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Law+of+Contracts Posner2002c
Law+of+Contracts Posner2002c
DOCTRINE: In order for a contract to exist, both parties must show the intention to contract.
EXAMPLES:
Embry v Hargadine: “Go ahead, you’re all right; get your men out there and don’t let that worry
you.”
Lucy v Zehmer: D jokingly goes through motions of selling farm, Lucy accepts offer.
but see Lonergan v Scolnick: D responds to ad about land for sale, receives form letter, letter encouraging
him to hurry, “accepts.”
Cobaugh v Klick-Lewis: Sign on golf course advertising car for hole-in-one.
AGREEMENTS TO AGREE:
1) Letters of Intent: presumption for K unless
8. “subject to” clauses, including procedural formalities, indicate otherwise
9. issues that remain to be worked out are not trivial
2) Oral agreements intended to be memorialized in writing
a) same as above; presumption for K unless a) and b).
EXAMPLES:
Empro Manufacturing v Ball-Co.: Letter of intent to buy Ball-Co. “subject to” board approval.
but see Oglebay Norton Co. v Armco: prior agreement to agree upheld even when terms become uncertain
Offer
RSS 24: “A statement or act that creates a power of acceptance. When a person makes an offer, she is
indicating that she is willing to be immediately bound by the other person’s acceptance without further
negotiation.”
Acceptance
RSS 45(1) -- Creation of Option Contract by Part Performance. Where an offer invites an offeree
to accept by rendering a performance and does not invite a promissory acceptance, an option
contract is created when the offeree tenders or begins the invited performance or tenders a
beginning of it.
RSS 45(2) -- Offeror’s Duty. The offeror’s duty of performance under any option contract so
created is conditional on completion or tender of the invited performance in accordance with the
terms of the offer.
Marchiondo v Scheck: Despite communicating revocation of offer to sell house, contract with
broker who later found buyer upheld because partial performance had occurred.
MAILBOX RULE:
Missing Terms
UCC 2-204
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness
if the parties have intended to make a contract and there is a reasonably certain basis for giving an
appropriate remedy.
Indefiniteness
RSS 33 -- Certainty
(a) Even though a manifestation of intention is intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms of the contract are reasonably certain.
(b) The terms of a contract are reasonably certain if they provide a basis for determining the
existence of a breach and for giving an appropriate remedy.
(c) The fact that one or more terms of a proposed bargain are left open or uncertain may show that
a manifestation of intention is not intended to be understood as an offer or as an acceptance.
TEST:
RSS 20 (1) There is no manifestation of mutual assent to an exchange if the parties attach materially
different meanings to their manifestations AND
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meaning attached to
them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other
knows the meaning attached by the first party; OR
(b) that party has no reason to know of any different meaning attached by the other, and
the other has reason to know the meaning attached by the first party.
EXAMPLES:
Raffles v Wichelhaus: The “Peerless” sailing from Bombay in October or December? Holmes:
each had just as good a reason as the other for attaching a different meaning to Peerless. Since the
plaintiff offered one thing, and the defendant expressed his assent to another, the offer was thus
never accepted.
Konic International Corp. v Spokane Computer Services: Surge-protector for “fifty-six twenty.”
Parol Evidence Rule
Is there a prior written or oral agreement or a contemporaneous oral agreement?
DOCTRINE: When a written agreement is completely integrated, or when a term in a partially integrated
agreement is found to be integrated, it can’t be contradicted or supplemented with prior written or oral
terms or agreements, or contemporaneous oral agreements. An integrated agreement or term is one which
the parties intended to be a final and complete statement of their agreement.
UCC 2-202: “No evidence is admissible to show prior written or oral agreements, or contemporaneous oral
agreements contradicting the contract -- however, a contract can be explained or supplemented by evidence
of trade usage, or course of dealings or performance. Furthermore, unless the contract is found to be a
complete and exclusive statement of terms, evidence of consistent additional terms may be admitted.”
EXCEPTIONS:
1) Defect in formation (fraud, duress, lack of consideration, mistake, etc.)
2) Evidence that the agreement wasn’t final
3) Nonoccurrence of a Condition Precedent
4) Evidence about patent ambiguities
5) Omitted terms
MERGER CLAUSE:
“This writing is a final expression of all the terms agreed upon by the parties, and it is a complete
and exclusive statement of those terms.”
