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Introduction
Two key elements of a K
A promise or promises and
Enforcement
A contract is an agreement the law will enforce.
Hill v. Gateway
Judge Easterbrook pro-business opinion (U of Chicago)
Ks are formed when expectations of both sides are met
Law looks to protect those expectations
Law and Economics solving the problem through the most cost
effective method with wealth maximization in mind
Businesses can operate more efficiently when the terms of the K may
be included with the product
Overlooks the application of UCC 2-207- additional terms to a K arent
applicable unless the consumer explicitly agrees in merchantconsumer transactions
Compare with Klocek
I. Has a deal been made?
Tested through an Objective Standard
A. Mutual Assent
Lucy v. Zehmer
Facts: Parties signed contract over drinking for Lucy to buy
Zehmers farm for 50K, a reasonable price. Zehmer later
reneged.
Rule: Lucy actually believed Zehmer was serious, AND was
justified in believing so. No evidence that Zehmer was too
drunk to make contract.
Objective theory of Ks; modern theory
Reasonable meanings of actions of parties
Outward expression manifests intention over secret,
unexpressed intention
Literal meeting of the minds not required
Reduce business risk and enhance predictability
Undisclosed intentions are immaterial
Not what the offeror meant but the reasonable impression
created
Policy: This decision paves the way for a more predictable business
environment. Businesses risk less when creating a K as the other party
cannot bring in their inward intents.
Leonard v. Pepsico
Facts: Pepsi advertised junk for points, including Harrier Jet for
7M points as a joke.
Rule: An advertisement doesnt represent a valid offer unless
specific conditions are included Objective person must construe
an ad as an offer, which excludes acts in jest. No real offer
made by Pepsi.
Reasonable assessment of offers is required
Jokes dont count as valid offers
Restatement 26- most advertisements arent offers to sell
because they dont contain sufficient words of commitment
Preliminary negotiations
1. Advertising
2. Invitation of bids or other offers
Gleason v. Freeman
Facts: Sellers use E-bay auction to find potential buyer for
home, E-bay terms say not binding sales K seller added own
terms, P wins auction but didnt like 60 day provision & wants to
negotiate, no further talking, 3rd party buys the house, P sues
for breach
Rule: When the words used create a doubt to the parties
intention...review situation, acts, and conduct
Negotiation does not mean mutual assent
Objective: Unclear of intent, view situation
Ebay auction was a solicitation for offers for the house, not an
offer itself
The additional language did not override the Ebay terms &
conditions, since evidence shows that both parties continued to
negotiate terms of the contract after the auction was over
Smith v. Boyd
Facts: Boyd sell house willing to include appliances. Got
written purchase forms from Duxburys, Smiths (w/ appliances),
and Durigans (w/o appliances) accepted Duxburys purchase
form by signing Smith sue for breach of alleged oral
agreement (agreed on terms no signing)
Each party must have an objective intent to be bound
Trade practices imply knowledge of parties to what is typically
required (Real estate requires written agreement)
Expectation of informed participants- parties entering into a
business arena are expected to have knowledge of the rules
and customs that govern
Nature of real estate requires writing (Statute of Frauds)
Subjective intent may be indicative of objective intent
Considerations of objective intent
1. trade practices
2. prior dealings between parties
3. who drew up the agreement
4. statements made during negotiations
B. Offer
An offer is a statement or act that creates a power of acceptance.
When an offer is made the offeror is indicating that he is willing to be
immediately bound by the others acceptance, without further
negotiation.
Assent typically occurs by a mutual concurrence and understanding of
the parties. Important to note the context in which the agreement
takes place.
Invalid offers:
Made in jest
Expression of opinion
Preliminary negotiations
Statement of future intentions
Solicitations of bids (auctions with reserve)
Rest 24 Offer Defined
Facts: Pepsi advertised junk for points, including Harrier Jet for
7M points as a joke.
Law: Advertisement is generally not offer, but solicitation of
one. Objective person must construe an ad as an offer, which excludes
acts in jest. No real offer made by Pepsi.
Lefkowitz v. Great Minneapolis Surplus
Facts: D published in newspaper Sat 9am, 3 new coats, worth
$100, first come first serve $1. P arrived with $1 but D said
offer only to women. Court ruled for P.
