Emanuel Law Outlines
Contracts
Chapter 1
INTRODUCTION
I. MEANING OF "CONTRACT"
A. Definition: A "contract" is an agreement that the law will enforce.
1. Written v. oral contracts: Although the word "contract" often refers to a written document, a writing is not always necessary to create a contract. An agreement may be binding on both parties even though it is oral. Some contracts, however, must be in writing under the Statute of Frauds.
II. SOURCES OF CONTRACT LAW
A. The UCC: Contract law is essentially common law, i.e. judge-made, not statutory. However, in every state but Louisiana, sales of goods are governed by a statute, Article 2 of the Uniform Commercial Code.
1. Common-law: If the UCC is silent on a particular question, the common law of the state will control. See UCC § 1-103.
Chapter 2
OFFER AND ACCEPTANCE
I. INTENT TO CONTRACT
A. Objective theory of contracts: Contract law follows the objective theory of contracts. That is, a party’s intent is deemed to be what a reasonable person in the position of the other party would think that the first party’s objective manifestation of intent meant. For instance, in deciding whether A intended to make an offer to B, the issue is whether A’s conduct reasonably indicated to one in B’s position that A was making an offer. [10 - 11]
Example: A says to B, "I’ll sell you my house for $1,000." If one in B’s position would reasonably have believed that A was serious, A will be held to have made an enforceable offer, even if subjectively A was only joking.
B. Legal enforceability: The parties’ intention regarding whether a contract is to be legally enforceable will normally be effective. Thus if both parties intend and desire that their "agreement" not be legally enforceable, it will not be. Conversely, if both desire that it be legally enforceable, it will be even if the parties mistakenly believe that it is not. [11 - 12]
Example: Both parties would like to be bound by their oral understanding, but mistakenly believe that an oral contract cannot be enforceable. This arrangement will be enforceable, assuming that it does not fall within the Statute of Frauds.
1. Presumptions: Where the evidence is ambiguous about whether the parties intended to be bound, the court will follow these rules: (1) In a "business" context, the court will presume that the parties intended their agreement to be legally enforceable; (2) but in a social or domestic situation, the presumption will be that legal relations were not intended.
Example: Husband promises to pay a monthly allowance to Wife, with whom he is living amicably. In the absence of evidence otherwise, this agreement will be presumed not to be intended as legally binding, since it arises in a domestic situation.
C. Intent to put in writing later: If two parties agree (either orally or in a brief writing) on all points, but decide that they will subsequently put their entire agreement into a more formal written document later, the preliminary agreement may or may not be binding. In general, the parties’ intention controls. (Example: If the parties intend to be bound right away based on their oral agreement, they will be bound even though they expressly provide for a later formal written document.) [12 - 13]
1. Where no intent manifested: Where the evidence of intent is ambiguous, the court will generally treat a contract as existing as soon as the mutual assent is reached, even if no formal document is ever drawn up later. But for very large deals (e.g., billion dollar acquisitions), the court will probably find no intent to be bound until the formal document is signed.
II. OFFER AND ACCEPTANCE GENERALLY
A. Definitions: [14]
1. "Offer" defined: An offer is "the manifestation of willingness to enter into a bargain," which justifies another person in understanding that his assent can conclude the bargain. In other words, an offer is something that creates a power of acceptance.
2. "Acceptance" defined: An acceptance of an offer is "a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer."
Example: A says to B, "I’ll sell you my house for $100,000, if you give me a check right now for $10,000 and promise to pay the rest within 30 days." This is an offer. If B says, "Here is my $10,000 check, and I’ll have the balance to you next week," this is an acceptance. After the acceptance occurs, the parties have an enforceable contract (assuming that there is no requirement of a writing, as there probably would be in this situation).
B. Unilateral vs. bilateral contracts: An offer may propose either a bilateral or a unilateral contract. [14 - 15]
1. Bilateral contract: A bilateral contract is a contract in which both sides make promises. (Example: A says to B, "I promise to pay you $1,000 on April 15 if you promise now that you will walk across the Brooklyn Bridge on April 1." This is an offer for a bilateral contract, since A is proposing to exchange his promise for B’s promise.)
2. Unilateral contract: A unilateral contract is one which involves an exchange of the offeror’s promise for the offeree’s act. That is, in a unilateral contract the offeree does not make a promise, but instead simply acts.
Example: A says to B, "If you walk across the Brooklyn Bridge, I promise to pay you $1,000 as soon as you finish." A has proposed to exchange his promise for B’s act of walking across the bridge. Therefore, A has proposed a unilateral contract.
III. VALIDITY OF PARTICULAR KINDS OF OFFERS
A. Offer made in jest: An offer which the offeree knows or should know is made in jest is not a valid offer. Thus even if it is "accepted," no contract is created. [16]
B. Preliminary negotiations: If a party who desires to contract solicits bids, this solicitation is not an offer, and cannot be accepted. Instead, it merely serves as a basis for preliminary negotiations. [16]
Example: A says, "I would like to sell my house for at least $100,000." This is almost certainly a solicitation of bids, rather than an offer, so B cannot "accept" by saying, "Here’s my check for $100,000."
C. Advertisements: Most advertisements appearing in newspapers, store windows, etc., are not offers to sell. This is because they do not contain sufficient words of commitment to sell. (Example: A circular stating, "Men’s jackets, $26 each," would not be an offer to sell jackets at that price, because it is too vague regarding quantity, duration, etc.) [19]
1. Specific terms: But if the advertisement contains specific words of commitment, especially a promise to sell a particular number of units, then it may be an offer. (Example: "100 men’s jackets at $26 apiece, first come first served starting Saturday," is so specific that it probably is an offer.)
2. Words of commitment: Look for words of commitment – these suggest an offer. (Example: "Send three box tops plus $1.95 for your free cotton T-shirt," is an offer even though it is also an advertisement; this is because the advertiser is committing himself to take certain action in response to the consumer’s action.)
D. Auctions: When an item is put up for auction, this is usually not an offer, but is rather a solicitation of offers (bids) from the audience. So unless the sale is expressly said to be "without reserve," the auctioneer may withdraw the goods from the sale even after the start of bidding. See UCC § 2-328(3). [20]
IV. THE ACCEPTANCE
A. Who may accept: An offer may be accepted only by a person in whom the offeror intended to create a power of acceptance. [23]
Example: O says to A, "I offer to sell you my house for $100,000." B overhears, and says, "I accept." Assuming that O’s offer was reasonably viewed as being limited to A, B cannot accept even though the consideration he is willing to give is what O said he wanted.
B. Offeree must know of offer: An acceptance is usually valid only if the offeree knows of the offer at the time of his alleged acceptance.
1. Rewards: Thus if a reward is offered for a particular act, a person who does the act without knowing about the reward cannot claim it.
C. Method of acceptance: The offeror is the "master of his offer." That is, the offeror may prescribe the method by which the offer may be accepted (e.g., by telegram, by letter, by mailing a check, etc.). [26 - 31]
1. Where method not specified: If the offer does not specify the mode of acceptance, the acceptance may be given in any reasonable method. [26]
2. Acceptance of unilateral contract: An offer for a unilateral contract is accepted by full performance of the requested act. [26]
Example: A says to B, "I’ll pay you $1,000 if you cross the Brooklyn Bridge." This can only be accepted by A’s act of completely crossing the bridge. (However, the offer will be rendered temporarily irrevocable once B starts to perform, as discussed below.)
3. Offer invites either promise or performance: If the offer does not make clear whether acceptance is to occur through a promise or performance, the offeree may accept by either a promise or performance. [27]
a. Shipment of goods: For instance, if a buyer of goods places a "purchase order" that does not state how acceptance is to occur, the seller may accept by either promising to ship the goods, or by in fact shipping the goods. UCC § 2-206(1)(b).
b. Accommodation shipment: If the seller is "accommodating" the buyer by shipping what the seller knows and says are non-conforming goods, this does not act as an acceptance. In this "accommodation shipment" situation, the seller is making a counter-offer, which the buyer can then either accept or reject. If the buyer accepts, there is a contract for the quantity and type of goods actually sent by the seller, not for those originally ordered by the buyer. If the buyer rejects, he can send back the goods. In any event, seller will not be found to be in breach. UCC § 2-206(1)(b). [28]
4. Notice of acceptance of unilateral contract: Where an offer looks to a unilateral contract, most courts now hold that the offeree must give notice of his acceptance after he has done the requested act. If he does not, the contract that was formed by the act is discharged. [29]
Example: A says to B, "I’ll pay you $1,000 if you cross the Brooklyn Bridge by April 1." B crosses the bridge on time. As soon as B crosses, a contract is formed. But if B does not notify A within a reasonable time thereafter that he has done so, A’s obligation will be discharged.
5. Acceptance by silence: Generally, an offer cannot be accepted by silence. But there are a few exceptions: [29 - 30]
a. Reason to understand: Silence can constitute acceptance if the offeror has given the offeree reason to understand that silence will constitute acceptance, and the offeree subjectively intends to be bound.
b. Benefit of services: An offeree who silently receives the benefit of services (but not goods) will be held to have accepted a contract for them if he: (1) had a reasonable opportunity to reject them; and (2) knew or should have known that the provider of the services expected to be compensated.
c. Prior conduct: The prior course of dealing may make it reasonable for the offeree’s silence to be construed as consent. (Example: Each time in the past, Seller responds to purchase orders from Buyer either by shipping, or by saying, "We don’t have the item." If Seller now remains silent in the face of an order by Buyer for a particular item, Seller’s silence will constitute an acceptance of the order.)
d. Acceptance by dominion: Where the offeree receives goods, and keeps them, this exercise of "dominion" is likely to be held to be an acceptance.
V. ACCEPTANCE VARYING FROM OFFER
A. Common law "mirror image" rule: Under the common law, the offeree’s response operates as an acceptance only if it is the precise mirror image of the offer. If the response conflicts at all with the terms of the offer, or adds new terms, the purported acceptance is in fact a rejection and counter offer, not an acceptance. [32 - 33]
Example: A writes to B, "I’ll sell you my house for $100,000, closing to take place April 1." B writes back, "That’s fine; let’s close April 2, however." At common law, B’s response is not an acceptance because it diverges slightly from the offer, so there is no contract.
B. UCC view: The UCC rejects the "mirror image" rule, and will often lead to a contract being formed even though the acceptance diverges from the offer. Wherever possible, the UCC tries to find a contract, so as to keep the parties from weaseling out (as they often try to do when the market changes). This entire "battle of the forms" is dealt with in UCC § 2-207, probably the most important UCC provision for the Contracts student. [34 - 35]
1. General: At the most general level, § 2-207(1) provides that any "expression of acceptance" or "written confirmation" will act as an acceptance even though it states terms that are "additional to or different from" those contained in the offer.
