George Mason Contracts I Outline

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Contents

CONTRACTS I: OUTLINE

INTRODUCTION TO CONTRACT LAW

MEANING OF "CONTRACT"

  • Definition of Contract: §1 a contract is a promise that is enforceable under law

1. What is a Promise: §2:

  • Manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made
  • Person manifesting the intention is the promisor
  • Person to who manifestation is addressed is the promisee
  • If performance benefits a person other than promisee, they are beneficiaries

2. Purposes of Contract Law

  • Determine which promises are enforceable
  • Fill in gaps in enforceable contracts
  • Help define the meaning of the contract
  • Define which rules are default rules and which are mandatory (duress, fraud, unconscionability)

3. Theories of Contract:

  • Autonomy: contract law protects the freedom of individuals to make binding commitments w/ each other.
  • Economic: contract law creates incentives for future contracting parties and should therefore support socially desirable outcomes.

4. Types of Contracts

  • Express Contract:
  • Elements
  • Promise
  • Bargain/Exchange §17
  • Consideration
  • Implied in Fact: §4 "promise may be stated in words…or may be inferred wholly or partly from conduct"
  • Elements (per Bailey v. West):
  • Mutual agreement
  • Intent to contract
  • Promise is implied in actions
  • Implied in Law: a.k.a. quasicontract; not actually a contract at all. Intent of parties to contract does not matter.
  • Elements
  • Benefit conferred upon D by P
  • Appreciation by D of such benefit
  • Acceptance and retention by D of benefit such that it would be inequitable to retain benefit w/o payment

5. Cases: Is there a promise?

  • Bailey v. West (Race horse case)
  • Rule: There must be intent to promise' and mutual understanding for there to be a K.
  • Facts: P knew there was a dispute of ownership of a horse but took care of it anyway; P never talked to D and D disavowed horse on first bill. P billed both D and another party showing it didn’t know who he had a contract w/.
  • Other: 1. Trial court had found an "Implied in Fact" contract. This was reversed because elements "mutual agreement" and "intent to promise" were not met.
  • Lucy v. Zehmer (drunk sale of farm)
  • Rule: Objective, not subjective, actions are measured to find assent (both offer and acceptance)
  • Facts: P signed K in a bar to sell his farm, had his wife sign, then said he was joking. If objectively to a reasonable person it looked like an offer, then he is bound. Mental assent is NOTE required.
  • Leonard v. PepsiCo Inc. (pepsi points harrier jet)
  • Rule: Offer is also measured by objective standard.
  • Facts: Pepsi had an outlandish ad that stated you could redeem pepsi points for a harrier jet. Court said a reasonable person would find the ad to be a joke, and therefore, no offer.
  • Other: Even though D’s were both joking, this is different than Lucy v. Zehmer because here it was obvious to a reasonable person.

ENFORCING PROMISES

ENFORCING PROMISES

  • 3 ways to enforce a promise
  • Valid Consideration
  • Promissory Estoppel
  • Material Benefit Rule

CONSIDERATION DOCTRINE

  • Definition: a promise is supported by consideration if:
  • Detriment: promisee gives up something of value, or gives up his liberty in some way
  • Exchange: the promise is given as part of a bargain (§17:)
  • Modern use: modern courts don’t use benefit/detriment anymore. They may mention it along with the bargain/exchange doctrine. (§17:)
  • Consideration vs. Conditional Gift
  • Did condition benefit promisor?
  • YES  consideration
  • NO  conditional gift

CONSIDERATION: BARGAIN vs. GIFT

  • Rule: Consideration often renders promises to make gifts unenforceable.
  • §71: Bargain/Exchange
  • "To constitute consideration, a performance must be bargained for.
  • Performance may consist of
  • an act
  • a forbearance
  • the creation, modification, or destruction of a legal relation"
  • Cases: Is there consideration?
  • Hamer v. Sidway (uncle gives nephew $ to quit smoking)
  • Rule: Forbearance (§71(3b)) from something you have a right to do is sufficient to be consideration. Consideration does not have to benefit the promisee (though in this case it did).
  • Facts: Uncle promised nephew $5k if he quits smoking, doesn’t drink, etc. until 21. Nephew does.
  • Other: 1. Despite being intrafamilial, this is enforced. Why? Uncle wanted to pay up until death.
  • Kirksey v. Kirksey (move into town and I’ll take care of you)
  • Rule: Promises to give gifts are not enforceable. To make a gift irrevocable you have to actually give it, not just promise it.
  • Facts: D tells widow sister-in-law that if she moves down, he’ll take care of her. He does for a while then kicks her out into the woods.
  • Other: 1. dissent opinion found moving to town was sufficient consideration; 2. unenforced intrafamilial K. Consideration vs. Conditional Gift – did condition benefit promisor? YES  consideration, NO  conditional gift.
  • St. Peter v. Pioneer Theatre Corp. (cinema lottery – 1sec too late)
  • Rule: Not a gratuitous promise. It was a unilateral contract that expected performance. Adequacy of consideration (§79(b)) is not considered by court.
  • Facts: Theatre says if you stand out here and come in when your name is called you get a prize. Said P failed because they were 1 sec. too late. This was a unilateral contract where only performance matters. P gets the prize.
  • In Re Greene (illicit lover won’t sue if she is paid – he goes bankrupt)
  • Rule: Nominal consideration ($1) - §79(d) is NOT consideration. Past consideration (previous illicit cohabitation) is NOT consideration. Illegal consideration (future illicit cohabitation) is NOT consideration.
  • Facts: Illicit lover promises not to sue promisor for breach of promise to marry her if he promises to pay her rent and give her cash. He goes bankrupt and she sues.
  • Other: These were gifts w/o valid consideration.

CONSIDERATION: ADEQUACY OF CONSIDERATION

  • Nominal Consideration: §79(d) "Disparity in value, with or without other circumstances, sometimes indicates that the purported consideration was not in fact bargained for but was a mere formality or pretense. Such sham or ’nominal’ consideration does not satisfy the requirement of §71" [In re greene – illicit lover won’t sue if she is paid – he goes bankrupt]
  • Adequacy of Consideration: §71(b) "If the requirement of consideration is met, there is no additional requirement of (a)…(b)equivalence in the values exchanged…"
  • Cases: Adequacy of Consideration?
  • Batsakis v. Demotsis (greek drachmas; $25 traded for $2k in WWII)
  • Rule: Inadequacy of consideration does not void a K. Only complete lack of consideration voids K.
  • Facts: Desperate woman borrows equivalent of $25 in drachmas during WWII promising to pay back $2000. She got what she bargained for.
  • Other: they tried to defraud the court by writing that promisor had actually lent $2k not just $25.
  • Wolford v. Powers (name kid after me for $)
  • Rule: Courts should honor the values parties have placed on their performances.
  • Facts: Guy promises $10k if a friend names his kid after him. When promisor gets what he bargained for it is consideration, even if it doesn’t look like it benefits him or is a detriment to the promisee.
  • Other: 1) this is a unilateral contract; 2) ct. mentions caretaking of guy by promisee as consideration but this is wrong b/c it is past consideration.