P fulfilled terms of the ad, ad was specific- nothing open for
negotiation
An ad can be an offer if:
o Clear
o Definite
o Explicit
o Leaves nothing open for negotiation
If ad meets above criteria, offeror is bound
Note Case IMPLIED IN FACT K
Facts: Mongo LVS law school raising fee after saying the increase
wouldnt apply to his class
The University acted in a way that was reasonable for Mongo to
believe that the fee would remain at the same level
Rule: Implied in Fact K Offeror can bind themselves to terms by their
conduct even if they dont necessarily write it down and say here, sign
here
C. Destroying the Offer
Offers create the power of acceptance in the offeree. When an offer is
made in face to face conversation, the default rule is that it expires
when the parties part company.
Rest 35 Power of Acceptance
An offer gives the offeree a continuing power of acceptance
Offeree cannot accept until the offer is complete
Rest 36 Methods of Terminating the Power of Acceptance
Termination may occur by
1. Rejection or counter offer by the offeree
2. Lapse of time
3. Revocation by the offeror
4. Death of the offeror or offeree
1. Indirect Revocation
Dickinson v. Dodds (Indirect Revocation/NO
Consideration)
Facts: Wed Dodds offered to sell house to Dickinson.
Thurs Dodds sold to Allan (then Dodds found out). Fri
Dickinson tried to accept offer and was refused.
Reasonable expectation that all is required is acceptance
on the part of the offeree
Without consideration it is not mandatory for an offer to
be held open for a promised amount of time
Notification must be made to offeree to revoke offer but
court is flexible as to how the notification takes place
No consideration=No option
Rest. 48
o An offerees power of acceptance is terminated upon the
offerors death
o In absence of legislation the rule remains in effect
o
When an offeree dies or becomes incapacitated,
the offer dies unless the terms of the offer allow a
representative to accept
o This rule does not affect option Ks
Subjective theory holdover
o Party cannot perform terms of K if dead. However, if K would
have been able to accept just prior to death, K would have
been valid and offeror would still be unable to perform. This
technicality shows that perhaps this rule is outdated.
D. Preserving the Offer
Beall v. Beall
Facts: Carlton bought farm, had option to buy Cecelia/Calvins
parcel for 28k. Carlton put $100 down to keep the option open,
then in 71, Calvin puts down another $100 to keep it open for 5
more years. In 75, Calvin/Cecelia amend 71 doc to extend for 3
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performance. Go to 3.
If it is a written confirmation, it operates as an offer to modify
a pre-existing contract. Go to 2.
NO: Go to 2.
(2)Additional terms serve as proposals for an addition to the contract and
between merchants become part of the contract unless:
the offer expressly limits acceptance to its terms;
they materially alter the contract; or
notification of objection has already been given or is given
within a reasonable time after receipt of notice of the
additional terms.
(3)If the writings of the parties do not establish a contract, the conduct of
the parties may establish a contract consisting of the terms on which their
writings agree and any supplementary terms provided by other provisions
of the Act.
F. Defeating Agreements Based on Misunderstanding of the Terms
There is no mutual assent if the parties have assented to different
things.
Raffles v. Wichelhaus (2 Ships named Peerless- Class Hypo)
Any mistaken term can void the agreement
Very subjective view
Classic case of mutual mistake
G. Consideration
A BARGAINED FOR EXCHANGE
Purpose of consideration is to distinguish between gratuitous and nongratuitous promises
a. MUTUAL INDUCEMENT: bilateral promise, with the promisor trying to
renege
NOMINAL CONSIDERATION PEPPERCORN: An exchange where
mutual inducement is lacking and its really a gift (other than
value reasons) the consideration was a sham the court
suspects dressing up a gift to look like a BFE
Nominal consideration sits in between bargain & gift
A way to determine if there was mutual inducement is if there is
a real benefit to the promisor
Promises that are not part of an economic exchange are NOT
enforceable so GIFTS are NOT enforceable
Rest 71 Requirement and Types of Exchange
To constitute consideration, a performance or promise must be
bargained for
A performance or return promise may consist of
1. An act other than a promise
2. A forebearance
3. The creation, modification, or destruction of a legal relation
Rest 73 Performance of a Legal Duty
Performing a duty already legally required does not constitute
consideration
Ex: A offers reward for anyone coming forward with evidence
about a crime. B produces evidence in the performance of his
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Compare to Hamer
Beginning of doctrine- promise the most important factor
Midwest Energy, Inc. v. Orion Food Systems, Inc. (PE as
Sword)
Facts: P was a builder contracting to franchise a store
with D. D made P change the design of the building to
accommodate their store. After P was told to go ahead
by D, P changed their building and didnt get the
franchise.