“ALL CHANGES MUST BE IN WRITING” CLAUSE: Not enforceable, because subsequent oral
agreement is considered evidence that this clause has been waved. However, under UCC, enforceable
unless not enforcing the modification would be unfair because a party materially changed position in
reliance on the oral modification or waiver. (UCC 2-209)
POLICY:
1) To avoid perjured testimony, and
2) To give a clear basis on which to base a judgment.
CASES:
Mitchel v Lath: Oral agreement to buy farm on condition that ice house be demolished excluded.
but see Luther Williams Jr., Inc. v Johnson: Oral understanding that contract for home improvements
conditional upon financing included.
Alaska Northern Development v Alyeska Pipeline Service: Oral evidence limiting board’s
authority to approve or reject sales agreement for spare parts excluded.
but see Masterson v Sine: Oral evidence that an option was not assignable included.
Statute of Frauds
DOCTRINE: If statute not satisfied, contract unenforceable.
Restitution for reasonable value of part or full performance of goods / services rendered
possible
EXCUSES UNDER RSS: A writing will not be required where there is:
1) Full performance by both sides
2) Seller conveys property to buyer
3) Buyer pays all or part of the purchase price AND performs some act explainable only by the
contract’s existence (e.g. building a house on property)
4) Promissory estoppel
5) Waiver (only by not affirmatively pleading Statute of Frauds as defense)
6) Admission in court (only enforced, however, to extent admitted)
EXAMPLES:
Langer v Superior Steel Corp.: Plaintiff agrees to retire in exchange for $100 / mo. And
promise not to compete.
Hamer v Sidway: Nephew gives up drinking, gambling and use of tobacco until 21 in
return for $5000
In re Greene: Money to buy house and yearly payments in exchange for relationship (or
promise not to speak of relationship) a mere gratuity. Affair illegal. Concern for
blackmail.
Afpel v Prudential-Bach: idea for computer program held as adequate consideration, so
long as:
1) Idea explicitly reviewed after non-disclosure agreement signed before bargain
EXAMPLES:
Kirksey v Kirksey: D invites widow to live on land, then reneges on promise.
Bogigian v Bogigian: Marriage dissolved under condition that sum be paid to Hazel if
house sold. Hazel signed waiver, court voided release.
but see Thomas v Thomas: Husband amends will on deathbed, in front of witnesses, to provide
for wife. Testators enforce wish that she stay in house, in return for One Pound yearly.
Pre-Existing Duty
DOCTRINE: If, in exchange for a promise or performance, a party does or refrains from doing something
that she is already under legal obligation to do, there is no consideration.
POLICY:
1) Prevent hold-up.
EXCEPTIONS:
1) Different Performance. (Consideration = modification. E.g. not to file for bankruptcy.)
2) Honest dispute over existence of debt. (Consideration = agreeing not to withhold)
3) Honest dispute over amount of debt. (Consideration = amount above old bargain)
ACCORD: An agreement where the party with a right to receive performance agrees to some performance
different than that originally contracted for.
EXAMPLES:
Rewards and bonuses when promise already under obligation
Alaska Packers v Domenico: workers demand raise when arrive in Alaska; raise rescinded.
Levine v Blumenthal: Tenant’s request to not honor contracted rent increase honored by landlord,
but court rescinds change in lease.
but see Angel v Murray: garbage collection renegotiated after unexpected increase in houses serviced.
Mutuality of Consideration
DOCTRINE: In bilateral contracts, both parties must furnish consideration, must suffer detriment, and must
make promises that bind them.
REQUIREMENTS CONTRACT:
In return for exclusive selling arrangement, buyer agrees to buy all required goods.
Other details may be read in by court and tied to fair dealing and customary practice.
McMichael v Price: Plaintiff tries and fails to argue lack of mutuality b/c of possibility can’t
perform b/c of bankruptcy.
OUTPUT CONTRACT:
In return for exclusive buying arrangement, seller agrees to supply all output to buyer.
Other details may be read in by court and tied to fair dealing and customary practice.
TERMINATION CLAUSES:
Only enforceable if right to terminate comes after partial performance or linked to some other
detriment.
CONDITIONAL PROMISES:
Enforceable so long as condition depends on some outside event not in control of promise.
Omni-Group v Seattle First National Bank:
Enforceable Promises Lacking Consideration
1. GIFTS TO CHARITY:
1. Must be in writing
Webb v McGowin: Employee saves life of employer, permanently disabled, employer promises to
pay stipend for life. Suit against employer’s testators.
but see Harrington v Taylor: Hand injury from stopping wife from killing husband; husband promises to
pay, but after paltry payment, reneges.
but see Mills v Wyman: adult son sick and cared for.
