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Contract Law Outline

Fall 08

Mutual Assent I. Requirements to form a contract -17 of the rest 2d contracts states that you need mutual assent and consideration to be able to form a legally binging contract - 22 states that there does NOT need to be an offer and acceptance for the contract to be formed and exist II. Mutual Assent in general Is an agreement by both parties usually in the form of offer and acceptance It is a form of contract formation which includes seven subunits - Communication of a present commitment - Certainty of terms - Special offer rules - Manner of acceptance - Termination of the power to accept - The mailbox rules - Mutual assent under U.C.C. Article 2 III. The manifestation requirement for offers and acceptances: A. The essence of the rule: each party entering into a contract must show a present commitment to the forming of the contract. In most cases it takes the form of an offer and acceptance. [expression of the willingness to form the contract] B. Additional rules: the actions and words of the party are what the court looks at when trying to determine the presence of a contract and look at what a reasonable person would think in that same situation. C. Policy for the rule: Fairness- so that people will continue to make contracts knowing what they are making the contract for D. How to apply the Four Steps of Legal Analysis to manifestation issues 1. The key facts are: a) The words expressed in the making and contract itself b) The environment in which the contract was formed 2. The inferences are drawn by: a) Re the language: How a reasonable person would interpret the language of the contract and the words exchanged during the making of the contract b) Re the surrounding circumstances: how a reasonable person would interpret the situation in which the contract was formed- would it indicate that a serious contract was being made. IV. Certainty A. Rule Essential terms should be included in the offer. The court needs to know if there was enough information exchanged to know that a party did wrong so they can give relief for that wrong B. Helpful mnemonic- Q TPPPS quantity, time, parties, price, place, subject matter C. How to use certainty on exams useful in being able to determine if there is a present commitment as many parties will not enter into a contract or show commitment to a transaction if they do not know at least some of the terms. [if there is an absence of essential terms then there may not have been an offer] V. Special Offer Rules A. Advertisements, circulars as offer 1. General rule they are not considered offers but invitations 2. Policy for general rule 3.

Contract Law Outline


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Keys to look for in exception cases has there been a creation of a specific offeree, is there a present commitment expressed, a limited quantity is given B. Letters of intent 1. Rule: usually not intended to be binding 2. Keys to look for: is there an expression that the parties want the contract to be binding, an expression of present commitment C. Requests for bids 1. General rule Not considered an offer, but an invitation 2. Policy for general rule 3. Keys to look for: the language of the request, if there is an expression of commitment then it could be considered an offer 4. Auctions without reserve no conditions it is an irrevocable offer to sell goods to highest bidder with reserve can revoke until the hammer falls D. Price Quotes 1. General Rule not offers 2. Keys to look for language that would give evidence of an offer Acceptance A. 4 Requirements to accept 1. Manifestation (see above) 2. Manner a) Who controls the manner: The offeror is the master of the offer They choose the terms and how acceptance should be preformed b) Rules re stating a manner (i) If offer silent re manner: Then a reasonable acceptance in that situation would be acceptable (ii) If offer states a manner (a) Test to determine significance of stated manner (i) Test: Look at the wording of the offer to determine if there is a way that the offeror indicated they would want the acceptance performed (ii) How to apply test: (b) Effect if manner is prescribed: The offeree must perform the way the offeror prescribed the acceptance or there is no contract (c) Effect if manner merely suggested: The offeree can either accept in the way suggested or they can accept in any other form reasonable under the circumstances [the offeror is asking for a particular way but not forcing the action c) Offers of unilateral vs. bilateral contracts (i) Terms defined: (a) Unilateral: The proper manner of acceptance of an offer is performance (b) Bilateral: The proper manner of acceptance is a promise to perform (ii) How determine which it is:

Contract Law Outline

Fall 08
Wording of the offer Significance of distinction (a) If bilateral the promise to perform creates the contract even if the performance has not taken place yet (b) If unilateral the performance is the acceptance of the offer and thus the contract is not made until the performance has been complete (c) If unclear which it is it is considered a bilateral contract because it protects both parties sooner

