Contracts Condensed Outline – Law School


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Essential Supplements for Success in 1L Contracts:

Damages

Expectation Damages

  • The basic rule for the amount of damages is: The court will award the non-breaching party enough money to put that party in the position he would have been in if the contract had been performed.
  • This is called expectation damages. By giving the non breaching party something he would have had in the action of the contract, it contrasts with reliance, which puts the non-breaching party back where he would have been in had the contract not been made, and restitution, which compels the breaching party to give back benefits conferred by the non-breaching party.
    • (Rest. 344)

Reliance Damages

  • Reliance – a person’s interest in being reimbursed for loss caused by reliance on a promise.
  • Rest 90 – Promise Reasonably Inducing Action of Forbearance
    • 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 is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.
  • This provision applies when there is not a bargained-for-contract. The concept of reliance also applies when there is a K and the non-breaching party chooses the remedy of reliance over the other available remedies.
    • Rest 349 – Damages based on reliance
  • Damages will generally be awarded only for reliance expenses that are incurred after the K is made. However, an exception may be made and damages may be awarded for expenses incurred before the K was made where the breaching party had reason to know that the losses would be incurred and would be lost b/c of the breach. If the breaching party can prove that it would have been a losing K, then those losses may be deducted from the reliance damages (Rest 349)

Restitution Damages

  • Rest 344 – Purposes of Remedies, describes the interests of a promisee as the expectation interest, reliance, and restitution interest.
  • Rest 374 – Restitution in Favor of Party in Breach
    • (1) if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party’s breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has cause by his own breach
  • Restitution – a person’s interest in having another person restore any benefit that he has conferred on that person.
    • Requires that a person return what that person has unfairly gained.
      • Prevents unjust enrichment
  • Remedies created by the courts to solve the problem of unjust enrichment in specific circumstances
    • Quantum meruit – P gets a money judgment for the reasonable value of services that she conferred on the D
    • Quantum valebant – The P gets a money judgment for the fair market value of goods that D received from the P
  • May be available where there is no contract between the parties, when there is a contract that is rescinded, or when the contract is breach.
    • Contract cases – When Contract is not a Bar to Restitution
      • In certain cases a P can sue in restitution even when there is a contract with the D. This occurs when the D has materially breached the contract. In that situation, the P’s duties under the contract are discharged and P is no longer suing on the contract
      • Ex: Osteen v Johnson
  • Available for the P or for the D
  • To recover in restitution, P must show
      • The P conferred a benefit on the D
      • That if would be unjust to allow the D to retain the benefit
    • A P who succeeds in showing both of these requirements is entitled to the reasonable value of the benefit conferred. Reasonable value can be measured in a variety of ways.
  • The return of $$ paid by mistake is a classic case where appropriate remedy is restitution. (Law school accidentally gives student a check for $1,000 too much. Restitution would be returning the $$.
  • How to measure the value of the benefit conferred for restitution
    • Market value – the amount a reasonable person would be willing to pay for an item or service in the market
    • Value to the provider – how much it cost the person who conferred the benefit to provide it
    • Value to the recipient – how much the person who got it values it, even though its market value might be considerable less.

Limitations on Damages – Mitigation

  • The basic concept is that the non-breaching party is not permitted to recover damages that the party could have avoided by making reasonable efforts
  • Mitigation can be thought of as part of avoidable consequences – the non-breaching party must avoid the consequences of breach, for a court is reluctant to award damages that a party could have prevent.
  • Ex: Rockingham County v Luten Bridge
    • Followed the expectation/mitigation measure of damages.
    • The rule in three steps is:
      • Figure out what the position of the non-breaching party would have been if the promise had been kept
      • Figure out the position that the non-breaching party would be in after the breach – provided the non-breaching party did whatever was reasonably possible to mitigate damages
      • Figure how much we need to give the non-breaching party to move them from the position they are in after the breach (described in (2)) to the position they would have been in had the contract been performed (described in (1))
  • Proper mitigation – doing everything reasonably possible to mitigate damages.
  • Proper mitigator – non-breaching party, whether the non-breaching party properly mitigated damages or not.
  • What counts as proper mitigation? The non-breaching party should take reasonable steps to mitigate.
    • Reasonableness – courts look at home much mitigation steps would cost versus how much the non-breaching party would save by taking those steps. If the non-breaching party has to spend money to reduce losses, but is still spending less than he gains, then spending money is probably proper mitigation.
  • UCC on mitigation (pretty much silent) – “The remedies provided by this Act shall be liberal administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.” (1-106(1)).
    • “Unless displaced by the particular provisions of this Act, the principles of law and equity . . . shall supplement its provisions.” (101-3)
    • “An action is taken seasonably when it is taken at or within the time agreed or if no time is agreed at or within a reasonable time” (1-204(3)).