RSS: Consideration must be cited but not fulfilled. UCC: Consideration not needed.
UCC 2-205 -- Firm Offers. An offer by a merchant to buy or sell goods is irrevocable if it is a
signed writing and it gives explicit assurance that the offer will be held open. There is no need for
consideration.
EXAMPLES:
Humble Oil v Westside Investment: P tries to attach provisions to exercise of option to buy land
(normally a counter-offer), later waives the provisions. Sale upheld.
Conditional Promises
Failure of a condition causes forfeiture; failure of a promise causes breach.
TYPES OF CONDITIONS
1) precedent: Plaintiff has burden to show that any conditions occurred and performance was due.
2) concurrent: same
3) subsequent: Defendant has burden to show that any condition was not met and duty was
discharged. Courts will only uphold these if they are reasonable.
4) express: agreed to the letter. Usually requires strict compliance, not substantial performance.
5) implied: agreed without being explicit. Usually requires strict compliance.
6) constructive: not agreed to by parties but granted by law. Requires substantial performance
(quantum meruit) only.
EXAMPLES:
1) Tender of goods (sale): a constructive, concurrent conditional contract.
2) “Satisfaction” clauses: if matter of personal taste, honest claim of dissatisfaction is good enough
for exchange to fail (claim must not be reasonable); if matter is commercial, then not because
clause carries an implied condition that the dissatisfaction claim be made in good faith.
3) Financing clauses: legal, usually carry an implied promise of good faith effort to secure.
NOTE: Especially in the context of insurance contracts, courts may find a waiver of the condition
or read out a condition if:
a) no prejudice results, where prejudice is an unexpected or unfair harm incurred by one
party corresponding with an unexpected or unfair benefit incurred by the other. For
example, if the purpose of the condition is preserved despite its violation.
b) violation of the condition was not unreasonable, inexcusable, or in bad faith
c) the contract was an adhesion contract, giving no occasion to bargain.
EXAMPLES:
Clark v West: Triple payment of $2/page for law books if condition of abstaining from drinking
met. Condition waived b/c major purpose of contract realized (timely & quality production).
but see Aetna Casualty and Surety Co. v Murphy: Insurred violates condition of insurance claim after
two-year delay in filing. Summary judgment upheld b/c no showing of no prejudice.
Dove v Rose Acre Farms: Law student gets sick, is not on time to work, misses big bonus.
Wal-Noon v Hill: Violation of implied condition of notification before re-roofing.
BILATERAL CONTRACTS:
Unless otherwise stated or implied, each party’s substantial performance creates a constructive
condition to the performance of any subsequent duties by other party.
EXAMPLE:
Kingston v Preston: Refusal to turn over business b/c of violation of conditional provision of
security. Working for one year not enough for substantial performance.
Divisible Contracts and Substantial Performance
DIVISIBLE CONTRACTS: Exist if
RSS240 1) Each party’s performance is divided into at least two parts, which are dependent on the other
party’s corresponding part for their value. [consideration apportioned]
2) The segments of performance each party owes are equal in number.
3) Each segment of performance has an agreed-upon corresponding performance form the other
party.
NOTE: Divisible contracts allow parsing of damages, as the contract is treated as a series of
contracts for the purpose of determining constructive conditions. Courts will only use to
determine damages if result does not prejudice non-breaching party.
EXAMPLES:
Lowy v United Pacific Insurance: Substantial performance of first of two portions of contract.
Britton v Turner: Worked for 9 months when contracted for 12.
MATERIAL BREACH: When breach so great that performance is not substantial and non-breaching party
can both recover damages and also suspend or be discharged from performance.
EXAMPLES:
O.W. Grun Roofing v Cope: Mismatched shingled roof held to be material breach.
Jacob & Youngs v Kent: Wrong brand of pipe mistakenly installed.
Mistake
DOCTRINE: A mistake is “a belief that is not in accord with the facts.” May justify rescission.
EXAMPLES:
Beachcomber Coins v Boskett: court decides on rescission despite dealer’s superior position.
Sherwood v Walker: sale of barren cow turns out to be breeding cow. Rescission.
but see Lenawee Country Board of Health v Messerly: Pickles buys apartment complex, signs “as is”
provision, but finds out that septic tank disaster makes land virtually worthless. Tough luck.
