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Abstract legal relationship between two or more parties. Bilateral contract – where parties exchange promises to form a contract. Unilateral contract – involves one promisor and one promise. (i.e. accepted by performance) It is essential to the existence of a contract that there should be: Parties capable of contracting Their consent o Free If not free, contract is not absolutely void, but may be rescinded by the parties. Not free when obtained through: Duress Menance Fraud Undue influence Mistake o Mutual Determined by objective (outward) rather than subjective criteria. Manifestation (demonstrate) of mutual assent by all parties In Re Estate of Thottan [Three siblings splitting deceased mother’s assets through mediation. All 3 signed off on a chart with names of all of the mothers assets and who would take what (distribution of assets). Also initialed next to each asset. One sibling attempted to enforce the settlement. COURT: initials and signatures on the chart show mutual assent, thus the settlement is a contract] Assent to the same thing in the same sense. Siegel v. Warner Bros. [Spiderman contract. Preliminary negotiations in letters is not a 1
contract. Both parties must agree to all terms of the contract] No contract if consent is not mutual Mistake may preclude formation of contract if parties did not mean/agree to same thing in the same sense. Chakmak v. HJ Lucas Masonry, Inc [California State University Hayward v Fresno Health Center. ∆ submitted a bid to be a subcontractor on Hayward, while ∏ was taking a bid for Fresno.
Both ∏ and ∆ thought they were talking about the same health center. After ∆ won the bid, ∏ told them that it was for Fresno. ∆ refused to do it and sent ∏ a letter. COURT: Mutual mistake. Parties did not agree on the same thing] Mistake is not mutual, unless parties all agree upon the same thing in the same sense. o Communicated by each other A lawful object Sufficient Consideration. California Civil Code §1550 & §1565 Executed Contract vs. Executory o Executed – object of which is fully performed. o Executory – all else. o Lockheed Missiles v. Gilmore Industries [ Service man electrocuted while performing maintenance work – repairs have not been completed.. COURT: Simply performance, while it may constitute acceptance of an offer, does not mean there is an executed agreement. Executed – means completed (performed on both sides). Offer may be accepted by commencement of performance, this does not mean there is an executed agreement.] Implied vs. Express Contract o Express The terms of which are stated in words o Implies 2
The existence of terms of which are manifested by conduct.
Promise o Offer Exchange o Consideration Bargain-for-exchange [Restatement (Second) of Contracts §71] Performance or a return promise must be bargained for Performance or return promise is bargained for if it is sought by the promissory in exchange for his promise and is given by the promisee in exchange for that promise. Performance may consist of an act other than a promise a forbearance the creation, modification or destruction of a
legal relation The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or some other person Courts will not question adequacy of consideration Equivalence in values exchanged is not required Harris v. Time, Inc. [opening advertisement letter that promised a calculator watch – waste of resources of the court] Sufficient consideration i.e. consideration did not fail both parties performed their promises. Past consideration – is no consideration for K Harrington v. Taylor [∆ promised π some $ for damages after he helped her when she was bitten, but did not pay. COURT: No consideration because was not bargain-for-exchange] 3
o Acceptance Legally Enforceable o Bargain-for-exchange [consideration] o Or Promise [promissory estoppel] Reasonably induced reliance by the promise and which does induce such reliance in such fashion that justice requires its enforcement. Reasonable reliance on the promise and injustice can be avoided only by enforcement of the promise Miles Homes Division v. First State Bank of Joplin [bank committed (promised) to notify the seller about the delinquency, but did not. Seller relied on the promise when gave a 2nd loan and sustained loss when the bank did not fulfill the promise] Evidence of contract o Written memorial Signed writing o Performance (result of previous contract) Sale Money exchanged for goods Conveyance Money exchanged for land.
Intention to be legally bound o Exclude acts done without intent to create legal relations
Words and actions that allegedly formed a contract are
so clear themselves that reasonable (objective) people could not differ over their meaning.
Whether an offer has been made depends on objective
reasonableness of the offeree’s belief that the advertisement of solicitation was intended as an offer.
If it is clear that the offer was not serious – then no
offer has been made
Leonard v. Pepsi Co. [Harrier jet commercial: no
objective person could reasonably conclude that the commercial offered the harrier jet] Express Statements Concerning Legal Consequences o Not legally binding clauses Courts recognize parties intention that the agreement is not legally binding. o Letters of intent Typical letter of intent is not a binding contract. Some letters of intent may include certain binding obligations. Despite signing a document w/ heading of “letter of intent”, contract between them can be found if the manifest their intention to be bound to such contract. Agreement to negotiate a contract Agreements to negotiate toward the formation of a contract are themselves enforceable as contracts if the parties intended to be legally bound. Agreement to negotiate does not contain the terms of the final agreement. Venture Associates Corp. v. Zenith Data Systems [Venture wanted to Acquire of Heath from Zenith. They had an agreement to negotiate in good faith. Zenith did not sell Heath to Venture. ∏ argues that ∆ did not negotiated in good faith. COURT: No contract because there was not final agreement as to terms] An obligation to negotiate in good faith can only arise from a contract. A contract can be found in a letter of intent. Absent a contractual obligation, there is no duty to negotiate in good faith because there is not duty to negotiate at all. 5
“Agreement in principle” without implementing details. If intended to be binding – it is a contract. o Pennzoil v. Texaco [tortuous interference with Pennzoil’s contract right with Getty by acquiring Getty Oil despite Getty Oil’s agreement in principle to merge with Pennzoil]
o Gap Fillers Contract does not fail for indefiniteness because one or more terms are left open if there is a manifested intention to make a contract and there is a reasonably certain basis for a court to afford a remedy. Gap filling terms Single delivery is required unless circumstances indicate contrary Time for delivery of goods – reasonable time Payment is due at the time and place the buyer is to receive the goods.