P/E: D made a promise (go ahead), it was foreseeable P
would rely on it (to get the franchise), P relied in fact
(modified building), and there was injustice absent
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1. Letterheads
2. Typed communications; must be clear it is from the
person specified
The writing creates an evidentiary platform
Statute of Frauds is a gatekeeper to the oral K
Policy of preventing the enforcement of by means of fraud or
perjury
Technical requirements overlooked due to admission
An admission that a K was made, while not making the K
enforceable, provides evidence that a K was made
Policy of the statute is to prevent fraud and not to make
admitted Ks unenforceable due to technicalities
McIntosh v. Murphy
Courts generally look to get around 1 year requirement of the S
of F
Facts: Oral employment K that allegedly violates SOF one-year
provision. P (employee) seeks to recover damages from D
(employer) for breach of one-year employment K. P was given
offer on 5/25, but didnt start work until 5/27. (Acceptance could
have been on either day, so formation date is ambiguous). P
gets fired after 2.5 months for not being able to close deals &
was bad at training.
Date of formation was important if formation happened on
Saturday, then would have been within SOF, and needed writing
to be enforceable (D says this is true, but Trial court Judge said
this was ridiculous)
D says hired P on a trial basis so it cant be completed in 1
year, writing is needed to make K enforceable & there wasnt
P says he had a one-year contract, so not within SOF, dont
need writing to be enforceable
Appellate: Ruled for P based on equitable estoppel said SOF
limited by (1) equitable estoppel (2) judicial circumvention
No reason to resort to legal rubrics/formulas
Uses R2K 139 covers situations were there has been reliance
on an oral K that falls within SOF
Ps claim also satisfied 4 prongs of P/E
Dissent: Court says just because P relied on D, the oral K is
enforceable
SOF made to prevent the consequences court is putting on D
someone is lying and dissent thinks its P
Justification for retention of the S of F:
1. Evidentiary function
2. Cautionary effect
3. Distinguish enforceable and unenforceable Ks
Rest. 139- S of F wont prevent enforcement if a party has
justifiably relied on the promise to his detriment
II. Is it a deal that the law will enforce?
A. Preview
Questions surrounding enforceability:
1. What do courts do to enforce contracts?
Injunctions
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Damages
Specific performance
2. Why arent all agreements legally enforceable?
The way the deal was made
Parties involved
Terms of the deal
3. Which agreements arent legally enforceable?
B. Mistaken, Unstated Factual Assumptions
Three core problems
1. Proof- How do you prove what your client was thinking but
didnt say when he entered the agreement?
2. Policy- Why should the courts excuse someone from a contract?
3. Rules- Once the courts decide the policy, what rule should the
court decide advances this policy?