Example: Buyer sends a "purchase order" containing a warranty. Seller responds with an "acknowledgement," containing a disclaimer of warranty. There will be a contract under the UCC, even though there would not have been one at common law.
2. Acceptance expressly conditional on assent to changes: An "expression of acceptance" does not form a contact if it is "expressly made conditional on assent to...additional or different terms." § 2-207(1). So if the purported "acceptance" contains additional or different terms from the offer, and also states something like, "This acceptance of your offer is effective only if you agree to all of the terms listed on the reverse side of this acceptance form," there is no contract formed by the exchange of documents. [36 - 40]
a. Limited: Courts are reluctant to find that this section applies. Only if the second party’s form makes it clear that that party is unwilling to proceed with the transaction unless the first party agrees to the second party’s changes, will the clause be applied so as to prevent a contract from forming.
3. "Additional" term in acceptance: Where the offeree’s response contains an "additional" term (i.e., a clause taking a certain position on an issue with which the offer does not deal at all), the consequences depend on whether both parties are merchants. [41 - 43]
a. At least one party not merchant: If at least one party is not a merchant, the additional term does not prevent the offeree’s response from giving rise to a contract, but the additional term becomes part of the contract only if the offeror explicitly assents to it.
Example: Consumer sends a purchase order to Seller, which does not mention how disputes are to be resolved. Seller sends an acknowledgement form back to Consumer, which correctly recites the basic terms of the deal (price, quantity, etc.), and then says, "All disputes are to be arbitrated."
Even though the acknowledgement (the "acceptance") differed from the purchase order by introducing the arbitration term, the acknowledgement formed a contract. However, since at least one party (Consumer) was not a merchant, this additional term will only become part of the contract if Consumer explicitly assents to that term (e.g., by initialing the arbitration clause on the acknowledgement form).
b. Both merchants: But if both parties to the transaction are "merchants," then the additional term automatically becomes part of the contract, as a general rule. (Example: On facts of prior example, if Buyer was a merchant, the arbitration clause would become part of the contract.) However, there are two important exceptions to this "additional term becomes part of the contract" rule:
i. Materiality: The addition will not become part of the contract if it is one which "materially alters" the contract. For instance, a disclaimer of warranty will always be found to materially alter the contract, so if the seller includes such a disclaimer in his acknowledgement form after receiving the buyer’s purchase order, the disclaimer will not become part of the contract.
ii. Objection: If the offeror objects to having the additional term become part of the contract, it will not so become.
4. Acceptance silent: If an issue is handled in the first document (the offer), but not in the second (the acceptance), the acceptance will be treated as covering all terms of the offer, not just those on which the writings agree. [42 - 43]
Example: Buyer’s purchase order says that disputes will be arbitrated; Seller’s acknowledgement is silent on the issue of arbitration. The Seller’s form will be found to be an acceptance, and disputes will be arbitrated.)
5. Conflicting terms in documents: If an issue is covered one way in the offering document and another (conflicting) way in the acceptance, most courts apply the "knock out" rule. That is, the conflicting clauses "knock each other out" of the contract, so that neither enters the contract. Instead, a UCC "gap-filler" provision is used if one is relevant; otherwise, the common law controls. [43 - 45]
Example: Buyer’s purchase order states that disputes will be litigated in New York state court. Seller’s acknowledgement form states that disputes will be arbitrated. Most courts would apply the "knock out" rule, whereby neither the "New York courts" nor "arbitration" clauses would take effect. Instead, the common law – allowing an ordinary civil suit to be brought in any state that has jurisdiction – would apply.
6. Response diverges too much to be acceptance: If a purported acceptance diverges greatly from the terms of the offer, it will not serve as an acceptance at all, so no contract is formed. [45]
7. Contract by parties’ conduct: If the divergence referred to in the prior paragraph occurs (so that the exchange of documents does not create a contract), the parties’ conduct later on can still cause a contract to occur. Section 2-207(3) provides that "conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract." [45 - 47]
Example: Buyer’s purchase order is for 100 widgets at $5 each. Seller’s acknowledgement form is for 200 widgets at $7 each. Buyer does not say anything in response to the acknowledgement form. Seller ships the 200 widgets, and Buyer keeps them. Even though the exchange of documents did not create a contract, the parties’ conduct gave rise to a contract by performance. [46]
a. Terms: Where a contract by conduct is formed, the terms "consist of those terms in which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act." § 2-207(3). For instance, the price term would be a "reasonable price at the time for delivery," as imposed by § 2-305’s price "gap filler."
8. Confirmation of oral contract: If the parties initially reach an oral agreement, a document later sent by one of them memorializing the agreement is called a "confirmation." [47 - 50]
a. Additional terms in confirmation: If the confirmation contains a term that is additional to the oral agreement, that additional term becomes part of the contract unless either: (1) the additional term materially alters the oral agreement; or (2) the party receiving the confirmation objects to the additional terms.
b. "Different" term in confirmation: If a clause contained in the confirmation is "different" from a term on the same issue reached in the oral agreement, the new clause probably does not become part of the agreement.
VI. DURATION OF THE POWER OF ACCEPTANCE
A. General strategy: For an acceptance to be valid, it must become effective while the power of acceptance is still in effect. So where there is doubt about whether the acceptance is timely: (1) pinpoint the moment at which the "acceptance" became effective; and (2) ask whether the power of acceptance was still in effect at that moment. If the answer to part (2) is "yes," the acceptance was timely. [53]
B. Ways of terminating power of acceptance: The offeree’s power of acceptance may be terminated in five main ways: (1) rejection by the offeree; (2) counter-offer by the offeree; (3) lapse of time; (4) revocation by the offeror; and (5) death or incapacity of the offeror or offeree. [53 - 58]
1. Rejection by offeree: Normally, if the offeree rejects the offer, this will terminate her power of acceptance. [54]
a. Exceptions: But rejection will not terminate the power of acceptance if either: (1) the offeror indicates that the offer still stands despite the rejections; or (2) the offeree states that although she is not now accepting, she wishes to consider the offer further later.
2. Counter-offer: If the offeree makes a counter-offer, her power to accept the original offer is terminated just as if she had flatly rejected the offer. [54 - 55]
Example: On July 1, A offers to sell B 100 widgets at $5 each, the offer to be left open indefinitely. On July 2, B responds, "I’ll buy 50 at $4." A declines. On July 3, the market price of widgets skyrockets. On July 4, B tells A, "I’ll accept your July 1 offer." No contract is formed, because B’s power of acceptance was terminated as soon as B made her counter-offer on July 2.
a. Contrary statement: But as with a rejection, a counter-offer does not terminate the power of acceptance if either offeror or offeree indicates otherwise. (Example: On facts of above example, if B said on July 2, "I’ll buy 50 from you right now for $4; otherwise, I’d like to keep considering your original offer," A’s offer would have remained in force.)
3. Lapse of time: The offeror, as "master of his offer," can set a time limit for acceptance. At the end of this time limit, the offeree’s power of acceptance automatically terminates. [55 - 56]
a. End of reasonable time: If the offeror does not set a time limit for acceptance, the power of acceptance terminates at the end of a reasonable time period.
i. Face-to-face conversation: If the parties are bargaining face-to-face or over the phone, the power of acceptance continues only during the conversation, unless there is evidence of a contrary intent.
4. Revocation: The offeror is free to revoke his offer at any time before it is accepted (except in the case of option contracts). [56 - 58]
a. Effective upon receipt: A revocation by the offeror does not become effective until it is received by the offeree.
Example: On June 15, A mails an offer to B. On July 1, A mails a revocation to B. On July 3, B has a letter of acceptance hand delivered to A. On July 5, A’s revocation is received by B. B’s acceptance is valid, because A’s revocation did not take effect until its receipt by B, which was later than the July 3 date on which B’s acceptance took effect.
i. Lost revocation: If the letter or telegram revoking the offer is lost through misdelivery, the revocation never becomes effective.
5. Death or incapacity of offeror or offeree: If either the offeror or offeree dies or loses the legal capacity to enter into the contract, the power to accept is terminated. This is so even if the offeree does not learn of the offeror’s death or incapacity until after he has dispatched the "acceptance." [58]
Example: On July 1, A sends an offer. On July 2, A dies. On July 3, B telegraphs her "acceptance." On July 4, B learns of A’s death. There is no contract.
C. Irrevocable offers: The ordinary offer is revocable at the will of the offeror. (This is true even if it states something like, "This offer will remain open for two weeks.") However, there are some exceptions to this general rule of revocability: [59 - 61]
1. Standard option contract: First, the offeror may grant the offeree an "option" to enter into the contract. The offer itself is then referred to as an "option contract." [59]
a. Common law requires consideration: The traditional common-law view is that an option contract can be formed only if the offeree gives the offeror consideration for the offer.
b. Modern (Restatement) approach: But the modern approach, as shown in the Restatement, is that a signed option contract that recites the payment of consideration will be irrevocable, even if the consideration was never paid.
2. "Firm offers" under the UCC: The UCC is even more liberal in some cases: it allows formation of an irrevocable offer even if no recital of the payment of consideration is made. By § 2-205, an offer to buy or sell goods is irrevocable if it: (1) is by a merchant (i.e., one dealing professionally in the kind of goods in question); (2) is in a signed writing; and (3) gives explicit assurance that the offer will be held open. Such an offer is irrevocable even though it is without consideration or even a recital of consideration. [60]
Example: Jeweler gives Consumer a signed document stating, "For the next 120 days, I agree to buy your two-carat diamond antique engagement ring for $4,000." Even though Consumer has not paid consideration for the irrevocability, and even though there is no recital of consideration in the signed offer, Jeweler’s offer is in fact irrevocable for 120 days, because it is by a merchant (Jeweler professionally sells or buys goods of the kind in question), is in a signed writing, and explicitly assures that the offer will be held open.
a. Three month limit: No offer can be made irrevocable for any longer than three months, unless consideration is given. § 2-205.
b. Forms supplied by offeree: If the firm offer is on a form drafted by the offeree, it is irrevocable only if the particular "firm offer" clause is separately signed by the offeror.