Preliminary negotiations vs. Offer 1. Manifestation of objective test What a reasonable man in the position of the offeree has been let to believe. What offeree should have understood under all surrounding circumstances with all of his opportunities for comprehending the intention of the offeror, rather than what the offeror, in fact, intended. 2. If there are no words of promise, undertaking, or commitment – the expression is invitation for an offer or mere preliminary negotiation in the absence of strong countervailing circumstances. 3. Determination of the party or parties to whom the purported offer has been addressed If the expression definitely names a party – it is more likely to be construed as an offer. 6
If the addressee is an indefinite group, it is less likely to be an offer (i.e. advertisement) Except reward cases – expression is an offer 4. Definiteness of the proposal The more definite the proposal is, the more reasonable it is to treat the proposal as involving a commitment. o Southworth v. Oliver [∆ asked π is he wanted to by the property…π wanted to…∆ said he will contact π once he know the price…sent multiple letters to each other.] o Offer creates legal power of acceptance in the offeree: Acceptance is a voluntary act of the offeree whereby he exercises the power conferred to him by the offer…creates a contract. After the offeror has created the power, the legal consequences thereof are out of his hands and he may be brought into numerous consequential relations of which he did not dream, and to which he might not have consented. o Advertisements are not binding offers, unless they invite acceptance without further negotiations in clear, definite, express and unconditional language Zanakis-Pico [Car advertisement offered a car for $0 down.
Π wanted to purchase the car by ∆ asked for down payment. Court said that advertisement is not a contract]
Exception: CA Vehicle Code §11713.1 Dealer can not advertise vehicle without identifying vehicle by model, license #, or portion of v.i.n. number
Can not advertise price without all costs to the purchaser at the time of purchase except taxes. Can not fail to sell the vehicle for advertised price. o Offer can be revoked before it is accepted BC Tire v. GTE Directories Corp. [ Yellow pages
advertisement publishing case. According to exclusionary
clause offer was accepted only when ad was printed. – Since it wasn’t printed, offer was not accepted and revoked by offeror– no contract]
Jury (matter of fact) should determine reasonableness of time the offer expires if the expiration time is not specified in the offer. Vaskie v. West American Insurance Co. [After accident ∆
& ∏ negotiated settlement of $25k…offer had no expiration]
Termination of power of acceptance / Rejection o An offer is extinguished upon rejection. Chaplin v. Consolidated Edison [∆ made offer by letter: “take it or leave it”. At first, ∏ did not take the offer, but than came back and wanted to accept pervious offer. ∆ said no more offer] o Proposal may be revoked at any time before its acceptance, but not afterwards. o Even if definite time in which acceptance may be made is named in proposal, the proposer may revoke his proposal within that period unless it was given for consideration. o New counter offer creates new power of acceptance. Farley v. Champs Fine Foods, Inc. [Farley was hired to manage restaurants in North Dakota and Minnesota. According to contract Farley had option to purchase up to 50% of Champs stocks] o “Mailbox” Rule Offers, Revocations and rejections are not effective until they are received. Acceptances are effective upon mailing (dispatch). The offeree is not permitted to speculate at the offeror’s expense during the time required for the letter to arrive. Offeror can specify the particular manner (promise or performance) or medium (mail, fax, etc.) of acceptance.
If does not specify, it may be accepted in any reasonable manner and by any reasonable medium. Risk of transmission of acceptance falls on offeror. Mailbox rule does not apply to option contracts. Acceptance by telephone or other “Instantaneous twoway communication” is similar to parties being in the presence of each other. The Restatement (Second) of Contracts §64 Case law has not adopted the same view.
Telegram, Fax, Telex – Mailbox rule applies Email – no case law as to whether the mailbox rule applies. Uniform Computer Information Transactions Act (UCITA) – time of receipt rule for electronic acceptance. o Counter offers The acceptance may not impose additional conditions on the offer, nor may add its limitation Acceptance which is equivocal or upon condition or with limitation is counter offer and requires acceptance by its original offeror before contractual relationship can exist Acceptance may be valid despite conditional language if the acceptance is clearly independent of the condition Ardente v. Horan [∏ accepted an offer to purchase a house from ∆, but conditioned that the house must come with a dining room set & etc. ∆ refused to sell the house to ∏]
“Mirror image” or “matching acceptance” rule requires the acceptance to match offer. Counter offer rejects the original offer. It terminates the original power of acceptance in the offeree who is not a counter-offeror. o Making offers irrevocable Option contract 9
Separate contract with only one purpose: to make an offer irrevocable. Unless specified reasonable time has to be given to exercise right under option contract. Orlowkski v. Moore [Option contract to have a first chance to purchase a house if owner decides to sell it.] Irrevocable through part performance In unilateral contracts: upon part performance = acceptance/binding contract = irrevocable
Dahl v. Hem Pharmaceuticals Corp. [Medical study completed. After completion of the program patients would receive 1 year supply of the drug. HEM refused to give the supply] o Manner of Acceptance In a ambiguous offer (typical offer where manner of acceptance is not specified), the offeror does not care how the offer is accepted. Davis v. Jacoby [Uncle’s Inheritance case, where the offer was that ∏ and husband would move to look after ∆’s in return would get inheritance...] Acceptance by performance Arduini v. Board of Education [∏ accepted contract (w/ liquidated damages policy) by continuing to perform his duties and accepting his paycheck.] o Limitation of liability A provision in a contract liquidating the damages for the breach of the contract is valid unless the party is seeking to invalidate the provision established that the provision was unreasonable under the circumstances existing at the time the contract was made. o Warranty Ownership Title 10
Right to sell Insurable Interest Quality Express warranty Warranty of fact and not opinion o Relating to some quality or feature of the product with are subject matter of the contract of sale. Bases of the bargain. Implied warranty Seller who deals in goods of that kind Goods are fit for ordinary purposes for which such goods are used. Average quality of goods [to satisfy the warranty] Implied warranty of fitness for a particular purpose. Buyer relies on sellers skill and judgment. Reliance of the buyer: higher quality.