PROMISSORY ESTOPPEL

  • Definition: Promises which foreseeably induce reliance on the part of promisee will often be enforced, w/o consideration, under promissory estoppel.
  • §90:
  • §90 Section 1: "1)a promise which the promisor should 2) reasonably expect to induce action…on the part of the promisee…and which 3) does induce such action…is binding if 4) injustice can be avoided only be enforcement of the promise."
  • §90 Section 2: "charitable subscription or a marriage settlement is binding under section 1 without proof that the promise induced action or forbearance" – under 2nd Restatement, no reliance needed for charitable subscription to be binding. Not all jurisdictions apply this rule.
  • Summary
Situation Promissory Estoppel Used to Enforce?
Intrafamilial Promises Not by default. [exception when dealing w/ deceased estates]
Pensions Yes. Reliance is typically assumed.
Charitable Subscriptions §90 Yes. ; C/L – written  YES, oral  NO, w/o reliance
Preliminary Negotiations Not by default. [exception: Hoffman v. Red Owl]
Promises to Insure Yes. Reliance is typically assumed.
  • INTRAFAMILIAL PROMISES
  • Rule: promises made by and to family members or other "donative" or "gratuitous" promises are generally not enforced.
  • Reasoning: Intrafamilial promisors are unlikely to intend their promises to be legally enforceable. They are enforced because of love, loyalty and moral obligation and tend to be reliable. A rule that forces them to emphasize their intent not to be bound may undermine their ability to communicate a highly reliable promise.
  • Cases
  • Haase v. Cardoza (didn’t give "inheritance" to sister-in-law)

1. Rule: A promise alone, w/o reliance, does not constitute consideration.

2. Facts: Husband leaves everything to wife but asks her to give $10k to sister. She doesn’t and feels guilty so she promises to give her $50/month. After a few months, sister-in-law tries to get promissory note for the balance. D stops payments. P sues.

3. Other: P failed to show reliance. If she had shown more reliance ($50/month gym membership?) she might have a better case.

  • Ricketts v. Scothorn (my granddaughter doesn’t have to work)

1. Rule: Detrimental reliance will allow for promissory estoppel to be applied. The more specific the reliance a promisor expects to induce, and the more specific the promisee relies, the more injustice, P.E. is more likely.

2. Facts: grandpa tells granddaughter she doesn’t have to work and promises her $2k. He makes payments and wants to fulfill his promise until his death. She stopped work as a result but starts up again. Stopping work was not consideration b/c it was not bargained for. However, she did rely on the $ and grandpa expected to induce that reliance.

3. Other: Similar to Hamer v. Sidway, intrafamilial promise enforced b/c deceased wanted to fulfill promise until death, never reneging.

  • Exception to "Intrafamilial" Rule:
  • Intrafamilial promises are more likely to be enforced when it is obvious that:

1. parties intended to be legally liable

2. contract is written

3. if a party is now deceased, they never reneged on the promise and wanted to perform. [Ricketts v. Scothorn – granddaughter doesn’t have to work], [Hamer v. Sidway – uncle gives nephew $ to stop smoking]

  • PROMISES IN EMPLOYMENT CONTEXTS
  • Rule: With pensions, reliance is typically assumed. [EXCEPTION: Hayes v. Plantation Steel Co. ("we’ll take care of you"- oral promise)]
  • Cases
  • Fienberg v. Pfeiffer Co. (pension promised then reneged)

1. Rule: Forgoing gainful employment in reliance of a promise of a pension will allow enforcement under promissory estoppel. With pensions, reliance is typically assumed.

2. Facts: Employer promises P, in writing, pension upon retirement for rest of her life. D retires 2 yrs later and starts drawing pension. 7 yrs later management changes and her pension is reduced. Promissory estoppel is applied b/c she relied on the promise of pension when deciding to retire from her lucrative position and now (at 63) she can’t really go back to work.

3. Other: 1) her continuing to work after promise of pension is not consideration because it was not bargained for.

  • Hayes v. Plantation Steel Co. ("we’ll take care of you")

1. Rule: Decision to retire was made before any promise of a pension. Pension was not relied on in decision to retire, so no promissory estoppel. P’s promise was not meant to induce performance by D.

2. Facts: Hayes announces he’s quitting in a year. A week before retirement he asks if he’s going to get a pension and is orally promised that he will be "taken care of" but no amount is specified. Each yr, he asks if he’s getting another years pension. Management changes and payments are stopped.

3. Other: Trial court found "implied in fact" contract. Supreme court reverses because implied in fact contracts require consideration. Here there wasn’t any. Court says §90 does not apply because "these circumstances do not lead to a conclusion that injustice can be avoided only be enforcement of Plantation’s promise"

  • CHARITABLE SUBSCRIPTIONS
  • Rule 2nd Restatement: Under §90(2), pledgor is bound w/ or w/o reliance. However, if there is no reliance how can there be any injustice (as required in §90(1))? Many courts ignore
  • Rule C/L:
  • Written promises to make charitable contributions generally (almost always) are enforceable w/o consideration or reliance, under P/E. [Salsbury v. Northwestern Bell Telephone Co. – college pledge in letter]
  • Oral promises usually are not enforceable unless charity relies on promise to their detriment (particularly when dealing with deceased’s estate  how can they prove?). [Congregation Kadimah Toras-Moshe v. DeLeo – $25k for synagogue library on deathbed]
  • Reasoning: There is a public policy goal to make charitable subscriptions enforceable. This can’t be done w/ consideration b/c there isn’t any. It can’t be done w/ normal P.E. because there isn’t always reliance.
  • Cases
  • Salsbury v. Northwestern Bell Telephone Co. (college pledge in letter)

1. Rule: charitable subscription in writing is enforceable w/o consideration or detrimental reliance.

2. Facts: Co. makes pledge to college building effort. Effort fails before first payment is made and they refuse.

  • Congregation Kadimah Toras-Moshe v. DeLeo (synagogue library)

1. Rule: Oral pledges are not enforceable under promissory estoppel. "Benefits" granted after donor promise don’t count as reliance or consideration b/c promisor didn’t expect to induce reliance.

2. Facts: Sick Jew promises orally multiple times on deathbed to give $25k to synagogue. After these promises, synagogue tells him they’re going to use $ to create library and name it after him. They hadn’t started building it (just put it in their budget) so court said there was no reliance. §90(2) (no reliance needed) did not apply because there would be "no injustice in declining to enforce the decedent’s promise" as required in §90(1) therefore no promissory estoppel.

3. Other: 1) Public policy. It is bad to enforce oral promises against an estate.

  • INCOMPLETE NEGOTIATIONS
  • Rule: §90 and promissory estoppel are not ordinarily used to enforce incomplete negotiations.
  • You can’t agree to agree: contracts that spell out the terms of a future contract to be agreed upon are not contracts and are not enforced under promissory estoppel. [Coley v. Lang – selling name of co.]
  • Risks of negotiation: during negotiation, both sides may take actions that are risky in order to rinally reach an agreement. The problem is that the risks that are incurred aren’t being assigned. When this happens, the law’s default is that P.E. is not used and the parties that take certain risks retain the liability for those risks. [EXCEPTION: Hoffman v. Red Owl (screwed by franchisor)]
  • §26: Preliminary Negotiations "a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent."
  • Cases
  • Coley v. Lang (selling the name of co.)

1. Rule: Agreements to agree in the future to specified terms are not valid K’s.

2. Facts: D offered to buy name of P’s company. They executed documents saying 1) it was not a final agreement, 2) there were still details to be worked out, 3) the final agreement should be entered by 18th. D used the company name in the meantime, but pulled out before the 18th. No promissory estoppel b/c no action or forbearance of a definite and substantial character was taken by P. Actions D took to prepare for the deal were not reliance b/c they were just normal business risks that companies assume when negotiating.