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3. By the offeree 4. To the terms of the offer (see counter-offer and rejection below) Knowledge of the offer and silence as acceptance 1. Rule re knowledge of the offer offeree must know of the offer before the acceptance is finished 2. Silence rules a) General rule: silence is not acceptance b) 4 exceptions - 69 (i) The offeree takes the benefit of the offered services and had the opportunity to reject them and reason to believe that the offeror expected compensation (ii) The offeror has stated or given reason to believe that assent can be given by silence, and the offeree stays silent in the intention of accepting the offer (iii) Previous dealings in which silence was a reasonable acceptance, the offeree should notify the offeror if they do not intend to accept (iv) If the offeree does any act inconsistent with the offerors ownership they are bound in accordance with the terms unless they are noticeably unreasonable Termination of the Power to Accept 1. 6 forms a) Rejection b) Counter-offer c) Death d) Incapacity e) Revocation f) Lapse of time (i) If any of these happen the deal is off the table 2. Lapse rules: 41 a) Time state in the offer b) If the time is not stated a reasonable time under the circumstances c) Face-face exception offer lapses when the conversation ends unless otherwise specified 3. Revocation and option contracts a) Direct revocation 42 (i) Defined: manifestation not to enter into the proposed contract (ii) Policy implicated: freedom to enter into a contract b) Indirect revocation 43 (i) Communication of revocation does not come from the offeror directly

Contract Law Outline


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Element 1: the offeror does an inconsistent act in relation to the offer (iii) Element 2: the offeree acquires reliable information about the act c) Irrevocable offers (i) Option contracts 45 Bilateral- the buyer is purchasing time for money, the offeror cannot revoke the offer (ii) Part performance of unilateral contracts- the offeree starts the performance for the acceptance of the contract and the offeror cannot revoke the offer 4. Rejection and counter-offer a) Rejection 38 (i) Defined: manifestation not to accept the offer (ii) Effect: the power to accept is terminated by the offeree b) Counter offer 39 (i) Four elements: (a) offer (b) From the offeree (c) Relating to the same subject of the original offer (d) Proposing a different bargain (ii) Effect: terminates the power to accept unless contrary intention is expressed by either party or offeree manifests intent to take it under further advisement c) Death and incapacity rule: 48 (i) The power of acceptance is terminated when the offeror or offeree dies or is deprived of the legal capacity to enter into the contract D. The mailbox rules 1. Acceptance a) General rule re when effective The acceptance by mail is effective upon dispatch b) Exceptions: (i) Failure to use required or suggested medium or manner (ii) Option contract (iii) Improper dispatch 2. Everything else (offers, counter-offers, rejections, revocations) rule: Everything else is effect when the other party receives it not when it is mailed 3. Mind changing rules: a) Defined: b) Rejection or counter-offer and then acceptance c) Acceptance and then rejection or counter-offer (i) General rule: (ii) Exception: Mutual assent under Article 2 of the UCC A. 2-204 Formation in general 1. A contract is made in any manner sufficient to show an agreement a) Even if we dont know when it was made as long as we know there was an agreement b) Even if terms are missing as long as if there is intent and reasonably certain basis for remedy 2. Terms needed

Contract Law Outline

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a) Parties b) Subject matter c) Quantity d) Price is not needed 2-206 Offer an acceptance in formation of a contract 1. Unless otherwise explicitly indicated by the language or circumstances a) If contract is silent re manner, any reasonable manner is okay b) If offer for prompt shipment (i) May accept b promise to ship or (ii) May accept by prompt shipment of the goods (a) If non-conforming not an acceptance if seller seasonably says its just an accommodation c) If beginning performance is reasonable offeree may begin, but offer lapses unless offeror gets reasonable notice of the acceptance 2-207 additional terms in acceptance or confirmation 1. A contract is formed if there is a definite and seasonable expression of acceptance or written confirmation sent within a reasonable time a) Even if it states additional or different terms (i) It operates as an acceptance (a) Unless (i) Acceptance is expressly conditional on assent to the additional or different terms 2. The terms of the contract formed are those upon which both agree and the additional terms become part of the contract only if a) The contract is between merchants b) But does not become part of the contract if either (i) Offer expressly limited acceptance to its terms or (ii) The additional terms materially alter the contract or (iii) Offeror has objected or does object within a reasonable time 3. A contract is formed if the conduct of the parties recognizes the existence of a contract a) The terms of the contract are those on which the writings agree and b) UCC supplementary terms (i) 2-305 (ii) 2-307 (iii) 2-308 (iv) 2-309 (v) 2-310

Consideration I. In general A. Effect of a lack of consideration There is no contract (no consideration = no contract) B. Rules 1. Basic rule: - Requires a bargained-for exchange - Consideration is a formation concept - Rest 71 What is consideration? o To constitute consideration, a performance or a return promise must be bargained for