3. Part performance or detrimental reliance: The offeree’s part performance or detrimental reliance (e.g., preparations to perform) may transform an otherwise-revocable offer into a temporarily irrevocable one. [61 - 65]
a. Offer for unilateral contract: Where the offer is for a unilateral contract, the beginning of performance by the offeree makes the offer temporarily irrevocable. As long as the offeree continues diligently to perform, the offer remains irrevocable until he has finished. [61]
Example: A says to B, "I’ll pay you $1,000 if you cross the Brooklyn Bridge anytime in the next three hours." Before B starts to cross the bridge, A may revoke. But once B starts to cross the bridge, A’s offer becomes temporarily irrevocable. If B crosses the bridge within three hours, a contract is formed and A owes B the money. If B starts to cross, then changes his mind, neither party will be bound.
i. Preparations: This doctrine applies only to the beginning of actual performance, not the making of preparations to perform. (Example: On facts of above example, if B went out and bought expensive walking shoes in preparation for crossing, this act would not cause his offer to be irrevocable.)
b. Preparations by Offeree: If the offer is for a bilateral contract (i.e., a contract which is to be accepted by a return promise), the offeree’s making of preparations will cause the offer to be temporarily irrevocable if justice requires. "An offer which the offeror should reasonably expect to induce action or forbearance of substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice." Rest.2d, § 87(2). [65]
i. Offers by sub-contractors: Most importantly, an offer by a sub-contractor to a general contractor will often become temporarily irrevocable under this rule.
Example: A, sub-contractor, offers to supply steel to B on a job where B is bidding to become the general contractor. B calculates his bid in reliance on the figure quoted by A. B gets the job. Before B can accept, A tries to revoke.
If B can show that he bid a lower price because of A’s sub-bid, the court will probably hold A to the contract, or at least award B damages equal to the difference between A’s bid and the next-lowest available bid. But observe that B, the offeree, is not bound, so B could accept somebody else’s sub-bid.
VII. WHEN ACCEPTANCE BECOMES EFFECTIVE
A. Mailbox rule: In most courts, the acceptance is effective upon proper dispatch. This is called the "mailbox" rule. [67 - 71]
Example: On July 1, A offers to sell 100 widgets to B at $5 apiece. On July 2, B deposits a properly-addressed acceptance in the mail. On July 10, A finally receives the letter, several days later than would ordinarily be expected from first-class mail. A contract was formed on July 2. Any attempt at revocation by A on, say, July 5 would have been ineffective.
1. Offer provides otherwise: The "mailbox" rule does not apply if the offer provides otherwise (e.g., "This offer will be accepted when and if your letter of acceptance is personally received by me").
2. Lost in transmission: If the acceptance is lost in transmission or delayed, the applicability of the mailbox rule depends on whether the communication was properly addressed.
a. Properly addressed: If the acceptance is properly addressed, it is effective at the time of dispatch even if it is lost and never received by the offeror at all. (But a court might "discharge" the offeror in this circumstance, for instance if he had sold the goods to someone else.)
b. Not properly addressed: If the acceptance is not properly addressed, or not properly dispatched (e.g., sent by an unreasonably slow means), it will be effective upon dispatch only if it is received within the time in which a properly dispatched acceptance would normally have arrived. If it comes later than this "normal" time, it will not be effective until receipt.
B. Both acceptance and rejection sent by offeree: If the offeree sends both an acceptance and rejection, the rule depends on which is dispatched first. [71 - 73]
1. Rejection sent first: If the rejection is sent first, then the acceptance will be effective if (and only if) the offeror receives it before he receives the rejection.
2. Acceptance dispatched first: If the acceptance is sent before the rejection, the acceptance is effective upon dispatch, and the subsequently-dispatched "rejection" (really a "revocation of acceptance") does not undo the acceptance, whether that rejection is received by the offeror before or after he receives the acceptance.
C. Option contracts: The acceptance of an option contract is effective upon receipt by the offeror, not upon dispatch. [73]
D. Risk of mistake in transmission: The risk of a mistake in transmission of the terms of the offer is upon the offeror. That is, a contract is formed on the terms of the offer as received by the offeree. [73]
Example: A intends to offer to sell 100 widgets at $5 each. Instead, the telegraph company transmits the offer as an offer to sell 200 widgets at $4. If B accepts without knowledge of the error, A will be stuck having to sell 200 widgets at $4.
1. No right to "snap up" obviously wrong offer: However, if the offeree knows or should reasonably have known that the offer has undergone a mistake in transmission, she cannot "snap up" the offer.
VIII. INDEFINITENESS
A. Generally: No contract will be found if the terms of the parties’ "agreement" are unduly indefinite. (Example: A and B agree that B will buy widgets from A from time to time. The parties do not decide anything about quantity, price, delivery, etc. A court would probably find that even though A and B may have meant to conclude a binding agreement, the absence of terms makes their agreement void for indefiniteness.) [76]
1. Court supplies missing term: But if the court believes that the parties intended to contract, and the court believes that it can supply a "reasonable" value for the missing term, it will generally do so. [77]
a. UCC: The UCC expressly allows the court to fill in terms for price, place for delivery, time for shipment, time for payment, etc., as long as the parties have intended to make a contract. See § 2-204(3). The UCC also implies a term requiring good faith in every contract for the sale of goods. § 1-203. [77 - 80]
b. Non-UCC: In non-UCC cases, most modern courts follow this "supply the missing term on a reasonable basis" approach, as long as the parties have shown an intent to create a binding contract. [80]
c. Too indefinite: But there may be situations where even though the parties intended to create a binding contract, they have fleshed out the terms of their deal so little that the court simply cannot meaningfully supply all of the missing terms. In that case, the court will find the agreement void for indefiniteness. (But this is rare.) [80 - 81]
2. Agreement to agree: Similarly, the court will generally supply a missing term if the parties intentionally leave that term to be agreed upon later, and they then don’t agree. See, e.g., UCC § 2-305(1)(b), which allows the court to supply a reasonable price term if "the price is left to be agreed by the parties and they fail to agree...." [81]
3. Part performance: Even if an agreement is too indefinite for enforcement at the time it is made, the subsequent performance of the parties may cure this indefiniteness. [83]
Example: A contracts to make a suit for B, without specifying the type or color of material to be used. This is probably unenforceable for indefiniteness when made. But if A begins to make the suit with gray cotton cloth, and B raises no objection, the indefiniteness will be cured by this part performance.
IX. MISUNDERSTANDING
A. General rule: If the parties have a misunderstanding about what they are agreeing to, this may prevent them from having the required "meeting of the minds," and thus prevent a contract from existing. No contract will be formed if: (1) the parties each have a different subjective belief about a term of the contract; (2) that term is a material one; and (3) neither party knows or has reason to know of the misunderstanding. [83 - 85]
Example: A offers to ship goods to B on the steamer "Peerless." B accepts. Unknown to both, there are in fact two steamships by this name. A intends to use the later one; B subjectively intends to get shipment on the earlier one. Because both are in subjective disagreement about the meaning of a material term, and neither has reason to know of the disagreement, there is no contract. [Raffles v. Wichelhaus]
1. Fault: Conversely, if one party knows or should know that he has a different understanding as to the meaning of an ambiguous term than the other, a contract will be formed on the term as understood by the other (innocent) party.
Example: Same facts as above example. This time, A knows or should know that there are two Peerlesses, and knows or should know that B means the earlier one. B doesn’t and shouldn’t know that there are two. A contract is formed for shipment on the earlier (the one understood by B, the "innocent" party).
B. Offeree doesn’t understand offer: Where the offeree fails to understand or read the offer, a similar "fault" system applies: [84 - 85]
1. Offeree is negligent: If the offeree’s failure to read or understand the offer is due to his own negligence, he is bound by the terms of the contract as stated in the offer.
2. Misrepresentation: But if the offeree’s misunderstanding is due to the offeror’s misrepresentation of the terms of the offer, and the offeror knows this, there is a contract on the terms as understood by the offeree.
Chapter 3
CONSIDERATION
I. INTRODUCTION
A. Definition of consideration: As a general rule, a contract will not be enforceable unless it is supported by "consideration." (The few exceptions are treated in "Promises binding without consideration" below.) A promise is supported by consideration if: [95]
1. Detriment: The promisee gives up something of value, or circumscribes his liberty in some way (i.e., he suffers a "legal detriment"); and
2. Exchange: The promise is given as part of a "bargain"; that is, the promisor makes his promise in exchange for the promisee’s giving of value or circumscription of liberty.
B. Uses of doctrine: The requirement of consideration renders unenforceable two main types of transactions: [95 - 97]
1. Promises to make gifts (which do not satisfy the "bargain" element); and
2. Business situations in which one party has not really promised to do something or given anything up, even though he may appear to have done so (the "detriment" element is missing here).
II. THE BARGAIN ELEMENT
A. Promises to make gifts: A promise to make a gift is generally unenforceable, because it lacks the "bargain" element of consideration. [97 - 103]
Example: A says to B, his daughter, "When you turn 21 in four years, I will give you a car worth $10,000." The four years pass, A refuses to perform, and B sues for breach of contract. B will lose, because there was no consideration for A’s promise. In particular, A’s promise was not "bargained for."
1. Existence of condition: Even if the person promising to make a gift requires the promisee to meet certain conditions in order to receive the gift, there will still be no consideration (and the promise will thus be unenforceable) if the meeting of the conditions is not really "bargained for" by the promisor. [97 - 103]
Example: A promises his widowed sister-in-law B a place to live "if you will come down and see me." In response, B travels to see A, thereby incurring expenses. Even though B has suffered a "detriment" (the expenses), the "bargain" element is lacking – A was not promising B a place to live because he wanted to see her, but was merely imposing a necessary pre-condition for her to get the gift. Therefore, his promise is unenforceable for lack of consideration. [Kirksey v. Kirksey]
a. Occurrence of condition is of benefit to promisor: But if the promisor imposes a condition, and the occurrence of this condition is of benefit to him, then the bargain element probably will be present.
Example: A promises his nephew B $5,000 if B will refrain from smoking, drinking and gambling until age 21. B so abstains. Here, A’s promise was "bargained for" (and thus supported by consideration), because A was attempting to obtain something he regarded as desirable. [Hamer v. Sidway]
i. Altruistic pleasure not sufficient: But the fact that one who promises to make a gift expects to derive altruistic pleasure, or love and affection, from making the gift is not sufficient to constitute a "bargain."
2. Executed gifts: It is only the promise to make a gift, not the actual making of a gift, that is unenforceable for lack of consideration. Once the promisor makes the gift, he cannot rescind it for lack of consideration. [103]
B. Sham and nominal consideration: Even though a deal looks on its face as if it is supported by consideration, the court may conclude that the purported consideration is sham or nominal, and is thus not consideration at all. [101]
1. Nominal amount: Thus where the "consideration" that has been paid is so small as to be nominal, the court may conclude as a factual matter that there is no real "bargain" present at all. If so, the promise will not be enforced, due to lack of consideration.
