Contracts Outline- based on course syllabus Christine Dodd Fall 2013 Chapter 1: An Introduction to the Study of Contract Law

A. Contract- an agreement between two or more persons with legal effect (enforcement); Except where special rules apply, formation of a contract requires a bargain to which the contracting parties give assent and a consideration, which can take the form of either a return promise or an actual performance (Restatement 17). a. Offer is the manifestation of the willingness to enter a bargain so made as to justify the offeree in believing that his assent to that bargain is invited and will conclude it i. Offeror must intend to be bound ii. Terms must be definite and certain iii. Offer must be communicated to offeree iv. no meeting of the minds (Longergan v. Scolnick) the advertisement was a mere request for an offer; RS1 25 / RS2 26 v. Exceptions: a. Offers made in jest (Winkelman) b. Bid solicitations negotiations c. Advertisements, generally not offers (exceptions) i. Intentionally misleading advertisements (bait and switch) will be enforceable (Izadi v. Machado) ad was offer from objective reading d. Auctions b. Acceptance i. Assent, by the person offeror intended, to terms made by offeree as invited or required by the offer 1. Mirror image rule for services (not sale of goods/UCC) a. RS 59: acceptance must be the mirror image of the offer 2. Last shot rule a. The last form on the table when the parties stop bargaining and proceed to performance becomes the operative one ii. Must be in response to an offer (not solicitation) iii. Must know of the offer (cant collect on a reward unless you knew to accept it) iv. Method of acceptance 1. Offeror is master of offer: he/she can prescribe the methods of acceptance 2. Mailbox rule: An acceptance becomes effective and binds the offeror once it has been postmarked (unless otherwise specified) 3. Generally an offer cant be accepted by silence (exceptions) v. Terminating the power of acceptance 1. Rejection by offeree 2. Counteroffer for services (difference in terms) RS 2 59 a. Mirror image rule, verbiage of acceptance must mirror offer b. RS 39 2: an offerees power of acceptance is terminated by the making of a counteroffer c. A seller can revoke a counteroffer if acceptance hasnt occurred (Normile v. Miller) not an option contract unless clearly specified 3. Expiration of time limit 4. Communicated revocation by offeror RS243

5. Death/incapacity of offeree/offeror vi. Formal Contract Contemplated 1. Parties have reached an agreement on major provisions but contemplate execution of formal written K (Quake Construction Inc. v. American Airlines, Inc.) Intent to be bound = meeting of the minds a. RS2 27: manifestations of assent that are in themselves sufficient to conclude that contract will not be prevented from so operating by the fact that the parties also manifest intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations c. Consideration i. Contract unenforceable unless supported by consideration 1. Consideration is bargained for exchange for something of legal value (an act, forbearance, promise) a. Benefit or Detriment Test (The nephews forbearance of a legal act was a detriment) RS2 71 ii. Bargain 1. RS2 71(2): a performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise 2. Modern bargained for exchange test for consideration (Pennsy Supply v. American Ash Recycling Corp. of Penn.) a. There is a distinction between consideration and a condition to a gift b. To determine whether the condition for accepting the gift is bargained for or not, ask whether the condition is a benefit to the promisor? iii. Courts will not examine the adequacy of the consideration 1. If its there, doesnt matter how much or if equal a. Unless grossly inadequate, Fraud, mistake, lake of capacity, duress or under influence b. Merely inadequate consideration will not render K unenforceable (Batsakis v. Demotsis) $500,000 drachmas for $25 US dollars 2. Past conduct, previously suffered detriment, moral obligation cannot service as consideration (Plowman v. Indian Refining Co.) iv. Executory promise, a promise to be made in the future v. Illusory promises 1. An illusory promise is a statement which appears to be promising something, but in fact does not commit the promisor to anything at all 2. Illusory promises are not consideration because there is no binding commitment on the promisor a. A contingent unilateral K with an illusory promise on one side is still enforceable (Marshall Durbin Food Corp. v. Baker, illusory promise)