  • Hoffman v. Red Owl (screwed by franchisor)

1. Rule: For promissory estoppel to be applicable, there does not have to be consideration that would have formed a contract. Only the promisor reasonably foreseeing reliance is necessary. P.E. is NOT consideration.

2. Facts: P was in negotiations w/ Red Owl franchise. They promised him a franchise. As part of negotiations he sold his bakery, bought land, moved locations, etc. After all this, they raised the price on him. Negotiations broke down and he sued and won.

3. Other: celebrated exception. Promissory estoppel not usually used to enforce incomplete negotiations.

  • PROMISES TO INSURE
  • Rule: promises to insure are almost always enforced by promissory estoppel b/c the promisee will almost always rely.
  • Cases
  • East Providence Credit Union v. Geremia (car loan insurance)

1. Rule: Promises to insure are almost always enforced.

2. Facts: Bank tells P’s if they don’t pay their insurance, bank will do it and add it to their outstanding balance. P’s call and tell them to pay it. They rely on this. Car gets totaled.

3. Other: The fact that P’s couldn’t have paid insurance doesn’t affect reliance. They could have chosen not to drive the car.

MATERIAL BENEFIT RULE

  • Definition: The ability to enforce a promise to pay for past consideration only if the promisee had reason to expect to be repaid when he first made the transaction (including situations where the promise is renewed).
  • Elements
  • Material benefit must be received. [Mills v. Wyman - Samaritan takes care of sick son; no benefit b/c son died]
  • P has reason to expect to be repaid (not a gift)
  • D promises to repay in writing
  • Rules:
  • Material Benefit (more than gift) + Promise to Pay  CONTRACT!! [Defined, but not used, in: Manvill v. Oyler (farm gifts and cattle)]
  • Moral obligation + Promise to pay  CONTRACT!! [Webb v. McGowin I&II (hurt while saving other’s life)]
  • Just Moral Obligation  No Contract.
  • Gift + Promise to pay  No Contract. §86(2); [Mills v. Wyman (Samaritan takes care of sick son)]
  • §86(1) "a promise made in recognition of a benefit received by the promisor from the promisee is binding to the extend necessary to prevent injustice"
  • §86(2): "A promise is not binding under Section 1 (a) if the promisee conferred the benefit as a gift
  • Doctrine is used to enforce
  • Promises to pay past debts
  • Generally: Most states enforce a promise to pay a past debt that is no longer enforceable, even though no consideration for this new promise is given. Thus promises to pay debts that have been discharged by bankruptcy, or that are no longer collectable because of statutes of limitations, or incapacity (K’s by minors, etc.) are enforceable in most states if renewed.

1. Writing required: Most states require a signed writing in these cases. This is to protect folk with discharged debts from being strong-armed by their creditors.

  • Promise to pay for benefits received and non-donative material benefits
  • Generally: A promise to pay for benefits or services one has previously received will generally be enforceable even without consideration. This is especially likely where the services were requested, or where the services were furnished without request in an emergency.

1. A detriment to the promisee does come into calculation of whether to apply the material benefit rule, although it is not officially (under C/L or 2nd Restatement) an element necessary.

  • Cases:

1. Mills v. Wyman (Samaritan takes care of sick son)

  • Rule: Gift + Promise to pay  No Contract.
  • Facts: P voluntarily takes care of sick son until he dies. After death, D promises to pay costs and later changes his mind. This was not enforceable b/c there was no benefit conferred on D (his son died).

2. Manvill v. Oyler (farm gifts and cattle)

  • Rule: A moral obligation by itself is not consideration. For material benefit rule to be applied, donor had to have expected repayment.
  • Facts: P makes series of expensive gifts to P including cattle and grazing permit. Action would have been barred by statute of limitations but D made an oral promise to extend. Even if court found there was a contract (instead of a gift), which it didn’t, the oral promise would not have been enough to renew. When D made the gifts, he didn’t expect to get repaid.
  • Other: Oral promises to renew debt are not valid. Must be in writing.

3. Webb v. McGowin I&II (hurt while saving other’s life)

  • Rule: Material benefit received and later promised to be repaid is enforceable in emergency.
  • Facts: P was hurt saving D’s life. D promises to pay him monthly sum for life. He does so until he dies. Estate refuses to continue payments. D received substantial material benefit from P and, when promising to pay for it, made it a legally enforceable contract w/ the benefit (and moral obligation) as the consideration. Ct said: "It is well settled that a moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability resting on the promisor."

THE BARGAIN CONTEXT

THE BARGAIN CONTEXT

offer, counteroffer, acceptance, revocation, shrink-wrap licences

  • §17: requires that for K to exist, there must be a ’bargain’ and ’exchange’
  • §18: requires that you have manifestation of mutual assent to this bargain.
  • §20: says there is no manifestation of assent if parties mean different things by their manifestations
  • §71(1): requires that a promise be bargained for to constitute consideration.

OFFER AND ACCEPTANCE

  • Subjective and Objective Tests of mutual assent
  • Subjective Test: dominant until about a century ago. Held that the parties’ intent (what they were thinking) matters to whether K was formed. Dead today. ("Meeting of minds" – no longer in use)
  • Objective Test: Only the parties’ outward manifestation of intent matter. Used today. §20(comment a) "if the manifestation is at variance with the mental intent,…it is the expression which is controlling" [Lucy v. Zehmer (drunk sale of farm)]; [Leonard v. PepsiCo Inc. (pepsi points harrier jet)]
  • OFFER
  • Defined: §24 "An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain invited and will conclude it."
  • Offeror is master of the promise – he decides how acceptance must be manifested and how long the offer remains open.
  • §26: Preliminary Negotiations "a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent."
  • Cases:
  • Bailey v. West (Race horse case)

1. Rule: There must be intent to promise and mutual understanding for there to be a K.

2. Facts: above. A reasonable person (given horse was lame and that there was dispute over ownership) would not have believed there was an offer.

3. Other: P sent bills to both parties. He wasn’t sure who his K was with. No offer. No K.

  • Lucy v. Zehmer (drunk sale of farm)

1. Rule: Objective, not subjective, actions are measured to find assent (both offer and acceptance)

2. Facts: above.

3. Other: Cts will look at how formal parties make their K (e.g. writing)

  • Leonard v. PepsiCo Inc. (pepsi points harrier jet)

1. Rule: Offer is also measured by objective standard.

2. Facts: above.

  • Dyno Construction Co. v. McWane Inc. (sale of pipes)

1. Rule: Price quotes often look like offers but are just an invitation to offer. Depends on intent of person giving quote.

2. Facts: P needed pipes and called D. D sent faxes w/ quotes that said estimate and "please call." P called and accepted. No contract at this point because there was no offer. D then FedExed forms with liability limitation clause. Forms were lost. Faxed over forms later but liability limitation wasn’t faxed. P signed. Contract formed. Jury ruled P should have known about liability limitation.

  • Lefkowitz v. Great Minneapolis Surplus Store, Inc. (ads for ladies furs)

1. Rule: Newspaper ads are not offers. They are invites to offer. This case is an exception.

2. Facts: Store places ads for fur coats in paper. Specific about price, quantity, location, time. Guy performs and store says he is not eligible. P wins.