Consideration o Legal value Interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by another. i.e. forbearance = right to sue Consideration is necessary to support the validity of a contract Promise. Meretricious services or companion services do not constitute valuable consideration necessary to support promise. One object is lawful and one unlawful, in whole or part, the contract is void as to the latter and valid as to the rest California Civil Code §1599 Whorton v. Dillingham [chauffer, bodyguard, social and business secretary, counselor in real estate investments, and 11
lover services provided for ½ of a certain property. COURT: while consideration of being a lover is illegal, ∏ provided independent consideration by being a chauffer, bodyguard, counselor.] o Bargain-for-exchange Promise & consideration must purport to be the motive each for the other in whole or at least in part. It is not enough that the promise induces the detriment or the detriment induced promise, if the other half is wanting. In absence of consideration in addition to the rendering of services incident to the employment, and agreement for a permanent employment is no more than an indefinite general hiring, terminable without liability to the other. Fisher v. Jackson [∏ argued that he suffered detriment by giving up his job at a bakery in order to take a job with ∆. However, ∆ did not bargained for it.] Consideration must be bargained for and must have been intended as thing given in exchange for the promise. Colorado National Bank of Denver v. Bohm [∆ signed a promissory note as a favor to ∆’s mother, so that she could re-assure & give incentive to ∏ about the loan. ∏’s mother said she would never ask to pay that promissory note and if she did ∆ would not sign it. COURT: there was no consideration for ∆’s note and he signed note as accommodation to ∏’s mother and he signed it on condition that he would not be held liable for it.] Consideration for a promise An act other than a promise, or Forbearance, or 12
The creation, modification, or destruction of a legal relation, or A return promise Bargained for and given in exchange for consideration. Employee handbook is a unilateral contract if: The handbook is sufficiently definite in its terms to create an offer The handbook is communicated to and accepted by the employee so as to constitute acceptance. Receipt of the handbook is sufficient communication. Offeree’s performance “must have been induced by the promise made.” The employee provides consideration. Look for existence of an offer objectively-not subjectively. Look for terms with precise meaning that provide certainty of performance. If offer is indefinite there is no intent to be bound. A disclaimer can prevent the formation of a contract by clarifying the intent of the employer not to make an offer. Anderson v. Douglass & Lomason Co. [∏
claims that ∆’s employee handbook was a contract]
A Single Consideration can support several promises Johnson v. Holmes Turtle Lincoln Mercury [∏ wanted to purchase a vehicle from ∆, but requested to get a full coverage insurance. After realized that there was no full coverage insurance, he sued ∆. ∆ alleges that there was no consideration to procure full coverage insurance. COURT: Agreement was that in consideration of ∏ 13
purchasing the car, ∆ will procure a full coverage insurance. A Contract will not be enforced if consideration is lacking Kremen v. Cohen [Network solutions case over sex.com. Kremen registered the domain for free, and there was no consideration. If something is promised for free, party must show that it conferred some benefit the other party was not already entitled to receive or suffered some
prejudice it was not already bound to endure. Kremen did not give consideration for his domain name, so there was no K] o Illusory promises A promise to perform an act unless the promisor changes his mind promises nothing. No binding commitment to do or refrain from doing anything. There is no benefit to the promisor and no detriment to the promisee. Can be enforced if there is part performance. Money Store Investment v. Southern Cal. Bank [The bank did not notify money store about the change of terms as promised.. In reliance on the Bank Money store loaned the money and the person defaulted. Had the money store been notified as promised, they would not loan the money. Money
store performed by providing the money] o Mutuality of obligation Either both parties are bound or neither is bound. Bilateral contracts requires consideration (mutuality of obligation). Seller is not bound to perform because he could choose to sell or not to sell property to anyone. 14
The buyer as promisor is not receiving any benefit and there is no detriment to seller as promisee. Centerville builders v. Wynne [agreement to sell land. ∆ & ∏ singed document with condition that it was subject to satisfactory purchase & sales agreement. One condition was not signed by the seller, while the whole agreement was signed by the buyer, indicating lack of mutuality of obligation. ∆ wanted more money for the
property] o Mutual Consent No contract unless the parties assent, and they must assent to the same thing in the same sense. Failure to reach meeting of the minds on all material points prevents the formation of a contract even though the parties have orally agreed upon some of the terms, or have taken some action related to the contract. Banner Entertainment v. Alchemy Filmworks [oral agreement to send Alchemy to Cannes Festival to market films and to pay 10% of sales it achieves…companies were working on permanent agreement. Had several draft agreements. Had not reached an agreement about arbitration or final agreement with included all terms] Only individuals over the age of 18 shall have the right to enter in to contracts. Will avoid the contract Can disaffirm a contract w/in a reasonable time after the reaching the age of 18 because minors should not be bound by mistake of their immaturity or overbalance of unscrupulous adults. Milicic v. Basketball Marketing Co. [endorsement agreement when Milicic was 16. He send a letter 15
to ∆ 11 days after he turned 18 disaffirming the contract. Letter was sent within a reasonable time] Persons suffering from mental illnesses also lack of capacity. TEST Did the party understand the nature and consequences of the transaction. o Lack of essential terms A legally binding agreement is not formed where essential elements are reserved for future agreement. Goodworth Holdings Inc. v. Dr. Suh and JPMorgan [Joint venture agreement: lacked essential elements, i.e. ownership %. Only had a framework for the agreement or preliminary negotiations, thus no legally binding agreement] o A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has a reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent. o Pre-existing duty = no Acceptance = no contract Accepting an offer after one has a pre-existing duty is nothing more than doing something that one already has to do. Slattery v. Wells Fargo Armored Services [∏ was doing a polygraph examination on a person, who he got to admit to doing an unrelated bank robbery. ∏ was working for government and at that time did not know that Wells Fargo offered a reward. Court said that he is not entitled to a reward because he had a pre-existing duty to report any finding during his examination because was already paid for the information by the county.] Modification of the pre-existing duty rule 16
Does not compel a modification of an unprofitable or unfair contract. Modification of a contract is a contract itself that needs to be supported by consideration. Enforces modification If the parties voluntarily agree 1. The promise modifying the original contract was made before the contract was fully performed on either side 2. The underlying circumstances which prompted the modification were unanticipated by the parties 3. Modification is fair and equitable Angel v. Murray [ 5 year contract to remove all combustible and noncombustible waste generated within the city. Requested $10k increase in the fee due to increased cost of collection because of unanticipated and unexpected increase of 400 new dwelling units. The request was agreed to by
the city. Similar request next year was also approved by the city. The city made the payments and the agreement was executed] Accord and Satisfaction – Substitute contract. Essential element of accord and satisfaction is the existence of a bona fide dispute between parties. CA Civ §1521 o An accord is an agreement to accept, in extinction of an obligation, something different from or less than that to which the person agreeing to accept is entitled. CA Civ §1523 o Satisfaction - Acceptance, by the creditor, of the consideration of an accord extinguishes the obligation, and is called satisfaction 17
One of the methods of discharging a contractual obligation – by entering into a substitute contract Modification of the original contract, supported by consideration. o Breach: limited to the action on the substitute contract. Entrance of the contract in satisfaction of the original obligation o The first contract will not be discharged until the second one is executed (performed) Breach of substitute contract permits a breach claim on either the original or the substitute contract. Unless, according to UCC, a party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. o County Fire Door Corp. v. C.D. Wooding [fee dispute for a door that was delivered late. ∆ wrote a check for a partial amount and wrote on the check that the payee accepts this check in full satisfaction of all claims. Meanwhile ∏ cashed it, crossing the ∆’s words and writing that check is accepted under protest and with full reservation of rights to collect unpaid balance.]