i. The presence of an illusory promise doesnt destroy the possibility of a K, instead it may create unilateral K and the promisor who made the illusory promise can accept by performance II. Executory Contracts- agreements for the future exchange of various types of performance (the conveyance of property- tangible and intangible, the performance of services, and the payment of money) III. Transaction has 3 elements: 1. the agreement in-fact between the parties 2. the agreement as-written (which may or may not correspond accurately to the agreement in-fact) 3. the set of rights and duties created by (1) and (2) 4. The Sources of Contract Law- 2 Sources or authority used to derive law: a. Primary authority- common law, statutes, ordinances and the like b. Secondary authority- anything else that can appropriately influence the court; Including: commentary of legal scholars/commentary and the American Law Institutes Restatements of the Law, treaties, articles A. Judicial Opinions; Reasons for the stare decisis (precedents) system: a. high degree of predictability of decision b. puts a rein on prejudice, personal emotion, or other factors that we might regard as improper grounds for decision c. For better or worse it is also static and conservative, oriented toward preservation of the status quo. But this can be avoided by making precedent: 1. only binding when decided by same court or higher 2. from lower courts or from other jurisdictions merely persuasive 3. When binding it may still be avoided if: i. the current facts can be distinguish from the precedent case ii. from the same court or higher can overrule the earlier decision B. Statutory Law- any court, even the highest court of the jurisdiction, is bound to follow the provisions of a valid statute that apply to the dispute before it. (because legislature has ultimate lawmaking power, so long as it acts within the bounds of its constitutional authority.) a. UCC Code: Uniform Commercial Code created to unify states laws during industrialization (Doesnt apply to real estate or personal service contracts) b. Statute of Frauds: Contract to transfer an interest in real property for: i. Contract that cannot be performed within one year ii. Contract to pay the debts of another iii. Contract made in contemplation of marriage iv. Contract for the sale of goods greater than $500 Excused for unexpected events v. Impracticability (performance made highly impractical/burdensome than originally thought eg extreme cost) vi. Impossibility (The car got hit by a meteorite) vii. Frustration of Purpose (fundamental purpose of one of the parties is frustrated) 1. Coronation

b. Parties excused for failure of condition Express/construction conditions (K states duty to pay based on satisfaction of quality of product delivered) C. The Restatements- a secondary authority, does not have the force of law, Created by American Law Institute, formed in 1923 to create authoritative summaries of the rules of common law in various fields (including contracts, torts, and property) First and most successful was Restatement of Contracts 1. First restatement emphasized generalization and predictability at the expense of diversity and flexibility (published 1932) 2. Second restatement acknowledges some of the complexities and freer rein for judicial discretion (published 1979) 5. The Perspective of Contract Theory A. The Formalist Approach- Classical-showed a preference for clear rules over general standards (such as reasonableness) Relatively indifferent to issues of morality or social policy (other than keeping contracts) reflecting deeper notions of laissez faire economics and limited govt interference in private transactions B. The Legal Realist- Apply science to the decision making process to serve the ideal of a perfectible liberal state (events before and after WWII hurt the idealism) C. Efficiency- (predominantly the Chicago School) is when general efficiency is thought to be increased when the cost of transactions in society are reduced and resources are allocated to their most highly valued use. Politically and economically conservative group. They make two claims: 1. the positive or empirical argument that legal rules (particularly common law) tend to reach efficient outcomes 2. the normative claim that inefficient rules of law should be modified in the direction of greater efficiency. D. Critical Legal Studies- (favored the earlier Legal Realists) they argue that it is impossible to discover or develop any rational system of decision making within our legal system as it now exists. Attempts to justify the existing legal process are essentially a form of political ideology, mere rhetoric having as its consequence the preservation of existing distributions of power and wealth in society. E. Modern- influenced by the UCC and case law, characterized less by rules and more by standards, and frequently more responsive to issues of social justice and economic power than classical. Words like Good Faith and Unconscionable Chapter 2: The Basis of Contractual Obligation A. Mutual Assent(Meeting of the minds v mutual assent, subjective v. objective. Meeting of the minds considers intent, mutual assent considers actions) a. Three interests trying to protect i. Expectation interest-what would she have gotten? ii. Restitution interest- consider unjust benefit to defendant iii. Reliance interest-weigh actions/investment in depending 1. The Objective Theory of Contract (Ray-country builders and an engineer) Mutual Assent by reasonable persons; objective test of whether parties agreed to be bound by contract; absent fraud,

duress or mutual mistake one having the capacity to understand the contract is responsible for signing 2. B. Bilateral Contracts distinguish by whether both parties have a right and a duty (bilateral) or one party has a right and the other has a duty (unilateral); exchange for mutual promises; promise for a promise i. Both parties are promisors and promisees. ii. Contract that results from an offer that is open as to how it can be accepted. iii. Promissory exchange at instant of contracting, promises remain outstanding on both sides. iv. Can also have Promissory Exchange by Implication If it is commonly understood in the market that a seller warrants the fitness of what he sells, a simple exchange without any express words relating to the condition, will give rise to an implied promise of warranty. A. an exchange of promises B. a negotiating process usually known as offer and acceptance. An offer is revocable until it is accepted unless: 1. Option Contract 2. Part Performance 3. Reliance 4. Firm Offers (Lonergan- 40 acres in Joshua Tree) difference between gaging interest, preliminary negotiations and an actual offer, is it intended to be an expression of a fixed purpose? (Izadi-ad to buy car) words are not pebbles in alien juxtaposition, they have only a communal existence, attempt to bait and switch, what would a reasonable person in the position of the parties think it meant? 3. 3. Unilateral Contracts afford maximum protection to the offeror, who would not be bound unless and until he had received the performance he sought; Acceptance by performance; promise for an action or forbearance i. Contract in which the offer requested performance rather than a promise. ii. of Contracts iii. Offeror-promisor promises to pay upon completion of the requested act by the promisee. Once act is completed, contract is said to be formed. iv. Only one promisor and one promisee. v. Unilateral contracts are revocable by the offeror at anytime prior to beginning of performance. vi. Restatement 45 Option Contract Created by Part Performance or Tender: treats commencement of the performance in response to a unilateral offer as an option contract on the offeree a right to complete the performance he commenced if he chooses to do so. Offer is, therefore, treated as irrevocable once performance is commenced. However, offeree is not bound to complete the performance (which would in essence turn unilateral offer into a bilateral contract) but if offeree abandons the undertaking, offeror is not required to compensate or perform his part in some other way.