3. Other: this case is atypical. Ads have to be very, very specific to be considered offers by courts.

  • ACCEPTANCE
  • Definition: §50(1) "a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer."
  • Who may accept: only the person to whom the offeror intended to create a power of acceptance.
  • Offeree must know of offer: e.g. rewards
  • Acceptance of Unilateral Contract: accepted by full performance. However, partial performance can temporarily remove offeror’s right of revocation.
  • Acceptance of Bilateral Contract: part performance forms a K. part performance renders offer temporarily irrevocable for a reasonable period of time.
  • Ever-Tite Roofing Corp. v. Green (roofing case)

1. Rule: In a bilateral K, commencing to perform prior to revocation forms a contract.

2. Facts: Roofing Corp. enter into K with couple. K said it was binding upon commencing performance. In timely manner, roofers got a credit check, loaded trucks and went to couple’s house. They found there were already other roofers. Couple then tried (and failed) to revoke offer. Court said loading trucks began performance. (Note: if couple had called and revoked prior to loading of trucks there would be no K.)

  • Method of Acceptance: can be set by offeror. When not specified, the acceptance can be any reasonable method.
  • §30(2) "unless otherwise indicated…an offer invites acceptance in any manner…reasonable in the circumstances."
  • §19 "(1)words, acts, or failures to act can bind you. (2) The conduct of a party has to be voluntary to count (i.e. someone bumps your arm up at an auction). Intent doesn’t matter, only voluntariness. (If you are stretching and raise your hand, you’re bound.)
  • Ciamarella v. Reader’s Digest (employment suit settlement)

1. Rule: If agreement calls for signature, then it must be executed for there to be a K.

2. Facts: Employee, suing ex-employer, is negotiating a settlement. Proposed agreement says it must be signed for it to be binding. Proposed agreement goes back and forth and parties preliminarily agree w/ P’s lawyer saying "we have a deal". Meanwhile, ex-employee changes mind. Court said not binding.

3. Other: settlement agreements usually are not binding until there is a signature.

  • Silence as acceptance: §69 silence can be acceptance if:
  • Offeree takes the benefit of the services offered with a reasonable opportunity to reject them
  • Parties have agreed to such beforehand.
  • Such acceptance is part of a course of dealing.
  • Mailbox Rule – generally, an acceptance is valid when it is sent, whether or not it reaches the offeror. §63 By contrast, a revocations is effective when it is received by the offeree. §42
  • REVOCATION
  • Indirect Revocation: §43: "an offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect."
  • Example: In [Ever-Tite Roofing], if roofers had driven by before loading the trucks and seen work being done, then they would have known the K was revoked.
  • Irrevocable Offers: option contracts can force an offeror to hold the offer open for the length of the option.
  • Example: sometimes bids given by contractors on construction jobs function as irrevocable offers.

1. UCC§2-205: "an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time." Court in Pavel Enterprises uses this to say a sub contractors bid, in writing, implicitly promises to keep offer open so that general contractor can find out if it won. However, in Pavel, general contractor lost first, then was awarded later.

2. Unilateral Contract Analysis: if the sub intended its bid as an offer in a unilateral K, use of sub-bid in general’s bid constitutes part performance rendering the bid irrevocable.

3. Pavel Enterprises, Inc. v. A.S. Johnson Company, Inc. (NIH Prime comes in 2nd, then gets K)

  • Rule: If general contractor is denied K, but then later is awarded K, subcontractors can revoke bids.
  • Facts: D gives P a quote. P makes bid on general K and loses. D discovers error in bid but doesn’t communicate it b/c they have lost. P gets K after winner is disqualified. P accepts offer. D revokes. Held for D b/c bid was conditional on winning and P didn’t originally win.
  • Other: Also, after being unofficially informed it would get the K, P shopped around, which tells the court that it hadn’t relied on D’s bid.

OFFER & COUNTEROFFER

  • Definition: §39(1): "an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer."
  • §39(2) Counteroffer kills original offer.
  • Common Law View:
  • Mirror Image Rule – Under C/L, offeree’s response operates as acceptance only if it is the precise mirror image of the offer. If the response conflicts at all with existing terms, or adds new terms, it is a rejection and a counteroffer.
  • Last Shot Doctrine – Under C/L, if terms of K are conflicting, but parties acted anyway like there was a K, then the controlling terms are the last ones exchanged, even if it added or changed terms drastically. (Battle of the Forms)
  • UCC§2-207 – UCC rejects the "mirror image" rule AND the "last shot" doctrine for commercial and merchant transactions. UCC allows contracts to be formed even though it differs from the offer. Where possible, UCC tries to find a contract to prevent parties from weasling out.
  • General: §2-207(1) provides that any expression of acceptance or written confirmation will act as an acceptance, even if it states terms that are different from those contained in the offer.
  • UCC§2-207(1): acceptance (or written confirmation) will operate as acceptance even though there are additional or different terms UNLESS:
  • the acceptance is conditional on assent to the new or additional terms (in which case it is a counteroffer). Note: if conditional, you can still try §2-207(3).
  • UCC§2-207(2): terms if you have a contract under §2-207(1)
  • w/o merchants, new terms become proposals.
  • b/w merchants, terms are incorporated UNLESS

1. the offer expressly limits acceptance to ITS terms.

2. they materially alter the K

3. the new terms are rejected in a timely manner

  • UCC§2-207(3): if the writing don’t otherwise = K under §2-207(1), but parties act like they have a K, then there is a K. Terms of K are:
  • Terms on which writings agree
  • Supplemented by UCC default gap-fillers
  • Cases
  • Common Law

1. Dataserv Equipment, Inc. v. Technology Finance Leasing Corp. (battle over the "Indepth" clause, then sneaky acceptance)

  • Rule: If you receive an offer and make a counteroffer, you reject the original offer.
  • Facts: A offers to buy computers from B. B counteroffers to sell w/ "Indepth" clause. A counteroffers to buy w/o Indepth clause. B counteroffers to sell w/ "Third Party" clause. A rejects saying it is too late. B tries to accept the first offer (which was rejected, so no good).
  • UCC§2-207

1. Ionics, Inc. v. Elmwood (thermostats for water heaters)

  • Rule: If parties both accept but w/ mutually exclusive conditions, and then perform, then under UCC§2-207 there is a K & terms are those that agree supplanted w/ UCC gap-fillers.
  • Facts: A sent PO to B w/ its warranty terms. B sent A acknowledgment w/ conflicting warranty terms. A tried to claim under warranty and B said no. UCC§2-207(3) applies.
  • Other: this is a battle of the forms case.

CONTRACT FORMATION IN THE INTERNET AGE

  • Rule: shrink-wrap licenses/contracts, for the most part, are enforceable.
  • Cases
  • Step-Saver Data Systems, Inc. v. Wyse Technology, Inc. (doctors’/lawyers’ office software – UCC)
  • Rule: If new terms materially alter contract, they are not incorporated.
  • Facts: A inquires about B’s software and B assures A. Later A makes a phone order (offer) and B jots down and ships (acceptance). B’s software has boxtop license that limits warranty and says it is not transferable. A is allowed to collect warranty b/c B unconditionally accepted so §2-207(1) applies and there is a contract. §2-207(2) says the new terms will not be incorporated because they materially alter the contract.
  • Hill v. Gateway 2000, Inc (couple bought pc from gateway – common law)
  • Rule: Terms in product boxes are binding Ks.
  • Facts: A orders computer by phone from Gateway. Computer arrives with list of terms in the box. A doesn’t read them, but later disagrees with one. A says K was formed on the phone and so the terms should be proposals and therefore not incorporated. Court held for Gateway citing ProCD and Coase Theorem saying it is not practical for order taker to read 4 pages of terms to buyer over the phone. It is practical to have a buyer return a product if it disagrees with the terms.
  • Other: Only one form. UCC doesn’t come into play because there aren’t conflicting terms. Just trying to void a K. This is different from the one form in Step-Saver because they had conflicting oral assurances.