EXAMPLE:
Ayer v Western Union: errant telegraphed price quote; contract enforced; Western Union pays
difference, not just refund of cost of message.
UNILATERAL MISTAKE TEST: Rescission only justified when MUTUAL MISTAKE TEST met AND
1) enforcement of the contract would be unconscionable OR
a) would not be oppressive or grossly unfair AND
b) would not impose substantial hardship on other party (usually, that means not yet
performed.)
2) the other party had reason to know of the mistake, knew of the mistake, or actually caused it [in
which case contract voidable.]
CONSTRUCTION BIDS:
1) Mistake must be a significant amount, depriving of most of profit (otherwise not material)
a) look for unperformed vs. performed contract.
2) No fault: clerical error common reason
EXAMPLE:
Boise Jr. College District v Mattefs Construction: Bidder mistakenly left out large component of
estimate. Plaintiff knew or should have known, so contract voidable.
Impossibility, Impracticability, and Frustration of Purpose
DOCTRINE: “Where, after a contract is made, a party’s performance is made impracticable without his
fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is discharged, unless the language or the
circumstances indicate the contrary.”
IMPOSSIBILITY
IMPRACTICABILITY
DOCTRINE: If an unexpected event makes performance excessively and unreasonably costly, party may
be discharged of obligations.
TEST: 1) Event unforeseen and ex-post; 2) “Non-occurrence of event basic assumption of contract; 3)
Event was not fault of a party; AND 4) Parties did not otherwise allocate the risk of the event.
FRUSTRATION OF PURPOSE
DOCTRINE: If unexpected event frustrates one party’s purpose in entering into the agreement, even
though performance of the contract not impossible or costly, that party may be discharged of obligations.
TEST: As above, with these additions: 1) Frustrated purpose is principle purpose of contract; 2) Frustration
must be substantial; AND 3) Promisee got no benefit from contract after event.
NOTE: Key is nature of the good. General purpose goods to which buyers attach specific purposes are not
sufficient. Rather, need specific purpose good whose specific purpose frustrated ex-post. Like mistake.
EXAMPLES:
Krell v Henry: Rented apartment for viewing coronation procession; coronation did not occur.
Washington State Hop Producers v Goschie Farms: Allotments to grow hops sold, then USDA
terminates allotment requirement.
Misrepresentaiton & Duty to Disclose
FRAUD DOCTRINE: When a party obtains the other party’s assent to a contract by misrepresenting a
material term, whether reasonable or not, the contract is voidable at the option of the defrauded party.
CONSTRUCTIVE FRAUD: “Any breach of duty [arising from a confidential or trust relationship] which,
without an actually fraudulent intent, gains an advantage to the person in fault, or anyone claiming under
him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him.”
CA. “Where 1) the seller knows of facts materially affecting the value or desirability of the property
which are known or accessible only to him and also 2) knows that such facts are not known to, or
within the reach of the diligent attention and observation of the buyer, the seller is under a duty to
disclose them to the buyer.” (Lingsch v Savage, in Hill v Jones.)
POLICY CONCERNS:
1) Promote honesty and fair dealing
2) Encourage parties to inform themselves by limiting ways to rescind.
CASES:
Vokes v Arthur Murray: dance studio’s effort to convince a bad dancer that she was good.
Morta v Korea Insurance: general release signed after accident payment
Laidlaw v Organ: tobacco sale at end of War of 1812
Duress and Undo Influence
“Unless you agree to this bargain, I will see that X happens,” where X is usually withholding of needed
goods.
TEST: 1) the party who asserts business compulsion must show that he has been the victim of a wrongful
or unlawful act or threat; and 2) the threat must be one which deprives the victim of his unfettered will.
NOTE: Element 2 is high hurdle because courts have injunctive powers and parties always have
the option to use them. Would have to show circumstances precluding such injunction.
CASES:
UNDO INFLUENCE: Arising from one of the following (Guam Civ. Code, see Morta v Korea Insurance):
1) “the use, by one in whom a confidence is reposed by another... of such confidence ... for the
purpose of obtaining an unfair advantage over him”
2) “taking an unfair advantage of another’s weakness of mind”
3) “taking a grossly oppressive and unfair advantage of another’s necessities or distress.”
Unconscionability
PROCEDURAL UNCONSCIONABILITY: Unfair surprise
Usually dispositive. When unfair clauses present, presumption against knowing & willing assent.