Moral Obligation o Not an effective validation device because it would make all promises would be enforceable. Promissory Estoppel 18
o Reliance on promise + injustice can only be avoided by enforcement. Feinberg v. Pfeiffer Co. [∆ promises to pay π $200/mo lifetime as a pension. No consideration. ∆ does not want to pay anymore, after paying for 1.5 years. ∏ relied on the pension] o Detrimental reliance by third persons If the promisee actually foresees, or has a reason to foresee, action by a third person in reliance on the promise, it may be unjust to refuse to perform the promise. i.e. 3rd party can get reliance damages Hoffman v. Red Owl Stores [husband and wife coowners of the bakery store. ∆’s made a promise to husband only who relied on it. Husband and wife sold the bakery building relying on the promise/request of the ∆’s]. o Where there is no enforceable contract due to indefiniteness, promissory estoppel will permit a recovery of reliance damages which the plaintiff sustains. Wheeler v. White [ ∏ demolished his property in reliance that ∆ will secure a loan for construction of the shopping center. ∆ did not obtain the loan and argued that there was no contract because of indefiniteness, but court found that ∏ can recover reliance damages because of promissory estoppel]
Breach of Contract
To establish breach of K ∏ must allege o There was a K The Parties manifest an intent to enter into contract Advertisement is not a contract because it does not require to perform w/out any further communication. Offer must be clear and unambiguous Sateriaale et al. v. R.J. Reynolds Tobacco Co. [camel cash advertisement case] 19
contract must be interpreted to give effect to the mutual intention of the parties as it existed when K was made. Terms of agreement must be Sufficiently certain to make the precise act which is to be done clearly ascertainable. ∏ performance or excuse for non performance o ∆’s breach o damages To state a claim for Promissory estoppel o Promise clear and unambiguous in its terms o Reliance by the party to whom the promise is made Must be both reasonable and foreseeable o Party asserting estoppel must be injured in reliance. o * promissory estoppel is not made to enforce the bargained for consideration K. J.B. Enterprises v. Sid and Marty Kroft Pictures Corporation [∏ & ∆ signed intent to purchase ∆’s company, specifying that it was not a binding agreement and K would arise only when K was signed. ∏ entered 30 day due diligence period where they examined company assets and liabilities. They never signed the K to purchase the company despite the fact that they were running it together]
Remedies Time-barred/Statute of limitation o Unless breaching party made a new promise to perform the K Will enforce on basis of moral obligation. New promise to perform raises the bar of the limitations statute. Breaching party may not be liable for damages, unless those damages were foreseeable at the time the contract was formed. Damages must be reasonably certain o No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and origin. California Civil Code §3301 20
o Punitive damages Not recoverable for breach of contract o Expectation Interest in having the benefit of the bargain Place in as good of the position as would have occurred had the contract been performed. Simulate as much as possible plaintiffs economic situation if there was no breach. Expectation damages for Agreement to negotiate. Must be predicated on the outcome that would have been reached had the defendant been negotiating in good faith. Such proof would be impossible in most cases o Vestar Development v. General Dynamics [ Π and ∆ had an agreement to negotiate to purchase land from ∆ in order to built shopping
cener. Never signed a contract. ∏ sued ∆ for expectation damages.] Injured party must act reasonably Reasonable and good faith Whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective. Act reasonably with due diligence and respect. o Huntington Beach School District v. Continental Information Systems Corp. [Company won a tender for computer equipment but failed to deliver on time…school district had 21
another tender…the best bid was 60k more then CIS Corp. Court said it was ok.] Who’s wrong forced the choice cannot complain that one rather than another was chosen. Consequential Damages 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 be reasonably be prevented by cover or otherwise. UCC §2-715(2)(a)
Liquidated Damages Clause Clause in the contract stating that they have agreed upon specific damages that will be payable in the event of breach. Efficient Breach Will not punish if contract is breached without any harm to the other party. Remedy of specific performance Equitable relief Given when damages would be inadequate Item is subjectively unique and particularly valuable to a given individual though it has little or no market value. Personal Service Contracts 22 13th Amendment prohibiting involuntary servitude. Impossible to impose judgment on quality of performance Avoid friction and social costs. Except: Parties with unique talents may be subject to other remedies
o Restitution Preventing unjust enrichment of the party who has received benefits at the expense of another. Where the contract is unenforceable one party has conferred a benefit upon the other through part performance, courts will grant restitution on the footing that such a recovery in quasi contract does not undermine the statute of frauds. Where part payment has been made pursuant to an oral contract for the sale of land, the unenforceability of the contract will not preclude restitution of the payment. Where services have been performed pursuant to an unenforceable contract the reasonable value of the services will be recoverable.