Foreseeability

  • Expectation damages are the amount of money that will put the non-breaching party in as good a position as he would have been in had the contract been performed as promised.
  • The right to receive expectation damages is a limited right. Some of the limitations are that !) The purpose of damages is to compensate, 2) the damages must be established to a reasonable certainty, and 3) the non-breaching party must mitigate the damages.
  • Another limitation is the rule of foreseeability. The rule may be stated as follows: The non-breaching party is entitled to compensation only at the time of contracting, could be foreseen by a reasonable person in the shows of the breaching party as a probable result of the breach.
  • This rule derives from Hadley v Baxendale.
  • The court set forth a new rule of damages called “direct damages or “general damages: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect to such breach of contract should be such as may fairly and reasonable be considered either (1) arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
    • The P doesn’t have to spell the damages out in detail because everybody knows a D is responsible for the.
  • The second kind of Hadley damages are called “consequential damages” or “special damages” and are “such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
    • You get these second kinds of damages when a reasonable person in the shoes of the breaching party, at the time of making the contract, knows they may occur.
    • Objective test. The issue is whether a reasonable person would have known the loss may result. One way to make sure a person knows is to tell him. But he is also responsible for the loss even if he is not told if he should have known from the circumstances.
    • The P has to spell these damages out in detail because the D might be taken by surprise to learn that there is a claim for them.
    • Once you know what damages you are liable for, that is, what risks have been shifted to you, you can use your freedom of contract to avoid those risks or shift them back. For ex: you promise to sell me Type A widget for $1000. I say, “I just want you to know that I have customer who is going to pay me $2000 for that widget.” At this point you should say, “I’m sorry but I won’t deal on those terms.” This is more risk that you wanted to take.
  • These rules favor the breaching party. The goal of contract damages is to compensate, not to punish, so there are no punitive damages for breach of K. The principle of certainty keeps the damages from being speculative. The principle of mitigation requires the non-breaching party to avoid losses. And the principle of foreseeability limits the damages to those a reasonable person would have known would result from the breach.
  • Efficient breach – breach the contract, pay the damages, and still come out ahead.

Certainty

  • What counts as reasonable certainty?
    • The traditional rule was that lost profits were NOT recoverable where the breach of contract prevented the P from establishing a new business. It was though that it was not possible to prove the lost profits with the degree of certainty the law required. Since the business never got started, there was no history of the business to use as evidence of how much profit it would have made
    • The current rule is that the reasonable certainty requirement does not prevent the recovery of lost profits in situations like the Shopping Center example. The view now is that it may be possible to prove losses such as those from a new business with reasonable certainty.
    • So to put Tenant in as good a position as she would have been in had the contract been performed as promised, we have to award Tenant the profits she would have earned, after proper mitigation, had Shopping Center not breached the contract.
    • Restatement 352 – Uncertainty as a Limitation on Damages
      • Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.
  • When a P can prove that there was breach of K, and that breach caused a loss, but the P can’t prove the amount of the loss to a reasonable certainty, the court will award nominal damages.
    • Although nominal damages often signal only a moral victory, they can be important if, for example, the prevailing party recovers court costs or attorney fees. For a P who is awarded nominal damages is the prevailing party, while a P who is awarded no damages did not prevail in proving damages.
  • The UCC – reflects this liberalization of the proof requirements for damages.
    • First, the UCC provides in Rev 1-103(b) that the general principles of law and equity apply, so the common law principles that apply to other cases also apply to cases involving the sale of goods.
    • More specifically, the UCC Rev 1-305(a) provides that the remedies provided by the UCC must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed. Official Comment 1 to this section states that one purpose of the section is to: “reject any doctrine that damages must be calculable with mathematical accuracy they have to be proved with whatever definiteness and accuracy the facts permit, but no more.
  • Restatement 352 – contains the following illustration, which involves the sale of goods:
    • A, a manufacturer, makes a K with B, a wholesaler, to sell B a quantity of plastic. B resells the plastic to dealers. The plastic is discovered to be defective and B has many complaints from dealers, some of which refuse to place further orders with him. B can establish the damages for his lost business with reasonable certainty

Cost of Completion

  • When a P is entitled to $ damages for breach of contract, cost of completing is a way of measuring the remedy. It is sometimes awarded when there is work still to be completed under a contract, or where the work called for under the contract was improperly done. For ex: a builder constructs a house but omits putting molding around the floors and ceiling. The cost of completion award would be the cost of having another contractor install the missing molding.
  • Ex: Peevyhouse v Garland Coal & Mining- where the cost of completion would be extremely costly in proportion to the value added, courts have another way of measuring the expectancy. Recall that the goal of expectation damages is to put the non-breaching party where he would have been if the contract had been completed. Instead of awarding the cost of getting a party there, the alternative is to give the party the difference in value between what they have after the breach and what they would have had if the contract had been performed.