CONTRACTUAL RELATIONSHIPS & CONDUCT

INDEFINITE CONTRACTUAL AGREEMENTS

  • Generally
  • When a K is indefinite, the court looks at:
  • Intent of the parties – vague terms often means that the parties haven’t finished negotiating.
  • Difficulty to the courts in determining breach and remedy (more often remedy)

1. They don’t want to encourage parties to leave out terms so that courts could fill it in later.

2. By not enforcing those Ks, the courts hope to incentivize future parties to be specific about their terms.

  • Indefiniteness more likely to be tolerated in:
  • Long-term contracts: (harder to set up terms up front. Forcing companies to be definite does not necessarily decrease the likelihood of breach)
  • Course of dealing has made indefiniteness more concrete
  • Minor terms: parties haven’t bothered to put them in the contract. Even though minor, it ends up being important.
  • Indefinite term is irrelevant to dispute:
  • Indefiniteness less likely to be tolerated when:
  • Seeking specific performance
  • Open-ended renting agreements [Joseph Martin Jr. Delicatessen, Inc. v. Schumacher (rent hold-up)]
  • Indefinite term was discussed but came to no agreement: this is different than a minor term that was never discussed.)
  • Contract gives one party total control. [Corthell v. Summit Thread Company (sewing machine inventions)]
  • Indefinite term is material: w/ no explanation for why it is not there. [Koufman v. IBM Corp. (building IBM a building]
  • OLD Common Law Rule on Indefinite Ks: An indefinite promise leaving out material terms will be void for being indefinite. So, the rule used to be a bright line test.
  • Restatement on Indefinite Contracts
  • §33(1): (RULE: Indefinite K’s cannot be accepted) "Even though a manifestation of intention is intended to by understood as an offer, it cannot be accepted so as to form a K unless the terms of the K are reasonably certain."
  • §33(2): (RULE: When are terms reasonably certain?) "terms of a K are reasonably certain if they provide a basis for determining the existence of a breach and an appropriate remedy." (NOTE: this is different than UCC because it requires ability to determine a breach)
  • §33(3): (RULE: Open terms is evidence of lack of intent to contract) "one or more terms…left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance"
  • UCC/Modern Common Law on Indefinite Ks:
  • UCC§2-204(1): "K for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a K."
  • UCC§2-204(2): "an agreement sufficient to constitute a K for sale may be found even though the moment of its making is undetermined."
  • UCC§2-204(3): "even though one or more terms are left open a K for sale does not fail for indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving an appropriate remedy."
  • Cases
  • Corthell v. Summit Thread Company (sewing machine inventions)
  • Rule: A term that requires "reasonable" but indefinite compensation can’t be interpreted as zero compensation or an indefinite K.
  • Facts: A sells option to buy his inventions over the next 5 yrs to B for "reasonable compensation" to be determined solely by B. Over that time, B accepts 3 inventions, then refuses to pay A. B says there is no K b/c "reasonable" is too indefinite. Court held for A because "reasonable" cannot mean "zero".
  • Other: 1. K had a good faith clause which Boardman says is redundant. All K’s require good faith.
  • Joseph Martin Jr. Delicatessen, Inc. v. Schumacher (rent hold-up)
  • Rule: You can’t agree to agree later. This is too indefinite.
  • Facts: A leases deli to B for 5 years w/ option to renew for another 5 for an amount to be agreed to. B tries to exercise option but A’s price is too high. B tries to get specific performance for market value. Held for A saying that "to be agreed upon" is too indefinite and court won’t invent a figure.
  • Other: indefiniteness of option does not affect rest of contract. Option is void but rest of K is valid.
  • Koufman v. IBM Corp. (building IBM a building) – C/L for services…
  • Rule: A K doesn’t exist when there are no terms specifying material aspects of agreement.
  • Facts: IBM solicits bids to build building for it to lease. B submits 5 bids. IBM calls and says congrats and says to start planning. IBM later calls back and reneges. B sues for breach. Held for IBM b/c too much was indefinite: 1. which of the 5 mutually exclusive bids had been accepted?, 2. start/end dates not specified, 3. who would pay taxes not specified, etc.
  • Other: §33(1) "even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a K unless the terms of the K are reasonably certain."
  • Paloukos v. Intermountain Chevrolet, Co. (just wanted a truck) – UCC for goods…
  • Rule: If there are terms and conduct that are specific, there’s a K, even if it’s on a paper that says "not a K".
  • Facts: A goes to buy a pickup from a car dealer B. B writes specific details of order on sheet labeled "not a PO." A&B sign and A leaves $ for deposit. 5 months later, B calls A saying it can’t get the truck and returns $. Court held for B saying there was a K and it was breached. Under UCC§2-204(1) there is a K based off conduct in addition to the writing.
  • Other: just b/c there was a breached K doesn’t mean B gets specific performance or other damages.

OUTPUT & REQUIREMENTS CONTRACTS

  • Background: you can have K’s w/ open quantity terms b/c it may be a long-term K and you don’t know what the future holds. Price terms can also be pegged to a market index, etc.
  • Output K: I’ll buy all you output.
  • Requirements K: I’ll sell you all you require at X price if you buy exclusively from me.
  • Rules:
  • UCC§2-306(1): "a term which measures the quantity by the 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 or demanded."
  • Before the Comma: assumes open quantity term means quantity in good faith.
  • After the Comma: says except that it cannot be unreasonably disproportionate to a stated estimate or a prior, normal amount.
  • Cases
  • Eastern Airlines v. Gulf Oil Corp. (oil requirements contract – OPEC)
  • Rule: You can’t drastically change amount ordered in a requirements K.
  • Facts: Eastern enters into a requirement K with Gulf to exclusively buy all the oil it requires. They fix the price to the market index. After OPEC embargo, prices are high but the index is artificially low. It is advantageous for Eastern to buy. Eastern seems to be buying more and taking advantage. Gulf sues saying Eastern was acting in bad faith. Court finds for Eastern saying it wasn’t ordering more than before and was acting in accordance with accepted industry practices.
  • Other: 1. outcome might have been different if Eastern were trying to RESELL the extra oil. This would be bad faith.
  • Empire Gas Corp. v. American Bakeries Co. (truck fleet – propane to gas conversion)
  • Rule: You can’t K for an estimated Q and then order zero.
  • Facts: D contracts to buy 3,000 units "more or less" from P. He then has second thoughts and orders none. Found for P stating that such a radical change is bad faith. This differs drastically from estimate.
  • Other: 1. Posner thinks if you are ordering zero in good faith, you are not breaching UCC§2-306(1). This is the MINORITY view. Boardman disagrees.