Example: A says to B, his son, "In consideration for $1 paid and received, I promise to give you a car worth $10,000 four years from now." Even if the $1 is actually paid, the court will probably conclude that A did not "bargain" for the $1, and that there is thus no consideration; A’s promise will therefore be unenforceable.
a. "Adequacy" irrelevant: But if the consideration is big enough to suggest that there was a bargain, the fact that it is "inadequate" is irrelevant. (See infra.)
2. Payment not in fact made: If a non-trivial payment is recited, but the payment was not in fact made, most courts will take this as evidence that no bargain was present. Always, the question is whether there was in fact a bargain, and payment or non-payment is merely non-dispositive evidence of whether there was a bargain.
C. Promisee unaware: Generally, the promisee must be aware of the promise, for the act performed by him to be consideration for the promise. This means that if a reward is promised for a certain act, and the act is performed without the actor’s being aware of the reward, he cannot recover. [102]
D. "Past consideration" no good: If the promise is made in return for detriment previously suffered by the promisee, there is no bargain, and thus no consideration. Thus promises to pay a pre-existing debt, and promises to pay for services already received, usually lack the "bargain" element (but these may be binding even without consideration, as discussed below). [103 - 104]
III. THE "DETRIMENT" ELEMENT
A. Generally: For consideration to be present, the promisee must suffer a "detriment." That is, she must do something she does not have to do, or refrain from doing something that she has a right to do. (Example: After P has already retired from working for D, D promises P a lifetime pension, for which P need not do anything. At common law, this promise would probably be unenforceable, because P has not suffered any detriment in return for it.) [106]
1. Non-economic detriment: Even a non-economic detriment will suffice. (Example: If A promises B $5,000 in return for B’s abstaining from alcohol and tobacco, B’s refraining will be a "detriment" that will serve as consideration for A’s promise. Thus A’s promise will be enforceable.) [106]
2. Adequacy not considered: The court will not inquire into the "adequacy" of the consideration. As long as the promisee suffers some detriment, no matter how small, the court will not find consideration lacking merely because what the promisee gave up was of much less value than what he received. [110 - 112]
Example: D is desperate for funds during WWII, and promises to pay P $2,000 after the war in return for $25 now. Held, there is consideration for D’s promise, so P may collect. Mere "inadequacy of consideration" is no defense. [Batsakis v. Demotsis].
a. Lack of bargain: But remember that extreme disparity in value between what the promisee gives up and receives may suggest that there is not in fact a "bargain," in which case there will be no consideration even though the detriment requirement is satisfied.
B. Pre-existing duty rule: If a party does or promises to do what he is already legally obligated to do, or if he forbears or promises to forbear from doing something which he is not legally entitled to do, he has not incurred a "detriment" for purposes of consideration. This is the pre-existing duty rule. [112]
1. Modification: This general rule means that if parties to an existing contract agree to modify the contract for the sole benefit for one of them, the modification will usually be unenforceable at common law, for lack of consideration. Be on the lookout for this scenario especially in construction cases. [112 - 115]
a. Restatement: The Second Restatement, and most modern courts, follow this general rule, but they make an exception where the modification is "fair and equitable in view of circumstances not anticipated by the parties when the contract was made."
2. Extra duties: Even under the traditional pre-existing duty rule, if the party who promises to do what he is already bound to do assumes the slightest additional duties (or even different duties), his undertaking of these new duties does constitute the required "detriment." [115]
3. UCC: For contracts for the sale of goods, the UCC abolishes the pre-existing duty rule. Section 2-209(1) provides that "an agreement modifying a contract¼needs no consideration to be binding." But there must be good faith, and any no-oral-modification clause must be complied with. [115]
4. Agreement to accept part payment of debt: Some courts apply the pre-existing duty rule to render unenforceable a creditor’s promise not to require payment by his debtor of the full debt. These courts also treat as unenforceable a creditor’s promise to allow the debtor extra time to pay. These courts reason that the debtor already owes the money, and is therefore not promising to do something he was not already required to do. This is known as the rule of Foakes v. Beer. [116 - 118]
a. Modern trend: But the modern trend is to abolish or limit the rule of Foakes v. Beer. For instance, the UCC, in § 2-209(1), says that "an agreement modifying a contract within this article needs no consideration to be binding...." This seems to overrule Foakes v. Beer, and to make a seller’s promise to take partial payment in return for goods enforceable.
b. Disputed debt: Also, the rule of Foakes v. Beer applies only to debts where the parties are in agreement about amount and liability, called "liquidated" debts. If the debtor in good faith and reasonably disputes his liability, or the amount of that liability, then a settlement by which the creditor agrees to take less than he thinks is due is enforceable (even in courts following the traditional Foakes v. Beer rule).
c. Cashing of check tendered as settlement: Debtors sometimes send a check for less that the amount due, and mark it "in full settlement." If the creditor writes "In protest" on the check, but cashes it, the UCC holds that the cashing normally constitutes an acceptance by the creditor of the proposed settlement, and the creditor cannot sue for the balance. § 3-311. [117]
5. Other settlements: Settlements of other kinds of suits (e.g., tort suits) will generally be found to meet the consideration requirement. But if the plaintiff surrenders a claim which he knows is invalid, this will not be consideration, and the other party need not pay. [119 - 120]
IV. ILLUSORY, ALTERNATIVE AND IMPLIED PROMISES
A. Illusory promises: An "illusory" promise is not supported by consideration, and is therefore not enforceable. An illusory promise is a statement which appears to be promising something, but which in fact does not commit the promisor to do anything at all. [124 - 129]
Example: A says to B, "I’ll sell you as many widgets at $4 apiece, up to 1,000, as you choose to order in the next 4 weeks." B answers, "Fine, we’ve got a deal." B then gives A an order for 100 widgets, and A refuses to sell at the stated price because the market has gone up. B’s promise is illusory, since she has not committed herself to do anything. Therefore, A’s promise is not supported by consideration, and is not binding on him.
1. Right to terminate: If the contract allows one or both parties to terminate the agreement at his option, this right of termination might make the promise illusory and the contract therefore unenforceable. [127]
a. Unfettered right: If the agreement allows one party to terminate simply by giving notice at any time, the traditional common law view is that the party with the termination right has not furnished consideration. But the modern trend is to hold that as long as the terminating party has the obligation to give notice (even if this obligation is an implied one), this duty of notice itself furnishes consideration.
B. Implied promises: Courts try to avoid striking down agreements for lack of consideration. One way they do this is by finding that the promisee has made an implied promise in return. [128 - 129]
Example: D, a fashion designer, gives P the exclusive right to sell products made from D’s designs. P promises to pay royalties on any product sold, but the agreement does not expressly require P to make sales. D violates the agreement by letting someone else sell her designs. P sues D, who defends on the grounds that P did not really promise to do anything, and that there is thus no consideration for D’s promise of exclusivity.
Held, for P – P can be impliedly found to have promised to use reasonable efforts to market D’s designs, thus furnishing consideration for D’s counter-promise. [Wood v. Lucy, Lady Duff Gordon].
Chapter 4
PROMISES BINDING WITHOUT CONSIDERATION
I. PROMISES TO PAY PAST DEBTS
A. General rule: Most states enforce a promise to pay a past debt, even though no consideration for the promise is given. Thus promises to pay debts that have been discharged by bankruptcy, or that are no longer collectible because of the statute of limitations, are enforceable in most states. [142 - 143]
1. Writing required: Most states require a signed writing, at least where the promise is to pay a debt barred by the statute of limitations.
II. PROMISE TO PAY FOR BENEFITS RECEIVED
A. 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. [143 - 145]
III. OTHER CONTRACTS BINDING WITHOUT CONSIDERATION
A. Modification of sales contracts: Under the UCC, a modification of a contract for the sale of goods is binding without consideration. See § 2-209. [146] (Example: A contracts to supply 100 widgets to B at $4 a piece. Before shipment, A says, "My costs have gone up; I’ll have to charge you $5." B agrees. Under UCC § 2-209, this modification is enforceable, even though B received no consideration for promising to pay the higher price.)
1. No-oral-modification clauses: But a "no oral modifications" clause in a sales contract will normally be enforced. (Example: On the facts of the above example, if the original contract between A and B said that any modification must be in writing, B’s promise to pay the higher price would be enforceable only if in writing.)
B. Option contracts: Recall that option contracts are sometimes enforceable without consideration. Thus an offer that purports to be enforceable, and that falsely recites that consideration was paid for the irrevocability, will be enforced in most courts. Also, remember that UCC § 2-205 renders enforceable "firm offers" under certain circumstances. [148]
C. Guaranties: In most states, a guaranty (that is, a promise to pay the debts of another) will be enforced without consideration. Generally, the guarantee must be in writing, and must state that consideration has been paid (though the consideration does not in fact have to have been paid). [148 - 149]
IV. PROMISSORY ESTOPPEL
A. General approach: Promises which foreseeably induce reliance on the part of the promisee will often be enforceable without consideration, under the doctrine of promissory estoppel ("P.E."). Rest.2d, § 90’s definition of the doctrine is as follows: "A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." [151]
Example: A promises to pay for B’s college education if B will attend school full time. A intends this to be a gift. B gives up a good job and enrolls in college, incurring a liability of $5,000 for the first year. A then refuses to pay the bill. Under the doctrine of P.E., B would be able to recover at least the value of the lost job and first-year tuition from A, even though A’s promise was a promise to make a gift and was thus not supported by consideration.
1. Actual reliance: The promisee must actually rely on the promise. (Example: On the facts of the above example, B must show that without A’s promise, B would not have quit his job and attended college.) [153]
2. Foreseeable reliance: The promisee’s reliance must also have been reasonably foreseeable to the promisor. [153]
B. Possible applications:
1. Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment. [153]
a. Intra-family promises: The doctrine may be applied where the promise is made by one member of a family to another. (Example: Mother promises to pay for Son’s college education, and Son quits his job. Probably the court will award just the damages Son suffers from losing the job, not the full cost of a college education.)