Rest 151 Mistake Defined
A mistake is a belief not in accord with the facts
An erroneous belief at the time of formation
Need not be articulated and may be an assumption
Erroneous predictions of the future are not mistakes
Legal consequences determined by contractual liability
Rest 152
o When a mistake regarding a basic assumption which the
parties had a formation causes a material effect on the
agreement, the K is voidable by the adversely affected
party unless he bears the risk of mistake
o In determining materiality, account is taken of relief by
reformation, restitution, or otherwise
o PER doesnt bar evidence that establishes the mistakes
o Parties must be mistaken as to the same assumption or
it is a unilateral mistake, making the K voidable only if
the voiding party does not bear the risk
o Must affect the basic assumption on which the K was
made
Rest. 154
o A party bears the risk of mistake when it is allocated to
him in the agreement, he is aware of the mistake at the
time of formation that he only possesses limited
knowledge, or the risk is allocated to him by the court
Unconscionability
Rest 152, 154
Rest. 153
o A mistake at the time of formation by one party may
make the K voidable if he doesnt bear the risk and the
effect of enforcement would be unconscionable or the
other party had superior knowledge
First Restatement only allows rescission for mistake due to the
fault of another or where one party has reason to know that the
mistake exists
Rest 155
Where a writing embodying an agreement fails to express the
correct terms due to a mistake in the writing, the court may
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2. A general term joined with a specific one will include only things
that are like the specific one
3. If one or more specific terms are listed, without general terms,
other items although similar are excluded
4. An interpretation that makes the K valid is preferred over one
that makes it invalid
5. Read Ks to favor the party that didnt draft the K or the party
with the least bargaining power
6. Interpret the K as a whole
7. Examine the purpose of the parties
8. A specific provision is an exception to a general one
9. Handwritten provisions control over printed provision on the
same K
10. Public interest is preferred
4. Special Interpretive Rules for Ks of Adhesion
Meyer v. State Farm
Adhesion Ks arent evil, they are efficient ways of doing
business and reducing costs
ADR is favored by the courts when it provides a fair method of
relief for both parties
Arbitration clauses that are more friendly to the party with less
bargaining power are more likely to be enforced
What are the established practices in the industry?
Public policy, plain language, no unconscionability, no fine print,
and a fair process make adhesion Ks and arbitration clauses
stronger
Not reading a K is no defense
If the insertion of an arbitration clause is induced by fraud, it
will not be enforced
Lauvetz v. Alaska Sales & Service dba National Car Rental
Rest. 211- where one party has reason to believe the other
would not accept the agreement if he knew the writing
contained due to a particular term, that term is not effective
In Ks of adhesion, which people most often dont read, the
agreement will be construed according to principles of
reasonable expectations
IV. When is Someone Who Made an Enforceable Deal Excused from Doing
What He Agreed to Do?
Reasons that justify non-performance in contract law are termed excuses.
A. Satisfaction of Mature Obligations to Perform: The Concept of
Discharge
Rest 235
Full performance discharges a K
Any non-performance is a breach
Full performance only will discharge a K.
Excuses for less than full performance
1. Conditions: something must happen first before a party is
obligated to perform
2. Amendment
3. Modification
4. Waiver
5. Estoppel
6. Impossibility
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7. Impracticability
8. Frustration of purpose
9. Repudiation
10. Failure of Adequate Assurance of Future Performance
11. Material Breach
B. Conditions
Conditions may be used to allocate risk.
Types of Conditions
Express
Can be stated expressly (and unambiguously)
Can be stated ambiguously (and so implied-in-fact)
Constructive - Order performance
Implied by law to do justice
Ex: services usually paid after service rendered (i.e., auto
body work; employment)
When we talk about express conditions, we cannot say breach. If a condition
isnt met, there is not breach but the duty to abide by the agreement is
excused.
All non-performances are not breaches
Strict Compliance
Difference between promise and condition
Express conditions modify promissory obligations
Function of express conditions (question of fact)
Allocate risk of the non-occurrence of critical event to one party or
the other
Reflects parties intent so thats how it is found
When something is a question of fact, it means that the parties can contract
around it.
Condition precedent the obligation never arises if the condition isnt met
Condition subsequent the obligation happened, but later the condition
failed
Promissory obligations are under the control of the party
Conditions are not under the control of the party
Express conditions are different from promises
Differences between promise & condition
Triggering of obligation
o Promise - Agreement between the parties (Formation).
Promises are absolute. Once formation has happened,
they are not changing/going away.
o Condition uncertain event (conditional)
Obligation requires what level of performance/occurrence?
o Promise absolute but can be performed partially
o Condition Strict compliance
Effect of not meeting the obligation?
o Promise breach (partial or material)
Partial breach stuck
Material breach full - done
o Condition discharge/excused from K duty
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Waiver
1. intentional relinquishment of a known right; or
2. Excuse of the nonoccurrence of or a delay in the occurrence of a
condition or duty
Waiver may be effectuated by one party (unilateral)
Waiver is retractable in absence of reliance
Waiver only applies to conditions doesnt apply to promises
Modification
the changing of the terms of the agreement which may diminish or
increase the duty of either party
The result of the bilateral action of both parties to the sales
transaction
Modification cannot be retracted unilaterally
Applies more to promises
Estoppel
if abandon/stop insisting upon a condition precedent, and other
party, entitled to rely on such conduct, does in fact rely, then one
benefitted by condition is estopped from arguing it
waiver like conduct that induces reasonable and actual reliance,
depends on both parties
precludes "a person from denying or asserting anything to the
contrary of that which has, in contemplation of law, been
established as the truth, either by the acts of judicial or legislative
officers, or by his own deed, acts, or representations, either express
or implied.