Cost of Completion of Diminution in Value?

  • The rule is that the non-breaching party is entitled to the costs of completing unless the amount is grossly disproportionate to the value of the work if the work had been completed as promised. When the amount is grossly disproportionate, the non-breaching party gets the “diminution in value,” which is the difference between the value generated by the actual performance and the value that would have been generated if the contract had been performed as promised.
  • Exceptions – when the breach is willful, courts will sometimes award cost of completion even when that award is grossly disproportionate to the value that would be gained by completing the work. “Willful” breaches are those in which the breaching party’s conduct is especially bad or reprehensible. For example, suppose that we could prove that, at the time it made the contract with Peevyhouse, Garland Coal Co had no intention of filling in the ditches – even though that is what is promised to do. Such fraudulent conduct would most likely be “willful.” Fraud is just an example. Courts can find willful breaches where there is no fraud.
  • Since courts are concerned about the damage award being a windfall for the nonbreaching party, they also look at the likelihood that the party will use the award to repair the condition. A related factor is whether the breach results in a dangerous condition; presumably a party is more likely to use the money to fix a dangerous condition.
    • Ex: Jacobs & Young v Kent
  • Summary – The non-breaching party is generally entitled to the cost of completion unless that amount is grossly disproportionate to the value of the work if the work had been completed as promised. When the amount is grossly disproportionate, the non-breaching party may get only the “diminution in value,” which is the difference between the values generate by the actual performance and the value that would have been generated if the contract had been performed as promised.
    • The cost of completion award is grossly disproportionate to the value that would be produced by completing the work when it would not be proper mitigation to complete the work (economic waste).
    • Courts sometimes carve out exceptions to the doctrine of economic waste
      • Willful breach – When the breach is “willful,” some courts will award the cost of completion even when that award is grossly disproportionate to the value that would be gained by completing the work, but other courts pay only lip service to the concept of “willful” breach
      • Likelihood of repair – Since courts are concerned about the damage award being a windfall for the non-breaching party, they also look at the likelihood that the party will use the award to repair the condition
      • Dangerous condition – Courts also look at whether the breach results in a dangerous condition.

UCC Remedies – Buyer’s Remedies when the Seller is in the Breach

  • Official Comment 1 to UCC 2-711 states that the purpose of it is “to index in this section the buyer’s remedies, subsection (1) covering those remedies permitting the recovery of money damages, and subsection (2) covering those which permit reaching the goods themselves.”
    • 2-711. Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods
      • (1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Sec 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid
        • (a) “cover” and have damages under the next section as to all goods affected whether or not they have been identified to the contract; or
        • (b) recover damages for non-delivery as provided in this Article (Sec 2-713)
      • (2) When the seller fails to deliver or repudiates the buyer may also
        • (a) if the goods have been identified recover them as provided in this Article (Sec 2-502); or
        • (b) in a proper case obtain specific or replevy the goods as provided in this Article (Sec 2-716)
      • On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods a resell them in like manner as an aggrieved seller (Section 2-706)
  • Seller in Breach, Seller has Goods
    • Specific Performance – If the seller is in breach and the seller has the goods, then one obvious remedy is for the buyer to sue to obtain the goods themselves.
      • 2716. Buyer’s Right to Specific Performance or Replevin
        • (1) Specific performance may be decreed where the goods are unique or in other proper circumstances.
    • When the Buyer Covers
    • 2-712. “Cover;” Buyer’s Procurement of Substitute Goods
      • (1) After a breach within the preceding section the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller
      • (2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (2-715), but less expenses saved in consequence of the seller’s breach.
        • Damages = Cover Price – Contract Price + Incidental+ Consequential Damages – Expenses Saved
    • 2-715. Buyer’s Incidental & Consequential Damages
      • (2) Consequential damages resulting from the seller’s breach include:
        • (a) any loss resulting from general or particular requirements and needs of which the seller at the time of the contracting had reason to know which could not reasonably be prevented by cover or otherwise; and
        • (b) Injury to person or property proximately resulting from any breach of warranty.
      • Break rule down into two requirements:
        • Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know, and
        • Which could not reasonably be prevented by cover or otherwise
    • When the Buyer does not Cover
    • 2-713. Buyer’s Damages for Non –delivery or Repudiation
      • (1) Subject to the provisions of this Article with respect to proof of market price (2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article, but less expenses saved in consequence of the seller’s breach
      • Market price is to be determined as of the place for the tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
      • (Market price – contract price) + Incidental damages + consequential damages – expenses saved
    • 2-712 applies if the buyer covers. 2-713 applies if the buyer does not cover
    • Seller in Breach, Buyer has Goods
    • Substantial Performance – when there is a material breach by the seller, the buyer does not have to accept the goods. And even if the buyer accepts, if the breach is material, the buyer may be able to revoke acceptance under 2-608
    • But sometimes the buyer accepts the goods even though the seller has breached by delivering goods that do not conform to the contract. If the breach is not material, the buyer is entitled to damages for the seller’s breach. The seller has breached, but the buyer keeps the goods and recovers damages under 2-714.
    • Ex: where the seller has given the buyer warranties and the seller breaches a warranty.
    • Assume the buyer inspects the goods, finds nothing materially wrong with them, and accepts them. What if the buyer later finds something wrong with them? It is technically too late to reject the goods. But the buyer may have the remedy of revocation under 2-608.
      • 2-608. Revocation of Acceptance in Whole or in Part
        • (1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
          • (a) on the reasonable assumption that its non-conformity would be cured and it has not seasonably cured; or
          • (b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances
        • (2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it
        • (3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them
    • 2-719(2) – where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
  • Breach of Warranty – situation where the buyer has accepted the goods but the seller is in breach. Often the breach does not qualify for revocation of acceptance under 2-608 either because the non-conformity does not substantially impair the value or because the other requirements are not satisfied.
    • The most important part of a warranty analysis is to determine what warranties were given and whether the seller breached them.
    • The remedy for a breach of warranty is found in 2-714
    • 2-714. Buyer’s Damages for Breach in Regard to Accepted Goods
      • (1) Where the buyer has accepted goods and given notification (subsec (3) of sec 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable
      • (2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
      • (3) In a proper case any incidental and consequential damages under the next section may also be covered.