2. Charitable subscriptions: A written promise to make a charitable contribution will generally be binding without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be enforceable unless the charity relies on the promise to its detriment.) [154]
3. Gratuitous bailments and agencies: If a person promises to take care of another’s property (a "gratuitous bailment") or promises to carry out an act as another person’s agent (gratuitous agency), the promisor may be held liable under P.E. if he does not perform at all. (However, courts are hesitant to apply P.E. to promises to procure insurance for another.) [155]
4. Offers by sub-contractors: Where a sub-contractor makes a bid to a general contractor, and the latter uses the bid in computing his own master bid on the job, the P.E. doctrine is often used to make the sub-bid temporarily irrevocable. [156]
5. Promise of job: If an employer promises an at-will job to an employee, and then revokes the promise before the employee shows up for work, P.E. may apply. [157]
Example: A offers a job to B, terminable by either at any time. B quits his established job. Before B shows up for work, A cancels the job offer. A court might hold that even though B could have been fired at any time once he showed up, B should be able to collect the value of the job he quit from A, under a P.E. theory. [Grouse v. Group Health Plan]
6. Negotiations in good faith: A person who negotiates with another may be found to have a duty to bargain in good faith; if bad faith is found, the court may use P.E. to furnish a remedy. [158 - 161]
Example: A, owner of a shopping mall, promises that it will negotiate a lease for particular space with B, a tenant. B rejects an offer of space from another landlord. A then leases the space to one of B’s competitors for a higher rent. A court might apply P.E., by holding that A implicitly promised to use good faith in the negotiations and breached that promise.
a. Promises of franchise: The use of P.E. to protect negotiating parties is especially likely where the promise is a promise by a national corporation to award a franchise to the other party. (Example: P, a national company that runs a fast food chain, promises B a franchise. B quits his job and undergoes expensive training in the restaurant business. If A then refuses to award the franchise, a court might use P.E. to enforce the promise, at least to the extent of reimbursing B for his lost job and training expenses.)
C. Amount of recovery: Where P.E. is used, the damages awarded are generally limited to those necessary to "prevent injustice." Usually, this will mean that the plaintiff receives reliance damages, rather than the greater expectation measure. In other words, P is placed in the position he would have been in had the promise never been made. [161 - 162]
Example: If A promises B a franchise, and B quits his job in reliance, the court will probably award B the value of the lost job, not the greater sum equaling profits that B would have made from the franchise.
Chapter 5
MISTAKE
I. MISTAKE GENERALLY
A. Definition: A "mistake" is a "belief that is not in accord with the facts." [167 - 168]
1. Mutual mistake: If both parties have the same mistaken belief, the mistake is said to be "mutual."
2. Unilateral: By contrast, if only one party has the mistaken belief, the mistake is "unilateral."
3. Existing fact: The doctrines applicable to mistake apply only to a mistaken belief about an existing fact, not an erroneous belief about what will happen in the future.
Example: If Buyer and Seller both think that a stone is an emerald when it is in fact a topaz, this is a mistake. But if Buyer and Seller both think that the price of oil will remain relatively stable over the next five years, and in fact it goes up by 50% per year, this is not a mistake, since it does not relate to existing fact.
4. Mistake of law: A mistake about a legal principle, according to most courts today, can be a mistake.
II. MUTUAL MISTAKE
A. Three requirements for avoidance: Three requirements must be satisfied before the adversely-affected party may avoid the contract on account of mutual mistake: [169 - 170]
1. Basic assumption: The mistake must concern a basic assumption on which the contract was made. (Examples: The belief that a violin is a Stradavarius when it is in fact a worthless 20th century imitation is a "basic" mistake. But the seller’s belief that a buyer to whom he is selling on credit is credit-worthy is probably a "collateral" rather than a "basic" mistake.)
2. Material effect: The mistake must have a material effect on the "agreed exchange of performance." (Example: If both Buyer and Seller thinks that a violin is a Stradavarius, but it is in fact a Guarnarius worth almost the same amount, the mistake would not have a "material effect" on the agreed exchange.)
3. Risk: The adversely-affected party (the one seeking to avoid the contract) must not be the one on whom the contract has implicitly imposed the risk of the mistake. Often, the contract does not make it clear which party is to bear the risk of a certain type of mistake, so the court allocates this risk in the manner that it finds to be "reasonable" in the circumstances.
B. Special contexts: [170 - 174]
1. Market conditions: Mistakes as to market conditions will generally not be "basic" ones, so the mistaken party will not be able to avoid the contract. (Example: Seller agrees to sell Blackacre to Buyer. Both parties believe that comparable land is worth $5,000 per acre. Buyer can’t avoid the contract if comparable land is really worth $2,000 per acre.) [171]
2. Existence of subject matter: The existence of the subject matter of the contract is usually a "basic" assumption. [171 - 172]
Example: Seller agrees to sell land containing timber to Buyer. Both parties believe that there are 100,000 board feet on the property. In fact, fire has destroyed much of the timber, so that only 20,000 feet remain. This will be a basic assumption, so Buyer can avoid the contract when the facts emerge, whether this is before or after closing.
3. Quality of subject matter: A major mistake as to the quality of the contract’s subject matter is often a "basic" assumption, so the disadvantaged party can avoid the contract. (Example: If both parties believe a violin is a Stradivarius when in fact it is an almost worthless imitation, this will be a mistake on a basic assumption, and Buyer can avoid the contract.) [171 - 172]
4. Minerals in land: In land-sale contracts, the Seller will almost always bear the risk that valuable oil and gas deposits will be found on the land (i.e., Seller cannot avoid the contract when such a discovery is made). [174]
5. Building conditions: When a builder contracts to construct a building on land owned by the other party, the builder will almost always be found to bear the risk of a mistake about soil or other unexpected conditions, so he cannot avoid the contract if construction proves much more difficult than expected. [174]
III. UNILATERAL MISTAKE
A. Modern view: Where the mistake is unilateral, it is more difficult for the mistaken party to avoid the contract than in the mutual mistake situation. The mistaken party must make the same three showings as for mutual mistake (basic assumption, material effect, and risk on the other party), plus must show either that: [176 - 178]
1. Unconscionability: The mistake is such that enforcement of the contract would be unconscionable; or
2. Reason to know: The other party had reason to know of the mistake, or the other party’s fault caused the mistake.
B. Construction bids: The most common type of unilateral mistake occurs where a contractor or sub-contractor makes an error on a bid for a construction job. [177 - 178]
1. Unconscionability: The mistaken contractor will succeed in showing unconscionability only if he shows that not only will he be severely harmed if forced to perform, but also that the other party has not relied on the bid.
Example: Sub-contractor gives contractor a bid of $50,000 for electrical work. Contractor relies on this bid to prepare her own master bid for the entire project. Contractor gets the contract, enters into a sub-contract with Sub-contractor, and Sub-contractor then discovers that his $50,000 bid should have been $75,000, due to a clerical error. The court would probably not find it unconscionable to hold Sub-contractor to the contract, because Contractor has relied on the $50,000 sub-bid.
2. "Snapping up" of offer: Alternatively, the mistaken contractor may try to show that the other party either knew or had reason to know of the error. (Example: On the above example, if Sub-contractor can show that Contractor should have known that there probably was a mistake, because Sub-contractor’s bid was much lower than all other sub-bids, the court is likely to let Sub-contractor avoid the contract based on unilateral mistake.)
IV. DEFENSES AND REMEDIES
A. Negligence: Where a party seeks to avoid the contract because of his own (or both parties’) mistake, the fact that the mistake was due to his negligence will ordinarily not prevent relief.
1. Failure to read writing: But if the mistake stems from a party’s failure to read the contract, he will not normally be entitled to rescind. [180]
B. Remedies: There are two main remedies that may be appropriate for mistake: [180 - 181]
1. Avoidance: The most common remedy is avoidance of the contract (sometimes called "rescission"). Here, the court treats the contract as if it has never been made, and attempts to return each party to the position he was in just before the contract was signed. (Generally, restitution will be ordered – each party will return the benefits he has received from the other.)
2. Reliance: Alternatively, the court may award reliance damages, especially where restitution/ avoidance would not work because one party has suffered loses but the other has not received benefits.
V. REFORMATION AS REMEDY FOR ERROR IN EXPRESSION
A. Generally: If the parties orally agree on a deal, but mistakenly prepare and execute a document which incorrectly reflects the oral agreement, either party may obtain a court order for reformation (i.e., a re-writing of the document). [181 - 182]
Example: Seller orally agrees to sell Blackacre to Buyer for $100,000. Their oral deal includes a provision that Buyer will also assume an existing mortgage of $50,000. The written agreement neglects the assumption provision. At either party’s request, the court will reform the document so that it includes the assumption provision.
Chapter 6
PAROL EVIDENCE AND INTERPRETATION
I. PAROL EVIDENCE RULE GENERALLY
A. What the rule does: The parol evidence rule limits the extent to which a party may establish that discussions or writings prior to the signed written contract should be taken as part of the agreement. In some circumstances, the rule bars the fact-finder from considering any evidence of certain preliminary agreements that are not contained in the final writing, even though this evidence might show that the preliminary agreement did in fact take place and that the parties intended it to remain part of their deal despite its absence from the writing. [186 - 187]
II. TOTAL AND PARTIAL INTEGRATIONS
A. Definitions: [[187]
1. "Integration": A document is said to be an "integration" of the parties’ agreement if it is intended as the final expression of the agreement. (The parol evidence rule applies only to documents which are "integrations," i.e., final expressions of agreement.)
2. Partial integration: A "partial" integration is a document that is intended to be final, but that is not intended to include all details of the parties’ agreement.
3. Total integration: A "total" integration is a document that is not only a final expression of agreement, but that is also intended to include all details of the agreement.
B. Statement of rule: The "parol evidence rule" is in fact two sub-rules: [187 - 188]
1. Partial integration: When a writing is a partial integration, no evidence of prior or contemporaneous agreements or negotiations (oral or written) may be admitted if this evidence would contradict a term of the writing.
2. Total integration: When a document is a total integration, no evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or add to the writing.
3. Summary: Putting the two sub-parts together, the parol evidence rule provides that evidence of a prior agreement may never be admitted to contradict an integrated writing, and may furthermore not even supplement an integration which is intended to be complete.
4. Prior writings and oral agreements: The parol evidence rule applies to oral agreements and discussions that occur prior to a signing of an integration. It also applies to writings created prior to an integration (e.g., draft agreements that were not intended to be final expressions of agreement). [188]
5. Contemporaneous writing: If an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the writing, and will not be subject to the parol evidence rule.
6. Subsequent agreements: The parol evidence rule never bars consideration of subsequent oral agreements. That is, a written contract may always be modified after its execution, by an oral agreement.
a. "No oral modifications" clause: However, if the written document contains a "no oral modification" clause, that clause will usually be enforced by the court, unless the court finds that the defendant waived the benefits of that clause.