usually does not require examination of a partys intent. Instead,
the equitable doctrine of estoppel looks to whether the party
asserting estoppel would otherwise suffer an inequitable detriment
based upon the conduct of the other party
Dynamic v. Machine & Electric Co.
Facts: P (buyer) agreed to buy lathe from D. Payment in segments in
meantime, P rented a lathe from D. P told D rental lathe had problems
and if these problems werent fixed in new lathe, P would reject it
(condition precedent). P & D made oral agreement to extend deadline
for install/commissioning to 9/19. 10/9 D delivered and installed. 12/9
Ps letter to D granted final deadline for D to deliver a working lathe by
12/19. Next day P got info that led him to conclude lathe wouldnt be
able to meet required specifications. P notified D it intended to retract
deadline extension. D didnt materially rely on deadline extension from
12/9 prior to P revoking on 12/11. P sues D
Issue: was this a modification or a waiver? (Question of fact)
turns on whether P and D mutually agreed to extend deadline
P says waiver if its a waiver, signing doesnt matter because
waiver doesnt require SOF formalities can be express/implied
D says modification (so that way P couldnt retract) the
12/19 extension being signed makes it look like an agreement,
shows they were channeling their behavior)
Court: If modification, P cant retract unilaterally bc both parties
need to agree and needs new consideration under CL. If waiver,
can retract unilaterally if youre the one that benefits court
remands to find out
Held: absence of consideration under UCC doesnt preclude a
finding for modification, doesnt have to be in writing for a
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The failure to perform one part does not bar recovery for
performance of another
The performance of each division of the service will be impliedly
a condition precedent to the recovery of a corresponding
portion of the price
The party who has performed one of these partys has the right to its
agreed equivalent just as if the parties had made a separate contract
with regard to that pair of corresponding parties (R2K 240)
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Hawkins v. McGee
Hairy Hand Case
General rule gives expectancy damages
Puts in as good of position as he would have been in had
performed
Difference in value
Expectancy may be difficult to compute in some contexts
Damages are compensation for a breach measured in the terms
of the K
Panorama Village Homeowners Assn v. Golden Rule Roofing
Facts: D contracted to install roofs and issue manufacturers
warranties. Construction was defective and warranties not
issued
Rule: Injured party must establish cost to remedy breach;
contractor then bears the burden to challenge the evidence to
reduce the award.
Leingang v. Mandan Weed Board
Facts: Weed control company - City mistakenly assigned large
lots to other company
For a breach of K, is entitled to compensation for the loss
suffered, but can recover only the amount that would have
been gained by full performance
In a K for services, the value of the K when breached is
1. s reasonable expenditures that would have been spent in
performance subtracted from
2. the anticipated revenues
may recover lost profits if they are reasonable and not
speculative
Overhead costs are not deducted as they must be paid anyway
and thus factoring them in causes to pay them twice
K price is reduced by reduced by expenses actually saved
Groves v. John Wunder Co.
Facts: contract to remove sand and gravel from Ps premises
and leave the property at a uniform grade, substantially the
same as the grade now existing at the roadway. D paid P
$105,000 but willfully failed to leave the property at a uniform
grade.
is ineligible for relief under substantial performance if it has
acted in bad faith
If there is a windfall, it must go to the innocent party
Cost of completion vs. Diminution in value
Correct doctrine is the cost of remedying the defect
is liable for the reasonable costs of doing what they promised
to do and have willfully declined to do
has bargained for the performance, not the increase in the
value of the land
If the court finds substantial performance, an effort to avoid
economic waste will be undertaken and damages will be
calculated by diminution in value
Without substantial performance, which requires good faith, the
damages will be calculated as cost of completion
Peevyhouse v. Garland Coal & Mining Co.
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