UCC Remedies: Seller’s Remedies When Buyer is in Breach

  • Seller’s Remedies
    • UCC 2-703 provides what the Official Comment to that section calls an index section which gathers together in one convenient place all of the various remedies open to a seller for any breach by the buyer.
    • 2-703. Seller’s Remedies in General
      • Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before the delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (Section 2-612), then also with respect to the whole undelivered balance, the aggrieved seller may
        • Withhold delivery of such goods
        • Stop delivery by any bailee as hereafter provided (Sec 20705)
        • Proceed under the next section respecting goods still unidentified to the contract
        • Resell and recover damages as hereafter provided (Sec 2-706)
        • Recover damages for non-acceptance (Sec 2-708) or in a proper case the price (2-709)
        • Cancel
  • Buyer in Breach, Buyer has the Goods
    • General rule is that Seller can recover the contract price
    • 2-709. Action for the Price
    • (1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price
      • (a) of goods accepted or of conforming goods lost or damages within a commercially reasonable time after risk of their loss has passed to the buyer
    • UCC provides the same result as the cl expectation measure
    • 2-606(1) applies if the seller resells:
      • Seller’s Resale Including Contract for Resale
        • (1) Under the conditions stated in Sec 2-703 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the K price together with any incidental damages allowed under the provisions of this Article (2-710), but less expenses saved in consequence of the buyer’s breach.
      • When the seller resells the goods, 2-706(1) allows the seller to recover the K price minus the resale price, plus incidental damages, minus expenses saved.
      • This rule can be stated as: Seller’s recovery = contract price – the resale price + incidental damages – expenses saved OR Seller’s recovery = (KP-RP) + ID – ES
  • The Expectancy
    • Under the rule of expectation damages, a seller is entitled to be put in the position the seller would have been in if the buyer had performed the K.
  • When the seller does not resell
    • 2-708(1). Seller’s Damages for Non-acceptance on Repudiation
    • (1) Subject to subsec (2) and to the provisions of this Article with respect to proof of market price (Sec 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article, but less expenses saved in consequences of the buyer’s breach
      • Seller’s recovery = contract price – market price + incidental damages – expenses saved
  • Down Payments
  • UCC 2-718. Liquidation or Limitation of Damages; Deposits
  • (1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining ad adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
  • (2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds
    • (a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsec (1), or
    • (b) in the absence of such terms, 20% of the value of the total performance for which the buyer is obligated under the K or $500, whichever is smaller
  • (3) The buyer’s right to restitution under subsec (2) is subject to offset to the extent that the seller establishes
    • (a) a right to recover damages under the provision of this Article other than subsec (1), and
    • (b) The amount or value of any benefits received by the buyer directly or indirectly be reason of the K.