DOCTRINE 2: Adhesion contracts disfavored where an adhesion contract exists unless party who assents
has reason to believe that like writings are regularly used to embody terms of agreements of the same type,
AND 1) standardized form, 2) non-negotiated terms 3) favorable to drafter 4) on take it or leave it basis.
BALANCING TEST:
CONTRACT CONSUMER
Size of type Physical infirmity
Confusing wording Ignorance
Confusing organization Illiteracy
of paragraphs Inability to Understand Language
EXAMPLES:
Jones v Star Credit: Court rules that not probable that Jones understood terms.
Cutler Corp v Latshaw: evidence that P never called D’s attention to boilerplate language in small
type on back of contract
But see Williams v Walker-Thomas Furniture: D uneducated, on public assistance, but had
absolute duty to read.
BALANCING TEST: 1) “shockingly unfair,” 2) “gross inequity of bargaining power,” 3) Superior party
knows that no reasonable probability that other party can meet obligation without penalties.
EXAMPLES:
Jones v Star Credit: Paid $600 of $1400 for a freezer worth $300.
Cutler Corp v Latshaw: warrant of attorney with confession of judgment (these have been banned)
But see Williams v Walker-Thomas Furniture: clause allowing repossession of all goods if one
good not paid for.
REMEDIES:
Refuse to enforce
Strike through offending clause
Limit force of clause
Lack of Capacity
DOCTRINE: If an incompetent enters a contract, that contract is voidable at her option. (That party may
disaffirm contract.)
Bowling v Sperry: Minor buys car with aunt’s money and in her presence, disaffirms when turns
out to be a lemon. Presence of guardian not sufficient to overcome incompetence.
RSS 15 (1) “A person incurs only voidable contractual duties by entering into a transaction if by reason of
mental illness or defect (a) he is unable to understand in a reasonable manner the nature and
consequences of the transaction, OR (b) he is unable to act in a reasonable manner in relation to
the transaction and the other party has reason to know of his condition.”
Com. b “Where a person has some understanding of a particular transaction which is affected by mental
illness or defect, the controlling consideration is whether the transaction in its result is one which a
reasonably competent person might have made.”
RSS 13 “A person has no capacity to incur contractual duties if his property is under guardianship...”
POLICY BALANCE:
1) justifiable expectations and the security of transactions
2) the protection of persons unable to protect themselves against imposition.
Illegality
DOCTRINE: If a contract’s subject matter is illegal or against public policy, the contract is void.
CASES:
Sinnar v LeRoy: Payoff to bribe official into buying previously-denied liquor liscence.
Test: 1) Reasonable scope & duration (covers only main customer area; limited duration)
AND
2) Protects a legitimate interest (trade secrets; customer lists; confidential information)
Note: Courts will usually refuse to recognize skills acquired at company during
employment as a legitimate interest.
Case: Data Management v Greene: General I.T. employee signed clause not to compete for 5
years in all of Alaska
Test: Balance 1) the interest in enforcing bargain against 2) the policy against enforcement.
Case: Watts v Watts: “Wife” sues on grounds of unjust enrichment after 12 years
misrepresentation as married.
REMEDIES:
1) Strike offending clause
2) Blue pencil offending words in clause
3) Reform the covenant to make it enforceable
Remedies
ELEVEN STEP PROCESS FOR DETERMINING REMEDIES:
1) Do the parties simply want to modify an incorrectly written agreement to reflect their actual
agreement? Reformation.
2) Does the plaintiff want to return the parties to the position they were in before the contract was
formed, as though the contract never existed? Rescission & Restitution
3) Would money damages inadequately compensate the plaintiff?
Specific Performance
4) Is there a liquidated damages clause? Is it valid? Liquidated damages controls
5) Is it possible to put the plaintiff in the position he would have been in had there been no breach?
Expectation Damages
6) Is it possible to give the plaintiff the money equivalent of the benefits he conferred on the
defendant? Restitution Damages
7) Is it possible to compensate the plaintiff for his detriment in changing position in response to
the promise? Reliance Damages
8) Is plaintiff entitled to damages that are due to unique circumstances of the plaintiff?
Consequential Damages
9) Did the plaintiff suffer from malicious conduct or a malicious tort?
Punitive Damages
10) Was there breach but no harm? Nominal Damages
11) Should the plaintiff’s damages be reduced due to a failure to mitigate?
Consequential & Liquidated Damages