o Reliance Position that the party would have obtained had the contract never been made. Out of pocket loss (actual loss) Relevant for breach of contract to negotiate a contract Copeland v. Baskin Robbins USA [∏ & ∆ had a contract to negotiate a contract. Π negotiating with ∆ on terms of contract to purchase a plant. ∆ sent π letter indicating conditions to sell the plant. Asked π to send a deposit check if terms were acceptable. ∆ would purchase 7,000,000 gallons of ice cream from π. Had to agree on co-packing deal & had to agree on price of ice cream purchased. ∆ ended negotiations, stating that they could not agree to co-packing deal and returned deposit to π. ∏ -> asking for damages for lost profit. COURT: only reliance damages in K to negotiate a K.] 23
Validation A. Evidence of bargained-for-exchange between parties / CONSIDERATION B. A promise which the promisor should reasonably expect to induce reliance by the promisee and which does, in fact, induce such reliance in such a fashion that justice requires enforcement. / PROMISSORY ESTOPPEL.
OPERATIVE EXPRESSION OF ASSENT
STATUTE OF FRAUDS Requires certain types of contracts to be evidenced by a writing. If the parties form an oral contract that violates this statute, absent certain exceptions, the oral expressions of the parties will be denied operative effect (i.e. will be unenforceable) Suretyship Promises o Three party relationship in which a principal debtor or obligor promises to pay a certain indebtedness to a creditor or obligee, and the third party, surety, promises to pay if the principal debtor does not pay. i.e. co-sign a loan Requires the contract to be in writing to prevent fraud and perjury in such cases, oral Suretyship promises are not enforceable. Marriage Agreements o Agreements have to be in writing o Part performance Exception to statute of frauds When oral contract is reaffirmed by performance Contract must be proven by clear, cogent and convincing evidence Acts relied upon as constituted must point to existence of agreement DewBerry v. George [prenuptial agreement to keep assets separate. Both maintained separate checking accounts, separate property for which 24
they paid for and a joint account where both deposited money to care for their child.] Contracts for sale of land o Must be in writing and signed Part performance exception: Must pay the purchase money Buyer must take possession, or Make improvements to the land or property, or Change the property in some way in reliance to the oral agreement. Doctrine of part performance is not applicable for monetary damages. i.e. May recover the down payment to prevent unjust enrichment, but not Equitable remedies. Cain v. Cross [Contract to sell land. ∏ made $10k down payment and arranged financing for the rest. ∆ did not convey property to ∆, but sold it to someone else. ∏ claims damages of $50k]
Contracts not performable within one year from formation o Have to be in writing Alternative v. Termination Alternative Could be performed over 5 years or one year Enforceable Power of termination Performed over 5 years, but ∆ had power to terminate Unenforceable Hopper v. Lennen [Radio show 5 year contract with a power of termination w/ 1 month notice.] Contracts for the sale of goods (UCC) o Contract for the sale of goods over $500 must be in writing & signed o Exception: 25
Between merchants, if a writing confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its content. Unless written notice of objection to its content is given within 10 days after it is received. If goods are to be especially manufactured for the buyer and not suitable for sale to others in ordinary course of the sellers business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement. If the ∆ admits in his pleadings, testimony or otherwise in court of existence of K With respect to goods for which payment has been made and accepted or which have been received and accepted. Azevedo v. Minister [K for hey purchase. ∏ made some
payments and received parts of the goods. ∆ sent periodic accountings. COURT: parties were merchants, accountings confirmed memoranda about selling agreement.] Promissory Estoppel and statute of frauds o Promissory estoppel would prevail. o 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 the action or forbearance is enforceable no withstanding the statute of frauds if injustice can be avoided only by enforcement of the promise. Injustice: Availability and adequacy of other remedies, particularly cancellation and restitution The definite and substantial character of the action or forbearance in relation to the remedy sought 26
The extend to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence The reasonableness of the action or forbearance The extent to which the action or forbearance was foreseeable by the promisor. Alaska Democratic Party v. Rice [ K between
∏ and ∆ that ∏ would work for ∆ as executive director. She left her current job and moved to Alaska. Executive committee advice ∆ that he could not hire ∏. The party & ∆ reasonably could induce Rice’s action by their promise. ∏ did resign and move and lost money as a result of her reliance on promise. ]
Monarco v. Lo Greco [ mother and step father promised ∏ that if he stayed living with them, they would leave him the farm
after they die. However stepfather, in his will, gave the farm to his grandson. ∏ relied on promise that farm will be his and forbore educational opportunities and etc. – farm was given to the ∏] o ∏’s burden in overriding the statute of frauds is to establish the promise’s existence by clear and convincing evidence. Restatement (Second) of Contracts §139 Electronic writing o UCC Printing, typewriting, or any other intentional reduction to tangible form. o State Technology law Electronic record Information evidencing any act produced or stored by electronic means and capable of being 27
accurately reproduced in forms perceptible by human sensory capabilities. o Black laws dictionary Expression of ideas by letters visible to the eye. D’Arrigo v. Alitalia [Claim for damaged luggage submitted via computer. Claims governed by Warsaw Convention – must be in writing. Convention limits liability for lost/damaged luggage] TRANSPORTATION CONTRACTS LIMITING LIABILITY o
VALIDITY OF CONTRACTS o Limiting liability through exculpatory clauses o Public interest limitation in health care context PAROLE EVIDENCE RULE Writing Memorializes agreement Parole evidence rule is activated when o the agreement is intended to be final. o Judge has to make a determination if this is the final agreement Tests 1. Appearance 2. Dealt with in writing 3. Reasonable person would put clause in to the contract 4. Merged clause It is not used in interpretation. If terms of K are ambiguous – can not use parole evidence rule for interpretation. Can not use oral agreement to reduce terms outlined in writing. Parole rule is not a rule of evidence. It Is a rule of substantive law. Will not add the terms of a written agreement. o Designed to preserve integrity and certainty of written documents against disputes arising from fraudulent claims or faulty recollections Tests 28