C. UCC: Section 2-202 of the UCC essentially follows the common-law parol evidence rule as summarized above. [192 - 193]
III. ROLES OF JUDGE AND JURY
A. Preliminary determinations made by judge: Nearly all courts hold that the judge, not the jury, decides: (1) whether the writing was intended as an integration; (2) if so, whether the integration is "partial" or "total"; and (3) whether particular evidence would supplement the terms of a complete integration. [195]
1. Conflicting views: Courts disagree about how the judge should make these decisions. Two extreme positions are: (1) the "four corners" rule, by which the judge decides whether there is an integration, and whether it is total or partial, by looking solely at the document; and (2) the "Corbin" view, by which these questions are to be answered by looking at all available evidence, including testimony, to determine the actual intention of the parties. [195 - 197]
2. Merger clause: Most contracts contain a "merger" clause, i.e., a clause stating that the writing constitutes the sole agreement between the parties. The presence of such a clause makes it more likely that the court will find the writing to have been intended as a total integration (in which case not even consistent additional prior oral or written terms may be shown). [195]
IV. SITUATIONS WHERE PAROL EVIDENCE RULE DOES NOT APPLY
A. Fraud, mistake or other voidability: Even if a writing is a total integration, a party may always introduce evidence of earlier oral agreements to show illegality, fraud, duress, mistake, lack of consideration, or any other fact that would make the contract void or voidable. In other words, the parol evidence rule never prevents the introduction of evidence that would show that no valid contract exists or that the contract is voidable. [198]
Example: In order to induce Buyer to buy a rental property, Seller lies about the profitability of the property. The parties then sign a sale contract that contains a standard "merger" clause, reciting that the contract constitutes the sole agreement between the parties. The parol evidence rule will not prevent Buyer from showing that Seller made fraudulent misrepresentations to induce him to enter into the contract.
1. Particular disclaimer: But if the contract contains a very specific statement that no representations of a particular sort have been made, some courts prevent a party from showing that the disclaimer is false.
Example: On the facts of the above example, suppose that the contract stated, "Seller has made no representations or warranties regarding the profitability of the property, and Buyer has relied solely on his own investigation as to profitability." Some courts – though probably a minority – would prohibit Buyer from showing that Seller in fact made fraudulent misrepresentations about profitability.
B. Existence of a condition: If the parties orally agree on a condition to the enforceability of the contract, or to the duty of one of them, but this condition is then not included in the writing, courts generally allow proof of this condition despite the parol evidence rule. [199 - 200]
Example: A and B agree that A will sell a patent to B for $10,000 if C, an engineer advising B, approves. A and B sign a written agreement that seems to be complete, except that the contract does not mention C’s approval. Nearly all courts would allow B to prove that the oral agreement regarding approval was in fact made.
C. Collateral agreements: An oral agreement that is supported by separate consideration may be demonstrated, even though it occurred prior to what seems to be a total integration. [200]
Example: In a written agreement that seems to be a complete expression of the parties’ intent, A promises to sell B a particular automobile. As part of the transaction, the parties orally agree that B may keep the car in A’s garage for one year for $15 per month. Because the alleged oral agreement is supported by separate consideration – the $15 per month – B may prove that the oral agreement occurred even though there is an integrated writing that does not include that agreement.
D. Subsequent transactions: Recall that the parol evidence rule never bars evidence that after the signing of the writing, the parties orally or in writing agreed to modify or rescind the writing. [200]
V. INTERPRETATION
A. Modern view: Most courts today allow parties to introduce extrinsic evidence to aid in the interpretation of a contract, even if the writing is an integration. That is, parties are generally allowed to introduce evidence of what they subjectively thought the terms in a writing meant, even if the writing is an integration. [201 - 203]
B. Maxims of interpretation: There are a number of "maxims" that courts use in deciding which of two conflicting interpretations of a clause should be followed: [203]
1. Primary purpose: If the "primary purpose" of the parties in making the contract can be ascertained, that purpose is given great weight.
2. All terms made reasonable, lawful and effective: All terms will be interpreted, where possible, so that they will have a reasonable, lawful and effective meaning.
3. Construed against drafter: An ambiguous term will be construed against the person who drafted the contract.
4. Negotiated terms control standard terms: A term that has been negotiated between the parties will control over one that is part of a standardized portion of the agreement (i.e., the fine print "boilerplate"). (Example: A clause that has been typewritten in as a "rider" to a pre-printed form contract, or a clause that has been handwritten onto a typewritten, agreement, will have priority.)
VI. TRADE USAGE, COURSE OF PERFORMANCE, AND COURSE OF DEALING
A. Definitions: There are three special sources which are used in interpreting the terms of a contract. These are especially important in sales contracts, since the UCC gives these sources specific treatment: [204 - 206]
1. Course of performance: A "course of performance" refers to the way the parties have conducted themselves in performing the particular contract at hand. (Example: The contract calls for repeated deliveries of "highest grade oil." Evidence as to the quality of oil delivered and accepted in the first installments would be admissible as a course of performance to help determine whether oil delivered in a later installment met the contract standard.)
2. Course of dealing: A "course of dealing" refers to how the parties have acted with respect to past contracts.
3. Usage of trade: A "usage of trade" is "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question." UCC § 1-205(2). Thus the meaning attached to a particular term in a certain region, or in a certain industry, would be admissible.
B. Used to interpret even a complete integration: Course of dealing, course of performance, and usage of trade may be introduced to help interpret the meaning of a writing even if the writing is a complete integration. That is, these sources are not affected by the parol evidence rule – even though a writing is found to be the final and exclusive embodiment of the agreement, it may still be explained by evidence from these three sources. [205 - 206]
1. Contradiction of express terms: But these customs may not be used to contradict the express terms of a contract. See UCC § 2-208(2). However, if these customs can reasonably be harmonized with the writing, then the customs may be shown and may become part of the contract.
C. Priorities: Where more than one of these types of customs is present, the most specific pattern controls. Thus an express contractual provision controls over a course of performance, which controls over a course of dealing, which controls over a trade usage. UCC §§ 2-208(2) and 1-205. [206]
VII. OMITTED TERMS SUPPLIED BY COURT
A. Generally: Courts will generally supply a missing term (that is, a term as to which the contract documents are silent) if it is apparent that the parties wanted to bind themselves, and there is a reasonable way for the court to go about formulating the missing term. Here are some examples: [206]
1. Good faith: The court will normally supply a term imposing on each party a "duty of good faith." (Example: Where A agrees to have exclusive marketing rights to a design or invention produced by B, A will be found to have an implied duty to make good faith efforts to promote B’s product.) [207]
2. Duty to continue business: In requirement and output contracts, generally there will not be a duty to continue the business (assuming the owner acted in good faith when she closed it down.) [207 - 208]
3. Termination of dealership or franchise: Some but not all courts will supply a term to prevent one party from arbitrarily terminating a franchise or dealership arrangement. Sometimes, the court will refuse to allow termination except for cause. More commonly, courts will find an implied requirement of a reasonable notice prior to termination. [208]
4. Termination of employment contract: A strong minority of courts now find that an at-will employment contract contains an implied term prohibiting the employer from terminating the arrangement in bad faith. In these courts, an employer may not terminate an at-will arrangement in order to deprive the employee of a pension, to retaliate for the employee’s refusal to commit wrongdoing at the employer’s urging, or for other bad faith reasons. [208 - 211]
Chapter 7
CONDITIONS, BREACH AND OTHER ASPECTS OF PERFORMANCE
I. CONDITIONS GENERALLY
A. Definition of "condition": An event which must occur before a particular performance is due is called a "condition" of that performance. [215]
Example: Seller promises to ship Buyer 100 widgets. Buyer promises to pay for the widgets within 30 days of receipt. The parties agree that if the widgets don’t meet Buyer’s specs, he
may return them and he will not have to pay for them. It is a condition of Buyer’s duty of payment that the widgets be shipped, and that they meet his specifications. Buyer’s duty is said to be conditional on the shipment of satisfactory widgets.
1. Concurrent: A concurrent condition is a particular kind of condition precedent which exists only when the parties to a contract are to exchange performances at the same time. (Example: A promises to deliver his car to B on a certain date, at which time B is to pay for the car. Delivery and payment are "concurrent conditions," since performance by both is to be rendered simultaneously.) Concurrent conditions are found most frequently in contracts for the sale of goods and contracts for the conveyance of land.
2. Express and constructive conditions: If the parties explicitly agree that a duty is conditional upon the happening of some event, that event is an "express" condition. If, instead, the happening of an event is made a condition of a duty because a court so determines, the condition is a "constructive" one (or a condition "implied in law"). [217 - 218]
Example of express condition: A is to ship widgets to B, and B agrees to either return them if they don’t satisfy her, or pay for them. The contract states, "B’s duty to pay for the widgets shall be conditional upon her being satisfied with them." This is an express condition.
Example of constructive condition: Same facts as above example – A contracts to ship widgets to B, and B agrees to either return the widgets as unsatisfactory, or pay for them. No language of condition is used in the agreement. As a matter of common law (or the UCC), the court will impose a constructive condition: B’s duty to pay for the widgets will be constructively conditioned upon her receiving them and being satisfied with them.
a. Significance of distinction: The reason we distinguish between express and constructive conditions is that strict compliance with express conditions is ordinarily necessary, but merely substantial compliance is usually required to satisfy a constructive condition.
B. Distinction between conditions and promises: The fact that an act is a condition does not by itself make it also a promise. If the act is a condition on the other party’s duty, and the act fails to occur, the other party won’t have to perform. If the act is a promise, and it doesn’t occur, the other party can sue for damages. But the two don’t automatically go together. [218 - 220]
Example: Landlord promises Tenant that Landlord will make any necessary repairs on the leased premises, provided that Tenant gives him notice of the need for such repairs. Tenant’s giving notice of the needed repairs is an express condition to Landlord’s duty to perform the repairs. But such notice is not a promise by Tenant.
Therefore, if Tenant does not give the notice, he has not committed any breach of contract, but a condition to Landlord’s duty has failed to occur. Landlord is relieved from having to make the repairs, but cannot sue Tenant for breach.
1. Distinguishing: To determine whether a particular act is a condition, a promise, or both, the main factor is the intent of the parties. Words like "upon condition that" indicate an intent that the act be a condition; words like "I promise" or "I warrant" indicate a promise (though as described below, failure to keep the promise will also generally constitute the failure of a constructive condition.)
II. EXPRESS CONDITIONS
A. Strict compliance: Strict compliance with an express condition is ordinarily required. [221 - 224]
Example: A contracts to sell his house to B for $100,000. The contract provides that B’s duty to consummate the purchase is "conditional upon B’s receiving a mortgage for at least $80,000 at an interest rate no higher than 9%." If the best mortgage B is able to obtain, after reasonable effort, is at 9.25%, the court will probably hold that B is not obligated to close, since the condition is an express one, and strict compliance with express conditions is ordinarily required.
