Chapter 2 The Basis of Contractual Obligation: Mutual Assent and Consideration

Classical Contract Law: Preference for clear rules (legal formalism)

Traditional Contract Law: Indifferent to moral or social policy except that contracts should be kept(pacta sunt servanda).

A. Mutual Assent: A contract requires that there is mutual assent to exchange and a consideration. You can have a contract even though no bargaining took place between the parties. (EX: Feldman v. Google). The doctrines of restitution and promissory estoppel involve liability between parties even though no contact has been formed or contemplated between parties. 1. How can a party be relived of an Obligation? If the other party has engaged in some form of i. bargaining misconduct ii. fraud iii. duress iv. undue influence v. Or if circumstances that existed at the time of the contract have changed sufficiently to justify nonperformance. 1. Intention to be Bound: The Objective Theory of Contract: Many states believe that in order to form a valid contract that you must have a meeting of the minds between the two entities. Meeting of minds is required: This view is considered subjective because the actual intention of the party rather than the conduct determines the legal obligation that is required. If manifestation of mutual assent: This view is considered objective because it looks at the conduct of the parties from the view of a reasonable person rather than the subjective intentions.

Ray v. William G. Eurice & Bros., Inc.

Court: Maryland Court of Appeals Procedural History: Started in the circuit court of Baltimore County by the owners of the unimproved lot against the construction company for breach of contract to build house ruled for the defendants and the plaintiffs (Ray appealed). Facts: Plaintiff decided to build a house and entered into negotiations with a number of builders and the defendant was chosen. The contract was entered into. Defendant made changes which were marked in green and the Plaintiff drew up their own specifications and sent them to the Defendant who said that they would have their lawyers draw up a contract. Defendant claims that the contract drawn up by Plaintiffs attorney was to be based on the three-page proposed contract and that the five page specifications were not physically attached to the contract when signed. Plaintiff states that while the specifications may not have been physically attached, the five page specifications were present and discussed at the signing.

Issue: Whether there is a legally binding contract even when there is a unilateral misconception between the two parties about the specific specifications of the building of the house. Holding: Yes, the company wrongfully breached their contract due to a one sided misunderstanding. The court first thought that due to the fact that there was not a meeting of the minds because of a misunderstanding of the specifications caused the contract to be invalid. The Court of Appeals figured differently by finding that if the mistake was unilateral the contract specifically specified which specifications where to be used. The defendant even signed the back of the specifications. The court ruled that a unilateral mistake could not cause a contract to be invalid as would a bilateral mistake. Rule of the Case: Even though the misunderstanding may be one sided, instead of a mutual misunderstanding does not stop the meeting of the minds that is required in order to form a contract.

2. Offer and Acceptance in Bilateral Contracts: A contract normally involves the notion of Futurity- commitment to some course of action to be undertaken in the future. An exchange of promises that involve commitments from both sides is known as Bilateral Contracts (offer and acceptance).

Longergan v. Scolnick
Court: California District Court of Appeal Procedural History: In the lower courts it was found that the plaintiff and defendant did not enter into a contract and the defendant is entitled to judgment. The judgment was entered and now the plaintiff has appealed. Facts:
Scolnick (Defendant) was trying to post an ad for selling a 40 acre piece of land. -Lonergan (plaintiff) On March 26th wrote a letter describing the land and how interest was expressed. On April 7th Lonergan responds with a suggestion for an escrow bank, meanwhile Scolnick the Defendant wrote that he had found the property and gave a description of the land and that the bank suggested was fine but that the plaintiff would have to act fast indicating that there was more than one person competing for the property on April 8th. On April 12th Lonergan takes too long to make offer and Scolnick sell to someone else unbeknown to the reader. On the 14th of April Lonergan received the letter and thinks that is a formal offer and writes on April 15th to accept the offer and puts down $ 100.00 to start the escrow proceedings.

Issue: Did the Defendant and the Plaintiff enter into a legally binding contract when the ad was placed and the Plaintiff responded with interest in purchasing the property? Holding:
No, the defendant and the plaintiff did not enter into a legally binding contract. When this case first came to trial with the trial courts they found that an offer had been made but was not binding because the plaintiff did not accept before the offer was removed. When the case reached court of Appeals the court stated that the Defendants letters with the plaintiff where not a contract but invitation for offers and the Defendant let the plaintiff know that there were other buyers and does not agree to hold the property for plaintiff.

Rule of the Case: Just because interest is expressed in making an offer does not make it an enforceable contract.

Izadi v. Machado (Gus) Ford, Inc.

Court: Florida District Court of Appeal Facts: Plaintiff attempted to purchase a vehicle from Defendant for $3,595 and a trade in. Based on Defendants advertisement, Plaintiff believed that any trade-in, regardless of value, would be offered a $3,000 allowance. Plaintiff mistakenly thought the allowance applied to the purchase of any new vehicle. In fine print the ad indicated that the allowance applied to only two vehicle models, neither of which Plaintiff was attempting to purchase. Issue: Did the defendant breach his contract, and did the Defendant extend an offer by reasonable understanding? Holding: YES, the Plaintiff may file a breach of contract claim because the Court believes that Defendant
may have in fact wanted the public to interpret the advertisement as Plaintiff did allowing for the bait and switch and the courts want to promote honesty and fair business process.

Rule of the Case: An advertising that is misleading by reasonable understanding may still be considered a binding contract even though the person who made the advertisement did not intend to make an offer.

Normile v. Miller

Court: Supreme Court of North Carolina

Procedural History: Normile and Segal both file separate actions for specific performance (sell the house as bound by contract).Segal motioned for consolidation of trials, granted. Miller recognized contract with Segal; but since lawsuit pending, couldnt hand over title to Segal. Both Plaintiffs filed for summary judgment; Segals accepted. Miller ordered to give title to Segal. Normile appealed summary judgment denial to Court of Appeals. Affirmed by ct. NC Supreme Court heard case on Discretionary Review appeal. Facts: Plaintiff Normile and a third party buyer Segal both tried to purchase a piece of real estate from Miller the Defendant. Normile was the first to give a bid, but Plaintiff responded with a counteroffer in turn not accepting the original offer. Prior to Normiles counteroffer being accepted, Defendant Miller sold the property to Segal. Issue: Does a counter-offer have a time period attached when one is not stated? Does the original time period from first offer still apply to counter-offer? Is supplying a counteroffer a rejection of the initial offer? Did Normile and Miller enter into a binding contract to buy property? Holding: No. The counter-offer effectively erased the initial offer by changing the terms. The power of acceptance was then on Normile, who waited, thinking they had an option, which they didnt. Miller did not have to hold it for a specific period of time. Segal won the right to buy the house.A contract is not an option unless there is a time attached to it. Normiles attachment of a time frame on first offer does not apply to counter. Cites Ward v. Albertson and Kidd v. Early; both of which demonstrate the way in which a time period can be designated.

Cites Restatements 1&2- Power of acceptance terminated by offerees rejection; upon revisions, prior contract is terminated. Restatements 2nd both people must be on exact same page for there to be a contract. Affirmed lower courts ruling. Rule of the Case: A counteroffer is essentially a rejection of the original terms and the original terms do not exist unless the counteroffer is accepted before it is taken away.