Specific Performance

  • Black Letter law – specific performance will not be awarded when $ damages would be adequate.
  • Specific Performance in the Sale of Goods – In most Ks for the sale of goods, money damages will be an adequate remedy for breach. Typically, there is a market for goods in which the buyer can buy replacement goods when the seller breaches, or the seller can resell the goods when the buyer breaches. In either case, a monetary award will put the non-breaching party in as good a position as he would have been had the K been performed as promised.
  • UCC 2-716(1). Buyer’s Right to Specific Performance
  • (1) Specific performance may be decreed where the goods are unique or in other proper circumstances.
  • (3) The buyer has the right of replevin for goods identified to the K if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing
  • Uniqueness in Output and Requirements Contracts
    • The test of uniqueness must be made in terms of the total situation which characterizes the contract. Output and requirements contracts involving a particular or peculiarly available source or market present today the typical commercial specific performance situation, as contrasted with contracts for the sale of heirlooms or priceless works of art which were usually involved in the older cases.
  • Seller’s Specific Performance
    • Section 2-709 is the seller’s specific performance remedy under the UCC. It provides that when the buyer fails to pay the price as it becomes due the seller may recover the price of the goods (with some restrictions).
  • Contracts Outside the UCC:
    • Land Contracts
      • Specific performance is generally available for Ks for the sale of land. If Buyer contracts to buy BA and Seller breaches, the court could grant Buyer specific performance.
    • Employment Contracts
      • Specific performance is NOT generally available for Ks for employment. If Employee agrees to work for Employer but then quits, Employer will NOT be able to get an order of specific performance compelling Employee to work.
      • Reasons:
        • It would be difficult for the court to surpervise the performance
        • It would be costly for the court to supervise the performance
        • It is similar to slavery to force one person to work for another
        • Because the remedy for not following a court order is contempt, it would amount to putting people in jail for breaching a contract
        • The remedy at law is usually adequate
      • Nevertheless, there are occasions when a person who is uniquely qualified promises to perform a service and the court is persuaded to grant equitable relief. Traditionally, the cases have involved entertainers, such as opera singers and athletes.
        • Ex: Philadelphia Ball Club v Lajoie – best second baseman broke his contract and went to another team. Court ordered a negative injunction forbidding Lajoie from playing for anyone besides the Phillies.
      • Cts usually don’t award specific performance on service contracts

Offer

  • Parties enter into a contract by manifesting assent. Mutual assent to be bound is an essential element of contract formation.
  • Manifestation of mutual assent ordinarily takes place:
    • By one party (the offeror) making an offer to another party (the offeree)
    • Which the offeree accepts
  • Three essential elements to an offer
    • Assent/intent – to enter into a bargain
      • Objective test
    • Definiteness
      • Even though the parties may intend to form a contract, if the terms of their purported agreement are not reasonably certain, no contract will result.
      • If the terms proposed in an offer are not reasonably certain, an acceptance of the offer cannot form a contract. As with other areas of contract formation, it is a question of intent. Thus, all of the circumstances surrounding the transaction must be examined.
      • Indefiniteness can be divides into three general categories
        • The parties purport to agree on a material term but leave it too indefinite or vague (indefinite term)
        • The purported agreement is silent on a material term (omitted term).
        • The parties agree to later agree on a material term (agree to agree)
      • In order for an offer to be definite enough, there must be a reasonably certain basis for a remedy in the event of breach. More specifically, a court must have a basic guide available to calculate the amount of money damages awardable for breach or to award specific performance of contract.
      • UCC 2-205 – If the parties had otherwise exhibited an intention to form an agreement, Article 2 uses “gap fillers” to provide terms where the parties fail to make an agreement on term(s) of the contract
    • Communication of the offer
      • Failure of the offeror to communicate the offer to the offeree may indicate that no offer exists in the circumstances. Furthermore, on offer only creates the power of acceptance in the offeree and not in other third parties.
      • The fact that the legislative enactment is not addressed to a specifically named party, even though it may invite action in reliance upon it, is a factor indicating that a promissory offer is not being made. This factor is of importance also in the transactions of private individuals; but there are many cases in which published offers of a reward are promissory offers although addressed to the public at large, not to any specific person.
      • The Restatement further explains: Comment a. Mutuality of assent. Twp manifestations of willingness to make a bargain, though having the same terms, do not constitute a bargain unless each is made with reference to the other. Ordinarily one party, by making an offer, assents in advance; the other, upon learning of the offer, assents by accepting it and thereby forms the contract. The offer may be communicated directly or through an agent; but information received by one party that another is willing to enter into a bargain is not necessarily an offer. The test is whether the offer is made as to justify the accepting party in a belief that the offer is made to him.
      • Generally, offers are only good as to those individuals for whom they are intended and who actually know about the offer. A person who acts without knowledge of an offer is not within the scope of the offer.