o Completeness Test Whether the writing embodies the whole or only a part of the transaction depends on completeness o Contradicts the writing Whether the evidence outside the writing “varies and contradicts” the terms of the writing o Intent to cover the certain subject of their negotiation (Wismore rule) Intent should be determined from the conduct and language of the parties and the surrounding circumstances. o Rule of Restatement Oral Agreement is not superseded or invalidated by a subsequent or contemporaneous integration, nor a writing agreement by a subsequent integration relating to the same subject-matter, if the agreement is not inconsistent with the integrated contract, and Is made for separate consideration, or Is such an agreement as might naturally be made as separate agreement by parties situated as were the parties to the written contract. Where not consideration is stated in an integration, facts showing that there was consideration and the nature of it, even if it was a promise, or any other facts that are sufficient to make a promise enforceable, are admissible in evidence and are operative. Restatement, Contracts §240, p 335 Traudt v. Nebraska Public Power District [∏ alleges that
∏ and ∆ had an oral agreement, subsequent to the written agreement that is ∆ purchases property from others at a higher price, they will give the ∏ more money.] o Natural inclusion test Would the parties (similarly situated) naturally and normally include it (the extrinsic matter) in the writing 29
Masterson v. Sine [ Conveyance of the ranch from a family member to a family member with an option to repurchase for the same amount + depreciation value of all improvements made to the property] o Merger clause Clause in writing that reads that agreement contains the whole agreement between ∆ & ∏ and there are no other terms, conditions, and etc. Absent evidence that the parties have consciously considered and assented to a printed merger clause, there is an authority for refusing to accord such a clause conclusive effect. UCC parol evidence, trade usage o Parole evidence is inadmissible to contradict the terms of a writing that is intended to be a “final expression” of the provisions in question. o Even a complete writing may be “explained or supplemented by evidence of course of performance and usage of trade. Ralph’s Distributing co v. AMF, Inc. [Ski-Daddler snowmobile case. Parties entered signed contract indicated that Ralphs would but the snowmobiles directly from AMF and sell them to dealers in the territory that AMF assigned to Ralphs. They later extended the contract. Later AMF started to distribute snowmobiles directly to the Harley-Davidson dealers in the Ralph’s territory. Court: Agreement modification by course performance and usage of trade.] Reformation and Parole Evidence rule o Where by reason of a scrivener’s mistake an instrument “omits or contains terms or stipulations contrary to the common intention of the parties – the court wil consider a mutual mistake common to both parties – that is the scrivener left out or included provisions neither party intended – and therefore correct the error in a manner that will place the parties in the position they would have occupied had the error not occurred. 30
Devenport v. Beck [promissory/loan note where there was a lerical error indicating that ∏ has to make 135 payments instead of 226] Fraud, condition precedent and parol evidence o For tortious fraud, a ∏ must show: 1. False representation was made 2. The falsity was known to the speaker or the misrepresentation was made with reckless indifference to its truth 3. The misrepresentation was made for the purpose of defrauding the plaintiff 4. The plaintiff relied on the misrepresentation, had a right to rely on it, and would not have done the thing from which he injury resulted if the misrepresentation had not been made 5. The plaintiff suffered loss or injury by reason of the misrepresentation o If the parties orally agreed that performance of the written agreement was subject to a condition, either the writing is not an integrated agreement or the agreement is only partially integrated until the condition occurs. Even a “merger” clause in the writing, explicitly negating oral terms, does not control the question whether there is an integrated agreement or the scope of the writing. Smith v. Rosenthal Toyota Inc. [ ∆ gave the car to ∏ telling him that if his wife likes the car, he should bring her to co-sign for it and they will buy the car, else they should return it and will get their trade in back. Before driving away, Mr. Smith signed documents which included a merged clause indicating that all prior agreements were void and it is a warranty that he provide full title for the trade in and the sale takes place. ∏ sued ∆ for fraud. ]
INTERPRITATION Ambiguity o Intellectual uncertainty 31
Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning. Deals with meaning of the language. Standards of Interpretation o Uncertainty in a contract must be construed against the party who caused the uncertainty to exist o Bind parties by the objective manifestations of their intent. o Having said the same thing, not having meant the same thing. o Court is not authorized to construe a contract in such a way as to modify the plain meaning of its words, under the guise of interpretation. o When K is clear and unequivocal – its meaning must be determined by content alone. Where parties without any fraud or mistake, have deliberately put their engagements in writing, the law declares the writing to be not only the best, but the only evidence of their agreement. Terms can not be added or subtracted from by parole evidence. In interpreting the contract court seeks to ascertain What the parties intended and, Consider circumstances, the situation of the parties the objects they have in mind and the nature of the subject matter of the contract. o Process: Judge to hear the proffer of the parties and determine if there is objective indicia that, from linguistic reference point of the parties, the terms of the K are susceptible of different meanings. Determine if the full evidentiary hearing is necessary. Objective evidence in support of the interpretation should be considered by the fact finder o Parties will be held to definitions given to words in their specialized commercial and trade areas in which they deal. 32
Rules, Guides, Maxims 1. Contextual Interpretation Consider all of the surrounding circumstances prior to and contemporaneous with the making of the K, so as to more precisely identify the sense in which the parties used the expressions of the agreement. 2. Purpose of the Parties Discovery of the purpose of the parties. What was the apparent objective of the parties w/ respect to the K in general or particular clause in the K 3. The transaction Must be viewed as a whole All different parts of the agreement must be viewed together as a whole, and each part interpreted in the light of all of the other parts. 4. Reasonable, Lawful or Effective Interpretation Preferred. Preference for an interpretation that is reasonable under the circumstances rather than a literal interpretation that would lead to absurd results. 5. Public Interest Favored The construction favoring the public interest will be favored 6. Contra Proferentem Against the party responsible for its drafting. 7. Expressio Unius Est Exclusio Alterius A clause in the K may specify certain items. 8. Ejusdem Generis Where the K document contains general language followed by the enumeration of specific items, the meaning of the general language is said to be limited to matters similar in kind or classification to the enumerated specific terms. 9. Other Presumptions The ordinary or popular sense of words as used throughout the country will be preferred absent countervailing evidence as to the parties’ intention 33
