage of time; (5) either the offeror or offeree dies. b. Restatement 25: The option is not only an offer to the contract, but is at the same time a contract in which the offeror promises that she will keep the offer open for a certain time. Options contracts are socially useful, and keeps offers open. Doesnt require option contract to be written. c. Restatement 87: Provides that a written, signed option contract can be formed without the actual giving of consideration, as long as it recites a purported consideration for the making of the offer. Limit to hold contract open is three months. d. UCC 2-205: The UCC allows the formation of an irrevocable offer under certain circumstances even if no recitation of the payment of consideration is made. Firm Offers provide that an offer by a merchant to buy or sell goods is irrevocable if the offer meets two conditions: (1) it is signed in writing; and (2) it gives explicit assurance that the offer will be held open. e. Options Contracts: Concerned with the fact that the offeror is the master of the contract, and the offeree is at the mercy of the offeror because they can revoke until acceptance, and the offeree might need time to consider deal. There is a time where offeree is protected so they dont have to jump at the offer to make sure its not revoked. f. Cases: i. Great Northern Railway Co. v. Witham: In response to ad, Witham sent a letter saying that interested. Basis for Withams claim that he didnt have to fill out a P.O, because he said this was unilateral agreement, and there was no consideration on the part of the RR co. Court concluded that Witham had to fill order because it was still a valid offer. Withams letter was the offer (identified price, # of items, etc.); RR Letter served as all we may buy; RR P.O. was the acceptance.

ii. Marsh v. Lott: Correspondence between Lott and Marsh where terms of payment and sale of land are discussed. This is case where the terms are being proposed by seller are specific enough to be seen as an offer. The assent will be in the term of paying at least 30k down in specified time period. Court recognized that an options contract is a socially useful device. 1. Main offer: To sell land. This is accepted through paying 100k. The 100k is characterized as consideration & acceptance of offer for sale of land or K. 2. Option: Promise to keep main offer open st through July 1 . The 25 cents could be characterized as acceptance of options promise; consideration to hold promise open. Once 25 cents is accepted, we have promise to keep main offer open until July 1. This is what we bargained for. 3. Lower court might believe that offeror could revoke offer because 25 cents was a pittance. 4. Courts will enforce these options contracts even if or a minimal amount of money. Law doesnt question the adequacy of consideration. iii. Mid-South Packers v. Shoneys: Term in proposal that they would give 45 days notice if prices changed. Shoneys placed orders in July, August, and then Mid-South said they were going to raise prices (didnt give 45 days notice). Shoneys continued placing meat orders; Shoneys kept running tab of difference in price, then deducted that amount from the last invoice. Definitely had an offer because they stated product, price, and delivery. There as an offer where assent was invited. Court said it was a firm offer. The orders that Shoneys began to place after the three-month period fell out of the 3-month period, therefore MidSouth was able to change the offer/contract. a. Applying UCC-2: a) transaction for sales of goods; b) signed in writing; c) merchant; d) total limit of 3 months. i. Restatement 45: The beginning of performance by the offeree creates an options contract. Once the offeree starts to perform, the offer becomes temporarily irrevocable. j. Case: i. Drennan v. Star Paving: Drennan was a general contract accepting bids from subcontractors to renovate a school. Star Paving submitted lowest bid for paving. Drennan went to Star Paving and Star Paving said they made a mistake, and said they needed to up the bid by 8k. It seems that the proposal they submitted was definite and clear, and the general contractor could assent. Star said they revoked the offer before it was accepted. The reliance of the contractor is enough to made the bid irrevocable. Were looking at fairness, and the general contractor relied on many small bids to

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comprise major bid to school, which had already been accepted. Res. 90 and Res 45 are both applied 1. Action in reliance is consideration substitute which holds offeror to implied promise to hold offer open until there is time to accept. 2. Star is held to offer because its a situation where its foreseeable where offeree is going to have to make some sort of action or forbearance prior to acceptance to offer, and imply subsidiary promise. The Binding Event: Acceptance a. Acceptance: The offerees manifestation of assent to the terms of the offer, made in a manner invited or required by the offer. b. The offeror has right to determine the mode of acceptance. If its not specified in the offer, then acceptance is deemed to be any reasonable means. c. Acceptance is the necessary component with the offer to create contract. Acceptance has to demonstrate that the party is making a commitment. Acceptance must be exactly in the terms of offer, and cannot change terms of offer (if it does, its a counter-offer). Acceptance is often promissory and acceptance can be viewed as consideration that binds the offeror. d. Focus on: What is the promise in the issue. What is the offer, has there been acceptance. Is the person entitled to the rights theyre claiming. e. Cases: i. Hill v. Gateway: Hills, P ordered a computer from Gateway, D. When it arrived, it had additional terms, additional services, and other software. Further, there was an agreement to arbitrate if there were any disputes, as well as we accept all of these terms or else return this policy before 30 days. Hills became dissatisfied with computer, and sought a class-action. The court sees that Hill is bound to arbitration clause because you had information and couldve read it. 1. Offer and Acceptance: Gateway is making the offer, as in here is out computer, software, etc. was an invitation, terms of offer. Gateway determined terms, including 30 days, and then post-30 days is acceptance of offer. 2. Hills claim that arbitration should be part of the contract because the contract was made before they saw the terms. P essentially is contesting that the contract was truly made and they were bound before additional terms were made. Court rejects because its impractical to relay those details over the phone. 3. Generally silence is not deemed as acceptance. But sometimes silence can mean acceptance when you dont say anything i.e.: lawn care services.

