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Contracts Outline 2 - Professor Dawson, Study notes of Contract Law

University of Florida (UF)Contract Law

Contracts course outline for University of Florida Levin College of Law class in Contracts.

Typology: Study notes

2011/2012

Uploaded on 03/02/2012

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Introduction to Interpretation
(pp. 362-402)
- So far, have focused on 2nd requirement of bargain, consideration
- Now, turning to 1st part, mutual assent
- We are only legal system that puts importance on mutual assent, and it has
important role for us
Manifestation of Mutual Assent:
- part of mechanics of entering into a bargain
- have to determine if parties are talking about the same thing
- 2 problems:
o Interpretation: how determine meaning of language used?
o Acceptance: usually an offer by one party and acceptance of the other
party
- Mutual assent is necessary for consideration, but not sufficient
Lucy v Zehmer (1954, Virginia)
Lucy (farmer) offers $50K for land, Zehmer writes out contract and signs it, but later says
he is “only joking.” Promise IS enforced.
- Issue is whether there is a contract at all. Mutual assent?
- Courts can only judge the actual conduct, not the unexpressed feelings
- They can see only the external manifestation of the intent, not the internal,
undisclosed intention
- Zehmer should have known Lucy was serious, Lucy did not have reason to
know Zehmer was only joking
Raffles v Wichelhaus (1864, England) “Peerless”
Agreement to buy cotton off of ship named “Peerless,” but 2 different ships, one
departing 2 months after the first. Agreement is NOT binding.
- no “meeting of the minds”, no mutual assent
- ambiguity as to the product (whereas in Lucy had ambiguity about intent)
- neither party knew what they other meant so no mutual assent
- Identity of Peerless is “fundamental information” to agreement
R § 20: Effect of Misunderstanding
(1) No manifestation of mutual assent if the parties attach materially different meaning
to their manifestations AND
(a) neither party knows or has reason to know the meaning attached by the other;
or
(b) each party knows or should know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meanings
attached to them by one of the parties if
(a)(b)* that party does not know (or has no reason to know)* of any different
meaning attached by the other, and the other knows (or has reason to know)* the meaning
attached by the first party [Lucy v Zehmer]
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Download Contracts Outline 2 - Professor Dawson and more Study notes Contract Law in PDF only on Docsity!

Introduction to Interpretation (pp. 362-402)

  • So far, have focused on 2 nd requirement of bargain, consideration
  • Now, turning to 1 st part, mutual assent
  • We are only legal system that puts importance on mutual assent, and it has important role for us Manifestation of Mutual Assent:
  • part of mechanics of entering into a bargain
  • have to determine if parties are talking about the same thing
  • 2 problems: o Interpretation: how determine meaning of language used? o Acceptance: usually an offer by one party and acceptance of the other party
  • Mutual assent is necessary for consideration, but not sufficient Lucy v Zehmer (1954, Virginia) Lucy (farmer) offers $50K for land, Zehmer writes out contract and signs it, but later says he is “only joking.” Promise IS enforced.
  • Issue is whether there is a contract at all. Mutual assent?
  • Courts can only judge the actual conduct, not the unexpressed feelings
  • They can see only the external manifestation of the intent, not the internal, undisclosed intention
  • Zehmer should have known Lucy was serious, Lucy did not have reason to know Zehmer was only joking Raffles v Wichelhaus (1864, England) “Peerless” Agreement to buy cotton off of ship named “Peerless,” but 2 different ships, one departing 2 months after the first. Agreement is NOT binding.
  • no “meeting of the minds”, no mutual assent
  • ambiguity as to the product (whereas in Lucy had ambiguity about intent)
  • neither party knew what they other meant so no mutual assent
  • Identity of Peerless is “fundamental information” to agreement R § 20: Effect of Misunderstanding (1) No manifestation of mutual assent if the parties attach materially different meaning to their manifestations AND (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or should know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meanings attached to them by one of the parties if (a)(b)* that party does not know (or has no reason to know)* of any different meaning attached by the other, and the other knows (or has reason to know)* the meaning attached by the first party [Lucy v Zehmer]

Frigalimment Importing Co v B.N.S. Intern. Sales Corp. (1960, NY) “The issue is, what is chicken?” Contract is NOT binding b/c:

  • no mutual assent re meaning of chicken.
  • again, ambiguity as to product
  • meaning of chicken is “fundamental” to agreement
  • Judge decided issue as matter of law. He did not say exactly WHAT chicken was, but said Π had burden of showing that “chicken” was used in the narrower rather than the broader sense, and they did not prove so. à complaint dismissed with costs D: There is a continuum b/w Formation and Interpretation Formation – question if there is a contract at all b/c of lack of mutual assent Interpretation – assume there is a contract, parties have already behaved as if there is a contract, but a question re the meaning of a term of the contract is disputed
  • 19 th Century judges were very reluctant to say they were “interpreting” a contract. Thought they “knew” what contract meant based on the literal language. Did not consider context.
  • Modern approach is to look at the context
  • Impossible to cover all potential contingencies in a contract, have to figure out how to handle problems when they arise, how predict what court will do? (essence of being a lawyer) Objective and Subjective Elements of Interpretation: (text)
  • Classical contract law tended to be objective and standardized – “making of a contract does not depend upon the state of the parties’ minds; it depends upon their overt acts” o Williston: demonstrates objectivism of classical contract law: “meaning and effect of contract depends on the construction given the written language by the court , and the court will give that language its natural and appropriate meaning; and, if it is unambiguous, will not even admit evidence of what the parties may have thought the meaning to be” (text p.

o Learned Hand: “a contract has, strictly speaking, nothing to do with the personal, or individual intent of the parties”

  • Modern contract law tends to be subjective and individualized: principles of interpretation should be responsive not only to objective elements but to the parties’ subjective intentions.
  • Four central modern principles of interpretation: o Principle I: If parties attach different meanings to an expression, neither party knows that the other attaches a different meaning, and the two meanings are not equally reasonable, the more reasonable meaning prevails. § based on concept of liability for fault.

does not know that A attaches meaning MM, meaning YY prevails even if it is reasonable than meaning MM. § Largely subjective, supported by a fault analysis § B may be at fault for thinking the wrong thing, but A is more at fault in allowing B to proceed knowing they were thinking something different § EX (??): Lucy v Zehmer – only joking. Zehmer was more at fault for knowing that Lucy was serious and proceeding anyway without clarifying his own intentions R § 201 (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party... Haines v New York (1977, NY) [duration of contract] Agreement first entered into in 1924 b/w City and intervenors (Town of Hunter & Village of Tannersville). City assumed obligation of constructing a sewage system... and subsequent operation, maintenance, and repair... also to extend sewage lines when necessitated by future growth. New developer wants NYC to extend lines, and since system is way over capacity, wants NYC to build a new sewage system to accommodate the new development

  • Trial and Appellate courts both found for Π, said NYC was obligated to build new plant
  • “Where the parties have not clearly expressed the duration of a contract, the courts will imply that they intended to continue for a reasonable time” (R § 204)
  • this rule is not applied to contracts of employment, exclusive agency, distributorship, or requirements
  • NYC is obligated to maintain existing facility, but is not obligated to build a new since extending the lines to the present facility would overextend it
  • Court applied a reasonableness standard in their response to Π – the contracts looks as though NYC should do what Π wants, but it is not reasonable to expect them to do this 50+ years after agreement was entered into. Court had to find legitimate reasons to apply the reasonableness standard (has to be based on law, thus limiting the duration) R § 204 Supplying an Omitted Essential Term When the parties to a bargain (1) sufficiently defined to be a contract (2) have not agreed with respect to a term which is essential to a determination of their rights and duties, (3) a term which is reasonable in the circumstances is supplied by the court.

Spaulding v Morse (1947, Mass.) [Supplying a reasonable term] Divorce case, F will pay $1200 per year for son until his entrance into college then F will pay $2200 per year for no more than 4 years. Son gets drafted right out of high school into army for WWI, F stops paying. Trustee sues to get F to make back payments and to pay until son enters college b/c he’s a minor.