Contract Law Outline


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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 - Paraphrase of 71 o It is that for which the parties have dealt o Parties will be deemed to have dealt for whatever they aspired to gain from the proposed contract - Consideration requires that the parties bargain for what the other party is giving - Or bargained for the relinquishment of autonomy ie the giving up of independence 2. Forbearance as consideration Forbearance is withholding a possible legal action GR: is that it is good consideration C. Policy for requiring consideration Predictability- another concept to help parties that are negotiating a contract know when a contract has been formed and entered into *You need to have bargained for consideration and whichever rule applies to the problem (you cant consider the problem with consideration if you dont have the bargained-for part) Adequacy of consideration A. General rule re adequacy 79 Courts will not inquire into the adequacy of consideration Mere inadequacy of consideration will not void a contract B. Policy for general rule Freedom of contract we are free to enter into any contract we desire regardless of if it is a fair exchange or not C. Exceptions to general rule 1. Like-kind exchange - The exchange of identical items in different quantities - The net effect- is a gift and no consideration - The court will then inquire into the adequacy o E.g. American dollars for American dollars - UNLESS the promisee takes on the risk of non-payment 2. Nominal consideration - Is consideration that is so insignificant as to bear no relationship to the value of what is being exchanged - Exception o Option contract (exchanging time for money) 3. Sufficiency - If it is something that is not capable of being owned you cannot exchange it and thus cannot bargain for it Past and moral consideration A. General rule - Past and moral consideration are not good consideration - Minority rule 86- Promise for Benefit Received o A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice B. Rationale for general rule - Predictability- you cant bargain for something you already have

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Forbearance of claims as consideration 74 A. When does this issue arise? When a party is trying to get out of a settlement contract by saying that if they would have litigated it they would have won [information is received after the fact] B. Rule: Settlement of a claim the parties later determine to be invalid is good consideration if: 1. The plaintiff asserts the claim in good faith a) You have to have an honest belief that you have a good claim 2. Claim has to have a reasonable basis a) Claim has to be colorable (1) Have some basis that is legit Pre-existing duty rule 73 A. General Rule: A party who agrees only to do what that party already was legally obligated to do has given no consideration B. Alternative claim to asserting pre-existing duty rule C. Rationale for pre-existing duty rule Provides predictability that will allow parties to count on the performance of contracts and plan accordingly D. Exceptions 1. Honest dispute of the terms (73) 2. Changing of duties 3. Change in circumstances that were not foreseeable (minority rule) (89) E. U.C.C. Rule RE modifications 1. 2-209 no consideration needed for modifications a) Under 1-103 duress is listed as an example of a common law rule adopted by reference Illusory promise A. Elements of illusory promise 1. There is a promise (language of a promise) 2. The party who made the promise is free to perform or not at their sole discretion (without liability for breach) 3. The promise cannot be made to restrict the promisors discretion by implying a duty of good faith, reasonable efforts or reasonableness B. Policy 1. Why courts are concerned re illusory promises Predictability if the promisor has the sole discretion to perform the promisee would not be able to rely on the promise 2. Why courts try to save illusory promises The courts try to save the contracts to increase predictability and freedom of contract C. U.C.C. 2-306 1. The requirements Will be measured by a standard of good faith For the promise to be illusory it has to be able to be proven D. Common illusory promise fact patterns 1. In general-- through language used (tying duty to perform to a partys desire or choice) 2. Requirements contracts 3. Output contracts

Contract Law Outline


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Satisfaction conditions When a promise has to do with if the promisor is satisfied there is good consideration because there has to be an honest reason/good faith reason for being dissatisfied [one that can be proven] Loan conditions on land purchases Termination clauses Termination implies the promise/requires you to notify the other party the implied duty of notice in a termination clause would give consideration Wood v. Lucy-type cases There is an implied promise of reasonable efforts because otherwise neither party would receive anything