(Normile-You snooze, you loose; not an option) counter offer cancels original offer; an option must be supported by consideration; offers are freely revocable (Cook-changing R.E. bonus offer) the contract is enforceable to the extent performed, once performance has begun consideration has been paid; performance is the consideration. An offer to enter into a unilateral contract can be revoked at any time prior to beginning performance 4.Postponed Bargaining: The "Agreement to Agree" not enforceable without subsequent conduct by parties (Walker- could not agree on rent for option to renew) purpose of requiring a writing to evidence an agreement is to assure certainty of the essential terms; an agreement in order to be binding must be sufficiently definite to enable the court to give it an exact meaning. Or can be fatally defective. (Quake-airline expansion letter of intent) intent to be bound can be found with the anticipation of a formal K, meeting of the minds 5. Consideration- There is a distinction between consideration and a condition to a gift; To determine ask whether the condition is a benefit to the promisor? 1. Defining Consideration (Hamer-nephew abstains from drinking for $5k) A valuable consideration may consist either in some right, interest, profit or benefit accruing to the one party or some forbearance (of legal activity), detriment, loss or responsibility given, suffered or undertaken by the other. Benefit/Detriment Test (Pennsy- paving the school yard with toxic waste) promise by company to supply aggregate free of charge was not a conditional gift, when promisor has an agenda for his promise 2. Applying the Consideration Doctrine (Dougherty- Aunt signs note for nice boy to get 3k) A mere pretense of a bargain does not suffice; insufficient if nominal or falsely reported (Batsakis- contract to exchange $25 for $2000) mere inadequacy of compensation will not void a contract, unless unconscionable. (Plowman- benefit offers for many years of service) without legal consideration no motive will support a promise; Past conduct or previously suffered detriment cannot serve as consideration 6.Qualified Acceptance: The Battle of the Forms (Princess Cruises-service turbines) importance of establishing whether a contract is for services (common law) or the sale of goods (UCC governs) a. Common Law: change terms made a counter-offer (voided original offer) i. Mirror Image Rule b. UCC- Can amend original offer, if predominantly for the sale of goods Chapter 3: Liability in the Absence of Bargained-For Exchange A. The Doctrine of Promissory Estoppel: Protection of Promisees Reliance to maintain an action in promissory estoppel, the plaintiff must show that: 1. a promise that when reasonably considered would create a 2. detrimental reliance on the promise (action or forbearance) where 3. injustice can be avoided only by enforcing the promise. 1. Promises Within the Family-