Technical terms and words of art are to be given their technical meaning absent contrary circumstances Words with an established legal meaning will be given that interpretation, absent evidence of a contrary understanding. The usage of a trade, locality, profession or the like will supersede the ordinary or popular sense of words where that assumption is justified Specific terms will usually be held to qualify general terms because specific terms normally suggest a more precise identification of the parties’ intentions A word or phrase used more than once is interpreted in the same sense throughout the contract Obvious mistakes of grammar or punctuation will be corrected or disregarded to the extent that they conflict with a clear intention expressed in the contract Conflicts between printed and typewritten (or word processed) provisions favors the latter since more conscious attention is directed toward the latter,
similarly, handwritten provisions will be favored over typewritten Where inconsistent intentions are manifested in different clauses, the intention manifested in the principal or more important clause is favored. Vague meanings o Parole evidence: trade custom, to define terms of contract o Objective meaning (try to find K where they can. o Frigaliment Importing v. B.N.S. International Sales Corp [Chicken vs. Chicken export case] Latent Ambiguity o There can be no mutual assent if parties have assented to different things. Their intentions are so fundamentally different that they never had a deal. Raffles v. Wichelhaus [Delivery of cotton on Peerless ship. Parties attached 2 different meanings to a material 34
term and both meanings are reasonable and so, no contract is formed because they did not actually agree on the same thing] MISTAKE Mistake is a belief that is not in accord with facts Mutual Mistake Hoel v. Waters [case where ∆ did not correctly describe the boundaries property he was selling to the π. It was 125 acres less] o Mistake is common to both parties By reason of it each party has done what neither intended Defense may be asserted when Mutual mistake comes to Subject matter The price Or the terms Mistake must be of existing or past fact Fact has to be material As to a fact which enters in to and forms the basis
of the contract [essence of the agreement] o Statute of limitation is 3 years from the time mistake was discovered. o Party who assumes the risk of mistake regarding the certain facts may not seek to rescind a contract merely because the facts were not as he hoped. The party has assumed risk of mistake when: The risk is allocated to him by agreement of the parties He is aware, at the time the K is made that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. o Requirement for avoidance 35
If the mistake is foundational or a basic assumption, if it has a material effect on the agred exchange and, finally, if there is not basis for allocating the risk of mistake to the plaintiff, the plaintiff may exercise a power of avoidance. Mistake must be material Material effect on the agreed exchange Or substantial Mistake in offer o Duty to may be imposed on the person receiving the offer when there are factors that reasonably raise a presumption of error. o Speckel v. Perkins [$50000 offer instead of $15000 settlement offer. ∆ sent the ∏ letter that was inconsistent. Where at first it said that demanded amount was unreasonable it offered that amount as settlement and suggested that ∆ would consider counter offers from the ∏. Mistake of subject matter o Knowledge by one party that the other is laboring under a mistake concerning the subject matter of the contract renders it voidable by the mistaken party. o Court will not assist a man whose condition is attributable to the want of due diligence which may be fairy expected from a reasonable person. Anderson Brothers Corp v. O’Meara [ K to purchase a dredge for use in submarines. ∏ needed to use it for shallow water. ∏ sent an employee to inspect it before buying, but the employee knew nothing about the dredges. The dredge was not suitable for shallow water unless it was modified. ∆ did not know what did the ∏ need the dredge for. ∏ did not exercise due diligence when sent an employee that knew nothing about dredges.] Unilateral Mistake o A unilateral mistake of fact cannot invalidate a K w/out a showing that the other party to the contract was aware of the 36
mistaken belief and unfairly utilized it to take advantage of the other party. o Not sufficient to avoid contract if It’s not accompanied by Fraud Imposition Undue influence Like oppressive circumstances o Sufficient to avoid contract when The other party had a reason to know the mistake or caused the mistake. o Voidable if: The effect of the mistake is such that enforcement would be unconscionable, or The other party had a reason to know of the mistake or his fault caused the mistake Lanci v. Metropolitan [insurance policy limit case. ∏ accepted the $15,000 settlement believing that it was the policy limit. Metropolitan knew or should have known that he accepted the terms under mistaken belief (from his letter to ∆) that it was the limit of his coverage.] Mistake in release o Release is binding unless executed under fraud, duress or mutual mistake. o Mistake must relate to the basis of the bargain o Must materially affect the parties performance o And must not be one as to which the injured party bears the risk before the party will be entitled to relief o If the other party knows of the unilateral mistake, and the mistake, as well as the actual intent of the parties is clearly shown, relief will be granted to the same extent as a mutual mistake. Lanci v. Metropolitan [insurance policy limit case. ∏ accepted the $15,000 settlement believing that it was 37
the policy limit. Metropolitan knew or should have known that he accepted the terms under mistaken belief (from his letter to ∆) that it was the limit of his coverage.] Release-unknown injury o Mistake must involve a fact capable of ascertainment at the time the contract was entered into, and not a mere expectation or opinion about future events. o A contract will not be rescinded for mutual mistake where one party was aware at the time the contract was signed that he had limited knowledge as to essential facts, nut nonetheless assumed the risk that circumstances would prove to be other than as expected. o For personal injury may be avoided on the ground of mutual mistake if the parties at the time of signing the agreement were mistaken as to the existence of an injury, as opposed to the unknown consequences of unknown injuries. Intention of the parties is controlling Relevant inquiry is whether there has been a conscious and deliberate intention by the parties to release claims for injuries existing but not known to them at the time of the agreement Must consider language of the agreement The circumstances of its negotiation and execution Including legal representation of the parties The seriousness of the unknown injury Consideration paid to the plaintiff for he release of the ∆’s liability. LaFleur v. C. C. Pierce Co. [insurance liability case where ∏ suffered injured to his foot. ∏’s doctor said that is was sprained toe. ∆ & ∏ signed settlement agreement that for $4k - ∏ would waive all claims relating to this accident. ∏ later discovered that there was another injury which led to amputation of his legs. Court ruled that 38