Acceptance

  • An effective acceptance requires three things:
    • A manifestation of assent by the offeree to the terms of the offer
      • There must be commitment
      • The commitment must not be conditional
      • The commitment must be on the terms proposed without variation.
    • The acceptance must be made in the manner invited or required by the offer
    • The acceptance must occur while the offer is still open, i.e., if the offer has already been revoked, the acceptance is not effective to create a K.
  • Parties enter into a contract by manifesting assent
  • Mutual assent to be bound is an essential element of contract formation. Parties may achieve mutual assent through a bargaining process which involves an offer and an acceptance.
  • Manifestation of mutual assent ordinarily takes place:
    • By one party (the offeror) making an offer to another party (the offeree)
    • Which the offeree accepts
  • Both parties (the offeror and the offeree) must manifest assent to the deal before a contract arises.
  • Acceptance is the manifestation of assent that is made by the offeree. However, since the offeror is a master of the offer, the offer may be restricted to a form of acceptance dictated in the offer. Thus, the form of manifestation of assent by the offeree may be restricted by the offer
  • Acceptance can be defined as the action (promise or performance) by the offeree that creates a contract (i.e. makes the offeror’s promise enforceable). Acceptance, then, is the name given to the offeree’s action of the legal effect of that action is to make the offeror’s promise enforceable.
  • An offeror who wants to restrict the manner in which an offeree must accept must be clear as to the requisite manner of acceptance in order for limitations to be enforced.
  • Second, the commitment must both be conditional on any further act by either party. Since an acceptance is the ultimate step in making a contract, the commitment cannot be conditional on some final step to be taken by the offeror
  • Commitment must be on the terms proposed without variation
    • The expression of commitment manifesting assent to the bargain offered must be on the terms proposed by the offeror without any variation. This is called the mirror image rule. That is, the acceptance must be the mirror image of the offer.
  • Manner of acceptance
    • The second element of an acceptance is the manner in which acceptance is made. Typically, an offer is accepted when the offeree promises to perform the terms of the offer. Since an offeror is master of the offer, though, the offeror can specify that the offer can be accepted by performance or by the offeree making a promise to perform. Sometimes, however, the offer does not specify the manner of acceptance and in such cases the offeree can accept in any manner reasonable under the circumstances.
  • Who can accept the offer
    • An offer can only be accepted by the person to whom it is addressed. That is, a third part may not accept an offer not directed to her.
  • Silence as Acceptance
    • The general rule is that acceptance is not made by the offeree remaining silent in response to the offer. That is, typically, an offeror cannot foist a contract on an offeree by forcing the offeree act to reject the offer. The receipt of an unsolicited offer does not create an obligation on the offeree to respond of face acceptance by silence. However, exceptional circumstances do exist and conduct of the offeree may amount to acceptance in some cases such as:
      • Taking the benefit of the offer
      • Prior conduct of the offeree giving the offeror reason to believe that silence would be acceptance
      • Exercise of dominion over goods
      • Where the offer states that the offer may be accepted by silence and the offeree remains silent with the intention of accepting
  • Rejection and Counter-offer
    • A counter-offer proposes an offer on the same subject matter and also rejects the original offer.
  • Counter-offer or rejection by offer who has an option
    • Sometimes, the offeree may have a binding option with respect to the offer. What happens when the offeree holding such an option makes a counter-offer or rejects the original offer while the option is still good? The general rule that a counter-offer or rejection operates to terminate the offeree’s power of acceptance does not apply. Since an option is itself a contract, with contract rights, an offeree does not lose their contract rights simply due to a counter-offer or rejection. Instead, the power of acceptance is not terminated and the rule is reversed here. However, in the event that the offeree makes a counter-offer or rejection and the other party relies on it through a material change in position, the offeree may be estopped from revoking the rejection.