  • This is NOT a misunderstanding case, not like Raffles where both parties attached different meanings. The parents never anticipated these circumstances, have to interpret the language to figure out how to handle the situation.
  • Court handles it by looking at intention of the parties, has 3 options: o F does have to pay [interpretation] o F does not have to pay, OR [interpretation] o Say there is no contract at all, b/c no meeting of the minds (a theoretical option, but not a practically viable option [formation issue]
  • R § 204 – court can supply a term that is reasonable under the circumstances; a narrow and limiting doctrine, cannot use it arbitrarily
  • Parties enter into contracts on their own free will, but courts will supply terms to “write the contract” when necessary Berwick & Smith Co v Salem Press Inc. (1954, Mass) Printer (Π) sues author (Δ) for non-payment of publishing 5,000 volumes of a 2-vol set. Dispute has to the “unit” of sale – either 5,000 sets or 10,000 total books. Δ wants to pay for 5,000 sets at .561 each, and Π wants them to pay for 10,000 total books at .538.
  • language is not super clear, if not in trade probably don’t know what it means
  • Π knew what the language meant; arguable that Δ knew as well
  • Court could have said as a matter of law that Π didn’t prove case (like Frigaliment), but didn’t. This court looked at the context of agreement to make sense of the language.
  • “expression was not unambiguous” à it was ambiguous, so the court can interpret the contract and settle it as a matter-of-law – for the judge to determine (very complex) as question-of-law
  • when issue goes beyond interpreting the language of an agreement, when there is evidence disputing the meaning, it becomes an issue for a jury to determine as a question-of-fact (for jury to decide on evidence of “usage of trade”)
  • This case comes down to a usage of trade issue
  • Can turn to other sources of information to determine meaning of a term: R § 203: Standards of Preference in Interpretation Express terms à Course of performance à Course of dealing (R § 223) à Usage of trade (R § 222)

Ad (not offer), Π’s letter of inquiry (not offer), Δ’s response to inquiry by form letter (not offer), Π’s further inquiry (not offer), Δ’s second response (no offer, but Π interprets it as such), Π then responds with “acceptance” but the land has already been sold (this is an OFFER).

  • ad is not offer b/c only one parcel of land, can’t be expected to be held liable to everyone who did not get opportunity to purchase the land, same deal with the form letter (only one parcel of land, multiple potential buyers); both are more an “invitation for an offer”
  • have to ask if Π is justified in understanding letter as an offer – no, he isn’t. No clear offer of terms, haven’t even negotiated price of land
  • Π cannot “accept” if there was never an offer Lefkowitz v. Great Minneapolis Surplus Store (1957, Minnesota) [ad IS an offer] Store places ad for 3 furs, first come first serve for $1. Man is first to arrive at store and attempts to buy the fur for $1, but store says no b/c “for women only.” Same thing happens following weekend, but this time the furs are given a value of $139.50. Man sues for breach of contract.
  • Π argues that the ad was offer, by being 1st^ in line he accepted offer, thus a bargain, and the store was in breach of the bargain
  • Ad was an offer b/c had clear, definite, explicit terms with nothing open for negotiation (limit of product, only 3 to sell, when run out offer is over, offer made to first in store)
  • Usually, ads are not considered an offer (what do you do when they run out? Can’t be held liable to all potential buyers); depends on facts of case
  • Stores used to take advantage of this contract law and do the “bait-and- switch” – advertise one product to lure people into store and then try to sell them something else
  • Realist approach – the court didn’t like what store did so interpreted ad as offer so they would be liable (but only calculated damages for 2nd^ event where the value of coat was specified, damages = $138.50) Akers v J.B. Sedberry (1955, Tennessee) [termination of Power of Acceptance] Employment contract with time frame, 2 employees “offer” resignation, employer does not accept (question of fact), then “accepts” offer 3 days later.
  • If it was “employment at will” would not have a case b/c employees could not quit outright – they would be in breach of contract
  • Have to have understanding of mutual assent; what you say or do has to be interpreted as acceptance of offer by offeree
  • Power of acceptance terminates after lapse of “reasonable time,” usually by close of conversation or as determined by court
  • § 36 indexes different ways offer/power of acceptance terminates
  • offer is rejected when offeror has reason to believe it has been rejected or not accepted (through words and conduct)

R § 36: Methods of Termination of the Power of Acceptance (POA) Power of acceptance may be terminated by: (a) rejection or counter-offer [§ 38 Rejection; § 39 Counter-offer] (b) lapse of time [§ 41 Lapse of time] (c) revocation by offeror [§ 42 Revocation by communication, § 43 indirect commun.] (d) death or incapacity of either party [§ 48 ] § 38: Rejection Manifestation not to accept offer is rejection unless offeree manifests intention to take it under further advisement