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Promissory Estoppel I. Fundamental Goal of Promissory Estoppel a. To protect a party that legitimately relies on another partys promise, even though the technical requisites for the formation of a contract have not been met II. Elements of the claim a. Promise b. Promisor should reasonably expect to induce action or forbearance c. Promise does induce such action or forbearance d. Injustice can be avoided only by enforcing the promise e. EXCEPTION: a charitable subscription and marriage settlement is binding without proof that the promise induced action or forbearance III. Policies a. Policy for allowing relief based on promissory estoppel Mostly fairness as the promisee was counting on the promise and even acted on the promise and it wasnt completed. Also predictability because if a promise is made where it is reasonable that another will act on it there should be an expectation that the other side will also do their part. b. Policy harmed by promissory estoppel Freedom of contract? IV. Measurement of damages The last sentence of 90 (1) The remedy granted for breach may be limited as justice requires This allows the court to have discretion in granting full or partial enforcement when applying the promissory estoppels doctrine. V. Four situations where courts have applied promissory estoppel a. Used as a substitute for consideration In some situations there is a promise (or words that can be interpreted as a promise) but there is no consideration given by a promisor or promisee, and the promisee reasonably relies on the promise and acts on it, the court can analyze the enforcement of the promise through promissory estoppel b. Standing in for an absent writing Statute of frauds requires certain types of agreements to be in writing (tend to be big contracts), if a person a person enters into an agreement that would fall under the statute of frauds (in that it should have been written) and reasonably relies and acts on the promise then the court can enforce the agreement under promissory estoppel if it would prevent injustice. c. To make some offer irrevocable In Drennan v. Star Paving, Drennan puts out a request for bids of which brings the offer to do the work from Star Paving, the general rule on revocation is that Star Paving could revoke their offer to Drennan until he accepts it. In this case they did but the court found that because the offer was

Contract Law Outline

Fall 08

made and Star Paving should have reasonably expected that if they had the lowest bid that Drennan would use it, in which they did, and the court reasoned that it would avoid injustice if the forced performance of the offer, thus although Star Pavings revocation fell under the common law general rules, the court said that once they made their offer and Drennan used it for calculations it was irrevocable. d. To police predatory bargaining behavior In Hoffman v. Red Owl Stores, the court ruled that because Red Owl was making many promises to Hoffman about becoming a manager and to become it asking him to do many things that they should have reasonably expected that he would do, and he did do them, the court found that it there was injustice because they kept asking and asking him to do more and nothing final was coming out of it. Contract Defenses I. Mistake a. Mutual Mistake i. Mistake element of mistake defined 1. There must be some mistake as to the facts surrounding the parties transaction committed by both parties at the time they formed their contract ii. Basic assumption 1. The basic mistake goes to the basic assumption goes to the function or purpose of the material being exchanged 2. Must relate to the very essence of the contract iii. Material effect (NOT responsible for) 1. Mistake has a material effect on the contract exchange iv. Party claiming mistake did not assume the risk of that mistake (three ways) 1. The contract allocates risk to a party 2. Party contracts knowing that she has limited knowledge of the facts (conscious ignorance) 3. Court allocates the risk to the party because it is just to do so 5. Ability to restore status quo

II. Duress a. Overview/ policies implicated i. Classic traditional duress involves a wrongful act and the preclusion of will in making a contract b. Elements i. Traditional Duress 1. Wrongful act a. Threat or use of violence or captivity OR b. Any other wrongful act or threat 2. Precludes Exercise of Free Will a. Causation element: the threat subjugate victims will ii. Economic duress 1. Need (Wrongful Act) a. Threat of Breach and b. In bad faith 2. Need (Precludes Exercise of Free Will)

Contract Law Outline

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a. No practical legal remedy exists (they cant afford to wait and sue)(must prove that suing wasnt a viable opinion) and b. No other feasible alternative exists [difficult element because the one thing everyone could do is sue]

III. Unconscionability a. Policies implicated i. The courts allow because of fairness it is unfair to force a party into an unfair contract ii. However courts struggle with because it violates the policy of freedom of contract b. Elements i. Procedural unconscionability (Process) 1. Definition: a. (Blacks) results from unfairness in the contract formation (misrepresentations in the communication or the unequal of bargaining positions) b. It is the absence of meaningful choice OR gross inequality of bargaining power i. Counter argument is that they always could have just said no 2. Considerations (for the absence of meaningful choice) a. Opportunity to understand terms b. Use of legalese c. Deceptive sales practices d. Take-it-or-leave-it ii. Substantive Unconscionability (Terms) 1. Definition a. (Blacks) Results from contract terms that are unduly harsh, commercially unreasonable, and grossly unfair given the existing circumstances b. Contract terms shocks the conscience of the court (extremely unfair contract terms) 2. Considerations a. Market place b. Parties respective risks c. Competition iii. U.C.C. 2-302 Unconscionable contract or clause 1. If the court finds a contract or clause to be unconscionable, the court may a. Refuse to enforce the contract b. Can enforce the remainder of the contract without the unconscionable clause c. Can limit the application of any unconscionable clause to avoid any unconscionable result Measure of Damages and Limitations on Damages I. Measure of Damages a. General damages (Benefit of the Bargain) i. Policy/goal of awarding general damages