Mutual Asset

  • Although mutual assent (Rest 18) is generally a requisite to the formation of a K, some early K cases also required an actual meeting of the minds or subjective intent to K. If taken literally, this would require that all of the parties to a valid K must actually intent to bring temsleves to the contract. Modern K cases state that the mental assent of the parties is not a requisite to the formation of a contract and the objective intent is suffient.
    • If has already been shown that a meeting of the minds is not an unvarying prerequisite to an enforceable K. But if it is made clear that there has in fact been no such meeting of the minds, the court will not hold a party bound by the K varying from the party’s own understanding unless this party’s words and conduct were in a context giving the party reason to know that the other party would be and was in fact misled. In determining whether a party had reason to know the other party’s understanding, the party must be judged in relation to the usage and understanding of other people, but in determining whether a party did in fact know the other party’s understanding, much more direct and cogent evidence (such as statements made to and by this party) may be available.
  • Although mutual assent to the formation of a contract is generally seen as a contractual requisite, parties need NOT manifest an intention to be nound or intend for legal consequences that might flow from the formation of a contract.
    • There seems to be no serious doubt that a mutual agreement trade a horse for a cow would be an enforceable contract, even though it is made by two ignorant persons who never heard of a legal relation and who do not know that society offers any kind of a remedy for the enforcement of such an agreement.
  • Restatement 21, Intention to be Legally Bound
    • Neither real nor apparent intention that a promise be legally bidning is essential to the formation of a contract but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract
  • Misunderstandings – sometimes a misunderstanding will result in a complete lack of mutual assent by the parties and prevent the formation of a contract. Generally, there is no mutual assent where the parties attach materially different meanings to what is agreed upon if: (1) neither party knows or has reason to know of the other’s meaning or (2) both know or have reason to know of the other’s meaning. However, there is mutual assert on the basis of one of the parties if: (1) one party does not know (or has reason to know) of the other’s different meaning and the other does know (or has reason to know) of the different meaning. (Rest 20).

Consideration

  • Entering into a contract is usually a voluntary act. That is, a person exercises his autonomy to enter into a contract (a set of legally binding promises, Rest 1). Parties enter into a contract by manifesting assert (one of the contractual elements). While mutual assent is an essential element of contract formation, consideration or another justification for enforcing the promises made is also essential. (Rest 17). That is, not all promises are enforceable as contracts without some additional validating mechanism. Consideration is the best known of these validating mechanisms making promises biding on the parties.
  • Consideration is typically described as requiring a bargained for exchange (Rest 71). The bargained for exchange is established when the promisor gives the promise in exchange for the return promise given by the promisee. In turn, the return promise by the promisee is given in exchange for the promisor’s promise.
  • The classic formula of consideration requires a bargained for exchange of something which, in the eyes of the law, is of some value: “A performance or a return promise must be bargained for.” The cases are legion in which courts describe consideration in terms of a benefit to the promisor or detriment to the promisee, i.e., the concentration is on the legal value element of consideration. Other courts remember to add the other critical element, bargained for exchange, as part of the formula. There is no doubt that all courts would consider the bargained for exchange element essential .
  • Something is said to be bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
  • Today, consideration is typically described as requiring a bargained for exchange. The traditional benefit to the promisor or detriment to the promisee is no longer controlling. The bargained for exchange is established when the promisor gives the promise in exchange for the promise given by the promise, who in turn enters into the exchange for the promisor’s promise.
  • Bargained for exchange is a requisite to establishing consideration. The bargained for exchange is established when the promisor gives a promise in exchange for a promise given by the promisee, who in turn enters into the exchange for the promisor’s promise. Similar to the law regarding mutual assent, whether an exchange is bargained for is determined on an objective basis. The promisee does not need to inquire into the intent of the promisor and the motive is immaterial absent a showing that both parties knew the consideration is merely a pretense.
  • Types of Consideration –
    • Just about anything that parties want to bargain for can be consideration to support a promise. The classic description is some type of transaction involving a benefit or detriment to the parties, with typical contracts having benefits and detriments to both parties. However, this general statement does not clearly and accurately account for all situations.
    • Harber v Sidway – (unless promise to nephew to pay him $ if he refrains for drinking, swearing etc. Uncle benefited from this promise – in that he wouldn’t have to worry so much about his younger nephew. The court, enforcing the promise, found that this lack of clear benefit to the uncle was not fatal when there was a clear detriment to the nephew in giving up his legal right to pursue the behaviors the uncle wanted him to quit.
    • The consideration for a promise might be a performance by the promisee, called a unilateral contract because there is only one promise involved. Other times, the bargain might involve a forbearance – refraining from doing an affirmative act. Typically, however, the bargain involves one promise by the promisor in exchange for a return promise by the promisee (express of implied), which is a bilateral contract because there are two promises involved (Restatement 75). All of these are sufficient in terms of consideration so long as the exchange is bargained for.
    • Furthermore, so long as a contract is supported by some bargained for exchange, it does not matter if other promises contained in the contract do not have independent consideration. That is, it is sufficient for a number or promises to be supported by one consideration.
  • Consideration moving to or from a third person
    • In the typical contract, the bargained for exchange moves between the promisor and the promisee. Sometimes, however, the consideration bargained for is not actually intended by the parties to be for the benefit of the promisor or the promisee. The rule is that it does not matter from who the consideration moves or to whom it ultimately reaches. The key is still whether there is a bargained for exchange (i.e., not gratuitous) (See Rest 71, comment e). In such cases, the promises are enforceable because there is consideration no matter who ultimately it moves to or from.
  • Adequacy of Consideration
    • Parties to a contract are free to place whatever value they desire on a particular bargain. Opinions as to value often differ from person to person. There is no rule in K assessing the market value of the exchange made by contracting parties. Therefore, as a general rule, courts do not inquire into the adequacy or sufficiency of consideration. Policing the fairness of bargains would be an insurmountable task for courts to undertake. Thus, a party who makes a bad deal is typically bound and cannot claim unfairness in the bargain on grounds of consideration. The value of the transaction to the parties clearly does not have to be significant. Some theorists have concluded that even a peppercorn so long as bargained-for, would be enough to be adequate consideration.
    • However, a mere pretense of bargain will not be sufficient, as where there is a false recital of consideration of where the purported consideration is merely nominal such that the transaction is really gratuitous.
    • A pretense that there is consideration when in fact there is none is not consideration. The terms nominal and sham consideration refer to cases where the stated consideration is a pretense and not a reality. Thus, normal consideration and sham consideration are not consideration as that term is generally defined. By the word nominal we mean in name only – the purported consideration is given, but is not bargained for as part of an exchange. It is given as a mere pretense or formality. It does not refer to the smallness of the sum as in the expression a “nominal sum,” although usually nominal consideration is a small sum such as $1 or $10. For example, if a document recites, “in consideration of $10, in hand paid, receipt of which is hereby acknowledged, and the ten dollars is paid, but only as a token, it is nominal consideration. The term sham consideration refers to falsity of recital that something has been paid or done. If the ten dollars was not paid, there is only sham consideration. In either case, the final question is whether the agreement is enforceable without consideration.
    • For instance, Mabel wants to give her son, Sam, a valuable painting. To make the promise enforceable, Mabel promises to give Sam the painting in exchange for his promise to give her one dollar, which he does. Surely, the one dollar did not induce Mabel’s promise nor was the promise bargained-for and the law will consider this a mere recital or consideration or nominal consideration. In these situation, since there is no bargained-for-exchange, there is no consideration and the agreement is not enforced absent some rationale to enforce the promise without consideration.
  • Multiple Exchanges
    • Often parties will enter into an agreement that involves a number of exchanges. Again, courts generally do not inquire into the adequacy of consideration in multiple exchanges any more than they do in singular ones. One promise that is itself bargained-for and consideration is sufficient to constitute consideration for any number of return promises. Whether one part of the agreement would not have been consideration is not sufficient to prevent the whole from being enforceable consideration. (Rest 80)