  • once someone rejects an offer, their power of acceptance terminates and they cannot change their mind (cannot bind offeror when acceptor keeps changing mind) Ardente v. Horan (1976, Rhode Island) [counter-offer] House listed for sale, D makes bid of $250K
    • Where is the offer? o Listing house for sale? No. B/c an “invitation for offers”, an advertised property for sale (same as Lonergan). Advertisement is generally not an offer o Bid for $250K? Maybe. (court views as verbal negotiation) o Sellers verbal “OK” acceptance? Maybe.
    • The issue of whether there was a valid contract (offer and acceptance) wasn’t raised at trial so Appellate court didn’t consider it
    • Statute of Frauds – oral contracts for sale of land is unenforceable, so this wouldn’t be official offer and acceptance, needs to be in writing
    • Court sees offer as the Δ sending the written P&S agreement to P (but not signed so might not be offer, but court looks at facts in light most favorable to P)
    • Court then views Π response to P&S as a “counter offer” b/c of letter asking about the additional items in the house, thus no binding contract
    • An interpretive issue – possible that court could have read letter differently, not as a counter offer (viewed $20K down payment as acceptance)
    • Have to have definite and unequivocal acceptance of offer (unless parties say otherwise) [§ 39, §58]
    • Counter-offers terminate offeree’s POA, but give it to original offeror – they now have power to say “yes, we accept your counter-offer,” but it takes original offer off the table unless they had manifested an intention to keep offer open Classical contract law = “Mirror-image” rule: if acceptance varies from original offer in any way, no matter how minor, there is no contract Modern contract law – rule has softened this a bit

Modern law: First Restatements reversed classical position

  • 2 nd Restatement allows formation of option contract through: partial performance, consideration, or reliance on offer (e.g., general contractors) § 45: Option Contract Created by Part Performance or Tender (1) When offer invites acceptance by performance , an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror’s duty of performance under any option contract so created is conditional on completion of the invited performance Drennan v. Star Paving (1958, California) [option contract, reliance] Subcontractor bids on job, but says he made a mistake on the price and wants out. Sub is bound by his offer.
  • Sub’s bid is an “offer,” but general’s use of offer is not “acceptance”
  • General relies upon the bid, the sub cannot revoke the offer à creates option contract
  • Not reciprocal, sub does not “rely” upon the general’s use of the bid (doesn’t know if bid was used, makes same bid to lots of different generals, doesn’t put a lot of time into preparing the bid)
  • If general has reason to believe there was an error in the bid (unreasonably low), he could not have justifiably relied upon it and it would not be enforced
  • Courts are reluctant to bind a general to the bids used (say it was acceptance), he is still free to choose who his sub’s will be (don’t have time to negotiate before, may have to negotiate timing of contracts, use minority co’s); but subs are bound by their offer due to reliance
  • § 90 (old Restatement) and §87(2)(new restatement): Option contract – offer which induces reliance is irrevocable (still not a contract, but may collect damages)
  • some courts reject reliance argument when there is evidence general did bid shopping or bid chopping (in bad faith) HYPO: I’ll pay you $1,000 if you climb flagpole and sit there for 30 min. Offer = to pay $1, Acceptance = by performance à an option contract if begin to perform, so once climb the flagpole, offer cannot be revoked [§45, option contract created by part performance]
  • doesn’t work when seek acceptance by promise, doesn’t make sense b/c you either have the promise or not, no partial promise
  • when offeror seeks acceptance by performance, offeror is in control of the situation and offeree assumes all the risk - §45 gives some protection
  • when acceptance is by promise, don’t need the extra protection b/c it is considered a binding contract as soon as the promise is given

HYPO: Ask B to deliver 100 widgets at certain time. The only performance asked for is delivery of the goods. B then collects/manufacturers 100 widgets, but the offer is revoked before delivery.

  • §45 – option contract formed by preparing to perform (tendering or beginning performance)
  • §87 – option contract through reliance, induced action, action = preparing to perform Mechanics of Acceptance (pp. 444-505) When dealing with offer and acceptance, have to ask if acceptance should be by promise or by performance (either can be specified, or it could be left open)
  • if by performance, option contract is created as soon as performance is begun or has been tendered (preparing to begin)
  • if promise, acceptance is effective as soon as it is dispatched Adams v. Lindsell (1818) [acceptance by mail] Non-delivery of wool. Seller offered wool (unusual, offer is usually from buyer) and was seeking acceptance by promise. S sent letter to wrong address, B doesn’t get it for a few days and even though they sent response out immediately, S had already sold wool to someone else.
  • When is acceptance effective? Sending or dispatching acceptance makes it effective, even if offeror isn’t aware of the acceptance
  • Have to chose a rule – either effective on dispatch or upon receipt
  • §63: (unless stated otherwise) acceptance is effective as soon as dispatched, put out of offeree’s hands; but acceptance under an option contract isn’t effective until received [only when acceptance sought by promise, only way it makes sense]
  • Offeror can dictate the terms of the offer, including method of acceptance, also has responsibility of following up on the offer (haven’t heard from you …) In face-to-face interactions, acceptance occurs instantaneously, as long as there is manifestation of mutual assent. It is assumed that other party understands it as acceptance.