1. Avoidance of forfeiture: However, courts often avoid applying the "strict compliance" rule where a forfeiture would result. A forfeiture occurs when one party has relied on the bargain (e.g., by preparing to perform or by making part performance), and insistence on strict compliance with the condition would cause him to fail to receive the expected benefits from the deal.
Example: A contracts to build a house for B on land owned by B, for a price of $100,000. The contract provides that "B’s duty to pay for the house is expressly conditional upon the finished house exactly matching the specifications of B’s architect." A builds the house in general accordance with the specifications, but the living room is six inches shorter than shown on the plans, a deviation which does not noticeably affect the market value of the house.
Despite the rule that strict compliance with an express condition is ordinarily required, the court would probably hold that strict enforcement here would amount to a forfeiture, and would therefore hold that the condition was satisfied despite the trivial defect.
a. Excuse of condition: Alternatively, a court may find that the fulfillment of the express condition is "excused" where extreme forfeiture would occur. This will only be done, however, if the damage to the other party’s expectations from non-occurrence of the condition is relatively minor. (Example: On the facts of the above example, the damage to B’s expectations from the short living room is very small, so the court would probably excuse the non-occurrence of the condition.)
B. Satisfaction of a party: If a contract makes one party’s duty to perform expressly conditional on that party’s being satisfied with the other’s performance, the court will usually presume that an objective standard of "reasonable" satisfaction was meant. [224 - 225]
1. Subjective: But it is the intent of the parties that controls here: If the parties clearly intend that one party’s subjective satisfaction should control, the court will honor that intent. This is likely to be true, for instance, where the bargain clearly involves the tastes of a person. Here, good-faith but unreasonable dissatisfaction will still count as the non-occurrence of the condition.
C. Satisfaction of third person: If the duty of performance is expressly conditioned on the satisfaction of some independent third party (e.g., an architect or other professional), the third party’s subjective judgment usually controls. But this judgment must be made in good faith. [225]
III. CONSTRUCTIVE CONDITIONS
A. Use in bilateral conditions: Remember that a constructive condition is a condition which is not agreed upon by the parties, but which is supplied by the court for fairness. The principal use of constructive conditions is in bilateral contracts (where each party makes a promise to the other). [227 - 228]
1. General rule: Where each party makes one or more promises to the other, each party’s substantial performance of his promise is generally a constructive condition to the performance of any subsequent duties by the other party.
Example: Contractor agrees to build a house for Owner for $100,000. The contract provides that Owner will pay $10,000 upon completion of the foundation, and provides a schedule on which the work is to proceed. No language of condition is used anywhere in the document. Contractor builds the foundation on schedule, but Owner without cause refuses to pay the $10,000 charge.
Owner’s fulfillment of his promise – to pay $10,000 – is a constructive condition of Contractor’s duty to continue with the work. Therefore, Contractor does not have to continue with the work until Owner pays the $10,000, even though the contract does not expressly make Contractor’s duty of continuation conditional upon Owner’s making the first payment. The court simply supplies this "constructive condition" for fairness, reasoning that Contractor shouldn’t have to keep doing work if Owner hasn’t been keeping his part of the bargain.
B. Order of performance: Be careful to interpret the contract to determine the order in which the parties’ performances are to occur. [228 - 232]
1. Intent: The parties’ intent always controls. Where the intent is not clear, the court supplies certain presumptions, as discussed below.
2. Periodic alternating: The parties may agree that their performances shall alternate. This is true of most installment contracts. Here, a series of alternating constructive conditions arises: each party’s obligation to perform his duty is constructively conditioned on the other’s having performed the prior duty. It’s therefore important to decide who was the first to fail to substantially perform, since that failure of substantial performance is the non-occurrence of a constructive condition of the other party’s subsequent duty. [228 - 229]
3. No order of performance agreed upon: If the parties do not agree upon the order of performance, there are several general presumptions courts use: [230 - 231]
a. Only one party’s work requires time: Where the performance of one party requires a period of time, and the other’s does not, the performance requiring time must ordinarily occur first, and its performance is a constructive condition to the other party’s performance. This applies to contracts for services – a party who is to perform work must usually substantially complete the work before he may receive payment if the parties do not otherwise agree.
b. Sales of goods and land: If each party’s promised performance can occur at the same time as the other’s, the court will normally require that the two occur simultaneously, in which case the two performances are "concurrent conditions." This applies to sales of goods and land.
i. Tender of performance: Courts express this by saying that where the two performances are concurrent, each party must "tender" (i.e., conditionally offer) performance to the other. See UCC §§ 2-507(1) and 2-511(1).
Example: Seller contracts to sell Blackacre to Buyer. The closing is to take place on July 1, at which time Seller will deliver a deed to the property free and clear of liens, and Buyer will deliver a certified check for $100,000. Since each performance can occur simultaneously, the court will presume that simultaneity is what the parties intended.
Therefore, on July 1, Seller’s duty to deliver the deed will be conditional upon Buyer’s coming forward with the certified check, and Buyer’s duty to come forward with the check will be conditional upon Seller’s tendering the deed. If Seller fails to show up with a proper deed, Buyer will not be able to sue Seller for breach unless Buyer shows that he tendered the certified check, i.e., had the check in his possession and arrived at the place of closing with it.
C. Independent or dependent promises: In the normal bilateral contract, the court will presume that the promises are in exchange for each other. That is, the court will treat the promises as being mutually dependent, so that each party’s duty is constructively conditional upon the other’s substantial performance of all previous duties. [232 - 233]
1. Independent promises: But in a few situations, circumstances may indicate that the promises are intended to be independent of each other. Here, the court will not apply the theory of constructive conditions.
a. Real estate leases: For instance, promises in the typical real estate lease are generally construed as being independent of each other. Thus a tenant’s promise to pay rent, and a landlord’s return-promise to make repairs, are treated as independent, so if the landlord does not make the repairs, the tenant cannot refuse to pay the rent (though he can of course sue for damages). But a growing minority of courts have rejected this rule of independence.
D. Divisible contracts: A divisible contract is one in which both parties have divided up their performance into units or installments, in such a way that each part performance is roughly the compensation for a corresponding part performance by the other party. If a contract is found to be divisible, it will for purposes of constructive conditions be treated as a series of separate contracts. [233 - 236]
1. Significance: If the contract is found to be divisible, here’s the significance: if one party partly performs, the other will have to make part payment. If the contract is not divisible, then the non-breaching party won’t have to pay anything at all (at least under the contract).
Example: In a single document, Contractor agrees to build a deck for Owner and renovate Owner’s kitchen. The contract lists a price of $30,000 for the renovation and $20,000 for the deck. Payment on the entire contract is due when all work is done. Contractor completes the deck but never even starts on the kitchen.
If the contract is found to be divisible into two parts, Owner will be required to pay $20,000 for the deck even though he never gets the kitchen. If the contract is not divisible, Contractor will be found to not have substantially performed the whole, and he will not be able to recover on the contract for the work on the deck (though he will be able to recover the fair value of what he has done on a quasi-contract or restitution theory).
2. Test for divisibility: A contract is divisible if it can be "apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents.¼" (Example: On the facts of the above example, a court would probably find that the parties implicitly agreed that $20,000 would be an agreed equivalent for the deck and $30,000 for the kitchen. Therefore, the court would probably find that the contract was divisible.) [233 - 236]
a. Employment contracts: Most employment contracts are looked on as being divisible. Usually, the contract will be divided into lengths of time equal to the time between payments. Thus if the employee is paid by the week, the contract will be divided into one-week "sub-contracts"; payment for a particular week will be constructively conditioned only on the employee’s having worked that week, not on his having fulfilled the entire contract.
b. Fairness: The court will not find a contract to be divisible if this would be unfair to the non-breaching party. For instance, even though the contract recites separate prices for different part performances, requiring the non-breaching party to pay the full stated price for the part performance received may deprive him of fair value.
Example: A construction contract requires Owner to pay one-tenth of the contract price for each of 10 weeks of estimated work. The first week, Contractor does everything scheduled for that week, but the scheduling is very light, consisting mainly of site preparation. If Contractor breaches after the first week, the court will probably not find the contract divisible, since a finding of divisibility would require Owner to pay one-tenth of the contract price for performance that represents less than one-tenth of the full job.
IV. SUBSTANTIAL PERFORMANCE
A. Doctrine generally: Recall that it is a constructive condition to a party’s duty of performance that the other party have made a "substantial performance" of the latter’s previous obligations. In other words, if one party fails to substantially perform, the other party’s remaining duties do not fall due. [238]
B. Suspension followed by discharge: If a party fails to substantially perform, but the defects could be fairly easily cured, the other party’s duty to give a return performance is merely suspended; the defaulter then has a chance to cure his defective performance. If, on the other hand, the defect is so substantial that it cannot be cured within a reasonable time, or if the defaulter fails to take advantage of a chance to cure, the other party is then completely discharged, and may also sue for breach. [238]
C. Factors regarding materiality: Here are some factors that help determine whether a breach is material (i.e., whether the breaching party has nonetheless substantially performed): [239 - 241]
1. Deprivation of expected benefit: The more the non-breaching party is deprived of the benefit which he reasonably expected, the more likely it is that the breach was material. [239]
2. Part performance: The greater the part of the performance which has been rendered, the less likely it is that a breach will be deemed material. Thus a breach occurring at the very beginning of the contract is more likely to be deemed material than the same "size" breach coming near the end. [239]
3. Likeliness of cure: If the breaching party seems likely to be able and willing to cure, the breach is less likely to be material than where cure seems impossible. [240]
4. Willfulness: A willful (i.e., intentional) breach is more likely to be regarded as material than a breach caused by negligence or other factors. [240]
5. Delay: A delay, even a substantial one, will not necessarily constitute a lack of substantial performance. The presumption is that time is not "of the essence" unless the contract so states, or other circumstances make the need for promptness apparent. (Even if the contract does contain a "time is of the essence" clause, a short delay will not be deemed "material" unless the circumstances show that the delay seriously damaged the other party.) [240 - 241]
D. Material breach in contracts for the sale of goods: The UCC imposes special rules governing what constitutes substantial performance by a seller of goods (and thus when a buyer can reject the goods). [241 - 249]
1. "Perfect tender" rule: UCC § 2-601 says that as long as the contract does not involve installments (i.e., multiple deliveries), "Unless otherwise agreed ... if the goods or tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest." On its face, this section seems to impose the "perfect tender" rule – that is, it seems to give the buyer the right to cancel the contract, and refuse to pay, if the goods deviate from the contract terms in any respect, no matter how slight. [241]
a. Not so strict: But in reality, there are loopholes in this "perfect tender" rule. Courts usually only allow buyers to reject the seller’s delivery if the defect is a substantial one. Also, the buyer must follow strict procedures for rejecting the delivery, and the seller generally has the right to "cure" the defect. See below.