Unilateral v bilateral contracts

  • Unilateral – the term does not mean that there is only one party the contract. It simply means that only one party has made a promise and some action (rather than a return promise) is needed by the other party in order to form the K.
    • In the case of an offer for a unilateral contract, an option K is created when the offeree tenders or begins the performance requested in the offer. At this point, the offeree has the ability (but not the obligation) to complete the invited performance. The offeror’s duty to perform, however, is conditioned on completion of performance by the offeree. The creation of an option contract makes the offer irrevocable.
  • Bilateral – consists of a set of mutual promise(s) made by both parties. The effect is that as a matter of law the promisor is the one under the legal duty to perform. The party that does not make the promises is not obligated to perform.
  • Determining whether promise or performance is requested –
    • Common law – determining the type of acceptance requested in the offer has effects on the obligations odd the parties and the K’s validity. An offer can invite acceptance by a return promise to perform or by performing the requested action. However, if there is any doubt as to whether the offer is requesting a return promise or performance, the offeree can accept by either promising or rendering the performance.
    • UCC 2-206 – unless the parties indicate otherwise, an offer can be accepted in any manner reasonable under the circumstances. Specifically, an offer to purchase goods for prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods. However, a shipment go goods that doesn’t conform to the contract is not acceptance if the seller reasonable notifies the buyer that the shipment is offered only as an accommodation to the buyer. Finally, where performance is a reasonable manner of acceptance, an offeror who is not notified of the acceptance can treat the offer as having lapsed (the power to acceptance has been revoked).

Conditions

  • Does an event have to occur before an obligation is due? When a party is accused of breach of K for failing to perform an obligation, the party will sometimes admit that it didn’t do what it promises to do, but will claim that it is nevertheless not in breach. In its defense against a claim of breach, the party will argue that its performance was not due until some event had occurred. Because the even had not occurred, it did not have to perform. Therefore its nonperformance is excused and is not a breach.
    • Such an event that has to occur before a performance is due is a condition.
  • Promise v Condition – a promise is a manifestation of intention o act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.
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