(Harvey-daughter builds house on parents land) When transferring land, and the donee has made substantial improvements in reliance upon the promise to convey the land, courts will enforce the promise to convey. Reliance reasonably inducing a foreseeable unjust change of position. 2.Charitable Subscriptions (King- who gets Kings papers?) letter established that there was a promise to give supported by consideration or reliance: Policy: to be careful around requiring fulfillment of pledges to not deter gifting 3.Promises in a Commercial Context (Katz-injured retiree enforces pension) consideration as bargained for exchange13 mos. bargaining for pension terms while working 4. The Effect of Pre-Acceptance Reliance (Drennan-contractor relied on bid) A subcontractors bid is binding under promissory estoppel, there is an implied promise not to revoke; policy: the loss resulting from mistake should fall on the party that caused it. (Berryman- option for $10 not paid) an option contract absent consideration is a mere offer to sell, which may be withdrawn at anytime prior to acceptance; consideration is bargained for, promissory estoppel is not bargained for (Pops- Boardwalk TCBY) Have a duty to bargain in good faith; RS2 90 in order to avoid injustice courts seemingly relax the strict requirement of a clear and definite promise in making a prima facie case of Promissory Estoppel. B. Liability for Benefits Received: Restitution The Material Benefit Rule, Promissory Restitution Principle: a. Obligation rests on the assent of the person subject to liability, without bargaining b. If enforcement of the promise would be disproportionate to the value of the benefit received, enforcement may be limited to that value 1. Restitution in Absence of a Promise Elements of a Quasi Contract: 1. the plaintiff has conferred a benefit on the defendant 2. the defendant has knowledge of the benefit 3. the defendant has accepted or retained the benefit conferred 4. the circumstances are such that it would be inequitable for the defendant to retain the benefit without paying fair value for it. 5. EXAM- if contract unfair, after applying contract law principles, include a paragraph on quasi-contract and relief available. (Credit Bureau- forced hospitalization bill) constructive contracts rests on a legal fiction arising from considerations of justice and the equitable principles of unjust enrichment; RS3 A person who performs, supplies, or obtains professional services required for the protection of anothers life or health is entitled to restitution from the other as necessary to prevent unjust enrichment, if the circumstances justify the decision to intervene without request. (Commerce-Genl Contractor doesnt pay subs) A subcontractor may recover in restitution from an owner when the owner has not paid the general contractor for the work performed and the subcontractor has exhausted its remedies against the general contractor. (to avoid unjust enrichment) (Watts- immoral, illegal cohabitation with 2 kids) The deadbeat would be unjustly enriched by their joint efforts. Policy: A harsh per se rule that the

contract and property rights of unmarried cohabitants will not be recognized may encourage wealthy individuals to avoid marriage to retain their wealth. 2. Promissory Restitution (Mills- scam about nursing son) a verbal promise without consideration cannot be enforced by action, Enforceable only if the party making the promise gains something or he whom it is made loses something (not retroactive) (Webb- injured saving life) McGowin was benefited, Appellant was injured, sufficient consideration. where the promise cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisors subsequent agreement to pay for the service, because of the material benefit recvd. Agreement to pay and acceptance of payments for 8 years evidence not a gratuitous statement Remedies c. Monetary damages i. Expectation (most common): Placing the innocent party in the same position she would have been in if the contract had been performed ii. Reliance: Placing the innocent party in as good of a position as she was in before the contract was made iii. Restitution: Prevents unjust enrichment to D by returning to P the value of the performance rendered to D d. Equitable remedies i. Injunction: Order to refrain from doing something ii. Quasi-contract 1. Quantum meruit as much as he had deserved 2. No contract iii. Specific performance: Order to render promised performance iv. e. Contract interpretation i. Ambiguous 1. Parties attach same meaning to terms = that meaning rules 2. Different meanings? Who wins? (innocent party) 3. Course of dealing/ Trade usage / Course of performance considered 4. Omitted terms may be supplied (good faith) ii. Parol evidence rule 1. Court will not permit evident of prior oral or written agreements to the contract to supplement or contradict the final written contract (total integration) a. Doesnt bar agreements made after b. Can clarify doesnt bar admission of evidence about the meaning the parties intended to give to particular contract terms I. Any reason not to enforce the deal? a. The law is clear absent fraud, duress, or mutual mistake, that one having capacity to understand a written contract, who reads and signs it, will be bound by his signature in law (Ray v. Williams) the law looks merely for sufficient expression (objective standard) of commitment to perform. You have a duty to read before sign. 2R 21 1. Capacity

2.

3.

4.

5. 1. Coronation 6. Parties excused for failure of condition i. Express/construction conditions (K states duty to pay based on satisfaction of quality of product delivered)

a. Minor, drunk, mentally incompetent Illegal/Public policy a. Duress (coerced) b. Misrepresentation c. Unconscionability (one-sided) d. Mistake mutal Statute of Frauds a. Contract to transfer an interest in real property b. Contract that cannot be performed within one year c. Contract to pay the debts of another d. Contract made in contemplation of marriage (prenup) e. Contract for the sale of goods greater than $500 Excused for unexpected events a. Impracticability (performance made highly impractical/burdensome than originally thought) i. Extreme cost b. Impossibility (The car got hit by a meteorite) Frustration of Purpose (fundamental purpose of one of the parties is frustrated)

a. iii. 1. iv. 1. 2. v. 1. b. vi. 1. vii. 1. 2.

Equitable remedies Injunction Order to refrain from doing something Quasi-contract Quantum meruit as much as he had deserved No contract Specific performance Order to render promised performance Mitigation of damages Non-breaching party has duty to lessen the amount of damages (duty to mitigate) Wrongful discharge Anticipatory repudiation Party states there is no way they can perform the K before the K is due Duty to cover

Vocabulary: Illusory promise: A promise of nothing that limits the freedom of promisor Eg. I will sell you my bike unless I change my mind Quasi Contract- Unjust enrichment

Assumpsit: A promise by which someone assumes or undertakes an obligation to another person.