EXCLUSIVE DEALINGS CONTRACTS

  • Background: you can contract to be exclusive provider of X, but be careful about how you set up price and performance.
  • Cases
  • Wood v. Lucy, Lady Duff-Gordon (famous trend-setter) – COMMON LAW
  • Rule: Promising to make reasonable efforts to do X is consideration.
  • Facts: P contracts w/ D to be exclusive manager of D’s endorsements, splitting profits 50/50. D endorses on her own and doesn’t share the profits. P sues for breach. D says there was no K b/c P didn’t give her any consideration. Court held that it was implied that P would use best efforts to market the name of D.
  • Other: 1. Boardman: "Best Efforts > reasonable efforts; Best efforts > good faith" 2. Don’t worry about difference between best efforts and reasonable efforts. Just base it off of case law… 3. every K has a covenant of good faith and fair dealing
  • Bloor v. Falstaff Brewing Corp. (Ballantine beer)
  • Rule: If you promise to, you have to make your best efforts (even going into a losing position) short of going bankrupt.
  • Facts: P sells brewery for fixed price + $.50 on the barrel sold. K requires best efforts of D to maintain high volume of sales. D acquires brewery and tries to maximize profits of entire company, letting sales of that brand of beer slip. Court held for P saying that D didn’t do everything it could to keep a high volume.
  • Other: Not expending best efforts. Also, while this court acts like showing an example of a better effort proves that best efforts aren’t being made, this is not the case.

TERMINATION CLAUSES

  • Background: at-will Ks can be terminated for good cause and no cause, but not bad cause (see def’s below). No cause is OK although some critics say it can hide a bad cause. Onus should be on P to show bad cause, not D to show good cause. UCC requires reasonable notification. Bad cause usually means breach of covenant of good faith and fair dealing.
  • Causes:
  • Good Cause: e.g. poor performance
  • No Cause: downsizing (this is a reason, but not a cause)
  • Bad Cause:
  • Public Policy Exception: can’t fire for refusing to do something illegal.
  • Implied-in-fact Exception: subsequent manuals, policies, conduct or speech can be taken as part of the K.
  • Implied-in-law Exception: not in K, but breach of good faith and fair dealing inherent in all Ks – this is the hardest exception to win on.
  • Cases
  • Wagenseller v. Scottsdale Memorial Hospital (nurse wouldn’t ’group up’ while camping)
  • Rule: Can’t terminate at-will Ks for bad cause.
  • Facts: Wagenseller hired as at-will employee. D supervisor gave her promotions until they go camping and P refuses to participate in public bathing or "moon river" skit. After D makes fun of her publicly, gives her uncharacteristic bad reviews, P is fired. P sues for breach. Held for D that w/ at-will Ks you can fire for good cause or no cause, but not bad cause. (this was no cause).
  • Other: Court mentions 3 ways of finding bad cause:

1. Public Policy Exception: can’t fire for refusing to do something illegal.

2. Implied-in-fact Exception: subsequent manuals, policies, conduct or speech can be taken as part of the K.

3. Implied-in-law Exception: not in K, but breach of good faith and fair dealing inherent in all Ks – this is the hardest exception to win on.

  • Consumers International v. Sysco Corp. (sysco terminates relationship w/ distributor)
  • Rule: "No Cause" termination is OK, especially w/ written notification. K also allows for "no cause".
  • Facts: P entered K to distribute for D. K had a clause allowing either party to terminate for no cause after 60 days notice. D exercises this option. P claims that b/c D is bigger than it, it violated covenant of good faith and fair dealing. Court held for D saying exercising good faith does not mean having good cause for termination. No cause is allowed, especially when accounted for with a clause in the contract.
  • Other: UCC§2-309(3): "termination of a K by one party except on the happening of an agreed event requires reasonable notification to be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable."

COVENANTS NOT TO COMPETE

  • Background: Courts think of covenants not to compete as restrictions to trade so courts frown on them. It’s on the party that wants to enforce the covenant that has to prove:
  • 1. the covenant is ancillary or related to the employment K
  • 2. there must be consideration
  • 3. appropriately/reasonably limited in scope (time, geography and type of limitation)
  • 4. covenant must be necessary to protect employer – goes to the motive of the employer and where there’s anything to protect.
  • Cases
  • Gagliardi Brothers, Inc. v. Caputo (fired steak-umm controller works for similar company)
  • Rule: Exemplifies the elements stated above.
  • Facts: D was controller at P’s steak-umm. He was required to sign a no-compete K where most people hired after him were not. He got a scheduled raise at the same time. The K limited him from working for another steak firm w/in 100 miles for 1 yr. Info P was trying to protect was now in public domain. No K b/c failed all 4 parts of the test above.
  • Other: to enforce, all 4 above must be present. Courts are hesitant to enforce.

MODIFICATION OF EXISTING AGREEMENTS

  • Common Law Rule:
  • "Pre-Existing Duty" Rule: If you have a K and you change a term, but nothing else, this is no good b/c there is no new consideration for the change. (Modification of agreements often comes b/c of threats not to perform which can occasionally get you into duress.)
  • UCC§2-209(1): kills "pre-existing duty" rule:
  • "an agreement modifying a contract within this Article needs no consideration to be binding."
  • Note: this means that whether a modification is enforceable turns completely on whether it was made in good faith. (this is important but not mentioned within the section.)
  • Comment 2: discusses what "good faith" means. It says there must be a "legitimate commercial reason" for requiring the modification.
  • Cases
  • C/L: Alaska Packers Ass’n v. Domenico (Alaska fishermen hold-up)
  • Rule: Can’t raise price for exact same work, need consideration – pre-existing duty rule.
  • Facts: P fishermen agree to go to Alaska to fish for D for X price. Once there, where company can’t get new fishermen (hold-up), they demand higher price Y for same work. D says he doesn’t have authority, but agrees to new terms. When they get back, company refuses to pay new price. Court held for D.
  • Other: If this had been judged under §2-209, while no consideration would have been necessary there still would have been bad faith, unless fishermen could show otherwise. (e.g. Fishermen complained that the nets were not good.)
  • UCC: Ralston Purina v. McNabb (farmer doesn’t deliver soybeans)
  • Rule: Modifications allowed w/o consideration, except for bad faith.
  • Facts: D agrees to deliver X amount of soybeans at Y price to P by Nov. 30th. B/c of bad weather, D fails. P gives an extension (modification) of 1 month. D accepts by delivering more after extension. They give 3 more extensions before they finally cover the difference and sue for damages. D has to pay but question is at what price. Nov 30th prices, or current market value. Court finds lower price because P kept extending to bring D into a higher price (bad faith).
  • Other: Boardman thinks this is bad reasoning b/c Ralston has no incentive to drive up the price. They had to buy at the market value as well.