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Contract Law Outline

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1. The goal of awarding damages for a breach of contract is to award a plaintiff a sum of money sufficient to place him in the same economic situation he would be in if the breaching party fully and perfectly performed 2. Benefit of the bargains 3. Put the Plaintiff in the Performance Position ii. General rule for measuring general damages 1. Breach by non-performance a. Fair Market Value (FMV) K price [Damages = Value expected to get value expected to give] i. Look at benefit of the bargain and the amount he paid to put him in the same position as if the contract was performed 2. Breach by defective performance a. FMV as promised FMV as received iii. Specific rules for specific parties/contracts 1. Land sale contract, buyer breaches by non-performance: a. K price FMV of land 2. Land sale contracts, seller breaches by non-performance: a. FMV of land k price 3. Construction contract, contractor breaches by non-performance: a. FMV of contractors services k price 4. Construction contract, owner breaches by non-performance: a. K price contractors cost of performing 5. Construction contract, contractor breaches by defective performance: a. Cost of Repair (COR) unless COR is grossly disproportionate to Diminution in Value (DIV) 6. Employment contract, employer breaches by non-performance: a. K price 7. Employment contract, employee breaches by non-performance: a. FMV of employees services k price iv. Steps in damage analysis 1. What kind of breach did the defendant commit? a. Non-performance or b. Defective performance 2. To what damages might the plaintiff be entitled? (how do we calculate the number?) a. Try to put the plaintiff in the performance position 3. Do any limitations justify reducing Ps damages recovery? b. Special damages i. Reliance (incidental) damages 1. Essential reliance a. Money spent in performing or in preparing to perform 2. Incidental reliance a. Money spent anticipating other partys performance b. Money spent dealing with breach fallout ii. Consequential damages: 1. Property damage 2. Personal injury 3. Lost resale profits

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Contract Law Outline

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4. Lost use of profits II. Limitations on damages a. Avoidability i. Policy for avoidability 1. Economic efficiency because society gains most if injuries are prevented or minimized before they happen or worsen ii. General rule 1. Damages based on harms that a party could have evaded without unreasonable burden, risk or humiliation are not recoverable a. Standard isnt whether you could avoid it but whether you were reasonable iii. Rockingham County Rule 1. After an absolute refusal to perform, a party cant keep performing and recover damages based on full performance iv. Rule where an employee is the victim of the breach 1. Employees need not take different or inferior job to address wrongful termination

b. Foreseeability i. Policy 1. Predictability you should be able to predict the possible consequences of a breach ii. Rule 1. Only liable for damages you could reasonably foresee at formation as a probable result of the breach: a. Because they would arise in the ordinary course of events (naturally flow) Or b. Because they would arise from Plaintiffs special circumstances of which the defendant had reason to know iii. Case holdings for applying and distinguishing 1. Hadley a. Lost profits are recoverable if they are naturally occurring or if the defendant was aware of the possibility of the loss b. Lost profits from delay in delivery of broken mill shaft to engineer for repairs held not foreseeable where common carrier only told that the mill shaft was broken and needed to be taken to the engineer for repairs but not told the mill was completely shut down 2. Victoria Laundry a. Not required that you actually foresee but it has to be foreseeable (a likely, serious possibility) b. general business losses from delay in delivery of boiler to laundry held foreseeable where seller knew buyer was a laundry and was extremely likely to use such a large boiler for laundry business and knew, from repeated statements by buyer during negotiations, that buyer planned to put the boiler to use immediately; therefore, seller could anticipate loss of whatever business the laundry would have normally

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Contract Law Outline

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3. Prutch a. Manufacturer of farming equipment could reasonably foresee that failure of equipment to function properly would result in crop loss to farmer (nature of industry to foresee loss to buyer) Certainty i. Rules 1. Certainty as to the existence of damages a. Show that more likely than not the plaintiff suffered the alleged harm 2. Certainty as to the amount of damages a. Sufficient data from which a reasonable estimate can be made 3. Split of authority with respect to new business enterprises a. Traditional rule: The New Business Rule i. New businesses may never recover lost profits b. Modern rule: i. New businesses may recover lost profits if the evidence meets the general rules regarding certainty of damages

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