there was a mutual mistake based on unknown injury rule.] Mistake of Value o Contract may be rescinded on the ground of a mutual mistake as to a “basic assumption on which both parties made the contract. o Parties mutual mistake mush have had “such a material effect on the agreed exchange of performances as to upset the very bases of the contract o The mistake must not be one on which the party seeking relief bears the risk. Party is aware, at the time the contract is made, that he knows he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient. In such situations, there is no mistake. Instead there is an awareness of uncertainty or conscious ignorance of the future. Even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. If he was not only so aware that his knowledge was limited but undertook to perform in the face of that awareness, he bears the risk of the mistake. It is sometimes said in such a situation that in a sense there was not mistake but “conscious ignorance”. Court may allocate the risk of mistake to one party “on the found that it is reasonable in the circumstances to do so.” In making this determination court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions. 39
o Estate of Nelson v. Rice [mistake of value of fine art. ∏ hire appraiser who they knew was not qualified to appraise fine art. They also knew nothing about fine art. They sold two paintings to the ∆ for $60 who resold them for $1 mil. ∏ sued ∆ claiming mutual mistake of value. Court: ∏ bore a risk because they knew that they knew nothing about fine art and they knew that their appraiser knew nothing about it too. Thus its not a mistake, but a conscious ignorance.] ABUSE OF THE BARGAINING PROCESS Unconscionability o Contract defense Contract itself or a contract provision becomes unenforceable. Substantive element Unequal bargaining power Oppression Surprise Geoffroy v. Washington Mutual [$80k fraudulently spent on the account plus $20k overdraft. WaMu: ∏ are liable for the $20k overdraft. Also suggest an arbitration because of the clause written on the signature card used to open the account. COURT: “take it or leave it” is adhesive (***standard contract w/ out opportunity to negotiate***) = procedural unconscionability. Having the agreement on the signature card is element of surprise, because the signature cards are generally used for signature authentication. = Substantive element of surprise. Also in CA availability in the market of a substitute service does not defeat unconscionability; Cost splitting for arbitration, forces customer to pay for vindicating their federal rights = not fair in substance. WaMu does not have to follow arbitration for its claims. – agreement requires 40
arbitration for weaker party, but not for the stronger. ] Procedural element Overly harsh One-sided results Discover Bank v. Superior court [Discover Card late payment processing class action suit…discover claims that it should not be allowed because of arbitration clause that was added to the cardholder agreement when they changed the
card member agreement. Discover sent a letter to customers informing them of change of terms and arbitration clause. If the customer disagrees, they had to call discover and stop using their card. COURT: amendment via “bill-stuffer” deemed to accept if do not cancel the account is an element of procedural unconscionability] o Courts may refuse to enforce contract which it finds to be unconscionable at the time it was made. o Has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether the meaningful choice is present can only be determined by consideration of all the circumstances surrounding the transaction. Negated by gross inequality of bargaining power. Did each party have a reasonable opportunity to understand the terms of the K Where the important terms hidden in a maze of fine print Terms minimized by deceptive sales practices Williams v. Walker-Thomas Furniture [∏ purchased many household articles from ∆. ∏ signed 14 Ks which 41
stated that ∆ retained the title to the first purchased article until the 14th purchase, which was made 5 years later, was fully paid. Holding: K was unconscionable] o Procedural Inequality of bargaining power Abasing (belittle someone) contract Ingle v. Circuit City [ ∆ to ∏: sign arbitration agreement if you want to apply for the job. Pay the fee to Circuit City, Pay ½ of the costs following the award and maybe pay CC’s share of Abirtation Services itself. COURT: hars and unfair – substantively unconscinable] Matter of negotiation Absence of choice You must adhere (weaker party adheres to stronger party) i.e. one sided. o Has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Whether the meaningful choice is present can only be determined by consideration of all the circumstances surrounding the transaction. Did each party have a reasonable opportunity to understand the terms of the K Where the important terms hidden in a maze of fine print 42
Terms minimized by deceptive sales practices Williams v. Walker-Thomas Furniture [∏ purchased many household articles from ∆. ∏ signed 14 Ks which stated that ∆ retained the title to the first purchased article until the 14th purchase, which was made 5 years later, was fully paid. Holding: K was unconscionable]
small print o Substantive Focuses on terms of the agreement. Whether they are so one-sided as to shock the conscience. Must analyze the K as of the time it was made. Harsh Terms Unilateral power to terminate K Envelope stuffing Unequitable remedy Ingle v. Circuit City [ ∆ to ∏: sign arbitration agreement if you want to apply for the job. Pay the fee to Circuit City, Pay ½ of the costs following the award and maybe pay CC’s share of Arbitration Services itself. COURT: harsh and unfair – substantively unconscionable, CC’ had unilateral power to terminate the K] Good faith requirement o Does not create duty of reasonableness and fairness o Directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced. o Failure to perform or enforce in a good faith, a specific duty or obligation under the K, constitutes a breach of that K or makes it unavailable, under the circumstances, a remedial right or power. 43
o The court has to have a reason to interpolate a clause into a contract. o Deliberately taking advantage of your K’ing partners mistaking during performance stage is a breach of good faith. Market Street v. Frey [JC Penney building lease contract w/ clause #34 indicating that Pension fund (∆) has to negotiate in good faith the financing renovation expenses of over $250,000 or the ∏ has an option to purchase back the building at the . Market Street was at same price + 6% for each year. ∏ requested financing for the renovation (w/ out mentioning the lease), ∆ refused to consider it. After that ∏ requested to purchase the building based on the option. COURT: If ∏ believed that ∆ knew or would find out about the clause #34, I was not dishonest or opportunistic to fail to flag that paragraph, or even to fail to mention the lease.