2. Mechanics of rejection: The buyer may "reject" any non-conforming delivery from the seller. As noted, in theory this right exists if the goods deviate in any respect from what is required under the contract. But the buyer’s right of rejection is subject to some fairly strict procedural rules: [245 - 246]
a. Time: Rejection must occur within a "reasonable time" after the goods are delivered. The buyer must give prompt notice to the seller that buyer is rejecting. § 2-602(1).
b. Must not be preceded by acceptance: The buyer can only reject if he has not previously "accepted" the goods. He will be deemed to have "accepted" them if either: (1) after a reasonable opportunity to inspect, buyer has indicated to the seller that the goods are conforming or that he will keep them despite non-conformity; or (2) buyer fails to make a timely rejection (though this cannot happen until buyer has had a reasonable inspection opportunity); or (3) buyer does "any act inconsistent with the seller’s ownership" (e.g., using the goods as part of a manufacturing process). See § 2-606(1).
3. Revocation of acceptance: Even if the buyer has "accepted" the goods, if he then discovers a defect he may be able to revoke his acceptance. If he revokes, the result is the same as if he had never accepted – he can throw the goods back on the seller and refuse to pay. [246]
a. Revocation vs. rejection: The buyer who wants to revoke an acceptance must make a stronger showing of non-conformity than the buyer who rejects – the revoker must show that the non-conformity "substantially impairs" the value of the goods, whereas the rejecter must merely show that the goods fail to conform "in any respect." On the other hand, a buyer probably gets more time to revoke than to reject.
4. Cure: Both the buyer’s right to reject and his right to revoke an acceptance are subject to the seller’s right to cure the non-conformity. See § 2-508(1). [247 - 248]
a. Beyond contract: Even after the time for performance under the contract has passed, the seller has a limited right to cure: he gets additional time to cure once the time for delivery under the contract has passed, if he reasonably thought that either: (1) the goods, though non-conforming, would be acceptable to the buyer; or (2) the buyer would be satisfied with a money allowance. See UCC § 2-508(2).
5. Installment contracts: The Code is more lenient to sellers under installment contracts (i.e., contracts calling for several deliveries) than in single delivery contracts. In the case of an installment contract, "the buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured...." § 2-612(2). So a slight non-conformity in one installment does not allow the buyer to reject it, as he could in a single-delivery contract. [245]
a. Cancellation of whole: The buyer has the right to cancel the entire installment contract if the defect is grave enough: cancellation of the whole is allowed if the defective installment "substantially impairs the value of the whole contract." § 2-612(3).
Example: Seller contracts to deliver a computer, as well as a customized disk drive to work in the computer. Buyer’s application requires both parts to work successfully. Seller delivers a defective disk drive and fails to cure. Buyer can probably cancel the whole contract, since the defect in the disk drive substantially impairs the value of the whole contract, including the computer, to him.
V. EXCUSE OF CONDITIONS
A. Introduction: In some instances, the non-occurrence of a condition is "excused," so that the other party nonetheless must perform. [251]
B. Hindrance: Where one party’s duty is conditional on an event, and that same party’s wrongful conduct prevents the occurrence of the condition, the non-occurrence of the condition is excused, and the party must perform despite the non-occurrence. [251 - 253]
1. Implied promise of cooperation: Courts sometimes express this concept by saying that each party makes the other an "implied promise of cooperation." One consequence of a breach of this implied promise is that the non-occurrence of the condition to that party’s duty is excused.
Example: P agrees to live with D, his grandmother, and to care for her for the rest of her life, in return for D’s promise to leave P $100,000 in D’s will. P lives with D for seven years, at the end of which D unreasonably forces P to leave the house. Five years later, D dies. P will be able to recover the $100,000, even though he did not live with D for the rest of her life. The reason is that the non-occurrence of the condition – caring for D for the rest of her life – was excused by D’s failure to cooperate.
C. Waiver: A party who owes a conditional duty may indicate that he will not insist upon the occurrence of the condition before performing. A court will often take the party at his word, and enforce that party’s willingness to forego the benefit of the condition. In this event, the party is said to have waived the condition. [253 - 257]
1. Minor conditions: Generally, the court is much more likely to find that the condition is waived if it is a minor one, such as a procedural or technical one. [255]
2. Continuation of performance: If a promisor continues his own performance after learning that a condition of duty has failed to occur, his conduct is likely to be found to operate as a waiver of the condition. [255]
Example: Insurer insures Owner’s house for fire; Insurer’s duty to pay a claim is expressly conditional upon notice by Owner within seven days of any fire. Owner gives notice three weeks after a fire. Insurer sends an adjuster, attempts to make a settlement, and otherwise behaves as if it is not insisting on strict compliance with the notice provision. This continuation of performance will probably be found to be a waiver of the timely-notice condition.
a. Right to damages not lost: When a party continues his own performance after breach, or otherwise waives a condition, he has not necessarily lost his right to recover damages for breach of the condition. [256]
VI. REPUDIATION AND PROSPECTIVE INABILITY TO PERFORM
A. General effect of prospective breach: If a party indicates that he will subsequently be unable or unwilling to perform, this will act as the non-occurrence of a constructive condition, in the same way as a present material breach does. In other words, the other party has the right to suspend his own performance. [260]
1. Distinction: Where the party indicates that he will refuse to perform, this is called an "anticipatory repudiation" of the contract. If he indicates that he would like to perform but will be unable to do so, this is an indication of "prospective inability to perform" but not repudiation; however, the consequence is still that the other party may suspend performance. [260]
B. Insolvency or financial inability: If a party is insolvent or otherwise financially incapable of performing, this will entitle the other party to stop performance.
1. Cancellation: If the prospective inability or unwillingness to perform is certain or almost certain, the other party can not only suspend her performance, but can actually cancel the contract. But where it is not so clear whether the first party will be unable or unwilling to perform, the other party may only suspend performance.
C. Right to adequate assurance of performance: If a party’s conduct or words don’t constitute an outright repudiation, but merely suggest that that party may not perform, the other party may demand assurances that the first party will perform. If the first party fails to provide these assurances, this failure will itself be considered a repudiation, entitling the innocent party to cancel. [261 - 264]
1. UCC: Thus UCC § 2-609(1) provides that "when reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may, if commercially reasonable, suspend any performance for which he has not already received the agreed return." [261]
Example: Buyer places two orders (separate contracts) with Seller, one for shipment on July 1 and the other for shipment on September 1. Each shipment is to be paid for within 30 days. Seller ships the first order promptly, and by August 28 the bill is almost one month past due.
Seller may in writing demand assurances that Buyer will pay for both the first order and the second order in a timely fashion. If Buyer fails to respond, Seller may cancel the second contract, and sue for breach of both. But if Buyer furnishes reasonable assurances – as by demonstrating that non-payment of the first invoice was a clerical omission, and immediately rectifying it – Seller must reinstate the second contract.
Chapter 8
ANTICIPATORY REPUDIATION AND OTHER ASPECTS OF BREACH
I. ANTICIPATORY REPUDIATION
A. General rule: If a party makes it clear, even before his performance is due, that he cannot or will not perform, he is said to have anticipatorily repudiated the contract. All states except Massachusetts allow the victim of such an anticipatory repudiation to sue before the repudiator’s time for performance has arrived. This is sometimes called the rule of Hochster v. De La Tour. [271]
Example: Star promises Movie Co. that Star will act in Movie Co.’s movie, shooting for which is scheduled to commence in the U.S. on July 1. On June 1, Star announces to the press that he is going to live abroad for a year beginning the next day and will not do the movie. Under the rule of Hochster v. De La Tour, Movie Co. can sue Star for breach as soon as he issues his press statement; Movie Co. need not wait until July 1, the time at which Star’s performance is due.
B. What constitutes repudiation: An anticipatory repudiation occurs whenever a party clearly indicates that he cannot or will not perform his contractual duty. [272 - 274]
1. Statement: Sometimes, the repudiation takes the form of a statement by the promisor that he intends not to perform. (The above example illustrates this.) But the fact that the promisor states vague doubts about his willingness or ability to perform is not enough. (Example: On facts of above example, Star says, "I’m feeling pretty exhausted, so I don’t know if I’ll be able to perform the role, but let’s hope I’ll feel well enough." This would probably not be an anticipatory repudiation, because it is equivocal.) [272 - 273]
2. Voluntary actions: The repudiation may occur by means of an act by the promisor that makes his performance impossible. (Example: Seller contracts to convey Blackacre to Buyer, the closing to take place on July 1. On June 15, Seller conveys Blackacre to X. This is an anticipatory repudiation by action, and Buyer may sue immediately, rather than waiting until July 1.) [273]
3. Prospective inability to perform: Something analogous to anticipatory repudiation occurs when it becomes evident that the promisor will be unable to perform, even though he desires to do so. When this occurs, all courts agree that the promisee may suspend her performance. But courts are split on whether the promisee may bring an immediate suit for breach, as she is allowed to do where the repudiation is a statement or a voluntary act. [273]
a. Insolvency: The promisor’s insolvency usually is not considered to be the type of anticipatory repudiation that allows the other party to sue immediately for breach. But the promisee may request assurances of performance, and if the promisor can’t give these (e.g., he can’t show that he will become sufficiently solvent to perform), then an immediate suit for breach is allowed.
II. OTHER ASPECTS OF REPUDIATION
A. Repudiation after performance is due: Similar rules apply where a party’s time for performance becomes due, and the party then repudiates (i.e., he indicates by word or deed that he cannot or will not perform). Here, even though the repudiation is not "anticipatory," the other party may cancel the contract and bring an immediate suit for breach, just as in the anticipatory situation. [275]
B. Retraction of repudiation: A repudiation (whether anticipatory or occurring after the time for performance) may normally be retracted until some event occurs to make the repudiation final.
1. Final acts: In most courts, the repudiator’s time to retract ends as soon as the other party: (1) sues for breach; (2) changes her position materially in reliance on the repudiation; or (3) states that she regards the repudiation as final. See UCC § 2-611(1). [276]
C. Mitigation required: After a rep