IV.

I.e.: Building operator supplied steam heat to building owner. Inference from silence that the building owner was willing to accept and pay for heat. ii. Beard Implement Co. v. Krusa: Dispute between farmer and implement company whether there was an agreement/contract and did the farmer promise to purchase combine that was negotiated over. There was a signed P.O., included price, and left with the dealership, as well as an undated check, sufficing down payment. Beard contended they had an agreement. Trial court agreed, but reverse on appeal. 1. Court looked at UCC 2-206 because its for the sale of goods. 2-206 provides offer can be accepted in any reasonable fashion. This mirrors the way transactions operate in real world. UCC 2-206 preserves common law value of the master of the offer. 2. Beard says they had a deal because they gave Krusa the price, and signed a counter-check as consideration of offer. 3. P.O. filled out by Krusa was the form that Beard Co. used, drafted, and while terms were filled in as to price, parties, and other specs., at the end of the form, it provides that the order is subject to acceptance by dealer. No one from Beard signed on the bottom line. 4. Beard essentially had all the control, and court saw them as more responsible and liable because they made the forms themselves. Pre-Contractual Liability a. Cases: i. Empro Mfg. Co. v. Ball-Co Mfg. Co: Negotiations whether Empro would buy Ball Co. Letter sent to Ball had a lot of material items including payment terms, purchase price, provided that after initial payments would be secured by promissory note. Language said this was subject to a final writing or definitive agreement; not final until someone approves. 1. Could we characterize letter as an offer? Invitation of acceptance is lacing because it doesnt conclude deal. Couldnt consummate deal without approval of shareholders. Both suggest this is in the realm of preliminary negotiations, and youre making it clear through this language that MORE is necessary before willing to enter in to bargain. This was not something that was assented, invited, or concluded the bargain. 2. Subject to clarification. Needed to clarify the security of the basis of the note. 3. The provisions the final deal was subject to, including a final draft of the deal, were sufficient to say that the parties did not intend to be bound.

4.

ii.

iii.

Arcadian Phosphates, Inc. v. Arcadian Corp.: Proposed transaction between API and AC. There is a letter of intent, and memo of understanding. Memo, in the context of the transaction, shows they started negotiations at a point when price of fertilizer dropped in price, and AC benefited from selling off operation. Memo contained terms such as price, assets to be sold, and the terms of the sale. But there were subject to parts of this sale that led to the conclusion that they hadnt reached an agreement yet, and wasnt enforceable as a contract. The provisions in this memo seemed to be a transaction they were going to work through in stages, and had held back from a binding agreement. There were terms protecting each side from going forward. Price skyrocketed shortly thereafter. 1. API argued that they had an agreement, and AC broke this agreement. 2. Court looks to intentions of parties were they intending to be bound? Factors a court would look at in determining to be bound are: (clear language) to assess whether parties want to be bound, as well as sufficiently definite terms (non-open terms), and the context of the transaction. In this case, there is clear language about not intending to be bound. 3. If you cannot show an agreement, then go to promissory estoppel analysis. Hoffman v. Red Owl Stores, Inc.: Hoffman, P went to great lengths to get franchise. He bought a grocery store to get experience, and sold two other stores to get cash necessary for Red Owl store. He sold both at losses. Sold options at a loss for land. Paid moving and rental expenses, and the deal fell through, because ultimately, Red Owl told Hoffman all the way through that if he had 18k, that it would be enough to enter in to the transaction. Red Owl later ask for more money, and P couldnt come up with it, and D stopped the deal. D says there was no agreement, and P was not entitled to recovery. Regarding specific terms, Red Owl would assert that they were in the preliminary negotiation stages and did not specify enough terms for offer; therefore, no offer, no acceptance, no deal. P claims he is apt for promissory estoppel. Good faith in business. The court held for P under the promissory estoppel theory and compensated him for his foreseeable, definite and substantial reliance. 1. Court analyzes each of the actions taken by P whether the action was taken as foreseeable by D, as well as reasonable, definite and substantial. Court found actions to be foreseeable because D actually suggested what actions to take, and were well aware of it. It was also definite and substantial.

2. This is the furthest courts have gone in finding precontractual liability. An opportunity for liability and damages are held in preliminary negotiation stages. In an egregious case such as this, a court would provide a remedy. Exam Strategies: *Restatements are persuasive, not binding authority* -Spot Issue -Make it clear you understand the rule applied to the issue -Go through complete analysis of elements of rule I.e.: Was there a promise? Is the promise enforceable? Do we have consideration for the promise? Was there a manifestation of intent? Did the other party believe there was a party(?)? -Acknowledge these through the facts of the case. -Are there counter-arguments raised from the facts? -Reach conclusion by evaluating different arguments of parties. -Show steps of analysis and facts that support this. -Generally, weigh the facts and evaluate the claims. In CONSIDERATION look for: -Promise (Identify offer and acceptance and promise to bind) -Act or forbearance to act or return promise (Identify possible consideration) -Bargained for term (Exchange of promises; intention behind promise; past consideration CANNOT be bargained for) -Legal Detriment (Not otherwise legally obligated to do).