REGULATING THE BARGAINING PROCESS

DURESS

  • Background: Duress is a force that interferes w/ voluntary force and can be used to void Ks. From no choice (gun to head) to full choice (millionaire buys luxury item). In b/w are gray areas. (Note: if you are starving and someone offers you a loaf of bread for $100, this is not duress b/c they didn’t put you in your situation.)
  • §174: Physical Compulsion is Duress: "if conduct that appears to be manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent."
  • §175(1): Non-Physical Compulsion is Duress: "manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, it is voidable by the victim."
  • 1. improper threat (defined in §176)
  • 2. improper threat induces the promise
  • 3. there is no reasonable alternative
  • §176: Threats are improper if: (Motive matters!!)
  • Threat is a crime.
  • Threat of criminal prosecution.
  • Threat is breach of the duty of good faith and fair dealing.
  • Threat results in exchange not on fair terms,
  • Threatened act would harm recipient and would not significantly benefit the party making the threat. [Wolf v. Marlton – do it or we’ll sell to an undesirable]
  • What is threatened is otherwise a use of power for illegitimate ends.
  • Cases
  • Wolf v. Marlton (…or we’ll sell to an undesirable)
  • Rule: A threat that would hurt other party and not significantly benefit the party making the threat is improper (duress).
  • Facts: Couple enters K for house in new development. They then want out. Developer says no. They say, if you don’t let us out we’ll sell the house to an undesirable and your development will suffer. Developer treats contract as breached and keeps the deposit. Court held this was fine because the threat would hurt the developer w/o benefiting the Wolfs.
  • Other: test for whether a party felt threatened is objective and subjective. Would a reasonable person feel threatened and did this person feel threatened…
  • Austin Instrument v. Loral Corp (pay more or you won’t get the parts you need)
  • Rule: You can consider a K breached if the other party threatens to do something lawful in bad faith to try to induce you to do something you wouldn’t do otherwise.
  • Facts: P is a navy contractor that subcontracted 20 parts to D. Parts needed at certain times to meet Navy demands. There is a liquidated damages clause if D fails to meet deadline. P gets a new Navy K and only gives D 20 of 40 parts. D says if you don’t give us all, we won’t deliver parts on original order. P says no. D doesn’t deliver. P looks around, no one else can deliver, so they relent. Once delivered, P takes D to court for duress. P wins.
  • Other: P didn’t have any reasonable alternative (no other subs would have met deadline). Also, D’s breaching K was legal, but here it was done in bad faith.
  • Post v. Jones (cargo of stranded boat)
  • Rule:
  • Facts: Boat A is in trouble. Boat B comes to rescue. Cargo of A would be a total loss. B says they would pay a price X which is very low. Court finds duress.
  • Other: Boardman says it only finds distress because it is a maritime case. Under normal circumstances, it wouldn’t be duress because B did not put A in its situation.

FRAUD

  • Background: You can divide fraud into active (willful misrepresentation) and passive (non-disclosure where there is a duty to disclose) fraud. Active Fraud: Intentional misrepresentation (statement), Intentional Concealment (act). NOTE: test for concealment is the same as misrepresentation but instead of a statement, look for an act. Passive Fraud: Negligent misrepresentation, Failure to Disclose.
  • Caveat Emptor: let the buyer beware. Contract law begins with this premise. Misrepresentation, concealment and failure to disclose carve out exceptions to this default.
  • Options Under Fraud:
  • Rescind: go back to the status quo.
  • Affirm: affirm K and seek damages.
  • WILLFUL & NEGLIGENT MISREPRESENTATION
  • TEST: For Willful and Negligent Misrepresentation, there must be: [Spiess v. Brandt – this resort is really profitable]
  • a false representation or concealment of a material fact susceptible of knowledge (NOTE: future event doesn’t count; must be past or current event)
  • made w/ knowledge of its falsity or made w/o sufficient knowledge on the subject to warrant a representation
  • with the intent to induce the person to whom it is made to act upon it.
  • person relied upon the representations
  • to his damage.
  • Cases (MISREPRESENTATION)
  • Spiess v. Brandt (this resort is really profitable, buy it)

1. Rule: Knowingly making false statements that are relied on by the other party makes a K voidable.

2. Facts: D wants to buy resort from P. P says resort has been really profitable, but it hasn’t. They refuse to show books. P write in K that if D defaults on just one payment, they keep all paid until then and get back the resort. D relies and buys, but it isn’t profitable and they miss a payment. P says they’ll give more time but then sue for breach. D says bad faith and seeks rescission. D wins.

3. Other: Bad faith representations about both past and future profitability. Past is looked at. Any predictions of future are not looked at.

  • Danann Realty Corp. v. Harris (bought apt. building, fraud disclaimers in K)
1. Rule: Willful misrepresentations are fraud even if they are disclaimed in K.    

2. Facts: P buys apt. building. D made representations about operations cost. They sign K with merger clause (i.e. every prior dealing is superceded by this K) that says all representations made by P and D are disclaimed. Court held there was fraud, but Boardman says that the dissent is the MAJORITY view.

3. Other: 1. if merger clause were enforced, you wouldn’t be able to bring in parole evidence (ev. outside of K.). 2. courts will enforce merger clauses if both parties agree in K "we rely on no other representations except X, Y and Z." This is truly specific.

  • DISCLOSURE & CONCEALMENT
  • CONCEALMENT: making an assertion by your silence that something doesn’t exist – i.e. termites (use same test as misrepresentation above).
  • Cases (CONCEALMENT)

1. Obde v. Schlemeyer (latent termites in house)

  • Rule: Where there are concealed defects dangerous and latent to the property, health or life of the buyer, which are known to seller, and which under careful examination on his part would not disclose, seller has a duty to inform. Failure to inform is fraud.
  • Facts: D owns a house and finds termites so it calls pest control. PC treats but can’t guarantee they’re gone unless they do X. D doesn’t want to do X. He sells the house to P and doesn’t mention termites. D inspects the house but has no reason to ask about termites. Termites come back, D sues and wins.
  • Other: If termite infestation had been obvious, then no duty.

2. Reed v. King (house of multiple murders sold)

  • Rule: You may have a duty to disclose material terms that aren’t physical if they affect value of exchange.
  • Facts: P buys a house from D. D doesn’t disclose that it’s location of multiple murders that has reduced its market value. D asks neighbors not to say anything. P later finds out and sues for rescission. Held for P b/c the murders are a material fact affecting property value.
  • Other: Test for materiality: 1) gravity of harm inflicted by nondisclosure; 2. fairness of imposing duty of discovery on buyer (easy for D to tell?); 3. impact on stability of Ks if rescission permitted.
  • NON-DISCLOSURE: requires that you not share the fact AND that there be a duty to disclose.
  • Test:

1. if there is a trust and confidence b/w parties such that the recipient expects that info will be disclosed to them – physician/patient, family, clergy, trusteeship, etc.; OR

2. Duty to disclose if there is a need to correct. E.g. :

  • Prior representation is no longer true.
  • You have created a false impression from true things you’ve said.
  • You know the party has a false impression but you didn’t create it.
  • Cases (NON-DISCLOSURE)

1. L&N Grove v. Chapman (Disney makes land value skyrocket)

  • Rule: Buyer doesn’t have to disclose speculative reasons for purchase.
  • Facts: D buys land from P b/c he thinks Disney will open up next door. Disney does and P sues saying he wouldn’t have sold if he’d known and D didn’t disclose. Court said there was no duty to disclose b/c what D knew was speculation, not fact. Additionally, this speculation was made from public information. Also, P was a real estate agent and could/should have known.
  • Other: this is a strange case because the buyer fails to disclose. Usually it is the seller.

CAPACITY TO CONTRACT

  • Reasoning: both autonomy and economic approaches justify contract law to require doctrines that enforce bargains only if the parties to them have the psychological and intellectual capacity to understand and evaluate the consequences of their agreements.
  • INFANCY
  • Rule: Minors are almost never held legally responsible for their contracts. The age of 18 is a bright line test – nothing else matters. Corallary is that a minor cannot surrender the power to avoid/disaffirm. You can disaffirm at any time up to majority and for a reasonable time thereafter.
  • Ratification: The day you turn 18 you can give yp your power to avoid. If you affirm a contract you made prior to reaching majority then the K becomes wholly legally binding. Your actions can ratify/affirm the contract.
  • Restitution: If you disaffirm, you don’t have to make restitution on services. You do have to return goods you receive, but in whatever condition they’re in.
  • Exceptions: (Note: none of the exceptions mean they can’t disaffirm. It’s just whether they have to pay anything back).

1. if the K was for necessities.

2. education, in some jurisdictions…

3. marriage K

  • Cases
  • Kiefer v. Fred Howe Motors, Inc. (emancipated minor disaffirms K for car)

1. Rule: The Ks of an emancipated minor, except for necessities, are voidable at his option.

2. Facts: Keifer, representing that he was 21 even though he was 5 months shy, purchased a car from D. He is emancipated and uses the car to go to work. He then disaffirms K. Court held this was OK.

3. Other: Dissent said he was using car to go to work so it was a necessity.

  • Halbman v. Lemke (minor buys car, engine breaks, then disaffirms)

1. Rule: Restitution: A minor disaffirming a K must return as much of the consideration as remains in the minor’s possession.

2. Facts: Minor bought a car from P. The engine broke and minor took it to the shop. Garage towed the vehicle to the minor’s residence where it was vandalized and wrecked. Court held minor did not have to make restitution for any use or depreciation.

  • Shields v. Gross (Brooke Shields baby pics)

1. Rule: You can rescind K executed by mom when you are an infant, unless there’s a statutory exception.

2. Facts: D takes nude pictures of P when she is 10 yrs old. P’s mom signs K saying D can use them for whatever whenever. When P is 17, D reissues pics. P sues to avoid the K. Under C/L she probably would have won. However, here there was a NY civil rights statute. Boardman thinks this is wrong.

3. Other: If this is law, a parent can take advantage of their kid by entering them into contracts that they are bound by for the rest of their lives!!

  • MENTAL ILLNESS
  • Background: As a matter of efficiency, contracts entered into by infants or mentally incompetent persons are not likely to enhance social welfare. In order to prevent these mistakes, contract law places the incentive on the party who is able at least cost to prevent such mistakes.
  • Kinds: Mental illness, insanity, retardation, old age, alcohol and drug abuse. The lower you go on the IQ scale, the less courts will uphold Ks that are disadvantageous to the mentally incompetent.
  • Rule: §15 Ks are voidable by reason of mental illness if:
  • unable to understand nature and consequences of transaction
  • unable to act in a reasonable manner regarding the transaction and other party has reason to know
  • if contract is made on fair terms w/o other parties knowledge of mental illness, voidability terminates when the contract has been so performed in whole or in part that avoidance would be unjust.
  • Cases
  • Faber v. Sweet Style Manufacturing Corp. (Manic-depressive cool cat)

1. Rule: K by a mental incompetent is voidable if the other party can be returned to the status quo – even if the other party had no idea & the incompetent knew what he was doing.

2. Facts: P is a manic depressive and goes nuts even though he looks sane. He buys land from D and digs a hole for a foundation to a store. P is later committed to a mental institution. K is voidable because all they need to do to restore status quo is fill in the hole.

3. Other: 1. C/L says for a guy to be incompetent enough to make K voidable, he has to be unable to understand the K. The court here also finds Ks voidable if the guy understood what he was doing but was compelled by his mental disease to do it. 2. think of §15 as an alternative that is a little less common than Faber.

  • Williamson v. Matthews (drunk woman sells house)

1. Rule: For mental incapacity to make K voidable, they must show the incapacity prevented the person from understanding the nature and terms of the K.

2. Facts: P is drunk old woman about to default on home loan. She wants to sell to buy a mobile home. P, after a few drinks, sells to D for $1700 after negotiating and both execute at lawyer’s office. Within hours she calls lawyer, she realizes she meant to sell for $17,000. Held for P b/c consideration was inadequate AND she was weak of mind at time of execution.

  • Uribe v. Olson ("…Give it back to the Indian’s if you want to")

1. Rule:

2. Facts: Mother is selling property at what looks like fair market value in presence of her daughter. During negotiations, which last over multiple days, she says, "I don’t care what you do w/ the property. You can give it back to the Indians if you want to." Court doesn’t find evidence that she did not have the capacity to contract.

3. Other: 1. Boardman says these kinds of cases will increase as baby boomer’s bodies outlive their brains. If old people (who have money) can’t contract, we’re all in trouble.

PUBLIC POLICY LIMITATIONS

  • Background: Autonomy and economic principals do not support unrestricted freedom of contract if the effects of contractual enforcement are not confined to the contractual parties themselves. (e.g. externalities) Public policy exceptions can help parties ’internalize’ the costs of the transaction. In particular, public policy exceptions help prevent negative externalities by prohibiting Ks that encourage immoral activities and illegal activities. Also, notice that unlike fraud which punishes D, public policy limitations punish P.
  • Economic approach: would support using public policy exceptions to contractual enforcement in order to prevent parties from entering into such agreements that reduce social welfare
  • Autonomy approach: would reject enforcement of agreements that diminish the extend or value of the autonomy of third parties.
  • Elements: 1. a large number of people were affected. 2. this type of harm could occur over and over again.
  • ILLEGALITY
  • Cases (ILLEGALITY)
  • Watts v. Malatesta (gambler keeps winnings and is repaid losses)

1. Rule: Gambling is illegal and against public policy. Best way to discourage the behavior is to discourage the professionals from providing the temptation.

2. Facts: P gambles at horse races with his bookie, D. He is up a good deal of money but sues D (under statute 994) to recoup a string of losses. Court holds that bookie is a professional and best way to curb gambling is to prevent the professional’s "constant offer of temptation." P keeps winnings and is repaid losses.

3. Other: 1. this is the MAJORITY position. If we care more about screwing the bookie than the casual gambler than this is best. 2. Dissent says this encourages casual gamblers to gamble more, if they can find a game. Dissent opinion was that they should be returned to status quo.

  • New York Football Giants, Inc. v. Los Angeles Chargers Football Club, Inc. (signing players before eligibility)

1. Rule: Signing Ks before bowl games against SEC/NCAA rules is defrauding the public and against public policy. Discourage behavior by voiding K.

2. Facts: Star football player signs contract saying he would play for the Giants prior to bowl game, and therefore against SEC and NCAA rules. K would be valid once approved by Commissioner, which it was secretly on 12/15. Star player tried by telephone to get out of deal on 12/5. Court held this was fine because of the K was defrauding the public and therefore against public policy.

3. Other: 1. Boardman thinks this should be in immoral section not illegal section. 2. Court says, "he who comes into equity must come with clean hands."

  • IMMORALITY
  • Cases (IMMORALITY)
  • Roddy-Eden v. Berle (Milton Berle gets ghost writer then reneges)

1. Rule: Ks meant to defraud the public are immoral and against public policy.

2. Facts: Milton Berle hires a ghost writer to write a novel under his name. They would split profits 50/50. Berle then backs out after writer finishes book. Court held that K was immoral, and therefore void, because it was going to defraud the public.

3. Other: 1. there is a difference b/w a K that is illegal and one that just won’t be enforced. If it just can’t be enforced, some courts don’t have the power to return any money. They may just leave it where it is.

  • In re Baby M

1. Rule: Surrogacy Ks are unenforceable b/c they attempt to determine best interests of child prior to birth.

2. Facts: P wants to have baby but wife is infertile. They pay D $10k to have wife impregnated w/ Stern’s sperm and then give up parental rights. They sign K. D changes her mind and takes the baby to Florida. Trial ct found being with P was in best interests of child deciding that surrogacy Ks are enforceable. Appellate reverse saying surrogacy Ks are not enforceable b/c of statutes and public policy considerations. NJ public policy says best interests of the child are what determine custody and this can’t be assigned b/f birth by a K.

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